THE CONCENTRATION OF CONTROL OF MONEY AND CREDIT
HAVE WE A MONEY TRUST?
[227]If by a "money trust" is meant--
An established and well-defined identity and community of
interest between a few leaders of finance which has been
created and is held together through stock holdings,
interlocking directorates, and other forms of domination
over banks, trust companies, railroads, public-service and
industrial corporations, and which has resulted in a vast
and growing concentration of control of money and credit in
the hands of a comparatively few men--
your committee has no hesitation in asserting as the result of its
investigation that this condition, largely developed within the past
five years, exists in this country to-day.
The parties to this combination or understanding or community of
interest, by whatever name it may be called, may be conveniently
classified, for the purpose of differentiation, into four separate
groups.
First. The first, which for convenience of statement we will call the
inner group, consists of J. P. Morgan & Co., the recognised leaders, and
George F. Baker and James Stillman in their individual capacities and in
their joint administration and control of the First National Bank, the
National City Bank, the National Bank of Commerce, the Chase National
Bank, the Guaranty Trust Co., and the Bankers Trust Co., with total
known resources, in these corporations alone, in excess of
$1,300,000,000, and of a number of smaller but important financial
institutions. This takes no account of the personal fortunes of these
gentlemen.
Second. Closely allied with this inner or primary group, and indeed
related to them practically as partners in many of their larger
financial enterprises, are the powerful international banking houses of
Lee, Higginson & Co. and Kidder, Peabody & Co., with three affiliated
banks in Boston--the National Shawmut Bank, the First National Bank, and
the Old Colony Trust Co.--having at least more than half of the total
resources of all the Boston banks; also with interests and
representation in other important New England financial institutions.
Third. In New York City the international banking house of Messrs. Kuhn,
Loeb & Co., with its large foreign clientele and connections, whilst
only qualifiedly allied with the inner group, and only in isolated
transactions, yet through its close relations with the National City
Bank and the National Bank of Commerce and other financial institutions
with which it has recently allied itself has many interests in common,
conducting large joint-account transactions with them, especially in
recent years, and having what virtually amounts to an understanding not
to compete, which is defended as a principle of "banking ethics."
Together they have with a few exceptions pre-empted the banking business
of the important railways of the country.
Fourth. In Chicago this inner group associates with and makes issues of
securities in joint account or through underwriting participations
primarily with the First National Bank and the Illinois Trust & Savings
Bank, and has more or less friendly business relations with the
Continental & Commercial National Bank, which participates at times in
the underwriting of security issues by the inner group. These are the
three largest financial institutions in Chicago, with combined resources
(including the two affiliated and controlled state institutions of the
two national banks) of $561,000,000.
Radiating from these principal groups and closely affiliated with them
are smaller but important banking houses, such as Kissel Kinnicut & Co.,
White. Weld & Co., and Harvey Fisk & Sons, who receive large and
lucrative patronage from the dominating groups and are used by the
latter as jobbers or distributors of securities the issuing of which
they control, but which for reasons of their own they prefer not to have
issued or distributed under their own names. Messrs. Lee, Higginson &
Co., besides being partners with the inner group, are also frequently
utilised in this service because of their facilities as distributors of
securities.
Beyond these inner groups and subgroups are banks and bankers throughout
the country who co-operate with them in underwriting or guaranteeing the
sale of securities offered to the public and who also act as
distributors of such securities. It was impossible to learn the identity
of these corporations, owing to the unwillingness of the members of the
inner group to disclose the names of their underwriters, but sufficient
appears to justify the statement that there are at least hundreds of
them and that they extend into many of the cities throughout this and
foreign countries.
The patronage thus proceeding from the inner group and its subgroups is
of great value to these banks and bankers, who are thus tied by
self-interest to the great issuing houses and may be regarded as a part
of this vast financial organisation. Such patronage yields no
inconsiderable part of the income of these banks and bankers and without
much risk on account of the facilities of the principal groups for
placing issues of securities through their domination of great banks and
trust companies and their other domestic affiliations and their foreign
connections. The underwriting commissions on issues made by this inner
group are usually easily earned and do not ordinarily involve the
underwriters in the purchase of the underwritten securities. Their
interest in the transaction is generally adjusted, unless they choose to
purchase part of the securities, by the payment to them of a commission.
There are, however, occasions on which this is not the case. The
underwriters are then required to take the securities. Bankers and
brokers are so anxious to be permitted to participate in these
transactions under the lead of the inner group that as a rule they join
when invited to do so, regardless of their approval of the particular
business, lest by refusing they should thereafter cease to be invited.
It can hardly be expected that the banks, trust companies, and other
institutions that are thus seeking participations from this inner group
would be likely to engage in business of a character that would be
displeasing to the latter or that would interfere with their plans or
prestige. And so the protection that can be offered by the members of
this inner group constitutes the safest refuge of our great industrial
combinations and railroad systems against future competition. The
powerful grip of these gentlemen is upon the throttle that controls the
wheels of credit and upon their signal those wheels will turn or stop.
In the case of the pending New York subway financing of $170,000,000 of
bonds by Messrs. Morgan & Co. and their associates, Mr. Davison
estimated that there were from 100 to 125 such underwriters who were
apparently glad to agree that Messrs. Morgan & Co., the First National
Bank, and the National City Bank should receive 3 per cent.--equal to
$5,100,000--for forming this syndicate, thus relieving themselves from
all liability, whilst the underwriters assumed the risk of what the
bonds would realise and of being required to take their share of the
unsold portion. This transaction furnishes a fair illustration of the
basis on which this inner group is able to capitalise its financial
power.
It may be that this recently concentrated money power so far has not
been abused otherwise than in the possible exaction of excessive profits
through absence of competition. Whilst no evidence of abuse has come to
the attention of the committee from impartial sources, neither has there
been adequate proof or opportunity for proof on the subject. Here again
the data have not been available.
Sufficient has, however, been developed to demonstrate that neither
potentially competing banking institutions nor competing railroad or
industrial corporations should be subject to a common source of private
control.
Your committee is convinced that however well founded may be the
assurances of good intentions by those now holding the places of power
which have been thus created, the situation is fraught with too great
peril to our institutions to be tolerated.
THE BORROWER AND THE MONEY TRUST
[228]Some trusts are denounced because of their attitude toward their
employes. Many trusts are efficient or inefficient because of the way
their millions of labourers work. But let us be fair to Big Business.
Why not examine its one branch where labour is almost absent, where
there is no brawn and all brain?
BANKING THE MOST LOGICAL OF TRUSTS
A bank in New York City gave its employes a Christmas present equal to
half their annual salary. The bank had assets of $100,000,000. A fine
example, you say, to other great business concerns! But the bank had
only fifty employes. In the entire country there are probably not more
than 100,000 persons engaged in banking, either directly or indirectly.
The banker has, relatively speaking, no human factor to consider. And
that factor with a concern like the United States Steel Corporation or
the Pennsylvania Railroad is mammoth, almost baffling. The banker deals
not in the production or distribution of wealth itself (in both of which
much labor is needed), but solely in the paper representatives of
wealth, money, and credit. Thus he can apply far more directly than the
manufacturer or railroad manager the economies and efficiencies of Big
Business.
Banking--the business of dealing in money and credit--is the most
logical of trusts. And in practice it has justified the theory. Where
banks have become larger they have become stronger, where co-operation
and concentration have gone far, there safety and effectiveness have
reached a high pitch.... Banking is the one central business of all--it
is the business of businesses. So if it has become more efficient as the
trust idea, or at least the principle of concentration, has gained sway,
how can we have too much concentration and who is there to complain?...
If the bankers have, faithfully and well, handled the trust of
extending credit to the limit of their ability, yet when the president
of the second bank in size in the country acknowledges himself to be one
of about a dozen men in whose hands the power of extending credit is, in
the last analysis, concentrated--then it is high time, seriously and
fearlessly, to consider the subject....
Three main factors are in the main responsible for the concentration of
the control of credit and they are the growth of big banks, the growth
of big industries, and the financial laws of the country....
NO LACK OF BANKING FACILITIES
However great the concentration of money power in this country, it
cannot truthfully be said that banking facilities are not also
increasing. Figures taken from the reports of the National Monetary
Commission and other official sources show that the number of banks is
mounting up faster than either wealth or population....
WHERE THE MONEY HAS GONE
When one first realises the extent of this country's banking resources
he is properly astonished. But how evenly are these resources
distributed? It is commonly known that banking facilities in the
Southern and Western sections of the country are small indeed as
compared with the New England, Eastern, Central, and Pacific Coast
sections, where large cities abound. To illustrate, in 1909, when the
total banking power was close to twenty-one billions, more than half was
represented by forty-seven cities, and close to one-quarter was held by
the two hundred banks in New York and Chicago. In other words about 1
per cent. of the country's banks held close to one-quarter of the
country's banking power.
Now it is a well-known fact that an individual or corporation with large
resources and large business exerts an influence in his particular field
far in excess of his actual mathematical percentage of the total
resources or business. Thus the dominating position of the big banks is
even greater than mere figures indicate. But there is still another fact
which centralises and cements their power. The only banks which are
really large are in a few cities, and the larger they are, the more they
tend to the very greatest centres of population. Thus toward the end of
1911, there were 183 banking institutions with deposits of $10,000,000
or more, of which sixty-two were in New York City. There were thirty-six
institutions with deposits of $25,000,000 or more. Sixteen of these were
in New York City and four in Chicago. There were ten with deposits of
$75,000,000 or more, and of these, seven were in New York and two in
Chicago. Of the ten largest trust companies six were in New York, three
in Chicago, and one in Boston.
These great banks and trust companies are of very recent growth. Twenty
years ago the deposits of our largest bank were one-twentieth of what
they are to-day. At the first inauguration of President McKinley, which
was really not so far back as the Dark Ages, there was no bank in New
York with more than $30,000,000 of deposits. Now there are six banks
each with more than $100,000,000 of deposits. A trust company in New
York City, which had deposits of $20,000,000 five years ago, now has
deposits of $166,000,000 and its twenty-eight directors sit [1912] in
boards of other banking institutions with resources of $1,250,000,000.
When it comes to actual cash we find the position of the New York and
Chicago banks even more dominant....
CONSOLIDATION--A STEADY PROCESS
Despite the disproportionate size of New York and Chicago banks their
number is steadily decreasing. This is because the process of
consolidation proceeds just as steadily. In 1853 there were fifty-three
banks in the New York Clearing House Association, and in 1911 there were
fifty, although in the meantime the amount of business had increased
twenty times. There are now less than 130 banks in New York, or ten less
than ten years ago, although in that time cash holdings have doubled and
deposits have increased a third. In ten years no less than 103 banks
have gone out of existence, generally through absorption into larger
institutions.... In Chicago the same process of consolidation has gone
on. One Chicago trust company has absorbed six others in eight years.
New York and Chicago are by no means the only cities in which the
obvious tendency is to have fewer but larger banks. Look about at
random. Akron, Ohio, where the rubber industry has recently become of
more than local importance, has felt the necessity of banks large enough
to carry on its trade, and consolidation has resulted. In Detroit, where
the automobile trade has set in motion a great industrial development,
the Old Detroit National has absorbed the American Exchange National. In
Seattle, Nashville, Wilmington, Portland, Philadelphia, Baltimore, San
Francisco, and Louisville there have been many recent mergers and
absorptions. In Cincinnati one of the largest institutions in the Ohio
Valley has been formed by the absorption of the Merchants' National by
the First National. As for Boston the desire of her capitalists to make
New England more powerful in the business life of the country has led to
the recent absorption of the City Trust Company by the Old Colony and
the steady growth of three financial institutions, the Shawmut National
Bank, the First National Bank, and the Old Colony Trust Company, these
three far exceeding all others in size....
HOW THE LAW HAS FOSTERED AFFILIATION
... One great cause of the concentration of banking and financial power
into a few hands has been the consolidation of banking resources into a
few great units and the friendly affiliations of these units. But these
units have not grown big merely because their managers or owners willed
it so. The banking and currency laws of the country have forced money
into a few centres. The banks of New York City employ--mainly in
financial or stock market loans--about $600,000,000 which belongs to
banks in other parts of the country. Naturally this concentration of
money in a few banks "places these banks in a position to control the
issuing or granting of credit"--to use the exact words of the president
of one of them--"thereby placing the money power in the hands of a
comparatively small number of men."
But this gravitation of money to New York is because the money is idle
and is hunting a job, and not because of any process of usurpation,
manipulation, or combination. It naturally arises under and by virtue
of the reserve requirements of our National Banking Act.... The bulk of
idle country bank cash which finds employment in New York comes here
because of the existing reserve system, and there are several great
banks in both New York and Chicago which have few customers other than
the thousands of country banks whose "correspondents" they are.
THE CORPORATION AND THE BANK
Thus banking and financial power is concentrated in a few hands not only
by the growth of great banks and by the laws of the country, but also by
the legitimate business practices which have grown up under these laws.
But the massing of this power in a few vast, centralised units has been
a development of the last ten or fifteen years only. That is, it has
been coincident with the development of trusts and combinations. Big
Business and Big Banking have gone hand in hand. Each has made the other
possible. By law a bank cannot loan more than one-tenth of its capital
and surplus to any one customer. But the customers have grown into
behemoths. How then could the banks fail to grow?
Before trusts existed and before small railroads were united into large
systems the few banking houses of magnitude which existed in Wall Street
had engaged in merchant banking, for the industries and railroads had
not been large enough to attract their attention. These small industries
and railroads were controlled by their owners, and their capital
requirements were supplied largely in the localities in which they were
situated. But as railroads and industries were consolidated it was found
necessary to apply to the larger New York banking firms to supply the
funds. These bankers had European connections as well as close
affiliations with the big national banks and life insurance companies,
and were able not only to furnish the needed capital but also undertook
to market the securities of the newly formed combinations.
Thus a few banking houses, of which J. P. Morgan & Co. is the chief
example, became in a way responsible for these new creations and
naturally assumed charge not only of their finances, but to some extent
of their other affairs. Thus the headquarters of the trusts and
railroads gradually moved to New York. In the treasuries of these
companies were vast sums of money to be banked, and it was inevitable
that most of it should be placed in New York banks. The average daily
balance of the United States Steel Corporation is about $75,000,000 and
the American Tobacco Company has perhaps $20,000,000. There is also the
Standard Oil Company, whose balance is perhaps as large.
These few financial groups, J. P. Morgan & Co., Kuhn, Loeb & Co., and
the capitalists identified with the National City Bank and the First
National Bank, along with a few others, are primarily in the business of
selling securities and loaning money upon them. In fact they may be
described as the great security issuing houses. Such influence as their
members or directors may exert over railroad and other corporations is
largely due to their ability to dispose of securities and to give these
securities the stamp of soundness and conservatism. Here it may be added
that men like J. P. Morgan would not be directors in so many
corporations if their advice and assistance were not eagerly sought.
In the small village a small group of men own the bank, the coal yard,
the ice-plant, the trolley line, the gas plant, and the little
factories. Every day of the year these men, in their different
capacities, have to trade with themselves in the purchase of supplies,
etc., for their different companies, one from another. No one thinks of
accusing them of double dealing, and yet the situation differs not a
whit from the vast system of interlocking bank and corporate directors
in New York except in degree and in fact, which, however, is vital, that
the New York system affects the whole commonwealth whereas the business
convolutions of Deacon Jones of Jones' Corners do not.
Now it must not be supposed that bankers such as Mr. Morgan and his
partners are usually large owners in the companies they influence or
even control. Often they do not own 15 per cent. of the stock of the
banks they dominate. Often they become directors with but a few shares
of qualifying stock. Still more often their influence is exerted merely
as financial advisers. Often they nominate the president of a railroad
or manufacturing company as Morgan & Co. nominated the president of the
Atlas Portland Cement Company. Often the bankers take no part in the
direction of companies until these companies have shown incapacity or
have had for any reason, business or governmental, to be reorganised,
either in form or management. Recent cases which come under one or the
other of these heads are the Wabash Railroad, the United States Motors
Co., the Westinghouse Electric & Manufacturing Company, the
International Paper Company, the American Tobacco Company and the
American Sugar Refining Company.
HARMONY THE WATCHWORD
There is little evidence to show any actual agreement or even
arrangement among the great financial groups. Through interlocking
directors and the wide following of smaller firms which each of the big
groups has, the whole big banking situation in New York is closely knit
together. There is a carefully fostered community of interest even among
hostile groups, each group having a director or two, like a financial
ambassador, in the other banks.[229] In the past there has been keen
rivalry. Historically the Morgan and First National Bank groups have
long been close, and two members of the Morgan firm were taken from the
First National Bank. At one time these two groups bitterly fought the
other two powerful groups--the Kuhn, Loeb-National City Bank interests.
But in recent years harmony has prevailed....
It must be remembered that the four banking groups are now managed for
the most part by young men. These young men are more accustomed to the
ways of conciliation than were the late E. H. Harriman, and John D.
Rockefeller and J. P. Morgan. The younger men trouble themselves little
with the former conflicts of Morgan, Hill, Rockefeller, Schiff,
Stillman, Harriman, and Ryan. They have forgotten even the accusations
and charges which the life insurance scandals made public. Their aim is
more impersonal--it is to "develop business," and the surest way to do
that is by working harmoniously together.
MONEY POWER NOT DISTINCTLY AMERICAN
Striking as the concentration of banking, money, and financial power
seems, it is no greater here than abroad, perhaps not so great. In
London there are banks with fifty millions of capital, or twice as much
as our one largest bank, and deposits of nearly four hundred millions of
dollars, or twice as much as our largest bank. Even Canada, with a
population less than one-tenth of ours, has a bank as great as our
greatest. Relatively its big banks are bigger than ours. Concentration
in Canada has gone much farther than here. Six banks in the Dominion
hold half its entire banking resources. The autocratic power wielded by
the score of great Canadian banks would start a revolution in this
country. Germany and France long ago went through the process of bank
consolidation.
WHY, THEN, DO WE HEAR FEW COMPLAINTS FROM ABROAD?
Here is a problem to be faced with intellectual honesty. Money power may
be a bad thing, but let us not be so dishonest as to declare it a new
thing. The New York Clearing House Association may wield power too
autocratic, but let it not be overlooked that a similar organisation in
London, with only one-third as many members, has long exercised as great
power without raising any hue and cry of a Money Trust. Also consider
Germany. If you have the time and courage to undertake such a task, go
through the ponderous volume issued by the National Monetary Commission
telling of the actual results of the great bank system in that country.
It is a weary task reading the long-winded testimony of Herr Professor
Doctor Governor this and that, but it is worth the labour.
We are told that great banks are more amenable to public opinion than
smaller scattered institutions, that the Government is more ably
assisted in its financial operations, that fewer reckless loans are
made. Quicker prognostication of crises, whether on the Bourse or in
commerce and industry, quicker adoption of preventive measures thereby
lessening the effects of crises, are other services rendered by
concentrated banking in Germany....
In 1907, when there was far less both of co-operation and concentration
among the banks of this country than there is to-day, each bank standing
weakly isolated and alone, frantically grasped all the cash it could
muster. When the panic storm broke banks struggled to call in loans and
line their vaults with cash. Business was crippled; industry was
squeezed dry of its lifeblood. Last year when Germany was threatened
with both war and panic, trouble was averted by the German "Money
Trust," which loaned more than $200,000,000. It takes no expert
knowledge of finance or banking to perceive that a few great, strong
banks, or many smaller ones (provided they are welded closely together)
can meet a storm more calmly than scattered, unconnected institutions.
WHERE IS THE VITAL DIFFERENCE?
If concentration is a good thing, how can there be too much of it? Here
is the answer. Concentrated power without responsibility may be the
worst possible thing. The other great financial nations have money
trusts ... too, but each is capped by a vast central bank, more or less
a government institution, and from the necessity of the case operated
not only with a view to the general welfare but more or less openly and
publicly.... The American "Money Trust" is strictly private, responsible
to no one. It may act philanthropically if it chooses, but it is
governed by nothing but choice. The money kings can, if they wish, exact
any price.
R. H. Thomas, former president of the New York Stock Exchange, told the
Pujo committee how Wall Street had finally to turn to one man, J. P.
Morgan, in the panic of 1907, to save it from complete disaster. He did
not know where the relief came from, in what form, nor with what
conditions. It just came. Since at that time the entire country was
dependent upon Wall Street because its surplus money was there, there is
no escaping the fact that the whole financial situation of the country
was at the mercy of one man. A 200 per cent. rate for loans would be
inconceivable in one of the European financial centres because the
central banks of Europe are the guarantors of the stability of the
money market. The central banks of Europe depend upon no man, selfish or
altruistic. They are the public financial regulators of the whole
nation.
Has the Money Power been used to crush and squeeze?... Suppose that it
has not been so used. Nevertheless, its control is in the hands of a few
men. Even if their action be honest and intended for the public
interest, they are necessarily most interested in the great undertakings
in which we have seen them to be engaged. By reason of these limitations
they must check and limit, if they do not destroy, genuine economic
freedom and competition.... A handful of men, responsible to no one but
themselves and God, have become masters of the lifeblood of commerce and
industry. That this power has been more rapidly concentrated into their
hands than the people have supposed is the unavoidable conclusion of
this article.
From private persons, acting in private, and dominated in the main by
private motives there cannot be expected the wisest and broadest
direction of the flow of money--the lifeblood of business. These men
have not asked for this power. They know it is too great for them. On
the whole they have behaved with singular restraint. But only a fool
would suppose that the best system for financing the small farmer in
Florida or the small tin can manufacturer in Oregon is to turn over the
entire money power of the nation to J. P. Morgan and a few other private
persons. How under such a system could the great trusts fail to thrive
at the expense of the small man?
THE BANKS AND RAILWAY FINANCE
[230]Close relationships of railways with banks or other credit
institutions have grown up naturally through the need for new capital
constantly imposed upon an expanding railway system. Some railways have
been fortunate enough to possess a relatively stable body of
stockholders whose confidence in the management is so complete that new
funds can be raised by direct appeal of the management to the
stockholders without the intervention of outside financial interests.
But these cases have thus far been rare in American railway finance.
When the policy calls for the raising of funds by the issuance of bonds
rather than stock, the appeal is to a wider and to an anonymous public
rather than to a corporation's own stockholders. Frequently the appeal
must be to a class of investors situated in another section of the
country or even in a foreign country. Most railways have not the
technical organization nor the established market necessary to handle
their issues easily, and usually it is found that in spite of the often
exorbitantly high commissions which the bankers exact for their
services, the net result is more satisfactory than that secured through
the railway's own efforts. To the extent that this is the case, the
bankers are performing a service of genuine economic value, and it must
be concluded that under present conditions such service cannot readily
be dispensed with.
Assuming this service as a necessity, the next step is for the banker to
seek representation upon the railway board. His house has made itself
responsible for a large issue of securities. It appeals to the investing
public, not technically guaranteeing the issue, but practically doing so
because of solicitude that its reputation for the handling of high-grade
securities shall not be impaired. It seeks therefore to protect its own
standing, and at the same time to make the securities more attractive to
its customers, by demanding a place on the board of directors from which
it can follow in detail the employment of the funds secured through its
assistance. Large investors like life insurance companies, savings
banks, fire insurance companies, guaranty companies, trust companies,
demand as a prerequisite to purchase of securities that the underwriting
house shall be represented on the board. The railway's credit--its
ability to sell its issues--is dependent frequently upon the presence on
its directorate of this representative. However, the banker is not in
the position solely of a spectator or a detective. His expert advice is
sought and usually followed. Often he is in a position where he can
stipulate conditions under which alone he will undertake to provide the
funds required, and such stipulations are frequently of immense
influence in furthering efficient railway management. A recent example
is found in the furnishing of money to the Chesapeake and Ohio Railway
Company by Kuhn, Loeb & Co. under a stipulation that the road must put
back into its property each year a certain amount of its earnings.
Instances might be multiplied in which railway corporations have been
saved from disaster and set upon their feet through the aid of those who
have furnished the funds, and who have stipulated in connection
therewith that in order to insure their knowledge of all transactions,
and to give them a position from which they might bring their influence
to bear, they should be granted representation on the railway board.
Of course it must be admitted that the power of the banker may be
misused to his own private advantage. The power is there--the power to
refuse funds--the power that comes from command of enormous sources of
capital, the prestige gained by years of successful experience. Men who
have attained such a position have the personal qualities that give them
naturally a commanding place in any council of business men. When such
men dominate the policy of a railway and the results are disastrous, it
is exceedingly difficult fairly to fix the responsibility and assess the
blame. The line between good faith and good judgment or between personal
ambition that amounts to breach of trust, and a misplaced optimism
concerning the outcome of a specific policy, is a very difficult line to
draw. Although praise and blame cannot be assigned with any precision
between Mr. Morgan and Mr. Mellen in the unfortunate New Haven
situation, it is the prevailing opinion of the New England public that
it has not been benefited greatly by the presence on the New Haven board
of the distinguished banker member. Generally speaking, however, the
powerful banking interests have thrown their influence in the direction
of railway efficiency and the public advantage. If our judgment as to
the desirability of the relationship of railways and credit institutions
is to be determined solely by results, we must conclude that the balance
swings heavily in favor of the continuance of the present policy.
However, opposition to the close association of financial houses and
railways has not sprung from any such favorable relationships as we
have here described. It grows rather out of the concentration and
monopolization of credit. A powerful banking house which has identified
its interests with that of one railway system is in position, because of
its direct influence on the railway and its close affiliation with all
other sources of credit, seriously to hamper if not altogether to
prevent the securing of credit by a rival interest. This power over
credit is not confined to one city or to one section of the country, but
it reaches every section and even extends beyond national boundaries
into the foreign sources of investment funds. Local or small enterprises
requiring only moderate underwriting are frequently financed
independently, but it is an acknowledged fact testified to by the large
bankers themselves that with rare exceptions issues of securities in
large amounts, except when taken up by the stockholders, must receive at
least the tacit approval of the big financial group. Participation by
the smaller banking houses in future underwritings depends upon loyalty
to the syndicate in whatever enterprises are now being offered. The
little fellows are inclined to respect a suggestion not to assist an
enterprise of a character likely to interfere with undertakings already
financed by the large interests. This informal but none the less
effective network of alliances tends to destroy the competitive market
for capital, and to restrict the railways to one source of credit. There
does not appear to be any serious competition among the large bankers,
but rather an understanding in the nature of a division of the field. A
railway obtains the services of a single banking house which acts as its
fiscal agent, underwrites its securities, receives its deposits, and has
a representative on the railway's board of directors. When the railway
becomes involved in financial difficulties, the same banking house
organizes protective committees, devises reorganization schemes, and
creates voting trusts. As Mr. Brandeis has put it, it adds to its duty
as midwife also that of undertaker.
Is this relationship potentially dangerous for the railways and the
public? The late Mr. Morgan, in his illuminating testimony in the money
trust investigation, took the position that the situation might be
dangerous in the hands of the wrong men, but he clearly implied that
there had been no bad results thus far and there were not likely to be
in the future with a continuance of the present leadership. His argument
reminds one of the young lady who "when she was good was very, very
good, and when she was bad she was horrid." Yet this view is that of
most of the financial leaders who appeared before the Pujo committee....
Mr. Davison and Mr. Schiff both opposed the policy of concentration
through interlocking at the point where the representative of the two
interests might wield a dominating influence, but they found it
difficult to fix that point.
Mr. Baker, who took the position that safety lies in the personnel of
the men, that in good hands interlocking could not do any harm, but in
bad hands would be very bad, concluded nevertheless that the movement of
concentration had gone about far enough. And Mr. George M. Reynolds, of
Chicago, thus frankly expressed himself: "I am inclined to think that
the concentration, having gone to the extent it has, does constitute a
menace." And again, "I think a more wide distribution of the power of
credit ... would really be better in the long run." When asked the
direct question, "Do you approve of the identity of directors or
interlocking directorates in potentially competing institutions?" he
replied, "Personally I do not believe that is the best policy."
It should be kept in mind that there is no evidence on record that this
power has been used oppressively otherwise than in the rate of
commission charged. Many of the bankers insist that the monopolization
of credit is a physical impossibility.... There is, nevertheless, a
concentration of credit in comparatively few hands.
If the conclusions thus far established are sound, it becomes clear that
the real evil resulting from the interlocking of railways and credit
houses, if any evil exists, arises primarily out of the relation of
credit institutions to each other, rather than out of their relation to
the railways through representation on railway boards. Were this
interlocking of railways and banks to be wholly prohibited without any
alteration in the organization of the credit market, I am unable to see
how the situation would be changed materially. The tendency on the part
of the bankers would still be to follow the law of "banking ethics" and
divide the field; a railway would still employ a single banking house as
its fiscal agent, and this banking house would still exercise a powerful
influence in determining the policy of the railway. At the same time the
railway would be deprived of the presence on its board of a financial
expert whose experience might be drawn upon in the detail of management
day by day.
As Mr. Reynolds has admitted, the menace is in the concentration of
credit. Such power may not thus far have been misused. But as the Pujo
committee has said, "whenever the incentive is at hand, the machinery is
ready." Those who have the public welfare at heart have no right to
assume that such power will never be used to the personal interest of
the bankers themselves and to the injury of the public. While I have no
great enthusiasm for the popular pastime of rushing to Washington for a
statute whenever the economic machinery fails to run smoothly, I am in
sympathy with those who are studying the problem of the restoration of
an open competitive market for capital.
However, this is a problem of extraordinary difficulty, and I do not
myself see the way at present to its solution. I am aware that Congress
has enacted legislation with the purpose of destroying this
concentration of credit, and that many look upon the Clayton Act, so far
as it touches our problem, as a distinct step in advance. Personally I
am sceptical as to its efficacy in its present form. The opportunities
for evasion are too numerous. However, it can be laid down as a general
rule that all statutory enactment which really endures is a product of
successive increments of legislation--the result of experimental tests
and the knowledge that is gained by experience. It is no argument
against the interlocking provisions of the Clayton Act that they do not
solve the problem and that they can be evaded readily. Such an attitude
of timidity and pessimism assumed twenty-five years ago would never have
given us our present air-tight Interstate Commerce Act. It may well be,
however, that no relief can be found short of the radical step of
employing government credit in aid of public-service industries. So
vital is the necessity of the service to the people that the time may
come when government loans to transportation corporations will appear to
be a logical and natural step. But this is a digression.
Once this free market for capital is assured, the question again arises,
Shall the railway board of directors contain banker members? Obviously
the only purpose that the railway could then have in admitting bankers
to its directorate would be the opportunity to utilize their experience
in the direct management of the property. Quite as obviously the
principal motive of the banker in accepting membership on a railway
board would be to represent the underwriters and to act as fiscal agent.
But with the capital market competitive, I can find no serious objection
to such relationship. Even under present conditions the banker in the
majority of cases respects his trust, refuses to vote on questions
involving his personal interest, and performs loyally his service to the
railway; but his mere presence on the board as the embodiment of the
railway's only source of credit may be sufficient to control the
situation in his behoof. However, with a free credit market, the
dominating position of the banker largely disappears and he becomes what
he ought to be, an expert adviser on financial matters. It may be asked
why, if the banker is now to confine his activities to what Mr. Loree
has called the "necessarily intimate relation between the banker and the
seeker for accommodation," this cannot be accomplished in the same
manner as in unincorporated businesses without putting the banker on the
directorate. In reply attention may be called to the fact that even in
the case of unincorporated businesses, the credit departments of the
large banks are virtually in the position of directors, so intimate and
comprehensive is their influence and advice. But more than this the
business of a railroad is so complex and extensive, its activities are
so multifarious, that an intimacy with its affairs sufficient to make
the banker's counsel of value would be impossible except by actual
presence on the directorate.
Under these changed conditions of credit, I can see greater opportunity
for the utilization of the service of expert bankers in railway
management. Directorships which have been monopolized in the hands of a
few banker specialists in railway securities should then be more widely
distributed. It is quite impossible to believe that expert banking
talent available for this service is as rare as the present situation
would suggest, in which the abilities of a relatively few men are made
to do duty in dozens of corporations. This absurd situation springs not
from a scarcity of talent but from the narrow market for credit. A
liberation of that market would bring latent ability from its
hiding-places, and by the infusion of new blood would stimulate the
management of our railway enterprises. It would open this field of
activity to men "who have been obliged to serve when their abilities
entitled them to direct."
FOOTNOTES:
[227] Adapted from the _Report of the Committee Appointed to Investigate
the Concentration of Control of Money and Credit_, 62d Congress, 3d
Session, pp. 130-33.
[228] Adapted from Albert W. Atwood, _The Borrower and the Money Trust,
Review of Reviews_, Vol. 46, August. 1912, pp. 207-218.
[229] [Interlocking directorates among the more important banks were
prohibited by the Clayton Act, passed in 1914. See p. 624.]
[230] Frank Haigh Dixon, _The Economic Significance of Interlocking
Directorates in Railway Finance, The Journal of Political Economy_, Vol.
23, No. 2, February, 1915, pp. 938-946.