BIG MEN AND LITTLE BUSINESS
J. P. Morgan & Co. declare, in their letter to the Pujo Committee,
that “practically all the railroad and industrial development of this
country has taken place initially through the medium of the great
banking houses.” That statement is entirely unfounded in fact. On the
contrary nearly every such contribution to our comfort and prosperity
was “initiated” _without_ their aid. The “great banking houses” came
into relation with these enterprises, either after success had been
attained, or upon “reorganization” after the possibility of success had
been demonstrated, but the funds of the hardy pioneers, who had risked
their all, were exhausted.
This is true of our early railroads, of our early street railways, and
of the automobile; of the telegraph, the telephone and the wireless; of
gas and oil; of harvesting machinery, and of our steel industry; of the
textile, paper and shoe industries; and of nearly every other important
branch of manufacture. The _initiation_ of each of these enterprises
may properly be characterized as “great transactions”; and the men
who contributed the financial aid and business management necessary
for their introduction are entitled to share, equally with inventors,
in our gratitude for what has been accomplished. But the instances
are extremely rare where the original financing of such enterprises
was undertaken by investment bankers, great or small. It was usually
done by some common business man, accustomed to taking risks; or by
some well-to-do friend of the inventor or pioneer, who was influenced
largely by considerations other than money-getting. Here and there you
will find that banker-aid was given; but usually in those cases it was
a small local banking concern, not a “great banking house” which helped
to “initiate” the undertaking.
RAILROADS
We have come to associate the great bankers with railroads. But their
part was not conspicuous in the early history of the Eastern railroads;
and in the Middle West the experience was, to some extent, similar. The
Boston & Maine Railroad owns and leases 2,215 miles of line; but it is
a composite of about 166 separate railroad companies. The New Haven
Railroad owns and leases 1,996 miles of line; but it is a composite of
112 separate railroad companies. The necessary capital to build these
little roads was gathered together, partly through state, county or
municipal aid; partly from business men or landholders who sought to
advance their special interests; partly from investors; and partly from
well-to-do public-spirited men, who wished to promote the welfare of
their particular communities. About seventy-five years after the first
of these railroads was built, J. P. Morgan & Co. became fiscal agent
for all of them by creating the New Haven-Boston & Maine monopoly.
STEAMSHIPS
The history of our steamship lines is similar. In 1807, Robert
Fulton, with the financial aid of Robert R. Livingston, a judge and
statesman--not a banker--demonstrated with the _Claremont_, that it
was practicable to propel boats by steam. In 1833 the three Cunard
brothers of Halifax and 232 other persons--stockholders of the Quebec
and Halifax Steam Navigation Company--joined in supplying about $80,000
to build the _Royal William_,--the first steamer to cross the Atlantic.
In 1902, many years after individual enterprises had developed
practically all the great ocean lines, J. P. Morgan & Co. floated the
International Mercantile Marine with its $52,744,000 of 4 1/2 bonds,
now selling at about 60, and $100,000,000 of stock (preferred and
common) on which no dividend has ever been paid. It was just sixty-two
years after the first regular line of transatlantic steamers--The
Cunard--was founded that Mr. Morgan organized the Shipping Trust.
TELEGRAPH
The story of the telegraph is similar. The money for developing
Morse’s invention was supplied by his partner and co-worker, Alfred
Vail. The initial line (from Washington to Baltimore) was built with
an appropriation of $30,000 made by Congress in 1843. Sixty-six years
later J. P. Morgan & Co. became bankers for the Western Union through
financing its purchase by the American Telephone & Telegraph Company.
HARVESTING MACHINERY
Next to railroads and steamships, harvesting machinery has probably
been the most potent factor in the development of America; and
most important of the harvesting machines was Cyrus H. McCormick’s
reaper. That made it possible to increase the grain harvest twenty-
or thirty-fold. No investment banker had any part in introducing this
great business man’s invention.
McCormick was without means; but William Butler Ogden, a railroad
builder, ex-Mayor and leading citizen of Chicago, supplied $25,000
with which the first factory was built there in 1847. Fifty-five years
later, J. P. Morgan & Co. performed the service of combining the five
great harvester companies, and received a commission of $3,000,000.
The concerns then consolidated as the International Harvester Company,
with a capital stock of $120,000,000, had, despite their huge assets
and earning power, been previously capitalized, in the aggregate, at
only $10,500,000--strong evidence that in all the preceding years no
investment banker had financed them. Indeed, McCormick was as able
in business as in mechanical invention. Two years after Ogden paid
him $25,000 for a half interest in the business, McCormick bought it
back for $50,000; and thereafter, until his death in 1884, no one but
members of the McCormick family had any interest in the business.
THE BANKER ERA
It may be urged that railroads and steamships, the telegraph and
harvesting machinery were introduced before the accumulation of
investment capital had developed the investment banker, and before
America’s “great banking houses” had been established; and that,
consequently, it would be fairer to inquire what services bankers had
rendered in connection with later industrial development. The firm of
J. P. Morgan & Co. is fifty-five years old; Kuhn, Loeb & Co. fifty-six
years old; Lee, Higginson & Co. over fifty years; and Kidder, Peabody
& Co. forty-eight years; and yet the investment banker seems to have
had almost as little part in “initiating” the great improvements of the
last half century, as did bankers in the earlier period.
STEEL
The modern steel industry of America is forty-five years old. The
“great bankers” had no part in initiating it. Andrew Carnegie, then
already a man of large means, introduced the Bessemer process in 1868.
In the next thirty years our steel and iron industry increased greatly.
By 1898 we had far outstripped all competitors. America’s production
about equalled the aggregate of England and Germany. We had also
reduced costs so much that Europe talked of the “American Peril.” It
was 1898, when J. P. Morgan & Co. took their first step in forming the
Steel Trust, by organizing the Federal Steel Company. Then followed
the combination of the tube mills into an $80,000,000 corporation,
J. P. Morgan & Co. taking for their syndicate services $20,000,000 of
common stock. About the same time the consolidation of the bridge and
structural works, the tin plate, the sheet steel, the hoop and other
mills followed; and finally, in 1901, the Steel Trust was formed, with
a capitalization of $1,402,000,000. These combinations came thirty
years after the steel industry had been “initiated”.
THE TELEPHONE
The telephone industry is less than forty years old. It is probably
America’s greatest contribution to industrial development. The bankers
had no part in “initiating” it. The glory belongs to a simple,
enthusiastic, warm-hearted, business man of Haverhill, Massachusetts,
who was willing to risk _his own_ money. H. N. Casson tells of this,
most interestingly, in his “History of the Telephone”:
“The only man who had money and dared to stake it on the future of
the telephone was Thomas Sanders, and he did this not mainly for
business reasons. Both he and Hubbard were attached to Bell primarily
by sentiment, as Bell had removed the blight of dumbness from Sanders’
little son, and was soon to marry Hubbard’s daughter. Also, Sanders had
no expectation, at first, that so much money would be needed. He was
not rich. His entire business, which was that of cutting out soles for
shoe manufacturers, was not at any time worth more than thirty-five
thousand dollars. Yet, from 1874 to 1878, he had advanced nine-tenths
of the money that was spent on the telephone. The first five thousand
telephones, and more, were made with his money. And so many long,
expensive months dragged by before any relief came to Sanders, that
he was compelled, much against his will and his business judgment, to
stretch his credit within an inch of the breaking-point to help Bell
and the telephone. Desperately he signed note after note until he faced
a total of one hundred and ten thousand dollars. If the new ‘scientific
toy’ succeeded, which he often doubted, he would be the richest citizen
in Haverhill; and if it failed, which he sorely feared, he would be
a bankrupt. Sanders and Hubbard were leasing telephones two by two,
to business men who previously had been using the private lines of
the Western Union Telegraph Company. This great corporation was at
this time their natural and inevitable enemy. It had swallowed most
of its competitors, and was reaching out to monopolize all methods of
communication by wire. The rosiest hope that shone in front of Sanders
and Hubbard was that the Western Union might conclude to buy the Bell
patents, just as it had already bought many others. In one moment of
discouragement they had offered the telephone to President Orton, of
the Western Union, for $100,000; and Orton had refused it. ‘What use,’
he asked pleasantly, ‘could this company make of an electrical toy?’
“But besides the operation of its own wires, the Western Union was
supplying customers with various kinds of printing-telegraphs and
dial-telegraphs, some of which could transmit sixty words a minute.
These accurate instruments, it believed, could never be displaced
by such a scientific oddity as the telephone, and it continued to
believe this until one of its subsidiary companies--the Gold and
Stock--reported that several of its machines had been superseded by
telephones.
“At once the Western Union awoke from its indifference. Even this tiny
nibbling at its business must be stopped. It took action quickly,
and organized the ‘American Speaking-Telephone Company,’ and with
$300,000 capital, and with three electrical inventors, Edison, Gray,
and Dolbear, on its staff. With all the bulk of its great wealth
and prestige, it swept down upon Bell and his little body-guard. It
trampled upon Bell’s patent with as little concern as an elephant can
have when he tramples upon an ant’s nest. To the complete bewilderment
of Bell, it coolly announced that it had the only original telephone,
and that it was ready to supply superior telephones with all the latest
improvements made by the original inventors--Dolbear, Gray, and Edison.
“The result was strange and unexpected. The Bell group, instead of
being driven from the field, were at once lifted to a higher level in
the business world. And the Western Union, in the endeavor to protect
its private lines, became involuntarily a ‘bell-wether’ to lead
capitalists in the direction of the telephone.”
Even then, when financial aid came to the Bell enterprise, it was from
capitalists, not from bankers, and among these capitalists was William
H. Forbes (son of the builder of the Burlington) who became the first
President of the Bell Telephone Company. That was in 1878. More than
twenty years later, after the telephone had spread over the world, the
great house of Morgan came into financial control of the property.
The American Telephone & Telegraph Company was formed. The process of
combination became active. Since January, 1900, its stock has increased
from $25,886,300 to $344,606,400. In six years (1906 to 1912), the
Morgan associates marketed about $300,000,000 bonds of that company or
its subsidiaries. In that period the volume of business done by the
telephone companies had, of course, grown greatly, and the plant had to
be constantly increased; but the proceeds of these huge security issues
were used, to a large extent, in effecting combinations; that is, in
buying out telephone competitors; in buying control of the Western
Union Telegraph Company; and in buying up outstanding stock interests
in semi-independent Bell companies. It is these combinations which have
led to the investigation of the Telephone Company by the Department of
Justice; and they are, in large part, responsible for the movement to
have the government take over the telephone business.
ELECTRICAL MACHINERY
The business of manufacturing electrical machinery and apparatus
is only a little over thirty years old. J. P. Morgan & Co. became
interested early in one branch of it; but their dominance of the
business today is due, not to their “initiating” it, but to their
effecting a combination, and organizing the General Electric Company
in 1892. There were then three large electrical companies, the
Thomson-Houston, the Edison and the Westinghouse, besides some small
ones. The Thomson-Houston of Lynn, Massachusetts, was in many respects
the leader, having been formed to introduce, among other things,
important inventions of Prof. Elihu Thomson and Prof. Houston. Lynn
is one of the principal shoe-manufacturing centers of America. It is
within ten miles of State Street, Boston; but Thomson’s early financial
support came not from Boston bankers, but mainly from Lynn business
men and investors; men active, energetic, and used to taking risks
with _their own_ money. Prominent among them was Charles A. Coffin,
a shoe manufacturer, who became connected with the Thomson-Houston
Company upon its organization and president of the General Electric
when Mr. Morgan formed that company in 1892, by combining the
Thomson-Houston and the Edison. To his continued service, supported
by other Thomson-Houston men in high positions, the great prosperity
of the company is, in large part, due. The two companies so combined
controlled probably one-half of all electrical patents then existing
in America; and certainly more than half of those which had any
considerable value.
In 1896 the General Electric pooled its patents with the Westinghouse,
and thus competition was further restricted. In 1903 the General
Electric absorbed the Stanley Electric Company, its other large
competitor; and became the largest manufacturer of electric apparatus
and machinery in the world. In 1912 the resources of the Company
were $131,942,144. It billed sales to the amount of $89,182,185. It
employed directly over 60,000 persons,--more than a fourth as many as
the Steel Trust. And it is protected against “undue” competition; for
one of the Morgan partners has been a director, since 1909, in the
Westinghouse,--the only other large electrical machinery company in
America.
THE AUTOMOBILE
The automobile industry is about twenty years old. It is now America’s
most prosperous business. When Henry B. Joy, President of the Packard
Motor Car Company, was asked to what extent the bankers aided in
“initiating” the automobile, he replied:
“It is the observable facts of history, it is also my experience of
thirty years as a business man, banker, etc., that first the seer
conceives an opportunity. He has faith in his almost second sight.
He believes he can do something--develop a business--construct an
industry--build a railroad--or Niagara Falls Power Company,--and
make it pay!
“Now the human measure is not the actual physical construction, but
the ‘make it pay’!
“A man raised the money in the late ’90s and built a beet sugar
factory in Michigan. Wise-acres said it was nonsense. He gathered
together the money from his friends who would take a chance with
him. He not only built the sugar factory (and there was never any
doubt of his ability to do that) but he made it pay. The next
year two more sugar factories were built, and were financially
successful. These were built by private individuals of wealth,
taking chances in the face of cries of doubting bankers and trust
companies.
“Once demonstrated that the industry was a sound one financially
and _then_ bankers and trust companies would lend the new sugar
companies which were speedily organized a large part of the
necessary funds to construct and operate.
“The motor-car business was the same.
“When a few gentlemen followed me in my vision of the possibilities
of the business, the banks and older business men (who in the
main were the banks) said, ‘fools and their money soon to be
parted’--etc., etc.
“Private capital at first establishes an industry, backs it through
its troubles, and, if possible, wins financial success when banks
would not lend a dollar of aid.
“The business once having proved to be practicable and financially
successful, then do the banks lend aid to its needs.”
Such also was the experience of the greatest of the many financial
successes in the automobile industry--the Ford Motor Company.
HOW BANKERS ARREST DEVELOPMENT
But “great banking houses” have not merely failed to initiate
industrial development; they have definitely arrested development
because to them the creation of the trusts is largely due. The recital
in the Memorial addressed to the President by the Investors’ Guild in
November, 1911, is significant:
“It is a well-known fact that modern trade combinations tend
strongly toward constancy of process and products, and by their
very nature are opposed to new processes and new products
originated by independent inventors, and hence tend to restrain
competition in the development and sale of patents and patent
rights; and consequently tend to discourage independent inventive
thought, to the great detriment of the nation, and with injustice
to inventors whom the Constitution especially intended to encourage
and protect in their rights.”
And more specific was the testimony of the _Engineering News_:
“We are today something like five years behind Germany in iron and
steel metallurgy, and such innovations as are being introduced by
our iron and steel manufacturers are most of them merely following
the lead set by foreigners years ago.
“We do not believe this is because American engineers are any
less ingenious or original than those of Europe, though they may
indeed be deficient in training and scientific education compared
with those of Germany. We believe the main cause is the wholesale
consolidation which has taken place in American industry. A huge
organization is too clumsy to take up the development of an
original idea. With the market closely controlled and profits
certain by following standard methods, those who control our trusts
do not want the bother of developing anything new.
“We instance metallurgy only by way of illustration. There are
plenty of other fields of industry where exactly the same condition
exists. We are building the same machines and using the same
methods as a dozen years ago, and the real advances in the art are
being made by European inventors and manufacturers.”
To which President Wilson’s statement may be added:
“I am not saying that all invention had been stopped by the growth
of trusts, but I think it is perfectly clear that invention in many
fields has been discouraged, that inventors have been prevented
from reaping the full fruits of their ingenuity and industry, and
that mankind has been deprived of many comforts and conveniences,
as well as the opportunity of buying at lower prices.
“Do you know, have you had occasion to learn, that there is no
hospitality for invention, now-a-days?”
TRUSTS AND FINANCIAL CONCENTRATION
The fact that industrial monopolies arrest development is more
serious even than the direct burden imposed through extortionate
prices. But the most harm-bearing incident of the trusts is their
promotion of financial concentration. Industrial trusts feed the money
trust. Practically every trust created has destroyed the financial
independence of some communities and of many properties; for it has
centered the financing of a large part of whole lines of business in
New York, and this usually with one of a few banking houses. This is
well illustrated by the Steel Trust, which is a trust of trusts; that
is, the Steel Trust combines in one huge holding company the trusts
previously formed in the different branches of the steel business.
Thus the Tube Trust combined 17 tube mills, located in 16 different
cities, scattered over 5 states and owned by 13 different companies.
The wire trust combined 19 mills; the sheet steel trust 26; the bridge
and structural trust 27; and the tin plate trust 36; all scattered
similarly over many states. Finally these and other companies were
formed into the United States Steel Corporation, combining 228
companies in all, located in 127 cities and towns, scattered over
18 states. Before the combinations were effected, nearly every one
of these companies was owned largely by those who managed it, and
had been financed, to a large extent, in the place, or in the state,
in which it was located. When the Steel Trust was formed all these
concerns came under one management. Thereafter, the financing of each
of these 228 corporations (and some which were later acquired) had to
be done through or with the consent of J. P. Morgan & Co. _That was the
greatest step in financial concentration ever taken._
STOCK EXCHANGE INCIDENTS
The organization of trusts has served in another way to increase the
power of the Money Trust. Few of the independent concerns out of
which the trusts have been formed, were listed on the New York Stock
Exchange; and few of them had financial offices in New York. Promoters
of large corporations, whose stock is to be held by the public, and
also investors, desire to have their securities listed on the New York
Stock Exchange. Under the rules of the Exchange, no security can be so
listed unless the corporation has a transfer agent and registrar in New
York City. Furthermore, banker-directorships have contributed largely
to the establishment of the financial offices of the trusts in New
York City. That alone would tend to financial concentration. But the
listing of the stock enhances the power of the Money Trust in another
way. An industrial stock, once listed, frequently becomes the subject
of active speculation; and speculation feeds the Money Trust indirectly
in many ways. It draws the money of the country to New York. The New
York bankers handle the loans of other people’s money on the Stock
Exchange; and members of the Stock Exchange receive large amounts from
commissions. For instance: There are 5,084,952 shares of United States
Steel common stock outstanding. But in the five years ending December
31, 1912, speculation in that stock was so extensive that there were
sold on the Exchange an average of 29,380,888 shares a year; or nearly
six times as much as there is Steel common in existence. Except where
the transactions are by or for the brokers, sales on the Exchange
involve the payment of twenty-five cents in commission for each share
of stock sold; that is, twelve and one-half cents by the seller and
twelve and one-half cents by the buyer. Thus the commission from
the Steel common alone afforded a revenue averaging many millions a
year. The Steel preferred stock is also much traded in; and there are
138 other industrials, largely trusts, listed on the New York Stock
Exchange.
TRUST RAMIFICATIONS
But the potency of trusts as a factor in financial concentration
is manifested in still other ways; notably through their ramifying
operations. This is illustrated forcibly by the General Electric
Company’s control of water-power companies which has now been disclosed
in an able report of the United States Bureau of Corporations:
“The extent of the General Electric influence is not fully
revealed by its consolidated balance sheet. A very large number of
corporations are connected with it through its subsidiaries and
through corporations controlled by these subsidiaries or affiliated
with them. There is a still wider circle of influence due to the
fact that officers and directors of the General Electric Co. and
its subsidiaries are also officers or directors of many other
corporations, some of whose securities are owned by the General
Electric Company.
“The General Electric Company holds in the first place all the
common stock in three security holding companies: the United
Electric Securities Co., the Electrical Securities Corporation,
and the Electric Bond and Share Co. Directly and through these
corporations and their officers the General Electric controls a
large part of the water power of the United States.
... “The water-power companies in the General Electric group are
found in 18 States. These 18 States have 2,325,757 commercial
horsepower developed or under construction, and of this total
the General Electric group includes 939,115 h. p. or 40.4 per
cent. The greatest amount of power controlled by the companies in
the General Electric group in any State is found in Washington.
This is followed by New York, Pennsylvania, California, Montana,
Iowa, Oregon, and Colorado. In five of the States shown in the
table the water-power companies included in the General Electric
group control more than 50 per cent. of the commercial power,
developed and under construction. The percentage of power in
the States included in the General Electric group ranges from a
little less than 2 per cent. in Michigan to nearly 80 per cent.
in Pennsylvania. In Colorado they control 72 per cent.; in New
Hampshire 61 per cent.; in Oregon 58 per cent.; and in Washington
55 per cent.
“Besides the power developed and under construction water-power
concerns included in the General Electric group own in the States
shown in the table 641,600 h. p. undeveloped.”
This water power control enables the General Electric group to control
other public service corporations:
“The water-power companies subject to General Electric influence
control the street railways in at least 16 cities and towns;
the electric-light plants in 78 cities and towns; gas plants in
19 cities and towns; and are affiliated with the electric light
and gas plants in other towns. Though many of these communities,
particularly those served with light only, are small, several of
them are the most important in the States where these water-power
companies operate. The water-power companies in the General
Electric group own, control, or are closely affiliated with, the
street railways in Portland and Salem, Ore.; Spokane, Wash.; Great
Falls, Mont.; St. Louis, Mo.; Winona, Minn.; Milwaukee and Racine,
Wis.; Elmira, N. Y.; Asheville and Raleigh, N. C., and other
relatively less important towns. The towns in which the lighting
plants (electric or gas) are owned or controlled include Portland,
Salem, Astoria, and other towns in Oregon; Bellingham and other
towns in Washington; Butte, Great Falls, Bozeman and other towns
in Montana; Leadville and Colorado Springs in Colorado; St. Louis,
Mo.; Milwaukee, Racine and several small towns in Wisconsin; Hudson
and Rensselaer, N. Y.; Detroit, Mich.; Asheville and Raleigh,
N. C.; and in fact one or more towns in practically every community
where developed water power is controlled by this group. In
addition to the public-service corporations thus controlled by the
water-power companies subject to General Electric influence, there
are numerous public-service corporations in other municipalities
that purchase power from the hydroelectric developments controlled
by or affiliated with the General Electric Co. This is true of
Denver, Colo., which has already been discussed. In Baltimore,
Md., a water-power concern in the General Electric group, namely,
the Pennsylvania Water & Power Co., sells 20,000 h. p. to the
Consolidated Gas, Electric Light & Power Co., which controls the
entire light and power business of that city. The power to operate
all the electric street railway systems of Buffalo, N. Y., and
vicinity, involving a trackage of approximately 375 miles, is
supplied through a subsidiary of the Niagara Falls Power Co.”
And the General Electric Company, through the financing of public
service companies, exercises a like influence in communities where
there is no water power:
“It, or its subsidiaries, has acquired control of or an interest in
the public-service corporations of numerous cities where there is
no water-power connection, and it is affiliated with still others
by virtue of common directors.... This vast network of relationship
between hydro-electric corporations through prominent officers and
directors of the largest manufacturer of electrical machinery and
supplies in the United States is highly significant....
“It is possible that this relationship to such a large number of
strong financial concerns, through common officers and directors,
affords the General Electric Co. an advantage that may place
rivals at a corresponding disadvantage. Whether or not this great
financial power has been used to the particular disadvantage of any
rival water-power concern is not so important as the fact that such
power exists and that it might be so used at any time.”
THE SHERMAN LAW
The Money Trust cannot be broken, if we allow its power to be
constantly augmented. To break the Money Trust, we must stop that power
at its source. The industrial trusts are among its most effective
feeders. Those which are illegal should be dissolved. The creation
of new ones should be prevented. To this end the Sherman Law should
be supplemented both by providing more efficient judicial machinery,
and by creating a commission with administrative functions to aid in
enforcing the law. When that is done, another step will have been taken
toward securing the New Freedom. But restrictive legislation alone
will not suffice. We should bear in mind the admonition with which
the Commissioner of Corporations closes his review of our water power
development:
“There is ... presented such a situation in water powers and other
public utilities as might bring about at any time under a single
management the control of a majority of the developed water power in
the United States and similar control over the public utilities in a
vast number of cities and towns, including some of the most important
in the country.”
We should conserve all rights which the Federal Government and the
States now have in our natural resources, and there should be a
complete separation of our industries from railroads and public
utilities.