profits through the sale of the securities of the new company. This matter is discussed in chapter XII; it will suffice here to point out that the underwriting syndicate realized a profit of $62,500,000 through the promotion of the Steel Corporation.

Another reason for the organization of the Steel Corporation was the desirability of integrating the business more fully, and of securing the economies of the trust form of organization. These two considerations, to repeat, must be sharply distinguished. Complete integration can be secured without resort to a trust, i. e., without attaining a monopolistic position at any stage in the process of production, whereas the economies of the trust form of organization can be secured, of course, only by a trust. The significant inquiry always is: can a trust produce more cheaply than a combination, more cheaply even than a highly integrated combination? If it can, anti-trust legislation is likely to prove futile. Now the organization of the Steel Corporation did lead to a somewhat greater degree of integration. The bringing together under one control of the iron ore mines, the iron ore railroads, the Lake vessels, the coking coal properties, and the plants making all kinds of iron and steel products meant that the Corporation was quite independent of others, and that no profits at any stage in the productive process need to be paid to anyone else. So far as the manufacturing processes were concerned, it is doubtful whether anything particular was gained; the advantages of integration were already about as fully realized by the larger and stronger of the constitutent companies,1 such as the Carnegie Company, or if not already realized, would have been upon the completion of the extensions proposed in 1900 to 1901. As to the economies of the trust form of organization detailed information, as usual, is difficult, if not impossible, to secure.2

1 Report of the Commissioner of Corporations, part I, p. 108.

2 The Bureau of Corporations in part III of its Report on the Steel Industry made a study of the cost of producing various steel products, but its investigation threw no light on the costs of the Steel Corporation as compared with the costs of other large and well integrated concerns. In fact, the Bureau, in order to protect the privacy of business, particularly refrained from giving any figures which would reveal the costs at the several independent plants.

It is probable that the steel trust, simply because it was a trust, did effect certain savings. The combining of so many manufacturing properties under one management probably made possible a more economical subdivision of the business whereby particular plants could specialize on certain products, with a consequent reduction in cost. The distribution of the Steel Corporation's plants also gave it an important advantage with respect to transportation costs; it could ship from the nearest mill, and thus save cross freights.1 Savings were undoubtedly effected through competition between the managers of the different plants; and a more complete utilization was made of certain by-products, such as blast furnace slag (used in the manufacture of cement), which was formerly a waste product.2 No doubt, also, the large capital possessed by the Steel Corporation assisted it in developing the export trade-claimed by the promoters to be one of the principal reasons for forming the Corporation-but it does not follow that the amount of capital required could have been supplied only by a trust. How important the above enumerated economies were it is not possible to say, but in view of the rapid growth of the independent concerns, as described later, it is not likely that they were controlling. Certainly few, if any, economies were achieved by the trust in the selling end; selling expenses in the iron and steel trade are a comparatively minor factor. In fact, the Commissioner of Corporations believes, the argument of economy in production was probably brought forward to justify the establishment of the trust, and to promote the sale of the company's securities; the

1 Mr. Schwab at a dinner held on December 12, 1900, discussed the advantages that might be derived from a combination, and referred specifically to specialization, location of plants near the centers of consumption, competition of the several managements, reduction in overhead expense, and the development of the export trade. He expressed the opinion that from a metallurgical or mechanical standpoint the limit of economies had been reached, or nearly so, so highly perfected had the processes of manufacture become. Brief for the United States (no. 481), vol. II, pp. 508-510.

2 Brief for the United States Steel Corporation (no. 481), pp. 106

3

* Report of the Commissioner of Corporations, part III, pp. 20–21.

main reason for the organization of the Steel Corporation was certainly the hope of averting the threatening competitive struggle.1

2

The capitalization of the Steel Corporation was enormous. Under its amended certificate of incorporation it issued $304,000,000 of bonds, exclusive of $81,000,000 underlying indebtedness, and was authorized to issue $1,100,000,000 of stock, half preferred and half common. All of the bonds and $425,000,000 of each class of the stock were issued, mainly in exchange for the securities of the companies first acquired. Shortly after its organization the Corporation acquired the Lake Superior Consolidated Iron Mines and other concerns, and as a result its issue of each class of stock increased to over $500,000,000, making a total stock issue of over $1,000,000,000. The Steel Corporation, measured by capitalization, and perhaps by any test, was the largest industrial corporation the country had yet produced.

The company upon its organization controlled three-fifths of the steel business of the country. It produced almost 60 per cent of the pig iron used for steel making purposes, about 66 per cent of the crude steel output, and about 50 per cent of the finished steel products in the manufacture of which it was engaged. It had hundreds of millions of tons of iron ore; over 50,000 acres of the best coking coal lands; over 1,000 miles of railroad, including the iron ore railroads; more than one hundred Lake vessels; and large miscellaneous holdings, such as docks, natural gas and limestone properties. Yet despite its enormous size the Steel Corporation did not secure a monopoly of the iron and steel industry, though in certain lines its position was distinctly monopolistic. This is indicated by the following table, 1 Report of the Commissioner of Corporations, part I, pp. 108-109. 2 Ibid., p. 106.

3 Ibid., p. 109.

* That its position was not even more monopolistic in certain lines resulted from the fact that some of the constituent trusts had lost heavily in their percentage of the country's trade since their organization some two or three years previous. See on this point Brief for the Steel Corporation (no. 481), p. 77, and 223 Fed. Rep. 134.

showing the Steel Corporation's computation of its proportion of the country's output of the leading products in 1901.1

Among the more important rivals of the Steel Corporation in 1901 were Jones and Laughlin, the Lackawanna Iron and Steel Company, the Republic Iron and Steel Company, the Pennsylvania Steel Company, the Cambria Steel Company, and the Bethlehem Steel Company. The Colorado Fuel and Iron Company because of its location was not an effective rival, though the Steel Corporation conducted negotiations looking toward its acquisition; and the Tennessee Coal, Iron and Railroad Company was at this time chiefly engaged in the production of foundry pig iron.

The capitalization of the Steel Corporation as noted above was enormous. But so was the amount of property acquired. Was the Corporation overcapitalized?

The capitalization of the company in 1901 after the acquisition of the Shelby Tube Company (in August) was as follows: 2

1 Report of the Commissioner of Corporations, part I, p. 365. See also

p. 214

2 Ibid., p. 14.

The Bureau of Corporations made a detailed study of the value of the properties of the Steel Corporation in 1901 in order to determine whether the company was overcapitalized, and if so, to what extent. Three different methods were employed. The first method was an historical study, an analysis of the investment of the constituent companies at the time of their organization. The second method was a mathematical computation, a summation of the market value of the securities of the constituent companies, using the average weekly prices from the date of the organization of these combinations up to December 31, 1900. The market prices during the early months of 1901 were not included, since these were naturally influenced by the prospective organization of the Steel Corporation. This second method represented the estimate put by the public on the securities of the constituent companies, and it therefore reflected the probable earning power of these combinations. The third method was a physical valuation, a detailed estimate of the physical properties of the Steel Corporation by departments of its business, the valuation of the ore properties being made in particular detail. The valuation arrived at by the Bureau by the first method was $676,000,000; by the second method, which included intangible items, $793,000,000; and by the third and more accurate method, $682,000,000.1

The conclusion of the Bureau, therefore, was that the entire issue of common stock was water, i. e., had no property back of it; and that a large amount, one-fifth to two-fifths, of the preferred stock was water. Even including the intangible assets, the common stock represented nothing but the hope of monopoly gains. By any reasonable standard, therefore, the Steel Corporation was very heavily overcapitalized.

After 1901, however, the Steel Corporation added greatly to its investment. This it did, first, by the construction of additional plants out of surplus earnings or out of the proceeds of issues of securities; and, second, by the acquisition of competing concerns through the sale of its own securities. The most important piece of new construction was the plant at Gary, 1 Report of the Commissioner of Corporations, part I, p. 15.