Trusts

The trust, or more accurately, industrial trust, is a legal structure that emerged in the 1880s and 1890s in the United States as a mechanism for consolidating industries. A trust is a legal arrangement where property owners transfer control of their property to a separate entity—the “trust”—that manages the collected properties for the benefit of another party, which can be the original owners or someone else. Legal title to property is held by that one person or entity, the trustee, for the benefit of another, the beneficiary or beneficiaries. The trust structure was employed by industrial companies in the United States to establish economic monopolies over goods and services: All (or substantively all) participants in an industry would exchange their property for dividend-paying ownership shares in the trust, which would then be able to act unilaterally when setting prices, regulating output, and maintaining collective unity among the trust's member entities. Trusts attempt to circumvent conditions of free competition by uniting industry players into a single entity for the purpose of controlling the economic activities within the industry.

After the U.S. Civil War (which ended in 1865), the second half of the 19th century witnessed a substantial expansion of the railroads and the subsequent emergence of national networks for the transportation and distribution of goods. These changes transformed the U.S. economy from a collection of agrariancentered, localized markets to a national marketplace dominated by large-scale industrial production. Meanwhile, the growing pace of innovation in numerous industries led to increasingly complex, automated processes that created higher capital and fixed costs for business firms. With the greater economies of [Page 2123]scale occasioned by large-scale production, businesses focused their efforts on increasing profits by controlling the entire productive process from raw materials to finished goods. The increasing volatility of financial markets during this period, as demonstrated by the panic of 1873 and subsequent national economic depression, further stimulated business efforts to consolidate industries, lessen the economic risks of what was termed “ruinous competition,” and provide increased economic stability in the new environment.

These economic forces spurred industries to initiate attempts at coordinating activities among competing firms. However, the initial efforts at forming and maintaining economic monopolies or oligopolies foundered on several legal and practical issues. First, pooling agreements and cartel arrangements to fix prices and divide markets not only violated commonlaw restrictions on restraint of trade but also proved unenforceable in court. In addition, corporate laws—which under the principle of states' rights resided within the power of the states rather than the federal government—often prevented corporate entities from owning shares in other corporations and even from doing business outside their home states. Finally, competitive pressures among involved firms often tended to produce incentives for participating enterprises to violate coordinating agreements, regardless of their economic efficiency or statutory legality.

Businesses searched for new legal structures that could organize economic activities in ways deemed favorable to their growth and profitability. The trust (industrial trust) was the culmination of their efforts to develop a legally acceptable and economically beneficial framework. Standard Oil Company, founded by John D. Rockefeller, pioneered the industrial trust in 1882. In adapting the legal concept of the trust to an industrial setting, Standard Oil persuaded the stockholders of 30 companies in the economically critical oil industry to turn control of their corporate stock over to nine trustees, who then could exercise all voting rights for this stock in a coordinated fashion. In return, these previous stockholders received shares in the newly created entity—the trust—which entitled them to receive financial returns based on the overall performance of the new combined entity. This legal framework enabled Standard Oil to centralize economic and managerial control over all the participating companies without developing illegal agreements or cartel arrangements. Furthermore, the trust structure allowed the combined entity to coordinate activities across state boundaries, thereby expanding its geographical reach, while eliminating the incentive to cheat by ensuring the distribution of profits based on the overall performance of all firms in the industry.

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