Laws Relating To Trusts, Corporations, And Railroads
( Originally Published Early 1900's )
A better administration of these laws needed. Safeguards of corporations, and a comparison of ours with those of foreign countries. The railroad situation and the Supreme Court decision. Views on the subject. The pooling question and business interests. A new law to regulate railroad rates and to define a violation of railroad law indispensable. In so far as the laws on the statute book are sufficient to deal with any abuse that corporations or trusts may be guilty of, the question resolves itself into one of execution or of enforcing the law; and upon the necessity of this in relation to all business concerns in the management and profits of which more than one person is interested, I have always insisted that the terms of the charters of corporations should be fully complied with, and that means of a public official character should be resorted to for the purpose of compelling such compliance. In some foreign nations matters relating to corporations seem to have better safeguards thrown around them than here. France, Germany and Belgium are all noteworthy in this respect, and England also could impart to us some useful lessons learned in the school of hard experience since the South Sea Bubble and the Mississippi Scheme. The rule regarding paid-up capital is more strictly adhered to abroad, and, in this respect and other matters of administration, New York State lags behind several other states, notably Massachusetts. I see that since the famous court decision in the Trans-Missouri case treated in the preceding chapter much emphasis has been laid on this vital point of administration; and Mr. V. H. Lockwood and the Hon. Perry Belmont, both very close reasoners on this subject, have dissected and laid bare the insidious defects of the administration of existing laws in a way that should commend itself to all lovers of justice and equity. Mr. Belmont in his very elaborate and pithy essay of twenty five pages in the North American Review for April, I897, dwelt at some length on the conflict of opinion in the United States Supreme Court arising out of state laws regarding railroads and other corporations; and he finally arrived at the conclusion that congressional legislation is absolutely necessary to settle the pending trouble. The precedents which Mr. Belmont cites are somewhat unique as well as important in this discussion, and I regret that space will not permit a full quotation, but I insert two paragraphs which illustrate his sharp, legal, and strictly logical method of drawing conclusions: “Although the court has, by the narrow majority of one, decided that the law of I890 covers common carriers, and has adjudged the comprehensiveness of the word 'every' before the word 'contract,' yet the published conflicting opinions have exhibited such evidence of exhaustive debate in the consultation, if not of animated feeling, between the judicial disputants that there seems little hope of a change of vote on reargument, and another consultation -the members of the court divided on a question of law, not of fact. Therefore the question now at issue is one for Congress. "There are two new and important considerations confronting the country. On a first superficial view it is not easy to discover why it should be that if railway directors are really competent - if, as the law demands, they really direct in prescribing rates; if they do not abandon the work and illegally delegate it to freight agents — the railway corporations cannot achieve, without formal agreements with each other, the thing they have heretofore done by agreements now condemned by the court. "The other consideration is that if it shall now be seen that organized private capital is not, by its boards of directors acting in corporations, capable of reasonably and safely conducting interstate railway transportation, aided by such help in administration as an energetic Interstate Commerce Commission can give, then socialism will be heard in an attempt to show that only organized political government can do the work, as it now does in so many European countries, and as the Populists insist must be done in the United States, by government ownership of railways, telegraphs, telephones, and other agencies in public use." It is not amiss to call attention here to the operations of these great combinations of capital, the development of which seems to have become inseparable from modern business methods, and which are in common parlance erroneously designated as "trusts." To state the case in plain and simple terms, the object sought to be attained is to put various interests belonging to different parties together so as to form a large concern represented by stock capital without personal liability, having in view a reduction in expenses, greater efficiency, production on a larger scale, and the realization of greater profits without advancing the price. When a number of small individual plants are thus united for a common object, under efficient official management, the expenses are materially cut down. With the increased capital which this method admits, better machinery is secured, with better results in meeting foreign competition, which adds largely to this country's exports. In this way this country has, during the past ten years, increased to an immense extent its ability to compete successfully with Great Britain and other European countries. Now, the great and underlying principle that has put it in our power during the last decade to make such an unprecedented advance in a department of commerce from which we were generally supposed to have been almost excluded, is that of the much maligned combination of capital. Without such means as we possess (despite much ignorant hostility) of aggregating capital, there could have been no such progress as statistics clearly demonstrate. People who take a narrow view of the subject say that the system throws men out of employment. To my mind it is evident that there must have been far more money spent in wages when the manufactured exports were $82,000,000,000 than when they were only $78,000,000 ten years previously. More than double the value of material by nearly $300,000,000 worth, certainly could not be moved by a less number of men. It probably required more than half as many more, namely 50 per cent.; and during this period labor itself has increased only 25 per cent., thus leaving the workman better off than before the combinations began to make much progress in the improvement of machinery. It seems unnecessary to go over much more of the ground in detail, as this example very clearly and amply illustrates the principle. Can anybody imagine that the railroads could employ an army of 800,000 workmen at good wages and that T- part of a cent per ton per mile would make the difference between dividend and no dividend to certain prosperous roads, if the principle of combination were not worked extensively in the railroad industry? As similar arguments apply to other industries with equal cogency, I consider it unnecessary to multiply examples, as any one can do so for himself simply by opening his eyes, looking over the industrial field past and present, coolly reflecting on the situation, and without permitting political prejudice or newspaper sensationalism to cloud his reason or distort his common sense. One of the results inseparable from combinations, no matter how selfish the promoters may be, is that they make everything which they produce cheaper to the consumer than it possibly could be without their existence; and the larger the combination, as a rule, the better and the cheaper is the consumer served. It is only during the brief transition period of the change from the separate concerns to the combine that wage earners suffer. After that they are better off and labor is more fully employed, usually at higher wages. Many of the smaller concerns that go into the combines and obtain very profitable remuneration for their properties would otherwise become bankrupt. The fact that a reduction in the price of a manufactured article invariably stimulates consumption needs no more demonstration than that the inflexible law of supply and demand disposes of any fear as to arbitrary advances in price. The chief good achieved by the so-called " trusts "'consists in the power and facilities which they possess of making almost everything of use and desirability cheaper to the consumer than it could possibly be by any other means. During the last two decades the staple articles of commerce in general have been reduced to the consumer from 15 to 50 per cent. If the trust were an octopus, as has often been unthinkingly asserted, these large profits, instead of being divided among consumers, would be appropriated by the trust. The most important contributors to this great desideratum on behalf of the consumers have been the railroad corporations, frequently regarded as each a trust in itself. And here it is appropriate to remark that these corporations, as a rule, above all others least deserve to have any odium attached to them, for it has chiefly been through them that products of every kind have fallen so much in price, largely in consequence of the reduction in freight rates from 3 cents per ton in 1870 to about.805 at the present time. If the railroad corporation or trust were an octopus it would have held this important item of nearly two cents a ton within its greedy tentacles, thus realizing many hundreds of millions during the thirty years in question, and a very large amount in the years between the former period and the invention of the locomotive. One of the most difficult things connected with the whole abstruse and vexed question of trusts is the definition of the term. So far as anything approaching a clear idea of a trust can be gleaned from the Sherman Act of I890, which has given so much rise to controversy, it may be defined, according to the author of the bill, as "a contract in restraint of trade between the different States." The application of this definition gave rise to a good deal of dissatisfaction and controversy at the time of the decision of the United States Supreme Court in the case of the Trans-Missouri Traffic Association. The knotty point assumed in this matter, as in that of the Chicago warehouse affair, was that every business forming a part of interstate commerce and affected with public interest should be subject to the legislation and control of Congress. To show how poor a chance the general public has of understanding the rendition of this Sherman Act, the division of opinions of the Supreme Court in that case will amply illustrate the point in question. There were two issues before the Court, one being as to whether the Sherman Anti-Trust Law applied to railways, and the other related to the nature of agreements in restraint of trade, partial as well as general. The Court was divided, the decision being rendered by the casting vote of Chief Justice Fuller, who, with four others - Justices Harlan, Brewer, Brown, and Peckham - held that the statute applied to railroads and included every agreement in restraint of trade which might be entered into by any company, corporation, or person. The opinion, which was about half as long as the latest novel or law book, was written by Justice Peckham. The minority opinion, in which four of the nine Justices coincided, dissented from the majority on both issues. They held that common carriers, being already under the regulation of the Interstate Commerce Law, were not within the purview and were not to be held within the operation aimed against trusts. They maintained that the statute can be rightly construed as applying only to general and unreasonable contracts in restraint of trade, and not to reasonable contracts only partially having that effect. They also held that to extend its operations to all contracts and agreements indiscriminately would not only be destructive of the freedom of contract and of trade, but against the whole current of judicial authority. The opinion goes on to say: "The plain intention of the law was to protect the liberty of contract and the freedom of trade. Will this intention not be frustrated by a construction which, if it does not destroy, at least gravely impairs both the liberty of the individual to contract and the freedom of trade? If the rule of reason no longer determines the right of the individual to contract, or secures the validity of contracts upon which trade depends and results, what becomes of the liberty of the citizen or the freedom of trade? Secured no longer by the law of reason, all these rights become subject, when questioned, to the mere caprice of judicial authority. Thus, a law in favor of freedom of contract is so interpreted as gravely to impair that freedom. Progress and not reaction was the purpose of the act of Congress. The construction now given to the act disregards the whole current of judicial authority. The remedy intended to be accomplished by the act of Congress was to shield against the danger of contract or combination of the few against the interest of the many and to the detriment of freedom. The construction now given strikes down the interest of the many to the advantage and benefit of the few." The following comments were entirely to the purpose: - "The interpretation of the statute, which holds that reasonable agreements are within its purview, makes it embrace every peaceable organization or combination of the laborer to benefit his condition, either by obtaining an increase of wages or a diminution of the hours of labor. It is, therefore, absolutely true to say that the construction now adopted which works out such results not only frustrates the plain purpose intended to be accomplished by Congress, but also makes the statute tend to an end never contemplated and against the accomplishment of which its provisions were enacted." In the light of practical events it will be observed that the Sherman Law has a very plausible but at the same time a very seductive and deceptive reading. The pretence is that it is directed against "unlawful restraints of trade," while it really intermeddles with agreements of a lawful character indispensable to the equitable distribution of profits among the members of a company or corporation. The execution of the law thus imposes hardships and suffering of the most tyrannical character upon innocent people, as illustrated in the Trans-Missouri case, by the interpretation of the law by which it is made a crime for people united in the same kind of business to have a fair division of their honest and equitable profits. A large amount of those profits is distributed among the people at large for the various necessaries of life, through grocers, bakers, clothiers, landlords etc. Thus we see that a trust or combine of this description, instead of being an octopus or greedy monopoly, assumes the character of a most beneficent agent of distribution in every walk of life. Arbitrary laws, after the manner and spirit of the Sherman Act, are calculated to rob people of their vested rights, and are clearly in violation of that clause of the Fifth Amendment to the Constitution which states that" No person shall be deprived of property without due process of law, nor shall private property be taken for public use without just compensation." The practical effect of this wrong was clearly set forth in the famous Nebraska Maximum Freight Rate case, in which it was shown that the reduction effected in freight rates by the legislature amounted to about thirty per cent. of the entire rate as fixed by the company upon an equitable paying basis. The case was brought into the United States Supreme Court to test the validity of the law passed by the Nebraska Legislature of I893, prescribing the maximum freight rate within the State of Nebraska. It has been estimated that if the law of Nebraska were carried out in this instance, its execution would amount to a practical confiscation of the railroads in that State. It would seem to be a most desirable thing, calculated to disarm prejudice and at the same time to conserve public right, that the several States should unite in passing laws requiring these great industrial combinations to submit periodical statements of their financial condition and operation. Such legislation should be in the line of that governing the railroad corporations; and in the case of corporations transacting business in several States, supervision could be very properly lodged with the present Interstate Commerce Commission by enactment of a national law. The industrials cannot expect to gain full public confidence until they furnish reliable annual or semi-annual reports of their operations and conditions. In view of the enormous powers and advantages which they hold, the public has a right to this information; and legislation against the trusts could take no wiser or more effective form than an enforced publicity. By such means the public would be protected against monopolistic abuses, investors would be saved from fraud, and the industrials themselves would gain through commanding the confidence which many of them now lack. One thing, which seems to me very defective about legislation in regard to trusts and corporations, is that we are left very much in the dark as to what acts constitute a violation of the law. This part of the statutes is so indefinite that the judiciary has quite too wide a range afforded it for definition; and this defect becomes especially marked when a judge without practical business and financial knowledge attempts to adjudicate upon a case, for a clear understanding of which such an equipment is indispensable. Knowledge of this character should be better represented on the Supreme Bench, and it is not so difficult to procure at the present time as it has been in the past, for many lawyers now get a fair business and commercial education, and certain members of the United States Bar all over the country have in the last few years organized themselves into a special association for the promotion of the study and practice of commercial law. I believe many of the best lawyers will agree with me when I say that this educational defect was clearly visible in the majority opinion of the Supreme Court in the Trans-Missouri case, and I say it without any disposition to detract from the great ability of the learned members of that court. This kind of training is seen to advantage wherever it is brought into the settlement of questions involving a combination of law and business calculations. The point was recently illustrated in an interview of a daily newspaper with the Hon. Chauncey M. Depew, in which he spoke of a case where free railroad competition had sway, and a merchant in a small town who gave all his business to one road on exclusive terms was enabled through a special rate to monopolize the business of that town and freeze out the other merchants in the same line. If pooling had been permitted under proper surveillance and regulation, this action in restraint of trade could not have happened, and a lawyer who was expert in commercial matters could have warned the victims of the impending danger. The want of a rule to follow in defining what is an act involving this so-called crime of "restraint of trade " was conspicuously illustrated in the abortive attempt of the Lexow Committee to discover illegality in the organization and workings of certain corporations. In its report it floundered around in a very ridiculous fashion, aiming fruitlessly at some definite charge to prefer. Some organization akin to the Massachusetts Commission, now so generally referred to in the periodicals, might be a good medium for helping to enforce the law in cases of alleged delinquency, and for defining more clearly what a violation of the law is, so that a person or a company could know when an illegal act had been committed; for these are things of which everybody but the Supreme Court appears to be ignorant. The District Court and Circuit Court of Appeals are equally in the dark with all who may have anything to do with the question, and who may be liable to be involved in the commission of an indefinite and undefined crime punishable by fine of $5000 and a year's imprisonment. There are sufficiently urgent reasons why Congress should intervene in a matter of such paramount importance and take a short cut toward ending the danger by the adoption of a law or resolution to the effect that the Sherman Anti-Trust Law shall not apply to the railroads. This would at once end the troubles arising out of the decisions of the Supreme Court in the TransMissouri case, and prevent any such difficulties in the future; while the question of devising new legal regulations authorizing pooling, revising the relations between the roads and the Interstate Commission, and for holding destructive competition in check, could be easily left over for more mature consideration. The question is a great, complicated, and difficult one; and its final solution by legislative enactments can be reached only by calm and more or less protracted deliberation. Upon the whole, it is reasonable to expect that the more exciting phases of this question have been passed. Time is now ripe for readjustment.