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When the costs of production have been fairly agreed upon among the capitalists, and they are willing to fix upon that basis the rate of profit which each one must insist upon before a sale is made, the most difficult part of the task, so far as the capitalist is concerned, has been performed. Mr. Smith, however, has found it necessary, as well as desirable, to insist upon further conditions, which will include the laborers as well, before a combination can be formed. He provides, therefore, for:
(1) “The formation of an association amongst the work people, if none is in existence.
(2) “The signing of a compact between the two associations to support the principle of trade unionism on both sides. Employers engage to employ none but union workmen, and workmen engage to work for none but union or association employers.
(3) “The recognition of wages, and the hours and conditions of labour, existing at the time of the signing of the alliance, with an agreement that so long as the alliance is in force, none of these things shall be altered, or at least made worse for the work people.
(4) “The payment of a separate bonus upon such wages, such bonus to be paid on the first pay day after the issue of the new price list. The first bonus is not to be interfered with during the existence of the compact, but any further bonus paid in consequence of an increase of profits is to be subject to a sliding scale. Should profits, from any reason, be decreased, the bonus shall also be decreased in the proportion agreed upon; should they be increased, the bonus shall be increased also. portion of bonus is fixed upon the proportion which the wages bear in the selling prices of the article. In an article made of clay this proportion will be high, so that the bonus must be small; in an article made of expensive material the proportion of wages will be probably low, so that the bonus can be larger. This is one of the incidences of manufacturing which must be recognized.
(5) “The establishment of a wages and conciliation board, formed of an equal number of employers and employed, the secretaries of both associations acting conjointly, the chairman being an employer or a representative, the vice-chairman an employee. All questions as to rise or fall in profits, or the fixing of new prices, to be first submitted to this board, and all disputes between employers and employed to be referred to and settled by it. An arbitrator to be called in in case of a deadlock, whose decision must be accepted on both sides.
(6) “Employers to have full control over the management of their works: that is, as to transferring a workman from one department to another, or making any change which does not either lower wages, or harden the conditions of labor, or increase the number of hours; also, in all cases of insobriety, irregularity, incompetency, etc. All questions, however, of wages, and the hours and conditions of labor to be referred to the board for settlement, if found necessary.
No workman to leave his employment or to be discharged concerning any of these questions. In cases of dispute the workman to accept the employer's
terms under protest until the question has been settled by the board. All decisions given, to be retrospective, so that no one can suffer by any delay.
(7) "Although the board has no power to alter any of the wages or conditions obtaining at the time of the signing of the alliance, either side to have the right to bring before the board any exceptional circumstance for friendly discussion and advice.
(8) "All expenses incurred in consequence of any decision of the board to be defrayed by equal contributions from either side.
“It will be seen that, after this alliance is completed, the only possibility of a strike or lockout must happen from some decision of the board upon which both sides are agreed. In such a case both sides would work together. As, for instance, the breaking away of any of the members of either association, or their expulsion from membership on account of violation of rules to which they have agreed. The late engineering strike could not have happened had the trade been regulated by these conditions.
“The next step is to provide a fund sufficient for fighting, and all other special association purposes. Of course, the ordinary expenses of the association are met by periodical levies made on a return of the work people employed on each works. The larger the number of work people employed the higher is this capitation tax. Thus, a levy may be made at the rate of Is. per head on 20 employees; from 20 to 50, 1s. 6d. per head; from 50 to 100, 2s. 6d. per head, and so on. This is arranged on the supposition that, the larger the interest in the trade, the greater the benefits to be derived from combination.
“The guaranty fund is a special matter, quite distinct from management expenses, although made up on the same ratio. It is necessary that the association should be able to employ, at any moment, a large sum of money. To avoid the necessity, however, it is not asked that the cash shall be paid. Each member becomes respon
sible for the payment of some proportionate amount which is set against his name, only 15 per cent of which he must pay at once. The deed is kept until it is required, or executed at once, as may be agreed. A bank will advance the money, less about 15 per cent, to cover possible loss on a guaranty, which is not a joint and several document. Should any of the money be used, the amount is included in the next levy, so that the fund may always be intact. It is invested in the names of two trustees, who receive an indemnity for its use for association purposes. There is an advantage in executing this deed at once and depositing the cash obtained as a separate account. It will be at once seen that, in the event of any member breaking away from the association, he must leave behind him his guaranty for the payment of a sum of money which may be used for the purpose of fighting a defaulter—the very purpose for which he gave his guaranty.
"The next step is to establish a department for investigation of complaints and suspicions as to breaches of faith. The experience of years has shown how this can be best be done. It may be taken for granted that 98 per cent. of these complaints and suspicions are groundless, but each must be carefully investigated. The tales of customers, the gullibility of agents and travellers, and the suspicious nature of competitors have all to be reckoned with in this work. I have the control of many such departments, and my returns clearly show that no report can be believed until the necessary evidence, has been produced. It is the duty of the department to obtain such evidence, if it exists. For this purpose the guaranty fund may be used. Any ordinary charge of underselling may be easily proved or disproved. Underhand practices are more difficult; but in these cases it is purely a question of the length of the purse. As the dishonest member is fighting with his own purse against the resources of the whole association, the chances are greatly against him. When a charge is substantiated, a fine is imposed in proportion to the size and nature of the offence. The name of the complainant is never mentioned, so that no friction between members can arise, and the name of the delinquent is concealed until the case is concluded and the penalty fixed, so that no personal feeling can influence the decision. I could fill pages with illustrations showing how difficult it is to evade detection of any illicit practice. My experience of this work is, that after a while every member discovers that it pays better to be honest than to attempt to evade the rule. Of course, the inquiries extend not only to selling prices, but also to cash discounts, terms, and charges for carriage, every item of which is regulated by the rules of the association.
“The carriage question is not an easy one to settle. My plan is to issue a carriage rate book. In this the name of every town in the United Kingdom is given, and a colour added to each. Each colour means a rate which every member must charge. Thus each member is on an equality with the rest in respect to carriage charges in every town.
“Îhe middlemen-merchants and factors are provided for (often by arrangement with themselves), by a special allowance being given to them, which is sufficient to enable them to sell at the same prices and terms as manufacturers. To this they are bound by agreement before being placed on printed schedules showing who are entitled to the privileges.
“The large buyers, who sell retail, are also provided for. They have the right of buying from each and every member, if they care to do so. At the end of each half year they can send in to the secretary a return of their total purchases, with a claim to a rebate in proportion to the trade done with the association. The money is collected by the secretary from the members concerned and sent direct to the customer.
“Everything that I have mentioned so far is indispensable to the formation of a combination, but its resources are by no means exhausted when all these arrangements are carried out. I have so far been content to leave it to the judgment and experience of the members as to the adoption of other safeguards. Some associations adopt everything at the time of formation, and these are the strongest combinations in the country. Some are content to go on with the principles and methods already described. They may or may not be quite safe, according to circumstances, but they can easily make themselves so at any time. The two principal safeguards which are still open to them are: First, an arrangement with the persons who supply material to the trade; and, second, an agreement with every customer to whom they supply their goods. Both have been successfully adopted in some trades, but there is a strong feeling against the latter in other trades. Time will prove whether they are needed, but as to their possibility, there is no question."
This plan of Mr. Smith's was started first in the bedstead trade. In July, 1900, there were 56 bedstead manufacturers in England. Of these 50 were members of the
1 The New Trades Combination Movement, pp. 32 ff.
combination and 6 were opposing it. The association had been in existence for some 10 years with varying fortunes, but most of the time it had been apparently successful. As a consequence of this success, Mr. Smith had been invited to organize similar combinations in other lines of industry, and several others, for example, the fender trade, the metal rolling trade, the china furniture trade, the electrical fittings trade, the brass cased tube trade, the steel close joint tube trade, and the coffin furniture trade, have already been organized, while others are still forming. During that summer, however, there came a serious revolt in the association itself, so much so that it was announced in the papers that the association had broken up:
It will be noted that a provision is made in the organization of associations under Mr. Smith's plan for a guaranty fund. Each member becomes responsible for the payment of some proportionate amount, although only 15 per cent of that amount is actually paid. Whenever a member goes out of the combination the fund in the bank is always drawn upon, the other 85 per cent of the guaranty being taken by the association for the purpose of fighting him. In case a bank should hesitate or refuse to press the seceding member for the payment of his bond, it is likely to be threatened with the withdrawal of the patronage of the combination and of all of its members—a threat which would be likely to persuade the bank to act upon the
suggestion of collecting the balance of the guaranty fund due at the request of the combination. Regarding the struggle on hand in 1900, following extract from a letter received from Mr. Smith, under date of September 14, 1900, explains the situation: “Not merely is the association employing at the present time the use of this guaranty fund, but it is also cutting prices against its competitors. It is an interesting fact that up to this last revolt each preceding fight against any of its own members had paid for itself-that is to say, the guaranty fund paid in by the seceding member had been sufficient to pay the costs of the struggle. In addition to this guaranty fund, however, a provision is made for a special fighting fund of 2 per cent. of the workmen's bonus and 27 per cent. from the employer. When one reflects that in many lines of the industry the workmen's bonus is 42 per cent. upon his wages at the time the combination is organized, one can see how large this fund may readily become.
It will be noted that in these associations there is a combination of the manufacturer and of the workmen with the intention of securing increased wages and certain profits at the expense of the consumer. It is of course entirely true that this most careful system of cost taking and the intimate association of the different manufacturers, one with the other, ought to and probably do furnish to the trade all the information necessary for lowering the costs of production, so that there may possibly still remain to the consumer the advantage of a lower price, while giving to the manufacturer and the laborer increased profits and wages. This, however, is not likely; and in fact Mr. Smith himself says that he in no case considers one of his associations a success until it has been able to raise prices to some extent. This raising and holding of prices steady shows that the members, including the workmen, are living faithfully to their agreements. Mr. Smith himself does not believe that the consumers ought to complain so long as the profits are kept within reasonable limits. The rate of profit which has been practically adopted by the Bedstead Association, before this last cut to bring pressure to bear upon its competitors, is about 10 per cent on the entire cost. It varies somewhat with the different grades of bedsteads, on some an 8 per cent. profit being demanded; on others, 10 per cent.; on others, 12 per cent. It will be noted, however, that this is an absolute per cent. on the entire cost, including interest on capital, salaries of managers, etc., and is moreover a percentage of gain on the turn-over. In that trade it is expected that there will be a turn-over of capital probably twice a year-sometimes even three times a year. It is probable that in the opinion of many consumers and to many business men in other lines of industry this profit seems a large one, and certainly it is one based upon monopolistic power.
This power is also sometimes felt by dealers who purchase from opponents of the combination, the combination not hesitating to charge such a dealer more for certain lines of goods which he must buy from it than it charges others whose entire trade is given to it.
Many persons have predicted that these combinations would be short lived on account of the arrangements made with the workingmen, it being believed that the workmen could not be trusted to hold rigidly to their part of the agreement and to refuse to work for any employer who did
not come into the combination. It will be seen from Mr. Smith's letter that the trade unions in the combinations have never included quite all the laborers, so that the severity of the present revolt has doubtless been somewhat greater than it would have been could the workmen all have been held in line.
It is probable, however, that a better justified attack upon these combinations is the one made from the standpoint of the consumer. The employer and the laborer have interests that, if they are combined, can beyond any question affect unfavorably those of the consumer,—this at any rate so long as these combinations are found in but few lines of industry. Should, however, this combination system extend until it became substantially universal, it is readily seen that a very large proportion of the advantages to the capitalist and to the workmen themselves would be taken away by the increased cost which would of necessity come to them in all of the articles of their consumption. There can be no doubt that as an exceptional system applied here and there it may work great advantages to both capitalists and laborers, partly at the expense of the community, unless great care is taken not to put profits above a very modest rate. The advantages that come from the careful system of cost taking and the exchange of views among manufacturers can not be questioned; but in this case, as in most others where the power of monopoly is put into the hands of a few, that power seems likely to be somewhat abused.
(a) The promoter and his methods.—Under the English law it is intended that the work of the promoter of a corporation shall be done in the open and that intending purchasers of shares shall be able to know the method in which the promoter has arrived at his conclusions regarding the value of the properties taken into the new corporation, the amount that he has paid for expert assistance, for legal fees, and other necessary expenses of organization, as well as the amount that he has received for his own services. In the formation of the various large combinations, whether in the form of so-called pools or contracts of the nature of the E. J. Smith combinations, or whether in the form of the single large corporation, which buys up all of the different establishments entering into the agreement, it has usually been necessary, of course, that some one individual take the most active part in bringing about the organization.
Until within the last two or three years, the combinations have apparently been brought about chiefly through the exigencies of trade, with the initiative taken chiefly by men who are engaged in the trade itself. During these recent years, however, we have seen a process of organization quite like that which has been followed in the United States. The promoter, and it is perhaps worth while to note that the chief promoters and the most successful ones seem to have been chartered accountants entirely familiar with various lines of business and with business methods, have themselves taken the initiative in going to business men engaged in industries where competition was exceedingly severe, and in showing them the advantages that could come from union and persuading them to enter into such a combination.
So far as can be learned, the promoter has in no case proceeded as those of some of the most important combinations in the United States have done. Here, it will be recalled, the promoter often took an option personally upon all of the establishments about to enter into the combination to buy them at a certain fixed price in cash. After he had secured in this way all of the establishments needed for the combination, he proceeded to organize his new corporation, to select its first board of directors and managers himself
, and then usually offered to the vendors of the different establishments their choice to take for their pay either cash or shares in the new company. The most frequent plan, perhaps, has been to give one share of preferred stock and one share of common stock for each $100 of cash valuation, it being understood that the preferred stock represented the cash value substantially, although in many cases there was in this cash value doubtless a large amount allowed for good will in the proper sense of the word, whereas the common stock was supposed to stand for good will in the rather broad sense in which that term has of late been used,--that is, as representing the speculative element or the hope of the promoter and of those entering into the combination of its future success. In several of the most noteworthy cases in the United States, there has been no definite valuation of the plants by experts, but the promoter has fixed upon a valuation which seemed to him fair and which he could persuade the individual vendor or vendors of the different establishments to accept. In very many cases, apparently, there has been no definite rule followed in the valuation of all of the different establishments.
In England there seems more generally to have been a definite rule followed. Sometimes an option was left to the vendors to sell either on a valuation basis, that is to say, to sell their properties at a valuation that should be fixed definitely by appraisers properly chosen so as to be not interested, it being understood that the establishment was to be appraised as a going concern; or, second, the property was to be purchased on a profit basis,—the profits of a preceding term of years as actually
shown by the books of the company being carefully investigated by some firm of certified accountants.
It is required under the English law that contracts for the purchase of property by a corporation thus organized shall be filed in the office of the registrar of joint stock companies, where they can be examined by the public; and from this record intending purchasers of shares can form somewhat definite ideas with reference to the value of the property taken over. The requirements under the English law for the accuracy of the statements made in the prospectuses are also extremely rigid. The way in which under these provisions of the law the stock is nevertheless frequently watered in the organization of companies will be spoken of in a later paragraph.
So far as the late combinations are concerned, the secrecy that is at times desired in the formation of companies can be secured in only one of two ways. In the first place, these contracts for sale may be made out definitely, but not made fully known by the promoter until the time for the floating of the new company's shares, when, of course, it is too late for any of the vendors to withdraw from their agreement. In the second place, the properties are sometimes bought for a lump sum which has been agreed upon instead of having the various items of cost, profits, etc., set out in the contract. In this way the total amount received becomes known, but the way in which the purchase price was arrived at is not known. The following forms of agreement will serve to illustrate these two methods. Both have been employed in the formation of late combinations.
“For the purpose of ascertaining the purchase price to be paid by the Association for the assets the following things shall be done, namely:
“(a) The works and extra plant and extra land, if any, shall be valued by as a going concern, and as between a willing seller and a willing buyer, and in making such valuation Messrs. shall ascertain the values of the works and of the extra plant and extra land, if there is any, separately; and if any question shall arise as to what is extra plant or extra land it shall be settled conclusively by them.
(b) The yearly profits of the business, taken on the average hereinafter mentioned, shall be ascertained by of
chartered accountant. “The purchase price shall then be fixed either on a profit basis or on a valuation basis, as hereinafter mentioned.
On a profit basis the purchase price will be 15 times the yearly profits of the business, ascertained as hereinafter mentioned. This price is fixed on the assumption that the works are held in fee simple, or for a leasehold term of which at least 80 years shall be unexpired on the day as from which the sale is to take effect, and that the normal amount of book debts and stock-in-trade will be included in the sale. If the works are not held in fee simple or for such a leasehold term as aforesaid, a fair deduction from the purchase price which would otherwise be payable shall be made in respect thereof. And if on the day as from which the sale is to take effect the book debts and [or] stock-in-trade shall be less than the normal amount, the price to be paid on the profit basis shall be reduced by the amount of the deficient book debts and [or] the value of the deficient stock-in-trade.
“On a valuation basis the purchase price will be the aggregate of the following items, namely:
(a) The amount of the valuation of the works.
(6) The value ascertained as hereinafter mentioned of the stock-in-trade included in the sale up to but not exceeding the normal amount.
"(c) The amount of the book debts in the sale up to but not exceeding the normal amount.
“(d) A sum for goodwill equal to eight times the balance of the yearly profits of the business ascertained as hereinafter mentioned, after deducting therefrom interest at the rate of 41 per cent per annum on the amount of the valuation the works and on the normal amount of book debts, and on the value, ascertained as hereinafter mentioned, of the normal amount of stock-in-trade.
“Subject nevertheless to the following limitations, namely: That the total amount payable under the preceding provisions of this clause must not exceed the sum upon which the yearly profits of the business, ascertained as hereinafter mentioned, will yield 41 per cent.
“If any extra plant or extra land, or any book debts or stock-in-trade in excess of the normal amount shall be included in the sale, the vendors, whether the sale is made on a profit or on a valuation basis, shall, in addition to the purchase price hereinbefore mentioned, be entitled to receive from the Association (a) the value ascertained as herein before mentioned of the extra plant and extra land, if any, (1) the