WEBVTT NOTE The Rise of Big Business: The Failure of Trusts and Cartels (continued) 1 00:00:00.000 --> 00:00:16.000 Despite the drive for monopoly, despite the mentality of many businessmen, monopoly is the key thing that will provide more efficiency and lower cost and higher prices and all that. 2 00:00:16.000 --> 00:00:23.000 Really, by the end of this period, we were talking about only oil, sugar and corn products were dominated by a single company. 3 00:00:23.000 --> 00:00:31.000 And steel was 60 percent, not 90, but there we also see the collapse of the US steel attempt. 4 00:00:36.000 --> 00:00:41.000 There's also, again, there's charming examples of what happens here. 5 00:00:42.000 --> 00:00:44.000 There's also the so-called whiskey trust. 6 00:00:45.000 --> 00:00:51.000 80 small firms in the whiskey industry in the form of distillers and cattle heaters trust, in 1987. 7 00:00:51.000 --> 00:01:00.000 And the first thing they do is concentrate their production of 21 plants. They scrap the other plants. They figure they'll raise prices, cut production. 8 00:01:00.000 --> 00:01:13.000 And the price of whiskey was then raised, okay? So what happens? What happens is it stimulates a group of small, local, new firms suddenly popping into the whiskey business and undercut the stores and cattle feeders' trust. 9 00:01:13.000 --> 00:01:43.000 So what do you do? He has a distiller's and cattle feeder's trust. They're trying to form a monopoly. They desperately get all these guys together, they merge, and finally they find these crumbs suddenly pop up and undercut them. What do they do about it? Either they can ignore it, in which case they lose their monopoly, or they buy them out. But again, they can't keep buying out people forever, and so they went bankrupt in 1896. Again, just as triumphant. And they try that again. Another distiller's company tries it later, in the reach of a kind of a similar thing. They have a lot of competitors. 10 00:01:43.000 --> 00:01:50.000 The National Biscuit Company was formed in 1998 as a giant combination of three regional giant combinations. 11 00:02:13.000 --> 00:02:25.000 They tried their best to control prices and production, limit competition, buy out the competition, they tried to buy out every biscuit company that popped up, too expensive and they meant disaster in this process. 12 00:02:25.000 --> 00:02:33.000 And finally in 1901, this was only three years, but it was a very traumatic three years for the National Biscuit Company, and finally in 1901 they gave up. 13 00:02:33.000 --> 00:02:59.000 The National Biscuit Company gives up the idea of controlling prices for cutting production, raising prices, monopolizing everything, and saying, we've had it, we're almost bankrupt. 14 00:02:59.000 --> 00:03:01.540 they changed the idea of cutting costs 15 00:03:01.540 --> 00:03:04.600 of improving efficiency and not worrying too much about the competition 16 00:03:04.600 --> 00:03:06.460 having systematic marketing and so forth 17 00:03:06.460 --> 00:03:08.760 and improving the quality of the biscuit 18 00:03:08.760 --> 00:03:12.560 uh... they decided they were not going to buy out anybody else, the whole of them 19 00:03:12.560 --> 00:03:13.780 uh... 20 00:03:13.780 --> 00:03:16.600 and what they did when they decided not to buy out anybody else, they came up with a great 21 00:03:16.600 --> 00:03:18.600 invention, you need a biscuit, the first 22 00:03:18.600 --> 00:03:25.080 the phrase, the first consumer, the market innovation, the first guy to sell package 23 00:03:25.080 --> 00:03:26.300 cookies 24 00:03:26.300 --> 00:03:28.100 uh... package stuff for the consumer 25 00:03:28.100 --> 00:03:31.440 uh... package crackers, nobody really thought of that before 26 00:03:31.440 --> 00:03:34.260 before that, even when I was growing up, I'm not that old 27 00:03:34.260 --> 00:03:37.580 when I was growing up, you didn't really buy package stuff for the consumer much 28 00:03:37.580 --> 00:03:40.780 you went to the grocery store, you went to the grocery store, you bought 29 00:03:40.780 --> 00:03:43.060 the grocery store had a tub of butter 30 00:03:43.060 --> 00:03:46.420 and they had a bunch of pickle, a jar of pickle, and you sort of reach in, you say, well give me 31 00:03:46.420 --> 00:03:50.860 a slice off a quarter of a pound of butter, and the guy would hack away at his big tub 32 00:03:50.860 --> 00:03:55.180 there was no brickstone or firestone or other stuff, it was just butter 33 00:03:55.180 --> 00:03:57.180 We were deprived of a choice between brands. 34 00:03:57.180 --> 00:04:00.880 We couldn't pick between this kind of margarine, this kind of butter, and this kind of corn oil. 35 00:04:00.880 --> 00:04:01.680 It was just butter. 36 00:04:01.680 --> 00:04:05.880 You know, you went to the grocery store and there was this yellow stuff and they hacked it off. 37 00:04:05.880 --> 00:04:08.680 And this was the idea of consumer brands is very new. 38 00:04:08.680 --> 00:04:17.280 It's really a great thing because now we can pick, we can choose between Malamasi and Edith Biscuits and stuff like that. 39 00:04:17.280 --> 00:04:23.280 Some people, some of the health nuts around here might score in this, these choices. 40 00:04:23.280 --> 00:04:25.280 I think it's important that... 41 00:04:31.680 --> 00:04:37.480 Let me quote from the National Biscuit Company's annual report of 1901, announcing this change. 42 00:04:37.480 --> 00:04:38.680 They say, quote, 43 00:04:38.680 --> 00:04:43.880 When we look back over the four years, that was the four miserable years they've been in existence, 44 00:04:43.880 --> 00:04:48.080 when we look back over the four years, we find that a radical change has been wrought in our methods of business. 45 00:04:48.080 --> 00:04:52.280 When this company started, it was thought we must control competition, 46 00:04:52.280 --> 00:04:56.080 And to do this, we had to either fight competition or buy it. 47 00:04:56.080 --> 00:04:58.600 It was either drive it to the wall or someone would buy it. 48 00:04:58.600 --> 00:05:04.480 The first meant a ruinous war of prices, so I rejected that idea, and a great loss of profit. 49 00:05:04.480 --> 00:05:09.520 The second, a constantly increasing capitalization, buying more and more of these competitors. 50 00:05:09.520 --> 00:05:17.720 Experience soon proved to us that, instead of bringing success, either of these courses, if persevered in, must bring disaster. 51 00:05:17.720 --> 00:05:22.040 This led us to reflect whether it was necessary to control competition. 52 00:05:22.040 --> 00:05:26.320 We soon satisfied ourselves that within the company itself we must look for success. 53 00:05:26.320 --> 00:05:30.800 We turned our attention and bent our energies to improving the internal management of our business, 54 00:05:30.800 --> 00:05:34.360 to getting full benefit from purchasing our raw materials in large quantities, 55 00:05:34.360 --> 00:05:38.720 to economizing the expenses of manufacture, to systematizing and rendering 56 00:05:38.720 --> 00:05:41.120 more effective our selling department, 57 00:05:41.120 --> 00:05:44.640 and in both world things and before world things to improve the quality of our goods 58 00:05:44.640 --> 00:05:47.760 and the condition in which they should reach the customer. 59 00:05:47.760 --> 00:05:50.000 It became the subtle policy of this company to 60 00:05:50.000 --> 00:05:53.520 the buyout, no competition 61 00:05:53.520 --> 00:05:56.120 and this really sort of says it 62 00:05:56.120 --> 00:05:59.000 they didn't arrive at this through laissez-faire theory 63 00:05:59.000 --> 00:06:02.640 they arrived at it through hard-nosed empirical 64 00:06:02.640 --> 00:06:03.600 colleagues 65 00:06:03.600 --> 00:06:10.800 as Marxists would say, they were educated through struggle 66 00:06:10.800 --> 00:06:15.200 one of my brightest students that I've had in my foreign marketing history last year 67 00:06:15.200 --> 00:06:19.860 was converted from anti-trust-busting and laissez-faire by reading this report 68 00:06:19.860 --> 00:06:47.860 All right, we have a similar thing in agricultural machinery. Once again, J.P. Morgan, the Mephistophelian hand, J.P. Morgan, in work, tries to set up a monopoly in agricultural machinery, sets up the International Arvester Company, along with McCormick's. 69 00:06:47.860 --> 00:06:56.860 In 1902, this was supposed to be another great monopoly, tapping the efficiencies of giant-scale production, etc. 70 00:06:56.860 --> 00:06:58.860 What happened to the international harvester? 71 00:06:58.860 --> 00:07:00.860 A crummy situation, singularly unprofitable. 72 00:07:00.860 --> 00:07:04.860 There were fights between McCormick's and the Deerings that would emerge from this thing. 73 00:07:04.860 --> 00:07:07.860 There was a great deal of lethargy, there was poor organization, overconfidence, 74 00:07:07.860 --> 00:07:10.860 and there was a great decline in their shares of the market. 75 00:07:10.860 --> 00:07:16.760 In 1903, international harvester had 91% of the mowers in the country, 76 00:07:16.760 --> 00:07:20.560 reduced 91% of the mowers and 96% of the binders. 77 00:07:20.560 --> 00:07:27.360 By 1911, they were reduced from 96% to 87% of the miners and from 91% to 75% of the mowers. 78 00:07:27.360 --> 00:07:32.860 And the harvesters were reduced from 85% in 1902 to 64% in 1918. 79 00:07:32.860 --> 00:07:36.260 So, but by the time, you know, after 10, 20 years or over, 80 00:07:36.260 --> 00:07:40.260 international harvesters were being cut down systematically to size, so to speak. 81 00:07:40.260 --> 00:07:55.260 And the non-merged companies are going to expand. The competitors are not in on this great, tempted monopoly on the free market, such as Deere and company J.I. Case, expand and fill in the interstices, so to speak, of this operation. 82 00:07:55.260 --> 00:08:04.260 And to continue the story, in 1922, as I think I said, well, total farm machinery, international harvest are at 44% of the total farm machinery in 1922. 83 00:08:04.260 --> 00:08:11.260 By 1948 it had 23%. A steady decline, steady and happy decline for those of us who like to see this sort of thing happen. 84 00:08:11.260 --> 00:08:20.260 And also they would lag behind the new combine market, they were the last guys to get in the combines, behind an idea of rubber tire tractors and so forth and so on. 85 00:08:20.260 --> 00:08:25.260 and so on, behind again, in fundamental innovations in that particular industry. 86 00:08:33.260 --> 00:08:39.260 I mentioned something about Morgan, as I think Paul has touched on, 87 00:08:39.260 --> 00:08:46.260 before the late 1890s, the funds for these combinations came essentially from manufacturers themselves, pooling of their assets. 88 00:08:46.260 --> 00:09:16.260 After 1897, particularly in the famous great merger wave of 1897-1901, approximately, the great merger boom, essentially we have a key role of the Wall Street financiers in this thing, investment bankers, commercial bankers, the industrial stock market was just really coming in then, before that really the stock market was largely railroad bonds and government bonds, that sort of thing. So it was really these investment bankers, the Morgan pipes, promoted the great merger wave in 1897-1901. 89 00:09:16.260 --> 00:09:20.260 Okay, we also have the sugar trust. 90 00:09:28.260 --> 00:09:34.260 This is, I'm referring to the great article by Richard Zerbe on the sugar trust in Journal of Law and Economics. 91 00:09:36.260 --> 00:09:42.260 I mentioned before that he showed that there was no predatory price cutting, no attempt to be done by mergers. 92 00:09:42.260 --> 00:09:58.260 We had an increasing concentration of sugar in the 1860s, 1880s approximately, and one of the things that stimulated was an increase in the tariff, a high tariff of sugar. 93 00:09:58.260 --> 00:10:04.260 There were a lot of abortive cartels in the 1880s, and they collapsed once again. The same story begins to repeat itself. 94 00:10:04.260 --> 00:10:13.260 The sugar industry, although that was kind of a peculiar thing, it was largely concentrated in Brooklyn in that period. 95 00:10:13.260 --> 00:10:20.260 There were 10 firms, there was G. Rafferty, and it was heavily concentrated. 96 00:10:20.260 --> 00:10:25.260 There were 10 sugar firms in New York City, sugar manufacturers in the 1880s. 97 00:10:25.260 --> 00:10:28.260 Six of them were in Brooklyn, three of the largest were in Brooklyn. 98 00:10:28.260 --> 00:10:32.260 The key guy in the sugar industry in this period was Henry O. Havemeyer. 99 00:10:32.260 --> 00:10:36.260 Habermeyer Family, and Merck and Sugar Refining Company, and so forth. 100 00:10:36.260 --> 00:10:41.260 It was Habermeyer who coined the great phrase, the tariff is the mother of world trusts, as far as I know. 101 00:10:41.260 --> 00:10:48.260 It was Habermeyer who said, quote, the mother of world trusts is the customs tariff bill, the existing bill, which was the tariff of 1897, 102 00:10:48.260 --> 00:10:53.260 and the preceding ones have been the occasion of the formation of world-wide trusts. 103 00:10:53.260 --> 00:11:01.260 The idea, again, is you have to keep out foreign competition in order to be able to have any kind of successful trust at all. 104 00:11:01.260 --> 00:11:10.260 And there's a saga, the sugar trust saga can be pretty well outlined. 105 00:11:10.260 --> 00:11:15.260 As far as the tariff goes, kind of a cute thing here. 106 00:11:15.260 --> 00:11:39.260 We have the price of British sugar, British refined sugar plus the, first of all, British refined sugar plus transportation costs, in other words, the New York price of British sugar. 107 00:11:39.260 --> 00:11:55.260 1885, 1886, 1889, and this is $4.70 a hundred weight. 108 00:11:55.260 --> 00:12:03.260 $4.99 a hundred weight. 109 00:12:03.260 --> 00:12:23.260 Now we have the price of British sugar, high in sugar, plus the power, which is what adds on top of the price, $8.38, a pretty large amount of power. 110 00:12:23.260 --> 00:12:30.260 The history of sugar in the United States has been a vast loophole from then up to the present day of government action. 111 00:12:30.260 --> 00:12:41.260 The real sugar price is $7.38, $8.38, $18.98. 112 00:12:41.260 --> 00:12:46.260 We have practically a doubling of the price even with transport costs. 113 00:12:46.260 --> 00:13:03.980 Now we have the US price of US sugar, US refined sugar, $6.44, $6.12, $6.01, $7.64, $7.17 114 00:13:03.980 --> 00:13:09.160 It's showing, I think, pretty clearly that the United States sugar refineries have had to close up shop pretty well. 115 00:13:09.160 --> 00:13:21.160 The huge tariff which makes English sugar uncompetitive and allows Habermeyer to do his dirty work trying to cartelize the sugar industry. 116 00:13:21.160 --> 00:13:31.160 The Sugar Trust, of course, is a sugar refining company, lobbying very heavily for higher tariffs on refined sugar and lower tariffs on raw sugar. 117 00:13:31.160 --> 00:13:40.160 The sugar industry has a peculiar situation. We buy sugar from Cuba, raw sugar, we refine it in the United States and we sell it. 118 00:13:40.160 --> 00:13:49.160 So the idea was to be a big free trade theorist when it comes to raw sugar and be a big American system theorist when it comes to refined sugar. 119 00:13:49.160 --> 00:13:53.160 And the fortunes of the sugar industry in this period can be directly related. 120 00:13:53.160 --> 00:14:22.160 In 1887, the so-called Sugar Trusts was formed, the American Sugar Refining Company, to be more specific, more accurate. 121 00:14:22.160 --> 00:14:27.440 and more accurately, with 80% of the total American sugar refining output, formed obviously 122 00:14:27.440 --> 00:14:32.320 under the stimulus of this big tariff, and Havermeyer again was obviously being completely 123 00:14:32.320 --> 00:14:38.600 accurate when he said that he would never even try to form a sugar trust without the 124 00:14:38.600 --> 00:14:51.880 high tariff, and what they tried to do was to lower production and raise price within 125 00:14:51.880 --> 00:14:55.880 and of course this tariff, you know, this tariff protection. 126 00:14:55.880 --> 00:15:00.680 So in 1888, they had originally 20 plants, 20 sugar plants in the sugar trust. 127 00:15:00.680 --> 00:15:01.680 They reduced it to 10. 128 00:15:01.680 --> 00:15:07.480 They put 10 out of business, either dismantling them or combining them in some way. 129 00:15:07.480 --> 00:15:15.760 And they operated at a very, only, much less than full capacity even with the, just half 130 00:15:15.760 --> 00:15:17.640 of the plants. 131 00:15:17.640 --> 00:15:24.600 And in 1888, they already dropped. In one year after this cartel arrangement, even within 132 00:15:24.600 --> 00:15:30.640 the tariff war, in one year's time, the American sugar refining company's share of the market 133 00:15:30.640 --> 00:15:36.440 had fallen from 80% to 73%. Especially on the west coast, they had fallen to 50%. Because 134 00:15:36.440 --> 00:15:41.280 what happened is, on the west coast, the Hawaiian sugar manufacturer, the so-called sugar king 135 00:15:41.280 --> 00:15:46.840 of the sandwich islands, Klaus Speckles, enters the sugar industry. In California, he zips 136 00:15:46.840 --> 00:15:54.840 Spreckel's in the California because here, boy oh boy, here's this guy, Havonlein, he's raised the sugar prices, a lot of profits here, let's produce some sugar refineries. 137 00:15:54.840 --> 00:15:57.840 And so Spreckel's begins to build sugar refineries on the west coast. 138 00:15:57.840 --> 00:16:04.840 So not only do they have, you know, not only is this the feat of purpose, the Havonlein's purpose of having this monopoly cartel kind of situation, 139 00:16:04.840 --> 00:16:09.840 but he's faced with a permanent pain in the neck, which is Spreckel's, you know, a permanent new competition coming up, 140 00:16:09.840 --> 00:16:14.840 which wouldn't have been cool into being without this, you know, the original higher price. 141 00:16:14.840 --> 00:16:43.840 The price of, before this attempted monopoly, the price of sugar had been falling, from 1881 it was 9.2 cents a pound, this represents a fall, before the attempted trust, the trust comes in 1888, the price goes up from 7 cents to 7.6 cents, and bingo, Spreckel nips in, 142 00:16:43.840 --> 00:16:54.840 And now we have a problem. The production of Spreckels and the other independents increases from 8,000 barrels a day to 10,000 barrels a day. 143 00:16:54.840 --> 00:17:01.840 And we wind up with a sugar trust. By 1889, the sugar trust has only 66% of total sugar output. 144 00:17:01.840 --> 00:17:08.840 In other words, in two years, the American sugar refining company's share of the market falls from 80% to 66%. 145 00:17:08.840 --> 00:17:17.840 Spreckel pops up with new plants and the price of sugar against the fool finally goes down about 4.7 cents 146 00:17:17.840 --> 00:17:27.840 As a whole it's happening and the sugar trust tries to buy Spreckels out and he does buy Spreckels out 147 00:17:27.840 --> 00:17:33.840 and we have an American sugar refining company in 1892, a newly reorganized company 148 00:17:33.840 --> 00:17:38.840 which has brought Spreckels and six other people and now has 95% of the sugar production. 149 00:17:38.840 --> 00:17:42.840 Okay, we brought Spreckels out, we're in great shape, we have 90% of the production product. 150 00:17:42.840 --> 00:17:46.840 There's only two independents left in the great 1892 merger. 151 00:17:46.840 --> 00:17:50.840 There are only two independents left, one small plant in Boston which is making only 500 barrels of sugar a day 152 00:17:50.840 --> 00:17:55.840 and another two teeny plants in Louisiana that are making 400 a day. It's practically nothing. 153 00:17:55.840 --> 00:18:04.840 Otherwise, there was only beet sugar, which was only about 4% of sugar production in those days. 154 00:18:04.840 --> 00:18:11.840 That was very little. So here is, okay, we finally have the reorganized thing, we bought Spreckles out, we have as great a Spreckle to have in our alliance. 155 00:18:11.840 --> 00:18:15.840 Now what? Well, all sorts of old sugar hands are going to come back into the business. 156 00:18:15.840 --> 00:18:23.840 Hey, we've got higher prices, we've got higher profits, and we have two gentlemen named Adolf Siegel and Frederic Hippel. 157 00:18:23.840 --> 00:18:28.840 I went into the business of producing sugar plants, building sugar plants, so that the sugar mining company would have to buy it. 158 00:18:28.840 --> 00:18:32.840 Once again, we have this so-called blackmail arrangement. It's really a great thing. 159 00:18:32.840 --> 00:18:37.840 You have to really be a good sugar manufacturer. All you have to do is to build a plant, and then some guy has to buy it. 160 00:18:37.840 --> 00:18:40.840 Takes it off your hands. 161 00:18:40.840 --> 00:18:46.840 So, at one time the sugar plants were pretty sore, but they found out they bought a plant from Hipple Seagull. 162 00:18:46.840 --> 00:18:50.840 They found out there was no water supply there, and the whole thing was hardly anything. 163 00:18:50.840 --> 00:18:54.840 No equipment, it was a big rip-off, as we would say. 164 00:19:00.840 --> 00:19:08.840 So this continues on, and by 1894, with the same cost, only two years after the American sugar refining company has 95% of total sugar production, 165 00:19:08.840 --> 00:19:17.840 by 1894 they have only 85%, they drop 10% in two years, and the price starts falling again, because they have to compete for these new independents popping up. 166 00:19:17.840 --> 00:19:24.760 1895-1996, they try it all over again. They have a new cartel arrangement between the 167 00:19:24.760 --> 00:19:29.160 old sugar refining company, the old have-a-minus, reckless people, the new guys, and they have 168 00:19:29.160 --> 00:19:34.000 now a cartelization covering 90% of production. The price of sugar then goes up. The price 169 00:19:34.000 --> 00:19:39.400 of sugar had fallen during this competitive period from 4.8 cents to 4.1 cents a pound, 170 00:19:39.400 --> 00:19:44.520 and now went up to 4.5 cents a pound. Raise the little bit. So everything is hunky-dory 171 00:19:44.520 --> 00:20:14.520 about a year, and then a new guy enters the picture, a new old sugar guy who sort of dropped out of the business and done something else, Klaus Dorscher, and the Arbuckle brothers, the ancestor of the famous Fatty Arbuckle, and a little bit more stupid Fatty Arbuckle, so the Arbuckle brothers at Dorscher enter the business, they've been here, they take advantage of the high power-ups, they take advantage of the higher prices, the higher profits, they're going great cheap, great guns, and they begin to win, 172 00:20:14.520 --> 00:20:19.520 We turn that on the competitive struggle by 1898, which is only two years later. 173 00:20:19.520 --> 00:20:23.520 They're down to 75% of the output. 174 00:20:23.520 --> 00:20:26.520 The price of sugar falls again. 175 00:20:26.520 --> 00:20:33.520 Essentially, Arbuckle, by the way, broke the cartel with a lower cost and superior product. 176 00:20:33.520 --> 00:20:37.520 Arbuckle developed the idea of coffee packaging. 177 00:20:37.520 --> 00:20:41.520 Sugar was usable for coffee, which apparently hadn't been thought of very much before. 178 00:21:11.520 --> 00:21:14.520 in the authentic case of the sabotageous plant. 179 00:21:14.520 --> 00:21:20.520 And we have another great merger. In 1902, we have a new merger, 180 00:21:20.520 --> 00:21:23.520 American Sugar Refining Company with 90% of the total output. 181 00:21:23.520 --> 00:21:25.520 We're back up finally, painfully again at 90%. 182 00:21:25.520 --> 00:21:30.520 Profits went up, sugar price went up, 5.3 cents. 183 00:21:30.520 --> 00:21:49.520 And once again we start up, the west coast pops up again, California pops up again, the Hawaiian sugar plantations pop up again, 184 00:21:49.520 --> 00:21:58.520 a new Hawaiian guy starts building plants in California, shipping the sugar to California in the farm rate, and that doesn't work either. 185 00:21:58.520 --> 00:22:06.520 and also the beet sugar people, it hasn't been heard from before, now begin to zip into the market, I mean, prices of sugar are going up, profits are going up, let's start selling beet sugar. 186 00:22:06.520 --> 00:22:15.520 There also has been a higher tariff for fine sugar in 1897, which also prompted them to enter this picture. 187 00:22:15.520 --> 00:22:22.520 So all of a sudden we have a little beet sugar interest, we have the Louisiana cane sugar people, we have to increase their production. 188 00:22:22.520 --> 00:22:26.600 and uh... 189 00:22:26.600 --> 00:22:30.200 so in the sugar trust field they have to start buying up the beet sugar companies 190 00:22:30.200 --> 00:22:34.080 they start racing around to try to buy these people off, they're becoming a threat 191 00:22:34.080 --> 00:22:36.600 well, as I say, none of this really worked 192 00:22:36.600 --> 00:22:39.520 uh... again we have the same sort of pattern 193 00:22:39.520 --> 00:22:43.200 the uh... 1902 194 00:22:43.200 --> 00:22:47.400 when the final, when this final beet sugar thing was 90% of the total output 195 00:22:47.400 --> 00:22:52.400 uh... by 1905 they only had 70% of the total output, by 1907 they had 60% 196 00:22:52.400 --> 00:23:00.400 In 1911 they had 54% and beet sugar kept popping up more and more and was raising their share of 4 to 14%. 197 00:23:07.400 --> 00:23:15.400 And also in cane sugar more competition comes up. Spreckels comes up again, other plants come up, California. 198 00:23:15.400 --> 00:23:21.400 And so, by 1905, as I said, we're down to 70% and 60% to 54%. 199 00:23:21.400 --> 00:23:23.400 The great sugar trust didn't work. 200 00:23:23.400 --> 00:23:29.400 After all these constant headaches, after buying out people, and all the rest of it, the thing collapsed. 201 00:23:29.400 --> 00:23:35.400 Because we didn't have a government promotion or encouragement in the cartel, a government enforcement in the cartel. 202 00:23:35.400 --> 00:23:43.400 The refined sugar price begins to fall, once again, from 5.3 cents down to about 4.4. 203 00:23:43.400 --> 00:24:06.400 They tried to have an international cartel agreement, that didn't work either, and as we'll see again, once again, World War I, just as in the steel industry, just as World War I brought joy to the hearts of Judge Gary, so in the sugar industry, World War I brought joy to the hearts of the sugar manufacturers. They finally came into their own. 204 00:24:06.400 --> 00:24:12.400 World War I brought joy to the hearts of many people in the United States, not those, of course, who were killed. 205 00:24:18.400 --> 00:24:28.400 Habermeyer, again, had another quote on the tariff of Habermeyer. He said that the sugar refining had to build up under, quote, enormous protection. 206 00:24:28.400 --> 00:24:32.400 If I had a tariff, I doubt if we should have dared to take the risk of forming the trust. 207 00:24:32.400 --> 00:24:39.400 I certainly should not have risked all I have in a trust unless the business had been protected as it was by the tariff. 208 00:24:39.400 --> 00:24:43.400 But even with the tariff protection, the thing collapsed. 209 00:24:43.400 --> 00:24:57.560 They finally, what they finally had to do was simply keep the price low, keep the profit 210 00:24:57.560 --> 00:25:02.320 margins low, and not keep stimulating increased competition, which of course is about the 211 00:25:02.320 --> 00:25:06.400 whole thing, but anyways they gave up the idea really of trying to establish a monopoly 212 00:25:06.400 --> 00:25:09.400 and the price. 213 00:25:09.400 --> 00:25:12.400 Well, I think... 214 00:25:16.400 --> 00:25:20.400 I think I'll stop at this point. I have a little bit more on the failure of the trust and cartel. 215 00:25:20.400 --> 00:25:24.400 I'll deal with it tomorrow and probably won't start it on a progressive... 216 00:25:24.400 --> 00:25:30.400 a progressive period attempts to counteract the winds of the free market. 217 00:25:36.400 --> 00:25:42.400 Get back to the failure of the trust and so forth. 218 00:25:42.400 --> 00:25:56.400 By the early 1900s, as Walter Block raised the question, how come these guys didn't learn about it? 219 00:25:56.400 --> 00:26:03.400 Forrest mentioned the Morgan, I think it was a very good statement, about the Morgan's benefiting from commissions, forming trusts, etc. 220 00:26:03.400 --> 00:26:09.540 etc. But various businessmen were beginning to see as early as 1900 that the trust thing 221 00:26:09.540 --> 00:26:18.540 doesn't seem to be working. Various theoreticians, so to speak, in business. For example, in 222 00:26:18.540 --> 00:26:22.240 the iron and steel industry, as I think I might have mentioned, numerous independent 223 00:26:22.240 --> 00:26:26.920 firms pop up after U.S. Steel was founded and they start to share in the alleged profits 224 00:26:26.920 --> 00:26:33.000 and mergers and so forth. And Iron Age, the magazine of the iron and steel industry, writes 225 00:26:33.000 --> 00:26:43.840 writes about this, rather sadly, in September 20, 1900, and says, this is especially true, 226 00:26:43.840 --> 00:26:48.960 this collapse of the merger because of new firms coming in and competing, this is especially 227 00:26:48.960 --> 00:26:55.920 true where the combination is naming, as they put it, or fixing, confessively high prices 228 00:26:55.920 --> 00:27:00.060 for its goods and is at the same time under heavy expenses on account of buying out competitors 229 00:27:00.060 --> 00:27:02.800 or subsidizing them to keep out of the market. 230 00:27:02.800 --> 00:27:10.800 Iron Age saw this thing as early as 1900, even before the final U.S. Steel merger. 231 00:27:10.800 --> 00:27:14.800 On November 19, 1900, Iron Age again says, 232 00:27:14.800 --> 00:27:19.800 The most serious problem that confronts trust combinations today is competition from independent sources. 233 00:27:19.800 --> 00:27:23.800 When the papers speak of a cessation of operation in certain trust industries, 234 00:27:23.800 --> 00:27:27.800 they fail to mention the awakening of new life in independent plants. 235 00:27:27.800 --> 00:27:36.800 So they're seeing this. I mean, the more thoughtful members of the business community were already latched onto this even as early as 1900. 236 00:27:36.800 --> 00:27:50.800 There are other trusts that the same thing happens to. There's, for example, the Wallpaper Trust, which breaks up rather quickly in about eight years or so. 237 00:27:50.800 --> 00:28:20.600 The Continental Company Limited, formed in 1899 or 1900, controlling 95 percent of the sales of screw doors and windows, dissolved in one year, one crummy year from its commanding height of 95 percent of the business, dissolves, why? Because of growing competition due to the high prices that they were trying to charge and their failure to achieve any kind of real economies, you know, of course. 238 00:28:20.600 --> 00:28:30.600 I also second Forrest McDonald's statement about the cheap money, that's a very important point about the, which stimulates, stimulates the merger movement of that period. 239 00:28:30.600 --> 00:28:40.600 Benjamin M. Anderson's great work, economics and public welfare, also points to this as being one of the key things that spurred this merger movement. 240 00:28:40.600 --> 00:28:48.600 A couple of other cases, I don't want to bore you with too many cases, but I find them kind of fascinating. 241 00:28:48.600 --> 00:28:57.120 The Leather Trust. Here we have a highly competitive industry making sole leather. We have a lot 242 00:28:57.120 --> 00:29:04.320 of small firms, very little capital required to invest in any particular firm. And they're 243 00:29:04.320 --> 00:29:08.560 mostly concentrated in southern New York and Pennsylvania. Five of the largest firms get 244 00:29:08.560 --> 00:29:14.440 together and form the U.S. Leather Company in 1893, controlling 58% of the tanned sole 245 00:29:14.440 --> 00:29:21.440 and 72% of Hemlock tanned and 45% of Union tanned and so forth. 246 00:29:21.440 --> 00:29:28.440 As a matter of fact, when it was formed in 1893, the U.S. level of company was the largest capitalized firm in the country at the time, 247 00:29:28.440 --> 00:29:31.440 totaling $130 million of capital. 248 00:29:31.440 --> 00:29:36.440 The Standard Oil Trust, for example, the Standard Oil in New Jersey is only $102 million at that point. 249 00:29:36.440 --> 00:29:43.440 So what do they expect of tanners? They expect that the end of competition would bring them high prices, prosperity, high profits 250 00:29:43.440 --> 00:29:45.440 and economies of large-scale production. 251 00:29:48.440 --> 00:29:51.440 Yet, what happens to the U.S. weather company? 252 00:29:51.440 --> 00:29:56.440 Almost immediately, they lose $1.3 million, like that. 253 00:29:56.440 --> 00:29:58.440 No dividends on their common stock. 254 00:29:58.440 --> 00:30:00.440 Their profits continue to be very low. 255 00:30:00.440 --> 00:30:03.440 The stock collapses. 256 00:30:03.440 --> 00:30:04.440 Why is that? 257 00:30:04.440 --> 00:30:06.440 Well, it was a business slump. 258 00:30:06.440 --> 00:30:12.440 Also, they over-expanded their assets. 259 00:30:12.440 --> 00:30:24.440 They found that they couldn't raise their prices because the small tanners that were competing with them were very well entrenched. 260 00:30:24.440 --> 00:30:32.440 There were a lot of independents, there were a lot of large Oakland Union tanners because they really only sort of controlled the hemlock tanning. 261 00:30:32.440 --> 00:30:37.440 And they found out that the small businesses often had very superior management to them. 262 00:30:37.440 --> 00:30:50.440 And the end of this saga, which took 11 years, by 1904, the US leather company quote reorganized on quote, in other words goes bankrupt, that was the end of the leather trust. 263 00:30:50.440 --> 00:31:04.440 There's also the saga of the cornstarch trust, I think I mentioned yesterday, there were three companies, three leading industries where there was almost a monopoly, oil, cornstarch and sugar. 264 00:31:04.440 --> 00:31:29.440 The cornstarch, we have a highly competitive industry, we start with a highly competitive industry with falling prices, and so forth, we have, they form around 1890, they form a national starch manufacturing company, a merger of 20 starch factories, controlling about 70% of the total starch output, including the largest single factory in the business. 265 00:31:29.440 --> 00:31:33.840 So, what happens? Well, what happens is they get severe competition 266 00:31:33.840 --> 00:31:39.620 suddenly coming in from Western Bulk Starch. Two kinds of starch, apparently. Bulk Starch 267 00:31:39.620 --> 00:31:45.360 going to manufacturers, and Bulk Starch just went to the consumers. So, they find severe 268 00:31:45.360 --> 00:31:50.000 competition from Western Bulk Starch, and then they find that after five years, see 269 00:31:50.000 --> 00:31:52.680 what happens is one of the guys who merged with them, one of the large firms merging 270 00:31:52.680 --> 00:31:58.520 to form the largest factory, I should say, forming this national starch manufacturing 271 00:31:58.520 --> 00:32:09.520 The Duryay-Glencove Manufacturing Company, Duryay Family, and they sign this thing saying for five years we're not going to enter the business. 272 00:32:09.520 --> 00:32:19.520 Well, five years are up, Duryay zips into the business again, builds new plants, more competitive, more newer than the previous ones, and becomes highly competitive. 273 00:32:19.520 --> 00:32:23.520 And it's the relative output of National Star Manufacturing Company 6. 274 00:32:23.520 --> 00:32:31.920 1899, they started it, they try it again, D'Orier included this time, we have the United 275 00:32:31.920 --> 00:32:40.280 Starch Company, which included the union of the four biggest box starch companies at the 276 00:32:40.280 --> 00:32:41.280 time. 277 00:32:41.280 --> 00:32:48.440 And in 1900, the whole group merges, the United Starch Company, the old National Starch Manufacturing 278 00:32:48.440 --> 00:32:53.440 Company and the US Glucose Company all merged into one giant, gigantic national starch company. 279 00:32:53.440 --> 00:33:23.440 The National Starch Company now has 90% of the box starch in the country and 75% of the total starch. Box and bulk. So they're pretty young. They think of themselves in pretty good shape. They expect big monopoly profits and so forth. What happens? Profits are low. Profits are coming. They find the marketing costs are very high, doing very well. And what happens is the rise in the price of corn, which they're trying to affect 280 00:33:23.440 --> 00:33:36.440 Shifts, the mills were buying starch, they tried to raise the price of cornstarch, the mills start buying potato starch, a new gimmick suddenly pops in, which has not been monopolized. 281 00:33:36.440 --> 00:33:49.440 In addition to that, independent mills, independent cornstarch, pop up new hydraulic processes, better, you know, lower cost plants, and more rapid production and so forth. 282 00:33:49.440 --> 00:33:59.440 The profits for National Starch Company fall, and very quickly they're down to 40% of the share of the market from their original 90. 283 00:34:05.440 --> 00:34:17.440 There's also the glucose trust. There's an obscure technological connection between starch and glucose, which I'm not going to go into, because I'm feeling rather shaky ground, feeling the technology of starch and glucose. 284 00:34:19.440 --> 00:34:29.440 The glucose industry, and the glucose firm was trying to make a form of pool in 1885, from 1885 to 1890, big glucose pooling. 285 00:34:29.440 --> 00:34:34.440 And they assigned quotas of production to each plant, every plant gets its allocated quota. 286 00:34:34.440 --> 00:34:41.440 And we have first the American Glucose Company, which has 65% of the glucose market. 287 00:34:41.440 --> 00:34:46.440 But, so what happens? Well, newer manufacturers come in, they increase their production, 288 00:34:46.440 --> 00:34:54.440 and they try to bring them into the quota system that means each member of the American Glucose Company team has to cut their production 289 00:34:54.440 --> 00:35:03.440 and we wind up with all these headaches and in a very short amount of time, a few years, the American Glucose Company is down 45% from its original 65% of the market 290 00:35:03.440 --> 00:35:14.440 One of the things that happens is the Chicago sugar refining company breaks the pool, just breaks it away and starts increasing its production and cutting prices 291 00:35:14.440 --> 00:35:19.440 Engages in severe competition with the American Glucose Company, which even sinks more rapidly. 292 00:35:19.440 --> 00:35:22.440 So in 1897, they try, okay, we'll bring them all together. 293 00:35:22.440 --> 00:35:27.440 And they have a mighty consolidation of six large companies into the Glucose Sugar Refining Company, 294 00:35:27.440 --> 00:35:31.440 worth $40 million and controlling 85% of the glucose market. 295 00:35:31.440 --> 00:35:36.440 This time, a Chicago sugar refining company back in as the largest plant. 296 00:35:36.440 --> 00:35:41.440 And the American Glucose Company is also included, so we have this mighty merger. 297 00:35:41.440 --> 00:35:46.440 and they raise the price of glucose. First they're making high profits, yippee, they're in. 298 00:35:46.440 --> 00:35:51.440 So what happens? Well, it stimulates the high profits, stimulates new manufacturers entering the industry. 299 00:35:51.440 --> 00:35:59.440 And new glucose firms pop up. The Illinois Sugar Refunding Company, National Scarch Company, the Charles Paper Glucose Company, 300 00:35:59.440 --> 00:36:06.440 which cuts prices of the candy manufacturers, and the New York Glucose Company, which is essentially a standard oil subsidiary. 301 00:36:06.440 --> 00:36:20.000 In 1901, only four years after they reformed with 85% of the market, they're down to 45% 302 00:36:20.000 --> 00:36:25.160 of the market and making severe losses, and their stock prices are collapsing, and so 303 00:36:25.160 --> 00:36:26.160 forth. 304 00:36:26.160 --> 00:36:33.520 Finally, in 1902, if they haven't given up yet, another consolidation takes place promoted 305 00:36:33.520 --> 00:36:39.440 by the Bankers of the Glucose Sugar Refining Company, the National Sugar Company, the Charles 306 00:36:39.440 --> 00:36:45.240 Pope Company, Illinois Sugar Refining Company, and New York Glucose Company, I think half 307 00:36:45.240 --> 00:36:46.240 of their stock. 308 00:36:46.240 --> 00:36:50.800 They're one giant company, a corn products company, capitalized at 76 million dollars 309 00:36:50.800 --> 00:36:54.720 with 80% of the starch and glucose market. 310 00:36:54.720 --> 00:36:58.080 And they expect boy oh boy now they're going to have high profits, they have this virtual 311 00:36:58.080 --> 00:37:02.960 monopoly, they scrap many of their plants to reduce production. 312 00:37:02.960 --> 00:37:07.760 So what happens? Very, very quickly, once again, new starch factories, new glucose factories 313 00:37:07.760 --> 00:37:13.740 nip in the market. The Peel Brothers Company, Warner Company, the corn products company 314 00:37:13.740 --> 00:37:19.640 finds itself again with declining profits. Again, the high cost of corn, again, the corn 315 00:37:19.640 --> 00:37:25.640 market limits the market for corn. By the second year of the corn products company, 316 00:37:25.640 --> 00:37:42.640 and their suffering heavy losses, their stock prices collapse and by 1903, which is one year after the corn product company was formed with 80% of the market, they're down to 45% of the entire starch glucose business, which apparently has not been consolidated. 317 00:37:42.640 --> 00:37:45.640 They're down to 45% and their stock has collapsed. 318 00:37:45.640 --> 00:38:00.640 By 1906, a new consolidation takes place. The corn products company New York Glucose Warner and St. Louis Glucose enter the corn products refining company with 91% of the market, excuse me, 91 million dollars and 74% of the market accept. 319 00:38:00.640 --> 00:38:12.640 At this time they decide they're not going to try to raise prices, they're not going to try to buy up all the competitors, they're going to stick to low-cost production and distribution and sort of go the way of the national biscuit company and become a regular company and not try to be a monopoly. 320 00:38:12.640 --> 00:38:16.640 That's essentially the corn product who co-starred Saga. 321 00:38:21.640 --> 00:38:23.640 Quick survey of the saga. 322 00:38:27.640 --> 00:38:33.640 Okay, and I have some overall assessments here of this thing. 323 00:38:34.640 --> 00:38:41.640 Of the nearly 100 companies of this type, consolidated trust companies formed in 1899, 1900, 324 00:38:41.640 --> 00:38:49.640 By 1900, in other words, after one year, three quarters were not paying dividends, three quarters were in badge financial shape. 325 00:38:49.640 --> 00:38:53.640 Most of the hopes of the promoters, at least the hopes of being to the public were not realized. 326 00:38:53.640 --> 00:38:57.640 New competition comes pouring in in almost all of these cases. 327 00:38:57.640 --> 00:39:05.640 In the various overall figures, Coco points out in his Triumph for Conservatism that of the 50 largest corporations in 1909, 328 00:39:05.640 --> 00:39:18.640 By 1919, ten years later, seven had dropped out of the top 100, and by 1929, 20 had dropped out, 20 of the 50 had dropped out of the top 100, not just the top 50. 329 00:39:18.640 --> 00:39:26.640 Of the 100 largest corporations in 1909, 47 had dropped out of the top 100 by 1919, and 61 had dropped out by 1929. 330 00:39:26.640 --> 00:39:33.640 So we have a very mobile kind of situation, a very high turnover of the top corporations in this period. 331 00:39:33.640 --> 00:39:43.640 Arthur Dewing has done a great, excellent quantitative study of what happened to these trusts. 332 00:39:43.640 --> 00:39:51.640 It was reprinted, finally, in his mammoth two-volume work, which unfortunately is just considered a corporate finance textbook, so nobody ever really reads it. 333 00:39:51.640 --> 00:39:55.640 It's called Financial Policy of Corporations, which I commend the intention of. Fascinating book. 334 00:39:55.640 --> 00:39:58.640 Huge number of huge long footnotes in the old tradition. 335 00:39:58.640 --> 00:40:03.640 Arthur S. Dilling, D-E-W-I-N-G 336 00:40:03.640 --> 00:40:11.200 It's the old-style classical footnote. You go on for about five pages and you have footnotes 337 00:40:11.200 --> 00:40:22.760 onto the footnote. I like that, as all people can take it. You don't have to read the footnotes. 338 00:40:22.760 --> 00:40:28.840 Dewey's overall assessment, his statement on the subject for going in quantitative thing, 339 00:40:28.840 --> 00:40:35.040 He says that the climax comes about really by 1901, a little bit by 1901, there's a 340 00:40:35.040 --> 00:40:41.640 scattering number of more solid trust formation until 1903, and more or less stopped by then. 341 00:40:41.640 --> 00:40:47.000 And he says, well, the trust turned out badly, they didn't suppress competition, they didn't 342 00:40:47.000 --> 00:40:54.400 realize big economy, large scale economy, investors didn't realize their expectations, 343 00:40:54.400 --> 00:40:58.280 the prices of the stock steadily declined, the promoters found a large amount of security 344 00:40:58.280 --> 00:41:05.280 The theory didn't remain unsold, few paid any dividends, many of the trusts actually collapsed and were actually going bankrupt. 345 00:41:05.280 --> 00:41:24.280 But doing this, he took a random sample of 35 of these trusts, industrial solidations, of approximately, I don't know, it's kind of obscure exactly how many there were, certainly over 130, maybe as high as 260, a little vague. 346 00:41:24.280 --> 00:41:30.280 At any rate, he took a random sample of 35 industries, these kinds of trust consolidations. 347 00:41:30.280 --> 00:41:35.140 He compared the earnings of the constituent competing parts, competing firms, before the 348 00:41:35.140 --> 00:41:42.480 trust was formed with the anticipated earnings declared by the promoters or the bankers when 349 00:41:42.480 --> 00:41:46.320 the trust was being formed, with the earnings for the first year after the trust was formed 350 00:41:46.320 --> 00:41:48.880 and then 10 years after that. 351 00:41:48.880 --> 00:41:52.080 So in other words, you take what happened to the individual companies before the trust 352 00:41:52.080 --> 00:41:55.080 And what happened after the trust was formed? 353 00:41:55.080 --> 00:42:06.080 We found out on the average that the earnings just before the trust were 25% higher than the earnings the first year after the trust. 354 00:42:06.080 --> 00:42:10.080 You know, having to take an average 25% collapse. 355 00:42:10.080 --> 00:42:19.080 And also that the earnings before the trust were more than the average earnings for the first 10 years after the formation of the trust and even for the 10th year. 356 00:42:19.080 --> 00:42:27.080 So as late as 10 years after the trust was formed, they're still making less profits than the original firms did before the whole thing was conceived. 357 00:42:27.080 --> 00:42:33.080 The estimates of the promoters, as far as the estimates of the promoters and bankers went, 358 00:42:33.080 --> 00:42:40.080 the expectation of what would happen in the large-scale economies, supposedly in cooperation replacing competition, 359 00:42:40.080 --> 00:42:45.080 these estimates of the promoters and bankers were 50% higher than the actual first-year earnings. 360 00:42:45.080 --> 00:42:50.280 So in other words, the actual earnings before the trust were 25% higher than the earnings 361 00:42:50.280 --> 00:42:55.320 afterwards and the promoter's expectation averaged 50% higher than what actually happened. 362 00:42:55.320 --> 00:43:01.160 And it can also be considerably higher than the first 10 years' worth of earnings. 363 00:43:01.160 --> 00:43:05.400 The promoters overestimated even for the 10 years ahead. 364 00:43:05.400 --> 00:43:17.960 Let's start taking another set of, statistically, another way. Of these 35 trusts, 13 had first 365 00:43:17.960 --> 00:43:23.840 year earnings equal to the pre-trust and 22 had first year earnings less than pre-trust 366 00:43:23.840 --> 00:43:28.960 earnings. And this is also about the same ratio for the first 10 years after the trust 367 00:43:28.960 --> 00:43:33.400 was formed. In fact, only four had earnings equal to the anticipation of the promoters 368 00:43:33.400 --> 00:43:34.400 of B35. 369 00:43:34.400 --> 00:43:43.320 What we're looking at in another way, earnings after the trust were expected to be 40% higher 370 00:43:43.320 --> 00:43:44.320 than before the trust. 371 00:43:44.320 --> 00:43:48.640 Now, the average expectation by the promoter and the bankers, etc., were that you're going 372 00:43:48.640 --> 00:43:52.400 to have a 40% increase in earnings once you have this consolidation. 373 00:43:52.400 --> 00:43:58.080 But actually, you have 20% less in the first year and 10% less for the first 10-year period. 374 00:43:58.080 --> 00:44:02.080 This gives you sort of the range of what happened. 375 00:44:02.080 --> 00:44:07.080 Ludwig goes into some of the reasons for this very interesting discussion. 376 00:44:07.080 --> 00:44:11.080 He says the pools were too high. 377 00:44:11.080 --> 00:44:14.080 They expected economies of large-scale production. 378 00:44:14.080 --> 00:44:18.080 His expectations were based on a pure analogy, as I mentioned last night and the night before. 379 00:44:18.080 --> 00:44:20.080 If bigger is better, then biggest is best. 380 00:44:20.080 --> 00:44:22.080 This turns out to be incorrect. 381 00:44:22.080 --> 00:44:24.080 This argument from analogy is incorrect. 382 00:44:24.080 --> 00:44:26.080 They assume there was no limit to economies of scale. 383 00:44:26.080 --> 00:44:33.880 scale. There seems to be no limit to successful organization size. And also you point out 384 00:44:33.880 --> 00:44:37.960 that when you have this trust, everything is routinized and bureaucratized. You eliminate 385 00:44:37.960 --> 00:44:43.560 creativity as we were talking about a couple of days ago. And you eliminate the input of 386 00:44:43.560 --> 00:44:48.200 intelligence by each, the creative intelligence of each individual entrepreneur and you're 387 00:44:48.200 --> 00:44:54.480 replacing it by this bureaucratic kind of setup, which can't be replaced by automatic 388 00:44:54.480 --> 00:44:57.040 Automatic Routine Processes 389 00:44:57.040 --> 00:44:59.680 and he points out the management ability is scarce, 390 00:44:59.680 --> 00:45:01.480 entrepreneurial ability is scarce, 391 00:45:01.480 --> 00:45:04.320 something which these guys didn't realize. 392 00:45:04.320 --> 00:45:07.520 And he says the loyalty to each of their firm was weakened, 393 00:45:07.520 --> 00:45:10.440 the individual entrepreneur, no one really gave a damn, 394 00:45:10.440 --> 00:45:12.840 he was part of this huge, solid organization. 395 00:45:13.720 --> 00:45:17.520 And the personal touch, the personal salesman role 396 00:45:17.520 --> 00:45:19.240 was weakened and so forth and so on. 397 00:45:19.240 --> 00:45:36.240 Also, as he pointed out, this very large size is often a disadvantage, a handicap in competing with smaller and more mobile competitors. I mentioned the pushcart probably. He didn't. He's a little squarer than that. At any rate, it's that sort of analysis. 398 00:45:36.240 --> 00:45:42.240 He also points out that this very large size often raises the price of raw material too much. 399 00:45:42.240 --> 00:45:49.240 You get very big and you start to keep buying this raw material, you raise the price. 400 00:45:49.240 --> 00:45:55.240 In the meantime, the small competitors can shop around in secret, sort of make secret deals with the raw material suppliers. 401 00:45:55.240 --> 00:46:01.240 Also, the small competitors have a lower overhead so they can nip out in poor years, 402 00:46:01.240 --> 00:46:04.240 they can sort of get out of the business or reduce their production in small years, 403 00:46:04.240 --> 00:46:10.240 and then nipped back in in good years and is again more mobile in this competitive contest. 404 00:46:10.240 --> 00:46:20.240 Also, he didn't point this out, but I'll add to this, there's been very interesting studies of it in the last 10-15 years. 405 00:46:20.240 --> 00:46:24.240 This fits in with our creativity discussion. 406 00:46:24.240 --> 00:46:29.240 It's usually considered by orthodox historians. 407 00:46:29.240 --> 00:46:42.240 Consider while in the 19th century most of the big inventors, the inventors of great new products and processes, were small and they were small businessmen or also independent, you know, people hickering their laboratory in the basement. 408 00:46:42.240 --> 00:46:50.240 But now in the 20th century all the really big inventions have to come from big corporate, huge corporate R&D kind of processes. 409 00:46:50.240 --> 00:46:57.240 Turns out it's not true. It's still true in the 20th century the major inventions, the really fundamental creative inventions, 410 00:46:57.240 --> 00:47:03.240 are still being made by small independent guys in the backyard or in small laboratories and small firms. 411 00:47:03.240 --> 00:47:07.240 There have been several studies of this which I commend your attention. 412 00:47:07.240 --> 00:47:14.240 John Jukes's, Jukes, Sayward and Stallerman's great work, Sources of Invention, I think is in the library here, 413 00:47:14.240 --> 00:47:23.240 goes through a systematic study of all the top inventions of the 20th century and shows that the largest part of them are still done by small types, 414 00:47:23.240 --> 00:47:34.240 Small people, small firms, and also others like Schmuckler and Nelson and a whole bunch of other people have done studies of invention and anything pretty successfully. 415 00:47:34.240 --> 00:47:41.240 I mentioned Xerox and Polaroid. It's one of the heroic cases, which I sort of use for my students. 416 00:47:41.240 --> 00:47:46.240 Students have to have some sort of a grabber, something which is relevant in close days to their concerns. 417 00:47:46.240 --> 00:47:57.240 One of my favorite examples of this is the great invention in modern times in the shaving field, which is the Teflon coated razor blade. 418 00:47:57.240 --> 00:48:06.240 Before this happened, Gillette had a huge proportion of razor business. They were advertising everywhere, of course. 419 00:48:06.240 --> 00:48:14.240 Every sporting event for the last 40 years, all my life, has been Gillette tech, worldwide sports, or whatever. 420 00:48:14.240 --> 00:48:21.240 So, and yet, despite this, we have this teeny little company in England, Wilkinson Sword Company. 421 00:48:21.240 --> 00:48:24.240 Purely as a by-product, so I'm stumbling into this. 422 00:48:24.240 --> 00:48:31.240 Develops this Teflon-coated blade so they can use it as the other processor, stainless steel blade or whatever. 423 00:48:31.240 --> 00:48:33.240 Coated with Teflon. 424 00:48:33.240 --> 00:48:35.240 And they produce it, they don't really care about blades. 425 00:48:35.240 --> 00:48:40.240 They're throwing it away, they're giving it away as a package deal to promote their swords. 426 00:48:40.240 --> 00:48:42.240 The only thing I'm really interested in is swords. 427 00:48:42.240 --> 00:48:45.240 Beautiful swords, you know, sharp and all the rest of it. 428 00:48:45.240 --> 00:48:50.240 We also have a couple of blades we'll throw in to show you how great swords we make. 429 00:48:50.240 --> 00:48:56.240 And I remember this as my own personal experience because they didn't want to promote it. 430 00:48:56.240 --> 00:48:58.240 And they had a little teeny office in Madison Avenue. 431 00:48:58.240 --> 00:49:02.240 You have to walk up, not in the swanky part of Madison Avenue, but the sort of lower Madison Avenue. 432 00:49:02.240 --> 00:49:05.240 You had to walk up two, three flights to go to a little office. 433 00:49:05.240 --> 00:49:07.240 And the word got around purely by word of mouth. 434 00:49:37.240 --> 00:49:44.340 There's another heroic example of small enterprise invention, competition busting through the 435 00:49:44.340 --> 00:49:50.840 cake of custom. 436 00:49:50.840 --> 00:49:55.080 So large scale, because the business is big, does not necessarily make it more competitive, 437 00:49:55.080 --> 00:49:57.320 more efficient, more innovative. 438 00:49:57.320 --> 00:50:03.040 And doing another great book, which sums up a lot of the glucose and starch and leather 439 00:50:03.040 --> 00:50:17.360 I've been impressed throughout by the powerlessness of mere aggregates of capital, the whole monopoly. 440 00:50:17.360 --> 00:50:22.680 I've been impressed too by the tremendous importance of individual innate ability or its lack in 441 00:50:22.680 --> 00:50:26.120 determining the success or failure of any enterprise. 442 00:50:26.120 --> 00:50:30.940 With these observations in mind, one may hazard the belief that whatever quote trust problem 443 00:50:30.940 --> 00:50:47.940 exists, will work out its own solution. The doom of the inefficient waits on no legislator regulation. It is rather delayed thereby. Restrictive regulation will perpetuate the inefficient cooperation by furnishing an artificial prop to support natural weakness. 444 00:50:47.940 --> 00:50:59.940 I love that solid social Darwinism rhetoric. By furnishing an artificial prop to support natural weakness, it will hamper the efficient by impeding the free play of personal ambition. 445 00:50:59.940 --> 00:51:13.260 OK, from this point, this concludes my lecture, second block of lectures, so to speak, on 446 00:51:13.260 --> 00:51:16.180 big business and the rise of big business and the fall of the trusts.