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OTHER PEOPLE’S MONEY
AND HOW THE BANKERS USE IT
OTHER PEOPLE’S MONEY
AND HOW THE BANKERS USE IT
BY
LOUIS D. BRANDEIS
[Illustration]
NEW YORK
FREDERICK A. STOKES COMPANY
PUBLISHERS
_Copyright, 1913, 1914, by_
THE MCCLURE PUBLICATIONS
_Copyright, 1914, by_
FREDERICK A. STOKES COMPANY
_All rights reserved_
FASCo _March, 1914_
PREFACE
While Louis D. Brandeis’s series of articles on the money trust was
running in Harper’s Weekly many inquiries came about publication in
more accessible permanent form. Even without such urgence through the
mail, however, it would have been clear that these articles inevitably
constituted a book, since they embodied an analysis and a narrative
by that mind which, on the great industrial movements of our era, is
the most expert in the United States. The inquiries meant that the
attentive public recognized that here was a contribution to history.
Here was the clearest and most profound treatment ever published on
that part of our business development which, as President Wilson and
other wise men have said, has come to constitute the greatest of our
problems. The story of our time is the story of industry. No scholar
of the future will be able to describe our era with authority unless
he comprehends that expansion and concentration which followed the
harnessing of steam and electricity, the great uses of the change, and
the great excesses. No historian of the future, in my opinion, will
find among our contemporary documents so masterful an analysis of why
concentration went astray. I am but one among many who look upon Mr.
Brandeis as having, in the field of economics, the most inventive and
sound mind of our time. While his articles were running in Harper’s
Weekly I had ample opportunity to know how widespread was the belief
among intelligent men that this brilliant diagnosis of our money trust
was the most important contribution to current thought in many years.
“Great” is one of the words that I do not use loosely, and I look upon
Mr. Brandeis as a great man. In the composition of his intellect, one
of the most important elements is his comprehension of figures. As one
of the leading financiers of the country said to me, “Mr. Brandeis’s
greatness as a lawyer is part of his greatness as a mathematician.”
My views on this subject are sufficiently indicated in the following
editorial in Harper’s Weekly.
ARITHMETIC
About five years before the Metropolitan Traction Company of New
York went into the hands of a receiver, Mr. Brandeis came down
from Boston, and in a speech at Cooper Union prophesied that that
company must fail. Leading bankers in New York and Boston were
heartily recommending the stock to their customers. Mr. Brandeis
made his prophecy merely by analyzing the published figures. How
did he win in the Pinchot-Glavis-Ballinger controversy? In various
ways, no doubt; but perhaps the most critical step was when he
calculated just how long it would take a fast worker to go through
the Glavis-Ballinger record and make a judgment of it; whereupon he
decided that Mr. Wickersham could not have made his report at the
time it was stated to have been made, and therefore it must have
been predated.
Most of Mr. Brandeis’s other contributions to current history
have involved arithmetic. When he succeeded in preventing a raise
in freight rates, it was through an exact analysis of cost. When
he got Savings Bank Insurance started in Massachusetts, it was
by being able to figure what insurance ought to cost. When he
made the best contract between a city and a public utility that
exists in this country, a definite grasp of the gas business was
necessary--combined, of course, with the wisdom and originality
that make a statesman. He could not have invented the preferential
shop if that new idea had not been founded on a precise knowledge
of the conditions in the garment trades. When he established
before the United States Supreme Court the constitutionality of
legislation affecting women only, he relied much less upon reason
than upon the amount of knowledge displayed of what actually
happens to women when they are overworked--which, while not
arithmetic, is built on the same intellectual quality. Nearly two
years before Mr. Mellen resigned from the New Haven Railroad, Mr.
Brandeis wrote to the present editor of this paper a private letter
in which he said:
“When the New Haven reduces its dividends and Mellen resigns, the
‘Decline of New Haven and Fall of Mellen’ will make a dramatic
story of human interest with a moral--or two--including the evils
of private monopoly. Events cannot be long deferred, and possibly
you may want to prepare for their coming.
“Anticipating the future a little, I suggest the following as an
epitaph or obituary notice:
“Mellen was a masterful man, resourceful, courageous, broad
of view. He fired the imagination of New England; but, being
oblique of vision, merely distorted its judgment and silenced its
conscience. For a while he trampled with impunity on laws human and
divine; but, as he was obsessed with the delusion that two and two
make five, he fell, at last, a victim to the relentless rules of
humble arithmetic.
“‘Remember, O Stranger, Arithmetic is the first of the sciences and
the mother of safety.’”
The exposure of the bad financial management of the New Haven railroad,
more than any other one thing, led to the exposure and comprehension
of the wasteful methods of big business all over the country and
that exposure of the New Haven was the almost single-handed work of
Mr. Brandeis. He is a person who fights against any odds while it is
necessary to fight and stops fighting as soon as the fight is won. For
a long time very respectable and honest leaders of finance said that
his charges against the New Haven were unsound and inexcusable. He
kept ahead. A year before the actual crash came, however, he ceased
worrying, for he knew the work had been carried far enough to complete
itself. When someone asked him to take part in some little controversy
shortly before the collapse, he replied, “That fight does not need me
any longer. Time and arithmetic will do the rest.”
This grasp of the concrete is combined in Mr. Brandeis with an equally
distinguished grasp of bearing and significance. His imagination is
as notable as his understanding of business. In those accomplishments
which have given him his place in American life, the two sides of his
mind have worked together. The arrangement between the Gas Company
and the City of Boston rests on one of the guiding principles of Mr.
Brandeis’s life, that no contract is good that is not advantageous
to both parties to it. Behind his understanding of the methods of
obtaining insurance and the proper cost of it to the laboring man lay
a philosophy of the vast advantage to the fibre and energy of the
community that would come from devising methods by which the laboring
classes could make themselves comfortable through their whole lives
and thus perhaps making unnecessary elaborate systems of state help.
The most important ideas put forth in the Armstrong Committee Report
on insurance had been previously suggested by Mr. Brandeis, acting
as counsel for the Equitable policy holders. Business and the more
important statesmanship were intimately combined in the management of
the Protocol in New York, which has done so much to improve conditions
in the clothing industry. The welfare of the laborer and his relation
to his employer seems to Mr. Brandeis, as it does to all the most
competent thinkers today, to constitute the most important question we
have to solve, and he won the case, coming up to the Supreme Court of
the United States, from Oregon, establishing the constitutionality of
special protective legislation for women. In the Minimum Wage case,
also from the State of Oregon, which is about to be heard before the
Supreme Court, he takes up what is really a logical sequence of the
limitation of women’s hours in certain industries, since it would be
a futile performance to limit their hours and then allow their wages
to be cut down in consequence. These industrial activities are in
large part an expression of his deep and ever growing sympathy with
the working people and understanding of them. Florence Kelley once
said: “No man since Lincoln has understood the common people as Louis
Brandeis does.”
While the majority of Mr. Brandeis’s great progressive achievements
have been connected with the industrial system, some have been
political in a more limited sense. I worked with him through the
Ballinger-Pinchot controversy, and I never saw a grasp of detail more
brilliantly combined with high constructive ethical and political
thinking. After the man who knew most about the details of the Interior
Department had been cross-examined by Mr. Brandeis he came and sat
down by me and said: “Mr. Hapgood, I have no respect for you. I do
not think your motives in this agitation are good motives, but I want
to say that you have a wonderful lawyer. He knows as much about the
Interior Department today as I do.” In that controversy, the power of
the administration and of the ruling forces in the House and Senate
were combined to protect Secretary Ballinger and prevent the truth
from coming to light. Mr. Brandeis, in leading the fight for the
conservation side, was constantly haunted by the idea that there was a
mystery somewhere. The editorial printed above hints at how he solved
the mystery, but it would require much more space to tell the other
sides, the enthusiasm for conservation, the convincing arguments for
higher standards in office, the connection of this conspiracy with the
country’s larger needs. Seldom is an audience at a hearing so moved as
it was by Mr. Brandeis’s final plea to the committee.
Possibly his work on railroads will turn out to be the most significant
among the many things Mr. Brandeis has done. His arguments in 1910–11
before the Interstate Commerce Commission against the raising of rates,
on the ground that the way for railroads to be more prosperous was to
be more efficient, made efficiency a national idea. It is a cardinal
point in his philosophy that the only real progress toward a higher
national life will come through efficiency in all our activities. The
seventy-eight questions addressed to the railroads by the Interstate
Commerce Commission in December, 1913, embody what is probably the most
comprehensive embodiment of his thought on the subject.
On nothing has he ever worked harder than on his diagnosis of the
Money Trust, and when his life comes to be written (I hope many years
hence) this will be ranked with his railroad work for its effect in
accelerating industrial changes. It is indeed more than a coincidence
that so many of the things he has been contending for have come to
pass. It is seldom that one man puts one idea, not to say many ideas,
effectively before the world, but it is no exaggeration to say that
Mr. Brandeis is responsible for the now widespread recognition of
the inherent weakness of great size. He was the first person who set
forth effectively the doctrine that there is a limit to the size of
greatest efficiency, and the successful demonstration of that truth is
a profound contribution to the subject of trusts. The demonstration
is powerfully put in his testimony before the Senate Committee in
1911, and it is powerfully put in this volume. In destroying the
delusion that efficiency was a common incident of size, he emphasized
the possibility of efficiency through intensive development of the
individual, thus connecting this principle with his whole study of
efficiency, and pointing the way to industrial democracy.
Not less notable than the intellect and the constructive ability that
have gone into Mr. Brandeis’s work are the exceptional moral qualities.
Any powerful and entirely sincere crusader must sacrifice much. Mr.
Brandeis has sacrificed much in money, in agreeableness of social life,
in effort, and he has done it for principle and for human happiness.
His power of intensive work, his sustained interest and will, and his
courage have been necessary for leadership. No man could have done what
he has done without being willing to devote his life to making his
dreams come true.
Nor should anyone make the mistake, because the labors of Mr. Brandeis
and others have recently brought about changes, that the system which
was being attacked has been undermined. The currency bill has been
passed, and as these words are written, it looks as if a group of
trust bills would be passed. But systems are not ended in a day. Of
the truths which are embodied in the essays printed in this book, some
are being carried out now, but it will be many, many years before the
whole idea can be made effective; and there will, therefore, be many,
many years during which active citizens will be struggling for those
principles which are here so clearly, so eloquently, so conclusively
set forth.
The articles reprinted here were all written before November, 1913.
“The Failure of Banker Management” appeared in Harper’s Weekly Aug. 16,
1913; the other articles, between Nov. 22, 1913 and Dec. 17, 1914.
NORMAN HAPGOOD.
_March, 1914._
CONTENTS
CHAPTER PAGE
I OUR FINANCIAL OLIGARCHY 1
II HOW THE COMBINERS COMBINE 28
III INTERLOCKING DIRECTORATES 51
IV SERVE ONE MASTER ONLY! 69
V WHAT PUBLICITY CAN DO 92
VI WHERE THE BANKER IS SUPERFLUOUS 109
VII BIG MEN AND LITTLE BUSINESS 135
VIII A CURSE OF BIGNESS 162
IX THE FAILURE OF BANKER-MANAGEMENT 189
X THE INEFFICIENCY OF THE OLIGARCHS 201
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, statesmen must address
themselves with an earnest determination to serve the long future and
the true liberties of men.”
The Pujo Committee--appointed in 1912--found:
“Far more dangerous than all that has happened to us in the past in
the way of elimination of competition in industry is the control of
credit through the domination of these groups over our banks and
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
render impossible all attempts to restore normal competitive
conditions in the industrial world....
“If the arteries of credit now clogged well-nigh to choking by the
obstructions created through the control of these groups are opened
so that they may be permitted freely to play their important part
in the financial system, competition in large enterprises will
become possible and business can be conducted on its merits instead
of being subject to the tribute and the good will of this handful
of self-constituted trustees of the national prosperity.”
The promise of New Freedom was joyously proclaimed in 1913.
The facts which the Pujo Investigating Committee and its able Counsel,
Mr. Samuel Untermyer, have laid before the country, show clearly the
means by which a few men control the business of America. The report
proposes measures which promise some relief. Additional remedies will
be proposed. Congress will soon be called upon to act.
How shall the emancipation be wrought? On what lines shall we proceed?
The facts, when fully understood, will teach us.
THE DOMINANT ELEMENT
The dominant element in our financial oligarchy is the investment
banker. Associated banks, trust companies and life insurance companies
are his tools. Controlled railroads, public service and industrial
corporations are his subjects. Though properly but middlemen, these
bankers bestride as masters America’s business world, so that
practically no large enterprise can be undertaken successfully without
their participation or approval. These bankers are, of course, able
men possessed of large fortunes; but the most potent factor in their
control of business is not the possession of extraordinary ability
or huge wealth. The key to their power is Combination--concentration
intensive and comprehensive--advancing on three distinct lines:
_First:_ There is the obvious consolidation of banks and trust
companies; the less obvious affiliations--through stockholdings, voting
trusts and interlocking directorates--of banking institutions which
are not legally connected; and the joint transactions, gentlemen’s
agreements, and “banking ethics” which eliminate competition among the
investment bankers.
_Second:_ There is the consolidation of railroads into huge systems,
the large combinations of public service corporations and the
formation of industrial trusts, which, by making businesses so “big”
that local, independent banking concerns cannot alone supply the
necessary funds, has created dependence upon the associated New York
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, originally, by a distinct set of men, became united in the
investment banker. It is to this union of business functions that the
existence of the Money Trust is mainly due.*
* Obviously only a few of the investment bankers exercise this
great power; but many others perform important functions in the
system, as hereinafter described.
* * * * *
The development of our financial oligarchy followed, in this respect,
lines with which the history of political despotism has familiarized
us:--usurpation, proceeding by gradual encroachment rather than by
violent acts; subtle and often long-concealed concentration of distinct
functions, which are beneficent when separately administered, and
dangerous only when combined in the same persons. It was by processes
such as these that Cæsar Augustus became master of Rome. The makers of
our own Constitution had in mind like dangers to our political liberty
when they provided so carefully for the separation of governmental
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,
municipalities, states and governments which need money, and selling
to those seeking investments. The banker performs, in this respect,
the function of a merchant; and the function is a very useful one.
Large business enterprises are conducted generally by corporations.
The permanent capital of corporations is represented by bonds and
stocks. The bonds and stocks of the more important corporations are
owned, in large part, by small investors, who do not participate in
the management of the company. Corporations require the aid of a
banker-middleman, for they lack generally the reputation and clientele
essential to selling their own bonds and stocks direct to the investor.
Investors in corporate securities, also, require the services of a
banker-middleman. The number of securities upon the market is very
large. Only a part of these securities is listed on the New York
Stock Exchange; but its listings alone comprise about sixteen hundred
different issues aggregating about $26,500,000,000, and each year new
listings are made averaging about two hundred and thirty-three to an
amount of $1,500,000,000. For a small investor to make an intelligent
selection from these many corporate securities--indeed, to pass an
intelligent judgment upon a single one--is ordinarily impossible. He
lacks the ability, the facilities, the training and the time essential
to a proper investigation. Unless his purchase is to be little better
than a gamble, he needs the advice of an expert, who, combining special
knowledge with judgment, has the facilities and incentive to make a
thorough investigation. This dependence, both of corporations and of
investors, upon the banker has grown in recent years, since women and
others who do not participate in the management, have become the owners
of so large a part of the stocks and bonds of our great corporations.
Over half of the stockholders of the American Sugar Refining Company
and nearly half of the stockholders of the Pennsylvania Railroad and of
the New York, New Haven & Hartford Railroad are women.
* * * * *
Good-will--the possession by a dealer of numerous and valuable regular
customers--is always an important element in merchandising. But in
the business of selling bonds and stocks, it is of exceptional value,
for the very reason that the small investor relies so largely upon
the banker’s judgment. This confidential relation of the banker to
customers--and the knowledge of the customers’ private affairs acquired
incidentally--is often a determining factor in the marketing of
securities. With the advent of Big Business such good-will possessed
by the older banking houses, preëminently J. P. Morgan & Co. and their
Philadelphia House called Drexel & Co., by Lee, Higginson & Co. and
Kidder, Peabody, & Co. of Boston, and by Kuhn, Loeb & Co. of New York,
became of enhanced importance. The volume of new security issues was
greatly increased by huge railroad consolidations, the development of
the holding companies, and particularly by the formation of industrial
trusts. The rapidly accumulating savings of our people sought
investment. The field of operations for the dealer in securities was
thus much enlarged. And, as the securities were new and untried, the
services of the investment banker were in great demand, and his powers
and profits increased accordingly.
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 & Company formed the Steel Trust, the Harvester Trust
and the Shipping Trust. And, adding the duties of undertaker to those
of midwife, the investment bankers became, in times of corporate
disaster, members of security-holders’ “Protective Committees”; then
they participated as “Reorganization Managers” in the reincarnation of
the unsuccessful corporations and ultimately became directors. It was
in this way that the Morgan associates acquired their hold upon the
Southern Railway, the Northern Pacific, the Reading, the Erie, the Père
Marquette, the Chicago and Great Western, and the Cincinnati, Hamilton
& Dayton. Often they insured the continuance of such control by the
device of the voting trust; but even where no voting trust was created,
a secure hold was acquired upon reorganization. It was in this way also
that Kuhn, Loeb & Co. became potent in the Union Pacific and in the
Baltimore & Ohio.
But the banker’s participation in the management of corporations was
not limited to cases of promotion or reorganization. An urgent or
extensive need of new money was considered a sufficient reason for the
banker’s entering a board of directors. Often without even such excuse
the investment banker has secured a place upon the Board of Directors,
through his powerful influence or the control of his customers’
proxies. Such seems to have been the fatal entrance of Mr. Morgan into
the management of the then prosperous New York, New Haven & Hartford
Railroad, in 1892. When once a banker has entered the Board--whatever
may have been the occasion--his grip proves tenacious and his influence
usually supreme; for he controls the supply of new money.
* * * * *
The investment banker is naturally on the lookout for good bargains
in bonds and stocks. Like other merchants, he wants to buy his
merchandise cheap. But when he becomes director of a corporation,
he occupies a position which prevents the transaction by which he
acquires its corporate securities from being properly called a bargain.
Can there be real bargaining where the same man is on both sides of
a trade? The investment banker, through his controlling influence
on the Board of Directors, decides that the corporation shall issue
and sell the securities, decides the price at which it shall sell
them, and decides that it shall sell the securities to himself. The
fact that there are other directors besides the banker on the Board
does not, in practice, prevent this being the result. The banker,
who holds the purse-strings, becomes usually the dominant spirit.
Through voting-trusteeships, exclusive financial agencies, membership
on executive or finance committees, or by mere directorships, J. P.
Morgan & Co., and their associates, held such financial power in at
least thirty-two transportation systems, public utility corporations
and industrial companies--companies with an aggregate capitalization of
$17,273,000,000. Mainly for corporations so controlled, J. P. Morgan
& Co. procured the public marketing in ten years of security issues
aggregating $1,950,000,000. This huge sum does not include any issues
marketed privately, nor any issues, however marketed, of intra-state
corporations. Kuhn, Loeb & Co. and a few other investment bankers
exercise similar control over many other corporations.
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 ability to market their goods. They saw that if they could
control the security-buyers, as well as the security-makers, investment
banking would, indeed, be “a happy hunting ground”; and they have made
it so.
The numerous small investors cannot, in the strict sense, be
controlled; but their dependence upon the banker insures their being
duly influenced. A large part, however, of all bonds issued and of
many stocks are bought by the prominent corporate investors; and
most prominent among these are the life insurance companies, the
trust companies, and the banks. The purchase of a security by these
institutions not only relieves the banker of the merchandise, but
recommends it strongly to the small investor, who believes that these
institutions are wisely managed. These controlled corporate investors
are not only large customers, but may be particularly accommodating
ones. Individual investors are moody. They buy only when they want
to do so. They are sometimes inconveniently reluctant. Corporate
investors, if controlled, may be made to buy when the bankers need a
market. It was natural that the investment bankers proceeded to get
control of the great life insurance companies, as well as of the trust
companies and the banks.
The field thus occupied is uncommonly rich. The life insurance
companies are our leading institutions for savings. Their huge surplus
and reserves, augmented daily, are always clamoring for investment.
No panic or money shortage stops the inflow of new money from the
perennial stream of premiums on existing policies and interest on
existing investments. The three great companies--the New York Life, the
Mutual of New York, and the Equitable--would have over $55,000,000 of
_new_ money to invest annually, even if they did not issue a single new
policy. In 1904--just before the Armstrong investigation--these three
companies had together $1,247,331,738.18 of assets. They had issued
in that year $1,025,671,126 of new policies. The New York legislature
placed in 1906 certain restrictions upon their growth; so that their
new business since has averaged $547,384,212, or only fifty-three
per cent. of what it was in 1904. But the aggregate assets of these
companies increased in the last eight years to $1,817,052,260.36. At
the time of the Armstrong investigation the average age of these three
companies was fifty-six years. _The growth of assets in the last eight
years was about half as large as the total growth in the preceding
fifty-six years._ These three companies must invest annually about
$70,000,000 of new money; and besides, many old investments expire
or are changed and the proceeds must be reinvested. A large part of
all life insurance surplus and reserves are invested in bonds. The
aggregate bond investments of these three companies on January 1, 1913,
was $1,019,153,268.93.
It was natural that the investment bankers should seek to control
these never-failing reservoirs of capital. George W. Perkins was
Vice-President of the New York Life, the largest of the companies.
While remaining such he was made a partner in J. P. Morgan & Co., and
in the four years preceding the Armstrong investigation, his firm sold
the New York Life $38,804,918.51 in securities. The New York Life is a
mutual company, supposed to be controlled by its policy-holders. But,
as the Pujo Committee funds “the so-called control of life insurance
companies by policy-holders through mutualization is a farce” and “its
only result is to keep in office a self-constituted, self-perpetuating
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
$3,000,000 for $51,000, par value of this stock, or $5,882.35 a share.
The dividend return on the stock investment is less than one-eighth
of one per cent.; but the assets controlled amount now to over
$500,000,000. And certain of these assets had an especial value for
investment bankers;--namely, the large holdings of stock in banks and
trust companies.
* * * * *
The Armstrong investigation disclosed the extent of financial power
exerted through the insurance company holdings of bank and trust
company stock. The Committee recommended legislation compelling the
insurance companies to dispose of the stock within five years. A law to
that effect was enacted, but the time was later extended. The companies
then disposed of a part of their bank and trust company stocks; but,
as the insurance companies were controlled by the investment bankers,
these gentlemen sold the bank and trust company stocks to themselves.
Referring to such purchases from the Mutual Life, as well as from the
Equitable, the Pujo Committee found:
“Here, then, were stocks of five important trust companies and one of
our largest national banks in New York City that had been held by
these two life insurance companies. Within five years all of these
stocks, so far as distributed by the insurance companies, have found
their way into the hands of the men who virtually controlled or were
identified with the management of the insurance companies or of their
close allies and associates, to that extent thus further entrenching
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 three great life insurance companies the
influence of J. P. Morgan & Co. and their associates is exerted without
any individual investment by them whatsoever. Even in the Equitable,
where Mr. Morgan bought an actual majority of all the outstanding
stock, his investment amounts to little more than one-half of one per
cent. of the assets of the company. The fetters which bind the people
are forged from the people’s own gold.
* * * * *
But the reservoir of other people’s money, from which the investment
bankers now draw their greatest power, is not the life insurance
companies, but the banks and the trust companies. Bank deposits
represent the really quick capital of the nation. They are the life
blood of businesses. Their effective force is much greater than that
of an equal amount of wealth permanently invested. The 34 banks and
trust companies, which the Pujo Committee declared to be directly
controlled by the Morgan associates, held $1,983,000,000 in deposits.
Control of these institutions means the ability to lend a large part
of these funds, directly and indirectly, to themselves; and what is
often even more important, the power to prevent the funds being lent
to any rival interests. These huge deposits can, in the discretion of
those in control, be used to meet the temporary needs of their subject
corporations. When bonds and stocks are issued to finance permanently
these corporations, the bank deposits can, in large part, be loaned by
the investment bankers in control to themselves and their associates;
so that securities bought may be carried by them, until sold to
investors. Or these bank deposits may be loaned to allied bankers,
or jobbers in securities, or to speculators, to enable them to carry
the bonds or stocks. Easy money tends to make securities rise in the
market. Tight money nearly always makes them fall. The control by the
leading investment bankers over the banks and trust companies is so
great, that they can often determine, for a time, the market for money
by lending or refusing to lend on the Stock Exchange. In this way,
among others, they have power to affect the general trend of prices
in bonds and stocks. Their power over a particular security is even
greater. Its sale on the market may depend upon whether the security is
favored or discriminated against when offered to the banks and trust
companies, as collateral for loans.
Furthermore, it is the investment banker’s access to other people’s
money in controlled banks and trust companies which alone enables
any individual banking concern to take so large part of the annual
output of bonds and stocks. The banker’s own capital, however large,
would soon be exhausted. And even the loanable funds of the banks
would often be exhausted, but for the large deposits made in those
banks by the life insurance, railroad, public service, and industrial
corporations which the bankers also control. On December 31, 1912, the
three leading life insurance companies had deposits in banks and trust
companies aggregating $13,839,189.08. As the Pujo Committee finds:
“The men who through their control over the funds of our railroads and
industrial companies are able to direct where such funds shall be kept
and thus to create these great reservoirs of the people’s money, are
the ones who are in position to tap those reservoirs for the ventures
in which they are interested and to prevent their being tapped for
purposes of which they do not approve. The latter is quite as important
a factor as the former. It is the controlling consideration in its
effect on competition in the railroad and industrial world.”
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 purchase price; and still do not part with their money. This
is accomplished by the simple device of becoming the bank of deposit
of the controlled corporations, instead of having the company deposit
in some merely controlled bank in whose operation others have at least
some share. When J. P. Morgan & Co. buy an issue of securities the
purchase money, instead of being paid over to the corporation, is
retained by the banker for the corporation, to be drawn upon only as
the funds are needed by the corporation. And as the securities are
issued in large blocks, and the money raised is often not all spent
until long thereafter, the aggregate of the balances remaining in the
banker’s hands are huge. Thus J. P. Morgan & Co. (including their
Philadelphia house, called Drexel & Co.) held on November 1, 1912,
deposits aggregating $162,491,819.65.
POWER AND PELF
The operations of so comprehensive a system of concentration
necessarily developed in the bankers overweening power. And the
bankers’ power grows by what it feeds on. Power begets wealth; and
added wealth opens ever new opportunities for the acquisition of wealth
and power. The operations of these bankers are so vast and numerous
that even a very reasonable compensation for the service performed by
the bankers, would, in the aggregate, produce for them incomes so large
as to result in huge accumulations of capital. But the compensation
taken by the bankers as commissions or profits is often far from
reasonable. Occupying, as they so frequently do, the inconsistent
position of being at the same time seller and buyer, the standard for
so-called compensation actually applied, is not the “Rule of reason”,
but “All the traffic will bear.” And this is true even where there is
no sinister motive. The weakness of human nature prevents men from
being good judges of their own deservings.
The syndicate formed by J. P. Morgan & Co. to underwrite the United
States Steel Corporation took for its services securities which netted
$62,500,000 in cash. Of this huge sum J. P. Morgan & Co. received, as
syndicate managers, $12,500,000 in addition to the share which they
were entitled to receive as syndicate members. This sum of $62,500,000
was only a part of the fees paid for the service of monopolizing the
steel industry. In addition to the commissions taken specifically
for organizing the United States Steel Corporation, large sums were
paid for organizing the several companies of which it is composed. For
instance, the National Tube Company was capitalized at $80,000,000 of
stock; $40,000,000 of which was common stock. Half of this $40,000,000
was taken by J. P. Morgan & Co. and their associates for promotion
services; and the $20,000,000 stock so taken became later exchangeable
for $25,000,000 of Steel Common. Commissioner of Corporations Herbert
Knox Smith, found that:
“More than $150,000,000 of the stock of the Steel Corporation was
issued directly or indirectly (through exchange) for mere promotion or
underwriting services. In other words, nearly one-seventh of the total
capital stock of the Steel Corporation appears to have been issued
directly or indirectly to promoters’ services.”
* * * * *
The so-called fees and commissions taken by the bankers and associates
upon the organization of the trusts have been exceptionally large. But
even after the trusts are successfully launched the exactions of the
bankers are often extortionate. The syndicate which underwrote, in
1901, the Steel Corporation’s preferred stock conversion plan, advanced
only $20,000,000 in cash and received an underwriting commission of
$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 willing to buy at 106 bonds which the Company were to pay
J. P. Morgan & Co. $1,680,000 to be willing to take at par.
WHY THE BANKS BECAME INVESTMENT BANKERS
These large profits from promotions, underwritings and security
purchases led to a revolutionary change in the conduct of our leading
banking institutions. It was obvious that control by the investment
bankers of the deposits in banks and trust companies was an essential
element in their securing these huge profits. And the bank officers
naturally asked, “Why then should not the banks and trust companies
share in so profitable a field? Why should not they themselves become
investment bankers too, with all the new functions incident to ‘Big
Business’?” To do so would involve a departure from the legitimate
sphere of the banking business, which is the making of temporary
loans to business concerns. But the temptation was irresistible. The
invasion of the investment banker into the banks’ field of operation
was followed by a counter invasion by the banks into the realm of the
investment banker. Most prominent among the banks were the National
City and the First National of New York. But theirs was not a hostile
invasion. The contending forces met as allies, joined forces to control
the business of the country, and to “divide the spoils.” The alliance
was cemented by voting trusts, by interlocking directorates and by
joint ownerships. There resulted the fullest “coöperation”; and ever
more railroads, public service corporations, and industrial concerns
were brought into complete subjection.