Trusts, broadly speaking, and as a term of common acceptance, any com bination of manufacturers of a given commodity, ranging from a verbal agree ment among them, to centralized owner ship and management, tending toward a monopoly in an industry. Within this general field there are many types and degrees of combination. First of these is an understanding between manufactur ers of one commodity whereby each agrees to restrict its business to a limited ter ritory, the agreement apportioning to each manufacturer a certain amount of territory, in proportion to the trade done. Another form is an agreement whereby each manufacturer agrees to limit the output of his manufacturing plants to a certain amount, which is usually in pro portion to the amount of capital invested. A third form, or degree, of this type of "gentlemen's agreement," and most per nicious of all, is that by which all members of the ring agree to fix a standard price, by which all must abide, any change of price being made by a conference of representatives of all con cerned. Such a pact, naturally, is only possible when practically all the manu facturers in the country of the com modity in question adhere to it, the out siders being so few that they may be crushed by a temporary lowering of prices, entailing a loss which only the members of the trust are strong to sustain. It was this type of trust that was exposed by the Lockwood In vestigation Committee in the building trades in New York, during the latter part of 1920, and the early months of 1921.
Higher types of trusts include two main forms: federated unions and centralized unions of manufacturers. The federated unions may again be di vided into two types—trusts proper and holding combinations. The centralized union is a type by itself, and includes single ownership and management, under one corporation, involving a financial union and the purchase or sale of securities or physical assets. To create a trust proper the heads of the various firms meet, a trust deed is drawn up, similar to a corporate charter, which pro vides, first, that the common stock of the members be exchanged for trust certi ficates and, second, that the trustees manage the several corporations in the manner they deem most conducive to the best interests of the holders of the trust certificates. Such a combination constitutes a permanent financial union.
The first trust created in the United States was the Standard Oil Company, through the remarkable genius of S. C. T. Dodd. Within the next ten years, trusts were also organized in the cotton, sugar, and whisky industries. As these and other similar combinations appeared, however, restrictive legislation was passed in the various States, with the exception of New Jersey, whose laws re mained so accommodating that most com binations established their headquarters in that State.
The stockholding method was that which was most in practice during the earlier period of trust formation in this country. As an illustration, the Amer ican Sugar Company, known as the sugar trust, was formed by the corporation acquiring a majority interest in its rivals, in 1894. During the following ten
years this method was widely practiced among the railroads. In 1900 a new and advanced step was taken, when James J. Hill organized the Northern Securities Company, which acquired possession of the Great Northern railroad companies and the Northern Pacific. Later suit was brought by the State of Minnesota to have this merger dissolved, the Supreme Court finally passing a decision that this form of trust was illegal.
The rapid growth of these various forms and types of corporations in the United States was recognized as a con stantly growing menace to the social interests, which could not be met by the legislation of the individual States. The vast capital available to certain com binations made it possible to crush small competitors by economic oppression, without redress before the courts of the country. On the other hand, the creation of a monopoly made it possible for them to levy what amounted to heavy taxes on the consuming public in the form of arbitrary profits, unlimited by competi tion. By the pooling arrangements, al ready described, competing firms were transformed into partners in one gigan tic concern that could restrain trade and control the market.
In 1890, when ten States had already enacted anti-trust legislation, without much effect, the popular demand became so strong that Congress was compelled to take action. On July 2 of that year the famous Sherman Anti-Trust Law was passed, which for the first time gave the Federal Government power to take legal action against combinations in any part of the country.
Though drawn up with care and de bated at length, the new law could only declare those combinations illegal which were in "restraint of trade." Tremendous efforts were therefore made to amend the provisions of the law so as to render their application impotent. The best legal talent available was employed to have incorporated the phrase which would define a trust as enjoying a com plete monopoly of the market for its particular commodity. The law was also attacked on the ground that it curtailed the fundamental right of free contract. The act having been passed, these same interpretations were put forth through test cases. Several of the lower Federal courts decided in favor of the corporate interests, but after a tedious series of litigations the Supreme Court finally decided that a complete monopoly need not necessarily be proven, and that the liberty to make contracts applied only to legal contracts. But in spite of the fact that several notable convictions were obtained under the Sherman law, in such cases as the Standard Oil Company and the Tobacco trust, both of which were ordered to dissolve into their former com ponent parts, it soon became evident that this piece of Federal legislation was in effectual. By means of gentlemen's agreements, dummy directors and inter locking directorates, the trusts continued to operate.