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OTHER PEOPLE'S MONEY
AND HOW THE BANKERS USE IT
OTHER PEOPLE'S MONEY
AND HOW THE BANKERS USE IT
BY
LOUIS D. BRANDELS
NEW YORK
FREDERICK A. STOKES COMPANY
PUBLISHERS
Copyright, 1913, 1914, by The McClure Pubijcations
Copyright, 1914, by Frederick A. Stokes Company
All rights reserved
H6-
n
March, 19H
PREFACE
While Louis D. Brandeis's series of articles on the money trust was running in Harper's Weekly many inquiries came about publication in more accessible permanent form. Even with- out such urgence through the mail, however, it would have been clear that these articles inevit- ably constituted a book, since they embodied an analysis and a narrative by that mind which, on the great industrial movements of our era, is the most expert in the United States. The inquiries meant that the attentive public recognized that here was a contribution to history. Here was the clearest and most profound treatment ever published on that part of our business develop- ment which, as President Wilson and other wise men have said, has come to constitute the greatest of our problems. The story of our time is the story of industry. No scholar of the future will be able to describe our era with authority unless he comprehends that expansion and concentration which followed the harnessing of steam and elec- tricity, the great uses of the change, and the great
vi PREFACE
excesses. No historian of the future, in my opin- ion, will find among our contemporary documents so masterful an analysis of why concentration went astray. I am but one among many who look upon jMr. Brandeis as having, in the field of economics, the most inventive and sound mind of our time. While his articles were running in Harper's Weekly I had ample opportunity to know how widespread was the belief among intelligent men that this brilliant diagnosis of our money trust was the most important contri- bution to current thought in many years.
"Great" is one of the words that I do not use loosely, and I look upon Mr. Brandeis as a great man. In the composition of his intellect, one of the most important elements is his compre- hension of figures. As one of the leading finan- ciers of the country said to me, "Mr. Brandeis's greatness as a lawyer is part of his greatness as a mathematician." My views on this subject are sufficiently indicated in the following edito- rial in Harper's Weekly.
ARITHMETIC
About five years before tlic Metropolitan Traction Compunj' of New York went into tlie hands of a receiver, Mr. Bnindeis came down from lioston, and in a speech at Cooper Union prophesied that that company must fail,
PREFACE vii
Leading bankers in New York and Boston were heartily recommending the stock to their customers. Mr. Brandeis made his prophecy merely by analyzing the published figures. How did he win in the Pinchot-Glavis-Ballinger controversy? In various ways, no doubt; but perhaps the most critical step was when he calculated just how long it would take a fast worker to go through the Glavis-Ballinger record and make a judgment of it; whereupon he decided that Mr. Wickersham could not have made his report at the time it was stated to have been made, and therefore it must have been predated.
Most of Mr. Brandeis's other contributions to current history have involved arithmetic. When he succeeded in preventing a raise in freight rates, it was through an exact analysis of cost. When he got Savings Bank Insurance started in Massachusetts, it was by being able to figure what insurance ought to cost. When he made the best contract between a city and a public utility that exists in this country, a definite grasp of the gas business was necessary — com- bined, of course, with the wisdom and originality that make a statesman. He could not have invented the preferential shop if that new idea had not been founded on a precise knowledge of the conditions in the garment trades. When he established before the United States Supreme Court the constitutionality of legislation affecting women only, he relied much less upon reason than upon the amount of knowl- edge displayed of what actually happens to women when they are overworked — which, while not arithmetic, is built on the same intellectual quality. Nearly two years before Mr. Mellen resigned from the New Haven Railroad, Mr. Brandeis wrote to the present editor of this paper a private letter in which he said:
"When the New Haven reduces its dividends and Mellen resigns, the ' Decline of New Haven and Fall of Mellen' will
viii PREFACE
make a dramatic story of human interest with a moral — or two — including the evils of private monopoly. Events can- not be long deferred, and possibly you may want to prepare for their coming.
"Anticipating the future a little, I suggest the following as an epitaph or obituary notice:
"Mellen was a masterful man, resourceful, courageous, broad of view. He fired the imagination of New England; but, being obUque of vision, merely distorted its judgment and silenced its conscience. For a while he trampled with impunity on laws human and divine; but, as he was obsessed with the delusion that two and two make five, he fell, at last, a victim to the relentless rules of humble arithmetic.
'"Remember, O Stranger, Arithmetic is the first of the sciences and the mother of safety.'"
The exposure of the bad jBnancial management of the New Haven raikoad, more than any- other one thing, led to the exposure and com- prehension of the wasteful methods of big busi- ness all over the country and that exposure of the New Haven was the almost single-handed work of Mr. Brandeis. He is a person who fights against any odds while it is necessary to fight and stops fighting as soon as the fight is won. For a long time very respectable and honest leaders of finance said that his charges against the New Haven were unsound and in- excusable. He kept ahead. A year before the actual crash came, however, he ceased worrying, for he knew the work had been carried far enough
PREFACE ix
to complete itself. When someone asked him to take part in some little controversy shortly before the collapse, he replied, ''That fight does not need me any longer. Time and arithmetic will do the rest."
This grasp of the concrete is combined in Mr. Brandeis with an equally distinguished grasp of bearing and significance. His imagination is as notable as his understanding of business. In those accomplishments which have given him his place in American life, the two sides of his mind have worked together. The arrangement be- tween the Gas Company and the City of Boston rests on one of the guiding principles of Mr. Brandeis' s life, that no contract is good that is not advantageous to both parties to it. Behind his understanding of the methods of obtaining insurance and the proper cost of it to the laboring man lay a philosophy of the vast advantage to the fibre and energy of the community that would come from devising methods by which the labor- ing classes could make themselves comfortable through their whole lives and thus perhaps mak- ing unnecessary elaborate systems of state help. The most important ideas put forth in the Armstrong Committee Report on insurance had been previously suggested by Mr. Brandeis,
X PREFACE
acting as counsel for the Equitable policy holders. Business and the more important statesmanship were intimately combined in the management of the Protocol in New York, which has done so much to improve condi- tions in the clothing industry. The welfare of the laborer and his relation to his employer seems to ]\Ir. Brandeis, as it does to all the most competent thinkers today, to constitute the most important question we have to solve, and he won the case, coming up to the Supreme Court of the United States, from Oregon, estab- lishing the constitutionality of special protective legislation for women. In the IMinimum Wage case, also from the State of Oregon, which is about to be heard before the Supreme Court, he takes up what is really a logical sequence of the limitation of women's hours in certain industries, since it would be a futile performance to limit their hours and then allow their wages to be cut down in consequence. These industrial activities are in large part an expression of liis deep and ever growing sympathy with the working people and understanding of them. Florence Kelley once said: "No man since Lincoln has understood the common people as Louis Brandies does."
PREFACE xi
While the majority of Mr. Brandeis's great progressive achievements have been connected with the industrial system, some have been polit- ical in a more limited sense. I worked with him through the Ballinger-Pinchot controversy, and I never saw a grasp of detail more brilliantly combined with high constructive ethical and political thinking. After the man who knew most about the details of the Interior Depart- ment had been cross-examined by Mr. Brandeis he came and sat down by me and said: "Mr. Hapgood, I have no respect for you. I do not think your motives in this agitation are good motives, but I want to say that you have a wonderful lawyer. He knows as much about the Interior Department today as I do." In that controversy, the power of the administra- tion and of the ruling forces in the House and Senate were combined to protect Secretary Ballinger and prevent the truth from coming to light. Mr. Brandeis, in leading the fight or the conservation side, was constantly haunted by the idea that there was a mystery somewhere. The editorial printed above hints at how ho solved the mystery, but it would require much more space to tell the other sides, the enthus- iasm for conservation, the convincing arguments
xii PREFACE
for higher standards in office, the connection of this conspiracy with the country's larger needs. Seldom is an audience at a hearing so moved as it was by Mr. Brandeis's final plea to the committee.
Possibly his work on railroads will turn out to be the most significant among the many things Mr. Brandeis has done. His arguments in 1910-11 before the Interstate Commerce Commission against the raising of rates, on the ground that the way for railroads to be more prosperous was to be more efficient, made efficiency a national idea. It is a cardinal point in his philosophy that the only real progress toward a higher na- tional life will come through efficiency in all our activities. The seventy-eight questions addressed to the railroads by the Interstate Commerce Commission in December, 1913, embody what is probably the most comprehensive embodiment of his thought on the subject.
On nothing has he ever worked harder than on his diagnosis of the Money Trust, and when his life comes to be written (I hope many years hence) this will be ranked with his railroad work for its effect in accelerating industrial changes. It is indeed more than a coincidence that so many of the things he has been contending for have
PREFACE xiii
come to pass. It is seldom that one man puts one idea, not to say many ideas, effectively before the world, but it is no exaggeration to say that Mr. Brandeis is responsible for the now wide- spread recognition of the inherent weakness of great size. He was the first person who set forth effectively the doctrine that there is a limit to the size of greatest efficiency, and the successful demon- stration of that truth is a profound contribu- tion to the subject of trusts. The demonstration is powerfully put in his testimony before the Senate Committee in 1911, and it is powerfully put in this volume. In destroying the delusion that efficiency was a common incident of size, he emphasized the possibility of efficiency through intensive development of the individual, thus connecting this principle with his whole study of efficiency, and pointing the way to industrial democracy.
Not less notable than the intellect and the constructive ability that have gone into Mr. Brandeis' s work are the exceptional moral quali- ties. Any powerful and entirely sincere crusader must sacrifice much. Mr. Brandeis has sacrificed much in money, in agreeableness of social life, in effort, and he has done it for principle and for human happiness. His power of intensive work,
xiv PREFACE
his sustained interest and will, and his courage have been necessary for leadership. No man could have done what he has done without being willing to devote his life to making his dreams come true.
Nor should anyone make the mistake, because the labors of Mr. Brandeis and others have re- cently brought about changes, that the system which was being attacked has been undermined. The currency bill has been passed, and as these words are written, it looks as if a group of trust bills would be passed. But systems are not ended in a day. Of the truths which are embod- ied in the essays printed in this book, some are being carried out now, but it will be many, many years before the whole idea can be made effective; and there will, therefore, be many, many years during which active citizens will be struggling for those principles which are here so clearly, so eloquently, so conclusively set forth.
The articles reprinted here were all written
before November, 1913. "The Failure of Banker
Management" appeared in Harper's Weekly
Aug. IG, 1913; the other articles, between Nov.
22, 1913 and Dec. 17, 1914.
Norman Hapgood. March, 1914.
CONTENTS
CHAPTER PAGE
I Our Financial Oligarchy 1
II How THE Combiners Combine 28
III Interlocking Directorates 51
IV Serve One Master Only! 69
V What Publicity Can Do 92
VI Where the Banker is Superfluous . .109 VII Big Men and Little Business . . . .135
VIII A Curse of Bigness 162
IX The Failure of Banker- management . . 189 X The Inefficiency of the Oligarchs . . 201
XV
OTHER PEOPLE'S MONEY
AND HOW THE BANKERS USE IT
CHAPTER I OUR FINANCIAL OLIGARCHY
President Wilson, when Governor, declared in 1911:
"The great monopoly in this country is the money monopoly. So long as that exists, our old variety and freedom and individual energy of development are out of the question. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men, who, even if their actions be honest and intended for the public interest, are necessarily concentrated upon the great undertakings in which their own money is involved and who, necessarily, by every reason of their own limitations, chill and check and destroy genuine economic freedom. This is the greatest question of all; and to this, states-
2 OTHER PEOPLE'S MONEY
men must address themselves with an earnest determination to serve the long future and the true hberties of men."
The Pujo Committee — appointed in 1912 — found :
"Far more dangerous than all that has hap- pened to us in the past in the way of ehmination of competition in industry is the control of credit through the domination of these groups over our banks and industries." . . .
"Whether under a different currency system the resources in our banks would be greater or less is comparatively immaterial if they continue to be controlled by a small group." . . .
"It is impossible that there should be compe- tition with all the facilities for raising money or selling large issues of bonds in the hands of these few bankers and their partners and allies, who together dominate the financial policies of most of the existing systems. . . . The acts of this inner group, as here described, have nevertheless been more destructive of competition than any- thing accomplished by the trusts, for they strike at the very vitals of potential competition in every industry that is under their protection, a condition which if permitted to continue, will
OUR FINANCIAL OLIGARCHY 3
render impossible all attempts to restore nor- mal competitive conditions in the industrial world. . . .
"If the arteries of credit now clogged well-nigh to choking by the obstructions created through the control of these groups are opened so that they may be permitted freely to play their important part in the financial system, competition in large enterprises will become possible and business can be conducted on its merits instead of being sub- ject to the tribute and the good will of this hand- ful of self-constituted trustees of the national prosperity."
The promise of New Freedom was joyously proclaimed in 1913.
The facts which the Pujo Investigating Com- mittee and its able Counsel, Mr. Samuel Unter- myer, have laid before the country, show clearly the means by which a few men control the busi- ness of America. The report proposes meas- ures which promise some relief. Additional reme- dies will be proposed. Congress will soon be called upon to act.
How shall the emancipation be wrought? On what lines shall we proceed? The facts, when fully understood, will teach us.
4 OTHER PEOPLE'S MONEY
THE DOMINANT ELEMENT
The dominant element in our financial oli- garchy is the investment banker. Associated banks, trust companies and life insurance com- panies are his tools. Controlled railroads, public service and industrial corporations are his sub- jects. Though properly but middlemen, these bankers bestride as masters America's business world, so that practically no large enterprise can be undertaken successfully without their partici- pation or approval. These bankers are, of course, able men possessed of large fortunes; but the most potent factor in their control of business is not the possession of extraordinary ability or huge wealth. The key to their power is Combination — concentration intensive and com- prehensive— advancing on three distinct lines:
First: There is the obvious consolidation of banks and trust companies; the less obvious afhliations — through stockholdings, voting trusts and interlocking directorates — of banking insti- tutions which are not legally connected; and the joint transactions, gentlemen's agreements, and "banking ethics" which eliminate competi- tion among the investment bankers.
Second: There is the consolidation of railroads into huge systems, the large combinations of
OUR FINANCIAL OLIGARCHY 5
public service corporations and the formation of industrial trusts, which, by making businesses so "big" that local, independent banking concerns cannot alone supply the necessary funds, has created dependence upon the associated New York bankers.
But combination, however intensive, along these lines only, could not have produced the Money Trust — another and more potent factor of combination was added.
Third: Investment bankers, like J. P. Morgan & Co., dealers in bonds, stocks and notes, en- croached upon the functions of the three other classes of corporations with which their business brought them into contact. They became the directing power in railroads, public service and industrial companies through which our great business operations are conducted — the makers of bonds and stocks. They became the directing power in the life insurance companies, and other corporate reservoirs of the people's savings — the buyers of bonds and stocks. They became the directing power also in banks and trust companies — the depositaries of the quick capital of the coun- try— the life blood of business, with which they and others carried on their operations. Thus four distinct functions, each essential to business.
6 OTHER PEOPLE'S MONEY
and each exercised, originall}", by a distinct set of men, became united in the investment banker. It is to this union of business functions that the existence of the Money Trust is mainly due.*
The development of our financial oligarchy followed, in this respect, lines with which the history of political despotism has familiarized us : — usurpation, proceeding by gradual encroach- ment rather than by violent acts; subtle and often long-concealed concentration of distinct functions, which are beneficent when separately administered, and dangerous onl}" when combined in the same persons. It was by processes such as these that Caisar Augustus became master of Rome. The makers of our own Constitution had in mind Uke dangers to our political liberty when they provided so carefully for the separation of governmental powers.
THE PROPER SPHERE OF THE INVESTMENT BANKER
The original function of the investment banker was that of dealer in bonds, stocks and notes; buying mainly at wholesale from corporations,
*ObviousIj' only a few of (ho invest nicrit bimkors oxor- risc this Krcat power; but many othors i)erf(jrin important func- tions in the eystem, as hereinafter described.
OUR FINANCIAL OLIGARCHY 7
muDicipalities, states and governments which need money, and selHng to those seeking invest- ments. The banker performs, in this respect, the function of a merchant; and the function is a very useful one. Large business enterprises are conducted generally by corporations. The per- manent capital of corporations is represented by bonds and stocks. The bonds and stocks of the more important corporations are owned, in large part, by small investors, who do not participate in the management of the company. Corpora- tions require the aid of a banker-middleman, for they lack generally the reputation and clien- tele essential to selling their own bonds and stocks direct to the investor. Investors in corporate securities, also, require the services of a banker- middleman. The number of securities upon the market is very large. Only a part of these se- curities is listed on the New York Stock Ex- change; but its listings alone comprise about sixteen hundred different issues aggregating about $26,500,000,000, and each year new list- ings are made averaging about two hundred and thu-ty-three to an amount of $1,500,000,000. For a small investor to make an intelligent selec- tion from these many corporate securities — in- deed, to pass an intelligent judgment upon a
8 OTHER PEOPLE'S MONEY
single one — is ordinarily impossible. He lacks the abilit}', the facilities, the training and the time essential to a proper investigation. Unless his purchase is to be little better than a gamble, he needs the advice of an expert, who, combining special knowledge with judgment, has the facil- ities and incentive to make a thorough investiga- tion. This dependence, both of corporations and of investors, upon the banker has grown in recent years, since women and others who do not par- ticipate in the management, have become the owners of so large a part of the stocks and bonds of our great corporations. Over half of the stockholders of the American Sugar Refining Company and nearly half of the stockholders of the Pennsylvania RaUroad and of the New York, New Haven & Hartford Railroad are women.
Good- will — the possession by a dealer of num- erous and valuable regular customers — is always an important element in merchandising. But in the business of selling bonds and stocks, it is of exceptional value, for the very reason that the small investor relics so largely upon the banker's judgment. This confidential relation of the banker to customers — and the knowledge of the customers' private afTairs acquired incidentally —
OUR FINANCIAL OLIGARCHY 9
is often a determining factor in the marketing of securities. With the advent of Big Business such good-will possessed by the older banking houses, preeminently J. P. Morgan & Co. and their Philadelphia House called Drexel & Co., by Lee, Higginson & Co. and Kidder, Peabody, & Co. of Boston, and by Kuhn, Loeb & Co. of New York, became of enhanced importance. The volume of new security issues was greatly increased by huge railroad consolidations, the development of the holding companies, and par- ticularly by the formation of industrial trusts. The rapidly accumulating savings of our people sought investment. The field of operations for the dealer in securities was thus much enlarged. And, as the securities were new and untried, the services of the investment banker were in great demand, and his powers and profits increased accordingly.
CONTROLLING THE SECURITY MAKERS
But this enlargement of their legitimate field of operations did not satisfy investment bankers. They were not content merely to deal in securities. They desired to manufacture them also. They became promoters, or allied themselves with promoters. Thus it was that J. P. Morgan <fe
10 OTHER PEOPLE'S MONEY
Company formed the Steel Trust, the Harvester Trust and the Shipping Trust. And, adding the duties of undertaker to those of midwife, the investment bankers became, in times of corporate disaster, members of security-holders' "Pro- tective Committees"; then they participated as "Reorganization Managers" in the reincarnation of the unsuccessful corporations and ultimately became directors. It was in this way that the Morgan associates acquired their hold upon the Southern Railway, the Northern Pacific, the Reading, the Erie, the Pere Marquette, the Chicago and Great Western, and the Cincinnati, Hamilton & Dayton. Often they insured the continuance of such control by the device of the voting trust; but even where no voting trust was created, a secure hold was acquired upon re- organization. It was in this way also that Kuhn, Loeb & Co. became potent in the Union Pacific and in the Baltimore & Ohio.
But the banker's participation in the manage- ment of corporations was not limited to cases of promotion or reorganization. An urgent or extensive need of new money was considered a BufTicicnt reason for the banker's entering a board of directors. Often without even such excuse the investment banker has secured a
OUR FINANCIAL OLIGARCHY 11
place upon the Board of Directors, through his powerful influence or the control of his customers' proxies. Such seems to have been the fatal en- trance of Mr. Morgan into the management of the then prosperous New York, New Haven & Hartford Railroad, in 1892. When once a banker has entered the Board — whatever may have been the occasion — his grip proves tena- cious and his influence usually supreme; for he controls the supply of new money.
The investment banker is naturally on the lookout for good bargains in bonds and stocks. Like other merchants, he wants to buy his merchandise cheap. But when he becomes di- rector of a corporation, he occupies a position which prevents the transaction by which he acquires its corporate securities from being properly called a bargain. Can there be real bargaining where the same man is on both sides of a trade? The investment banker, through his controlling influence on the Board of Directors, decides that the corporation shall issue and sell the securities, decides the price at which it shall sell them, and decides that it shall sell the securities to himself. The fact that there are other directors besides the banker on the Board
12 OTHER PEOPLE'S MONEY
does not, in practice, prevent this being the result. The banker, who holds the purse-strings, becomes usually the dominant spirit. Through voting- trusteeships, exclusive financial agencies, mem- bership on executive or finance committees, or by mere directorships, J. P. Morgan & Co., and their associates, held such financial power in at least thirty-two transportation systems, public utility corporations and industrial companies — com- panies with an aggregate capitalization of S17,- 273,000,000. IMainly for corporations so con- trolled, J. P. Morgan & Co. procured the public marketing in ten years of security issues aggre- gating $1,950,000^,000. This huge sum does not include any issues marketed privately, nor any issues, however mai'keted, of intra-state cor- porations. Kuhn, Loeb & Co. and a few other investment bankers exercise similar control over many other corporations.
CONTROLLING SECURITY BUYERS
Such control of railroads, public service and industrial corporations assures to the investment bankers an ample supply of securities at attract- ive prices; and merchandise well bought is half sold. But these bond and stock merchants are not disposed to take even a slight risk as to their
OUR FINANCIAL OLIGARCHY 13
ability to market their goods. They saw that if they could control the security-buyers, as well as the security-makers, investment banking would, indeed, be "a happy hunting ground"; and they have made it so.
The numerous small investors cannot, in the strict sense, be controlled; but their dependence upon the banker insures their being duly in- fluenced. A large part, however, of all bonds issued and of many stocks are bought by the prominent corporate investors; and most promi- nent among these are the life insurance companies, the trust companies, and the banks. The purchase of a security by these institutions not only relieves the banker of the merchandise, but recommends it strongly to the small investor, who believes that these institutions are wisely managed. These controlled corporate investors are not only large customers, but may be particularly accommo- dating ones. Individual investors are moody. They buy only when they want to do so. They are sometimes inconveniently reluctant. Cor- porate investors, if controlled, may be made to buy when the bankers need a market. It was natural that the investment bankers proceeded to get control of the great life insurance companies, as well as of the trust companies and the banks.
14 OTHER PEOPLE'S MONEY
The field thus occupied is uncommonly rich. The life insurance companies are our leading institutions for savings. Their huge surplus and reserves, augmented daily, are always clamoring for investment. No panic or money shortage stops the inflow of new money from the perennial stream of premiums on existing policies and inter- est on existing investments. The three great companies — the New York Life, the Mutual of New York, and the Equitable — would have over $55,000,000 of new money to invest annually, even if they did not issue a single new policy. In 1904 — just before the Armstrong investiga- tion— these three companies had together $1,247,- 331,738.18 of assets. They had issued in that year $1,025,671,126 of new poUcies. The New York legislature placed in 1906 certain restrictions upon their growth; so that their new business since has averaged $547,384,212, or only fifty- three per cent, of what it was in 1904. But the aggregate assets of these companies increased in the last eight years to $1,817,052,260.36. At the time of the Armstrong investigation the average age of these tliree companies was fifty-six years. The growth of assets in the last eight years was about half as large as the total growth in the preceding fifty-six years. These three companies must
OUR FINANCIAL OLIGARCHY 15
invest annually about $70,000,000 of new money; and besides, many old investments expire or are changed and the proceeds must be reinvested. A large part of all life insurance surplus and re- serves are invested in bonds. The aggregate bond investments of these three companies on January 1, 1913, was $1,019,153,268.93.
It was natural that the investment bankers should seek to control these never-failing reser- voirs of capital. George W. Perkins was Vice- President of the New York Life, the largest of the companies. While remaining such he was made a partner in J. P. Morgan & Co., and in the four years preceding the Armstrong investi- gation, his firm sold the New York Life $38,804, 918.51 in securities. The New York Life is a mutual company, supposed to be controlled by its policy-holders. But, as the Pujo Committee funds 'Hhe so-called control of life insurance com- panies by policy-holders through mutualization is a farce" and "its only result is to keep in office a self-constituted, self-perpetuating man- agement."
The Equitable Life Assurance Society is a stock company and is controlled by $100,000 of stock. The dividend on this stock is limited by law to seven per cent.; but in 1910 Mr. Morgan
16 OTHER PEOPLE'S MONEY
paid about S3, 000,000 for $51,000, par value of this stock, or S5,SS2.35 a share. The dividend return on the stock investment is less than one- eighth of one per cent. ; but the assets controlled amount now to over $500,000,000. And certain of these assets had an especial value for invest- ment bankers; — namely, the large holdings of stock in banks and trust companies.
The Armstrong investigation disclosed the extent of financial power exerted through the insurance company holdings of bank and trust company stock. The Committee recommended legislation compelling the insurance companies to dispose of the stock within five years. A law to that effect was enacted, but the time was later extended. The companies then disposed of a part of theu" bank and trust company stocks; but, as the insurance companies were controlled by the investment bankers, these gentlemen sold the bank and trust company stocks to themselves.
Referring to such purchases from the Mutual Life, as well as from the Equitable, the Pujo Committee found:
"Here, then, were stocks of fiv'e important trui-t companies and one of our largest national
OUR FINANCIAL OLIGARCHY 17
banks in New York City that had been held by these two life insurance companies. Within five years all of these stocks, so far as distributed by the insurance companies, have found their way into the hands of the men who virtually con- trolled or were identified with the management of the insurance companies or of their close allies and associates, to that extent thus further en- trenching them."
The banks and trust companies are deposi- taries, in the main, not of the people's savings, but of the business man's quick capital. Yet, since the investment banker acquired control of banks and trust companies, these institutions also have become, like the life companies, large purchasers of bonds and stocks. Many of our national banks have invested in this manner a large part of all their resources, including cap- ital, surplus and deposits. The bond invest- ments of some banks exceed by far the aggre- gate of their capital and surplus, and nearly equal their loanable deposits.
CONTROLLING OTHER PEOPLE's QUICK CAPITAL
The goose that lays golden eggs has been con- sidered a most valuable possession. But even more profitable is the privilege of taking the
18 OTHER PEOPLE'S MONEY
golden eggs laid by somebody else's goose. The investment bankers and their associates now enjoy that privilege. They control the people through the people's own money. If the bank- ers' power were commensurate only with their wealth, they would have relatively little influence on American business. Vast fortunes like those of the Astors are no doubt regrettable. They are inconsistent with democracy. They are un- social. And they seem peculiarly unjust when they represent largely unearned increment. But the wealth of the Astors does not endanger political or industrial liberty. It is insignificant in amount as compared with the aggregate wealth of America, or even of New York City. It lacks significance largely because its owners have only the income from their own wealth. The Astor wealth is static. The wealth of the Morgan associates is dynamic. The power and the growth of power of our financial oligarchs comes from wielding the savings and quick capital of others. In two of the tliree groat life insurance companies the influence of J. P. Morgan & Co. and their associates is exerted without any in- dividual investment by them whatsoever. Even in the E(}uitable, where Mr. Morgan bought an actual majority of all the outstanding stock, his
OUR FINANCIAL OLIGARCHY 19
investment amounts to little more than one-half of one per cent, of the assets of the company. The fetters which bind the people are forged from the people's own gold.
But the reservoir of other people's money, from which the investment bankers now draw their greatest power, is not the life insurance companies, but the banks and the trust companies. Bank deposits represent the really quick capital of the nation. They are the life blood of busi- nesses. Their effective force is much greater than that of an equal amount of wealth permanently invested. The 34 banks and trust companies, which the Pujo Committee declared to be directly controlled by the Morgan associates, held $1,983,- 000,000 in deposits. Control of these institutions means the ability to lend a large part of these funds, directly and indirectly, to themselves; and what is often even more important, the power to prevent the funds being lent to any rival in- terests. These huge deposits can, in the dis- cretion of those in control, be used to meet the temporary needs of their subject corporations. When bonds and stocks are issued to finance permanently these corporations, the bank depos- its can, in large part, be loaned by the investment
20 OTHER PEOPLE'S MONEY
bankers in control to themselves and their asso- ciates; so that securities bought may be carried by them, until sold to investors. Or these bank deposits may be loaned to allied bankers, or jobbers in securities, or to speculators, to enable them to carry the bonds or stocks. Easy money tends to make securities rise in the mai-ket. Tight money nearly always makes them fall. The control by the leading investment bankers over the banks and trust companies is so great, that they can often determine, for a time, the mar- ket for money by lending or refusing to lend on the Stock Exchange. In this way, among others, they have power to affect the general trend of prices in bonds and stocks. Their power over a particular security is even greater. Its sale on the market may depend upon whether the secur- ity is favored or discriminated against when offered to the banks and trust companies, as collateral for loans.
Furthermore, it is the investment banker's access to other people's money in controlled banks and trust companies which alone enables any individual banking concern to take so large part of the annual output of bonds and stocks. The banker's own capital, however large, would soon be exhausted. And even the loanable
OUR FINANCIAL OLIGARCHY 21
funds of the banks would often be exhausted, but for the large deposits made in those banks by the life insurance, railroad, public service, and industrial corporations which the bankers also control. On December 31, 1912, the three lead- ing life insurance companies had deposits in banks and trust companies aggregating $13,839,- 189.08. As the Pujo Committee finds:
''The men who through their control over the funds of oiu" railroads and industrial companies are able to direct where such funds shall be kept and thus to create these great reservoirs of the people's money, are the ones who are in position to tap those reservoirs for the ventures in which they are interested and to prevent their being tapped for purposes of which they do not approve. The latter is quite as important a factor as the former. It is the controlling consideration in its effect on competition in the railroad and industrial world."
HAVING YOUR CAKE AND EATING IT TOO
But the power of the investment banker over other people's money is often more direct and effective than that exerted through controlled banks and trust companies. J. P. Morgan & Co. achieve the supposedly impossible feat of having
22 OTHER PEOPLE'S MONEY
their cake and eating it too. They buy the bonds and stocks of controlled railroads and industrial concerns, and pay the pui'chase price; and still do not part with their money. This is accom- plished by the simple device of becoming the bank of deposit of the controlled corporations, instead of having the company deposit in some merely controlled bank in whose operation others have at least some share. When J. P. Morgan & Co. buy an issue of securities the purchase money, instead of being paid over to the corporation, is retained by the banker for the corporation, to be drawn upon only as the funds are needed by the corporation. And as the securities are issued in large blocks, and the money raised is often not all spent until long thereafter, the aggregate of the balances remaining in the banker's hands are huge. Thus J. P. Morgan & Co. (including their Philadelphia house, called Drexel & Co.) held on November 1, 1912, deposits aggregating $1G2,491,819.G5.
POWER AND PELF
The operations of so comprehensive a system of concentration necessarily developed in the bankers overweening j)()wor. And the bankers' power grows by what it feeds on. Power begets
OUR FINANCIAL OLIGARCHY 23
wealth; and added wealth opens ever new oppor- tunities for the acquisition of wealth and power. The operations of these bankers are so vast and numerous that even a very reasonable compensa- tion for the service performed by the bankers, would, in the aggregate, produce for them in- comes so large as to result in huge accumulations of capital. But the compensation taken by the bankers as commissions or profits is often far from reasonable. Occupying, as they so fre- quently do, !he inconsistent position of being at the same tims seller and buyer, the standard for so-called compensation actually applied, is not the "Rule of reason", but ''All the traffic will bear." And this is true even where there is no sinister motive. The weakness of human nature prevents men from being good judges of their own deservings.
The syndicate formed by J. P. Morgan & Co. to underwrite the United States Steel Corpora- tion took for its services securities which netted $62,500,000 in cash. Of this huge sum J. P. Morgan & Co. received, as syndicate managers, $12,500,000 in addition to the share which they were entitled to receive as syndicate members. This sum of $62,500,000 was only a part of the fees paid for the service of monopolizing the steel in-
24 OTHER PEOPLE'S MONEY
dustry. In addition to the commissions taken specifically for organizing the United States Steel Corporation, large sums were paid for organizing the several companies of which it is composed. For instance, the National Tube Company was capitalized at $80,000,000 of stock; $40,000,000 of which was common stock. Half of this $40,000,000 was taken by J. P. Morgan & Co. and their associates for promotion services; and the $20,000,000 stock so taken became later exchangeable for $25,000,000 of Steel Common. Commissioner of Corporations Herbert Knox Smith, found that:
"More than $150,000,000 of the stock of the Steel Corporation was issued directly or in- directly (tlirough exchange) for mere promo- tion or underwriting services. In other words, nearly one-seventh of the total capital stock of the Steel Corporation appears to have been issued directly or indirectly to promoters' services."
The so-called fees and commissions taken by the bankers and associates upon the organiza- tion of the trusts have been exceptionally large. But even after the trusts are successfully launched the exactions of the bankers are often
OUR FINANCIAL OLIGARCHY 25
extortionate. The syndicate which underwrote, in 1901, the Steel Corporation's preferred stock conversion plan, advanced only $20,000,000 in cash and received an underwriting commission of $6,800,000.
The exaction of huge commissions is not con- fined to trust and other industrial concerns. The Interborough Railway is a most prosperous corporation. It earned last year nearly 21 per cent, on its capital stock, and secured from New York City, in connection with the subway ex- tension, a very favorable contract. But when it financed its $170,000,000 bond issue it was agreed that J. P. Morgan & Co. should receive three per cent., that is, $5,100,000, for merely forming this syndicate. More recently, the New York, New Haven & Hartford Railroad agreed to pay J. P. Morgan & Co. a commission of $1,680,000; that is, 2 1/2 per cent., to form a syndicate to underwrite an issue at par of $67,000,000 20- year 6 per cent, convertible debentures. That means: The bankers bound themselves to take at 97 1/2 any of these six per cent, convertible bonds which stockholders might be unwilling to buy at 100. When the contract was made the New Haven's then outstanding six per cent, con- vertible bonds were selling at 114. And the
26 OTHER PEOPLE'S MONEY
new issue, as soon as announced, was in such demand that the public offered and was for months wilUng to buy at 106 bonds which the Company were to pay J. P. Morgan & Co. $1,- 680,000 to be willing to take at par.
WHY THE BANKS BECAME INVESTMENT BANKERS
These large profits from promotions, under- writings and security purchases led to a revolu- tionary change in the conduct of our leading banking institutions. It was obvious that con- trol by the investment bankers of the deposits in banks and trust companies was an essential element in their securing these huge profits. And the bank officers naturally asked, "Why then should not the banks and trust companies share in so profitable a field? Why should not they themselves become investment bankers too, with all the new functions incident to 'Big Business'?" To do so would involve a de- parture from the legitimate sphere of the banking business, which is the making of tem- porary loans to business concerns. But the temptation was irresistible. The invasion of the investment banker into the banks' field of operation was followed by a counter invasion by the banks into the realm of the investment
OUR FINANCIAL OLIGARCHY 27
banker. Most prominent among the banks were the National City and the First National of New York. But theirs was not a hostile invasion. The contending forces met as allies, joined forces to control the business of the country, and to "divide the spoils." The al- liance was cemented by voting trusts, by inter- locking directorates and by joint ownerships. There resulted the fullest "cooperation"; and ever more railroads, public service corporations, and industrial concerns were brought into complete subjection.
CHAPTER II HOW THE COMBINERS COMBINE
Among the allies, two New York banks — the National City and the First National — stand preeminent. They constitute, with the ]\Iorgan firm, the inner group of the Money Trust. Each of the two banks, like J. P. Mor- gan & Co., has huge resources. Each of the two banks, like the firm of J. P. Morgan & Co., has been dominated by a genius in combination. In the National Citj^ it is James Stillman; in the First National, George F. Baker. Each of these gentlemen was formerly President, and is now Chairman of the Board of Directors. The resources of the National City Bank (including its Siamese-twin security company) are about $300,000,000; those of the First National Bank (including its Siamese-twin security company) are about $200,000,000. The resources of the Morgan firm have not been disclosed. But it appears that they have available for their opera- tions, also, huge deposits from their subjects; deposits reported as $102,500,000.
28
HOW THE COMBINERS COMBINE 29
The private fortunes of the chief actors in the combination have not been ascertained. But sporadic evidence indicates how great are the possibiUties of accumulation when one has the use of "other people's money." Mr. Morgan's wealth became proverbial. Of Mr. Stillman's many investments, only one was specifically referred to, as he was in Europe during the investigation, and did not testify. But that one is significant. His 47,498 shares in the National City Bank are worth about $18,000,000. Mr. Jacob H. Schiff aptly described this as ''a very nice investment."
Of Mr. Baker's investments we know more, as he testified on many subjects. His 20,000 shares in the First National Bank are worth at least $20,000,000. His stocks in six other New York banks and trust companies are together worth about $3,000,000. The scale of his in- vestment in railroads may be inferred from his former holdings in the Central Railroad of New Jersey. JHe was its largest stockholder — so large that with a few friends he held a majority of the $27,436,800 par value of outstanding stock, which the Reading bought at $160 a share. He is a director in 28 other railroad companies; and presumably a stockholder in, at least, as
30 OTHER PEOPLE'S MONEY
many. The full extent of his fortune was not inquired into, for that was not an issue in the investigation. But it is not surprising that Mr. Baker saw little need of new laws. When asked:
''You think everything is all right as it is in this world, do you not?"
He answered:
"Pretty nearly."
RAMIFICATIONS OF POWER
But wealth expressed in figures gives a wholly inadequate picture of the allies' power. Their wealth is dynamic. It is wielded by geniuses in combination. It finds its proper expression in means of control. To comprehend the power of the allies we must try to visualize the ramifi- cations through which the forces operate.
Mr. Baker is a director in 22 corporations having, with their many subsidiaries, aggregate resources or capitalization of $7,272,000,000. But the direct and visible power of the First National Bank, which ]Mr. Baker dominates, extends further. The Pujo report shows that its directors (including Mr. Baker's son) arc directors in at least 27 other corporations with resources of $4,270,000,000. That is, the First National is represented in 19 corporations,
HOW THE COMBINERS COMBINE 31
with aggregate resources or capitalization of $11,542,000,000.
It may help to an appreciation of the allies' power to name a few of the more prominent corporations in which, for instance, Mr. Baker's influence is exerted — visibly and directly — as voting trustee, executive committee man or simple director.
1. Banks, Trust, and Life Insurance Companies: First National Bank of New York; National Bank of Commerce; Farmers' Loan and Trust Company; Mutual Life Insurance Company.
2. Railroad [Companies: New York Central Lines; New Haven, Reading, Erie, Lackawanna, Lehigh Valley, Southern, Northern Pacific, Chicago, Burlington & Quincy.
3. Public Service Corporations: American Tele- graph & Telephone Company, Adams Express Company.
4. Industrial Corporations: United States Steel Corporation, Pullman Company.
Mr. Stillman is a director in only 7 corpora- tions, with aggregate assets of $2,476,000,000; but the directors in the National City Bank, which he dominates, are directors in at least 41 other corporations which, with their subsidiaries,
32 OTHER PEOPLE'S MONEY
have an aggregate capitalization or resources of S10,564,000,000. The members of the firm of J. P. ]M organ & Co., the acknowledged leader of the allied forces, hold 72 directorships in 47 of the largest corporations of the country.
The Pujo Committee finds that the members of J. P. Morgan & Co. and the directors of their controlled trust companies and of the First National and the National City Bank together hold:
"One hundred and eighteen directorships in 34 banks and trust companies having total re- sources of $2,679,000,000 and total deposits of $1,983,000,000.
"Thirty duectorships in 10 insurance com- panies having total assets of $2,293,000,000.
"One hundred and five directorships in 32 transportation systems having a total capitaliza- tion of $11,784,000,000 and a total mileage (ex- cluding express companies and steamship lines) of 150,200.
"Sixty- three directorships in 24 producing and trading corporations having a total capital- ization of $3,330,000,000.
"Twenty-five directorships in 12 public-utility corporations having a total capitalization of $2,150,000,000.
HOW THE COMBINERS COMBINE 33
''In all, 341 directorships in 112 corporations having aggregate resources or capitalization of $22,245,000,000."
TWENTY-TWO BILLION DOLLARS,
''Twenty- two billion dollars is a large sum — so large that we have difficulty in grasping its significance. The mind realizes size only through comparisons. With what can we compare twenty-two billions of dollars? Twenty-two bil- lions of dollars is more than three times the as- sessed value of all the property, real and personal, in all New England. It is nearly three times the assessed value of all the real estate in the City of New York. It is more than twice the as- sessed value of all the property in the thirteen Southern states. It is more than the assessed value of all the property in the twenty- two states, north and south, lying west of the Miss- issippi River.
But the huge sum of twenty-two bilHon dollars is not large enough to include all the corporations to which the "influence" of the three allies, directly and visibly, extends, for
First: There are 56 other corporations (not included in the Pujo schedule) each with capital or resources of over $5,000,000, and aggregating
34 OTHER PEOPLE'S MONEY
nearly $1,350,000,000, in which the ]\Iorgan allies are represented according to the directories of directors.
Second: The Pujo schedule does not include any corporation with resources of less than $5,000,000. But these financial giants have shown their humility by becoming directors in many such. For instance, members of J. P. Morgan & Co., and directors in the National City Bank and the First National Bank are also directors in 158 such corporations. Available publications disclose the capitalization of only 38 of these, but those 38 aggregate $78,669,375.
Third: The Pujo schedule includes only the corporations in which the Morgan associates actually appear by name as directors. It does not include those in which they are represented by dummies, or otherwise. For instance, the Morgan influence certainly extends to the Kansas City Terminal Railway Company, for which they have marketed since 1910 (in connection with others) four issues aggregating $41,761,000. But no member of J. P. Morgan & Co., of the National City Bank, or of the First National Bank appears on the Kansas City Terminal directorate.
Fourth: The Pujo schedule does not include
HOW THE COMBINERS COMBINE 35
all the subsidiaries of the corporations scheduled. For instance, the capitalization of the New- Haven System is given as $385,000,000. That sum represents the bond and stock capital of the New Haven Railroad. But the New Haven System comprises many controlled corporations whose capitalization is only to a slight extent in- cluded directly or indirectly in the New Haven Railroad balance sheet. The New Haven, like most large corporations, is a holding company also; and a holding company may control sub- sidiaries while owning but a small part of the latters' outstanding securities. Only the small part so held will be represented in the holding company's balance sheet. Thus, while the New Haven Railroad's capitalization is only $385- 000,000 — and that sum only appears in the Pujo schedule — the capitalization of the New Haven System, as shown by a chart submitted to the Committee, is over twice as great; namely, $849,000,000.
It is clear, therefore, that the $22,000,000,000, referred to by the Pujo Committee, understates the extent of concentration effected by the inner group of the Money Trust.
S6 OTHER PEOPLE'S MONEY
CEMENTING THE TRIPLE ALLIANCE
Care was taken by these builders of imperial power that their structure should be enduring. It has been buttressed on every side by joint ownerships and mutual stockholdings, as well as by close personal relationships; for directorships are ephemeral and may end with a new election. Mr. Morgan and his partners acquired one- sixth of the stock of the First National Bank, and made a S6, 000,000 investment in the stock of the National City Bank. Then J. P. IMorgan & Co., the National City, and the First National (or their dominant officers — Mr. Stillman and ;Mr. Baker) acquired together, by stock purchases and voting trusts, control of the National Bank of Commerce, with its $190,000,000 of resources; of the Chase National, with $125,000,000; of the Guaranty Trust Company, with $232,000,000; of the Bankers' Trust Company, with $205,000,- 000; and of a number of smaller, but important, financial institutions. They became joint voting trustees in great railroad systems; and finally (as if the allies were united into a single concern) loyal and efficient service in the banks — like that rendered by Mr. Davison and Mr. Lamont in the First National — was rewarded by promotion
HOW THE COMBINERS COMBINE 37
to membership in the firm of J. P. Morgan &Co.
THE PROVINCIAL ALLIES
Thus equipped and bound together, J. P. Morgan & Co., the National City and the First National easily dominated America's financial center, New York; for certain other important bankers, to be hereafter mentioned, were held in restraint by "gentlemen's" agreements. The three allies dominated Philadelphia too; for the firm of Drexel & Co. is J. P. Morgan & Co. under another name. But there are two other important money centers in America, Boston and Chicago.
In Boston there are two large international banking houses — Lee, Higginson & Co., and Kidder, Peabody & Co. — both long established and rich; and each possessing an extensive, wealthy clientele of eager investors in bonds and stocks. Since 1907 each of these firms has pur- chased or underwritten (principally in conjunc- tion with other bankers) about 100 different security issues of the greater interstate corpora- tions, the issues of each banker amounting in the aggregate to over $1,000,000,000. Concen- tration of banking capital has proceeded even
38 OTHER PEOPLE'S MONEY
further in Boston than in New York. By suc- cessive consolidations the number of national banks has been reduced from 58 in 1898 to 19 in 1913. There are in Boston now also 23 trust companies.
The National Shawmut Bank, the First National Bank of Boston and the Old Colony Trust Co., which these two Boston banking houses and their associates control, alone have aggregate resources of $288,386,294, constituting about one-half of the banking resources of the city. These great banking institutions, which are themselves the result of many consolidations, and the 21 other banks and trust companies, in which their directors are also directors, hold together 90 per cent, of the total banking re- sources of Boston. And linked to them by inter- locking directorates are 9 other banks and trust companies whose aggregate resources are about 2 1/2 per cent, of Boston's total. Thus of 42 banking institutions, 33, with aggregate resources of 8560,516,239, holding about 92 1/2 per cent, of the aggregate banking resources of Boston, are interlocked. But even the remaining 9 banks and trust companies, which together hold but 7 1/2 per cent, of Boston banking resources, are not all independent of one another. Three
HOW THE COMBINERS COMBINE 39
are linked together; so that there appear to be only six banks in all Boston that are free from interlocking directorate relations. They to- gether represent but 5 per cent, of Boston's banking resources. And it may well be doubted whether all of even those 6 are entirely free from affiliation with the other groups.
Boston's banking concentration is not limited to the legal confines of the city. Around Boston proper are over thirty suburbs, which with it form what is popularly known as "Greater Boston." These suburban municipalities, and also other important cities like Worcester and Springfield, are, in many respects, within Boston's "sphere of influence." Boston's inner banking group has interlocked, not only 33 of the 42 banks of Boston proper, as above shown, but has linked with them, by interlocking directorships, at least 42 other banks and trust companies in 35 other municipalities.
Once Lee, Higginson & Co. and Kidder, Pea- body & Co. were active competitors. They are so still in some small, or purely local matters; but both are devoted co-operators with the Morgan associates in larger and interstate trans- actions; and the alliance with these great Boston banking houses has been cemented by mutual
40 OTHER PEOPLE'S MONEY
stockholdings and co-directorships. Financial concentration seems to have found its highest ex- pression in Boston.
Somewhat similar relations exist between the triple alliance and Chicago's great financial insti- tutions— its First National Bank, the Illinois Trust and Savings Bank, and the Continental & Commercial National Bank — which together control resources of S561, 000,000. And similar relations would doubtless be found to exist with the leading bankers of the other important finan- cial centers of America, as to which the Pujo Committee was prevented by lack of time from making investigation.
THE AUXILIARIES
Such are the primary, such the secondary powers which comprise the IMoney Trust; but these are supplemented by forces of magnitude.
"Radiating from these principal groups," says the Pujo Committee, "and closely affiliated with them are smaller but important banking houses, such as Kissel, Kinnicut & Co., White, Weld & Co., and Harvey Fisk & Sons, who receive large and lucrative patronage from the dominat- ing groups, and are used by the latter as jobbers or distributors of securities, the issuing of which
HOW THE COMBINERS COMBINE 41
they control, but which for reasons of their own they prefer not to have issued or distributed under their own names. Lee, Higginson & Co., besides being partners with the inner group, are also frequently utilized in this service because of their facilities as distributors of securities."
For instance, J. P. Morgan & Co. as fiscal agents of the New Haven Railroad had the right to market its securities and that of its sub- sidiaries. Among the numerous New Haven subsidiaries, is the New York, Westchester and Boston — the road which cost $1,500,000 a mile to build, and which earned a deficit last year of nearly $1,500,000, besides failing to earn any return upon the New Haven's own stock and bond investment of $8,241,951. When the New Haven concluded to market $17,200,000 of these bonds, J. P. Morgan & Co., ''for reasons of their own," ''preferred not to have these bonds issued or distributed under their own name." The Morgan firm took the bonds at 92 1/2 net; and the bonds were marketed by Kissel, Kinnicut & Co. and others at 96 1/4.
THE SATELLITES
The alliance is still further supplemented, as the Pujo Committee shows:
42 OTHER PEOPLE'S MONEY
''Beyond these inner groups and sub-groups are banks and bankers throughout the country who co-operate with them in underwriting or guaran- teeing the sale of securities offered to the public, and who also act as distributors of such securities. It was impossible to learn the identity of these corporations, owing to the unwillingness of the members of the inner group to disclose the names of their underwriters, but sufficient appears to justify the statement that there are at least hundreds of them and that they extend into many of the cities throughout this and foreign countries.
''The patronage thus proceeding from the inner group and its sub-groups is of great value to these banks and bankers, who are thus tied by self-interest to the great issuing houses and may be regarded as a part of this vast financial organization. Such patronage yields no incon- siderable part of the income of these banks and bankers and without much risk on account of the facilities of the principal groups for placing issues of securities through their domination of great banks and trust companies and their other do- mestic afliliations and their foreign connections. The underwriting commissions on issues made by this inner group are usually easily earned and do
HOW THE COMBINERS COMBINE 43
not ordinarily involve the underwriters in the purchase of the underwritten securities. Their interest in the transaction is generally adjusted unless they choose to purchase part of the securi- ties, by the payment to them of a commission. There are, however, occasions on which this is not the case. The underwriters are then re- quired to take the securities. Bankers and brokers are so anxious to be permitted to par- ticipate in these transactions under the lead of the inner group that as a rule they join when invited to do so, regardless of their approval of the particular business, lest by refusing they should thereafter cease to be invited."
In other words, an invitation from these royal bankers is interpreted as a command. As a result, these great bankers frequently get huge commissions without themselves distributing any of the bonds, or ever having taken any actual risk.
"In the case of the New York subway financ- ing of $170,000,000 of bonds by Messrs. Morgan & Co. and their associates, Mr. Davison [as the Pujo Committee reports] estimated that there were from 100 to 125 such underwriters who were apparently glad to agree that Messrs,
U OTHER PEOPLE'S MONEY
Morgan & Co., the First National Bank, and the National City Bank should receive 3 per cent., — equal to $5,100,000 — for forming this syndi- cate, thus relieving themselves from all liability, whilst the underwriters assumed the risk of what the bonds would realize and of being required to take their share of the unsold portion."
THE PROTECTION OF PSEUDO-ETHICS
The organization of the ]\Ioney Trust is in- tensive, the combination comprehensive; but one other element was recognized as necessary to render it stable, and to make its dynamic force irresistible. Despotism, be it financial or politi- cal, is vulnerable, unless it is believed to rest upon a moral sanction. The longing for freedom is ineradicable. It will express itself in protest against servitude and inaction, unless the striv- ing for freedom be made to seem immoral. Long ago monarchs invented, as a preservative of absolutism, the fiction of "The divine right of kings." Bankers, imitating royalty, invented re- cently that precious rule of so-called "Ethics," by which it is declared unprofessional to come to the financial relief of any corporation which is already the prey of another "reputable" banker.
"The possibility of competition between these
HOW THE COMBINERS COMBINE 45
banking houses in the purchase of securities," says the Pujo Committee, "is further removed by the understanding between them and others, that one will not seek, by offering better terms, to take away from another, a customer which it has theretofore served, and by corollary of this, namely, that where given bankers have once satisfactorily united in bringing out an issue of a corporation, they shall also join in bringing out any subsequent issue of the same corpora- tions. This is described as a principle of banking ethics."
The "Ethical" basis of the rule must be that the interests of the combined bankers are superior to the interests of the rest of the com- munity. Their attitude reminds one of the "spheres of influence" with ample " hinterlands " by which rapacious nations are adjusting differ- ences. Important banking concerns, too am- bitious to be willing to take a subordinate position in the alliance, and too powerful to be suppressed, are accorded a financial "sphere of influence" upon the understanding that the rule of banking ethics will be faithfully observed. Most promi- nent among such lesser potentates are Kuhn, Loeb & Co., of New York, an international banking house of great wealth, with large clientele
46 OTHER PEOPLE'S MONEY
and connections. They are accorded an impor- tant "sphere of influence" in American rail- roading, including among other systems the Baltimore & Ohio, the Union Pacific and the Southern Pacific. They and the IMorgan group have with few exceptions preempted the banking business of the important railroads of the country. But even Kuhn, Loeb & Co. are not wholly independent. The Pujo Committee re- ports that they are ''quaUfied aUies of the inner group"; and through their "close relations with the National City Bank and the National Bank of Commerce and other financial institutions" have "many interests in common with the Morgan associates, conducting large joint- account operations with them."
THE EVILS RESULTANT
First: These banker-barons levy, through their excessive exactions, a heavy toll upon the whole community; upon owners of money for leave to invest it; upon railroads, public service and industrial companies, for leave to use this money of other people; and, through these corporations, upon consumers.
"The charge of capital," says the Pujo Com- mittee, "which of course enters universally into
HOW THE COMBINERS COMBINE 47
the price of commodities and of service, is thus in effect determined by agreement amongst those supplying it and not under the check of competi- tion. If there be any virtue in the principle of competition, certainly any plan or arrangement which prevents its operation in the performance of so fundamental a commercial function as the supplying of capital is peculiarly injurious."
Second: More serious, however, is the effect of the Money Trust in directly suppressing com- petition. That suppression enables the monopo- list to extort excessive profits; but monopoly increases the burden of the consumer even more in other ways. Monopoly arrests development; and through arresting development, prevents that lessening of the cost of production and of distribution which would otherwise take place.
Can full competition exist among the anthra- cite coal railroads when the Morgan associates are potent in all of them? And with like conditions prevailing, what competition is to be expected between the Northern Pacific and the Great Northern, the Southern, the Louisville and Nashville, and the Atlantic Coast Line; or between the Westinghouse Manufacturing Com- pany and the General Electric Company? As the Pujo Committee finds:
48 OTHER PEOPLE'S MONEY
"Such affiliations tend as a cover and conduit for secret arrangements and understandings in restriction of competition through the agency of the banking house thus situated."
And under existing conditions of combina- tion, reUef tlirough other banking houses is precluded.
"It can hardly be expected that the banks, trust companies, and other institutions that are thus seeking participation from this inner group would be likely to engage in business of a charac- ter that would be displeasing to the latter or would interfere with their plans or prestige. And so the protection that can be afforded by the members of the inner group constitutes the safest refuge of our great industrial combinations against future competition. The powerful grip of these gentlemen is upon the throttle that controls the wheels of credit, and upon their signal those wheels will tm-n or stop."
TJiird: But far more serious even than the suppression of competition is the suppression of industrial liberty, indeed of manhood itself, which this overweening financial power entails. The intimidation which it effects extends far beyond "the banks, trust companies, and other institutions seeking participation from this inner
HOW THE COMBINERS COMBINE 49
group in their lucrative underwritings" ; and far beyond those interested in the great corporations directly dependent upon the inner group. Its blighting and benumbing effect extends as well to the small and seemingly independent business man, to the vast army of professional men and others directly dependent upon *'Big Business," and to many another; for
1. Nearly every enterprising business man needs bank credit. The granting of credit in- volves the exercise of judgment of the bank offi- cials; and however honestly the bank officials may wish to exercise their discretion, experience shows that their judgment is warped by the existence of the all-pervading power of the Money Trust. He who openly opposes the great interests will often be found to lack that quality of "safe and sane"-ness which is the basis of financial credit.
2. Nearly every enterprising business man and a large part of our professional men have some- thing to sell to, or must buy something from, the great corporations to which the control or influence of the money lords extends directly, or from or to affiliated interests. Sometimes it is merchandise; sometimes it is service; sometimes
50 OTHER PEOPLE'S MONEY
they have nothing either to buy or to sell, but desire political or social advancement. Some- times they want merely peace. Experience shows that "it is not healthy to buck against a locomo- We," and ''Business is business."
Here and there you will find a hero, — red- blooded, and courageous, — loving manhood more than wealth, place or security, — who dared to fight for independence and won. Here and there you may find the mart}T, who resisted in silence and suffered with resignation. But America, which seeks "the greatest good of the greatest number," cannot be content with conditions that fit only the hero, the martyr or the slave.
CHAPTER III
INTERLOCKING DIRECTORATES
The practice of interlocking directorates is the root of many evils. It offends laws human and divine. Applied to rival corporations, it tends to the suppression of competition and to violation of the Sherman law. Applied to corporations which deal with each other, it tends to disloyalty and to violation of the fundamental law that no man can serve two masters. In either event it tends to inefficiency; for it removes incentive and destroys soundness of judgment. It is undemocratic, for it rejects the platform: ''A fair field and no favors," — substituting the pull of privilege for the push of manhood. It is the most potent instru- ment of the Money Trust. Break the control so exercised by the investment bankers over rail- roads, public-service and industrial corporations, over banks, life insurance and trust companies, and a long step will have been taken toward attainment of the New Freedom.
The term ''Interlocking directorates" is here used in a broad sense as including all intertwined
51
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conflicting interests, whatever the form, and by whatever device effected. The objection extends alike to contracts of a corporation whether with one of its directors individually, or with a firm of which he is a member, or with another corpora- tion in which he is interested as an officer or director or stockholder. The objection extends likewise to men holding the inconsistent position of director in two potentially competing corpora- tions, even if those corporations do not actually deal with each other.
THE ENDLESS CHAIN
A single example will illustrate the vicious circle of control — the endless chain — through which our financial oligarchy now operates:
J. P. Morgan (or a partner), a director of the New York, New Haven & Hartford Railroad, causes that company to sell to J. P. IMorgan & Co. an issue of bonds. J. P. Morgan & Co. borrow the money with which to pay for the bonds from the Guaranty Trust Company, of which Mr. Morgan (or a partner) is a director. J. P. Morgan & Co. sell the bonds to the Penn Mutual Life Insurance Company, of which Mr. Morgan (or a partner) is a director. The New Haven spends the proceeds of the bonds in purchasing
INTERLOCKING DIRECTORATES 53
steel rails from the United States Steel Corpora- tion, of which Mr. Morgan (or a partner) is a director. The United States Steel Corporation spends the proceeds of the rails in purchasing electrical supplies from the General Electric Company, of which Mr. Morgan (or a partner) is a director. The General Electric sells supplies to the Western Union Telegraph Company, a subsidiary of the American Telephone and Telegraph Company; and in both Mr. Morgan (or a partner) is a director. The Telegraph Company has an exclusive wire contract with the Reading, of which Mr. Morgan (or a partner) is a director. The Reading buys its passenger cars from the Pullman Company, of which Mr. Morgan (or a partner) is a director. The Pullman Company buys (for local use) loco- motives from the Baldwin Locomotive Company, of which Mr. Morgan (or a partner) is a director. The Reading, the General Electric, the Steel Corporation and the New Haven, like the Pullman, buy locomotives from the Baldwin Company. The Steel Corporation, the Tele- phone Company, the New Haven, the Reading, the Pullman and the Baldwin Companies, like the Western Union, buy electrical supplies from the General Electric. The Baldwin, the Pull-
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man, the Reading, the Telephone, the Telegraph and the General Electric companies, like the New Haven, buy steel products from the Steel Corporation. Each and every one of the com- panies last named markets its securities through J. P. Morgan & Co.; each deposits its funds with J. P. Morgan & Co.; and with these funds of each, the firm enters upon further operations.
This specific illustration is in part suppositi- tious; but it represents truthfully the operation of interlocking directorates. Only it must be multi- phed many times and with many permutations to represent fully the extent to which the interests of a few men are intertwined. Instead of taking the New Haven as the railroad starting point in our example, the New York Central, the Santa F6, the Southern, the Lehigh Valley, the Chicago and Great Western, the Erie or the P6re Mar- quette might have been selected; instead of the Guaranty Trust Company as the banking reser- voir, any one of a dozen other important banks or trust companies; instead of the Penn Mutual as piu-chaser of the bonds, other insurance compa- nies; instead of the General Electric, its qualified competitor, the Westinghouse Electric and Manu- facturing Company. The chain is indeed end-
INTERLOCKING DIRECTORATES 55
less; for each controlled corporation is entwined with many others.
As the nexus of "Big Business" the Steel Corporation stands, of course, preeminent. The Stanley Committee showed that the few men who control the Steel Corporation, itself an owner of important railroads, are directors also in twenty- nine other railroad systems, with 126,000 miles of hne (more than half the railroad mileage of the United States), and in important steamship companies. Through all these alliances and the huge traffic it controls, the Steel Corporation's influence pervades railroad and steamship com- panies— not as carriers only — but as the largest customers for steel. And its influence with users of steel extends much further. These same few men are also directors in twelve steel-using street railway systems, including some of the largest in the world. They are directors in forty machinery and similar steel-using manufacturing companies; in many gas, oil and water com- panies, extensive users of iron products; and in the great wire-using telephone and telegraph companies. The aggregate assets of these differ- ent corporations — through which these few men exert their influence over the business of the United States — exceeds sixteen billion dollars.
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Obviously, interlocking directorates, and all that term implies, must be effectually prohibited before the freedom of American business can be regained. The prohibition will not be an in- novation. It will merely give full legal sanction to the fundamental law of morals and of human nature: that "No man can serve two masters." The surprising fact is that a principle of equity so firmly rooted should have been departed from at all in deahng with corporations. For no rule of law has, in other connections, been more rigor- ously appUed, than that which prohibits a trustee from occupying inconsistent positions, from deal- ing with himself, or from using his fiduciary position for personal profit. And a director of a corporation is as obviously a trustee as persons holding similar positions in an unincorporated association, or in a private trust estate, who are called specifically by that name. The Courts have recognized this fully.
Thus, the Court of Appeals of New York de- clared in an important case:
"While not technically trustees, for the title of the corporate property was in the corporation itself, they were charged with the duties and subject to the liabilities of trustees. Clothed
INTERLOCKING DIRECTORATES 57
with the power of controlling the property and managing the affairs of the corporation without let or hindrance, as to third persons, they were its agents; but as to the corporation itself equity holds them liable as trustees. While courts of law generally treat the directors as agents, courts of equity treat them as trustees, and hold them to a strict account for any breach of the trust relation. For all practical purposes they are trustees, when called upor in equity to account for their official conduct."
NULLIFYING THE LAW
But this wholesome rule of business, so clearly laid down, was practically nullified by courts in creating two unfortunate limitations, as concessions doubtless to the supposed needs of commerce.
First: Courts held valid contracts between a corporation and a director, or between two corporations with a common director, where it was shown that in making the contract, the cor- poration was represented by independent direct- ors and that the vote of the interested director was unnecessary to carry the motion and his pres- ence was not needed to constitute a quorum.
Second: Courts held that even where a com-
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mon director participated actively in the making of a contract between two corporations, the contract was not absolutely void, but voidable only at the election of the corporation.
The first limitation ignored the rule of law that a beneficiary is entitled to disinterested advice from all liis trustees, and not merely from some; and that a trustee may violate his trust by in- action as well as by action. It ignored, also, the laws of human nature, in assuming that the in- fluence of a director is confined to the act of voting. Every one knows that the most effective work is done before any vote is taken, subtly, and without provable participation. Every one should know that the denial of minority repre- sentation on boards of directors has resulted in the domination of most corporations by one or two men; and in practically banishing all criti- cism of the dominant power. And even where the board is not so dominated, there is too often that "harmonious cooperation" among directors which secures for each, in his own line, a due share of the corporation's favors.
The second limitation — by which contracts, in the making of which the interested director participates actively, are held merely voidable instead of absolutely void — ignores the teachings
INTERLOCKING DIRECTORATES 59
of experience. To hold such contracts merely voidable has resulted practically in declaring them valid. It is the directors who control corporate action; and there is little reason to expect that any contract, entered into by a board with a fellow director, however unfair, would be subsequently avoided. Appeals from Philip drunk to Philip sober are not of frequent occurrence, nor very fruitful. But here we lack even an appealing party. Directors and the dominant stockholders would, of course, not appeal; and the minority stockholders have rarely the knowledge of facts which is essential to an effective appeal, whether it be made to the directors, to the whole body of stockholders, or to the courts. Besides, the financial burden and the risks incident to any attempt of individual stockholders to interfere with an existing manage- ment is ordinarily prohibitive. Proceedings to avoid contracts with directors are, therefore, sel- dom brought, except after a radical change in the membership of the board. And radical changes in a board's membership are rare. Indeed the Pujo Committee reports:
"None of the witnesses (the leading American bankers testified) was able to name an instance in
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the history of the country in which the stock- holders had succeeded in overthi'owing an exist- ing management in any large corporation. Nor does it appear that stockholders have ever even succeeded in so far as to secure the investigation of an existing management of a corporation to ascertain whether it has been well or honestly managed."
Air. Max Pam proposed in the April, 1913, Harvard Law Review, that the government come to the aid of minority stockholders. He urged that the president of every corporation be re- quired to report annuallj^ to the stockholders, and to state and federal officials every contract made by the company in which any director is inter- ested; that the Attorney-General of the United States or the State investigate the same and take proper proceedings to set all such contracts aside and recover any damages sufTered; or without disaffirming the contracts to recover (rom the interested directors the profits derived iherefrom. And to this end also, that State and National Bank Examiners, State Superintend- ents of Insurance, and the Interstate Commerce Commission be directed to examine the records of every bank, trust company, insurance com-
INTERLOCKING DIRECTORATES Gl
pany, railroad company and every other corporar tion engaged in interstate commerce. Mr. Pam's views concerning interlocking directorates are entitled to careful study. As counsel promi- nently identified with the organization of trusts, he had for years full opportunity of weighing the advantages and disadvantages of ''Big Business." His conviction that the practice of interlocking directorates is a menace to the public and demands drastic legislation, is significant. And much can be said in support of the specific measure which he proposes. But to be effective, the remedy must be fundamental and comprehensive.
THE ESSENTIALS OF PROTECTION
Protection to minority stockholders demands that corporations be prohibited absolutely from making contracts in which a director has a private interest, and that all such contracts be declared not voidable merely, but absolutely void.
In the case of railroads and public-service corporations (in contradistinction to private industrial companies), such prohibition is de- manded, also, in the interests of the general public. For interlocking interests breed in- efficiency and disloyalty; and the public pays,
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in higher rates or in poor service, a large part of the penalty for graft and inefficiency. Indeed, whether rates are adequate or excessive cannot be determined until it is known whether the gross earnings of the corporation are properly expended. For when a company's important contracts are made through directors who are interested on both sides, the common presump- tion that money spent has been properly spent does not prevail. And this is particularly true in railroading, where the company so often lacks effective competition in its own field.
But the compelling reason for prohibiting interlocking directorates is neither the protection of stockholders, nor the protection of the public from the incidents of inefficiency and graft. Conclusive evidence (if obtainable) that the practice of interlocking directorates benefited all stockholders and was the most efficient form of organization, would not remove the objections. For even more important than efficiency are in- dustrial and political liberty; and these are imperiled by the Money Trust. Interlocking directorates must he prohibited, because it is impos- sible to break the Money Trust without putting an end to the practice in the larger corporations.
INTERLOCKING DIRECTORATES 63
BANKS AS PUBLIC-SERVICE CORPORATIONS
The practice of interlocking directorates is peculiarly objectionable when applied to banks, because of the nature and functions of those institutions. Bank deposits are an important part of our currency sy^em. They are almost as essential a factor in commerce as our railways. Receiving deposits and making loans therefrom should be treated by the law not as a private business, but as one of the public services. And recognizing it to be such, the law already regu- lates it in many ways. The function of a bank is to receive and to loan money. It has no more right than a common carrier to use its powers specifically to build up or to destroy other businesses. The granting or withholding of a loan should be determined, so far as concerns the borrower, solely by the interest rate and the risk involved; and not by favoritism or other con- siderations foreign to the banking function. Men may safely be allowed to grant or to deny loans of their own money to whomsoever they see fit, whatsoever their motive may be. But bank resources are, in the main, not owned by the stockholders nor by the directors. Nearly three- fourths of the aggregate resources of the thirty-
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four banking institutions in which the Morgan associates hold a predominant influence are rep- resented by deposits. The dependence of com- merce and industry upon bank deposits, as the common reservoir of quick capital is so complete, that deposit banking should be recognized as one of the businesses "affected with a public interest." And the general rule which forbids public-service corporations from making unjust discriminations or giving undue preference should be applied to the operations of such banks.
Senator Owen, Chairman of the Committee on Banking and Currency, said recently:
"My own judgment is that a bank is a public- utility institution and cannot be treated as a private affair, for the simple reason that the public is invited, under the safeguards of the government, to deposit its money with the bank, and the public has a right to have its interests safeguarded through organized authorities. The logic of this is beyond escape. All banks in the United States, public and private, should be treated as public-utility institutions, where they receive public deposits."
The directors and officers of banking institu- tions must, of course, be entrusted with wide
INTERLOCKING DIRECTORATES 65
discretion in the granting or denying of loans. But that discretion should be exercised, not only honestly as it affects stockholders, but also impartially as it affects the public. Mere honesty to the stockholders demands that the interests to be considered by the directors be the interests of all the stockholders; not the profit of the part of them who happen to be its direct- ors. But the general welfare demands of the director, as trustee for the public, performance of a stricter duty. The fact that the granting of loans involves a delicate exercise of discretion makes it difficult to determine whether the rule of equahty of treatment, which every public- service corporation owes, has been performed. But that difficulty merely emphasizes the im- portance of making absolute the rule that banks of deposit shall not make any loan nor engage in any transaction in which a director has a private interest. And we should bear this in mind: If privately- owned banks fail in the public duty to afford borrowers equality of opportunity, there will arise a demand for government-owned banks, which will become irresistible.
The statement of Mr. Justice Holmes of the Supreme Court of the United States, in the Oklahoma Bank case, is significant:
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''We cannot say that the public interests to which we have adverted, and others, are not sufficient to warrant the State in taking the whole business of banking under its control. On the contrary we are of opinion that it may go on from regulation to prohibition except upon such con- ditions as it may prescribe."
OFFICIAL PRECEDENTS
Nor would the requirement that banks shall make no loan in which a director has a private interest impose undue hardships or restrictions upon bank du'ectors. It might make a bank director dispose of some of his investments and refrain from making others; but it often happens that the holding of one office precludes a man from holding another, or compels him to dispose of certain financial interests.
A judge is disqualified from sitting in any case in which he has even the smallest financial interest; and most judges, in order to be free to act in any matters arising in their court, proceed, upon taking office, to dispose of all investments which could conceivably bias their judgment in any matter that might come before them. An Interstate Commerce Commissioner is prohibited from owning any bonds or stocks in any corpora-
INTERLOCKING DIRECTORATES 67
tion subject to the jurisdiction of the Commission. It is a serious criminal offence for any executive officer of the federal government to transact government business with any corporation in the pecuniary profits of which he is directly or indirectly interested.
And the directors of our great banking in- stitutions, as the ultimate judges of bank credit, exercise today a function no less important to the country's welfare than that of the judges of our courts, the interstate commerce commissioners, and departmental heads.
SCOPE OF THE PROHIBITION
In the proposals for legislation on this subject, four important questions are presented:
1. Shall the principle of prohibiting inter- locking directorates in potentially competing corporations be applied to state banking insti- tutions, as well as the national banks?
2. Shall it be applied to all kinds of corpora- tions or only to banking institutions?
3. Shall the principle of prohibiting corpora- tions from entering into transactions in which the management has a private interest be applied to both directors and officers or be confined in its application to officers only?
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4. Shall the principle be applied so as to prohibit transactions with another corporation in which one of its directors is interested merely as a stockholder?
i
CHAPTER IV
SERVE ONE MASTER ONLY
The Pujo Committee has presented the facts concerning the Money Trust so clearly that the conclusions appear inevitable. Their diagnosis discloses intense financial concentra- tion and the means by which it is effected. Combination, — the intertwining of interests, — is shown to be the all-pervading vice of the present system. With a view to freeing in- dustry, the Committee recommends the enact- ment of twenty-one specific remedial provisions. Most of these measures are wisely framed to meet some abuse disclosed by the evidence; and if all of these were adopted the Pujo legislation would undoubtedly alleviate present suffering and aid in arresting the disease. But many of the remedies proposed are ''local" ones; and a cure is not possible, without treatment which is fundamental. Indeed, a major operation is necessary. This the Committee has hesitated to advise; although the fundamental treatment required is simple: "Serve one Master only."
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The evils incident to interlocking dii-ector- ates are, of course, fully recognized; but the prohibitions proposed in that respect ai*e re- stricted to a very narrow sphere.
First: The Committee recognizes that po- tentially competing corporations should not have a common director; — but it restricts this prohibition to directors of national banks, saying:
"No ofRcer or director of a national bank shall be an officer or director of any other bank or of any trust company or other financial or other corporation or institution, whether or- ganized under state or federal law, that is author- ized to receive money on deposit or that is engaged in the business of loaning money on collateral or in buying and selling securities except as in this section provided; and no person shall be an officer or director of any national bank who is a private banker or a member of a firm or partner- ship of bankers that is engaged in the business of receiving deposits: Provided, That such bank, trust company, financial institution, banker, or firm of bankers is located at or engaged in busi- ness at or in the same city, town, or village as that in which such national bank is located or engaged in business: Provided further. That a
I
SER\1E ONE MASTER ONLY 71
director of a national bank or a partner of such director may be an officer or director of not more than one trust company organized by the laws of the state in which such national bank is engaged in business and doing business at the same place."
Second: The Committee recognizes that a corporation should not make a contract in which one of the management has a private interest; but it restricts this prohibition (1) to national banks, and (2) to the officers, saying:
*'No national bank shall lend or advance money or credit or purchase or discount any promissory note, draft, bill of exchange or other evidence of debt bearing the signature or in- dorsement of any of its officers or of any partner- ship of which such officer is a member, directly or indirectly, or of any corporation in which such officer owns or has a beneficial interest of upward of ten per centum of the capital stock, or lend or advance money or credit to, for or on behalf of any such officer or of any such partnership or corporation, or purchase any se- curity from any such officer or of or from any partnership or corporation of which such officer is a member or in which he is financially inter- ested, as herein specified, or of any corporation
■i'Z
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of which any of its officers is an officer at the time of such transaction."
Prohibitions of intertwining relations so re- stricted, however supplemented by other pro- visions, will not end financial concentration. The Money Trust snake will, at most, be scotched, not killed. The prohibition of a common director in potentially competing cor- porations should apply to state banks and trust companies, as well as to national banks; and it should apply to railroad and industrial cor- porations as fully as to banking institutions. The prohibition of corporate contracts in which one of the management has a private interest should apply to du-ectors, as well as to officers, and to state banks and trust companies and to other classes of corporations, as well as to national banks. And, as will be hereafter shown, such broad legislation is within the power of Congress.
Let us examine this further:
THE PROHIBITION OF COMMON DIRECTORS IN PO- TENTIALLY COMPETING CORPORATIONS
1. National Baiiks. The objection to com- mon directors, as applied to banking institutions, is clearly shown by the Pujo Committee.
SERVE ONE MASTER ONLY 73
''As the first and foremost step in applying a remedy, and also for reasons that seem to us conclusive, independently of that consideration, we recommend that interlocking directorates in potentially competing financial institutions be abolished and prohibited so far as lies in the power of Congress to bring about that re- sult. . . . When we find, as in a number of instances, the same man a director in half a dozen or more banks and trust companies all located in the same section of the same city, doing the same class of business and with a like set of associates similarly situated, all belong- ing to the same group and representing the same class of interests, all further pretense of competition is useless. ... If banks serving the same field are to be permitted to have common directors, genuine competition will be rendered impossible. Besides, this prac- tice gives to such common directors the un- fair advantage of knowing the affairs of bor- rowers in various banks, and thus affords endless opportunities for oppression."
This recommendation is in accordance with the legislation or practice of other countries. The Bank of England, the Bank of France, the National Bank of Belgium, and the leading
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banks of Scotland all exclude from their boards persons who are du'ectors in other banks. By law, in Russia no person is allowed to be on the board of management of more than one bank.
The Committee's recommendation is also in harmony with laws enacted by the Common- wealth of Massachusetts more than a genera- tion ago designed to curb financial concentra- tion through the savings banks. Of the great wealth of ^Massachusetts a large part is repre- sented by deposits in its savings banks. These deposits are distributed among 194 different banks, located in 131 different cities and towns. These 194 banks are separate and distinct; not only in form, but in fact. In order that the banks may not be controlled by a few financiers, the Massachusetts law provides that no execu- tive oflScer or trustee (director) of any savings bank can hold any office in any other savings bank. That statute was passed in 1876. A few years ago it was supplemented by providing that none of the executive officers of a savings bank could hold a similar office in any national bank. Massachusetts attempted thus to curb the power of the individual financier; and no disadvantages are discernible. When that Act was passed the aggregate deposits in its savings banks were
SERVE ONE MASTER ONLY 75
$243,340,642; the number of deposit accounts 739,289; the average deposit to each person of the population $144. On November 1, 1912, the aggregate deposits were $838,635,097.85; the number of deposit accounts 2,200,917; the average deposit to each account $381.04. Mas- sachusetts has shown that curbing the power of the few, at least in this respect, is entirely- consistent with efficiency and with the prosperity of the whole people.
2. State Banks and Trust Companies. The reason for prohibiting common directors in banking institutions applies equally to national banks and to state banks including those trust companies which are essentially banks. In New York City there are 37 trust companies of which only 15 are members of the clearing house; but those 15 had on November 2, 1912, aggregate resources of $827,875,653. Indeed the Bankers' Trust Company with resources of $205,000,000, and the Guaranty Trust Company, with re- sources of $232,000,000, are among the most useful tools of the Money Trust. No bank in the country has larger deposits than the latter; and only one bank larger deposits than the former. If common directorships were permitted in state banks or such trust companies, the
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charters of leading national banks would doubt- less soon be surrendered; and the institutions would elude federal control by re-incorporating under state laws.
The Pujo Committee has failed to apply the prohibition of common directorships in po- tentially competing banking institutions rigor- ously even to national banks. It permits the same man to be a director in one national bank and one trust company doing business in the same place. The proposed concession opens the door to grave dangers. In the first place the provision would permit the interlocking of any national bank not with one trust company only, but with as many trust companies as the bank has du'ectors. For while under the Pujo bill no one can be a national bank director who is di- rector in more than one such trust company, there is nothing to prevent each of the directors of a bank from becoming a director in a differ- ent trust company. The National Bank of Com- merce of New York has a board of 38 directors. There are 37 trust companies in the City of New York. Thirty-seven of the 38 directors might each become a director of a different New York trust company: and thus 37 trust companies would be interlocked with the National Bank of
SERVE ONE MASTER ONLY 77
Commerce, unless the other recommendation of the Pujo Committee limiting the number of directors to 13 were also adopted.
But even if the bill were amended so as to limit the possible interlocking of a bank to a single trust company, the wisdom of the conces- sion would still be doubtful. It is true, as the Pujo Committee states, that ''the business that may be transacted by" a trust company is of "a, different character" from that properly trans- acted by a national bank. But the business actually conducted by a trust company is, at least in the East, quite similar; and the two classes of banking institutions have these vital elements in common: each is a bank of deposit, and each makes loans from its deposits. A private banker may also transact some business of a character different from that properly con- ducted by a bank; but by the terms of the Committee's bill a private banker engaged in the business of receiving deposits would be prevented from being a director of a national bank; and the reasons underlying that prohi- bition apply equally to trust companies and to private bankers.
3. Other Corporations. The interlocking of banking institutions is only one of the factors
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which have developed the Money Trust. The interlocking of other corporations has been an equally important element. And the prohibi- tion of interlocking directorates should be ex- tended to potentially competing corporations whatever the class; to life insurance companies, railroads and industrial companies, as well as banking institutions. The Pujo Committee has shown that Mr. George F. Baker is a common director in the six railroads which haul 80 per cent, of all anthracite marketed and own 88 per cent, of all anthracite deposits. The Mor- gan associates are the nexus between such sup- posedly competing railroads as the Northern Pacific and the Great Northern; the Southern, the Louisville & Nashville and the Atlantic Coast Line, and between partially competing industrials like the Wcstinghouse Electric and IManufacturing Company and the General Elec- tric. The ?iexus between all the large poten- tially competing corporations must be severed, if the Money Trust is to be broken.
PROHIBITING CORPORATE CONTRACTS IN WHICH THE MANAGEMENT HAS A PRIVATE INTEREST
The principle of prohibiting corporate contracts in which the management has a private interest
SERVE ONE MASTER ONLY 79
is applied, in the Pujo Committee's recom- mendations, only to national banks, and in them only to officers. All other corporations are to be permitted to continue the practice; and even in national banks the directors are to be free to have a conflicting private interest, except that they must not accept compensation for promoting a loan of bank funds nor participate in syndicates, promotions or underwriting of securities in which their banks may be interested as underwriters or owners or lenders thereon: that all loans or other transactions in which a director is interested shall be made in his own name; and shall be authorized only after ample notice to co-directors; and that the facts shall be spread upon the records of the corporation.
The Money Trust would not be disturbed by a prohibition limited to officers. Under a law of that character, financial control would continue to be exercised by the few without substantial impairment; but the power would be exerted through a somewhat different channel. Bank officers are appointees of the directors; and ordinarily their obedient servants. Individuals who, as bank officers, are now important factors in the financial concentration, would doubtless resign as officers and become merely directors.
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The loss of official salaries involved could be easily compensated. No member of the firm of J. P. Morgan & Co. is an officer in any one of the thirteen banking institutions with aggregate resources of S1,2S3,000,000, through which as directors they carry on their vast operations. A prohibition limited to officers would not affect the Morgan operations with these banking institu- tions. If there were minority representation on bank boards (which the Pujo Committee wisely advocates), such a provision might afford some protection to stockholders through the vigilance of the minority directors preventing the dominant directors using their power to the injury of the minority stockholders. But even then, the pro- vision would not safeguard the public; and the primary purpose of Money Trust legislation is not to prevent directors from injuring stockhold- ers; but to prevent their injuring the pubhc through the intertwined control of the banks. No prohibition limited to officers will materially change this condition.
The prohibition of interlocking directorates, even if applied only to all banks and trust com- panies, would practically compel the Morgan representatives to resign from the directorates of the thirteen l)anking institutions with which they
SERVE ONE MASTER ONLY 81
are connected, or from the directorates of all the railroads, express, steamship, public utility, manu- facturing, and other corporations which do busi- ness with those banks and trust companies. Whether they resigned from the one or the other class of corporations, the endless chain would be broken into many pieces. And whether they re- tired or not, the Morgan power would obviously be greatly lessened: for if they did not retire, their field of operations would be greatly narrowed.
APPLY THE PRIVATE INTEREST PROHIBITION TO ALL KINDS OF CORPORATIONS
The creation of the Money Trust is due quite as much to the encroachment of the investment banker upon railroads, public service, industrial, and life-insurance companies, as to his control of banks and trust companies. Before the Money Trust can be broken, all these relations must be severed. And they cannot be severed unless corporations of each of these several classes are prevented from dealing with their own directors and with corporations in which those directors are interested. For instance: The most potent single source of J. P. Morgan & Co.'s power is the $162,500,000 deposits, including those of 78 interstate railroad, public-service and industrial
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corporations, which the Morgan firm is free to use as it sees fit. The proposed proliibition, even if applied to all banking institutions, would not afifect directly this great source of Morgan power. If, however, the prohibition is made to include railroad, public-service, and industrial corpora- tions, as well as banking institutions, members of J. P. IVIorgan & Co. will quickly retire from substantially all boards of directors.
APPLY THE PRIVATE INTEREST PROHIBITION TO STOCKHOLDING INTERESTS
The prohibition against one corporation enter- ing into transactions with another corporation in which one of its directors is also interested, should apply even if his interest in the second corporation is merely that of stockholder. A conflict of interests in a director may be just as serious where he is a stockholder only in the second corporation, as if he were also a director.
One of the annoying petty monopolies, con- cerning which evidence was taken by the Pujo Committee, is the exclusive privilege granted to the American Bank Note Company by the New York 8tock Exchange. A recent $60,000,000 issue of New York City bonds was denied listing
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on the Exchange, because the city refused to submit to an exaction of $55,800 by the Ameri- can Company for engraving the bonds, when the New York Bank Note Company would do the work equally well for $44,500. As tending to explain this extraordinary monopoly, it was shown that men prominent in the financial world were stockholders in the American Company. Among the largest stockholders was Mr. Morgan, with 6,000 shares. No member of the Morgan firm was a director of the American Company; but there was sufficient influence exerted some- how to give the American Company the stock exchange monopoly.
The Pujo Committee, while failing to recom- mend that transactions in which a director has a private interest be prohibited, recognizes that a stockholder's interest of more than a certain size may be as potent an instrument of influence as a direct personal interest; for it recommends that:
"Borrowings, directly or indirectly by . . . any corporation of the stock of which he (a bank director) holds upwards of 10 per cent, from the bank of which he is such director, should only be permitted, on condition that notice shall have
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been given to his co-directors and that a full statement of the transaction shall be entered upon the minutes of the meeting at which such loan was authorized."
As shown above, the particular provision for notice affords no protection to the public; but if it did, its application ought to be extended to lesser stock-holdings. Indeed it is difficult to fix a limit so low that financial interest will not influence action. Certainly a stockholding in- terest of a single director, much smaller than 10 per cent., might be most effective in inducing favors. IVIr. Morgan's stockholdings in the American Bank Note Company was only three per cent. The $6,000,000 investment of J. P. Morgan & Co. in the National City Bank repre- sented only 6 per cent, of the bank's stock; and would undoubtedly have been effective, even if it had not been supplemented by the election of his son to the board of directors.
SPECIAL DISQUALIFICATIONS
The Stanley Committee, after investigation of the Steel Trust, concluded that the evils of inter- locking directorates were so serious that repre- sentatives of certain industries which arc largely
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dependent upon railroads should be absolutely prohibited from serving as railroad directors, officers or employees. It, therefore, proposed to disqualify as railroad director, officer or employee any person engaged in the business of manufactur- ing or selling railroad cars or locomotives, railroad rail or structural steel, or in mining and selling coal. The drastic Stanley bill, shows how great is the desire to do away with present abuses and to lessen the power of the Money Trust.
Directors, officers, and employees of banking institutions should, by a similar provision, be disqualified from acting as directors, officers or employees of life-insurance companies. The Armstrong investigation showed that life-in- surance companies were in 1905 the most potent factor in financial concentration. Their power was exercised largely through the banks and trust companies which they controlled by stock ownership and their huge deposits. The Arm- strong legislation directed life-insurance com- panies to sell their stocks. The Mutual Life and the Equitable did so in part. But the Morgan associates bought the stocks. And now, instead of the life-insurance companies controlling the banks and trust companies, the latter and the bankers control the life-insurance companies.
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HOW THE PROHIBITION MAT BE LIMITED
The Money Trust cannot be destroyed unless all classes of corporations are included in the prohibition of interlocking directors and of transactions by corporations in which the man- agement has a private interest. But it does not follow that the prohibition must apply to every corporation of each class. Certain exceptions are entirely consistent with merely protecting the public against the Money Trust; although pro- tection of minority stockholders and business ethics demand that the rule prohibiting a cor- poration from making contracts in which a di- rector has a private financial interest should be universal in its application. The number of corporations in the United States Dec. 31, 1912, was 305,336. Of these only 1610 have a capi- tal of more than $5,000,000. Few corporations (other than banks) with a capital of less than $5,000,000 could appreciably affect general credit conditions either through their own operations or their affiliations. Corporations (other than banks) with capital resources of less than $5,000,- 000 might, therefore, be excluded from the scope of the statute for the present. The prohibition could also be limited so as not to apply to any
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industrial concern, regardless of the amount of capital and resources, doing only an intrastate business; as practically all large industrial cor- porations are engaged in interstate commerce. This would exclude some retail concerns and local jobbers and manufacturers not otherwise excluded from the operation of the act. Like- wise banks and trust companies located in cities of less than 100,000 inhabitants might, if thought advisable, be excluded, for the present if their capital is less than S500,000, and their resources less than, say, $2,500,000. In larger cities even the smaller banking institutions should be sub- ject to the law. Such exceptions should over- come any objection which might be raised that in some smaller cities, the prohibition of inter- locking directorates would exclude from the bank directorates all the able business men of the community through fear of losing the oppor- tunity of bank accommodations.
An exception should also be made, so as to permit interlocking directorates between a cor- poration and its proper subsidiaries. And the prohibition of transactions in which the manage- ment has a private interest should, of course, not apply to contracts, express or implied, for such services as are performed indiscriminately for
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the whole community by raih-oads and public service corporations, or for services, common to all customers, like the ordinary service of a bank for its depositors.
THE POWER OF CONGRESS
The question may be asked: Has Congress the power to impose these limitations upon the conduct of any business other than national banks? And if the power of Congress is so lim- ited, will not the dominant financiers, upon the enactment of such a law, convert their national banks into state banks or trust companies, and thus escape from congressional control?
The answer to both questions is clear. Con- gress has ample power to impose such prohibitions upon practically all corporations, including state banks, trust companies and life insurance com- panies; and evasion may be made impossible. While Congress has not been granted power to regulate directly state banks, and trust or life insurance companies, or railroad, public-service and industrial corporations, except in respect to interstate commerce, it may do so indirectly by virtue either of its control of the mail privilege or through the taxing power.
Practically no business in the United States can
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be conducted without use of the mails; and Con- gress may in its reasonable discretion deny the use of the mail to any business which is con- ducted under conditions deemed by Congress to be injurious to the public welfare. Thus, Congress has no power directly to suppress lot- teries ; but it has indirectly suppressed them by denying, under heavy penalty, the use of the mail to lottery enterprises. Congress has no power to suppress directly business frauds; but it is constantly doing so indirectly by issuing fraud-orders denying the mail privilege. Con- gress has no direct power to require a newspaper to publish a list of its proprietors and the amount of its circulation, or to require it to mark paid- matter distinctly as advertising: But it has thus regulated the press, by denying the second-class mail privilege, to all publications which fail to comply with the requirements prescribed.
The taxing power has been resorted to by Con- gress for like purposes: Congress has no power to regulate the manufacture of matches, or the use of oleomargarine; but it has suppressed the manufacture of the "white phosphorous" match and has greatly lessened the use of oleomargarine by imposing heavy taxes upon them. Congress
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has no power to prohibit, or to regulate directly the issue of bank notes by state banks, but it indirectly prohibited their issue by imposing a tax of ten per cent, upon any bank note issued by a state bank.
The power of Congress over interstate com- merce has been similarly utilized. Congress cannot ordinarily provide compensation for ac- cidents to employees or undertake directly to suppress prostitution; but it has, as an inci- dent of regulating interstate commerce, enacted the Railroad Employers' Liability law and the White Slave Law; and it has full power over the instrumentalities of commerce, like the telegraph and the telephone.
As such exercise of congressional power has been common for, at least, half a century. Con- gress should not hesitate now to employ it where its exercise is urgently needed. For a compre- hensive prohibition of interlocking directorates is an essential condition of our attaining the New Freedom. Such a law would involve a great change in the relation of the leading banks and bankers to other businesses. But it is the very purpose of Money Trust legislation to effect a great change; and unless it does so, the power of our financial oligarchy cannot be broken.
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But though the enactment of such a law is essential to the emancipation of business, it will not alone restore industrial liberty. It must be supplemented by other remedial measures.
CHAPTER V WHAT PUBLICITY CAN DO
Publicity is justly commended as a remedy for social and industrial diseases. Sunlight is said to be the best of disinfectants; electric light the most efficient policeman. And publicity has already played an important part in the struggle against the Money Trust. The Pujo Committee has, in the disclosure of the facts concerning financial concentration, made a most important contribution toward attainment of the New Freedom. The battlefield has been surveyed and charted. The hostile forces have been located, counted and appraised. That was a necessary first step — and a long one — towards relief. The provisions in the Committee's bill concerning the incorporation of stock exchanges and the state- ment to be made in connection with the listing of securities would doubtless have a beneficent effect. But there should be a further call upon publicity for service. That potent force must, in the im- pending struggle, be utilized in many ways as a continuous remedial measure.
02
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WEALTH
Combination and control of other people's money and of other people's businesses. These are the main factors in the development of the Money Trust. But the wealth of the invest- ment banker is also a factor. And with the ex- traordinary growth of his wealth in recent years, the relative importance of wealth as a factor in financial concentration has grown steadily. It was wealth which enabled Mr. Morgan, in 1910, to pay $3,000,000 for $51,000 par value of the stock of the Equitable Life Insurance Society. His direct income from this investment was limited by law to less than one- eighth of one per cent, a year; but it gave legal control of $504,000,000, of assets. It was wealth which enabled the Morgan associates to buy from the Equitable and the Mutual Life Insurance Company the stocks in the several banking in- stitutions, which, merged in the Bankers' Trust Company and the Guaranty Trust Company, gave them control of $357,000,000 deposits. It was wealth which enabled Mr. Morgan to acquire his shares in the First National and National City banks, worth $21,000,000, through which he cemented the triple alliance with those institutions.
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Xow, how has this great wealth been accu- mulated? Some of it was natural accretion. Some of it is due to special opportunities for investment wisely availed of. Some of it is due to the vast extent of the bankers' operations. Then power breeds wealth as wealth breeds power. But a main cause of these large fortunes is the huge tolls taken by those who control the avenues to capital and to investors. There has been exacted as toll literally "all that the traffic will bear."
EXCESSIVE bankers' COMMISSIONS
The Pujo Committee was unfortunately pre- vented by lack of time from presenting to the country the evidence covering the amounts taken by the investment bankers as promoters' fees, underwriting commissions and profits. Noth- ing could have demonstrated so clearly the power exercised by the bankers, as a schedule showing the aggregate of these taxes levied within recent years. It would be well worth while now to re- open the Money Trust investigation merely to collect these data. But earlier investigations have disclosed some illuminating, though spor- adic facts.
The syndicate which jH'omoted the Steel Trust,
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took, as compensation for a few weeks' work, securities yielding $62,500,000 in cash; and of this, J. P. Morgan & Co. received for their services, as Syndicate Managers, $12,500,000, besides their share, as syndicate subscribers, in the remaining $50,000,000. The Morgan syndicate took for promoting the Tube Trust $20,000,000 common stock out of a total issue of $80,000,000 stock (preferred and common). Nor were monster commissions limited to trust promotions. More recently, bankers' syndicates have, in many in- stances, received for floating preferred stocks of recapitalized industrial concerns, one-third of all common stock issued, besides a considerable sum in cash. And for the sale of preferred stock of well established manufacturing concerns, cash commissions (or profits) of from 7 1/2 to 10 per cent, of the cash raised are often exacted. On bonds of high-class industrial concerns, bankers' commissions (or profits) of from 5 to 10 points have been common.
Nor have these heavy charges been confined to industrial concerns. Even railroad securities, supposedly of high grade, have been subjected to like burdens. At a time when the New Haven's credit was still unimpaired, J. P. Morgan & Co. took the New York, Westchester & Boston Rail-
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way first mortgage bonds, guaranteed by the New Haven at 92 1/2; and they were marketed at 96 1/4. They took the Portland Terminal Company bonds, guaranteed by the jNIaine Cen- tral Railroad — a corporation of unquestionable credit — at about 88, and these were marketed at 92.
A large part of these under^vTiting commis- sions is taken by the great banking houses, not for their services in selling the bonds, nor in as- suming risks, but for securing others to sell the bonds and incur risks. Thus when the Inter- boro Railway — a most prosperous corporation — financed its recent §170,000,000 bond issue, J. P. Morgan & Co. received a 3 per cent, com- mission, that is, $5,100,000, practically for ar- ranging that others should underwrite and sell the bonds.
The aggregate commissions or profits so taken by leading banking houses can only be conjec- tured, as the full amount of their transactions has not been disclosed, and the rate of com- mission or profit varies very widely. But the Pujo Committee has supplied some interesting data bearing upon the subject: Counting the issues of securities of interstate corporations only, J. P. Morgan & Co. directly procured the
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public marketing alone or in conjunction with others during the years 1902-1912, of $1,950,- 000,000. What the average commission or profit taken by J. P. Morgan & Co. was we do not know; but we do know that every one per cent, on that sum yields $19,500,000. Yet even that huge aggregate of $1,950,000,000 includes only a part of the securities on which commissions or profits were paid. It does not include any issue of an intrastate corporation. It does not include any securities privately marketed. It does not include any government, state or municipal bonds. It is to exactions such as these that the wealth of the investment banker is in large part due. And since this wealth is an important factor in the creation of the power exercised by the Money Trust, we must endeavor to put an end to this improper wealth getting, as well as to improper combination. The Money Trust is so powerful and so firmly entrenched, that each of the sources of its undue power must be effectually stopped, if we would attain the New Freedom.
HOW SHALL EXCESSIVE CHARGES BE STOPPED?
The Pujo Committee recommends, as a remedy for such excessive charges, that interstate cor- porations be prohibited from entering into any
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agreements creating a sole fiscal agent to dispose of their security issues; that the issue of the securities of interstate railroads be placed under the supervision of the Interstate Commerce Commission; and that their securities should be disposed of only upon public or private competi- tive bids, or under regulations to be prescribed by the Commission with full powers of investi- gation that will discover and punish combina- tions which prevent competition in bidding. Some of the state public-service commissions now exercise such power; and it may possibly be wise to confer this power upon the interstate commission, although the recommendation of the Hadley Railroad Securities Commission are to the contrar3\ But the official regulation as pro- posed by the Pujo Committee would be confined to railroad corporations; and the new security issues of other corporations listed on the New York Stock Exchange have aggregated in the last five years $4,525,404,025, which is more than cither the jailroad or the municipal issues. Publicity ofi'crs, however, another and even more promising remedy: a method of regulating bankers' charges which would apply automa- tically to railroad, public-service and industrial corporations alike.
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The question may be asked: Why have these excessive charges been submitted to? Corpora- tions, which in the first instance bear the charges for capital, have, doubtless, submitted because of banker-control; exercised directly through interlocking directorates, or kindred relations, and indirectly through combinations among bankers to suppress competition. But why have the investors submitted, since ultimately all these charges are borne by the investors, except so far as corporations succeed in shifting the burden upon the community? The large army of small investors, constituting a substantial majority of all security buyers, are entirely free from banker control. Their submission is un- doubtedly due, in part, to the fact that the bankers control the avenues to recognizedly safe investments almost as fully as they do the avenues to capital. But the investor's serviUty is due partly, also, to his ignorance of the facts. Is it not probable that, if each in- vestor knew the extent to which the seciu-ity he buys from the banker is diluted by excessive underwritings, commissions and profits, there would be a strike of capital against these unjust exactions?
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THE STRIKE OF CAPITAL
A recent British experience supports this view. In a brief period last spring nine differ- ent issues, aggregating $135,840,000, were offered by syndicates on the London market, and on the average only about 10 per cent, of these loans was taken by the public. Money was "tight," but the rates of interest offered were very liberal, and no one doubted that the investors were well supplied with funds. The London Daily Mail presented an explanation:
"The long series of rebuffs to new loans at the hands of investors reached a climax in the ill success of the great Rothschild issue. It will remain a topic of financial discussion for many days, and many in the city are expressing the opinion that it may have a revolutionary effect upon the present system of loan issuing and underwriting. The question being discussed is that the public have become loth to subscribe for stock which they believe the underwriters can afford, by reason of the commission they receive, to sell subsetjuontly at a lower price than the issue price, and tliat the Stock Exchange has begun to realize the public's attitude. The public
WHAT PUBLICITY CAN DO 101
sees in the underwriter not so much one who in- sures that the loan shall be subscribed in return for its commission as a middleman, who, as it were, has an opportunity of obtaining stock at a lower price than the public in order that he may pass it off at a profit subsequently. They prefer not to subscribe, but to await an oppor- tunity of dividing that profit. They feel that if, when these issues were made, the stock were offered them at a more attractive price, there would be less need to pay the underwriters so high commissions. It is another practical pro- test, if indirect, against the existence of the middleman, which protest is one of the features of present-day finance."
PUBLICITY AS A EEMEDY
Compel bankers when issuing securities to make public the commissions or profits they are receiving. Let every circular letter, prospectus or advertisement of a bond or stock show clearly what the banker received for his middleman- services, and what the bonds and stocks net the issuing corporation. That is knowledge to which both the existing security holder and the prospective purchaser is fairly entitled. If the bankers' compensation is reasonable, consider-
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ing the skill and risk involved, there can be no objection to making it known. If it is not reasonable, the investor will ''strike," as in- vestors seem to have done recently in England.
Such disclosures of bankers' commissions or profits is demanded also for another reason: It will aid the investor in judging of the safety of the investment. In the marketing of securities there are two classes of risks: One is the risk whether the banker (or the corporation) will find ready purchasers for the bonds or stock at the issue price; the other whether the investor will get a good article. The maker of the security and the banker are interested chiefly in getting it sold at the issue price. The investor is interested chiefly in buying a good article. The small investor relies almost exclusively upon the banker for his knowledge and judgment as to the quality of the security; and it is this which makes his relation to the banker one of confidence. But at present, the investment banker occupies a position inconsistent with that relation. The bankers' compensation should, of course, vary according to the risk he assumes. Where there is a large risk that the bonds or stock will not be promptly sold at the issue price, the underwriting commission (that is the insurance premium)
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should be correspondingly large. But the banker ought not to be paid more for getting investors to assume a larger risk. In practice the banker gets the higher commission for underwriting the weaker security, on the ground -that his own risk is greater. And the weaker the security, the greater is the banker's incentive to induce his customers to relieve him. Now the law should not undertake (except incidentally in connection with railroads and public-service corporations) to fix bankers' profits. And it should not seek to prevent investors from making bad bargains. But it is now recognized in the simplest mer- chandising, that there should be full disclosures. The archaic doctrine of caveat emptor is vanishing. The law has begun to require publicity in aid of fair dealing. The Federal Pure Food Law does not guarantee quality or prices; but it helps the buyer to judge of quality by requiring disclosure of ingredients. Among the most important facts to be learned for determining the real value of a seciu-ity is the amount of water it contains. And any excessive amount paid to the banker for marketing a security is water. Require a full disclosure to the investor of the amount of commissions and profits paid; and not only will investors be put on their guard, but bankers'
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compensation will tend to adjust itself auto- matically to what is fair and reasonable. Ex- cessive commissions — this form of unjustly ac- quired wealth — will in large part cease.
REAL DISCLOSURE
But the disclosure must be real. And it must be a disclosure to the investor. It will not suffice to require merely the filing of a statement of facts with the Commissioner of Corporations or with a score of other officials, federal and state. That would be almost as ineffective as if the Pure Food Law required a manufactm-er merely to deposit with the Department a statement of ingredients, instead of requiring the label to tell the story. Nor would the filing of a full statement with the Stock Exchange, if incorporated, as provided by the Pujo Committee bill, be adequate.
To be effective, knowledge of the facts must be actually brought home to the investor, and this can best be done by requiring the facts to be stated in good, large type in every notice, circu- lar, letter and advertisement inviting the investor to purchase. Compliance with this requirement should also be obhgatory, and not something which the investor could waive. For the whole public is interested in putting an end to the
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bankers' exactions. England undertook, years ago, to protect its investors against the wiles of promoters, by requiring a somewhat similar dis- closure; but the British act failed, in large measure of its purpose, partly because under it the statement of facts was filed only with a public official, and partly because the investor could waive the provision. And the British statute has now been changed in the latter respect.
DISCLOSE SYNDICATE PARTICULARS
The required publicity should also include a disclosure of all participants in an underwriting. It is a common incident of underwriting that no member of the syndicate shall sell at less than the syndicate price for a definite period, unless the syndicate is sooner dissolved. In other words, the bankers make, by agreement, an artificial price. Often the agreement is probably illegal under the Sherman Anti-Trust Law. This price maintenance is, however, not necessarily objec- tionable. It may be entirely consistent with the general welfare, if the facts are made known. But disclosure should include a list of those par- ticipating in the underwriting so that the public may not be misled. The investor should know whether his adviser is disinterested.
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Not long ago a member of a leading banking house was undertaking to justify a commission taken by his firm for floating a now favorite pre- ferred stock of a manufacturing concern. The bankers took for their services $250,000 in cash, besides one-third of the common stock, amount- ing to about $2,000,000. "Of course," he said, "that would have been too much if we could have kept it all for ourselves; but we couldn't. We had to divide up a large part. There were fifty- seven participants. "V\'Tiy, we had even to give $10,000 of stock to (naming the presi- dent of a leading bank in the city where the busi- ness was located). He might some day have been asked what he thought of the stock. If he had shrugged his shoulders and said he didn't know, we might have lost many a customer for the stock. We had to give him $10,000 of the stock to teach him not to shrug his shoulders."
Think of the effectiveness with practical Amer- icans of a statement like this:
A. B. & Co.
Investment Bankers
We have today secured substantial control of the successful machinery business heretofore
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conducted by at , Illinois, which
has been incorporated under the name of the Excelsior Manufacturing Company with a capital of $10,000,000, of which $5,000,000 is Preferred and $5,000,000 Common.
As we have a large clientele of confiding customers, we were able to secure from the owners an agreement for marketing the Pre- ferred stock — we to fix a price which shall net the owners in cash $95 a share.
We offer this excellent stock to you at $100.73 per share. Our own commission or profit will be only a little over $5.00 per share, or say, $250,000 cash, besides $1,500,000 of the Common stock, which we received as a bonus. This cash and stock commission we are to divide in various proportions with the following participants in the underwriting syndicate:
C. D. & Co., New York
E. F. & Co., Boston
L. M. & Co., Philadelphia
I. K. & Co., New York.
O. P. & Co., Chicago
Were such notices common, the investment bankers would "be worthy of their hire," for only reasonable compensation would ordinarily be taken.
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For marketing the preferred stock, as in the case of Excelsior ^Manufactui'ing Co. referred to above, investment bankers were doubtless essential, and as middlemen they performed a useful service. But they used their strong position to make an excessive charge. There are, how- ever, many cases where the banker's services can be altogether dispensed with; and where that is possible he should be eliminated, not only for economy's sake, but to break up financial concentration.
CHAPTER VI WHERE THE BANKER IS SUPERFLUOUS
The abolition of interlocking directorates will greatly curtail the bankers' power by putting an end to many improper combinations. Publicity concerning bankers' commissions, profits and associates, will lend effective aid, particularly by curbing undue exactions. Many of the specific measures recommended by the Pujo Committee (some of them dealing with technical details) will go far toward correcting corporate and bank- ing abuses; and thus tend to arrest financial concentration. But the investment banker has, within his legitimate province, acquired control so extensive as to menace the public welfare, even where his business is properly conducted. If the New Freedom is to be attained, every proper means of lessening that power must be availed of. A simple and effective remedy, which can be widely applied, even without new legislation, lies near at hand: — Ehminate the banker-middleman where he is superfluous.
Today practically all governments, states and
109
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municipalities pay toll to the banker on all bonds sold. Why should they? It is not be- cause the banker is always needed. It is because the banker controls the only avenue through which the investor in bonds and stocks can or- dinarily be reached. The banker has become the universal tax gatherer. True, the pro rata of taxes levied by him upon our state and city governments is less than that levied by him upon the corporations. But few states or cities escape payment of some such tax to the banker on every loan it makes. Even where the new issues of bonds are sold at public auction, or to the highest bidder on sealed proposals, the bankers' syndicates usually secure large blocks of the bonds which ai-e sold to the people at a considerable profit. The middleman, even though unnecessary, col- lects his tribute.
There is a legitimate field for dealers in state and municipal bonds, as for other merchants. Investors already owning such bonds must have a medium through which they can sell their holdings. And those states or municipalities which lack an established reputation among investors, or which must seek more distant markets, need the banker to distribute new issues. But there are many states and cities which have
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an established reputation and have a home market at hand. These should sell their bonds direct to investors without the intervention of a middleman. And as like conditions prevail with some corporations, their bonds and stocks should also be sold direct to the investor. Both financial efficiency and industrial liberty demand that the bankers' toll be abolished, where that is possible.
BANKER AND BROKER
The business of the investment banker must not be confused with that of the bond and stock broker. The two are often combined; but the functions are essentially different. The broker performs a very limited service. He has properly nothing to do with the original issue of securities, nor with their introduction into the market. He merely negotiates a purchase or sale as agent for another under specific orders. He exercises no discretion, except in the method of bringing buyer and seller together, or of executing orders. For his humble service he receives a moderate compensation, a commission, usually one-eighth of one per cent. (12 1/2 cents for each $100) on the par value of the security sold. The invest- ment banker also is a mere middleman. But he is a principal, not an agent. He is also a merchant
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in bonds and stocks. The compensation received for his part in the transaction is in many cases more accurately described as profit than as com- mission. So far as concerns new issues of government, state and municipal bonds, espe- ciall}', he acts as merchant, buying and selling securities on his own behalf; buying commonly at wholesale from the maker and selling at retail to the investors; taking the merchant's risk and the merchant's profits. On purchases of corpo- rate securities the profits are often very large; but even a large profit may be entirely proper; for when the banker's services are needed and are properl}^ performed, they are of great value. On purchases of government, state and munic- ipal securities the profit is usually smaller; but even a very small profit cannot be justified, if unnecessary.
HOW THE BANKER CAN SERVE
The banker's services include three distinct functions, and only three:
First: Specifically as expert. The investment banker has tlie responsibility of the ordinary retailer to sell only that merchandise which is good of its kind. But his responsibility in this respect is unusually heavy, because he deals in an
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article on which a great majority of his customers are unable, themselves, to pass intelligent judg- ment without aid. The purchase by the investor of most corporate securities is little better than a gamble, where he fails to get the advice of some one who has investigated the security thoroughly as the banker should. For few investors have the time, the facilities, or the ability to investigate properly the value of corporate securities.
Second: Specifically as distributor. The banker performs an all-important service in providing an outlet for securities. His connections enable him to reach possible buyers quickly. And good- will— that is, possession of the confidence of regu- lar customers — enables him to effect sales where the maker of the security might utterly fail to find a market.
Third: Specifically as jobber or retailer. The investment banker, like other merchants, carries his stock in trade until it can be marketed. In this he performs a service which is often of great value to the maker. Needed cash is obtained immediately, because the whole issue of securities can thus be disposed of by a single transaction. And even where there is not immediate payment, the knowledge that the money will be provided when needed is often of paramount importance.
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By carrying securities in stock, the banker per- forms a service also to investors, who are thereby enabled to buy securities at such times as they desire.
Whenever makers of securities or investors require all or any of these three services, the investment banker is needed, and payment of compensation to him is proper. Where there is no such need, the banker is cleai'ly superfluous. And in respect to the original issue of many of our state and municipal bonds, and of some corporate securities, no such need exists.
WHERE THE BANKER SERVES NOT
It needs no banker experts in value to tell us that bonds of Massachusetts or New York, of Boston, Philadelphia or Baltimore and of scores of lesser American cities, are safe investments. The basic financial facts in regard to such bonds are a part of the common knowledge of many American investors; and, certainly, of most pos- sible investors who reside in the particular state or city whose bonds arc in question. Where the financial facts are not generally known, they are so simple, that they can be easily summarized and understood by any prospective investor without interpretation by an expert. Bankers often
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employ, before purchasing securities, their own accountants to verify the statements supplied by the makers of the security, and use these account- ants' certificates as an aid in selling. States and municipalities, the makers of the securities, might for the same purpose employ independent public accountants of high reputation, who would give their certificates for use in marketing the securities. Investors could also be assured with- out banker-aid that the basic legal conditions are sound. Bankers, before purchasing an issue of securities, customarily obtain from their own counsel an opinion as to its legality, which inves- tors are invited to examine. It would answer the same purpose, if states and municipalities should supplement the opinion of their legal representatives by that of independent counsel of recognized professional standing, who would certify to the legality of the issue.
Neither should an investment banker be needed to find investors walling to take up, in small lots, a new issue of bonds of New York or Massa- chusetts, of Boston, Philadelphia or Baltimore, or a hundred other American cities. A state or municipality seeking to market direct to the investor its own bonds would naturally experi- ence, at the outset, some difficulty in marketing a
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large issue. And in a newer communitj^, where there is little accumulation of unemployed capital, it might be impossible to find buyers for any large issue. Investors are apt to be conservative; and they have been trained to regard the inter- vention of the banker as necessary. The bankers would naturally discoiu-age any attempt of states and cities to dispense with their services. En- trance upon a market, hitherto monopolized by them, would usually have to be struggled for. But banker-fed investors, as well as others could, in time, be brought to reahze the advantage of avoiding the middleman and deahng dii'ectly with responsible borrowers. Governments, like private concerns, would have to do educational work; but this publicity would be much less expensive and much more productive than that undertaken by the bankers. Many investors are already impa- tient of banker exactions; and eager to deal directly with governmental agencies in whom they have more confidence. And a great demand could, at once, be developed among smaller investors whom the bankers have been unable to interest, and who now never buy state or municipal bonds. The opening of this new field would fut-nish a mar- ket, in some respects more desirable and certainly wider tluui th:i( now reached by the bankers.
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Neither do states or cities ordinarily need the services of the investment banker to carry their bonds pending distribution to the investor. Where there is immediate need for large funds, states and cities — at least the older communities — should be able to raise the money temporarily, quite as well as the bankers do now, while await- ing distribution of their bonds to the investor. Bankers carry the bonds with other people's money, not with their own. Why should not cities get the temporary use of other people's money as well? Bankers have the preferential use of the deposits in the banks, often because they control the banks. Free these institutions from banker-control, and no applicant to borrow the people's money will be received with greater favor than our large cities. Boston, with its $1,500,000,000 of assessed valuation and $78,033,- 128 net debt, is certainly as good a risk as even Lee, Higginson & Co. or Kidder, Peabody & Co.
But ordinarily cities do not, or should not, require large sums of money at any one time. Such need of large sums does not arise except from time to time where maturing loans are to be met, or when some existing public utility plant is to be taken over from private owners. Large issues of bonds for any other purpose are usually
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made in anticipation of future needs, rather than to meet present necessities. Modern efficient public financiering, through substituting serial bonds for the long term issues (which in Massa- chusetts has been made obligatory) will, in time, remove the need of large sums at one time for paying maturing debts, since each year's maturi- ties will be paid from the year's taxes. Purchases of existing public utiUty plants are of rare occur- rence, and are apt to be preceded by long periods of negotiation. When they occur they can, if foresight be exercised, usually be financed without full cash paj^ment at one time.
Today, when a large issue of bonds is made, the banker, while ostensibly paying his own money to the city, actually pays to the city other people's money which he has borrowed from the banks. Then the banks get back, through the city's de- posits, a large part of the money so received. And when the money is returned to the bank, the banker has the opportunity of borrowing it again for other operations. The process results in double loss to the city. The city loses by not getting from the banks as much for its bonds as investors would pay. And then it loses interest on the money raised before it is needed. For the bankers receive from the city bonds bearing rarely
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less than 4 per cent, interest; while the proceeds are deposited in the banks which rarely allow more than 2 per cent, interest on the daily balances.
CITIES THAT HELPED THEMSELVES
In the present year some cities have been led by necessity to help themselves. The bond market was poor. Business was uncertain, money tight and the ordinary investor reluctant. Bankers were loth to take new bond issues. Municipali- ties were unwilling to pay the high rates de- manded of them. And many cities were prohib- ited by law or ordinance from paying more than 4 per cent, interest; while good municipal bonds were then selling on a 4 1/2 to 5 per cent, basis. But money had to be raised, and the attempt was made to borrow it direct from the lenders instead of from the banker-middleman. Among the cities which raised money in this way were Phila- delphia, Baltimore, St. Paul, and Utica, New York.
Philadelphia, under Mayor Blankenburg's inspiration, sold nearly $4,175,000 in about two days on a 4 per cent, basis and another ''over-the- counter" sale has been made since. In Balti- more, with the assistance of the Sun- $4,766,000
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were sold ''over the counter" on a 4 1/2 per cent, basis. Utica's two ''popular sales" of 4 1/2 per cent, bonds were largely "over-subscribed." And since then other cities large and small have had their "over-the-counter" bond sales. The experience of Utica, as stated by its Control- ler, Fred G. Reusswig, must prove of general interest :
"In June of the present year I advertised for sale two issues, one of S 100,000, and the other of $19,000, bearing interest at 4 1/2 per cent. The latter issue was purchased at par by a local bidder and of the former we purchased $10,000 for our sinking funds. That left $90,000 unsold, for which there were no bidders, which was the first time that I had been unable to sell our bonds. About this time the 'popular sales' of Baltimore and Philadelphia attracted my attention. The laws in effect in those cities did not restrict the officials as does our law and I could not copy their methods. I realized that there was plenty of money in this immediate vicinity and if I could devise a plan conforming with our laws under which I could inake the sale attractive to small investors it would undoubtedly prove successful. I had found, in previous efforts to interest people of small means, that they did not understand the
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meaning of premium and would rather not buy than bid above par. They also objected to mak- ing a deposit with their bids. In arranging for the 'popular sales' I announced in the papers that, while I must award to the highest bidder, it was my opinion that a par bid would be the highest bid. I also announced that we would issue bonds in denominations as low as $100 and that we would not require a deposit except where the bid was $5,000 or over. Then I succeeded in getting the local papers to print editorials and local notices upon the subject of municipal bonds, with particular reference to those of Utica and the forthcoming sale. All the prospective purchaser had to do was to fill in the amount desired, sign his name, seal the bid and await the day for the award. I did not have many bidders for very small amounts. There was only one for $100 at the first sale and one for $100 at the second sale and not more than ten who wanted less than $500. Most of the bidders were looking for from $1,000 to $5,000, but nearly all were peo- ple of comparatively small means, and with some the investment represented all their savings. In awarding the bonds I gave preference to residents of Utica and I had no difficulty in apportioning the various maturities in a satisfactory way.
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"I believe that there are a large number of per- sons in every cit}^ who would buy their own bonds if the way w^ere made easier by law. Syracuse and the neighboring village of Ilion, both of which had been unable to sell in the usual way, came to me for a program of procedure and both have since had successful sales along similar lines. We have been able by this means to keep the interest rate on our bonds at 4 1/2 per cent., while cities which have followed the old plan of relying upon bond houses have had to increase the rate to 5 per cent. I am in favor of amending the law in such a manner that the Common Council, approved by the Board of Estimate and Appor- tionment, may fix the prices at which bonds shall be sold, instead of calling for competitive bids. Then place the bonds on sale at the Controller's office to any one who will pay the price. The prices upon each issue should be graded according to the different values of different maturities. Under the present law, as we have it, conditions are too complicated to make a sale practicable except upon a basis of par bids."
THE ST. PAUL EXPERIMENT
St. Paul wisely introduced into its experiment a more democratic feature, which Tom L. Johnson,
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Cleveland's great mayor, thought out (but did not utilize), and which his friend W. B. Colver, now Editor-in-Chief of the Daily News, brought to the attention of the St. Paul officials. Mayor John- son had recognized the importance of reaching the small savings of the people; and concluded that it was necessary not only to issue the bonds in very small denominations, but also to make them redeemable at par. He sought to combine practically, bond investment with the savings bank privilege. The fact that municipal bonds are issuable ordinarily only in large denomina- tions, say, $1,000, presented an obstacle to be overcome. Mayor Johnson's plan was to have the sinking fund commissioners take large blocks of the bonds, issue against them certificates in denominations of $10, and have the commis- sioners agree (under their power to purchase securities) to buy the certificates back at par and interest. Savings bank experience, he insisted, showed that the redemption feature would not prove an embarrassment; as the percentage of those wishing to withdraw their money is small; and deposits are nearly always far in excess of withdrawals.
The St. Paul sinking fund commissioners and City Attorney O'Neill approved the Johnson
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plan; and in the face of high money rates, sold on a 4 per cent, basis, during July, certificates to the net amount of $502,300; during August, $147,- 000; and during September, over $150,000, the average net sales being about $5,700 a day. Mr. Colver, reporting on the St. Paul experience, said:
''There have been about 2,000 individual pur- chasers making the average deposit about $350 or $3G0. There have been no certificates sold to banks. During the first month the deposits averaged considerably higher and for this reason : in very many cases people who had savings which represented the accumulation of considerable time, withdrew their money from the postal sav- ings banks, from the regular banks, from various hiding places and deposited them with the city. Now these same people are coming once or twice a month and making deposits of ten or twenty dollars, so that the average of the individual deposit has fallen very rapidly during September and every indication is that the number of small deposits will continue to increase and the rela- tively large deposits become less frequent as time goes on.
As a matter of fact, these certificate deposits are stable, far more than the deposits and invest-
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ments of richer people who watch for advanta- geous reinvestments and who shift their money about rather freely. The man with three or four hundred dollars savings will suffer almost anything before he will disturb that fund. We believe that the deposits every day here, day in and day out, will continue to take care of all the withdrawals and still leave a net gain for the day, that net figure at present being about $5,700 a day."
Many cities are now prevented from selling bonds direct to the small investors, through laws which compel bonds to be issued in large denomi- nations or which require the issue to be offered to the highest bidder. These legislative limita- tions should be promptly removed.
SALESMANSHIP AND EDUCATION
Such success as has already been attained is largely due to the unpaid educational work of leading progressive newspapers. But the educa- tional work to be done must not be confined to teaching "the people" — the buyers of the bonds. Municipal officials and legislators have quite as much to learn. They must, first of all, study salesmanship. Selling bonds to the people is a
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new art, still undeveloped. The general problems have not yet been worked out. And besides these problems common to all states and cities, there will be, in nearly every community, local problems which must be solved, and local difficul- ties which must be overcome. The proper solu- tion even of the general problems must take con- siderable time. There will have to be many ex- periments made; and doubtless there will be many failures. Every great distributor of merchandise knows the obstacles which he had to overcome before success was attained; and the large sums that had to be invested in opening and preparing a market. Individual concerns have spent mil- lions in wise publicity; and have ultimateh' reaped immense profits when the market was won. Cities must take their lessons from these great distributors. Cities must be ready to study the problems and to spend prudently for proper pub- licity work. It might, in the end, prove an econ- omy, even to allow, on particular issues, where nec- essary, a somewhat higher interest rate than bank- ers would exact, if tliereby a direct market for bonds could be secured. Future operations would yield large economics. And the obtaining of a direct market for city bonds is growing ever more important, because of the huge increase in loans
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which must attend the constant expansion of municipal functions. In 1898 the new munic- ipal issues aggregated $103,084,793; in 1912, $380,810,287.
SAVINGS BANKS AS CUSTOIMERS
In New York, Massachusetts and the other sixteen states where a system of purely mutual savings banks is general, it is possible, with a little organization, to develop an important mar- ket for the direct purchaser of bonds. The bonds issued by Massachusetts cities and towns have averaged recently about $15,000,000 a year, and those of the state about $3,000,000. The 194 Massachusetts savings banks, with aggregate assets of $902,105,755.94, held on October 31, 1912, $90,536,581.32 in bonds and notes of states and municipalities. Of this sum about $60,000,- 000 are invested in bonds and notes of Massa- chusetts cities and towns, and about $8,000,000 in state issues. The deposits in the savings banks are increasing at the rate of over $30,000,000 a year. Massachusetts state and municipal bonds have, within a few years, come to be issued tax exempt in the hands of the holder, whereas other classes of bonds usually held by savings banks are subject to a tax of one-half of one per cent.
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of the market value. Massachusetts savings banks, therefore, will to an increasing extent, se- lect ^Massachusetts municipal issues for high-grade bond investments. Certainly Massachusetts cit- ies and towns might, with the cooperation of the Commonwealth, easily develop a "home market" for "over-the-counter" bond business with the savings banks. And the savings banks of other states offer similar opportunities to their munici- palities.
COOPERATION
Bankers obtained their power through com- bination. Why should not cities and states by means of cooperation free themselves from the bankers? For by cooperation between the cities and the state, the direct marketing of municipal bonds could be greatly facilitated.
Massachusetts has 33 cities, each with a popu- lation of over 12,000 persons; 71 towns each with a population of over 5,000; and 250 towns each with a population of less than 5,000. Three hundred and eight of these municipalities now have funded indebtedness outstanding. The aggregate net indebtedness is about $180,000,000. Every year about $15,000,000 of bonds and notes are issued by the Massachusetts cities and towna
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for the purpose of meeting new requirements and refunding old indebtedness. If these munici- palities would cooperate in marketing securities, the market for the bonds of each municipality- would be widened; and there would exist also a common market for Massachusetts municipal securities which would be usually well supplied, would receive proper publicity and would attract investors. Successful merchandising ob\dously involves carrying an adequate, well-assorted stock. If every city acts alone, in endeavoring to market its bonds direct, the city's bond-selling activity will necessarily be sporadic. Its ability to supply the investor will be limited by its own necessities for money. The market will also be limited to the bonds of the particular municipal- ity. But if a state and its cities should cooperate, there could be developed a continuous and broad market for the sale of bonds ''over-the-counter." The joint selling agency of over three hundred municipalities, — as in Massachusetts— would natu- rally have a constant supply of assorted bonds and notes which could be had in as small amounts as the investor might want to buy them. It would be a simple matter to establish such a joint selUng agency by which municipalities,
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under proper regulation of, and aid from the state, would cooperate.
And cooperation among the cities and with the state might serve in another important respect. These 354 Massachusetts municipalities carry in the aggregate large bank balances. Sometimes the balance carried by a city represents unex- pended revenues; sometimes unexpended pro- ceeds of loans. On these balances they usually receive from the banks 2 per cent, interest. The balances of municipalities vary like those of other depositors; one having idle funds, when another is in need. Why should not all of these cities and towns cooperate, making, say, the State their common banker, and supply each other with funds as farmers and laborers cooperate tlirough credit unions? Then cities would get, instead of 2 per cent, on their balances, all their money was worth.
The Commonwealth of jMassachusetts holds now in its sinking and other funds nearly S30,000- 000 of Massachusetts municipal securities, con- stituting nearly tliree-fourths of all securities held in these funds. Its annual purchases aggregate nearly $4,000,000. Its purchases direct from cities and towns have already exceeded $1,000,000 this year. It would 1)0 but a sinii)Io extension of
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the state's function to cooperate, as indicated, in a joint, Municipal Bond Selling Agency an dCredit Union. It would be a distinct advance in the efficiency of state and municipal financing; and what is even more important, a long step toward the emancipation of the people from banker-control.
CORPORATE SELF-HELP
Strong corporations with established reputa- tions, locally or nationally, could emancipate themselves from the banker in a similar manner. Public-service corporations in some of our leading cities could easily establish ''over-the-counter" home markets for their bonds; and would be greatly aided in this by the supervision now being exercised by some state commissions over the issue of securities by such corporations. Such corporations would gain thereby not only in freedom from banker-control and exactions, but in the winning of valuable local support. The investor's money would be followed by his sym- pathy. In things economic, as well as in things political, wisdom and safety lie in direct appeals to the people.
The Pennsylvania Raiboad now relies largely upon its stockholders for new capital. But a
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corporation with its long-continued success and reputation for stability should have much wider financial support and should eliminate the banker altogether. With the 2,700 stations on its system, the Pennsylvania could, with a slight expense, create nearly as many avenues through which money would be obtainable to meet its growing needs.
BANKER PROTECTORS
It may be urged that reputations often outlive the conditions which justify them, that outlived reputations are pitfalls to the investors; and that the investment banker is needed to guard him from such dangers. True; but when have the big bankers or (their little satellites protected the people from such pitfalls?
Was there ever a more be-bankered railroad than the New Haven? Was there ever a more banker-led community of investors than New England? Six years before the fall of that great system, the hidden dangers were pointed out to these banker-experts. Proof was furnished of the rotting timbers. The disaster-breeding poli- cies were laid bare. The bankers took no action. Repeatedly, thereafter, the bankers' attention was called to the steady deterioration of the
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structure. The New Haven books disclose 11,- 481 stockholders who are residents of Massa- chusetts; 5,682 stockholders in Connecticut; 735 in Rhode Island; and 3,510 in New York. Of the New Haven stockholders 10,474 were women. Of the New Haven stockholders 10,222 were of such modest means that their holdings were from one to ten shares only. The investors were sorely in need of protection. The city directories disclose 146 banking houses in Boston, 26 in Providence, 33 in New Haven and Hartford, and 357 in New York City. But who, connected with those New England and New York bank- ing houses, during the long years which pre- ceded the recent investigation of the Interstate Commerce Commission, raised either voice or pen in protest against the continuous mismanage- ment of that great trust property or warned the public of the impending disaster? Some of the bankers sold their own stock holdings. Some bankers whispered to a few favored customers advice to dispose of New Haven stock. But not one banker joined those who sought to open the eyes of New England to the impending disaster and to avert it by timely measures. New England's leading banking houses were ready to "cooperate" with the New Haven management
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in taking generous commissions for marketing the endless supply of new securities; but they did nothing to protect the investors. Were these bankers blind? Or were they afraid to oppose the will of J. P. Morgan & Co.?
Perhaps it is the banker who, most of all, needs the New Freedom.
CHAPTER VII BIG MEN AND LITTLE BUSINESS
J. P. Morgan & Co. declare, in their letter to the Pujo Committee, that ''practically all the railroad and industrial development of this coun- try has taken place initially through the medium of the great banking houses." That statement is entirely unfounded in fact. On the contrary nearly every such contribution to our comfort and prosperity was "initiated" without their aid. The ''great banking houses" came into relation with these enterprises, either after success had been attained, or upon "reorganization" after the possibility of success had been demonstrated, but the funds of the hardy pioneers, who had risked their all, were exhausted.
This is true of our early railroads, of our early street railways, and of the automobile; of the telegraph, the telephone and the wireless; of gas and oil; of harvesting machinery, and of our steel industry; of the textile, paper and shoe industries; and of nearly every other important branch of manufacture. The initiation of each
13«
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of these enterprises may properly be character- ized as "great transactions"; and the men who contributed the financial aid and business man- agement necessary for their introduction are entitled to share, equally with inventors, in our gratitude for what has been accomplished. But the instances are extremely rare where the origi- nal financing of such enterprises was undertaken by investment bankers, great or small. It was usually done by some common business man, accustomed to taking risks; or by some well-to- do friend of the inventor or pioneer, who was influenced largely by considerations other than money-getting. Here and there you will find that banker-aid was given; but usually in those cases it was a small local banking concern, not a "great banking house" which helped to "initi- ate" the undertaking.
RAILROADS
We have come to associate the great bankers with railroads. But their part was not conspicu- ous in the early history of the Eastern railroads; and in the ^liddle West the experience was, to some extent, similar. The Boston & Maine Railroad owns and leases 2,215 miles of line; but it is a composite of about ICG separate railroad
BIG MEN AND LITTLE BUSINESS 137
companies. The New Haven Railroad owns and leases 1,996 miles of line; but it is a compos- ite of 112 separate railroad companies. The necessary capital to build these little roads was gathered together, partly through state, county or municipal aid; partly from business men or landholders who sought to advance their special interests; partly from investors; and partly from well-to-do public-spirited men, who wished to promote the welfare of their particular communi- ties. About seventy-five years after the first of these railroads was built, J. P. Morgan & Co. became fiscal agent for all of them by creating the New Haven-Boston & Maine monopoly.
STEAMSHIPS
The history of our steamship lines is similar. In 1807, Robert Fulton, with the financial aid of Robert R. Livingston, a judge and statesman — not a banker — demonstrated with the Claremont, that it was practicable to propel boats by steam. In 1833 the three Cunard brothers of Halifax and 232 other persons — stockholders of the Quebec and Halifax Steam Navigation Com- pany— joined in supplying about $80,000 to build the Royal William, — the first steamer to cross the Atlantic. In 1902, many years after
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individual enterprises had developed practically all the great ocean lines, J. P. IMorgan & Co. floated the International Mercantile Marine with its 852,744,000 of 4 1/2 bonds, now selling at about 60, and $100,000,000 of stock (pre- ferred and common) on which no dividend has ever been paid. It was just sixty- two years after the first regular line of transatlantic steamers — The Cunard — was founded that Mr. Morgan organized the Shipping Trust.
TELEGRAPH
The story of the telegraph is similar. The money for developing Morse's invention was supplied by his partner and co-worker, Alfred Vail. The initial line (from Washington to Balti- more) was built with an appropriation of $30,000 made by Congress in 1843. Sixty-six years later J. P. Morgan & Co. became bankers for the Western Union through financing its pur- chase by the American Telephone & Telegraph Company.
HARVESTING MACHINERY
Next to railroads and steamships, harvesting machinery has probably been the most potent factor in the development of America; and most
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important of the harvesting machines was Cyrus H. McCormick's reaper. That made it possible to increase the grain harvest twenty- or thirty- fold. No investment banker had any part in in- troducing this great business man's invention.
McCormick was without means; but William Butler Ogden, a railroad builder, ex-Mayor and leading citizen of Chicago, supplied $25,000 with which the first factory was built there in 1847. Fifty-five years later, J. P. Morgan & Co. per- formed the service of combining the five great harvester companies, and received a commission of $3,000,000. The concerns then consolidated as the International Harvester Company, with a capital stock of $120,000,000, had, despite their huge assets and earning power, been pre- viously capitalized, in the aggregate, at only $10,500,000 — strong evidence that in all the preceding years no investment banker had financed them. Indeed, McCormick was as able in business as in mechanical invention. Two years after Odgen paid him $25,000 for a half interest in the business, McCormick bought it back for $50,000; and thereafter, until his death in 1884, no one but members of the McCormick family had any interest in the business.
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THE BANKER ERA
It may be urged that railroads and steamships, the telegraph and harvesting machinery were introduced before the accumulation of investment capital had developed the investment banker, and before America's "great banking houses" had been established; and that, consequently, it would be fairer to inquire what services bankers had rendered in connection with later industrial development. The firm of J. P. Morgan & Co. is fifty-five years old; Kuhn, Loeb & Co. fifty- six years old; Lee, Higginson & Co. over fifty years; and Kidder, Peabody & Co. forty-eight years; and yet the investment banker seems to have had almost as little part in "initiating" the great improvements of the last half century, as did bankers in the earlier period.
STEEL
The modern steel industry of America is forty- five years old. The "great bankers" had no part in initiating it. Andrew Carnegie, then already a man of large means, introduced the Bessemer process in 18G8. In the next thirty years our steel and iron industry increased greatly. By 1898 we had far outstripped all competitors.
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America's production about equalled the aggre- gate of England and Germany. We had also reduced costs so much that Europe talked of the "American Peril." It was 1898, when J. P. Morgan & Co. took their first step in forming the Steel Trust, by organizing the Federal Steel Company. Then followed the combination of the tube mills into an $80,000,000 corporation, J. P. Morgan & Co. taking for their syndicate services $20,000,000 of common stock. About the same time the consolidation of the bridge and structural works, the tin plate, the sheet steel, the hoop and other mills followed; and finally, in 1901, the Steel Trust was formed, with a capitali- zation of $1,402,000,000. These combinations came thirty years after the steel industry had been "initiated".
THE TELEPHONE
The telephone industry is less than forty years old. It is probably America's greatest contri- bution to industrial development. The bankers had no part in "initiating" it. The glory belongs to a simple, enthusiastic, warm-hearted, business man of Haverhill, Massachusetts, who was willing to risk his own money. H. N. Casson tells of this, most interestingly, in his "History of the Telephone":
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"The only man who had monej' and dared to stake it on the future of the telephone was Thomas Sanders, and he did this not mainly for business reasons. Both he and Hubbard were attached to Bell primaril}" by sentiment, as Bell had removed the blight of dumbness from San- ders' little son, and was soon to marry Hubbard's daughter. Also, Sanders had no expectation, at first, that so much money would be needed. He was not rich. His entire business, which was that of cutting out soles for shoe manufacturers, was not at any time worth more than thirty- five thousand dollars. Yet, from 1874 to 1878, he had advanced nine-tenths of the money that was spent on the telephone. The first five thousand telephones, and more, were made with his money. And so many long, expensive months dragged by before any relief came to Sanders, that he was compelled, much against his will and his business judgment, to stretch his credit within an inch of the breaking-point to help Bell and the telephone. Desperately he signed note after note until he faced a total of one hundred and ten thousand dollars. If the new 'scientific toy' succeeded, which he often doubted, he would be the richest citizen in Haverhill; and if it failed, which he sorely feared, he would be a bankrupt.
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Sanders and Hubbard were leasing telephones two by two, to business men who previously had been using the private lines of the Western Union Telegraph Company. This great corporation was at this time their natural and inevitable enemy. It had swallowed most of its competi- tors, and was reaching out to monopolize all methods of communication by wire. The rosiest hope that shone in front of Sanders and Hubbard was that the Western Union might conclude to buy the Bell patents, just as it had already bought many others. In one moment of discourage- ment they had offered the telephone to President Orton, of the Western Union, for $100,000; and Orton had refused it. 'What use,' he asked pleasantly, ' could this company make of an elec- trical toy?'
"But besides the operation of its own wires, the Western Union was supplying customers with various kinds of printing-telegraphs and dial- telegraphs, some of which could transmit sixty words a minute. These accurate instruments, it believed, could never be displaced by such a scien- tific oddity as the telephone, and it continued to believe this until one of its subsidiary companies — the Gold and Stock — reported that several of its machines had been superseded by telephones.
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"At once the Western Union awoke from its indifference. Even this tiny nibbUng at its business must be stopped. It took action quickly, and organized the 'American Speaking-Tele- phone Company,' and with $300,000 capital, and with three electrical inventors, Edison, Gray, and Dolbear, on its staff. With all the bulk of its great wealth and prestige, it swept down upon Bell and his little body-guard. It trampled upon Bell's patent with as Uttle concern as an elephant can have when he tramples upon an ant's nest. To the complete bewilderment of Bell, it coolly announced that it had the only original telephone, and that it was ready to sup- ply superior telephones with all the latest improvements made by the original inventors — Dolbear, Gray, and Edison.
"The result was strange and unexpected. The Bell group, instead of being driven from the field, were at once lifted to a higher level in the business world. And the Western Union, in the endeavor to protect its private lines, became involuntarily a 'bell-wether' to lead capitalists in the direction of the telephone."
Even then, when financial aid came to the Bell enterprise, it was from cai)italists, not from l)ank- ers, and among these capitalists was William II.
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Forbes (son of the builder of the Burlington) who became the first President of the Bell Telephone Company. That was in 1878. More than twenty years later, after the telephone had spread over the world, the great house of Morgan came into financial control of the property. The American Telephone & Telegraph Company was formed. The process of combination became active. Since January, 1900, its stock has increased from $25,886,300 to $344,606,400. In six years (1906 to 1912), the Morgan associates marketed about $300,000,000 bonds of that com- pany or its subsidiaries. In that period the vol- ume of business done by the telephone companies had, of course, grown greatly, and the plant had to be constantly increased; but the proceeds of these huge security issues were used, to a large extent, in effecting combinations; that is, in buying out telephone competitors; in buying control of the Western Union Telegraph Com- pany; and in buying up outstanding stock interests in semi-independent Bell companies. It is these combinations which have led to the investigation of the Telephone Company by the Department of Justice; and they are, in large part, responsible for the movement to have the government take over the telephone business.
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ELECTRICAL MACHINERY
The business of manufacturing electrical machinery and apparatus is only a little over thirty years old. J. P. ]\Iorgan & Co. became interested early in one branch of it; but their dominance of the business today is due, not to their ''initiating" it, but to their effecting a com- bination, and organizing the General Electric Company in 1892. There were then three large electrical companies, the Thomson-Hous- ton, the Edison and the Westinghouse, besides some small ones. The Thomson-Houston of Lynn, Massachusetts, was in many respects the leader, having been formed to introduce, among other things, important inventions of Prof. Elihu Thomson and Prof. Houston. L3'nn is one of the principal shoe-manufacturing centers of America. It is within ten miles of State Street, Boston; but Thomson's early financial support came not from Boston bankers, but mainly from Lynn business men and investors; men active, energetic, and used to taking risks with their own money. Prominent among them was Charles A. Coffin, a shoe manufacturer, who became connected with the Thomson-Ht)uston Company upon its organi- zation and president of the General Electric when Mr. Morgan formed that company in 1892, by
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combining the Thomson-Houston and the Edison. To his continued service, supported by other Thomson-Houston men in high positions, the great prosperity of the company is, in large part, due. The two companies so combined controlled probably one-half of all electrical patents then existing in America; and certainly more than half of those which had any considerable value.
In 1896 the General Electric pooled its patents with the Westinghouse, and thus competition was further restricted. In 1903 the General Electric absorbed the Stanley Electric Company, its other large competitor; and became the largest manufacturer of electric apparatus and machinery in the world. In 1912 the resources of the Com- pany were $131,942,144. It billed sales to the amount of $89,182,185. It employed directly over 60,000 persons, — more than a fourth as many as the Steel Trust. And it is protected against "undue" competition; for one of the Morgan partners has been a director, since 1909, in the Westinghouse, — the only other large electrical machinery company in America.
THE AUTOMOBILE
The automobile industry is about twenty years old. It is now America's most prosperous
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business. When Henry B. Joy, President of the Packard Motor Car Company, was asked to what extent the bankers aided in ''initiating" the automobile, he replied:
"It is the observable facts of history, it is also my experience of thirty years as a business man, banker, etc., that first the seer conceives an oppor- tunity. He has faith in his almost second sight. He believes he can do something — develop a business — construct an industry — build a railroad — or Niagara Falls Power Company, — and make it pay!
"Now the human measure is not the actual physical construction, but the 'make it pay'!
"A man raised the money in the late '90s and built a beet sugar factory in Michigan. Wise- acres said it was nonsense. He gathered together the money from his friends who would take a chance with him. He not only built the sugar factory (and there was never any doubt of his ability to do that) but he made it pay. The next year two more sugar factories were built, and were financially successful. These were built by private individuals of wealth, taking chances in the face of cries of doubting bankers and trust companies.
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''Once demonstrated that the industry was a sound one financially and then bankers and trust companies would lend the new sugar companies which were speedily organized a large part of the necessary funds to construct and operate.
''The motor-car business was the same.
"When a few gentlemen followed me in my vision of the possibilities of the business, the banks and older business men (who in the main were the banks) said, 'fools and their money soon to be parted' — etc., etc.
"Private capital at first establishes an industry, backs it through its troubles, and, if possible, wins financial success when banks would not lend a dollar of aid.
"The business once having proved to be prac- ticable and financially successful, then do the banks lend aid to its needs."
Such also was the experience of the greatest of the many financial successes in the automobile industry — the Ford Motor Company.
HOW BANKERS ARREST DEVELOPMENT
But "great banking houses" have not merely failed to initiate industrial development; they have definitely arrested development because to
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them the creation of the trusts is largely due. The recital in the ^Memorial addressed to the President by the Investors' Guild in November, 1911, is significant:
"It is a well-known fact that modern trade combinations tend strongl}' toward constancy of process and products, and by their very nature are opposed to new processes and new products originated by independent inventors, and hence tend to restrain competition in the development and sale of patents and patent rights; and con- sequently tend to discourage independent inven- tive thought, to the great detriment of the nation, and with injustice to inventors whom the Con- stitution especially intended to encourage and protect in their rights."
And more specific was the testimony of the
Engineering News:
"We are today something like five years behind Germany in iron and steel metallurgy, and such innovations as arc being introduced by our iron and steel manufacturers are most of them merely following the lead set by foreigners years ago.
"Wc do not believe this is because American
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engineers are any less ingenious or original than those of Europe, though they may indeed be deficient in training and scientific education com- pared with those of Germany. We beheve the main cause is the wholesale consohdation which has taken place in American industry. A huge organization is too clumsy to take up the develop- ment of an original idea. With the market closely controlled and profits certain by following standard methods, those who control our trusts do not want the bother of developing anything new.
"We instance metallurgy only by way of illus- tration. There are plenty of other fields of indus- try where exactly the same condition exists. We are building the same machines and using the same methods as a dozen years ago, and the real advances in the art are being made by European inventors and manufacturers."
To which President Wilson's stateijent may be added:
"I am not saying that all invention had been stopped by the growth of trusts, but I think it is perfectly clear that invention in many fields has been discouraged, that inventors have been
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prevented from reaping the full fruits of their ingenuity and industry, and that mankind has been deprived of many comforts and con- veniences, as well as the opportunity of buying at lower prices.
"Do you know, have you had occasion to learn, that there is no hospitality for invention, now-a-days?"
TRUSTS AND FINANCIAL CONCENTRATION
The fact that industrial monopolies arrest development is more serious even than the direct burden imposed through extortionate prices. But the most harm-bearing incident of the trusts is their promotion of financial con- centration. Industrial trusts feed the money trust. Practically every trust created has de- stroyed the financial independence of some communities and of many properties; for it has centered the financing of a large part of whole lines of business in New York, and this usually with one of a few banking houses. This is well illustrated by the Steel Trust, which is a trust of trusts; that is, the Steel Trust combines in one huge holding company the trusts previously formed in the different branches of the steel business. Thus the Tube Trust combined 17
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tube mills, located in 16 different cities, scat- tered over 5 states and owned by 13 different companies. The wire trust combined 19 mills; the sheet steel trust 26; the bridge and structural trust 27; and the tin plate trust 36; all scattered similarly over many states. Finally these and other companies were formed into the United States Steel Corporation, combining 228 com- panies in all, located in 127 cities and towns, scattered over 18 states. Before the combina- tions were effected, nearly every one of these companies was owned largely by those who managed it, and had been financed, to a large extent, in the place, or in the state, in which it was located. When the Steel Trust was formed all these concerns came under one management. Thereafter, the financing of each of these 228 corporations (and some which were later ac- quired) had to be done through or with the consent of J. P. Morgan & Co. That was the greatest step in financial concentration ever taken.
STOCK EXCHANGE INCIDENTS
The organization of trusts has served in another way to increase the power of the Money Trust. Few of the independent concerns out of which the trusts have been formed, were listed on the
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New York Stock Exchange; and few of them had financial offices in New York. Promoters of large corporations, whose stock is to be held by the public, and also investors, desire to have their securities listed on the New York Stock Exchange. Under the rules of the Exchange, no security can be so listed unless the corporation has a transfer agent and registrar in New York City. Further- more, banker-directorships have contributed largely to the establishment of the financial offices of the trusts in New York City. That alone would tend to financial concentration. But the listing of the stock enhances the power of the Money Trust in another way. An in- dustrial stock, once listed, frequently becomes the subject of active speculation; and speculation feeds the Money Trust indirectly in many ways. It draws the money of the country to New York. The New York bankers handle the loans of other people's money on the Stock Exchange; and members of the Stock Exchange receive large amounts from commissions. For instance: There are 5,084,952 shares of United States Steel com- mon stock outstanding. But in the five years ending December 31, 1912, speculation in that stock was so extensive that there were sold on the Exchange an average of 29,380,888 shares
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a year; or nearly six times as much as there is Steel common in existence. Except where the transactions are by or for the brokers, sales on the Exchange involve the payment of twenty- five cents in commission for each share of stock sold; that is, twelve and one-half cents by the seller and twelve and one-half cents by the buyer. Thus the commission from the Steel common alone afforded a revenue averaging many millions a year. The Steel preferred stock is also much traded in; and there are 138 other industrials, largely trusts, listed on the New York Stock Exchange.
TEUST RAMIFICATIONS
But the potency of trusts as a factor in financial concentration is manifested in still other ways; notably through their ramifying operations. This is illustrated forcibly by the General Electric Company's control of water-power companies which has now been disclosed in an able report of the United States Bureau of Corporations:
*'The extent of the General Electric influence is not fully revealed by its consolidated balance sheet. A very large number of corporations are connected with it through its subsidiaries and
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through corporations controlled by these sub- sidiaries or affiliated with them. There is a still wider circle of influence due to the fact that officers and directors of the General Electric Co. and its subsidiaries are also officers or directors of many other corporations, some of whose securities are owned by the General Electric Company.
''The General Electric Company holds in the first place all the common stock in three security holding companies : the United Electric Securities Co., the Electrical Securities Corporation, and the Electric Bond and Share Co. Directly and through these corporations and their officers the General Electric controls a large part of the water power of the United States.
. . . ''The water-power companies in the General Electric group are found in 18 States. These 18 States have 2,325,757 commercial horsepower developed or under construction, and of this total the General Electric group in- cludes 939,115 h. p. or 40.4 per cent. The greatest amount of power controlled by the companies in the General Electric group in any State is found in Washington. This is followed by New York, Pennsylvania, California, Mon- tana, Iowa, Oregon, and Colorado. In five of
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the States shown in the table the water-power companies included in the General Electric group control more than 50 per cent, of the com- mercial power, developed and under construction. The percentage of power in the States included in the General Electric group ranges from a little less than 2 per cent, in Michigan to nearly 80 per cent, in Pennsylvania. In Colorado they control 72 per cent.; in New Hampshire 61 per cent. ; in Oregon 58 per cent. ; and in Washington 55 per cent.
Besides the power developed and under con- struction water-power concerns included in the General Electric group own in the States shown in the table 641,600 h. p. undeveloped."
This water power control enables the General Electric group to control other public service corporations :
"The water-power companies subject to General Electric influence control the street railways in at least 16 cities and towns; the electric-light plants in 78 cities and towns; gas plants in 19 cities and towns; and are affiliated with the electric hght and gas plants in other towns. Though many of these communities, particularly those served with light only, are
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small, several of them are the most important in the States where these water-power companies operate. The water-power companies in the General Electric group own, control, or are closely affiliated with, the street railways in Portland and Salem, Ore.; Spokane, Wash.; Great Falls, ]\Iont.; St. Louis, Mo.; Winona, IMinn.; ^Milwaukee and Racine, Wis.; Elmira, N. Y.; Ashcville and Raleigh, N. C., and other relatively less important towns. The towns in which the lighting plants (electric or gas) are owned or controlled include Portland, Salem, Astoria, and other towns in Oregon; Bellingham and other towns in Washington; Butte, Great Falls, Bozeman and other towns in Montana; Leadville and Colorado Springs in Colorado; St. Louis, Mo.; Milwaukee, Racine and several small towns in Wisconsin; Hudson and Rens- selaer, N. Y.; Detroit, Mich.; Asheville and Raleigh, N. C; and in fact one or more towns in practically every community where developed water power is controlled by this group. In addition to the public-service corporations thus controlled by the water-power companies subject to General Electric influence, there are numerous public-service corporations in other municipalities that purchase power from the hydroelectric
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developments controlled by or affiliated with the General Electric Co. This is true of Denver, Colo., which has already been discussed. In Baltimore, Md., a water-power concern in the General Electric group, namely, the Pennsylvania Water & Power Co., sells 20,000 h. p. to the Consolidated Gas, Electric Light & Power Co., which controls the entire light and power business of that city. The power to operate all the electric street railway systems of Buffalo, N. Y., and vicinity, involving a trackage of approxi- mately 375 miles, is supplied through a subsidiary of the Niagara Falls Power Co."
And the General Electric Company, through the financing of public service companies, exer- cises a Hke influence in communities where there is no water power:
"It, or its subsidiaries, has acquired control of or an interest in the public-service corporations of numerous cities where there is no water-power connection, and it is affiliated with still others by virtue of common directors. . . . This vast network of relationship between hydro-electric corporations through prominent officers and directors of the largest manufacturer of electrical machinery and supplies in the United States is highly significant. . . .
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"It is possible that this relationship to such a large number of strong financial concerns, through common officers and directors, affords the General Electric Co. an advantage that may place rivals at a corresponding disadvantage. Whether or not this great financial power has been used to the particular disadvantage of any rival water- power concern is not so important as the fact that such power exists and that it might be so used at any time."
THE SHERMAN LAW
The Money Trust cannot be broken, if we allow its power to be constantly augmented. To break the Money Trust, we must stop that power at its source. The industrial trusts are among its most effective feeders. Those which are illegal should be dissolved. The creation of new ones should be prevented. To this end the Sherman Law should be supplemented both by providing more efficient judicial machinery, and by creating a commission with administra- tive functions to aid in enforcing the law. When that is done, another step will have been taken toward securing the New Freedom. But restrictive legislation alone will not suffice. We should bear in mind the admonition with which
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the Commissioner of Corporations closes his review of our water power development:
''There is . . . presented such a situation in water powers and other public utilities as might bring about at any time under a single manage- ment the control of a majority of the developed water power in the United States and similar control over the public utilities in a vast number of cities and towns, including some of the most important in the country."
We should conserve all rights which the Fed- eral Government and the States now have in our natural resources, and there should be a complete separation of our industries from rail- roads and public utilities.
CHAPTER VIII
A CURSE OF BIGNESS
Bigness has been an important factor in the rise of the ]\Ioney Trust: Big railroad systems, Big industrial trusts, Big public service com- panies; and as instruments of these Big banks and Big trust companies. J. P. Morgan & Co. (in their letter of defence to the Pujo Committee) urge the needs of Big Business as the justification for financial concentration. They declare that what they euphemistically call "cooperation" is "simply a further result of the necessity for handling great transactions"; that "the country obviously requires not only the larger individual banks, but demands also that those banks shall cooperate to perform efficiently the country's business"; and that "a step backward along this line would mean a halt in industrial progress that would affect every wage-earner from the Atlantic to the Pacific." The phrase "great transactions" is used by the bankers apparently as meaning large corporate security issues.
Leading bankers have undoul)tcdly cooperated
during the last 15 years in floating some very
\6i
A CURSE OF BIGNESS 163
large security issues, as well as many small ones. But relatively few large issues were made necessary by great improvements undertaken or by industrial development. Improvements and development ordinarily proceed slowly. For them, even where the enterprise involves large expenditures, a series of smaller issues is usually more appropriate than single large ones. This is particularly true in the East where the building of new railroads has practically ceased. The "great" security issues in which bankers have cooperated were, with relatively few exceptions, made either for the purpose of effecting com- binations or as a consequence of such combina- tions. Furthermore, the combinations which made necessary these large security issues or underwritings were, in most cases, either contrary to existing statute law, or contrary to laws recom- mended by the Interstate Commerce Commis- sion, or contrary to the laws of business efficiency. So both the financial concentration and the combinations which they have served were, in the main, against the public interest. Size, we are told, is not a crime. But size may, at least, become noxious by reason of the means through which it was attained or the uses to which it is put. And it is size attained by
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combination, instead of natural growth, which has contributed so largely to our financial con- centration. Let us examine a few cases:
THE HARRIMAN PACIFICS
J. P. Morgan & Co., in urging the "need of large banks and the cooperation of bankers," said:
"The Attorney-General's recent approval of the Union Pacific settlement calls for a single com- mitment on the part of bankers of $126,000,000."
This §126,000,000 "commitment" was not made to enable the Union Pacific to secure capital. On the contrary it was a guaranty that it would succeed in disposing of its Southern Pacific stock to that amount. And when it had disposed of that stock, it was confronted with the serious problem — what to do with the proceeds? This huge underwriting became necessary solely because the Union Pacific had violated the Sherman Law. It had acquired that amount of Southern Pacific stock illegally; and the Supreme Court of the United States finally decreed that the illegality cease. This same illegal purchase had been the occasion, twelve years earlier, of another "groat transaction," — the issue of a S 100,000,000 of Union Pacific bonds, which were
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sold to provide funds for acquiring this Southern Pacific and other stocks in violation of law. Bankers ''cooperated" also to accomplish that.
UNION PACIFIC IMPROVEMENTS
The Union Pacific and its auxiliary lines (the Oregon Short Line, the Oregon Railway and Navigation and the Oregon-Washington Railroad) made, in the fourteen years, ending June 30, 1912, issues of securities aggregating $375,158,183 (of which $46,500,000 were refunded or redeemed); but the large security issues served mainly to sup- ply funds for engaging in illegal combinations or stock speculation. The extraordinary improve- ments and additions that raised the Union Pacific Railroad to a high state of efficiency were provided mainly by the net earnings from the operation of its railroads. And note how great the improvements and additions were: Tracks were straightened, grades were lowered, bridges were rebuilt, heavy rails were laid, old equipment was replaced by new; and the cost of these was charged largely as operating expense. Additional equipment was added, new lines were built or acquired, increasing the system by 3524 miles of line, and still other improvements and betterments were made and charged to capital
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account. These expenditures aggi'egated S191,- 512,328. But it needed no "large security issues" to provide the capital thus wisely ex- pended. The net earnings from the operations of these railroads were so large that nearly all these improvements and additions could have been made without issuing on the average more than SI, 000,000 a year of additional securities for "new money," and the company still could have paid six per cent, dividends after 1906 (when that rate was adopted). For while $13,679,452 a year, on the average, was charged to Cost of Road and Equipment, the surplus net earnings and other funds would have yielded, on the average, $12,750,982 a year available for improvements and additions, without raising money on new security issues.
HOW THE SECURITY PROCEEDS WERE SPENT
The 8375,000,000 securities (except to the extent of about $13,000,000 required for im- provements, and the amounts applied for refund- ing and redemptions) were available to buy stocks and bonds of other companies. And some of the stocks so acquired were sold at large profits, providing further sums to be employed in stock purchases.
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The $375,000,000 Union Pacific Lines security issues, therefore, were not needed to supply funds for Union Pacific improvements; nor did these issues supply funds for the improvement of any of the companies in which the Union Pacific invested (except that certain amounts were advanced later to aid in financing the Southern Pacific). They served, substantially, no purpose save to transfer the ownership of railroad stocks from one set of persons to another.
Here are some of the principal investments:
1. $91,657,500, in acquiring and financing the Southern
Pacific.
2. $89,391,401, in acquiring the Northern Pacific stock and
stock of the Northern Securities Co.
3. $45,466,960, in acquiring Baltimore & Ohio stock.
4. $37,692,256, in acquiring Illinois Central stock.
5. $23,205,679, in acquiring New York Central stock.
6. $10,395,000, in acquiring Atchison, Topeka & Santa Fe
stock.
7. $8,946,781, in acquiring Chicago & Alton stock.
8. $11,610,187, in acquiring Chicago, Milwaukee & St. Paul
stock.
9. $6,750,423, in acquiring Chicago & Northwestern stock. 10. $6,936,696, in acquiring Railroad Securities Co. stock
(Illinois Central stock.)
The immediate effect of these stock acquisi- tions, as stated by the Interstate Commerce Commission in 1907, was merely this;
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"Mr. Harriman maj' journey by steamship from New York to New Orleans, thence by rail to San Francisco, across the Pacific Ocean to China, and, returning by another route to the United States, may go to Ogden by any one of three rail lines, and thence to Kansas City or Omaha, without leaving the deck or platform of a carrier which he controls, and without duplicating any part of his journey.
"He has further what appears to be a dominant control in the Illinois Central Railroad running directly north from the Gulf of Mexico to the Great Lakes, parallel to the Mississippi River; and two thousand miles west of the Mississippi he controls the only line of railroad parallel to the Pacific Coast, and running from the Colorado River to the Mexican border. . . .
"The testimony taken at this hearing shows that about fifty thousand square miles of terri- tory in the State of Oregon, surrounded by the lines of the Oregon Short Line Railroad Com- pany, the Oregon Railroad and Navigation Company, and the Southern Pacific Company, is not developed. While the funds of those companies which could be used for that purpose arc being invested in stocks like the New York Central and other lines having only a remote
A CURSE OF BIGNESS 169
relation to the territory in which the Union Pacific System is located."
Mr. Harriman succeeded in becoming director in 27 railroads with 39,354 miles of Hne; and they extended from the Atlantic to the Pacific; from the Great Lakes to the Gulf of Mexico.
THE AFTERMATH
On September 9, 1909, less than twelve years after Mr. Harriman first became a director in the Union Pacific, he died from overwork at the age of 61. But it was not death only that had set a limit to his achievements. The multiplicity of his interests prevented him from performing for his other railroads the great services that had won him a world-wide reputation as manager and rehabilitator of the Union Pacific and the Southern Pacific. Within a few months after Mr. Harriman's death the serious equipment scandal on the Illinois Central became public, culminating in the probable suicide of one of the vice-presidents of that company. The Chicago & Alton (in the management of which Mr. Harriman was prominent from 1899 to 1907, as President, Chairman of the Board, or Executive Committeeman), has never regained the pros- perity it enjoyed before he and his ^.ssociates