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Title: Other People's Money - And How the Bankers Use It
Author: Brandeis, Louis Dembitz
Language: English
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  _Copyright, 1913, 1914, by_

  _Copyright, 1914, by_

  _All rights reserved_

FASCo _March, 1914_


While Louis D. Brandeis’s series of articles on the money trust was
running in Harper’s Weekly many inquiries came about publication in
more accessible permanent form. Even without such urgence through the
mail, however, it would have been clear that these articles inevitably
constituted a book, since they embodied an analysis and a narrative
by that mind which, on the great industrial movements of our era, is
the most expert in the United States. The inquiries meant that the
attentive public recognized that here was a contribution to history.
Here was the clearest and most profound treatment ever published on
that part of our business development which, as President Wilson and
other wise men have said, has come to constitute the greatest of our
problems. The story of our time is the story of industry. No scholar
of the future will be able to describe our era with authority unless
he comprehends that expansion and concentration which followed the
harnessing of steam and electricity, the great uses of the change, and
the great excesses. No historian of the future, in my opinion, will
find among our contemporary documents so masterful an analysis of why
concentration went astray. I am but one among many who look upon Mr.
Brandeis as having, in the field of economics, the most inventive and
sound mind of our time. While his articles were running in Harper’s
Weekly I had ample opportunity to know how widespread was the belief
among intelligent men that this brilliant diagnosis of our money trust
was the most important contribution to current thought in many years.

“Great” is one of the words that I do not use loosely, and I look upon
Mr. Brandeis as a great man. In the composition of his intellect, one
of the most important elements is his comprehension of figures. As one
of the leading financiers of the country said to me, “Mr. Brandeis’s
greatness as a lawyer is part of his greatness as a mathematician.”
My views on this subject are sufficiently indicated in the following
editorial in Harper’s Weekly.


  About five years before the Metropolitan Traction Company of New
  York went into the hands of a receiver, Mr. Brandeis came down
  from Boston, and in a speech at Cooper Union prophesied that that
  company must fail. Leading bankers in New York and Boston were
  heartily recommending the stock to their customers. Mr. Brandeis
  made his prophecy merely by analyzing the published figures. How
  did he win in the Pinchot-Glavis-Ballinger controversy? In various
  ways, no doubt; but perhaps the most critical step was when he
  calculated just how long it would take a fast worker to go through
  the Glavis-Ballinger record and make a judgment of it; whereupon he
  decided that Mr. Wickersham could not have made his report at the
  time it was stated to have been made, and therefore it must have
  been predated.

  Most of Mr. Brandeis’s other contributions to current history
  have involved arithmetic. When he succeeded in preventing a raise
  in freight rates, it was through an exact analysis of cost. When
  he got Savings Bank Insurance started in Massachusetts, it was
  by being able to figure what insurance ought to cost. When he
  made the best contract between a city and a public utility that
  exists in this country, a definite grasp of the gas business was
  necessary--combined, of course, with the wisdom and originality
  that make a statesman. He could not have invented the preferential
  shop if that new idea had not been founded on a precise knowledge
  of the conditions in the garment trades. When he established
  before the United States Supreme Court the constitutionality of
  legislation affecting women only, he relied much less upon reason
  than upon the amount of knowledge displayed of what actually
  happens to women when they are overworked--which, while not
  arithmetic, is built on the same intellectual quality. Nearly two
  years before Mr. Mellen resigned from the New Haven Railroad, Mr.
  Brandeis wrote to the present editor of this paper a private letter
  in which he said:

  “When the New Haven reduces its dividends and Mellen resigns, the
  ‘Decline of New Haven and Fall of Mellen’ will make a dramatic
  story of human interest with a moral--or two--including the evils
  of private monopoly. Events cannot be long deferred, and possibly
  you may want to prepare for their coming.

  “Anticipating the future a little, I suggest the following as an
  epitaph or obituary notice:

  “Mellen was a masterful man, resourceful, courageous, broad
  of view. He fired the imagination of New England; but, being
  oblique of vision, merely distorted its judgment and silenced its
  conscience. For a while he trampled with impunity on laws human and
  divine; but, as he was obsessed with the delusion that two and two
  make five, he fell, at last, a victim to the relentless rules of
  humble arithmetic.

  “‘Remember, O Stranger, Arithmetic is the first of the sciences and
  the mother of safety.’”

The exposure of the bad financial management of the New Haven railroad,
more than any other one thing, led to the exposure and comprehension
of the wasteful methods of big business all over the country and
that exposure of the New Haven was the almost single-handed work of
Mr. Brandeis. He is a person who fights against any odds while it is
necessary to fight and stops fighting as soon as the fight is won. For
a long time very respectable and honest leaders of finance said that
his charges against the New Haven were unsound and inexcusable. He
kept ahead. A year before the actual crash came, however, he ceased
worrying, for he knew the work had been carried far enough to complete
itself. When someone asked him to take part in some little controversy
shortly before the collapse, he replied, “That fight does not need me
any longer. Time and arithmetic will do the rest.”

This grasp of the concrete is combined in Mr. Brandeis with an equally
distinguished grasp of bearing and significance. His imagination is
as notable as his understanding of business. In those accomplishments
which have given him his place in American life, the two sides of his
mind have worked together. The arrangement between the Gas Company
and the City of Boston rests on one of the guiding principles of Mr.
Brandeis’s life, that no contract is good that is not advantageous
to both parties to it. Behind his understanding of the methods of
obtaining insurance and the proper cost of it to the laboring man lay
a philosophy of the vast advantage to the fibre and energy of the
community that would come from devising methods by which the laboring
classes could make themselves comfortable through their whole lives
and thus perhaps making unnecessary elaborate systems of state help.
The most important ideas put forth in the Armstrong Committee Report
on insurance had been previously suggested by Mr. Brandeis, acting
as counsel for the Equitable policy holders. Business and the more
important statesmanship were intimately combined in the management of
the Protocol in New York, which has done so much to improve conditions
in the clothing industry. The welfare of the laborer and his relation
to his employer seems to Mr. Brandeis, as it does to all the most
competent thinkers today, to constitute the most important question we
have to solve, and he won the case, coming up to the Supreme Court of
the United States, from Oregon, establishing the constitutionality of
special protective legislation for women. In the Minimum Wage case,
also from the State of Oregon, which is about to be heard before the
Supreme Court, he takes up what is really a logical sequence of the
limitation of women’s hours in certain industries, since it would be
a futile performance to limit their hours and then allow their wages
to be cut down in consequence. These industrial activities are in
large part an expression of his deep and ever growing sympathy with
the working people and understanding of them. Florence Kelley once
said: “No man since Lincoln has understood the common people as Louis
Brandeis does.”

While the majority of Mr. Brandeis’s great progressive achievements
have been connected with the industrial system, some have been
political in a more limited sense. I worked with him through the
Ballinger-Pinchot controversy, and I never saw a grasp of detail more
brilliantly combined with high constructive ethical and political
thinking. After the man who knew most about the details of the Interior
Department had been cross-examined by Mr. Brandeis he came and sat
down by me and said: “Mr. Hapgood, I have no respect for you. I do
not think your motives in this agitation are good motives, but I want
to say that you have a wonderful lawyer. He knows as much about the
Interior Department today as I do.” In that controversy, the power of
the administration and of the ruling forces in the House and Senate
were combined to protect Secretary Ballinger and prevent the truth
from coming to light. Mr. Brandeis, in leading the fight for the
conservation side, was constantly haunted by the idea that there was a
mystery somewhere. The editorial printed above hints at how he solved
the mystery, but it would require much more space to tell the other
sides, the enthusiasm for conservation, the convincing arguments for
higher standards in office, the connection of this conspiracy with the
country’s larger needs. Seldom is an audience at a hearing so moved as
it was by Mr. Brandeis’s final plea to the committee.

Possibly his work on railroads will turn out to be the most significant
among the many things Mr. Brandeis has done. His arguments in 1910–11
before the Interstate Commerce Commission against the raising of rates,
on the ground that the way for railroads to be more prosperous was to
be more efficient, made efficiency a national idea. It is a cardinal
point in his philosophy that the only real progress toward a higher
national life will come through efficiency in all our activities. The
seventy-eight questions addressed to the railroads by the Interstate
Commerce Commission in December, 1913, embody what is probably the most
comprehensive embodiment of his thought on the subject.

On nothing has he ever worked harder than on his diagnosis of the
Money Trust, and when his life comes to be written (I hope many years
hence) this will be ranked with his railroad work for its effect in
accelerating industrial changes. It is indeed more than a coincidence
that so many of the things he has been contending for have come to
pass. It is seldom that one man puts one idea, not to say many ideas,
effectively before the world, but it is no exaggeration to say that
Mr. Brandeis is responsible for the now widespread recognition of
the inherent weakness of great size. He was the first person who set
forth effectively the doctrine that there is a limit to the size of
greatest efficiency, and the successful demonstration of that truth is
a profound contribution to the subject of trusts. The demonstration
is powerfully put in his testimony before the Senate Committee in
1911, and it is powerfully put in this volume. In destroying the
delusion that efficiency was a common incident of size, he emphasized
the possibility of efficiency through intensive development of the
individual, thus connecting this principle with his whole study of
efficiency, and pointing the way to industrial democracy.

Not less notable than the intellect and the constructive ability that
have gone into Mr. Brandeis’s work are the exceptional moral qualities.
Any powerful and entirely sincere crusader must sacrifice much. Mr.
Brandeis has sacrificed much in money, in agreeableness of social life,
in effort, and he has done it for principle and for human happiness.
His power of intensive work, his sustained interest and will, and his
courage have been necessary for leadership. No man could have done what
he has done without being willing to devote his life to making his
dreams come true.

Nor should anyone make the mistake, because the labors of Mr. Brandeis
and others have recently brought about changes, that the system which
was being attacked has been undermined. The currency bill has been
passed, and as these words are written, it looks as if a group of
trust bills would be passed. But systems are not ended in a day. Of
the truths which are embodied in the essays printed in this book, some
are being carried out now, but it will be many, many years before the
whole idea can be made effective; and there will, therefore, be many,
many years during which active citizens will be struggling for those
principles which are here so clearly, so eloquently, so conclusively
set forth.

The articles reprinted here were all written before November, 1913.
“The Failure of Banker Management” appeared in Harper’s Weekly Aug. 16,
1913; the other articles, between Nov. 22, 1913 and Dec. 17, 1914.


  _March, 1914._

















President Wilson, when Governor, declared in 1911:

“The great monopoly in this country is the money monopoly. So long
as that exists, our old variety and freedom and individual energy
of development are out of the question. A great industrial nation
is controlled by its system of credit. Our system of credit is
concentrated. The growth of the nation, therefore, and all our
activities are in the hands of a few men, who, even if their actions
be honest and intended for the public interest, are necessarily
concentrated upon the great undertakings in which their own money
is involved and who, necessarily, by every reason of their own
limitations, chill and check and destroy genuine economic freedom. This
is the greatest question of all; and to this, statesmen must address
themselves with an earnest determination to serve the long future and
the true liberties of men.”

The Pujo Committee--appointed in 1912--found:

  “Far more dangerous than all that has happened to us in the past in
  the way of elimination of competition in industry is the control of
  credit through the domination of these groups over our banks and

  “Whether under a different currency system the resources in our
  banks would be greater or less is comparatively immaterial if they
  continue to be controlled by a small group.”...

  “It is impossible that there should be competition with all the
  facilities for raising money or selling large issues of bonds in
  the hands of these few bankers and their partners and allies, who
  together dominate the financial policies of most of the existing
  systems.... The acts of this inner group, as here described, have
  nevertheless been more destructive of competition than anything
  accomplished by the trusts, for they strike at the very vitals
  of potential competition in every industry that is under their
  protection, a condition which if permitted to continue, will
  render impossible all attempts to restore normal competitive
  conditions in the industrial world....

  “If the arteries of credit now clogged well-nigh to choking by the
  obstructions created through the control of these groups are opened
  so that they may be permitted freely to play their important part
  in the financial system, competition in large enterprises will
  become possible and business can be conducted on its merits instead
  of being subject to the tribute and the good will of this handful
  of self-constituted trustees of the national prosperity.”

The promise of New Freedom was joyously proclaimed in 1913.

The facts which the Pujo Investigating Committee and its able Counsel,
Mr. Samuel Untermyer, have laid before the country, show clearly the
means by which a few men control the business of America. The report
proposes measures which promise some relief. Additional remedies will
be proposed. Congress will soon be called upon to act.

How shall the emancipation be wrought? On what lines shall we proceed?
The facts, when fully understood, will teach us.


The dominant element in our financial oligarchy is the investment
banker. Associated banks, trust companies and life insurance companies
are his tools. Controlled railroads, public service and industrial
corporations are his subjects. Though properly but middlemen, these
bankers bestride as masters America’s business world, so that
practically no large enterprise can be undertaken successfully without
their participation or approval. These bankers are, of course, able
men possessed of large fortunes; but the most potent factor in their
control of business is not the possession of extraordinary ability
or huge wealth. The key to their power is Combination--concentration
intensive and comprehensive--advancing on three distinct lines:

_First:_ There is the obvious consolidation of banks and trust
companies; the less obvious affiliations--through stockholdings, voting
trusts and interlocking directorates--of banking institutions which
are not legally connected; and the joint transactions, gentlemen’s
agreements, and “banking ethics” which eliminate competition among the
investment bankers.

_Second:_ There is the consolidation of railroads into huge systems,
the large combinations of public service corporations and the
formation of industrial trusts, which, by making businesses so “big”
that local, independent banking concerns cannot alone supply the
necessary funds, has created dependence upon the associated New York

But combination, however intensive, along these lines only, could
not have produced the Money Trust--another and more potent factor of
combination was added.

_Third:_ Investment bankers, like J. P. Morgan & Co., dealers in bonds,
stocks and notes, encroached upon the functions of the three other
classes of corporations with which their business brought them into
contact. They became the directing power in railroads, public service
and industrial companies through which our great business operations
are conducted--the makers of bonds and stocks. They became the
directing power in the life insurance companies, and other corporate
reservoirs of the people’s savings--the buyers of bonds and stocks.
They became the directing power also in banks and trust companies--the
depositaries of the quick capital of the country--the life blood of
business, with which they and others carried on their operations.
Thus four distinct functions, each essential to business, and each
exercised, originally, by a distinct set of men, became united in the
investment banker. It is to this union of business functions that the
existence of the Money Trust is mainly due.*

  * Obviously only a few of the investment bankers exercise this
    great power; but many others perform important functions in the
    system, as hereinafter described.

       *       *       *       *       *

The development of our financial oligarchy followed, in this respect,
lines with which the history of political despotism has familiarized
us:--usurpation, proceeding by gradual encroachment rather than by
violent acts; subtle and often long-concealed concentration of distinct
functions, which are beneficent when separately administered, and
dangerous only when combined in the same persons. It was by processes
such as these that Cæsar Augustus became master of Rome. The makers of
our own Constitution had in mind like dangers to our political liberty
when they provided so carefully for the separation of governmental


The original function of the investment banker was that of dealer in
bonds, stocks and notes; buying mainly at wholesale from corporations,
municipalities, states and governments which need money, and selling
to those seeking investments. The banker performs, in this respect,
the function of a merchant; and the function is a very useful one.
Large business enterprises are conducted generally by corporations.
The permanent capital of corporations is represented by bonds and
stocks. The bonds and stocks of the more important corporations are
owned, in large part, by small investors, who do not participate in
the management of the company. Corporations require the aid of a
banker-middleman, for they lack generally the reputation and clientele
essential to selling their own bonds and stocks direct to the investor.
Investors in corporate securities, also, require the services of a
banker-middleman. The number of securities upon the market is very
large. Only a part of these securities is listed on the New York
Stock Exchange; but its listings alone comprise about sixteen hundred
different issues aggregating about $26,500,000,000, and each year new
listings are made averaging about two hundred and thirty-three to an
amount of $1,500,000,000. For a small investor to make an intelligent
selection from these many corporate securities--indeed, to pass an
intelligent judgment upon a single one--is ordinarily impossible. He
lacks the ability, the facilities, the training and the time essential
to a proper investigation. Unless his purchase is to be little better
than a gamble, he needs the advice of an expert, who, combining special
knowledge with judgment, has the facilities and incentive to make a
thorough investigation. This dependence, both of corporations and of
investors, upon the banker has grown in recent years, since women and
others who do not participate in the management, have become the owners
of so large a part of the stocks and bonds of our great corporations.
Over half of the stockholders of the American Sugar Refining Company
and nearly half of the stockholders of the Pennsylvania Railroad and of
the New York, New Haven & Hartford Railroad are women.

       *       *       *       *       *

Good-will--the possession by a dealer of numerous and valuable regular
customers--is always an important element in merchandising. But in
the business of selling bonds and stocks, it is of exceptional value,
for the very reason that the small investor relies so largely upon
the banker’s judgment. This confidential relation of the banker to
customers--and the knowledge of the customers’ private affairs acquired
incidentally--is often a determining factor in the marketing of
securities. With the advent of Big Business such good-will possessed
by the older banking houses, preëminently J. P. Morgan & Co. and their
Philadelphia House called Drexel & Co., by Lee, Higginson & Co. and
Kidder, Peabody, & Co. of Boston, and by Kuhn, Loeb & Co. of New York,
became of enhanced importance. The volume of new security issues was
greatly increased by huge railroad consolidations, the development of
the holding companies, and particularly by the formation of industrial
trusts. The rapidly accumulating savings of our people sought
investment. The field of operations for the dealer in securities was
thus much enlarged. And, as the securities were new and untried, the
services of the investment banker were in great demand, and his powers
and profits increased accordingly.


But this enlargement of their legitimate field of operations did not
satisfy investment bankers. They were not content merely to deal
in securities. They desired to manufacture them also. They became
promoters, or allied themselves with promoters. Thus it was that
J. P. Morgan & Company formed the Steel Trust, the Harvester Trust
and the Shipping Trust. And, adding the duties of undertaker to those
of midwife, the investment bankers became, in times of corporate
disaster, members of security-holders’ “Protective Committees”; then
they participated as “Reorganization Managers” in the reincarnation of
the unsuccessful corporations and ultimately became directors. It was
in this way that the Morgan associates acquired their hold upon the
Southern Railway, the Northern Pacific, the Reading, the Erie, the Père
Marquette, the Chicago and Great Western, and the Cincinnati, Hamilton
& Dayton. Often they insured the continuance of such control by the
device of the voting trust; but even where no voting trust was created,
a secure hold was acquired upon reorganization. It was in this way also
that Kuhn, Loeb & Co. became potent in the Union Pacific and in the
Baltimore & Ohio.

But the banker’s participation in the management of corporations was
not limited to cases of promotion or reorganization. An urgent or
extensive need of new money was considered a sufficient reason for the
banker’s entering a board of directors. Often without even such excuse
the investment banker has secured a place upon the Board of Directors,
through his powerful influence or the control of his customers’
proxies. Such seems to have been the fatal entrance of Mr. Morgan into
the management of the then prosperous New York, New Haven & Hartford
Railroad, in 1892. When once a banker has entered the Board--whatever
may have been the occasion--his grip proves tenacious and his influence
usually supreme; for he controls the supply of new money.

       *       *       *       *       *

The investment banker is naturally on the lookout for good bargains
in bonds and stocks. Like other merchants, he wants to buy his
merchandise cheap. But when he becomes director of a corporation,
he occupies a position which prevents the transaction by which he
acquires its corporate securities from being properly called a bargain.
Can there be real bargaining where the same man is on both sides of
a trade? The investment banker, through his controlling influence
on the Board of Directors, decides that the corporation shall issue
and sell the securities, decides the price at which it shall sell
them, and decides that it shall sell the securities to himself. The
fact that there are other directors besides the banker on the Board
does not, in practice, prevent this being the result. The banker,
who holds the purse-strings, becomes usually the dominant spirit.
Through voting-trusteeships, exclusive financial agencies, membership
on executive or finance committees, or by mere directorships, J. P.
Morgan & Co., and their associates, held such financial power in at
least thirty-two transportation systems, public utility corporations
and industrial companies--companies with an aggregate capitalization of
$17,273,000,000. Mainly for corporations so controlled, J. P. Morgan
& Co. procured the public marketing in ten years of security issues
aggregating $1,950,000,000. This huge sum does not include any issues
marketed privately, nor any issues, however marketed, of intra-state
corporations. Kuhn, Loeb & Co. and a few other investment bankers
exercise similar control over many other corporations.


Such control of railroads, public service and industrial corporations
assures to the investment bankers an ample supply of securities at
attractive prices; and merchandise well bought is half sold. But these
bond and stock merchants are not disposed to take even a slight risk as
to their ability to market their goods. They saw that if they could
control the security-buyers, as well as the security-makers, investment
banking would, indeed, be “a happy hunting ground”; and they have made
it so.

The numerous small investors cannot, in the strict sense, be
controlled; but their dependence upon the banker insures their being
duly influenced. A large part, however, of all bonds issued and of
many stocks are bought by the prominent corporate investors; and
most prominent among these are the life insurance companies, the
trust companies, and the banks. The purchase of a security by these
institutions not only relieves the banker of the merchandise, but
recommends it strongly to the small investor, who believes that these
institutions are wisely managed. These controlled corporate investors
are not only large customers, but may be particularly accommodating
ones. Individual investors are moody. They buy only when they want
to do so. They are sometimes inconveniently reluctant. Corporate
investors, if controlled, may be made to buy when the bankers need a
market. It was natural that the investment bankers proceeded to get
control of the great life insurance companies, as well as of the trust
companies and the banks.

The field thus occupied is uncommonly rich. The life insurance
companies are our leading institutions for savings. Their huge surplus
and reserves, augmented daily, are always clamoring for investment.
No panic or money shortage stops the inflow of new money from the
perennial stream of premiums on existing policies and interest on
existing investments. The three great companies--the New York Life, the
Mutual of New York, and the Equitable--would have over $55,000,000 of
_new_ money to invest annually, even if they did not issue a single new
policy. In 1904--just before the Armstrong investigation--these three
companies had together $1,247,331,738.18 of assets. They had issued
in that year $1,025,671,126 of new policies. The New York legislature
placed in 1906 certain restrictions upon their growth; so that their
new business since has averaged $547,384,212, or only fifty-three
per cent. of what it was in 1904. But the aggregate assets of these
companies increased in the last eight years to $1,817,052,260.36. At
the time of the Armstrong investigation the average age of these three
companies was fifty-six years. _The growth of assets in the last eight
years was about half as large as the total growth in the preceding
fifty-six years._ These three companies must invest annually about
$70,000,000 of new money; and besides, many old investments expire
or are changed and the proceeds must be reinvested. A large part of
all life insurance surplus and reserves are invested in bonds. The
aggregate bond investments of these three companies on January 1, 1913,
was $1,019,153,268.93.

It was natural that the investment bankers should seek to control
these never-failing reservoirs of capital. George W. Perkins was
Vice-President of the New York Life, the largest of the companies.
While remaining such he was made a partner in J. P. Morgan & Co., and
in the four years preceding the Armstrong investigation, his firm sold
the New York Life $38,804,918.51 in securities. The New York Life is a
mutual company, supposed to be controlled by its policy-holders. But,
as the Pujo Committee funds “the so-called control of life insurance
companies by policy-holders through mutualization is a farce” and “its
only result is to keep in office a self-constituted, self-perpetuating

The Equitable Life Assurance Society is a stock company and is
controlled by $100,000 of stock. The dividend on this stock is
limited by law to seven per cent.; but in 1910 Mr. Morgan paid about
$3,000,000 for $51,000, par value of this stock, or $5,882.35 a share.
The dividend return on the stock investment is less than one-eighth
of one per cent.; but the assets controlled amount now to over
$500,000,000. And certain of these assets had an especial value for
investment bankers;--namely, the large holdings of stock in banks and
trust companies.

       *       *       *       *       *

The Armstrong investigation disclosed the extent of financial power
exerted through the insurance company holdings of bank and trust
company stock. The Committee recommended legislation compelling the
insurance companies to dispose of the stock within five years. A law to
that effect was enacted, but the time was later extended. The companies
then disposed of a part of their bank and trust company stocks; but,
as the insurance companies were controlled by the investment bankers,
these gentlemen sold the bank and trust company stocks to themselves.

Referring to such purchases from the Mutual Life, as well as from the
Equitable, the Pujo Committee found:

“Here, then, were stocks of five important trust companies and one of
our largest national banks in New York City that had been held by
these two life insurance companies. Within five years all of these
stocks, so far as distributed by the insurance companies, have found
their way into the hands of the men who virtually controlled or were
identified with the management of the insurance companies or of their
close allies and associates, to that extent thus further entrenching

The banks and trust companies are depositaries, in the main, not of the
people’s savings, but of the business man’s quick capital. Yet, since
the investment banker acquired control of banks and trust companies,
these institutions also have become, like the life companies, large
purchasers of bonds and stocks. Many of our national banks have
invested in this manner a large part of all their resources, including
capital, surplus and deposits. The bond investments of some banks
exceed by far the aggregate of their capital and surplus, and nearly
equal their loanable deposits.


The goose that lays golden eggs has been considered a most valuable
possession. But even more profitable is the privilege of taking the
golden eggs laid by somebody else’s goose. The investment bankers and
their associates now enjoy that privilege. They control the people
through the people’s own money. If the bankers’ power were commensurate
only with their wealth, they would have relatively little influence on
American business. Vast fortunes like those of the Astors are no doubt
regrettable. They are inconsistent with democracy. They are unsocial.
And they seem peculiarly unjust when they represent largely unearned
increment. But the wealth of the Astors does not endanger political
or industrial liberty. It is insignificant in amount as compared
with the aggregate wealth of America, or even of New York City. It
lacks significance largely because its owners have only the income
from their own wealth. The Astor wealth is static. The wealth of the
Morgan associates is dynamic. The power and the growth of power of our
financial oligarchs comes from wielding the savings and quick capital
of others. In two of the three great life insurance companies the
influence of J. P. Morgan & Co. and their associates is exerted without
any individual investment by them whatsoever. Even in the Equitable,
where Mr. Morgan bought an actual majority of all the outstanding
stock, his investment amounts to little more than one-half of one per
cent. of the assets of the company. The fetters which bind the people
are forged from the people’s own gold.

       *       *       *       *       *

But the reservoir of other people’s money, from which the investment
bankers now draw their greatest power, is not the life insurance
companies, but the banks and the trust companies. Bank deposits
represent the really quick capital of the nation. They are the life
blood of businesses. Their effective force is much greater than that
of an equal amount of wealth permanently invested. The 34 banks and
trust companies, which the Pujo Committee declared to be directly
controlled by the Morgan associates, held $1,983,000,000 in deposits.
Control of these institutions means the ability to lend a large part
of these funds, directly and indirectly, to themselves; and what is
often even more important, the power to prevent the funds being lent
to any rival interests. These huge deposits can, in the discretion of
those in control, be used to meet the temporary needs of their subject
corporations. When bonds and stocks are issued to finance permanently
these corporations, the bank deposits can, in large part, be loaned by
the investment bankers in control to themselves and their associates;
so that securities bought may be carried by them, until sold to
investors. Or these bank deposits may be loaned to allied bankers,
or jobbers in securities, or to speculators, to enable them to carry
the bonds or stocks. Easy money tends to make securities rise in the
market. Tight money nearly always makes them fall. The control by the
leading investment bankers over the banks and trust companies is so
great, that they can often determine, for a time, the market for money
by lending or refusing to lend on the Stock Exchange. In this way,
among others, they have power to affect the general trend of prices
in bonds and stocks. Their power over a particular security is even
greater. Its sale on the market may depend upon whether the security is
favored or discriminated against when offered to the banks and trust
companies, as collateral for loans.

Furthermore, it is the investment banker’s access to other people’s
money in controlled banks and trust companies which alone enables
any individual banking concern to take so large part of the annual
output of bonds and stocks. The banker’s own capital, however large,
would soon be exhausted. And even the loanable funds of the banks
would often be exhausted, but for the large deposits made in those
banks by the life insurance, railroad, public service, and industrial
corporations which the bankers also control. On December 31, 1912, the
three leading life insurance companies had deposits in banks and trust
companies aggregating $13,839,189.08. As the Pujo Committee finds:

“The men who through their control over the funds of our railroads and
industrial companies are able to direct where such funds shall be kept
and thus to create these great reservoirs of the people’s money, are
the ones who are in position to tap those reservoirs for the ventures
in which they are interested and to prevent their being tapped for
purposes of which they do not approve. The latter is quite as important
a factor as the former. It is the controlling consideration in its
effect on competition in the railroad and industrial world.”


But the power of the investment banker over other people’s money is
often more direct and effective than that exerted through controlled
banks and trust companies. J. P. Morgan & Co. achieve the supposedly
impossible feat of having their cake and eating it too. They buy the
bonds and stocks of controlled railroads and industrial concerns, and
pay the purchase price; and still do not part with their money. This
is accomplished by the simple device of becoming the bank of deposit
of the controlled corporations, instead of having the company deposit
in some merely controlled bank in whose operation others have at least
some share. When J. P. Morgan & Co. buy an issue of securities the
purchase money, instead of being paid over to the corporation, is
retained by the banker for the corporation, to be drawn upon only as
the funds are needed by the corporation. And as the securities are
issued in large blocks, and the money raised is often not all spent
until long thereafter, the aggregate of the balances remaining in the
banker’s hands are huge. Thus J. P. Morgan & Co. (including their
Philadelphia house, called Drexel & Co.) held on November 1, 1912,
deposits aggregating $162,491,819.65.


The operations of so comprehensive a system of concentration
necessarily developed in the bankers overweening power. And the
bankers’ power grows by what it feeds on. Power begets wealth; and
added wealth opens ever new opportunities for the acquisition of wealth
and power. The operations of these bankers are so vast and numerous
that even a very reasonable compensation for the service performed by
the bankers, would, in the aggregate, produce for them incomes so large
as to result in huge accumulations of capital. But the compensation
taken by the bankers as commissions or profits is often far from
reasonable. Occupying, as they so frequently do, the inconsistent
position of being at the same time seller and buyer, the standard for
so-called compensation actually applied, is not the “Rule of reason”,
but “All the traffic will bear.” And this is true even where there is
no sinister motive. The weakness of human nature prevents men from
being good judges of their own deservings.

The syndicate formed by J. P. Morgan & Co. to underwrite the United
States Steel Corporation took for its services securities which netted
$62,500,000 in cash. Of this huge sum J. P. Morgan & Co. received, as
syndicate managers, $12,500,000 in addition to the share which they
were entitled to receive as syndicate members. This sum of $62,500,000
was only a part of the fees paid for the service of monopolizing the
steel industry. In addition to the commissions taken specifically
for organizing the United States Steel Corporation, large sums were
paid for organizing the several companies of which it is composed. For
instance, the National Tube Company was capitalized at $80,000,000 of
stock; $40,000,000 of which was common stock. Half of this $40,000,000
was taken by J. P. Morgan & Co. and their associates for promotion
services; and the $20,000,000 stock so taken became later exchangeable
for $25,000,000 of Steel Common. Commissioner of Corporations Herbert
Knox Smith, found that:

“More than $150,000,000 of the stock of the Steel Corporation was
issued directly or indirectly (through exchange) for mere promotion or
underwriting services. In other words, nearly one-seventh of the total
capital stock of the Steel Corporation appears to have been issued
directly or indirectly to promoters’ services.”

       *       *       *       *       *

The so-called fees and commissions taken by the bankers and associates
upon the organization of the trusts have been exceptionally large. But
even after the trusts are successfully launched the exactions of the
bankers are often extortionate. The syndicate which underwrote, in
1901, the Steel Corporation’s preferred stock conversion plan, advanced
only $20,000,000 in cash and received an underwriting commission of

The exaction of huge commissions is not confined to trust and other
industrial concerns. The Interborough Railway is a most prosperous
corporation. It earned last year nearly 21 per cent. on its capital
stock, and secured from New York City, in connection with the subway
extension, a very favorable contract. But when it financed its
$170,000,000 bond issue it was agreed that J. P. Morgan & Co. should
receive three per cent., that is, $5,100,000, for merely forming this
syndicate. More recently, the New York, New Haven & Hartford Railroad
agreed to pay J. P. Morgan & Co. a commission of $1,680,000; that is,
2 1/2 per cent., to form a syndicate to underwrite an issue at par of
$67,000,000 20-year 6 per cent. convertible debentures. That means: The
bankers bound themselves to take at 97 1/2 any of these six per cent.
convertible bonds which stockholders might be unwilling to buy at 100.
When the contract was made the New Haven’s then outstanding six per
cent. convertible bonds were selling at 114. And the new issue, as
soon as announced, was in such demand that the public offered and was
for months willing to buy at 106 bonds which the Company were to pay
J. P. Morgan & Co. $1,680,000 to be willing to take at par.


These large profits from promotions, underwritings and security
purchases led to a revolutionary change in the conduct of our leading
banking institutions. It was obvious that control by the investment
bankers of the deposits in banks and trust companies was an essential
element in their securing these huge profits. And the bank officers
naturally asked, “Why then should not the banks and trust companies
share in so profitable a field? Why should not they themselves become
investment bankers too, with all the new functions incident to ‘Big
Business’?” To do so would involve a departure from the legitimate
sphere of the banking business, which is the making of temporary
loans to business concerns. But the temptation was irresistible. The
invasion of the investment banker into the banks’ field of operation
was followed by a counter invasion by the banks into the realm of the
investment banker. Most prominent among the banks were the National
City and the First National of New York. But theirs was not a hostile
invasion. The contending forces met as allies, joined forces to control
the business of the country, and to “divide the spoils.” The alliance
was cemented by voting trusts, by interlocking directorates and by
joint ownerships. There resulted the fullest “coöperation”; and ever
more railroads, public service corporations, and industrial concerns
were brought into complete subjection.



Among the allies, two New York banks--the National City and the First
National--stand preëminent. They constitute, with the Morgan firm,
the inner group of the Money Trust. Each of the two banks, like J. P.
Morgan & Co., has huge resources. Each of the two banks, like the firm
of J. P. Morgan & Co., has been dominated by a genius in combination.
In the National City it is James Stillman; in the First National,
George F. Baker. Each of these gentlemen was formerly President,
and is now Chairman of the Board of Directors. The resources of the
National City Bank (including its Siamese-twin security company) are
about $300,000,000; those of the First National Bank (including its
Siamese-twin security company) are about $200,000,000. The resources
of the Morgan firm have not been disclosed. But it appears that they
have available for their operations, also, huge deposits from their
subjects; deposits reported as $162,500,000.

The private fortunes of the chief actors in the combination have not
been ascertained. But sporadic evidence indicates how great are the
possibilities of accumulation when one has the use of “other people’s
money.” Mr. Morgan’s wealth became proverbial. Of Mr. Stillman’s many
investments, only one was specifically referred to, as he was in
Europe during the investigation, and did not testify. But that one is
significant. His 47,498 shares in the National City Bank are worth
about $18,000,000. Mr. Jacob H. Schiff aptly described this as “a very
nice investment.”

Of Mr. Baker’s investments we know more, as he testified on many
subjects. His 20,000 shares in the First National Bank are worth at
least $20,000,000. His stocks in six other New York banks and trust
companies are together worth about $3,000,000. The scale of his
investment in railroads may be inferred from his former holdings in
the Central Railroad of New Jersey. He was its largest stockholder--so
large that with a few friends he held a majority of the $27,436,800 par
value of outstanding stock, which the Reading bought at $160 a share.
He is a director in 28 other railroad companies; and presumably a
stockholder in, at least, as many. The full extent of his fortune was
not inquired into, for that was not an issue in the investigation. But
it is not surprising that Mr. Baker saw little need of new laws. When

“You think everything is all right as it is in this world, do you not?”

He answered:

“Pretty nearly.”


But wealth expressed in figures gives a wholly inadequate picture of
the allies’ power. Their wealth is dynamic. It is wielded by geniuses
in combination. It finds its proper expression in means of control.
To comprehend the power of the allies we must try to visualize the
ramifications through which the forces operate.

Mr. Baker is a director in 22 corporations having, with their many
subsidiaries, aggregate resources or capitalization of $7,272,000,000.
But the direct and visible power of the First National Bank, which
Mr. Baker dominates, extends further. The Pujo report shows that its
directors (including Mr. Baker’s son) are directors in at least 27
other corporations with resources of $4,270,000,000. That is, the First
National is represented in 49 corporations, with aggregate resources
or capitalization of $11,542,000,000.

       *       *       *       *       *

It may help to an appreciation of the allies’ power to name a few of
the more prominent corporations in which, for instance, Mr. Baker’s
influence is exerted--visibly and directly--as voting trustee,
executive committee man or simple director.

1. _Banks, Trust, and Life Insurance Companies:_ First National Bank of
New York; National Bank of Commerce; Farmers’ Loan and Trust Company;
Mutual Life Insurance Company.

2. _Railroad Companies:_ New York Central Lines; New Haven, Reading,
Erie, Lackawanna, Lehigh Valley, Southern, Northern Pacific, Chicago,
Burlington & Quincy.

3. _Public Service Corporations:_ American Telegraph & Telephone
Company, Adams Express Company.

4. _Industrial Corporations:_ United States Steel Corporation, Pullman

Mr. Stillman is a director in only 7 corporations, with aggregate
assets of $2,476,000,000; but the directors in the National City Bank,
which he dominates, are directors in at least 41 other corporations
which, with their subsidiaries, have an aggregate capitalization
or resources of $10,564,000,000. The members of the firm of J. P.
Morgan & Co., the acknowledged leader of the allied forces, hold 72
directorships in 47 of the largest corporations of the country.

The Pujo Committee finds that the members of J. P. Morgan & Co. and the
directors of their controlled trust companies and of the First National
and the National City Bank together hold:

“One hundred and eighteen directorships in 34 banks and trust companies
having total resources of $2,679,000,000 and total deposits of

“Thirty directorships in 10 insurance companies having total assets of

“One hundred and five directorships in 32 transportation systems
having a total capitalization of $11,784,000,000 and a total mileage
(excluding express companies and steamship lines) of 150,200.

“Sixty-three directorships in 24 producing and trading corporations
having a total capitalization of $3,339,000,000.

“Twenty-five directorships in 12 public-utility corporations having a
total capitalization of $2,150,000,000.

“In all, 341 directorships in 112 corporations having aggregate
resources or capitalization of $22,245,000,000.”


Twenty-two billion dollars is a large sum--so large that we have
difficulty in grasping its significance. The mind realizes size only
through comparisons. With what can we compare twenty-two billions of
dollars? Twenty-two billions of dollars is more than three times the
assessed value of all the property, real and personal, in all New
England. It is nearly three times the assessed value of all the real
estate in the City of New York. It is more than twice the assessed
value of all the property in the thirteen Southern states. It is more
than the assessed value of all the property in the twenty-two states,
north and south, lying west of the Mississippi River.

But the huge sum of twenty-two billion dollars is not large enough to
include all the corporations to which the “influence” of the three
allies, directly and visibly, extends, for

_First:_ There are 56 other corporations (not included in the Pujo
schedule) each with capital or resources of over $5,000,000, and
aggregating nearly $1,350,000,000, in which the Morgan allies are
represented according to the directories of directors.

_Second:_ The Pujo schedule does not include any corporation with
resources of less than $5,000,000. But these financial giants have
shown their humility by becoming directors in many such. For instance,
members of J. P. Morgan & Co., and directors in the National City
Bank and the First National Bank are also directors in 158 such
corporations. Available publications disclose the capitalization of
only 38 of these, but those 38 aggregate $78,669,375.

_Third:_ The Pujo schedule includes only the corporations in which the
Morgan associates actually appear by name as directors. It does not
include those in which they are represented by dummies, or otherwise.
For instance, the Morgan influence certainly extends to the Kansas
City Terminal Railway Company, for which they have marketed since 1910
(in connection with others) four issues aggregating $41,761,000. But
no member of J. P. Morgan & Co., of the National City Bank, or of the
First National Bank appears on the Kansas City Terminal directorate.

_Fourth:_ The Pujo schedule does not include all the subsidiaries of
the corporations scheduled. For instance, the capitalization of the New
Haven System is given as $385,000,000. That sum represents the bond and
stock capital of the New Haven _Railroad_. But the New Haven _System_
comprises many controlled corporations whose capitalization is only
to a slight extent included directly or indirectly in the New Haven
Railroad balance sheet. The New Haven, like most large corporations,
is a holding company also; and a holding company may control
subsidiaries while owning but a small part of the latters’ outstanding
securities. Only the small part so held will be represented in the
holding company’s balance sheet. Thus, while the New Haven Railroad’s
capitalization is only $385,000,000--and that sum only appears in the
Pujo schedule--the capitalization of the New Haven System, as shown by
a chart submitted to the Committee, is over twice as great; namely,

It is clear, therefore, that the $22,000,000,000, referred to by the
Pujo Committee, understates the extent of concentration effected by the
inner group of the Money Trust.


Care was taken by these builders of imperial power that their structure
should be enduring. It has been buttressed on every side by joint
ownerships and mutual stockholdings, as well as by close personal
relationships; for directorships are ephemeral and may end with a new
election. Mr. Morgan and his partners acquired one-sixth of the stock
of the First National Bank, and made a $6,000,000 investment in the
stock of the National City Bank. Then J. P. Morgan & Co., the National
City, and the First National (or their dominant officers--Mr. Stillman
and Mr. Baker) acquired together, by stock purchases and voting trusts,
control of the National Bank of Commerce, with its $190,000,000 of
resources; of the Chase National, with $125,000,000; of the Guaranty
Trust Company, with $232,000,000; of the Bankers’ Trust Company, with
$205,000,000; and of a number of smaller, but important, financial
institutions. They became joint voting trustees in great railroad
systems; and finally (as if the allies were united into a single
concern) loyal and efficient service in the banks--like that rendered
by Mr. Davison and Mr. Lamont in the First National--was rewarded by
promotion to membership in the firm of J. P. Morgan & Co.


Thus equipped and bound together, J. P. Morgan & Co., the National City
and the First National easily dominated America’s financial center, New
York; for certain other important bankers, to be hereafter mentioned,
were held in restraint by “gentlemen’s” agreements. The three allies
dominated Philadelphia too; for the firm of Drexel & Co. is J. P.
Morgan & Co. under another name. But there are two other important
money centers in America, Boston and Chicago.

In Boston there are two large international banking houses--Lee,
Higginson & Co., and Kidder, Peabody & Co.--both long established
and rich; and each possessing an extensive, wealthy clientele of
eager investors in bonds and stocks. Since 1907 each of these firms
has purchased or underwritten (principally in conjunction with other
bankers) about 100 different security issues of the greater interstate
corporations, the issues of each banker amounting in the aggregate to
over $1,000,000,000. Concentration of banking capital has proceeded
even further in Boston than in New York. By successive consolidations
the number of national banks has been reduced from 58 in 1898 to 19 in
1913. There are in Boston now also 23 trust companies.

The National Shawmut Bank, the First National Bank of Boston and the
Old Colony Trust Co., which these two Boston banking houses and their
associates control, alone have aggregate resources of $288,386,294,
constituting about one-half of the banking resources of the city. These
great banking institutions, which are themselves the result of many
consolidations, and the 21 other banks and trust companies, in which
their directors are also directors, hold together 90 per cent. of the
total banking resources of Boston. And linked to them by interlocking
directorates are 9 other banks and trust companies whose aggregate
resources are about 2 1/2 per cent. of Boston’s total. Thus of 42
banking institutions, 33, with aggregate resources of $560,516,239,
holding about 92 1/2 per cent. of the aggregate banking resources of
Boston, are interlocked. But even the remaining 9 banks and trust
companies, which together hold but 7 1/2 per cent. of Boston banking
resources, are not all independent of one another. Three are linked
together; so that there appear to be only six banks in all Boston
that are free from interlocking directorate relations. They together
represent but 5 per cent. of Boston’s banking resources. And it may
well be doubted whether all of even those 6 are entirely free from
affiliation with the other groups.

Boston’s banking concentration is not limited to the legal confines
of the city. Around Boston proper are over thirty suburbs, which with
it form what is popularly known as “Greater Boston.” These suburban
municipalities, and also other important cities like Worcester and
Springfield, are, in many respects, within Boston’s “sphere of
influence.” Boston’s inner banking group has interlocked, not only 33
of the 42 banks of Boston proper, as above shown, but has linked with
them, by interlocking directorships, at least 42 other banks and trust
companies in 35 other municipalities.

Once Lee, Higginson & Co. and Kidder, Peabody & Co. were active
competitors. They are so still in some small, or purely local matters;
but both are devoted co-operators with the Morgan associates in
larger and interstate transactions; and the alliance with these great
Boston banking houses has been cemented by mutual stockholdings and
co-directorships. Financial concentration seems to have found its
highest expression in Boston.

Somewhat similar relations exist between the triple alliance and
Chicago’s great financial institutions--its First National Bank, the
Illinois Trust and Savings Bank, and the Continental & Commercial
National Bank--which together control resources of $561,000,000. And
similar relations would doubtless be found to exist with the leading
bankers of the other important financial centers of America, as to
which the Pujo Committee was prevented by lack of time from making


Such are the primary, such the secondary powers which comprise the
Money Trust; but these are supplemented by forces of magnitude.

“Radiating from these principal groups,” says the Pujo Committee, “and
closely affiliated with them are smaller but important banking houses,
such as Kissel, Kinnicut & Co., White, Weld & Co., and Harvey Fisk &
Sons, who receive large and lucrative patronage from the dominating
groups, and are used by the latter as jobbers or distributors of
securities, the issuing of which they control, but which for reasons
of their own they prefer not to have issued or distributed under their
own names. Lee, Higginson & Co., besides being partners with the inner
group, are also frequently utilized in this service because of their
facilities as distributors of securities.”

For instance, J. P. Morgan & Co. as fiscal agents of the New Haven
Railroad had the right to market its securities and that of its
subsidiaries. Among the numerous New Haven subsidiaries, is the New
York, Westchester and Boston--the road which cost $1,500,000 a mile to
build, and which earned a _deficit_ last year of nearly $1,500,000,
besides failing to earn any return upon the New Haven’s own stock and
bond investment of $8,241,951. When the New Haven concluded to market
$17,200,000 of these bonds, J. P. Morgan & Co., “for reasons of their
own,” “preferred not to have these bonds issued or distributed under
their own name.” The Morgan firm took the bonds at 92 1/2 net; and the
bonds were marketed by Kissel, Kinnicut & Co. and others at 96 1/4.


The alliance is still further supplemented, as the Pujo Committee

  “Beyond these inner groups and sub-groups are banks and bankers
  throughout the country who co-operate with them in underwriting
  or guaranteeing the sale of securities offered to the public,
  and who also act as distributors of such securities. It was
  impossible to learn the identity of these corporations, owing to
  the unwillingness of the members of the inner group to disclose
  the names of their underwriters, but sufficient appears to justify
  the statement that there are at least hundreds of them and that
  they extend into many of the cities throughout this and foreign

  “The patronage thus proceeding from the inner group and its
  sub-groups is of great value to these banks and bankers, who
  are thus tied by self-interest to the great issuing houses and
  may be regarded as a part of this vast financial organization.
  Such patronage yields no inconsiderable part of the income of
  these banks and bankers and without much risk on account of the
  facilities of the principal groups for placing issues of securities
  through their domination of great banks and trust companies and
  their other domestic affiliations and their foreign connections.
  The underwriting commissions on issues made by this inner group
  are usually easily earned and do not ordinarily involve the
  underwriters in the purchase of the underwritten securities.
  Their interest in the transaction is generally adjusted unless
  they choose to purchase part of the securities, by the payment to
  them of a commission. There are, however, occasions on which this
  is not the case. The underwriters are then required to take the
  securities. Bankers and brokers are so anxious to be permitted to
  participate in these transactions under the lead of the inner group
  that as a rule they join when invited to do so, regardless of their
  approval of the particular business, lest by refusing they should
  thereafter cease to be invited.”

In other words, an invitation from these royal bankers is interpreted
as a command. As a result, these great bankers frequently get huge
commissions without themselves distributing any of the bonds, or ever
having taken any actual risk.

“In the case of the New York subway financing of $170,000,000 of bonds
by Messrs. Morgan & Co. and their associates, Mr. Davison [as the Pujo
Committee reports] estimated that there were from 100 to 125 such
underwriters who were apparently glad to agree that Messrs. Morgan
& Co., the First National Bank, and the National City Bank should
receive 3 per cent.,--equal to $5,100,000--for forming this syndicate,
thus relieving themselves from all liability, whilst the underwriters
assumed the risk of what the bonds would realize and of being required
to take their share of the unsold portion.”


The organization of the Money Trust is intensive, the combination
comprehensive; but one other element was recognized as necessary
to render it stable, and to make its dynamic force irresistible.
Despotism, be it financial or political, is vulnerable, unless it is
believed to rest upon a moral sanction. The longing for freedom is
ineradicable. It will express itself in protest against servitude and
inaction, unless the striving for freedom be made to seem immoral.
Long ago monarchs invented, as a preservative of absolutism, the
fiction of “The divine right of kings.” Bankers, imitating royalty,
invented recently that precious rule of so-called “Ethics,” by which
it is declared unprofessional to come to the financial relief of any
corporation which is already the prey of another “reputable” banker.

“The possibility of competition between these banking houses in the
purchase of securities,” says the Pujo Committee, “is further removed
by the understanding between them and others, that one will not seek,
by offering better terms, to take away from another, a customer which
it has theretofore served, and by corollary of this, namely, that where
given bankers have once satisfactorily united in bringing out an issue
of a corporation, they shall also join in bringing out any subsequent
issue of the same corporations. This is described as a principle of
banking ethics.”

The “Ethical” basis of the rule must be that the interests of the
combined bankers are superior to the interests of the rest of the
community. Their attitude reminds one of the “spheres of influence”
with ample “hinterlands” by which rapacious nations are adjusting
differences. Important banking concerns, too ambitious to be willing
to take a subordinate position in the alliance, and too powerful to
be suppressed, are accorded a financial “sphere of influence” upon
the understanding that the rule of banking ethics will be faithfully
observed. Most prominent among such lesser potentates are Kuhn, Loeb
& Co., of New York, an international banking house of great wealth,
with large clientele and connections. They are accorded an important
“sphere of influence” in American railroading, including among other
systems the Baltimore & Ohio, the Union Pacific and the Southern
Pacific. They and the Morgan group have with few exceptions preëmpted
the banking business of the important railroads of the country. But
even Kuhn, Loeb & Co. are not wholly independent. The Pujo Committee
reports that they are “qualified allies of the inner group”; and
through their “close relations with the National City Bank and the
National Bank of Commerce and other financial institutions” have “many
interests in common with the Morgan associates, conducting large
joint-account operations with them.”


_First:_ These banker-barons levy, through their excessive exactions,
a heavy toll upon the whole community; upon owners of money for leave
to invest it; upon railroads, public service and industrial companies,
for leave to use this money of other people; and, through these
corporations, upon consumers.

“The charge of capital,” says the Pujo Committee, “which of course
enters universally into the price of commodities and of service,
is thus in effect determined by agreement amongst those supplying
it and not under the check of competition. If there be any virtue
in the principle of competition, certainly any plan or arrangement
which prevents its operation in the performance of so fundamental
a commercial function as the supplying of capital is peculiarly

_Second:_ More serious, however, is the effect of the Money Trust
in directly suppressing competition. That suppression enables the
monopolist to extort excessive profits; but monopoly increases the
burden of the consumer even more in other ways. Monopoly arrests
development; and through arresting development, prevents that lessening
of the cost of production and of distribution which would otherwise
take place.

Can full competition exist among the anthracite coal railroads when the
Morgan associates are potent in all of them? And with like conditions
prevailing, what competition is to be expected between the Northern
Pacific and the Great Northern, the Southern, the Louisville and
Nashville, and the Atlantic Coast Line; or between the Westinghouse
Manufacturing Company and the General Electric Company? As the Pujo
Committee finds:

“Such affiliations tend as a cover and conduit for secret arrangements
and understandings in restriction of competition through the agency of
the banking house thus situated.”

And under existing conditions of combination, relief through other
banking houses is precluded.

“It can hardly be expected that the banks, trust companies, and other
institutions that are thus seeking participation from this inner
group would be likely to engage in business of a character that would
be displeasing to the latter or would interfere with their plans or
prestige. And so the protection that can be afforded by the members of
the inner group constitutes the safest refuge of our great industrial
combinations against future competition. The powerful grip of these
gentlemen is upon the throttle that controls the wheels of credit, and
upon their signal those wheels will turn or stop.”

_Third:_ But far more serious even than the suppression of competition
is the suppression of industrial liberty, indeed of manhood itself,
which this overweening financial power entails. The intimidation which
it effects extends far beyond “the banks, trust companies, and other
institutions seeking participation from this inner group in their
lucrative underwritings”; and far beyond those interested in the great
corporations directly dependent upon the inner group. Its blighting and
benumbing effect extends as well to the small and seemingly independent
business man, to the vast army of professional men and others directly
dependent upon “Big Business,” and to many another; for

  1. Nearly every enterprising business man needs bank credit. The
  granting of credit involves the exercise of judgment of the bank
  officials; and however honestly the bank officials may wish to
  exercise their discretion, experience shows that their judgment is
  warped by the existence of the all-pervading power of the Money
  Trust. He who openly opposes the great interests will often be
  found to lack that quality of “safe and sane”-ness which is the
  basis of financial credit.

  2. Nearly every enterprising business man and a large part of our
  professional men have something to sell to, or must buy something
  from, the great corporations to which the control or influence
  of the money lords extends directly, or from or to affiliated
  interests. Sometimes it is merchandise; sometimes it is service;
  sometimes they have nothing either to buy or to sell, but desire
  political or social advancement. Sometimes they want merely
  peace. Experience shows that “it is not healthy to buck against a
  locomotive,” and “Business is business.”

Here and there you will find a hero,--red-blooded, and
courageous,--loving manhood more than wealth, place or security,--who
dared to fight for independence and won. Here and there you may find
the martyr, who resisted in silence and suffered with resignation. But
America, which seeks “the greatest good of the greatest number,” cannot
be content with conditions that fit only the hero, the martyr or the



The practice of interlocking directorates is the root of many evils.
It offends laws human and divine. Applied to rival corporations,
it tends to the suppression of competition and to violation of the
Sherman law. Applied to corporations which deal with each other, it
tends to disloyalty and to violation of the fundamental law that no
man can serve two masters. In either event it tends to inefficiency;
for it removes incentive and destroys soundness of judgment. It is
undemocratic, for it rejects the platform: “A fair field and no
favors,”--substituting the pull of privilege for the push of manhood.
It is the most potent instrument of the Money Trust. Break the control
so exercised by the investment bankers over railroads, public-service
and industrial corporations, over banks, life insurance and trust
companies, and a long step will have been taken toward attainment of
the New Freedom.

The term “Interlocking directorates” is here used in a broad sense
as including all intertwined conflicting interests, whatever the
form, and by whatever device effected. The objection extends alike
to contracts of a corporation whether with one of its directors
individually, or with a firm of which he is a member, or with another
corporation in which he is interested as an officer or director
or stockholder. The objection extends likewise to men holding the
inconsistent position of director in two potentially competing
corporations, even if those corporations do not actually deal with each


A single example will illustrate the vicious circle of control--the
endless chain--through which our financial oligarchy now operates:

J. P. Morgan (or a partner), a director of the New York, New Haven &
Hartford Railroad, causes that company to sell to J. P. Morgan & Co.
an issue of bonds. J. P. Morgan & Co. borrow the money with which to
pay for the bonds from the Guaranty Trust Company, of which Mr. Morgan
(or a partner) is a director. J. P. Morgan & Co. sell the bonds to the
Penn Mutual Life Insurance Company, of which Mr. Morgan (or a partner)
is a director. The New Haven spends the proceeds of the bonds in
purchasing steel rails from the United States Steel Corporation, of
which Mr. Morgan (or a partner) is a director. The United States Steel
Corporation spends the proceeds of the rails in purchasing electrical
supplies from the General Electric Company, of which Mr. Morgan (or
a partner) is a director. The General Electric sells supplies to the
Western Union Telegraph Company, a subsidiary of the American Telephone
and Telegraph Company; and in both Mr. Morgan (or a partner) is a
director. The Telegraph Company has an exclusive wire contract with the
Reading, of which Mr. Morgan (or a partner) is a director. The Reading
buys its passenger cars from the Pullman Company, of which Mr. Morgan
(or a partner) is a director. The Pullman Company buys (for local use)
locomotives from the Baldwin Locomotive Company, of which Mr. Morgan
(or a partner) is a director. The Reading, the General Electric, the
Steel Corporation and the New Haven, like the Pullman, buy locomotives
from the Baldwin Company. The Steel Corporation, the Telephone Company,
the New Haven, the Reading, the Pullman and the Baldwin Companies,
like the Western Union, buy electrical supplies from the General
Electric. The Baldwin, the Pullman, the Reading, the Telephone, the
Telegraph and the General Electric companies, like the New Haven, buy
steel products from the Steel Corporation. Each and every one of the
companies last named markets its securities through J. P. Morgan & Co.;
each deposits its funds with J. P. Morgan & Co.; and with these funds
of each, the firm enters upon further operations.

This specific illustration is in part supposititious; but it represents
truthfully the operation of interlocking directorates. Only it must be
multiplied many times and with many permutations to represent fully the
extent to which the interests of a few men are intertwined. Instead of
taking the New Haven as the railroad starting point in our example, the
New York Central, the Santa Fé, the Southern, the Lehigh Valley, the
Chicago and Great Western, the Erie or the Père Marquette might have
been selected; instead of the Guaranty Trust Company as the banking
reservoir, any one of a dozen other important banks or trust companies;
instead of the Penn Mutual as purchaser of the bonds, other insurance
companies; instead of the General Electric, its qualified competitor,
the Westinghouse Electric and Manufacturing Company. The chain is
indeed endless; for each controlled corporation is entwined with many

As the _nexus_ of “Big Business” the Steel Corporation stands, of
course, preëminent. The Stanley Committee showed that the few men who
control the Steel Corporation, itself an owner of important railroads,
are directors also in twenty-nine other railroad systems, with 126,000
miles of line (more than half the railroad mileage of the United
States), and in important steamship companies. Through all these
alliances and the huge traffic it controls, the Steel Corporation’s
influence pervades railroad and steamship companies--not as carriers
only--but as the largest customers for steel. And its influence with
users of steel extends much further. These same few men are also
directors in twelve steel-using street railway systems, including some
of the largest in the world. They are directors in forty machinery
and similar steel-using manufacturing companies; in many gas, oil and
water companies, extensive users of iron products; and in the great
wire-using telephone and telegraph companies. The aggregate assets of
these different corporations--through which these few men exert their
influence over the business of the United States--exceeds sixteen
billion dollars.

Obviously, interlocking directorates, and all that term implies, must
be effectually prohibited before the freedom of American business can
be regained. The prohibition will not be an innovation. It will merely
give full legal sanction to the fundamental law of morals and of human
nature: that “No man can serve two masters.” The surprising fact is
that a principle of equity so firmly rooted should have been departed
from at all in dealing with corporations. For no rule of law has,
in other connections, been more rigorously applied, than that which
prohibits a trustee from occupying inconsistent positions, from dealing
with himself, or from using his fiduciary position for personal profit.
And a director of a corporation is as obviously a trustee as persons
holding similar positions in an unincorporated association, or in a
private trust estate, who are called specifically by that name. The
Courts have recognized this fully.

Thus, the Court of Appeals of New York declared in an important case:

  “While not technically trustees, for the title of the corporate
  property was in the corporation itself, they were charged with the
  duties and subject to the liabilities of trustees. Clothed with
  the power of controlling the property and managing the affairs of
  the corporation without let or hindrance, as to third persons, they
  were its agents; but as to the corporation itself equity holds
  them liable as trustees. While courts of law generally treat the
  directors as agents, courts of equity treat them as trustees, and
  hold them to a strict account for any breach of the trust relation.
  For all practical purposes they are trustees, when called upon in
  equity to account for their official conduct.”


But this wholesome rule of business, so clearly laid down, was
practically nullified by courts in creating two unfortunate
limitations, as concessions doubtless to the supposed needs of

_First:_ Courts held valid contracts between a corporation
and a director, or between two corporations with a common director,
where it was shown that in making the contract, the corporation
was represented by independent directors and that the vote of the
interested director was unnecessary to carry the motion and his
presence was not needed to constitute a quorum.

_Second:_ Courts held that even where a common director participated
actively in the making of a contract between two corporations, the
contract was not absolutely void, but voidable only at the election of
the corporation.

The first limitation ignored the rule of law that a beneficiary is
entitled to disinterested advice from _all_ his trustees, and not
merely from some; and that a trustee may violate his trust by inaction
as well as by action. It ignored, also, the laws of human nature, in
assuming that the influence of a director is confined to the act of
voting. Every one knows that the most effective work is done before any
vote is taken, subtly, and without provable participation. Every one
should know that the denial of minority representation on boards of
directors has resulted in the domination of most corporations by one
or two men; and in practically banishing all criticism of the dominant
power. And even where the board is not so dominated, there is too often
that “harmonious coöperation” among directors which secures for each,
in his own line, a due share of the corporation’s favors.

The second limitation--by which contracts, in the making of which the
interested director participates actively, are held _merely voidable_
instead of absolutely void--ignores the teachings of experience.
To hold such contracts merely voidable has resulted practically in
declaring them valid. It is the directors who control corporate action;
and there is little reason to expect that any contract, entered into by
a board with a fellow director, however unfair, would be subsequently
avoided. Appeals from Philip drunk to Philip sober are not of frequent
occurrence, nor very fruitful. But here we lack even an appealing
party. Directors and the dominant stockholders would, of course, not
appeal; and the minority stockholders have rarely the knowledge of
facts which is essential to an effective appeal, whether it be made to
the directors, to the whole body of stockholders, or to the courts.
Besides, the financial burden and the risks incident to any attempt of
individual stockholders to interfere with an existing management is
ordinarily prohibitive. Proceedings to avoid contracts with directors
are, therefore, seldom brought, except after a radical change in the
membership of the board. And radical changes in a board’s membership
are rare. Indeed the Pujo Committee reports:

  “None of the witnesses (the leading American bankers testified)
  was able to name an instance in the history of the country in
  which the stockholders had succeeded in overthrowing an existing
  management in any large corporation. Nor does it appear that
  stockholders have ever even succeeded in so far as to secure
  the investigation of an existing management of a corporation to
  ascertain whether it has been well or honestly managed.”

Mr. Max Pam proposed in the April, 1913, Harvard Law Review, that the
government come to the aid of minority stockholders. He urged that
the president of every corporation be required to report annually to
the stockholders, and to state and federal officials every contract
made by the company in which any director is interested; that the
Attorney-General of the United States or the State investigate
the same and take proper proceedings to set all such contracts
aside and recover any damages suffered; or without disaffirming
the contracts to recover from the interested directors the profits
derived therefrom. And to this end also, that State and National Bank
Examiners, State Superintendents of Insurance, and the Interstate
Commerce Commission be directed to examine the records of every bank,
trust company, insurance company, railroad company and every other
corporation engaged in interstate commerce. Mr. Pam’s views concerning
interlocking directorates are entitled to careful study. As counsel
prominently identified with the organization of trusts, he had for
years full opportunity of weighing the advantages and disadvantages
of “Big Business.” His conviction that the practice of interlocking
directorates is a menace to the public and demands drastic legislation,
is significant. And much can be said in support of the specific measure
which he proposes. But to be effective, the remedy must be fundamental
and comprehensive.


Protection to minority stockholders demands that corporations be
prohibited absolutely from making contracts in which a director has a
private interest, and that all such contracts be declared not voidable
merely, but absolutely void.

In the case of railroads and public-service corporations (in
contradistinction to private industrial companies), such prohibition
is demanded, also, in the interests of the general public. For
interlocking interests breed inefficiency and disloyalty; and the
public pays, in higher rates or in poor service, a large part of the
penalty for graft and inefficiency. Indeed, whether rates are adequate
or excessive cannot be determined until it is known whether the gross
earnings of the corporation are properly expended. For when a company’s
important contracts are made through directors who are interested on
both sides, the common presumption that money spent has been properly
spent does not prevail. And this is particularly true in railroading,
where the company so often lacks effective competition in its own field.

But the compelling reason for prohibiting interlocking directorates
is neither the protection of stockholders, nor the protection of
the public from the incidents of inefficiency and graft. Conclusive
evidence (if obtainable) that the practice of interlocking directorates
benefited all stockholders and was the most efficient form of
organization, would not remove the objections. For even more important
than efficiency are industrial and political liberty; and these are
imperiled by the Money Trust. _Interlocking directorates must be
prohibited, because it is impossible to break the Money Trust without
putting an end to the practice in the larger corporations._


The practice of interlocking directorates is peculiarly objectionable
when applied to banks, because of the nature and functions of those
institutions. Bank deposits are an important part of our currency
system. They are almost as essential a factor in commerce as our
railways. Receiving deposits and making loans therefrom should be
treated by the law not as a private business, but as one of the public
services. And recognizing it to be such, the law already regulates
it in many ways. The function of a bank is to receive and to loan
money. It has no more right than a common carrier to use its powers
specifically to build up or to destroy other businesses. The granting
or withholding of a loan should be determined, so far as concerns the
borrower, solely by the interest rate and the risk involved; and not
by favoritism or other considerations foreign to the banking function.
Men may safely be allowed to grant or to deny loans of their _own_
money to whomsoever they see fit, whatsoever their motive may be. But
bank resources are, in the main, not owned by the stockholders nor by
the directors. Nearly three-fourths of the aggregate resources of the
thirty-four banking institutions in which the Morgan associates hold
a predominant influence are represented by deposits. The dependence of
commerce and industry upon bank deposits, as the common reservoir of
quick capital is so complete, that deposit banking should be recognized
as one of the businesses “affected with a public interest.” And the
general rule which forbids public-service corporations from making
unjust discriminations or giving undue preference should be applied to
the operations of such banks.

Senator Owen, Chairman of the Committee on Banking and Currency, said

  “My own judgment is that a bank is a public-utility institution and
  cannot be treated as a private affair, for the simple reason that
  the public is invited, under the safeguards of the government, to
  deposit its money with the bank, and the public has a right to have
  its interests safeguarded through organized authorities. The logic
  of this is beyond escape. All banks in the United States, public
  and private, should be treated as public-utility institutions,
  where they receive public deposits.”

The directors and officers of banking institutions must, of course, be
entrusted with wide discretion in the granting or denying of loans.
But that discretion should be exercised, not only honestly as it
affects stockholders, but also impartially as it affects the public.
Mere honesty to the stockholders demands that the interests to be
considered by the directors be the interests of all the stockholders;
not the profit of the part of them who happen to be its directors.
But the general welfare demands of the director, as trustee for the
public, performance of a stricter duty. The fact that the granting of
loans involves a delicate exercise of discretion makes it difficult
to determine whether the rule of equality of treatment, which every
public-service corporation owes, has been performed. But that
difficulty merely emphasizes the importance of making absolute the
rule that banks of deposit shall not make any loan nor engage in any
transaction in which a director has a private interest. And we should
bear this in mind: If privately-owned banks fail in the public duty to
afford borrowers equality of opportunity, there will arise a demand for
government-owned banks, which will become irresistible.

The statement of Mr. Justice Holmes of the Supreme Court of the United
States, in the Oklahoma Bank case, is significant:

“We cannot say that the public interests to which we have adverted,
and others, are not sufficient to warrant the State in taking the
whole business of banking under its control. On the contrary we are of
opinion that it may go on from regulation to prohibition except upon
such conditions as it may prescribe.”


Nor would the requirement that banks shall make no loan in which a
director has a private interest impose undue hardships or restrictions
upon bank directors. It might make a bank director dispose of some of
his investments and refrain from making others; but it often happens
that the holding of one office precludes a man from holding another, or
compels him to dispose of certain financial interests.

A judge is disqualified from sitting in any case in which he has even
the smallest financial interest; and most judges, in order to be free
to act in any matters arising in their court, proceed, upon taking
office, to dispose of all investments which could conceivably bias
their judgment in any matter that might come before them. An Interstate
Commerce Commissioner is prohibited from owning any bonds or stocks in
any corporation subject to the jurisdiction of the Commission. It is
a serious criminal offence for any executive officer of the federal
government to transact government business with any corporation in the
pecuniary profits of which he is directly or indirectly interested.

And the directors of our great banking institutions, as the ultimate
judges of bank credit, exercise today a function no less important
to the country’s welfare than that of the judges of our courts, the
interstate commerce commissioners, and departmental heads.


In the proposals for legislation on this subject, four important
questions are presented:

1. Shall the principle of prohibiting interlocking directorates
in potentially competing corporations be applied to state banking
institutions, as well as the national banks?

2. Shall it be applied to all kinds of corporations or only to banking

3. Shall the principle of prohibiting corporations from entering into
transactions in which the management has a private interest be applied
to both directors and officers or be confined in its application to
officers only?

4. Shall the principle be applied so as to prohibit transactions with
another corporation in which one of its directors is interested merely
as a stockholder?



The Pujo Committee has presented the facts concerning the Money Trust
so clearly that the conclusions appear inevitable. Their diagnosis
discloses intense financial concentration and the means by which it is
effected. Combination,--the intertwining of interests,--is shown to be
the all-pervading vice of the present system. With a view to freeing
industry, the Committee recommends the enactment of twenty-one specific
remedial provisions. Most of these measures are wisely framed to meet
some abuse disclosed by the evidence; and if all of these were adopted
the Pujo legislation would undoubtedly alleviate present suffering and
aid in arresting the disease. But many of the remedies proposed are
“local” ones; and a cure is not possible, without treatment which is
fundamental. Indeed, a major operation is necessary. This the Committee
has hesitated to advise; although the fundamental treatment required is
simple: “Serve one Master only.”

The evils incident to interlocking directorates are, of course,
fully recognized; but the prohibitions proposed in that respect are
restricted to a very narrow sphere.

_First:_ The Committee recognizes that potentially competing
corporations should not have a common director;--but it restricts this
prohibition to directors of national banks, saying:

“No officer or director of a national bank shall be an officer or
director of any other bank or of any trust company or other financial
or other corporation or institution, whether organized under state or
federal law, that is authorized to receive money on deposit or that is
engaged in the business of loaning money on collateral or in buying and
selling securities except as in this section provided; and no person
shall be an officer or director of any national bank who is a private
banker or a member of a firm or partnership of bankers that is engaged
in the business of receiving deposits: Provided, That such bank, trust
company, financial institution, banker, or firm of bankers is located
at or engaged in business at or in the same city, town, or village as
that in which such national bank is located or engaged in business:
Provided further, That a director of a national bank or a partner of
such director may be an officer or director of not more than one trust
company organized by the laws of the state in which such national bank
is engaged in business and doing business at the same place.”

_Second:_ The Committee recognizes that a corporation should not make
a contract in which one of the management has a private interest; but
it restricts this prohibition (1) to national banks, and (2) to the
officers, saying:

“No national bank shall lend or advance money or credit or purchase or
discount any promissory note, draft, bill of exchange or other evidence
of debt bearing the signature or indorsement of any of its officers
or of any partnership of which such officer is a member, directly
or indirectly, or of any corporation in which such officer owns or
has a beneficial interest of upward of ten per centum of the capital
stock, or lend or advance money or credit to, for or on behalf of any
such officer or of any such partnership or corporation, or purchase
any security from any such officer or of or from any partnership
or corporation of which such officer is a member or in which he is
financially interested, as herein specified, or of any corporation
of which any of its officers is an officer at the time of such

Prohibitions of intertwining relations so restricted, however
supplemented by other provisions, will not end financial concentration.
The Money Trust snake will, at most, be scotched, not killed. The
prohibition of a common director in potentially competing corporations
should apply to state banks and trust companies, as well as to national
banks; and it should apply to railroad and industrial corporations
as fully as to banking institutions. The prohibition of corporate
contracts in which one of the management has a private interest should
apply to directors, as well as to officers, and to state banks and
trust companies and to other classes of corporations, as well as to
national banks. And, as will be hereafter shown, such broad legislation
is within the power of Congress.

Let us examine this further:


1. _National Banks._ The objection to common directors, as applied to
banking institutions, is clearly shown by the Pujo Committee.

“As the first and foremost step in applying a remedy, and also
for reasons that seem to us conclusive, independently of that
consideration, we recommend that interlocking directorates in
potentially competing financial institutions be abolished and
prohibited so far as lies in the power of Congress to bring about that
result.... When we find, as in a number of instances, the same man a
director in half a dozen or more banks and trust companies all located
in the same section of the same city, doing the same class of business
and with a like set of associates similarly situated, all belonging
to the same group and representing the same class of interests, all
further pretense of competition is useless.... If banks serving the
same field are to be permitted to have common directors, genuine
competition will be rendered impossible. Besides, this practice gives
to such common directors the unfair advantage of knowing the affairs of
borrowers in various banks, and thus affords endless opportunities for

This recommendation is in accordance with the legislation or practice
of other countries. The Bank of England, the Bank of France, the
National Bank of Belgium, and the leading banks of Scotland all
exclude from their boards persons who are directors in other banks. By
law, in Russia no person is allowed to be on the board of management of
more than one bank.

The Committee’s recommendation is also in harmony with laws enacted by
the Commonwealth of Massachusetts more than a generation ago designed
to curb financial concentration through the savings banks. Of the great
wealth of Massachusetts a large part is represented by deposits in
its savings banks. These deposits are distributed among 194 different
banks, located in 131 different cities and towns. These 194 banks are
separate and distinct; not only in form, but in fact. In order that the
banks may not be controlled by a few financiers, the Massachusetts law
provides that no executive officer or trustee (director) of any savings
bank can hold any office in any other savings bank. That statute was
passed in 1876. A few years ago it was supplemented by providing
that none of the executive officers of a savings bank could hold a
similar office in any national bank. Massachusetts attempted thus
to curb the power of the individual financier; and no disadvantages
are discernible. When that Act was passed the aggregate deposits in
its savings banks were $243,340,642; the number of deposit accounts
739,289; the average deposit to each person of the population $144.
On November 1, 1912, the aggregate deposits were $838,635,097.85; the
number of deposit accounts 2,200,917; the average deposit to each
account $381.04. Massachusetts has shown that curbing the power of the
few, at least in this respect, is entirely consistent with efficiency
and with the prosperity of the whole people.

2. _State Banks and Trust Companies._ The reason for prohibiting common
directors in banking institutions applies equally to national banks and
to state banks including those trust companies which are essentially
banks. In New York City there are 37 trust companies of which only
15 are members of the clearing house; but those 15 had on November
2, 1912, aggregate resources of $827,875,653. Indeed the Bankers’
Trust Company with resources of $205,000,000, and the Guaranty Trust
Company, with resources of $232,000,000, are among the most useful
tools of the Money Trust. No bank in the country has larger deposits
than the latter; and only one bank larger deposits than the former.
If common directorships were permitted in state banks or such trust
companies, the charters of leading national banks would doubtless soon
be surrendered; and the institutions would elude federal control by
re-incorporating under state laws.

The Pujo Committee has failed to apply the prohibition of common
directorships in potentially competing banking institutions rigorously
even to national banks. It permits the same man to be a director in one
national bank and one trust company doing business in the same place.
The proposed concession opens the door to grave dangers. In the first
place the provision would permit the interlocking of any national bank
not with one trust company only, but with as many trust companies as
the bank has directors. For while under the Pujo bill no one can be
a national bank director who is director in more than one such trust
company, there is nothing to prevent each of the directors of a bank
from becoming a director in a different trust company. The National
Bank of Commerce of New York has a board of 38 directors. There are
37 trust companies in the City of New York. Thirty-seven of the 38
directors might each become a director of a different New York trust
company: and thus 37 trust companies would be interlocked with the
National Bank of Commerce, unless the other recommendation of the Pujo
Committee limiting the number of directors to 13 were also adopted.

But even if the bill were amended so as to limit the possible
interlocking of a bank to a single trust company, the wisdom of the
concession would still be doubtful. It is true, as the Pujo Committee
states, that “the business that may be transacted by” a trust company
is of “a different character” from that properly transacted by a
national bank. But the business actually conducted by a trust company
is, at least in the East, quite similar; and the two classes of banking
institutions have these vital elements in common: each is a bank of
deposit, and each makes loans from its deposits. A private banker may
also transact some business of a character different from that properly
conducted by a bank; but by the terms of the Committee’s bill a private
banker engaged in the business of receiving deposits would be prevented
from being a director of a national bank; and the reasons underlying
that prohibition apply equally to trust companies and to private

3. _Other Corporations._ The interlocking of banking institutions
is only one of the factors which have developed the Money Trust.
The interlocking of other corporations has been an equally important
element. And the prohibition of interlocking directorates should be
extended to potentially competing corporations whatever the class; to
life insurance companies, railroads and industrial companies, as well
as banking institutions. The Pujo Committee has shown that Mr. George
F. Baker is a common director in the six railroads which haul 80 per
cent. of all anthracite marketed and own 88 per cent. of all anthracite
deposits. The Morgan associates are the _nexus_ between such supposedly
competing railroads as the Northern Pacific and the Great Northern; the
Southern, the Louisville & Nashville and the Atlantic Coast Line, and
between partially competing industrials like the Westinghouse Electric
and Manufacturing Company and the General Electric. The _nexus_ between
all the large potentially competing corporations must be severed, if
the Money Trust is to be broken.


The principle of prohibiting corporate contracts in which the
management has a private interest is applied, in the Pujo Committee’s
recommendations, only to national banks, and in them only to officers.
All other corporations are to be permitted to continue the practice;
and even in national banks the directors are to be free to have
a conflicting private interest, except that they must not accept
compensation for promoting a loan of bank funds nor participate in
syndicates, promotions or underwriting of securities in which their
banks may be interested as underwriters or owners or lenders thereon:
that all loans or other transactions in which a director is interested
shall be made in his own name; and shall be authorized only after ample
notice to co-directors; and that the facts shall be spread upon the
records of the corporation.

The Money Trust would not be disturbed by a prohibition limited to
officers. Under a law of that character, financial control would
continue to be exercised by the few without substantial impairment; but
the power would be exerted through a somewhat different channel. Bank
officers are appointees of the directors; and ordinarily their obedient
servants. Individuals who, as bank officers, are now important factors
in the financial concentration, would doubtless resign as officers
and become merely directors. The loss of official salaries involved
could be easily compensated. No member of the firm of J. P. Morgan
& Co. is an officer in any one of the thirteen banking institutions
with aggregate resources of $1,283,000,000, through which as directors
they carry on their vast operations. A prohibition limited to officers
would not affect the Morgan operations with these banking institutions.
If there were minority representation on bank boards (which the Pujo
Committee wisely advocates), such a provision might afford some
protection to stockholders through the vigilance of the minority
directors preventing the dominant directors using their power to the
injury of the minority stockholders. But even then, the provision
would not safeguard the public; and the primary purpose of Money Trust
legislation is not to prevent directors from injuring stockholders; but
to prevent their injuring the public through the intertwined control of
the banks. No prohibition limited to officers will materially change
this condition.

The prohibition of interlocking directorates, even if applied only to
all banks and trust companies, would practically compel the Morgan
representatives to resign from the directorates of the thirteen
banking institutions with which they are connected, or from the
directorates of all the railroads, express, steamship, public utility,
manufacturing, and other corporations which do business with those
banks and trust companies. Whether they resigned from the one or the
other class of corporations, the endless chain would be broken into
many pieces. And whether they retired or not, the Morgan power would
obviously be greatly lessened: for if they did not retire, their field
of operations would be greatly narrowed.


The creation of the Money Trust is due quite as much to the
encroachment of the investment banker upon railroads, public service,
industrial, and life-insurance companies, as to his control of banks
and trust companies. Before the Money Trust can be broken, all
these relations must be severed. And they cannot be severed unless
corporations of each of these several classes are prevented from
dealing with their own directors and with corporations in which those
directors are interested. For instance: The most potent single source
of J. P. Morgan & Co.’s power is the $162,500,000 deposits, including
those of 78 interstate railroad, public-service and industrial
corporations, which the Morgan firm is free to use as it sees fit. The
proposed prohibition, even if applied to all banking institutions,
would not affect directly this great source of Morgan power. If,
however, the prohibition is made to include railroad, public-service,
and industrial corporations, as well as banking institutions, members
of J. P. Morgan & Co. will quickly retire from substantially all boards
of directors.


The prohibition against one corporation entering into transactions with
another corporation in which one of its directors is also interested,
should apply even if his interest in the second corporation is merely
that of stockholder. A conflict of interests in a director may be just
as serious where he is a stockholder only in the second corporation, as
if he were also a director.

One of the annoying petty monopolies, concerning which evidence was
taken by the Pujo Committee, is the exclusive privilege granted to the
American Bank Note Company by the New York Stock Exchange. A recent
$60,000,000 issue of New York City bonds was denied listing on the
Exchange, because the city refused to submit to an exaction of $55,800
by the American Company for engraving the bonds, when the New York Bank
Note Company would do the work equally well for $44,500. As tending to
explain this extraordinary monopoly, it was shown that men prominent in
the financial world were stockholders in the American Company. Among
the largest stockholders was Mr. Morgan, with 6,000 shares. No member
of the Morgan firm was a director of the American Company; but there
was sufficient influence exerted somehow to give the American Company
the stock exchange monopoly.

The Pujo Committee, while failing to recommend that transactions in
which a director has a private interest be prohibited, recognizes
that a stockholder’s interest of more than a certain size may be as
potent an instrument of influence as a direct personal interest; for it
recommends that:

  “Borrowings, directly or indirectly by ... any corporation of
  the stock of which he (a bank director) holds upwards of 10 per
  cent. from the bank of which he is such director, should only be
  permitted, on condition that notice shall have been given to his
  co-directors and that a full statement of the transaction shall
  be entered upon the minutes of the meeting at which such loan was

As shown above, the particular provision for notice affords no
protection to the public; but if it did, its application ought to be
extended to lesser stockholdings. Indeed it is difficult to fix a limit
so low that financial interest will not influence action. Certainly
a stockholding interest of a single director, much smaller than 10
per cent., might be most effective in inducing favors. Mr. Morgan’s
stockholdings in the American Bank Note Company was only three per
cent. The $6,000,000 investment of J. P. Morgan & Co. in the National
City Bank represented only 6 per cent. of the bank’s stock; and would
undoubtedly have been effective, even if it had not been supplemented
by the election of his son to the board of directors.


The Stanley Committee, after investigation of the Steel Trust,
concluded that the evils of interlocking directorates were so serious
that representatives of certain industries which are largely dependent
upon railroads should be absolutely prohibited from serving as railroad
directors, officers or employees. It, therefore, proposed to disqualify
as railroad director, officer or employee any person engaged in the
business of manufacturing or selling railroad cars or locomotives,
railroad rail or structural steel, or in mining and selling coal. The
drastic Stanley bill, shows how great is the desire to do away with
present abuses and to lessen the power of the Money Trust.

Directors, officers, and employees of banking institutions should, by a
similar provision, be disqualified from acting as directors, officers
or employees of life-insurance companies. The Armstrong investigation
showed that life-insurance companies were in 1905 the most potent
factor in financial concentration. Their power was exercised largely
through the banks and trust companies which they controlled by stock
ownership and their huge deposits. The Armstrong legislation directed
life-insurance companies to sell their stocks. The Mutual Life and
the Equitable did so in part. But the Morgan associates bought the
stocks. And now, instead of the life-insurance companies controlling
the banks and trust companies, the latter and the bankers control the
life-insurance companies.


The Money Trust cannot be destroyed unless all _classes_ of
corporations are included in the prohibition of interlocking directors
and of transactions by corporations in which the management has a
private interest. But it does not follow that the prohibition must
apply to _every_ corporation of each class. Certain exceptions are
entirely consistent with merely protecting the public against the Money
Trust; although protection of minority stockholders and business ethics
demand that the rule prohibiting a corporation from making contracts in
which a director has a private financial interest should be universal
in its application. The number of corporations in the United States
Dec. 31, 1912, was 305,336. Of these only 1610 have a capital of more
than $5,000,000. Few corporations (other than banks) with a capital
of less than $5,000,000 could appreciably affect general credit
conditions either through their own operations or their affiliations.
Corporations (other than banks) with capital resources of less than
$5,000,000 might, therefore, be excluded from the scope of the statute
for the present. The prohibition could also be limited so as not to
apply to any industrial concern, regardless of the amount of capital
and resources, doing only an intrastate business; as practically all
large industrial corporations are engaged in interstate commerce. This
would exclude some retail concerns and local jobbers and manufacturers
not otherwise excluded from the operation of the act. Likewise banks
and trust companies located in cities of less than 100,000 inhabitants
might, if thought advisable, be excluded, for the present if their
capital is less than $500,000, and their resources less than, say,
$2,500,000. In larger cities even the smaller banking institutions
should be subject to the law. Such exceptions should overcome any
objection which might be raised that in some smaller cities, the
prohibition of interlocking directorates would exclude from the bank
directorates all the able business men of the community through fear of
losing the opportunity of bank accommodations.

An exception should also be made, so as to permit interlocking
directorates between a corporation and its proper subsidiaries. And
the prohibition of transactions in which the management has a private
interest should, of course, not apply to contracts, express or
implied, for such services as are performed indiscriminately for the
whole community by railroads and public service corporations, or for
services, common to all customers, like the ordinary service of a bank
for its depositors.


The question may be asked: Has Congress the power to impose these
limitations upon the conduct of any business other than national banks?
And if the power of Congress is so limited, will not the dominant
financiers, upon the enactment of such a law, convert their national
banks into state banks or trust companies, and thus escape from
congressional control?

The answer to both questions is clear. Congress has ample power to
impose such prohibitions upon practically all corporations, including
state banks, trust companies and life insurance companies; and evasion
may be made impossible. While Congress has not been granted power to
regulate _directly_ state banks, and trust or life insurance companies,
or railroad, public-service and industrial corporations, except in
respect to interstate commerce, it may do so _indirectly_ by virtue
either of its control of the mail privilege or through the taxing power.

Practically no business in the United States can be conducted without
use of the mails; and Congress may in its reasonable discretion
deny the use of the mail to any business which is conducted under
conditions deemed by Congress to be injurious to the public welfare.
Thus, Congress has no power directly to suppress lotteries; but it has
indirectly suppressed them by denying, under heavy penalty, the use
of the mail to lottery enterprises. Congress has no power to suppress
directly business frauds; but it is constantly doing so indirectly by
issuing fraud-orders denying the mail privilege. Congress has no direct
power to require a newspaper to publish a list of its proprietors and
the amount of its circulation, or to require it to mark paid-matter
distinctly as advertising: But it has thus regulated the press, by
denying the second-class mail privilege, to all publications which fail
to comply with the requirements prescribed.

       *       *       *       *       *

The taxing power has been resorted to by Congress for like purposes:
Congress has no power to regulate the manufacture of matches, or
the use of oleomargarine; but it has suppressed the manufacture of
the “white phosphorous” match and has greatly lessened the use of
oleomargarine by imposing heavy taxes upon them. Congress has no power
to prohibit, or to regulate directly the issue of bank notes by state
banks, but it indirectly prohibited their issue by imposing a tax of
ten per cent. upon any bank note issued by a state bank.

The power of Congress over interstate commerce has been similarly
utilized. Congress cannot ordinarily provide compensation for accidents
to employees or undertake directly to suppress prostitution; but it
has, as an incident of regulating interstate commerce, enacted the
Railroad Employers’ Liability law and the White Slave Law; and it has
full power over the instrumentalities of commerce, like the telegraph
and the telephone.

As such exercise of congressional power has been common for, at least,
half a century, Congress should not hesitate now to employ it where
its exercise is urgently needed. For a comprehensive prohibition of
interlocking directorates is an essential condition of our attaining
the New Freedom. Such a law would involve a great change in the
relation of the leading banks and bankers to other businesses. But
it is the very purpose of Money Trust legislation to effect a great
change; and unless it does so, the power of our financial oligarchy
cannot be broken.

But though the enactment of such a law is essential to the emancipation
of business, it will not _alone_ restore industrial liberty. It must be
supplemented by other remedial measures.



Publicity is justly commended as a remedy for social and industrial
diseases. Sunlight is said to be the best of disinfectants; electric
light the most efficient policeman. And publicity has already played
an important part in the struggle against the Money Trust. The Pujo
Committee has, in the disclosure of the facts concerning financial
concentration, made a most important contribution toward attainment of
the New Freedom. The battlefield has been surveyed and charted. The
hostile forces have been located, counted and appraised. That was a
necessary first step--and a long one--towards relief. The provisions in
the Committee’s bill concerning the incorporation of stock exchanges
and the statement to be made in connection with the listing of
securities would doubtless have a beneficent effect. But there should
be a further call upon publicity for service. That potent force must,
in the impending struggle, be utilized in many ways as a continuous
remedial measure.


Combination and control of other people’s money and of other people’s
businesses. These are the main factors in the development of the Money
Trust. But the wealth of the investment banker is also a factor. And
with the extraordinary growth of his wealth in recent years, the
relative importance of wealth as a factor in financial concentration
has grown steadily. It was wealth which enabled Mr. Morgan, in 1910,
to pay $3,000,000 for $51,000 par value of the stock of the Equitable
Life Insurance Society. His direct income from this investment was
limited by law to less than one-eighth of one per cent. a year; but
it gave legal control of $504,000,000, of assets. It was wealth which
enabled the Morgan associates to buy from the Equitable and the Mutual
Life Insurance Company the stocks in the several banking institutions,
which, merged in the Bankers’ Trust Company and the Guaranty Trust
Company, gave them control of $357,000,000 deposits. It was wealth
which enabled Mr. Morgan to acquire his shares in the First National
and National City banks, worth $21,000,000, through which he cemented
the triple alliance with those institutions.

Now, how has this great wealth been accumulated? Some of it was natural
accretion. Some of it is due to special opportunities for investment
wisely availed of. Some of it is due to the vast extent of the bankers’
operations. Then power breeds wealth as wealth breeds power. But a main
cause of these large fortunes is the huge tolls taken by those who
control the avenues to capital and to investors. There has been exacted
as toll literally “all that the traffic will bear.”


The Pujo Committee was unfortunately prevented by lack of time from
presenting to the country the evidence covering the amounts taken by
the investment bankers as promoters’ fees, underwriting commissions and
profits. Nothing could have demonstrated so clearly the power exercised
by the bankers, as a schedule showing the aggregate of these taxes
levied within recent years. It would be well worth while now to re-open
the Money Trust investigation merely to collect these data. But earlier
investigations have disclosed some illuminating, though sporadic facts.

The syndicate which promoted the Steel Trust, took, as compensation
for a few weeks’ work, securities yielding $62,500,000 in cash;
and of this, J. P. Morgan & Co. received for their services, as
Syndicate Managers, $12,500,000, besides their share, as syndicate
subscribers, in the remaining $50,000,000. The Morgan syndicate took
for promoting the Tube Trust $20,000,000 common stock out of a total
issue of $80,000,000 stock (preferred and common). Nor were monster
commissions limited to trust promotions. More recently, bankers’
syndicates have, in many instances, received for floating preferred
stocks of recapitalized industrial concerns, one-third of all common
stock issued, besides a considerable sum in cash. And for the sale
of preferred stock of well established manufacturing concerns, cash
commissions (or profits) of from 7 1/2 to 10 per cent. of the cash
raised are often exacted. On bonds of high-class industrial concerns,
bankers’ commissions (or profits) of from 5 to 10 points have been

Nor have these heavy charges been confined to industrial concerns. Even
railroad securities, supposedly of high grade, have been subjected
to like burdens. At a time when the New Haven’s credit was still
unimpaired, J. P. Morgan & Co. took the New York, Westchester & Boston
Railway first mortgage bonds, guaranteed by the New Haven at 92 1/2;
and they were marketed at 96 1/4. They took the Portland Terminal
Company bonds, guaranteed by the Maine Central Railroad--a corporation
of unquestionable credit--at about 88, and these were marketed at 92.

A large part of these underwriting commissions is taken by the great
banking houses, not for their services in selling the bonds, nor
in assuming risks, but for securing others to sell the bonds and
incur risks. Thus when the Interboro Railway--a most prosperous
corporation--financed its recent $170,000,000 bond issue, J. P.
Morgan & Co. received a 3 per cent. commission, that is, $5,100,000,
practically for arranging that others should underwrite and sell the

The aggregate commissions or profits so taken by leading banking houses
can only be conjectured, as the full amount of their transactions
has not been disclosed, and the rate of commission or profit varies
very widely. But the Pujo Committee has supplied some interesting
data bearing upon the subject: Counting the issues of securities of
interstate corporations only, J. P. Morgan & Co. directly procured the
public marketing alone or in conjunction with others during the years
1902–1912, of $1,950,000,000. What the average commission or profit
taken by J. P. Morgan & Co. was we do not know; but we do know that
every one per cent. on that sum yields $19,500,000. Yet even that huge
aggregate of $1,950,000,000 includes only a part of the securities
on which commissions or profits were paid. It does not include any
issue of an intrastate corporation. It does not include any securities
privately marketed. It does not include any government, state or
municipal bonds.

It is to exactions such as these that the wealth of the investment
banker is in large part due. And since this wealth is an important
factor in the creation of the power exercised by the Money Trust, we
must endeavor to put an end to this improper wealth getting, as well
as to improper combination. The Money Trust is so powerful and so
firmly entrenched, that each of the sources of its undue power must be
effectually stopped, if we would attain the New Freedom.


The Pujo Committee recommends, as a remedy for such excessive charges,
that interstate corporations be prohibited from entering into any
agreements creating a sole fiscal agent to dispose of their security
issues; that the issue of the securities of interstate railroads be
placed under the supervision of the Interstate Commerce Commission;
and that their securities should be disposed of only upon public or
private competitive bids, or under regulations to be prescribed by the
Commission with full powers of investigation that will discover and
punish combinations which prevent competition in bidding. Some of the
state public-service commissions now exercise such power; and it may
possibly be wise to confer this power upon the interstate commission,
although the recommendation of the Hadley Railroad Securities
Commission are to the contrary. But the official regulation as proposed
by the Pujo Committee would be confined to railroad corporations; and
the new security issues of other corporations listed on the New York
Stock Exchange have aggregated in the last five years $4,525,404,025,
which is more than either the railroad or the municipal issues.
Publicity offers, however, another and even more promising remedy: a
method of regulating bankers’ charges which would apply automatically
to railroad, public-service and industrial corporations alike.

The question may be asked: Why have these excessive charges been
submitted to? Corporations, which in the first instance bear
the charges for capital, have, doubtless, submitted because of
banker-control; exercised directly through interlocking directorates,
or kindred relations, and indirectly through combinations among bankers
to suppress competition. But why have the investors submitted, since
ultimately all these charges are borne by the investors, except so far
as corporations succeed in shifting the burden upon the community? The
large army of small investors, constituting a substantial majority
of all security buyers, are entirely free from banker control. Their
submission is undoubtedly due, in part, to the fact that the bankers
control the avenues to recognizedly safe investments almost as fully
as they do the avenues to capital. But the investor’s servility is due
partly, also, to his ignorance of the facts. Is it not probable that,
if each investor knew the extent to which the security he buys from the
banker is diluted by excessive underwritings, commissions and profits,
there would be a strike of capital against these unjust exactions?


A recent British experience supports this view. In a brief period last
spring nine different issues, aggregating $135,840,000, were offered
by syndicates on the London market, and on the average only about 10
per cent. of these loans was taken by the public. Money was “tight,”
but the rates of interest offered were very liberal, and no one doubted
that the investors were well supplied with funds. _The London Daily
Mail_ presented an explanation:

  “The long series of rebuffs to new loans at the hands of investors
  reached a climax in the ill success of the great Rothschild issue.
  It will remain a topic of financial discussion for many days, and
  many in the city are expressing the opinion that it may have a
  revolutionary effect upon the present system of loan issuing and
  underwriting. The question being discussed is that the public
  have become loth to subscribe for stock which they believe the
  underwriters can afford, by reason of the commission they receive,
  to sell subsequently at a lower price than the issue price, and
  that the Stock Exchange has begun to realize the public’s attitude.
  The public sees in the underwriter not so much one who insures
  that the loan shall be subscribed in return for its commission as a
  middleman, who, as it were, has an opportunity of obtaining stock
  at a lower price than the public in order that he may pass it off
  at a profit subsequently. They prefer not to subscribe, but to
  await an opportunity of dividing that profit. They feel that if,
  when these issues were made, the stock were offered them at a more
  attractive price, there would be less need to pay the underwriters
  so high commissions. It is another practical protest, if indirect,
  against the existence of the middleman, which protest is one of the
  features of present-day finance.”


Compel bankers when issuing securities to make public the commissions
or profits they are receiving. Let every circular letter, prospectus
or advertisement of a bond or stock show clearly what the banker
received for his middleman-services, and what the bonds and stocks net
the issuing corporation. That is knowledge to which both the existing
security holder and the prospective purchaser is fairly entitled. If
the bankers’ compensation is reasonable, considering the skill and
risk involved, there can be no objection to making it known. If it is
not reasonable, the investor will “strike,” as investors seem to have
done recently in England.

Such disclosures of bankers’ commissions or profits is demanded also
for another reason: It will aid the investor in judging of the safety
of the investment. In the marketing of securities there are two classes
of risks: One is the risk whether the banker (or the corporation)
will find ready purchasers for the bonds or stock at the issue price;
the other whether the investor will get a good article. The maker
of the security and the banker are interested chiefly in getting it
sold at the issue price. The investor is interested chiefly in buying
a good article. The small investor relies almost exclusively upon
the banker for his knowledge and judgment as to the quality of the
security; and it is this which makes his relation to the banker one of
confidence. But at present, the investment banker occupies a position
inconsistent with that relation. The bankers’ compensation should,
of course, vary according to the risk _he_ assumes. Where there is
a large risk that the bonds or stock will not be promptly sold at
the issue price, the underwriting commission (that is the insurance
premium) should be correspondingly large. But the banker ought not
to be paid more for getting _investors_ to assume a larger risk. In
practice the banker gets the higher commission for underwriting the
weaker security, on the ground that his own risk is greater. And
the weaker the security, the greater is the banker’s incentive to
induce his customers to relieve him. Now the law should not undertake
(except incidentally in connection with railroads and public-service
corporations) to fix bankers’ profits. And it should not seek to
prevent investors from making bad bargains. But it is now recognized
in the simplest merchandising, that there should be full disclosures.
The archaic doctrine of _caveat emptor_ is vanishing. The law has
begun to require publicity in aid of fair dealing. The Federal Pure
Food Law does not guarantee quality or prices; but it helps the buyer
to judge of quality by requiring disclosure of ingredients. Among the
most important facts to be learned for determining the real value of a
security is the amount of water it contains. And any excessive amount
paid to the banker for marketing a security is water. Require a full
disclosure to the investor of the amount of commissions and profits
paid; and not only will investors be put on their guard, but bankers’
compensation will tend to adjust itself automatically to what is fair
and reasonable. Excessive commissions--this form of unjustly acquired
wealth--will in large part cease.


But the disclosure must be real. And it must be a disclosure to the
investor. It will not suffice to require merely the filing of a
statement of facts with the Commissioner of Corporations or with a
score of other officials, federal and state. That would be almost as
ineffective as if the Pure Food Law required a manufacturer merely to
deposit with the Department a statement of ingredients, instead of
requiring the label to tell the story. Nor would the filing of a full
statement with the Stock Exchange, if incorporated, as provided by the
Pujo Committee bill, be adequate.

To be effective, knowledge of the facts must be actually brought home
to the investor, and this can best be done by requiring the facts to
be stated in good, large type in every notice, circular, letter and
advertisement inviting the investor to purchase. Compliance with this
requirement should also be obligatory, and not something which the
investor could waive. For the whole public is interested in putting
an end to the bankers’ exactions. England undertook, years ago, to
protect its investors against the wiles of promoters, by requiring
a somewhat similar disclosure; but the British act failed, in large
measure of its purpose, partly because under it the statement of facts
was filed only with a public official, and partly because the investor
could waive the provision. And the British statute has now been changed
in the latter respect.


The required publicity should also include a disclosure of all
participants in an underwriting. It is a common incident of
underwriting that no member of the syndicate shall sell at less than
the syndicate price for a definite period, unless the syndicate is
sooner dissolved. In other words, the bankers make, by agreement,
an artificial price. Often the agreement is probably illegal under
the Sherman Anti-Trust Law. This price maintenance is, however, not
necessarily objectionable. It may be entirely consistent with the
general welfare, if the facts are made known. But disclosure should
include a list of those participating in the underwriting so that the
public may not be misled. The investor should know whether his adviser
is disinterested.

Not long ago a member of a leading banking house was undertaking to
justify a commission taken by his firm for floating a now favorite
preferred stock of a manufacturing concern. The bankers took for their
services $250,000 in cash, besides one-third of the common stock,
amounting to about $2,000,000. “Of course,” he said, “that would have
been too much if we could have kept it all for ourselves; but we
couldn’t. We had to divide up a large part. There were fifty-seven
participants. Why, we had even to give $10,000 of stock to----(naming
the president of a leading bank in the city where the business was
located). He might some day have been asked what he thought of the
stock. If he had shrugged his shoulders and said he didn’t know, we
might have lost many a customer for the stock. We had to give him
$10,000 of the stock to teach him not to shrug his shoulders.”

Think of the effectiveness with practical Americans of a statement like

  =A. B. & Co.=

  =Investment Bankers=

  =We have today secured substantial control of the successful
  machinery business heretofore conducted by ---- at ----, Illinois,
  which has been incorporated under the name of the Excelsior
  Manufacturing Company with a capital of $10,000,000, of which
  $5,000,000 is Preferred and $5,000,000 Common.=

  =As we have a large clientele of confiding customers, we were able
  to secure from the owners an agreement for marketing the Preferred
  stock--we to fix a price which shall net the owners in cash $95 a

  =We offer this excellent stock to you at $100.75 per share. Our own
  commission or profit will be only a little over $5.00 per share, or
  say, $250,000 cash, besides $1,500,000 of the Common stock, which
  we received as a bonus. This cash and stock commission we are to
  divide in various proportions with the following participants in
  the underwriting syndicate:=

    =C. D. & Co., New York=
    =E. F. & Co., Boston=
    =L. M. & Co., Philadelphia=
    =I. K. & Co., New York=
    =O. P. & Co., Chicago=

Were such notices common, the investment bankers would “be worthy of
their hire,” for only reasonable compensation would ordinarily be

For marketing the preferred stock, as in the case of Excelsior
Manufacturing Co. referred to above, investment bankers were doubtless
essential, and as middlemen they performed a useful service. But they
used their strong position to make an excessive charge. There are,
however, many cases where the banker’s services can be altogether
dispensed with; and where that is possible he should be eliminated, not
only for economy’s sake, but to break up financial concentration.



The abolition of interlocking directorates will greatly curtail the
bankers’ power by putting an end to many improper combinations.
Publicity concerning bankers’ commissions, profits and associates, will
lend effective aid, particularly by curbing undue exactions. Many of
the specific measures recommended by the Pujo Committee (some of them
dealing with technical details) will go far toward correcting corporate
and banking abuses; and thus tend to arrest financial concentration.
But the investment banker has, within his legitimate province, acquired
control so extensive as to menace the public welfare, even where his
business is properly conducted. If the New Freedom is to be attained,
every proper means of lessening that power must be availed of. A simple
and effective remedy, which can be widely applied, even without new
legislation, lies near at hand:--Eliminate the banker-middleman where
he is superfluous.

Today practically all governments, states and municipalities pay toll
to the banker on all bonds sold. Why should they? It is not because the
banker is always needed. It is because the banker controls the only
avenue through which the investor in bonds and stocks can ordinarily be
reached. The banker has become the universal tax gatherer. True, the
_pro rata_ of taxes levied by him upon our state and city governments
is less than that levied by him upon the corporations. But few states
or cities escape payment of some such tax to the banker on every
loan it makes. Even where the new issues of bonds are sold at public
auction, or to the highest bidder on sealed proposals, the bankers’
syndicates usually secure large blocks of the bonds which are sold
to the people at a considerable profit. The middleman, even though
unnecessary, collects his tribute.

There is a legitimate field for dealers in state and municipal bonds,
as for other merchants. Investors already owning such bonds must have a
medium through which they can sell their holdings. And those states or
municipalities which lack an established reputation among investors, or
which must seek more distant markets, need the banker to distribute new
issues. But there are many states and cities which have an established
reputation and have a home market at hand. These should sell their
bonds direct to investors without the intervention of a middleman.
And as like conditions prevail with some corporations, their bonds
and stocks should also be sold direct to the investor. Both financial
efficiency and industrial liberty demand that the bankers’ toll be
abolished, where that is possible.


The business of the investment banker must not be confused with
that of the bond and stock broker. The two are often combined; but
the functions are essentially different. The broker performs a very
limited service. He has properly nothing to do with the original
issue of securities, nor with their introduction into the market.
He merely negotiates a purchase or sale as agent for another under
specific orders. He exercises no discretion, except in the method of
bringing buyer and seller together, or of executing orders. For his
humble service he receives a moderate compensation, a commission,
usually one-eighth of one per cent. (12 1/2 cents for each $100) on
the par value of the security sold. The investment banker also is
a mere middleman. But he is a principal, not an agent. He is also
a merchant in bonds and stocks. The compensation received for his
part in the transaction is in many cases more accurately described
as profit than as commission. So far as concerns new issues of
government, state and municipal bonds, especially, he acts as merchant,
buying and selling securities on his own behalf; buying commonly at
wholesale from the maker and selling at retail to the investors;
taking the merchant’s risk and the merchant’s profits. On purchases
of corporate securities the profits are often very large; but even a
large profit may be entirely proper; for when the banker’s services
are needed and are properly performed, they are of great value. On
purchases of government, state and municipal securities the profit is
usually smaller; but even a very small profit cannot be justified, if


The banker’s services include three distinct functions, and only three:

_First:_ Specifically as expert. The investment banker has the
responsibility of the ordinary retailer to sell only that merchandise
which is good of its kind. But his responsibility in this respect is
unusually heavy, because he deals in an article on which a great
majority of his customers are unable, themselves, to pass intelligent
judgment without aid. The purchase by the investor of most corporate
securities is little better than a gamble, where he fails to get the
advice of some one who has investigated the security thoroughly as the
banker should. For few investors have the time, the facilities, or the
ability to investigate properly the value of corporate securities.

_Second:_ Specifically as distributor. The banker performs an
all-important service in providing an outlet for securities.
His connections enable him to reach possible buyers quickly.
And good-will--that is, possession of the confidence of regular
customers--enables him to effect sales where the maker of the security
might utterly fail to find a market.

_Third:_ Specifically as jobber or retailer. The investment banker,
like other merchants, carries his stock in trade until it can be
marketed. In this he performs a service which is often of great value
to the maker. Needed cash is obtained immediately, because the whole
issue of securities can thus be disposed of by a single transaction.
And even where there is not immediate payment, the knowledge that the
money will be provided when needed is often of paramount importance.
By carrying securities in stock, the banker performs a service also to
investors, who are thereby enabled to buy securities at such times as
they desire.

Whenever makers of securities or investors require all or any of
these three services, the investment banker is needed, and payment of
compensation to him is proper. Where there is no such need, the banker
is clearly superfluous. And in respect to the original issue of many
of our state and municipal bonds, and of some corporate securities, no
such need exists.


It needs no banker experts in value to tell us that bonds of
Massachusetts or New York, of Boston, Philadelphia or Baltimore and
of scores of lesser American cities, are safe investments. The basic
financial facts in regard to such bonds are a part of the common
knowledge of many American investors; and, certainly, of most possible
investors who reside in the particular state or city whose bonds are
in question. Where the financial facts are not generally known, they
are so simple, that they can be easily summarized and understood by
any prospective investor without interpretation by an expert. Bankers
often employ, before purchasing securities, their own accountants
to verify the statements supplied by the makers of the security, and
use these accountants’ certificates as an aid in selling. States and
municipalities, the makers of the securities, might for the same
purpose employ independent public accountants of high reputation, who
would give their certificates for use in marketing the securities.
Investors could also be assured without banker-aid that the basic
legal conditions are sound. Bankers, before purchasing an issue of
securities, customarily obtain from their own counsel an opinion as to
its legality, which investors are invited to examine. It would answer
the same purpose, if states and municipalities should supplement the
opinion of their legal representatives by that of independent counsel
of recognized professional standing, who would certify to the legality
of the issue.

Neither should an investment banker be needed to find investors
willing to take up, in small lots, a new issue of bonds of New York or
Massachusetts, of Boston, Philadelphia or Baltimore, or a hundred other
American cities. A state or municipality seeking to market direct to
the investor its own bonds would naturally experience, at the outset,
some difficulty in marketing a large issue. And in a newer community,
where there is little accumulation of unemployed capital, it might be
impossible to find buyers for any large issue. Investors are apt to be
conservative; and they have been trained to regard the intervention of
the banker as necessary. The bankers would naturally discourage any
attempt of states and cities to dispense with their services. Entrance
upon a market, hitherto monopolized by them, would usually have to be
struggled for. But banker-fed investors, as well as others could, in
time, be brought to realize the advantage of avoiding the middleman and
dealing directly with responsible borrowers. Governments, like private
concerns, would have to do educational work; but this publicity would
be much less expensive and much more productive than that undertaken by
the bankers. Many investors are already impatient of banker exactions;
and eager to deal directly with governmental agencies in whom they
have more confidence. And a great demand could, at once, be developed
among smaller investors whom the bankers have been unable to interest,
and who now never buy state or municipal bonds. The opening of this
new field would furnish a market, in some respects more desirable and
certainly wider than that now reached by the bankers.

Neither do states or cities ordinarily need the services of the
investment banker to carry their bonds pending distribution to the
investor. Where there is immediate need for large funds, states and
cities--at least the older communities--should be able to raise the
money temporarily, quite as well as the bankers do now, while awaiting
distribution of their bonds to the investor. Bankers carry the bonds
with other people’s money, not with their own. Why should not cities
get the temporary use of other people’s money as well? Bankers have
the preferential use of the deposits in the banks, often because
they control the banks. Free these institutions from banker-control,
and no applicant to borrow the people’s money will be received with
greater favor than our large cities. Boston, with its $1,500,000,000
of assessed valuation and $78,033,128 net debt, is certainly as good a
risk as even Lee, Higginson & Co. or Kidder, Peabody & Co.

But ordinarily cities do not, or should not, require large sums of
money at any one time. Such need of large sums does not arise except
from time to time where maturing loans are to be met, or when some
existing public utility plant is to be taken over from private owners.
Large issues of bonds for any other purpose are usually made in
anticipation of future needs, rather than to meet present necessities.
Modern efficient public financiering, through substituting serial
bonds for the long term issues (which in Massachusetts has been made
obligatory) will, in time, remove the need of large sums at one time
for paying maturing debts, since each year’s maturities will be paid
from the year’s taxes. Purchases of existing public utility plants
are of rare occurrence, and are apt to be preceded by long periods
of negotiation. When they occur they can, if foresight be exercised,
usually be financed without full cash payment at one time.

Today, when a large issue of bonds is made, the banker, while
ostensibly paying his own money to the city, actually pays to the city
other people’s money which he has borrowed from the banks. Then the
banks get back, through the city’s deposits, a large part of the money
so received. And when the money is returned to the bank, the banker has
the opportunity of borrowing it again for other operations. The process
results in double loss to the city. The city loses by not getting from
the banks as much for its bonds as investors would pay. And then it
loses interest on the money raised before it is needed. For the bankers
receive from the city bonds bearing rarely less than 4 per cent.
interest; while the proceeds are deposited in the banks which rarely
allow more than 2 per cent. interest on the daily balances.


In the present year some cities have been led by necessity to help
themselves. The bond market was poor. Business was uncertain, money
tight and the ordinary investor reluctant. Bankers were loth to take
new bond issues. Municipalities were unwilling to pay the high rates
demanded of them. And many cities were prohibited by law or ordinance
from paying more than 4 per cent. interest; while good municipal bonds
were then selling on a 4 1/2 to 5 per cent. basis. But money had to be
raised, and the attempt was made to borrow it direct from the lenders
instead of from the banker-middleman. Among the cities which raised
money in this way were Philadelphia, Baltimore, St. Paul, and Utica,
New York.

Philadelphia, under Mayor Blankenburg’s inspiration, sold nearly
$4,175,000 in about two days on a 4 per cent. basis and another
“over-the-counter” sale has been made since. In Baltimore, with the
assistance of the _Sun_, $4,766,000 were sold “over the counter” on a
4 1/2 per cent. basis. Utica’s two “popular sales” of 4 1/2 per cent.
bonds were largely “over-subscribed.” And since then other cities large
and small have had their “over-the-counter” bond sales. The experience
of Utica, as stated by its Controller, Fred G. Reusswig, must prove of
general interest:

“In June of the present year I advertised for sale two issues, one of
$100,000, and the other of $19,000, bearing interest at 4 1/2 per cent.
The latter issue was purchased at par by a local bidder and of the
former we purchased $10,000 for our sinking funds. That left $90,000
unsold, for which there were no bidders, which was the first time that
I had been unable to sell our bonds. About this time the ‘popular
sales’ of Baltimore and Philadelphia attracted my attention. The laws
in effect in those cities did not restrict the officials as does our
law and I could not copy their methods. I realized that there was
plenty of money in this immediate vicinity and if I could devise a plan
conforming with our laws under which I could make the sale attractive
to small investors it would undoubtedly prove successful. I had found,
in previous efforts to interest people of small means, that they did
not understand the meaning of premium and would rather not buy than
bid above par. They also objected to making a deposit with their bids.
In arranging for the ‘popular sales’ I announced in the papers that,
while I must award to the highest bidder, it was my opinion that a par
bid would be _the highest bid_. I also announced that we would issue
bonds in denominations as low as $100 and that we would not require a
deposit except where the bid was $5,000 or over. Then I succeeded in
getting the local papers to print editorials and local notices upon
the subject of municipal bonds, with particular reference to those
of Utica and the forthcoming sale. All the prospective purchaser had
to do was to fill in the amount desired, sign his name, seal the bid
and await the day for the award. I did not have many bidders for very
small amounts. There was only one for $100 at the first sale and one
for $100 at the second sale and not more than ten who wanted less than
$500. Most of the bidders were looking for from $1,000 to $5,000, but
nearly all were people of comparatively small means, and with some
the investment represented all their savings. In awarding the bonds
I gave preference to residents of Utica and I had no difficulty in
apportioning the various maturities in a satisfactory way.

“I believe that there are a large number of persons in every city who
would buy their own bonds if the way were made easier by law. Syracuse
and the neighboring village of Ilion, both of which had been unable
to sell in the usual way, came to me for a program of procedure and
both have since had successful sales along similar lines. We have been
able by this means to keep the interest rate on our bonds at 4 1/2 per
cent., while cities which have followed the old plan of relying upon
bond houses have had to increase the rate to 5 per cent. I am in favor
of amending the law in such a manner that the Common Council, approved
by the Board of Estimate and Apportionment, may fix the prices at which
bonds shall be sold, instead of calling for competitive bids. Then
place the bonds on sale at the Controller’s office to any one who will
pay the price. The prices upon each issue should be graded according to
the different values of different maturities. Under the present law, as
we have it, conditions are too complicated to make a sale practicable
except upon a basis of par bids.”


St. Paul wisely introduced into its experiment a more democratic
feature, which Tom L. Johnson, Cleveland’s great mayor, thought
out (but did not utilize), and which his friend W. B. Colver, now
Editor-in-Chief of the _Daily News_, brought to the attention of the
St. Paul officials. Mayor Johnson had recognized the importance of
reaching the small savings of the people; and concluded that it was
necessary not only to issue the bonds in very small denominations, but
also to make them redeemable at par. He sought to combine practically,
bond investment with the savings bank privilege. The fact that
municipal bonds are issuable ordinarily only in large denominations,
say, $1,000, presented an obstacle to be overcome. Mayor Johnson’s plan
was to have the sinking fund commissioners take large blocks of the
bonds, issue against them certificates in denominations of $10, and
have the commissioners agree (under their power to purchase securities)
to buy the certificates back at par and interest. Savings bank
experience, he insisted, showed that the redemption feature would not
prove an embarrassment; as the percentage of those wishing to withdraw
their money is small; and deposits are nearly always far in excess of

The St. Paul sinking fund commissioners and City Attorney O’Neill
approved the Johnson plan; and in the face of high money rates, sold
on a 4 per cent. basis, during July, certificates to the net amount of
$502,300; during August, $147,000; and during September, over $150,000,
the average net sales being about $5,700 a day. Mr. Colver, reporting
on the St. Paul experience, said:

  “There have been about 2,000 individual purchasers making the
  average deposit about $350 or $360. There have been no certificates
  sold to banks. During the first month the deposits averaged
  considerably higher and for this reason: in very many cases people
  who had savings which represented the accumulation of considerable
  time, withdrew their money from the postal savings banks, from the
  regular banks, from various hiding places and deposited them with
  the city. Now these same people are coming once or twice a month
  and making deposits of ten or twenty dollars, so that the average
  of the individual deposit has fallen very rapidly during September
  and every indication is that the number of small deposits will
  continue to increase and the relatively large deposits become less
  frequent as time goes on.

  “As a matter of fact, these certificate deposits are stable, far
  more than the deposits and investments of richer people who watch
  for advantageous reinvestments and who shift their money about
  rather freely. The man with three or four hundred dollars savings
  will suffer almost anything before he will disturb that fund. We
  believe that the deposits every day here, day in and day out, will
  continue to take care of all the withdrawals and still leave a net
  gain for the day, that net figure at present being about $5,700 a

Many cities are now prevented from selling bonds direct to the small
investors, through laws which compel bonds to be issued in large
denominations or which require the issue to be offered to the highest
bidder. These legislative limitations should be promptly removed.


Such success as has already been attained is largely due to the unpaid
educational work of leading progressive newspapers. But the educational
work to be done must not be confined to teaching “the people”--the
buyers of the bonds. Municipal officials and legislators have quite as
much to learn. They must, first of all, study salesmanship. Selling
bonds to the people is a new art, still undeveloped. The general
problems have not yet been worked out. And besides these problems
common to all states and cities, there will be, in nearly every
community, local problems which must be solved, and local difficulties
which must be overcome. The proper solution even of the general
problems must take considerable time. There will have to be many
experiments made; and doubtless there will be many failures. Every
great distributor of merchandise knows the obstacles which he had to
overcome before success was attained; and the large sums that had to be
invested in opening and preparing a market. Individual concerns have
spent millions in wise publicity; and have ultimately reaped immense
profits when the market was won. Cities must take their lessons from
these great distributors. Cities must be ready to study the problems
and to spend prudently for proper publicity work. It might, in the end,
prove an economy, even to allow, on particular issues, where necessary,
a somewhat higher interest rate than bankers would exact, if thereby
a direct market for bonds could be secured. Future operations would
yield large economies. And the obtaining of a direct market for city
bonds is growing ever more important, because of the huge increase in
loans which must attend the constant expansion of municipal functions.
In 1898 the new municipal issues aggregated $103,084,793; in 1912,


In New York, Massachusetts and the other sixteen states where a
system of purely mutual savings banks is general, it is possible,
with a little organization, to develop an important market for the
direct purchaser of bonds. The bonds issued by Massachusetts cities
and towns have averaged recently about $15,000,000 a year, and those
of the state about $3,000,000. The 194 Massachusetts savings banks,
with aggregate assets of $902,105,755.94, held on October 31, 1912,
$90,536,581.32 in bonds and notes of states and municipalities. Of this
sum about $60,000,000 are invested in bonds and notes of Massachusetts
cities and towns, and about $8,000,000 in state issues. The deposits
in the savings banks are increasing at the rate of over $30,000,000
a year. Massachusetts state and municipal bonds have, within a few
years, come to be issued tax exempt in the hands of the holder,
whereas other classes of bonds usually held by savings banks are
subject to a tax of one-half of one per cent. of the market value.
Massachusetts savings banks, therefore, will to an increasing extent,
select Massachusetts municipal issues for high-grade bond investments.
Certainly Massachusetts cities and towns might, with the coöperation of
the Commonwealth, easily develop a “home market” for “over-the-counter”
bond business with the savings banks. And the savings banks of other
states offer similar opportunities to their municipalities.


Bankers obtained their power through combination. Why should not cities
and states by means of coöperation free themselves from the bankers?
For by coöperation between the cities and the state, the direct
marketing of municipal bonds could be greatly facilitated.

Massachusetts has 33 cities, each with a population of over 12,000
persons; 71 towns each with a population of over 5,000; and 250 towns
each with a population of less than 5,000. Three hundred and eight of
these municipalities now have funded indebtedness outstanding. The
aggregate net indebtedness is about $180,000,000. Every year about
$15,000,000 of bonds and notes are issued by the Massachusetts cities
and towns for the purpose of meeting new requirements and refunding
old indebtedness. If these municipalities would coöperate in marketing
securities, the market for the bonds of each municipality would be
widened; and there would exist also a common market for Massachusetts
municipal securities which would be usually well supplied, would
receive proper publicity and would attract investors. Successful
merchandising obviously involves carrying an adequate, well-assorted
stock. If every city acts alone, in endeavoring to market its bonds
direct, the city’s bond-selling activity will necessarily be sporadic.
Its ability to supply the investor will be limited by its own
necessities for money. The market will also be limited to the bonds
of the particular municipality. But if a state and its cities should
coöperate, there could be developed a continuous and broad market for
the sale of bonds “over-the-counter.” The joint selling agency of over
three hundred municipalities,--as in Massachusetts--would naturally
have a constant supply of assorted bonds and notes which could be had
in as small amounts as the investor might want to buy them. It would
be a simple matter to establish such a joint selling agency by which
municipalities, under proper regulation of, and aid from the state,
would coöperate.

And coöperation among the cities and with the state might serve in
another important respect. These 354 Massachusetts municipalities carry
in the aggregate large bank balances. Sometimes the balance carried by
a city represents unexpended revenues; sometimes unexpended proceeds
of loans. On these balances they usually receive from the banks 2 per
cent. interest. The balances of municipalities vary like those of
other depositors; one having idle funds, when another is in need. Why
should not all of these cities and towns coöperate, making, say, the
State their common banker, and supply each other with funds as farmers
and laborers coöperate through credit-unions? Then cities would get,
instead of 2 per cent. on their balances, all their money was worth.

The Commonwealth of Massachusetts holds now in its sinking and other
funds nearly $30,000,000 of Massachusetts municipal securities,
constituting nearly three-fourths of all securities held in these
funds. Its annual purchases aggregate nearly $4,000,000. Its purchases
direct from cities and towns have already exceeded $1,000,000 this
year. It would be but a simple extension of the state’s function to
coöperate, as indicated, in a joint, Municipal Bond Selling Agency and
Credit Union. It would be a distinct advance in the efficiency of state
and municipal financing; and what is even more important, a long step
toward the emancipation of the people from banker-control.


Strong corporations with established reputations, locally or
nationally, could emancipate themselves from the banker in a similar
manner. Public-service corporations in some of our leading cities could
easily establish “over-the-counter” home markets for their bonds; and
would be greatly aided in this by the supervision now being exercised
by some state commissions over the issue of securities by such
corporations. Such corporations would gain thereby not only in freedom
from banker-control and exactions, but in the winning of valuable local
support. The investor’s money would be followed by his sympathy. In
things economic, as well as in things political, wisdom and safety lie
in direct appeals to the people.

The Pennsylvania Railroad now relies largely upon its stockholders for
new capital. But a corporation with its long-continued success and
reputation for stability should have much wider financial support and
should eliminate the banker altogether. With the 2,700 stations on its
system, the Pennsylvania could, with a slight expense, create nearly
as many avenues through which money would be obtainable to meet its
growing needs.


It may be urged that reputations often outlive the conditions which
justify them, that outlived reputations are pitfalls to the investors;
and that the investment banker is needed to guard him from such
dangers. True; but when have the big bankers or their little satellites
protected the people from such pitfalls?

Was there ever a more be-bankered railroad than the New Haven? Was
there ever a more banker-led community of investors than New England?
Six years before the fall of that great system, the hidden dangers
were pointed out to these banker-experts. Proof was furnished of the
rotting timbers. The disaster-breeding policies were laid bare. The
bankers took no action. Repeatedly, thereafter, the bankers’ attention
was called to the steady deterioration of the structure. The New Haven
books disclose 11,481 stockholders who are residents of Massachusetts;
5,682 stockholders in Connecticut; 735 in Rhode Island; and 3,510 in
New York. Of the New Haven stockholders 10,474 were women. Of the New
Haven stockholders 10,222 were of such modest means that their holdings
were from one to ten shares only. The investors were sorely in need of
protection. The city directories disclose 146 banking houses in Boston,
26 in Providence, 33 in New Haven and Hartford, and 357 in New York
City. But who, connected with those New England and New York banking
houses, during the long years which preceded the recent investigation
of the Interstate Commerce Commission, raised either voice or pen
in protest against the continuous mismanagement of that great trust
property or warned the public of the impending disaster? Some of the
bankers sold their own stock holdings. Some bankers whispered to a
few favored customers advice to dispose of New Haven stock. But not
one banker joined those who sought to open the eyes of New England
to the impending disaster and to avert it by timely measures. New
England’s leading banking houses were ready to “coöperate” with the
New Haven management in taking generous commissions for marketing the
endless supply of new securities; but they did nothing to protect the
investors. Were these bankers blind? Or were they afraid to oppose the
will of J. P. Morgan & Co.?

Perhaps it is the banker who, most of all, needs the New Freedom.



J. P. Morgan & Co. declare, in their letter to the Pujo Committee,
that “practically all the railroad and industrial development of this
country has taken place initially through the medium of the great
banking houses.” That statement is entirely unfounded in fact. On the
contrary nearly every such contribution to our comfort and prosperity
was “initiated” _without_ their aid. The “great banking houses” came
into relation with these enterprises, either after success had been
attained, or upon “reorganization” after the possibility of success had
been demonstrated, but the funds of the hardy pioneers, who had risked
their all, were exhausted.

This is true of our early railroads, of our early street railways, and
of the automobile; of the telegraph, the telephone and the wireless; of
gas and oil; of harvesting machinery, and of our steel industry; of the
textile, paper and shoe industries; and of nearly every other important
branch of manufacture. The _initiation_ of each of these enterprises
may properly be characterized as “great transactions”; and the men
who contributed the financial aid and business management necessary
for their introduction are entitled to share, equally with inventors,
in our gratitude for what has been accomplished. But the instances
are extremely rare where the original financing of such enterprises
was undertaken by investment bankers, great or small. It was usually
done by some common business man, accustomed to taking risks; or by
some well-to-do friend of the inventor or pioneer, who was influenced
largely by considerations other than money-getting. Here and there you
will find that banker-aid was given; but usually in those cases it was
a small local banking concern, not a “great banking house” which helped
to “initiate” the undertaking.


We have come to associate the great bankers with railroads. But their
part was not conspicuous in the early history of the Eastern railroads;
and in the Middle West the experience was, to some extent, similar. The
Boston & Maine Railroad owns and leases 2,215 miles of line; but it is
a composite of about 166 separate railroad companies. The New Haven
Railroad owns and leases 1,996 miles of line; but it is a composite of
112 separate railroad companies. The necessary capital to build these
little roads was gathered together, partly through state, county or
municipal aid; partly from business men or landholders who sought to
advance their special interests; partly from investors; and partly from
well-to-do public-spirited men, who wished to promote the welfare of
their particular communities. About seventy-five years after the first
of these railroads was built, J. P. Morgan & Co. became fiscal agent
for all of them by creating the New Haven-Boston & Maine monopoly.


The history of our steamship lines is similar. In 1807, Robert
Fulton, with the financial aid of Robert R. Livingston, a judge and
statesman--not a banker--demonstrated with the _Claremont_, that it
was practicable to propel boats by steam. In 1833 the three Cunard
brothers of Halifax and 232 other persons--stockholders of the Quebec
and Halifax Steam Navigation Company--joined in supplying about $80,000
to build the _Royal William_,--the first steamer to cross the Atlantic.
In 1902, many years after individual enterprises had developed
practically all the great ocean lines, J. P. Morgan & Co. floated the
International Mercantile Marine with its $52,744,000 of 4 1/2 bonds,
now selling at about 60, and $100,000,000 of stock (preferred and
common) on which no dividend has ever been paid. It was just sixty-two
years after the first regular line of transatlantic steamers--The
Cunard--was founded that Mr. Morgan organized the Shipping Trust.


The story of the telegraph is similar. The money for developing
Morse’s invention was supplied by his partner and co-worker, Alfred
Vail. The initial line (from Washington to Baltimore) was built with
an appropriation of $30,000 made by Congress in 1843. Sixty-six years
later J. P. Morgan & Co. became bankers for the Western Union through
financing its purchase by the American Telephone & Telegraph Company.


Next to railroads and steamships, harvesting machinery has probably
been the most potent factor in the development of America; and
most important of the harvesting machines was Cyrus H. McCormick’s
reaper. That made it possible to increase the grain harvest twenty-
or thirty-fold. No investment banker had any part in introducing this
great business man’s invention.

McCormick was without means; but William Butler Ogden, a railroad
builder, ex-Mayor and leading citizen of Chicago, supplied $25,000
with which the first factory was built there in 1847. Fifty-five years
later, J. P. Morgan & Co. performed the service of combining the five
great harvester companies, and received a commission of $3,000,000.
The concerns then consolidated as the International Harvester Company,
with a capital stock of $120,000,000, had, despite their huge assets
and earning power, been previously capitalized, in the aggregate, at
only $10,500,000--strong evidence that in all the preceding years no
investment banker had financed them. Indeed, McCormick was as able
in business as in mechanical invention. Two years after Ogden paid
him $25,000 for a half interest in the business, McCormick bought it
back for $50,000; and thereafter, until his death in 1884, no one but
members of the McCormick family had any interest in the business.


It may be urged that railroads and steamships, the telegraph and
harvesting machinery were introduced before the accumulation of
investment capital had developed the investment banker, and before
America’s “great banking houses” had been established; and that,
consequently, it would be fairer to inquire what services bankers had
rendered in connection with later industrial development. The firm of
J. P. Morgan & Co. is fifty-five years old; Kuhn, Loeb & Co. fifty-six
years old; Lee, Higginson & Co. over fifty years; and Kidder, Peabody
& Co. forty-eight years; and yet the investment banker seems to have
had almost as little part in “initiating” the great improvements of the
last half century, as did bankers in the earlier period.


The modern steel industry of America is forty-five years old. The
“great bankers” had no part in initiating it. Andrew Carnegie, then
already a man of large means, introduced the Bessemer process in 1868.
In the next thirty years our steel and iron industry increased greatly.
By 1898 we had far outstripped all competitors. America’s production
about equalled the aggregate of England and Germany. We had also
reduced costs so much that Europe talked of the “American Peril.” It
was 1898, when J. P. Morgan & Co. took their first step in forming the
Steel Trust, by organizing the Federal Steel Company. Then followed
the combination of the tube mills into an $80,000,000 corporation,
J. P. Morgan & Co. taking for their syndicate services $20,000,000 of
common stock. About the same time the consolidation of the bridge and
structural works, the tin plate, the sheet steel, the hoop and other
mills followed; and finally, in 1901, the Steel Trust was formed, with
a capitalization of $1,402,000,000. These combinations came thirty
years after the steel industry had been “initiated”.


The telephone industry is less than forty years old. It is probably
America’s greatest contribution to industrial development. The bankers
had no part in “initiating” it. The glory belongs to a simple,
enthusiastic, warm-hearted, business man of Haverhill, Massachusetts,
who was willing to risk _his own_ money. H. N. Casson tells of this,
most interestingly, in his “History of the Telephone”:

“The only man who had money and dared to stake it on the future of
the telephone was Thomas Sanders, and he did this not mainly for
business reasons. Both he and Hubbard were attached to Bell primarily
by sentiment, as Bell had removed the blight of dumbness from Sanders’
little son, and was soon to marry Hubbard’s daughter. Also, Sanders had
no expectation, at first, that so much money would be needed. He was
not rich. His entire business, which was that of cutting out soles for
shoe manufacturers, was not at any time worth more than thirty-five
thousand dollars. Yet, from 1874 to 1878, he had advanced nine-tenths
of the money that was spent on the telephone. The first five thousand
telephones, and more, were made with his money. And so many long,
expensive months dragged by before any relief came to Sanders, that
he was compelled, much against his will and his business judgment, to
stretch his credit within an inch of the breaking-point to help Bell
and the telephone. Desperately he signed note after note until he faced
a total of one hundred and ten thousand dollars. If the new ‘scientific
toy’ succeeded, which he often doubted, he would be the richest citizen
in Haverhill; and if it failed, which he sorely feared, he would be
a bankrupt. Sanders and Hubbard were leasing telephones two by two,
to business men who previously had been using the private lines of
the Western Union Telegraph Company. This great corporation was at
this time their natural and inevitable enemy. It had swallowed most
of its competitors, and was reaching out to monopolize all methods of
communication by wire. The rosiest hope that shone in front of Sanders
and Hubbard was that the Western Union might conclude to buy the Bell
patents, just as it had already bought many others. In one moment of
discouragement they had offered the telephone to President Orton, of
the Western Union, for $100,000; and Orton had refused it. ‘What use,’
he asked pleasantly, ‘could this company make of an electrical toy?’

“But besides the operation of its own wires, the Western Union was
supplying customers with various kinds of printing-telegraphs and
dial-telegraphs, some of which could transmit sixty words a minute.
These accurate instruments, it believed, could never be displaced
by such a scientific oddity as the telephone, and it continued to
believe this until one of its subsidiary companies--the Gold and
Stock--reported that several of its machines had been superseded by

“At once the Western Union awoke from its indifference. Even this tiny
nibbling at its business must be stopped. It took action quickly,
and organized the ‘American Speaking-Telephone Company,’ and with
$300,000 capital, and with three electrical inventors, Edison, Gray,
and Dolbear, on its staff. With all the bulk of its great wealth
and prestige, it swept down upon Bell and his little body-guard. It
trampled upon Bell’s patent with as little concern as an elephant can
have when he tramples upon an ant’s nest. To the complete bewilderment
of Bell, it coolly announced that it had the only original telephone,
and that it was ready to supply superior telephones with all the latest
improvements made by the original inventors--Dolbear, Gray, and Edison.

“The result was strange and unexpected. The Bell group, instead of
being driven from the field, were at once lifted to a higher level in
the business world. And the Western Union, in the endeavor to protect
its private lines, became involuntarily a ‘bell-wether’ to lead
capitalists in the direction of the telephone.”

Even then, when financial aid came to the Bell enterprise, it was from
capitalists, not from bankers, and among these capitalists was William
H. Forbes (son of the builder of the Burlington) who became the first
President of the Bell Telephone Company. That was in 1878. More than
twenty years later, after the telephone had spread over the world, the
great house of Morgan came into financial control of the property.
The American Telephone & Telegraph Company was formed. The process of
combination became active. Since January, 1900, its stock has increased
from $25,886,300 to $344,606,400. In six years (1906 to 1912), the
Morgan associates marketed about $300,000,000 bonds of that company or
its subsidiaries. In that period the volume of business done by the
telephone companies had, of course, grown greatly, and the plant had to
be constantly increased; but the proceeds of these huge security issues
were used, to a large extent, in effecting combinations; that is, in
buying out telephone competitors; in buying control of the Western
Union Telegraph Company; and in buying up outstanding stock interests
in semi-independent Bell companies. It is these combinations which have
led to the investigation of the Telephone Company by the Department of
Justice; and they are, in large part, responsible for the movement to
have the government take over the telephone business.


The business of manufacturing electrical machinery and apparatus
is only a little over thirty years old. J. P. Morgan & Co. became
interested early in one branch of it; but their dominance of the
business today is due, not to their “initiating” it, but to their
effecting a combination, and organizing the General Electric Company
in 1892. There were then three large electrical companies, the
Thomson-Houston, the Edison and the Westinghouse, besides some small
ones. The Thomson-Houston of Lynn, Massachusetts, was in many respects
the leader, having been formed to introduce, among other things,
important inventions of Prof. Elihu Thomson and Prof. Houston. Lynn
is one of the principal shoe-manufacturing centers of America. It is
within ten miles of State Street, Boston; but Thomson’s early financial
support came not from Boston bankers, but mainly from Lynn business
men and investors; men active, energetic, and used to taking risks
with _their own_ money. Prominent among them was Charles A. Coffin,
a shoe manufacturer, who became connected with the Thomson-Houston
Company upon its organization and president of the General Electric
when Mr. Morgan formed that company in 1892, by combining the
Thomson-Houston and the Edison. To his continued service, supported
by other Thomson-Houston men in high positions, the great prosperity
of the company is, in large part, due. The two companies so combined
controlled probably one-half of all electrical patents then existing
in America; and certainly more than half of those which had any
considerable value.

In 1896 the General Electric pooled its patents with the Westinghouse,
and thus competition was further restricted. In 1903 the General
Electric absorbed the Stanley Electric Company, its other large
competitor; and became the largest manufacturer of electric apparatus
and machinery in the world. In 1912 the resources of the Company
were $131,942,144. It billed sales to the amount of $89,182,185. It
employed directly over 60,000 persons,--more than a fourth as many as
the Steel Trust. And it is protected against “undue” competition; for
one of the Morgan partners has been a director, since 1909, in the
Westinghouse,--the only other large electrical machinery company in


The automobile industry is about twenty years old. It is now America’s
most prosperous business. When Henry B. Joy, President of the Packard
Motor Car Company, was asked to what extent the bankers aided in
“initiating” the automobile, he replied:

  “It is the observable facts of history, it is also my experience of
  thirty years as a business man, banker, etc., that first the seer
  conceives an opportunity. He has faith in his almost second sight.
  He believes he can do something--develop a business--construct an
  industry--build a railroad--or Niagara Falls Power Company,--and
  make it pay!

  “Now the human measure is not the actual physical construction, but
  the ‘make it pay’!

  “A man raised the money in the late ’90s and built a beet sugar
  factory in Michigan. Wise-acres said it was nonsense. He gathered
  together the money from his friends who would take a chance with
  him. He not only built the sugar factory (and there was never any
  doubt of his ability to do that) but he made it pay. The next
  year two more sugar factories were built, and were financially
  successful. These were built by private individuals of wealth,
  taking chances in the face of cries of doubting bankers and trust

  “Once demonstrated that the industry was a sound one financially
  and _then_ bankers and trust companies would lend the new sugar
  companies which were speedily organized a large part of the
  necessary funds to construct and operate.

  “The motor-car business was the same.

  “When a few gentlemen followed me in my vision of the possibilities
  of the business, the banks and older business men (who in the
  main were the banks) said, ‘fools and their money soon to be
  parted’--etc., etc.

  “Private capital at first establishes an industry, backs it through
  its troubles, and, if possible, wins financial success when banks
  would not lend a dollar of aid.

  “The business once having proved to be practicable and financially
  successful, then do the banks lend aid to its needs.”

Such also was the experience of the greatest of the many financial
successes in the automobile industry--the Ford Motor Company.


But “great banking houses” have not merely failed to initiate
industrial development; they have definitely arrested development
because to them the creation of the trusts is largely due. The recital
in the Memorial addressed to the President by the Investors’ Guild in
November, 1911, is significant:

  “It is a well-known fact that modern trade combinations tend
  strongly toward constancy of process and products, and by their
  very nature are opposed to new processes and new products
  originated by independent inventors, and hence tend to restrain
  competition in the development and sale of patents and patent
  rights; and consequently tend to discourage independent inventive
  thought, to the great detriment of the nation, and with injustice
  to inventors whom the Constitution especially intended to encourage
  and protect in their rights.”

And more specific was the testimony of the _Engineering News_:

  “We are today something like five years behind Germany in iron and
  steel metallurgy, and such innovations as are being introduced by
  our iron and steel manufacturers are most of them merely following
  the lead set by foreigners years ago.

  “We do not believe this is because American engineers are any
  less ingenious or original than those of Europe, though they may
  indeed be deficient in training and scientific education compared
  with those of Germany. We believe the main cause is the wholesale
  consolidation which has taken place in American industry. A huge
  organization is too clumsy to take up the development of an
  original idea. With the market closely controlled and profits
  certain by following standard methods, those who control our trusts
  do not want the bother of developing anything new.

  “We instance metallurgy only by way of illustration. There are
  plenty of other fields of industry where exactly the same condition
  exists. We are building the same machines and using the same
  methods as a dozen years ago, and the real advances in the art are
  being made by European inventors and manufacturers.”

To which President Wilson’s statement may be added:

  “I am not saying that all invention had been stopped by the growth
  of trusts, but I think it is perfectly clear that invention in many
  fields has been discouraged, that inventors have been prevented
  from reaping the full fruits of their ingenuity and industry, and
  that mankind has been deprived of many comforts and conveniences,
  as well as the opportunity of buying at lower prices.

  “Do you know, have you had occasion to learn, that there is no
  hospitality for invention, now-a-days?”


The fact that industrial monopolies arrest development is more
serious even than the direct burden imposed through extortionate
prices. But the most harm-bearing incident of the trusts is their
promotion of financial concentration. Industrial trusts feed the money
trust. Practically every trust created has destroyed the financial
independence of some communities and of many properties; for it has
centered the financing of a large part of whole lines of business in
New York, and this usually with one of a few banking houses. This is
well illustrated by the Steel Trust, which is a trust of trusts; that
is, the Steel Trust combines in one huge holding company the trusts
previously formed in the different branches of the steel business.
Thus the Tube Trust combined 17 tube mills, located in 16 different
cities, scattered over 5 states and owned by 13 different companies.
The wire trust combined 19 mills; the sheet steel trust 26; the bridge
and structural trust 27; and the tin plate trust 36; all scattered
similarly over many states. Finally these and other companies were
formed into the United States Steel Corporation, combining 228
companies in all, located in 127 cities and towns, scattered over
18 states. Before the combinations were effected, nearly every one
of these companies was owned largely by those who managed it, and
had been financed, to a large extent, in the place, or in the state,
in which it was located. When the Steel Trust was formed all these
concerns came under one management. Thereafter, the financing of each
of these 228 corporations (and some which were later acquired) had to
be done through or with the consent of J. P. Morgan & Co. _That was the
greatest step in financial concentration ever taken._


The organization of trusts has served in another way to increase the
power of the Money Trust. Few of the independent concerns out of
which the trusts have been formed, were listed on the New York Stock
Exchange; and few of them had financial offices in New York. Promoters
of large corporations, whose stock is to be held by the public, and
also investors, desire to have their securities listed on the New York
Stock Exchange. Under the rules of the Exchange, no security can be so
listed unless the corporation has a transfer agent and registrar in New
York City. Furthermore, banker-directorships have contributed largely
to the establishment of the financial offices of the trusts in New
York City. That alone would tend to financial concentration. But the
listing of the stock enhances the power of the Money Trust in another
way. An industrial stock, once listed, frequently becomes the subject
of active speculation; and speculation feeds the Money Trust indirectly
in many ways. It draws the money of the country to New York. The New
York bankers handle the loans of other people’s money on the Stock
Exchange; and members of the Stock Exchange receive large amounts from
commissions. For instance: There are 5,084,952 shares of United States
Steel common stock outstanding. But in the five years ending December
31, 1912, speculation in that stock was so extensive that there were
sold on the Exchange an average of 29,380,888 shares a year; or nearly
six times as much as there is Steel common in existence. Except where
the transactions are by or for the brokers, sales on the Exchange
involve the payment of twenty-five cents in commission for each share
of stock sold; that is, twelve and one-half cents by the seller and
twelve and one-half cents by the buyer. Thus the commission from
the Steel common alone afforded a revenue averaging many millions a
year. The Steel preferred stock is also much traded in; and there are
138 other industrials, largely trusts, listed on the New York Stock


But the potency of trusts as a factor in financial concentration
is manifested in still other ways; notably through their ramifying
operations. This is illustrated forcibly by the General Electric
Company’s control of water-power companies which has now been disclosed
in an able report of the United States Bureau of Corporations:

  “The extent of the General Electric influence is not fully
  revealed by its consolidated balance sheet. A very large number of
  corporations are connected with it through its subsidiaries and
  through corporations controlled by these subsidiaries or affiliated
  with them. There is a still wider circle of influence due to the
  fact that officers and directors of the General Electric Co. and
  its subsidiaries are also officers or directors of many other
  corporations, some of whose securities are owned by the General
  Electric Company.

  “The General Electric Company holds in the first place all the
  common stock in three security holding companies: the United
  Electric Securities Co., the Electrical Securities Corporation,
  and the Electric Bond and Share Co. Directly and through these
  corporations and their officers the General Electric controls a
  large part of the water power of the United States.

  ... “The water-power companies in the General Electric group are
  found in 18 States. These 18 States have 2,325,757 commercial
  horsepower developed or under construction, and of this total
  the General Electric group includes 939,115 h. p. or 40.4 per
  cent. The greatest amount of power controlled by the companies in
  the General Electric group in any State is found in Washington.
  This is followed by New York, Pennsylvania, California, Montana,
  Iowa, Oregon, and Colorado. In five of the States shown in the
  table the water-power companies included in the General Electric
  group control more than 50 per cent. of the commercial power,
  developed and under construction. The percentage of power in
  the States included in the General Electric group ranges from a
  little less than 2 per cent. in Michigan to nearly 80 per cent.
  in Pennsylvania. In Colorado they control 72 per cent.; in New
  Hampshire 61 per cent.; in Oregon 58 per cent.; and in Washington
  55 per cent.

  “Besides the power developed and under construction water-power
  concerns included in the General Electric group own in the States
  shown in the table 641,600 h. p. undeveloped.”

This water power control enables the General Electric group to control
other public service corporations:

  “The water-power companies subject to General Electric influence
  control the street railways in at least 16 cities and towns;
  the electric-light plants in 78 cities and towns; gas plants in
  19 cities and towns; and are affiliated with the electric light
  and gas plants in other towns. Though many of these communities,
  particularly those served with light only, are small, several of
  them are the most important in the States where these water-power
  companies operate. The water-power companies in the General
  Electric group own, control, or are closely affiliated with, the
  street railways in Portland and Salem, Ore.; Spokane, Wash.; Great
  Falls, Mont.; St. Louis, Mo.; Winona, Minn.; Milwaukee and Racine,
  Wis.; Elmira, N. Y.; Asheville and Raleigh, N. C., and other
  relatively less important towns. The towns in which the lighting
  plants (electric or gas) are owned or controlled include Portland,
  Salem, Astoria, and other towns in Oregon; Bellingham and other
  towns in Washington; Butte, Great Falls, Bozeman and other towns
  in Montana; Leadville and Colorado Springs in Colorado; St. Louis,
  Mo.; Milwaukee, Racine and several small towns in Wisconsin; Hudson
  and Rensselaer, N. Y.; Detroit, Mich.; Asheville and Raleigh,
  N. C.; and in fact one or more towns in practically every community
  where developed water power is controlled by this group. In
  addition to the public-service corporations thus controlled by the
  water-power companies subject to General Electric influence, there
  are numerous public-service corporations in other municipalities
  that purchase power from the hydroelectric developments controlled
  by or affiliated with the General Electric Co. This is true of
  Denver, Colo., which has already been discussed. In Baltimore,
  Md., a water-power concern in the General Electric group, namely,
  the Pennsylvania Water & Power Co., sells 20,000 h. p. to the
  Consolidated Gas, Electric Light & Power Co., which controls the
  entire light and power business of that city. The power to operate
  all the electric street railway systems of Buffalo, N. Y., and
  vicinity, involving a trackage of approximately 375 miles, is
  supplied through a subsidiary of the Niagara Falls Power Co.”

And the General Electric Company, through the financing of public
service companies, exercises a like influence in communities where
there is no water power:

  “It, or its subsidiaries, has acquired control of or an interest in
  the public-service corporations of numerous cities where there is
  no water-power connection, and it is affiliated with still others
  by virtue of common directors.... This vast network of relationship
  between hydro-electric corporations through prominent officers and
  directors of the largest manufacturer of electrical machinery and
  supplies in the United States is highly significant....

  “It is possible that this relationship to such a large number of
  strong financial concerns, through common officers and directors,
  affords the General Electric Co. an advantage that may place
  rivals at a corresponding disadvantage. Whether or not this great
  financial power has been used to the particular disadvantage of any
  rival water-power concern is not so important as the fact that such
  power exists and that it might be so used at any time.”


The Money Trust cannot be broken, if we allow its power to be
constantly augmented. To break the Money Trust, we must stop that power
at its source. The industrial trusts are among its most effective
feeders. Those which are illegal should be dissolved. The creation
of new ones should be prevented. To this end the Sherman Law should
be supplemented both by providing more efficient judicial machinery,
and by creating a commission with administrative functions to aid in
enforcing the law. When that is done, another step will have been taken
toward securing the New Freedom. But restrictive legislation alone
will not suffice. We should bear in mind the admonition with which
the Commissioner of Corporations closes his review of our water power

“There is ... presented such a situation in water powers and other
public utilities as might bring about at any time under a single
management the control of a majority of the developed water power in
the United States and similar control over the public utilities in a
vast number of cities and towns, including some of the most important
in the country.”

We should conserve all rights which the Federal Government and the
States now have in our natural resources, and there should be a
complete separation of our industries from railroads and public



Bigness has been an important factor in the rise of the Money Trust:
Big railroad systems, Big industrial trusts, Big public service
companies; and as instruments of these Big banks and Big trust
companies. J. P. Morgan & Co. (in their letter of defence to the Pujo
Committee) urge the needs of Big Business as the justification for
financial concentration. They declare that what they euphemistically
call “coöperation” is “simply a further result of the necessity for
handling great transactions”; that “the country obviously requires not
only the larger individual banks, but demands also that those banks
shall coöperate to perform efficiently the country’s business”; and
that “a step backward along this line would mean a halt in industrial
progress that would affect every wage-earner from the Atlantic to
the Pacific.” The phrase “great transactions” is used by the bankers
apparently as meaning large corporate security issues.

Leading bankers have undoubtedly coöperated during the last 15 years
in floating some very large security issues, as well as many small
ones. But relatively few large issues were made necessary by great
improvements undertaken or by industrial development. Improvements
and development ordinarily proceed slowly. For them, even where the
enterprise involves large expenditures, a series of smaller issues is
usually more appropriate than single large ones. This is particularly
true in the East where the building of new railroads has practically
ceased. The “great” security issues in which bankers have coöperated
were, with relatively few exceptions, made either for the purpose
of effecting combinations or as a consequence of such combinations.
Furthermore, the combinations which made necessary these large security
issues or underwritings were, in most cases, either contrary to
existing statute law, or contrary to laws recommended by the Interstate
Commerce Commission, or contrary to the laws of business efficiency.
So both the financial concentration and the combinations which they
have served were, in the main, against the public interest. Size,
we are told, is not a crime. But size may, at least, become noxious
by reason of the means through which it was attained or the uses to
which it is put. And it is size attained by combination, instead of
natural growth, which has contributed so largely to our financial
concentration. Let us examine a few cases:


J. P. Morgan & Co., in urging the “need of large banks and the
coöperation of bankers,” said:

“The Attorney-General’s recent approval of the Union Pacific settlement
calls for a single commitment on the part of bankers of $126,000,000.”

This $126,000,000 “commitment” was not made to enable the Union Pacific
to secure capital. On the contrary it was a guaranty that it would
succeed in disposing of its Southern Pacific stock to that amount. And
when it had disposed of that stock, it was confronted with the serious
problem--what to do with the proceeds? This huge underwriting became
necessary solely because the Union Pacific had violated the Sherman
Law. It had acquired that amount of Southern Pacific stock illegally;
and the Supreme Court of the United States finally decreed that the
illegality cease. This same illegal purchase had been the occasion,
twelve years earlier, of another “great transaction,”--the issue of a
$100,000,000 of Union Pacific bonds, which were sold to provide funds
for acquiring this Southern Pacific and other stocks in violation of
law. Bankers “coöperated” also to accomplish that.


The Union Pacific and its auxiliary lines (the Oregon Short Line, the
Oregon Railway and Navigation and the Oregon-Washington Railroad) made,
in the fourteen years, ending June 30, 1912, issues of securities
aggregating $375,158,183 (of which $46,500,000 were refunded or
redeemed); but the large security issues served mainly to supply
funds for engaging in illegal combinations or stock speculation. The
extraordinary improvements and additions that raised the Union Pacific
Railroad to a high state of efficiency were provided mainly by the net
earnings from the operation of its railroads. And note how great the
improvements and additions were: Tracks were straightened, grades were
lowered, bridges were rebuilt, heavy rails were laid, old equipment
was replaced by new; and the cost of these was charged largely as
operating expense. Additional equipment was added, new lines were built
or acquired, increasing the system by 3524 miles of line, and still
other improvements and betterments were made and charged to capital
account. These expenditures aggregated $191,512,328. But it needed no
“large security issues” to provide the capital thus wisely expended.
The net earnings from the operations of these railroads were so large
that nearly all these improvements and additions could have been
made without issuing on the average more than $1,000,000 a year of
additional securities for “new money,” and the company still could have
paid six per cent. dividends after 1906 (when that rate was adopted).
For while $13,679,452 a year, on the average, was charged to Cost of
Road and Equipment, the surplus net earnings and other funds would have
yielded, on the average, $12,750,982 a year available for improvements
and additions, without raising money on new security issues.


The $375,000,000 securities (except to the extent of about $13,000,000
required for improvements, and the amounts applied for refunding and
redemptions) were available to buy stocks and bonds of other companies.
And some of the stocks so acquired were sold at large profits,
providing further sums to be employed in stock purchases.

The $375,000,000 Union Pacific Lines security issues, therefore, were
not needed to supply funds for Union Pacific improvements; nor did
these issues supply funds for the improvement of any of the companies
in which the Union Pacific invested (except that certain amounts were
advanced later to aid in financing the Southern Pacific). _They served,
substantially, no purpose save to transfer the ownership of railroad
stocks from one set of persons to another._

Here are some of the principal investments:

  1. $91,657,500, in acquiring and financing the Southern Pacific.

  2. $89,391,401, in acquiring the Northern Pacific stock and stock
        of the Northern Securities Co.

  3. $45,466,960, in acquiring Baltimore & Ohio stock.

  4. $37,692,256, in acquiring Illinois Central stock.

  5. $23,205,679, in acquiring New York Central stock.

  6. $10,395,000, in acquiring Atchison, Topeka & Santa Fe stock.

  7. $8,946,781, in acquiring Chicago & Alton stock.

  8. $11,610,187, in acquiring Chicago, Milwaukee & St. Paul stock.

  9. $6,750,423, in acquiring Chicago & Northwestern stock.

 10. $6,936,696, in acquiring Railroad Securities Co. stock
        (Illinois Central stock.)

The immediate effect of these stock acquisitions, as stated by the
Interstate Commerce Commission in 1907, was merely this:

“Mr. Harriman may journey by steamship from New York to New Orleans,
thence by rail to San Francisco, across the Pacific Ocean to China,
and, returning by another route to the United States, may go to Ogden
by any one of three rail lines, and thence to Kansas City or Omaha,
without leaving the deck or platform of a carrier which he controls,
and without duplicating any part of his journey.

“He has further what appears to be a dominant control in the Illinois
Central Railroad running directly north from the Gulf of Mexico to the
Great Lakes, parallel to the Mississippi River; and two thousand miles
west of the Mississippi he controls the only line of railroad parallel
to the Pacific Coast, and running from the Colorado River to the
Mexican border....

“The testimony taken at this hearing shows that about fifty thousand
square miles of territory in the State of Oregon, surrounded by the
lines of the Oregon Short Line Railroad Company, the Oregon Railroad
and Navigation Company, and the Southern Pacific Company, is not
developed. While the funds of those companies which could be used for
that purpose are being invested in stocks like the New York Central and
other lines having only a remote relation to the territory in which
the Union Pacific System is located.”

Mr. Harriman succeeded in becoming director in 27 railroads with 39,354
miles of line; and they extended from the Atlantic to the Pacific; from
the Great Lakes to the Gulf of Mexico.


On September 9, 1909, less than twelve years after Mr. Harriman
first became a director in the Union Pacific, he died from overwork
at the age of 61. But it was not death only that had set a limit to
his achievements. The multiplicity of his interests prevented him
from performing for his other railroads the great services that had
won him a world-wide reputation as manager and rehabilitator of the
Union Pacific and the Southern Pacific. Within a few months after
Mr. Harriman’s death the serious equipment scandal on the Illinois
Central became public, culminating in the probable suicide of one
of the vice-presidents of that company. The Chicago & Alton (in the
management of which Mr. Harriman was prominent from 1899 to 1907, as
President, Chairman of the Board, or Executive Committeeman), has
never regained the prosperity it enjoyed before he and his associates
acquired control. The Père Marquette has passed again into receiver’s
hands. Long before Mr. Harriman’s death the Union Pacific had disposed
of its Northern Pacific stock, because the Supreme Court of the
United States declared the Northern Securities Company illegal, and
dissolved the Northern Pacific-Great Northern merger. Three years
after his death, the Supreme Court of the United States ordered the
Union Pacific-Southern Pacific merger dissolved. By a strange irony,
the law has permitted the Union Pacific to reap large profits from its
illegal transactions in Northern Pacific and Southern Pacific stocks.
But many other stocks held “as investments” have entailed large losses.
Stocks in the Illinois Central and other companies which cost the Union
Pacific $129,894,991.72, had on November 15, 1913, a market value of
only $87,851,500; showing a shrinkage of $42,043,491.72 and the average
income from them, while held, was only about 4.30 per cent. on their


Kuhn, Loeb & Co. were the Union Pacific bankers. It was in pursuance of
a promise which Mr. Jacob H. Schiff--the senior partner--had given,
pending the reorganization, that Mr. Harriman first became a member
of the Executive Committee in 1897. Thereafter combinations grew and
crumbled, and there were vicissitudes in stock speculations. But the
investment bankers prospered amazingly; and financial concentration
proceeded without abatement. The bankers and their associates received
the commissions paid for purchasing the stocks which the Supreme Court
holds to have been acquired illegally--and have retained them. The
bankers received commissions for underwriting the securities issued
to raise the money with which to buy the stocks which the Supreme
Court holds to have been illegally acquired, and have retained them.
The bankers received commissions paid for floating securities of the
controlled companies--while they were thus controlled in violation
of law--and have, of course, retained them. Finally when, after
years, a decree is entered to end the illegal combination, these same
bankers are on hand to perform the services of undertaker--and receive
further commissions for their banker-aid in enabling the law-breaking
corporation to end its wrong doing and to comply with the decree of the
Supreme Court. And yet, throughout nearly all this long period, both
before and after Mr. Harriman’s death, two partners in Kuhn, Loeb &
Co. were directors or members of the executive committee of the Union
Pacific; and as such must be deemed responsible with others for the
illegal acts.

Indeed, these bankers have not only received commissions for the
underwritings of transactions accomplished, though illegal; they
have received commissions also for merely _agreeing_ to underwrite
a “great transaction” which the authorities would not permit to be
_accomplished_. The $126,000,000 underwriting (that “single commitment
on the part of bankers” to which J. P. Morgan & Co. refer as being
called for by “the Attorney General’s approval of the Union Pacific
settlement”) never became effective; because the Public Service
Commission of California refused to approve the terms of settlement.
But the Union Pacific, nevertheless, paid the Kuhn Loeb Syndicate a
large underwriting fee for having been ready and willing “to serve,”
should the opportunity arise: and another underwriting commission was
paid when the Southern Pacific stock was finally distributed, with the
approval of Attorney General McReynolds, under the Court’s decree. Thus
the illegal purchase of Southern Pacific stock yielded directly four
crops of commissions; two when it was acquired, and two when it was
disposed of. And during the intervening period the illegally controlled
Southern Pacific yielded many more commissions to the bankers. For the
schedules filed with the Pujo Committee show that Kuhn, Loeb & Co.
marketed, in addition to the Union Pacific securities above referred
to, $334,000,000 of Southern Pacific and Central Pacific securities
between 1903 and 1911.

The aggregate amount of the commissions paid to these bankers in
connection with Union Pacific-Southern Pacific transactions is
not disclosed. It must have been very large; for not only were
the transactions “great”; but the commissions were liberal. The
Interstate Commerce Commission finds that bankers received about 5
per cent. on the purchase price for buying the first 750,000 shares
of Southern Pacific stock; and the underwriting commission on the
first $100,000,000 Union Pacific bonds issued to make that and other
purchases was $5,000,000. How large the two underwriting commissions
were which the Union Pacific paid in effecting the severance of this
illegal merger, both the company and the bankers have declined to
disclose. Furthermore the Interstate Commerce Commission showed,
clearly, while investigating the Union Pacific’s purchase of the
Chicago & Alton stock, that the bankers’ profits were by no means
confined to commissions.


Such railroad combinations produce injury to the public far more
serious than the heavy tax of bankers’ commissions and profits. For in
nearly every case the absorption into a great system of a theretofore
independent railroad has involved the loss of financial independence
to some community, property or men, who thereby become subjects or
satellites of the Money Trust. The passing of the Chicago, Burlington &
Quincy, in 1901, to the Morgan associates, presents a striking example
of this process.

After the Union Pacific acquired the Southern Pacific stock in 1901,
it sought control, also, of the Chicago, Burlington & Quincy,--a
most prosperous railroad, having then 7912 miles of line. The Great
Northern and Northern Pacific recognized that Union Pacific control
of the Burlington would exclude them from much of Illinois, Missouri,
Wisconsin, Kansas, Nebraska, Iowa, and South Dakota. The two northern
roads, which were already closely allied with each other and with
J. P. Morgan & Co., thereupon purchased for $215,227,000, of their
joint 4 per cent. bonds, nearly all of the $109,324,000 (par value)
outstanding Burlington stock. A struggle with the Union Pacific ensued
which yielded soon to “harmonious coöperation.” The Northern Securities
Company was formed with $400,000,000 capital, thereby merging the
Great Northern, the Northern Pacific and the Burlington, and joining
the Harriman, Kuhn-Loeb, with the Morgan-Hill interests. Obviously
neither the issue of $215,000,000 joint 4’s, nor the issue of the
$400,000,000 Northern Securities stock supplied one dollar of funds
for improvements of, or additions to, any of the four great railroad
systems concerned in these “large transactions.” _The sole effect of
issuing $615,000,000 of securities was to transfer stock from one set
of persons to another._ And the resulting “harmonious coöperation”
was soon interrupted by the government proceedings, which ended with
the dissolution of the Northern Securities Company. But the evil done
outlived the combination. The Burlington had passed forever from its
independent Boston owners to the Morgan allies, who remain in control.

The Burlington--one of Boston’s finest achievements--was the creation
of John M. Forbes. He was a builder; not a combiner, or banker, or
wizard of finance. He was a simple, hard-working business man. He
had been a merchant in China at a time when China’s trade was among
America’s big business. He had been connected with shipping and with
manufactures. He had the imagination of the great merchant; the
patience and perseverance of the great manufacturer; the courage of
the sea-farer; and the broad view of the statesman. Bold, but never
reckless; scrupulously careful of other people’s money, he was ready,
after due weighing of chances, to risk his own in enterprises promising
success. He was in the best sense of the term, a great adventurer. Thus
equipped, Mr. Forbes entered, in 1852, upon those railroad enterprises
which later developed into the Chicago, Burlington & Quincy. Largely
with his own money and that of friends who confided in him, he built
these railroads and carried them through the panic of ’57, when
the “great banking houses” of those days lacked courage to assume
the burdens of a struggling ill-constructed line, staggering under
financial difficulties.

Under his wise management, and that of the men whom he trained, the
little Burlington became a great system. It was “built on honor,” and
managed honorably. It weathered every other great financial crisis, as
it did that of 1857. It reached maturity without a reorganization or
the sacrifice of a single stockholder or bondholder.

       *       *       *       *       *

Investment bankers had no place on the Burlington Board of Directors;
nor had the banker-practice, of being on both sides of a bargain.
“I am unwilling,” said Mr. Forbes, early in his career, “to run the
risk of having the imputation of buying from a company in which I am
interested.” About twenty years later he made his greatest fight to
rescue the Burlington from the control of certain contractor-directors,
whom his biographer, Mr. Pearson, describes as “persons of integrity,
who had conceived that in their twofold capacity as contractors and
directors they were fully able to deal with themselves justly.” Mr.
Forbes thought otherwise. The stockholders, whom he had aroused, sided
with him and he won.

       *       *       *       *       *

Mr. Forbes was the pioneer among Boston railroad-builders. His example
and his success inspired many others, for Boston was not lacking then
in men who were builders, though some lacked his wisdom, and some his
character. Her enterprise and capital constructed, in large part,
the Union Pacific, the Atchison, the Mexican Central, the Wisconsin
Central, and 24 other railroads in the West and South. One by one
these western and southern railroads passed out of Boston control; the
greater part of them into the control of the Morgan allies. Before the
Burlington was surrendered, Boston had begun to lose her dominion,
even, over the railroads of New England. In 1900 the Boston & Albany
was leased to the New York Central,--a Morgan property; and a few years
later, another Morgan railroad--the New Haven--acquired control of
nearly every other transportation line in New England. Now nothing is
left of Boston’s railroad dominion in the West and South, except the
Eastern Kentucky Railroad--a line 36 miles long; and her control of the
railroads of Massachusetts is limited to the Grafton & Upton with 19
miles of line and the Boston, Revere Beach & Lynn,--a passenger road 13
miles long.


The rise of the New Haven Monopoly presents another striking example
of combination as a developer of financial concentration; and it
illustrates also the use to which “large security issues” are put.

In 1892, when Mr. Morgan entered the New Haven directorate, it was a
very prosperous little railroad with capital liabilities of $25,000,000
paying 10 per cent. dividends, and operating 508 miles of line. By
1899 the capitalization had grown to $80,477,600, but the aggregate
mileage had also grown (mainly through merger or leases of other lines)
to 2017. Fourteen years later, in 1913, when Mr. Morgan died and Mr.
Mellen resigned, the mileage was 1997, just 20 miles less than in 1899;
but the capital liabilities had increased to $425,935,000. Of course
the business of the railroad had grown largely in those fourteen years;
the road-bed was improved, bridges built, additional tracks added, and
much equipment purchased; and for all this, new capital was needed;
and additional issues were needed, also, because the company paid out
in dividends more than it earned. But of the capital increase, over
$200,000,000 was expended in the acquisition of the stock or other
securities of some 121 other railroads, steamships, street railway-,
electric-light-, gas- and water-companies. It was these outside
properties, which made necessary the much discussed $67,000,000, 6 per
cent. bond issue, as well as other large and expensive security issues.
For in these fourteen years the improvements on the railroad including
new equipment have cost, on the average, only $10,000,000 a year.


Few, if any, of those 121 companies which the New Haven acquired
had, prior to their absorption by it, been financed by J. P. Morgan
& Co. The needs of the Boston & Maine and Maine Central--the largest
group--had, for generations, been met mainly through their own
stockholders or through Boston banking houses. No investment banker had
been a member of the Board of Directors of either of those companies.
The New York, Ontario & Western--the next largest of the acquired
railroads--had been financed in New York, but by persons apparently
entirely independent of the Morgan allies. The smaller Connecticut
railroads, now combined in the Central New England, had been financed
mainly in Connecticut, or by independent New York bankers. The
financing of the street railway companies had been done largely by
individual financiers, or by small and independent bankers in the
states or cities where the companies operate. Some of the steamship
companies had been financed by their owners, some through independent
bankers. As the result of the absorption of these 121 companies into
the New Haven system, the financing of all these railroads, steamship
companies, street railways, and other corporations, was made tributary
to J. P. Morgan & Co.; and the independent bankers were eliminated or
became satellites. _And this financial concentration was proceeded
with, although practically every one of these 121 companies was
acquired by the New Haven in violation either of the state or federal
law, or of both._ Enforcement of the Sherman Act will doubtless result
in dissolving this unwieldy illegal combination.


Proof of the “coöperation” of the anthracite railroads is furnished by
the ubiquitous presence of George F. Baker on the Board of Directors
of the Reading, the Jersey Central, the Lackawanna, the Lehigh,
the Erie, and the New York, Susquehanna & Western railroads, which
together control nearly all the unmined anthracite as well as the
actual tonnage. These roads have been an important factor in the
development of the Money Trust. They are charged by the Department of
Justice with fundamental violations both of the Sherman Law and of
the Commodity clause of the Hepburn Act, which prohibits a railroad
from carrying, in interstate trade, any commodity in which it has an
interest, direct or indirect. Nearly every large issue of securities
made in the last 14 years by any of these railroads (except the Erie),
has been in connection with some act of combination. The combination
of the anthracite railroads to suppress the construction, through
the Temple Iron Company, of a competing coal road, has already been
declared illegal by the Supreme Court of the United States. And in the
bituminous coal field--the Kanawha District--the United States Circuit
Court of Appeals has recently decreed that a similar combination by the
Lake Shore, the Chesapeake & Ohio, and the Hocking Valley, be dissolved.


The cases of the Union Pacific and of the New Haven are typical--not
exceptional. Our railroad history presents numerous instances of large
security issues made wholly or mainly to effect combinations. Some
of these combinations have been proper as a means of securing natural
feeders or extensions of main lines. But far more of them have been
dictated by the desire to suppress active or potential competition;
or by personal ambition or greed; or by the mistaken belief that
efficiency grows with size.

Thus the monstrous combination of the Rock Island and the St. Louis and
San Francisco with over 14,000 miles of line is recognized now to have
been obviously inefficient. It was severed voluntarily; but, had it not
been, must have crumbled soon from inherent defects, if not as a result
of proceedings under the Sherman law. Both systems are suffering now
from the effects of this unwise combination; the Frisco, itself greatly
overcombined, has paid the penalty in receivership. The Rock Island--a
name once expressive of railroad efficiency and stability--has, through
its excessive recapitalizations and combinations, become a football of
speculators, and a source of great apprehension to confiding investors.
The combination of the Cincinnati, Hamilton and Dayton, and the Père
Marquette led to several receiverships.

There are, of course, other combinations which have not been disastrous
to the owners of the railroads. But the fact that a railroad
combination has not been disastrous does not necessarily justify it.
The evil of the concentration of power is obvious; and as combination
necessarily involves such concentration of power, the burden of
justifying a combination should be placed upon those who seek to effect

For instance, what public good has been subserved by allowing the
Atlantic Coast Line Railroad Company to issue $50,000,000 of securities
to acquire control of the Louisville & Nashville Railroad--a widely
extended, self-sufficient system of 5000 miles, which, under the wise
management of President Milton H. Smith had prospered continuously for
many years before the acquisition; and which has gross earnings nearly
twice as large as those of the Atlantic Coast Line. The legality of
this combination has been recently challenged by Senator Lea; and an
investigation by the Interstate Commerce Commission has been ordered.


The reports from the Pennsylvania suggest the inquiry whether even
this generally well-managed railroad is not suffering from excessive
bigness. After 1898 it, too, bought, in large amounts, stocks in
other railroads, including the Chesapeake & Ohio, the Baltimore &
Ohio, and the Norfolk & Western. In 1906 it sold all its Chesapeake
& Ohio stock, and a majority of its Baltimore & Ohio and Norfolk &
Western holdings. Later it reversed its policy and resumed stock
purchases, acquiring, among others, more Norfolk & Western and New
York, New Haven & Hartford; and on Dec. 31, 1912, held securities
valued at $331,909,154.32; of which, however, a large part represents
Pennsylvania System securities. These securities (mostly stocks)
constitute about one-third of the total assets of the Pennsylvania
Railroad. The income on these securities in 1912 averaged only 4.30
per cent. on their valuation, while the Pennsylvania paid 6 per cent.
on its stock. But the cost of carrying these foreign stocks is not
limited to the difference between this income and outgo. To raise money
on these stocks the Pennsylvania had to issue its own securities;
and there is such a thing as an over-supply even of Pennsylvania
securities. Over-supply of any stock depresses market values, and
increases the cost to the Pennsylvania of raising new money. Recently
came the welcome announcement of the management that it will dispose
of its stocks in the anthracite coal mines; and it is intimated that
it will divest itself also of other holdings in companies (like the
Cambria Steel Company) extraneous to the business of railroading. This
policy should be extended to include the disposition also of all stock
in other railroads (like the Norfolk & Western, the Southern Pacific
and the New Haven) which are not a part of the Pennsylvania System.


Six years ago the Interstate Commerce Commission, after investigating
the Union Pacific transaction above referred to, recommended
legislation to remedy the evils there disclosed. Upon concluding
recently its investigation of the New Haven, the Commission repeated
and amplified those recommendations, saying:

“No student of the railroad problem can doubt that a most prolific
source of financial disaster and complication to railroads in the
past has been the desire and ability of railroad managers to engage
in enterprises outside the legitimate operation of their railroads,
especially by the acquisition of other railroads and their securities.
The evil which results, first, to the investing public, and, finally,
to the general public, cannot be corrected after the transaction
has taken place; it can be easily and effectively prohibited. In
our opinion the following propositions lie at the foundation of all
adequate regulation of interstate railroads:

1. Every interstate railroad should be prohibited from spending money
or incurring liability or acquiring property not in the operation
of its railroad or in the legitimate improvement, extension, or
development of that railroad.

2. No interstate railroad should be permitted to lease or purchase any
other railroad, nor to acquire the stocks or securities of any other
railroad, nor to guarantee the same, directly or indirectly, without
the approval of the federal government.

3. No stocks or bonds should be issued by an interstate railroad except
for the purposes sanctioned in the two preceding paragraphs, and none
should be issued without the approval of the federal government.

It may be unwise to attempt to specify the price at which and the
manner in which railroad stocks and securities shall be disposed of;
but it is easy and safe to define the purpose for which they may be
issued and to confine the expenditure of the money realized to that

These recommendations are in substantial accord with those adopted by
the National Association of Railway Commissioners. They should be
enacted into law. And they should be supplemented by amendments of the
Commodity Clause of the Hepburn Act, so that:

1. Railroads will be effectually prohibited from owning stock in
corporations whose products they transport;

2. Such corporations will be prohibited from owning important
stockholdings in railroads; and

3. Holding companies will be prohibited from controlling, as does
the Reading, both a railroad and corporations whose commodities it

If laws such as these are enacted and duly enforced, we shall be
protected from a recurrence of tragedies like the New Haven, of
domestic scandals like the Chicago and Alton, and of international ones
like the Frisco. We shall also escape from that inefficiency which
is attendant upon excessive size. But what is far more important,
we shall, by such legislation, remove a potent factor in financial
concentration. Decentralization will begin. The liberated smaller
units will find no difficulty in financing their needs without bowing
the knee to money lords. And a long step will have been taken toward
attainment of the New Freedom.



There is not one moral, but many, to be drawn from the Decline of the
New Haven and the Fall of Mellen. That history offers texts for many
sermons. It illustrates the Evils of Monopoly, the Curse of Bigness,
the Futility of Lying, and the Pitfalls of Law-Breaking. But perhaps
the most impressive lesson that it should teach to investors is the
failure of banker-management.


For years J. P. Morgan & Co. were the fiscal agents of the New Haven.
For years Mr. Morgan was _the_ director of the Company. He gave to
that property probably closer personal attention than to any other of
his many interests. Stockholders’ meetings are rarely interesting or
important; and few indeed must have been the occasions when Mr. Morgan
attended any stockholders’ meeting of other companies in which he was
a director. But it was his habit, when in America, to be present at
meetings of the New Haven. In 1907, when the policy of monopolistic
expansion was first challenged, and again at the meeting in 1909
(after Massachusetts had unwisely accorded its sanction to the Boston
& Maine merger), Mr. Morgan himself moved the large increases of stock
which were unanimously voted. Of course, he attended the important
directors’ meetings. His will was law. President Mellen indicated this
in his statement before Interstate Commerce Commissioner Prouty, while
discussing the New York, Westchester & Boston--the railroad without a
terminal in New York, which cost the New Haven $1,500,000 a mile to
acquire, and was then costing it, in operating deficits and interest
charges, $100,000 a month to run:

“I am in a very embarrassing position, Mr. Commissioner, regarding the
New York, Westchester & Boston. I have never been enthusiastic or at
all optimistic of its being a good investment for our company in the
present, or in the immediate future; but people in whom I had greater
confidence than I have in myself thought it was wise and desirable; I
yielded my judgment; indeed, I don’t know that it would have made much
difference whether I yielded or not.”


Bankers are credited with being a conservative force in the community.
The tradition lingers that they are preëminently “safe and sane.” And
yet, the most grievous fault of this banker-managed railroad has been
its financial recklessness--a fault that has already brought heavy
losses to many thousands of small investors throughout New England for
whom bankers are supposed to be natural guardians. In a community where
its railroad stocks have for generations been deemed absolutely safe
investments, the passing of the New Haven and of the Boston & Maine
dividends after an unbroken dividend record of generations comes as a

This disaster is due mainly to enterprises outside the legitimate
operation of these railroads; for no railroad company has equaled the
New Haven in the quantity and extravagance of its outside enterprises.
But it must be remembered, that neither the president of the New Haven
nor any other railroad manager could engage in such transactions
without the sanction of the Board of Directors. It is the directors,
not Mr. Mellen, who should bear the responsibility.

Close scrutiny of the transactions discloses no justification. On the
contrary, scrutiny serves only to make more clear the gravity of the
errors committed. Not merely were recklessly extravagant acquisitions
made in mad pursuit of monopoly; but the financial judgment, the
financiering itself, was conspicuously bad. To pay for property several
times what it is worth, to engage in grossly unwise enterprises, are
errors of which no conservative directors should be found guilty;
for perhaps the most important function of directors is to test
the conclusions and curb by calm counsel the excessive zeal of too
ambitious managers. But while we have no right to expect from bankers
exceptionally good judgment in ordinary business matters; we do have
a right to expect from them prudence, reasonably good financiering,
and insistence upon straightforward accounting. And it is just the
lack of these qualities in the New Haven management to which the
severe criticism of the Interstate Commerce Commission is particularly

Commissioner Prouty calls attention to the vast increase of
capitalization. During the nine years beginning July 1, 1903, the
capital of the New York, New Haven & Hartford Railroad Company
itself increased from $93,000,000 to about $417,000,000 (excluding
premiums). That fact alone would not convict the management of
reckless financiering; but the fact that so little of the new capital
was represented by stock might well raise a question as to its
conservativeness. For the indebtedness (including guaranties) was
increased over twenty times (from about $14,000,000 to $300,000,000),
while the stock outstanding in the hands of the public was not doubled
($80,000,000 to $158,000,000). Still, in these days of large things,
even such growth of corporate liabilities might be consistent with
“safe and sane management.”

But what can be said in defense of the financial judgment of the
banker-management under which these two railroads find themselves
confronted, in the fateful year 1913, with a most disquieting floating
indebtedness? On March 31, the New Haven had outstanding $43,000,000 in
short-time notes; the Boston & Maine had then outstanding $24,500,000,
which have been increased since to $27,000,000; and additional notes
have been issued by several of its subsidiary lines. Mainly to meet its
share of these loans, the New Haven, which before its great expansion
could sell at par 3 1/2 per cent. bonds convertible into stock at
$150 a share, was so eager to issue at par $67,500,000 of its 6 per
cent. 20-year bonds convertible into stock as to agree to pay J. P.
Morgan & Co. a 2 1/2 per cent. underwriting commission. True, money was
“tight” then. But is it not very bad financiering to be so unprepared
for the “tight” money market which had been long expected? Indeed, the
New Haven’s management, particularly, ought to have avoided such an
error; for it committed a similar one in the “tight” money market of
1907–1908, when it had to sell at par $39,000,000 of its 6 per cent.
40-year bonds.

These huge short-time borrowings of the System were not due to
unexpected emergencies or to their monetary conditions. They were of
gradual growth. On June 30, 1910, the two companies owed in short-term
notes only $10,180,364; by June 30, 1911, the amount had grown to
$30,759,959; by June 30, 1912, to $45,395,000; and in 1913 to over
$70,000,000. Of course the rate of interest on the loans increased
also very largely. And these loans were incurred unnecessarily. They
represent, in the main, not improvements on the New Haven or on the
Boston & Maine Railroads, but money borrowed either to pay for stocks
in other companies which these companies could not afford to buy, or
to pay dividends which had not been earned.

In five years out of the last six the New Haven Railroad has, on its
own showing, paid dividends in excess of the year’s earnings; and the
annual deficits disclosed would have been much larger if proper charges
for depreciation of equipment and of steamships had been made. In
each of the last three years, during which the New Haven had absolute
control of the Boston & Maine, the latter paid out in dividends so much
in excess of earnings that before April, 1913, the surplus accumulated
in earlier years had been converted into a deficit.

Surely these facts show, at least, an extraordinary lack of financial


Now, how can the failure of the banker-management of the New Haven be

A few have questioned the ability; a few the integrity of the bankers.
Commissioner Prouty attributed the mistakes made to the Company’s
pursuit of a transportation monopoly.

“The reason,” says he, “is as apparent as the fact itself. The present
management of that Company started out with the purpose of controlling
the transportation facilities of New England. In the accomplishment of
that purpose it bought what must be had and paid what must be paid. To
this purpose and its attempted execution can be traced every one of
these financial misfortunes and derelictions.”

But it still remains to find the cause of the bad judgment exercised
by the eminent banker-management in entering upon and in carrying out
the policy of monopoly. For there were as grave errors in the execution
of the policy of monopoly as in its adoption. Indeed, it was the
aggregation of important errors of detail which compelled first the
reduction, then the passing of dividends and which ultimately impaired
the Company’s credit.

The failure of the banker-management of the New Haven cannot be
explained as the shortcomings of individuals. The failure was not
accidental. It was not exceptional. It was the natural result of
confusing the functions of banker and business man.


The banker should be detached from the business for which he performs
the banking service. This detachment is desirable, in the first
place, in order to avoid conflict of interest. The relation of
banker-directors to corporations which they finance has been a subject
of just criticism. Their conflicting interests necessarily prevent
single-minded devotion to the corporation. When a banker-director of a
railroad decides as railroad man that it shall issue securities, and
then sells them to himself as banker, fixing the price at which they
are to be taken, there is necessarily grave danger that the interests
of the railroad may suffer--suffer both through issuing of securities
which ought not to be issued, and from selling them at a price less
favorable to the company than should have been obtained. For it is
ordinarily impossible for a banker-director to judge impartially
between the corporation and himself. Even if he succeeded in being
impartial, the relation would not conduce to the best interests of
the company. The best bargains are made when buyer and seller are
represented by different persons.


But the objection to banker-management does not rest wholly, or perhaps
mainly, upon the importance of avoiding divided loyalty. A complete
detachment of the banker from the corporation is necessary in order to
secure for the railroad the benefit of the clearest financial judgment;
for the banker’s judgment will be necessarily clouded by participation
in the management or by ultimate responsibility for the policy actually
pursued. It is _outside_ financial advice which the railroad needs.

Long ago it was recognized that “a man who is his own lawyer has a
fool for a client.” The essential reason for this is that soundness
of judgment is easily obscured by self-interest. Similarly, it is not
the proper function of the banker to construct, purchase, or operate
railroads, or to engage in industrial enterprises. The proper function
of the banker is to give to or to withhold credit from other concerns;
to purchase or to refuse to purchase securities from other concerns;
and to sell securities to other customers. The proper exercise of
this function demands that the banker should be wholly detached from
the concern whose credit or securities are under consideration.
His decision to grant or to withhold credit, to purchase or not to
purchase securities, involves passing judgment on the efficiency of
the management or the soundness of the enterprise; and he ought not
to occupy a position where in so doing he is passing judgment on
himself. Of course detachment does not imply lack of knowledge. The
banker should act only with full knowledge, just as a lawyer should act
only with full knowledge. The banker who undertakes to make loans to
or purchase securities from a railroad for sale to his other customers
ought to have as full knowledge of its affairs as does its legal
adviser. But the banker should not be, in any sense, his own client. He
should not, in the capacity of banker, pass judgment upon the wisdom of
his own plans or acts as railroad man.

Such a detached attitude on the part of the banker is demanded also
in the interest of his other customers--the purchasers of corporate
securities. The investment banker stands toward a large part of his
customers in a position of trust, which should be fully recognized.
The small investors, particularly the women, who are holding an
ever-increasing proportion of our corporate securities, commonly
buy on the recommendation of their bankers. The small investors do
not, and in most cases cannot, ascertain for themselves the facts on
which to base a proper judgment as to the soundness of securities
offered. And even if these investors were furnished with the facts,
they lack the business experience essential to forming a proper
judgment. Such investors need and are entitled to have the bankers’
advice, and obviously their unbiased advice; and the advice cannot be
unbiased where the banker, as part of the corporation’s management, has
participated in the creation of the securities which are the subject of
sale to the investor.

Is it conceivable that the great house of Morgan would have aided in
providing the New Haven with the hundreds of millions so unwisely
expended, if its judgment had not been clouded by participation in the
New Haven’s management?



We must break the Money Trust or the Money Trust will break us.

The Interstate Commerce Commission said in its report on the most
disastrous of the recent wrecks on the New Haven Railroad:

  “On this directorate were and are men whom the confiding public
  recognize as magicians in the art of finance, and wizards in
  the construction, operation, and consolidation of great systems
  of railroads. The public therefore rested secure that with the
  knowledge of the railroad art possessed by such men investments and
  travel should both be safe. Experience has shown that this reliance
  of the public was not justified as to either finance or safety.”

This failure of banker-management is not surprising. The surprise is
that men should have supposed it would succeed. For banker-management
contravenes the fundamental laws of human limitations: _First_, that
no man can serve two masters; _second_, that a man cannot at the same
time do many things well.


There are numerous seeming exceptions to these rules; and a relatively
few real ones. Of course, many banker-managed properties have been
prosperous; some for a long time, at the expense of the public; some
for a shorter time, because of the impetus attained before they were
banker-managed. It is not difficult to have a large net income,
where one has the field to oneself, has all the advantages privilege
can give, and may “charge all the traffic will bear.” And even in
competitive business the success of a long-established, well-organized
business with a widely extended good-will, must continue for a
considerable time; especially if buttressed by intertwined relations
constantly giving it the preference over competitors. The real test of
efficiency comes when success has to be struggled for; when natural
or legal conditions limit the charges which may be made for the goods
sold or service rendered. Our banker-managed railroads have recently
been subjected to such a test, and they have failed to pass it. “It is
only,” says Goethe, “when working within limitations, that the master
is disclosed.”


Banker-management fails, partly because the private interest destroys
soundness of judgment and undermines loyalty. It fails partly, also,
because banker directors are led by their occupation (and often
even by the mere fact of their location remote from the operated
properties) to apply a false test in making their decisions. Prominent
in the banker-director mind is always this thought: “What will be the
probable effect of our action upon the market value of the company’s
stock and bonds, or, indeed, generally upon stock exchange values?”
The stock market is so much a part of the investment-banker’s life,
that he cannot help being affected by this consideration, however
disinterested he may be. The stock market is sensitive. Facts are
often misinterpreted “by the street” or by investors. And with the
best of intentions, directors susceptible to such influences are led
to unwise decisions in the effort to prevent misinterpretations. Thus,
expenditures necessary for maintenance, or for the ultimate good of
a property are often deferred by banker-directors, because of the
belief that the making of them _now_, would (by showing smaller net
earnings), create a bad, and even false, impression on the market.
Dividends are paid which should not be, because of the effect which it
is believed reduction or suspension would have upon the market value of
the company’s securities. To exercise a sound judgment in the difficult
affairs of business is, at best, a delicate operation. And no man can
successfully perform that function whose mind is diverted, however
innocently, from the study of, “what is best in the long run for the
company of which I am director?” The banker-director is peculiarly
liable to such distortion of judgment by reason of his occupation
and his environment. But there is a further reason why, ordinarily,
banker-management must fail.


The banker, with his multiplicity of interests, cannot ordinarily
give the time essential to proper supervision and to acquiring that
knowledge of the facts necessary to the exercise of sound judgment. The
_Century Dictionary_ tells us that a Director is “one who directs; one
who guides, superintends, governs and manages.” Real efficiency in any
business in which conditions are ever changing must ultimately depend,
in large measure, upon the correctness of the judgment exercised,
almost from day to day, on the important problems as they arise. And
how can the leading bankers, necessarily engrossed in the problems of
their own vast private businesses, get time to know and to correlate
the facts concerning so many other complex businesses? Besides, they
start usually with ignorance of the particular business which they are
supposed to direct. When the last paper was signed which created the
Steel Trust, one of the lawyers (as Mr. Perkins frankly tells us) said:
“That signature is the last one necessary to put the Steel industry, on
a large scale, into the hands of men who do not know anything about it.”


The New Haven System is not a railroad, but an agglomeration of a
railroad plus 121 separate corporations, control of which was acquired
by the New Haven after that railroad attained its full growth of
about 2000 miles of line. In administering the railroad and each of
the properties formerly managed through these 122 separate companies,
there must arise from time to time difficult questions on which the
directors should pass judgment. The real managing directors of the
New Haven system during the decade of its decline were: J. Pierpont
Morgan, George F. Baker, and William Rockefeller. Mr. Morgan was, until
his death in 1913, the head of perhaps the largest banking house in
the world. Mr. Baker was, until 1909, President and then Chairman of
the Board of Directors of one of America’s leading banks (the First
National of New York), and Mr. Rockefeller was, until 1911, President
of the Standard Oil Company. Each was well advanced in years. Yet
each of these men, besides the duties of his own vast business, and
important private interests, undertook to “guide, superintend, govern
and manage,” not only the New Haven but also the following other
corporations, some of which were similarly complex: Mr. Morgan, 48
corporations, including 40 railroad corporations, with at least 100
subsidiary companies, and 16,000 miles of line; 3 banks and trust or
insurance companies; 5 industrial and public-service companies. Mr.
Baker, 48 corporations, including 15 railroad corporations, with at
least 158 subsidiaries, and 37,400 miles of track; 18 banks, and trust
or insurance companies; 15 public-service corporations and industrial
concerns. Mr. Rockefeller, 37 corporations, including 23 railroad
corporations with at least 117 subsidiary companies, and 26,400 miles
of line; 5 banks, trust or insurance companies; 9 public service
companies and industrial concerns.


It has been urged that in view of the heavy burdens which the leaders
of finance assume in directing Business-America, we should be patient
of error and refrain from criticism, lest the leaders be deterred from
continuing to perform this public service. A very respectable Boston
daily said a few days after Commissioner McChord’s report on the North
Haven wreck:

  “It is believed that the New Haven pillory repeated with some
  frequency will make the part of railroad director quite undesirable
  and hard to fill, and more and more avoided by responsible men.
  Indeed it may even become so that men will have to be paid a
  substantial salary to compensate them in some degree for the risk
  involved in being on the board of directors.”

But there is no occasion for alarm. The American people have as little
need of oligarchy in business as in politics. There are thousands of
men in America who could have performed for the New Haven stockholders
the task of one “who guides, superintends, governs and manages,”
better than did Mr. Morgan, Mr. Baker and Mr. Rockefeller. For though
possessing less native ability, even the average business man would
have done better than they, because working under proper conditions.
There is great strength in serving with singleness of purpose one
master only. There is great strength in having time to give to a
business the attention which its difficult problems demand. And tens
of thousands more Americans could be rendered competent to guide our
important businesses. Liberty is the greatest developer. Herodotus
tells us that while the tyrants ruled, the Athenians were no better
fighters than their neighbors; but when freed, they immediately
surpassed all others. If industrial democracy--true coöperation--should
be substituted for industrial absolutism, there would be no lack of
industrial leaders.


England, too, has big business. But her big business is the Coöperative
Wholesale Society, with a wonderful story of 50 years of beneficent
growth. Its annual turnover is now about $150,000,000--an amount
exceeded by the sales of only a few American industrials; an amount
larger than the gross receipts of any American railroad, except the
Pennsylvania and the New York Central systems. Its business is very
diversified, for its purpose is to supply the needs of its members.
It includes that of wholesale dealer, of manufacturer, of grower, of
miner, of banker, of insurer and of carrier. It operates the biggest
flour mills and the biggest shoe factory in all Great Britain. It
manufactures woolen cloths, all kinds of men’s, women’s and children’s
clothing, a dozen kinds of prepared foods, and as many household
articles. It operates creameries. It carries on every branch of the
printing business. It is now buying coal lands. It has a bacon factory
in Denmark, and a tallow and oil factory in Australia. It grows tea in
Ceylon. And through all the purchasing done by the Society runs this
general principle: Go direct to the source of production, whether at
home or abroad, so as to save commissions of middlemen and agents.
Accordingly, it has buyers and warehouses in the United States, Canada,
Australia, Spain, Denmark and Sweden. It owns steamers plying between
Continental and English ports. It has an important banking department;
it insures the property and person of its members. Every one of these
departments is conducted in competition with the most efficient
concerns in their respective lines in Great Britain. The Coöperative
Wholesale Society makes its purchases, and manufactures its products,
in order to supply the 1399 local distributive, coöperative societies
scattered over all England; but each local society is at liberty to buy
from the wholesale society, or not, as it chooses; and they buy only if
the Coöperative Wholesale sells at market prices. This the Coöperative
actually does; and it is able besides to return to the local a fair
dividend on its purchases.


Now, how are the directors of this great business chosen? Not by
England’s leading bankers, or other notabilities, supposed to possess
unusual wisdom; but democratically, by all of the people interested in
the operations of the Society. And the number of such persons who have
directly or indirectly a voice in the selection of the directors of the
English Coöperative Wholesale Society is 2,750,000. For the directors
of the Wholesale Society are elected by vote of the delegates of the
1399 retail societies. And the delegates of the retail societies are,
in turn, selected by the members of the local societies;--that is,
by the consumers, on the principle of one man, one vote, regardless
of the amount of capital contributed. Note what kind of men these
industrial democrats select to exercise executive control of their vast
organization. Not all-wise bankers or their dummies, but men who have
risen from the ranks of coöperation; men who, by conspicuous service
in the local societies have won the respect and confidence of their
fellows. The directors are elected for one year only; but a director
is rarely unseated. J. T. W. Mitchell was president of the Society
continuously for 21 years. Thirty-two directors are selected in this
manner. Each gives to the business of the Society his whole time and
attention; and the aggregate salaries of the thirty-two is less than
that of many a single executive in American corporations; for these
directors of England’s big business serve each for a salary of about
$1500 a year.

The Coöperative Wholesale Society of England is the oldest and largest
of these institutions. But similar wholesale societies exist in 15
other countries. The Scotch Society (which William Maxwell has served
most efficiently as President for thirty years at a salary never
exceeding $38 a week) has a turn-over of more than $50,000,000 a year.


Albert Sonnichsen, General Secretary of the Coöperative League, tells
in the _American Review of Reviews_ for April, 1913, how the Swedish
Wholesale Society curbed the Sugar Trust; how it crushed the Margerine
Combine (compelling it to dissolve after having lost 2,300,000 crowns
in the struggle); and how in Switzerland the Wholesale Society forced
the dissolution of the Shoe Manufacturers Association. He tells also
this memorable incident:

  “Six years ago, at an international congress in Cremona, Dr. Hans
  Müller, a Swiss delegate, presented a resolution by which an
  international wholesale society should be created. Luigi Luzzatti,
  Italian Minister of State and an ardent member of the movement,
  was in the chair. Those who were present say Luzzatti paused, his
  eyes lighted up, then, dramatically raising his hand, he said: ‘Dr.
  Müller proposes to the assembly a great idea--that of opposing
  to the great trusts, the Rockefellers of the world, a world-wide
  coöperative alliance which shall become so powerful as to crush the


America has no Wholesale Coöperative Society able to grapple with
the trusts. But it has some very strong retail societies, like the
Tamarack of Michigan, which has distributed in dividends to its members
$1,144,000 in 23 years. The recent high cost of living has greatly
stimulated interest in the coöperative movement; and John Graham Brooks
reports that we have already about 350 local distributive societies.
The movement toward federation is progressing. There are over 100
coöperative stores in Minnesota, Wisconsin and other Northwestern
states, many of which were organized by or through the zealous work of
Mr. Tousley and his associates of the Right Relationship League and
are in some ways affiliated. In New York City 83 organizations are
affiliated with the Coöperative League. In New Jersey the societies
have federated into the American Coöperative Alliance of Northern New
Jersey. In California, long the seat of effective coöperative work, a
central management committee is developing. And progressive Wisconsin
has recently legislated wisely to develop coöperation throughout the

Among our farmers the interest in coöperation is especially keen.
The federal government has just established a separate bureau of
the Department of Agriculture to aid in the study, development and
introduction of the best methods of coöperation in the working of
farms, in buying, and in distribution; and special attention is
now being given to farm credits--a field of coöperation in which
Continental Europe has achieved complete success, and to which David
Lubin, America’s delegate to the International Institute of Agriculture
at Rome, has, among others, done much to direct our attention.


The German farmer has achieved democratic banking. The 13,000 little
coöperative credit associations, with an average membership of about
90 persons, are truly banks of the people, by the people and for the

_First:_ The banks’ resources are _of_ the people. These aggregate
about $500,000,000. Of this amount $375,000,000 represents the farmers’
savings deposits; $50,000,000, the farmers’ current deposits;
$6,000,000, the farmers’ share capital; and $13,000,000, amounts earned
and placed in the reserve. Thus, nearly nine-tenths of these large
resources belong to the farmers--that is, to the members of the banks.

_Second:_ The banks are managed _by_ the people--that is, the members.
And membership is easily attained; for the average amount of paid-up
share capital was, in 1909, less than $5 per member. Each member has
one vote regardless of the number of his shares or the amount of his
deposits. These members elect the officers. The committees and trustees
(and often even, the treasurer) serve without pay: so that the expenses
of the banks are, on the average, about $150 a year.

_Third:_ The banks are _for_ the people. The farmers’ money is loaned
by the farmer to the farmer at a low rate of interest (usually 4 per
cent. to 6 per cent.); the shareholders receiving, on their shares,
the same rate of interest that the borrowers pay on their loans. Thus
the resources of all farmers are made available to each farmer, for
productive purposes.

This democratic rural banking is not confined to Germany. As Henry W.
Wolff says in his book on coöperative banks:

“Propagating themselves by their own merits, little people’s
coöperative banks have overspread Germany, Italy, Austria, Hungary,
Switzerland, Belgium. Russia is following up those countries; France
is striving strenuously for the possession of coöperative credit.
Servia, Roumania, and Bulgaria have made such credit their own. Canada
has scored its first success on the road to its acquisition. Cyprus,
and even Jamaica, have made their first start. Ireland has substantial
first-fruits to show of her economic sowings.

“South Africa is groping its way to the same goal. Egypt has discovered
the necessity of coöperative banks, even by the side of Lord Cromer’s
pet creation, the richly endowed ‘agricultural bank.’ India has made
a beginning full of promise. And even in far Japan, and in China,
people are trying to acclimatize the more perfected organizations of
Schulze-Delitzsch and Raffeisen. The entire world seems girdled with a
ring of coöperative credit. Only the United States and Great Britain
still lag lamentably behind.”


The saving banks of America present a striking contrast to these
democratic banks. Our savings banks also have performed a great
service. They have provided for the people’s funds safe depositories
with some income return. Thereby they have encouraged thrift and have
created, among other things, reserves for the proverbial “rainy day.”
They have also discouraged “old stocking” hoarding, which diverts the
money of the country from the channels of trade. American savings banks
are also, in a sense, banks _of_ the people; for it is the people’s
money which is administered by them. The $4,500,000,000 deposits in
2,000 American savings banks belong to about ten million people, who
have an average deposit of about $450. But our savings banks are not
banks _by_ the people, nor, in the full sense, _for_ the people.

_First:_ American savings banks are not managed _by_ the people.
The stock-savings banks, most prevalent in the Middle West and the
South, are purely commercial enterprises, managed, of course, by the
stockholders’ representatives. The mutual savings banks, most prevalent
in the Eastern states, have no stockholders; but the depositors have
no voice in the management. The banks are managed by trustees _for_
the people, practically a self-constituted and self-perpetuating
body, composed of “leading” and, to a large extent, public-spirited
citizens. Among them (at least in the larger cities) there is apt to
be a predominance of investment bankers, and bank directors. Thus the
three largest savings banks of Boston (whose aggregate deposits exceed
those of the other 18 banks) have together 81 trustees. Of these, 52
are investment bankers or directors in other Massachusetts banks or
trust companies.

_Second:_ The funds of our savings banks (whether stock or purely
mutual) are not used mainly _for_ the people. The depositors are
allowed interest (usually from 3 to 4 per cent.). In the mutual savings
banks they receive ultimately all the net earnings. But the money
gathered in these reservoirs is not used to aid _productively_ persons
of the classes who make the deposits. The depositors are largely wage
earners, salaried people, or members of small tradesmen’s families.
Statically the money is used for them. Dynamically it is used for the
capitalist. For rare, indeed, are the instances when savings banks
moneys are loaned to advance productively one of the depositor class.
Such persons would seldom be able to provide the required security;
and it is doubtful whether their small needs would, in any event,
receive consideration. In 1912 the largest of Boston’s mutual savings
banks--the Provident Institution for Savings, which is the pioneer
mutual savings bank of America--managed $53,000,000 of people’s
money. Nearly one-half of the resources ($24,262,072) was invested
in bonds--state, municipal, railroad, railway and telephone and in
bank stock; or was deposited in national banks or trust companies.
Two-fifths of the resources ($20,764,770) were loaned on real estate
mortgages; and the average amount of a loan was $52,569. One-seventh
of the resources ($7,566,612) was loaned on personal security; and
the average of each of these loans was $54,830. Obviously, the “small
man” is not conspicuous among the borrowers; and these large-scale
investments do not even serve the individual depositor especially
well; for this bank pays its depositors a rate of interest lower than
the average. Even our admirable Postal Savings Bank system serves
productively mainly the capitalist. These postal saving stations are
in effect catch-basins merely, which collect the people’s money for
distribution among the national banks.


Alphonse Desjardins of Levis, Province of Quebec, has demonstrated
that coöperative credit associations are applicable, also, to at least
some urban communities. Levis, situated on the St. Lawrence opposite
the City of Quebec, is a city of 8,000 inhabitants. Desjardins himself
is a man of the people. Many years ago he became impressed with the
fact that the people’s savings were not utilized primarily to aid the
people productively. There were then located in Levis branches of
three ordinary banks of deposit--a mutual savings bank, the postal
savings bank, and three incorporated “loaners”; but the people were
not served. After much thinking, he chanced to read of the European
rural banks. He proceeded to work out the idea for use in Levis; and
in 1900 established there the first “credit-union.” For seven years
he watched carefully the operations of this little bank. The pioneer
union had accumulated in that period $80,000 in resources. It had made
2900 loans to its members, aggregating $350,000; the loans averaging
$120 in amount, and the interest rate 6 1/2 per cent. In all this time
the bank had _not met with a single loss_. Then Desjardins concluded
that democratic banking was applicable to Canada; and he proceeded
to establish other credit-unions. In the last 5 years the number of
credit-unions in the Province of Quebec has grown to 121; and 19 have
been established in the Province of Ontario. Desjardins was not merely
the pioneer. All the later credit-unions also have been established
through his aid; and 24 applications are now in hand requesting like
assistance from him. Year after year that aid has been given without
pay by this public-spirited man of large family and small means, who
lives as simply as the ordinary mechanic. And it is noteworthy that
this rapidly extending system of coöperative credit-banks has been
established in Canada wholely without government aid, Desjardins having
given his services free, and his travelling expenses having been paid
by those seeking his assistance.

In 1909, Massachusetts, under Desjardin’s guidance, enacted a law for
the incorporation of credit-unions. The first union established in
Springfield, in 1910, was named after Herbert Myrick--a strong advocate
of coöperative finance. Since then 25 other unions have been formed;
and the names of the unions and of their officers disclose that 11 are
Jewish, 8 French-Canadian, and 2 Italian--a strong indication that the
immigrant is not unprepared for financial democracy. There is reason
to believe that these people’s banks will spread rapidly in the United
States and that they will succeed. For the coöperative building and
loan associations, managed by wage-earners and salary-earners, who
joined together for systematic saving and ownership of houses--have
prospered in many states. In Massachusetts, where they have existed for
35 years, their success has been notable--the number, in 1912, being
162, and their aggregate assets nearly $75,000,000.

Thus farmers, workingmen, and clerks are learning to use their little
capital and their savings to help one another instead of turning over
their money to the great bankers for safe keeping, and to be themselves
exploited. And may we not expect that when the coöperative movement
develops in America, merchants and manufacturers will learn from
farmers and workingmen how to help themselves by helping one another,
and thus join in attaining the New Freedom for all? When merchants and
manufacturers learn this lesson, money kings will lose subjects, and
swollen fortunes may shrink; but industries will flourish, because the
faculties of men will be liberated and developed.

       *       *       *       *       *

President Wilson has said wisely:

“No country can afford to have its prosperity originated by a small
controlling class. The treasury of America does not lie in the brains
of the small body of men now in control of the great enterprises....
It depends upon the inventions of unknown men, upon the originations
of unknown men, upon the ambitions of unknown men. Every country is
renewed out of the ranks of the unknown, not out of the ranks of the
already famous and powerful in control.”


Transcriber’s Notes

Punctuation and spelling were made consistent when a predominant
preference was found in this book; otherwise they were not changed.

Simple typographical errors were corrected; occasional unbalanced
quotation marks retained.

Ambiguous hyphens at the ends of lines were retained; occurrences of
inconsistent hyphenation have not been changed.

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