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 directorates are, of course,
fully recognized; but the prohibitions proposed in that respect are
restricted to a very narrow sphere.
_First:_ The Committee recognizes that potentially competing
corporations should not have a common director;--but it restricts this
prohibition to directors of national banks, saying:
“No officer or director of a national bank shall be an officer or
director of any other bank or of any trust company or other financial
or other corporation or institution, whether organized under state or
federal law, that is authorized to receive money on deposit or that is
engaged in the business of loaning money on collateral or in buying and
selling securities except as in this section provided; and no person
shall be an officer or director of any national bank who is a private
banker or a member of a firm or partnership of bankers that is engaged
in the business of receiving deposits: Provided, That such bank, trust
company, financial institution, banker, or firm of bankers is located
at or engaged in business at or in the same city, town, or village as
that in which such national bank is located or engaged in business:
Provided further, That a director of a national bank or a partner of
such director may be an officer or director of not more than one trust
company organized by the laws of the state in which such national bank
is engaged in business and doing business at the same place.”
_Second:_ The Committee recognizes that a corporation should not make
a contract in which one of the management has a private interest; but
it restricts this prohibition (1) to national banks, and (2) to the
officers, saying:
“No national bank shall lend or advance money or credit or purchase or
discount any promissory note, draft, bill of exchange or other evidence
of debt bearing the signature or indorsement of any of its officers
or of any partnership of which such officer is a member, directly
or indirectly, or of any corporation in which such officer owns or
has a beneficial interest of upward of ten per centum of the capital
stock, or lend or advance money or credit to, for or on behalf of any
such officer or of any such partnership or corporation, or purchase
any security from any such officer or of or from any partnership
or corporation of which such officer is a member or in which he is
financially interested, as herein specified, or of any corporation
of which any of its officers is an officer at the time of such
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 directors, as well as to officers, and to state banks and
trust companies and to other classes of corporations, as well as to
national banks. And, as will be hereafter shown, such broad legislation
is within the power of Congress.
Let us examine this further:
THE PROHIBITION OF COMMON DIRECTORS IN POTENTIALLY COMPETING
CORPORATIONS
1. _National Banks._ The objection to common directors, as applied to
banking institutions, is clearly shown by the Pujo Committee.
“As the first and foremost step in applying a remedy, and also
for reasons that seem to us conclusive, independently of that
consideration, we recommend that interlocking directorates in
potentially competing financial institutions be abolished and
prohibited so far as lies in the power of Congress to bring about that
result.... When we find, as in a number of instances, the same man a
director in half a dozen or more banks and trust companies all located
in the same section of the same city, doing the same class of business
and with a like set of associates similarly situated, all belonging
to the same group and representing the same class of interests, all
further pretense of competition is useless.... If banks serving the
same field are to be permitted to have common directors, genuine
competition will be rendered impossible. Besides, this practice gives
to such common directors the unfair advantage of knowing the affairs of
borrowers in various banks, and thus affords endless opportunities for
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 directors in other banks. By
law, in Russia no person is allowed to be on the board of management of
more than one bank.
The Committee’s recommendation is also in harmony with laws enacted by
the Commonwealth of Massachusetts more than a generation ago designed
to curb financial concentration through the savings banks. Of the great
wealth of Massachusetts a large part is represented by deposits in
its savings banks. These deposits are distributed among 194 different
banks, located in 131 different cities and towns. These 194 banks are
separate and distinct; not only in form, but in fact. In order that the
banks may not be controlled by a few financiers, the Massachusetts law
provides that no executive officer or trustee (director) of any savings
bank can hold any office in any other savings bank. That statute was
passed in 1876. A few years ago it was supplemented by providing
that none of the executive officers of a savings bank could hold a
similar office in any national bank. Massachusetts attempted thus
to curb the power of the individual financier; and no disadvantages
are discernible. When that Act was passed the aggregate deposits in
its savings banks were $243,340,642; the number of deposit accounts
739,289; the average deposit to each person of the population $144.
On November 1, 1912, the aggregate deposits were $838,635,097.85; the
number of deposit accounts 2,200,917; the average deposit to each
account $381.04. Massachusetts has shown that curbing the power of the
few, at least in this respect, is entirely consistent with efficiency
and with the prosperity of the whole people.
2. _State Banks and Trust Companies._ The reason for prohibiting common
directors in banking institutions applies equally to national banks and
to state banks including those trust companies which are essentially
banks. In New York City there are 37 trust companies of which only
15 are members of the clearing house; but those 15 had on November
2, 1912, aggregate resources of $827,875,653. Indeed the Bankers’
Trust Company with resources of $205,000,000, and the Guaranty Trust
Company, with resources of $232,000,000, are among the most useful
tools of the Money Trust. No bank in the country has larger deposits
than the latter; and only one bank larger deposits than the former.
If common directorships were permitted in state banks or such trust
companies, the charters of leading national banks would doubtless soon
be surrendered; and the institutions would elude federal control by
re-incorporating under state laws.
The Pujo Committee has failed to apply the prohibition of common
directorships in potentially competing banking institutions rigorously
even to national banks. It permits the same man to be a director in one
national bank and one trust company doing business in the same place.
The proposed concession opens the door to grave dangers. In the first
place the provision would permit the interlocking of any national bank
not with one trust company only, but with as many trust companies as
the bank has directors. For while under the Pujo bill no one can be
a national bank director who is director in more than one such trust
company, there is nothing to prevent each of the directors of a bank
from becoming a director in a different trust company. The National
Bank of Commerce of New York has a board of 38 directors. There are
37 trust companies in the City of New York. Thirty-seven of the 38
directors might each become a director of a different New York trust
company: and thus 37 trust companies would be interlocked with the
National Bank of Commerce, unless the other recommendation of the Pujo
Committee limiting the number of directors to 13 were also adopted.
But even if the bill were amended so as to limit the possible
interlocking of a bank to a single trust company, the wisdom of the
concession would still be doubtful. It is true, as the Pujo Committee
states, that “the business that may be transacted by” a trust company
is of “a different character” from that properly transacted by a
national bank. But the business actually conducted by a trust company
is, at least in the East, quite similar; and the two classes of banking
institutions have these vital elements in common: each is a bank of
deposit, and each makes loans from its deposits. A private banker may
also transact some business of a character different from that properly
conducted by a bank; but by the terms of the Committee’s bill a private
banker engaged in the business of receiving deposits would be prevented
from being a director of a national bank; and the reasons underlying
that prohibition apply equally to trust companies and to private
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 Westinghouse Electric
and Manufacturing Company and the General Electric. The _nexus_ between
all the large potentially competing corporations must be severed, if
the Money Trust is to be broken.
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 $1,283,000,000, through which as directors
they carry on their vast operations. A prohibition limited to officers
would not affect the Morgan operations with these banking institutions.
If there were minority representation on bank boards (which the Pujo
Committee wisely advocates), such a provision might afford some
protection to stockholders through the vigilance of the minority
directors preventing the dominant directors using their power to the
injury of the minority stockholders. But even then, the provision
would not safeguard the public; and the primary purpose of Money Trust
legislation is not to prevent directors from injuring stockholders; but
to prevent their injuring the public through the intertwined control of
the banks. No prohibition limited to officers will materially change
this condition.
The prohibition of interlocking directorates, even if applied only to
all banks and trust companies, would practically compel the Morgan
representatives to resign from the directorates of the thirteen
banking institutions with which they are connected, or from the
directorates of all the railroads, express, steamship, public utility,
manufacturing, and other corporations which do business with those
banks and trust companies. Whether they resigned from the one or the
other class of corporations, the endless chain would be broken into
many pieces. And whether they retired or not, the Morgan power would
obviously be greatly lessened: for if they did not retire, their field
of operations would be greatly narrowed.
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 prohibition, even if applied to all banking institutions,
would not affect directly this great source of Morgan power. If,
however, the prohibition is made to include railroad, public-service,
and industrial corporations, as well as banking institutions, members
of J. P. Morgan & Co. will quickly retire from substantially all boards
of directors.
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 Stock Exchange. A recent
$60,000,000 issue of New York City bonds was denied listing on the
Exchange, because the city refused to submit to an exaction of $55,800
by the American Company for engraving the bonds, when the New York Bank
Note Company would do the work equally well for $44,500. As tending to
explain this extraordinary monopoly, it was shown that men prominent in
the financial world were stockholders in the American Company. Among
the largest stockholders was Mr. Morgan, with 6,000 shares. No member
of the Morgan firm was a director of the American Company; but there
was sufficient influence exerted somehow to give the American Company
the stock exchange monopoly.
The Pujo Committee, while failing to recommend that transactions in
which a director has a private interest be prohibited, recognizes
that a stockholder’s interest of more than a certain size may be as
potent an instrument of influence as a direct personal interest; for it
recommends that:
“Borrowings, directly or indirectly by ... any corporation of
the stock of which he (a bank director) holds upwards of 10 per
cent. from the bank of which he is such director, should only be
permitted, on condition that notice shall have been given to his
co-directors and that a full statement of the transaction shall
be entered upon the minutes of the meeting at which such loan was
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 stockholdings. Indeed it is difficult to fix a limit
so low that financial interest will not influence action. Certainly
a stockholding interest of a single director, much smaller than 10
per cent., might be most effective in inducing favors. Mr. Morgan’s
stockholdings in the American Bank Note Company was only three per
cent. The $6,000,000 investment of J. P. Morgan & Co. in the National
City Bank represented only 6 per cent. of the bank’s stock; and would
undoubtedly have been effective, even if it had not been supplemented
by the election of his son to the board of directors.
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 are largely dependent
upon railroads should be absolutely prohibited from serving as railroad
directors, officers or employees. It, therefore, proposed to disqualify
as railroad director, officer or employee any person engaged in the
business of manufacturing or selling railroad cars or locomotives,
railroad rail or structural steel, or in mining and selling coal. The
drastic Stanley bill, shows how great is the desire to do away with
present abuses and to lessen the power of the Money Trust.
Directors, officers, and employees of banking institutions should, by a
similar provision, be disqualified from acting as directors, officers
or employees of life-insurance companies. The Armstrong investigation
showed that life-insurance companies were in 1905 the most potent
factor in financial concentration. Their power was exercised largely
through the banks and trust companies which they controlled by stock
ownership and their huge deposits. The Armstrong legislation directed
life-insurance companies to sell their stocks. The Mutual Life and
the Equitable did so in part. But the Morgan associates bought the
stocks. And now, instead of the life-insurance companies controlling
the banks and trust companies, the latter and the bankers control the
life-insurance companies.
HOW THE PROHIBITION MAY 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 $500,000, and their resources less than, say,
$2,500,000. In larger cities even the smaller banking institutions
should be subject to the law. Such exceptions should overcome any
objection which might be raised that in some smaller cities, the
prohibition of interlocking directorates would exclude from the bank
directorates all the able business men of the community through fear of
losing the opportunity of bank accommodations.
An exception should also be made, so as to permit interlocking
directorates between a corporation and its proper subsidiaries. And
the prohibition of transactions in which the management has a private
interest should, of course, not apply to contracts, express or
implied, for such services as are performed indiscriminately for the
whole community by railroads and public service corporations, or for
services, common to all customers, like the ordinary service of a bank
for its depositors.
THE 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.