O T H E R P E O PL E S M O N E Y

A N D H O W THE B A N K ER S USE IT
T HE R PE O P LE S M O N E
’

A ND HO W T H E B A NKE RS US E I T

BY

LOUIS D . BR A N D EIS

N EW YORK

C
FRED ER I K A . S T OK ES C OM P A N Y
PUBLIS HE RS
 Co m/rig h t , 1 9 1 3 , 1 9 1 4, by
THE M C C LUR E PUB LI C A TI O N S

Co pyr ig h t , 1 9 1 4 , by
FRE DE R I C K A S T O K E S C O M P A N Y
.

A ll rig h ts res erved

 P RE FA C E

WH I L E Louis D Brandeis s series o f articl e s

.
’

on the m o n ey trust w a s running i n Harp er s ’

Weekl y many in qu iries came ab out publication

in more ac c essibl e perm an e n t form E v e n with
.

out such urgenc e through the ma il however it , ,

wou l d have b een clear that these artic l es in evit

ab l y constituted a b ook sin c e they emb o di e d a n
,

an al ysis a nd a n ar r ative by that mind which on ,

the great industri al movem e nts of o ur er a is the ,

most expert in the Unite d States The inquiri e s

.

meant that the attentive public recogniz e d that

h e re w a s a contrib ution t o history Here w a s the
.

clear e st and most pro fo un d treatment ever

published on that part of our b usin e ss deve l op
ment which a s Pr e sid e nt Wilson a nd other wis e
,

men have said has come to constitut e the g r e a test

,

of our p r oblems T h e story o f our time is the

.

sto r y o f industry N o scho l ar of the f ut ur e will

.

b e abl e to d e sc r ib e our era with a uthority u nl e ss

he comprehends that expansion a nd concentr ation
w h ich followed the harn e ssing o f steam and e l e c
t ric it y the great uses o f the change an d th e g re at
, ,

v
vi P RE FA C E

exces ses N o histo r ian o f the futur e in my opin

.
,

ion will fin d among o ur cont e mporary documents

,

s o master fu l an an alysis o f why c oncentr a tio n

went ast ray I am b ut o n e among many who

.

l ook upon M r Brand e is as having in the fiel d o f

.
,

economics th e most inventive a nd soun d mi n d

,

o f o ur time Whil e his articl e s w e re run ning in

.

H arper s Weekly I had ample opportunity to

’

kn ow ho w widesprea d was the b elief a mong

intelligent men that this bril liant diagnosis o f
o ur money trust w a s the most impo r tant contri

b u t io n to c u rrent though t in many years .

“ ”
Gre a t i s one o f the words that I do not use
l oosely a nd I l ook upon Mr Brand e is as a great
, .

man I n the composition of h is intellect one

.
,

o f the most important elem e nts is h is compre

h e ns io n o f figures A s o n e o f th e le ading fin an
.

“ ’
cier s o f the country s a id to me Mr Brandeis s , .

gr e atness a s a lawyer is p art o f his g r eatness a s

a math e matician ”
M y views o n t h is sub j ect
.

ar e sufficiently indicated in the foll o wing e d ito

’
ri al in Ha rpe r s W ee kly .

AR ITHM ETI C
Ab o u t years b efo re t h e M etro p o lit an Trac ti o n
fiv e
C o mp a ny o f N e w Yo rk w e n t i n t o t h e h an d s o f a rec e i ver ,

M r B ra nd ei s c a m e d o w n fro m B o st o n a nd in a speec h a t
.
,

C o o per Un i o n pro p h es i ed th a t th at c o mp any mus t f ail .

 P RE FA C E vii
Leadi ng b ankers in N ew York and B o s to n w ere heartil y
rec o mmen di ng t h e s t o c k t o thei r cus t o mers M r Bran d ei s
. .

m ad e hi s pro p hecy merel y b y anal y z i ng t h e pu bli s hed

figures . Ho w did h e win in t h e Pi n c h o t C l av i s B all i nger
- -

c o ntro versy ? In v ari o us w ays n o do u bt ; b u t perhaps t h e

,

m o s t criti c al s tep was w hen h e c al cul ated j us t h o w l o n g it

wo uld t ake a f as t wo rker t o g o thro ug h t h e C l av i s B alli nger
-

rec o r d an d m ak e a j u d gmen t o f it ; w h ereup o n h e d ec id e d

th at M r Wi c kers h am c o ul d no t h ave m ad e his rep o rt at

.

t h e ti me it was s t at e d t o h ave b een m a d e an d theref ore it

,

mus t h ave b een pred at ed .

M o s t o f M r B ran d ei s s o th er c o ntrib u ti o ns t o curren t

.
’

hi s tory h ave i nv o l ved arith meti c When h e succeed ed in

.

preventin g a rai se in frei g ht rat es it was thro ug h an exac t

,

a nal ys i s o f c o s t .When h e g o t S avings B ank Insu ran ce

s t arted in M ass a c h usett s it was b y b ei n g abl e t o figure w h at
,

i ns uran ce o ug ht t o c o s t Wh en h e m ad e t h e b es t co ntrac t
.

b et ween a c ity and a pu blic u tility th at exi s ts in this c o untry ,

a d efini t e grasp o f t h e g as b us i ness was n ecess ary— co m

bined o f c o urse with t h e wi s d o m an d o r i g i n alit y th at m ak e

, ,

a s t atesm an He c o ul d n o t h ave i n ven t ed t h e preferen ti al

.

s h o p if th at n ew idea h ad n o t b een fo u n ded o n a prec i se

k no wl ed ge o f t h e co n diti o ns in t h e g armen t trades Wh en .

h e es t abli s he d b efore t h e Unit ed S t at es S upreme C o ur t t h e

c o ns tit u ti o n alit y o f l eg i s l ati o n aff ec ti n g w o men o nl y he ,

reli ed muc h l ess up o n reaso n th an up o n t h e a mo u n t o f k no wl

ed ge di spl ayed of wh at ac t u all y h appen s t o w o men wh en
they are o verwo rk ed— w hi c h whil e no t arith meti c i s b u ilt
, ,

o n t h e s ame in tell ec t u al q u alit y N earl y t wo years b efore

.

M r M ell en res i gned fro m t h e N ew H aven R ail ro ad M r

.
,
.

B randei s wro t e t o t h e presen t edit or of this p aper a pri v at e

l etter in whi c h h e s aid
Wh en t h e N e w H aven red uces it s di vid en d s and M ell en
res i gns , t h e Decl i ne o f N ew Haven an d Fall o f M el l en wi ll
$ ’
viii P RE FA C E
m ak e a dram ati c s to ry o f h um an in teres t with a m o ral—o r
t wo — i n c l u di ng t h e ev il s o f pr i v a t e m o n o p o l y E ven t s c an
.

n o t b e l o n g d ef erred an d p o ss ibl y y o u m ay w an t t o prep are

,

f o r thei r c o ming .

An ti c i p ati ng t h e f u t ure a l ittl e I sugges t t h e f o ll o wi n g

“
,

as an ep it a p h o r o bit u ary n o ti ce $
“
M ell en was a m as terful m an res o urcefu l c o urageo us
, , ,

bro ad o f v i ew He fired t h e i m ag in ati o n o f N ew E ngl an d ;

.

b u t b ei ng o bli que o f v i s i o n merel y di s torted its j u d gmen t

, ,

a n d s il en ce d its c o n sc i e n ce Fo r a w hil e h e t ra mp l ed with

.

i mpu nity o n l a w s h um an an d di v i ne ; b u t as h e was o b sessed ,

wi th t h e d el us i o n th at t wo and t wo m ak e five h e fell at , ,

l as t a v i c ti m t o t h e rel en tl ess ru l es o f h u m bl e arith meti c

, .

R e mem b er O S tran ger Arith meti c i s t h e firs t o f t h e

“$
, ,

sc i e n ces an d t h e m o ther o f
The exposure o f the b ad fin a ncial m anagem e nt
o f the N ew Hav e n rail road mo r e than any ,

other o n e thing l ed to the exp osure and c om

,

p re hension o f the w a stef u l methods of big busi

n e ss all over the count r y and that e xposure o f
the N ew Haven was the almost singl e handed -

work of Mr Brandeis He is a pe r son who

. .

fights against any odds while it is necessary

to fight a nd stops fighting as soon as the fight
is won Fo r a long time v er y r e sp e ctable and
.

hon e st lead er s o f fi nanc e said that his cha r g e s

against the N ew Hav e n w er e unsound and in
e xcusabl e H e kep t ah e ad A y e a r b e fo re the
. .

actual c r ash cam e how e v er h e c e as e d wo rrying

, , ,

fo r h e kn e w th e wo r k had b ee n carr i e d far e nough

 P RE FA C E ix

t o c o mp l ete itself Wh e n someone asked him

.

to t ake p art in some littl e contr oversy shortly

“
b ef ore the collaps e h e re pli e d That fight does
, ,

not need me any l onger Time a nd arithmetic

.

”
wi l l do the r e st.

This g r asp of the concrete i s combine d in Mr .

Brandeis with an e qually distinguished g r asp of

b earing and significance His imagination is as
.

notabl e as his understanding o f business I n .

thos e a ccomplishm e nts which have given h im his

plac e in Ame r ican lif e t h e two sid e s of h is mind
,

have w ork ed together The arrangement b e

.

tween the Gas C ompany a nd t h e City of B oston

r e sts on one o f the guiding p r inciples of Mr .

’
Brandeis s life th a t n o cont r act is good that is
,

not advantageous to b oth p arties to it B ehind .

his under standing of the methods o f ob taining

insuranc e a nd t h e p r oper cost o f i t to the l ab oring
man l ay a phi l osophy o f the v a st adv a nt age to
th e fib r e and ener gy of the community that woul d
com e from d e vising methods b y w hic h the lab o r
ing cl asses coul d make themselves c o m f ortabl e
thr ough their whol e lives a nd thus perhaps mak
ing unnecess ary elab or a te systems of st a te help .

The most important ide a s put f orth in the

Armstrong C om m i ttee R ep ort on i nsuranc e had
been p r evi ously suggested by M r B r and e is .
,
x P RE FA C E
acting as c ounsel f o r t h e E quitab l e p olicy
hol ders. Busin e ss and the more impo r tant
statesmanshi p w e re intimately comb ined in the
manag e ment o f the P r otocol in N e w Y o r k ,

which has d one so much to improve condi

tions in the cl othi ng indust r y The w e lfar e
.

o f the lab orer and his rel ation to h is employ e r

se e ms to M r Brandeis a s it does to al l the

.
,

most competent thi nk ers today to constitute ,

the most important question we have to solve ,

and he won the case comi n g up to the Supreme

,

C ourt o f the United Stat e s f r om O regon estab

, ,

lish ing th e constitutionality o f sp e cial prot e ctive

l e gislation for wom e n I n the Minimum Wage
.

cas e also from the S tate o f Ore gon which is

, ,

ab out to b e h e ard b efore the Sup re me C ourt h e ,

takes up what is really a l ogic al sequence o f the

’
limitation of women s hours i n ce r tain industr i e s ,

since i t w oul d b e a futil e p er fo r mance to limit

their hours and then allow their wages to b e cut
down in consequence T hese in d ustri al a ctivi ties
.

are i n l arge p art a n e x pression o f h is d eep an d

ever growing sympathy with the wor king peopl e
and unde r standing o f them Florence K e lley
.

“
on c e said $ N o man sinc e L incoln has understood
”
th e common p eo p le a s L ouis Br an d i e s d oes .
 P RE FA C E xi
While the maj ority of M r Bran d eis s great .
’

progressive a chievem e nts have b een connected

with the industrial system some have b een polit
,

ic al i n a more limit e d sense I worked with him.

t hr ough the Ball inger-Pinchot cont ro versy and ,

I never s aw a g r asp of de tail more brilli antly

combine d with high const r uctive ethi c al a nd
politic al thi nk ing After the man wh o k n e w
.

most ab out the details o f the Inter i or D epart

ment h ad b een cross ex am in e d by M r Brandeis
-
.

he c ame a nd sat d own by me a n d said $ M r “

.

Hapgoo d I have no respect for you I d o not

, .

think your motiv e s in this agitation are g ood

motives b ut I want to say that y o u h ave a
,

wonderful lawy er H e knows as much ab out

.

”
the Int er ior D epartm e nt today a s I d o In .

th a t controve r sy the power o f the adm inist r a

,

tion a n d of t h e ruling f orc e s in t h e House and

S enate were combine d to protect S e c r e tar y
Ballinger a nd prev e nt the truth from coming
to light M r B r and e is i n le a ding the fight o r
. .
,

the conserv a tion side was constantly haunt e d

,

by the id e a that ther e w a s a myst e ry somewh e r e .

The e dito r ial print e d ab ove hints a t ho w b e

solved the myst er y b ut it woul d r eq uir e much
,

mo r e space to t e ll the oth e r sid e s t h e e nt h u s

,

ias m f o r c onserv a tion the convincing ar g um e nts

,
xii P RE FA C E
fo r higher standards in office the connection ,
’
of this conspir acy with the count r y s l ar g e r
needs . S el dom is a n audience a t a h e aring so
moved as it was by Mr Bran deis s fin al plea to
.
’

the committee .

P ossibly his work on r ail roads wi ll turn o u t to b e

the most sig nifi c ant among th e many things Mr .

Brand e is has done . His argum e nts in 1 9 1 0—1 1

b e fo r e the I nterstate C omm e rce C ommission
against the raising o f rates o n the ground that
,

the way for railroads to b e mo r e prosperous was

to b e mo r e effi cient ma d e effi ciency a national
,

idea It is a cardin al point in his p hil osophy

.

th a t th e o nly real progr e ss toward a h igher na

t io n al lif e will com e through e ffi ciency in all o ur
a ctivities The seventy eight questions a ddressed
.
-

t o the ra il r oads by the I nterst a te Co mmerce

C ommission i n D ecemb er 1 9 1 3 emb ody what
, ,

is prob ably the most comp r ehensive embodim e nt

o f his tho u ght on the subj e ct .

O n nothing has he ever worked h ar d er th a n on

his diagnosis of the M oney Trust and when his ,

life com e s to b e written ( I hope many years henc e)

this wi l l b e rank e d with his railroad wo r k for
its eff e ct i n acc e l er ating industri al changes It .

is ind ee d mor e than a coincid e nce that so many

o f t h e things h e has b ee n cont e n ding fo r hav e
 P RE FA C E xiii

c o me t o p ass It is seldom that one m a n puts

.

one i d e a not t o s ay many ide as eff ective l y

, ,

b ef ore the worl d b ut it i s no exaggeration to say

,

th a t M r Br a n de is is responsibl e for the now wide

.

spre ad rec o gnition o f the i nherent weak ness of

gre a t siz e H e w as t h e first pers o n who set f orth
.

e ff ective l y the doctrine that there is a limit to the

size of greatest efficiency a nd the successful d emon
,

s t rat io n of th a t truth is a pr o foun d c o n t rib u

ti o n to the sub j ect o f trusts The d emonstr a tion

.

is p o werfull y put in his testimony b ef ore the

Sen ate Co mmittee in 1 9 1 1 a nd it is power f u ll y
,

put in this vo l ume In d estroying the delusion

.

that efficiency was a common incident o f siz e h e ,

e mph a siz e d the possibility of e f ficiency throug h

intensive d eve lo pment o f the indivi d ual t h u s ,

c onnecting this princip l e with his who l e stu d y o f

e fficiency , a n d pointing the way to i n d ustrial
democr a c y .

No t l es s not ab l e th a n the inte ll ect a n d the

constructive ab ility that h ave gone into Mr .

’
Brandeis s work are the exception al mor al qu al i
ties A ny powerf u l a nd entir ely sincere crus ad er
.

must sacrifice much M r Br a ndeis h as sacrific ed

. .

much in money in agre e ableness of soci al life

, ,

in eff ort a nd h e h as done it for principle a nd for

,

human h appiness His po w er of intensive wo r k

.
,
xiv PRE FA C E
his sust aine d interest an d wi l l and hi s cour a ge ,

have b een nec ess ary f o r l e adership N o man .

c oul d have done what he has done wi thout

b eing wi lling to d ev o te his life t o m ak ing his
dreams come true .

N o r shoul d a nyone m ake the mistak e b ecause ,

the l ab ors o f Mr Br a ndeis a nd oth e rs hav e re

.

c e n t l y brought a b out changes that the system ,

which w a s b eing attack ed has b een under m i ned .

The curr ency b ill has b een passed a nd as these ,

wor ds are written it l oo k s as if a group o f trust

,

bil ls would b e p ass ed B ut systems are not .

en d e d i n a d ay O f the truths which are em b o d

.

ie d in the essays printed in this b oo k some are ,

b e ing c arried out n o w b ut it wil l b e many many

, ,

years b efo r e the whole i d ea can b e m ad e e ff ective ;

and the r e will ther efore b e many many years
, , ,

dur ing which active citiz e ns will b e struggling f o r

those principles which are here so cl e arly so ,

e loquently so conclusively set f orth

, .

The articl e s repr i nte d here w ere al l w ri tten

“
b e fore N ovember 1 9 1 3 , The F ailure o f Bank e r
.

” ’
M anagement a ppeare d in Harp e r s Wee kly
Aug 1 6 1 9 1 3 ; th e oth e r articl e s be t w een N ov
.
, ,
.

2 2 1 9 1 3 and Dec 1 7 1 9 1 4
, .
, .

N O R MAN HA P G OO D .

M arch 1 9 14
, .
 C O N T EN T S
C HA P TE R PA GE

OUR FINAN C I AL OL I G AR C H Y .

Ho w T HE C O MB I NERS C OMB I NE
INT ERL OC K I N G D I R E C T O RAT E S

S ERV E ON E M AST E R ON LY l .

WH AT P UB LI C I TY C A N D o
WH ERE T HE BA N K E R IS S UPERFLU O U S .

B I G M EN A N D LI TT LE B U SI N E SS

A C U RSE o r B I G NE SS
THE FA I L U RE o r B AN K ER MANA G EM EN T
-
.

T HE IN E F FI C I EN C Y O F T HE OL I G AR C H S
 ’
2 O TH ER P E OPLE S M ONEY

m e n must addr ess thems e lves with an earn e st

det er mination to s er ve the long futur e and th e
”
true lib er ti e s o f m e n
.

The P uj o C ommittee— appointed in 1 9 1 2

found $

Far mo r e dangerous than all that has hap

pened to us in the past in the way o f elimination
o f competition in indust r y is th e cont r ol of c r edit

through the domi nation of these groups o ver o ur

”
b a nks and industries .

“
Whether under a diff erent c u rrency system
the r e so u rc e s in o ur banks would be great e r or
le ss is comparativ e ly immat er ial if th e y continue
to b e controlled by a small g r oup .

“
I t is impossible that ther e should b e compe
tition with all th e facilities fo r r aisi n g money or
s e lling large issues o f b onds in th e hands o f these
f e w bankers and th e ir partners and allies who ,

tog e th e r domin a te th e fi nancial polici e s o f most

o f th e existing syst e ms . Th e acts o f this
inn er gr oup as her e d e scribed have nev er thel e ss
, ,

been mo re d e st r uctive of comp e tition than any

thing accomplish e d by the t r usts fo r th e y st r ike
,

at the v er y V itals o f pot e ntial competition in

e v er y indust r y that is und er th e i r p r ot e ction
,
a
condition which if p er mitted to continu e will ,
 O U R FI NA N C IAL OL IGA R C H Y 3

render impossible al l att e mpts t o r e sto r e n o r

ma l comp e titive conditions in the industrial
wo r ld .

“
If the arter ies o f credit n o w c l ogge d well —nigh
to choking by the obstructions cr e ated t h r ou gh
the contr ol of th e se g r oups are opened so that they
may be permitted fre e ly to play th e ir important
part in the financial system competition in la r ge
,

enterprises will become possib l e and business can

be conducted on its merits instead of b eing su b
j ec t to t h e t r ibute and the good wil l of this hand
fu l Of s e lf constituted trustees o f t h e nationa l
-

”
prosperity .

T he promise of N ew Freedom was j oyously

proclaim e d in 1 9 1 3 .

The facts which the P u j o I nvestigating C om

m it t ee and its a bl e C ounsel Mr Samuel Unter
, .

myer have laid before the country S how clearly

, ,

the means b y which a f ew men cont r o l the b usi

ness o f Am erica Th e report proposes meas
.

ures w hich promise some r e li e f Additiona l reme

.

dies wi ll b e proposed C ongress wil l soon be

.

call ed upon to act .

How shall the e mancipation b e wrought ? O n

what lin e s shall we p r oc ee d ? The f a cts wh e n ,

fully und e rstood wil l teach u s

, .
 ’
4 O TH E R P E OPLE S M ONE Y

TH ED O M INANT E LE ME NT
The domin ant e l e m e nt in o u r fi nanci al o li
garchy is the inv e stment bank er Associat e d .

bank s trust compani e s and life insurance com

,

pa ni es ar e his tools . C ontrolled r ai lroads pu b lic

,

se r vice and indust r ial corporations ar e hi s su b

j ec t s Though proper ly but middl e men these
.
,
’
bankers b e st r id e as masters Am e rica s busin e ss
world so that practically no larg e enterprise can
,

b e und e rtaken successful ly without their partici

pat io n o r app r oval . These b ank ers ar e o f ,

cours e able m e n possess e d o f l arge fortunes ;

,

but th e most potent factor in th e ir cont r ol o f

busin e ss is not th e possession of extraordinary
abil ity o r huge w e alth The k e y to their power is
.

—
Combination conc e nt r ation int e nsive and com
—
p re hensiv e advancing o n thr e e distinct lines $
First $ The r e is the obvious consolidation of
b anks and trust companies ; the l ess o b vious
a ffilia t io n s— thr ough stockholdings voting trusts
,

—
and int e rlocking directo r ates o f b a nking insti
t u t io n s which are not l e gally connected ; and
’
th e j oint t r ansactions g e ntlem e n s agre e m e nts
, ,

“ ”
and banking e thics wh ich e liminate comp e ti
tion among the i n v e stm e nt b ank er s .

S ec o n d$ The re is th e consolidation o f railroads

into hug e syst e ms the l arg e combinations o f
,
 O U R FI N A N C IAL OL IGA R C H Y 5

public service corporations a nd the formation o f

industrial trusts w hi ch by making busin e ss e s so
, ,

“ ”
big that local ind e pendent banking conc er ns
,

cannot alon e supply the nec e ssa r y funds has ,

cr e ated d e pend e nce upon the associated N ew

Y ork bank e rs .

But combin a tion however inte nsive along

, ,

these li n e s only could not h ave produced the

,

—
Money Trust another and more potent factor
of combination was added .

Third $ I nv e stment bank e rs like J P Morgan , . .

C o deal er s in b onds stocks and notes e n

.
, , ,

c ro ac h e d upon the functions of the three other

classes of co rp orations with w hic h their busin e ss

b r ought them into contact They became the .

dir ecting p ower in railr oads public servic e and ,

indust r ial companies t h rough which o ur great

—
busin e ss op erations a r e conducted the ma k e r s
of b onds and stocks They becam e the directing
.

power in the life insurance compa nie s and oth e r ,

co rporat e reservoir s of t h e p e opl e s savings— t h e ’

buyers o f b onds and stocks They became the .

directing pow e r also in b a nks a nd t r ust compani e s

—the d e positar i e s o f th e quick capital o f the coun
—
try the l ife blood of business with w hich they ,

and oth er s carried on th eir ope r ations Thus .

f our distinct functions e ach essentia l to busin e ss

, ,
 ’
6 O THE R PE OPLE S M ONEY

and each e xercis e d originall y by a distinct set o f

, ,

m e n b e cam e united in the inv e stment bank er

, .

I t is to t h is uni on o f busin e ss functions that the

$
e xistence o f th e Mon e y Tr ust is mainly due .

The d e v e lopment o f o ur fi nancial oligarchy

followed in this resp e ct lines with w h ich the
, ,

histo r y o f p olitical d e sp otism has familiariz ed us $

— us urpation p r oceedi ng by gradual e ncroach
,

ment rather than by vi olent acts ; subtle a nd

O ften long concealed concentration o f distinct
-

functions which ar e b e ne fic e n t wh e n sep arat e ly

,

admi nist e r e d and dang e rous only when combin e d

,

in the sam e pe r sons It was by proc e ss e s such .

as th e se that C aesar Augustus b e came mast e r o f

R om e Th e mak e rs o f o ur o wn C onstitution
.

had in mind like dangers to o ur political liber ty

when th e y provided so carefully for the s e paration
O f gove r nmental powe r s .

TH E P R O P ER S P HERE O F T H E INV ES T ME NT
BA N K ER
The original function of the inv e stment b ank e r
was that o f d e al e r in b onds stocks and not e s ; ,

buying mainly at whol e sal e f r om co r po r ations ,

$
v i o usly n l y
Ob o a fe w o f t he i nv st m e n t b nk s e x
e a er er

cm t hi s g t p w
e re a o e r; but m an y o t h p f m i m p t n t f un c
e rs er o r or a

ti n s in t h sy st m
o e e ,
as h i
e re n a f t e r d sc i be d
e r .
 O U R FI N A N C IA L OL IGA R C H Y 7

mun icipalities st ates and gov e rnments whi ch

,

n ee d money a nd s e lling t o those se e king inv e st

,

m e nts T he bank e r p e rforms in this respect the

.
, ,

function of a merchant ; a nd the function is a

very useful o n e L arge business ent e rp r is e s are
.

conducted g e nera lly by corpo r ations The p e r .

man e nt c apital o f co r porations is r e presented by

b onds a nd stocks Th e b onds a nd stocks o f the
.

mo r e important co r po r ations ar e own e d in l arg e ,

part by small inv e sto rs who do not participate

, ,

in the manag e m e nt o f t h e company C orpora .

tions r e quir e the aid o f a bank er middl e man -

,

for th e y lack g e n er ally t h e r e putation and c l ien

t e l e ess e ntial to s e lli n g th e ir o wn b onds and stocks
d ir ect t o the investor Investors in corpo r ate
.

securities also r e quire the s e rvi ces o f a b anker

, ,

mid dl e man Th e number o f secu r iti e s upon the

.

market is v e ry large O nl y a pa r t o f th e se se
.

c u rit ies i s list e d o n the Ne w Y ork Stock E x

change ; but its listings alone compris e a b out
S ixt ee n hund re d di ff ere nt issues aggregating
ab out and e ach year new list
ings a r e made averaging about two hundr e d
and thir ty thre e to a n amount o f
-

For a small inv e sto r to mak e an intel ligent sel e c

tion f r om these many co r po r ate securities in —

d ee d to pass an int e lligent j udgmen t u p on a

,
8 O THE R P E OPLE S M ONEY
’

singl e o n e — is ordinarily imp ossibl e H e lacks the

.

ab ility the facilities th e trainin g and the tim e

, ,

ess e ntial to a p r op er inv e stigation U nl ess his .

purchase is to b e littl e b e tt e r than a gambl e he ,

n e eds th e advic e of an e xp er t wh o c ombi ning

, ,

special knowledg e with j udgm e nt has the f acil ,

iti e s and inc e ntive to make a tho r ough investiga

tion This d e p e nd e nc e b oth o f corpo r ations and
.
,

of investors upon th e banker has grown in r e c e nt

,

years sinc e wom e n and others who do n o t p ar

,

t ic ipat e in the manag e m e nt have become the

,

owne r s of so l arge a part o f th e stocks and bonds

of o ur g r eat corpo r ations O ver h alf o f the
.

stockholde r s o f the Amer ican Suga r Re fining

C ompany and n e ar ly half of th e stockholde r s o f
th e P ennsylvania R ail r oad and of the Ne w Y o r k ,

N ew Haven Hartfo r d R ail r oad are women .

G ood -
wil l —
th e p oss e ssion by a deal e r o f num
e r o u s and valuabl e re gula r customers — is always
an impo r tant e l e m e nt in m er chandising But in .

th e busi n e ss of s e lling b onds and stocks it is o f ,

e xc e ptional valu e f o r th e v er y r e ason that th e

,

small inv e stor r e l i e s so larg e ly upon th e banker s ’

j udgm e nt This confid e ntial r e lation o f th e

.

—
b ank e r to custom er s and the k nowl e dge o f th e
custom er s p r ivate a ffair s acquired incid e ntall y
’
 O TH E R P E O PL E S M ONEY
’
10

C omp a ny formed th e S tee l Trust the Har vest e r ,

Tr u st and the Shipping Trust A nd adding th e .

,

duties of und e rt aker to those o f midwife the ,

investment b ankers bec ame in times o f corporate

,

“
disaster members o f security holders ’
,
Pro -

t e c t iv e C ommitte e s then they participated as

“
R eo r ga ni zation M anagers in the reincarnation
o f the unsuccessfu l corporations and u ltimately

became directors It was in this way that the

.

M organ a ssociates acquired th e ir hold upon the

S outhern R ailway the N orthe r n P acific the
, ,

R e ading the Eric the Pére M arqu e tte t h e

, , ,

C hicago and Great W e st er n and the Cincinnati

, ,

Hamil ton D ayton O ften t h ey insur e d the

.

c ontinuance o f such control by the device o f the

voting trust ; but even where no voting trust was
creat e d a secure hol d w a s acquir e d upon re
,

organiz a tion It was in this way also that K uhn

.
,

L oe b C O became p otent in the Union P acific

.

and in the Baltimore O hio .

’
B ut the ba nker s participation in the manage
ment o f corporations was not limit e d to cas e s
o f p r omotion o r r e o r ganization An u r gent o r .

e xtensiv e need of new money w a s c o nsid e r e d a

suff ici e nt r e ason for the banker s ente r i n g a ’

boa r d o f dire ctors O ften without even such

.

e xcus e the inv e stm e nt banker h a s secu r ed a

 O U R FI NA N C IAL OL IGA R C H Y 11

place upon the B oard of D irectors through his ,

pow er ful infl uence or the c ontrol of his custom e rs ’

proxies Such se e ms to h a ve been the fatal e n

.

trance of Mr M org a n into the man agement of

.

the then prosperous N ew Y ork N ew H aven ,

Hartford R ailroad in 1 89 2 Wh en o nce a

, .

—
banker has entered the B oard wh a tever m a y
—
have be e n the occ asion his grip proves tena
c io u s and his influence usually supreme ; fo r h e

contro l s the supply of new money .

Th e inv e stment banker is n a tur al ly o n the

lookout f o r good b argains in b onds and stocks .

L ik e oth e r m e rchants h e wants to buy his

,

m e rchandise cheap B ut when h e b e com e s di

.

rector o f a co r por a tion he occupies a position

,

which prevents the transaction by which he

acquires it s corporate securities from being
properly called a bargain Can there b e rea l.

b argaining wh er e t h e same man is on b oth sid e s

o f a trad e ? The inv e stm e nt ba nker th r ough his ,

controlling influence o n the B oard of D irectors ,

d e cid e s that t h e co rp o r ation shall issue an d sell '

the securities decid e s t h e p r ic e at which it shall

,

sell them and decid e s that it shall sell t h e

,

securities to hims e lf Th e fact that ther e a re

.

other directors b e sid e s t h e banker on the Boar d

 ’
12 O TH E R P E OPLE S M ONE Y

does not in practic e p r ev e nt t h is b e ing th e result

, , .

Th e bank er who holds th e purs e st r ings becom e s

,
-
,

usuall y th e dominant spir it Thr ough voting .

$

truste e ships e xclusive fi nancial ag e ncies m e m

, ,

b ership o n executive o r finance com m itte e s o r by ,

m er e dir ecto r ships J P M o r gan C o and thei r

, . . .
,

associates held such fi nancial pow er in at least

,

thirty two transpo r tation systems public utility

-
,

corp o r ations and indust r ial companies com —

panics with a n aggregate capitalization o f $ 1 7 ,

M ainly for corp orations so con

t r o l led J P M organ
,
. C o procur ed the public
. .

mar keting in ten y e ar s of secu r ity issu e s a g g re

gating T hi s hug e sum do e s not
include any issues marketed privat e ly nor any ,

issues how e v e r mark e t e d o f intra—state cor

, ,

p o r a t io n s K uhn
. L o e b C
,
o and a few oth e r .

inv e stm e nt bankers e x er cis e similar cont r ol ov er

many oth er corp orations .

CONTR O LL IN G SE C UR IT Y B U YERS
S uch control o f railr oads public s er vice and ,

indust r ial co r porations assur es to th e i n v e stm e nt

banke r s an ampl e supply o f securiti e s at att r act
iv e p r ic e s ; and m er chandise w e ll b ought is half
sold B ut these b ond and stock m er chants a re
.

not d isp os e d to take even a slight r isk as to th e ir

 O U R FI NA N C IAL OL I GA R C H Y 13

ability to market their goods They saw that if .

they coul d control the secur ity buyer s as well as-

,

the s e c u rity mak e rs investm e nt banking would

-
, ,

ind e ed b e a happy hunting ground a n d they

,

have mad e it so .

The numerous smal l investors cannot in t h e ,

strict s e ns e b e controll e d ; but their d e pend e nc e

,

upon the banker insures th e ir being dul y in

flu e n c e d. A la r ge part h owever o f all b onds
, ,

issu e d and of many stocks are b ought by the

pro m inent corporate inv e stors ; and most pro m i
nent among these are t h e life insurance compani e s ,

t h e trust compani e s and the b anks The purchas e

, .

o f a security by these institutions not only re l ieves

the banker o f the merchandise but recommends ,

it strongly t o the small investor who bel iev e s ,

that th e se institutions are wisely managed T hese .

controlled corporate investo r s are not only l arge

customers but may b e particul arly ac c o m m o
,

dating on e s Individua l investors are moody

. .

Th e y b uy only when they want to do so They .

a r e sometimes inconv e ni e ntly r e luctant C or .

p o rat e investors if controlled may b e made to

, ,

buy when the b a nkers ne e d a market It was .

natura l that the investment b anke r s p r oceede d to

g e t contro l o f the gr e at lif e insuranc e compani e s ,

as w e ll as o f t h e trust compani e s and th e banks .

14 O THE R P E OPLE S M ONEY’

The fi e ld thus occupied is uncommonly rich .

The life ins uranc e compani e s are o u r l e ading

institutions for sa v ings Their huge sur plus and
.

r e serv e s augmented daily are always clamoring

, ,

for inv e stment N o panic o r money sho r tage

.

stops the infl ow o f new mon e y from the p e rennial

stream of p re miums o n e xisting policies and int er
est o n existing investm e nts The three great
.

—
comp a ni e s the N ew Y ork L if e the Mutu al o f
,

—
N ew Y o r k and the E quita bl e woul d have ov e r
,

O f n ew money to invest a nnu al ly ,

e ven if they did not issu e a S ing l e new policy .

—
I n 1 9 04 j ust before the Armstrong inv e stiga
—
tion th e se thr ee companies had together
o f ass e ts
. Th e y had issu e d in that
year o f new p olicies . The N ew
Y ork l e gislatur e plac e d in 1 9 06 c e rtain rest r ictions
upon th e ir growth ; so that th e ir new business
since has av e raged or only fif t y
thr e e p e r cent o f wh at it was in 1 9 04 B ut the
. .

aggre gate assets o f these companies increased in

th e l ast eight y e ars to At the
tim e o f th e Ar mstrong inv e stigation the av er age
age of th e s e thre e compa ni e s was fif t y six y e a r s-
.

Th e g r owth of assets in th e l a st eigh t year s was a bou t

h a lf as l a rg e a s t h e t o t a l g ro wth in t h e preceding

fif ty s ix years Th e s e th r e e compani e s must

-
.
 O U R FI N A N C I AL OL I GA R C H Y 15

invest a nnua ll y a b out o f n e w money ;

an d besides many o l d investm e nts expir e or are

,

chang e d and the proc ee ds must b e r e inv e sted A .

lar ge part of all lif e insurance surplus and re

s e rves are invest e d in b onds The aggregate .

b on d investments o f th e se thr ee companies o n

Janu ary 1 19 1 3 was , ,

It was natu r al that t h e inv e stment ba n k ers

s ho u ld seek to cont r o l these neve r failing reser -

v o irs of capita l George W P erkins was V ice

. .

P resident of the N ew Y ork L ife the l argest o f ,

the c ompani e s While remaining suc h h e was

.

m a de a partner in J P M organ C o a n d in
. . .
,

the fou r ye ar s preceding the Armstrong investi

g at io n his fi r m sold the N e w Y ork L ife
,

in securities The N ew Y o r k L ife is a

.

mutua l company supposed to b e control l ed by

,

it s policy hold er s
-
But as the P uj o Com m itt e e
.
,

funds the so—

“
call e d control of life insuranc e com
p a nics b y p o licy hold e rs through mutu al iz a tion
-

is a farce a nd its on l y r e su l t is to k e e p i n
off ice a se lf-c o nstituted self perpetu a ting man ,
-

”
ag e m e n t .

The E quita bl e L if e As surance S ociety is a

stoc k company and is contr oll e d by of

stock Th e divid e nd o n t h is stock is limited by

.

law to seven per cent ; but in 1 9 1 0 Mr M o r gan . .

 ’
16 O TH E R P E O PLE S M ONE Y

p aid about for par va l ue o f

this stock o r ,
a shar e Th e dividend
.

r e tur n o n the stock investm e nt is l e ss than One

e ighth o f one per c e nt ; but th e assets cont r o ll e d
.

amoun t n o w to ov er And cer t ain

of th e s e ass e ts had an especial value fo r inv e st
—
m e n t bank er s namely the l a r g e hol dings o f
,

stock in banks and trust compani e s .

The Ar mstrong investigation disclosed the

e xt e nt O f fi nancial power e xert e d through the
ins u ranc e company holdings o f ban k and trust
company stock The Committee r e commende d
.

l e gislation compelling th e insu r ance compani e s

to dispos e o f the stock within five y e ars A l aw .

to that e ff e ct was enacted but th e time was later

,

e xt e nded Th e compani e s th e n dispos e d o f a

.

pa r t o f the ir bank an d trust company stocks ;

but as th e insuranc e compani e s were controlled
,

by the investment bank er s th e se gentlemen,

sold the b ank and trust company stocks to

th e mselves .

R ef e rr ing to such pur chas e s f r om the Mutual

L ife as w e ll as fr om the E quitabl e the P uj o
, ,

C ommitt ee found
H ere th e n w ere stocks o f five impo r tant
, ,

t r u s t c ompani e s and o n e of ou r lar g e st n ational

 ’
18 O TH E R P E OPLE S M ONEY
’
golden eggs l aid by som e b ody else s goos e .

The investment bankers and th e ir associates now

enj oy that p r ivilege Th e y control the people
.

’
through the p eople s o wn money I f the bank .

e r s pow er were comm e n sur ate only with th e i r

’

wealth t h e y wo ul d h ave r e lativ e ly little i n flue n ce

,

o n Am er ican business V ast fo r tunes l ike t h ose

.

o f the Astors are n o doub t r e g re ttable They .

are inconsistent with democracy They are u n .

socia l And th e y seem peculia r ly unj ust when

.

they rep re sent largely unearn e d incr e ment B ut .

th e wealth o f the Asto r s do e s not endang e r

p olitical o r indust r ial lib er ty It is insignifi cant
.

in amount as compared with t h e agg re gate wealth

o f Am er ica or even of N e w Y o r k City
,
I t lacks .

significance l arg e ly b ecause its own er s have only

th e incom e fr om their own w e alth Th e Asto r .

w e a l th is static Th e wealth of the M o r gan

.

associates is dynamic The power a nd the .

g r owth o f power o f o ur financial oligarchs com e s

f r om wi e lding the savings and quick capita l o f
others In two o f the three g re at life insuranc e
.

c ompanies the influenc e o f J P M o r gan .Co . .

and th e ir associat e s is exe r t e d without any in

di vidual inv e stm e nt by th e m whatso e v er E v e n .

in th e E quitabl e wh ere M r M o r gan bought an

,
.

actual maj o r ity of all th e outstanding stock his ,

 O U R FI N A N C IAL OL IGA R C H Y 19

investment amounts t o little mor e than o n e half -

o f one p e r c e nt o f the assets o f th e company

. .

Th e fetters which bind the people are f o rg e d from

’
t h e people s o wn gold .

’
But the reservoir of other people s m on e y ,

f r om which the investment bank er s n o w draw

th e ir g r eat e st power is n o t the life insur ance
,

companies but t h e banks a nd the trust companies

, .

Bank dep osits r epresent the really quic k capital

of the nation They are the life blood o f busi
.

nesses Their e ff e ctive fo r c e is much g r eater than

.

t h at of an e qual amount o f wealth per manently

inv e st e d The 34 banks and t r ust compani e s
.
,

which the P uj o C ommitt e e d e clar e d t o b e di re ctly

controll e d by the M o r gan associat e s h e ld ,

in deposits C ont r ol o f these institutions

.

m e ans t h e ability t o lend a large pa r t o f th e se

funds dire ctly and indi re ctly to th e ms e lves ; and
, ,

what is often even more important the power ,

to prevent the funds b e ing lent to any rival in

t eres t s. These huge dep osits can in the dis ,

c re tion of those in control b e us e d to meet th e

,

t empor ary needs o f th e ir subj ect co r p orations .

When bonds and stocks are issu e d to financ e

per manently thes e co rp o r ations th e bank depo s
,

its can in larg e part b e loan e d by the investm e nt

, ,
 O TH E R PE OPLE S M ONEY
’
20

bankers in contr ol to thems e lves a nd t h eir asso

ciat e s ; so that securiti e s bo u ght may b e ca rried
by th e m until sold to inv e sto r s O r thes e b ank
, .

d e posits may b e loan e d to alli e d ba n k er s or ,

j obbers in secur iti e s o r to sp e culato r s to enabl e

, ,

th e m to car r y the b onds or stocks E asy money .

t e nds to mak e s e cur iti e s rise in the mar k e t .

Tight mon e y nearly always mak e s them fall .

The co n t r ol by the le ading inv e stment bank er s

ov er th e banks and trust companies is so g r eat ,

that th e y can oft e n d e t er min e for a time the mar

, ,

k e t fo r mo n e y by l e nding o r re fusing to l e nd on
th e S tock E xchange In this way among oth er s
.
, ,

th e y hav e p ow er to a ff e ct th e g e n er al t re nd o f
p r ic e s in b onds a n d stocks Thei r p ow er ov er a
.

pa r ticular s e c u rity is ev e n g re at er Its sale on .

th e mark e t may d ep e nd upon wheth er th e sc our

ity is favo re d o r disc r iminat e d against when
o ff ere d to th e banks and trust c ompani e s as ,

collat er al fo r loans.

’
Furth er mo re it is the inv e stment b anke r s
,

access to othe r p e opl e s mon e y in contr oll e d

’

banks and t r ust companies which alon e e nabl e s

a n y individual ba n ki n g conc er n to tak e so la r g e

pa r t of th e an n ual output o f bonds and stocks .

Th e bank er s own capi t al how e v er la r g e would

’
, ,

soon b e e xhaust e d And e v e n th e loanabl e

.
 O U R FI N A N C IAL OL IGA R C H Y 21

funds Of the banks would often b e e xhausted ,

but for th e la r ge deposits made in those banks

by t h e lif e ins ur anc e r ailr oad public s e rvice and
, , ,

indust r ial co rpo r ations w h ich t h e bankers also

contr ol O n D ecemb er 3 1 19 12 the t h ree l e ad
.
, ,

ing lif e insu rance compani e s had d e posits in

banks and t r ust compani e s aggr e gating
As the P uj o C ommitt ee finds $
Th e m e n who th r ough th e ir contro l ov e r t h e
funds o f o ur rail r oads and indust r ial companies
ar e able to dir e ct where such funds sh al l be kept
and thus to create these great r e servoirs o f the
’
p e op l e s mon e y a re th e on e s who ar e in p osition
,

to tap thos e reservo irs for the ventur e s in which

th e y are interested and to prevent their be ing
tapped fo r purposes o f which th ey do not approv e .

The l atter is quite as important a factor as the

fo r m e r I t is t h e c ontrolling consid e ration in its
.

e ff e ct on comp e tition in the railroad and industrial

”
wo r ld.

HAV IN G Y O UR C A K E AND EA TIN G IT TO O

But th e power o f th e inv e stm e nt banker over

oth e r peopl e s mon e y is oft e n more dir e ct and
’

eff e ctive than that e xerted through controlled

banks and t r ust companies J P M o r gan C o
. . . .

achi e ve the suppos e dly impossibl e f e at of having

 ’
22 O THE R P E OPLE S M ONEY

their cak e and e at ing it too Th e y buy the b onds

.

and stocks o f cont r oll e d rail r oads and industrial

conc er ns and pay th e pur chase p r ice ; and still
,

do not pa r t with th e ir mon e y This is a ecom .

p l is h e d by th e simpl e d e vice of b ecoming the ban k

o f d e p osit of th e cont r olled co r p orations inst e ad ,

o f having th e company deposit in some merely

c ontroll e d bank in whose op er ation other s have

at least som e sh ar e When J P M organ
. . CO . .

buy an issu e of s e c u riti e s the p u r chase mon e y ,

instead o f b e ing paid over to th e co r poration is ,

r e tained by the banker for the co r p o r ation to ,

b e dr awn upon only as th e funds ar e ne e d e d by

the co rp o r ation And as the s e cu r ities are issu e d
.

in la r g e blocks and th e money r ais e d is O ften not

,

all sp e nt until lo n g th ere aft er th e aggr e gate o f

,

th e balanc e s r emaini n g in th e banke r s hands a r e ’

hug e Thus J P M organ C o ( including their

. . . .

P h il adelphia hous e call e d Drex el

, C o ) h e ld .

on N ov e mb er 1 19 12 d eposits aggr egating

, ,

P O W ER AND PE LF
Th e op e rations o f so compr e hensive a syst e m
of conc e nt r ation n e c e ssar ily d e v e lop e d in th e
bank er s ov er w ee ni n g pow e r And t h e bank er s
.
’

pow er g r ows by what it f ee ds on P ow e r b e g e ts .

 O U R FI NA N C IAL OL IGA R C H Y 23

wea l th ; and added w e alth opens ever new o ppo r

t u nit ies f o r the acquisition o f wealth and p ower .

The oper ations o f t h ese bank ers a re so vast and

nume r ous that even a v er y r e asonab l e comp e nsa
tion f or the service perform e d by the bank er s ,

w ou l d in the aggregate p r oduce for them in

, ,

com e s so large as to res ul t in huge accumul ations

of capita l But th e compensation t aken by the
.

ba nkers a s commissions or p r ofits is often far

from reas o nable O ccupying as th e y so ire
.
,

quently do t h e inconsistent position of b eing at

,

the same tim e sel l er and buy e r the standard for ,

s o- call e d c ompensation a ctually applied is not ,

“ ” “
the R ul e of reason but Al l t h e t rafli c w ill
,

b ear. And this is true even wh e re th e re i s no

S inister motive The weakn e ss o f human nature
.

prevents men f rom b e ing good j udg e s o f the ir

own deservings .

Th e syndicate form e d by J P M organ . Co . .

t o underwrite the United S tates S te e l C orp or a

tion took for its s e rvic e s s e curiti e s whic h nett e d
in cash O f this huge su m J P
. . .

M o r gan C O received a s syndicate managers

.
, ,

in addition to the sh ar e w hic h they

were entitled to rec e ive as syndic a te m e mbers .

This su m o f was only a part o f the fees

paid f or the service o f monopolizing the stee l in
 ’
24 O TH E R PE OPLE S M ONE Y

du st ry . I n addition to the commissions taken

spec ifically for o r ganiz ing the United S tat e s
Steel C o r poration lar g e sums wer e paid for
,

organiz ing th e s e v eral companies o f which it is

compos e d Fo r instance the N ational Tub e
.
,

C ompany was capitaliz e d at of

stock ; o f which was common stock .

Half of this was taken by J P . .

M o r gan C o and thei r associat e s for promotion

.

s e rvices ; and the stock so taken

b e came later e xchang e able for of

St e el C ommon C ommission er of C o r porations

.

H er b er t K nox Smith f ound that,

“
M o r e than of the st o ck o f the
St ee l C o rp oration was issu e d dir e ctly o r in
d ir ectly ( through exchang e ) for m e re p r omo
tion o r und er writ ing services In other words
.
,

n e arly o n e-s e venth o f the total capital stoc k

o f t h e S t e el C o r poration appears to have b een

’
issu e d d ir ectly o r indi re ctly t o p r omoters
s er vices .

Th e so—called fe e s and commissions taken b y

th e bank er s and associates upon t h e organiz a
ti on o f the trusts have been e xceptionally
la r g e B ut e v e n aft e r th e trusts a re successfully
.

launch e d th e e xactions o f th e bank er s ar e oft e n

 ’
26 O THE R P E OPLE S M ONEY

n e w issue as soon as announ ced was in suc h

, ,

d e mand that th e pub lic o ff e re d an d was for

months willing to buy at 1 06 bonds which th e
C ompany w er e to pay J P M o r gan
. . Co $ 1 .
,

to be willing to take at par .

W HY T H E BA N K S BE C AME I NV ES TME NT B AN K ERS

These l arg e profits fr om promotions under ,

writings and s e c urity purchases led to a re v o l u

t io n ary change in th e conduct of our leading
b a nking institutions It was obvi ous that con
.

t r ol by th e investment bank er s o f the d e posits

in banks a nd t r ust companies was an e ssential
e l e ment in the ir sec uring these huge profits .

“
And the bank offi c er s naturally asked Wh y ,

then should not the bank s and t r ust companies

share in so p r ofitabl e a fie l d ? Why should not
th e y themselves b ecome investm e nt b ankers
$
too with all the new functions incid e nt to Big
,

T o do so would invo l ve a d e
partur e fr o m the l egitimate sph e re o f the
b anking b usiness w hi ch is the making o f t e m
,

porary l oans to business conc e rns B ut th e

.

tempt a t i on was irr e sistible The invasion of

.

the investm e nt bank er into the b anks field o f ’

op e ration was follow e d by a count e r invasion

by th e b a nk s into the r e alm o f the inv e stm e nt
 O U R FI N A N C IAL OL IGA R C H Y 27

b anker Most prominent among the b anks

.

w ere the N ational City and the Fi r st N ational

of N ew Y ork But thei r s was n o t a hostile
.

invasion The contending f orc e s met as al lies

.
,

j oined forces to control t h e business of the

“ ”
country and to divide the sp oils
,
. The al
li e n e e was cement e d by voting trusts b y int e r
,

l ocking directorates and by j o int ownerships .

”
Th e re resu l ted the f ull est c ooper a tion ; a nd
ev e r more railroads public service c orporations
, ,

and industria l conc er ns w ere brought into

compl e te sub j ection.
 C HAP T E R II
Ho w T HE C OM B I N ERS C O M B I NE

AM ON G th e alli e s two N e w Y ork banks

,

th e N ational City and th e Fir st N ational

stand p re eminent Th e y constitute with th e
.
,

M o r gan fir m th e inn e r g r oup of th e M on ey

,

T r ust E ach of th e two b anks lik e J P M o r

.
,
. .

gan Co has hug e r e sour ces E ach o f th e

.
,
.

two b anks lik e th e fi r m o f J P M o r gan

,
. Co . .
,

has b ee n dominated by a g e nius in combination .

I n the N ational City it is James S tillman ; in

the F irst N ational G e o r g e F Bak e r E ach of
,
. .

these g e ntl e m e n was fo r m e rly Pre sid e nt and is ,

now C hai rman o f th e Boa r d o f D ir e cto r s T h e .

r e sour c e s of th e N ational City Bank ( including

its Siam e s e twin s e curity company ) ar e about
-

those o f th e Fi r st N ational Bank

( including its Siam e s e twin s e cu r ity company )
-

a re about Th e re sourc e s of t h e
M o r gan fi r m have not b ee n discl os e d But it .

app e ar s that th e y hav e avail abl e fo r thei r op er a

tio n s also hug e d e posits f r om th e ir subj ects ;
, ,

d e posits r e p ort e d as
 HOW TH E C O MB I NER S C O MB I NE 29

The p r ivat e fo r tun e s o f th e chi e f acto r s i n th e

combination have not b ee n asc er tain e d B ut .

sporadic evid e nc e indicat e s how g re at a r e the

possibiliti e s of accumulation when o n e h as t h e
“ ”
use o f other p e opl e s money ’
M r M o r gan s
. .
’

w e alth b e cam e p r ov e rbial O f Mr S tillman s

. .
’

many inv e stments only o n e was sp e cifically

,

r e ferr ed to as h e w a s in E u r ope during the

,

inv e stigation and did not t e stify B ut that o n e

, .

is significant H is. share s in th e N ational

City Bank a r e wo r th ab out Mr .

Jacob H S chi ff aptly d e sc r ib e d this as a v er y

.

”
nice inv e stm e nt .

O f M r Bak er s inv e stm e nts we know mo re

.
’
,

as h e t e stifi e d o n many subj e cts His .

sha re s in th e F irst N ational Bank a re wo r th at

l e ast His stocks in six oth er N e w
Y ork banks and t r ust compani e s a r e tog e th e r
worth ab out Th e scal e o f his in
v e stm e nt in rail r oads may b e inf erre d fr om his
fo r m er holdings in th e C e nt r al R ailr oad o f N e w
Jers e y H e was its la r g e st stockhold er— so la r ge
.

that with a f e w fr i e nds h e h e ld a maj o r ity of

th e p ar valu e of outstanding stock ,

which t h e Re ading b ought at $ 1 6 0 a shar e .

H e is a dire ctor in 2 8 oth er rail r oad compani e s ;

and presumably a stockholde r in at least as , ,
 ’
30 O TH E R P E OPLE S M ONE Y

many The full extent o f his fo r tune was not

.

inqu ire d into fo r that was not an issu e in th e

,
'

inv e stigation B ut it is n o t sur p r ising that M r

. .

B ak er saw little ne e d o f n e w laws Wh e n ask e d .

“
Yo u think e v er ything is all r ight as it is
”
in this wo r ld do you not ?
,

H e answ er ed
“
Pre tty n e a r ly .

RAM I F I C A TIO N S O F PO W ER
But w e alth exp re ss e d in figures gives a wholly
inad e quat e pictu re o f th e alli e s pow er Th e i r
’
.

w e alth is dy n amic I t is wi e ld e d by genius e s

.

in comb ination I t fi nds its p r op er exp re ssio n

.

i n m e ans of c ont r ol T o comp re h e nd th e pow er

.

o f the alli e s w e must t r y to visualiz e th e ra m ifi

cations t h r ough which the fo r ces op er ate .

M r B ak er is a directo r in 2 2 c o r po r ations
.

having with th e ir many subsidia r ies agg re gat e

, ,

r e so u rc e s o r capitalization of
B ut th e dir ect and visibl e p ow e r o f th e Fi r st
N ational B ank which M r Baker dominat e s
,
.
,

extends furth e r The P uj o r e po r t shows that

.

its dir e cto r s ( including Mr B ak e r s s o n) ar e

.
’

dire cto r s in at l e ast 2 7 oth er c o r po ra tio n s

with re so u r c e s o f That is th e ,

F ir st N ational is r e p re s e nt e d in 4 9 co r po r ations ,
 HOW T H E C O MB I NER S C O MB I NE 31

with agg r egate r e sou r c e s or capitaliz ation of

I t may h elp to an app r eciation o f the alli e s ’

power to name a few of the more promin e nt

c orpor a tions in which f o r instance Mr Bak e r s
, , .
’

influ e nce is exerted visibly and directly— as

—

voting trustee executive c ommittee man or

,

simp l e director .

1 B anks Tru st and Lif e I nsu ranc e Co m panies

.
, ,

Fir st N ationa l Bank o f N e w Y o r k ; N ational

B ank o f C omm er c e ; Fa r mers Loan an d Trust ’

C ompany ; M utua l L if e I nsu r ance C ompany .

2 R ailroad (Co m panies $ N e w Y ork C e ntral

.

L in e s ; N e w Haven Re ading Er ie L ackawanna

, , , ,

L e high V all e y S outh e rn N orthern P acific

, , ,

Chicago Bu r lington
, Quincy .

3 P u blic S ervice Corpora tion s $ Am e rican T el e

.

g r aph T ele phon e C ompany Adams E xpr e ss ,

C ompany .

4 I n du stria l Corporations $ United S tat e s S t ee l

.

C o r p o r ation P ullman C ompany

,
.

Mr S tillman is a dire cto r in only 7 corp o r a

.

tions with agg re gate ass e ts o f

,

b ut th e di re cto r s in th e N ational City B ank ,

which he dominates a r e dir e cto r s in at least 4 1

,

other corp orations which with th e ir subsidia r i e s

, ,
32 O TH E R PE OPLE S M ONE Y
’

hav e an ag g re gat e capitaliz ation or r e sources o f

Th e m e mb er s o f t h e firm o f
J P M o r gan
. . Co t h e ack nowledg e d l e ad e r
.
,

of th e alli e d f orc e s hold 72 dir ecto r ships in 4 7

,

o f the la r gest co rp o r ations o f th e c ountry .

Th e P uj o C ommitt e e fi nds that th e m e mb e rs

o f J P Mo r gan
. . C O and th e dir e ctors o f th e ir
.

cont r oll e d t r ust compani e s an d of the Fi r st

N ational and the N ational City B ank together
hold
“
On e hun dr e d and e ighteen directo r ships in
3 4 banks and t r ust compani e s having total re
sourc e s o f and total d e posits of

“
Thir ty dir e cto r ships in 1 0 insuranc e c om
panics having total ass e ts of
“
O n e hundr e d and fiv e dire cto r ships in 3 2
t r anspo r tation syst e ms havi n g a total capitaliza
tion o f and a total mileag e ( e x
cluding e xpress companies and st e amship lines )
of
S ixty three d ire cto r ships in 2 4 p r oducing
-

and t r ading c o r p o r ations havi n g a total capital

iz a t io n of
“
Tw e n ty fiv e dire cto r ships in 1 2 public utility
- -

co r po r ations having a total capitaliz ation of

 O TH ER PE OPLE S M ONEY
’
34

n e ar ly in which th e M o r gan alli e s

ar e r e p r esent e d acco r ding to the dire ctories o f
dire cto r s
.

S ec o n d$ Th e P uj o sch e dul e does n o t includ e

any c or p oration with resources o f l e ss than
But th e s e fi nancial giants have
shown th e i r humility by becoming dir e ctors in
many such Fo r instanc e m e mb e rs o f J P
.
, . .

M organ Co and di re cto r s in th e N ational

.
,

City Bank and th e First N ational Bank ar e also

directo r s in 1 58 su c h co r po r ations Available .

p ub lications disclos e th e capitaliz ation o f only

3 8 o f th e s e but thos e 3 8 aggre gate
,

Th ird$ The P uj o schedule includ e s only the

corpo r ations in which the M o r gan associates
actually app e a r by nam e as dir ectors It does .

not includ e those in which th e y are rep r es e nt e d

by dumm i e s o r oth er wis e For instance the
,
.
,

M organ influ e nce c er tainly e xtends to the K ansas

City T e rminal R ailway C ompany for w hich th e y,

have mark e t e d since 1 9 1 0 ( in connection with

others ) four issu e s agg re gating
But no m e mb er o f J P M o r gan . . C o o f th e .
,

N ational City Bank o r o f th e First N ational

,

Bank app e a r s on the K ansas City T e rminal

dir e cto r at e
.

Fo u r th $ Th e P uj o sch e dul e do e s not includ e

 HOW T H E C O MB I NER S C O MB I NE 35

al l the subsidiar ies of the c o r porations schedul ed .

Fo r instanc e t h e capitaliz ation o f t h e N ew

,

Haven Syst e m is given as That

su m represents the b ond and stock capital o f
th e N ew Hav e n Railroad B ut the N e w Haven .

S ystem comprises many cont r ol l ed co r p o r ations

whose capitaliz ation is only to a slight ext e nt in
clude d dir e ctly o r indirectly in the N ew Haven
R ailr oad balance sheet The N ew Haven like
.
,

most l ar ge c orpo r ations is a holding company

,

also ; a nd a holding comp a ny may contro l su b

s idiaries while owning but a small part of t h e
’
latt ers outstanding securiti e s O nly the smal l .

par t so held will b e r e presented in t h e holding

’
company s b alance sh ee t Thus whil e the N e w.
,
’
Hav e n R ailr oad s capitaliz ation is only $ 385
—and that su m only appears in t h e P uj o
—
sched u l e the c apitalization o f t h e N ew H a ven
System a s shown b y a ch ar t submitte d t o the
,

Committee is o ver twice as gre a t ; name l y

, ,

It is cl e ar there f ore that the

, ,

ref e rred t o by th e P uj o C ommitt ee unde r states ,

t h e ext e nt o f conc e nt r ation e ff e cted by t h e inner

group of the M o ney Trust .
 ’
36 O TH E R PE OPLE S M ONE Y

C EME NTIN G TH E T R IP L E A LL I A NC E
Care was taken by thes e buil d e rs o f imperial
power that th e ir structure shoul d b e enduring .

I t h as been buttressed o n every side b y j oint

own e rships and mutual stockholdings as well as ,

by c l os e per sonal relationships ; f o r dire ctorships

are epheme r al and may end with a n e w election .

Mr M organ and his partners a cquired one

.

sixth o f th e stock o f the Fir st N ationa l B an k ,

and made a investment in the stock

o f the N ational City Bank Then J P M organ
. . .

C o the N ational City and the Fir st N ational

.
, ,

th e ir dominant ffi — M S tillman and

( o r O c e rs r .

Mr B ak e r ) acquired tog e th e r by stock purchases

.
,

and voting t r usts c ontr ol o f the N ationa l Bank

,

o f C omm e rc e with its

,
o f resources ;
o f the C has e N ational with , o f th e

Guaranty Trust C ompany with ,

’
o f the Bankers Trust C ompany with ,

0 00 ; and o f a numb e r o f small e r b ut important , ,

fi nancial institutions They becam e j oint voting

.

t r uste e s in great ra ilroad systems ; and fi nally

( as if the allies w er e unit e d into a single conc er n )
—
l oya l and effici e nt s e rvice in the b anks like that
r e nd ere d by M r D avison and Mr L amont in
. .

—
the First N ational was r e ward e d by promotion
 HOW TH E C O MB I NER S C O MB I NE 37

to mem b ership in the fir m of J . P Morgan

.

Co .

TH E P R O V INCI A L A LL I ES
Thus equipped a nd b ound together J P ,
. .

Morg a n C o the N ational City and the Fi r st

.
,

N ational eas ily domin a ted America s financial ’

center N e w Y o r k ; f or c ertain other important

,

bankers t o b e hereafter mentioned w e re held

, ,
“ ” ’
in restr a int by gentl e men s a gr e ements .

The thr e e a lli e s dominated P hil ad e lphia too ;

fo r the firm of Drexel C o is J P Morg a n . . .

C o under another name But ther e are two

. .

other important money centers i n America ,

B oston a nd C hicago .

In B oston th ere are two large intern a tional

—
b anking houses L ee Higginson Co a nd .
, ,

K idder P eab ody Co — b oth long esta bl ish e d

.
,

a nd rich ; and eac h p ossessing a n extensive ,

wea l thy clientele o f eager investors in b onds a nd

stocks Since 1 9 07 each of th e se firms has pur
.

chased or und e r written ( p r incipally in c o nj u n c

tion with other ba nk ers ) ab out 1 00 diff erent
secu r ity issu e s of t h e gr e ater int e rstate c orp ora
tions the issues of each banker amounting in
,

the agg re gate t o over C one en

t ra t io n of b a nking capital has proc e eded e v e n
38 O TH E R P E OPLE S M ONEY ’

furth e r in B oston than in Ne w Y ork By su c .

c es siv e c onsolidations the numb er o f national

banks has b ee n reduc e d fr om 58 in 1 89 8 to 1 9

in 1 9 1 3 Th er e ar e in B ost o n now al so 2 3 trust
.

c ompanies .

Th e N ational S hawmut Bank the First ,

N ational Bank o f B oston and the O ld C olony

Trust C o w hi ch th e s e two B oston bank in g
.
,

houses an d th e ir associat e s control al on e h ave ,

a g g r e gate resources o f c onstituting

a b out o n e half o f the b anking r e sour ces o f the
-

city T hese g re at b anking institutions which

.
,

are thems e lv e s th e result of many consolidations ,

and th e 2 1 oth er banks and t r ust c ompani e s in ,

which th e ir dire cto r s a r e also d ire ctors hold ,

togeth e r 9 0 p er cent of the total b anking re

.

sour c e s o f B oston And link e d to th e m by inter

.

locking d ire cto r ates are 9 oth e r b anks and trust

compani e s whose agg re gate r e sourc e s are ab out
2 p er cent of B oston s total Thus o f 4 2
.
’
.

b anking institutions 3 3 with agg re gat e re sourc e s

, ,

of holding ab out 9 2 p er c e nt .

o f th e agg re gat e b anking re sourc e s of Boston ,

a re int e rlock e d B ut e v e n th e re mai n ing 9 banks

.

and trust compani e s which tog e th e r hold but

,

7 p er c e nt o f B oston b anking r e sou r c e s ar e

.
,

not all i n d e p e n d e nt of o n e anoth e r T h re e .

 H O W TH E C O MB I NER S C O MB I NE 39

are l inke d together ; so that the r e a pp e ar to be

only six banks in all B oston that are fr e e from
interlocking di r ectorate relations They to .

get h er rep r esent but 5 per cent Of B oston s .

’

bank ing r e so u rces A nd it may well be doub ted

.

whether all o f even those 6 are entirely free from

a ffi liation with the other groups .

B oston s banking conc e ntration is n o t l imited

’

to the l e gal confin e s o f the city Ar ound B oston .

p r oper ar e over th irty sub urbs w hi ch wi t h it ,

form what is popularly known as Gre a ter

”
B ost o n
. T hes e sub urban municipalities and ,

also o ther important citi e s l ike Worcest e r a nd

Springfield are in many r e spects within B oston s
, , ,
’

” ’
sph e re of influ e nce B oston s inner b an k ing
.

g r oup has int e rlocked n o t only 3 3 o f the 42

,

banks of B oston p r oper as ab ove shown but h a s

, ,

linked with th e m by int er locking dir ectorships

, ,

at l east 42 oth e r b anks and trust comp anies in

3 5 other municipalities .

O nce L ee Higginson
, C O a nd K i d der P e a
.
,
r

b ody C o were active competitors They are

. .

s o st ill in some small o r purely loc al matters ;

,

but b oth are devoted c o operators w ith the -

Morgan associ a tes in large r and interstat e trans

a c t ions ; and the alliance with these great B oston

ba nkin g houses h as been cemented b y mutu a l

 ’
40 O T H E R P E OPLE S M ONEY

stockholdings and c o dire cto r ships Financi al

-
.

c oncentration s ee ms to have found its highest e x

pression in Boston .

S omewhat similar relations exist b etween the

’
triple alliance an d Chicago s gr e at fi nan cial insti
t u t io n s— its First N ational Bank the Illinois ,

Trust and S avings Bank and the C ontin e nt al,

—
C ommercial N ational B ank which together
c ontro l resources o f And similar
relations would doubtless b e found to exist with
the lead ing bank er s o f the other impo r tant fin an
c ial centers o f America as to which the P uj o
,

C ommittee was p re vented by lac k of time from

making investigation .

TH E AU$ I L IA R I ES
S uch are the p r imary such the s e condary
,

powers which comp r ise the Money Trust ; but

th e se are suppl e m e nt e d by forc e s O f magnitud e .

“ ”
R adiating f r om th e s e p r incipal g r oups says ,

“
th e P uj o C ommittee and clos e ly a ffi liat e d with
,

them are small er but important ba n ki n g h ous e s ,

such as K issel K in nic u t

,
Co White W e ld .
, ,

( it Co
. and Har v e y Fisk
,
Sons who rec e ive ,

large and lucrative pat r onag e f r om the dominat

ing g r oups and a re us e d by th e latt e r as j obb er s
,

o r distri b utors of secu r iti e s th e issuing of wh ich

,
 ’
42 O T HE R P E OPLE S M ONE Y

Beyond thes e inn e r groups and sub groups are

-

b a nks and b ankers throughout the country who

c o -operate with them in und e r writing o r guaran

teeing the sal e o f securities o ff e r ed to th e public ,

and who also act as distributors o f such securities .

It was im possible to learn the id e ntity o f these

corp o r ations owing to the unwillingness o f t h e
,

memb er s o f the inner group to discl o se t h e nam e s

o f th e ir under writers ,
b ut suffi cient a ppears t o
j ustify the statement that there are at least
hundreds o f them and that they e x tend into
many o f the cities throughout this a nd for e ign
countries .

“
The p atronage thus pr o cee di ng f rom the
inner group and its su b groups is o f great v al ue
-

t o these banks and b ank er s who are thus tied

,

by se l f int e r e st to t h e gr e at issu ing houses and

-

may b e r e garded as a part o f this vast financial

o r ganization S uch patr onag e yields no in c o n
.
v

s idera b l e part of the income o f these ba nk s an d

b ankers and withou t much risk o n account o f t h e

fac il ities of the principa l g r oups for placing issu e s
o f securities through their domination o f g r eat

b an ks and t r ust companies and their oth e r d o

m o stic affiliations and their for e ign conn e c tions .

Th e und er writing commissions on issu e s mad e by

th is inne r g ro up are usuall y e asily e arned a nd d o
 HOW T H E C O MB I NER S C O MB I NE 43

not or d inarily involve the under writ e rs in the

purchase o f the underwritten secu r ities Th e ir .

interest in the tr a nsaction is gen e rally adj usted

unless they ch oose to purchase part of the securi
ties by the payment to them of a c ommission
,
.

Th e r e are however occasions o n which this is

, ,

not the case The underwriters are then re

.

quired t o take the securities B ankers a nd .

b r oker s are so anxious to b e permitted to par

t ic ipat e in these transactions under the lead of
the inner g r oup that as a r ul e they j oin when
i nvited to do so regardless O f their approv al of
,

the particul ar business lest by refusing they

,

”
shoul d thereafter c e ase to b e invited .

In other words an invitation from th e s e

,

royal bank er s is inter preted as a c ommand As .

a r e sult these g re at bankers frequ e ntly get huge

,

c ommissions without th e mselv e s dist r ibuting any

o f the b onds or ever h aving taken a ny actual

,

risk.

In the case of the N ew Y o rk subway finan c

ing of $ 1 7 o f b onds by M e ssrs Mo r gan .

C o and th e ir associat e s Mr Davison $as t h e

.
, .

P uj o C omm i ttee r epo r ts$ estimated that th er e

we re from 1 00 to 12 5 such underwriters who
were apparentl y gla d t o a gree tha t M e ssrs .
 ’
44 O TH ER PE O PLE S M ONE Y

Mo r gan C o the First N ational B a nk and the

.
, ,

N ational City Bank shoul d receive 3 per cent .

,

— e qual to — for fo r ming this s n di

y
cat e thus relieving th e ms e lves f r om all liabil ity
, ,

whilst th e und e rwriters assumed the risk o f what

th e b onds would re alize and of b e ing requir ed to
”
take th e ir share o f the unsold portion .

T H E P R OT E CTIO N OF P SE U D O -
E T H IC S
The o r ganiz ation of the M on e y Trust is in
t e nsiv e the combination c ompr e hensive ; but
,

o n e oth er e l e m e nt was r e cogniz ed as necessary

to re nd er it stabl e and to mak e its dynamic fo r ce

,

irre sistibl e D e spotism b e it fi nancial o r politi

.
,

cal is vu l n er abl e unless it is beli e ve d to r e st

, ,

upon a mo r al sanction The longing for fr e edom

.

is in er adicable I t will e xp r ess its e lf in prot e st

.

against s e rvitude and inaction unless the st riv ,

ing f o r fr ee dom b e made to s ee m immo r al .

L ong ago mona r chs invent e d as a p re servative ,

o f absolutism the fi ction of

,
Th e divine right of
”
kings .Bank er s imitating royalty inv e nted re
, ,

“
c e n t l y that p r ecious r ul e of s o call e d E thics by-
,

which it is d e cla re d unp r of e ssional to come to th e

fi nancial r e li e f o f any co r poration which is a l r e ady
“ ”
th e p re y of anoth er re putable bank e r .

“
Th e possibility of competition b e tw ee n th e se
 HOW T H E C O MB I NER S C O MB I NE 45

b anking hous e s in the pur chase o f securities ,

“
says the P uj o Committ ee ,
is further r e moved
by the und er standing b e tween th e m and others ,

that one will not s e ek by o ffering b e tt er t e rms

, ,

to take away f r om anoth e r a custom e r which it

,

has theretofore s er v e d and by corollar y of this

, ,

namely th a t wh ere giv e n bankers hav e once

,

satisfacto r ily united in bringing o u t an issue of

a corpo r ation th e y shall also j oin in b r inging
,

o u t any subsequent issue of the same co r pora

tions This is described a s a p r inciple of b anking

.

ethics .

”
T h e E thical b asis o f the rule must b e that
the interests of the combined banke r s a r e
superior to the interests o f the r e st o f the com
munity Th e ir attitud e r e minds o n e of the
.

“ ” “ ”
sph er es of influence with ampl e hinterlands
by which r apacious nations a r e adj usting di ffer
e n c es
. Important banking conc er ns too am ,

bit io u s to be willing to take a sub ordinate p osition

in the a lliance and too powe r ful t o b e supp re ssed
, ,

“ ”
are accord e d a finan c l al sph e re o f influenc e
upon the und e rstanding th a t the rule o f banking
ethics will be faithfully obs er v e d M ost promi
.

nent among such lesser potentates are K uhn ,

L oeb Co .of N e w Y o r k an int er national

, ,

banking house of great wealth with large clientel e

,
 ’
46 O TH E R PE OPLE S M ONE Y

and connections They a r e accorded an impor

.

“ ”
tant sphe r e o f influ e nc e in Am er ican rail
roading including among other syst e ms the
,

Bal timore O hi o the Union P acific and th e

,

S outh ern P acific Th e y and the M o r gan group

.

have with few e xc e ptions p r e empted the b anking

business o f the important rail r oads o f th e
c ountry B ut ev e n K uhn L oeb
. C o are not
,
.

wholl y ind e p e nd e nt The P uj o C o m mittee r e

.

ports that they are qualified alli e s o f the inn er

“
gr oup an d through their clos e relations with
th e N ationa l City Bank and the N ational Bank
of C o mmerce and oth e r financial institutions
“
have many interests in common with th e
Morgan a ss oc iat e s conducting larg e j oint
,
”
account op er ations with th e m .

TH E E V I L S RES U L T A NT
First $ These banke r b arons levy -
through ,

their e xcessive exactions a heavy toll upon the

,

whole community ; upon own er s o f money fo r

l e ave to invest it ; upon railr oads public service ,

and indust r ial companies f o r l e av e to use this

,

mon e y of oth er p e ople ; and thr ough thes e ,

co rp o r ations upon consum e rs

,
.

“ ”
Th e charg e o f capital says the P uj o C o m
,

“
m it t e e
,
which o f cou r s e e nt er s univ er sally into
 HOW TH E C O MB I NER S C O MB I NE 47

the price o f commoditi e s a nd of service is thus

,

in e ff ect dete r mined by agr eement amongst those

supplying it and not und e r the check o f competi
tion I f th e re be any virtu e in the p r inciple of
.

competition cer tainly any plan o r arrang e m e nt

,

which pr e v e nts its op e ration in t h e perfo r manc e

o f so fundamenta l a comm er cia l function as t h e
”
supplying of capital is p e culiarly inj urious .

S econ d$ M o r e serious however is the eff ect

, ,

o f the Money Trust in di re ctly supp re ssing com

petition That supp re ssion e nables t h e monopo

.

list to extort excessive profits ; but monopoly

increases the burden of the c onsumer even more
in othe r w ays Monopoly arr e sts d e velopment ;
.

and through arresting development pr e v e nts,

that lessening o f t h e cost o f p r oduction and of

distribution which would otherwis e take p l ace .

C an full competition exist among t h e anthra

cite coal railroads when the M organ associat e s
are pot e nt in al l o f them ? And with like
c on ditions p r evail ing what comp e tition is to be
,

e xpected between t h e N orthern P acifi c and t h e

Great N orthern t h e S outhe r n the L ouisvill e

, ,

and N ashvill e and the Atlantic C oast L in e ; or

,

b etw e en the W e stinghouse Manufacturing C om

p any and the Gen er al E lectric C ompany ? As
the P uj o C ommitt ee finds
 ’
48 O T H ER PE O PLE S M ONEY

Such a ffi liations tend as a cover and conduit

for s e c re t arrang e m e nts and und er standings in
r e str iction of comp e tition through the ag e ncy o f
”
the b anking hous e thus situat e d .

And unde r e xisting c onditions o f combina

tion re l i e f through oth e r b anking hous e s is
,

p re cluded.

“
I t can hardly b e expected that the banks ,

trust compani e s and oth er institutions that ar e

,

thus s ee king par ticipation from this inn er gr oup

woul d b e lik e ly to e ngag e in b usiness o f a char ac
t er that would b e displ e asing to the latter or
would int e rfer e with th e ir plans or prestige .

And so the prot e ction that can b e a ff ord e d by the

m e mbers o f th e inner group c onstitutes the
saf e st re fug e o f o ur great industr ial combinations
against futur e c ompetition T he p ow erfu l g r ip
.

of th e se g e ntlemen is upon th e t hr ott l e that

controls the whe e ls o f cr e dit and up o n th e ir
,
”
signal those wh ee ls will t u rn o r stop .

Third$ B ut far mo re se r ious even than th e

supp re ssion of comp e tition is th e supp re ssion o f
i n dust r ial lib er ty i n d ee d o f manhood its e lf
, ,

which this ov er w ee ni n g financial pow e r e ntails .

Th e intimidation which it e ff e cts e xt e nds far

“
b e yond th e bank s t r ust compani e s and oth er
, ,

i nstitutio n s s ee k ing par ticipation fr om this inn er

50 O THE R P E O PLE S M ONEY’

they have nothing e ither to buy or to s e ll but ,

d e sir e political o r social advanc e m e nt S ome .

times they want me r ely peace E xp er ience shows

.

“
that it is not h e althy to buck against a l o c o m o
we and Business is business
,
” “ ”
.

H er e and the re will

find a he r o — red
y ou ,

—
blood e d and cour ag e ous loving manhood mo re
, ,

—
than wealth plac e o r secu r ity who dar e d to
, ,

fight f o r ind e p end e nce and won H ere and th e re

.

you may find th e m ar tyr who r e sisted in silence

,

and s u ff ered with r e signation But Am erica .

,

which seeks the gr e at e st good o f the g re at e st

”
n u mber cannot b e cont e nt with c onditions that
,

fi t only the hero the ma r tyr o r the slave

, .
 C HAPT E R III
I N T E RL OC K I N G D I R EC T ORA T ES

TH E p r actice of interlocking di re ctorates is the

root o f many e vils It o ffends laws human and
.

divin e Appli e d t o rival cor p o r ations it tends to

.
,

the suppression o f comp e tition and to violation of

the She r man law Appli e d to co r po r ations which
.

deal with each oth e r it tends to disloyalty and to

,

violation o f the fundam e ntal law that no man can

se r v e t wo mast er s I n e ith er e vent it t e nds to
.

in e ffici e ncy ; f or it removes inc e ntive and d e st r oys

soundn e ss of j udgm e nt It is und e mocr a tic fo r
.
,

it r e j ects the platform $ A fair field and no

”
favors ,
substituting the pull o f privil e g e for th e
push o f manhood It is th e most p otent in st ru
.

m e nt o f the M oney Trust Break th e cont r ol so

.

exercised by t h e i nvestment b ank e rs ove r rail

roads public service and industria l co rp o r ations
,
-
,

ov er b anks life insur a nce and trust compani e s

, ,

and a long step will have been taken towa r d

attainm e nt o f the Ne w F r e e dom .

The term I nt e rlocking dir e cto r ates is h e r e

us e d in a bro a d sense as including all int ertwin e d
51
 O TH E R PE OPLE S M ONEY
’
52

c onflicting int ere sts whatev er th e form and by

, ,

what e v er d e vice e ff ected T he obj ection extends

.

alike to contracts of a co r p oration wh e th e r with

o n e o f its dir e cto r s individuall y o r with a firm ,

o f which h e is a member or with anoth e r corpo r a

,

tion in which he is inter e sted as an officer o r

directo r o r stockholder The obj e ction ext e nds
.

likewis e to m e n holding th e inconsistent position

o f dire ctor in two pot e ntially comp e ting corp ora

tions e v e n if thos e corporations do not actually

,

deal with each oth er .

TH E E N D L ESS C HA IN
A si n gl e e xampl e will illust r ate the vicious cir cle
o f c ontrol — —
the end le ss ch ain thr ough which o ur
fi nancial oligarchy now operates $
J P M o r gan ( o r a partner) a dire cto r of the
. .
,

N e w Y ork N ew Haven,
H ar tford R ail r oad ,

caus e s that company to sell to J P Mo r gan . .

C o an issue of b onds J P M o r gan

. . . CO . .

b o rr ow the money with which to pay f o r th e b onds

f r om th e Gua r anty T r ust C ompany o f which ,

M r M o r gan ( o r a pa r tne r ) is a di re ctor J P

. . . .

Morgan C o s e ll th e b onds to the P e nn Mutua l

.

L ife I nsuranc e C ompany of which M r M o r gan ,

.

( o r a pa r tn er ) is a di re cto r The N e w Haven .

sp e nds th e p r oc ee ds o f th e b onds in purchasing

 IN TERLOC K IN G D I RE C T OR AT E S 53

st ee l rails f r om the United S tat e s Ste el C orpora

tion o f which Mr M organ ( or a pa r tne r ) is a
,
.

dir e ctor The Unit e d States Steel C orpo r ation

.

spends the proceeds o f t h e r a ils in pur chasing

e lectrical suppli e s fr om t h e General E l e ct r ic
Company o f which Mr Mo r gan ( o r a partner)
, .

is a director The Gen e ral E lect r ic sells supplies

.

to t h e Western Union T e l e gr aph C ompany a ,

su b sidiar y o f the American Te l ephone and

Telegraph C ompany ; and in b oth Mr Morgan .

( or a pa r tn e r) is a dir ector The Telegraph .

C ompany has an exclusive wire contract with the

Re a ding of which Mr Morgan ( o r a partner) is
,
.

a directo r The R eading buys it s passeng e r c ars

.

fr om the P ullman Company o f which Mr , .

M organ ( or a p artner ) is a directo r The .

P ullman C ompany buys ( for l oca l use ) loco

motiv e s from the Bald win L ocomotive C ompany ,

of which M r Morgan ( or a partner ) is a dire ctor

. .

Th e R eading the Gen e ral E l e ctric the Ste e l

, ,

C o r por ation an d t h e N ew Haven like the ,

P ullman buy locomotives from the Baldwin

,

C ompany The St ee l C orpo r ation the Tele

.
,

phone Company the N e w Haven the R eading

, , ,

th e P u l lman and the Ba l d win C ompanies like ,

t h e W e st er n Union buy elect r ical supplies from

,

the General E l e ctric The B aldwin the P ull

.
,
 ’
54 O TH E R PE OPLE S M ONE Y

man th e Re ading the Telephon e the Telegraph

, , ,

and th e Gen er al E l e ct r ic c ompani e s like the ,

N e w Hav e n buy steel p r oducts f r om the Ste e l

,

C o rpo r ation E ach and e v er y o n e o f the c o m

.

panics last nam e d m arkets its s e c urities through

J P Morgan
. . C o e ach d e posits its funds with
.

J P M o r gan
. . C o ; and with these funds o f
.

e ach th e fi r m ente r s upon furthe r operations

, .

This sp e c ifi c illustration is in part suppositi

tious ; but it re p r esents truthfully the op er ation o f
int e rlocking directo r at e s O nly it must be multi.

plied many times and with many permutations

to r e p r esent fully the extent to which the int e rests
o f a f e w m e n a re int er twin e d I nstead o f taking .

the N e w Hav e n as th e r ail r oad starting point in

o ur exampl e the N ew Y ork Central the Santa
, ,

Fé th e S outh e rn the L e high V alley the Chicago

, , ,

and G re at W e st er n th e Er ie o r the Pere M ar

,

q u e t t e might hav e be e n s e lect e d ; instead o f the

Guaranty T r ust C ompany as th e b anking re s e r
vo ir any o ne o f a dozen oth e r important banks o r
,

t r ust companies ; instead of the P e nn M utu al as

p urchase r o f the b onds oth er insurance c ompa,

ni e s ; instead of th e G e n er al E l e ct r ic i ts qualifi e d ,

comp e titor the W e stinghous e E lec tric and Manu

,

f a c t uring Company The chain is indeed end

.
 IN TERLO C K IN G D I RE C T OR AT E S 55

less ; f o r each cont r oll e d co rp oration is ent win e d

with many oth er s .

As the n exu s o f Big Business the Stee l

C o r poration stands o f cou r s e p re eminent Th e
, ,
.

Stanl e y C ommitt e e show e d that th e few men who

cont r ol the S te e l C or po r ation its e lf an owne r o f
,

imp ortant railroads are dir e cto r s also in twenty

,

nine oth er rail r oad syst e ms with ,

mil e s
o f line ( more than half the railroad mileage o f the

Unit e d Stat e s ) and in impo r tant st e amship

,

companies Through all these alliances and the

.

’
huge t r affi c it controls the S t e el Co rp oration s
,

influenc e p e rvad e s railr oad and steamship com

— —
panies not as ca r ri er s only but as t h e larg e st
custom er s f o r stee l And its influence w ith
.

users o f st e e l e xtends much fur ther Th e s e sam e

.

f e w m e n a r e also di r ecto r s in tw e lve steel using-

street railway systems including some of t h e

,

lar g e st in t h e world . Th e y are dire ctors in forty

mac hi n e ry and simila r st ee l using manufacturing
-

compani e s ; in many gas o il and water c o m

,

panics ext e nsive u ser s o f i r on products ; and

,

in the g r eat wire-using telephone and t e l e graph

compani e s The agg re gat e ass e ts of these diff er
.

—
e nt co rp o r ations th r ough which these f e w m e n
ex e rt their influ e nc e ov e r t h e busin e ss o f t h e
—
Unit e d States e xceeds sixteen billio n d o ll ars .
56 O THE R PE OPLE S M ONE Y ’

O b viously inte r locking dire ctorates and all

, ,

that t er m imp lies must be e ff e ctually p r ohibit e d

,

b e fo r e the f r eedom of Am er ican b usin e ss can b e

re gain e d The p r ohibition wil l not be an in
.

novation I t will me r ely giv e full l e gal sanction

.

to th e fundam e ntal law of mo r als and of human

“ ”
nature $ that N 0 man can s er ve two mast er s .

Th e surp r ising fact is that a p r incipl e o f equity so

fir ml y r oot e d should hav e b ee n d e pa r t e d fr om at
a ll in d e aling with co r porations Fo r no rul e .

o f law has in oth er conn e ctions been mo re r igo r

, ,

o u sl y applied than that which p r ohibits a trust ee

,

f r om occupying inconsist e nt p ositions fr om d e al ,

in g with hims e lf o r f r om using his fiduciary

,

position fo r pe r sonal p r ofi t And a d ir ecto r o f a

.

co r po r ation is as obviously a t r ustee as pe r sons

holding similar p osi tions in an uninco r po r at e d
association o r in a privat e trust e stat e who a re
, ,

call e d specifi cally by that nam e The C ourts .

hav e re cogniz e d this fully .

Thus th e C ourt of Appeals of N ew Y ork de

,

c l are d in an impo r tant cas e $

Whil e not t e chnically trust ee s fo r the title ,

of the co rpo r at e p r op er ty was in the co r po r ation

i ts e lf th e y w ere char g e d with th e duti e s and
,

subj e ct to t h e liabiliti e s of t r ust ee s Cloth e d .

 ’
58 O TH E R PE OPLE S M ONEY

mon di re cto r participat e d activ e ly in th e making

of a cont r ac t b e tw ee n two corpo r atio n s the ,

cont r act was not absolut e ly void but voidable ,

only at the e l e ction of th e c o r po r ation .

Th e first limitation igno re d th e rule o f l aw that

a b e n e ficia r y is e ntitl e d to disintere sted advice
f r om a ll his t r ust ee s and not me r ely from som e ;
,

and that a t r uste e may violat e his t r ust by in

action as w e ll as by action I t ignor e d also the
.
, ,

l aws o f human nature in assuming that the in

,

fl u e n c e o f a director is confined to the ac t o f

voting E v e ry one knows that the most e ff e ctiv e
.

wo r k is done b efo r e any vot e is taken sub tly , ,

and without p r ovable p articipation E very one .

sho ul d know that the denial of minority repre

s e n t a t io n on b oa r ds o f d ir ecto r s has r e sult e d in

th e domination o f most co r p orations by o n e o r

two men ; and in practically banishing all eriti
c is m o f th e dominant pow er And e v e n wh ere
.

the b oa r d is not so dominat e d there is too oft e n ,

“
that harmonious coop er ation among di r ecto r s
which sec u r e s for each in his own line a due shar e
, ,

o f th e co r p o r ation s favors
’
.

The s e cond limitation— by which c ontracts ,

i n the making o f which t h e int er ested d ir ecto r

pa r tic ipates actively a r e h e ld m erel y vo ida bl e
,

—
i st e ad of absolut e ly void igno re s the t e achings
n
 IN TER LO C K IN G D I RE C T OR AT E S 59

of experience To ho l d such cont r acts merely

.

voidable has r e sult e d practically in d e cla r ing

th e m v alid I t is the directors who control
.

co r por a te action ; and the r e is little reason to

exp e ct that any c ontrac t ent er e d into b y a
,

b oard with a fellow dir ecto r however unfai r , ,

would be subsequ e ntly avoid e d App e als f r om .

P hilip d r unk to P hilip sob e r are not o f frequ e nt

occurrence nor very fruitful B ut h e re we lack
,
.

e ven an appealing party Dir e ctors and t h e

.

dominant stockhold er s would of course n o t , ,

appeal ; and th e m i nority stockholders hav e

rar e ly the knowl e dg e o f facts which is ess e ntial
to an e ff e ctiv e appeal wheth e r it be made to
,

the di r ecto r s to th e whole b ody o f stockholders

, ,

or to th e c ourts B esides t h e financial burden

.
,

and the r isks incid e nt t o any att e mpt o f in dividual

stockholder s to inte r f er e with an e xisting manag e
m e nt is or dinarily prohibitive Pr oc e edings to .

avoid c ontracts with dir ecto r s ar e the r efor e sel , ,

dom brought exc e p t aft er a r adical change in t h e

,

membe r ship o f th e b oa r d And radical changes

.

in a b oard s m e mb e rship a re ra re Ind e ed th e

’
.

P uj o C ommitt e e re po r ts

N one o f the witness e s ( the leading Am e rican

bankers testifi e d ) was able t o name an instanc e in
60 O TH E R PE OPLE S M ONEY ’

the histo r y o f the country in which th e stock

hold er s had succ e ed e d in ov er thr owing an e xist
ing man ag e m e nt in any la r g e co rp o r ation N o r
.

do e s it app e ar that stockholde r s have ev er ev e n

succeeded in so far as to s e cur e the investigation
o f an e xisting manag e ment o f a co r po r ation to

asce r tain whethe r it h as been w e ll or honestly

”
managed .

Mr Max P am p r oposed in the Ap r il 1 9 13

.
, ,

Harva r d L aw R evi e w that th e gov er nm e nt c om e

,

to the aid of minority stockhold e rs He urged .

that the p r esid e nt of eve r y corp oration b e re

q uir e d t o r e por t annually to the stockholde r s an d ,

to state and f e deral officials ev er y contrac t ma d e

by the company in which any director is inte r
e s t e d ; that the Atto r n e y G e ne r al o f the U ni te d
-

S tates o r the State investigate the same and t ak e

p r ope r proceedings to s e t all such contracts
aside and r e cov er any damag e s su ff ered ; o r
without dis affirm ing the contracts to r e cover
f r om the int ere sted dir e ctors the profi ts derived
t h ere f r om . And to this e nd also that S tate and
,

N ational Bank E xamin e rs S t a t e S up er int e nd

,

e nts of I nsuranc e and th e I nte r state C ommerce

,

C ommission b e dire cted to examine the reco r ds

o f e v er y b ank ,
t r ust c ompany insu r ance com
,
 IN TER LOC K IN G D I RE C T OR AT E S 61

pany railroad company and e v er y other c orpor a

,

tion e ngag e d in inte r state commerce Mr P am s . .

’

views conce r ning int er locking dir ectorates are

entitl e d to careful study A S couns e l promi
.

n e n t l y i dentified with th e o r ganiz ation of trusts ,

h e had f o r yea r s full O ppo r tu n ity Of w e ighing the

“ ”
advantag e s and disadvantag e s o f Big Business .

His conviction that t h e p r actic e of int e rlocking

dir ecto r at e s is a menac e to th e public and demands
d r astic l e gislation is significant And much c a n
,
.

b e said in suppo r t o f th e sp e cific m e asure which

h e p r oposes But to be e ff e ctiv e the reme d y
.
,

must be fundam e ntal and comp re h e nsive .

TH E ESSE NTI A L S OF P R OT E CTION

P ro t e ction to minor ity stockholders d e mands
that co r p or ations be p r ohibited absolutely from
making cont r acts in which a dir e ctor has a
private inte r est and that all such cont r acts be
,

declare d n o t voida bl e merely but absolutely ,

void .

In the c ase of railro a ds a nd public service -

c o r porations ( in c ontradistinction to p r ivate

indust r ia l companies ) such p r ohibition is de
,

m an de d also in the interests o f the g e nera l

, ,

public For interl o cking inter e sts breed in

.

e ffic ie n c y a n d disl o yalty ; an d the pu b lic pays ,

 ’
62 O TH ER PE OPLE S M ONE Y

in hi gher rat e s o r in poor service a large p ar t o f

,

the p e nalty for g r aft and ine ffi ci e ncy Ind e ed .

,

whether rat e s a re adequate o r e xc e ssiv e cannot

b e d e t er mined until it is known wheth e r the
g r oss earnings of the co r p oration ar e p r ope rly
’
e xp e nd e d Fo r when a company s important
.

contr acts ar e mad e th r ough di re ctors who ar e

int ere st e d o n b oth sides th e common pre su m p
,

tion that mon e y sp e nt has b ee n p r op er ly spent

do e s n o t p r evail And this is pa r ticula rly t r ue
.

in railroading wh ere the company so oft e n lacks

,

e ff ective comp e tition in its o wn fi e ld .

B ut the compelling r e ason fo r p r ohibiting

int er locking dir ec torates is n e ith er th e p r ot e ction
o f stockhold er s no r th e p r ot e ction of th e public
,

from the incid e nts o f in e ffi ci e ncy and g r aft .

C onclusive e vid e nc e ( if ob tainable ) that th e

practic e o f int er locking dir ecto r at e s b e n e fi ted all
stockhold er s and was the most e ffi ci e nt fo r m of
o r ganiz ation would not re mov e th e obj e ctions
,
.

For even mo r e impo r tant than effi ci e ncy are in

d us t rial and p olitical lib e rty ; and th e s e ar e
imp er il e d by th e M on e y T r ust I n terl o c king .

dir ec tor ates m u s t be pro hibited bec a u se it is im pos

,

s ibl e to break t h e M o n ey Tru st with o u t pu tting an

en d t o th e prac tic e in th e l arg er co rpora t io ns .

 I N T E RL O C K I N G D I RE C T OR AT E S 63

BA N K S AS P U B L IC SERV I C E CO R P O RA TION S
-

The practic e of int er locking di re cto r at e s is

peculiarly obj ectionable wh e n appli e d to b anks ,

because o f th e n a tur e and functions o f those

institutions Bank deposits a r e an imp ortant
.

part of o ur c u rr ency sy s t e m Th e y are almost

.

as essential a facto r in commerce as o ur r ailways .

R eceiving d ep osits and maki ng loans th ere f r om

should b e treated by t h e law not as a p r ivat e
busin e ss but as o n e o f t h e public se r vic e s And
, .

r e cognizing it to b e such t h e law already r e gu

,

lates it in many ways Th e function o f a b ank

.

is to rec e iv e and to loan money I t has no m o r e .

right than a c ommon ca r ri er to use its p ow er s

specifi cally to build up o r to dest r oy other
businesses The g r anting o r withholding o f a
.

loan should be d e t e rmined so fa r as c onc e rns t h e

,

b orrower solely by t h e interest r at e and the risk

,

involved ; and not by favo r itism o r other c on

sid er ations fo r eign to the banking function .

M e n may saf e ly b e allow e d to g r ant o r to deny

loans of th e i r own money to whomsoev e r they
se e fit, whatso e v er th e i r motiv e may be B ut .

bank r esources a re in the main n o t owned by the

, ,

stockhold e rs n or by th e di r ectors N e arly thre e .

fou r ths of the aggregat e resourc e s of the thi r ty

64 O TH E R PEOPLE S M ONE Y ’

four ban king institutions in which the M organ

associat e s hold a pr e dominant i nfl u e nce ar e re p
re s e nt e d by d e posi ts The d e p e ndence o i com
.

m er c e and industry up on bank dep osits as th e ,

c ommon reservoir of q uick capital is so compl e t e ,

that deposit b anking shoul d b e r e cogniz ed as

“
one o f the b us i n ess e s aff ect e d with a public
int ere st . And the gene r al rule which fo r bids
publi c service c orp o r ations f r om making unj ust
-

disc r iminations or giving undue preference should

b e appli e d to th e op er ations of such b anks .

Senato r O w e n C hairman of the C ommitt ee

,

on Banking and C urr e ncy said recently $ ,

My own j udgment is that a b ank is a public

utility institution and cannot b e t r eated as a
p r ivat e a ff air for the simpl e reason that the
,

public is invit e d und e r the saf e gu ar ds o f the

,

gov e rnm e nt to d e p osit its money with the b ank

, ,

and the public has a right to hav e its interests

saf e gua r ded through o r ganiz e d autho r iti e s The .

logic o f this is b e yond e scap e Al l banks in the .

Unit e d S tat e s public and p r ivat e sh ould be

, ,

t re at e d as public utility institutions wh e re they

-
,
”
r e c e ive public d e p osits .

Th e dire cto r s and offi ce r s o f b anking ins t it u

tions must of cours e b e e nt r ust e d with wide
, ,
 ’
66 O TH E R PE OPLE S M ONE Y

We can not say that the public inter e sts to

w hi ch we hav e adver t e d and othe r s ar e not
, ,

suf fici e nt to war ra n t th e State in taking th e whole

b us in e ss of banking und er its control O n the .

cont r ary we are o f opinion that it may go on f r om

re gul ation to p r ohibition excep t upon such con
”
dit io ns as it may p r esc r ibe .

O F F ICI A L P RE C E D E NT S
N or would th e r equir e m e nt that b a nks sh all
make no loan in w hi ch a dir e ctor has a p r ivat e
int ere st impos e undu e h ardships o r r e st r ictions
up on b ank dir e cto r s It might make a b an k
.

dire ctor disp os e o f some O f his inv e stm e nts and

r e fr ain from making others ; b ut i t oft e n happens
that the hol ding o f one o ffi c e p re cludes a man
f r om holding another o r compels him to di spos e
,

o f ce r tain financial int e rests .

A j udg e is disqualified fr om sitting in any

cas e in which he has even the smallest financia l
int e r e st ; and most j udges in o r d er to be fr e e to
,

ac t in any matt er s a r isi n g in th e i r cour t p r oceed

, ,

upon taking offic e to dispos e of all investments

,

which could co n c e ivably b ias th e ir j udgm e nt

in any matt e r that might com e b e fo re th e m An .

I nt er stat e C omm er c e C ommission er is p r ohibit e d

fr om owni n g any b onds o r stocks in any co r po r a
 I N T ERL O C KI N G D I RE C T OR AT E S 67

tion subj ect to th e j urisdiction o f th e C ommission .

It is a serious c r iminal o ff e nce f or any executiv e

offi cer o f th e f e de r a l gov e rnm e nt to t r ansact
gove r nm e nt business with any corp oration in the
p e cuniary p r ofits o f w hi ch h e is d irectly o r
indir ectly inte r este d .

And t h e dir e ctors o f our great b anking in

s t it u t io n s as the ultimate j udg e s of bank credit
, ,

e xercise t o day a function no l e ss important to th e

’
c ountry s welfare than that of the j udg e s of o u r
cou r ts th e inter stat e comm e rce commissioners
, ,

a n d d e partm e ntal h e ads .

S CO P E O F TH E P R O H IB ITIO N
In the proposals f or l egislation o n this su bj ect ,

four important questions are presented

1 S ha ll the princip l e o f prohibiting i nter
.

l ocking directo r ates in p ot e ntially comp e ting

c orporations b e applied to state banking insti
t u t io n s as well as the national banks ?
,

2 S hall it be applied to all kinds o f corpora

.

tions or on l y to banking institutions ?

3 S ha ll the principle of pro h ibiting corp or a
.

tions from e nter ing into transactions in which t h e

manag e ment has a private inter e st b e applied to
b oth directors and o fficers o r be confined in its
a pplication to officers only ?
 O T HE R P E OPLE S M ONE Y
’

4 S h all the principl e be applied so as to

.

pro hibit transactions with anothe r co r po r ation i n

which o n e o f its dir ectors is int ere sted me r ely as
a stockholder ?
 C HA P T ER I V
SE RVE ON E M AS T E R ONLY

The Pu j o C om m i ttee h as p r es e nted the

facts concern ing the M oney Trust so cl e ar ly
that the conclusions app e ar i nevitab l e Their .

diagnosis disc l oses intense financi al conc e ntra

tion and the means b y w hich it is e ff ected .

—
C om b ination the intertwi ning o f interests
, ,

is shown to b e the a ll p e rvadin g vice o f the

-

present system With a view to free i ng in

.

dus t ry the Committee recommends the enact

,

ment of twenty-one specific rem e di al provis i ons .

Most o f these measures a re wisely framed to

meet some a b use disc l osed by the evi dence ; a nd
if all of thes e w ere a dopted t h e P u j o l egis l ation
w ould undoubted l y all e viat e p r esent su ff ering
and a id in arresting the diseas e But many o f .

“ ”
the remedies p r oposed are l ocal ones ; a n d a
cure is n o t possible without treatment which is
,

fundam e ntal I ndeed a maj or operation is

.
,

n e cessary This the C ommittee h as hesitated

.

to a dvise ; although the fundamental treatment

”
requir ed is simpl e $ Serve o ne Master only .

69
70 O THE R PE OPLE S M ONEY ’

The evils incident to inte r locking dire cto r

at e s are of cours e fully r e cogniz e d ; but th e
, ,

p r ohibitions prop osed in that r e spect are re

s t ric t e d to a v er y nar r ow sph e re .

Firs t $ The C om m i ttee recognizes that po

t e n t iall y comp e ting co r p orations should not
—
hav e a common dir ecto r ; but it r e stricts this
prohibition to d irectors o f nationa l banks ,

saying
“
N o o ffi cer o r director o f a nation al b ank
shall b e an offi c er o r director O f any oth er b ank
or o f any trust company o r oth e r fi nancia l o r
other corpo r ation or institution wh e ther o r ,

g a n i z e d und er state or f ed er al l a w,
that is author
iz e d to receiv e mon e y o n deposit or that is e ngag e d
in th e busin e ss of loaning money on collat er al o r
in buying and selling secur iti e s except as in this
s e ction p r ovided ; and n o p e rson shal l b e an
offi c e r o r dir ector o f any national ban k who is
a p r ivat e banker or a memb e r of a fi r m o r partner
ship o f b ank er s that is engaged in the b usiness of
r e c e iving d e posits $ P r ovid e d That such bank
, ,

t r ust company fi nancial institution bank er o r

, , ,

fi r m o f b ank e rs is located at o r engag e d in busi

n e ss at o r in the sam e city town or villag e as
, ,

that in which such national bank is located or

e ngag e d in b usin e ss $ P r ovided fur ther That a ,
 S ERVE O N E MAST E R ONLY 71

d i r ector of a national b ank or a partner of

such dir ector may b e an offi c er o r dir e ctor o f
not mo r e than one trust company o r ganiz ed
by the laws of th e stat e in which such nationa l
b ank is e ngaged in business a nd doing b usiness
”
a t th e same place .

S econ d$ The C omm ittee recogni z es that a

co r poration should n o t make a cont r act in which
o n e of the man ag e ment has a private int e rest ;

but it restricts this prohibition ( 1 ) to nationa l

b anks and ( 2 ) to th e o fli c ers saying
, ,
“
No national bank shall l e nd o r a dvance
money o r c re dit o r p urchase o r discount any
p r omisso r y note draft bill o f e xchang e or oth e r
, ,

evidence o f d e b t b e a r ing the signature o r in

d orse m e n t o f any o f it s offi c e rs o r of any partner
ship o f which such o ffic e r is a m e mb e r directly
,

o r indi r ectly , o r of a ny co r po r ation in w hi ch

such o ffi c e r owns o r has a b e n e fi cia l interest

of upwa r d of ten per centum o f the capita l
stock o r lend o r advanc e mon e y or cr e dit to
, ,

fo r o r o n b e half of any such officer or of a ny such

par tnership o r co rp o r ation or purchase any se
,

c ur it y from any such o fli c er o r of or from a ny

par tn er ship o r co r p or ation o f which suc h o ffi cer

is a memb e r o r in which he is financially inter
est e d
, as herein sp e cifi e d or of any corpor a tion
,
 ’
72 O THE R PE OPLE S M ONEY

of which an y of its o ffi c er s is an Oflicer at the

”
time o f such transaction .

Prohibitions o f inte r twining r elations s o re

s t ric t e d however supplem e nt e d by oth er p r o
,

visions will not end financial concentration

, .

Th e Money T r ust snake will at most b e , ,

scotched not ki l led Th e p r ohibition o f a

, .

c ommon director in potentially comp e ting c o r

po ra t io n s should apply to state b anks and trust
c ompani e s as wel l as to national banks ; a nd
,

it should apply to railroad and industrial cor

p o ra t io n s as fully as to banking instituti ons .

The prohibition o f corporate c ontracts in which

o n e o f the manag e ment has a p r ivate int ere st

should apply to dire ctors as wel l as to offic e rs, ,

and to state b anks and trust companies and

to other classes o f cor po r ations as well as to ,

nationa l b anks And as will b e here after shown

.
, ,

such b road l e gislat ion is within the power of

C o n gr ess .

L e t us e xamin e this further

TH E P R O H IB ITI O N O F C O MM O N D I RE CT O RS I N PO

T E N TIA L LY C O M P E TIN G C O R P O RA TION S

1 . Th e O bj e ction to com
N a tio n a l B a n ks .

mon d ire cto r s as appli e d to ba n king i n stitutions

, ,

is cl e ar ly shown by th e P uj o Committ ee .
 O TH E R PE OPLE S M ONE Y
’
74

banks o f S cotland all e xc l ud e fr om th e ir b oards

p e rsons who are dir e cto r s in oth e r banks By .

law in R ussia no p er son is al l owed to b e o n the

,

b oard o f managem e nt of mo r e than o ne ban k .

’
The C ommitt ee s recomm e ndation is also in
harmony with laws enacted by the C ommon
wealth o f Massachus e tts more than a genera
tion ago d e signed to curb financ i al concentra
tion through the savings banks O f th e g r eat
.

wealth o f Massachus e tts a lar ge part is repre

s e nted by d e posits in its savings ban k s These
.

d e posits are dist r ibuted among 1 94 diff e r ent

ba nks locat ed in 1 3 1 di ff e re nt cities and towns
, .

These 1 9 4 banks are s e pa r ate and distinct ; not

only in fo r m but in fact In order that the
,
.

banks may not be cont r oll e d by a few fi nanci er s ,

the M assachus e tts law p r ovid e s that no e xe c u

tive o fli c er or t r ustee ( d ir ecto r ) o f any sav ings
ban k can hold any offi ce in any oth er savi n gs
b ank That statute was pass e d in 1 876 A f e w
. .

y e ars ago it was suppl e m e nt e d by p r oviding tha t

none of the executiv e offic er s o f a savings b an k
could hold a simila r o ffic e in any national bank .

M assachus e tts att e mpted thus to c u rb th e pow e r

of th e individual financi e r ; and no disadvantag e s
a re disc e rnibl e When that Ac t was pass e d th e
.

agg re gate d e posits in its savi n gs banks were

 S ERVE O N E MAST ER ONLY 75

th e number o f deposit accounts

the averag e deposit to each p er son of
the population $ 14 4 O n N ovemb er 1 1 9 12
.
, ,

the agg re gate deposits w er e

the number o f d e posit accounts the
ave r ag e deposit to e ach account M as
s a c h u se t t s has shown that curbing the pow e r o f

the few a t l e ast i n this respect is entir ely

, ,

c onsisten t with effici e ncy an d wi th the prosp e rity

o f t h e who l e people
.

2 S t ate B an ks an d Tru st Com panies

. The .

reason for prohibiting common dir e ctors in

banking institutions appli e s e qua ll y to nationa l
b anks and to stat e b anks including those trus t
comp a ni e s whic h are essentially banks In N e w .

Y o r k City there are 3 7 t r ust compani e s of which

only 1 5 are members of the c le ar ing house ; b ut
those 1 5 had on N ov e mbe r 2 1 9 12 aggr e gate
, ,

’
r e so u rc e s o f Indeed the Bank e rs
Trust C ompany with r e sourc e s of
and the Guaranty T r ust C ompany with re ,

sources o f are among the most

us e ful tools o f t h e M on e y Trust N o bank in
.

the count r y has larger d e posits than the latte r ;

a nd only one bank l arge r d e posits than th e
fo rmer I f common dir e cto r ships we r e pe r mitt e d
.

in st a te ba nks or suc h tru st companies the ,

 ’
76 O TH E R P E O PLE S M ONEY

chart e rs o f l e ading national b anks would dou b t

l e ss soon b e surr end ere d ; and the institutions
would elud e f e d er al c ontrol by r e incorpor a ti ng
under stat e l aws .

The P uj o C ommittee h as failed to a pply the

p r ohibition o f c ommon dire cto r ships in po
t e n t ial l y c omp e ting banking institutions rigor
o u s l y e ven to national banks . I t pe r mits the
same man to be a dir e cto r in one national bank
and on e tru st company doing business in the
same place The propos e d conc e ssion opens the
.

door to g r ave dange r s I n the first place the

.

p r ovision would p e rmit the inte r locking o f any

national bank not with o n e trust company only ,

b ut with as many t r ust companies as the bank

has dir ectors Fo r whil e und er t h e P uj o bill n o
.

o n e can be a national bank director wh o is di

recto r in more than o n e such trust c ompany ,

there is nothing to p r event e ach o f the dir ecto r s

o f a bank f r om b e coming a di re ctor in a diff er

e nt t r ust company Th e N ational B ank o f C om

.

m er c e o f N e w Y o r k has a b oard o f 3 8 dir e cto r s

.

Th ere a re 3 7 trust companies in the City o f N e w

Y o r k Thi r ty s e v e n o f the 3 8 dir e cto r s might
.
-

e ach b e com e a di re c tor of a di ff e rent N e w Y ork

t r ust c ompa n y $ and thus 3 7 t r ust c ompani e s
would b e int e rlock e d with th e N ational Bank o f
 S ERVE O N E MAST ER O N LY 77

C omm er c e unless the other recommendation o f

,

the P uj o C ommitt e e limiting the numb er of

directo r s to 1 3 were also adop t e d .

B ut even if the bill w ere am e nded S O as to

limit the possible int e rlocking o f a bank to a
s ingl e trust c ompany the wisdom o f t h e conc e s
,

sion would still be doub tful It is true as the

.
,

P uj o C ommitt e e stat e s that the b usiness that

,

” “
may b e transact e d by a trust c ompany is o f a
”
di fferent ch aracter f rom that proper l y trans
acted by a nationa l bank B ut the business
.

actua l ly conducted by a trust company is at ,

l e ast in th e E ast quit e similar ; and t h e t wo

,

classes o f b anking institutions hav e these vital

e l e ments in common $ e ach is a bank o f d e posit ,

a nd each makes lo a ns f r om its d e posits A .

p r ivate banke r may also transact some business

o f a ch aracter di ff e rent from that p r oper ly c o n
ducted b y a b ank ; but by the t e rms o f the
’
C om m i ttee s bil l a private b anker engag e d in
the business O f receiving d e p osits would b e
prevented f r om being a director of a national
ban k ; a nd the reasons underlying that p r o b i
bitiou apply equally t o trust c o mp a nies and to
p r ivate b anke r s
.

.3 Oth er Corpora tio ns The int er locking of

.

banking ins titutions is only o n e of the facto r s

 ’
78 O THE R P E O PLE S M O NE Y

w hi ch have developed the Money Trust The .

int er locking o f oth e r corp orations h as been an

equally important e l ement And th e pro h ibi
.

tion o f interlocking dir e cto r ates shou l d b e ex

t e nd e d to potentiall y competing corp o r ations
whatev er the class ; to life insurance compani e s ,

rail r oads a nd indust r ial c ompani e s as w e ll as

,

b anking institutions The P uj o C ommittee h as

.

shown that M r Georg e F Bake r is a c ommon

. .

dire cto r in th e six railroads w hi ch haul 80 per

cent O f all a nthr acite marketed and own 88
.

per c e nt o f all anthr acit e d e p osits The M o r

. .

gan associates are the n exu s between such su p

po s e dly c ompeting railroads as th e N orthern
P ac ific and the Great N o r thern ; the S outher n ,

the L ouisvi l le N ashv ill e and the Atlantic

C oast L in e and between partially c ompeting
,

indust r ials l ik e the W e stinghouse E lectr ic and

M anufacturing C ompany and the General E l e c
t r ic The n exu s b e tween all the la r ge pot e n
.

t ial l y comp e ting corp orations must be severed ,

if the Money T rust is to be broken .

P R O H IB ITIN G CO R P O RA T E CONT RA CT S I N W H IC H T H E
MA N AGEME NT HA S A P R IV A T E INT ERES T
The p r incipl e o f p r ohibiting corporat e c ontracts
in which th e manag e m e nt has a privat e int ere st
 S ERVE O N E MAST E R ONLY 79

’
is appli e d ,
in the P uj o C ommitte e s re c o m
m e n da t io ns only to national banks and in them
, ,

only to offi c e rs All oth e r co r porations are to be

.

pe r mitted to continu e the p r actice ; and even i n

nationa l b anks the directors a r e to be fre e to
have a conflicting p r ivate int er est except that
,

th e y must not accept comp e nsation fo r promoting

a loan o f bank funds n o r partic ipate in syndicates ,

p r omotions o r und e rwriting of s e cu r ities in which

their b anks may be int e r e sted as und e rwrit er s o r
owne r s o r lend er s thereon $ that all loans o r oth er
transactions in which a di re cto r is int e r e sted shall
b e made in h is own nam e ; and shall be authorized
only after ampl e notic e to c o di re cto r s ; and that
-

the facts shall be spread upon the reco r ds o f the

c orpo r ation .

Th e Money T r ust woul d not be distur b ed by a

p r ohibition limit e d to Ofli c ers Und er a l aw of
.

that charact er financial contro l would c ontinue

,

to be exercis e d by the few without substantial

impair ment ; but the power would be ex er t e d
th r ough a som e what di ff e r e nt chann e l Bank .

o ffic e rs a r e appoint e es of the di re ctors ; and

o r di n arily their ob e di e nt servants In dividu al s
.

who as bank offic e rs are now impo r tant factors

, ,

in th e financial c onc e ntration wo ul d doubtl e ss

,

resign as offic e rs and becom e m ere ly di r ectors .

80 O TH E R PE OPLE S M O N E Y
’

The loss o f official salaries involved could b e

e asil y c omp e nsat e d N o memb er o f th e firm of
.

J P M o r gan
. . C o is an o fli c e r in any o n e o f
.

the thi r t ee n banking institutions with aggr egate

r e sour ces o f th r ough which as
dire cto r s th e y carr y on th e i r vast O p er ations . A
p r ohibition limit e d to offic e rs would not aff e ct the
M organ operations with th e se banking inst it u
tions If th er e were mino r ity repres e ntation o n
.

bank b oards ( w hi ch th e P uj o C ommitte e wis e ly

advocat e s ) such a p r ovision might a ff ord some
,

p r ot e ction to stockholder s through the vigilanc e

o f th e m ino r ity di r ecto r s p re v e nting the dominant

dire cto r s using th e i r pow er to th e inj u ry of th e

mino r ity stockhold er s But ev e n then th e p r o
.
,

vision woul d not saf e gua r d the public ; and th e

p rima r y pu r pose o f M oney T r ust l e gislation is
not to p re v e nt di r ecto r s fr om inj u ring stockhold
e r s ; but to prev e nt th e i r inj u r i n g the public
th r ough the int er twined cont r ol o f th e banks .

N o p r ohibition limit e d to O ffic e rs will mater ially

chang e this condition .

The p r ohibition o f int erlocking di r ecto r at e s ,

e v e n if appli e d only to all banks and t r ust com

panics would p r actically c omp e l th e M o r gan
,

re p re s e n tativ e s to re sign f r om th e di re cto r at e s of

th e thi r t ee n banking institutions with which th e y
 ’
82 O T HE R P E O PLE S M ONEY

c orp orat i ons w hi ch the Morgan firm is fre e to

,

use as it sees fit The prop osed prohibition ev e n

.
,

if appli e d to all b a nking institutions would not ,

a ff e ct dir ectly this great source o f M o r gan powe r .

I f howev er th e p r ohibition is made to includ e

, ,

r ai l road pub lic service a nd i ndust r ial co r po r a

,
-
,

tions as well as b anking institutions members of

, ,

J P M o r gan
. . C o will quickly ret ire from
.

subst a nti al ly a ll b oards o f dir e cto r s .

A PP L Y T H E P R IV A T E I NT ERES T P R O H IB ITION TO
S TO C K H O LD IN G I NT ERES TS
The prohibiti o n ag ainst one c o r po r ation enter
ing into t ra ns actions with anoth e r c o r poration in
which o n e o f its dire cto r s is also inter e sted ,

shoul d apply even if his intere st in th e second

co r poration is mere l y th a t o f stock holder A .

c onflict o f inter e sts in a director may b e j ust

as serious where he is a stockhold e r only in
th e secon d c o rp o rati o n a s if he were al so a
,

dire ctor .

O ne o f the annoying p e tty monopolies con ,

ce r ning which evidence was tak e n by the P uj o

C ommitt ee is the e xclusive p r ivil e g e g r anted to
,

the Am er ican Bank N ote C ompany by the N e w

Y o r k S tock E xchang e A re c e n t .

issue of N ew Y o r k City b onds was d e ni e d listing

 S ERVE O N E MAST E R ONLY 83

on the E xchange b e cause the city r e fused to

,

submit to an exaction o f by the Am er i

c a n C ompany f o r engr aving th e b onds wh e n th e
,

N ew Y o r k Bank N ote C ompany would do the

work equally well f o r As t e nding to
explain this extraordinary monopoly it was ,

shown th a t men promin e nt in th e fi nancial world

were stockholde r s in the Am er ican C ompany .

Among the la r gest stockhold er s was Mr Morgan .

,

with sh ar e s N 0 m e mb er of the M o r gan

.

firm was a director of the American C ompany ;

but there w a s suffi ci e nt influ e nc e exert e d som e
how to give the American Comp a ny the stock
e xchange monopoly .

The P uj o C ommittee whi l e fai l ing to rec o m

,

mend that transacti o ns in which a director has a

p r ivate interest be prohibited r e cogniz e s th a t a
,

stockholder s inte r est of more than a certain S ize

’

may b e as p otent an instrument of influenc e

as a direct pers o n al interest ; f o r it rec o mmends
th a t

Borro w ings directly o r indir e ctly by

,

any c o r poration of th e stock of which he ( a bank

director ) holds upwards of 1 0 per cent from the
.

b ank o f which he is such dir e cto r S hould only b e

,

permitted on c o ndition that notice S hall hav e

,
 ’
84 O THE R P EOPLE S M ONE Y

b e en given t o his c o dir ectors and that a full

-

stat e m e nt o f the transaction sh all b e e nter ed

upon the minut e s o f the meeting at which such
loan was authorized .

As shown ab ove th e particular p ro vision for

,

notic e a ff ords no p r otection to the public ; but

if it did its application ought to b e extend e d
,

to l esse r stock holdi n gs Inde e d it is diffic u lt to

-
.

fix a limit so low that fi n a ncial int ere st will n o t

infl u e nce action C ertai nly a stockholding in
.

t e res t o f a single d irecto r much small er than 10 ,

p e r ce nt might b e most e ff ective i n inducing

.
,

fav o rs Mr M organ s stockholdings i n th e

. .
’

American Bank N ote C ompany was only three

per cent The. investment o f J P . .

M organ C O in th e N ati o nal City Bank repre

.

s e nted only 6 p er cent O f t h e bank s stock ; .

’

and would undoubted l y have been e ff e ctiv e ,

e v e n if it h ad n o t b e en supplemented by the
e lection o f his son to the b oard o f di r ectors .

S P E CI A L D I S $ UA L I F I C A TION S
The S tanl e y C ommitt e e after investigation of ,

the S teel T r ust concluded that the evils of int e r

,

locking di re cto r at e s w e r e so se r ious that re pre

s e n t a t ives o f certain ind u stri e s which ar e l argely
 ’
86 O THE R P E OPLE S M ONEY

H OW T H E P R O HI B ITION M AY BE L I M IT E D
Th e M on e y Trust cannot be destroyed u nless
all c l ass es o f c o r porations are includ e d in the

p r ohibition o f inte r locking dir e ctors a nd o f

transactions by c o r p orations in which the m a n
a g e m e n t h as a p r ivate interest But it does not
.

follow that the p r ohibition must apply to every

c orp o r ation o f e a ch class C er tain exceptions
.

are entir ely c onsistent with me r ely protecting the

public against the M oney Trust ; although pro
t e c t io n o f mino r ity stockhold er s and busin e ss
ethics demand that the rul e prohibiting a c or
p o r a t io n from making cont r acts in which a di
recto r has a p r ivat e fi nancial int e r e st should be
u nive r sa l in its application The number o f
.

c orp or ations in the United S tates Dec 3 1 1 9 12 .

, ,

was O f these only 1 6 1 0 have a capi

tal o f mo re than Few co r po r ations
( oth e r than banks ) with a capital o f l e ss than
could app re ciably a ff e ct general cr e dit
conditions e ith er th r ough their o wn operations
o r thei r a ffiliations . C orporations ( oth e r than
banks ) with capital resourc e s of l e ss than
000 might th e r e fo re b e e xcluded from th e scope
, ,

O f th e statut e fo r th e pr e s e nt Th e prohibition
.

c ould also be limited so as not to apply to any

 S ERVE O N E MASTE R O NL Y 87

industrial c onc e rn r e ga r dl e ss of the amount o f

,

capit al and re sou r ces doing only an intrastat e

,

business ; as practically all large indust r ial co r

p o r a t io n s are e ngaged in int e rstate c omm e rc e .

This would e xclude some retail c oncerns and

loca l j obb er s and manufacturers not otherwise
e xclud e d f r om the op er ation o f the act L ike .

wise banks a nd trust c ompani e s located in citi e s

o f l e ss than inhabitants might if thought
,

advisable be excluded fo r the pr e s e nt if th e ir

, ,

capita l is less than and their r e sour c e s

l e ss than s ay
, , In larger citi e s even
the smaller banking institutions should be su b
j e c t to the law Such exceptions should ove r
.

come a ny obj ection which might b e raised that

in some small er cities the prohibition Of i nter
,

locking dir ectorat e s woul d exc l ude from the

bank directorates all the abl e business men of
t h e community thr ough fear o f l osing the o ppo r
t u nit y o f bank accommodations .

An exc e ption should also be m a de so as to ,

permit interlocking directorates between a c e r

po rat io n and its prop e r subsidiari e s . And the
prohibition o f tr a nsactions in which the manage
ment has a priv a te inter e st should o f course n o t
, ,

apply to contracts e xpress o r implied f o r such

, ,

s e rvic e s a s a re perfo r med i ndiscrim i n a tely f o r

88 O TH E R PE OPLE S M ONE Y ’

the whole community by r ailroads and public

s er vice corporations o r for servic e s common to
, ,

all custom er s like the o r dinary service o f a ba n k

,

for its d e posito r s.

TH E PO W ER O F CO N GRESS
The qu e stion may be ask e d $ Has Congress
the power to impose th e se limitations upon the
conduct of any busin e ss oth er than national
b anks ? And if th e p ow er o f Cong re ss is so lim
it e d will not the dominant financiers upon the
, ,

enactm e nt of such a law conver t th e ir national

,

banks into stat e b anks o r trust comp a nies an d ,

thus e scape from cong r essional control ?

The a nswer to b oth questions is clear C on .

gr e ss has ample pow e r to impose such p r ohibitions

upon practically all co rpo r ations including st a te,

b anks trust companies and life insur ance c om

,

panics ; and evasion may b e made impossib le .

Whil e C ongre ss has not be e n g r anted p ower to

r e gulate direc t l y state b anks and trust o r l if e
,

ins urance compani e s o r rail r oad public s e rvic e

, ,
-

and industrial corporat ions exc e pt in r esp e ct to

,

int e rstate comm e rce i t may d o so in dir ec tl y

,

by vir tu e e ith e r of its cont r ol of the mail privilege

o r through th e taxing pow e r .

P r actically no business in the Unite d S tat e s can

 O TH E R P E OPLE S M ONEY
’
90

has no p ow er to p r ohibit o r to r e gulat e directly

,

th e issu e of b ank notes by stat e b anks but it ,

i n di re ctly p r ohibit e d their issu e by imposing a

tax of t e n per cent up on any b ank note issued by
.

a stat e ba nk .

Th e p ower of C ongress over interstate c om

m e rce h as be e n simil arly utilized C ongr e ss
.

cannot o r di narily provide comp e nsation f o r ac

c ide n t s to e mploy ee s o r und er take di r ectly to

suppress prostitutio n ; but it has a s an inci

,

d e nt o f regulating i nt er state comm e rc e enact e d ,

’
th e R ai lr o a d E mploye r s L iability law and the
Whit e Slave Law ; and it has full p ower ov e r
the instrum e nt a lities o f c ommerce like the ,

t e legraph and th e t e lephone .

As such exer cise of c ongressiona l p ower has

b ee n c ommon f o r at least half a century C on
, , ,

g re ss should not h e sitate now to employ it where

its exercis e is u r gently needed For a comp r e
.

h e nsive prohibition o f int er locking directo r at e s is

an e ssential condition o f our attai ning the N e w
Freedom Such a law would involve a gr e at
.

ch a ng e in the relation o f the l e ading banks a n d

banke rs to oth er busin e ss e s But it is the v er y
.

p urpose o f M on e y T r ust l e g islation to e ff e ct a

g r eat chang e ; and unl e ss it do e s so th e powe r of
,

our fi nancial oliga r chy cannot be brok e n .

 S ERVE O N E MAST ER ONLY
But though the en actment o f such a law is
essenti al to the emancipation of busin e ss it will
,

no t a l o ne r e store industrial lib e rty

. It must b e
supplemented by o ther remedi al measures .
 C HA P T ER V
WHA T PUBLI C I T Y C AN D O

P UB LI CITY is j ustly c ommended as a reme d y f o r

socia l a nd industrial di s e as e s Sunl ight is s aid
.

to b e th e b e st o f disinfectants ; electric light the

most efficient polic e man And publicity h as
.

al r eady play e d a n import a nt p art in the struggle

against th e M oney T r ust The P u j o C ommitt ee
.

has in the disclosure o f the facts conc e rning

,

fi nancial conc e ntration m a de a most important

,

cont r ibution towar d a ttainment of t h e Ne w

Freedom The b attlefield h as b een surveyed and
.

ch arte d The hostile fo r ces h a ve been locat e d

.
,

counte d a nd app r ais e d That w as a necessar y

.

— —
first step a nd a long o n e towards re l ie f T he .

’
pro visions i n the C ommitte e s bill conc e rning the
inc orporation o f stock e xchanges and the state
ment to be mad e in c onn e ction with the listing o f
s e curities would doubtl e ss h a ve a be n efic e n t eff ect .

But there should b e a f u rther c a l l upon publicity

for se r vic e That potent forc e must i n the im
.
,

p e nding struggl e b e utiliz e d in many ways as a

,

c ontinuous r e m e dial m e asur e .

92
 ’
94 O TH ER PE OPLE S M ONEY

N o w h ow h as this g r eat wea l th b een accu

,

m u l at e d ? S ome of it was natural a ccr e tion .

S ome o f it is due to sp e cial opportunities f or

investment wis e ly availed o f S ome of it is due
.

to the vast e xtent o f the b ankers operations ’

.

Then p ow e r breeds w eal t h as we alth breeds

p ower B ut a m ain cause o f these l arge fortun e s
.

is the huge to l ls t aken by those who c ontrol the

av e nues to c apita l and to investors Th e re has .

“
b ee n exacted as toll liter ally all that the tra ffi c
”
will bear .

E$ C ESS IV E BA N K ERS C O MM I SS ION S

’

T he P uj o C ommittee was unfor tunately pre

vented b y lac k o f time fr om p re senting to the
c ountry the evidence c overing th e amounts tak e n
’
by the investment b anke r s as promoter s fees ,

under writing commissions a nd profits N oth .

ing coul d have demonstr a ted so c l e ar ly the p owe r

e xercised by the bankers as a schedu l e showin g
,

th e aggregate o f these taxes levied within recent

y e ars It would be w e ll worth while now t o re
.

open th e Mon e y Trust investigation mer el y to

c ollec t these data But earli e r investigations
.

have disclos e d som e illuminating though spo r ,

adi e facts .

The syndicat e which p r omoted th e S t ee l T r ust ,

 W H AT PUB L I C I T Y C A N D O 95

’
took as c ompensation for a few weeks wo rk
, ,

s e curiti e s yielding i n c ash ; an d o f this ,

J P Morgan dz C o re c e ived f o r thei r se r vic e s as

. . .
,

Syn di cate Manage r s b e sides their

,

share as syndicate subscribers in the r e maining

, ,

The Morg a n syn di cate took fo r

promoting the Tube Trust common
stoc k o ut o f a tota l issue of stoc k
( preferre d a nd common ) N o r were monst e r .

commissions limited to trust pr o motions M ore .

recently b a nke r s syndicat e s h a ve in m any in

,
’
,

stances received for fl oating pref e rred stoc k s

,

of r e capitalized industria l concerns one-third ,

o f a ll c ommon stock issu e d b esides a c onsiderable ,

su m in cash And for the sa l e of pr e f er red stock

.

o f well e stab lished manuf a ctu r ing conc e rns cash ,

commissions ( o r profits) o f from 7 to 1 0 per

cent o f the cash rais e d are often ex acted O n
. .

b on ds o f high class industrial concerns b ank e rs

-
,
’

c ommissions ( or p r ofits) of from 5 to 1 0 points

hav e been common .

N o r h av e these he a vy ch arges b een confin e d

to industrial concer ns E ven railr oad securiti e s .
,

supposedly o f high g r ad e have been subj e cted to ,

lik e b ur dens At a time wh e n the N ew Haven s

.
’

credit was still unimpai r ed J P Morgan Co , . . .

took the N e w Y ork W e stch e st e r ,

Boston R a il
 ’
96 O TH E R P E OPLE S M ONE Y

w ay first mo r tgage b on ds guarantee d b y th e ,

N ew Hav e n at 9 2 and th e y w e re mark e t e d

at 96 They took th e P o r tland Terminal
C ompany b onds gua r ante e d by the M aine C e n
,

—
t r al R ailr oad a c o rp o r ation o f unqu e sti onabl e
—
c re dit a t ab out 88 and th e s e w er e mark e ted
,

at 9 2 .

A large part of th e s e und er writing c ommis

sions is taken by the g re at b anking hous e s not ,

fo r th e ir se r vices in s e lling the b onds no r in as ,

su m ing risks b ut for securing oth er s to s e ll th e

,

b onds and incur risks Thus when th e I nter

.

—
b o r o R ailway a most p r osp er ous corp o r ation
—fin anc e d its recent b ond issue ,

J P Morgan
. . C o r e c e ived a 3 per cent c om
. .

mission that is , ,
p r actically for a r
ranging that other s shou l d und e rwrite a nd s e ll
th e b onds .

The aggr e gat e commissions o r p r ofits so tak e n

by l e ading b anking hous e s can only b e conj ee
t ure d as the full amount o f th e ir t r ansac tions
,

has n o t b ee n disclos e d and th e rat e o f com

,

mission or profi t varies v er y widely But th e .

P uj o C ommitt e e has suppli e d som e i nt e r e sting

data b e ar ing upon the subj e ct $ C ounti n g the
issu e s of s e cur iti e s of int e rstat e c o r po r ations
only J P M o r gan
, . . C O di re ctly p r ocur e d the
.
 O TH E R PEOPLE S M ONEY
’
98

ag r eem e nts cr e ating a sole fiscal ag e nt to di spose

o f th e ir s e cur ity issu e s ; that the issu e of the

securiti e s o f int er stat e r ailr oads b e placed under

th e supervision o f the I n t er stat e C omme r ce
C ommission ; and that th e ir s e c u rities should be
dispos e d of only upon public or p r ivate comp e ti
tiv e bids o r und er reg ul ations to b e pr e scribed
,

by the C ommission with full p ow e rs o f i nv e sti

g at io n that will discov er and punish c ombina
tions which prevent c ompetition in bid di ng .

S ome o f th e state public s er vice commissions

-

now e x e rcise such p ow e r ; a nd it may possibly

b e wise to c onf e r this p ower upon th e int e rstat e
c ommission although the rec ommendation o f the
,

Hadley R ailroad S e curities C ommission are to

the contrary But th e official r e gulation as pro
.

pos e d by the P uj o C ommitt ee would be confi ned

to r ailr oad c o r porations ; a nd th e new sec urity
issues o f othe r corpor a tions l ist e d on the N ew
Y o rk S tock E xchange have agg r egated i n th e
last five yea r s which is more than
e ithe r the railroad o r the municipa l issues .

P ublicity o ff er s however another and even more

, ,

p r omising r e m e dy $ a m e thod of regulating

’
bankers cha r g e s which would apply automa
tically to rail r oad public service and industria l
,
-

c o r porations alik e .
 W HAT PUB L I C I T Y CA N D O 99

T he question may b e asked $ Why h ave th e s e

e x cessive char ges b ee n submitted t o ? C o r pora
tions which in the fi r st instance bear the ch ar g e s
,

for capital have doubtl e ss submitted b e caus e

, , ,

of b ank er cont r ol ; e x er cised dir ectly through

-

i nterlocking directorates or k indr ed relations

, ,

and i ndirect l y through c ombinations a mong

b anker s to suppress competition But why have .

the i nvestors submitted since ultimate l y al l

,

these cha r ges a r e b orne by the inv e sto r s excep t ,

so f ar a s corp o r ations succeed in shifting the

bur den upon the c ommunity ? The large army

of sma ll inv e stors c onstituting a substantia l
,

maj ority of all security buyers are ent irely free ,

fr om b anker c ontro l Their submission is nu

.

doubte d ly due in part to the fact that the

, ,

ban k ers contro l t h e a venues to recogniz ed l y s afe

investments al most as fully as they do the
’
a venues to capit al But the investor s servility
.

is d ue p artly a l so to his ignor a nce of t h e

, ,

f acts Is it not p r obable that if e ach in

.
,

v e s t or knew the extent to which t h e secur ity he

b uys f rom the b a nk er is di l ut e d by excessiv e

underwritings c o m m i ssIOnS and profits t h er e
, ,

would b e a strike o f capit al against these unj ust

e xactions ?
 ’
1 00 O TH E R P E O PLE S M ONE Y

TH E S TR I K E O F C A PIT A L
A recent British experience supports this
vi e w In a b r i e f pe r iod last sp r ing nine diff e r
.

ent issues agg r egating

, w ere o ff e re d
by syndicat e s o n the L ondon mark e t and o n the ,

av er age only ab out 1 0 pe r c e nt o f these loans.

was taken by the public M oney was tight.

“ ”
,

b ut the rat e s o f inter est o ff e r ed we r e very libera l ,

and n o o n e doub t e d that the inv e stors w e re

w e l l supp l i e d with funds Th e Lon don D aily
.

M a il presented an exp l anation

Th e long seri e s o f r e b u ffs to new loans at the

hands o f investors r e ached a climax in the ill
succ e ss o f th e g re at R othschild issue It wil l .

r e main a topic o f financia l discussion for many

days and many in the city a re exp re ssing the
,

opinion that i t may hav e a r e volutiona r y e ff e ct

upon th e p r esent system o f loan issuing and
und e rwriting Th e qu e stion b eing discussed is
.

that th e public have b e come loth to subscrib e

for stock which they beli e ve th e und er w r ite r s can
a fford by r e ason of the c ommission th e y r e c e iv e
, ,

to sell subs e qu e ntly at a low er p r ice than the

issu e p r ice and that the S tock E xchang e has
,

b e gun to r e aliz e th e public s attitud e Th e public

’
.
 ’
1 02 O TH E R P E OPLE S M ONE Y

in g th e skil l and risk involved th e r e can b e n o

,

obj e ction to making it known If it is not .

“
r e asonable th e i nv e stor will
, st r ike
,
a s in
v e st o rs s ee m to have done recently in E ngland .

’
Such d isclosu r e s o f b ankers commissions o r
p r ofits is d e mand e d also f o r a nother reason $ It
will aid th e inv e sto r in j udging o f the safety o f
th e investment In the mark e ting o f securities
.

there a r e two classes o f risks $ O ne is the risk

wheth er the b anker ( o r the c o r poration ) will find
ready purchasers fo r the b onds o r stoc k at the
issue p r ic e ; th e other wheth e r the investor wil l
g e t a good article The maker o f the security
.

and the b anke r a r e inter e sted chi e fly in g e tting i t

sold at the issue price The investo r is i nter e st e d
.

chi e fly in b uying a good article The small

investor r e li e s almost e xclusiv e ly upon the b anker
f o r his knowl e dg e and j udgm e nt as to th e quality
o f the security ; and it is this which mak e s h is

r el ation to the banker o n e o f confi dence B ut .

at p re s e nt th e i nv e stm e nt b ank e r occupies a

,

position i nconsist e nt with that r e lation Th e .

b ank e rs c omp e nsation should of c our s e vary

’
, ,

according to th e risk h e assumes Wh ere th er e

.

is a larg e risk that the b onds o r stock will not b e

promptly sold at th e issu e p r ic e th e und e rwriti n g
,

c ommission ( that is the i nsu r anc e premium )

 W HAT PUB L I C IT Y C A N D O 1 03

should b e correspondingly l arge B ut th e b a nke r

.

ought not to b e paid mo re for g e tting in vestors

to a ssum e a la r g er risk In practice the b ank e r
.

g e ts the high e r commission for under w riting th e

weaker security o n the ground t hat his o wn risk
,

is g re ater A nd the weaker the security the

.
,
’
great e r is the b ank e r s inc e ntive to induce h is
custom e rs to r e li e ve him N o w the law S hou l d
.

not und e rtak e ( excep t in ci dentally in connection

with railroads and public service c orporations) to
-

’
fix b ank er s p r ofits And it should not see k to
.

p re vent inv e sto r s f r om making b ad barg a ins .

But it is now r e cogniz ed in the simpl e st mer

c h an disin g ,
that th ere should b e full disclosures .

The ar chaic doctrine of cavea t em ptor is vanishing .

The law has b e gun to require publicity in ai d of

fai r d e aling The F e d e ral P ur e Food L a w do es
.

not guar ant e e quality o r pric e s ; b ut it h e lps the

b uy e r to j udg e o f quality by r e q uiring disclosur e
o f ing re di e nts Among the most important facts
.

to b e le ar ned for d e ter mining the real value o f a

secur ity is the amount of water it c ontains .

And any excessive amount p a id to the b a nker

f o r mar k e ting a security is wat e r R equire a
.

full disclosure to the inv e stor o f the amount o f

c ommissions and profits paid ; and n o t only will
’
inv e st ors b e put o n their guard b ut b an kers ,
 ’
1 04 O THE R P E OPLE S M ONEY

c ompensation will tend to adj ust itself auto

m at ic all y t o what is fa ir and reasonable Ex .

c e ssiv e c o m m issio n w t h is form o f unj ustly ao

q u ired wealth— will in larg e p art cease .

REA L D I S C L O SURE
B ut the disclosur e must b e r e al A nd it must
.

b e a disclosure to th e inv e stor I t will not suff ic e

.

to require m er ely the fi l ing o f a statement o f facts

with the C ommissioner o f C or po r ations o r with
a score o f other officials feder al and state That
,

would b e a lmost as in e ff ective as if the P ure Food

L a w required a manufacturer merely to deposit
wit h the Departm e nt a statement o f ing re dients ,

instead o f requi r ing the l ab el to tell the story .

N or woul d the fi ling o f a full statement with the

S toc k E xchang e if inco r po r ated a s provided
, ,

by th e P uj o C omm itt ee b ill b e adequate

, .

T o be e ff ectiv e knowl e dg e of th e facts must b e

,

actually b r ought hom e to th e inv e stor and this ,

can best b e done by req u i r i n g the facts to b e

stated in good la r g e typ e in eve r y notice cire n
, ,

lar l e tt er and adv er tis e m e nt inviting the inv e stor

,

to purchas e C omplianc e with this r e quire ment

.

should also b e obligato r y and not som e thing

,

wh ich the inv e sto r could waiv e Fo r the whol e

.

public is i nt ere st e d in putting an e nd to the

 ’
1 06 O TH E R P E OPLE S M ONE Y

N ot long ago a member o f a l e ading b anking

house w as undertaking to j ustify a com m ission
tak e n by his fir m fo r fl oating a n e w favorite p r e
f err ed stock of a manufacturing concern The .

b ankers took for their services in c ash ,

b e si d e s o n e—third o f the common stock amount ,

“ ”
ing to ab out O f c our se he said , ,
“
that woul d have been t o o much if we co u l d have
’
kept it all for our selves ; b ut we couldn t We .

had to divide up a l arge part T h e re were fif t y

.

s e ven participants Why we had even t o giv e

.
,

of stock t o — ( naming the presi

dent of a lea ding b ank in the city where the busi
ness w a s located ) He might some day h av e
.

b ee n asked what he thought o f the stock If he .

had shr ugg e d h is should e rs a nd sai d he didn t ’

k now w e might have lost many a custom e r fo r

,

the stock We h a d to give him

. o f the

stock to teach him not to shrug his shoulde r s .

Think of the e ff ectiveness with pr a ctic al Amer

ic a n s o f a statem e nt lik e this $

A . B . Co .

In v e s tm ent B ank er s

We hav e t o day s ecure d sub stantial c o ntr o l of

th e succ e s sf u l ma c hin e ry b usin e s s her e tofor e
 W HAT PUB L I C I T Y C A N D O 1 07

c on du c te d by at Il l in o is , wh ic h
h as b e e n in c o rpo rate d un d er t h e n am e o f t h e
Ex c e l s i o r M an u f ac t u rin g C om pan y with a c api t al
of of whic h is P r e ferr e d
an d C om m on .

A s we h av e a l ar g e c lie nt e l e of c onfidin g
cu s t o m er s , we w er e ab le t o s e c u r e f r om th e
o wn er s an ag re e m e n t f or m arketing t h e Pre
—
f er e d s t o c k we t o fix a pri c e wh ic h sh all n e t
r

t h e own e rs in c a s h $ 9 5 a s h are .

We ofi e r this e x c e l lent st o ck t o yo u at
pe r s h are O ur o wn c om m i s s i on o r pr ofit wil l
.

b e only a littl e o ver per s h ar e , o r s ay,

c a sh , b e s i d e s o f t h e C om m o n
s to c k, wh i c h we r e c eive d as a b o n u s . Th i s c a sh
an d s t o ck c om m is s io n we ar e t o d ivi d e in vari o u s

propo r t i o n s with t h e f o ll o w in g part ic ipan t s in t h e

un derwri tin g syn d i c ate $

C D . C o , N e w Yo rk
. .

E F . . C o , B o sto n
.

L M . C o , Ph il ad e lphia
. .

I K
. . C o , N e w Yo rk
. .

0 P . Co , C hi cag o
. .

Were such notic e s common the investment ,

“ ”
b ankers wou l d be wo r thy o f th e i r hir e ,
for
on l y r e asonable c ompensation woul d o rdinar ily
b e taken .
 ’
1 08 O TH E R P E OPLE S M ONE Y

For mar k eting the pre f erred stock as in the

,

c ase o f E xcelsio r Man uf acturing C o referred to

.

ab ove ,
investment b anke r s were d o ubt le ss
essential and as middlemen th e y performed a
,

useful se r vice B ut th e y used thei r strong p osition

.

to mak e an exc e ssive ch ar g e Th er e are how

.
,
’
ever many c as es wher e the b anke r s services
,

c an be al together di spensed with ; a nd wh er e

that is possib l e he sho ul d b e e limin a ted n o t ,
’
only for economy s s ak e b ut to b re ak up
,

financi al concentr a tion .

l 10 O TH E R PE OPLE S M ONE Y ’

municipaliti e s pay toll to th e b anker on all

b on ds sold Why should th e y ? I t is not b e
.

cause the b ank er is always n ee d e d It is because .

th e b anker cont r o l s the onl y avenue through

which th e investo r in b onds and stocks can o r
din aril y b e r e ach e d T h e b anker has b ecome the
.

u nive r sa l tax gatherer True the pro rata

.
,

o f tax e s levied by him upon o ur state an d city

gov er nm e nts is l e ss than that levied by him upon

the corporations But few states o r cities esc ape
.

payment o f some such tax to the b ank er o n every

loan it m ake s E v e n where the new issues of
.

b onds are sold at pub lic auction o r to the high e st

,
’
bidd e r o n sealed p r oposals the b ankers syndicat e s
,

usuall y secure large blocks o f the b onds which

ar e sold to the people at a considerable profit .

The middleman even though unnecess ar y col

, ,

lects his t r ibute .

There is a l egitimate fiel d f o r d e al ers i n stat e

and municipa l b onds a s f o r other merc h ants
, .

I nvesto r s al re ady owning such b onds must have

a m e dium t h r ough which they c a n sell their
holdings And thos e states o r municipa l iti e s
.

which l ack a n established r e putation among

inv e stors o r which must s e ek more d istant
,

mark e ts need the bank er to distribute n ew issu e s

,
.

But there ar e many states and cities which hav e

 SU PER FL U O US B A N K ER S 1l 1

a n established reputation and have a home

market at hand Th e s e should sell their b onds
.

direct to investo r s without the intervention o f a

midd l em a n And as l ike conditions p r evai l with
.

some corp orations th e ir b onds and stocks sho u ld

,

also b e so l d direct to the invest o r B oth fi nancial .

e fficiency a n d industria l liberty d emand th a t t h e

’
ban k ers to ll b e a bolished wh e re th a t is possible
,
.

B AN K ER AND BR O K E R
T h e b usiness o f the investment ban k er m ust
not b e confused with that of the b ond a nd stoc k
br o ke r The two are o f ten c ombined ; but the
.

f unctions are essenti ally diff e rent The bro k er .

performs a very limit e d servic e He has properl y .

nothing to do with the original issu e of securities ,

n o r with th e i r int r oduction into the ma r ket He .

merely negotiates a purchase or sale a s a gent f o r

another und e r specific orders H e ex e rcises no .

discretion except in the m e thod of bringing

,

buyer a n d seller together or of executing orders

, .

For h is humb l e service he receives a moderat e

compensation a c ommission usua l ly one-eighth
, ,

of one per cent ( 1 2 . cents for each $ 1 00) on

the par v al ue of the security sol d T h e invest .

ment b anker also is a mere middl e man But he .

i s a principal not an agent He is also a m e rc ha nt

; ,
.
1 12 O T H E R P E O PL E S M ONEY ’

i n b onds a nd stocks Th e compensation rec e ived

.

for his p ar t in the t r ansaction is in many cases

mo r e accurat e ly d e sc r ib e d as p r ofit than as com
mission S o far as c once r ns n e w issu e s o f
.

governm e nt state and municipa l b onds esp e

, ,

c ia l l y
,
he acts as m er chant buying and selling ,

sec urities o n his o wn b e half ; buying c ommonly

at wholesale fr om th e m ak e r and s elling at re tail
to the inv e sto r s ; taking th e m er chant s r isk and ’

’
th e merchant s p r ofits O n pur chas e s of c o r p o
.

rate securiti e s t h e p r ofits are oft e n v e ry large ;

but e ven a larg e p r ofit may b e e ntire ly p r op er ;
fo r wh e n t h e b ank er s s er vices ar e n ee d e d and
’

are p r operly p er fo r med they ar e o f g re at valu e

,
.

O n p u r chas e s o f gove r nment stat e and munic ,

ipal s e cu r iti e s th e p r ofit is usually small er ; but

e v e n a v er y small profi t cannot be j ustified if ,

unn e c e ssary .

H OW TH E B AN K ER CA N SERV E
The banke r s s e rvices include t hree distinct
’

functions and only thre e $

,

Firs t $ Sp e cifically as e xp er t Th e inv e stm e nt .

b ank er has th e r e sp onsibility o f the o r dinary

re tail er to s e ll only that m er chan d ise which is
good of its kind B ut his re sp onsibility in this
.

re s p e ct is unus u ally h e avy b e caus e h e deals i n an

,
 ’
1 14 O TH E R P E OPLE S M ONEY
By car r ying s e c u rities in stock th e bank er pe r ,

fo r ms a s er vic e also to inv es to r s who ar e th ere by,

e nabled to buy s e cur ities at such tim e s as th e y

d e si re
.

Wh e n e v e r mak e rs o f s e curities o r investo r s

r e quir e a ll o r any of thes e three s e rvices th e ,

investm e nt bank er is n ee d e d and paym e nt o f ,

comp e nsation to him is p r ope r Wh ere the r e is .

no such n ee d th e bank er is cl e arly supe r fluous

,
.

And in r esp e ct to th e o r igin al issue o f many of our

stat e and municipal b onds and of som e co rporate
,

s e curiti e s no such n ee d e xists

,
.

W HERE T H E BA N K E R SERV ES N O T
I t needs no b ank er e xp er ts in valu e to tell us
that b onds o f Massachus e tts o r N e w Y o r k of ,

B oston P hiladelphia o r Baltimo re and of sco re s

,

o f l e sser Ame r ican citi e s a r e saf e inv e stments

,
.

Th e b asic financial facts in re ga r d to such b onds

ar e a part of the common knowl e dg e o f many
Am er ican inv e sto r s ; a n d c er tainly of most pos
, ,

sibl e inv e sto r s wh o re sid e in th e pa r ticular stat e

o r city wh os e b onds a re in qu e stion Wh e re th e .

fi nancial facts a re not g e n er ally known th e y a re ,

so simpl e that th e y can b e e asily summar iz e d and

,

und er stood by any p r osp e ctive inv e sto r without

int erp re tation by an e xp er t Ba n k er s oft e n .
 SU PE R FL U O US BA N K ER S l 15

emp l oy b efore purch a sing s e curities their own

, ,

accountants to v er i fy the statements supplie d b y

the makers o f the secu r ity and u se th e s e a ccount
,

ants c e rtifi cates as a n aid in s e lling S tates and

’
.

municipalities t h e maker s o f the s e curiti e s

, ,

might for the same purp ose employ indep e ndent

public accountants of high reputation who w ould ,

giv e their certificates for use in mark e ting the

s e curities I nv e sto r s could also b e a ssur ed with
.

out bank er aid that th e basic legal conditions are

-

sound Bankers b e fore p urchasing an issu e of

.
,

s e c ur ities c ustomar ily ob tain from their own

,

c ouns e l an opinion as to its l e gality whic h inv es ,

to r s are invited to examine I t would answ er .

th e same purp ose if stat e s and m u n Ip alit ies

,

sho u ld suppl e m e nt the opinion o f their l e gal

r e p r esentativ e s by that of independent c o unsel
o f recognized p r of e ssional standing w ho wo u ld ,

c er tify t o the legality o f the issu e .

Ne ith er shou l d an investment b a n k er b e nee d ed

to find investors willing to t a ke up in sma l l lots , ,

a new issue o f b onds o f N ew Y ork or M assa

c h u se t t s o f B oston P hiladelp hi a o r Baltimor e or
, , ,

a hundr ed other A me r ican cities A st a te o r .

municipality seeking to ma r ket dir ect t o the

i nvestor its o wn b onds would naturally experi
ence a t the outset som e diffi c u lty in mark e ting a
, ,
 O TH E R PE OPLE S M ONE Y
’

1 16

large issu e And in a newer c ommunity whe r e

.
,

th e re is littl e a ccumulation o f unemployed capital ,

i t m ight b e impossibl e to find buye r s fo r any lar g e

issue Investors a re apt to b e c onservativ e ;
.

an d they have been t r ain e d to rega r d the inter

v e n t io n o f the b a nker as necess ary . The b anker s
would naturally discour age a ny a ttemp t o f stat e s
an d cities to dispense with their servi ces . En
t r ance upon a market hitherto monopo l ized by
,

th e m would usually have to b e struggled f or

, .

But b anker fed inv e sto r s as well a s others coul d

-
, ,

in time b e b r ought to realize the advantage o f

,

avoiding the middl e man and de aling directly with

re sponsible b orrowers G ov er nments like p r ivat e
.
,

concerns woul d hav e to d o e duc a tional work ; b ut

,

thi s publicity would b e much less expensiv e and

much mor e productive than that und e rtaken by
the b anke r s Many inv e stors are alrea d y impa
.

tient o f b anker ex a ctions ; a nd eager to d e al

dire ctly with gov er nmental agencies in whom they
have more confidence And a great d em a nd c o uld
.
,

a t o nce b e dev e loped among small er investo r s

,

w hom the b ankers have b ee n unabl e to int ere st ,

a nd wh o now n e ve r b uy stat e or municipal b onds .

T h e op e ning of this n e w fi e ld would fur nish a ma r

k e t in som e re s p e cts mo re d e si r abl e and c er tainly
,

wid e r than that now re ach e d by th e bank er s .

 ’
1 18 O TH E R P E O PLE S M ONEY

mad e in anticipation o f futur e n e eds rather than ,

to m ee t p re s e nt n e cessiti e s M od ern effi ci e nt .

pu b lic finan c iering through substituting s er ial

,

b on ds for the long t er m issu e s ( which in Massa

c h u se t t s has b ee n mad e obligatory ) will in time , ,

r e m ov e the n ee d of larg e sums at o n e time for

’
payi n g matur ing debts since each year s matur i
,

ties will b e p aid fr om the y e ar s taxes P urchas e s ’

.

o f e xisting public utility plants are o f rare occur

r e nc e and ar e apt to b e p re c e d e d by l ong p e riods

,

o f negotiation When they occur they can if

.
,

fo r esight b e exer cis e d usua l ly b e fin a nced without

,

full cash payment at o n e time .

Today whe n a la r ge issue of b onds is made the

, ,

b anker whil e ostensibly payi n g his own money to

,

th e city actually pays to th e city othe r p e ople s

,
’

m on e y which h e has b or row e d from the b anks .

Then th e banks g e t b ack through the city s d e ,

’

posits a la r g e pa r t o f the mon e y so r e ceiv e d And

, .

wh e n the mon e y is r e turn e d to the bank the ,

banker has the oppo r tunity o f b o rr owing it ag ai n

for othe r op er ations The process r e sults in
.

double l oss to th e city The city l oses by not .

g e tting fr om th e b anks as much for its b onds a s

inv e sto r s would pay And then it loses interest
.

on th e mon e y rais e d b e for e it is n ee d e d Fo r the .

bank er s re c e iv e fr om the city b onds b e ar ing rar e ly

 SUP E R FL U O US BA N K ER S 1 19

l ess th a n 4 per cent int ere st ; while the proc ee ds

.

are deposit e d in the banks which rarely allow

mo r e than 2 per cent int e rest o n the daily .

balances .

CITI ES T HA T HE L P E D T HE M SE LV ES
I n th e p r es e nt year som e citi e s have been led by
necessity to help themselves The b ond ma r ket .

was poo r Business was uncertain money tight

.
,

and the ordinary inv e stor reluctant B anker s .

w e re loth to tak e n e w b ond issu e s M unicipali .

ties were unwilling to pay t h e high rates de

m a n de d of them And many cities were pro h ib
.

it e d by l aw o r o r dinance fr om paying more than

4 p e r cent inte r est ; w hile good municipal b onds
.

w ere then selling o n a 4 to 5 per cent b asis . .

But money had to b e raised and the att e mpt was ,

m a de to bor r ow it dir ect fr om the lenders instead

of from the b ank er m i ddl e man Among t h e
-
.

cities which raised money in this way we r e P hila

delphi a Baltimore S t Paul and Utica Ne w
, , .
, ,

Y ork .

P hilad e lp hi a un d er M ayor Blankenb urg s

,
’

insp iration sold near ly

,
in ab out two
days o n a 4 per cent basis and another o ve r—the
.
“

”
count e r sale has b e en made since In Balti .

more with the assist a nce of the S u n

,
 O TH ER P E O PLE S M ONE Y
’
120

wer e sold over the counter o n a 4 1 2 per cent .

’ “
b asis Utica s two
. p opular sales of 4
“
p e r cent b onds w e r e larg e ly over subscrib e d
.
-
.

An d since th e n oth er citi e s large and small

—
have had their over the counte r b ond sales
-
”
.

The exper ienc e o f Utica as stated by its Cont r ol

,

l e r Fred G R eusswig must p r ove o f gene r al

, .
,

interest $
“
I n June of t h e p r es e nt year I a d v er tised for
sale two issu e s o n e o f,
and th e oth er o f
b ea r ing inter est at 4 p er cent Th e .

latter issue was pu r chased at pa r by a local bidd er

and o f the fo r me r we purchas e d for o u r
sinking funds That left . unsold for ,

which there w e re no bidde r s which was the first ,

time that I had b een un a ble to sell ou r b onds .

$ ’
Ab out this time th e popular sales of Baltimo r e
and P hilad e lphia att r act e d my att e ntion The .

laws in e ff e ct in thos e cities did not rest r ict th e

officials as d o e s ou r law and I could not copy their
methods I realiz e d that th er e was plenty o f
.

money in this imm e diate vicinity a nd if I could

d e vise a plan confo r ming with ou r laws under
which I could make the sale attractive to small
inv e sto r s it would und oub tedly p r ov e succ e ssful .

I had found in p r evious e ffo r ts to inte re st p e ople

,

of small m e ans that th e y did not und er stand th e

,
1 22 O THE R PE OPLE S M ONE Y ’

I b e lieve that th ere a r e a larg e numb er o f p er

sons in e v er y city who would buy th e ir o wn b onds
if th e way w ere mad e e asie r by law Sy r acuse
.

a n d th e neighbo r ing village o f I lion b oth of whic h

,

had b een unabl e to s e ll in the usu al way came to ,

me fo r a p r og r am o f p r ocedur e a nd b oth have

since had succ e ssful sal e s along similar l in e s .

W e have b ee n able by this m e ans to ke e p the

int ere st r ate on o ur b onds at 4 1 2 p er cent while .
,

citi e s which hav e follow e d th e o l d plan o f relying

upon b ond hous e s hav e had to incr e ase the rate
to 5 per cent I am in favor o f amending the law
.

in such a mann e r that th e C ommon C ouncil ,

approved by the B oard o f E stimate a nd Appo r

t io n m e n t may fix the prices at which b onds shal l
,

be sold instead o f cal l ing for competitive b ids

, .

’
Th e n plac e th e bonds on sal e at the C ontro ll e r s
offic e to any o ne who will pay the price The .

p r ices up on each issu e should b e g r ad e d according

to the di ff er e nt valu e s of diff erent matur iti e s .

Under th e pr e sent law a s we have it conditions

, ,

a re too complicat e d to make a s al e pr a cticable

”
exc e pt upon a basis of par bids .

TH E ST . P AU L E$ P ER I ME NT
S t P aul wis e ly intr od uc e d into its e xp er im e nt a
.

mo r e d e moc r atic f e ature which T o m L Johnson

,
.
,
 SUP ER FL U O US BA N K ER S 1 23

C leveland s gr eat mayo r , thought ( but did not

’
out

utiliz e ) and which his fr i e nd W B C olv e r now

,
. .
,

Edito r in Chief o f the Dail y N ews brought to the

- -
,

att e ntion o f the St P aul officials M ayo r J o h n

. .

s o n had r e cogniz e d the imp ortance o f r e aching the

small savings o f the people ; a n d c oncluded that

it was necessary not only to issue t h e b onds in
very smal l d e nominations but also to make them ,

redeemab l e at par He sought to combine .

practically b ond investment with the s avings

,

b ank privilege The fact that municipa l b onds

.

are issuable o r dinar ily only in large denomina

tions say
, , pr e sented an obstacle to b e
overc ome M ayor Johnson s plan was to h ave
.
’

the sinking fund c o m m i ss10 ners take large b l ocks

o f the b onds issue against them certificates in
,

d e nominations o f $ 1 0 a nd have the c ommis ,

s io n ers ag r ee ( under their p ower to purchase

secu r ities ) to b uy the c ertificates bac k at par and
int e rest S avings bank e xperienc e he insisted
.
, ,

showed that the redemption f e a ture would not

prove an emba rr assm e nt ; as the pe r c e ntage of
th o se wishing to withdraw their mon e y is small ;
and dep osits are nearly always f ar in excess o f
withdrawals .

The S t P aul sinking f und commission e rs an d

.

City A ttorn e y O N eill app r oved the Johnson

’
 ’
1 24 O THE R PE OPLE S M ONEY

plan ; and in th e fac e o f high money r ates so ld on ,

a 4 p e r cent basis dur ing July ce r tificates to the

.
, ,

net amount o f during August $ 14 7 , ,

00 0 ; and during S e p t e mb e r ov e r ,
the
av er ag e net sales b e ing ab out a day .

M r C olv er r e porting o n the St P aul e xperienc e

.
,
.
,

said
“
There have been a b out individua l pur
chas er s making the a verage d ep osit a b out $ 3 50
o r $ 3 60 . Th er e have b een no certifi cates sold
to b anks D ur ing the first month th e d e posits
.

av er ag e d c onsid e rably higher and for this reason $

in ve r y many cas e s p e opl e who h a d savings which
r e pr e s e nt e d th e accumulation o f c onsiderab l e
tim e withdr e w their money fr om the p ostal sav
,

ings b anks fr om the regul ar b a nks from v ar ious

, ,

hiding places and d e posit e d them with the city .

N ow th e s e same people are coming once o r twice

a month and making d e posits o f ten or twenty
dolla r s so that the ave r age of the individual
,

d e posit has fallen very r apidly during S e ptember

and e ve ry indication is that the number o f small
d e p osits will continue to incre a se a nd the rela
t iv e ly la r g e d e posits become less frequent a s
time goes on .

As a matt e r of fact th e se c e rtifi cat e deposits

,

a re stable far mo re than th e d eposits and inves t

,
1 26 O TH E R PE OPLE S M ONEY ’

new art stil l undev e lop e d The gene r al probl e ms

,
.

have n o t yet be e n wo r k e d out And besid e s .

th e s e p r oblems common to all stat e s and citi e s ,

there wil l b e in ne ar ly every community local

, ,

p r oblems which must b e solved and loca l diffi c u l ,

ti e s which must b e ov e rcome The p r op e r solu .

tion even o f the gener al p r oble m s m us t take con

s id erabl e time Th e r e will have to b e many ex
.

perim e n t s made ; and doub tless th er e will b e many

failur es E very g r eat distributo r o f m er chandise
.

knows th e obstacl e s which h e had to ove r com e

b e fore succ e ss was attain e d ; and th e la r g e sums
that had to b e invested in op e ning and p re pa r ing
a market Individual conc er n s h ave sp e nt mil
.

lions i n wis e publicity ; and have ultimat e ly r e ap e d

immens e p r ofits wh e n th e ma rk e t was won .

Cities must take th e i r l e ssons fr om th e s e g re at

distr ibutors Citi e s must b e r e ady to study th e
.

p r obl e ms and to sp e nd p r ud e ntly f o r p r op e r pub

l ic it y wo r k I t might in the e nd p r ov e an e con
.
, ,

o m y ev e n to allow on pa r ticula r issu e s wh er e n e c

, , ,

e ssary a somewhat highe r inte re st r at e than b ank

,

er s would exact if ther e by a di re ct ma r k e t fo r

,

b onds coul d b e secur e d Futu re op er ations would

.

yi e ld la r g e economi e s And the obtaining of a.

di re ct ma r k e t for ci ty b onds is g r owi ng e v er mo re

impo r tant b ecaus e o f th e hug e inc re as e in loans
,
 SUP E R FL U O US BA NK ER S 127

w hich must attend the c onstant expansion of

municipal functions I n 1 89 8 the n e w munic
.

ipal issu e s agg r egated i n 19 12 ,

SAV IN GS B AN K S AS C US TO MERS
I n N ew Y ork Massachus e tts and the o ther
,

sixte e n states where a syst e m of pur el y mutua l

savings banks is general it is p ossib l e wi th a
, ,

littl e organiz ation to d e velop a n imp ortant mar

,

k et f o r the di r e ct pur chaser o f b onds The .

b onds issued by M assachusetts cities a nd town s

have av e raged recently ab out a year ,

and thos e o f the stat e ab out The 1 9 4

M assac h usetts savings b anks with a gg re gate ,

assets of held on O ctob er 3 1 ,

19 1 2
,
in b onds and notes o f stat e s
and municipalities O f this su m ab out
.

000 are invest e d in b onds and notes of M assa

c h u se t t s cities and towns a nd ab out
,
in
stat e issu e s T he deposits in the savings b anks
.

a r e inc re asing at the rate of over a

y e ar M assachus e tts state and municipal b onds
.

have within a few y e ars c o m e to b e issu e d ta x

, ,

e x e mpt in the hands o f the holder whereas other ,

class e s of b onds usually h e ld by sav i ngs b anks

ar e subj ect to a tax of one half of o n e per cent
- .
1 28 O T HE R P E O PLE S M ONE Y ’

of the mar k et v a lue Massachus e tts savi ngs

.

b anks there fo r e will t o an inc r easing ext ent se

, , ,

lect Massachusetts municipal issues f o r high grade -

b ond inv e stm e nts C ertai nly M assachusetts cit

.

i e s and towns might with the c o Operat io n o f the

,
“ ”
C o m monwealth e asily develop a home m ar ket
,

f or
“
ove r t h e—counter b ond b usiness with the
-
”

savings b an ks And the savings b anks o f other

.

states o ff e r similar opportunities to their munici

palit ies .

CO OP ERA TION
B an k e r s obtained th e ir p ower thr o ugh com
bination Why should n o t citi e s and states
.

b y m e an s of c ooperation free themse l ves from

the b ankers ? For b y c o op er ation b etween the
citi e s an d t h e state t h e direct marketing of
,

municipal b onds c oul d b e gre atly facilitated .

Massachus e tts has 3 3 cities each wit h a po pu ,

l ation o f over persons ; 7 1 towns each

with a popu l ation o f over a nd 2 50 towns
e a ch with a population o f less than Thr ee
hundre d and eight of these municipalities now
h ave fund e d ind e b t e dness outstanding The .

a ggreg a te n e t ind e b t e dn e ss is ab out

E v ery ye ar ab out of b onds and notes
are is sued by the M assachusetts citi e s and towns
130 O THE R PE OPLE S M ONEY ’

u n d er p r op e r regulation o f and aid from t h e

,

stat e woul d c o Operat e

,
.

And c o Operat io n among the citi e s and with the

stat e might ser ve in anoth e r imp o r tant r e spect .

Th e se 3 54 Massachus e tts municipaliti e s carry in

the aggregate large b ank balances S om e tim e s .

th e balance carr i e d by a city repres e nts u n ex

p e nded revenu e s ; som e times un e xp end e d pro
c ee ds of loans . O n th e se b alanc e s they usually
rec e iv e fr om the b anks 2 per cent interest The. .

b alances o f municipaliti e s vary like those o f other

d eposito r s ; o n e having idl e funds wh e n another,

is in n e ed Why should not all of these citi e s

.

a n d towns c o Op era t e making say th e S tate their

, , ,

c ommon b ank er and supply each other w ith

,

funds as fa r mer s and lab o rer s c o Operat e thr ough

c re dit unions ? Th e n citi e s would get inste a d o f ,

2 p e r c e nt on their b al anc e s all their money

.
,

was wo r th .

The C ommonwealth of Massachusetts holds

now in its sinking and oth e r funds nearly
000 o f M assachusetts municipal sec urities con ,

s t it u t in g n e arly thr e e fou r ths of all secur iti e s held

in th e s e funds I ts annual pur chas e s agg re gate

.

n e a r ly Its purchas e s d ire ct f r om

citi e s and towns have a l re ady e xc ee d e d
this yea r I t would b e but a simpl e e xt e nsion of
.
 SU PER FL U O US BA N KE R S 31

’
the state s function to coope r ate as indicated in , ,

a j oint M u hic ipal B ond S e lling Ag e ncy an d C re dit

,

Union It wo ul d b e a distinct advanc e in the

.

e fficiency o f state and municipa l financing ;

an d what i s even more important a long step ,

toward the emancipation of the peop l e from

b anker-c ontro l .

CO R PO R AT E SE L F-HE L P
S trong corporations with establishe d reputa
tions local ly o r nationally could emancipat e
, ,

th e mse l ves from the b anker in a S imi l ar mann er .

P ub lic s er vice corp orations in some o f our l e ading

-

“ ”
cities c ou l d e as ily e stablish over the c ounter
- -

home mark e ts f o r their b onds ; an d would b e

greatly aid e d in this by the superv ision now being
exercised by some state c ommissions over t h e
issue of securities b y such corp orations S uch .

c orp or a tions wou ld gain thereby not o nl y in

f re edom from b ank er control and exactions but
-
,

in the w i nning o f valuable local supp ort The .

’
investor s money would b e followed by his sy m
p a thy In things econo m i c as w e ll as in t hings
.
,

po litical wisdom and safety lie in dir e ct appeals to

,

th e p eople .

The P ennsylvania R ail r oad n o w r e li e s la r g e ly

upon its stockhold er s fo r n e w capital But a .
132 O T HE R P E O PL E S M ONE Y ’

c orp oration wi th its long continu e d success an d

-

'

r e putation for stabi l ity sho u ld h av e m u c h wider

fi nanci al suppo r t an d sho ul d e liminate the b anker
altog e ther With the
. stations on its
system the P e nnsy l vania coul d with a slight
, ,

expe nse cr e ate nearly as man y avenues through

,

w hi ch mon e y wo ul d b e obt ainable to meet it s

g r o wing needs .

B AN KER P R OTE CTO RS

It m ay be urg e d that r e putations often outlive
the conditions w h ich j ustify th e m that outliv e d ,

r e putations are pitfalls to the inv e sto r s ; and that

the investm e nt b anker is ne ed ed to guar d him
from such dang e rs T rue ; but when h ave the
.

big b ank er s or $th e ir little sat e llites p r ot e cted the

peopl e from such pitfalls ?
W as th ere ever a more b e-h ankered railroa d
than th e N e w Haven ? Was th ere ev er a more
b anker led c ommunity o f investors than N ew
-

E ngland ? S ix years b e fo re the fall o f that gr e at

syst e m the hidd e n dang er s wer e p ointed o u t to
,

th e se b anker e xp e rts Pr oo f was furnished of

-
.

the rotting timbers Th e disast er b r eeding poli

.
-

ci e s were laid b ar e The b anke r s took no action

. .

Re p e at e dly th ere aft er th e banke r s att e ntion

, ,
’

was call e d to the steady dete r io r ation o f the

 ’
134 O THE R P E OPLE S M O N EY

in taking g e n er ous c o m missions for marketing the

endle ss supply of n e w s e curiti e s ; b ut th e y did
nothing to p r ot e ct the investors Were th e se
.

b ank er s blind ? O r w e re they af r ai d to oppose

th e will of J P M organ
. . Co ?
.

P er haps it is th e b anker who most of all

, ,

n eeds the N e w Freedom .

 C HA P T ER V II
BIG M EN AN D LI TT L E BUS I NESS

J P M O RGA N
. . C o declare in their l etter t o
.
,

“
the P uj o C ommitt e e that practical ly all the
,

ra ilroad and industr ial dev e lopm e nt o f this c oun

try has tak e n plac e initially through the medium
of the g re at b anking houses That statem e nt is
.

entirely unfounded in fact O n the cont r ary .

nearly e ver y such contribution to o ur co m f ort and

“ ”
p r osper ity was initiat e d with o u t their aid .

“
Th e g r eat b anking houses came into r e l ation
with these enterprises either aft er succ e ss had
,
“ ”
b ee n attained o r upon r e organiz ation a fter
,

t h e possibility of success had b ee n d e monstrat e d ,

b ut the funds of t h e h ar dy pioneers who had ,

risked their all w ere e xhausted

, .

T his is tr ue of o ur e ar ly railroads of our ,

early stre e t railways and o f the automobile ; of

,

the t e leg r aph the t e l ephone and the wir e less ;

,

of gas and o il ; of harv e sting machinery a nd of ,

our st ee l industry ; of the textil e paper and shoe ,

industries ; a nd o f n e a r ly every oth er important

b r anch o f manufactur e Th e initiation of eac h
.

135
 O TH E R P E OPLE S M ONE Y
’
136

of these ent e rprises may properly b e ch ar acter

”
iz e d as g re at transactions ; and the m e n who
c ont r ibut e d th e financial aid and business man
ag e m e n t necessary f o r th e ir introduction are
entitl e d to shar e equall y with inv e nto r s in our
, ,

gratitude f o r what has b ee n accomplish e d But .

th e instances are extremely rare wh ere the o r igi

na l fi nancing o f such ent erp r is e s was undertaken
by investm e nt b ankers g r eat or small I t was
,
.

usu all y done by some c ommon business man ,

accustomed to taking r isks ; o r by some well to -

d o friend o f th e inv e ntor o r pione e r wh o was ,

infl uenced larg e ly by consid e rations oth er than

mon e y getting H e re and th ere y o u wi ll fi nd
-
.

that b anker aid was given ; but usually in those

-

c ases i t was a small local b an king c onc e rn not ,

“ ” “
a gr e at banking house which helped t o init i
a te the undertaking .

RA I LR O A D S
We have com e to associate the gr e at bankers
with railr oads But th e i r pa r t was not c o n spic u
.

o u s in the e a r ly histo r y o f th e E ast er n rail r oads ;

and in the Middl e W e st th e e xp er ienc e was to ,

some ext e nt similar The Boston

,
. M aine
R ail r oad owns a nd l e ases mil e s o f l ine ; b ut
i t is a c omposite of ab out 1 6 6 s e parat e railroa d
138 O THE R PE OPLE S M ONEY ’

indivi dua l enterp r ises had dev e lop ed practically

a ll the great ocean lin e s J P M organ
,
. Co . .

fl oated the I nternation al Mercantil e M arine

w i th its of 4 b onds now selling ,

at a b out 6 0 and, of stoc k ( pr e

ferred and common ) on which no dividend h as
ever been paid It w a s j ust sixty two y e ars after
.
-

the first r e gular line o f transatlantic steam e rs

—
The Cunard was founded that Mr M organ .

o r ganized the S hipping T r ust .

T E LE GRA P H

The story o f the teleg r aph is similar The .

’
mon e y for developing Morse s invention was
supplied by his partne r and c o wo r ker Al fred -
,

V ail The initia l line ( from Washington to Balti

.

mo re ) was built with an approp r iation o f

mad e by C ongress in 1 84 3 S ixty six yea r s l ater
.
-

J P M organ
. . C o became b ank e rs for
.

the W e st e rn Union through financi n g its pu r

chas e by the American Tel e phon e T ele g r aph
C ompany .

HA RV ES TIN G M A C H IN ERY

N e x t to railroads and steamships harvesting ,

machin er y has p r ob ably b ee n th e most pot e nt

fa ctor in the d evelopm e nt o f Am er ica ; and mos t
 B I G M EN A N D L ITTLE BUSI NE SS 139

important o f the harvesting machin e s was Cyr us

H M c C o rm ic k s reaper That made it possible
.
’
.

to increase the grain harvest twenty or thirty

fold N o investment b anker had any part in in
.

’
t ro du c ing this gre a t business man s invention .

M c C o rm ic k was without means ; but W illi am

Butler O gden a rai lroa d b u ilder ex M ayor a n d
, ,
-

leading citiz en of C hicago supplied , w it h

which the fir st f a ctory was bui l t there in 1 84 7 .

Fifty five y e ars later J P M organ

-
, . .Co per .

f o rmed the s e rvice o f c ombi ning the five gre a t

h arvest e r c ompanies a nd receive d a c ommission
,

of The c oncerns then c o nsoli d ate d

as t h e Internationa l Harvester C omp a ny w it h ,

a c apita l stock o f h ad despite ,

their huge assets a nd earning power b een pre ,

viou sl y capitali z e d ,i n t h e a ggregate a t o n ly ,

— strong evi d ence th a t i n all the

pr e ceding years no investment b anker had
financed them Indeed M c C o rm ic k was as abl e
.
,

in b usiness a s i n mechanica l inventi o n T wo .

ye ar s af ter O dgen paid him f o r a ha l f

interest in the business M c C o rm ic k b ought it
,

back for a nd there af ter until h is death

,

in 1 884 no o n e but m e mb er s o f the M c C o rm ic k

,

family had any interest in the busin e ss .

 ’
1 40 O T HE R PE OPLE S M ONEY

TH E B AN K ER ERA

I t may b e urged that r ailr o a ds and ste amsh ips ,

the tel e graph and h ar v e sting machinery were

int r oduced b efo re the accumulation o f investment
capital had developed the investment b an ker ,
“ ’ ”
a nd b efore Am e rica s g re at b anking houses
had b ee n e stablished ; a nd that consequ e ntly it , ,

w ould b e fairer to inquire what services bank ers

had r e nd e red in connection with lat e r industrial
d e velopment The fi r m of J P M o r gan
. . Co . .

is fif t y fiv e years o ld ; K uhn L oeb

-
C o fif t y
, .

six years o l d ; L ee H i gginson

, C o over fifty .

years ; and K idder P eab ody

,
C o forty e ight .
-

year s ; and yet the investment ba nker seems to

“ ”
have had almost as littl e part in initi ating
th e g re at imp r ov e ments of the l ast h alf century ,

as did b an k er s in the earli e r period .

S T EE L
T he mo d ern stee l indust r y o f America is forty
“ ”
fiv e y e a r s old Th e great bankers had no pa r t
.

i n initiating it And re w Ca r n e gi e th e n al r eady

.
,

a man of la r g e m e ans int r od uced the Bessem e r

,

p r oc e ss in 1 86 8 I n the next thirty years our

.

st ee l a nd i r on industr y inc re as e d g re atly By .

1 89 8 we ha d fa r outstrip p e d a ll comp e tito r s .

 ’
142 O THE R P E OPLE S M ON E Y

The o nl y man who had money and dared to

stak e it o n the futur e o f th e t e l e phone was
Thomas Sander s an d he d id this n o t m ai nly f or
,

business r e asons B oth he and Hubb ard w e re

.

attached to B e ll primarily by s e ntiment as B e ll ,

had r e mov e d the blight o f d u mb ness from San

der s little s o n and was soon to mar r y Hubb ard s
’
,
’

daught e r Also Sand e rs had no e xpectation at

.
, ,

fi r st that so much mon e y would b e needed He

,
.

was not r ich His entir e bus iness which was

.
,

that of cutting out soles for sho e manufactur er s ,

was not at any tim e worth mo re than thirty

fiv e thousand d olla r s Y et from 1 874 to 1 878
.
, ,

he had advanced n in e t e n t h s o f th e mon e y that

was spent o n the t e l ephone Th e first fiv e .

thousand t e lephones and more we re made with

, ,

his money And s o many long exp e nsive months

.
,

d r agged by before any reli e f came to Sanders ,

that he was comp e lled much against his will an d

,

h is b usiness j udgm e nt to st r etch his cr e dit,

wit h in an inch o f the b r eaking point t o h el p Bel l -

and th e telephone D espe r ately he sign e d note

.

after note unti l he fac e d a total o f one hundre d

and ten thousand d olla r s I f th e new sci e ntific .
$

’
toy succ ee d e d which he often doub ted he would
, ,

b e the r ich e st citiz e n in Have r hill ; and if it fail e d ,

which he so re ly f e a re d he would be a bank r upt

, .
 BIG M E N A N D L ITTLE B USI NE SS 1 43

Sanders and Hubbar d were leasing tel e phones two

by two to busin e ss men who p r eviously had been
,

usin g the p r ivate lin e s of the W e stern Union

T e l e graph Company This g r eat corp oration.

was a t this time their natur al and inevitable

enemy It had swallowed most o f its competi
.

to r s a n d was r eaching o u t to monopoliz e all

,

methods o f communication by wi r e The rosi e st .

hope that shone in front o f Sander s and Hubba r d

was that the W e stern Union might conclud e to
buy the Bell p a tents j ust as it had alr e ady b ought
,

many oth e rs In one mom e nt of discourage

.

ment they had o ff er e d t h e t e l e phone to Pre sid e nt

O rton of the W e ster n Union for
,
and ,
$ ’
Orton had refus e d it What u se he asked .
,
$
pleasantly could this company mak e o f an elec
,

’
t ric al t o y ?
“
But b esides the oper ation o f its own wires th e ,

Western U nion w a s supplying customers with

various kinds o f printing t e l e g r aphs and dial -

teleg r aphs some o f which could t r ans m i t sixty

,

wo r ds a minute Th e s e accurate instrum e nts it

.
,

b e lieved could neve r b e disp la ced by such a scie n

,

t ific oddity as the t e l e phon e and it continued to ,

b e li e ve this until o n e o f it s subsi diary companies

— th e Gold and Stock — r e po r ted that s e v er al o f

its machines had be e n super sed e d by tel e phon e s .

1 44 O TH E R P E O PLE S M ONEY ’

At once th e W e st e rn U n ion awoke from its

ind iff ere nc e E v e n this tiny nibbling at its
.

business must b e stopp e d I t took action quickly .

,
$
and o r ganiz e d th e Am e rican Speaking Tele -

’
phone C ompa n y and with capit al and
, ,

with three e l e ct r ical inv e nto r s E dison G r ay and , , ,

D o l b e ar on its staff ,
With all th e bulk o f its .

gre at w e alth and pr e stig e it sw e pt down upon ,

B e ll and his little b ody gua r d It trampled -

.

Upon B e ll s patent with as littl e concern as an

’

el e phant can hav e when he t r ampl e s upon an

ant s n e st T o the compl e te b e wilderment o f
’
.

B e ll it coo l ly announc e d that it had the only

,

o r iginal tel e phon e and that it was ready to sup ,

ply sup er ior t e l e phones with all the lat e st

imp r ov e m e nts made by th e original inventors
D o l b ear G r ay and E dison
, ,
.

“
Th e r e sult was st r ang e and unexpected The .

B e ll g r oup instead of b e ing dr iv e n from th e field

, ,

w e re at once lift e d to a higher lev e l in the busin e ss

wo rld And th e W e st er n Union in th e endeavo r
.
,

to p r ot e c t its p r ivat e lin e s b e cam e involunta rily ,

a b e ll w e th er to l e ad capitalists in th e di r ec tion
$
-
’

”
o f th e t e l e pho n e .

E v e n th e n wh e n fi nancial aid cam e to th e B e ll

,

e nt erp r is e i t was fr o m capitalists not fr om bank

, ,

ers and amo n g th e s e capitalists was William H

,
.
 ’
146 O THE R P E O PLE S M ONEY

E LE C TR I C A L M AC H IN ERY
The business o f manufacturing e lect r ical
machin er y a n d apparatus is only a littl e ov e r
thir ty y e ars o l d J P M organ . Co b e came
. . .

inter e sted early i n o n e b r anch of it ; b ut th e ir

dominanc e of th e busin e ss today is due not to ,
“ ”
th e ir initiating it but to their e ff e cting a c o m
,

bi nation and o r ganizing the Gener al E lectric

,

Company in 1 89 2 Th e re wer e then thr e e .

large electric al c ompani e s the Thomson Ho u s ,

-

ton th e E dison and the W e stinghouse besid e s

, ,

some small on e s The T h o m so n—Houston o f

.

L ynn Massachusetts was in many re spects th e

, ,

l e ader having b ee n fo r m e d to int r oduc e among

, ,

other things impo r tant inv e ntions o f Pr of E lihu

,
.

Thomson and Pr of Houston L ynn is on e of th e

. .

p r incipal sho e manufacturing c e nt er s of Am er ica

-
.

I t is within t e n miles o f State S tree t Boston ; b ut ,

Thomson s e arly fi nancial suppo r t cam e not fr om

’

Boston b ankers but mainly from L ynn business

,

m e n a nd i nvestors ; m e n activ e e n er g e tic and , ,

us e d to taking risks with their o wn mon e y .

P r ominent among them was Charl e s A C offin .

,

a sho e manufactur er who b e cam e conn e ct e d wi th

,

the Thomson Houston C ompany upon its organi

-

z a t io n and president of th e G e n er al E l e ct r ic wh e n

M r M organ fo r m e d that company in 1 89 2 by

.
,
 BIG M EN A N D L I T TLE B US I NE SS 147

c ombining the Thomson Houston and th e E dison

-
.

To hi s c o ntinued servic e supporte d by othe r

,

Thomson Houston men in high positions t h e

-
,

g re at prosper ity of the company is in la r g e pa r t , ,

due T he t wo compan ie s so c ombin e d contr oll e d

.

p r ob a bly o ne-half of all el e ctrical patents th e n

e xist i ng in Am e rica ; and certainly mo r e than
half o f those which had any considerable va l ue .

In 1 896 the G e neral E l e ctric p ooled its p a t e nts

wit h the Westingh o use and thus c ompetition was
,

further restricted In 1 9 03 the Genera l E lect r ic

.

absorb ed the S t anley E lectric Co mpany its ,

other l arge comp e tito r ; an d b e came the la r g e st

manufacturer o f e lect r ic apparatus and machin er y
in the world In 1 9 1 2 t h e r e sourc e s o f the C o m
.

pany w e re I t bill e d sales to the

amoun t of I t employ e d direc tly
over —
persons mo r e th an a fourth a s many
,

a s the S teel Trust A nd it is p r otected against

.

“ ”
un due c ompetition ; for one of t h e Morgan
partners h as b een a director since 1 9 09 in the, ,

—
Westinghous e the only other large e lectrical
,

machinery c o mpany in Americ a .

TH E A U TO M O B I L E
The automob ile indust r y is ab out twenty
’
years o l d It is n o w America s most prosperous
.
 ’
148 O TH E R PE OPLE S M ONEY

busin e ss When H e nry B J oy Pr e sident o f th e

. .
,

P ackard M otor Car C ompany was asked to ,

“ ”
what ext e nt the b ank er s aided i n initiating
the automob ile he re pli e d,

I t is th e obs er vabl e facts o f his tory it is also ,

my expe rienc e of thirty years as a b usiness man ,

b anke r e tc that fir st th e s ee r conc e ives an o ppo r

,
.
,

t u nit y
. H e h as faith in his almost second sight .

H e b e li e v e s he c an do som e thing— develop a

— —
busin e ss construct an indust r y build a r ail r oad
-
o r N iag a ra Falls P ower C omp a ny
—and make ,

it pay $
N ow the hum a n me a sure is not the actual
$
physic al construction but th e m ak e it pay $ ’

’
A man r aised the money in the lat e 9 0s and
b uil t a b e et sugar factory in Michigan Wise .

ac r es said i t was nons e nse He gath ere d tog e ther

.

the money from his friends who would take a

chance with him He not only built the sugar
.

factory ( and th er e was nev er any doub t o f his

ability to d o that ) but he mad e it pay Th e next .

ye ar two mor e sugar facto r i e s we r e buil t and ,

w er e fi nancially successful Th e s e w er e built by

.

p r ivat e individuals o f wealth taking chanc e s ,

in th e fac e of cries o f d oub ting banke r s and

t r ust compani e s .
 ’
150 O TH E R P E OPLE S M ONEY

them the c r eation o f th e trusts is largely du e .

The r e cital in the M e mo r ial addr e ssed to the

’
Pres id e nt by th e I nv e stors Guild in N ovemb e r ,

1 9 1 1 is significant $
,

I t is a w e ll known fact that modern trade

-

c ombinations t e nd strongly towa r d constancy o f

p r ocess and p r oducts and by their very nature
,

a r e opposed to new p r ocess e s and new products

o r iginated by indep e nd e nt inventors and hence
,

tend to restrain competition in th e dev e lopment

and sale of patents and pat e nt rights ; a nd c on
sequently t e nd t o discourag e ind epend e nt inv e n
tive thought to the g re at d e triment of the nation
, ,

and with inj ustic e to invento r s whom th e C o n

s t it u t io n e sp e cially int e nded t o encourage and
”
p r ot e c t in th e ir rights
.

And mo r e specific was th e testimony of the

Eng in eering N ews $

We are today something lik e five year s behind

Germany in iron and st e el m e tallu r gy and such
,

innovations as a re being int r oduc e d by ou r iron

and st ee l manufacturers a re most of them m ere ly
following th e l e ad s e t by foreigner s y e a r s ago.

“
We d o not be li e ve this is becaus e American
 B I G M E N A N D L ITTLE B USI NE SS 151

enginee r s a re any less ingenious or original than

those o f E urope though th e y may indeed b e
,

deficient in t r aining and sci e ntifi c e ducation c o m

pared with those o f G er many We b e lieve the
.

main cause is the wholesale consolidation which

has tak e n place in Am e rican industry A huge .

organiz ation is t o o clumsy to take up the develop

ment of a n original id e a With the market
.

closely c ont r olled and p r ofits cer tain by following

standard methods thos e who c ontrol our trusts
,

do not wan t the b oth e r of d e ve l oping anything

n ew.

“
We i nstance metallurgy only by way of illus
t rat io n
. There are plenty of other fields of indus
try where ex actly the same condition exists We .

are building the same machines a nd using the

same m e thods as a do z en years ago and the rea l
,

advances in the art are b eing m ad e b y E uropean

”
invent ors an d manufacturer s .

’
To which President Wilson s statem ent m ay
b e a d d ed

I am not s aying that a l l invention ha d b een

stopped by the g r owth o f trusts but I think it is
,

per f e ctly cl e ar that inv e ntion in many fi e lds has

been discouraged th a t invent o rs h av e be en
,
 ’
1 52 O TH E R PE OPLE S M ONE Y

p re v e nted f r om r eaping the full fruits o f their

ingenuity and industr y and that m ankind has ,

b ee n dep r ived o f many comfo r ts and con

v e nie n c e s as well as the oppo r tunity of b uying
,

a t lower p r ic e s .

D o you k now hav e you had occasion to

l e ar n that th ere is no hospitality f o r invention
, ,

—
now a days ?
-
”

TRUS T S AND F IN A NCI A L CO NC E NT R ATIO N

Th e fact that industrial monopolies arrest
dev e lopm e nt is mo r e se r ious even th a n the
d ir ect bur d e n imposed through exto r tionat e
p r ices But t h e most h arm b earing incident o f
.
-

the t r usts is their p r omotion of fi nancial c o n

c e nt r ation Industrial trusts f ee d the mon e y
.

t r ust P ractically e very trust cr e at e d has de

.

st r oyed the fi nancia l independ e nce o f some

c ommuniti e s and o f many p r op er ti e s ; f or it has
c e nte r ed th e fi nancing o f a lar ge part o f w h ol e
lines of busin e ss in N ew Y o r k and this usually ,

with o n e o f a few banking houses T his is we ll .

illustrated by th e Ste e l Trust which is a trust of ,

t r usts ; that is the Stee l T r ust combin e s in o n e

,

huge holding c ompany the trusts previously

fo r med in the di ffe r ent branches o f th e st ee l
busin e ss Thus th e Tub e Trust combined 1 7
.
 ’
1 54 O TH E R P E OPLE S M ONE Y

N e w Y o r k Stock E xchan ge ; a n d few o f th e m had

fi nancial o ffi c e s in N ew Y o r k P r omot er s of .

l ar ge co r po r ations whose stock is to b e hel d by

,

th e public and al so inv e sto r s d e sire to have their

, ,

s e curiti e s list e d on th e N e w Y o r k Stock E xch ange .

Und er the r u les o f th e E xchang e n o security can,

b e so listed unl e ss the co r po r ation h as a transf er

agent a nd regist r ar in N e w Y ork Ci ty Fu r the r .

mo r e b ank er dire cto r ships have contribut e d

,
-

largely to the e stablishm e nt o f the financial

o fli c es o f the trusts in N ew Y o r k City That .

alon e would t e nd to financial c oncent r ation .

But the l isting of the stock enhances the p owe r

of the M on e y Trust in anothe r way An in .

d u st rial stock once listed f r equently becomes

, ,

the subj ect of active sp e culation ; and speculation

f e eds the M oney Trust indir ectly in many ways .

I t draws the money o f the count r y to N ew Y ork .

The N ew Y ork b ank e rs handle the loans o f oth er

’
people s mon e y on th e Stoc k E xchang e ; and
m e mbers of th e Stock E xchange receive la r g e
amounts from commissions For instance $ Ther e
.

are shares of Unit e d States S t e e l com

mon stoc k outstanding But in the five y e a r s
.

e nding Decemb e r 3 1 1 9 12 sp e culation in that

, ,

stock was so e xtensive that the re w ere sold on

th e E xchang e an averag e of shar e s
 BIG M E N A N D L ITTLE BUSI NE SS 1 55

a year ; o r n e ar ly six tim e s as much as th er e

is S teel common in existence E xc e pt whe r e
.

the trans a ctions a r e by or for the b r ok er s sal e s

,

on t h e E xchang e involve the paym e nt of tw e nty

five cents in commission f o r e ach shar e of stock
sold ; that is twelve and o n e-half c e nts by th e
,

seller and twe l ve and o ne hal f c e nts by the b uy e r

-
.

Thus the commission from the S t ee l common

alone aff orde d a r e venue averaging many mil l ions
a y e ar T he S t ee l pr e fe r r e d stock is also much
.

traded in ; a nd ther e are 1 3 8 oth er indust r ials ,

lar g e ly trusts l ist e d on the N ew Y or k S tock

,

E xchange .

TRUS T R A M I F IC A TIONS
B ut the p otency o f t r usts as a factor in fi nancial
conc e ntr ation is manif e st e d in still oth er ways ;
notably th r ough their ramifying op er ati ons .

This is i ll ustrat e d forcibly by th e G e n er al E lect r ic

’
C ompany s control o f wate r powe r compani e s
-

which has now b e en disclos e d in an abl e report o f

the United S tates Bureau o f C o r po r ations $

The extent o f the General E lect r ic influence

is not ful ly revealed by its consolidated balance
sheet A very la r g e numb e r of co r po r ations are
.

c onnected with it through its subsidiaries and

 O T H E R PE OPLE S M ONE Y
’
156

thr ough co rp o r ations cont r o l l e d by th e se sub

s idiar ie s o r affiliat e d wi th th e m .Th ere is a still
wid er ci r cl e of influ e nc e due to th e fact that
offic er s an d di re cto r s of th e G e n e ral E l e ct r ic
C o and its subsidia r ies a r e also officer s o r
.

dire cto r s o f many oth e r c o r po r ations som e o f ,

whos e securiti e s are owned by the G e n e ral

E l e ctr ic C ompany .

“
Th e G e n er al E l e ct r ic C ompany holds in the
fi r st plac e all th e common stock in thr ee s e curity
holding c ompani e s $ th e Unit e d E l e ct r ic S e c u riti e s
Co .
,
th e E l e ctrical S ecu r ities C o rp o r ation and ,

th e E l e ctric B ond and Share C o D ire c tly and

.

th r ough th e se co r p o r atio n s and their offic er s the

G e n er al E l e ct r ic contr ols a large p art o f the
wat e r pow e r of th e Unit e d S tat e s .

“
Th e wat er p ow er c ompanies in the
-

Gener al E l e ct r ic g r oup are found in 1 8 S tat e s .

Th e s e 1 8 States hav e comm er cial

ho r s e pow e r d e veloped o r under construction ,

and of this total th e Gen er al E l e ct r ic g r oup ih

e lud e s h p or
. . p e r cent Th e .

g re at e st amount of p ow er cont r olled by the

c ompanies in the G e n er al E lect r ic g r oup in any
S tat e is fou n d in Washington This is followed
.

by N e w Y o r k P e nnsylvania Califo r n ia M on
, , ,

tana I owa Ore gon and C olorad o In five of

, , ,
.
 ’
1 58 O TH ER P E OPLE S M ONEY

small s e veral o f th e m are the most impo r tant in

,

th e S tat e s wh ere th e s e water p ow er c ompani e s -

op er at e The wat er p owe r c ompanies in the

.
-

G e n er al E l e ct r ic g r oup o wn control o r ar e , ,

closely affiliat e d with the st ree t railways i n ,

P ortland and Sal e m Ore ; Spokane Wash ; ,

.
, .

G r eat Falls M ont ; S t L ouis M o ; Winona

,
. .
,
.
,

Minn ; Milwauk ee and R acine Wis E lm ir a

.
, .
,

N Y Ashev ille and R aleigh N C and other

. .
, . .
,

re latively l e ss impo r tant towns The towns in .

which the lighting plants ( elect r ic o r gas ) ar e

owned o r c ontr oll e d includ e P o r tland Sal e m , ,

Asto r ia and oth e r towns in Ore gon ; B e llingham

,

and oth er towns in Washingto n ; Butt e G re at ,

Falls B oz e man and oth er towns in M ontana ;

,

L e adville an d C olo r ad o Sp r ings in Colo r ad o ;

S t L ouis M o ; Milwauk ee R acine and s e v er al
.
,
.
,

small towns in Wisconsin ; Hudson and Re ns

s e l ae r N Y ; D e troit M ich ; Ash e vill e and
,
. .
,
.

R al e igh N C ; and in fac t on e o r mo re towns i n

,
. .

p r actically e v er y c ommunity wh er e d e v e lop e d

wat er p ower is cont r oll e d by thi s g r oup I n .

addition to the public s er vic e c o r porations thus -

cont r oll e d by th e wat er pow er compa ni e s subj e c t

-

to G e n er al E l e ct r ic influ e nc e th ere a re num er ous ,

public s er vic e co rpo r ations in oth er municipaliti e s

-

that purch as e pow e r from th e hyd r o e l e ct ric

 BIG M EN AND L ITTL E B USI NE SS 159

developments controlled by o r affiliated with the

G e n er al E l e ctric C o This is true o f D e nv er
.
,

Colo w hi ch has alre ady b ee n discuss e d In

.
,
.

Baltimo r e M d a wat er pow er c onc er n in the

,
.
,
-

Gener al E l e ctric group nam e ly t h e P ennsylv a ni a

, ,

Wat e r P ower C o s ells .h p to the

,
. .

Consolidated Gas E lectr ic L ight ,

P ower C o .
,

which contro l s the entire light and power b usiness

of that city The power to ope r ate a ll the
.

e l e ct r ic street railway systems o f Buffalo N Y ,

. .
,

and vicinity involving a tr ackage o f appro xi

,

mat el y 3 75 mil e s is suppli e d through a subsidi ary

,
”
o f t h e N iaga r a Falls P ow er C o .

And t h e General E l e ctric C omp any through ,

th e financing o f public s er vic e c ompa n i e s exer ,

cis e s a like influence in c ommunities where th er e

is no wat er p ower $
“
I t o r its subsidiaries has acquired control o f
, ,

or an int e rest i n the public s er vic e co r po r ations -

of num er ous cities wh e r e th ere is no water p ow e r -

conn e ction and it is affiliated with still other s by

,

v ir tu e o f common di r ecto r s This vast .

network o f relationship b e tw e en hydro e l ec tric -

c o r po r ations thr ough promin e nt o f ficer s and

di re cto r s o f th e larg e st manufacture r of electrical
mac hi ner y and supplies in the United States is
highly significant .
 ’
160 O TH ER P E OPLE S M ONEY

I t is possible that this relationship to such a

l arg e numb er of strong fi nancial c onc e rns t h rough,

common o ffi cer s and dire ctors aff o r ds the General

,

E l e ctr ic C o an advantage that may place rivals

.

at a co rr esponding disadvantage Wheth e r o r .

not this g re at financial pow er has b een used to

th e p articul ar disadvantage of any r iv al water
powe r conc e rn is not so important as th e fact that
such pow er exists an d that it might b e so us e d at
”
any tim e .

T HE SHERM AN LA W

The M on e y Trust c annot b e broken if we ,

allow its p ow e r to b e constantly augmented .

To br e ak the M oney Trust we must stop that

,

p ower at its source The industrial trusts are

.

among its most e ff e ctive feeders Those which .

ar e ill e gal should be dissolved The creation o f

.

new ones should be p r evented To t h is e nd the

.

Sher man L aw sho u ld b e supp l emented b oth by

p r oviding more effici e nt j udici al mach iner y ,

a nd by cr e ating a commission with administr a

tive functions to aid in enfo r cing the law .

Wh e n that is don e another step will have b e en

,

tak e n towa r d s e curing the New Freedom But .

r e st rictiv e l e gislation alone will not suffice We .

should b e ar in mind th e admonition with whic h

 C HA P T E R V III
A C URSE OF B I G NESS

Bigness h as b ee n an important factor in the

r is e of the Mon e y T r ust $ Big r ail r oad systems ,

Big industr ial t r usts Big public service c o m

,

panics ; and as instrum e nts of th e se Big b anks

and Big t r ust companies J P M organ . . . Co .

( in th e ir lette r of d e fence to th e P uj o C ommitte e )

urge the ne e ds o f Big Busin e ss as the j ustification
fo r fi nancial conc e nt r ation Th e y d e clar e that
.

”
what th e y euphemistically call c o Ope ra t io n
“
is simply a f u rth e r resul t of the necessity f o r
” “
hand l ing g r eat tr ansactions ; that the country
obviously requi r es not only the lar ger individua l
b anks b ut d e mands also that those b a nks shall
,

’
c o Op era t e to p er form e ffi ciently the c ountry s
” “
business ; and that a st e p b ackward along this
lin e wou l d m e an a hal t in indust r ia l progr e ss
that would aff e c t ev e ry wag e e arn er f r om the
“
Atlantic to th e P acifi c . Th e p hr ase g r eat
t r ansactions is used by the bank er s apparently
as m e aning larg e c orpo r ate security issues .

L e ading bank e rs hav e undoub t e dly c o Opera t e d

dur ing th e last 1 5 y e a r s in fl oating som e v er y
1 02
 A C U R S E O F B IG NE SS 1 63

l arge security issues a s we ll as many smal l on e s

, .

But relatively f ew l arge issues w e r e made

necess ary b y great improvements under tak e n o r
by industria l dev e lopment Improvem e nts an d
.

development ordinarily proceed slow l y Fo r .

them ev e n wher e the enterprise invo l v e s lar ge

,

expenditures a series o f smaller issues is usually

,

more approp r iate than sing l e large ones Th i s is .

p articu l ar l y true in the Ea st where the building

o f new railroads has practically ceased T he .

“ ”
gre a t s e curity issues in which b ankers have
c o Operat e d wer e with relatively f e w exceptions
, ,

made either for the purp ose of e ff ecting c om

binat io n s o r as a cons e quence of such c o m bin e r

tions Fur the r mo r e the c ombinations which

.
,

made necess ary these large s e curity issues or

underwritings were in most cases either contr ary
, ,

to existing statut e l aw or contrar y to laws rec o m

,

mended by the I nter state C omm e rc e C ommis

sion or contrary to the laws of business e ffici e ncy
, .

S o bo th the financial concentration and the

c ombin a tions which they have serve d were in ,

the m ain a gainst the public inte r est S i z e

, .
,

we are told is not a crime But siz e may a t

,
.
,

l e ast become noxious by r eason o f the m e ans

,

thr ough which it was att ain e d or the us e s to

which it is put And it is si z e attained by
.
 ’
164 O T HE R P E OPLE S M ONEY

comb ination instead o f natural growth which

, ,

has cont ribut e d so larg e ly to our fi nancial c o n

centration L e t us e xamine a f e w cases
.

TH E HARR I MA N P A C I FI C S

.J P M o r gan
. C o in ur ging the
.
, need o f
”
large b anks an d the c o Operat io n o f b anke r s ,

said $
“
The Attorn e y Gener a l s r e cent approval of
-
’

the Union P acifi c settl e m e nt calls f o r a single c om

m it m e n t on the part of b ank e rs of
“ ”
T hi s commitm e nt was not
made t o e nab l e th e Union P acifi c to secur e
capital O n the cont r ary it was a gua r anty that
.

it would succ ee d in disp osing o f i ts S outhe r n

P acific stock to that amount And when it had .

disposed of that stock it was confronte d with the

,

—
s e rious p r oblem what to do with the p r oceeds ?
This huge underwr iting becam e necess ary sol e ly
b e caus e the Union P acifi c had violat e d th e
Sh e rman L aw It had acqui r ed that amount of
.

South er n P acifi c stock ill e gally ; and the Sup re me

Court o f the U ni t e d States fi nally dec ree d that
the ill e gality c e as e This sam e i ll e gal purchas e
.

had be e n the occasion tw e lve yea r s earli e r o f

, ,

“ ”
anoth er g re at t r a n s action th e issu e o f a
,

of Union P acific b onds which w er e ,

 ’
1 66 O T HE R P E OPLE S M ONEY

account Th e s e exp e nditur e s aggregated $ 1 9 1

.
,
“
But it need e d no large security
”
issu e s to p r ovid e the capit al thus wi sely e x
p e nd e d Th e net earnings fr om the operations
.

o f these railr oads w e re so larg e that n e arly all

thes e imp r ovem e nts and additions c ould have

been made without issuing on the average mo r e
than a y e a r o f a dditiona l sec urities f o r
“ ”
new money and the company s til l coul d have
,

paid six p e r c e nt dividends after 1 906 ( when that

.

rate was adopted ) Fo r whil e . a

yea r o n the ave r age w a s charged to C ost
, ,

of R oa d and E quipment the surplus n e t ,

e arnings and oth e r funds would have yi e ld e d on ,

th e aver ag e ,
a year available fo r
imp r ov e m e nts and additions without r aising ,

mon e y o n new s e c u rity issues .

H OW TH E SE C UR IT Y P R O C EE D S W ERE S P E NT
The securities ( exc e pt to the
ext e nt of ab out requi re d fo r im
pro v em e n t s and the amounts appli e d fo r refund
,

ing and r e demptions ) wer e availabl e to buy

stocks and b onds o f other c ompanies And som e .

o f the stocks so acqui r ed we r e sold at la r ge

p r ofits p r oviding fur th e r su m s to b e e mployed

,

in stock p urch as es .
 A C U R S E O F B IG NE SS 167

The Union P acifi c Lines security

issues ther efore wer e not needed to supply
, ,

funds for Union Pacifi c improvements ; no r did

th e se issues supply funds f o r the imp r ovement o f
any o f the companies in which the Union P acifi c
invested ( exc e pt that certain amounts wer e
advanced later to aid in financing the S outhern
P acifi c ) Th ey served su bstan tial ly n o pu rp ose
.
, ,

s a ve t o transfer th e own ers hip of r ailro a d s tocks

f rom o ne set of persons to an o th er .

Her e ar e som e o f the p r incipal inv e stments

1 . in a cqui ri ng and fin an c i ng the So ut hern
Pa ci fic .

2 . in cqui i ng t h e N o rt hern Pa c i fic st o c k an d
a r

st o ck o f t h e N o rt h e n S e curi t i e s C o
r .

3 . in a cqui ri ng B a l t i m o re O hio st o c k .

in a cqui i ng Illi no i s C e nt a l st o c k
r r .

$
s in a cq u i ri ng N e w Yo k C e nt ra l st o c k
r .

a in a cqui ri ng A tc hi s o n T o pe k a, S ant a Fe
st o c k .

'

7 . in cquiri ng C hi c ag o
a A l t o n st o ck .

8 . in a cqui ri ng C hi c a g o , M ilwauk e e S t Paul.

st o c k .

9 . cqui ri ng C hi c ag o N o rt hwe st ern st o c k

in a .

10 . in a cq ui i ng R a il ro ad S e c uri t i e s C o st o c k
r .

( Illi n o i s C e nt ral st o ck ) .

The immediat e e ff e ct o f these stock acquisi

tions as stated by the I nt er stat e C ommerce
,

C ommissi o n in 1 9 07, was mer el y this

 ’
168 O TH E R P E O PLE S M ONE Y

M r Har r iman may j ourney b y steamship

.

from N e w Y ork to N ew Or l e ans thence by rai l ,

to S an Fran cisco across the P acifi c O cean to

,

C hina an d r e t u rning b y another route t o the

, ,

United S tates may go to O gden b y any o n e o f

,

thr ee rail lines a nd th e nce to K ansas City o r

,

O maha without leaving the deck o r platfo r m

,

of a carrier which he controls and without ,

duplicating any pa r t o f his j ourney .

“
He has further what appears to be a d ominant
contro l in th e I llinois C e nt r al R ai l road running
di re ctly north fr om the Gul f o f M e xico to the
Great L ak es parall e l to th e Mississippi R iv er ;
,

and two thousand mil e s west o f th e Mississippi

he controls the only line of railr oad parall e l to
the P acific C oast and running fr om the C o lorado
,

R iv er to the M e xican b o r d er .

“
The testimony taken at this hearing shows
that ab out fi fty thousand squa r e miles of t e r r i
to ry in the S tate of Ore gon s urrounded by the
,

l ines o f the Ore gon Sho r t L ine R ailroad C om

pany th e Ore gon R ail r oad and N avigation
,

C ompany and th e S outh er n P acific C ompany

, ,

is not d e v e lop e d Whil e the funds o f thos e

.

c ompani e s which could b e us e d for that purp ose

ar e b e ing inv e st e d in stocks like the N ew Y ork
Ce nt r al an d oth er lin e s having only a remot e
 ’
170 O THE R P E O PLE S M ONE Y

a cquir ed c ontro l T he Pére Marquette h as

.

’
pass e d again into receiver s hands L ong b e fore .

’
Mr H ar riman s death the Union P acifi c had
.

disp osed o f its N o r thern P acifi c stock b ec ause ,

the Suprem e C ourt of the United S tates decl ared

the N orthern Securities C ompan y illegal and ,

dissolved th e N o r thern P ac ific Gre a t N orther n -

merger Thr ee years after his de a th the S u

.
,

p r eme C ourt o f the United States ordered the

Union P a c ific S outhern Pac ifi c merger disso l ved
-
.

By a st r ange irony the law h as permitted the,

Union P acifi c to r eap large profits fr om its ill egal

transactions in N orthern P a cifi c a nd S outhern
P ac ifi c stocks But many other stocks held
.

as investments h ave ent ail e d l arge l osses .

S tocks in the I llinois C entral and other c o m

panics which c ost the Union P acifi c
had o n N ovemb er 1 5 1 9 1 3 a market , ,

value o f only showing a shr inkage

of and th e ave r ag e incom e from
them whil e held was only ab o ut
, ,
per c ent .

o n their c ost .

A B AN K ERS PA R ADI SE
’

K uhn Lo e b ,
C o w er e th e Union P acifi c .

bank er s I t was in pu rsuance o f a p r omise which

.

M r Jacob H Schi ff the senio r partner had

.
— .
—
 A C U R S E O F B IG NE SS 1 71

g i ven pending the reo r ganization that Mr

, , .

Harriman fi r st became a membe r of the E xecutive

C ommitt ee in 1 89 7 Thereafter combinations
.

gr e w and crumbled a nd there were vic issi

,

tudes in stock speculations But the investm e nt .

b anke r s prosper ed amazingly ; and financial c on

centr a tion proceeded without ab atement T h e .

banke r s a nd their associates received the com

missions paid for purchasing the stoc k s w hich
the Suprem e C ourt holds to have been acqui r ed
illegally and have retained th e m The bankers
-
.

rec e iv e d commissions for und er wr iting the securi

ties issued t o raise the mon e y with which to buy
the stocks which the Supreme C o u rt holds to have
b een ill e gally acquired and h ave retained th e m
, .

The b ankers rec e ived commissions paid f o r floating

securities o f the co tro l l e d companies while
n —

they were thus controll e d in violation o f law and —

h ave of cour se retained them Finally when

, , .
,

after year s a d e cr e e is e nt ere d to end t h e ill e gal

,

combination these same b ankers are on hand

,

f
to perfo r m the services o undertaker and —

receive furthe r commissions for their b anker aid -

in enab ling the l aw br e aking corpo r ation to end

-

its wrong doing and to comply with the decree o f

the Supr e me C ourt And y e t through out nea r ly
.
,

all this long p eriod b oth b e fo r e and after Mr

, .
 ’
1 72 O T HE R P E O PL E S M ONEY
’
H arrim an s d eath two partners in K uhn L oeb
, ,

C o wer e directors or member s o f the executiv e

.

committee o f the Uni o n P a cifi c ; an d a s such

mus t b e de e med responsi bl e wi t h o thers f or the
ill eg al a cts .

Indee d these b a nkers h ave not only receiv e d

,

commissions for the un d erwritings o f transactions

accomp lish e d though illegal ; they h ave re
,

c eiv e d c ommissions al so for merely ag reeing to

“
under write a great transaction which the
autho r ities would not permit to b e ac co m plish ed .

“
The underwriting ( that single
”
c ommitment o n the part o f bankers to which
J P M organ
. C o refer as being cal led f or by
.

’
the Attorney G e neral s approv al of the Union
”
P acifi c settlement ) never b ecame e ff ective ;
b e cause the P ub l ic Service C ommission o f Cali
f o rnia refused to approve the terms o f settlement .

B ut the Union P a cifi c neverth e l e ss paid th e

, ,

K uhn L oe b S ynd i cate a l arge underwriting fee f or

“ ”
h aving b een ready and willing to serve should ,

the opp ortunity arise $ and a nother underwriting

commission was paid wh e n t h e S outhern P acific
stoc k w as finally distributed with the approval ,

of Atto r ney General M c R ey n o l ds under the ,

’
C ourt s d e c r ee Thus t h e illegal purchase of
.

S outhern Pacifi c stoc k y ie l de d di rectly fou r

 O TH E R P E OPLE S M ONE Y
’
1 74

mission showed clearly while i nvestig a ting th e

, ,

Union P acific s p u rchas e o f th e Chicago

’
Al ton
’
stock that the bankers profits w er e by no means
,

confin e d to commissions .

TH E B UR L IN GTON

Such rai lroad combinations produce i nj ury

to th e public f ar more serious than the heavy tax
’
of b ank er s co m missions and profits Fo r in .

n e ar l y every case the a b sorption into a g r eat

syst e m o f a th ere tofore ind ependent railroad has
invo l ved the loss o f fi nancial indep e ndence to
some community prop e rty o r men who ther e by
, ,

b e come subj ects o r satellites o f the M on e y T r ust .

The passing o f t h e C hicago B urlington Quincy , ,

in 1 90 1 to the M o r gan associates p r esents a

, ,

striking example o f this p r ocess .

Af ter the Union P acific acquired the S outhern

P acifi c stoc k in 1 9 0 1 it sought control a l so o f
, , ,

the Chicago B urlington —

Quincy a most
, ,

p r osp er ous rai l r oad h aving then 79 1 2 miles o f

,

line Th e G r eat N orther n and N orther n P acific

.

recogniz e d that Union P acific control o f the

Bur lington would e xclud e th e m from much of
I llinois Missouri Wisconsin K ansas N eb r aska
, , , , ,

I owa and S outh Dakota Th e two no r th er n

, .
 A C U R S E O F B IG NE SS 1 75

roads which wer e al r eady closely allied with

,

e ach other and with J P M o r gan . C o there

. .
,

upon p u rchas e d f o r o f th e ir j oint

4 per cent b onds nea r ly al l o f the

.
,

( p ar va l u e ) outstanding Burlington stock A .

struggle with the Union P acific ensued which

”
yield e d soon to har monious c o Operat io n T he .

N orthern Securities C ompany was fo r med w ith

capital th e reby merging the Gr e at
,

N orther n th e N o r the r n P acifi c and the B urling

,

ton and j oining the Ha rriman K uhn L oeb with

, ,
-
,

the Mo r gan Hill inter ests O bviously neith e r

-
.

’
th e issue o f j oint 4 s n o r the issue ,

of t h e N o r th er n Sec u rities stock

suppli e d o n e dollar of funds for improv e ments o f ,

or additions to any o f the fo u r g r eat rai lroad

,

“
systems conc er n e d in these large transactions .

Th e so l e e
fiec t of issu in g of s ecu rities
’

was to tra nsfer s t oc k from o ne set of perso ns to

“
a n o th er And the r e sul ting
. harmonious c o
oper ation was soon inte rr upted by the govern
ment proce e dings which e nd e d with the dissolu
,

tion o f the N orther n S e curiti e s C ompany But .

the evil done outliv e d t h e combination The .

B urlington had pass e d fo re v er f r om its ind e

p e ndent Boston own er s to th e Mo r gan alli e s ,

who remain in cont r ol .

 ’
1 76 O THE R P EO PLE S M ONE Y

Th e —
Burlington o ne of Boston s finest achiev e ’
s

m e nts— was t h e c re ation of John M Forb es . .

H e was a b uil d e r ; not a combin e r o r b an k e r o r , ,

wiz ard o f fi nance H e was a simple h ard

.
,

working b usin e ss man He had been a mer chant

.

’
in C hina at a time wh e n China s t r ade was among
America s big b usiness He had b e en conn ec t e d
’
.

with shipping a nd with manufactur es He had .

the imagination o f the gr e at m er chant ; th e

patience and perseve r ance o f the g re at manu
facturer ; the c our age o f the se a f ar er ; and th e -

b r oad view o f the statesman B old b ut nev e r .

,

r eckless ; sc r upul ously car e ful o f other people s ’

mon e y he was r e ady after due weighing o f

, ,

chanc e s to r i sk his own in e nt e rp r is e s p r omising

,

succ e ss He was in th e b est s e nse of th e t e rm a

.
,

g r eat adventurer Th us equipped Mr Forb es

.
,
.

enter e d in 1 852 up on those railroad ent e rp r ises

, ,

which later develop e d into the C hicago Bur ling ,

ton ( it Quincy L ar gely with his o wn money

.

a nd that o f fr iends wh o c onfid e d in him he ,

built th e se railroads and c arried them through the

“ ”
panic o f 57 wh e n the g r e a t b anking hous e s
’
,

of those days lack e d cour age to assume th e

b ur dens o f a st r uggling ill constructed l ine -
,

stagg er ing unde r fi nancia l diffi cul ties .

 ’
1 78 O THE R P E O PLE S M ONEY

th e n in m e n who w e r e b uild er s though some ,

lack e d his wisdom and som e his characte r H e r

,
.

e nt erpris e and capital c onst r uct e d in l ar g e part , ,

the Union P acific th e Atchison th e M e xican

, ,

Centr al the Wisconsin C ent r al and 2 4 other

, ,

rai l r oads in the W e st and S outh O ne by o n e .

th e se wester n and south er n railr oads pass e d o u t

o f B oston cont r ol ; th e g re at e r par t o f th e m into

the cont r ol o f the M o r gan alli e s B efo re the .

Bur lington was sur r end ere d B oston had begun,

to l ose her dominion e v e n ov er the rai lr oads of

, ,

N e w E ngland I n 1 9 00 the B oston

. Al bany
—
was l e ased to th e N ew Y ork C e ntr al a M o r gan ,

p r oper ty ; and a f e w y e ars lat er anoth er Mo r gan

,

— —
railr oad the N ew Hav e n acqu ire d contr ol of
n e arly every other tr ansp o r tation line in N ew
E ngland N e w nothing is l e ft o f Boston s
.
’

railroad d omi ni on in th e W e st and S outh ,

excep t th e E ast er n K e ntucky R ail r oad a line—

3 6 m il e s l ong ; and h e r control of th e r ail r oads o f

M assachus e tts is limit e d to th e G r afton Upton
with 1 9 mil e s o f lin e and th e B oston Re v ere ,

Beach Lynn — a passeng e r road 1 3 mil e s long

, .

TH E NEW HAV E N M ON O P O L Y

Th e ris e of the N e w Haven M onopoly p re s e nts

anoth er str iking exampl e of combination as a
 A C U R S E O F B IG NE SS 1 79

developer of financial concentr ation ; and it

“
illustrates al so the use to which l arge security
”
issu e s are put .

In 1 89 2 when Mr Mo r gan entered the N ew

, .

Haven di r ectorat e it was a v er y p r osp e rous

,

little r ailroad with capital liabilities o f

paying 1 0 pe r c ent divid e nds and op er ating
.
,

508 miles of lin e By 1 89 9 the capitalization

.

had grown to b ut the agg r egate

mileage had also grown ( mainly through m erger
o r le ases of other lines ) t o 2 0 1 7 Fourteen year s .

lat e r in 1 9 1 3 wh e n Mr M or gan died and Mr

, ,
. .

Mellen r e signed the mil e age was 1 9 9 7 j ust

, ,

2 0 miles les s than in 1 899 ; but t h e capital lia

bil it ies had increased to O f cour s e
th e business of the railroad had g r own l ar g e ly
in those fourt e en y e ars ; t h e road b ed was im -

prov e d b ridges b uilt additional tr acks a dded

, , ,

and much equipm e nt p ur chased ; and for al l this ,

new capital was needed ; and additiona l issu e s

were needed also because the company paid
, ,

out in dividends more than it ear n e d But .

of the capital incr e ase over was

,

expende d in the acquisition of the stock o r oth e r

s e curities of some 1 2 1 oth e r railr oads steam ,

ships street railway e lect r ic l igh t

, gas and -
,

water comp a n i es It w a s these outside prop er

-
.
 O TH E R PE O PLE S M ONEY
’
1 80

ti e s w hi ch made necessary the muc h discuss e d

,

6 p e r cent b ond issue as w e ll as

.
,

other large and e xp e nsive security issu e s Fo r .

in these four t e en years the imp r ovem e nts o n

th e railr oad including new equipm e nt have c ost ,

o n th e av e rag e only ,
a year .

TH E NEW HAVE N B AN K ERS

Few if any o f those 12 1 companies which the
, ,

N e w Haven acqui re d had p r io r to their abso rp

,

tion by it be e n fi nanced by J P Morgan

, . .

Co . The needs o f the Boston Maine and

Maine C e ntral the larg e st group— had fo r
—
,

g e n er ations been met mainly through th e i r

,

o wn stockholders o r t h rough Boston banking

hous e s N o investment bank e r had been a

.

memb er o f th e B oard o f Dir ectors o f eith er o f

those c ompanies The N ew Y ork O ntario.
,

—
W e ster n the n e xt largest o f the acquir e d rail
—
roads had b ee n fi nanced in Ne w Y o r k but by ,

persons appa re ntly e nti re ly ind e pendent o f the

M o r gan allies T he small e r C onn e cticut rail
.

roads n e w combin e d in the C e nt r al N ew E ng

,

l and had be e n fi nanced mainly in C onnecticut

, ,

o r by indep e nd e nt N ew Y o r k b anke r s The .

fi nanci ng of th e st r e e t railway compani e s had

b ee n done la r g e ly by individual fi nanci er s o r ,
1 82 O THE R P E OPLE S M ONEY ’

b ee n an imp ortant factor in th e d e velopm e nt o f

the Money T r ust .Th e y are charg e d by the D e
p ar t m e n t o f Justice with fundament al violations
b oth of th e Sh er man L aw and of th e C ommodity
claus e o f the H e pb urn Act which p r o h ibits a
,

rail r oad fr om c ar r ying in int er state trade a ny

, ,

c ommodity in which it has an inter est dir ect o r ,

indir e ct N ear ly ever y l arge issue o f securities

.

made in th e last 1 4 y e ars by any o f these rail

roads ( exc e pt th e Er ie) has b een in connection
,

with some act o f c ombination The com b ina .

tion o f the anth r acit e r ail r oads to supp r ess the

c onstruction th r ough the T e mpl e I r on C ompany
, ,

o f a c omp e ting coal road has al r eady b e e n de

,

c l are d illegal by th e Supreme C ou r t o f the Unit e d

S tat e s And i n the bituminous coal fiel d th e

.
—
—
K anawha Dist r ict th e Unit e d S tates Circuit
C our t o f App e als has recently d e c ree d th a t a
simil ar c ombination by th e L ake S hore the ,

Ch e sap e ak e O hio and the Hocking V al l e y

, ,

b e dissolv e d .

O T HER RA I L R O A D CO M B IN A TI O N S
Th e cas e s of th e Union P acifi c and o f the Ne w
—
Hav e n a re typical not exc e p tiona l O ur rail .

r oad histo r y p re s e nts num er ous instanc e s of la r g e

s e curity issu e s mad e wholly o r mainly to e ff ect
 A C U R S E O F B IG NE SS 1 83

combinations S om e o f these c ombinations have

.

b ee n p r oper as a m e ans o f s e curing natur al

fe e ders or extensions of main lines But fa r mo r e
.

o f th e m have b een dictated by the desire to

suppr e ss active o r p otential competition ; o r by

personal ambition o r greed ; or by t h e mistaken
belief that effi ciency g r ows with siz e .

T hus the monstrous combination o f the R ock

Island and the S t L ouis and San Francisc o w ith
.

ov e r miles o f line is recogniz ed n o w to

have b een obviously in e fficient I t was severed
.

voluntarily ; b ut had it not b een must have

, ,

crumbl e d soon from inherent defects i f not as a ,

r e su l t of proc e edings under the S herman la w .

B oth syst e ms are su ff er ing now from the eff ects

o f this unwise combination ; the Frisc o i tself ,

g r eatly o v erc o m bin e d has paid the pena l ty in

,

—
receivership The R ock Islan d a name onc e
.

expressive o f railroad effici e ncy a nd stability

h as through its excessiv e recapitaliz ations a nd
,

com b inations b ecome a footb all of sp eculators

, ,

and a source of great appr e h e nsion to c o nfidin g

investors The combination of the Cincinnati
.
,

Hamilton and Dayt on and the Pere M arquette

,

led to sever al receiverships .

There are of cours e other combinations

, ,

which have not been dis a str o us t o t h e o wn e rs of

 O TH ER P E OPLE S M ONEY
’
1 84

the ra ilroads But the fact that a rai lr o ad

.

c ombination has not b e e n disast r ous does not

n e c e ssaril y j u stify it The evil o f the concentra
.

tion o f p owe r is obvious ; an d as combination

n e cessarily involv e s such conc e ntration of pow e r ,

the burden o f j u stifying a c ombination shou l d

b e placed upon those who s e ek to e ff ect i t .

For instance what public good has be e n

,

subserv e d by a l l owing the Atlantic C oast L ine

R ailr oad C ompany to issu e o f s e curi

ti e s to acquir e cont r ol o f the L ouisville N ash

—
vill e Railr oad a widely ext e nd e d self suffic ie n t -
,

system of 5000 mil e s which under th e w ise

, ,

manag e ment o f Pr e sid e nt Milton H Smith had .

prosp ere d continuously fo r many y e a r s b e fore the

acquisition ; and whi ch has g r oss earnings nearly
twice as large as those o f th e Atlantic C oast L ine .

The legality o f this combination has b een

re cently chall e ng e d by S e nator L ea ; a nd an
inv e stigation by th e I nt er stat e C ommerce C o m
mission has been o r dered .

TH E P E NN SY LVANI A
The reports fr om th e P e nnsylvania suggest th e
in quir y whether e v e n this g e n er ally well managed -

railr oad is not suff ern from e xc e ssive bign e ss .

Af ter 1 89 8 it too b ought in large amounts

, , , ,
 ’
1 86 O THE R PE OPLE S M ONE Y

c oal mines ; and it is intimat e d that i t wi l l div e st

its e lf also of other holdings in companies ( like
th e Cambria St ee l C ompany ) e xtr an e ous to th e
bus in e ss o f railr oading This p olicy shoul d b e
.

e xtend e d to include the disposition also of all

stock in oth er r ai l roads ( like th e N orfol k W e st
er n the S outh er n P acifi c and the N ew Hav e n )
,

which ar e not a part of th e P e nnsy l v a ni a System .

RE C O MME N D A TI O N S
S ix ye ar s a go the I nterstate C omme r ce C om
mission after inv e stigating the Union P acifi c
,

t r ansaction ab ove referr e d to recomm e nd e d ,

l e gislation to rem e dy th e evils there discl osed .

Upon concluding recently its investigation of the

N ew Hav e n the C ommission repeat ed and
,

ampl ifi ed those recommendations saying $ ,

“
N 0 student o f the rai l road pro b l e m can
d oub t that a most p r o l ifi c so urce o f fi nancial
disas ter and complication to railroads in th e past
has been th e d e sire and ability of rail r oad man
ag er s to e n gag e in e nt er p r is e s outsid e th e l eg it i
mat e op er ation o f th e ir r ail r oads especiall y by ,

th e a cquisition of oth er railr oads and th e ir

securiti e s The e vil which r esul ts first to th e
.
, ,

inv e sting public and finally to th e g e ne r al

, , ,

public cannot b e c orrec ted aft e r the transaction

,
 A C U R S E O F B I G NE SS 87

h as tak e n plac e ; it can b e e asily and e ff e ctiv e ly

p r ohibit e d I n our opinion th e following p r opo
.

s it io n s lie at the foundation of a ll adequat e r e gu

lation of interstate rai l roads

.1 E very int er state r ailr oa d shoul d b e pro
hibit e d from spending money o r incurring liability
o r acquiring prop er ty not in the oper ation o f its

railroad o r in the l e gitimat e improv e ment ex ,

t e nsion o r d e v e lopment o f that railroad

, .

2 N o interstat e r ailr oad should b e p er mitted to

.

le ase or purchase any other rail road n o r to acquir e

,

the stocks or securities o f any other railr oad ,

no r to guarantee the same direc t l o r indirectly

, ,

without the approval o f t h e f e der a l gov er nment .

3 N o stocks or b onds sho ul d b e issued by a n

.

int e rstate r ai l roa d exc ep t f o r the purp oses sanc

t io n e d in th e two p re ceding paragraphs an d ,

none sho u l d b e issued without the appr o val of the

federal government .

It may b e u nwise to attempt t o specif y the

p r ice at which and the manner in which r ail r o ad
stocks a n d securities shall b e dispos e d of ; but it is
easy a nd safe to d e fine th e purp os e f o r which they
may b e issued a nd to confine the expenditure of
”
t h e money rea li z ed to that purp o se .

Th e s e r e commendations are in sub stantial

a ccord with those a dopt e d by the N ational
1 88 O T HE R P E O PLE S M ONEY ’

Association o f R a il way Commissioner s Th ey .

shoul d b e enacted into law And they shoul d b e

.

supplem e nt e d by am e ndments o f the C ommodity

Claus e o f the H e pbur n Act so that $ ,

1 R ailr oads will b e e ff e ctually p r ohibit e d from

.

owning stock in corp orations whose products

th e y transp ort ;
2 S uch co r p orations wil l b e prohibited fr om
.

owning imp ortant stockh ol dings in r ail roads ; an d

3 Holding comp anies will b e p r ohibit e d from
.

c ontr olli ng as does the Re ading b oth a r a il

, ,

road and c orporations whose c ommodities it

transpo r ts .

I f laws such as th ese ar e en a cte d a n d duly

enforc e d we shall b e p r ot e cted from a recur r enc e
,

o f t r agedi e s like the N ew Haven of domestic ,

scandals like th e Chicago a nd Al ton an d of ,

international on e s like the Frisc o We sh al l al so

.

escape fr om that ineffi ci e ncy which is attendant

up on exc e ssive siz e B ut what is f ar more im
.

p ortant w e shall by such le gislation remove a

, , ,

p otent factor in financial concentration D e .

c e nt r aliz ation will b e gin T he liberat e d small e r

.

units will find no diffi cul ty in fi nancing their

ne e ds without bowing the knee t o money l ords .

And a long st e p will have b een t ak en toward

attainment o f the N ew Freedom .
 ’
190 O THE R P E OPLE S M ONEY

Am e rica to b e present at m ee tings o f the N ew

,

Hav e n In 1 907 wh e n the policy of monopolistic

.
,

expansion was fir st chall e ng e d and again at the ,

m ee ting i n 1 909 ( aft e r M assachusetts had u m

wisely accord e d its sanction to the B oston dz
M aine mer ger ) Mr M o r gan himself mov e d
, .

the large increases o f stock which wer e unani

m o u sl y vot e d O f c ourse he att e nd e d the
.
,
’
impo r tant di r ecto r s m e etings His w ill was
.

law Pr esid e nt M e llen indicat e d this in his

.

stat e m e nt b efo r e Interstate C ommerce C o m

missione r Pr outy while discussing the N ew
,

Y ork Westc h e ster —

Boston th e rail r oad with
,

o u t a t e rminal in N e w Y o r k which cost th e

,

N ew Haven a mil e to acqui re and ,

was th e n c osting it in op er ating d efi cits and

,

i nt e rest charges ,
a month to run $
“
I am in a v er y e mb arrassing position Mr ,
.

C ommission er re ga r ding th e N e w Y ork West

, ,

ch e st e r Boston I hav e n e v e r b e en e n t h u sias

.

tic o r at all optimistic o f its b eing a good inv e st

m e nt for o ur c ompany i n the p r es e nt o r in the ,

immediate futur e ; but peopl e in whom I had

g r eat e r c onfi d e nce than I hav e in mys elf thought
it was wis e and d e si r abl e ; I y i e ld e d my j udgm e nt ;
’
i n d ee d I don t know that it would hav e made
,
”
much di ff ere nc e wheth e r I yi e ld e d o r not .
 BA NK E R M A N A G EM EN T
-
19 1

THE BA N K ERS RES P ON S IB I L IT Y

’

B ankers a r e cr e dit e d with b e ing a c ons ervative

force in the community The t r adition ling e rs
.

”
that they are pre é m in en t ly safe and sane A nd.

y e t t h e most gri e vous fault of this b anker

,

managed railroad has b een its fi nancia l reckless

ness— a fault that has a l r eady brought heavy
l oss e s to many thousands of smal l investors
thr oughout N ew E ngland for whom b an k ers are
suppos e d to b e natu r al guardians In a c om .

munity wh e re its r ailroad stocks hav e f or gen

era t io n s b e e n d ee m e d absolut e ly safe invest
ments the passing of t h e N e w Hav e n and o f the
,

Boston M aine dividends aft er an unbroken

divi d end record o f generations c omes as a
disaster .

Thi s disaster is du e mainly to enterpris e s out

side the legitimate op er ation of th e s e r ai l r oads ;
for no rai lroad company has equal e d the N e w
Hav e n in t h e quantity and e xtr avagance o f its
outside enterpris e s But it must b e r e member ed
.
,

that n e ither the p r esident of the Ne w Hav e n nor

any oth er railr oad manager c ould engage in such
t r ansactions without th e sanction o f the Board
of Di re cto r s It is th e di re cto r s not Mr Mellen
.
,
.
,

who should b e ar the resp onsibility .

 ’
192 O T H E R P E OPLE S M ONEY

C lose scrutiny o f the transactions discl oses no

j ustifi cation O n the c ontr ar y sc r utiny serv e s
.
,

only to m ake more cle ar the g ra vity o f the e rro r s

committed N o t mere l y wer e rec kl essly ex
.

t rav ag an t acquisitions made in mad p ursuit o f

monop oly ; but the fi nan cial j udgm e nt the finan ,

e i sring itself was conspic u ously b ad To pay

, .

for prop e rty s e ver al times what it is worth to ,

engage in grossly unwise enterp r is e s are errors ,

o f which no c onservative directo r s S hou l d b e

foun d guilty ; f o r perhaps the most important

function o f di r ectors is to test th e conc l usions
and curb by calm counsel the excessive z eal o f
t o o ambitious m a n age r s . But while we hav e no
right to e xp e ct from b an k ers e xcep tionally good
j udgment in ordinary b usiness matt e rs ; we d o
have a r ight to expec t from th e m prudence ,

reasonably good finan c iering and insistence upon

,

str aightfo r ward acc ounting And i t is j ust the

.

lack o f these qualities i n the N ew H aven man

ag e m e n t to which t h e seve r e c r iticism of the

I nterstate C omm e rce C ommission is p articu l ar ly

directed .

C o mmissioner Prouty calls attention t o the

vast incr e as e o f capitaliz ation D uring the nine
.

y e ars b e g i nning Jul y 1 19 03 th e capital o f the

, ,

N ew Y ork N e w Haven
,
H artfo r d R ailroad
 ’
194 O THE R P E OPLE S M ONE Y

convertib l e into stock at $ 150 a share was so ,

e ag e r to issu e at par o f its 6 per

cent 2 0—
. y e ar b onds conver tible into stock as to
agr ee to pay J P Mo r gan
. . Co a 2 p er .

c e nt und e rwriting commission True mon e y

. .
,

“ ”
was tight th e n But is it not very b ad
.

“
fi nan c ierin g to b e so unp r ep ared for the tight
m on e y mark e t which had b een long expect e d ?
’
Indeed the N e w Hav e n s manag e m e nt par t icu
, ,

l arl y ought to hav e avoided such an error ; f o r

,

”
it committ e d a similar o n e in the tight money
mar k e t o f 19 07—1 9 08 wh e n it had to s e ll at par
,

o f its 6 per c e nt 4 0—
y e ar b onds . .

Th e s e hug e short- time b orrowings o f the S ys

t e m we r e not due to unexpect e d eme rgencies o r
to th e i r mon e tary c onditions Th e y w er e o f .

g r adual g r owth O n June 3 0 1 9 1 0 th e two

.
, ,

c ompani e s ow e d in sho r t t er m notes only $ 1 0

-
,

by J une 3 0 1 9 1 1 the amount had g r own

, ,

to by June 3 0 1 9 1 2 to , ,

and in 1 9 1 3 to ov e r O f c ourse the

rat e o f inte r est o n the l oans i nc r eas e d also
very l ar gely And these loans we r e i n cu rr ed
.

unn e cessarily Th e y r e p r es e nt in the main

.
, ,

not imp r ov e ments on the N e w Haven o r on the

B os ton M ai n e R ai lr oads but m on e y b o rr ow e d
,

e ith er to pay fo r stocks in oth er compani e s which

 BA N K E R -MA N AG E M E N T 195

these companies cou l d n o t aff ord to buy or to ,

pay dividends w h ich h a d not b een e arned .

In five ye ars out of the last six the N ew Haven

R ailr oad has on its own showing paid d ividends
, ,
’
in excess o f the ye ar s earnings ; a nd the a nnual
d efi cits disc l ose d wo u l d have been much larger
if proper ch arges for depreciation of equipment
a nd of ste ams h ips ha d been made In each of the.

l ast t hree ye ars dur ing w hich the N ew Hav e n

,

h ad ab so l ute c ontro l o f the B oston Maine ,

the l atter paid o u t in divi d ends so much in

excess o f earnings that b e fo r e April 1 9 1 3 the , ,

surplus a ccumulated in e ar lier y ears had been

converted into a d e ficit .

S ur e ly thes e facts show at l e ast a n extr a

, ,

ordinary lack of fi nancial p r udenc e .

WH Y B AN K ER -
MANA GEME NT F AI LE D
N ow h o w can the failure of t h e b anker
,

management of the N ew Haven b e e xplained ?

A fe w h a ve qu e stioned the abi l ity ; a fe w the
integrity o f the b anker s C ommissioner Prouty
.

’
attribute d the mist ak es m a de to the C omp an y s
pursuit of a tr a nsportation monop oly .

“ ” “
The re ason says he is as apparent as the
, ,

fact itself The present manag e m e nt o f t hat

.

C omp a ny started out with t h e purpose of con

 ’
19 6 O TH E R P E OPLE S M ONE Y

t r olling the t r ansportation fa c ilities o f N e w

E ng l an d In the a ccomp l ishment of that pur
.

p ose it b ought what must b e had and paid what

must b e paid T o this p u rp ose an d its attempted
.

execution can b e traced ev e ry one o f these finan

”
c ial misfortunes and d ere l ictions .

B ut it stil l remains to fi nd the c ause Of the

b ad j udgment exercised by the eminent b ank er
man agement in enter ing up on and in c arrying
o u t the p olicy o f m onop o l y Fo r there w ere as
.

gr ave errors i n the execution o f the p o l icy o f

monop o l y as in its a doption In d eed it was the
.
,

ag gregation o f imp ortant erro r s o f deta il which

compe ll e d first the reduction th e n t h e passing,

o f dividends and which ul timate l y imp ai red the

’
C omp a ny s cre d it .

The failure of the b a nk er-m a nagement of the

N ew Haven cannot b e ex p la ined as the short
comings of individuals T he failure w as not
.

accidenta l It w a s not exception al It was

. .

the natura l result o f confusing the functions o f

banker a nd business man .

U N D IV I D E D L O Y A L T Y
Th e banker should b e detach e d from the b usi
n e ss f o r which he p er fo r ms the b a nking servic e .

This d e tachment is desi r able in the first place

, ,
 ’
198 O THE R P E OPLE S M ONEY

ration is necessary i n order to s e cure for th e

railr oad the ben e fi t o f the clearest fi nan ci al
’
j udgm e nt ; for th e b ank er s j udgment will b e
n e cessarily cl oud e d by participation i n the
management o r by ul t imate resp onsibility for
the policy actually pursu e d It is ou tside finan
.

c ial advice which th e railroad needs .

L ong ago it was recogniz ed th a t a man who

”
is his o wn lawyer h as a fool f o r a c l i e nt T he
.

essenti al r e ason for t hi s is that soundness of

j udgm e nt is easily obscured by self inter e st -
.

S imilarly it is not th e p r oper f u nction o f th e

,

b anker to construct p u rchase o r operate rail

, ,

roads o r to engage in ind us tr ial ent e rprises

,
.

The prop e r function o f the banker is to give to

o r to withhold cr e dit from other conce r ns ; to

p urch ase o r to re fus e t o p u rchase sec urities f r om

other c onc e rns ; and to sell securities to oth e r
customer s Th e proper exercis e o f this function
.

d e mands that th e b anke r shoul d be wholly de

t ac h e d from th e c onc e rn whos e credit o r sec u ri
ti e s are under consider ation His decision to
.

grant o r to withhold credit to p u rchase o r not

,

to p u rchase s e curities involves passi n g j udg

,

m e nt on the effi ci e ncy o f th e manag e m e nt o r th e

soundn e ss o f th e e n t er p r is e ; and he ought not
to occupy a p osition where in s o doing h e is
 BA N KE R MA N AG E M EN T
-
1 99

passing j udgment o n himself O f course de .

t ac h m e n t does not imply lac k o f knowledg e .

The banker shoul d act only wi th full knowl e dge ,

j ust as a lawyer should act only w ith f u ll knowl

e dge. The b anker who undert ak es to mak e
loans to o r purchase securities from a railroad
for sale t o his oth e r custom ers ought to have as
full knowledge of its affai r s as does its l egal
adviser B ut the banker should n o t b e in a ny
.
,

sense his o wn client He should not in the c a

,
.
,

p a c it y o f b ank e r p ass,
j udgm e nt up on the wisdom
o f his own plans o r a cts as r ailroad man .

S uch a d e tach ed a ttitude o n t h e p art of the

b ank e r is demanded also in the inter e st of his
—
other custom er s the p ur chas ers o f corpor a te
secur ities Th e inv e stm e nt b anker stands to
.

ward a large part o f his custom e rs in a posi

tion of trust which S hould b e f ully rec ogniz e d
,
.

The small investo r s par ticul arly the women who

, ,

are holding an ev e r incr e asing prop ortion o f our

-

c orporate s e c u rities commonly b uy o n the

,

r e commendation o f th e ir bank ers The sma ll .

investors do not and in most cases cannot as

, ,

certain fo r th e mselves th e facts on which to base

a p r oper j udgm e nt as t o t h e soun dn e ss of securi
ti e s o ff er ed And even if these investors were
.

furnish e d with the facts they lack the b usin e ss

,
2 00 O TH E R P E O PLE S M ONE Y
’

exp erience essential to f orming a prop e r j udg

ment S uc h inv e st ors need and are entitl e d to
.

’
have the b an kers advic e and obviously th e ir
,

unbiased a dvice ; an d the advice cannot b e u n

bi as e d wher e the b ank e r as p ar t o f the c orp o r a
,

’
tion s management h as p articipated in th e c re a
,

tion of the s e cur ities w hi ch are the subj ect o f

sal e to the investor .

Is it conc e ivabl e that the great house o f M o r

gan would hav e aid e d in p r oviding the N ew
Haven with the hundreds of millions s o u m
wisely expended if its j udgm e nt had not b een
,

cl ouded by participati o n in the N ew H a ven s ’

management ?
 ’
2 02 O TH E R P E O PLE S M ONEY

of h u man limitations $ Firs t that n o man c an

,

serve two m aste r s ; sec o n d that a man cannot

,

at the s am e tim e do many things well .

SEEM IN G SU CC ESSES
There are numerous se e ming e x ceptions to
these rules ; an d a relatively few rea l on e s .

O f course many b anke r managed proper ties

,
-

have b een prospe r ous ; some for a long time ,

at the exp e nse o f the pub lic ; some for a sho r ter
time because of the impetus attained b e fore
,

they were b ank er managed I t is not di ffi cult

-
.

to have a l arge net income where o n e h as the

,

fi el d to oneself h a s a ll the advantages p r ivil eg e

,
“
c an give and may charge all the traffic wi l l
,

”
bear . And even in comp e titive b usin e ss the
success o f a long established w e ll o r ganiz ed b usi
-
,
-

n e ss with a widely extended good will must con

-
,

t in u e f o r a consi d e r abl e time ; esp e cially if but

tressed by inte r twined relations constantly giving
it the preference over competito r s The real .

test o f effi ciency comes when success h as to b e

struggled fo r ; when natural o r l e ga l conditions
limit th e char ges which may b e made for the
goods sold o r s e rvice rend e r e d Our bank e r
.

manag e d r ail r oads have recently b ee n subj e ct e d

to such a t e st and th ey hav e failed to pass it
,
.
 TH E OL I GA R C H I NE FFI C I EN T 2 03

I t i s only says Goeth e when working within

, ,

”
l imit a tions that the master is disclos e d
,
.

W HY O LI G A R C HY FA I L S
B a nker-man a gement fails partly b ecause the
,

privat e interest dest r oys soundness of j udgment

and undermin e s loy a lty It fails partly also
.
, ,

because b a nker di r ectors are l ed by thei r o c c u

pat io n ( and often even b y the me r e f act o f their
l oc a tion remote from the operated properti e s )
to apply a false test in ma k ing th e ir decisions .

Prominent in the b a nk e r-di r ector mind is al ways

this thought $ Wh a t will b e th e prob ab l e eff ec t
“

of o ur action up on the market valu e o f the com

’
pany s stock and b onds o r indeed g e nerally
, , ,
”
upon stoc k exchange values ? T h e stock mar k et
is so much a part of t h e inv e stment-b anke r s
’

life that he cannot help b eing aff ected b y this

,

c onsideration how e ver disint e rested he may b e

, .

The stoc k market is sensitiv e Facts are often .

“
misint erpreted by the street o r by investo r s .

And with the b est o f int e ntions di r ectors su s ,

c ept ibl e to such influ e nc e s are le d to unwise

decisions in the effort t o p r event m isin t erpre t a

tions Thus expenditur e s necess ar y f o r main
.
,

t en an c e or f o r th e ultimate good o f a proper ty

,

are often deferred b y b ank er d ir ect or s , becaus e

-
 ’
2 04 O TH E R P E O PLE S M ONE Y

of the b e li e f that the m aking o f them n o w ,

would ( by showing small e r net e arnings ) cr e ate ,

a b ad and ev e n false impression o n th e mark e t

, , .

Divid e nds are paid which shoul d n o t be b ecaus e ,

o f the e ff ect which it is beli e v e d reduction o r

suspension woul d have up o n the mark e t val ue of

’
the c ompany s securities T o exc erise a soun d
.

j udgm e nt in the diffic u l t aff ai r s o f b usiness is ,

at best a delicate O peration And no man c an

,
.

successf u lly perform that f u nction whose mind

is diverted however innocently from the study
, ,

of,
what is b est in the l ong run for the company
”
o f which I am director ? T he b anker director -

is pecul iarly liable to such distortion of j udgment

by r e ason o f his occupation and his environm e nt .

But there is a f u rther reason why o rdin arily , ,

b anker manag e ment must fail

- .

TH E E L E M E NT O F TI M E
The b anker with his multiplicity o f interests
, ,

c annot ordinarily give the tim e e ssential to prop er

sup e rvision and to acqui r ing that knowledg e o f
th e f a cts nec essary to the exercise of sound j udg
ment The Centu ry Dic tion ar y tells us that a
.

“
Di re c to r is o n e who di re cts ; o n e who guid e s ,
”
sup e rint e nds gov er ns and manag e s
,
Re al e f .

fic ie n c y in any b usiness in which conditions are

 ’
2 06 O THE R P E OPLE S M ONE Y

shoul d p ass j udgment The re al m anaging di .

r e ctors o f the N ew Haven system during the

d e cade of its decline were $ J P i er pont M organ .
,

George F B ak er and William R ockefeller

.
, .

Mr M organ was until his death in 1 9 1 3 the

.
, ,

head o f perhaps the l arg e st b anking house in

the world Mr B aker was until 1 909 P resi
. .
, ,

dent and then Ch a ir man o f the B o ar d o f Di

r e ctors o f o n e of Am erica s l eading b an k s ( the ’

Fi r st N ational o f N ew Y ork ) an d Mr R o c kc , .
L

f e ller was unti l 1 9 1 1 P resident o f the S tand ar d

, ,

O il C ompany E ach was we ll advanced in

.

y e ars Y et each o f these men besi d es the duties

.
,

o f his o wn vast b usiness an d import a nt private ,

“
i nter e sts undertook to
, guide superintend , ,
”
govern and manage n o t on l y the N ew Haven ,

b ut also the following other corporations some ,

of which we r e similarly c omplex $ Mr M or .

gan 4 8 c orp o r ations including 4 0 r ail ro ad cor

, ,

p at io n s with at least 100 subsidiary c o m

o r ,

p anics a nd ,
miles o f li ne ; 3 b anks a nd
trust o r ins u rance companies ; 5 in d ustr i al a nd
pub l ic s e rvice c ompanies Mr Baker 4 8 c o r
-
. .
,

p o ra t io ns including 1 5 railroad c orp or a tions

, ,

with at least 1 58 subsidia r ies an d mil e s ,

o f t r ack ; 1 8 banks and trust or insurance com

,

panics ; 1 5 public servic e co r po r ations a n d in

-
 TH E OL IGA R C H I NE FFI C I E N T 2 07

d u st rial concerns Mr R ockefell e r 3 7 corp o r a

. .
,

tions i ncluding 2 3 rail r oad c o r p o r ations with

,

at l e ast 1 1 7 subsidiar y c ompani e s and ,

mil e s o f lin e ; 5 b anks trust o r insuranc e c o m

,

pani c s ; 9 public service c ompanies and indust r ial

conce r ns .

S UB S TIT U T E S
I t h as been urg e d that in view o f the h e avy
b urd e ns which the leaders o f finance assum e in
directing B usin e ss Am erica we S hould b e pati e nt
-
,

of err or and re f r ain fr om c r iticism l e st th e lead

,

ers b e d e t err ed from continuing to p er fo r m this

p ublic service A ve r y respectabl e B oston daily
.

said a f e w days after C ommissione r M c C h o rd s ’

rep ort on t h e N orth Haven wreck $

I t is be l ieved th a t the Ne w Hav e n pillo r y

r epeated with som e frequency will mak e th e par t
o f r ailr oad directo r quite undesirab l e and hard

to fill a nd more and mo r e avoid e d by r esp onsibl e

,

men Indeed it may even b ecome so that m e n

.

will have t o b e paid a substantial salary to c o m

p e nsate th e m in som e deg r ee for t h e risk involv e d
”
in b e ing o n the b oard of di re ctors .

But th ere is no occasion f o r ala r m Th e .

Amer ican p e opl e hav e as little need o f oliga r chy

2 08 O THE R PE OPLE S M ONE Y ’

in bus iness as in p olitics Ther e are thousands .

of m e n in Am er ica who c oul d hav e perform e d

f o r the N e w Haven stockhold e rs the tas k o f
o ne who guides sup er intends governs and
, ,
”
manages ,
b ett e r than did M r M o r gan Mr . . .

B ak er an d Mr R ock e feller Fo r th ough p o s

. .

s e ssing less native abi l ity ev e n the averag e ,

business man would have don e b e tt er than they ,

b e cause wo r king und e r p r op e r conditions The re .

is gr e at str ength in s er ving with singleness of

p urp os e o n e master only There is g r eat strength
.

in having time to giv e to a busin e ss the a tt e n

tion which its diffi cult p r obl e ms d e mand And .

tens o f thousands mo re Amer icans could b e ren

der ed comp e t e nt to guide o ur imp ortant b usi
n e ss e s L ib er ty is th e g re atest d e v e loper Herod
. .

otus tells us that whil e the tyr ants ruled the ,

Athenians we re no b etter fight er s than th e ir

n e ighb ors ; b ut wh e n fre ed th ey immediately ,

surpassed all oth e rs If industr ial democracy

.

—
t r u e c o Operat io n should b e substituted for in
du s t rial absolutism th ere would b e no l ack o f
,

i n dust r ial lead er s .

E N G LA N D S ’
B IG B US IN ESS
E ngland too has big busin e ss But h er big
, ,
.

b usi n e s s is th e C o Opc ra t iv e Whol e s al e S oci e ty ,

 ’
2 10 O THE R P E OPLE S M ONEY

mar k and Sweden It owns st e am er s plying

.

b etween C ontin e ntal and E nglish p o r ts I t has .

an imp ortant b anking d epartm e nt ; it insures th e

p r op erty and p er son of its memb er s E v er y .

o n e o f these d e partm e nts is conduct e d i n com

p e tition with the most e ffi ci e nt conc er ns in th e ir

respective li nes in G re at B ritain The C o Opera
.

tive Wholes al e S oci e ty m akes its purchases and ,

manufactur e s its p r oducts i n ord er to supply

,

th e 1 3 9 9 local d istr ibutiv e co op er ativ e societi e s

,

scatt ere d ov e r all E ngland ; b ut e ach loca l soci e ty

is at lib er ty to b uy from the whol e sale soci e ty ,

o r not ,
a s it chooses ; and th e y b uy onl y if
th e C o Operat iv e Wholesal e s e lls at market prices .

This the C o Operat ive actually do e s ; and it is

able besid e s to r e turn to th e local a fai r divid e nd
o n i ts pu r ch a ses
.

IN D US TR IA L D EM O C RA C Y
N ow how a r e the di re ctors of this g r eat b usi
,

n e ss chosen ? N ot b y E ngland s l e ading b ank er s

’
,

o r oth er notabiliti e s supp os e d to poss e ss unusual

,

wisdom ; b ut democ r atically by all of th e p e opl e

,

int ere st e d in th e op er ations of th e S oci e ty And.

th e num ber of such p er sons who hav e di re c tly o r

indi r ectly a voic e i n th e s e l e ction of th e di re cto r s
of the E n gli s h C o Ope ra t iv e Whol e sal e S oci e ty is
 TH E OL IGA R C H I NE FFI C I E N T 211

For the di recto r s of the Wholesale

S ociety are elected by vote of the delegates of th e
1 399 retai l societies A nd the d e l e gates of the
.

retai l soci e ties are in t u rn se l ected by the m e m

, ,

b ers o f the l oc al societi e s th a t is by t h e con

-
,

sumers o n the principle of one man o ne v ot e

, , ,

reg ard l ess o f t h e amount of capital contrib ut e d .

N ote what k ind of men these industrial d e mocrats

sel ec t t o exercise executive control of their vast
organi z a ti o n N o t a ll wise ba nkers o r th e ir d um
.
-

mies b ut men wh o have risen from the ran k s of

,

c o Operat io n ; men w h o b y c onspicuous service

,

in the l oc al soci e ties h ave won the r e spect a nd

c onfidence of the ir f el lo ws The dir ectors a r e .

electe d f or one ye ar o n l y ; but a director is rarely

unse a te d J T W M itchell w a s president o f
. . . .

the S ociety cont i nuously for 2 1 ye ars Thirty .

tw o di rectors are se l ecte d in this manner E ach .

gives t o t h e business o f t h e S ociety his w hole

time a n d a ttention ; a n d the aggr e g a te sa l aries
o f the th irty two is l ess th a n th a t of m a ny a
-

single e x ecut i ve in Am erican corp orations ; f o r

’
these directors o f E ngland s b ig b usiness serve
e a ch for a s alary of ab out $ 1 500 a y ear .

T he C ooper a tive Wholesale S ociety of E nglan d

is the ol d est and larg e st of thes e institutions .

But similar wholes ale soc i eties exist in 1 5 oth e r

 ’
2 12 O TH E R PE O PLE S M ONE Y

countries The S cotch S oci e ty ( which William

.

M axw el l has served most e ff ici e ntly as Pr esid e nt

for thirty ye ars at a salary never exc ee ding $ 38
a we e k ) h as a turn over o f mo re than
-

a ye ar .

A REME D Y FOR TRUS TS

Albert S o n nieh s en Gener al Secret ary o f th e
,

C ob perat iv e L eagu e te l ls in the A m erican R eview

,

of Reviews for April 1 9 1 3 h o w the S wedish

, ,

Wholes al e S ociety curb ed the Sugar T r ust ; h o w

it crushed the M arg erine C ombine ( c ompelling
it to dissolve af t e r having l ost crowns
i n the struggle ) ; a n d how in Switz er land the
Wholesale S ociety forced the d iss o lution o f th e
Shoe M an ufacturers Association H e te ll s also .

this mem o r able incident

S ix ye ars ago at a n internationa l congress

,

in C remon a Dr Hans M uller a Swiss d e legate

,
.
, ,

p r es e nt e d a reso l ution b y whic h an int e rnational

whol e sale society shou l d b e cre a t ed L uigi L uz .

z a t t i Italian Minist e r o f S tate a nd a n a r dent

,

m e mb er o f the movement was i n the chair ,

.

Thos e who we r e present say Lu z z at t i paused his ,

e y e s lighted up then d ramatically raising his

, ,

hand h e said $ D r M iil l er p r opos e s to the assem

,
$
.
 ’
2 14 O TH E R P E OPLE S M ONE Y

m is d eveloping And p r ogressiv e Wisconsin

it t e e .

has recent l y le gislated wis ely to dev e lop c o Opera

tion thr oughout th e stat e .

Among o ur fa r mer s the interest in c o operation

is e sp e cially keen The f e der al gov e rnm e nt h as
.

j ust e stablish e d a s eparate bur eau of the Dep art

m e nt o f Ag r icult u r e to aid i n the study d e vel ,

o pm e n t and int r oduction o f the b est m e thods

o f co op er ation in th e wo r king o f farms in b uying , ,

and in distr ib ution ; and sp e cial attention is now

—
being giv e n to farm c r edits a fi e ld of c o Opera
tion in which C ontinental E ur op e has achieved
compl e te succ ess and to which D avid L ubin
, ,

Am er ica s d e l e gat e to the Inter national I nstitut e

’

o f Ag r icultur e at R ome has among others done

, , ,

much to direct o ur att e ntion .

P E OP L E S ’
S AV IN G S BA N K S
The G er man farmer has achieved d emoc r atic
banking The . littl e c o Opera t iv e cr e dit
associations with an average memb ersh ip o f
,

about 9 0 p er sons ar e trul y b a nks o f the people

, ,

by th e people a nd f o r the people .

First $ The b anks r e sourc e s are of the people

’
.

Th e s e a gg r egate ab out O f this

’
am ount repr e sents the farm er s
savings d e p osits ; the farme r s cur ’
 TH E OL IGA R C H I NE FFI C I EN T 2 15

’
r e nt d ep osits ; the farm e rs shar e
capital ; and amounts e arn e d and
plac e d in th e r e s e rve Thus nearly nine t e nths
.
,
-

o f th e se large resour c e s belong to the f arm erw

that is to th e memb ers o f the b anks

,
.

S ec on d$ The banks a re manag e d by the p e ople

— that is the m e mb e rs And m e mb ership is
.
,

e asily attain e d ; f o r the aver ag e amount of paid

up share capita l was in 1 909 l ess than $ 5 per
, ,

memb er E ach memb er has o n e vot e r e gar dless

.

o f the n u mber o f his sha r es o r the a mount o f

his d ep osits Th e se m e mb ers e l e ct th e o fli c ers

. .

The c ommitt e es and tr ust ee s ( and often even ,

the treas u r er ) s er v e without pay $ so that the ex

penses o f the banks are on the a verage ab out
, ,

$ 1 50 a ye ar .

Th ird$ The b a nks are f or the p e op l e The .

’
far m e rs mon e y is loan e d by the farm e r t o the
farm e r at a low rat e of inter e st ( usual ly 4 per
cent to 6 p er c e nt ) th e share hold e rs receiving
. .
,

o n the ir shares the same rate o f i nter e st that

,

th e b orrow e rs pay o n their l oans Thus th e .

r e sources o f al l far m e rs are made a vailab l e to

each farm e r for p ro ductiv e p urp oses
, .

This democratic r ur al banking is not confi ned

to Ger many As H e nr y W Wol ff says in his
. .

b o o k on c o Opera t iv e banks $
2 16 O T HE R PE OPLE S M ONEY ’

Propagating th ems e lv e s by their o wn m erits ,

littl e p e opl e s c o Opera t iv e banks hav e over sp r ead

’

G e rmany I taly Aust r ia Hungary Switz erland

, , , , ,

B e lgium R ussia is following up those countries ;

.

F r an ce is st r iving st re nuously f o r the p ossession

of c o Opera t iv e c re dit S ervia R oumania and
.
, ,

Bul garia hav e made such c re dit their o wn .

Canada h as scored its fi r st success o n th e road to

its acquisition Cypr u s an d even Jamaica hav e
.
, ,

made their fi r st start I re lan d has subst a ntial

.

firs t fruits to show o f h er economic sowings

- .

“
S outh Af rica is gropi n g its way to the sam e
goal E gyp t h as disc ov er ed the n e cessity of
.

c o Op era t iv e b anks e ven by the side o f Lo r d

,
$
C r om e r s pet cre a tion th e r ich l y endowed ag r i
’
,

cult u ral b ank India has mad e a b egin

ning f ull o f pr o mis e And even in far Japan
.
,

and i n C hina people are tryi n g to acclimatize

,

the more perfected organiz ations of S chulz e

D e litzsch a nd R aff e isen The e nt ir e wo r ld .

s e ems gi r dled with a ri n g of c o Opera t iv e credit .

O nly the Unit e d S tat e s and G re at B r itain still

”
lag lam e ntab ly b ehind .

BA N K ERS SAV IN GS BA N K S
’

The s a ving b anks o f Ame r ica p re s e nt a st r iking

contr ast t o these d e mocratic b a nks O ur savings .
 O TH ER PE OPLE S M ONE Y
’
2 18

e xtent p ublic spi r it e d citiz ens Among them

,
-
.

( at l e as t in th e lar g er citi e s ) th er e is apt to be a

p re dominance o f inv e stm e nt b ankers and b ank ,

dire cto r s T hus the th ree largest savings banks

.

of B oston ( whose aggregat e d e p osits e xce e d

thos e of the oth er 1 8 b anks ) have tog e th er 8 1
trus t ee s O f th e s e 52 a re inv e stm e nt banker s or
.
,

dire cto r s in oth e r Massachus e tts banks or trust

comp ani e s .

S ec o n d$ Th e funds o f o ur savings b anks

( wh e the r stock o r pur e ly mutu al ) are not u s e d
mai nly f or the p e opl e The deposito r s a re .

allowed inter e st ( usually from 3 to 4 per

In the mutual savings b anks they rec e ive ulti
mat e ly all the net earnings B ut the money .

gather ed in th e s e reservoir s is not use d to aid

p ro d u c t ivel y p er sons o f the class e s who mak e
the d ep osits The d e p ositors ar e larg e ly wage
.

e arners salari e d p e opl e o r m e mb ers o f smal l

, ,

t rades m e n s famili e s S tatically the money is

’
.

us e d for them Dynamically it is used fo r the

.

capitalist For ra re inde e d are the instanc e s

.
, ,

wh e n savings b anks m oneys a re l oan e d to a d

vance productiv e ly o n e o f th e d e positor class .

Such pe r sons would s e ldom b e a ble to provid e

th e r e q ui re d s e c ur ity ; and it is doub tful wh e th er
th e ir small n ee ds would in any ev e nt r e ceive
, ,
 TH E OL IGA R C H I N E FFI C I EN T 219

consider ation In 1 9 1 2 th e lar g e st of B oston s

.
’

—
mutua l savings b anks the Pr ovid e nt In st it u
tion for S avings which is the pion ee r mutual
,

—
saving s b a nk of Am er ica manag e d
’
0 00 of peop l e s money N ea r ly o.n e-
half of th e
resour c e s was invested in b onds
stat e municipal railroad r ailway and tel ephon e
, , ,

and in bank stock ; o r was d eposited i n national

b anks o r t r ust comp a nies T wo fif t h s o f the .
-

r e sourc e s we r e l oaned on real

estate mo r tgages ; and the averag e amount of
a l oan was O ne—sev e nth o f the re
so u rces was l oan e d on persona l
security ; and t h e av e rage of each o f these l oans
“ ”
was O bviously the smal l man is
,

n o t conspicu o us among the b orrowers ; a nd these

larg e scal e investm e nts do not even serve the

-

individual d epositor especiall y well ; for this

bank pays its d epositors a rate of int erest lower
than the a verage E ven our a d m irable P ostal
.

Savings Bank system serv e s productiv e ly mainly

the c apitalist These p ost al saving stations
.

ar e i n e ffec t c atch b asins m e rely which c oll e ct

-
,

t h e p e opl e s mon e y for distribution among th e

’

nation al banks .
220 O THE R P E OPLE S M ONE Y ’

P R O GRESS
Alphonse D e sj ar dins o f L e v is P rovinc e o f ,

Qu e b e c has d e monstr ated that c o bperat iv e c r edit

,

associations ar e applicabl e al so to at l east , ,

some urban c ommunities L e vis situate d on the

.
,

S t L awr e nce opposit e th e City o f Quebec is a

.
,

city o f inhabitants D e sj ar dins himse l f is

.

a man of th e p e opl e M any y e ars ago h e bec am e

.

’
imp re ss e d with th e fac t that th e peop l e s s av i ngs
were not utiliz e d primarily to aid the peop l e pro
du c t iv ely. T her e were th e n l ocat e d in Levis
b r anches o f thre e o r dinar y b anks o f d e posit— a
mutu al savings b a nk the postal savings b ank
, ,
“
and t hr ee incor p o r ated l oaner s b ut the peo
ple were not s e rved Aft e r much thin ki ng h e
.
,

chanced to r e ad of the E uropean r ur al ba nks .

H e p r oc e ed e d to wo r k out the id e a for use in

L e vis ; and in 1 9 00 e stab l ishe d there t h e first
”
c re dit- union
. Fo r s e v e n yea r s he watched
ca r ef u lly the op er ations o f this little ba nk .

Th e pioneer union had a ccumulated i n that

p er iod in r e sourc e s I t had made 2 9 00
.

loans to its m e mbe r s agg re gating

,
th e
l oans ave r agi n g $ 12 0 in amount and the int e r e st
,

rat e 6 p er cent In al l this tim e the b ank

.

had n o t m e t with a sing le l o s s Th e n D esj ardins

.
 PE OPLE S M ONE Y
’
222 O TH E R

discl ose that 1 1 are Jewish 8 French C anadian

,
-
,

and 2 I talian— a strong indication that t h e

immigr ant is not unp re par e d fo r fi nanci al d e
m o c ra c y . Th ere is r e ason to b eli e v e that th e s e
p e opl e s b anks wi l l sp r ead rapidly in th e Unit e d
’

S tates and that th e y will succeed Fo r the .

c o Op era t iv e b uilding and loan associations man ,

ag e d by wag e e arn ers and salary ear ner s who -

,

j oined together for syst e matic saving and o wner

f —
s hi p o houses hav e p r osp er ed in many states .

I n Massachusetts wh er e they hav e e xist e d for

,

35 y e a r s th e ir success has b een notable — the

,

numb e r in 1 9 1 2 being 1 6 2 and th e ir aggregat e

, , ,

ass e ts ne arly
Thus f armers wo r kingmen a nd cle r ks a re
, ,

l e a r ning to us e thei r little capital and th e ir sav

ings to help o n e an other inst e ad o f turning ov e r
their mon e y to th e g r eat b ank e rs f o r s afe ke ep
ing and t o b e thems e lves exploited
,
A n d m ay
.

w e not e xp e c t that when the co operative m o ve

m e nt develops in Amer ica merchants a nd manu
,

f a c t urers wi ll l e a r n fr om farmers and w orking

m e n how to h e lp th e ms e lves by hel ping o ne
anoth e r and thus j oin in a ttaining th e N ew Fr e e
,

dom for all ? When m e rchants and manufact u r er s

l e ar n this lesson mon e y kings will l os e subj e ct s
, ,

and swoll e n fo r tun e s m ay sh rink ; but indu s t r i e s

 TH E OL IGA R C H I NE FFI C I EN T 223

will fl ourish b e caus e th e faculti e s of m e n will b e

,

lib er at e d and d e v elop e d .

Pre sident Wilson has said wis e ly

N o c ountry can aff ord to have its p r osper ity
o r iginated by a small c ontr olling class T h e .

t re asury o f Am er ica does not li e in the brains o f

th e small b ody of men now in contro l of the
g r eat enter prises . It d epends up on the
inv e ntions of unknown men up on the o r iginations
,

of unknown men up on th e ambitions o f unknown

,

m e n E v er y c o u ntr y is renewed o u t o f the ranks

.

o f the unknown ,
n o t o u t o f the ranks of the
”
al re ady fam o us and power ful in c o ntrol .

TH E EN D