the restraint contemplated or interdicted by the statute; that it was not an unreasonable restraint; that modern business conditions rendered such agreements necessary; in effect, that it operated to "steady" prices, to prevent violent fluctuations and "ruinous. competition."

The answer to such excuses for the law's violation was sweeping and conclusive. "Upon this review of the law and the authorities," said the court, "we can have no doubt that the association of the defendants, however reasonable the prices they fixed, however great the competition they had to encounter, and however great the necessity for curbing themselves by joint agreement from committing financial suicide by ill-advised competition, was void at common law because in restraint of trade and tending to a monopoly." (85 Fed. R., 291.) And, again:

It is certain that if the contract of association which bound the defendants was void and unenforcible at the common law because in restraint of trade, it is within the inhibition of the statute if the trade it restrained was interstate (85 Fed. R., pp. 278-279).

After the decisions in the Addyston Pipe and other similar cases, there was no longer a mere "dread that the law might be violated"; there was the certainty that such associations were flagrantly illegal and it became more and more apparent that their existence could not always be successfully concealed.

In the latter part of 1896 and the early part of 1897 in particular, there was a rather general abandonment of such combinations. Thus the collapse of the wire-nail and billet pools was soon followed by the disruption of the steel rail poof itself; a number of other similar agreements were also abandoned at least temporarily about this time. (H. K. S. Rept., p. 75.) For a brief period such agreements, it appears, were partially discontinued or broken by the contracting parties, and many manufacturers of iron and steel sought to conduct a successful business by the methods which generally prevail in smaller and ordinary industrial and commercial operations. It became what the engineer, Julian Kennedy, aptly calls "a buyer's market"; that is, the manufacturer was to a degree dependent upon the preference of the consumer, and the excellence and cheapness of the article offered for sale. Purchasers were again able to obtain bona fide bids from actually competing concerns. (Hearings, p. 5077.) This condition was reflected in the lessening of cost to the consumer and of profits to the producer. To avert this condition, to secure the advantages of the old pools, to prevent or at least effectually restrain competition, and at the same time escape the serious pains and penalties denounced by the Sherman Act, was the delicate and difficult problem at this time confronting the manufacturers of steel.

7x

This hard and intricate task involved vast expenditures and the most radical and sweeping changes in the whole commercial and corporate make-up of this business. Under the advice of the most astute counsel and the aegis of powerful banking institutions, a scheme was finally elaborated which for the time being exceeded the expectations of the most avaricious of its inventors.

Hitherto the output of many separate and distinct concerns had been limited and the price fixed by a commissioner possessing plenary powers to enforce these pooling agreements or punish their infraction. Under the new arrangement it was not necessary to resort to these covert and perilous conventions. Instead of pooling rails or plates produced by numerous plants, they pooled the plants themselves. This was accomplished by the simple device of an "exchange of securities," through the organization of holding companies.

CONTROL OF OUTPUT OF SUBSIDIARIES OF UNITED STATES STEEL CORPORATION.

The holders of stocks and bonds of various tube plants, claiming to control about 90 per cent of the country's capacity, turned their securities over to a syndicate formed by J. P. Morgan & Co., and in return therefor received stock in an incorporated consolidation of all these plants, known as the "National Tube Company." (H. K. S. Rept., p. 143.) Or as stated by John W. Gates:

The National Tube Co. was an acquisition of the principal tube mills of the United States into one concern, whereby they could get a very handsome profit out of the manufacture of tubes, and that had been done by Mr. Morgan.

Mr. BEALL. There had been a combination of those tube mills by which competition had been largely destroyed, resulting in an increased price of their product, had there not?

Mr. GATES. I would say 85 or 90 per cent of the total tube tonnage in the United States was in the National Tube Co. at that time. (Hearing, p. 41.)

An examination of the minutes of these companies establishes beyond doubt that the control of prices and the restraint of competition was the predetermined and definite purpose for which these various and scattered tube mills were acquired and assembled under one corporate control.

On January 15, 1901, just prior to the formation of the United States Steel Corporation, Mr. Converse, then president of the National Tube Co., and afterwards a member of the board of directors of the United States Steel Corporation, declared:

It is well known, the tendency lately so conspicuous to establish a community of ownership or a unified control over great industries, as the only means of restraining destructive competition, led to the incorporation of various great companies. (Hearings, p. 4278.)

From 75 to 85 per cent (see Gary, hearings, p. 63, and Gates, hearings, p. 228) of all the wire rod and nail mills of the country hitherto under the control of separate and distinct corporations, and indulging in such competition as was not restrained by the various wire and nail pools, were consolidated into the American Steel & Wire Co.

The American Tin Plate Co. took over the makers of tin plate and secured absolute control of about 73 per cent of the tin-plate business. The makers of sheet steel formed the American Sheet Steel Co., with 70 per cent of the entire business.

Steel hoops and cotton ties were made by the American Steel Hoop Co.. which managed to produce all forms of steel bands and hoops. The manufacture of bridge and structural steel of all kinds was controlled by the American Bridge Co. In a short time baling and fencing wire, horseshoes, and horseshoe nails, pipes, sheet iron, tin plate, building materials-in fact, almost every conceivable article fabricated from iron or steel-was controlled by some one of these huge consolidations, holding a more or less monopolistic position.

The board of directors of one corporation, capitalized often at millions and hundreds of millions, took the place of the chosen representatives of the old concerns from which they were created, and the chairman of the board of directors or of the finance and executive committees assumed the duties once discharged by the secret commissioner. Pooling agreements, while still maintained, were no longer essential in dictating the price or determining the output. Their few straggling competitors who failed or refused to join these overmastering combinations, as a rule, exerted but little influence upon the industry. The effect of these compact and powerful combinations on the markets was marked and immediate.

EFFECT UPON PRICES.

The American Steel & Wire Co. of New Jersey was organized in January, 1899. In 1898, prior to the formation of this concern, wire nails had been selling at from $1.25 to $1.50 per keg. By June in the same year, the price had reached $2.10 and within eight months thereafter it was raised to $3.20 per keg. The maximum price in 1898 was $1.50; in 1899, it was $2.95, and the next year $3.20. (Hearings, p. 5560.) Wire rods brought $21 per ton in 1898; in 1899 they reached $31.50, and by 1900 $50 per ton. This result is the more surprising when it appears that there was but little difference in the production and demand for nails and rods in 1898 and 1899.

Wire rods, Pittsburgh:

Production 1898..

Production 1899..

(Hearings, p. 5564.)

Tons.

1,071, 683

1,036, 390

In three years there was a rise of $1.80 per keg in wire nails, and in 1900 there were produced 7,233,979 kegs of nails, or a profit to the consolidation, assuming the 1898 price to have been fair, of $13,021,162.20. (Hearings, p. 5560.)

Nails, fencing, and other forms of wire are made from wire rods. In 1898 there were produced in this country 1,071,683 tons of wire rods (see p. 5564). In June, 1898, the Pittsburgh price of wire rods was $20 per ton; in January, 1900, this price had risen to $50 per ton, with a total production, 1898 to 1900, of 2,954,372 tons.

The American Tin Plate Co. was incorporated in December, 1898. Commercial tin plate is made by coating steel sheets (black sheets), and these in turn are rolled from sheet bars. Sheet bars and tin plate showed a like increase upon the consolidation of the sheet-steel and tin-plate mills.

In November, 1898, tin plate sold for $2.95 per box. This company was organized in December of that year. By January the same plate sold for $3.34. In 30 days thereafter it reached $4.214, and from September till the close of the year ir remained stationary at $5 per box. (Rept. Ind. Com., vol. 1, p. 868.)

"MERGER VALUE" CAPITALIZED BY THE UNITED STATES STEEL CORPORATION.

So well satisfied were the syndicates who had evolved this plan for what Mr. Converse calls "community of ownership or unified control over great industries as the only means of restraining destructive competition" that they began to treat this ingenious and illegal device as a lawful institution, no doubt reassured in this position by the failure of the Government to proceed against them, and in their future operations they failed to discriminate between the cost of construction or the intrinsic value of these properties and earning capacity due entirely to "community of ownership and unified control," or "potential value," as James Gayley calls it. This "combination value" of the various companies since acquired by the Steel Corporation has been capitalized as a tangible asset, stocks issued and bonds sold, all based upon this new device, as a perfect and permanent evasion of all laws prohibiting combinations in restraint of trade.

The earning power of the American Steel and Wire, the Tin Plate, National Tube, and other companies was enormously increased by virtue of the complete monopoly which resulted from assembling practically all of the manufacturers of such commodities, as horseshoes, nails, fencing wire, sheet steel, and tin plate for roofing or kitchen utensils, under one control.

The gains incident to the difference in the price of such things sold under competitive and monopolistic conditions were but a small part

of the amount actually secured by these companies and by the Morgan-Moore and other syndicates.

To illustrate: If under normal conditions these various plants acting separately could earn 10 per cent, and acting collectively they could earn 100 per cent, then by discarding any form of physical valuation, either the original cost or the cost of reproduction, and taking as their sole standard the new and artificially created earning power, due entirely to the consolidation, and for that reason aptly termed "combination value," then 10 assembled plants were worth 10 times as much with the acquired monopoly of the business as the same 10 plants would have been worth acting separately and in competition. And these immense aggregations were created and capitalized upon that principle; neither in the incorporation of the Steel Corporation nor of the subsidiaries which preceded it, now under discussion, has there been any serious attempt to deny that the greater part of the securities of these companies had any other element of value.

"Everybody knows," said W. H. Moore, of the Moore syndicate, "what they are getting when they get common stock (in the Tin Plate Co.). They know they are not getting anything that represents assets." (Reports Industrial Commission, vol. 1, p. 963; hearings, pt. 63.)

Judge Gary, testifying before the Ways and Means Committee, 'guesses" the same thing is true of the Steel Corporation itself.

Mr. COCHRAN. Of this whole sum, $1,782,000,000, was not $1,000,000,000 at least capitalized profits, as distinguished from original investment?

Mr. GARY. I should have to guess at that; but I should guess yes, including increases in value. (See Hearings Ways and Means Committee, 1908 and 1909; see hearings, pt. 63, p. 240, Appendix.)

The Commissioner of Corporations gives an interesting account of the method by which these companies "capitalized” and recapitalized their profits:

In the organization of the American Steel & Wire Co. of Illinois, in March, 1898, each $100 of the stock of the Consolidated Steel & Wire Co., one of the constituent concerns (and itself a consolidation of seven plants), received $175 of preferred stock and $175 in common stock of the new company, or $350 of new securities for every $100 of the old. (See Com. Rept., p. 6.) "A few months later each $100 of the preferred stock of the American Steel & Wire Co. of Illinois received $100 in preferred stock and $60 in common stock of the American Steel & Wire Co. of New Jersey, while each $100 of the Illinois concern's common stock received $120 in common stock of the New Jersey concern. Thus each $100 stock of the old consolidated company became $490 in the stock of the