There are two
significant
aspects of these trust-fund figures.
Lundberg - The-Rich-and-the-Super-Rich-by-Ferdinand-Lundberg
I.
du Pont de Nemours and Company of the General Motors Corporation (discussed in Chapter IV).
While there were some cases where the big owners were under-represented in the management by reason of "youth, old age, sex, preoccupation with other financial or nonfinancial interests or other considerations" heavy representation or even overrepresentation was "much more common. " 20 Thus, although members of the Swift family owned only 5 per cent of the voting stock, the remainder of the stock being distributed mainly in slices of 100 to 500 shares each, the Swift family held six of the nine directorships. In the Crown Zellerbach Corporation the Zellerbach family, owning 8-1/2 per cent of the stock, provided the president, a vice president and three directors out of a board of thirteen. It is not necessary, then, for a family to own a majority or near-majority of stock to control a company and the disposition of its total weight. A small family block of stock and many small general stockholders are enough to secure control of the board of directors and officers.
Nor did the revelations to the TNEC in all cases show the true center of control, owing to a complicated network of company ownerships. An example is the Tidewater Associated Oil Company which as of December 15, 1939, the date of the TNEC questionnaire, was already well in the pocket of J. Paul Getty, although unknown to the world. The TNEC report shows that 3. 07 per cent of the common was owned by George F. Getty, Inc. , which in turn was 43 per cent owned by J. Paul Getty in person and 57 per cent as trustee for his children. But Pacific Western Oil Corporation owned 3. 93 per cent, and was in turn owned 67. 9 per cent by George F. Getty, Inc. , and 2. 62 by the Mission Corporation. Again, the Mission Corporation owned 16. 52 per cent, and was in turn owned 46. 53 by Getty's Pacific Western Oil Corporation and, observe, 7. 39 per cent by the Tidewater Associated Oil Company!
Directly and indirectly J. Paul Getty at the time, undetected by the TNEC analysts, already owned 23. 52 per cent of the mammoth Tidewater enterprise. Actually, his percentage of control was somewhat higher than this because the South Penn Oil Company, of which Tidewater owned 17. 27 per cent, reciprocally owned 2. 77 of Tidewater. Mission Corporation was originally established to hold the interest of Standard Oil (New Jersey) in Tidewater but Getty, as he reports in his memoirs, talked John D. Rockefeller, Jr. , into selling him his Mission stock and then in a quiet campaign prevailed on other stockholders to follow the Rockefeller lead. At the time of the TNEC study Standard Oil (Indiana) owned 1. 05 per cent of Tidewater through the 98-per cent- owned Pan American Southern Corporation. 21
The TNEC made a supplemental study of 10 interesting large companies that were not included on the list of the 200 largest. Some of them were as follows: 22
Family
Dorrance family
(by trust indenture)
Woodruff-Nunnally-Stetson-
Candler-Illges
Twenty individuals
Mainly members of the Bell
family among twenty
stockholders
Haverneyer family, H. O.
Havemeyer estate, and the
Ossorio, Thatcher and
Boettcher families
Heinz family
Twenty individual stock-
Corporation Percentage
Owned
Campbell Soup
Coca-Cola International
(controlling Coca
Cola Co. )
Crucible Steel
General Mills
Great Western Sugar
H. J. Heinz
International Utilities
100
nearly 50
45. 55 20. 14
43. 34
82. 10 26. 71
holders, mainly invest
ment companies
Ajax Pipe Line
Rockefeller Foundation
Harkness-Flagler-Prentiss
(Rockefeller)-four other
individuals and 11 trust
companies and brokerage
houses for others
St. Regis Paper
(utility holding company)
American Superpower
J. P. Morgan & Co. , Brown
Brothers Harriman & Co. , and
16 brokerage houses and
investment firms
Standard Oil (Ohio)
Standard Oil (Ohio)
Standard Oil (Ohio)
United Corporation
United Corporation
United Corporation
24. 77
17. 63
10. 92
8. 332
6. 640 9. 846
The tenth company on this supplemental list was the Electric Bond and Share Company, then a utility holding company and now an investment trust. Its twenty-one largest stockholders were banks, brokerage houses and investment companies, and the names of the beneficial owners of the stock were not elicited.
Leading family names not yet mentioned that were strewn through the twenty largest stockholders in the 200 largest nonfinancial companies--in many cases appearing in more than one company-were as follows:
Adler, Astor, Cabot, Clapp, Doris Duke Cromwell, Cunningham, Doherty, Drexel, Fleischmann, Forstmann, Goelet, Goldman, Guggenheim, Hanna, Hearst, Hillman, Hutton, Jones, Laughlin (Jones and Laughlin Steel), Lynch, McClintic, Miller, Milbank, Palmer, Payson, Penney, Pillsbury, Rosenwald, Schott, Skaggs, Vanderbilt, Watkins, Whitney, Widener and Winthrop.
Names of wealthy families that did not appear because their stockholdings were not among the twenty largest and were probably widely distributed in smaller blocks, rentier-style, through many companies or were in real estate or bonds, were the following:
Baker, Bedford, Berwind, Curtis-Bok, Fisher, Frick, Gould, Green, Hill, Kahn, Lehman, Metcalf, Patterson, Pratt, Phipps, Taft, Timken, Warburg and others.
These omissions, not at all to be deplored, came about because the TNEC study was not directed to ascertaining the names of all wealthy families--what it gleaned here was a byproduct--but merely of determining who controlled the 200 largest nonfinancial companies. Anyone who was concentrated mainly in real estate, banking, insurance or in widely diversified, nonconcentrated investments the study necessarily missed. All the new Texas oil men were missing. Joseph P. Kennedy's name did not appear.
Even if one had before one an up-to-date list of all the largest income-taxpayers, names of some extremely wealthy people could readily elude us, such as anyone who, like Mrs. Horace B. Dodge, had converted all her holdings into tax-exempt state and municipal securities. One could, theoretically, own a billion dollars worth of these, drawing a tax-free income of $25-$30 million a year, and never show up on the income- tax list at all.
What the TNEC analysis made incontrovertibly clear was that the family, not the individual, is now the significant wealth-holding and wealth-controlling entity in the United States, a thesis I had antecedently asserted, for the first time as far as I know. 23 While the proposition may seem firmly established to some it is, curiously, often denied or blandly ignored even though the SEC continues to supplement the TNEC findings in
detail. One man may amass the fortune, as in the case of John D. Rockefeller, but if the fortune is to remain intact it must have heirs. Where the fortune-builder is a bachelor or fails to establish a family, the fortune simply disappears in a foundation or institutional grants. Heirs, then, are as important to a fortune as to a title of nobility. Most American fortunes, easily by a majority of 70 per cent, are in the hands today of heirs.
And, in saying that the family holds the fortune, one cannot suppose this to suggest that its members fend individually for themselves to all points of the compass. They must hold together, for their predecessors have in almost all cases entangled them in a network of trusts and family holding companies that assure unified action at all times.
No less than half of all these controlling corporate holdings were in "trust funds, estates, and family holding companies. " 24 Even if an heir wished to go away on his own, all be could take with him would be income; the holding itself would remain in a center, massed with other individual holdings and directed by some individual or small family committee. This circumstance puts all the holdings into a tight fist, generating power that is played out in the political and cultural arena. Anyhow, who would want to walk away from the goose that lays the golden eggs?
Family Holding Companies
There are thousands of personal and family holding companies, large and small, in the United States. In most cases their names have never been seen or uttered by 99. 9 per cent of the citizenry because these entities are private, are under no obligation to make any report to anyone except the tax authorities. No public compilation of them exists.
Their names usually only come to public attention through court proceedings or as the byproduct to certain government investigations, such as the TNEC inquiry. That particular inquiry did provide information about the existence of some extremely large family holding companies.
A family holding company may have a score or more participants of beneficial interest in it--infants, teen-agers, the superannuated, the mentally retarded, absent big game hunters, scholars and normal persons in the prime of life. But the slices of beneficial interest, apart from the income pay-out, are all managed as one entity by a single person or a family committee, which in turn is either adept in the management of large properties or has the benefit of expensive professional advice. An heir may seem deficient in business acumen to all who know him, but he may be the constant beneficiary of the best legal and investment advice available, perhaps even against his own wishes. He might prefer to take his stake and invest it in various attractive schemes, or spend it, but he is firmly deterred from this course by the family holding company. And it functions, up and down the line, according to Standard Doctrine.
We have already noticed, in connection with the Du Ponts, that the TNEC found a large role being played by the Christiana Securities Company and Almour Securities, Inc. , both family holding companies. But other huge family companies were also uncovered in the report.
There was, first, the Bessemer Investment Company, instrument of the Phipps (Carnegie Steel) family that included, among many persons named Phipps, such names acquired by distaff marriages as Douglas, Janey, Sevastopoulo, Martin, and Winston and Raymond Guest. In all, twenty or more Phippses were beneficiaries. All appeared to have the financial status of rentiers and were well known social registerites and polo players. Bessemer Investment Company was found to be a principal stockholder in New England Power Association, International Hydro-Electric System and International Paper Company, whatever else it held of lesser dimensions.
Oldwood, Inc. , was 66. 58 per cent owned by the Bessemer Investment Company and a group including the Chace, Gammack, Majes, Cox Brady and Phipps families. It was a leading stockholder, too, in the New England Power Association.
More than twenty Du Ponts had a participation large enough to list for Christiana Securities Company, which had among its stockholders other Du Pont family holding companies such as Delaware Realty and Investment Company, Archmere, Inc. , and Du Pont trust funds.
The Cliffs Corporation, the personal instrument of the Mather family, owned all the common stock of the Cleveland Cliffs Iron Company, which was among the principal stockholders of the Wheeling Steel Corporation and the Republic Steel Corporation.
The Coalesced Company was owned 50-50 by Paul Mellon and Ailsa Mellon Bruce, and in turn was among the top stockholders in Koppers United Co. , The Virginian Railway Co. , Pittsburgh Coal Company and General American Transportation Company.
The Mellon Securities Company, owned by Richard K. Mellon, Sarah Mellon Scaife and various Mellon trusts, was a leading stockholder in Aluminum Company of America and the Gulf Oil Corporation.
The Curtiss Southwestern Company belonged to Arthur Curtiss James and Harriet P. James and in turn was a principal owner of the Phelps Dodge Corporation, the Western Pacific Railroad Corporation and the Missouri-Kansas-Texas Railroad Company.
The Empire Power Corporation was the instrument of the Laurimore Corporation (owned by Ellis and Kathryn Phillips), the Delaware Olmsted Company (owned by the Olmsted family), the Eastern Seaboard Securities Corporation (a joint Olmsted-Phillips venture) and individual Olmsteds and Phillipses. Empire Power was a principal stockholder of the Long Island Lighting Company.
The Falls Company was a holding company for the very numerous Rosengarten family and was a principal stockholder of the United Gas Improvement Company, the Duquesne Light Company and the Philadelphia Electric Company.
The M. A. Hanna Company, monument to Mark Hanna of McKinley era fame, belonged to the Hanna family and its numerous inter-related genetic lines. It was a principal stockholder in Phelps Dodge, Lehigh Coal and Navigation and the National Steel Corporation.
The Illges Securities Company belonged to the numerous Illges-Chenoweth-Woodruff and other families and was a principal stockholder in the Coca-Cola Company.
The Illinois Glass Company was the holding company of the numerous Levis family and was a principal stockholder in Owens-Illinois Glass Company and National Distillers Products Corporation.
Light and Power Securities Corporation belonged to the Starling W. Childs family and was a principal stockholder in four large public utility companies.
The Miami Corporation, a holding company for the Deering estate, was a chief stockholder in International Harvester Company and the Chesapeake and Ohio Railway Company.
The New Castle Corporation, owned by Mr. and Mrs. Alfred P. Sloan, held the Sloan stock in the General Motors Corporation and the Phillips Petroleum Company, both among the big holdings.
The North Negros Sugar Company belonged to the Ossorio family and was a principal stockholder of the Great Western Sugar Company and the American Sugar Refining Company.
The Phillips family, quite numerous, owned the T. W. Phillips Gas and Oil Company, which in turn was the dominant stockholder of the Federal Water Service Corporation.
The Pitcairn Company, a leading stockholder in the Pittsburgh Plate Glass Company, the Consolidated Oil Corporation and the Columbia Gas and Electric Corporation, was owned by the Pitcairn family of Pittsburgh.
The Provident Securities Company was owned by William W. Crocker, Helen Crocker Russell, Charles Crocker and Ethel Mary de Limur and in turn was a leading stockholder of the Tidewater Associated Oil Company, General Mills, Inc. , Pacific Telephone and Telegraph Company, Pacific Gas and Electric Company and the Southern California Edison Company.
The Rieck Investment Company belonged to the Rieck-Woodworth families and was a principal stockholder in the National Dairy Products Corporation and the Firestone Tire and Rubber Company.
The Taykair Corporation, which held a large number of serially numbered trusts, belonged to the Benjamin family and was a big stockholder in The Virginian Railway Company, Gimbel Brothers, Inc. , and the Brooklyn Union Gas Company.
Serial and paralleling family holding companies are not uncommon. For example, the Colgate family, of the Colgate-Palmolive-Peet Company, reported a tangle of holding companies that with a few other relatively small interests made up 31. 85 per cent of the twenty largest Colgate-Palmolive stockholdings. There was the Beechwood Securities Company; the Oakbrook Company; the Bertco Company; the Holly Security Company, which was 100 per cent owned by the Filston Security Company, itself a holding company for family members; and the Orange Security Company, owned 100 per cent by the Beechwood Securities Company; and then there were individual holdings by individual Colgates and distaff descendants.
One could go on at great length exhuming the names of hundreds of additional family holding companies but nothing would be added except repetitive detail to the essentials of this report.
It is not usually the case, then, that a big fortune is subject to the ownership and direction of some single individual, some dominating Croesus. It is usually directed by a small family committee with access to expert professional advice, each member of this committee owning only a small percentage of the big pie. But the decisions respecting the big pie are the same as far as the world outside is concerned as if one man owning hundreds of millions made his will effective.
Under American law the entailment of estates is prohibited, but the prohibition has in effect been nullified through what may be termed serial entailment. For property owners of the third generation make provisions for placing property once again in untouchable trusts extending to three more generations, and so on ad infinitum. Boston is a particular center of such long-range serialized trusts. 25
As in England under legal entailment, in the United States huge properties are thus secured for generations unborn. The future beneficiaries can never have made any compensatory social contribution and may never make any after they are born. They are simply privileged by prescription as under the longstanding American-despised European system.
Trust Funds
Whereas private family holding companies are a favorite way of keeping big holdings intact and under central direction (even though the beneficial interest in income may be spread among scores or hundreds of cousins, aunts and in-laws), there are also individual trust funds, usually under the direction of a bank. The concentration of many trust funds in large banks, of course, concentrates just this much industrial voting power under the boards of directors of the banks. It makes them powers in the land.
Some of these trusts are relatively small. But, altogether, they add up to an enormously big financial punch. And, as the banks largely maneuver according to the same point of view, they in effect act in concert in voting these securities in various corporations. Indeed the size of the holdings they represent often enables them to name members of corporate boards of directors, which is one of the reasons so many bank officials are found strewn among the corporate boards. The large amount of stock that places them in position is not their own. But it gives them a great deal of veiled authority.
In some cases, various apparently unconnected members of the boards of directors of the corporations are like so many horses running out of the same stables, carrying the same ownership colors. The family that is the biggest stockholder in Corporation X, holding 20 per cent, is also the biggest stockholder in the bank with many trust fund holdings in relatively small amounts of stock of Corporation X, also perhaps adding up to 20 per cent. Another bank, also holding a great deal of trust stock, perhaps 12 per cent in hundreds of trust funds, may not be controlled by any of the first parties but is merely a friendly back-scratching ally. Together the two groups absolutely control the corporation, name its officers, determine its policies, apply its influence.
To what extent are funds now under trusteeship?
"At the end of 1964, trust departments of commercial banks bad investment responsibility for assets of approximately $150 billion, of which about $50 billion represented employee benefit accounts. In addition, bank trust departments provided investnment management for agency accounts with assets of at least $35 billion. " 26 In these last the banks acted as agents for other trustees. We see, then, that nonemployee or individual trust funds amount to at least $135 billion, although the true figure is actually larger than this, for there are nonbank trustees who do not make use of banks even as agents.
Of the trust holdings of national banks, "More than 59 percent of these assets were invested in common stocks; about 52 percent of the employee benefit accounts, and approximately 62 percent of the other accounts. " 27
Most of these trust funds were concentrated in a few large banks. "Twenty-one banks with investment responsibility for trust assets of more than $500 million held approximately 56 percent of the total, and the 100 largest trust departments held more than 80 percent of the trust assets of national banks. Asset concentration was greatest among employee benefit accounts for which the 21 largest national bank trust departments held almost 80 percent of the assets where national banks acted as trustee. Large trust departments, for the most part, are concentrated in the largest commercial banks, although there are many exceptions where moderate-sized banks have very large trust operations and vice versa. " 28
"National banks with trust assets in excess of $5 million reported having approximately 580,000 trust accounts, including 68,500 corporate accounts, and 340,000 accounts where they exercised investment responsibility. " 29 These figures indicate, excluding the corporate employee accounts, that there are at least 920,000 individual or private trust accounts in national banks alone. Some persons, of course, are the beneficiaries of many trust funds. Not all trust funds are large, may indeed be as
small as $5,000 or $10,000, but the larger banks will not accept these. The larger New York banks do not like to be named as trustee for anything under $100,000 even for inclusion in their collective trust funds, in which there is a mingling of many smallish trust funds with proportionate participations, as in an investment trust.
The average size of trust accounts where the bank exercised investment responsibility, excluding employee benefit accounts, was $173,000; but in the larger banks the average size was $300,000. Smaller banks carried trust accounts at an average size of $53,000. 30
But "Investment management accounts tend to be larger than the average for other trust accounts, since many banks set a relatively high minimum size or minimum fee on such accounts. " 31 Thus the average size of such accounts was $582,000, and in the bigger banks it was $735,000.
In addition to national banks there are the state-chartered banks to be considered.
"We estimate that state-chartered banks have investment responsibility for trust assets, apart from those of employee benefit accounts, of approximately $51 billion, bringing the total of such assets for all banks to approximately $105. 5 billion. " 32 Employee- benefit accounts in such state-chartered banks were estimated at $29. 5 billion, with the New York State Banking Department alone accounting for $23. 6 billion as a definite nonestimated figure. For all state-chartered banks, investment management accounts were estimated at $20 billion. 33
Total trust accounts for which banks have investment responsibility, then, amounted to $155. 8 billion at the end of 1964, of which $105. 5 billion represented nonemployee benefit or individual accounts . 34 There was another $35 billion for which the banks acted as investment advisory agencies and an unknown amount in the bands of individuals or corporations that did not make use of banks as advisory agencies.
There are two significant aspects of these trust-fund figures.
First, they represent an entirely new set of statistics, the gathering of which was begun by the comptroller of the currency only in 1963.
Of greater significance, however, is that the figures show the deep foundations of vested inherited wealth in the United States. Trust funds are popularly thought of as solely for the benefit of widows and minor orphans, and such are no doubt included among the beneficiaries. But, by and large, most of the beneficiaries are able-bodied adults, unwidowed, unorphaned and, as often as not, pleasantly idle. In many cases the first generation in receipt of trust-fund benefits never collects the principal at all, which is left to the next generation. When principal is paid out, it is often in dribbling installments throughout the recipients' lifetimes. In the case of the original Marshall Field, trusts were established that did not allow the grandchildren to collect the last part of principal until they were fifty years of age.
Such provisos keep the fortune from being dissipated through the exercise of immature judgment. The first generation cannot disturb the principal and the next generation does not get all of it or, sometimes, any of it until its members are quite advanced in age. At that point many of them lock the principal, Boston-style, back in new trusts for the benefit of the next two generations. Again, too, inheritance taxes are bypassed except at those points where principal is paid over.
From a property-ownership point of view all this undoubtedly has great merit. But what it signifies for the unpropertied is that they will never lay hands on any of this property no matter how they perform, short of overturning the legal system and the military forces behind it. The beneficiaries cannot even be swindled out of their benefices. Obviously, economic opportunities, legal and illegal, are considerably
narrowed for the multitude when so much property is closely sequestered for the benefit of unborn generations.
The trust funds, like the family holding companies, point up the fact that the United States, like the Europe it proposed to surpass in equality of opportunity, has developed a permanent hereditary propertied class. Indeed, owing to the far greater proportion of public ownership now in western Europe, the United States actually has more of a hereditary property system than does Europe.
And if this seems paradoxical, one may notice this even greater paradox: There are kings now in Europe who are far more democratic in their attitudes than the average American citizen.
What stocks are trust funds concentrated in? This is not difficult to ascertain. Although individual trust funds may, by stipulation, be concentrated in one or a few stocks, when there is no such stipulation the principle of diversification is resorted to by competent trust officers. This amounts to invoking the principle of the investment trusts that limits their holding of any issue to no more than 2 per cent of the entire capital. The big New York banks issue to interested parties the portfolio list of their collective trust funds--that is, those where many smaller trusts are mingled together, with each trust participating proportionately to its size. A small trust is defined in different ways by different banks and may be as much as $500,000. "Small" here means too small to be managed profitably by itself.
As these lists of collective trust funds show, the stock investment is mainly in the list of the 200 largest companies and the 500 largest industrial companies and the 50 largest merchandising, public utilities and railroads, respectively, on the annual Fortune lists. Trust funds are not invested in the biggest companies per se but in the relatively well- performing stable companies that are relatively cheapest at each time of purchase. Public utility and insurance company stocks have for some time especially attracted trust accounts.
While questionable practices were uncovered in some trust accounts in the 1930's, such as stuffing them with dubious issues for which the bank was in an underwriting syndicate (now no longer possible with the separation of underwriting from banking under the law), in an advanced jurisdiction like New York the trust companies are under strict state supervision. The trust company has come to the fore as an institution because of the many cases in the past where individual trustees have exercised bad judgment or turned out to have sticky fingers with respect to the trusteed property. The very life of a trust company depends upon its proper operation within average limits.
Before leaving this topic of trust funds one may ask: What is their major utility? The trust funds are designed to keep principal intact and impervious to error of inexperienced heirs, and to hold inheritance taxes to a minimum.
Family Holding Companies Revisited
The personal and family holding companies also perform this function, and more. A personal holding company is defined in the Revenue Code as a company owned 50 per cent or more by no more than five stockholders with income derived primarily from certain types of investments. The two Mellon entities already named are examples. The family holding companies are the equivalent of close investment trusts and operate under tax laws appropriate to such entities.
Says Standard Doctrine: "A personal holding company is a close corporation, organized to hold corporate stocks and bonds and other investment assets, including personal service contracts, and employed to retain income for distribution at such time as is most advantageous to the individual stockholders from a tax point of view. " 35
As of 1958, the latest date available, there were 6,285 personal holding companies. Another type of closely held corporation, similar in many cases in its functions, is the legally defined Small Business Corporation. There were, as of 1962, more than 120,000 of these. They are taxed through their stockholders, of which there may not be more than ten.
The personal holding companies are purely investment companies. The total assets for all of them were $5,236,429,000, but $4,304,158,000 of the assets were concentrated in only 652 with assets of $1 million or more; 25 had assets exceeding $50 million, 12 exceeding $25 million and 48 exceeding $10 million. Total income of these entities was $361,916,000, of which $216,822,000 came from dividends. Whatever their size, these were instrumentalities of larger property holders. 36
A remaining advantage in both corporate forms is that they concentrate corporate voting power for the special benefit of all the beneficiaries. Let us, for the sake of simplicity, suppose that there is a family group of 200 individuals, each owning precisely $1 million stock in the mythical SuperCosmos Corporation whose outstanding stock is valued at $1 billion. Each one of these persons would on the basis of his personal equity have little to say about the company, it is clear, but would be part of the rabble of minor stockholders. Combined, however, possibly in a group of personal holding companies, they own 20 per cent of the stock and thus name members of the board and are always well advised in advance of inner-company developments. Their representatives, too, can trade such inner-company information with similar groups in other companies for investment orientation. They are, also, politically powerful as a group.
Again, under existing tax laws it is the general strategy of the very rich to keep dividend pay-outs low in relation to earnings. The family investment company can hold back some of its income as corporate reserve, thus reducing the tax liability of its members. This corporate reserve, in turn, is reinvested.
In the sphere of operating corporations as a whole, producing goods or services for the public, the average dividend pay-out is ordinarily about 50 per cent of earnings. Some of the earnings are retained to replace wornout equipment, to expand and to keep dividends stabilized in less profitable years. But corporations differ in their pay-out rates, even among good earners, ranging from zero to 80 per cent. Small stockholders tend to favor those with high pay-out rates. But many big stockholders have come to prefer those with small pay-out rates, for then personal income taxes are lower.
Control of companies, however exercised, enables one to have something to say on this important subject of pay-out rates.
But in recent years many of the large corporations have retained earnings greatly in excess of replacement and future dividend needs. Such earnings have been used in the acquisition of companies in unrelated fields, as part of a policy of investment diversification, and in buying control of foreign companies, which might be classed as economic imperialism. The advantage to the big stockholders is that the money is not paid out in taxable income but is continually ploughed back to increase the underlying value of equities. However, if any big stockholder wants more income he can take it in the form of low-taxed capital gains by selling some of his stock. The large yearly aggregates of capital-gain income reported to the Internal Revenue Bureau since 1950 reveal what is happening.
A fairly recent concept that has emerged in the corporate world is that of the "growth company. " A growth company, manifestly, is a company that grows. The name is attached rather indiscriminately by brokers to new companies in technologically novel fields: electronics, space-age, atomic power, etc. Not all of these are growth companies
for, as experience shows, not all of them grow. But any company that ploughs back a large proportion of its earnings steadily is obviously a growth company. With taxes in mind such companies are advantageous.
The very wealthy, in brief, are less interested in increasing their taxable incomes than in increasing their nontaxable ownership stake. This, when necessary, can always be cashed.
Observations En Passant
There remain some observations to be made about the American hereditary owners,
contradicting common beliefs.
It is generally supposed that the heirs of the big fortune-builders are comparatively incompetent playboys or at best poor copies of the original Old Man. While wastrels have been seen among some of the very wealthy, most of them women or some man intent upon impressing some woman (Astor, Vanderbilt, Hearst and others), in all the big surviving fortunes the heirs seem to show greater and greater finesse in applying Standard Doctrine under more and more complex conditions. The original fortune- builder might not understand everything they were doing but he would have to admit they are getting results as good as or better than he ever got. One reason for this is that the heirs now have available to them much more highly developed professional experts, deeply versed in the intricacies of each situation: economists, statisticians, analysts, engineers, psychologists, lawyers and the like.
Two original Du Ponts did very well in launching E. I. du Pont de Nemours and Company and deserve a reverent salute from all deeply committed money fans. But they seem to have been outdone by every succeeding generation of Du Ponts, each of which appears to have missed no opportunity to enlarge that part of the fortune it inherited.
The same with the Fords. After his first great success Henry Ford, set in his ways, dogmatic, began to lose his touch. He refused to defer to his son Edsel, who close observers believe would have put the company on a sounder footing than it found itself in the 1940's. But Henry Ford II, a grandson in his twenties, later aided by two younger brothers, brought the Ford Motor Company up to new heights of wealth, public esteem and prestige. In a little more than ten years the grandsons more than sextupled the value of the company, outperforming the economy as a whole, and have no doubt engaged in unknown side coups of more than modest proportions.
Judge Thomas Mellon's sons outdid his financial feats, and his grandchildren do not appear, under more difficult circumstances, to have lost the golden touch. The Mellons are still going strong, surrounded by family holding companies, trust funds and banks.
As to the Rockefellers, it might appear that none of them will ever be able to outdistance the wily old monopolist who put the family on the financial and political maps. But many authorities would argue that John D. Rockefeller, Jr. , performed a far more difficult feat in holding the fortune together under strong political attack. Judge Mellon's opinion that it is harder to hold on to money than to make it has been explicitly made part of Standard Doctrine. 37
If this is so then Rockefeller, Jr. , who inherited a difficult situation, must be considered to have surpassed his father. The grandchildren are doing even better, for in addition to advancing the family fortunes they have performed the difficult feat of making themselves the idols of a considerable public.
As to it being more difficult to retain money than to make it, probably few would readily agree with this proposition. But slight reflection will show that it is true. Most adults have jobs and are paid. But how long does the weekly pay check last? Could one
resolve not to spend it? Most people could not make such a resolution unless they wished to starve. Actually, most persons are unable to save as much as an average 5 per cent of their earnings. This state of affairs illustrates the point.
The average man in the street might contend that if his pay were only higher he would retain some of it; and in some few cases, let us agree, he would. But from time to time there are big sweepstakes and lottery winners, suddenly possessed of goodly sums. How old judge Mellon would smile if he could hear them excitedly telling newspaper reporters what they are going to do with their windfalls: a new house, a new wheelchair for grandma, crutches for Tiny Tim, a new car, a trip to Florida and then some government bonds of declining purchasing power! A year or so later, as it turns out, they are all where they were financially to begin with, looking back wistfully to the time they were suddenly rich. What happened to the money? they ask. Where did it go?
What defeats most people in holding onto money, reinforcing the judgment of Judge Mellon, is that they are basically childish spenders. And therein lies part of the opportunity of acquisitive moneymakers. One task of the marketplace is to separate people from their money, often giving them something meretricious in return.
Present Status of 200 TNEC Corporations
What has happened to the two hundred corporations of the TNEC in the twenty-five years that have elapsed? Have any fallen by the wayside, carrying their owners to disaster? Have any slipped from the top of the heap?
"Analysis of the 1937 group of 200 non-financial corporations," according to The Dartmouth Study 38 "reveals on the surface a number of things. In terms of current dollar values there has been great growth for the group as a whole. In terms of constant dollars (values adjusted for depreciation of money), the total growth is probably not much greater than the rate of growth of our economy. This point cannot be pressed further, however, in the absence of detailed information about the accounting adjustments which the various firms have made as the value of the dollar has declined and as new assets have been added. "
The TNEC list is set forth parallel with the 1964 list of biggest nonfinancial corporations in Appendix B.
There have been changes of detail in the list (although not significant) with respect to who owns and controls the wealth. With the exception of a few newcomers, the same groups own the companies as owned them in 1937.
Certain companies have moved off the master list of the leading 200, not because they have lost out entirely but because they have been squeezed off by mergers or by the emergence of new industries such as aviation and natural gas pipelines.
Except for the Mellon (Pittsburgh) Consolidation Coal Company, all coal companies have been pushed off the list, replaced by gas pipelines. Railroads have moved down on the list and some have moved off; but a merger kept Erie-Lackawanna on the list. Pullman, Inc. , a Mellon enterprise, has declined, partly because of an adverse antitrust decision. It is evident that the loss of a monopoly position in the face of new means of transport is what has taken the bloom off the railroads. In meat packing, the "big four" have been supplanted by the "big two"--Swift and Armour.
The electric utilities on the two lists are not strictly comparable. On the later list are many new regional companies that are the outcome of the dissolution of the old holding companies. But in essentials the same electric power properties are on both lists, though often under different names.
Film companies have been pushed off the list, owing to the competitive advent of television and adverse antitrust decisions. Their owners were never seriously classified among the big-wealthy.
In all, close to fifty companies appear to have been pushed off the list. In addition to three coal companies, two packers and fifteen old-line utility holding companies, they are: Texas Gulf Sulphur, American Sugar Refining, American Woolen (Textron), Hearst Consolidated, International Shoe, New Jersey Zinc, U. S. Smelting, National Supply, United Shoe Machinery, Gimbel's, Marshall Field, R. H. Macy, Hudson and Manhattan Rail Road, six interstate railroads and two film companies. No really big interests experienced a decline.
Some newcomers are the product of split-offs. Western Electric came out of AT&T and now ranks twenty-fifth in size. The only other newcomer in the first twenty-five is Tennessee Gas Transmission, representing new capital mobilization. The only newcomer in the second twenty-five is El Paso Natural Gas, owing to similar circumstances.
The second fifty have among them as new faces only Sperry Rand and Olin Mathieson, outcomes of mergers.
The most recent list, in brief, represents the same old crowd with a few additions produced mainly by mergers and subtractions by squeezing.
At the very top there is DO change except that the companies have grown much larger. AT&T, largest company in the world, leader of both lists and the stock of which is widely held, had total 1964 assets of $30. 306 billion compared with $3. 859 billion in 1937. Standard Oil (New Jersey), largest purely industrial company in the world in point of assets, had assets of $12. 49 billion compared with $2. 06 billion in 1937, and was in second place both times.
The smallest company on the TNEC list was Texas Gulf Sulphur, with assets of $62. 9 million. The smallest company on the later Fortune list was Scott Paper, closely shadowed by Allied Stores, with assets of $413. 8 million.
The TNEC list was compiled during a depression, the Fortune list after a war and twenty years of boom, heightened concentration and inflation.
As to the owners and controllers, there has been no significant change except that they are more firmly established in the ascendancy than before, Four Rockefeller companies appear among the first twenty-five compared with 3 in 1937, and there are 6 of them on the TNEC list and 7 on the Fortune list. The two big Du Pont companies have moved up among the first twenty-five, improving relatively. One of the chief Mellon properties, Gulf Oil, has moved into the first twenty-five, in eighth place, where it was not to be found in 1937. The Ford Motor Company has moved up from twenty-third to fourth place.
One of the most spectacular improvements in the approximately thirty or so years separating the two lists was Sears, Roebuck and Company, which moved from sixty- ninth place, with assets of $284 million, to ninth place, with assets of $4. 271 billion, making it the world's leading retail merchandiser. The position of the dominant Rosenwald family has been correspondingly improved, making it easily worth more than $500 million and on the threshold of super-wealth. An even more spectacular growth company was International Business Machines, leader of the computer- automation field, which moved from one hundred eighty-fifth to twelfth place in size of assets. Most of the newcomers to the list, however, are the result of mergers, spin-offs or the rise of new industries such as aviation and gas pipelines on the basis of new capital. But, although there are newcomers, few of the newcomers are new properties.
Mergers either brought companies onto the list, moved companies up on the list or kept them on the list: General Telephone, American Metal Climax, International Telephone and Telegraph, Olin Mathieson, Burlington Industries, Erie-Lackawanna, Georgia- Pacific, General Dynamics, United Merchants and others.
While the lists in both cases represent only a small sample of American companies, these companies represent almost 70 per cent of U. S. output. Basic economic activity outside these lists represents the lesser portion of the pie.
Aluminum Company of America moved from seventy-ninth to thirty-eighth place even though its monopoly position was broken by the sale of wartime government aluminum plants to competitors. The Kaiser interests--one of these competitors, and nurtured by government patronage--have put no less than three new companies on the master list: Kaiser Aluminum, Kaiser Industries and Kaiser Steel.
The Pew family's Sun Oil Company moved up from one hundred thirty-eighth place to seventy-fifth. Although J. Paul Getty's Tidewater Oil is only sixty-ninth on the list, up from ninety-second place, it should be remembered that Getty owns most of it and has many other oil interests whose lesser dimensions fail to qualify them for this list.
Viewed again purely from the perspective of this most recent list of the biggest American proprietors, the financial grand dukes of the United States appear still to be, individually and collectively, the Rockefellers, Du Ponts, Fords, Mellons, Rosenwalds, Pews, Gettys, Phiippses, Mathers, Hartfords, McCormicks and individuals like Allen Kirby, who in addition to his New York Central and Woolworth holdings is a leading stockholder of the big Manufacturers Hanover Trust Co. of New York.
The old question pops up: Have positions in these companies been maintained at the same level throughout the years? In some cases, as in that of the Du Ponts, we know they have. There have been some shifts in Rockefeller holdings, and the Ford holdings are about what they were when Henry Ford I died. At the time of the TNEC study the Rosenwalds held 12. 5 per cent of Sears, Roebuck. In view of the steady strong growth of this company one would not suppose they would have sold out. If anything, guided by Standard Doctrine, they would have increased their holdings.
As groups like railroads and coal companies declined in the economy, no doubt leading holders tended to sell them out. But they may also have reestablished positions at lower prices, and in recent years the railroads have shown great improvement, both in earnings and in market action of securities.
No big interests such as Hartfords, Zellerbachs, Weyerhaeusers, Dukes, Pitcairns, Mathews, Swifts and others are reported to have cleared out. Among smaller interests there have undoubtedly been inter-company shifts of holdings, as into oils, aviation, natural gas and gas pipelines.
Old money, though, has found its way into successful new enterprises, as in the Harriman-Warburg-Straus ground-floor investment in Polaroid.
We have seen that concentrated ownership is a more prominent feature of small companies. This circumstance and the fact that there is such concentrated ownership of very large companies show that concentration of ownership and control in few hands is a built-in feature of the American economy. While twenty million or more stockholders have an equity (usually trifling) in these and hundreds of other companies, it is a fact, as the TNEC study showed, that from two to three up to twenty of the largest stockholders own very large to total percentages of the companies.
While there were some cases where the big owners were under-represented in the management by reason of "youth, old age, sex, preoccupation with other financial or nonfinancial interests or other considerations" heavy representation or even overrepresentation was "much more common. " 20 Thus, although members of the Swift family owned only 5 per cent of the voting stock, the remainder of the stock being distributed mainly in slices of 100 to 500 shares each, the Swift family held six of the nine directorships. In the Crown Zellerbach Corporation the Zellerbach family, owning 8-1/2 per cent of the stock, provided the president, a vice president and three directors out of a board of thirteen. It is not necessary, then, for a family to own a majority or near-majority of stock to control a company and the disposition of its total weight. A small family block of stock and many small general stockholders are enough to secure control of the board of directors and officers.
Nor did the revelations to the TNEC in all cases show the true center of control, owing to a complicated network of company ownerships. An example is the Tidewater Associated Oil Company which as of December 15, 1939, the date of the TNEC questionnaire, was already well in the pocket of J. Paul Getty, although unknown to the world. The TNEC report shows that 3. 07 per cent of the common was owned by George F. Getty, Inc. , which in turn was 43 per cent owned by J. Paul Getty in person and 57 per cent as trustee for his children. But Pacific Western Oil Corporation owned 3. 93 per cent, and was in turn owned 67. 9 per cent by George F. Getty, Inc. , and 2. 62 by the Mission Corporation. Again, the Mission Corporation owned 16. 52 per cent, and was in turn owned 46. 53 by Getty's Pacific Western Oil Corporation and, observe, 7. 39 per cent by the Tidewater Associated Oil Company!
Directly and indirectly J. Paul Getty at the time, undetected by the TNEC analysts, already owned 23. 52 per cent of the mammoth Tidewater enterprise. Actually, his percentage of control was somewhat higher than this because the South Penn Oil Company, of which Tidewater owned 17. 27 per cent, reciprocally owned 2. 77 of Tidewater. Mission Corporation was originally established to hold the interest of Standard Oil (New Jersey) in Tidewater but Getty, as he reports in his memoirs, talked John D. Rockefeller, Jr. , into selling him his Mission stock and then in a quiet campaign prevailed on other stockholders to follow the Rockefeller lead. At the time of the TNEC study Standard Oil (Indiana) owned 1. 05 per cent of Tidewater through the 98-per cent- owned Pan American Southern Corporation. 21
The TNEC made a supplemental study of 10 interesting large companies that were not included on the list of the 200 largest. Some of them were as follows: 22
Family
Dorrance family
(by trust indenture)
Woodruff-Nunnally-Stetson-
Candler-Illges
Twenty individuals
Mainly members of the Bell
family among twenty
stockholders
Haverneyer family, H. O.
Havemeyer estate, and the
Ossorio, Thatcher and
Boettcher families
Heinz family
Twenty individual stock-
Corporation Percentage
Owned
Campbell Soup
Coca-Cola International
(controlling Coca
Cola Co. )
Crucible Steel
General Mills
Great Western Sugar
H. J. Heinz
International Utilities
100
nearly 50
45. 55 20. 14
43. 34
82. 10 26. 71
holders, mainly invest
ment companies
Ajax Pipe Line
Rockefeller Foundation
Harkness-Flagler-Prentiss
(Rockefeller)-four other
individuals and 11 trust
companies and brokerage
houses for others
St. Regis Paper
(utility holding company)
American Superpower
J. P. Morgan & Co. , Brown
Brothers Harriman & Co. , and
16 brokerage houses and
investment firms
Standard Oil (Ohio)
Standard Oil (Ohio)
Standard Oil (Ohio)
United Corporation
United Corporation
United Corporation
24. 77
17. 63
10. 92
8. 332
6. 640 9. 846
The tenth company on this supplemental list was the Electric Bond and Share Company, then a utility holding company and now an investment trust. Its twenty-one largest stockholders were banks, brokerage houses and investment companies, and the names of the beneficial owners of the stock were not elicited.
Leading family names not yet mentioned that were strewn through the twenty largest stockholders in the 200 largest nonfinancial companies--in many cases appearing in more than one company-were as follows:
Adler, Astor, Cabot, Clapp, Doris Duke Cromwell, Cunningham, Doherty, Drexel, Fleischmann, Forstmann, Goelet, Goldman, Guggenheim, Hanna, Hearst, Hillman, Hutton, Jones, Laughlin (Jones and Laughlin Steel), Lynch, McClintic, Miller, Milbank, Palmer, Payson, Penney, Pillsbury, Rosenwald, Schott, Skaggs, Vanderbilt, Watkins, Whitney, Widener and Winthrop.
Names of wealthy families that did not appear because their stockholdings were not among the twenty largest and were probably widely distributed in smaller blocks, rentier-style, through many companies or were in real estate or bonds, were the following:
Baker, Bedford, Berwind, Curtis-Bok, Fisher, Frick, Gould, Green, Hill, Kahn, Lehman, Metcalf, Patterson, Pratt, Phipps, Taft, Timken, Warburg and others.
These omissions, not at all to be deplored, came about because the TNEC study was not directed to ascertaining the names of all wealthy families--what it gleaned here was a byproduct--but merely of determining who controlled the 200 largest nonfinancial companies. Anyone who was concentrated mainly in real estate, banking, insurance or in widely diversified, nonconcentrated investments the study necessarily missed. All the new Texas oil men were missing. Joseph P. Kennedy's name did not appear.
Even if one had before one an up-to-date list of all the largest income-taxpayers, names of some extremely wealthy people could readily elude us, such as anyone who, like Mrs. Horace B. Dodge, had converted all her holdings into tax-exempt state and municipal securities. One could, theoretically, own a billion dollars worth of these, drawing a tax-free income of $25-$30 million a year, and never show up on the income- tax list at all.
What the TNEC analysis made incontrovertibly clear was that the family, not the individual, is now the significant wealth-holding and wealth-controlling entity in the United States, a thesis I had antecedently asserted, for the first time as far as I know. 23 While the proposition may seem firmly established to some it is, curiously, often denied or blandly ignored even though the SEC continues to supplement the TNEC findings in
detail. One man may amass the fortune, as in the case of John D. Rockefeller, but if the fortune is to remain intact it must have heirs. Where the fortune-builder is a bachelor or fails to establish a family, the fortune simply disappears in a foundation or institutional grants. Heirs, then, are as important to a fortune as to a title of nobility. Most American fortunes, easily by a majority of 70 per cent, are in the hands today of heirs.
And, in saying that the family holds the fortune, one cannot suppose this to suggest that its members fend individually for themselves to all points of the compass. They must hold together, for their predecessors have in almost all cases entangled them in a network of trusts and family holding companies that assure unified action at all times.
No less than half of all these controlling corporate holdings were in "trust funds, estates, and family holding companies. " 24 Even if an heir wished to go away on his own, all be could take with him would be income; the holding itself would remain in a center, massed with other individual holdings and directed by some individual or small family committee. This circumstance puts all the holdings into a tight fist, generating power that is played out in the political and cultural arena. Anyhow, who would want to walk away from the goose that lays the golden eggs?
Family Holding Companies
There are thousands of personal and family holding companies, large and small, in the United States. In most cases their names have never been seen or uttered by 99. 9 per cent of the citizenry because these entities are private, are under no obligation to make any report to anyone except the tax authorities. No public compilation of them exists.
Their names usually only come to public attention through court proceedings or as the byproduct to certain government investigations, such as the TNEC inquiry. That particular inquiry did provide information about the existence of some extremely large family holding companies.
A family holding company may have a score or more participants of beneficial interest in it--infants, teen-agers, the superannuated, the mentally retarded, absent big game hunters, scholars and normal persons in the prime of life. But the slices of beneficial interest, apart from the income pay-out, are all managed as one entity by a single person or a family committee, which in turn is either adept in the management of large properties or has the benefit of expensive professional advice. An heir may seem deficient in business acumen to all who know him, but he may be the constant beneficiary of the best legal and investment advice available, perhaps even against his own wishes. He might prefer to take his stake and invest it in various attractive schemes, or spend it, but he is firmly deterred from this course by the family holding company. And it functions, up and down the line, according to Standard Doctrine.
We have already noticed, in connection with the Du Ponts, that the TNEC found a large role being played by the Christiana Securities Company and Almour Securities, Inc. , both family holding companies. But other huge family companies were also uncovered in the report.
There was, first, the Bessemer Investment Company, instrument of the Phipps (Carnegie Steel) family that included, among many persons named Phipps, such names acquired by distaff marriages as Douglas, Janey, Sevastopoulo, Martin, and Winston and Raymond Guest. In all, twenty or more Phippses were beneficiaries. All appeared to have the financial status of rentiers and were well known social registerites and polo players. Bessemer Investment Company was found to be a principal stockholder in New England Power Association, International Hydro-Electric System and International Paper Company, whatever else it held of lesser dimensions.
Oldwood, Inc. , was 66. 58 per cent owned by the Bessemer Investment Company and a group including the Chace, Gammack, Majes, Cox Brady and Phipps families. It was a leading stockholder, too, in the New England Power Association.
More than twenty Du Ponts had a participation large enough to list for Christiana Securities Company, which had among its stockholders other Du Pont family holding companies such as Delaware Realty and Investment Company, Archmere, Inc. , and Du Pont trust funds.
The Cliffs Corporation, the personal instrument of the Mather family, owned all the common stock of the Cleveland Cliffs Iron Company, which was among the principal stockholders of the Wheeling Steel Corporation and the Republic Steel Corporation.
The Coalesced Company was owned 50-50 by Paul Mellon and Ailsa Mellon Bruce, and in turn was among the top stockholders in Koppers United Co. , The Virginian Railway Co. , Pittsburgh Coal Company and General American Transportation Company.
The Mellon Securities Company, owned by Richard K. Mellon, Sarah Mellon Scaife and various Mellon trusts, was a leading stockholder in Aluminum Company of America and the Gulf Oil Corporation.
The Curtiss Southwestern Company belonged to Arthur Curtiss James and Harriet P. James and in turn was a principal owner of the Phelps Dodge Corporation, the Western Pacific Railroad Corporation and the Missouri-Kansas-Texas Railroad Company.
The Empire Power Corporation was the instrument of the Laurimore Corporation (owned by Ellis and Kathryn Phillips), the Delaware Olmsted Company (owned by the Olmsted family), the Eastern Seaboard Securities Corporation (a joint Olmsted-Phillips venture) and individual Olmsteds and Phillipses. Empire Power was a principal stockholder of the Long Island Lighting Company.
The Falls Company was a holding company for the very numerous Rosengarten family and was a principal stockholder of the United Gas Improvement Company, the Duquesne Light Company and the Philadelphia Electric Company.
The M. A. Hanna Company, monument to Mark Hanna of McKinley era fame, belonged to the Hanna family and its numerous inter-related genetic lines. It was a principal stockholder in Phelps Dodge, Lehigh Coal and Navigation and the National Steel Corporation.
The Illges Securities Company belonged to the numerous Illges-Chenoweth-Woodruff and other families and was a principal stockholder in the Coca-Cola Company.
The Illinois Glass Company was the holding company of the numerous Levis family and was a principal stockholder in Owens-Illinois Glass Company and National Distillers Products Corporation.
Light and Power Securities Corporation belonged to the Starling W. Childs family and was a principal stockholder in four large public utility companies.
The Miami Corporation, a holding company for the Deering estate, was a chief stockholder in International Harvester Company and the Chesapeake and Ohio Railway Company.
The New Castle Corporation, owned by Mr. and Mrs. Alfred P. Sloan, held the Sloan stock in the General Motors Corporation and the Phillips Petroleum Company, both among the big holdings.
The North Negros Sugar Company belonged to the Ossorio family and was a principal stockholder of the Great Western Sugar Company and the American Sugar Refining Company.
The Phillips family, quite numerous, owned the T. W. Phillips Gas and Oil Company, which in turn was the dominant stockholder of the Federal Water Service Corporation.
The Pitcairn Company, a leading stockholder in the Pittsburgh Plate Glass Company, the Consolidated Oil Corporation and the Columbia Gas and Electric Corporation, was owned by the Pitcairn family of Pittsburgh.
The Provident Securities Company was owned by William W. Crocker, Helen Crocker Russell, Charles Crocker and Ethel Mary de Limur and in turn was a leading stockholder of the Tidewater Associated Oil Company, General Mills, Inc. , Pacific Telephone and Telegraph Company, Pacific Gas and Electric Company and the Southern California Edison Company.
The Rieck Investment Company belonged to the Rieck-Woodworth families and was a principal stockholder in the National Dairy Products Corporation and the Firestone Tire and Rubber Company.
The Taykair Corporation, which held a large number of serially numbered trusts, belonged to the Benjamin family and was a big stockholder in The Virginian Railway Company, Gimbel Brothers, Inc. , and the Brooklyn Union Gas Company.
Serial and paralleling family holding companies are not uncommon. For example, the Colgate family, of the Colgate-Palmolive-Peet Company, reported a tangle of holding companies that with a few other relatively small interests made up 31. 85 per cent of the twenty largest Colgate-Palmolive stockholdings. There was the Beechwood Securities Company; the Oakbrook Company; the Bertco Company; the Holly Security Company, which was 100 per cent owned by the Filston Security Company, itself a holding company for family members; and the Orange Security Company, owned 100 per cent by the Beechwood Securities Company; and then there were individual holdings by individual Colgates and distaff descendants.
One could go on at great length exhuming the names of hundreds of additional family holding companies but nothing would be added except repetitive detail to the essentials of this report.
It is not usually the case, then, that a big fortune is subject to the ownership and direction of some single individual, some dominating Croesus. It is usually directed by a small family committee with access to expert professional advice, each member of this committee owning only a small percentage of the big pie. But the decisions respecting the big pie are the same as far as the world outside is concerned as if one man owning hundreds of millions made his will effective.
Under American law the entailment of estates is prohibited, but the prohibition has in effect been nullified through what may be termed serial entailment. For property owners of the third generation make provisions for placing property once again in untouchable trusts extending to three more generations, and so on ad infinitum. Boston is a particular center of such long-range serialized trusts. 25
As in England under legal entailment, in the United States huge properties are thus secured for generations unborn. The future beneficiaries can never have made any compensatory social contribution and may never make any after they are born. They are simply privileged by prescription as under the longstanding American-despised European system.
Trust Funds
Whereas private family holding companies are a favorite way of keeping big holdings intact and under central direction (even though the beneficial interest in income may be spread among scores or hundreds of cousins, aunts and in-laws), there are also individual trust funds, usually under the direction of a bank. The concentration of many trust funds in large banks, of course, concentrates just this much industrial voting power under the boards of directors of the banks. It makes them powers in the land.
Some of these trusts are relatively small. But, altogether, they add up to an enormously big financial punch. And, as the banks largely maneuver according to the same point of view, they in effect act in concert in voting these securities in various corporations. Indeed the size of the holdings they represent often enables them to name members of corporate boards of directors, which is one of the reasons so many bank officials are found strewn among the corporate boards. The large amount of stock that places them in position is not their own. But it gives them a great deal of veiled authority.
In some cases, various apparently unconnected members of the boards of directors of the corporations are like so many horses running out of the same stables, carrying the same ownership colors. The family that is the biggest stockholder in Corporation X, holding 20 per cent, is also the biggest stockholder in the bank with many trust fund holdings in relatively small amounts of stock of Corporation X, also perhaps adding up to 20 per cent. Another bank, also holding a great deal of trust stock, perhaps 12 per cent in hundreds of trust funds, may not be controlled by any of the first parties but is merely a friendly back-scratching ally. Together the two groups absolutely control the corporation, name its officers, determine its policies, apply its influence.
To what extent are funds now under trusteeship?
"At the end of 1964, trust departments of commercial banks bad investment responsibility for assets of approximately $150 billion, of which about $50 billion represented employee benefit accounts. In addition, bank trust departments provided investnment management for agency accounts with assets of at least $35 billion. " 26 In these last the banks acted as agents for other trustees. We see, then, that nonemployee or individual trust funds amount to at least $135 billion, although the true figure is actually larger than this, for there are nonbank trustees who do not make use of banks even as agents.
Of the trust holdings of national banks, "More than 59 percent of these assets were invested in common stocks; about 52 percent of the employee benefit accounts, and approximately 62 percent of the other accounts. " 27
Most of these trust funds were concentrated in a few large banks. "Twenty-one banks with investment responsibility for trust assets of more than $500 million held approximately 56 percent of the total, and the 100 largest trust departments held more than 80 percent of the trust assets of national banks. Asset concentration was greatest among employee benefit accounts for which the 21 largest national bank trust departments held almost 80 percent of the assets where national banks acted as trustee. Large trust departments, for the most part, are concentrated in the largest commercial banks, although there are many exceptions where moderate-sized banks have very large trust operations and vice versa. " 28
"National banks with trust assets in excess of $5 million reported having approximately 580,000 trust accounts, including 68,500 corporate accounts, and 340,000 accounts where they exercised investment responsibility. " 29 These figures indicate, excluding the corporate employee accounts, that there are at least 920,000 individual or private trust accounts in national banks alone. Some persons, of course, are the beneficiaries of many trust funds. Not all trust funds are large, may indeed be as
small as $5,000 or $10,000, but the larger banks will not accept these. The larger New York banks do not like to be named as trustee for anything under $100,000 even for inclusion in their collective trust funds, in which there is a mingling of many smallish trust funds with proportionate participations, as in an investment trust.
The average size of trust accounts where the bank exercised investment responsibility, excluding employee benefit accounts, was $173,000; but in the larger banks the average size was $300,000. Smaller banks carried trust accounts at an average size of $53,000. 30
But "Investment management accounts tend to be larger than the average for other trust accounts, since many banks set a relatively high minimum size or minimum fee on such accounts. " 31 Thus the average size of such accounts was $582,000, and in the bigger banks it was $735,000.
In addition to national banks there are the state-chartered banks to be considered.
"We estimate that state-chartered banks have investment responsibility for trust assets, apart from those of employee benefit accounts, of approximately $51 billion, bringing the total of such assets for all banks to approximately $105. 5 billion. " 32 Employee- benefit accounts in such state-chartered banks were estimated at $29. 5 billion, with the New York State Banking Department alone accounting for $23. 6 billion as a definite nonestimated figure. For all state-chartered banks, investment management accounts were estimated at $20 billion. 33
Total trust accounts for which banks have investment responsibility, then, amounted to $155. 8 billion at the end of 1964, of which $105. 5 billion represented nonemployee benefit or individual accounts . 34 There was another $35 billion for which the banks acted as investment advisory agencies and an unknown amount in the bands of individuals or corporations that did not make use of banks as advisory agencies.
There are two significant aspects of these trust-fund figures.
First, they represent an entirely new set of statistics, the gathering of which was begun by the comptroller of the currency only in 1963.
Of greater significance, however, is that the figures show the deep foundations of vested inherited wealth in the United States. Trust funds are popularly thought of as solely for the benefit of widows and minor orphans, and such are no doubt included among the beneficiaries. But, by and large, most of the beneficiaries are able-bodied adults, unwidowed, unorphaned and, as often as not, pleasantly idle. In many cases the first generation in receipt of trust-fund benefits never collects the principal at all, which is left to the next generation. When principal is paid out, it is often in dribbling installments throughout the recipients' lifetimes. In the case of the original Marshall Field, trusts were established that did not allow the grandchildren to collect the last part of principal until they were fifty years of age.
Such provisos keep the fortune from being dissipated through the exercise of immature judgment. The first generation cannot disturb the principal and the next generation does not get all of it or, sometimes, any of it until its members are quite advanced in age. At that point many of them lock the principal, Boston-style, back in new trusts for the benefit of the next two generations. Again, too, inheritance taxes are bypassed except at those points where principal is paid over.
From a property-ownership point of view all this undoubtedly has great merit. But what it signifies for the unpropertied is that they will never lay hands on any of this property no matter how they perform, short of overturning the legal system and the military forces behind it. The beneficiaries cannot even be swindled out of their benefices. Obviously, economic opportunities, legal and illegal, are considerably
narrowed for the multitude when so much property is closely sequestered for the benefit of unborn generations.
The trust funds, like the family holding companies, point up the fact that the United States, like the Europe it proposed to surpass in equality of opportunity, has developed a permanent hereditary propertied class. Indeed, owing to the far greater proportion of public ownership now in western Europe, the United States actually has more of a hereditary property system than does Europe.
And if this seems paradoxical, one may notice this even greater paradox: There are kings now in Europe who are far more democratic in their attitudes than the average American citizen.
What stocks are trust funds concentrated in? This is not difficult to ascertain. Although individual trust funds may, by stipulation, be concentrated in one or a few stocks, when there is no such stipulation the principle of diversification is resorted to by competent trust officers. This amounts to invoking the principle of the investment trusts that limits their holding of any issue to no more than 2 per cent of the entire capital. The big New York banks issue to interested parties the portfolio list of their collective trust funds--that is, those where many smaller trusts are mingled together, with each trust participating proportionately to its size. A small trust is defined in different ways by different banks and may be as much as $500,000. "Small" here means too small to be managed profitably by itself.
As these lists of collective trust funds show, the stock investment is mainly in the list of the 200 largest companies and the 500 largest industrial companies and the 50 largest merchandising, public utilities and railroads, respectively, on the annual Fortune lists. Trust funds are not invested in the biggest companies per se but in the relatively well- performing stable companies that are relatively cheapest at each time of purchase. Public utility and insurance company stocks have for some time especially attracted trust accounts.
While questionable practices were uncovered in some trust accounts in the 1930's, such as stuffing them with dubious issues for which the bank was in an underwriting syndicate (now no longer possible with the separation of underwriting from banking under the law), in an advanced jurisdiction like New York the trust companies are under strict state supervision. The trust company has come to the fore as an institution because of the many cases in the past where individual trustees have exercised bad judgment or turned out to have sticky fingers with respect to the trusteed property. The very life of a trust company depends upon its proper operation within average limits.
Before leaving this topic of trust funds one may ask: What is their major utility? The trust funds are designed to keep principal intact and impervious to error of inexperienced heirs, and to hold inheritance taxes to a minimum.
Family Holding Companies Revisited
The personal and family holding companies also perform this function, and more. A personal holding company is defined in the Revenue Code as a company owned 50 per cent or more by no more than five stockholders with income derived primarily from certain types of investments. The two Mellon entities already named are examples. The family holding companies are the equivalent of close investment trusts and operate under tax laws appropriate to such entities.
Says Standard Doctrine: "A personal holding company is a close corporation, organized to hold corporate stocks and bonds and other investment assets, including personal service contracts, and employed to retain income for distribution at such time as is most advantageous to the individual stockholders from a tax point of view. " 35
As of 1958, the latest date available, there were 6,285 personal holding companies. Another type of closely held corporation, similar in many cases in its functions, is the legally defined Small Business Corporation. There were, as of 1962, more than 120,000 of these. They are taxed through their stockholders, of which there may not be more than ten.
The personal holding companies are purely investment companies. The total assets for all of them were $5,236,429,000, but $4,304,158,000 of the assets were concentrated in only 652 with assets of $1 million or more; 25 had assets exceeding $50 million, 12 exceeding $25 million and 48 exceeding $10 million. Total income of these entities was $361,916,000, of which $216,822,000 came from dividends. Whatever their size, these were instrumentalities of larger property holders. 36
A remaining advantage in both corporate forms is that they concentrate corporate voting power for the special benefit of all the beneficiaries. Let us, for the sake of simplicity, suppose that there is a family group of 200 individuals, each owning precisely $1 million stock in the mythical SuperCosmos Corporation whose outstanding stock is valued at $1 billion. Each one of these persons would on the basis of his personal equity have little to say about the company, it is clear, but would be part of the rabble of minor stockholders. Combined, however, possibly in a group of personal holding companies, they own 20 per cent of the stock and thus name members of the board and are always well advised in advance of inner-company developments. Their representatives, too, can trade such inner-company information with similar groups in other companies for investment orientation. They are, also, politically powerful as a group.
Again, under existing tax laws it is the general strategy of the very rich to keep dividend pay-outs low in relation to earnings. The family investment company can hold back some of its income as corporate reserve, thus reducing the tax liability of its members. This corporate reserve, in turn, is reinvested.
In the sphere of operating corporations as a whole, producing goods or services for the public, the average dividend pay-out is ordinarily about 50 per cent of earnings. Some of the earnings are retained to replace wornout equipment, to expand and to keep dividends stabilized in less profitable years. But corporations differ in their pay-out rates, even among good earners, ranging from zero to 80 per cent. Small stockholders tend to favor those with high pay-out rates. But many big stockholders have come to prefer those with small pay-out rates, for then personal income taxes are lower.
Control of companies, however exercised, enables one to have something to say on this important subject of pay-out rates.
But in recent years many of the large corporations have retained earnings greatly in excess of replacement and future dividend needs. Such earnings have been used in the acquisition of companies in unrelated fields, as part of a policy of investment diversification, and in buying control of foreign companies, which might be classed as economic imperialism. The advantage to the big stockholders is that the money is not paid out in taxable income but is continually ploughed back to increase the underlying value of equities. However, if any big stockholder wants more income he can take it in the form of low-taxed capital gains by selling some of his stock. The large yearly aggregates of capital-gain income reported to the Internal Revenue Bureau since 1950 reveal what is happening.
A fairly recent concept that has emerged in the corporate world is that of the "growth company. " A growth company, manifestly, is a company that grows. The name is attached rather indiscriminately by brokers to new companies in technologically novel fields: electronics, space-age, atomic power, etc. Not all of these are growth companies
for, as experience shows, not all of them grow. But any company that ploughs back a large proportion of its earnings steadily is obviously a growth company. With taxes in mind such companies are advantageous.
The very wealthy, in brief, are less interested in increasing their taxable incomes than in increasing their nontaxable ownership stake. This, when necessary, can always be cashed.
Observations En Passant
There remain some observations to be made about the American hereditary owners,
contradicting common beliefs.
It is generally supposed that the heirs of the big fortune-builders are comparatively incompetent playboys or at best poor copies of the original Old Man. While wastrels have been seen among some of the very wealthy, most of them women or some man intent upon impressing some woman (Astor, Vanderbilt, Hearst and others), in all the big surviving fortunes the heirs seem to show greater and greater finesse in applying Standard Doctrine under more and more complex conditions. The original fortune- builder might not understand everything they were doing but he would have to admit they are getting results as good as or better than he ever got. One reason for this is that the heirs now have available to them much more highly developed professional experts, deeply versed in the intricacies of each situation: economists, statisticians, analysts, engineers, psychologists, lawyers and the like.
Two original Du Ponts did very well in launching E. I. du Pont de Nemours and Company and deserve a reverent salute from all deeply committed money fans. But they seem to have been outdone by every succeeding generation of Du Ponts, each of which appears to have missed no opportunity to enlarge that part of the fortune it inherited.
The same with the Fords. After his first great success Henry Ford, set in his ways, dogmatic, began to lose his touch. He refused to defer to his son Edsel, who close observers believe would have put the company on a sounder footing than it found itself in the 1940's. But Henry Ford II, a grandson in his twenties, later aided by two younger brothers, brought the Ford Motor Company up to new heights of wealth, public esteem and prestige. In a little more than ten years the grandsons more than sextupled the value of the company, outperforming the economy as a whole, and have no doubt engaged in unknown side coups of more than modest proportions.
Judge Thomas Mellon's sons outdid his financial feats, and his grandchildren do not appear, under more difficult circumstances, to have lost the golden touch. The Mellons are still going strong, surrounded by family holding companies, trust funds and banks.
As to the Rockefellers, it might appear that none of them will ever be able to outdistance the wily old monopolist who put the family on the financial and political maps. But many authorities would argue that John D. Rockefeller, Jr. , performed a far more difficult feat in holding the fortune together under strong political attack. Judge Mellon's opinion that it is harder to hold on to money than to make it has been explicitly made part of Standard Doctrine. 37
If this is so then Rockefeller, Jr. , who inherited a difficult situation, must be considered to have surpassed his father. The grandchildren are doing even better, for in addition to advancing the family fortunes they have performed the difficult feat of making themselves the idols of a considerable public.
As to it being more difficult to retain money than to make it, probably few would readily agree with this proposition. But slight reflection will show that it is true. Most adults have jobs and are paid. But how long does the weekly pay check last? Could one
resolve not to spend it? Most people could not make such a resolution unless they wished to starve. Actually, most persons are unable to save as much as an average 5 per cent of their earnings. This state of affairs illustrates the point.
The average man in the street might contend that if his pay were only higher he would retain some of it; and in some few cases, let us agree, he would. But from time to time there are big sweepstakes and lottery winners, suddenly possessed of goodly sums. How old judge Mellon would smile if he could hear them excitedly telling newspaper reporters what they are going to do with their windfalls: a new house, a new wheelchair for grandma, crutches for Tiny Tim, a new car, a trip to Florida and then some government bonds of declining purchasing power! A year or so later, as it turns out, they are all where they were financially to begin with, looking back wistfully to the time they were suddenly rich. What happened to the money? they ask. Where did it go?
What defeats most people in holding onto money, reinforcing the judgment of Judge Mellon, is that they are basically childish spenders. And therein lies part of the opportunity of acquisitive moneymakers. One task of the marketplace is to separate people from their money, often giving them something meretricious in return.
Present Status of 200 TNEC Corporations
What has happened to the two hundred corporations of the TNEC in the twenty-five years that have elapsed? Have any fallen by the wayside, carrying their owners to disaster? Have any slipped from the top of the heap?
"Analysis of the 1937 group of 200 non-financial corporations," according to The Dartmouth Study 38 "reveals on the surface a number of things. In terms of current dollar values there has been great growth for the group as a whole. In terms of constant dollars (values adjusted for depreciation of money), the total growth is probably not much greater than the rate of growth of our economy. This point cannot be pressed further, however, in the absence of detailed information about the accounting adjustments which the various firms have made as the value of the dollar has declined and as new assets have been added. "
The TNEC list is set forth parallel with the 1964 list of biggest nonfinancial corporations in Appendix B.
There have been changes of detail in the list (although not significant) with respect to who owns and controls the wealth. With the exception of a few newcomers, the same groups own the companies as owned them in 1937.
Certain companies have moved off the master list of the leading 200, not because they have lost out entirely but because they have been squeezed off by mergers or by the emergence of new industries such as aviation and natural gas pipelines.
Except for the Mellon (Pittsburgh) Consolidation Coal Company, all coal companies have been pushed off the list, replaced by gas pipelines. Railroads have moved down on the list and some have moved off; but a merger kept Erie-Lackawanna on the list. Pullman, Inc. , a Mellon enterprise, has declined, partly because of an adverse antitrust decision. It is evident that the loss of a monopoly position in the face of new means of transport is what has taken the bloom off the railroads. In meat packing, the "big four" have been supplanted by the "big two"--Swift and Armour.
The electric utilities on the two lists are not strictly comparable. On the later list are many new regional companies that are the outcome of the dissolution of the old holding companies. But in essentials the same electric power properties are on both lists, though often under different names.
Film companies have been pushed off the list, owing to the competitive advent of television and adverse antitrust decisions. Their owners were never seriously classified among the big-wealthy.
In all, close to fifty companies appear to have been pushed off the list. In addition to three coal companies, two packers and fifteen old-line utility holding companies, they are: Texas Gulf Sulphur, American Sugar Refining, American Woolen (Textron), Hearst Consolidated, International Shoe, New Jersey Zinc, U. S. Smelting, National Supply, United Shoe Machinery, Gimbel's, Marshall Field, R. H. Macy, Hudson and Manhattan Rail Road, six interstate railroads and two film companies. No really big interests experienced a decline.
Some newcomers are the product of split-offs. Western Electric came out of AT&T and now ranks twenty-fifth in size. The only other newcomer in the first twenty-five is Tennessee Gas Transmission, representing new capital mobilization. The only newcomer in the second twenty-five is El Paso Natural Gas, owing to similar circumstances.
The second fifty have among them as new faces only Sperry Rand and Olin Mathieson, outcomes of mergers.
The most recent list, in brief, represents the same old crowd with a few additions produced mainly by mergers and subtractions by squeezing.
At the very top there is DO change except that the companies have grown much larger. AT&T, largest company in the world, leader of both lists and the stock of which is widely held, had total 1964 assets of $30. 306 billion compared with $3. 859 billion in 1937. Standard Oil (New Jersey), largest purely industrial company in the world in point of assets, had assets of $12. 49 billion compared with $2. 06 billion in 1937, and was in second place both times.
The smallest company on the TNEC list was Texas Gulf Sulphur, with assets of $62. 9 million. The smallest company on the later Fortune list was Scott Paper, closely shadowed by Allied Stores, with assets of $413. 8 million.
The TNEC list was compiled during a depression, the Fortune list after a war and twenty years of boom, heightened concentration and inflation.
As to the owners and controllers, there has been no significant change except that they are more firmly established in the ascendancy than before, Four Rockefeller companies appear among the first twenty-five compared with 3 in 1937, and there are 6 of them on the TNEC list and 7 on the Fortune list. The two big Du Pont companies have moved up among the first twenty-five, improving relatively. One of the chief Mellon properties, Gulf Oil, has moved into the first twenty-five, in eighth place, where it was not to be found in 1937. The Ford Motor Company has moved up from twenty-third to fourth place.
One of the most spectacular improvements in the approximately thirty or so years separating the two lists was Sears, Roebuck and Company, which moved from sixty- ninth place, with assets of $284 million, to ninth place, with assets of $4. 271 billion, making it the world's leading retail merchandiser. The position of the dominant Rosenwald family has been correspondingly improved, making it easily worth more than $500 million and on the threshold of super-wealth. An even more spectacular growth company was International Business Machines, leader of the computer- automation field, which moved from one hundred eighty-fifth to twelfth place in size of assets. Most of the newcomers to the list, however, are the result of mergers, spin-offs or the rise of new industries such as aviation and gas pipelines on the basis of new capital. But, although there are newcomers, few of the newcomers are new properties.
Mergers either brought companies onto the list, moved companies up on the list or kept them on the list: General Telephone, American Metal Climax, International Telephone and Telegraph, Olin Mathieson, Burlington Industries, Erie-Lackawanna, Georgia- Pacific, General Dynamics, United Merchants and others.
While the lists in both cases represent only a small sample of American companies, these companies represent almost 70 per cent of U. S. output. Basic economic activity outside these lists represents the lesser portion of the pie.
Aluminum Company of America moved from seventy-ninth to thirty-eighth place even though its monopoly position was broken by the sale of wartime government aluminum plants to competitors. The Kaiser interests--one of these competitors, and nurtured by government patronage--have put no less than three new companies on the master list: Kaiser Aluminum, Kaiser Industries and Kaiser Steel.
The Pew family's Sun Oil Company moved up from one hundred thirty-eighth place to seventy-fifth. Although J. Paul Getty's Tidewater Oil is only sixty-ninth on the list, up from ninety-second place, it should be remembered that Getty owns most of it and has many other oil interests whose lesser dimensions fail to qualify them for this list.
Viewed again purely from the perspective of this most recent list of the biggest American proprietors, the financial grand dukes of the United States appear still to be, individually and collectively, the Rockefellers, Du Ponts, Fords, Mellons, Rosenwalds, Pews, Gettys, Phiippses, Mathers, Hartfords, McCormicks and individuals like Allen Kirby, who in addition to his New York Central and Woolworth holdings is a leading stockholder of the big Manufacturers Hanover Trust Co. of New York.
The old question pops up: Have positions in these companies been maintained at the same level throughout the years? In some cases, as in that of the Du Ponts, we know they have. There have been some shifts in Rockefeller holdings, and the Ford holdings are about what they were when Henry Ford I died. At the time of the TNEC study the Rosenwalds held 12. 5 per cent of Sears, Roebuck. In view of the steady strong growth of this company one would not suppose they would have sold out. If anything, guided by Standard Doctrine, they would have increased their holdings.
As groups like railroads and coal companies declined in the economy, no doubt leading holders tended to sell them out. But they may also have reestablished positions at lower prices, and in recent years the railroads have shown great improvement, both in earnings and in market action of securities.
No big interests such as Hartfords, Zellerbachs, Weyerhaeusers, Dukes, Pitcairns, Mathews, Swifts and others are reported to have cleared out. Among smaller interests there have undoubtedly been inter-company shifts of holdings, as into oils, aviation, natural gas and gas pipelines.
Old money, though, has found its way into successful new enterprises, as in the Harriman-Warburg-Straus ground-floor investment in Polaroid.
We have seen that concentrated ownership is a more prominent feature of small companies. This circumstance and the fact that there is such concentrated ownership of very large companies show that concentration of ownership and control in few hands is a built-in feature of the American economy. While twenty million or more stockholders have an equity (usually trifling) in these and hundreds of other companies, it is a fact, as the TNEC study showed, that from two to three up to twenty of the largest stockholders own very large to total percentages of the companies.
