The word trust has been perverted during recent years from its proper signification. Properly speaking, trusts are of many kinds, but they all imply the placing of property or power, or both, in the hands of agents who are called trustees, and whose functions in relation thereto may be so broad as to permit the widest possible scope in the management of a business or the exercise of authority, or they may be limited to the merely nominal holding of title without any discretion or authority whatever, as in the case of real estate held for the benefit of another. Trusts of this character are as old as human law and as varied as human experience. An example of a pure trust may be found in what is known in modern financiering as the "voting trust."

A voting trust is an arrangement whereby the stockholders of a corporation part with their voting power for a specified time or term, and thus for such time give up their control over the affairs of the company. The object is to prevent changes of management which might arise in case a majority of the stock should change hands, thereby perhaps greatly diminishing its value by radical changes of policy. If all or a majority of the stock is placed in the hands of trustees, who give in return trust certificates entitling the holders to their dividends the investment becomes separated from the management. Holders of trust certificates may transfer their holdings, but the management continues unchanged. The Reading Railroad is an example of a corporation controlled and managed by a voting trust. This form of trust is chiefly for the protection of bondholders, who are thus assured of a uniform management of the corporation by competent and experienced men, who will see that the interest upon the bonds is promptly paid, and the sinking fund provided for. The rapid growth and development of the manufacturing interests of the United States during the last twenty years of the nineteenth century put into vigorous operation the laws of trade, one of which is that as industries grow in volume they tend to centralize. The large establishments can make and sell cheaper than the small ones. They can buy the raw material cheaper, avail themselves of the most approved machinery and employ the best skill and business ability. Fierce competition is constantly hammering down prices and the effect is to drive concerns into combinations whereby they may increase their capital and secure the benefits of a large volume of business. This tendency was manifest some years ago in the formation of corporations and changing of partnerships to corporations. The same causes continued to operate and produce the combination of corporations into trusts.

A trust may be defined as a combination of the capital of several corporations under one management whereby the cost of production is reduced, the amount of production limited and regulated, and the cost of the article to the consumer is controlled. Attempts were first made some years ago to secure the benefits of co-operation between manufacturers by agreements to sell through a common agent, and at agreed prices, but the courts held such agreements to be not binding, and members often secretly violated them, so that it became necessary to make an absolute transfer of the property of each member to the trust. A trust takes the management and ownership of the property out of the hands of the various corporations composing it, and deprives them of the power to withdraw their assent.

The method of procedure in the formation of a trust is for each of the parties to incorporate his establishment, if it is not already incorporated. The stock of these various corporations is then turned over to the managers of the trust, called trustees, and in return for it the trustees issue trust certificates similar in some respects to shares in a corporation. These certificates recite that the holder is a beneficiary of the trust to the extent of so many shares; and the certificates are assignable and transferable in the same manner as certificates of stock, though their legal status is in many respects dissimilar. It will be perceived that under this exchange the trustees hold a majority of the stock in each of the corporations and are able to elect the directors and officers of each concern and thus control the management to the smallest detail. They can close one factory, enlarge another, consolidate others, regulate the output generally and control the price. Those concerns which refuse to join the combination are crushed, if possible, by competition. The certificate holders are not injured by the closing up of this or that establishment belonging to the trust, since their profits come from the whole organization and not from any particular part. The holders of trust certificates elect trustees annually, and with the performance of that function their power ends. The trust certificates are watered to the point where the rates of dividends will be very moderate, and then sold upon the stock exchange like other stock.

This organization is called a trust because the stockholders part with their voting power, and practically repose absolute power in the trustees. The acts of the trustees and books of account are usually not open to inspection by the certificate holders. No limit is placed on the amount of the trust certificates that may be issued, and no question can be raised as to the exercise of discretionary power by the trustees. There is practically no limit placed upon the powers of the trustees in conducting the business.

Powers of a Trust

The greatest trusts formed in this manner were the Standard Oil Trust, the Cotton Seed Oil Trust and the Sugar Trust, but there seems no longer to be any doubt that a trust formed in this way is illegal. Recent decisions of our courts have so declared, on the ground of public policy. Hence it is that a large number of the trusts are now adopting a different mode of organization - that of the corporation plan, as exemplified by the Diamond Match Company. That company's plan was to organize one gigantic corporation and have it buy up and own outright all of the competing manufactories, paying for them either in cash or shares of stock. This form of organization, although called a trust, is in reality a great corporation, and it is certainly better to have the large corporation than the trust. The unlimited power possessed by the trustees in the case of a trust, their concealment of the condition of the business, and the secrecy of their acts, is dangerous not only to the financial welfare of the certificate holders but also to the public.