and for which individuals get credit, the invention of the trust did not really depend on the activity of any particular men. If neither Bell, nor Reis, nor McDonough, nor Edison had lived, a score of other men were looking for the telephone, and would soon have discovered it. Scientific and technical knowledge had reached a point from which it could not but be discovered; and no man could do more than hasten the discovery by a little. Just so, the development of the pool, the trust, and the giant consolidated corporation was inevitable in the social and economic conditions of our age. If the world had lacked Mr. Rockefeller and his associates, it had other men of business and other lawyers; and it would not long have lacked the

trust.

CHARLES E. EDGERTON.

IV

INDUSTRIAL POOLING AGREEMENTS1

POOLING agreements are occasionally brought to light by

the courts; but a large number live and die in obscurity, without interference, and without attracting attention from the general public. This form of combination has been strengthened and extended simultaneously with the growth in size of our manufacturing companies. The present industrial combinations, which succeeded the downfall of the trust organizations condemned by the courts more than a decade ago, have not obviated the necessity for these pooling agreements. As a matter of fact they seem at the present time rather to have stimulated a revival; for a considerable number of combinations are now parties to the very form of agreement which they were expected to supersede. For this reason, as an important factor in the determination of prices, especially at this present time of low ebb in the fortunes of the combinations formed in 1899-1900, the character and power of these agreements deserve study.

Certain features are common to nearly all forms of pooling. Manufacturers desiring to form a pool usually create an unincorporated organization, such as the Bessemer Steel Association, the Merchants' Ore Association, or the Steel Rail Association. All agree to maintain a schedule of prices fixed by the association, and to limit their production accordingly. Each manufacturer is allowed to produce (or sell) only a certain percentage of the whole output, depending upon the capacity and advantages of his plant. To prevent violation of the agreement, a money deposit is often required from each, forfeitable to the association. In many of the more intricate cases, the

1 From the Quarterly Journal of Economics, Vol. XIX, 1904, pp. 111-123. The History of a Pool, a pamphlet (pages 109) reprinted from the Iron Age, N. Y., 1898, is an interesting description of the inside working of these organizations. — ED.

agreement is drawn up by counsel in New York, Pittsburg, or Chicago, the lawyers' offices being used as headquarters for the association. The duties of the legal firm often include, at the same time, the auditing and verification of reports from the various companies. To do this work, a large force of expert accountants may be employed. A fine is imposed where these reports show a production greater than the allotted percentage, and a corresponding bonus is given to plants producing less than their allotment.

The regular meetings of the representatives of the constituent companies are held usually in November or December, in order to adjust prices and allotments for the ensuing year. On account of the non-enforceability of the agreement the minority must be treated fairly. Their withdrawal would mean the breaking up of the association. The money deposit restrains the members from withdrawal only when under slight provocation. The affairs of the pool are handled by the united action of the ablest men in the business. Each owner can manage and develop his own plant, with every inducement to reduce expenses. He knows very closely the amount of his annual output, so that the most economical production would seem possible under such an arrangement.

Territorial division of the market was a feature of the railroad pools, but has not been adopted by many industrial associations. This end is sometimes loosely accomplished by making all factory prices uniform, and adding the freight from factory to selling place to obtain the price at that point. Thus, in the iron and steel associations, prices are usually figured from a base price at Pittsburg. The amount of the freight from this base to the selling point must be added to the base price, to obtain the selling price. For example, if the Pittsburg base price of steel plates is $1.40 per hundred pounds, and the freight from Pittsburg to Iowa is 35 cents, the price in Iowa is $1.75, whether a Chicago or a Philadelphia concern does the selling. This operates to prevent waste in transportation by keeping shipments moving in directions away from the base point. Shipments made toward it suffer a loss in selling value as well as by reason of the expense for freight. Only very strong local in

terest can secure such a schedule, increasing still further the strength of its position.

Several pools have omitted the feature of percentage allotment, and have placed a tax upon all manufacturing. These are familiar, as they have come before the courts. In the case of the Candle Manufacturers' Association, formed in Ohio in 1880, the members were required to pay into the treasury 2 cents for every pound of candles sold. A more modern pool, the Addyston Pipe and Steel Company, had an elaborate system by which it fixed the price that a city should pay for pipe, and then gave the contract to the member offering to pay to the pool the highest amount for it. The others put in bids to cover appearances, but took care to name a higher price than that agreed upon. Certain companies were permitted to take

all the contracts let by large cities near them, called "reserve" cities. In 1899 the Sherman Act was successfully invoked to terminate this arrangement.2

An entirely different form of avoiding competition is through the adoption of a joint sales agent. The various firms agree to sell only through a certain agent or selling corporation. This agent contracts with each firm separately, but guarantees a uniform selling price. He also disposes of the goods from different firms in a given ratio. This ratio may be fixed or may vary with agreed conditions. An exported article would be advantageously controlled in this way. An arrangement of the same sort is most common in the case of articles not patented, and of long established use and approximately standard design. The Union Blue Stone Company in this way effected all the sales for the Blue Stone Association, fixing the price to be charged and the quota to be furnished by each member.

Still another form of pool is based upon patents essential to the manufacture of the article. The patentee sells the rights of use, for a uniform royalty, to all who apply. He also limits the quota to be produced by each firm, above which amount the royalty increases rapidly. Various ways by which patents may be used to control production have been adopted. Thus, for example, the United States Consolidated Seedless Raisin Com1 47 Ohio State, 320. 3 164 N. Y. 401.

2 20 U. S. 97.

pany was an association of nine California firms, owning all the patented raisin-seeding machinery. Members of the company paid a royalty of cent per pound, but outside firms were to paycent. This form of agreement the courts have upheld as legal. In another case that of the National Harrow Company - the manufacturers agreed to pay to the owner of the patents, $1 royalty on each harrow sold, and $4 additional on every harrow sold for less than a stipulated price. This form of agreement, unlike the preceding one, was held to be unenforceable at law.2

It is common knowledge that pooling agreements of one sort or another are numerous at the present time, but the secrecy with which they are guarded makes it difficult to discover their real extent and character. A single New York law firm, a few months ago, making a specialty of these associations, superintended no less than thirty-nine, each covering some manufactured product in the metal trades. But pools are not restricted to the iron and steel business. They cover a wide range of industry. A part of Mr. C. M. Schwab's testimony before the Industrial Commission bears upon this point.3

In the iron and steel trade, however, there would seem to be the majority of these pooling associations and price agreements in operation. As soon as the ore is dug, it is regulated by an association. The "independent" ore producers have organized the Merchants' Ore Association of Cleveland, which adjusts their relations with each other and with other ore producers, such as the United States Steel Corporation. The association attempts to establish the price of the various grades of iron ore and to state to each "independent" the maximum amount of ore that it may produce. The price must be satisfactory to the

1 126 Fed. Rep. 364.

2 76 Fed. Rep. 667.

8 Industrial Commission Report, Vol. XIII, p. 474: "The steel rail pools were simple price agreements between the managers of the various works, to sell rails at the same price at the same point.

"Q. For manufacturers before the organization of the United States Steel Corporation were similar arrangements existing ?

"A. Yes: in all lines of business, not only in steel, but in everything else. There were similar agreements, known as joint agreements, to maintain prices. They have existed in all lines of business as long as I can remember."