Lords of Creation
Page 24
Meanwhile the giant insurance companies were likewise growing at an astonishing rate: by 1930 there were three companies—the Metropolitan, the Prudential, and the New York Life—each of which had assets greater than all the life-insurance companies of the country combined had had in 1900. Here again, financial decisions involving billions of dollars in all were coming to be made by a few men.
Of the power represented by the investments of the big banks, the big insurance companies, and the big investment trusts there will be more to say later. At this point it need only be noted that, combined with the power exercised by the controlling forces in the 200 non-financial giants, it tended to bring into the hands of a few thousand men the immediate direction of something like half of the corporate business of the United States.
5
How was this concentration, which we have been trying to measure, brought about?
One way in which it was brought about, of course, was through the ancient process of the survival of the fittest. The large concern—if efficiently managed and properly decentralized in its operations—was able to make the most of several advantages: it could buy its materials at lower prices than its competitors, it could cut prices and undersell its competitors at critical points, it could spend more money on research, on advertising, and on salaries to able executives.
Another way in which concentration was brought about was by mergers of existing corporations. During the seven fat years there was a positive mania for mergers: it was a dull week that brought no marriage announcements in the financial pages. Over twelve hundred of these weddings were solemnized in the years 1919–1928, involving over four thousand concerns (for some of the alliances were not monogamous). To some extent the merger mania was due to a belief that a large concern with a varied business would be more stable than a smaller one, less subject to ups and downs of fortune. To some extent it was due to a desire to bring about more economical operation: if, for example, one salesman could sell two lines of goods instead of one, the cost of selling dropped (along with the second salesman). To some extent it was presumably due to a desire for the power that comes with size—the chance of being in some degree able to dictate prices, to approach monopoly.
Another less creditable but potent reason for merging—especially during the feverish days of the big bull market—was that a merger gave the men on the inside a chance to make money in the stock market. Sometimes the terms of the alliance put an extravagant value upon one or the other of the companies, and thus enhanced the immediate value of its stock; and anyhow, speculators had got the idea into their heads that mergers meant prosperity for the concerns involved. Therefore to arrange one of these alliances was to have a beautiful opportunity to push up the prices of the stock of the contracting parties, with easy profits for those who bought early and avoided the rush. And perhaps still another reason for many mergers was sheer vainglory: the blind urge toward bigness, the very human wish to do what everybody else seemed to be doing and do it on a suitably impressive scale.
Two examples of concentration, familiar to everyone, will illustrate what mergers and the survival of the fittest did to the American scene during the seven fat years. The first of these is the rise of the chain stores. By 1930, chain stores were doing practically one-fifth of the retail business of the country; in town after town, the local merchants along Main Street were failing one by one under the competition of groceries, cigar stores, drug stores which owed allegiance not to any citizen of the town, but to an office in a city hundreds or even thousands of miles away. The other example is the concentration of the booming automobile business into fewer and fewer big concerns. In 1923, 85 per cent of the sales of cars had been divided among six companies. By 1930, 83.3 per cent—almost the same proportion—was divided among only three companies. Ford, General Motors, and Chrysler had taken the middle of the road, and gradually their competitors were being forced off it.
Another way of achieving concentration, perhaps the most effective way of all, was through the use of the holding company—that far-from-ancient device which, as we have seen, had first come into wide popularity during the latter eighteen-nineties. Holding companies were legion now; indeed, to a large extent the economic history of the nineteen-twenties is the history of the holding company.
According to Berle and Means, among the 573 corporations whose stock was active on the New York Stock Exchange during the year 1928—an array of corporations which included most of the biggest in the country—92 were holding companies pure and simple, 395 were holding companies as well as operating companies, and only 86 were definitely outside the holding-company class. If there was a mania for mergers, so also was there a mania for the use of the holding-company device. By 1930, twenty per cent of the total railway mileage of the country had come under the domination of holding companies. (Shades of the Northern Securities Company!) As for the public utilities of the country, holding companies were taking them over so rapidly that by 1930—to quote N. R. Danielian—“about three-quarters of the power resources of the United States were under the aegis of nine holding-company systems.”
The most extraordinary device of all for achieving concentration was an extension of the holding-company device: what became known as “pyramiding”—namely, the organizing of holding companies to control holding companies which in turn controlled other holding companies—and so on almost ad infinitum. How pyramiding could be used to bring a whole flock of once independent businesses under the control of a single corporation, and could enable a financier to do this with a minimum investment of his own money, may be illustrated by the following simplified example. It offers clues to much of the recent economic history of the United States.
Suppose there are four corporations, known as A, B, C, and D, engaged in independent businesses. They may be electric-light companies in four different localities, for example. Each of these four corporations represents an investment of a million dollars, so divided into bonds (which have no voting power), preferred stock (which has no voting power) and common stock (which alone has the right to vote, and thus to control the management of the corporation), that an investment of $250,000 will enable you to maintain control of the whole million-dollar concern. (All you require, to give you undisputed control, is fifty-one per cent of the common stock, and often much less will serve the purpose; thus it would ordinarily take less than $250,000 to get a firm grip on a million-dollar concern. But let us arbitrarily adopt $250,000 as our figure.)
Let us say that you would like to get control not merely of one of these companies but of all four of them—but this would require four times $250,000, or a million dollars, and unhappily you do not possess so much money, or you have other uses for it. All you wish to put up is $250,000—enough to buy control of only one of the four.
Confronted by this difficulty, you meet it as follows: You organize Holding Company X. You put your own $250,000 into the purchase of enough stock in X to control it. You sell to the public the bonds and preferred stock of X and the rest of its common stock, thus bringing the total investment in Holding Company X up to a million dollars, of which you yourself have contributed only a quarter, and the outside public has contributed the other three-quarters.
Then with this million dollars, the disposal of which you can now dictate, you can achieve your objective: Holding Company X buys the control of Companies A, B, C, and D, paying $250,000 for each. You have got all four of them, and you have invested only your $250,000.
But this is not enough. You would like to get hold of other companies too. Corporations E, F, G, and H look tempting to you. Let us suppose they are of the same size as A, B, C, and D, which you now have in your domain.
You now organize a super-holding company, which we may call S, also with a capitalization of a million dollars, which an investment of $250,000 will control. You sell to the public the bonds and part of the stock of Super-holding Company S, thus getting $750,000 from the outside. With this money, so cheerfully contribute
d, you arrange for Super-holding Company S to take over your stock in Holding Company X, while you quickly substitute for this investment of yours in Company X an investment in a controlling share in Super-holding Company S—somewhat as a man doing up a package holds down with one finger the knot which he has just made while he ties another knot.
Now you have your own $250,000 invested in Super-holding Company S; S has $250,000 invested in Holding Company X, whose control of A, B, C, and D is still secure. And notice this. The $750,000 which the public put into Super-holding Company S is still free and clear, ready for investment.
With that $750,000, the disposition of which you can dictate (since you control S), you can easily organize Holding Company Y, which in like manner can take over Companies E, F, G, and H.
So presently you will find yourself in this enviable position: you sit at the top of a pyramid: you, with your $250,000 investment, control S, which in turn controls X and Y, which in turn control A, B, C, D, E, F, G, and H. You had only money enough to pay for a quarter of the bonds and stock in a single company, yet you now have eight operating companies, two holding companies, and a super-holding company where you can do as you like with them. And you have done nothing which the business community considers in the least irregular. You have merely carried out the holding company principle to its logical conclusion. Or rather, part of the way; for the process can be carried still farther if your confidence and ambition hold out and the banks will favor you by lending you money at the proper moments to hold your knots securely in place while you tie new ones.
This is an arbitrary and over-simplified example, of course. Nevertheless it illustrates the general principle by which a little money could be made to go a long way in building up an economic empire, once pyramiding had been accepted as an orthodox financial device.
If you think it may possibly be an over-elaborate example, consider the elaborateness of the actual device by which the Tidewater Power Company in North Carolina was controlled by the Insull interests. According to Professor Norman S. Buchanan, the Tidewater Power Company was controlled by the Sea-board Service Company, and the Seaboard by the National Public Service Corporation, and the National by the National Electric Power Company, and this National Electric Power Company by Middle West Utilities; and Middle West was controlled jointly by Corporation Securities Company of Chicago and Insull Utility Investments, Inc.—which in turn were controlled by the Insull family and by the banking house of Halsey, Stuart & Co. It was a very long distance from that little power company in North Carolina to Samuel Insull; there were at least six steps to this pyramid; but Insull dominated it nevertheless.
Pyramiding had many advantages to the pyramider, besides that of making a little money go a long way. In another chapter we shall follow the adventures of some noteworthy pyramiders and discover what some of these advantages were. For the present it is enough to remark that if it had not been for the lavish use of this logical extension of the holding-company device, many of the giants of the economic world would never have got their growth.
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But we are by no means done with describing the concentration of economic power during the seven fat years when we have measured the growth of the business giants and have listed some of the ways in which they added to their stature. It is just as important to inquire how these giant corporations themselves were owned and controlled. Let us begin at the beginning. Who owned them?
The answer to this question does not suggest concentration of control at all. On the contrary, it suggests wide dispersion of control. The fact is that the ownership of these big concerns was becoming more widely distributed than ever before.
Let us take as familiar examples three of the very biggest of them, three super-giants. First, the United States Steel Corporation. In 1910 it had had about 28,000 stockholders; in 1920, it had had 95,000; by 1930, it had 145,000—a steady increase. Second, let us take the Pennsylvania Railroad. In 1910 it had had 65,000 stockholders; in 1920, it had had 117,000; by 1930, it had as many as 207,000. Third, let us take an even more conspicuous example, the American Telephone and Telegraph Company—the biggest monopoly in the United States. In 1910, its stockholders had numbered 41,000. In 1920, they had more than tripled: the figure was 139,000. By 1930, they had more than quadrupled again, reaching 567,000—over half a million. So rapidly, in fact, were the Telephone stockholders multiplying that the amateur statistician could amuse himself by calculating that at the 1920–1930 rate of multiplication, it would take less than fifty years more for every man, woman, and child in the country to become an owner of Telephone stock.
In corporation after corporation the same tendency was exhibited. As the company expanded, so did the number of its shareholders expand. Surely, thought many observers, here was the conclusive answer to those who talked about the concentration of economic power. Industry and business were being democratized. The school-teacher with her ten shares of Telephone, the shopkeeper’s widow with her ten shares of Steel, the mechanic with his five shares of Pennsylvania Railroad—these were certainly not capitalists in the traditional sense, yet they were part owners of vast properties, they were voters in growing industrial republics. And there were millions of such little shareholders.
So huge had some of the corporate giants become that no longer was it possible for any individual to own a majority of the stock. Indeed, in the hugest of them no individual held more than a trifling percentage. In 1929 the twenty largest holders of Steel stock owned together only 5.1 per cent of the total number of shares; the twenty largest holders of American Telephone owned only 4 per cent; the twenty largest holders of Pennsylvania Railroad stock owned still less—a mere 2.7 per cent.
Yet the directors and officers of most of these companies remained securely in the saddle, small as were their collective holdings. How did this happen? Was it simply that their management of the properties was so capable that the numerous owners were continuously pleased?
Hardly that. But a large electorate is easily dictated to. Just as a city population is more easily controlled by political bosses than a village population which can gather in town meeting, so an army of stockholders is more amenable to the policies of the management than a corporal’s guard. They cannot readily meet to discuss the affairs of the corporation. If some of them wish to propose a change, the sheer immensity of the task of consulting their thousands or even hundreds of thousands of widely separated fellow-stockholders—to say nothing of the expense—is virtually prohibitive. It is enormously easier to sell one’s stock than to fight.
If one objects to the way in which this economic community is administered, one does not have to go on living in it, as one usually would have to go on living in a political community whose administration one disliked. One can move out, as it were, at a few hours’ or a few minutes’ notice. In nine hundred and ninety-nine cases out of a thousand, the disgruntled stockholder simply sells; and the management continues firmly in office, unless failing revenues or rivalries in the inner circle cause dissension there. The men of this inner circle-directors, executives, bankers—maintain their power by being entrenched at the center of things, somewhat like a political ring—except that political rings are from time to time thrown out by an enraged electorate, and it is not easy to recall a single case during the seven fat years when the electorate of one of the giants threw anybody out (although from time to time they took sides in battles between the big insiders, as in the contest between John D. Rockefeller, Jr., and Colonel Stewart for the control of the Standard Oil Company of Indiana).
If the insiders remained in harmony, the stockholders dutifully and unquestioningly signed their proxies designating certain gentlemen of the management to vote on their behalf at the annual meeting. The votes of the school-teacher, the shopkeeper’s widow, and the mechanic were thus cast exactly as the gentlemen of the management wished them cast. Dissensions there were, changes of control there were; but seldom if ever did the electorate bring them about.
r /> Not that the electorate was not assiduously wooed and flattered by the management. There was always, of course, the distant possibility that it might discover its latent power. More vital to the management, however, was the fact that the men and women of the electorate were potential buyers of the company’s products, potential allies of the company against political opposition or interference, and—if there were employees among them—potential defenders of its wage and dividend policies. Many big corporations made a point of selling stock to their workers to give them a practical interest in profits, to align them with the interests of capital. Many of the public utilities made a point of selling stock to those who used their electric light or their gas or water, to make these consumers less skeptical about rates, more amenable to large dividends, more enthusiastic about private operation as against public operation. In any case shrewd corporation executives considered it wise to do their best to secure the stockholders’ good will as a prerequisite to securing the good will of the general public.
Thus the purchaser of a few shares of stock would perhaps receive a letter signed (in persuasive facsimile) by the president of the company, welcoming him as one of the “partners in the business,” pointing out that if he patronized the company’s products he would thereby “increase directly the sales and earnings,” and suggesting that he must “feel at liberty to write me personally at any time.” Or he might receive a pamphlet describing the company’s business, with the president’s card neatly attached to it with a clip. The annual reports which came to him were sometimes replete not only with figures but with graphs and attractive photographs of the company’s products or properties. When he sold his stock, he might receive another letter expressing the president’s personal regret at his departure and the hope that the company had not failed him in any way. Forms, all of these, of course; forms devised by ingenious experts in public relations, and distributed by the hundreds of thousands; yet sometimes they were so telling that the small stockholder who received them and then saw a Buick pass on the road or a General Electric fan whirring, would warm momentarily with the sense that he himself was one of the proprietors of this useful product.