FEDERAL LICENSING OF CORPORATIONS

TUESDAY, APRIL 27, 1937

UNITED STATES SENATE,

SUBCOMMITTEE OF THE COMMITTEE ON THE JUDICIARY,

Washington, D. C.

The committee met, pursuant to the call of the chairman, at 2:30 p. m., in the committee room, Capitol, Senator Joseph C. O'Mahoney (chairman of subcommittee) presiding.

Present: Senators O'Mahoney (chairman), Hatch, and Austin.

STATEMENT OF PROF. WILLIAM Z. RIPLEY, PROFESSOR OF ECONOMICS, HARVARD UNIVERSITY

Senator O'MAHONEY. Professor Ripley, three of the members of the subcommittee are present, and we are prepared to proceed and hear your statement.

I might say to the members of the subcommittee that Professor Ripley is the author, among other books, of Main Street and Wall Street, and other well-known books.

Professor, will you be good enough to make a statement for the record? You are a member of the faculty of Harvard University, are you not?

Professor RIPLEY. Since 1900.

Senator O'MAHONEY. What positions have you held?

Professor RIPLEY. Professor of economics. I served for a number of years on Government commissions, first the United States Industrial Commission in 1900. Then, I served for the Federal EightHour Commission in 1916. I conducted a case on the Pittsburghplus system with two other men under the Federal Trade Commission. During the war I was Administrator of Labor Standards in the War Department; and for 2 years after that I was chairman of what was called the National Adjustment Commission, named to adjudicate their differences by the Shipping Board, shipowners, and longshoremen.

In 1921 the Interstate Commerce Commission put me for 2 years at a plan for consolidation of railroads, under the act through which the railroads were turned back by the United States to the owners. For 17 years I was a member of the board of directors of the Rock Island Railroad, and most of that time on the executive committee, after the old speculative management had been run out in 1916. I resigned sometime before it went into bankruptcy.

Senator O'MAHONEY. You have given a good deal of your time, have you not, to the study of organization and operation of interstate corporations? I mean corporations engaged in commerce among the States.

Professor RIPLEY. For a great number of years my principal writings and investigation had to do with railroads, and one had always to deal with industrial corporations. Throughout the period since 1900 the work at Harvard in what we call the economics of corporations fell to my lot. These matters that you have under consideration now have been under pretty close scrutiny for about 40 years. Not very much has happened to corporations that have not been analyzed in the hope some day to put it all together in a general treatise.

Senator O'MAHONEY. I am sure the committee will appreciate any statement you may care to make now, Professor Ripley.

Professor RIPLEY. It seems that I might well put into your hands this statement, which is just a picture of conditions in 1932 respecting corporations. Through a good many years I enjoyed a rather privileged relationship with the New York Times. This is my review of Modern Corporations and Private Property, by A. A. Berle and Gardiner Means. This abstract gives a pretty good picture derived from the book, of the extraordinary growth of the corporation as a form of business organization. That growth has been even more accelerated since that time, particularly within the field of holding corporations. While conditions were bad enough in 1926 when I put together Main Street and Wall Street, the movement spread through common use of the corporate form; for secrecy in stockmarket operations; for evasion of taxes; and through the extension of the corporate form of organization down into the domain of small business; and out into the West in the field of agriculture. As represented by current data Berle understated the situation at the present time rather than exaggerated it.

Senator O'MAHONEY. I think I will have incorporated in the record the article from the New York Times to which you refer. (The article referred to is here set forth in full, as follows:)

OUR CORPORATE REVOLUTION AND ITS PERILS

PROFESSOR RIPLEY ANALYZES THE GROWING CONTROL OF THE NATION'S WEALTH BY LARGE CORPORATIONS FINANCED BY THE PUBLIC'S INVESTMENTS, AND THE NEED OF PROTECTION FOR THE VAST ARMY OF STOCKHOLDERS

(By WILLIAM Z. RIPLEY)

(The question of protection for stockholders is one very much in the public mind. An important contribution to the subject is made in a book shortly to be published, The Modern Corporation and Private Property. In the following article Dr. Ripley, professor of political economy at Harvard and an outstanding student of economic practices and trends, discusses the whole complex situation, taking as his text the salient points made in the book.)

The late period of unexampled prosperity in the United States which culminated in 1929 was marked by the advent of a peculiar state of mind of the public. This may perhaps be best designated as "common-stock consciousness." An epidemic of popular preference for the junior securities of all sorts of corporations occurred. This was founded upon adherence to the belief that such immediate participation in business-holding stocks instead of bonds would entitle the people at large to share in the future growth and earning power of American business.

Sound economic reasoning, aided by much ballyhoo, induced this commonstock idea among the people at large. For 300 years there had been a progressive unfolding of power and wealth among us, unique in the world's history. Optimism for the long-run future could not but result. But this contention is bound to be overdone in times of such phenomenal promotion and development as marked the years 1925-29. "Watch us grow!" "Never sell the United

States short!" "Buy early and avoid the rush!" These admonitions were heard on all sides. The great wealth of our Morgans, Hills, Dohertys, Dukes, and Dollars was said to be founded upon such faith in the future of individual enterprise.

GOOD AND BAD ASPECTS

There is much to be said for this line of reasoning upon a smooth sea, under an open sky, and with a brisk following wind.

And yet we have come to the present pass. There is unemployment, of course, on a vast scale. But no less distressing than the awful prevalent idleness is this: That a multitude of people-a horde of bewildered investorshas little left in the world but ashes and aloes. These are all that remain of the precious fruits of years of self-denial and of hard labor. A raid upon the thrift and industry which lie at the very roots of our orderly civilization and culture has been, and still is, under way. This is becoming steadily more and more apparent as we set about clearing up the slash after the great timber cut of 1929.

The prelude marks the importance of a noteworthy legal and economic contribution, about to be issued-the Modern Corporation and Private Property, by Prof. A. A. Berle, Jr., and Dr. Gardiner C. Means, both of the Columbia University Law School. It deals with phenomena on the border line between law and economics. My privilege it was some years ago to brush over the field lightly in Main Street and Wall Street, but the subsequent frenzied prosperity of the 3 years just preceding the collapse of 1929, together with the facts which are now coming to light, were required for a more substantial appraisal of the true inwardness of the whole business.

A CORPORATE REVOLUTION

Under such distressing conditions public attention cannot but be arrested by such an affirmation as this: "It is of the essence of revolutions of the more silent sort that they are unrecognized until they are far advanced. This was the case with the so-called industrial revolution; it is the case with the corporate revolution through which we are at present passing. The translation of perhaps two-thirds of the industrial wealth of the country from individual ownership to ownership by the large publicly financed corporations vitally changes the lives of property owners, the lives of workers, and the methods of property tenure. The divorce of ownership from control consequent on that process almost necessarily involves a new form of economic organization of society."

Never so much as now has the issue been in the public mind. Many thousands of persons are smarting from the loss of a quarter of a billion dollars, more or less, in Kreuger & Toll and International Match. Other thousands are interested in the gamut of legal device employed in the Insull enterprises. Every shareholder who a few years ago profited, as it then appeared, by a "split-up" of his holdings in various properties must be concerned with the legal aspects of the subsequent decapitalization which has probably followed in due course. The creation of paid-up surpluses incident thereto, in order that the dividends on the preferred shares may be continued for the enlightenment of common-stock holders on the side lines; the kinks and devices attendant upon nonvoting stock, nopar shares, blank stock and purchase warrants, preemptive rights, the reclassification and exchange of security issues--all these and others are part of the picture which is now unfolding under our very eyes. And, preeminently, there is the matter of false representation of the worth of securities.

1. THE NEW TRENDS

Three economic trends, each of profound importance as an economic fact, are described in the book.

First, the rapid increase in the number of stock holdings and especially of modest ones.

Second, the marked and ever accelerating growth in wealth controlled by very large corporations.

Third, the actually considerable and potentially complete divorce of ownership from control, especially as respects companies of the greatest magnitude. Stock ownership in the United States is figured from the Federal income-tax returns and from the books of the 200 largest nonbanking corporations. The

number of names recorded as stockholders, as shown in the diagram below on this page, rose steadily from 4,400,000 in 1900 to 24,000,000 in 1932. The books of 144 out of 200 companies yielded 5,839,000 stockholders of record in 1929.

The larger the company, the wider is the dispersion of its ownership. Federal income-tax data show a total of persons paying such taxes between four and seven millions. Within the decade to 1927 the proportion of stock holdings, other than the largest, more than doubled. Odd-lot stockholders in 48 leading corporations, according to very recent returns, now comprise almost nine-tenths of the total of security holdings. There has been a rise of over 40 percent within the last 2 years. The five largest corporations in the country manifest this tendency to the highest degree. Telephone, Motors, United States Steel, Pennsylvania Railroad, and Standard Qil Co. stand forth distinctly. In Telephone, for instance, holders of less than 25 shares constituted this year 79 percent of the total 644.903 holdings.

The conclusion is reached that fully half of the savings of the community have recently been poured into such small investments. A very large propor tion was drawn into quasi-public enterprises, other than railroads, of one sort and another. Customer ownership and employee ownership account for a goodly proportion.

Examination of 200 of the largest nonbanking corporations reveals that in 1930 they controlled half of the total assets of all nonbanking corporations reported as paying Federal income taxes, 300,000 smaller corporations being accountable for the other half. The following table is of interest, based upon other data to the same effect:

According to this showing, 130 huge corporations out of the 573 largest companies controlled more than 80 percent of the total gross assets. Or, taking, the total wealth of the country-agriculture, banking, and commerce-200 of these corporations control roughly one-fifth of our national estate. This prodigious calculation was made possible through aid from the National Bureau of Economic Research, supported by one of the Rockefeller foundations. Here is indisputable evidence of that an important share of the private property of the United States is in flux, a change that has been peculiarly accelerated since the World War.

The pace at which the large corporations are outstripping those of medium size is also to be noted. Their growth is apparently two or three times as fast. The diagrams at the right on this page manifest this tendency on the part of the same 200 largest corporations. The proportion of total assets controlled has risen from one-third in 1910 to about one-half, or $81,000,000,000, 20 years later. At this rate another 20 years, pursuant to the same trend, would see them control about two-thirds of this type of wealth of the country. Up to the climax in 1929 there was also a greater profit, a larger reinvestment in plant of surplus income, and coincidently an overwhelming preponderance of new security offerings to the general public by the great corporations. This record, particularly as it fetched up more and more in mergers and involved corporate systems, as it appears, could not but break down of its own weight. It was the copious offering of new securities, which, of course, sprang from excessive resort to corporate credit of one sort and another, that is now so grievously apparent all along the line.

OWNERSHIP AND CONTROL

The third significant trend is the separation of ownership and control of the same 200 largest corporations. This condition is pictured in the two diagrams at the top of the page.