THE INEFFICIENCY OF THE OLIGARCHS
We must break the Money Trust or the Money Trust will break us.
The Interstate Commerce Commission said in its report on the most
disastrous of the recent wrecks on the New Haven Railroad:
“On this directorate were and are men whom the confiding public
recognize as magicians in the art of finance, and wizards in
the construction, operation, and consolidation of great systems
of railroads. The public therefore rested secure that with the
knowledge of the railroad art possessed by such men investments and
travel should both be safe. Experience has shown that this reliance
of the public was not justified as to either finance or safety.”
This failure of banker-management is not surprising. The surprise is
that men should have supposed it would succeed. For banker-management
contravenes the fundamental laws of human limitations: _First_, that
no man can serve two masters; _second_, that a man cannot at the same
time do many things well.
SEEMING SUCCESSES
There are numerous seeming exceptions to these rules; and a relatively
few real ones. Of course, many banker-managed properties have been
prosperous; some for a long time, at the expense of the public; some
for a shorter time, because of the impetus attained before they were
banker-managed. It is not difficult to have a large net income,
where one has the field to oneself, has all the advantages privilege
can give, and may “charge all the traffic will bear.” And even in
competitive business the success of a long-established, well-organized
business with a widely extended good-will, must continue for a
considerable time; especially if buttressed by intertwined relations
constantly giving it the preference over competitors. The real test of
efficiency comes when success has to be struggled for; when natural
or legal conditions limit the charges which may be made for the goods
sold or service rendered. Our banker-managed railroads have recently
been subjected to such a test, and they have failed to pass it. “It is
only,” says Goethe, “when working within limitations, that the master
is disclosed.”
WHY OLIGARCHY FAILS
Banker-management fails, partly because the private interest destroys
soundness of judgment and undermines loyalty. It fails partly, also,
because banker directors are led by their occupation (and often
even by the mere fact of their location remote from the operated
properties) to apply a false test in making their decisions. Prominent
in the banker-director mind is always this thought: “What will be the
probable effect of our action upon the market value of the company’s
stock and bonds, or, indeed, generally upon stock exchange values?”
The stock market is so much a part of the investment-banker’s life,
that he cannot help being affected by this consideration, however
disinterested he may be. The stock market is sensitive. Facts are
often misinterpreted “by the street” or by investors. And with the
best of intentions, directors susceptible to such influences are led
to unwise decisions in the effort to prevent misinterpretations. Thus,
expenditures necessary for maintenance, or for the ultimate good of
a property are often deferred by banker-directors, because of the
belief that the making of them _now_, would (by showing smaller net
earnings), create a bad, and even false, impression on the market.
Dividends are paid which should not be, because of the effect which it
is believed reduction or suspension would have upon the market value of
the company’s securities. To exercise a sound judgment in the difficult
affairs of business is, at best, a delicate operation. And no man can
successfully perform that function whose mind is diverted, however
innocently, from the study of, “what is best in the long run for the
company of which I am director?” The banker-director is peculiarly
liable to such distortion of judgment by reason of his occupation
and his environment. But there is a further reason why, ordinarily,
banker-management must fail.
THE ELEMENT OF TIME
The banker, with his multiplicity of interests, cannot ordinarily
give the time essential to proper supervision and to acquiring that
knowledge of the facts necessary to the exercise of sound judgment. The
_Century Dictionary_ tells us that a Director is “one who directs; one
who guides, superintends, governs and manages.” Real efficiency in any
business in which conditions are ever changing must ultimately depend,
in large measure, upon the correctness of the judgment exercised,
almost from day to day, on the important problems as they arise. And
how can the leading bankers, necessarily engrossed in the problems of
their own vast private businesses, get time to know and to correlate
the facts concerning so many other complex businesses? Besides, they
start usually with ignorance of the particular business which they are
supposed to direct. When the last paper was signed which created the
Steel Trust, one of the lawyers (as Mr. Perkins frankly tells us) said:
“That signature is the last one necessary to put the Steel industry, on
a large scale, into the hands of men who do not know anything about it.”
AVOCATIONS OF THE OLIGARCHS
The New Haven System is not a railroad, but an agglomeration of a
railroad plus 121 separate corporations, control of which was acquired
by the New Haven after that railroad attained its full growth of
about 2000 miles of line. In administering the railroad and each of
the properties formerly managed through these 122 separate companies,
there must arise from time to time difficult questions on which the
directors should pass judgment. The real managing directors of the
New Haven system during the decade of its decline were: J. Pierpont
Morgan, George F. Baker, and William Rockefeller. Mr. Morgan was, until
his death in 1913, the head of perhaps the largest banking house in
the world. Mr. Baker was, until 1909, President and then Chairman of
the Board of Directors of one of America’s leading banks (the First
National of New York), and Mr. Rockefeller was, until 1911, President
of the Standard Oil Company. Each was well advanced in years. Yet
each of these men, besides the duties of his own vast business, and
important private interests, undertook to “guide, superintend, govern
and manage,” not only the New Haven but also the following other
corporations, some of which were similarly complex: Mr. Morgan, 48
corporations, including 40 railroad corporations, with at least 100
subsidiary companies, and 16,000 miles of line; 3 banks and trust or
insurance companies; 5 industrial and public-service companies. Mr.
Baker, 48 corporations, including 15 railroad corporations, with at
least 158 subsidiaries, and 37,400 miles of track; 18 banks, and trust
or insurance companies; 15 public-service corporations and industrial
concerns. Mr. Rockefeller, 37 corporations, including 23 railroad
corporations with at least 117 subsidiary companies, and 26,400 miles
of line; 5 banks, trust or insurance companies; 9 public service
companies and industrial concerns.
SUBSTITUTES
It has been urged that in view of the heavy burdens which the leaders
of finance assume in directing Business-America, we should be patient
of error and refrain from criticism, lest the leaders be deterred from
continuing to perform this public service. A very respectable Boston
daily said a few days after Commissioner McChord’s report on the North
Haven wreck:
“It is believed that the New Haven pillory repeated with some
frequency will make the part of railroad director quite undesirable
and hard to fill, and more and more avoided by responsible men.
Indeed it may even become so that men will have to be paid a
substantial salary to compensate them in some degree for the risk
involved in being on the board of directors.”
But there is no occasion for alarm. The American people have as little
need of oligarchy in business as in politics. There are thousands of
men in America who could have performed for the New Haven stockholders
the task of one “who guides, superintends, governs and manages,”
better than did Mr. Morgan, Mr. Baker and Mr. Rockefeller. For though
possessing less native ability, even the average business man would
have done better than they, because working under proper conditions.
There is great strength in serving with singleness of purpose one
master only. There is great strength in having time to give to a
business the attention which its difficult problems demand. And tens
of thousands more Americans could be rendered competent to guide our
important businesses. Liberty is the greatest developer. Herodotus
tells us that while the tyrants ruled, the Athenians were no better
fighters than their neighbors; but when freed, they immediately
surpassed all others. If industrial democracy--true coöperation--should
be substituted for industrial absolutism, there would be no lack of
industrial leaders.
ENGLAND’S BIG BUSINESS
England, too, has big business. But her big business is the Coöperative
Wholesale Society, with a wonderful story of 50 years of beneficent
growth. Its annual turnover is now about $150,000,000--an amount
exceeded by the sales of only a few American industrials; an amount
larger than the gross receipts of any American railroad, except the
Pennsylvania and the New York Central systems. Its business is very
diversified, for its purpose is to supply the needs of its members.
It includes that of wholesale dealer, of manufacturer, of grower, of
miner, of banker, of insurer and of carrier. It operates the biggest
flour mills and the biggest shoe factory in all Great Britain. It
manufactures woolen cloths, all kinds of men’s, women’s and children’s
clothing, a dozen kinds of prepared foods, and as many household
articles. It operates creameries. It carries on every branch of the
printing business. It is now buying coal lands. It has a bacon factory
in Denmark, and a tallow and oil factory in Australia. It grows tea in
Ceylon. And through all the purchasing done by the Society runs this
general principle: Go direct to the source of production, whether at
home or abroad, so as to save commissions of middlemen and agents.
Accordingly, it has buyers and warehouses in the United States, Canada,
Australia, Spain, Denmark and Sweden. It owns steamers plying between
Continental and English ports. It has an important banking department;
it insures the property and person of its members. Every one of these
departments is conducted in competition with the most efficient
concerns in their respective lines in Great Britain. The Coöperative
Wholesale Society makes its purchases, and manufactures its products,
in order to supply the 1399 local distributive, coöperative societies
scattered over all England; but each local society is at liberty to buy
from the wholesale society, or not, as it chooses; and they buy only if
the Coöperative Wholesale sells at market prices. This the Coöperative
actually does; and it is able besides to return to the local a fair
dividend on its purchases.
INDUSTRIAL DEMOCRACY
Now, how are the directors of this great business chosen? Not by
England’s leading bankers, or other notabilities, supposed to possess
unusual wisdom; but democratically, by all of the people interested in
the operations of the Society. And the number of such persons who have
directly or indirectly a voice in the selection of the directors of the
English Coöperative Wholesale Society is 2,750,000. For the directors
of the Wholesale Society are elected by vote of the delegates of the
1399 retail societies. And the delegates of the retail societies are,
in turn, selected by the members of the local societies;--that is,
by the consumers, on the principle of one man, one vote, regardless
of the amount of capital contributed. Note what kind of men these
industrial democrats select to exercise executive control of their vast
organization. Not all-wise bankers or their dummies, but men who have
risen from the ranks of coöperation; men who, by conspicuous service
in the local societies have won the respect and confidence of their
fellows. The directors are elected for one year only; but a director
is rarely unseated. J. T. W. Mitchell was president of the Society
continuously for 21 years. Thirty-two directors are selected in this
manner. Each gives to the business of the Society his whole time and
attention; and the aggregate salaries of the thirty-two is less than
that of many a single executive in American corporations; for these
directors of England’s big business serve each for a salary of about
$1500 a year.
The Coöperative Wholesale Society of England is the oldest and largest
of these institutions. But similar wholesale societies exist in 15
other countries. The Scotch Society (which William Maxwell has served
most efficiently as President for thirty years at a salary never
exceeding $38 a week) has a turn-over of more than $50,000,000 a year.
A REMEDY FOR TRUSTS
Albert Sonnichsen, General Secretary of the Coöperative League, tells
in the _American Review of Reviews_ for April, 1913, how the Swedish
Wholesale Society curbed the Sugar Trust; how it crushed the Margerine
Combine (compelling it to dissolve after having lost 2,300,000 crowns
in the struggle); and how in Switzerland the Wholesale Society forced
the dissolution of the Shoe Manufacturers Association. He tells also
this memorable incident:
“Six years ago, at an international congress in Cremona, Dr. Hans
Müller, a Swiss delegate, presented a resolution by which an
international wholesale society should be created. Luigi Luzzatti,
Italian Minister of State and an ardent member of the movement,
was in the chair. Those who were present say Luzzatti paused, his
eyes lighted up, then, dramatically raising his hand, he said: ‘Dr.
Müller proposes to the assembly a great idea--that of opposing
to the great trusts, the Rockefellers of the world, a world-wide
coöperative alliance which shall become so powerful as to crush the
trusts.’”
COÖPERATION IN AMERICA
America has no Wholesale Coöperative Society able to grapple with
the trusts. But it has some very strong retail societies, like the
Tamarack of Michigan, which has distributed in dividends to its members
$1,144,000 in 23 years. The recent high cost of living has greatly
stimulated interest in the coöperative movement; and John Graham Brooks
reports that we have already about 350 local distributive societies.
The movement toward federation is progressing. There are over 100
coöperative stores in Minnesota, Wisconsin and other Northwestern
states, many of which were organized by or through the zealous work of
Mr. Tousley and his associates of the Right Relationship League and
are in some ways affiliated. In New York City 83 organizations are
affiliated with the Coöperative League. In New Jersey the societies
have federated into the American Coöperative Alliance of Northern New
Jersey. In California, long the seat of effective coöperative work, a
central management committee is developing. And progressive Wisconsin
has recently legislated wisely to develop coöperation throughout the
state.
Among our farmers the interest in coöperation is especially keen.
The federal government has just established a separate bureau of
the Department of Agriculture to aid in the study, development and
introduction of the best methods of coöperation in the working of
farms, in buying, and in distribution; and special attention is
now being given to farm credits--a field of coöperation in which
Continental Europe has achieved complete success, and to which David
Lubin, America’s delegate to the International Institute of Agriculture
at Rome, has, among others, done much to direct our attention.
PEOPLE’S SAVINGS BANKS
The German farmer has achieved democratic banking. The 13,000 little
coöperative credit associations, with an average membership of about
90 persons, are truly banks of the people, by the people and for the
people.
_First:_ The banks’ resources are _of_ the people. These aggregate
about $500,000,000. Of this amount $375,000,000 represents the farmers’
savings deposits; $50,000,000, the farmers’ current deposits;
$6,000,000, the farmers’ share capital; and $13,000,000, amounts earned
and placed in the reserve. Thus, nearly nine-tenths of these large
resources belong to the farmers--that is, to the members of the banks.
_Second:_ The banks are managed _by_ the people--that is, the members.
And membership is easily attained; for the average amount of paid-up
share capital was, in 1909, less than $5 per member. Each member has
one vote regardless of the number of his shares or the amount of his
deposits. These members elect the officers. The committees and trustees
(and often even, the treasurer) serve without pay: so that the expenses
of the banks are, on the average, about $150 a year.
_Third:_ The banks are _for_ the people. The farmers’ money is loaned
by the farmer to the farmer at a low rate of interest (usually 4 per
cent. to 6 per cent.); the shareholders receiving, on their shares,
the same rate of interest that the borrowers pay on their loans. Thus
the resources of all farmers are made available to each farmer, for
productive purposes.
This democratic rural banking is not confined to Germany. As Henry W.
Wolff says in his book on coöperative banks:
“Propagating themselves by their own merits, little people’s
coöperative banks have overspread Germany, Italy, Austria, Hungary,
Switzerland, Belgium. Russia is following up those countries; France
is striving strenuously for the possession of coöperative credit.
Servia, Roumania, and Bulgaria have made such credit their own. Canada
has scored its first success on the road to its acquisition. Cyprus,
and even Jamaica, have made their first start. Ireland has substantial
first-fruits to show of her economic sowings.
“South Africa is groping its way to the same goal. Egypt has discovered
the necessity of coöperative banks, even by the side of Lord Cromer’s
pet creation, the richly endowed ‘agricultural bank.’ India has made
a beginning full of promise. And even in far Japan, and in China,
people are trying to acclimatize the more perfected organizations of
Schulze-Delitzsch and Raffeisen. The entire world seems girdled with a
ring of coöperative credit. Only the United States and Great Britain
still lag lamentably behind.”
BANKERS’ SAVINGS BANKS
The saving banks of America present a striking contrast to these
democratic banks. Our savings banks also have performed a great
service. They have provided for the people’s funds safe depositories
with some income return. Thereby they have encouraged thrift and have
created, among other things, reserves for the proverbial “rainy day.”
They have also discouraged “old stocking” hoarding, which diverts the
money of the country from the channels of trade. American savings banks
are also, in a sense, banks _of_ the people; for it is the people’s
money which is administered by them. The $4,500,000,000 deposits in
2,000 American savings banks belong to about ten million people, who
have an average deposit of about $450. But our savings banks are not
banks _by_ the people, nor, in the full sense, _for_ the people.
_First:_ American savings banks are not managed _by_ the people.
The stock-savings banks, most prevalent in the Middle West and the
South, are purely commercial enterprises, managed, of course, by the
stockholders’ representatives. The mutual savings banks, most prevalent
in the Eastern states, have no stockholders; but the depositors have
no voice in the management. The banks are managed by trustees _for_
the people, practically a self-constituted and self-perpetuating
body, composed of “leading” and, to a large extent, public-spirited
citizens. Among them (at least in the larger cities) there is apt to
be a predominance of investment bankers, and bank directors. Thus the
three largest savings banks of Boston (whose aggregate deposits exceed
those of the other 18 banks) have together 81 trustees. Of these, 52
are investment bankers or directors in other Massachusetts banks or
trust companies.
_Second:_ The funds of our savings banks (whether stock or purely
mutual) are not used mainly _for_ the people. The depositors are
allowed interest (usually from 3 to 4 per cent.). In the mutual savings
banks they receive ultimately all the net earnings. But the money
gathered in these reservoirs is not used to aid _productively_ persons
of the classes who make the deposits. The depositors are largely wage
earners, salaried people, or members of small tradesmen’s families.
Statically the money is used for them. Dynamically it is used for the
capitalist. For rare, indeed, are the instances when savings banks
moneys are loaned to advance productively one of the depositor class.
Such persons would seldom be able to provide the required security;
and it is doubtful whether their small needs would, in any event,
receive consideration. In 1912 the largest of Boston’s mutual savings
banks--the Provident Institution for Savings, which is the pioneer
mutual savings bank of America--managed $53,000,000 of people’s
money. Nearly one-half of the resources ($24,262,072) was invested
in bonds--state, municipal, railroad, railway and telephone and in
bank stock; or was deposited in national banks or trust companies.
Two-fifths of the resources ($20,764,770) were loaned on real estate
mortgages; and the average amount of a loan was $52,569. One-seventh
of the resources ($7,566,612) was loaned on personal security; and
the average of each of these loans was $54,830. Obviously, the “small
man” is not conspicuous among the borrowers; and these large-scale
investments do not even serve the individual depositor especially
well; for this bank pays its depositors a rate of interest lower than
the average. Even our admirable Postal Savings Bank system serves
productively mainly the capitalist. These postal saving stations are
in effect catch-basins merely, which collect the people’s money for
distribution among the national banks.
PROGRESS
Alphonse Desjardins of Levis, Province of Quebec, has demonstrated
that coöperative credit associations are applicable, also, to at least
some urban communities. Levis, situated on the St. Lawrence opposite
the City of Quebec, is a city of 8,000 inhabitants. Desjardins himself
is a man of the people. Many years ago he became impressed with the
fact that the people’s savings were not utilized primarily to aid the
people productively. There were then located in Levis branches of
three ordinary banks of deposit--a mutual savings bank, the postal
savings bank, and three incorporated “loaners”; but the people were
not served. After much thinking, he chanced to read of the European
rural banks. He proceeded to work out the idea for use in Levis; and
in 1900 established there the first “credit-union.” For seven years
he watched carefully the operations of this little bank. The pioneer
union had accumulated in that period $80,000 in resources. It had made
2900 loans to its members, aggregating $350,000; the loans averaging
$120 in amount, and the interest rate 6 1/2 per cent. In all this time
the bank had _not met with a single loss_. Then Desjardins concluded
that democratic banking was applicable to Canada; and he proceeded
to establish other credit-unions. In the last 5 years the number of
credit-unions in the Province of Quebec has grown to 121; and 19 have
been established in the Province of Ontario. Desjardins was not merely
the pioneer. All the later credit-unions also have been established
through his aid; and 24 applications are now in hand requesting like
assistance from him. Year after year that aid has been given without
pay by this public-spirited man of large family and small means, who
lives as simply as the ordinary mechanic. And it is noteworthy that
this rapidly extending system of coöperative credit-banks has been
established in Canada wholely without government aid, Desjardins having
given his services free, and his travelling expenses having been paid
by those seeking his assistance.
In 1909, Massachusetts, under Desjardin’s guidance, enacted a law for
the incorporation of credit-unions. The first union established in
Springfield, in 1910, was named after Herbert Myrick--a strong advocate
of coöperative finance. Since then 25 other unions have been formed;
and the names of the unions and of their officers disclose that 11 are
Jewish, 8 French-Canadian, and 2 Italian--a strong indication that the
immigrant is not unprepared for financial democracy. There is reason
to believe that these people’s banks will spread rapidly in the United
States and that they will succeed. For the coöperative building and
loan associations, managed by wage-earners and salary-earners, who
joined together for systematic saving and ownership of houses--have
prospered in many states. In Massachusetts, where they have existed for
35 years, their success has been notable--the number, in 1912, being
162, and their aggregate assets nearly $75,000,000.
Thus farmers, workingmen, and clerks are learning to use their little
capital and their savings to help one another instead of turning over
their money to the great bankers for safe keeping, and to be themselves
exploited. And may we not expect that when the coöperative movement
develops in America, merchants and manufacturers will learn from
farmers and workingmen how to help themselves by helping one another,
and thus join in attaining the New Freedom for all? When merchants and
manufacturers learn this lesson, money kings will lose subjects, and
swollen fortunes may shrink; but industries will flourish, because the
faculties of men will be liberated and developed.
* * * * *
President Wilson has said wisely:
“No country can afford to have its prosperity originated by a small
controlling class. The treasury of America does not lie in the brains
of the small body of men now in control of the great enterprises....
It depends upon the inventions of unknown men, upon the originations
of unknown men, upon the ambitions of unknown men. Every country is
renewed out of the ranks of the unknown, not out of the ranks of the
already famous and powerful in control.”
THE END
Transcriber’s Notes
Punctuation and spelling were made consistent when a predominant
preference was found in this book; otherwise they were not changed.
Simple typographical errors were corrected; occasional unbalanced
quotation marks retained.
Ambiguous hyphens at the ends of lines were retained; occurrences of
inconsistent hyphenation have not been changed.
End of Project Gutenberg's Other People's Money, by Louis Dembitz Brandeis