OTHER PEOPLE'S MONEY

AND HOW THE BANKERS USE IT

CHAPTER I OUR FINANCIAL OLIGARCHY

President Wilson, when Governor, declared in 1911:

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

men must address themselves with an earnest determination to serve the long future and the true hberties of men."

The Pujo Committee—appointed in 1912— found:

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

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

"It is impossible that there should be 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

OUR FINANCIAL OLIGARCHY 3

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 Unter-myer, 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

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 afhliations—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

OUR FINANCIAL OLIGARCHY 5

public service corporations and the formation of industrial trusts, which, by making businesses so "big" that local, independent banking concerns cannot alone supply the necessary funds, has created dependence upon the associated New York bankers.

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

Third: Investment bankers, like J. P. Morgan & Co., dealers in bonds, stocks and notes, 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, originall}", by a distinct set of men, became united in the investment banker. It is to this union of business functions that the existence of the Money Trust is mainly due.*

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

THE PROPER SPHERE OF THE INVESTMENT BANKER

The original function of the investment banker was that of dealer in bonds, stocks and notes; buying mainly at wholesale from corporations,

*ObviousIj' only a few of (ho investnicrit bimkors oxor-risc this Krcat power; but many othors i)erf(jrin important functions in the eystem, as hereinafter described.

OUR FINANCIAL OLIGARCHY 7

muDicipalities, states and governments which need money, and selHng 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 thu-ty-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 abilit}', the facilities, the training and the time essential to a proper investigation. Unless his purchase is to be little better than a gamble, he needs the advice of an expert, who, combining special knowledge with judgment, has the 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 RaUroad 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 relics so largely upon the banker's judgment. This confidential relation of the banker to customers—and the knowledge of the customers' private afTairs acquired incidentally—

is often a determining factor in the marketing of securities. With the advent of Big Business such good-will possessed by the older banking houses, preeminently J. P. Morgan & Co. and their Philadelphia House called Drexel & Co., by Lee, Higginson & Co. and Kidder, Peabody, & Co. of Boston, and by Kuhn, Loeb & Co. of New York, became of enhanced importance. The volume of new security issues was greatly increased by huge railroad consolidations, the development of the holding companies, and 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.

CONTROLLING THE SECURITY MAKERS

But this enlargement of their legitimate field of operations did not satisfy investment bankers. They were not content merely to deal in securities. They desired to manufacture them also. They became promoters, or allied themselves with promoters. Thus it was that J. P. Morgan <fe

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 Pere Marquette, the Chicago and Great Western, and the Cincinnati, Hamilton & Dayton. Often they insured the continuance of such control by the device of the voting trust; but even where no voting trust was created, a secure hold was acquired upon 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 BufTicicnt reason for the banker's entering a board of directors. Often without even such excuse the investment banker has secured a

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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 S17,-273,000,000. IMainly 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 mai'keted, of intra-state corporations. Kuhn, Loeb & Co. and a few other investment bankers exercise similar control over many other corporations.

CONTROLLING SECURITY BUYERS

Such control of railroads, public service and industrial corporations assures to the investment bankers an ample supply of securities at 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

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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 poUcies. The New York legislature placed in 1906 certain restrictions upon their growth; so that their new business since has averaged $547,384,212, or only fifty-three per cent, of what it was in 1904. But the aggregate assets of these companies increased in the last eight years to $1,817,052,260.36. At the time of the Armstrong investigation the average age of these tliree companies was fifty-six years. The growth of assets in the last eight years was about half as large as the total growth in the preceding fifty-six years. These three companies must

OUR FINANCIAL OLIGARCHY 15

invest annually about $70,000,000 of new money; and besides, many old investments expire or are changed and the proceeds must be reinvested. A large part of all life insurance surplus and 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 'Hhe 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 management."

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 S3,000,000 for $51,000, par value of this stock, or S5,SS2.35 a share. The dividend return on the stock investment is less than one-eighth of one per cent.; but the assets controlled amount now to over $500,000,000. And certain of these assets had an especial value for 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 theu" bank and trust company stocks; but, as the insurance companies were controlled by the investment bankers, these gentlemen sold the bank and trust company stocks to themselves.

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

"Here, then, were stocks of fiv'e important trui-t companies and one of our largest national

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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 them."

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.

CONTROLLING OTHER PEOPLE's QUICK CAPITAL

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 tliree groat 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 E(}uitable, where Mr. Morgan bought an actual majority of all the outstanding stock, his

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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 mai-ket. Tight money nearly always makes them fall. The control by the leading investment bankers over the banks and trust companies is so great, that they can often determine, for a time, the 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

OUR FINANCIAL OLIGARCHY 21

funds of the banks would often be exhausted, but for the large deposits made in those banks by the life insurance, railroad, public service, and industrial corporations which the bankers also control. On December 31, 1912, the three 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 oiu" railroads and industrial companies are able to direct where such funds shall be kept and thus to create these great reservoirs of the people's money, are the ones who are in position to tap those reservoirs for the ventures in which they are interested and to prevent their being tapped for purposes of which they do not approve. The latter is quite as important a factor as the former. It is the controlling consideration in its effect on competition in the railroad and industrial world."

HAVING YOUR CAKE AND EATING IT TOO

But the power of the investment banker over other people's money is often more direct and effective than that exerted through controlled banks and trust companies. J. P. Morgan & Co. achieve the supposedly impossible feat of having

their cake and eating it too. They buy the bonds and stocks of controlled railroads and industrial concerns, and pay the pui'chase price; and still do not part with their money. This is 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 $1G2,491,819.G5.

POWER AND PELF

The operations of so comprehensive a system of concentration necessarily developed in the bankers overweening j)()wor. And the bankers' power grows by what it feeds on. Power begets

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, !he inconsistent position of being at the same tims seller and buyer, the standard for so-called compensation actually applied, is not the "Rule of reason", but ''All the traffic will bear." And this is true even where there is no sinister motive. The weakness of human nature prevents men from being good judges of their own deservings.

The syndicate formed by J. P. Morgan & Co. to underwrite the United States Steel 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 in-

dustry. In addition to the commissions taken specifically for organizing the United States Steel Corporation, large sums were paid for organizing the several companies of which it is composed. For instance, the National Tube Company was capitalized at $80,000,000 of stock; $40,000,000 of which was common stock. Half of this $40,000,000 was taken by J. P. Morgan & Co. and their associates for promotion services; and the $20,000,000 stock so taken became later exchangeable for $25,000,000 of Steel Common. Commissioner of Corporations Herbert Knox Smith, found that:

"More than $150,000,000 of the stock of the Steel Corporation was issued directly or indirectly (tlirough 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

OUR FINANCIAL OLIGARCHY 25

extortionate. The syndicate which underwrote, in 1901, the Steel Corporation's preferred stock conversion plan, advanced only $20,000,000 in cash and received an underwriting commission of $6,800,000.

The exaction of huge commissions is not 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 wilUng to buy at 106 bonds which the Company were to pay J. P. Morgan & Co. $1,-680,000 to be willing to take at par.

WHY THE BANKS BECAME INVESTMENT BANKERS

These large profits from promotions, under-writings and security purchases led to a 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

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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 "cooperation"; and ever more railroads, public service corporations, and industrial concerns were brought into complete subjection.

CHAPTER II HOW THE COMBINERS COMBINE

Among the allies, two New York banks— the National City and the First National— stand preeminent. They constitute, with the ]\Iorgan firm, the inner group of the Money Trust. Each of the two banks, like J. P. 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 Citj^ it is James Stillman; in the First National, George F. Baker. Each of these gentlemen was formerly President, and is now Chairman of the Board of Directors. The resources of the National City Bank (including its Siamese-twin security company) are about $300,000,000; those of the First National Bank (including its Siamese-twin security company) are about $200,000,000. The resources of the Morgan firm have not been disclosed. But it appears that they have available for their operations, also, huge deposits from their subjects; deposits reported as $102,500,000.

HOW THE COMBINERS COMBINE 29

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

Of Mr. Baker's investments we know more, as he testified on many subjects. His 20,000 shares in the First National Bank are worth at least $20,000,000. His stocks in six other New York banks and trust companies are together worth about $3,000,000. The scale of his investment in railroads may be inferred from his former holdings in the Central Railroad of New Jersey. JHe was its largest stockholder—so large that with a few friends he held a majority of the $27,436,800 par value of outstanding stock, which the Reading bought at $160 a share. He is a director in 28 other railroad companies; and presumably a stockholder in, at least, as

many. The full extent of his fortune was not inquired into, for that was not an issue in the investigation. But it is not surprising that Mr. Baker saw little need of new laws. When asked:

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

He answered:

"Pretty nearly."

RAMIFICATIONS OF POWER

But wealth expressed in figures gives a wholly inadequate picture of the allies' power. Their wealth is dynamic. It is wielded by geniuses in combination. It finds its proper expression in means of control. To comprehend the power of the allies we must try to visualize the 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) arc directors in at least 27 other corporations with resources of $4,270,000,000. That is, the First National is represented in 19 corporations,

HOW THE COMBINERS COMBINE 31

with aggregate resources or capitalization of $11,542,000,000.

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

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

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

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

4. Industrial Corporations: United States Steel Corporation, Pullman Company.

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 S10,564,000,000. 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 $1,983,000,000.

"Thirty duectorships in 10 insurance companies having total assets of $2,293,000,000.

"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 $3,330,000,000.

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

HOW THE COMBINERS COMBINE 33

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

TWENTY-TWO BILLION DOLLARS,

''Twenty-two billion dollars is a large sum— so large that we have difficulty in grasping its significance. The mind realizes size only through comparisons. With what can we compare twenty-two billions of dollars? Twenty-two 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 bilHon dollars is not large enough to include all the corporations to which the "influence" of the three allies, directly and visibly, extends, for

First: There are 56 other corporations (not included in the Pujo schedule) each with capital or resources of over $5,000,000, and aggregating

nearly $1,350,000,000, in which the ]\Iorgan allies are represented according to the directories of directors.

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

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

Fourth: The Pujo schedule does not include

HOW THE COMBINERS COMBINE 35

all the subsidiaries of the corporations scheduled. For instance, the capitalization of the New-Haven System is given as $385,000,000. That sum represents the bond and stock capital of the New Haven Railroad. But the New Haven System comprises many controlled corporations whose capitalization is only to a slight extent 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, $849,000,000.

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

S6 OTHER PEOPLE'S MONEY

CEMENTING THE TRIPLE ALLIANCE

Care was taken by these builders of imperial power that their structure should be enduring. It has been buttressed on every side by joint ownerships and mutual stockholdings, as well as by close personal relationships; for directorships are ephemeral and may end with a new election. Mr. Morgan and his partners acquired one-sixth of the stock of the First National Bank, and made a S6,000,000 investment in the stock of the National City Bank. Then J. P. IMorgan & Co., the National City, and the First National (or their dominant officers—Mr. Stillman and ;Mr. Baker) acquired together, by stock purchases and voting trusts, control of the National Bank of Commerce, with its $190,000,000 of resources; of the Chase National, with $125,000,000; of the Guaranty Trust Company, with $232,000,000; of the Bankers' Trust Company, with $205,000,-000; and of a number of smaller, but important, financial institutions. They became joint voting trustees in great railroad systems; and finally (as if the allies were united into a single concern) loyal and efficient service in the banks—like that rendered by Mr. Davison and Mr. Lamont in the First National—was rewarded by promotion

HOW THE COMBINERS COMBINE 37

to membership in the firm of J. P. Morgan &Co.

THE PROVINCIAL ALLIES

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

In Boston there are two large international banking houses—Lee, Higginson & Co., and Kidder, Peabody & Co.—both long established and rich; and each possessing an extensive, wealthy clientele of eager investors in bonds and stocks. Since 1907 each of these firms has purchased or underwritten (principally in conjunction with other bankers) about 100 different security issues of the greater interstate corporations, the issues of each banker amounting in the aggregate to over $1,000,000,000. Concentration of banking capital has proceeded even

further in Boston than in New York. By successive consolidations the number of national banks has been reduced from 58 in 1898 to 19 in 1913. There are in Boston now also 23 trust companies.

The National Shawmut Bank, the First National Bank of Boston and the Old Colony Trust Co., which these two Boston banking houses and their associates control, alone have aggregate resources of $288,386,294, constituting about one-half of the banking resources of the city. These great banking institutions, which are themselves the result of many consolidations, and the 21 other banks and trust companies, in which their directors are also directors, hold together 90 per cent, of the total banking resources of Boston. And linked to them by interlocking directorates are 9 other banks and trust companies whose aggregate resources are about 2 1/2 per cent, of Boston's total. Thus of 42 banking institutions, 33, with aggregate resources of 8560,516,239, holding about 92 1/2 per cent, of the aggregate banking resources of Boston, are interlocked. But even the remaining 9 banks and trust companies, which together hold but 7 1/2 per cent, of Boston banking resources, are not all independent of one another. Three

HOW THE COMBINERS COMBINE 39

are linked together; so that there appear to be only six banks in all Boston that are free from interlocking directorate relations. They 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, Pea-body & Co. were active competitors. They are so still in some small, or purely local matters; but both are devoted co-operators with the Morgan associates in larger and interstate 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 S561,000,000. 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 investigation.

THE AUXILIARIES

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

"Radiating from these principal groups," says the Pujo Committee, "and closely affiliated with them are smaller but important banking houses, such as Kissel, Kinnicut & Co., White, Weld & Co., and Harvey Fisk & Sons, who receive large and lucrative patronage from the dominating groups, and are used by the latter as jobbers or distributors of securities, the issuing of which

HOW THE COMBINERS COMBINE 41

they control, but which for reasons of their own they prefer not to have issued or distributed under their own names. Lee, Higginson & Co., besides being partners with the inner group, are also frequently utilized in this service because of their facilities as distributors of securities."

For instance, J. P. Morgan & Co. as fiscal agents of the New Haven Railroad had the right to market its securities and that of its 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 SATELLITES

The alliance is still further supplemented, as the Pujo Committee shows:

''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 countries.

''The patronage thus proceeding from the inner group and its sub-groups is of great value to these banks and bankers, who are thus tied by self-interest to the great issuing houses and may be regarded as a part of this vast financial organization. Such patronage yields no 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 afliliations 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,

U OTHER PEOPLE'S MONEY

Morgan & Co., the First National Bank, and the National City Bank should receive 3 per cent., —equal to $5,100,000—for forming this 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 PROTECTION OF PSEUDO-ETHICS

The organization of the ]\Ioney 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

HOW THE COMBINERS COMBINE 45

banking houses in the purchase of securities," says the Pujo Committee, "is further removed by the understanding between them and others, that one will not seek, by offering better terms, to take away from another, a customer which it has theretofore served, and by corollary of this, namely, that where given bankers have once satisfactorily united in bringing out an issue of a corporation, they shall also join in bringing out any subsequent issue of the same 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 IMorgan group have with few exceptions preempted the banking business of the important railroads of the country. But even Kuhn, Loeb & Co. are not wholly independent. The Pujo Committee reports that they are ''quaUfied aUies of the inner group"; and through their "close relations with the National City Bank and the National Bank of Commerce and other financial institutions" have "many interests in common with the Morgan associates, conducting large joint-account operations with them."

THE EVILS RESULTANT

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

"The charge of capital," says the Pujo Committee, "which of course enters universally into

HOW THE COMBINERS COMBINE 47

the price of commodities and of service, is thus in effect determined by agreement amongst those supplying it and not under the check of 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 injurious."

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, reUef tlirough other banking houses is precluded.

"It can hardly be expected that the banks, trust companies, and other institutions that are thus seeking participation from this inner group would be likely to engage in business of a 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 tm-n or stop."

TJiird: But far more serious even than the suppression of competition is the suppression of industrial liberty, indeed of manhood itself, which this overweening financial power entails. The intimidation which it effects extends far beyond "the banks, trust companies, and other institutions seeking participation from this inner

HOW THE COMBINERS COMBINE 49

group in their lucrative underwritings"; and far beyond those interested in the great corporations directly dependent upon the inner group. Its blighting and benumbing effect extends as well to the small and seemingly independent business man, to the vast army of professional men and others directly dependent upon *'Big Business," and to many another; for

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

2. Nearly every enterprising business man and a large part of our professional men have something to sell to, or must buy something from, the great corporations to which the control or influence of the money lords extends directly, or from or to affiliated interests. Sometimes it is merchandise; sometimes it is service; sometimes

they have nothing either to buy or to sell, but desire political or social advancement. Sometimes they want merely peace. Experience shows that "it is not healthy to buck against a locomo-We," and ''Business is business."

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

CHAPTER III

INTERLOCKING DIRECTORATES

The practice of interlocking directorates is the root of many evils. It offends laws human and divine. Applied to rival corporations, it tends to the suppression of competition and to violation of the Sherman law. Applied to corporations which deal with each other, it tends to disloyalty and to violation of the fundamental law that no man can serve two masters. In either event it tends to inefficiency; for it removes incentive and destroys soundness of judgment. It is undemocratic, for it rejects the platform: ''A fair field and no favors,"—substituting the pull of privilege for the push of manhood. It is the most potent 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 other.

THE ENDLESS CHAIN

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

J. P. Morgan (or a partner), a director of the New York, New Haven & Hartford Railroad, causes that company to sell to J. P. IMorgan & Co. an issue of bonds. J. P. Morgan & Co. borrow the money with which to pay for the bonds from the Guaranty Trust Company, of which Mr. Morgan (or a partner) is a director. J. P. Morgan & Co. sell the bonds to the Penn Mutual Life Insurance Company, of which Mr. Morgan (or a partner) is a director. The New Haven spends the proceeds of the bonds in purchasing

INTERLOCKING DIRECTORATES 53

steel rails from the United States Steel 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 Pull-

man, the Reading, the Telephone, the Telegraph and the General Electric companies, like the New Haven, buy steel products from the Steel Corporation. Each and every one of the 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 multi-phed many times and with many permutations to represent fully the extent to which the interests of a few men are intertwined. Instead of taking the New Haven as the railroad starting point in our example, the New York Central, the Santa F6, the Southern, the Lehigh Valley, the Chicago and Great Western, the Erie or the P6re 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 piu-chaser of the bonds, other insurance companies; instead of the General Electric, its qualified competitor, the Westinghouse Electric and Manufacturing Company. The chain is indeed end-

INTERLOCKING DIRECTORATES 55

less; for each controlled corporation is entwined with many others.

As the nexus of "Big Business" the Steel Corporation stands, of course, preeminent. The Stanley Committee showed that the few men who control the Steel Corporation, itself an owner of important railroads, are directors also in twenty-nine other railroad systems, with 126,000 miles of hne (more than half the railroad mileage of the United States), and in important steamship companies. Through all these alliances and the huge traffic it controls, the Steel Corporation's influence pervades railroad and steamship 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 deahng with corporations. For no rule of law has, in other connections, been more rigorously appUed, 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

INTERLOCKING DIRECTORATES 57

with the power of controlling the property and managing the affairs of the corporation without let or hindrance, as to third persons, they were its agents; but as to the corporation itself equity holds them liable as trustees. While courts of law generally treat the directors as agents, courts of equity treat them as trustees, and hold them to a strict account for any breach of the trust relation. For all practical purposes they are trustees, when called upor in equity to account for their official conduct."

NULLIFYING THE LAW

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

First: Courts held valid contracts between a corporation and a director, or between two corporations with a common director, where it was shown that in making the contract, the 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 com-

mon director participated actively in the making of a contract between two corporations, the contract was not absolutely void, but voidable only at the election of the corporation.

The first limitation ignored the rule of law that a beneficiary is entitled to disinterested advice from all liis trustees, and not merely from some; and that a trustee may violate his trust by 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 cooperation" among directors which secures for each, in his own line, a due share of the corporation's favors.

The second limitation—by which contracts, in the making of which the interested director participates actively, are held merely voidable instead of absolutely void—ignores the teachings

INTERLOCKING DIRECTORATES 59

of experience. To hold such contracts merely voidable has resulted practically in declaring them valid. It is the directors who control corporate action; and there is little reason to expect that any contract, entered into by a board with a fellow director, however unfair, would be subsequently avoided. Appeals from Philip drunk to Philip sober are not of frequent occurrence, nor very fruitful. But here we lack even an appealing party. Directors and the dominant stockholders would, of course, not appeal; and the minority stockholders have rarely the knowledge of facts which is essential to an effective appeal, whether it be made to the directors, to the whole body of stockholders, or to the courts. Besides, the financial burden and the risks incident to any attempt of individual stockholders to interfere with an existing 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 overthi'owing 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."

Air. Max Pam proposed in the April, 1913, Harvard Law Review, that the government come to the aid of minority stockholders. He urged that the president of every corporation be required to report annuallj^ to the stockholders, and to state and federal officials every contract made by the company in which any director is inter-ested; that the Attorney-General of the United States or the State investigate the same and take proper proceedings to set all such contracts aside and recover any damages sufTered; or without disaffirming the contracts to recover (rom the interested directors the profits derived iherefrom. And to this end also, that State and National Bank Examiners, State Superintendents of Insurance, and the Interstate Commerce Commission be directed to examine the records of every bank, trust company, insurance com-

INTERLOCKING DIRECTORATES Gl

pany, railroad company and every other corporar tion engaged in interstate commerce. Mr. Pam's views concerning interlocking directorates are entitled to careful study. As counsel prominently identified with the organization of trusts, he had for years full opportunity of weighing the advantages and disadvantages of ''BigBusiness." His conviction that the practice of interlocking directorates is a menace to the public and demands drastic legislation, is significant. And much can be said in support of the specific measure which he proposes. But to be effective, the remedy must be fundamental and comprehensive.

THE ESSENTIALS OF PROTECTION

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

In the case of railroads and public-service corporations (in contradistinction to private industrial companies), such prohibition is 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 he prohibited, because it is impossible to break the Money Trust without putting an end to the practice in the larger corporations.

INTERLOCKING DIRECTORATES 63

BANKS AS PUBLIC-SERVICE CORPORATIONS

The practice of interlocking directorates is peculiarly objectionable when applied to banks, because of the nature and functions of those institutions. Bank deposits are an important part of our currency sy^em. They are almost as essential a factor in commerce as our railways. Receiving deposits and making loans therefrom should be treated by the law not as a private business, but as one of the public services. And recognizing it to be such, the law already 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 recently:

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

The directors and officers of banking 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 equahty 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."

OFFICIAL PRECEDENTS

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

A judge is disqualified from sitting in any case in which he has even the smallest financial interest; and most judges, in order to be free to act in any matters arising in their court, proceed, upon taking office, to dispose of all investments which could conceivably bias their judgment in any matter that might come before them. An Interstate Commerce Commissioner is prohibited from owning any bonds or stocks in any corpora-

INTERLOCKING DIRECTORATES 67

tion subject to the jurisdiction of the Commission. It is a serious criminal offence for any executive officer of the federal government to transact government business with any corporation in the pecuniary profits of which he is directly or indirectly interested.

And the directors of our great banking 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.

SCOPE OF THE PROHIBITION

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

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

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

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

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

i

CHAPTER IV

SERVE ONE MASTER ONLY

The Pujo Committee has presented the facts concerning the Money Trust so clearly that the conclusions appear inevitable. Their diagnosis discloses intense financial 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 dii-ector-ates are, of course, fully recognized; but the prohibitions proposed in that respect ai*e 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 ofRcer or director of a national bank shall be an officer or director of any other bank or of any trust company or other financial or other corporation or institution, whether 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

I

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

■i'Z

OTHER PEOPLE'S MONEY

of which any of its officers is an officer at the time of such transaction."

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 du-ectors, as well as to officers, and to state banks and trust companies and to other classes of corporations, as well as to national banks. And, as will be hereafter shown, such broad legislation is within the power of Congress.

Let us examine this further:

THE PROHIBITION OF COMMON DIRECTORS IN POTENTIALLY COMPETING CORPORATIONS

1. National Baiiks. 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 oppression."

This recommendation is in accordance with the legislation or practice of other countries. The Bank of England, the Bank of France, the National Bank of Belgium, and the leading

banks of Scotland all exclude from their boards persons who are du'ectors in other banks. By law, in Russia no person is allowed to be on the board of management of more than one bank.

The Committee's recommendation is also in harmony with laws enacted by the 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 oflScer or trustee (director) of any savings bank can hold any office in any other savings bank. That statute was passed in 1876. A few years ago it was supplemented by providing that none of the executive officers of a savings bank could hold a similar office in any national bank. Massachusetts attempted thus to curb the power of the individual financier; and no disadvantages are discernible. When that Act was passed the aggregate deposits in its savings banks were

$243,340,642; the number of deposit accounts 739,289; the average deposit to each person of the population $144. On November 1, 1912, the aggregate deposits were $838,635,097.85; the number of deposit accounts 2,200,917; the average deposit to each account $381.04. Massachusetts has shown that curbing the power of the few, at least in this respect, is entirely-consistent with efficiency and with the prosperity of the whole people.

2. State Banks and Trust Companies. The reason for prohibiting common directors in banking institutions applies equally to national banks and to state banks including those trust companies which are essentially banks. In New York City there are 37 trust companies of which only 15 are members of the clearing house; but those 15 had on November 2, 1912, aggregate resources of $827,875,653. Indeed the Bankers' Trust Company with resources of $205,000,000, and the Guaranty Trust Company, with resources of $232,000,000, are among the most useful tools of the Money Trust. No bank in the country has larger deposits than the latter; and only one bank larger deposits than the former. If common directorships were permitted in state banks or such trust companies, the

charters of leading national banks would doubtless soon be surrendered; and the institutions would elude federal control by re-incorporating under state laws.

The Pujo Committee has failed to apply the prohibition of common directorships in potentially competing banking institutions rigorously even to national banks. It permits the same man to be a director in one national bank and one trust company doing business in the same place. The proposed concession opens the door to grave dangers. In the first place the provision would permit the interlocking of any national bank not with one trust company only, but with as many trust companies as the bank has du'ectors. 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 bankers.

3. Other Corporations. The interlocking of banking institutions is only one of the factors

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

PROHIBITING CORPORATE CONTRACTS IN WHICH THE MANAGEMENT HAS A PRIVATE INTEREST

The principle of prohibiting corporate contracts in which the management has a private interest

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 S1,2S3,000,000, through which as directors they carry on their vast operations. A prohibition limited to officers would not affect the Morgan operations with these banking 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 pubhc through the intertwined control of the banks. No prohibition limited to officers will materially change this condition.

The prohibition of interlocking directorates, even if applied only to all banks and trust companies, would practically compel the Morgan representatives to resign from the directorates of the thirteen l)anking 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.

APPLY THE PRIVATE INTEREST PROHIBITION TO ALL KINDS OF CORPORATIONS

The creation of the Money Trust is due quite as much to the encroachment of the investment banker upon railroads, public service, industrial, and life-insurance companies, as to his control of banks and trust companies. Before the Money Trust can be broken, all these relations must be severed. And they cannot be severed unless corporations of each of these several classes are prevented from dealing with their own directors and with corporations in which those directors are interested. For instance: The most potent single source of J. P. Morgan & Co.'s power is the $162,500,000 deposits, including those of 78 interstate railroad, public-service and industrial

corporations, which the Morgan firm is free to use as it sees fit. The proposed proliibition, even if applied to all banking institutions, would not afifect directly this great source of Morgan power. If, however, the prohibition is made to include railroad, public-service, and industrial corporations, as well as banking institutions, members of J. P. IVIorgan & Co. will quickly retire from substantially all boards of directors.

APPLY THE PRIVATE INTEREST PROHIBITION TO STOCKHOLDING INTERESTS

The prohibition against one corporation 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 8tock 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 authorized."

As shown above, the particular provision for notice affords no protection to the public; but if it did, its application ought to be extended to lesser stock-holdings. Indeed it is difficult to fix a limit so low that financial interest will not influence action. Certainly a stockholding interest of a single director, much smaller than 10 per cent., might be most effective in inducing favors. IVIr. Morgan's stockholdings in the American Bank Note Company was only three per cent. The $6,000,000 investment of J. P. Morgan & Co. in the National City Bank 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.

SPECIAL DISQUALIFICATIONS

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 arc 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.

HOW THE PROHIBITION MAT BE LIMITED

The Money Trust cannot be destroyed unless all classes of corporations are included in the prohibition of interlocking directors and of transactions by corporations in which the 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 S500,000, 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 raih-oads and public service corporations, or for services, common to all customers, like the ordinary service of a bank for its depositors.

THE POWER OF CONGRESS

The question may be asked: Has Congress the power to impose these limitations upon the conduct of any business other than national banks? And if the power of Congress is so 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.

CHAPTER V WHAT PUBLICITY CAN DO

Publicity is justly commended as a remedy for social and industrial diseases. Sunlight is said to be the best of disinfectants; electric light the most efficient policeman. And publicity has already played an important part in the struggle against the Money Trust. The Pujo Committee has, in the disclosure of the facts concerning financial concentration, made a most important contribution toward attainment of the New Freedom. The battlefield has been surveyed and charted. The hostile forces have been located, counted and appraised. That was a necessary first step—and a long one—towards relief. The provisions in the Committee's bill concerning the incorporation of stock exchanges and the 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.

WEALTH

Combination and control of other people's money and of other people's businesses. These are the main factors in the development of the Money Trust. But the wealth of the 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.

Xow, 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."

EXCESSIVE bankers' COMMISSIONS

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 reopen the Money Trust investigation merely to collect these data. But earlier investigations have disclosed some illuminating, though sporadic facts.

The syndicate which jH'omoted 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 common.

Nor have these heavy charges been confined to industrial concerns. Even railroad securities, supposedly of high grade, have been subjected to like burdens. At a time when the New Haven's credit was still unimpaired, J. P. Morgan & Co. took the New York, Westchester & Boston Rail-

way first mortgage bonds, guaranteed by the New Haven at 92 1/2; and they were marketed at 96 1/4. They took the Portland Terminal Company bonds, guaranteed by the jNIaine Central Railroad—a corporation of unquestionable credit—at about 88, and these were marketed at 92.

A large part of these under^vTiting 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 Inter-boro 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 bonds.

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.

HOW SHALL EXCESSIVE CHARGES BE STOPPED?

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 contrar3\ 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 cither the jailroad or the municipal issues. Publicity ofi'crs, however, another and even more promising remedy: a method of regulating bankers' charges which would apply automatically to railroad, public-service and industrial corporations alike.

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

100 OTHER PEOPLE'S MONEY

THE STRIKE OF CAPITAL

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 subsetjuontly at a lower price than the issue price, and tliat the Stock Exchange has begun to realize the public's attitude. The public

WHAT PUBLICITY CAN DO 101

sees in the underwriter not so much one who 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."

PUBLICITY AS A EEMEDY

Compel bankers when issuing securities to make public the commissions or profits they are receiving. Let every circular letter, prospectus or advertisement of a bond or stock show clearly what the banker received for his middleman-services, and what the bonds and stocks net the issuing corporation. That is knowledge to which both the existing security holder and the prospective purchaser is fairly entitled. If the bankers' compensation is reasonable, consider-

ing the skill and risk involved, there can be no objection to making it known. If it is not reasonable, the investor will ''strike," as 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)

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should be correspondingly large. But the banker ought not to be paid more for getting investors to assume a larger risk. In practice the banker gets the higher commission for underwriting the weaker security, on the ground -that his own risk is greater. And the weaker the security, the greater is the banker's incentive to induce his customers to relieve him. Now the law should not undertake (except incidentally in connection with railroads and public-service corporations) to fix bankers' profits. And it should not seek to prevent investors from making bad bargains. But it is now recognized in the simplest 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 seciu-ity is the amount of water it contains. And any excessive amount paid to the banker for marketing a security is water. Require a full disclosure to the investor of the amount of commissions and profits paid; and not only will investors be put on their guard, but bankers'

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.

REAL DISCLOSURE

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

To be effective, knowledge of the facts must be actually brought home to the investor, and this can best be done by requiring the facts to be stated in good, large type in every notice, circular, letter and advertisement inviting the investor to purchase. Compliance with this requirement should also be obhgatory, and not something which the investor could waive. For the whole public is interested in putting an end to the

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bankers' exactions. England undertook, years ago, to protect its investors against the wiles of promoters, by requiring a somewhat similar 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.

DISCLOSE SYNDICATE PARTICULARS

The required publicity should also include a disclosure of all participants in an underwriting. It is a common incident of underwriting that no member of the syndicate shall sell at less than the syndicate price for a definite period, unless the syndicate is sooner dissolved. In other words, the bankers make, by agreement, an artificial price. Often the agreement is probably illegal under the Sherman Anti-Trust Law. This price maintenance is, however, not necessarily 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. "V\'Tiy, 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 this:

A. B. & Co.

Investment Bankers

We have today secured substantial control of the successful machinery business heretofore

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conducted by at , Illinois, which

has been incorporated under the name of the Excelsior Manufacturing Company with a capital of $10,000,000, of which $5,000,000 is Preferred and $5,000,000 Common.

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

We offer this excellent stock to you at $100.73 per share. Our own commission or profit will be only a little over $5.00 per share, or say, $250,000 cash, besides $1,500,000 of the Common stock, which we received as a bonus. This cash and stock commission we are to divide in various proportions with the following participants in the underwriting syndicate:

C. D. & Co., New York

E. F. & Co., Boston

L. M. & Co., Philadelphia

I. K. & Co., New York.

O. P. & Co., Chicago

Were such notices common, the investment bankers would "be worthy of their hire," for only reasonable compensation would ordinarily be taken.

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For marketing the preferred stock, as in the case of Excelsior ^Manufactui'ing Co. referred to above, investment bankers were doubtless essential, and as middlemen they performed a useful service. But they used their strong position to make an excessive charge. There are, 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.

CHAPTER VI WHERE THE BANKER IS SUPERFLUOUS

The abolition of interlocking directorates will greatly curtail the bankers' power by putting an end to many improper combinations. Publicity concerning bankers' commissions, profits and associates, will lend effective aid, particularly by curbing undue exactions. Many of the specific measures recommended by the Pujo Committee (some of them dealing with technical details) will go far toward correcting corporate and 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:—Ehminate the banker-middleman where he is superfluous.

Today practically all governments, states and

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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 ai-e 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.

BANKER AND BROKER

The business of the investment banker must not be confused with that of the bond and stock broker. The two are often combined; but the functions are essentially different. The broker performs a very limited service. He has properly nothing to do with the original issue of securities, nor with their introduction into the market. He merely negotiates a purchase or sale as agent for another under specific orders. He exercises no discretion, except in the method of bringing buyer and seller together, or of executing orders. For his humble service he receives a moderate compensation, a commission, usually one-eighth of one per cent. (12 1/2 cents for each $100) on the par value of the security sold. The investment banker also is a mere middleman. But he is a principal, not an agent. He is also a merchant

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in bonds and stocks. The compensation received for his part in the transaction is in many cases more accurately described as profit than as commission. So far as concerns new issues of government, state and municipal bonds, espe-ciall}', he acts as merchant, buying and selling securities on his own behalf; buying commonly at wholesale from the maker and selling at retail to the investors; taking the merchant's risk and the merchant's profits. On purchases of 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 properl}^ 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 unnecessary.

HOW THE BANKER CAN SERVE

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

First: Specifically as expert. The investment banker has tlie responsibility of the ordinary retailer to sell only that merchandise which is good of its kind. But his responsibility in this respect is unusually heavy, because he deals in an

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 goodwill—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 cleai'ly superfluous. And in respect to the original issue of many of our state and municipal bonds, and of some corporate securities, no such need exists.

WHERE THE BANKER SERVES NOT

It needs no banker experts in value to tell us that bonds of Massachusetts or New York, of Boston, Philadelphia or Baltimore and of scores of lesser American cities, are safe investments. The basic financial facts in regard to such bonds are a part of the common knowledge of many American investors; and, certainly, of most possible investors who reside in the particular state or city whose bonds arc in question. Where the financial facts are not generally known, they are so simple, that they can be easily summarized and understood by any prospective investor without interpretation by an expert. Bankers often

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 walling 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

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large issue. And in a newer communitj^, where there is little accumulation of unemployed capital, it might be impossible to find buyers for any large issue. Investors are apt to be conservative; and they have been trained to regard the intervention of the banker as necessary. The bankers would naturally discoiu-age 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 reahze the advantage of avoiding the middleman and deahng dii'ectly with responsible borrowers. Governments, like private concerns, would have to do educational work; but this publicity would be much less expensive and much more productive than that undertaken by the bankers. Many investors are already 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 fut-nish a market, in some respects more desirable and certainly wider tluui th:i( 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 utiUty 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 paj^ment at one time.

Today, when a large issue of bonds is made, the banker, while ostensibly paying his own money to the city, actually pays to the city other people's money which he has borrowed from the banks. Then the banks get back, through the city's 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.

CITIES THAT HELPED THEMSELVES

In the present year some cities have been led by necessity to help themselves. The bond market was poor. Business was uncertain, money tight and the ordinary investor reluctant. Bankers were loth to take new bond issues. 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

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