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Hello pentareddyn.com lovers!

i hope you all are fine.

In this article, we are going to discuss a very interesting topic.

We are going to talk about the OTHER PEOPLE’S MONEY





Hope you’re enjoying the gentle breeze

Let’s begin!


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

  1. 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

  1. 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.


  1. _Railroad Companies:_ New York Central Lines; New Haven, Reading,

Erie, Lackawanna, Lehigh Valley, Southern, Northern Pacific, Chicago,

Burlington & Quincy.


  1. _Public Service Corporations:_ American Telegraph & Telephone

Company, Adams Express Company.


  1. _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

  1. 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.


  1. 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:


  1. 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?


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



  1. 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?


  1. 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.


  1. _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



  1. _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

  1. 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.










  1. 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

  1. 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,

  1. 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

  1. 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,

  1. 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:





  1. 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.


  1. $89,391,401, in acquiring the Northern Pacific stock and stock

of the Northern Securities Co.


  1. $45,466,960, in acquiring Baltimore & Ohio stock.


  1. $37,692,256, in acquiring Illinois Central stock.


  1. $23,205,679, in acquiring New York Central stock.


  1. $10,395,000, in acquiring Atchison, Topeka & Santa Fe stock.


  1. $8,946,781, in acquiring Chicago & Alton stock.


  1. $11,610,187, in acquiring Chicago, Milwaukee & St. Paul stock.


  1. $6,750,423, in acquiring Chicago & Northwestern stock.


  1. $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

  1. 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.


  1. 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.


  1. 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;


  1. Such corporations will be prohibited from owning important

stockholdings in railroads; and


  1. 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.”


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