Organization of Trusts.
In his second lecture on Trusts last night, Professor Jenks spoke of "Methods of Organization and Management," dwelling especially upon the operations and the responsibilities of the promoter. In the first place, the promoter must be a man who understands thoroughly every phase of the business in which he intends to form a combination; he must of course have a wide reputation for honesty, and be an able solicitor. Ordinarily a large proportion of the capital of a concern is in the form of plants. Here the problem comes up as to how much stock shall be issued for this, and the solution is worked out by the promoter, who by getting cash options on the plants, raises their value and thereby the amount of stock issued.
Generally, in order to attract capital from men of wealth, who want sure, safe, investments, a new concern issues preferred stock. The condition attached to this stock is that a certain fixed dividend be paid on the preferred stock before the holders of common stock receive any advantage from the profit. Although the common stock is speculative in character it is frequently more remunerative than preferred stock as is seen at present in the case of the American Sugar Refining Company. The proportion of capital of the large combinations, which goes toward the cost of their promotion is an immense item. The amount which goes into the pockets of promoters and bankers for floating the organization varies from 20 to 60 per cent. of the total capital invested. Capitalists say, however, that such remuneration is not excessive, for men with reputation for business capacity and strength of character, well enough established to be entrusted with the formation of such gigantic corporations, are very few and the promoters of these concerns run enormous risks, for which they should be compensated.
The part taken by the banks in floating these combinations is frequently an important one. Generally a new corporation must raise money by selling stock, and here the banks lend their aid by "underwriting the stock." A bank may make an agreement with the corporation to take at 50 per cent. all stock not sold by a certain time at a price above 50 per cent.
Trusts, so called, vary much in form. The first kind is the "pool" of which some are now in operation. In the old Trust form, of which the Standard Oil Company is a type, a small board of trustees have the business of managing all the different companies, but dividends are paid out on combined profits. Much anti-trust legislation, however, led to the formation of the typical form of trust--the single corporation. The form of Trust which is now in the ascendant is modelled much after the old Trust. A central company is organized to buy up all stock of all the corporations. Technically the individual boards of directors manage their own affairs, but in reality, the directors of the central company have the power. In all previous forms of the Trust, competition between the individual companies has been stopped. But the last named form of trust does not combine competition companies. The Federal Steel Company, for instance, bought up mines, manufactories dealing with the product in its various stages of refinement, and steamship and transportation companies. Such a system simply insures to the corporation a constant supply of raw material and a market for the finished product, but does not remove the healthful element of competition.