Skip to main content

Full text of "Other people's money, and how the bankers use it"

See other formats










Copyright, 1913, 1914, by 
The McClure Pubijcations 

Copyright, 1914, by 
Frederick A. Stokes Company 

All rights reserved 



March, 19H 


While Louis D. Brandeis's series of articles 
on the money trust was running in Harper's 
Weekly many inquiries came about publication 
in more accessible permanent form. Even with- 
out such urgence through the mail, however, it 
would have been clear that these articles inevit- 
ably constituted a book, since they embodied an 
analysis and a narrative by that mind which, on 
the great industrial movements of our era, is the 
most expert in the United States. The inquiries 
meant that the attentive public recognized that 
here was a contribution to history. Here was the 
clearest and most profound treatment ever 
published on that part of our business develop- 
ment which, as President Wilson and other wise 
men have said, has come to constitute the greatest 
of our problems. The story of our time is the 
story of industry. No scholar of the future will 
be able to describe our era with authority unless 
he comprehends that expansion and concentration 
which followed the harnessing of steam and elec- 
tricity, the great uses of the change, and the great 


excesses. No historian of the future, in my opin- 
ion, will find among our contemporary documents 
so masterful an analysis of why concentration 
went astray. I am but one among many who 
look upon jMr. Brandeis as having, in the field of 
economics, the most inventive and sound mind 
of our time. While his articles were running in 
Harper's Weekly I had ample opportunity to 
know how widespread was the belief among 
intelligent men that this brilliant diagnosis of 
our money trust was the most important contri- 
bution to current thought in many years. 

"Great" is one of the words that I do not use 
loosely, and I look upon Mr. Brandeis as a great 
man. In the composition of his intellect, one 
of the most important elements is his compre- 
hension of figures. As one of the leading finan- 
ciers of the country said to me, "Mr. Brandeis's 
greatness as a lawyer is part of his greatness as 
a mathematician." My views on this subject 
are sufficiently indicated in the following edito- 
rial in Harper's Weekly. 


About five years before tlic Metropolitan Traction 
Compunj' of New York went into tlie hands of a receiver, 
Mr. Bnindeis came down from lioston, and in a speech at 
Cooper Union prophesied that that company must fail, 


Leading bankers in New York and Boston were heartily 
recommending the stock to their customers. Mr. Brandeis 
made his prophecy merely by analyzing the published 
figures. How did he win in the Pinchot-Glavis-Ballinger 
controversy? In various ways, no doubt; but perhaps the 
most critical step was when he calculated just how long it 
would take a fast worker to go through the Glavis-Ballinger 
record and make a judgment of it; whereupon he decided 
that Mr. Wickersham could not have made his report at 
the time it was stated to have been made, and therefore it 
must have been predated. 

Most of Mr. Brandeis's other contributions to current 
history have involved arithmetic. When he succeeded in 
preventing a raise in freight rates, it was through an exact 
analysis of cost. When he got Savings Bank Insurance 
started in Massachusetts, it was by being able to figure what 
insurance ought to cost. When he made the best contract 
between a city and a public utility that exists in this country, 
a definite grasp of the gas business was necessary — com- 
bined, of course, with the wisdom and originality that make 
a statesman. He could not have invented the preferential 
shop if that new idea had not been founded on a precise 
knowledge of the conditions in the garment trades. When 
he established before the United States Supreme Court the 
constitutionality of legislation affecting women only, he 
relied much less upon reason than upon the amount of knowl- 
edge displayed of what actually happens to women when 
they are overworked — which, while not arithmetic, is built 
on the same intellectual quality. Nearly two years before 
Mr. Mellen resigned from the New Haven Railroad, Mr. 
Brandeis wrote to the present editor of this paper a private 
letter in which he said: 

"When the New Haven reduces its dividends and Mellen 
resigns, the ' Decline of New Haven and Fall of Mellen' will 


make a dramatic story of human interest with a moral — or 
two — including the evils of private monopoly. Events can- 
not be long deferred, and possibly you may want to prepare 
for their coming. 

"Anticipating the future a little, I suggest the following 
as an epitaph or obituary notice: 

"Mellen was a masterful man, resourceful, courageous, 
broad of view. He fired the imagination of New England; 
but, being obUque of vision, merely distorted its judgment 
and silenced its conscience. For a while he trampled with 
impunity on laws human and divine; but, as he was obsessed 
with the delusion that two and two make five, he fell, at 
last, a victim to the relentless rules of humble arithmetic. 

'"Remember, O Stranger, Arithmetic is the first of the 
sciences and the mother of safety.'" 

The exposure of the bad jBnancial management 
of the New Haven raikoad, more than any- 
other one thing, led to the exposure and com- 
prehension of the wasteful methods of big busi- 
ness all over the country and that exposure of 
the New Haven was the almost single-handed 
work of Mr. Brandeis. He is a person who 
fights against any odds while it is necessary 
to fight and stops fighting as soon as the fight 
is won. For a long time very respectable and 
honest leaders of finance said that his charges 
against the New Haven were unsound and in- 
excusable. He kept ahead. A year before the 
actual crash came, however, he ceased worrying, 
for he knew the work had been carried far enough 


to complete itself. When someone asked him 
to take part in some little controversy shortly 
before the collapse, he replied, ''That fight does 
not need me any longer. Time and arithmetic 
will do the rest." 

This grasp of the concrete is combined in Mr. 
Brandeis with an equally distinguished grasp of 
bearing and significance. His imagination is as 
notable as his understanding of business. In 
those accomplishments which have given him his 
place in American life, the two sides of his mind 
have worked together. The arrangement be- 
tween the Gas Company and the City of Boston 
rests on one of the guiding principles of Mr. 
Brandeis' s life, that no contract is good that is 
not advantageous to both parties to it. Behind 
his understanding of the methods of obtaining 
insurance and the proper cost of it to the laboring 
man lay a philosophy of the vast advantage to 
the fibre and energy of the community that would 
come from devising methods by which the labor- 
ing classes could make themselves comfortable 
through their whole lives and thus perhaps mak- 
ing unnecessary elaborate systems of state help. 
The most important ideas put forth in the 
Armstrong Committee Report on insurance had 
been previously suggested by Mr. Brandeis, 


acting as counsel for the Equitable policy 
holders. Business and the more important 
statesmanship were intimately combined in the 
management of the Protocol in New York, 
which has done so much to improve condi- 
tions in the clothing industry. The welfare 
of the laborer and his relation to his employer 
seems to ]\Ir. Brandeis, as it does to all the 
most competent thinkers today, to constitute 
the most important question we have to solve, 
and he won the case, coming up to the Supreme 
Court of the United States, from Oregon, estab- 
lishing the constitutionality of special protective 
legislation for women. In the IMinimum Wage 
case, also from the State of Oregon, which is 
about to be heard before the Supreme Court, he 
takes up what is really a logical sequence of the 
limitation of women's hours in certain industries, 
since it would be a futile performance to limit 
their hours and then allow their wages to be cut 
down in consequence. These industrial activities 
are in large part an expression of liis deep and 
ever growing sympathy with the working people 
and understanding of them. Florence Kelley 
once said: "No man since Lincoln has understood 
the common people as Louis Brandies does." 


While the majority of Mr. Brandeis's great 
progressive achievements have been connected 
with the industrial system, some have been polit- 
ical in a more limited sense. I worked with him 
through the Ballinger-Pinchot controversy, and 
I never saw a grasp of detail more brilliantly 
combined with high constructive ethical and 
political thinking. After the man who knew 
most about the details of the Interior Depart- 
ment had been cross-examined by Mr. Brandeis 
he came and sat down by me and said: "Mr. 
Hapgood, I have no respect for you. I do not 
think your motives in this agitation are good 
motives, but I want to say that you have a 
wonderful lawyer. He knows as much about 
the Interior Department today as I do." In 
that controversy, the power of the administra- 
tion and of the ruling forces in the House and 
Senate were combined to protect Secretary 
Ballinger and prevent the truth from coming 
to light. Mr. Brandeis, in leading the fight or 
the conservation side, was constantly haunted 
by the idea that there was a mystery somewhere. 
The editorial printed above hints at how ho 
solved the mystery, but it would require much 
more space to tell the other sides, the enthus- 
iasm for conservation, the convincing arguments 


for higher standards in office, the connection 
of this conspiracy with the country's larger 
needs. Seldom is an audience at a hearing so 
moved as it was by Mr. Brandeis's final plea to 
the committee. 

Possibly his work on railroads will turn out to be 
the most significant among the many things Mr. 
Brandeis has done. His arguments in 1910-11 
before the Interstate Commerce Commission 
against the raising of rates, on the ground that 
the way for railroads to be more prosperous was 
to be more efficient, made efficiency a national 
idea. It is a cardinal point in his philosophy 
that the only real progress toward a higher na- 
tional life will come through efficiency in all our 
activities. The seventy-eight questions addressed 
to the railroads by the Interstate Commerce 
Commission in December, 1913, embody what 
is probably the most comprehensive embodiment 
of his thought on the subject. 

On nothing has he ever worked harder than on 
his diagnosis of the Money Trust, and when his 
life comes to be written (I hope many years hence) 
this will be ranked with his railroad work for 
its effect in accelerating industrial changes. It 
is indeed more than a coincidence that so many 
of the things he has been contending for have 


come to pass. It is seldom that one man puts 
one idea, not to say many ideas, effectively 
before the world, but it is no exaggeration to say 
that Mr. Brandeis is responsible for the now wide- 
spread recognition of the inherent weakness of 
great size. He was the first person who set forth 
effectively the doctrine that there is a limit to the 
size of greatest efficiency, and the successful demon- 
stration of that truth is a profound contribu- 
tion to the subject of trusts. The demonstration 
is powerfully put in his testimony before the 
Senate Committee in 1911, and it is powerfully 
put in this volume. In destroying the delusion 
that efficiency was a common incident of size, he 
emphasized the possibility of efficiency through 
intensive development of the individual, thus 
connecting this principle with his whole study of 
efficiency, and pointing the way to industrial 

Not less notable than the intellect and the 
constructive ability that have gone into Mr. 
Brandeis' s work are the exceptional moral quali- 
ties. Any powerful and entirely sincere crusader 
must sacrifice much. Mr. Brandeis has sacrificed 
much in money, in agreeableness of social life, 
in effort, and he has done it for principle and for 
human happiness. His power of intensive work, 


his sustained interest and will, and his courage 
have been necessary for leadership. No man 
could have done what he has done without 
being willing to devote his life to making his 
dreams come true. 

Nor should anyone make the mistake, because 
the labors of Mr. Brandeis and others have re- 
cently brought about changes, that the system 
which was being attacked has been undermined. 
The currency bill has been passed, and as these 
words are written, it looks as if a group of trust 
bills would be passed. But systems are not 
ended in a day. Of the truths which are embod- 
ied in the essays printed in this book, some are 
being carried out now, but it will be many, many 
years before the whole idea can be made effective; 
and there will, therefore, be many, many years 
during which active citizens will be struggling for 
those principles which are here so clearly, so 
eloquently, so conclusively set forth. 

The articles reprinted here were all written 

before November, 1913. "The Failure of Banker 

Management" appeared in Harper's Weekly 

Aug. IG, 1913; the other articles, between Nov. 

22, 1913 and Dec. 17, 1914. 

Norman Hapgood. 
March, 1914. 



I Our Financial Oligarchy 1 

II How THE Combiners Combine 28 

III Interlocking Directorates 51 

IV Serve One Master Only! 69 

V What Publicity Can Do 92 

VI Where the Banker is Superfluous . .109 
VII Big Men and Little Business . . . .135 

VIII A Curse of Bigness 162 

IX The Failure of Banker- management . . 189 
X The Inefficiency of the Oligarchs . . 201 





President Wilson, when Governor, declared 
in 1911: 

"The great monopoly in this country is the 
money monopoly. So long as that exists, our 
old variety and freedom and individual energy of 
development are out of the question. A great 
industrial nation is controlled by its system of 
credit. Our system of credit is concentrated. 
The growth of the nation, therefore, and all our 
activities are in the hands of a few men, who, 
even if their actions be honest and intended for 
the public interest, are necessarily concentrated 
upon the great undertakings in which their own 
money is involved and who, necessarily, by every 
reason of their own limitations, chill and check 
and destroy genuine economic freedom. This 
is the greatest question of all; and to this, states- 


men must address themselves with an earnest 
determination to serve the long future and the 
true hberties of men." 

The Pujo Committee — appointed in 1912 — 
found : 

"Far more dangerous than all that has hap- 
pened to us in the past in the way of ehmination 
of competition in industry is the control of credit 
through the domination of these groups over our 
banks and industries." . . . 

"Whether under a different currency system 
the resources in our banks would be greater or 
less is comparatively immaterial if they continue 
to be controlled by a small group." . . . 

"It is impossible that there should be compe- 
tition with all the facilities for raising money or 
selling large issues of bonds in the hands of these 
few bankers and their partners and allies, who 
together dominate the financial policies of most 
of the existing systems. . . . The acts of this 
inner group, as here described, have nevertheless 
been more destructive of competition than any- 
thing accomplished by the trusts, for they strike 
at the very vitals of potential competition in 
every industry that is under their protection, a 
condition which if permitted to continue, will 


render impossible all attempts to restore nor- 
mal competitive conditions in the industrial 
world. . . . 

"If the arteries of credit now clogged well-nigh 
to choking by the obstructions created through 
the control of these groups are opened so that they 
may be permitted freely to play their important 
part in the financial system, competition in large 
enterprises will become possible and business can 
be conducted on its merits instead of being sub- 
ject to the tribute and the good will of this hand- 
ful of self-constituted trustees of the national 

The promise of New Freedom was joyously 
proclaimed in 1913. 

The facts which the Pujo Investigating Com- 
mittee and its able Counsel, Mr. Samuel Unter- 
myer, have laid before the country, show clearly 
the means by which a few men control the busi- 
ness of America. The report proposes meas- 
ures which promise some relief. Additional reme- 
dies will be proposed. Congress will soon be 
called upon to act. 

How shall the emancipation be wrought? On 
what lines shall we proceed? The facts, when 
fully understood, will teach us. 



The dominant element in our financial oli- 
garchy is the investment banker. Associated 
banks, trust companies and life insurance com- 
panies are his tools. Controlled railroads, public 
service and industrial corporations are his sub- 
jects. Though properly but middlemen, these 
bankers bestride as masters America's business 
world, so that practically no large enterprise can 
be undertaken successfully without their partici- 
pation or approval. These bankers are, of 
course, able men possessed of large fortunes; 
but the most potent factor in their control of 
business is not the possession of extraordinary 
ability or huge wealth. The key to their power is 
Combination — concentration intensive and com- 
prehensive — advancing on three distinct lines: 

First: There is the obvious consolidation of 
banks and trust companies; the less obvious 
afhliations — through stockholdings, voting trusts 
and interlocking directorates — of banking insti- 
tutions which are not legally connected; and 
the joint transactions, gentlemen's agreements, 
and "banking ethics" which eliminate competi- 
tion among the investment bankers. 

Second: There is the consolidation of railroads 
into huge systems, the large combinations of 


public service corporations and the formation of 
industrial trusts, which, by making businesses so 
"big" that local, independent banking concerns 
cannot alone supply the necessary funds, has 
created dependence upon the associated New 
York bankers. 

But combination, however intensive, along 
these lines only, could not have produced the 
Money Trust — another and more potent factor 
of combination was added. 

Third: Investment bankers, like J. P. Morgan 
& Co., dealers in bonds, stocks and notes, en- 
croached upon the functions of the three other 
classes of corporations with which their business 
brought them into contact. They became the 
directing power in railroads, public service and 
industrial companies through which our great 
business operations are conducted — the makers 
of bonds and stocks. They became the directing 
power in the life insurance companies, and other 
corporate reservoirs of the people's savings — the 
buyers of bonds and stocks. They became the 
directing power also in banks and trust companies 
— the depositaries of the quick capital of the coun- 
try — the life blood of business, with which they 
and others carried on their operations. Thus 
four distinct functions, each essential to business. 


and each exercised, originall}", by a distinct set of 
men, became united in the investment banker. 
It is to this union of business functions that the 
existence of the Money Trust is mainly due.* 

The development of our financial oligarchy 
followed, in this respect, lines with which the 
history of political despotism has familiarized us : 
— usurpation, proceeding by gradual encroach- 
ment rather than by violent acts; subtle and 
often long-concealed concentration of distinct 
functions, which are beneficent when separately 
administered, and dangerous onl}" when combined 
in the same persons. It was by processes such 
as these that Caisar Augustus became master of 
Rome. The makers of our own Constitution 
had in mind Uke dangers to our political liberty 
when they provided so carefully for the separation 
of governmental powers. 


The original function of the investment banker 
was that of dealer in bonds, stocks and notes; 
buying mainly at wholesale from corporations, 

*ObviousIj' only a few of (ho invest nicrit bimkors oxor- 
risc this Krcat power; but many othors i)erf(jrin important func- 
tions in the eystem, as hereinafter described. 


muDicipalities, states and governments which 
need money, and selHng to those seeking invest- 
ments. The banker performs, in this respect, the 
function of a merchant; and the function is a 
very useful one. Large business enterprises are 
conducted generally by corporations. The per- 
manent capital of corporations is represented by 
bonds and stocks. The bonds and stocks of the 
more important corporations are owned, in large 
part, by small investors, who do not participate 
in the management of the company. Corpora- 
tions require the aid of a banker-middleman, 
for they lack generally the reputation and clien- 
tele essential to selling their own bonds and stocks 
direct to the investor. Investors in corporate 
securities, also, require the services of a banker- 
middleman. The number of securities upon the 
market is very large. Only a part of these se- 
curities is listed on the New York Stock Ex- 
change; but its listings alone comprise about 
sixteen hundred different issues aggregating 
about $26,500,000,000, and each year new list- 
ings are made averaging about two hundred 
and thu-ty-three to an amount of $1,500,000,000. 
For a small investor to make an intelligent selec- 
tion from these many corporate securities — in- 
deed, to pass an intelligent judgment upon a 


single one — is ordinarily impossible. He lacks the 
abilit}', the facilities, the training and the time 
essential to a proper investigation. Unless his 
purchase is to be little better than a gamble, he 
needs the advice of an expert, who, combining 
special knowledge with judgment, has the facil- 
ities and incentive to make a thorough investiga- 
tion. This dependence, both of corporations and 
of investors, upon the banker has grown in recent 
years, since women and others who do not par- 
ticipate in the management, have become the 
owners of so large a part of the stocks and bonds 
of our great corporations. Over half of the 
stockholders of the American Sugar Refining 
Company and nearly half of the stockholders of 
the Pennsylvania RaUroad and of the New York, 
New Haven & Hartford Railroad are women. 

Good- will — the possession by a dealer of num- 
erous and valuable regular customers — is always 
an important element in merchandising. But in 
the business of selling bonds and stocks, it is of 
exceptional value, for the very reason that the 
small investor relics so largely upon the banker's 
judgment. This confidential relation of the 
banker to customers — and the knowledge of the 
customers' private afTairs acquired incidentally — 


is often a determining factor in the marketing of 
securities. With the advent of Big Business 
such good-will possessed by the older banking 
houses, preeminently J. P. Morgan & Co. and 
their Philadelphia House called Drexel & Co., 
by Lee, Higginson & Co. and Kidder, Peabody, 
& Co. of Boston, and by Kuhn, Loeb & Co. of 
New York, became of enhanced importance. 
The volume of new security issues was greatly 
increased by huge railroad consolidations, the 
development of the holding companies, and par- 
ticularly by the formation of industrial trusts. 
The rapidly accumulating savings of our people 
sought investment. The field of operations for 
the dealer in securities was thus much enlarged. 
And, as the securities were new and untried, the 
services of the investment banker were in great 
demand, and his powers and profits increased 


But this enlargement of their legitimate field 
of operations did not satisfy investment bankers. 
They were not content merely to deal in securities. 
They desired to manufacture them also. They 
became promoters, or allied themselves with 
promoters. Thus it was that J. P. Morgan <fe 


Company formed the Steel Trust, the Harvester 
Trust and the Shipping Trust. And, adding the 
duties of undertaker to those of midwife, the 
investment bankers became, in times of corporate 
disaster, members of security-holders' "Pro- 
tective Committees"; then they participated as 
"Reorganization Managers" in the reincarnation 
of the unsuccessful corporations and ultimately 
became directors. It was in this way that the 
Morgan associates acquired their hold upon the 
Southern Railway, the Northern Pacific, the 
Reading, the Erie, the Pere Marquette, the 
Chicago and Great Western, and the Cincinnati, 
Hamilton & Dayton. Often they insured the 
continuance of such control by the device of the 
voting trust; but even where no voting trust was 
created, a secure hold was acquired upon re- 
organization. It was in this way also that Kuhn, 
Loeb & Co. became potent in the Union Pacific 
and in the Baltimore & Ohio. 

But the banker's participation in the manage- 
ment of corporations was not limited to cases 
of promotion or reorganization. An urgent or 
extensive need of new money was considered a 
BufTicicnt reason for the banker's entering a 
board of directors. Often without even such 
excuse the investment banker has secured a 


place upon the Board of Directors, through his 
powerful influence or the control of his customers' 
proxies. Such seems to have been the fatal en- 
trance of Mr. Morgan into the management of 
the then prosperous New York, New Haven & 
Hartford Railroad, in 1892. When once a 
banker has entered the Board — whatever may 
have been the occasion — his grip proves tena- 
cious and his influence usually supreme; for he 
controls the supply of new money. 

The investment banker is naturally on the 
lookout for good bargains in bonds and stocks. 
Like other merchants, he wants to buy his 
merchandise cheap. But when he becomes di- 
rector of a corporation, he occupies a position 
which prevents the transaction by which he 
acquires its corporate securities from being 
properly called a bargain. Can there be real 
bargaining where the same man is on both sides 
of a trade? The investment banker, through his 
controlling influence on the Board of Directors, 
decides that the corporation shall issue and sell 
the securities, decides the price at which it shall 
sell them, and decides that it shall sell the 
securities to himself. The fact that there are 
other directors besides the banker on the Board 


does not, in practice, prevent this being the result. 
The banker, who holds the purse-strings, becomes 
usually the dominant spirit. Through voting- 
trusteeships, exclusive financial agencies, mem- 
bership on executive or finance committees, or by 
mere directorships, J. P. Morgan & Co., and their 
associates, held such financial power in at least 
thirty-two transportation systems, public utility 
corporations and industrial companies — com- 
panies with an aggregate capitalization of S17,- 
273,000,000. IMainly for corporations so con- 
trolled, J. P. Morgan & Co. procured the public 
marketing in ten years of security issues aggre- 
gating $1,950,000^,000. This huge sum does not 
include any issues marketed privately, nor any 
issues, however mai'keted, of intra-state cor- 
porations. Kuhn, Loeb & Co. and a few other 
investment bankers exercise similar control over 
many other corporations. 


Such control of railroads, public service and 
industrial corporations assures to the investment 
bankers an ample supply of securities at attract- 
ive prices; and merchandise well bought is half 
sold. But these bond and stock merchants are 
not disposed to take even a slight risk as to their 


ability to market their goods. They saw that if 
they could control the security-buyers, as well as 
the security-makers, investment banking would, 
indeed, be "a happy hunting ground"; and they 
have made it so. 

The numerous small investors cannot, in the 
strict sense, be controlled; but their dependence 
upon the banker insures their being duly in- 
fluenced. A large part, however, of all bonds 
issued and of many stocks are bought by the 
prominent corporate investors; and most promi- 
nent among these are the life insurance companies, 
the trust companies, and the banks. The purchase 
of a security by these institutions not only relieves 
the banker of the merchandise, but recommends 
it strongly to the small investor, who believes 
that these institutions are wisely managed. These 
controlled corporate investors are not only large 
customers, but may be particularly accommo- 
dating ones. Individual investors are moody. 
They buy only when they want to do so. They 
are sometimes inconveniently reluctant. Cor- 
porate investors, if controlled, may be made to 
buy when the bankers need a market. It was 
natural that the investment bankers proceeded to 
get control of the great life insurance companies, 
as well as of the trust companies and the banks. 


The field thus occupied is uncommonly rich. 
The life insurance companies are our leading 
institutions for savings. Their huge surplus and 
reserves, augmented daily, are always clamoring 
for investment. No panic or money shortage 
stops the inflow of new money from the perennial 
stream of premiums on existing policies and inter- 
est on existing investments. The three great 
companies — the New York Life, the Mutual of 
New York, and the Equitable — would have over 
$55,000,000 of new money to invest annually, 
even if they did not issue a single new policy. 
In 1904 — just before the Armstrong investiga- 
tion — these three companies had together $1,247,- 
331,738.18 of assets. They had issued in that 
year $1,025,671,126 of new poUcies. The New 
York legislature placed in 1906 certain restrictions 
upon their growth; so that their new business 
since has averaged $547,384,212, or only fifty- 
three per cent, of what it was in 1904. But the 
aggregate assets of these companies increased in 
the last eight years to $1,817,052,260.36. At the 
time of the Armstrong investigation the average 
age of these tliree companies was fifty-six years. 
The growth of assets in the last eight years was about 
half as large as the total growth in the preceding 
fifty-six years. These three companies must 


invest annually about $70,000,000 of new money; 
and besides, many old investments expire or are 
changed and the proceeds must be reinvested. A 
large part of all life insurance surplus and re- 
serves are invested in bonds. The aggregate 
bond investments of these three companies on 
January 1, 1913, was $1,019,153,268.93. 

It was natural that the investment bankers 
should seek to control these never-failing reser- 
voirs of capital. George W. Perkins was Vice- 
President of the New York Life, the largest of 
the companies. While remaining such he was 
made a partner in J. P. Morgan & Co., and in 
the four years preceding the Armstrong investi- 
gation, his firm sold the New York Life $38,804, 
918.51 in securities. The New York Life is a 
mutual company, supposed to be controlled by 
its policy-holders. But, as the Pujo Committee 
funds 'Hhe so-called control of life insurance com- 
panies by policy-holders through mutualization 
is a farce" and "its only result is to keep in 
office a self-constituted, self-perpetuating man- 

The Equitable Life Assurance Society is a 
stock company and is controlled by $100,000 of 
stock. The dividend on this stock is limited by 
law to seven per cent.; but in 1910 Mr. Morgan 


paid about S3, 000,000 for $51,000, par value of 
this stock, or S5,SS2.35 a share. The dividend 
return on the stock investment is less than one- 
eighth of one per cent. ; but the assets controlled 
amount now to over $500,000,000. And certain 
of these assets had an especial value for invest- 
ment bankers; — namely, the large holdings of 
stock in banks and trust companies. 

The Armstrong investigation disclosed the 
extent of financial power exerted through the 
insurance company holdings of bank and trust 
company stock. The Committee recommended 
legislation compelling the insurance companies 
to dispose of the stock within five years. A law 
to that effect was enacted, but the time was later 
extended. The companies then disposed of a 
part of theu" bank and trust company stocks; 
but, as the insurance companies were controlled 
by the investment bankers, these gentlemen 
sold the bank and trust company stocks to 

Referring to such purchases from the Mutual 
Life, as well as from the Equitable, the Pujo 
Committee found: 

"Here, then, were stocks of fiv'e important 
trui-t companies and one of our largest national 


banks in New York City that had been held by 
these two life insurance companies. Within 
five years all of these stocks, so far as distributed 
by the insurance companies, have found their 
way into the hands of the men who virtually con- 
trolled or were identified with the management 
of the insurance companies or of their close allies 
and associates, to that extent thus further en- 
trenching them." 

The banks and trust companies are deposi- 
taries, in the main, not of the people's savings, 
but of the business man's quick capital. Yet, 
since the investment banker acquired control 
of banks and trust companies, these institutions 
also have become, like the life companies, large 
purchasers of bonds and stocks. Many of our 
national banks have invested in this manner a 
large part of all their resources, including cap- 
ital, surplus and deposits. The bond invest- 
ments of some banks exceed by far the aggre- 
gate of their capital and surplus, and nearly 
equal their loanable deposits. 


The goose that lays golden eggs has been con- 
sidered a most valuable possession. But even 
more profitable is the privilege of taking the 


golden eggs laid by somebody else's goose. 
The investment bankers and their associates now 
enjoy that privilege. They control the people 
through the people's own money. If the bank- 
ers' power were commensurate only with their 
wealth, they would have relatively little influence 
on American business. Vast fortunes like those 
of the Astors are no doubt regrettable. They 
are inconsistent with democracy. They are un- 
social. And they seem peculiarly unjust when 
they represent largely unearned increment. But 
the wealth of the Astors does not endanger 
political or industrial liberty. It is insignificant 
in amount as compared with the aggregate wealth 
of America, or even of New York City. It lacks 
significance largely because its owners have only 
the income from their own wealth. The Astor 
wealth is static. The wealth of the Morgan 
associates is dynamic. The power and the 
growth of power of our financial oligarchs comes 
from wielding the savings and quick capital of 
others. In two of the tliree groat life insurance 
companies the influence of J. P. Morgan & Co. 
and their associates is exerted without any in- 
dividual investment by them whatsoever. Even 
in the E(}uitable, where Mr. Morgan bought an 
actual majority of all the outstanding stock, his 


investment amounts to little more than one-half 
of one per cent, of the assets of the company. 
The fetters which bind the people are forged from 
the people's own gold. 

But the reservoir of other people's money, 
from which the investment bankers now draw 
their greatest power, is not the life insurance 
companies, but the banks and the trust companies. 
Bank deposits represent the really quick capital 
of the nation. They are the life blood of busi- 
nesses. Their effective force is much greater than 
that of an equal amount of wealth permanently 
invested. The 34 banks and trust companies, 
which the Pujo Committee declared to be directly 
controlled by the Morgan associates, held $1,983,- 
000,000 in deposits. Control of these institutions 
means the ability to lend a large part of these 
funds, directly and indirectly, to themselves; and 
what is often even more important, the power 
to prevent the funds being lent to any rival in- 
terests. These huge deposits can, in the dis- 
cretion of those in control, be used to meet the 
temporary needs of their subject corporations. 
When bonds and stocks are issued to finance 
permanently these corporations, the bank depos- 
its can, in large part, be loaned by the investment 


bankers in control to themselves and their asso- 
ciates; so that securities bought may be carried 
by them, until sold to investors. Or these bank 
deposits may be loaned to allied bankers, or 
jobbers in securities, or to speculators, to enable 
them to carry the bonds or stocks. Easy money 
tends to make securities rise in the mai-ket. 
Tight money nearly always makes them fall. 
The control by the leading investment bankers 
over the banks and trust companies is so great, 
that they can often determine, for a time, the mar- 
ket for money by lending or refusing to lend on 
the Stock Exchange. In this way, among others, 
they have power to affect the general trend of 
prices in bonds and stocks. Their power over a 
particular security is even greater. Its sale on 
the market may depend upon whether the secur- 
ity is favored or discriminated against when 
offered to the banks and trust companies, as 
collateral for loans. 

Furthermore, it is the investment banker's 
access to other people's money in controlled 
banks and trust companies which alone enables 
any individual banking concern to take so large 
part of the annual output of bonds and stocks. 
The banker's own capital, however large, would 
soon be exhausted. And even the loanable 


funds of the banks would often be exhausted, 
but for the large deposits made in those banks 
by the life insurance, railroad, public service, and 
industrial corporations which the bankers also 
control. On December 31, 1912, the three lead- 
ing life insurance companies had deposits in 
banks and trust companies aggregating $13,839,- 
189.08. As the Pujo Committee finds: 

''The men who through their control over the 
funds of oiu" railroads and industrial companies 
are able to direct where such funds shall be kept 
and thus to create these great reservoirs of the 
people's money, are the ones who are in position 
to tap those reservoirs for the ventures in which 
they are interested and to prevent their being 
tapped for purposes of which they do not approve. 
The latter is quite as important a factor as the 
former. It is the controlling consideration in its 
effect on competition in the railroad and industrial 


But the power of the investment banker over 
other people's money is often more direct and 
effective than that exerted through controlled 
banks and trust companies. J. P. Morgan & Co. 
achieve the supposedly impossible feat of having 


their cake and eating it too. They buy the bonds 
and stocks of controlled railroads and industrial 
concerns, and pay the pui'chase price; and still 
do not part with their money. This is accom- 
plished by the simple device of becoming the bank 
of deposit of the controlled corporations, instead 
of having the company deposit in some merely 
controlled bank in whose operation others have 
at least some share. When J. P. Morgan & Co. 
buy an issue of securities the purchase money, 
instead of being paid over to the corporation, is 
retained by the banker for the corporation, to 
be drawn upon only as the funds are needed by 
the corporation. And as the securities are issued 
in large blocks, and the money raised is often not 
all spent until long thereafter, the aggregate of 
the balances remaining in the banker's hands are 
huge. Thus J. P. Morgan & Co. (including their 
Philadelphia house, called Drexel & Co.) held 
on November 1, 1912, deposits aggregating 


The operations of so comprehensive a system 
of concentration necessarily developed in the 
bankers overweening j)()wor. And the bankers' 
power grows by what it feeds on. Power begets 


wealth; and added wealth opens ever new oppor- 
tunities for the acquisition of wealth and power. 
The operations of these bankers are so vast and 
numerous that even a very reasonable compensa- 
tion for the service performed by the bankers, 
would, in the aggregate, produce for them in- 
comes so large as to result in huge accumulations 
of capital. But the compensation taken by the 
bankers as commissions or profits is often far 
from reasonable. Occupying, as they so fre- 
quently do, !he inconsistent position of being at 
the same tims seller and buyer, the standard for 
so-called compensation actually applied, is not 
the "Rule of reason", but ''All the traffic will 
bear." And this is true even where there is no 
sinister motive. The weakness of human nature 
prevents men from being good judges of their 
own deservings. 

The syndicate formed by J. P. Morgan & Co. 
to underwrite the United States Steel Corpora- 
tion took for its services securities which netted 
$62,500,000 in cash. Of this huge sum J. P. 
Morgan & Co. received, as syndicate managers, 
$12,500,000 in addition to the share which they 
were entitled to receive as syndicate members. 
This sum of $62,500,000 was only a part of the fees 
paid for the service of monopolizing the steel in- 


dustry. In addition to the commissions taken 
specifically for organizing the United States 
Steel Corporation, large sums were paid for 
organizing the several companies of which it is 
composed. For instance, the National Tube 
Company was capitalized at $80,000,000 of 
stock; $40,000,000 of which was common stock. 
Half of this $40,000,000 was taken by J. P. 
Morgan & Co. and their associates for promotion 
services; and the $20,000,000 stock so taken 
became later exchangeable for $25,000,000 of 
Steel Common. Commissioner of Corporations 
Herbert Knox Smith, found that: 

"More than $150,000,000 of the stock of the 
Steel Corporation was issued directly or in- 
directly (tlirough exchange) for mere promo- 
tion or underwriting services. In other words, 
nearly one-seventh of the total capital stock 
of the Steel Corporation appears to have been 
issued directly or indirectly to promoters' 

The so-called fees and commissions taken by 
the bankers and associates upon the organiza- 
tion of the trusts have been exceptionally 
large. But even after the trusts are successfully 
launched the exactions of the bankers are often 


extortionate. The syndicate which underwrote, 
in 1901, the Steel Corporation's preferred stock 
conversion plan, advanced only $20,000,000 in 
cash and received an underwriting commission 
of $6,800,000. 

The exaction of huge commissions is not con- 
fined to trust and other industrial concerns. 
The Interborough Railway is a most prosperous 
corporation. It earned last year nearly 21 per 
cent, on its capital stock, and secured from New 
York City, in connection with the subway ex- 
tension, a very favorable contract. But when it 
financed its $170,000,000 bond issue it was agreed 
that J. P. Morgan & Co. should receive three 
per cent., that is, $5,100,000, for merely forming 
this syndicate. More recently, the New York, 
New Haven & Hartford Railroad agreed to pay 
J. P. Morgan & Co. a commission of $1,680,000; 
that is, 2 1/2 per cent., to form a syndicate to 
underwrite an issue at par of $67,000,000 20- 
year 6 per cent, convertible debentures. That 
means: The bankers bound themselves to take 
at 97 1/2 any of these six per cent, convertible 
bonds which stockholders might be unwilling to 
buy at 100. When the contract was made the 
New Haven's then outstanding six per cent, con- 
vertible bonds were selling at 114. And the 


new issue, as soon as announced, was in such 
demand that the public offered and was for 
months wilUng to buy at 106 bonds which the 
Company were to pay J. P. Morgan & Co. $1,- 
680,000 to be willing to take at par. 


These large profits from promotions, under- 
writings and security purchases led to a revolu- 
tionary change in the conduct of our leading 
banking institutions. It was obvious that con- 
trol by the investment bankers of the deposits 
in banks and trust companies was an essential 
element in their securing these huge profits. 
And the bank officers naturally asked, "Why 
then should not the banks and trust companies 
share in so profitable a field? Why should not 
they themselves become investment bankers 
too, with all the new functions incident to 'Big 
Business'?" To do so would involve a de- 
parture from the legitimate sphere of the 
banking business, which is the making of tem- 
porary loans to business concerns. But the 
temptation was irresistible. The invasion of 
the investment banker into the banks' field of 
operation was followed by a counter invasion 
by the banks into the realm of the investment 


banker. Most prominent among the banks 
were the National City and the First National 
of New York. But theirs was not a hostile 
invasion. The contending forces met as allies, 
joined forces to control the business of the 
country, and to "divide the spoils." The al- 
liance was cemented by voting trusts, by inter- 
locking directorates and by joint ownerships. 
There resulted the fullest "cooperation"; and 
ever more railroads, public service corporations, 
and industrial concerns were brought into 
complete subjection. 


Among the allies, two New York banks — 
the National City and the First National — 
stand preeminent. They constitute, with the 
]\Iorgan firm, the inner group of the Money 
Trust. Each of the two banks, like J. P. Mor- 
gan & Co., has huge resources. Each of the 
two banks, like the firm of J. P. Morgan & Co., 
has been dominated by a genius in combination. 
In the National Citj^ it is James Stillman; in 
the First National, George F. Baker. Each of 
these gentlemen was formerly President, and is 
now Chairman of the Board of Directors. The 
resources of the National City Bank (including 
its Siamese-twin security company) are about 
$300,000,000; those of the First National Bank 
(including its Siamese-twin security company) 
are about $200,000,000. The resources of the 
Morgan firm have not been disclosed. But it 
appears that they have available for their opera- 
tions, also, huge deposits from their subjects; 
deposits reported as $102,500,000. 



The private fortunes of the chief actors in the 
combination have not been ascertained. But 
sporadic evidence indicates how great are the 
possibiUties of accumulation when one has the 
use of "other people's money." Mr. Morgan's 
wealth became proverbial. Of Mr. Stillman's 
many investments, only one was specifically 
referred to, as he was in Europe during the 
investigation, and did not testify. But that one 
is significant. His 47,498 shares in the National 
City Bank are worth about $18,000,000. Mr. 
Jacob H. Schiff aptly described this as ''a very 
nice investment." 

Of Mr. Baker's investments we know more, 
as he testified on many subjects. His 20,000 
shares in the First National Bank are worth at 
least $20,000,000. His stocks in six other New 
York banks and trust companies are together 
worth about $3,000,000. The scale of his in- 
vestment in railroads may be inferred from his 
former holdings in the Central Railroad of New 
Jersey. JHe was its largest stockholder — so large 
that with a few friends he held a majority of 
the $27,436,800 par value of outstanding stock, 
which the Reading bought at $160 a share. 
He is a director in 28 other railroad companies; 
and presumably a stockholder in, at least, as 


many. The full extent of his fortune was not 
inquired into, for that was not an issue in the 
investigation. But it is not surprising that Mr. 
Baker saw little need of new laws. When asked: 

''You think everything is all right as it is 
in this world, do you not?" 

He answered: 

"Pretty nearly." 


But wealth expressed in figures gives a wholly 
inadequate picture of the allies' power. Their 
wealth is dynamic. It is wielded by geniuses 
in combination. It finds its proper expression 
in means of control. To comprehend the power 
of the allies we must try to visualize the ramifi- 
cations through which the forces operate. 

Mr. Baker is a director in 22 corporations 
having, with their many subsidiaries, aggregate 
resources or capitalization of $7,272,000,000. 
But the direct and visible power of the First 
National Bank, which ]Mr. Baker dominates, 
extends further. The Pujo report shows that 
its directors (including Mr. Baker's son) arc 
directors in at least 27 other corporations 
with resources of $4,270,000,000. That is, the 
First National is represented in 19 corporations, 


with aggregate resources or capitalization of 

It may help to an appreciation of the allies' 
power to name a few of the more prominent 
corporations in which, for instance, Mr. Baker's 
influence is exerted — visibly and directly — as 
voting trustee, executive committee man or 
simple director. 

1. Banks, Trust, and Life Insurance Companies: 
First National Bank of New York; National 
Bank of Commerce; Farmers' Loan and Trust 
Company; Mutual Life Insurance Company. 

2. Railroad [Companies: New York Central 
Lines; New Haven, Reading, Erie, Lackawanna, 
Lehigh Valley, Southern, Northern Pacific, 
Chicago, Burlington & Quincy. 

3. Public Service Corporations: American Tele- 
graph & Telephone Company, Adams Express 

4. Industrial Corporations: United States Steel 
Corporation, Pullman Company. 

Mr. Stillman is a director in only 7 corpora- 
tions, with aggregate assets of $2,476,000,000; 
but the directors in the National City Bank, 
which he dominates, are directors in at least 41 
other corporations which, with their subsidiaries, 


have an aggregate capitalization or resources of 
S10,564,000,000. The members of the firm of 
J. P. ]M organ & Co., the acknowledged leader 
of the allied forces, hold 72 directorships in 47 
of the largest corporations of the country. 

The Pujo Committee finds that the members 
of J. P. Morgan & Co. and the directors of their 
controlled trust companies and of the First 
National and the National City Bank together 

"One hundred and eighteen directorships in 
34 banks and trust companies having total re- 
sources of $2,679,000,000 and total deposits of 

"Thirty duectorships in 10 insurance com- 
panies having total assets of $2,293,000,000. 

"One hundred and five directorships in 32 
transportation systems having a total capitaliza- 
tion of $11,784,000,000 and a total mileage (ex- 
cluding express companies and steamship lines) 
of 150,200. 

"Sixty- three directorships in 24 producing 
and trading corporations having a total capital- 
ization of $3,330,000,000. 

"Twenty-five directorships in 12 public-utility 
corporations having a total capitalization of 


''In all, 341 directorships in 112 corporations 
having aggregate resources or capitalization of 


''Twenty- two billion dollars is a large sum — 
so large that we have difficulty in grasping its 
significance. The mind realizes size only through 
comparisons. With what can we compare 
twenty-two billions of dollars? Twenty-two bil- 
lions of dollars is more than three times the as- 
sessed value of all the property, real and personal, 
in all New England. It is nearly three times the 
assessed value of all the real estate in the City 
of New York. It is more than twice the as- 
sessed value of all the property in the thirteen 
Southern states. It is more than the assessed 
value of all the property in the twenty- two 
states, north and south, lying west of the Miss- 
issippi River. 

But the huge sum of twenty-two bilHon dollars 
is not large enough to include all the corporations 
to which the "influence" of the three allies, 
directly and visibly, extends, for 

First: There are 56 other corporations (not 
included in the Pujo schedule) each with capital 
or resources of over $5,000,000, and aggregating 


nearly $1,350,000,000, in which the ]\Iorgan allies 
are represented according to the directories of 

Second: The Pujo schedule does not include 
any corporation with resources of less than 
$5,000,000. But these financial giants have 
shown their humility by becoming directors in 
many such. For instance, members of J. P. 
Morgan & Co., and directors in the National 
City Bank and the First National Bank are also 
directors in 158 such corporations. Available 
publications disclose the capitalization of only 
38 of these, but those 38 aggregate $78,669,375. 

Third: The Pujo schedule includes only the 
corporations in which the Morgan associates 
actually appear by name as directors. It does 
not include those in which they are represented 
by dummies, or otherwise. For instance, the 
Morgan influence certainly extends to the Kansas 
City Terminal Railway Company, for which they 
have marketed since 1910 (in connection with 
others) four issues aggregating $41,761,000. 
But no member of J. P. Morgan & Co., of the 
National City Bank, or of the First National 
Bank appears on the Kansas City Terminal 

Fourth: The Pujo schedule does not include 


all the subsidiaries of the corporations scheduled. 
For instance, the capitalization of the New- 
Haven System is given as $385,000,000. That 
sum represents the bond and stock capital of 
the New Haven Railroad. But the New Haven 
System comprises many controlled corporations 
whose capitalization is only to a slight extent in- 
cluded directly or indirectly in the New Haven 
Railroad balance sheet. The New Haven, like 
most large corporations, is a holding company 
also; and a holding company may control sub- 
sidiaries while owning but a small part of the 
latters' outstanding securities. Only the small 
part so held will be represented in the holding 
company's balance sheet. Thus, while the New 
Haven Railroad's capitalization is only $385- 
000,000 — and that sum only appears in the Pujo 
schedule — the capitalization of the New Haven 
System, as shown by a chart submitted to the 
Committee, is over twice as great; namely, 

It is clear, therefore, that the $22,000,000,000, 
referred to by the Pujo Committee, understates 
the extent of concentration effected by the inner 
group of the Money Trust. 



Care was taken by these builders of imperial 
power that their structure should be enduring. 
It has been buttressed on every side by joint 
ownerships and mutual stockholdings, as well as 
by close personal relationships; for directorships 
are ephemeral and may end with a new election. 
Mr. Morgan and his partners acquired one- 
sixth of the stock of the First National Bank, 
and made a S6, 000,000 investment in the stock 
of the National City Bank. Then J. P. IMorgan 
& Co., the National City, and the First National 
(or their dominant officers — Mr. Stillman and 
;Mr. Baker) acquired together, by stock purchases 
and voting trusts, control of the National Bank 
of Commerce, with its $190,000,000 of resources; 
of the Chase National, with $125,000,000; of the 
Guaranty Trust Company, with $232,000,000; 
of the Bankers' Trust Company, with $205,000,- 
000; and of a number of smaller, but important, 
financial institutions. They became joint voting 
trustees in great railroad systems; and finally 
(as if the allies were united into a single concern) 
loyal and efficient service in the banks — like that 
rendered by Mr. Davison and Mr. Lamont in 
the First National — was rewarded by promotion 


to membership in the firm of J. P. Morgan 


Thus equipped and bound together, J. P. 
Morgan & Co., the National City and the First 
National easily dominated America's financial 
center, New York; for certain other important 
bankers, to be hereafter mentioned, were held 
in restraint by "gentlemen's" agreements. 
The three allies dominated Philadelphia too; 
for the firm of Drexel & Co. is J. P. Morgan & 
Co. under another name. But there are two 
other important money centers in America, 
Boston and Chicago. 

In Boston there are two large international 
banking houses — Lee, Higginson & Co., and 
Kidder, Peabody & Co. — both long established 
and rich; and each possessing an extensive, 
wealthy clientele of eager investors in bonds and 
stocks. Since 1907 each of these firms has pur- 
chased or underwritten (principally in conjunc- 
tion with other bankers) about 100 different 
security issues of the greater interstate corpora- 
tions, the issues of each banker amounting in 
the aggregate to over $1,000,000,000. Concen- 
tration of banking capital has proceeded even 


further in Boston than in New York. By suc- 
cessive consolidations the number of national 
banks has been reduced from 58 in 1898 to 19 
in 1913. There are in Boston now also 23 trust 

The National Shawmut Bank, the First 
National Bank of Boston and the Old Colony 
Trust Co., which these two Boston banking 
houses and their associates control, alone have 
aggregate resources of $288,386,294, constituting 
about one-half of the banking resources of the 
city. These great banking institutions, which 
are themselves the result of many consolidations, 
and the 21 other banks and trust companies, in 
which their directors are also directors, hold 
together 90 per cent, of the total banking re- 
sources of Boston. And linked to them by inter- 
locking directorates are 9 other banks and trust 
companies whose aggregate resources are about 
2 1/2 per cent, of Boston's total. Thus of 42 
banking institutions, 33, with aggregate resources 
of 8560,516,239, holding about 92 1/2 per cent, 
of the aggregate banking resources of Boston, 
are interlocked. But even the remaining 9 banks 
and trust companies, which together hold but 
7 1/2 per cent, of Boston banking resources, are 
not all independent of one another. Three 


are linked together; so that there appear to be 
only six banks in all Boston that are free from 
interlocking directorate relations. They to- 
gether represent but 5 per cent, of Boston's 
banking resources. And it may well be doubted 
whether all of even those 6 are entirely free from 
affiliation with the other groups. 

Boston's banking concentration is not limited 
to the legal confines of the city. Around Boston 
proper are over thirty suburbs, which with it 
form what is popularly known as "Greater 
Boston." These suburban municipalities, and 
also other important cities like Worcester and 
Springfield, are, in many respects, within Boston's 
"sphere of influence." Boston's inner banking 
group has interlocked, not only 33 of the 42 
banks of Boston proper, as above shown, but has 
linked with them, by interlocking directorships, 
at least 42 other banks and trust companies in 
35 other municipalities. 

Once Lee, Higginson & Co. and Kidder, Pea- 
body & Co. were active competitors. They are 
so still in some small, or purely local matters; 
but both are devoted co-operators with the 
Morgan associates in larger and interstate trans- 
actions; and the alliance with these great Boston 
banking houses has been cemented by mutual 


stockholdings and co-directorships. Financial 
concentration seems to have found its highest ex- 
pression in Boston. 

Somewhat similar relations exist between the 
triple alliance and Chicago's great financial insti- 
tutions — its First National Bank, the Illinois 
Trust and Savings Bank, and the Continental 
& Commercial National Bank — which together 
control resources of S561, 000,000. And similar 
relations would doubtless be found to exist with 
the leading bankers of the other important finan- 
cial centers of America, as to which the Pujo 
Committee was prevented by lack of time from 
making investigation. 


Such are the primary, such the secondary 
powers which comprise the IMoney Trust; but 
these are supplemented by forces of magnitude. 

"Radiating from these principal groups," says 
the Pujo Committee, "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 dominat- 
ing 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. Lee, Higginson & Co., 
besides being partners with the inner group, are 
also frequently utilized in this service because of 
their facilities as distributors of securities." 

For instance, J. P. Morgan & Co. as fiscal 
agents of the New Haven Railroad had the 
right to market its securities and that of its sub- 
sidiaries. Among the numerous New Haven 
subsidiaries, is the New York, Westchester and 
Boston — the road which cost $1,500,000 a mile 
to build, and which earned a deficit last year 
of nearly $1,500,000, besides failing to earn any 
return upon the New Haven's own stock and 
bond investment of $8,241,951. When the New 
Haven concluded to market $17,200,000 of these 
bonds, J. P. Morgan & Co., ''for reasons of their 
own," ''preferred not to have these bonds issued 
or distributed under their own name." The 
Morgan firm took the bonds at 92 1/2 net; and 
the bonds were marketed by Kissel, Kinnicut 
& Co. and others at 96 1/4. 


The alliance is still further supplemented, as 
the Pujo Committee shows: 


''Beyond these inner groups and sub-groups are 
banks and bankers throughout the country who 
co-operate with them in underwriting or guaran- 
teeing 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 

''The patronage thus proceeding from the 
inner group and its sub-groups 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 
organization. Such patronage yields no incon- 
siderable 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 do- 
mestic afliliations 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 securi- 
ties, by the payment to them of a commission. 
There are, however, occasions on which this is 
not the case. The underwriters are then re- 
quired to take the securities. Bankers and 
brokers are so anxious to be permitted to par- 
ticipate 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." 

In other words, an invitation from these 
royal bankers is interpreted as a command. As 
a result, these great bankers frequently get huge 
commissions without themselves distributing any 
of the bonds, or ever having taken any actual 

"In the case of the New York subway financ- 
ing of $170,000,000 of bonds by Messrs. Morgan 
& Co. and their associates, Mr. Davison [as the 
Pujo Committee reports] 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 syndi- 
cate, thus relieving themselves from all liability, 
whilst the underwriters assumed the risk of what 
the bonds would realize and of being required to 
take their share of the unsold portion." 


The organization of the ]\Ioney Trust is in- 
tensive, the combination comprehensive; but 
one other element was recognized as necessary 
to render it stable, and to make its dynamic force 
irresistible. Despotism, be it financial or politi- 
cal, is vulnerable, unless it is believed to rest 
upon a moral sanction. The longing for freedom 
is ineradicable. It will express itself in protest 
against servitude and inaction, unless the striv- 
ing for freedom be made to seem immoral. 
Long ago monarchs invented, as a preservative 
of absolutism, the fiction of "The divine right of 
kings." Bankers, imitating royalty, invented re- 
cently that precious rule of so-called "Ethics," by 
which it is declared unprofessional to come to the 
financial relief of any corporation which is already 
the prey of another "reputable" banker. 

"The possibility of competition between these 


banking houses in the purchase of securities," 
says the Pujo Committee, "is further removed 
by the understanding between them and others, 
that one will not seek, by offering better terms, 
to take away from another, a customer which it 
has theretofore served, and by corollary of this, 
namely, that where given bankers have once 
satisfactorily united in bringing out an issue of 
a corporation, they shall also join in bringing 
out any subsequent issue of the same corpora- 
tions. This is described as a principle of banking 

The "Ethical" basis of the rule must be that 
the interests of the combined bankers are 
superior to the interests of the rest of the com- 
munity. Their attitude reminds one of the 
"spheres of influence" with ample " hinterlands " 
by which rapacious nations are adjusting differ- 
ences. Important banking concerns, too am- 
bitious to be willing to take a subordinate position 
in the alliance, and too powerful to be suppressed, 
are accorded a financial "sphere of influence" 
upon the understanding that the rule of banking 
ethics will be faithfully observed. Most promi- 
nent among such lesser potentates are Kuhn, 
Loeb & Co., of New York, an international 
banking house of great wealth, with large clientele 


and connections. They are accorded an impor- 
tant "sphere of influence" in American rail- 
roading, including among other systems the 
Baltimore & Ohio, the Union Pacific and the 
Southern Pacific. They and the IMorgan group 
have with few exceptions preempted the banking 
business of the important railroads of the 
country. But even Kuhn, Loeb & Co. are not 
wholly independent. The Pujo Committee re- 
ports that they are ''quaUfied aUies of the inner 
group"; and through their "close relations with 
the National City Bank and the National Bank 
of Commerce and other financial institutions" 
have "many interests in common with the 
Morgan associates, conducting large joint- 
account operations with them." 


First: These banker-barons levy, through 
their excessive exactions, a heavy toll upon the 
whole community; upon owners of money for 
leave to invest it; upon railroads, public service 
and industrial companies, for leave to use this 
money of other people; and, through these 
corporations, upon consumers. 

"The charge of capital," says the Pujo Com- 
mittee, "which of course enters universally into 


the price of commodities and of service, is thus 
in effect determined by agreement amongst those 
supplying it and not under the check of competi- 
tion. If there be any virtue in the principle of 
competition, certainly any plan or arrangement 
which prevents its operation in the performance 
of so fundamental a commercial function as the 
supplying of capital is peculiarly injurious." 

Second: More serious, however, is the effect 
of the Money Trust in directly suppressing com- 
petition. That suppression enables the monopo- 
list to extort excessive profits; but monopoly 
increases the burden of the consumer even more 
in other ways. Monopoly arrests development; 
and through arresting development, prevents 
that lessening of the cost of production and of 
distribution which would otherwise take place. 

Can full competition exist among the anthra- 
cite coal railroads when the Morgan associates 
are potent in all of them? And with like 
conditions prevailing, what competition is to be 
expected between the Northern Pacific and the 
Great Northern, the Southern, the Louisville 
and Nashville, and the Atlantic Coast Line; or 
between the Westinghouse Manufacturing Com- 
pany and the General Electric Company? As 
the Pujo Committee finds: 


"Such affiliations tend as a cover and conduit 
for secret arrangements and understandings in 
restriction of competition through the agency of 
the banking house thus situated." 

And under existing conditions of combina- 
tion, reUef tlirough other banking houses is 

"It can hardly be expected that the banks, 
trust companies, and other institutions that are 
thus seeking participation from this inner group 
would be likely to engage in business of a charac- 
ter that would be displeasing to the latter or 
would interfere with their plans or prestige. 
And so the protection that can be afforded by the 
members of the inner group constitutes the 
safest refuge of our great industrial combinations 
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 tm-n or stop." 

TJiird: But far more serious even than the 
suppression of competition is the suppression of 
industrial liberty, indeed of manhood itself, 
which this overweening financial power entails. 
The intimidation which it effects extends far 
beyond "the banks, trust companies, and other 
institutions seeking participation from this inner 


group in their lucrative underwritings" ; and far 
beyond those interested in the great corporations 
directly dependent upon the inner group. Its 
blighting and benumbing effect extends as well 
to the small and seemingly independent business 
man, to the vast army of professional men and 
others directly dependent upon *'Big Business," 
and to many another; for 

1. Nearly every enterprising business man 
needs bank credit. The granting of credit in- 
volves the exercise of judgment of the bank offi- 
cials; and however honestly the bank officials may 
wish to exercise their discretion, experience shows 
that their judgment is warped by the existence 
of the all-pervading power of the Money Trust. 
He who openly opposes the great interests will 
often be found to lack that quality of "safe 
and sane"-ness which is the basis of financial 

2. Nearly every enterprising business man and 
a large part of our professional men have some- 
thing to sell to, or must buy something from, the 
great corporations to which the control or 
influence of the money lords extends directly, or 
from or to affiliated interests. Sometimes it is 
merchandise; sometimes it is service; sometimes 


they have nothing either to buy or to sell, but 
desire political or social advancement. Some- 
times they want merely peace. Experience shows 
that "it is not healthy to buck against a locomo- 
We," and ''Business is business." 

Here and there you will find a hero, — red- 
blooded, and courageous, — loving manhood more 
than wealth, place or security, — who dared to 
fight for independence and won. Here and there 
you may find the mart}T, who resisted in silence 
and suffered with resignation. But America, 
which seeks "the greatest good of the greatest 
number," cannot be content with conditions that 
fit only the hero, the martyr or the slave. 



The practice of interlocking directorates is the 
root of many evils. It offends laws human and 
divine. Applied to rival corporations, it tends to 
the suppression of competition and to violation of 
the Sherman law. Applied to corporations which 
deal with each other, it tends to disloyalty and to 
violation of the fundamental law that no man can 
serve two masters. In either event it tends to 
inefficiency; for it removes incentive and destroys 
soundness of judgment. It is undemocratic, for 
it rejects the platform: ''A fair field and no 
favors," — substituting the pull of privilege for the 
push of manhood. It is the most potent instru- 
ment of the Money Trust. Break the control so 
exercised by the investment bankers over rail- 
roads, public-service and industrial corporations, 
over banks, life insurance and trust companies, 
and a long step will have been taken toward 
attainment of the New Freedom. 

The term ''Interlocking directorates" is here 
used in a broad sense as including all intertwined 



conflicting interests, whatever the form, and by 
whatever device effected. The objection extends 
alike to contracts of a corporation whether with 
one of its directors individually, or with a firm 
of which he is a member, or with another corpora- 
tion in which he is interested as an officer or 
director or stockholder. The objection extends 
likewise to men holding the inconsistent position 
of director in two potentially competing corpora- 
tions, even if those corporations do not actually 
deal with each other. 


A single example will illustrate the vicious circle 
of control — the endless chain — through which our 
financial oligarchy now operates: 

J. P. Morgan (or a partner), a director of the 
New York, New Haven & Hartford Railroad, 
causes that company to sell to J. P. IMorgan & 
Co. an issue of bonds. J. P. Morgan & Co. 
borrow the money with which to pay for the bonds 
from the Guaranty Trust Company, of which 
Mr. Morgan (or a partner) is a director. J. P. 
Morgan & Co. sell the bonds to the Penn Mutual 
Life Insurance Company, of which Mr. Morgan 
(or a partner) is a director. The New Haven 
spends the proceeds of the bonds in purchasing 


steel rails from the United States Steel Corpora- 
tion, of which Mr. Morgan (or a partner) is a 
director. The United States Steel Corporation 
spends the proceeds of the rails in purchasing 
electrical supplies from the General Electric 
Company, of which Mr. Morgan (or a partner) 
is a director. The General Electric sells supplies 
to the Western Union Telegraph Company, a 
subsidiary of the American Telephone and 
Telegraph Company; and in both Mr. Morgan 
(or a partner) is a director. The Telegraph 
Company has an exclusive wire contract with the 
Reading, of which Mr. Morgan (or a partner) is 
a director. The Reading buys its passenger cars 
from the Pullman Company, of which Mr. 
Morgan (or a partner) is a director. The 
Pullman Company buys (for local use) loco- 
motives from the Baldwin Locomotive Company, 
of which Mr. Morgan (or a partner) is a director. 
The Reading, the General Electric, the Steel 
Corporation and the New Haven, like the 
Pullman, buy locomotives from the Baldwin 
Company. The Steel Corporation, the Tele- 
phone Company, the New Haven, the Reading, 
the Pullman and the Baldwin Companies, like 
the Western Union, buy electrical supplies from 
the General Electric. The Baldwin, the Pull- 


man, the Reading, the Telephone, the Telegraph 
and the General Electric companies, like the 
New Haven, buy steel products from the Steel 
Corporation. Each and every one of the com- 
panies last named markets its securities through 
J. P. Morgan & Co.; each deposits its funds with 
J. P. Morgan & Co.; and with these funds of 
each, the firm enters upon further operations. 

This specific illustration is in part suppositi- 
tious; but it represents truthfully the operation of 
interlocking directorates. Only it must be multi- 
phed many times and with many permutations 
to represent fully the extent to which the interests 
of a few men are intertwined. Instead of taking 
the New Haven as the railroad starting point in 
our example, the New York Central, the Santa 
F6, the Southern, the Lehigh Valley, the Chicago 
and Great Western, the Erie or the P6re Mar- 
quette might have been selected; instead of the 
Guaranty Trust Company as the banking reser- 
voir, any one of a dozen other important banks or 
trust companies; instead of the Penn Mutual as 
piu-chaser of the bonds, other insurance compa- 
nies; instead of the General Electric, its qualified 
competitor, the Westinghouse Electric and Manu- 
facturing Company. The chain is indeed end- 


less; for each controlled corporation is entwined 
with many others. 

As the nexus of "Big Business" the Steel 
Corporation stands, of course, preeminent. The 
Stanley Committee showed that the few men who 
control the Steel Corporation, itself an owner of 
important railroads, are directors also in twenty- 
nine other railroad systems, with 126,000 miles 
of hne (more than half the railroad mileage of the 
United States), and in important steamship 
companies. Through all these alliances and the 
huge traffic it controls, the Steel Corporation's 
influence pervades railroad and steamship com- 
panies — not as carriers only — but as the largest 
customers for steel. And its influence with 
users of steel extends much further. These same 
few men are also directors in twelve steel-using 
street railway systems, including some of the 
largest in the world. They are directors in forty 
machinery and similar steel-using manufacturing 
companies; in many gas, oil and water com- 
panies, extensive users of iron products; and 
in the great wire-using telephone and telegraph 
companies. The aggregate assets of these differ- 
ent corporations — through which these few men 
exert their influence over the business of the 
United States — exceeds sixteen billion dollars. 


Obviously, interlocking directorates, and all 
that term implies, must be effectually prohibited 
before the freedom of American business can be 
regained. The prohibition will not be an in- 
novation. It will merely give full legal sanction 
to the fundamental law of morals and of human 
nature: that "No man can serve two masters." 
The surprising fact is that a principle of equity so 
firmly rooted should have been departed from at 
all in deahng with corporations. For no rule 
of law has, in other connections, been more rigor- 
ously appUed, than that which prohibits a trustee 
from occupying inconsistent positions, from deal- 
ing with himself, or from using his fiduciary 
position for personal profit. And a director of a 
corporation is as obviously a trustee as persons 
holding similar positions in an unincorporated 
association, or in a private trust estate, who are 
called specifically by that name. The Courts 
have recognized this fully. 

Thus, the Court of Appeals of New York de- 
clared in an important case: 

"While not technically trustees, for the title 
of the corporate property was in the corporation 
itself, they were charged with the duties and 
subject to the liabilities of trustees. Clothed 


with the power of controlling the property and 
managing the affairs of the corporation without 
let or hindrance, as to third persons, they were its 
agents; but as to the corporation itself equity 
holds them liable as trustees. While courts of 
law generally treat the directors as agents, courts 
of equity treat them as trustees, and hold them 
to a strict account for any breach of the trust 
relation. For all practical purposes they are 
trustees, when called upor in equity to account 
for their official conduct." 


But this wholesome rule of business, so clearly 
laid down, was practically nullified by courts 
in creating two unfortunate limitations, as 
concessions doubtless to the supposed needs of 

First: Courts held valid contracts between a 
corporation and a director, or between two 
corporations with a common director, where it 
was shown that in making the contract, the cor- 
poration was represented by independent direct- 
ors and that the vote of the interested director 
was unnecessary to carry the motion and his pres- 
ence was not needed to constitute a quorum. 

Second: Courts held that even where a com- 


mon director participated actively in the making 
of a contract between two corporations, the 
contract was not absolutely void, but voidable 
only at the election of the corporation. 

The first limitation ignored the rule of law that 
a beneficiary is entitled to disinterested advice 
from all liis trustees, and not merely from some; 
and that a trustee may violate his trust by in- 
action as well as by action. It ignored, also, the 
laws of human nature, in assuming that the in- 
fluence of a director is confined to the act of 
voting. Every one knows that the most effective 
work is done before any vote is taken, subtly, 
and without provable participation. Every one 
should know that the denial of minority repre- 
sentation on boards of directors has resulted in 
the domination of most corporations by one or 
two men; and in practically banishing all criti- 
cism of the dominant power. And even where 
the board is not so dominated, there is too often 
that "harmonious cooperation" among directors 
which secures for each, in his own line, a due share 
of the corporation's favors. 

The second limitation — by which contracts, 
in the making of which the interested director 
participates actively, are held merely voidable 
instead of absolutely void — ignores the teachings 


of experience. To hold such contracts merely 
voidable has resulted practically in declaring 
them valid. It is the directors who control 
corporate action; and there is little reason to 
expect that any contract, entered into by a 
board with a fellow director, however unfair, 
would be subsequently avoided. Appeals from 
Philip drunk to Philip sober are not of frequent 
occurrence, nor very fruitful. But here we lack 
even an appealing party. Directors and the 
dominant stockholders would, of course, not 
appeal; and the minority stockholders have 
rarely the knowledge of facts which is essential 
to an effective appeal, whether it be made to 
the directors, to the whole body of stockholders, 
or to the courts. Besides, the financial burden 
and the risks incident to any attempt of individual 
stockholders to interfere with an existing manage- 
ment is ordinarily prohibitive. Proceedings to 
avoid contracts with directors are, therefore, sel- 
dom brought, except after a radical change in the 
membership of the board. And radical changes 
in a board's membership are rare. Indeed the 
Pujo Committee reports: 

"None of the witnesses (the leading American 
bankers testified) was able to name an instance in 


the history of the country in which the stock- 
holders had succeeded in overthi'owing an exist- 
ing management in any large corporation. Nor 
does it appear that stockholders have ever even 
succeeded in so far as to secure the investigation 
of an existing management of a corporation to 
ascertain whether it has been well or honestly 

Air. Max Pam proposed in the April, 1913, 
Harvard Law Review, that the government come 
to the aid of minority stockholders. He urged 
that the president of every corporation be re- 
quired to report annuallj^ to the stockholders, and 
to state and federal officials every contract made 
by the company in which any director is inter- 
ested; that the Attorney-General of the United 
States or the State investigate the same and take 
proper proceedings to set all such contracts 
aside and recover any damages sufTered; or 
without disaffirming the contracts to recover 
(rom the interested directors the profits derived 
iherefrom. And to this end also, that State and 
National Bank Examiners, State Superintend- 
ents of Insurance, and the Interstate Commerce 
Commission be directed to examine the records 
of every bank, trust company, insurance com- 


pany, railroad company and every other corporar 
tion engaged in interstate commerce. Mr. Pam's 
views concerning interlocking directorates are 
entitled to careful study. As counsel promi- 
nently identified with the organization of trusts, 
he had for years full opportunity of weighing the 
advantages and disadvantages of ''Big Business." 
His conviction that the practice of interlocking 
directorates is a menace to the public and demands 
drastic legislation, is significant. And much can 
be said in support of the specific measure which 
he proposes. But to be effective, the remedy 
must be fundamental and comprehensive. 


Protection to minority stockholders demands 
that corporations be prohibited absolutely from 
making contracts in which a director has a 
private interest, and that all such contracts be 
declared not voidable merely, but absolutely 

In the case of railroads and public-service 
corporations (in contradistinction to private 
industrial companies), such prohibition is de- 
manded, also, in the interests of the general 
public. For interlocking interests breed in- 
efficiency and disloyalty; and the public pays, 


in higher rates or in poor service, a large part of 
the penalty for graft and inefficiency. Indeed, 
whether rates are adequate or excessive cannot 
be determined until it is known whether the 
gross earnings of the corporation are properly 
expended. For when a company's important 
contracts are made through directors who are 
interested on both sides, the common presump- 
tion that money spent has been properly spent 
does not prevail. And this is particularly true 
in railroading, where the company so often lacks 
effective competition in its own field. 

But the compelling reason for prohibiting 
interlocking directorates is neither the protection 
of stockholders, nor the protection of the public 
from the incidents of inefficiency and graft. 
Conclusive evidence (if obtainable) that the 
practice of interlocking directorates benefited all 
stockholders and was the most efficient form of 
organization, would not remove the objections. 
For even more important than efficiency are in- 
dustrial and political liberty; and these are 
imperiled by the Money Trust. Interlocking 
directorates must he prohibited, because it is impos- 
sible to break the Money Trust without putting an 
end to the practice in the larger corporations. 



The practice of interlocking directorates is 
peculiarly objectionable when applied to banks, 
because of the nature and functions of those 
institutions. Bank deposits are an important 
part of our currency sy^em. They are almost 
as essential a factor in commerce as our railways. 
Receiving deposits and making loans therefrom 
should be treated by the law not as a private 
business, but as one of the public services. And 
recognizing it to be such, the law already regu- 
lates it in many ways. The function of a bank 
is to receive and to loan money. It has no more 
right than a common carrier to use its powers 
specifically to build up or to destroy other 
businesses. The granting or withholding of a 
loan should be determined, so far as concerns the 
borrower, solely by the interest rate and the risk 
involved; and not by favoritism or other con- 
siderations foreign to the banking function. 
Men may safely be allowed to grant or to deny 
loans of their own money to whomsoever they 
see fit, whatsoever their motive may be. But 
bank resources are, in the main, not owned by the 
stockholders nor by the directors. Nearly three- 
fourths of the aggregate resources of the thirty- 


four banking institutions in which the Morgan 
associates hold a predominant influence are rep- 
resented by deposits. The dependence of com- 
merce and industry upon bank deposits, as the 
common reservoir of quick capital is so complete, 
that deposit banking should be recognized as 
one of the businesses "affected with a public 
interest." And the general rule which forbids 
public-service corporations from making unjust 
discriminations or giving undue preference should 
be applied to the operations of such banks. 

Senator Owen, Chairman of the Committee 
on Banking and Currency, said recently: 

"My own judgment is that a bank is a public- 
utility institution and cannot be treated as a 
private affair, for the simple reason that the 
public is invited, under the safeguards of the 
government, to deposit its money with the bank, 
and the public has a right to have its interests 
safeguarded through organized authorities. The 
logic of this is beyond escape. All banks in the 
United States, public and private, should be 
treated as public-utility institutions, where they 
receive public deposits." 

The directors and officers of banking institu- 
tions must, of course, be entrusted with wide 


discretion in the granting or denying of loans. 
But that discretion should be exercised, not only 
honestly as it affects stockholders, but also 
impartially as it affects the public. Mere 
honesty to the stockholders demands that the 
interests to be considered by the directors be 
the interests of all the stockholders; not the profit 
of the part of them who happen to be its direct- 
ors. But the general welfare demands of the 
director, as trustee for the public, performance of 
a stricter duty. The fact that the granting of 
loans involves a delicate exercise of discretion 
makes it difficult to determine whether the rule 
of equahty of treatment, which every public- 
service corporation owes, has been performed. 
But that difficulty merely emphasizes the im- 
portance of making absolute the rule that banks 
of deposit shall not make any loan nor engage in 
any transaction in which a director has a private 
interest. And we should bear this in mind: 
If privately- owned banks fail in the public 
duty to afford borrowers equality of opportunity, 
there will arise a demand for government-owned 
banks, which will become irresistible. 

The statement of Mr. Justice Holmes of the 
Supreme Court of the United States, in the 
Oklahoma Bank case, is significant: 


''We cannot say that the public interests to 
which we have adverted, and others, are not 
sufficient to warrant the State in taking the whole 
business of banking under its control. On the 
contrary we are of opinion that it may go on from 
regulation to prohibition except upon such con- 
ditions as it may prescribe." 


Nor would the requirement that banks shall 
make no loan in which a director has a private 
interest impose undue hardships or restrictions 
upon bank du'ectors. It might make a bank 
director dispose of some of his investments and 
refrain from making others; but it often happens 
that the holding of one office precludes a man 
from holding another, or compels him to dispose 
of certain financial interests. 

A judge is disqualified from sitting in any 
case in which he has even the smallest financial 
interest; and most judges, in order to be free to 
act in any matters arising in their court, proceed, 
upon taking office, to dispose of all investments 
which could conceivably bias their judgment 
in any matter that might come before them. An 
Interstate Commerce Commissioner is prohibited 
from owning any bonds or stocks in any corpora- 


tion subject to the jurisdiction of the Commission. 
It is a serious criminal offence for any executive 
officer of the federal government to transact 
government business with any corporation in the 
pecuniary profits of which he is directly or 
indirectly interested. 

And the directors of our great banking in- 
stitutions, as the ultimate judges of bank credit, 
exercise today a function no less important to the 
country's welfare than that of the judges of our 
courts, the interstate commerce commissioners, 
and departmental heads. 


In the proposals for legislation on this subject, 
four important questions are presented: 

1. Shall the principle of prohibiting inter- 
locking directorates in potentially competing 
corporations be applied to state banking insti- 
tutions, as well as the national banks? 

2. Shall it be applied to all kinds of corpora- 
tions or only to banking institutions? 

3. Shall the principle of prohibiting corpora- 
tions from entering into transactions in which the 
management has a private interest be applied to 
both directors and officers or be confined in its 
application to officers only? 


4. Shall the principle be applied so as to 
prohibit transactions with another corporation in 
which one of its directors is interested merely as 
a stockholder? 




The Pujo Committee has presented the 
facts concerning the Money Trust so clearly 
that the conclusions appear inevitable. Their 
diagnosis discloses intense financial concentra- 
tion and the means by which it is effected. 
Combination, — the intertwining of interests, — 
is shown to be the all-pervading vice of the 
present system. With a view to freeing in- 
dustry, the Committee recommends the enact- 
ment of twenty-one specific remedial provisions. 
Most of these measures are wisely framed to 
meet some abuse disclosed by the evidence; and 
if all of these were adopted the Pujo legislation 
would undoubtedly alleviate present suffering 
and aid in arresting the disease. But many of 
the remedies proposed are ''local" ones; and a 
cure is not possible, without treatment which is 
fundamental. Indeed, a major operation is 
necessary. This the Committee has hesitated 
to advise; although the fundamental treatment 
required is simple: "Serve one Master only." 


The evils incident to interlocking dii-ector- 
ates are, of course, fully recognized; but the 
prohibitions proposed in that respect ai*e re- 
stricted to a very narrow sphere. 

First: The Committee recognizes that po- 
tentially competing corporations should not 
have a common director; — but it restricts this 
prohibition to directors of national banks, 

"No ofRcer or director of a national bank 
shall be an officer or director of any other bank 
or of any trust company or other financial or 
other corporation or institution, whether or- 
ganized under state or federal law, that is author- 
ized to receive money on deposit or that is engaged 
in the business of loaning money on collateral or 
in buying and selling securities except as in this 
section provided; and no person shall be an 
officer or director of any national bank who is 
a private banker or a member of a firm or partner- 
ship of bankers that is engaged in the business of 
receiving deposits: Provided, That such bank, 
trust company, financial institution, banker, or 
firm of bankers is located at or engaged in busi- 
ness at or in the same city, town, or village as 
that in which such national bank is located or 
engaged in business: Provided further. That a 



director of a national bank or a partner of 
such director may be an officer or director of 
not more than one trust company organized 
by the laws of the state in which such national 
bank is engaged in business and doing business 
at the same place." 

Second: The Committee recognizes that a 
corporation should not make a contract in which 
one of the management has a private interest; 
but it restricts this prohibition (1) to national 
banks, and (2) to the officers, saying: 

*'No national bank shall lend or advance 
money or credit or purchase or discount any 
promissory note, draft, bill of exchange or other 
evidence of debt bearing the signature or in- 
dorsement of any of its officers or of any partner- 
ship of which such officer is a member, directly 
or indirectly, or of any corporation in which 
such officer owns or has a beneficial interest 
of upward of ten per centum of the capital 
stock, or lend or advance money or credit to, 
for or on behalf of any such officer or of any such 
partnership or corporation, or purchase any se- 
curity from any such officer or of or from any 
partnership or corporation of which such officer 
is a member or in which he is financially inter- 
ested, as herein specified, or of any corporation 



of which any of its officers is an officer at the 
time of such transaction." 

Prohibitions of intertwining relations so re- 
stricted, however supplemented by other pro- 
visions, will not end financial concentration. 
The Money Trust snake will, at most, be 
scotched, not killed. The prohibition of a 
common director in potentially competing cor- 
porations should apply to state banks and trust 
companies, as well as to national banks; and 
it should apply to railroad and industrial cor- 
porations as fully as to banking institutions. 
The prohibition of corporate contracts in which 
one of the management has a private interest 
should apply to du-ectors, as well as to officers, 
and to state banks and trust companies and 
to other classes of corporations, as well as to 
national banks. And, as will be hereafter shown, 
such broad legislation is within the power of 

Let us examine this further: 


1. National Baiiks. The objection to com- 
mon directors, as applied to banking institutions, 
is clearly shown by the Pujo Committee. 


''As the first and foremost step in applying a 
remedy, and also for reasons that seem to us 
conclusive, independently of that consideration, 
we recommend that interlocking directorates 
in potentially competing financial institutions 
be abolished and prohibited so far as lies in 
the power of Congress to bring about that re- 
sult. . . . When we find, as in a number 
of instances, the same man a director in half a 
dozen or more banks and trust companies all 
located in the same section of the same city, 
doing the same class of business and with a like 
set of associates similarly situated, all belong- 
ing to the same group and representing the 
same class of interests, all further pretense 
of competition is useless. ... If banks 
serving the same field are to be permitted 
to have common directors, genuine competition 
will be rendered impossible. Besides, this prac- 
tice gives to such common directors the un- 
fair advantage of knowing the affairs of bor- 
rowers in various banks, and thus affords 
endless opportunities for oppression." 

This recommendation is in accordance with 
the legislation or practice of other countries. 
The Bank of England, the Bank of France, the 
National Bank of Belgium, and the leading 


banks of Scotland all exclude from their boards 
persons who are du'ectors in other banks. By 
law, in Russia no person is allowed to be on the 
board of management of more than one bank. 

The Committee's recommendation is also in 
harmony with laws enacted by the Common- 
wealth of Massachusetts more than a genera- 
tion ago designed to curb financial concentra- 
tion through the savings banks. Of the great 
wealth of ^Massachusetts a large part is repre- 
sented by deposits in its savings banks. These 
deposits are distributed among 194 different 
banks, located in 131 different cities and towns. 
These 194 banks are separate and distinct; not 
only in form, but in fact. In order that the 
banks may not be controlled by a few financiers, 
the Massachusetts law provides that no execu- 
tive oflScer or trustee (director) of any savings 
bank can hold any office in any other savings 
bank. That statute was passed in 1876. A few 
years ago it was supplemented by providing that 
none of the executive officers of a savings bank 
could hold a similar office in any national bank. 
Massachusetts attempted thus to curb the power 
of the individual financier; and no disadvantages 
are discernible. When that Act was passed the 
aggregate deposits in its savings banks were 


$243,340,642; the number of deposit accounts 
739,289; the average deposit to each person of 
the population $144. On November 1, 1912, 
the aggregate deposits were $838,635,097.85; 
the number of deposit accounts 2,200,917; the 
average deposit to each account $381.04. Mas- 
sachusetts has shown that curbing the power of 
the few, at least in this respect, is entirely- 
consistent with efficiency and with the prosperity 
of the whole people. 

2. State Banks and Trust Companies. The 
reason for prohibiting common directors in 
banking institutions applies equally to national 
banks and to state banks including those trust 
companies which are essentially banks. In New 
York City there are 37 trust companies of which 
only 15 are members of the clearing house; but 
those 15 had on November 2, 1912, aggregate 
resources of $827,875,653. Indeed the Bankers' 
Trust Company with resources of $205,000,000, 
and the Guaranty Trust Company, with re- 
sources of $232,000,000, are among the most 
useful tools of the Money Trust. No bank in 
the country has larger deposits than the latter; 
and only one bank larger deposits than the 
former. If common directorships were permitted 
in state banks or such trust companies, the 


charters of leading national banks would doubt- 
less soon be surrendered; and the institutions 
would elude federal control by re-incorporating 
under state laws. 

The Pujo Committee has failed to apply the 
prohibition of common directorships in po- 
tentially competing banking institutions rigor- 
ously even to national banks. It permits the 
same man to be a director in one national bank 
and one trust company doing business in the 
same place. The proposed concession opens the 
door to grave dangers. In the first place the 
provision would permit the interlocking of any 
national bank not with one trust company only, 
but with as many trust companies as the bank 
has du'ectors. For while under the Pujo bill no 
one can be a national bank director who is di- 
rector in more than one such trust company, 
there is nothing to prevent each of the directors 
of a bank from becoming a director in a differ- 
ent trust company. The National Bank of Com- 
merce of New York has a board of 38 directors. 
There are 37 trust companies in the City of New 
York. Thirty-seven of the 38 directors might 
each become a director of a different New York 
trust company: and thus 37 trust companies 
would be interlocked with the National Bank of 


Commerce, unless the other recommendation of 
the Pujo Committee limiting the number of 
directors to 13 were also adopted. 

But even if the bill were amended so as to 
limit the possible interlocking of a bank to a 
single trust company, the wisdom of the conces- 
sion would still be doubtful. It is true, as the 
Pujo Committee states, that ''the business that 
may be transacted by" a trust company is of "a, 
different character" from that properly trans- 
acted by a national bank. But the business 
actually conducted by a trust company is, at 
least in the East, quite similar; and the two 
classes of banking institutions have these vital 
elements in common: each is a bank of deposit, 
and each makes loans from its deposits. A 
private banker may also transact some business 
of a character different from that properly con- 
ducted by a bank; but by the terms of the 
Committee's bill a private banker engaged in 
the business of receiving deposits would be 
prevented from being a director of a national 
bank; and the reasons underlying that prohi- 
bition apply equally to trust companies and to 
private bankers. 

3. Other Corporations. The interlocking of 
banking institutions is only one of the factors 


which have developed the Money Trust. The 
interlocking of other corporations has been an 
equally important element. And the prohibi- 
tion of interlocking directorates should be ex- 
tended to potentially competing corporations 
whatever the class; to life insurance companies, 
railroads and industrial companies, as well as 
banking institutions. The Pujo Committee has 
shown that Mr. George F. Baker is a common 
director in the six railroads which haul 80 per 
cent, of all anthracite marketed and own 88 
per cent, of all anthracite deposits. The Mor- 
gan associates are the nexus between such sup- 
posedly competing railroads as the Northern 
Pacific and the Great Northern; the Southern, 
the Louisville & Nashville and the Atlantic 
Coast Line, and between partially competing 
industrials like the Wcstinghouse Electric and 
IManufacturing Company and the General Elec- 
tric. The ?iexus between all the large poten- 
tially competing corporations must be severed, 
if the Money Trust is to be broken. 


The principle of prohibiting corporate contracts 
in which the management has a private interest 


is applied, in the Pujo Committee's recom- 
mendations, only to national banks, and in them 
only to officers. All other corporations are to be 
permitted to continue the practice; and even in 
national banks the directors are to be free to 
have a conflicting private interest, except that 
they must not accept compensation for promoting 
a loan of bank funds nor participate in syndicates, 
promotions or underwriting of securities in which 
their banks may be interested as underwriters or 
owners or lenders thereon: that all loans or other 
transactions in which a director is interested shall 
be made in his own name; and shall be authorized 
only after ample notice to co-directors; and that 
the facts shall be spread upon the records of the 

The Money Trust would not be disturbed by a 
prohibition limited to officers. Under a law of 
that character, financial control would continue 
to be exercised by the few without substantial 
impairment; but the power would be exerted 
through a somewhat different channel. Bank 
officers are appointees of the directors; and 
ordinarily their obedient servants. Individuals 
who, as bank officers, are now important factors 
in the financial concentration, would doubtless 
resign as officers and become merely directors. 


The loss of official salaries involved could be 
easily compensated. No member of the firm of 
J. P. Morgan & Co. is an officer in any one of 
the thirteen banking institutions with aggregate 
resources of S1,2S3,000,000, through which as 
directors they carry on their vast operations. A 
prohibition limited to officers would not affect the 
Morgan operations with these banking institu- 
tions. If there were minority representation on 
bank boards (which the Pujo Committee wisely 
advocates), such a provision might afford some 
protection to stockholders through the vigilance 
of the minority directors preventing the dominant 
directors using their power to the injury of the 
minority stockholders. But even then, the pro- 
vision would not safeguard the public; and the 
primary purpose of Money Trust legislation is 
not to prevent directors from injuring stockhold- 
ers; but to prevent their injuring the pubhc 
through the intertwined control of the banks. 
No prohibition limited to officers will materially 
change this condition. 

The prohibition of interlocking directorates, 
even if applied only to all banks and trust com- 
panies, would practically compel the Morgan 
representatives to resign from the directorates of 
the thirteen l)anking institutions with which they 


are connected, or from the directorates of all the 
railroads, express, steamship, public utility, manu- 
facturing, and other corporations which do busi- 
ness with those banks and trust companies. 
Whether they resigned from the one or the other 
class of corporations, the endless chain would be 
broken into many pieces. And whether they re- 
tired or not, the Morgan power would obviously be 
greatly lessened: for if they did not retire, their 
field of operations would be greatly narrowed. 


The creation of the Money Trust is due quite 
as much to the encroachment of the investment 
banker upon railroads, public service, industrial, 
and life-insurance companies, as to his control of 
banks and trust companies. Before the Money 
Trust can be broken, all these relations must be 
severed. And they cannot be severed unless 
corporations of each of these several classes are 
prevented from dealing with their own directors 
and with corporations in which those directors 
are interested. For instance: The most potent 
single source of J. P. Morgan & Co.'s power is 
the $162,500,000 deposits, including those of 78 
interstate railroad, public-service and industrial 


corporations, which the Morgan firm is free to 
use as it sees fit. The proposed proliibition, even 
if applied to all banking institutions, would not 
afifect directly this great source of Morgan power. 
If, however, the prohibition is made to include 
railroad, public-service, and industrial corpora- 
tions, as well as banking institutions, members of 
J. P. IVIorgan & Co. will quickly retire from 
substantially all boards of directors. 


The prohibition against one corporation enter- 
ing into transactions with another corporation in 
which one of its directors is also interested, 
should apply even if his interest in the second 
corporation is merely that of stockholder. A 
conflict of interests in a director may be just 
as serious where he is a stockholder only in 
the second corporation, as if he were also a 

One of the annoying petty monopolies, con- 
cerning which evidence was taken by the Pujo 
Committee, is the exclusive privilege granted to 
the American Bank Note Company by the New 
York 8tock Exchange. A recent $60,000,000 
issue of New York City bonds was denied listing 


on the Exchange, because the city refused to 
submit to an exaction of $55,800 by the Ameri- 
can Company for engraving the bonds, when the 
New York Bank Note Company would do the 
work equally well for $44,500. As tending to 
explain this extraordinary monopoly, it was 
shown that men prominent in the financial world 
were stockholders in the American Company. 
Among the largest stockholders was Mr. Morgan, 
with 6,000 shares. No member of the Morgan 
firm was a director of the American Company; 
but there was sufficient influence exerted some- 
how to give the American Company the stock 
exchange monopoly. 

The Pujo Committee, while failing to recom- 
mend that transactions in which a director has a 
private interest be prohibited, recognizes that a 
stockholder's interest of more than a certain size 
may be as potent an instrument of influence 
as a direct personal interest; for it recommends 

"Borrowings, directly or indirectly by . . . 
any corporation of the stock of which he (a bank 
director) holds upwards of 10 per cent, from the 
bank of which he is such director, should only be 
permitted, on condition that notice shall have 


been given to his co-directors and that a full 
statement of the transaction shall be entered 
upon the minutes of the meeting at which such 
loan was authorized." 

As shown above, the particular provision for 
notice affords no protection to the public; but 
if it did, its application ought to be extended 
to lesser stock-holdings. Indeed it is difficult to 
fix a limit so low that financial interest will not 
influence action. Certainly a stockholding in- 
terest of a single director, much smaller than 10 
per cent., might be most effective in inducing 
favors. IVIr. Morgan's stockholdings in the 
American Bank Note Company was only three 
per cent. The $6,000,000 investment of J. P. 
Morgan & Co. in the National City Bank repre- 
sented only 6 per cent, of the bank's stock; 
and would undoubtedly have been effective, 
even if it had not been supplemented by the 
election of his son to the board of directors. 


The Stanley Committee, after investigation of 
the Steel Trust, concluded that the evils of inter- 
locking directorates were so serious that repre- 
sentatives of certain industries which arc largely 


dependent upon railroads should be absolutely 
prohibited from serving as railroad directors, 
officers or employees. It, therefore, proposed to 
disqualify as railroad director, officer or employee 
any person engaged in the business of manufactur- 
ing or selling railroad cars or locomotives, railroad 
rail or structural steel, or in mining and selling 
coal. The drastic Stanley bill, shows how great 
is the desire to do away with present abuses and 
to lessen the power of the Money Trust. 

Directors, officers, and employees of banking 
institutions should, by a similar provision, be 
disqualified from acting as directors, officers or 
employees of life-insurance companies. The 
Armstrong investigation showed that life-in- 
surance companies were in 1905 the most potent 
factor in financial concentration. Their power 
was exercised largely through the banks and 
trust companies which they controlled by stock 
ownership and their huge deposits. The Arm- 
strong legislation directed life-insurance com- 
panies to sell their stocks. The Mutual Life and 
the Equitable did so in part. But the Morgan 
associates bought the stocks. And now, instead 
of the life-insurance companies controlling the 
banks and trust companies, the latter and the 
bankers control the life-insurance companies. 



The Money Trust cannot be destroyed unless 
all classes of corporations are included in the 
prohibition of interlocking directors and of 
transactions by corporations in which the man- 
agement has a private interest. But it does not 
follow that the prohibition must apply to every 
corporation of each class. Certain exceptions 
are entirely consistent with merely protecting the 
public against the Money Trust; although pro- 
tection of minority stockholders and business 
ethics demand that the rule prohibiting a cor- 
poration from making contracts in which a di- 
rector has a private financial interest should be 
universal in its application. The number of 
corporations in the United States Dec. 31, 1912, 
was 305,336. Of these only 1610 have a capi- 
tal of more than $5,000,000. Few corporations 
(other than banks) with a capital of less than 
$5,000,000 could appreciably affect general credit 
conditions either through their own operations 
or their affiliations. Corporations (other than 
banks) with capital resources of less than $5,000,- 
000 might, therefore, be excluded from the scope 
of the statute for the present. The prohibition 
could also be limited so as not to apply to any 


industrial concern, regardless of the amount of 
capital and resources, doing only an intrastate 
business; as practically all large industrial cor- 
porations are engaged in interstate commerce. 
This would exclude some retail concerns and 
local jobbers and manufacturers not otherwise 
excluded from the operation of the act. Like- 
wise banks and trust companies located in cities 
of less than 100,000 inhabitants might, if thought 
advisable, be excluded, for the present if their 
capital is less than S500,000, and their resources 
less than, say, $2,500,000. In larger cities even 
the smaller banking institutions should be sub- 
ject to the law. Such exceptions should over- 
come any objection which might be raised that 
in some smaller cities, the prohibition of inter- 
locking directorates would exclude from the 
bank directorates all the able business men of 
the community through fear of losing the oppor- 
tunity of bank accommodations. 

An exception should also be made, so as to 
permit interlocking directorates between a cor- 
poration and its proper subsidiaries. And the 
prohibition of transactions in which the manage- 
ment has a private interest should, of course, not 
apply to contracts, express or implied, for such 
services as are performed indiscriminately for 


the whole community by raih-oads and public 
service corporations, or for services, common to 
all customers, like the ordinary service of a bank 
for its depositors. 


The question may be asked: Has Congress 
the power to impose these limitations upon the 
conduct of any business other than national 
banks? And if the power of Congress is so lim- 
ited, will not the dominant financiers, upon the 
enactment of such a law, convert their national 
banks into state banks or trust companies, and 
thus escape from congressional control? 

The answer to both questions is clear. Con- 
gress has ample power to impose such prohibitions 
upon practically all corporations, including state 
banks, trust companies and life insurance com- 
panies; and evasion may be made impossible. 
While Congress has not been granted power to 
regulate directly state banks, and trust or life 
insurance companies, or railroad, public-service 
and industrial corporations, except in respect to 
interstate commerce, it may do so indirectly 
by virtue either of its control of the mail privilege 
or through the taxing power. 

Practically no business in the United States can 


be conducted without use of the mails; and Con- 
gress may in its reasonable discretion deny the 
use of the mail to any business which is con- 
ducted under conditions deemed by Congress 
to be injurious to the public welfare. Thus, 
Congress has no power directly to suppress lot- 
teries ; but it has indirectly suppressed them by 
denying, under heavy penalty, the use of the 
mail to lottery enterprises. Congress has no 
power to suppress directly business frauds; but 
it is constantly doing so indirectly by issuing 
fraud-orders denying the mail privilege. Con- 
gress has no direct power to require a newspaper 
to publish a list of its proprietors and the amount 
of its circulation, or to require it to mark paid- 
matter distinctly as advertising: But it has thus 
regulated the press, by denying the second-class 
mail privilege, to all publications which fail to 
comply with the requirements prescribed. 

The taxing power has been resorted to by Con- 
gress for like purposes: Congress has no power 
to regulate the manufacture of matches, or the 
use of oleomargarine; but it has suppressed the 
manufacture of the "white phosphorous" match 
and has greatly lessened the use of oleomargarine 
by imposing heavy taxes upon them. Congress 


has no power to prohibit, or to regulate directly 
the issue of bank notes by state banks, but it 
indirectly prohibited their issue by imposing a 
tax of ten per cent, upon any bank note issued by 
a state bank. 

The power of Congress over interstate com- 
merce has been similarly utilized. Congress 
cannot ordinarily provide compensation for ac- 
cidents to employees or undertake directly to 
suppress prostitution; but it has, as an inci- 
dent of regulating interstate commerce, enacted 
the Railroad Employers' Liability law and the 
White Slave Law; and it has full power over 
the instrumentalities of commerce, like the 
telegraph and the telephone. 

As such exercise of congressional power has 
been common for, at least, half a century. Con- 
gress should not hesitate now to employ it where 
its exercise is urgently needed. For a compre- 
hensive prohibition of interlocking directorates is 
an essential condition of our attaining the New 
Freedom. Such a law would involve a great 
change in the relation of the leading banks and 
bankers to other businesses. But it is the very 
purpose of Money Trust legislation to effect a 
great change; and unless it does so, the power of 
our financial oligarchy cannot be broken. 


But though the enactment of such a law is 
essential to the emancipation of business, it will 
not alone restore industrial liberty. It must be 
supplemented by other remedial measures. 


Publicity is justly commended as a remedy for 
social and industrial diseases. Sunlight is said 
to be the best of disinfectants; electric light the 
most efficient policeman. And publicity has 
already played an important part in the struggle 
against the Money Trust. The Pujo Committee 
has, in the disclosure of the facts concerning 
financial concentration, made a most important 
contribution toward attainment of the New 
Freedom. The battlefield has been surveyed and 
charted. The hostile forces have been located, 
counted and appraised. That was a necessary 
first step — and a long one — towards relief. The 
provisions in the Committee's bill concerning the 
incorporation of stock exchanges and the state- 
ment to be made in connection with the listing of 
securities would doubtless have a beneficent effect. 
But there should be a further call upon publicity 
for service. That potent force must, in the im- 
pending struggle, be utilized in many ways as a 
continuous remedial measure. 




Combination and control of other people's 
money and of other people's businesses. These 
are the main factors in the development of the 
Money Trust. But the wealth of the invest- 
ment banker is also a factor. And with the ex- 
traordinary growth of his wealth in recent 
years, the relative importance of wealth as a 
factor in financial concentration has grown 
steadily. It was wealth which enabled Mr. 
Morgan, in 1910, to pay $3,000,000 for $51,000 
par value of the stock of the Equitable Life 
Insurance Society. His direct income from this 
investment was limited by law to less than one- 
eighth of one per cent, a year; but it gave legal 
control of $504,000,000, of assets. It was wealth 
which enabled the Morgan associates to buy from 
the Equitable and the Mutual Life Insurance 
Company the stocks in the several banking in- 
stitutions, which, merged in the Bankers' Trust 
Company and the Guaranty Trust Company, 
gave them control of $357,000,000 deposits. 
It was wealth which enabled Mr. Morgan to 
acquire his shares in the First National and 
National City banks, worth $21,000,000, through 
which he cemented the triple alliance with those 


Xow, how has this great wealth been accu- 
mulated? Some of it was natural accretion. 
Some of it is due to special opportunities for 
investment wisely availed of. Some of it is due 
to the vast extent of the bankers' operations. 
Then power breeds wealth as wealth breeds 
power. But a main cause of these large fortunes 
is the huge tolls taken by those who control the 
avenues to capital and to investors. There has 
been exacted as toll literally "all that the traffic 
will bear." 


The Pujo Committee was unfortunately pre- 
vented by lack of time from presenting to the 
country the evidence covering the amounts taken 
by the investment bankers as promoters' fees, 
underwriting commissions and profits. Noth- 
ing could have demonstrated so clearly the power 
exercised by the bankers, as a schedule showing 
the aggregate of these taxes levied within recent 
years. It would be well worth while now to re- 
open the Money Trust investigation merely to 
collect these data. But earlier investigations 
have disclosed some illuminating, though spor- 
adic facts. 

The syndicate which jH'omoted the Steel Trust, 


took, as compensation for a few weeks' work, 
securities yielding $62,500,000 in cash; and of this, 
J. P. Morgan & Co. received for their services, as 
Syndicate Managers, $12,500,000, besides their 
share, as syndicate subscribers, in the remaining 
$50,000,000. The Morgan syndicate took for 
promoting the Tube Trust $20,000,000 common 
stock out of a total issue of $80,000,000 stock 
(preferred and common). Nor were monster 
commissions limited to trust promotions. More 
recently, bankers' syndicates have, in many in- 
stances, received for floating preferred stocks 
of recapitalized industrial concerns, one-third 
of all common stock issued, besides a considerable 
sum in cash. And for the sale of preferred stock 
of well established manufacturing concerns, cash 
commissions (or profits) of from 7 1/2 to 10 per 
cent, of the cash raised are often exacted. On 
bonds of high-class industrial concerns, bankers' 
commissions (or profits) of from 5 to 10 points 
have been common. 

Nor have these heavy charges been confined 
to industrial concerns. Even railroad securities, 
supposedly of high grade, have been subjected to 
like burdens. At a time when the New Haven's 
credit was still unimpaired, J. P. Morgan & Co. 
took the New York, Westchester & Boston Rail- 


way first mortgage bonds, guaranteed by the 
New Haven at 92 1/2; and they were marketed 
at 96 1/4. They took the Portland Terminal 
Company bonds, guaranteed by the jNIaine Cen- 
tral Railroad — a corporation of unquestionable 
credit — at about 88, and these were marketed 
at 92. 

A large part of these under^vTiting commis- 
sions is taken by the great banking houses, not 
for their services in selling the bonds, nor in as- 
suming risks, but for securing others to sell the 
bonds and incur risks. Thus when the Inter- 
boro Railway — a most prosperous corporation 
— financed its recent §170,000,000 bond issue, 
J. P. Morgan & Co. received a 3 per cent, com- 
mission, that is, $5,100,000, practically for ar- 
ranging that others should underwrite and sell 
the bonds. 

The aggregate commissions or profits so taken 
by leading banking houses can only be conjec- 
tured, as the full amount of their transactions 
has not been disclosed, and the rate of com- 
mission or profit varies very widely. But the 
Pujo Committee has supplied some interesting 
data bearing upon the subject: Counting the 
issues of securities of interstate corporations 
only, J. P. Morgan & Co. directly procured the 


public marketing alone or in conjunction with 
others during the years 1902-1912, of $1,950,- 
000,000. What the average commission or profit 
taken by J. P. Morgan & Co. was we do not know; 
but we do know that every one per cent, on that 
sum yields $19,500,000. Yet even that huge 
aggregate of $1,950,000,000 includes only a part 
of the securities on which commissions or profits 
were paid. It does not include any issue of 
an intrastate corporation. It does not include 
any securities privately marketed. It does not 
include any government, state or municipal bonds. 
It is to exactions such as these that the wealth 
of the investment banker is in large part due. 
And since this wealth is an important factor in 
the creation of the power exercised by the Money 
Trust, we must endeavor to put an end to this 
improper wealth getting, as well as to improper 
combination. The Money Trust is so powerful 
and so firmly entrenched, that each of the sources 
of its undue power must be effectually stopped, 
if we would attain the New Freedom. 


The Pujo Committee recommends, as a remedy 
for such excessive charges, that interstate cor- 
porations be prohibited from entering into any 


agreements creating a sole fiscal agent to dispose 
of their security issues; that the issue of the 
securities of interstate railroads be placed under 
the supervision of the Interstate Commerce 
Commission; and that their securities should be 
disposed of only upon public or private competi- 
tive bids, or under regulations to be prescribed 
by the Commission with full powers of investi- 
gation that will discover and punish combina- 
tions which prevent competition in bidding. 
Some of the state public-service commissions 
now exercise such power; and it may possibly 
be wise to confer this power upon the interstate 
commission, although the recommendation of the 
Hadley Railroad Securities Commission are to 
the contrar3\ But the official regulation as pro- 
posed by the Pujo Committee would be confined 
to railroad corporations; and the new security 
issues of other corporations listed on the New 
York Stock Exchange have aggregated in the 
last five years $4,525,404,025, which is more than 
cither the jailroad or the municipal issues. 
Publicity ofi'crs, however, another and even more 
promising remedy: a method of regulating 
bankers' charges which would apply automa- 
tically to railroad, public-service and industrial 
corporations alike. 


The question may be asked: Why have these 
excessive charges been submitted to? Corpora- 
tions, which in the first instance bear the charges 
for capital, have, doubtless, submitted because 
of banker-control; exercised directly through 
interlocking directorates, or kindred relations, 
and indirectly through combinations among 
bankers to suppress competition. But why have 
the investors submitted, since ultimately all 
these charges are borne by the investors, except 
so far as corporations succeed in shifting the 
burden upon the community? The large army 
of small investors, constituting a substantial 
majority of all security buyers, are entirely free 
from banker control. Their submission is un- 
doubtedly due, in part, to the fact that the 
bankers control the avenues to recognizedly safe 
investments almost as fully as they do the 
avenues to capital. But the investor's serviUty 
is due partly, also, to his ignorance of the 
facts. Is it not probable that, if each in- 
vestor knew the extent to which the seciu-ity he 
buys from the banker is diluted by excessive 
underwritings, commissions and profits, there 
would be a strike of capital against these unjust 



A recent British experience supports this 
view. In a brief period last spring nine differ- 
ent issues, aggregating $135,840,000, were offered 
by syndicates on the London market, and on the 
average only about 10 per cent, of these loans 
was taken by the public. Money was "tight," 
but the rates of interest offered were very liberal, 
and no one doubted that the investors were 
well supplied with funds. The London Daily 
Mail presented an explanation: 

"The long series of rebuffs to new loans at the 
hands of investors reached a climax in the ill 
success of the great Rothschild issue. It will 
remain a topic of financial discussion for many 
days, and many in the city are expressing the 
opinion that it may have a revolutionary effect 
upon the present system of loan issuing and 
underwriting. The question being discussed is 
that the public have become loth to subscribe 
for stock which they believe the underwriters can 
afford, by reason of the commission they receive, 
to sell subsetjuontly at a lower price than the 
issue price, and tliat the Stock Exchange has 
begun to realize the public's attitude. The public 


sees in the underwriter not so much one who in- 
sures that the loan shall be subscribed in return 
for its commission as a middleman, who, as it 
were, has an opportunity of obtaining stock at 
a lower price than the public in order that he 
may pass it off at a profit subsequently. They 
prefer not to subscribe, but to await an oppor- 
tunity of dividing that profit. They feel that 
if, when these issues were made, the stock were 
offered them at a more attractive price, there 
would be less need to pay the underwriters so 
high commissions. It is another practical pro- 
test, if indirect, against the existence of the 
middleman, which protest is one of the features 
of present-day finance." 


Compel bankers when issuing securities to 
make public the commissions or profits they are 
receiving. Let every circular letter, prospectus 
or advertisement of a bond or stock show clearly 
what the banker received for his middleman- 
services, and what the bonds and stocks net 
the issuing corporation. That is knowledge to 
which both the existing security holder and the 
prospective purchaser is fairly entitled. If the 
bankers' compensation is reasonable, consider- 


ing the skill and risk involved, there can be no 
objection to making it known. If it is not 
reasonable, the investor will ''strike," as in- 
vestors seem to have done recently in England. 

Such disclosures of bankers' commissions or 
profits is demanded also for another reason: It 
will aid the investor in judging of the safety of 
the investment. In the marketing of securities 
there are two classes of risks: One is the risk 
whether the banker (or the corporation) will find 
ready purchasers for the bonds or stock at the 
issue price; the other whether the investor will 
get a good article. The maker of the security 
and the banker are interested chiefly in getting it 
sold at the issue price. The investor is interested 
chiefly in buying a good article. The small 
investor relies almost exclusively upon the banker 
for his knowledge and judgment as to the quality 
of the security; and it is this which makes his 
relation to the banker one of confidence. But 
at present, the investment banker occupies a 
position inconsistent with that relation. The 
bankers' compensation should, of course, vary 
according to the risk he assumes. Where there 
is a large risk that the bonds or stock will not be 
promptly sold at the issue price, the underwriting 
commission (that is the insurance premium) 


should be correspondingly large. But the banker 
ought not to be paid more for getting investors 
to assume a larger risk. In practice the banker 
gets the higher commission for underwriting the 
weaker security, on the ground -that his own risk 
is greater. And the weaker the security, the 
greater is the banker's incentive to induce his 
customers to relieve him. Now the law should 
not undertake (except incidentally in connection 
with railroads and public-service corporations) to 
fix bankers' profits. And it should not seek to 
prevent investors from making bad bargains. 
But it is now recognized in the simplest mer- 
chandising, that there should be full disclosures. 
The archaic doctrine of caveat emptor is vanishing. 
The law has begun to require publicity in aid of 
fair dealing. The Federal Pure Food Law does 
not guarantee quality or prices; but it helps the 
buyer to judge of quality by requiring disclosure 
of ingredients. Among the most important facts 
to be learned for determining the real value of a 
seciu-ity is the amount of water it contains. 
And any excessive amount paid to the banker 
for marketing a security is water. Require a 
full disclosure to the investor of the amount of 
commissions and profits paid; and not only will 
investors be put on their guard, but bankers' 


compensation will tend to adjust itself auto- 
matically to what is fair and reasonable. Ex- 
cessive commissions — this form of unjustly ac- 
quired wealth — will in large part cease. 


But the disclosure must be real. And it must 
be a disclosure to the investor. It will not suffice 
to require merely the filing of a statement of facts 
with the Commissioner of Corporations or with 
a score of other officials, federal and state. That 
would be almost as ineffective as if the Pure Food 
Law required a manufactm-er merely to deposit 
with the Department a statement of ingredients, 
instead of requiring the label to tell the story. 
Nor would the filing of a full statement with the 
Stock Exchange, if incorporated, as provided 
by the Pujo Committee bill, be adequate. 

To be effective, knowledge of the facts must be 
actually brought home to the investor, and this 
can best be done by requiring the facts to be 
stated in good, large type in every notice, circu- 
lar, letter and advertisement inviting the investor 
to purchase. Compliance with this requirement 
should also be obhgatory, and not something 
which the investor could waive. For the whole 
public is interested in putting an end to the 


bankers' exactions. England undertook, years 
ago, to protect its investors against the wiles of 
promoters, by requiring a somewhat similar dis- 
closure; but the British act failed, in large 
measure of its purpose, partly because under it 
the statement of facts was filed only with a public 
official, and partly because the investor could 
waive the provision. And the British statute has 
now been changed in the latter respect. 


The required publicity should also include a 
disclosure of all participants in an underwriting. 
It is a common incident of underwriting that no 
member of the syndicate shall sell at less than the 
syndicate price for a definite period, unless the 
syndicate is sooner dissolved. In other words, 
the bankers make, by agreement, an artificial 
price. Often the agreement is probably illegal 
under the Sherman Anti-Trust Law. This price 
maintenance is, however, not necessarily objec- 
tionable. It may be entirely consistent with the 
general welfare, if the facts are made known. 
But disclosure should include a list of those par- 
ticipating in the underwriting so that the public 
may not be misled. The investor should know 
whether his adviser is disinterested. 


Not long ago a member of a leading banking 
house was undertaking to justify a commission 
taken by his firm for floating a now favorite pre- 
ferred stock of a manufacturing concern. The 
bankers took for their services $250,000 in cash, 
besides one-third of the common stock, amount- 
ing to about $2,000,000. "Of course," he said, 
"that would have been too much if we could have 
kept it all for ourselves; but we couldn't. We 
had to divide up a large part. There were fifty- 
seven participants. "V\'Tiy, we had even to give 
$10,000 of stock to (naming the presi- 
dent of a leading bank in the city where the busi- 
ness was located). He might some day have 
been asked what he thought of the stock. If he 
had shrugged his shoulders and said he didn't 
know, we might have lost many a customer for 
the stock. We had to give him $10,000 of the 
stock to teach him not to shrug his shoulders." 

Think of the effectiveness with practical Amer- 
icans of a statement like this: 

A. B. & Co. 

Investment Bankers 

We have today secured substantial control of 
the successful machinery business heretofore 


conducted by at , Illinois, which 

has been incorporated under the name of the 
Excelsior Manufacturing Company with a capital 
of $10,000,000, of which $5,000,000 is Preferred 
and $5,000,000 Common. 

As we have a large clientele of confiding 
customers, we were able to secure from the 
owners an agreement for marketing the Pre- 
ferred stock — we to fix a price which shall net 
the owners in cash $95 a share. 

We offer this excellent stock to you at $100.73 
per share. Our own commission or profit will 
be only a little over $5.00 per share, or say, 
$250,000 cash, besides $1,500,000 of the Common 
stock, which we received as a bonus. This cash 
and stock commission we are to divide in various 
proportions with the following participants in the 
underwriting syndicate: 

C. D. & Co., New York 

E. F. & Co., Boston 

L. M. & Co., Philadelphia 

I. K. & Co., New York. 

O. P. & Co., Chicago 

Were such notices common, the investment 
bankers would "be worthy of their hire," for 
only reasonable compensation would ordinarily 
be taken. 


For marketing the preferred stock, as in the 
case of Excelsior ^Manufactui'ing Co. referred to 
above, investment bankers were doubtless 
essential, and as middlemen they performed a 
useful service. But they used their strong position 
to make an excessive charge. There are, how- 
ever, many cases where the banker's services 
can be altogether dispensed with; and where 
that is possible he should be eliminated, not 
only for economy's sake, but to break up 
financial concentration. 


The abolition of interlocking directorates will 
greatly curtail the bankers' power by putting an 
end to many improper combinations. Publicity 
concerning bankers' commissions, profits and 
associates, will lend effective aid, particularly by 
curbing undue exactions. Many of the specific 
measures recommended by the Pujo Committee 
(some of them dealing with technical details) 
will go far toward correcting corporate and bank- 
ing abuses; and thus tend to arrest financial 
concentration. But the investment banker has, 
within his legitimate province, acquired control 
so extensive as to menace the public welfare, 
even where his business is properly conducted. 
If the New Freedom is to be attained, every 
proper means of lessening that power must be 
availed of. A simple and effective remedy, 
which can be widely applied, even without new 
legislation, lies near at hand: — Ehminate the 
banker-middleman where he is superfluous. 

Today practically all governments, states and 



municipalities pay toll to the banker on all 
bonds sold. Why should they? It is not be- 
cause the banker is always needed. It is because 
the banker controls the only avenue through 
which the investor in bonds and stocks can or- 
dinarily be reached. The banker has become the 
universal tax gatherer. True, the pro rata 
of taxes levied by him upon our state and city 
governments is less than that levied by him upon 
the corporations. But few states or cities escape 
payment of some such tax to the banker on every 
loan it makes. Even where the new issues of 
bonds are sold at public auction, or to the highest 
bidder on sealed proposals, the bankers' syndicates 
usually secure large blocks of the bonds which 
ai-e sold to the people at a considerable profit. 
The middleman, even though unnecessary, col- 
lects his tribute. 

There is a legitimate field for dealers in state 
and municipal bonds, as for other merchants. 
Investors already owning such bonds must have 
a medium through which they can sell their 
holdings. And those states or municipalities 
which lack an established reputation among 
investors, or which must seek more distant 
markets, need the banker to distribute new issues. 
But there are many states and cities which have 


an established reputation and have a home 
market at hand. These should sell their bonds 
direct to investors without the intervention of a 
middleman. And as like conditions prevail with 
some corporations, their bonds and stocks should 
also be sold direct to the investor. Both financial 
efficiency and industrial liberty demand that the 
bankers' toll be abolished, where that is possible. 


The business of the investment banker must 
not be confused with that of the bond and stock 
broker. The two are often combined; but the 
functions are essentially different. The broker 
performs a very limited service. He has properly 
nothing to do with the original issue of securities, 
nor with their introduction into the market. He 
merely negotiates a purchase or sale as agent for 
another under specific orders. He exercises no 
discretion, except in the method of bringing 
buyer and seller together, or of executing orders. 
For his humble service he receives a moderate 
compensation, a commission, usually one-eighth 
of one per cent. (12 1/2 cents for each $100) on 
the par value of the security sold. The invest- 
ment banker also is a mere middleman. But he 
is a principal, not an agent. He is also a merchant 


in bonds and stocks. The compensation received 
for his part in the transaction is in many cases 
more accurately described as profit than as com- 
mission. So far as concerns new issues of 
government, state and municipal bonds, espe- 
ciall}', he acts as merchant, buying and selling 
securities on his own behalf; buying commonly 
at wholesale from the maker and selling at retail 
to the investors; taking the merchant's risk and 
the merchant's profits. On purchases of corpo- 
rate securities the profits are often very large; 
but even a large profit may be entirely proper; 
for when the banker's services are needed and 
are properl}^ performed, they are of great value. 
On purchases of government, state and munic- 
ipal securities the profit is usually smaller; but 
even a very small profit cannot be justified, if 


The banker's services include three distinct 
functions, and only three: 

First: Specifically as expert. The investment 
banker has tlie responsibility of the ordinary 
retailer to sell only that merchandise which is 
good of its kind. But his responsibility in this 
respect is unusually heavy, because he deals in an 


article on which a great majority of his customers 
are unable, themselves, to pass intelligent judg- 
ment without aid. The purchase by the investor 
of most corporate securities is little better than a 
gamble, where he fails to get the advice of some 
one who has investigated the security thoroughly 
as the banker should. For few investors have the 
time, the facilities, or the ability to investigate 
properly the value of corporate securities. 

Second: Specifically as distributor. The banker 
performs an all-important service in providing 
an outlet for securities. His connections enable 
him to reach possible buyers quickly. And good- 
will — that is, possession of the confidence of regu- 
lar customers — enables him to effect sales where 
the maker of the security might utterly fail to 
find a market. 

Third: Specifically as jobber or retailer. The 
investment banker, like other merchants, carries 
his stock in trade until it can be marketed. In 
this he performs a service which is often of great 
value to the maker. Needed cash is obtained 
immediately, because the whole issue of securities 
can thus be disposed of by a single transaction. 
And even where there is not immediate payment, 
the knowledge that the money will be provided 
when needed is often of paramount importance. 


By carrying securities in stock, the banker per- 
forms a service also to investors, who are thereby 
enabled to buy securities at such times as they 

Whenever makers of securities or investors 
require all or any of these three services, the 
investment banker is needed, and payment of 
compensation to him is proper. Where there is 
no such need, the banker is cleai'ly superfluous. 
And in respect to the original issue of many of our 
state and municipal bonds, and of some corporate 
securities, no such need exists. 


It needs no banker experts in value to tell us 
that bonds of Massachusetts or New York, of 
Boston, Philadelphia or Baltimore and of scores 
of lesser American cities, are safe investments. 
The basic financial facts in regard to such bonds 
are a part of the common knowledge of many 
American investors; and, certainly, of most pos- 
sible investors who reside in the particular state 
or city whose bonds arc in question. Where the 
financial facts are not generally known, they are 
so simple, that they can be easily summarized and 
understood by any prospective investor without 
interpretation by an expert. Bankers often 


employ, before purchasing securities, their own 
accountants to verify the statements supplied by 
the makers of the security, and use these account- 
ants' certificates as an aid in selling. States and 
municipalities, the makers of the securities, 
might for the same purpose employ independent 
public accountants of high reputation, who would 
give their certificates for use in marketing the 
securities. Investors could also be assured with- 
out banker-aid that the basic legal conditions are 
sound. Bankers, before purchasing an issue of 
securities, customarily obtain from their own 
counsel an opinion as to its legality, which inves- 
tors are invited to examine. It would answer 
the same purpose, if states and municipalities 
should supplement the opinion of their legal 
representatives by that of independent counsel 
of recognized professional standing, who would 
certify to the legality of the issue. 

Neither should an investment banker be needed 
to find investors walling to take up, in small lots, 
a new issue of bonds of New York or Massa- 
chusetts, of Boston, Philadelphia or Baltimore, or 
a hundred other American cities. A state or 
municipality seeking to market direct to the 
investor its own bonds would naturally experi- 
ence, at the outset, some difficulty in marketing a 


large issue. And in a newer communitj^, where 
there is little accumulation of unemployed capital, 
it might be impossible to find buyers for any large 
issue. Investors are apt to be conservative; 
and they have been trained to regard the inter- 
vention of the banker as necessary. The bankers 
would naturally discoiu-age any attempt of states 
and cities to dispense with their services. En- 
trance upon a market, hitherto monopolized by 
them, would usually have to be struggled for. 
But banker-fed investors, as well as others could, 
in time, be brought to reahze the advantage of 
avoiding the middleman and deahng dii'ectly with 
responsible borrowers. Governments, like private 
concerns, would have to do educational work; but 
this publicity would be much less expensive and 
much more productive than that undertaken by 
the bankers. Many investors are already impa- 
tient of banker exactions; and eager to deal 
directly with governmental agencies in whom they 
have more confidence. And a great demand could, 
at once, be developed among smaller investors 
whom the bankers have been unable to interest, 
and who now never buy state or municipal bonds. 
The opening of this new field would fut-nish a mar- 
ket, in some respects more desirable and certainly 
wider tluui th:i( now reached by the bankers. 


Neither do states or cities ordinarily need the 
services of the investment banker to carry their 
bonds pending distribution to the investor. 
Where there is immediate need for large funds, 
states and cities — at least the older communities 
— should be able to raise the money temporarily, 
quite as well as the bankers do now, while await- 
ing distribution of their bonds to the investor. 
Bankers carry the bonds with other people's 
money, not with their own. Why should not 
cities get the temporary use of other people's 
money as well? Bankers have the preferential 
use of the deposits in the banks, often because 
they control the banks. Free these institutions 
from banker-control, and no applicant to borrow 
the people's money will be received with greater 
favor than our large cities. Boston, with its 
$1,500,000,000 of assessed valuation and $78,033,- 
128 net debt, is certainly as good a risk as even 
Lee, Higginson & Co. or Kidder, Peabody & Co. 

But ordinarily cities do not, or should not, 
require large sums of money at any one time. 
Such need of large sums does not arise except 
from time to time where maturing loans are to be 
met, or when some existing public utility plant 
is to be taken over from private owners. Large 
issues of bonds for any other purpose are usually 


made in anticipation of future needs, rather than 
to meet present necessities. Modern efficient 
public financiering, through substituting serial 
bonds for the long term issues (which in Massa- 
chusetts has been made obligatory) will, in time, 
remove the need of large sums at one time for 
paying maturing debts, since each year's maturi- 
ties will be paid from the year's taxes. Purchases 
of existing public utiUty plants are of rare occur- 
rence, and are apt to be preceded by long periods 
of negotiation. When they occur they can, if 
foresight be exercised, usually be financed without 
full cash paj^ment at one time. 

Today, when a large issue of bonds is made, the 
banker, while ostensibly paying his own money to 
the city, actually pays to the city other people's 
money which he has borrowed from the banks. 
Then the banks get back, through the city's de- 
posits, a large part of the money so received. And 
when the money is returned to the bank, the 
banker has the opportunity of borrowing it again 
for other operations. The process results in 
double loss to the city. The city loses by not 
getting from the banks as much for its bonds as 
investors would pay. And then it loses interest 
on the money raised before it is needed. For the 
bankers receive from the city bonds bearing rarely 


less than 4 per cent, interest; while the proceeds 
are deposited in the banks which rarely allow 
more than 2 per cent, interest on the daily 


In the present year some cities have been led by 
necessity to help themselves. The bond market 
was poor. Business was uncertain, money tight 
and the ordinary investor reluctant. Bankers 
were loth to take new bond issues. Municipali- 
ties were unwilling to pay the high rates de- 
manded of them. And many cities were prohib- 
ited by law or ordinance from paying more than 
4 per cent, interest; while good municipal bonds 
were then selling on a 4 1/2 to 5 per cent, basis. 
But money had to be raised, and the attempt was 
made to borrow it direct from the lenders instead 
of from the banker-middleman. Among the 
cities which raised money in this way were Phila- 
delphia, Baltimore, St. Paul, and Utica, New 

Philadelphia, under Mayor Blankenburg's 
inspiration, sold nearly $4,175,000 in about two 
days on a 4 per cent, basis and another ''over-the- 
counter" sale has been made since. In Balti- 
more, with the assistance of the Sun- $4,766,000 


were sold ''over the counter" on a 4 1/2 per cent, 
basis. Utica's two ''popular sales" of 4 1/2 
per cent, bonds were largely "over-subscribed." 
And since then other cities large and small 
have had their "over-the-counter" bond sales. 
The experience of Utica, as stated by its Control- 
ler, Fred G. Reusswig, must prove of general 
interest : 

"In June of the present year I advertised for 
sale two issues, one of S 100,000, and the other of 
$19,000, bearing interest at 4 1/2 per cent. The 
latter issue was purchased at par by a local bidder 
and of the former we purchased $10,000 for our 
sinking funds. That left $90,000 unsold, for 
which there were no bidders, which was the first 
time that I had been unable to sell our bonds. 
About this time the 'popular sales' of Baltimore 
and Philadelphia attracted my attention. The 
laws in effect in those cities did not restrict the 
officials as does our law and I could not copy their 
methods. I realized that there was plenty of 
money in this immediate vicinity and if I could 
devise a plan conforming with our laws under 
which I could inake the sale attractive to small 
investors it would undoubtedly prove successful. 
I had found, in previous efforts to interest people 
of small means, that they did not understand the 


meaning of premium and would rather not buy 
than bid above par. They also objected to mak- 
ing a deposit with their bids. In arranging for 
the 'popular sales' I announced in the papers 
that, while I must award to the highest bidder, it 
was my opinion that a par bid would be the highest 
bid. I also announced that we would issue bonds 
in denominations as low as $100 and that we 
would not require a deposit except where the bid 
was $5,000 or over. Then I succeeded in getting 
the local papers to print editorials and local 
notices upon the subject of municipal bonds, with 
particular reference to those of Utica and the 
forthcoming sale. All the prospective purchaser 
had to do was to fill in the amount desired, 
sign his name, seal the bid and await the day 
for the award. I did not have many bidders for 
very small amounts. There was only one for 
$100 at the first sale and one for $100 at the 
second sale and not more than ten who wanted 
less than $500. Most of the bidders were looking 
for from $1,000 to $5,000, but nearly all were peo- 
ple of comparatively small means, and with some 
the investment represented all their savings. In 
awarding the bonds I gave preference to residents 
of Utica and I had no difficulty in apportioning 
the various maturities in a satisfactory way. 


"I believe that there are a large number of per- 
sons in every cit}^ who would buy their own bonds 
if the way w^ere made easier by law. Syracuse 
and the neighboring village of Ilion, both of which 
had been unable to sell in the usual way, came to 
me for a program of procedure and both have 
since had successful sales along similar lines. 
We have been able by this means to keep the 
interest rate on our bonds at 4 1/2 per cent., while 
cities which have followed the old plan of relying 
upon bond houses have had to increase the rate 
to 5 per cent. I am in favor of amending the law 
in such a manner that the Common Council, 
approved by the Board of Estimate and Appor- 
tionment, may fix the prices at which bonds shall 
be sold, instead of calling for competitive bids. 
Then place the bonds on sale at the Controller's 
office to any one who will pay the price. The 
prices upon each issue should be graded according 
to the different values of different maturities. 
Under the present law, as we have it, conditions 
are too complicated to make a sale practicable 
except upon a basis of par bids." 


St. Paul wisely introduced into its experiment a 
more democratic feature, which Tom L. Johnson, 


Cleveland's great mayor, thought out (but did not 
utilize), and which his friend W. B. Colver, now 
Editor-in-Chief of the Daily News, brought to the 
attention of the St. Paul officials. Mayor John- 
son had recognized the importance of reaching the 
small savings of the people; and concluded that 
it was necessary not only to issue the bonds in 
very small denominations, but also to make them 
redeemable at par. He sought to combine 
practically, bond investment with the savings 
bank privilege. The fact that municipal bonds 
are issuable ordinarily only in large denomina- 
tions, say, $1,000, presented an obstacle to be 
overcome. Mayor Johnson's plan was to have 
the sinking fund commissioners take large blocks 
of the bonds, issue against them certificates in 
denominations of $10, and have the commis- 
sioners agree (under their power to purchase 
securities) to buy the certificates back at par and 
interest. Savings bank experience, he insisted, 
showed that the redemption feature would not 
prove an embarrassment; as the percentage of 
those wishing to withdraw their money is small; 
and deposits are nearly always far in excess of 

The St. Paul sinking fund commissioners and 
City Attorney O'Neill approved the Johnson 


plan; and in the face of high money rates, sold on 
a 4 per cent, basis, during July, certificates to the 
net amount of $502,300; during August, $147,- 
000; and during September, over $150,000, the 
average net sales being about $5,700 a day. 
Mr. Colver, reporting on the St. Paul experience, 

''There have been about 2,000 individual pur- 
chasers making the average deposit about $350 
or $3G0. There have been no certificates sold 
to banks. During the first month the deposits 
averaged considerably higher and for this reason : 
in very many cases people who had savings which 
represented the accumulation of considerable 
time, withdrew their money from the postal sav- 
ings banks, from the regular banks, from various 
hiding places and deposited them with the city. 
Now these same people are coming once or twice 
a month and making deposits of ten or twenty 
dollars, so that the average of the individual 
deposit has fallen very rapidly during September 
and every indication is that the number of small 
deposits will continue to increase and the rela- 
tively large deposits become less frequent as 
time goes on. 

As a matter of fact, these certificate deposits 
are stable, far more than the deposits and invest- 


ments of richer people who watch for advanta- 
geous reinvestments and who shift their money 
about rather freely. The man with three or 
four hundred dollars savings will suffer almost 
anything before he will disturb that fund. We 
believe that the deposits every day here, day in 
and day out, will continue to take care of all the 
withdrawals and still leave a net gain for the day, 
that net figure at present being about $5,700 a 

Many cities are now prevented from selling 
bonds direct to the small investors, through laws 
which compel bonds to be issued in large denomi- 
nations or which require the issue to be offered 
to the highest bidder. These legislative limita- 
tions should be promptly removed. 


Such success as has already been attained is 
largely due to the unpaid educational work of 
leading progressive newspapers. But the educa- 
tional work to be done must not be confined to 
teaching "the people" — the buyers of the bonds. 
Municipal officials and legislators have quite as 
much to learn. They must, first of all, study 
salesmanship. Selling bonds to the people is a 


new art, still undeveloped. The general problems 
have not yet been worked out. And besides 
these problems common to all states and cities, 
there will be, in nearly every community, local 
problems which must be solved, and local difficul- 
ties which must be overcome. The proper solu- 
tion even of the general problems must take con- 
siderable time. There will have to be many ex- 
periments made; and doubtless there will be many 
failures. Every great distributor of merchandise 
knows the obstacles which he had to overcome 
before success was attained; and the large sums 
that had to be invested in opening and preparing 
a market. Individual concerns have spent mil- 
lions in wise publicity; and have ultimateh' reaped 
immense profits when the market was won. 
Cities must take their lessons from these great 
distributors. Cities must be ready to study the 
problems and to spend prudently for proper pub- 
licity work. It might, in the end, prove an econ- 
omy, even to allow, on particular issues, where nec- 
essary, a somewhat higher interest rate than bank- 
ers would exact, if tliereby a direct market for 
bonds could be secured. Future operations would 
yield large economics. And the obtaining of a 
direct market for city bonds is growing ever more 
important, because of the huge increase in loans 


which must attend the constant expansion of 
municipal functions. In 1898 the new munic- 
ipal issues aggregated $103,084,793; in 1912, 


In New York, Massachusetts and the other 
sixteen states where a system of purely mutual 
savings banks is general, it is possible, with a 
little organization, to develop an important mar- 
ket for the direct purchaser of bonds. The 
bonds issued by Massachusetts cities and towns 
have averaged recently about $15,000,000 a year, 
and those of the state about $3,000,000. The 194 
Massachusetts savings banks, with aggregate 
assets of $902,105,755.94, held on October 31, 
1912, $90,536,581.32 in bonds and notes of states 
and municipalities. Of this sum about $60,000,- 
000 are invested in bonds and notes of Massa- 
chusetts cities and towns, and about $8,000,000 in 
state issues. The deposits in the savings banks 
are increasing at the rate of over $30,000,000 a 
year. Massachusetts state and municipal bonds 
have, within a few years, come to be issued tax 
exempt in the hands of the holder, whereas other 
classes of bonds usually held by savings banks 
are subject to a tax of one-half of one per cent. 


of the market value. Massachusetts savings 
banks, therefore, will to an increasing extent, se- 
lect ^Massachusetts municipal issues for high-grade 
bond investments. Certainly Massachusetts cit- 
ies and towns might, with the cooperation of the 
Commonwealth, easily develop a "home market" 
for "over-the-counter" bond business with the 
savings banks. And the savings banks of other 
states offer similar opportunities to their munici- 


Bankers obtained their power through com- 
bination. Why should not cities and states 
by means of cooperation free themselves from 
the bankers? For by cooperation between the 
cities and the state, the direct marketing of 
municipal bonds could be greatly facilitated. 

Massachusetts has 33 cities, each with a popu- 
lation of over 12,000 persons; 71 towns each 
with a population of over 5,000; and 250 towns 
each with a population of less than 5,000. Three 
hundred and eight of these municipalities now 
have funded indebtedness outstanding. The 
aggregate net indebtedness is about $180,000,000. 
Every year about $15,000,000 of bonds and notes 
are issued by the Massachusetts cities and towna 


for the purpose of meeting new requirements and 
refunding old indebtedness. If these munici- 
palities would cooperate in marketing securities, 
the market for the bonds of each municipality- 
would be widened; and there would exist also a 
common market for Massachusetts municipal 
securities which would be usually well supplied, 
would receive proper publicity and would attract 
investors. Successful merchandising ob\dously 
involves carrying an adequate, well-assorted 
stock. If every city acts alone, in endeavoring 
to market its bonds direct, the city's bond-selling 
activity will necessarily be sporadic. Its ability 
to supply the investor will be limited by its own 
necessities for money. The market will also be 
limited to the bonds of the particular municipal- 
ity. But if a state and its cities should cooperate, 
there could be developed a continuous and broad 
market for the sale of bonds ''over-the-counter." 
The joint selling agency of over three hundred 
municipalities, — as in Massachusetts— would natu- 
rally have a constant supply of assorted bonds 
and notes which could be had in as small amounts 
as the investor might want to buy them. It 
would be a simple matter to establish such a 
joint selUng agency by which municipalities, 


under proper regulation of, and aid from the 
state, would cooperate. 

And cooperation among the cities and with the 
state might serve in another important respect. 
These 354 Massachusetts municipalities carry in 
the aggregate large bank balances. Sometimes 
the balance carried by a city represents unex- 
pended revenues; sometimes unexpended pro- 
ceeds of loans. On these balances they usually 
receive from the banks 2 per cent, interest. The 
balances of municipalities vary like those of other 
depositors; one having idle funds, when another 
is in need. Why should not all of these cities 
and towns cooperate, making, say, the State their 
common banker, and supply each other with 
funds as farmers and laborers cooperate tlirough 
credit unions? Then cities would get, instead of 
2 per cent, on their balances, all their money 
was worth. 

The Commonwealth of jMassachusetts holds 
now in its sinking and other funds nearly S30,000- 
000 of Massachusetts municipal securities, con- 
stituting nearly tliree-fourths of all securities held 
in these funds. Its annual purchases aggregate 
nearly $4,000,000. Its purchases direct from 
cities and towns have already exceeded $1,000,000 
this year. It would 1)0 but a sinii)Io extension of 


the state's function to cooperate, as indicated, in 
a joint, Municipal Bond Selling Agency an dCredit 
Union. It would be a distinct advance in the 
efficiency of state and municipal financing; 
and what is even more important, a long step 
toward the emancipation of the people from 


Strong corporations with established reputa- 
tions, locally or nationally, could emancipate 
themselves from the banker in a similar manner. 
Public-service corporations in some of our leading 
cities could easily establish ''over-the-counter" 
home markets for their bonds; and would be 
greatly aided in this by the supervision now being 
exercised by some state commissions over the 
issue of securities by such corporations. Such 
corporations would gain thereby not only in 
freedom from banker-control and exactions, but 
in the winning of valuable local support. The 
investor's money would be followed by his sym- 
pathy. In things economic, as well as in things 
political, wisdom and safety lie in direct appeals to 
the people. 

The Pennsylvania Raiboad now relies largely 
upon its stockholders for new capital. But a 


corporation with its long-continued success and 
reputation for stability should have much wider 
financial support and should eliminate the banker 
altogether. With the 2,700 stations on its 
system, the Pennsylvania could, with a slight 
expense, create nearly as many avenues through 
which money would be obtainable to meet its 
growing needs. 


It may be urged that reputations often outlive 
the conditions which justify them, that outlived 
reputations are pitfalls to the investors; and that 
the investment banker is needed to guard him 
from such dangers. True; but when have the 
big bankers or (their little satellites protected the 
people from such pitfalls? 

Was there ever a more be-bankered railroad 
than the New Haven? Was there ever a more 
banker-led community of investors than New 
England? Six years before the fall of that great 
system, the hidden dangers were pointed out to 
these banker-experts. Proof was furnished of 
the rotting timbers. The disaster-breeding poli- 
cies were laid bare. The bankers took no action. 
Repeatedly, thereafter, the bankers' attention 
was called to the steady deterioration of the 


structure. The New Haven books disclose 11,- 
481 stockholders who are residents of Massa- 
chusetts; 5,682 stockholders in Connecticut; 735 
in Rhode Island; and 3,510 in New York. Of 
the New Haven stockholders 10,474 were women. 
Of the New Haven stockholders 10,222 were of 
such modest means that their holdings were from 
one to ten shares only. The investors were 
sorely in need of protection. The city directories 
disclose 146 banking houses in Boston, 26 in 
Providence, 33 in New Haven and Hartford, 
and 357 in New York City. But who, connected 
with those New England and New York bank- 
ing houses, during the long years which pre- 
ceded the recent investigation of the Interstate 
Commerce Commission, raised either voice or 
pen in protest against the continuous mismanage- 
ment of that great trust property or warned the 
public of the impending disaster? Some of the 
bankers sold their own stock holdings. Some 
bankers whispered to a few favored customers 
advice to dispose of New Haven stock. But not 
one banker joined those who sought to open the 
eyes of New England to the impending disaster 
and to avert it by timely measures. New 
England's leading banking houses were ready to 
"cooperate" with the New Haven management 


in taking generous commissions for marketing the 
endless supply of new securities; but they did 
nothing to protect the investors. Were these 
bankers blind? Or were they afraid to oppose 
the will of J. P. Morgan & Co.? 

Perhaps it is the banker who, most of all, 
needs the New Freedom. 


J. P. Morgan & Co. declare, in their letter to 
the Pujo Committee, that ''practically all the 
railroad and industrial development of this coun- 
try 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 character- 
ized as "great transactions"; and the men who 
contributed the financial aid and business man- 
agement 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 origi- 
nal 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 "initi- 
ate" the undertaking. 


We have come to associate the great bankers 
with railroads. But their part was not conspicu- 
ous in the early history of the Eastern railroads; 
and in the ^liddle 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 ICG separate railroad 


companies. The New Haven Railroad owns 
and leases 1,996 miles of line; but it is a compos- 
ite 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 communi- 
ties. 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. 


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 Com- 
pany — 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. IMorgan & Co. 
floated the International Mercantile Marine 
with its 852,744,000 of 4 1/2 bonds, now selling 
at about 60, and $100,000,000 of stock (pre- 
ferred 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. 


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 Balti- 
more) 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 pur- 
chase by the American Telephone & Telegraph 


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 in- 
troducing 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. per- 
formed 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 pre- 
viously 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 Odgen 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. 



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. 


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 18G8. 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 aggre- 
gate 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 capitali- 
zation of $1,402,000,000. These combinations 
came thirty years after the steel industry had 
been "initiated". 


The telephone industry is less than forty years 
old. It is probably America's greatest contri- 
bution 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 


"The only man who had monej' 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 primaril}" by sentiment, as Bell 
had removed the blight of dumbness from San- 
ders' 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 competi- 
tors, 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 discourage- 
ment 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 elec- 
trical 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 scien- 
tific 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 nibbUng at its 
business must be stopped. It took action quickly, 
and organized the 'American Speaking-Tele- 
phone 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 Uttle 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 sup- 
ply 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 cai)italists, not from l)ank- 
ers, and among these capitalists was William II. 


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 com- 
pany or its subsidiaries. In that period the vol- 
ume 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 Com- 
pany; 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. 



The business of manufacturing electrical 
machinery and apparatus is only a little over 
thirty years old. J. P. ]\Iorgan & 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 com- 
bination, and organizing the General Electric 
Company in 1892. There were then three 
large electrical companies, the Thomson-Hous- 
ton, 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. L3'nn 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-Ht)uston Company upon its organi- 
zation 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 Com- 
pany 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 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 oppor- 
tunity. 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 prac- 
ticable 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. 


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 strongl}' 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 con- 
sequently tend to discourage independent inven- 
tive thought, to the great detriment of the nation, 
and with injustice to inventors whom the Con- 
stitution 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 arc being introduced by our iron 
and steel manufacturers are most of them merely 
following the lead set by foreigners years ago. 

"Wc 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 com- 
pared with those of Germany. We beheve the 
main cause is the wholesale consohdation which 
has taken place in American industry. A huge 
organization is too clumsy to take up the develop- 
ment 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 

"We instance metallurgy only by way of illus- 
tration. There are plenty of other fields of indus- 
try 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 stateijent 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 con- 
veniences, 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, 


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 con- 
centration. Industrial trusts feed the money 
trust. Practically every trust created has de- 
stroyed 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, scat- 
tered 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 com- 
panies in all, located in 127 cities and towns, 
scattered over 18 states. Before the combina- 
tions 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 ac- 
quired) had to be done through or with the 
consent of J. P. Morgan & Co. That was the 
greatest step in financial concentration ever taken. 


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. Further- 
more, 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 in- 
dustrial 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 com- 
mon 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 


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 sub- 
sidiaries 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 in- 
cludes 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, Mon- 
tana, 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 com- 
mercial 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 con- 
struction 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 hght 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, ]\Iont.; St. Louis, Mo.; Winona, 
IMinn.; ^Milwaukee and Racine, Wis.; Elmira, 
N. Y.; Ashcville 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 Rens- 
selaer, 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 approxi- 
mately 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, exer- 
cises a Hke 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 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 administra- 
tive 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 manage- 
ment 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 Fed- 
eral Government and the States now have in 
our natural resources, and there should be a 
complete separation of our industries from rail- 
roads and public utilities. 



Bigness has been an important factor in the 
rise of the ]\Ioney Trust: Big railroad systems, 
Big industrial trusts, Big public service com- 
panies; and as instruments of these Big banks 
and Big trust companies. J. P. Morgan & Co. 
(in their letter of defence to the Pujo Committee) 
urge the needs of Big Business as the justification 
for financial concentration. They declare that 
what they euphemistically call "cooperation" 
is "simply a further result of the necessity for 
handling great transactions"; that "the country 
obviously requires not only the larger individual 
banks, but demands also that those banks shall 
cooperate to perform efficiently the country's 
business"; and that "a step backward along this 
line would mean a halt in industrial progress 
that would affect every wage-earner from the 
Atlantic to the Pacific." The phrase "great 
transactions" is used by the bankers apparently 
as meaning large corporate security issues. 

Leading bankers have undoul)tcdly cooperated 

during the last 15 years in floating some very 



large security issues, as well as many small ones. 
But relatively few large issues were made 
necessary by great improvements undertaken or 
by industrial development. Improvements and 
development ordinarily proceed slowly. For 
them, even where the enterprise involves large 
expenditures, a series of smaller issues is usually 
more appropriate than single large ones. This is 
particularly true in the East where the building 
of new railroads has practically ceased. The 
"great" security issues in which bankers have 
cooperated were, with relatively few exceptions, 
made either for the purpose of effecting com- 
binations or as a consequence of such combina- 
tions. Furthermore, the combinations which 
made necessary these large security issues or 
underwritings were, in most cases, either contrary 
to existing statute law, or contrary to laws recom- 
mended by the Interstate Commerce Commis- 
sion, or contrary to the laws of business efficiency. 
So both the financial concentration and the 
combinations which they have served were, in 
the main, against the public interest. Size, 
we are told, is not a crime. But size may, at 
least, become noxious by reason of the means 
through which it was attained or the uses to 
which it is put. And it is size attained by 


combination, instead of natural growth, which 
has contributed so largely to our financial con- 
centration. Let us examine a few cases: 


J. P. Morgan & Co., in urging the "need of 
large banks and the cooperation of bankers," 

"The Attorney-General's recent approval of 
the Union Pacific settlement calls for a single com- 
mitment on the part of bankers of $126,000,000." 

This §126,000,000 "commitment" was not 
made to enable the Union Pacific to secure 
capital. On the contrary it was a guaranty that 
it would succeed in disposing of its Southern 
Pacific stock to that amount. And when it had 
disposed of that stock, it was confronted with the 
serious problem — what to do with the proceeds? 
This huge underwriting became necessary solely 
because the Union Pacific had violated the 
Sherman Law. It had acquired that amount of 
Southern Pacific stock illegally; and the Supreme 
Court of the United States finally decreed that 
the illegality cease. This same illegal purchase 
had been the occasion, twelve years earlier, of 
another "groat transaction," — the issue of a 
S 100,000,000 of Union Pacific bonds, which were 


sold to provide funds for acquiring this Southern 
Pacific and other stocks in violation of law. 
Bankers ''cooperated" also to accomplish that. 


The Union Pacific and its auxiliary lines (the 
Oregon Short Line, the Oregon Railway and 
Navigation and the Oregon-Washington Railroad) 
made, in the fourteen years, ending June 30, 1912, 
issues of securities aggregating $375,158,183 (of 
which $46,500,000 were refunded or redeemed); 
but the large security issues served mainly to sup- 
ply funds for engaging in illegal combinations or 
stock speculation. The extraordinary improve- 
ments and additions that raised the Union Pacific 
Railroad to a high state of efficiency were 
provided mainly by the net earnings from the 
operation of its railroads. And note how great 
the improvements and additions were: Tracks 
were straightened, grades were lowered, bridges 
were rebuilt, heavy rails were laid, old equipment 
was replaced by new; and the cost of these was 
charged largely as operating expense. Additional 
equipment was added, new lines were built 
or acquired, increasing the system by 3524 
miles of line, and still other improvements and 
betterments were made and charged to capital 


account. These expenditures aggi'egated S191,- 
512,328. But it needed no "large security 
issues" to provide the capital thus wisely ex- 
pended. The net earnings from the operations 
of these railroads were so large that nearly all 
these improvements and additions could have 
been made without issuing on the average more 
than SI, 000,000 a year of additional securities for 
"new money," and the company still could have 
paid six per cent, dividends after 1906 (when that 
rate was adopted). For while $13,679,452 a 
year, on the average, was charged to Cost 
of Road and Equipment, the surplus net 
earnings and other funds would have yielded, on 
the average, $12,750,982 a year available for 
improvements and additions, without raising 
money on new security issues. 


The 8375,000,000 securities (except to the 
extent of about $13,000,000 required for im- 
provements, and the amounts applied for refund- 
ing and redemptions) were available to buy 
stocks and bonds of other companies. And some 
of the stocks so acquired were sold at large 
profits, providing further sums to be employed 
in stock purchases. 


The $375,000,000 Union Pacific Lines security 
issues, therefore, were not needed to supply 
funds for Union Pacific improvements; nor did 
these issues supply funds for the improvement of 
any of the companies in which the Union Pacific 
invested (except that certain amounts were 
advanced later to aid in financing the Southern 
Pacific). They served, substantially, no purpose 
save to transfer the ownership of railroad stocks 
from one set of persons to another. 

Here are some of the principal investments: 

1. $91,657,500, in acquiring and financing the Southern 


2. $89,391,401, in acquiring the Northern Pacific stock and 

stock of the Northern Securities Co. 

3. $45,466,960, in acquiring Baltimore & Ohio stock. 

4. $37,692,256, in acquiring Illinois Central stock. 

5. $23,205,679, in acquiring New York Central stock. 

6. $10,395,000, in acquiring Atchison, Topeka & Santa Fe 


7. $8,946,781, in acquiring Chicago & Alton stock. 

8. $11,610,187, in acquiring Chicago, Milwaukee & St. Paul 


9. $6,750,423, in acquiring Chicago & Northwestern stock. 
10. $6,936,696, in acquiring Railroad Securities Co. stock 

(Illinois Central stock.) 

The immediate effect of these stock acquisi- 
tions, as stated by the Interstate Commerce 
Commission in 1907, was merely this; 


"Mr. Harriman maj' journey by steamship 
from New York to New Orleans, thence by rail 
to San Francisco, across the Pacific Ocean to 
China, and, returning by another route to the 
United States, may go to Ogden by any one of 
three rail lines, and thence to Kansas City or 
Omaha, without leaving the deck or platform 
of a carrier which he controls, and without 
duplicating any part of his journey. 

"He has further what appears to be a dominant 
control in the Illinois Central Railroad running 
directly north from the Gulf of Mexico to the 
Great Lakes, parallel to the Mississippi River; 
and two thousand miles west of the Mississippi 
he controls the only line of railroad parallel to 
the Pacific Coast, and running from the Colorado 
River to the Mexican border. . . . 

"The testimony taken at this hearing shows 
that about fifty thousand square miles of terri- 
tory in the State of Oregon, surrounded by the 
lines of the Oregon Short Line Railroad Com- 
pany, the Oregon Railroad and Navigation 
Company, and the Southern Pacific Company, 
is not developed. While the funds of those 
companies which could be used for that purpose 
arc being invested in stocks like the New York 
Central and other lines having only a remote 


relation to the territory in which the Union Pacific 
System is located." 

Mr. Harriman succeeded in becoming director 
in 27 railroads with 39,354 miles of Hne; and they 
extended from the Atlantic to the Pacific; from 
the Great Lakes to the Gulf of Mexico. 


On September 9, 1909, less than twelve years 
after Mr. Harriman first became a director in the 
Union Pacific, he died from overwork at the age 
of 61. But it was not death only that had 
set a limit to his achievements. The multiplicity 
of his interests prevented him from performing 
for his other railroads the great services that had 
won him a world-wide reputation as manager 
and rehabilitator of the Union Pacific and the 
Southern Pacific. Within a few months after 
Mr. Harriman's death the serious equipment 
scandal on the Illinois Central became public, 
culminating in the probable suicide of one of the 
vice-presidents of that company. The Chicago 
& Alton (in the management of which Mr. 
Harriman was prominent from 1899 to 1907, as 
President, Chairman of the Board, or Executive 
Committeeman), has never regained the pros- 
perity it enjoyed before he and his ^.ssociates 


acquired control. The P^re IMarquette has 
passed again into receiver's hands. Long before 
Mr. Harriman's death the Union Pacific had 
disposed of its Northern Pacific stock, because 
the Supreme Court of the United States declared 
the Northern Securities Company illegal, and 
dissolved the Northern Pacific-Great Northern 
merger. Three years after his death, the Su- 
preme Court of the United States ordered the 
Union Pacific-Southern Pacific merger dissolved. 
By a strange irony, the law has permitted the 
Union Pacific to reap large profits from its illegal 
transactions in Northern Pacific and Southern 
Pacific stocks. But many other stocks held 
"as investments" have entailed large losses. 
Stocks in the Illinois Central and other com- 
panies which cost the Union Pacific $129,894,- 
991.72, had on November 15, 1913, a market 
value of only $87,851,500; showing a shrinkage 
of $42,043,491.72 and the average income from 
them, while held, was only about 4.30 per cent, 
on their cost. 

A bankers' paradise 

Kuhn, Loeb & Co. were the Union Pacific 
bankers. It was in pursuance of a promise which 
Mr. Jacob H. Schiff — the senior partner — had 


given, pending the reorganization, that Mr. 
Harriman first became a member of the Executive 
Committee in 1897. Thereafter combinations 
grew and crumbled, and there were vicissi- 
tudes in stock speculations. But the investment 
bankers prospered amazingly; and financial con- 
centration proceeded without abatement. The 
bankers and their associates received the com- 
missions paid for purchasing the stocks which 
the Supreme Court holds to have been acquired 
illegally — and have retained them. The bankers 
received commissions for underwriting the securi- 
ties issued to raise the money with which to buy 
the stocks which the Supreme Court holds to have 
been illegally acquired, and have retained them. 
The bankers received commissions paid for floating 
securities of the controlled companies — while 
they were thus controlled in violation of law — and 
have, of course, retained them. Finally when, 
after years, a decree is entered to end the illegal 
combination, these same bankers are on hand 
to perform the services of undertaker — and 
receive further commissions for their banker-aid 
in enabling the law-breaking corporation to end 
its wrong doing and to comply with the decree of 
the Supreme Court. And yet, throughout nearly 
all this long period, both before and after Mr. 


Harriman's death, two partners in Kuhn, Loeb & 
Co. were directors or members of the executive 
committee of the Union Pacific; and as such 
must be deemed responsible with others for the 
illegal acts. 

Indeed, these bankers have not only received 
commissions for the underwritings of transactions 
accomplished, though illegal; they have re- 
ceived commissions also for merely agreeing to 
underwrite a "great transaction" which the 
authorities would not permit to be accomplished. 
The $126,000,000 underwriting (that ''single 
commitment on the part of bankers" to which 
J. P. Morgan & Co. refer as being called for by 
"the Attorney General's approval of the Union 
Pacific settlement") never became effective; 
because the Public Service Commission of Cali- 
fornia refused to approve the terms of settlement. 
But the Union Pacific, nevertheless, paid the 
Kuhn Loeb Syndicate a large underwriting fee for 
having been ready and willing "to serve," should 
the opportunity arise: and another underwriting 
commission was paid when the Southern Pacific 
stock was finally distributed, with the approval 
of Attorney General McRcynolds, under the 
Court's decree. Thus the illegal purchase of 
Southern Pacific stock yielded directly four 


crops of commissions; two when it was acquired, 
and two when it was disposed of. And during 
the intervening period the illegally controlled 
Southern Pacific yielded many more commissions 
to the bankers. For the schedules filed with the 
Pujo Committee show that Kuhn, Loeb & Co. 
marketed, in addition to the Union Pacific 
securities above referred to, $334,000,000 of 
Southern Pacific and Central Pacific securities 
between 1903 and 1911. 

The aggregate amount of the commissions paid 
to these bankers in connection with Union 
Pacific-Southern Pacific transactions is not dis- 
closed. It must have been very large; for not 
only were the transactions ''great"; but the 
commissions were liberal. The Interstate Com- 
merce Commission finds that bankers received 
about 5 per cent, on the purchase price for buying 
the first 750,000 shares of Southern Pacific stock; 
and the underwriting commission on the first 
$100,000,000 Union Pacific bonds issued to make 
that and other purchases was $5,000,000. How 
large the two underwriting commissions were 
which the Union Pacific paid in efTecting the 
severance of this illegal merger, both the company 
and the bankers have declined to disclose. 
Furthermore the Interstate Commerce Com- 


mission showed, clearly, while investigating the 
Union Pacific's purchase of the Chicago & Alton 
stock, that the bankers' profits were by no means 
confined to commissions. 


Such railroad combinations produce injury 
to the public far more serious than the heavy tax 
of bankers' commissions and profits. For in 
nearly every case the absorption into a great 
system of a theretofore independent railroad has 
involved the loss of financial independence to 
some community, property or men, who thereby 
become subjects or satellites of the Money Trust. 
The passing of tho Chicago, Burlington & Quincy, 
in 1901, to the Morgan associates, presents a 
striking example of this process. 

After the Union Pacific acquired the Southern 
Pacific stock in 1901, it sought control, also, of 
the Chicago, Burlington & Quincy, — a most 
prosperous railroad, having then 7912 miles of 
line. The Great Northern and Northern Pacific 
recognized that Union Pacific control of the 
Burlington would exclude them from much of 
Illinois, Missouri, Wisconsin, Kansas, Nebraska, 
Iowa, and South Dakota. The two northern 


roads, which were already closely allied with 
each other and with J. P. Morgan & Co., there- 
upon purchased for $215,227,000, of their joint 
4 per cent, bonds, nearly all of the $109,324,000 
(par value) outstanding Burlington stock. A 
struggle with the Union Pacific ensued which 
yielded soon to ''harmonious cooperation." The 
Northern Securities Company was formed with 
$400,000,000 capital, thereby merging the Great 
Northern, the Northern Pacific and the Burling- 
ton, and joining the Harriman, Kuhn-Loeb, with 
the Morgan-Hill interests. Obviously neither 
the issue of $215,000,000 joint 4's, nor the issue 
of the $400,000,000 Northern Securities stock 
supplied one dollar of funds for improvements of, 
or additions to, any of the four great railroad 
systems concerned in these "large transactions." 
The sole effect of issuing $615,000,000 of securities 
was to transfer stock from one set of persons to 
another. And the resulting ''harmonious co- 
operation" was soon interrupted by the govern- 
ment proceedings, which ended with the dissolu- 
tion of the Northern Securities Company. But 
the evil done outlived the combination. The 
Burlington had passed forever from its inde- 
pendent Boston owners to the Morgan allies, 
who remain in control. 


The Burlington — one of Boston's finest achieve- 
ments — was the creation of John M. Forbes. 
He was a builder; not a combiner, or banker, or 
wizard of finance. He was a simple, hard- 
working business man. He had been a merchant 
in China at a time when China's trade was among 
America's big business. He had been connected 
with shipping and with manufactures. He had 
the imagination of the great merchant; the 
patience and perseverance of the great manu- 
facturer; the courage of the sea-farer; and the 
broad view of the statesman. Bold, but never 
reckless; scrupulously careful of other people's 
money, he was ready, after due weighing of 
chances, to risk his own in enterprises promising 
success. He was in the best sense of the term, a 
great adventurer. Thus equipped, Mr. Forbes 
entered, in 1852, upon those railroad enterprises 
which later developed into the Chicago, Burling- 
ton & Quincy. Largely with his own money 
and that of friends who confided in him, he 
built these railroads and carried them through the 
panic of '57, when the "great banking houses" 
of those days lacked courage to assume the 
burdens of a struggling ill-constructed line, 
staggering under financial difficulties. 


Under his wise management, and that of the 
men whom he trained, the little Bui-lington 
became a great system. It was "built on honor," 
and managed honorably. It weathered every 
other great financial crisis, as it did that of 1857. 
It reached maturity without a reorganization or 
the sacrifice of a single stockholder or bondholder. 

Investment bankers had no place on the 
Burhngton Board of Directors; nor had the 
banker-practice, of being on both sides of a 
bargain. ''I am unwilling," said Mr. Forbes, 
early in his career, "to run the risk of having 
the imputation of buying from a company in 
which I am interested." About twenty years 
later he made his greatest fight to rescue the 
Burlington from the control of certain contractor- 
directors, whom his biographer, Mr. Pearson, 
describes as "persons of integrity, who had 
conceived that in their twofold capacity as 
contractors and directors they were fully able to 
deal with themselves justly." Mr. Forbes 
thought otherwise. The stockholders, whom he 
had aroused, sided with him and he won. 

Mr. Forbes was the pioneer among Boston 
railroad-builders. His example and his success 
inspired many others, for Boston was not lacking 


then in men who were builders, though some 
lacked his wisdom, and some his character. Her 
enterprise and capital constructed, in large part, 
the Union Pacific, the Atchison, the Mexican 
Central, the Wisconsin Central, and 24 other 
railroads in the West and South. One by one 
these western and southern railroads passed out 
of Boston control; the greater part of them into 
the control of the JNIorgan allies. Before the 
Burlington was surrendered, Boston had begun 
to lose her dominion, even, over the railroads of 
New England. In 1900 the Boston & Albany 
was leased to the New York Central, — a Morgan 
property; and a few years later, another Morgan 
railroad — the New Haven — acquired control of 
nearly every other transportation line in New 
England. Now nothing is left of Boston's 
railroad dominion in the West and South, 
except the Eastern Kentucky Railroad — a line 
36 miles long; and her control of the railroads of 
Massachusetts is limited to the Grafton & Upton 
with 19 miles of line and the Boston, Revere 
Beach & Lynn, — a passenger road 13 miles long. 


The rise of the New Haven Monopoly presents 
another striking example of combination as a 


developer of financial concentration; and it 
illustrates also the use to which ''large security 
issues" are put. 

In 1892, when Mr. Morgan entered the New 
Haven directorate, it was a very prosperous 
little railroad with capital liabilities of $25,000,000 
paying 10 per cent, dividends, and operating 
508 miles of line. By 1899 the capitalization 
had grown to $80,477,600, but the aggregate 
mileage had also grown (mainly through merger 
or leases of other lines) to 2017. Fourteen years 
later, in 1913, when Mr. Morgan died and Mr. 
Mellen resigned, the mileage was 1997, just 
20 miles less than in 1899; but the capital lia- 
bilities had increased to $425,935,000. Of course 
the business of the railroad had grown largely 
in those fourteen years; the road-bed was im- 
proved, bridges built, additional tracks added, 
and much equipment purchased; and for all this, 
new capital was needed; and additional issues 
were needed, also, because the company paid 
out in dividends more than it earned. But 
of the capital increase, over $200,000,000 was 
expended in the acquisition of the stock or other 
securities of some 121 other railroads, steam- 
ships, street railway-, electric-light-, gas- and 
water-companies. It was these outside proper- 


ties, which made necessary the much discussed 
$67,000,000, 6 per cent, bond issue, as well as 
other large and expensive security issues. For 
in these fourteen years the improvements on 
the railroad including new equipment have cost, 
on the average, only $10,000,000 a year. 


Few, if any, of those 121 companies which the 
New Haven acquired had, prior to their absorp- 
tion by it, been financed by J. P. Morgan & 
Co. The needs of the Boston & Maine and 
Maine Central — the largest group — had, for 
generations, been met mainly through their 
own stockholders or through Boston banking 
houses. No investment banker had been a 
member of the Board of Directors of either of 
those companies. The New York, Ontario & 
Western — the next largest of the acquired rail- 
roads — had been financed in New York, but by 
persons apparently entirely independent of the 
Morgan allies. The smaller Connecticut rail- 
roads, now combined in the Central New Eng- 
land, had been financed mainly in Connecticut, 
or by independent New York bankers. The 
financing of the street railway companies had 
been done largely l)y individual financiers, or 


by small and independent bankers in the states 
or cities where the companies operate. Some of 
the steamship companies had been financed by 
their owners, some through independent bankers. 
As the result of the absorption of these 121 com- 
panies into the New Haven system, the financing 
of all these railroads, steamship companies, 
street railways, and other corporations, was 
made tributary to J. P. Morgan & Co.; and the 
independent bankers were eliminated or became 
satellites. And this financial concentration was 
proceeded with, although practically every one 
of these 121 companies was acquired by the New 
Haven in violation either of the state or federal 
law, or of both. Enforcement of the Sherman 
Act will doubtless result in dissolving this 
unwieldy illegal combination. 


Proof of the ''cooperation" of the anthracite 
railroads is furnished by the ubiquitous presence 
of George F. Baker on the Board of Directors 
of the Reading, the Jersey Central, the Lacka- 
wanna, the Lehigh, the Erie, and the New York, 
Susquehanna & Western railroads, which to- 
gether control nearly all the unmined anthracite 
as well as the actual tonnage. These roads have 


been an important factor in the development of 
the Money Trust. They are charged by the De- 
partment of Justice with fundamental violations 
both of the Sherman Law and of the Commodity 
clause of the Hepburn Act, which prohibits a 
railroad from carrying, in interstate trade, any 
commodity in which it has an interest, direct or 
indirect. Nearly every large issue of securities 
made in the last 14 years by any of these rail- 
roads (except the Erie), has been in connection 
with some act of combination. The combina- 
tion of the anthracite railroads to suppress the 
construction, through the Temple Iron Company, 
of a competing coal road, has already been de- 
clared illegal by the Supreme Court of the United 
States. And in the bituminous coal field — the 
Kanawha District — the United States Circuit 
Court of Appeals has recently decreed that a 
similar combination by the Lake Shore, the 
Chesapeake & Ohio, and the Hocking Valley, 
be dissolved. 


The cases of the Union Pacific and of the New 
Haven are typical — not excoi)tional. Our rail- 
road history presents numerous instances of large 
security issues made wholly or mainly to effect 


combinations. Some of these combinations have 
been proper as a means of securing natural 
feeders or extensions of main lines. But far more 
of them have been dictated by the desire to 
suppress active or potential competition; or by- 
personal ambition or greed; or by the mistaken 
belief that efficiency grows with size. 

Thus the monstrous combination of the Rock 
Island and the St. Louis and San Francisco with 
over 14,000 miles of line is recognized now to 
have been obviously inefficient. It was severed 
voluntarily; but, had it not been, must have 
crumbled soon from inherent defects, if not as a 
result of proceedings under the Sherman law. 
Both systems are suffering now from the effects 
of this unwise combination; the Frisco, itself 
greatly overcombined, has paid the penalty in 
receivership. The Rock Island — a name once 
expressive of railroad efficiency and stability — • 
has, through its excessive recapitalizations and 
combinations, become a football of speculators, 
and a source of great apprehension to confiding 
investors. The combination of the Cincinnati, 
Hamilton and Dayton, and the Pdre Marquette 
led to several receiverships. 

There are, of course, other combinations 
which have not been disastrous to the owners of 


the railroads. But the fact that a railroad 
combination has not been disastrous does not 
necessarily justify it. The evil of the concentra- 
tion of power is obvious; and as combination 
necessarily involves such concentration of power, 
the burden of justifying a combination should 
be placed upon those who seek to effect it. 

For instance, what public good has been 
subserved by allowing the Atlantic Coast Line 
Railroad Company to issue S50,000,000 of securi- 
ties to acquire control of the Louisville & Nash- 
ville Railroad — a widely extended, self-sufficient 
system of 5000 miles, which, under the wise 
management of President ^Milton H. Smith had 
prospered continuously for many years before the 
acquisition; and which has gross earnings nearly 
twice as large as those of the Atlantic Coast Line. 
The legality of this combination has been 
recently challenged by Senator Lea; and an 
investigation by the Interstate Commerce Com- 
mission has been ordered. 


The reports from the Pennsylvania suggest the 
inquiry whether even this generally well-managed 
railroad is not suffering from excessive bigness. 
After 1898 it, too, bought, in large amounts, 


stocks in other railroads, including the Chesa- 
peake & Ohio, the Baltimore & Ohio, and the 
Norfolk & Western. In 1906 it sold all its 
Chesapeake & Ohio stock, and a majority of its 
Baltimore & Ohio and Norfolk & Western 
holdings. Later it reversed its policy and re- 
sumed stock purchases, acquiring, among others, 
more Norfolk & Western and New York, New 
Haven & Hartford; and on Dec. 31, 1912, held 
securities valued at $331,909,154.32; of which, 
however, a large part represents Pennsylvania 
System securities. These securities (mostly 
stocks) constitute about one-third of the total 
assets of the Pennsylvania Railroad. The in- 
come on these securities in 1912 averaged only 
4.30 per cent, on their valuation, while the Penn- 
sylvania paid 6 per cent, on its stock. But the 
cost of carrying these foreign stocks is not limited 
to the difference between this income and outgo. 
To raise money on these stocks the Pennsylvania 
had to issue its own securities; and there is such 
a thing as an over-supply even of Pennsylvania 
securities. Over-supply of any stock depresses 
market values, and increases the cost to the Pen- 
nsylvania of raising new money. Recently came 
the welcome announcement of the management 
that it will dispose of its stocks in the anthracite 


coal mines; and it is intimated that it will divest 
itself also of other holdings in companies (like 
the Cambria Steel Company) extraneous to the 
business of railroading. This policy should be 
extended to include the disposition also of all 
stock in other railroads (like the Norfolk & West- 
ern, the Southern Pacific and the New Haven) 
which are not a part of the Pennsylvania System. 


Six years ago the Interstate Commerce Com- 
mission, after investigating the Union Pacific 
transaction above referred to, recommended 
legislation to remedy the evils there disclosed. 
Upon concluding recently its investigation of the 
New Haven, the Commission repeated and 
amplified those recommendations, saying: 

"No student of the railroad problem can 
doubt that a most prolific source of financial 
disaster and complication to railroads in the past 
has been the desire and ability of railroad man- 
agers to engage in enterprises outside the legiti- 
mate operation of their railroads, especially by 
the acquisition of other railroads and their 
securities. The evil which results, first, to the 
investing public, and, finally, to the general 
public, cannot be corrected after the transaction 


has taken place; it can be easily and effectively 
prohibited. In our opinion the following propo- 
sitions lie at the foundation of all adequate regu- 
lation of interstate railroads: 

1. Every interstate railroad should be pro- 
hibited from spending money or incurring liability 
or acquiring property not in the operation of its 
railroad or in the legitimate improvement, ex- 
tension, or development of that railroad. 

2. No interstate railroad should be permitted to 
lease or purchase any other railroad, nor to acquire 
the stocks or securities of any other railroad, 
nor to guarantee the same, directl or indirectly, 
without the approval of the federal government. 

3. No stocks or bonds should be issued by an 
interstate railroad except for the purposes sanc- 
tioned in the two preceding paragraphs, and 
none should be issued without the approval of the 
federal government. 

It may be unwise to attempt to specify the 
price at which and the manner in which railroad 
stocks and securities shall be disposed of; but it is 
easy and safe to define the purpose for which they 
may be issued and to confine the expenditure of 
the money realized to that purpose." 

These recommendations are in substantial 
accord with those adopted by the National 


Association of Railway Commissioners. They 
should be enacted into law. And they should be 
supplemented by amendments of the Commodity 
Clause of the Hepburn Act, so that: 

1. Railroads will be effectually prohibited from 
owning stock in corporations whose products 
they transport; 

2. Such corporations will be prohibited from 
owning important stockholdings in railroads; and 

3. Holding companies will be prohibited from 
controlling, as does the Reading, both a rail- 
road and corporations whose commodities it 

If laws such as these are enacted and duly 
enforced, we shall be protected from a recurrence 
of tragedies like the New Haven, of domestic 
scandals like the Chicago and Alton, and of 
international ones like the Frisco. We shall also 
escape from that inefficiency which is attendant 
upon excessive size. But what is far more im- 
portant, we shall, by such legislation, remove a 
potent factor in financial concentration. De- 
centralization will begin. The liberated smaller 
units will find no difficulty in financing their 
needs without bowing the knee to money lords. 
And a long step will have been taken toward 
attainment of the New Freedom. 


There is not one moral, but many, to be drawn 
from the Decline of the New Haven and the Fall 
of Mellen. That history offers texts for many 
sermons. It illustrates the Evils of Monopoly, 
the Curse of Bigness, the Futility of Lying, and 
the Pitfalls of Law-Breaking. But perhaps the 
most impressive lesson that it should teach to 
investors is the failure of banker-management. 


For years J. P. Morgan & Co. were the fis- 
cal agents of the New Haven. For years Mr. 
Morgan was the director of the Company. He 
gave to that property probably closer personal 
attention than to any other of his many interests. 
Stockholders' meetings are rarely interesting or 
important; and few indeed must have been the 
occasions when Mr. Morgan attended any stock- 
holders' meeting of other companies in which he 
was a director. But it was his habit, when in 



America, to be present at meetings of the New 
Haven. In 1907, when the policy of monopolistic 
expansion was first challenged, and again at the 
meeting in 1909 (after Massachusetts had un- 
wisely accorded its sanction to the Boston & 
Maine merger), Mr. IMorgan himself moved 
the large increases of stock which were unani- 
mously voted. Of course, he attended the 
important directors' meetings. His will was 
law. President Mellen indicated this in his 
statement before Interstate Commerce Com- 
missioner Prouty, while discussing the New 
York, Westchester & Boston — the railroad with- 
out a terminal in New York, which cost the 
New Haven $1,500,000 a mile to acquire, and 
was then costing it, in operating deficits and 
interest charges, $100,000 a month to run: 

"I am in a very embarrassing position, Mr. 
Commissioner, regarding the New York, West- 
chester & Boston. I have never been enthusias- 
tic or at all optimistic of its being a good invest- 
ment for our company in the present, or in the 
immediate future; but people in whom I had 
greater confidence than 1 have in myself thought 
it was wise and desirable; I yielded my judgment; 
indeed, I don't know that it would have made 
much difTerence whether I yielded or not." 


THE bankers' responsibility 

Bankers are credited with being a conservative 
force in the community. The tradition hngers 
that they are preeminently "safe and sane." And 
yet, the most grievous fault of this banker- 
managed railroad has been its financial reckless- 
ness — a fault that has already brought heavy 
losses to many thousands of small investors 
throughout New England for whom bankers are 
supposed to be natural guardians. In a com- 
munity where its railroad stocks have for gen- 
erations been deemed absolutely safe invest- 
ments, the passing of the New Haven and of the 
Boston & Maine dividends after an unbroken 
dividend record of generations comes as a 

This disaster is due mainly to enterprises out- 
side the legitimate operation of these railroads; 
for no railroad company has equaled the New 
Haven in the quantity and extravagance of its 
outside enterprises. But it must be remembered, 
that neither the president of the New Haven nor 
any other railroad manager could engage in such 
transactions without the sanction of the Board 
of Directors. It is the directors, not Mr. Mellen, 
who should bear the responsibility. 


Close scrutiny of the transactions discloses no 
justification. On the contrary, scrutiny serves 
only to make more clear the gravity of the errors 
committed. Not merely were recklessly ex- 
travagant acquisitions made in mad pursuit of 
monopoly; but the financial judgment, the finan- 
ciering itself, was conspicuously bad. To pay 
for property several times what it is worth, to 
engage in grossly unwise enterprises, are errors 
of which no conservative directors should be 
found guilty; for perhaps the most important 
function of directors is to test the conclusions 
and curb by calm counsel the excessive zeal of 
too ambitious managers. But while we have no 
right to expect from bankers exceptionally good 
judgment in ordinary business matters; we do 
have a right to expect from them prudence, 
reasonably good financiering, and insistence upon 
straightforward accounting. And it is just the 
lack of these qualities in the New Haven man- 
agement to which the severe criticism of the 
Interstate Commerce Commission is particularly 

Conmissioner Prouty calls attention to the 
vast increase of capitalization. During the nine 
years beginning July 1, 1903, the capital of the 
New York, New Haven & Hartford Railroad 


Company itself increased from $93,000,000 to 
about $417,000,000 (excluding premiums). That 
fact alone would not convict the management 
of reckless financiering; but the fact that so 
little of the new capital was represented by stock 
might well raise a question as to its conservative- 
ness. For the indebtedness (including guaran- 
ties) was increased over twenty times (from 
about $14,000,000 to $300,000,000), while the 
stock outstanding in the hands of the public 
was not doubled ($80,000,000 to $158,000,000). 
Still, in these days of large things, even such 
growth of corporate liabilities might be con- 
sistent with "safe and sane management." 

But what can be said in defense of the finan- 
cial judgment of the banker-management under 
which these two railroads find themselves con- 
fronted, in the fateful year 1913, with a most 
disquieting floating indebtedness? On March 
31, the New Haven had outstanding $43,000,000 
in short-time notes; the Boston & Maine had 
then outstanding $24,500,000, which have been 
increased since to $27,000,000; and additional 
notes have been issued by several of its sub- 
sidiary lines. Mainly to meet its share of these 
loans, the New Haven, which before its great 
expansion could sell at par 3 1/2 per cent, bonds 


convertible into stock at S150 a share, was so 
eager to issue at par $67,500,000 of its 6 per 
cent. 20-3'ear bonds convertible into stock as to 
agree to pay J. P. ]M organ & Co. a 2 1/2 per 
cent. underwTiting commission. True, money 
was ''tight" then. But is it not very bad 
financiering to be so unprepared for the "tight" 
money market which had been long expected? 
Indeed, the New Haven's management, particu- 
larly, ought to have avoided such an error; for 
it committed a similar one in the "tight" money 
market of 1907-1908, when it had to sell at par 
§39,000,000 of its 6 per cent. 40-year bonds. 

These huge short-time borrowings of the Sys- 
tem were not due to unexpected emergencies or 
to their monetary conditions. They were of 
gradual growth. On June 30, 1910, the two 
companies owed in short-term notes only $10,- 
180,364; by June 30, 1911, the amount had grown 
to $30,759,959; by June 30, 1912, to $45,395,000; 
and in 1913 to over $70,000,000. Of course the 
rate of interest on the loans increased also 
very largely. And these loans were incurred 
unnecessarily. They represent, in the main, 
not improvements on the New Haven or on the 
Boston & Maine Railroads, but money borrowed 
either to pay for stocks in other companies which 


these companies could not afford to buy, or to 
pay dividends which had not been earned. 

In five years out of the last six the New Haven 
Railroad has, on its own showing, paid dividends 
in excess of the year's earnings; and the annual 
deficits disclosed would have been much larger 
if proper charges for depreciation of equipment 
and of steamships had been made. In each of the 
last three years, during which the New Haven 
had absolute control of the Boston & Maine, 
the latter paid out in dividends so much in 
excess of earnings that before April, 1913, the 
surplus accumulated in earlier years had been 
converted into a deficit. 

Surely these facts show, at least, an extra- 
ordinary lack of financial prudence. 


Now, how can the failure of the banker- 
management of the New Haven be explained? 

A few have questioned the ability; a few the 
integrity of the bankers. Commissioner Prouty 
attributed the mistakes made to the Company's 
pursuit of a transportation monopoly. 

''The reason," says he, "is as apparent as the 
fact itself. The present management of that 
Company started out with the purpose of con- 


trolling the transportation facilities of New 
England. In the accomplishment of that pur- 
pose it bought what must be had and paid what 
must be paid. To this purpose and its attempted 
execution can be traced every one of these finan- 
cial misfortunes and derelictions." 

But it still remains to find the cause of the 
bad judgment exercised by the eminent banker- 
management in entering upon and in carrying 
out the policy of monopoly. For there were as 
grave errors in the execution of the policy of 
monopoly as in its adoption. Indeed, it was the 
aggregation of important errors of detail which 
compelled first the reduction, then the passing 
of dividends and which ultimately impaired the 
Company's credit. 

The failure of the banker-management of the 
New Haven cannot be explained as the shortr 
comings of individuals. The failure was not 
accidental. It was not exceptional. It was 
the natural result of confusing the functions of 
banker and business man. 


The banker should be detached from the busi- 
ness for which he performs the banking service. 
This detachment is desirable, in the first place, 


in order to avoid conflict of interest. The re- 
lation of banker-directors to corporations which 
they finance has been a subject of just criti- 
cism. Their conflicting interests necessarily pre- 
vent single-minded devotion to the corporation. 
When a banker-director of a railroad decides as 
railroad man that it shall issue securities, and 
then sells them to himself as banker, fixing the 
price at which they are to be taken, there is 
necessarily grave danger that the interests of 
the railroad may suffer — suffer both through is- 
suing of securities which ought not to be issued, 
and from selling them at a price less favorable 
to the company than should have been obtained. 
For it is ordinarily impossible for a banker- 
director to judge impartially between the cor- 
poration and himself. Even if he succeeded in 
being impartial, the relation would not conduce 
to the best interests of the company. The 
best bargains are made when buyer and seller 
are represented by different persons. 


But the objection to banker-management does 
not rest wholly, or perhaps mainly, upon the 
importance of avoiding divided loyalty. A com- 
plete detachment of the banker from the corpo- 


ration is necessary in order to secure for the 
railroad the benefit of the clearest financial 
judgment; for the banker's judgment will be 
necessarily clouded by participation in the 
management or by ultimate responsibility for 
the policy actually pursued. It is outside finan- 
cial advice which the railroad needs. 

Long ago it was recognized that "a man who 
is his own lawyer has a fool for a client." The 
essential reason for this is that soundness of 
judgment is easily obscured by self-interest. 
Similarly, it is not the proper function of the 
banker to construct, purchase, or operate rail- 
roads, or to engage in industrial enterprises. 
The proper function of the banker is to give to 
or to withhold credit from other concerns; to 
purchase or to refuse to purchase securities from 
other concerns; and to sell securities to other 
customers. The proper exercise of this function 
demands that the banker should be wholly de- 
tached from the concern whose credit or securi- 
ties are under consideration. His decision to 
grant or to withhold credit, to purchase or not 
to purchase securities, involves passing judg- 
ment on the efficiency of the management or the 
soundness of the enterprise; and he ought not 
to occupy a position where in so doing he is 


passing judgment on himself. Of course de- 
tachment does not imply lack of knowledge. 
The banker should act only with full knowledge, 
just as a lawyer should act only with full knowl- 
edge. The banker who undertakes to make 
loans to or purchase securities from a railroad 
for sale to his other customers ought to have aa 
full knowledge of its affairs as does its legal 
adviser. But the banker should not be, in any 
sense, his own client. He should not, in the ca- 
pacity of banker, pass judgment upon the wisdom 
of his own plans or acts as railroad man. 

Such a detached attitude on the part of the 
banker is demanded also in the interest of his 
other customers — the purchasers of corporate 
securities. The investment banker stands to- 
ward a large part of his customers in a posi- 
tion of trust, which should be fully recognized. 
The small investors, particularly the women, who 
are holding an ever-increasing proportion of our 
corporate securities, commonly buy on the 
recommendation of their bankers. The small 
investors do not, and in most cases cannot, as- 
certain for themselves the facts on which to base 
a proper judgment as to the soundness of securi- 
ties offered. And even if these investors were 
furnished with the facts, they lack the business 


experience essential to forming a proper judg- 
ment. Such investors need and are entitled to 
have the bankers' advice, and obviously their 
unbiased advice; and the advice cannot be un- 
biased where the banker, as part of the corpora- 
tion's management, has participated in the crea- 
tion of the securities which are the subject of 
sale to the investor. 

Is it conceivable that the great house of Mor- 
gan would have aided in providing the New 
Haven with the hundreds of millions so un- 
wisely expended, if its judgment had not been 
clouded by participation in the New Haven's 


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 construc- 
tion, operation, and consolidation of great sys- 
tems 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. 


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 busi- 
ness with a widely extended good-will, must con- 
tinue for a considerable time; especially if but- 
tressed 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." 


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 occu- 
pation (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 com- 
pany'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 sus- 
ceptible to such influences are led to unwise 
decisions in the effort to prevent misinterpreta- 
tions. Thus, expenditures necessary for main- 
tenance, 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 efifect which it is believed reduction or 
suspension would have upon the market value of 
the company's securities. To excerise 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 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 judg- 
ment. The Century Dictionary tells us that a 
Director is "one who directs; one who guides, 
superintends, governs and manages." Real ef- 
ficiency 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 im- 
portant 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 con- 
cerning 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 signa- 
ture 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." 


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 prop- 
erties formerly managed through these 122 sep- 
arate companies, there must arise from time to 
time difficult questions on which the directors 


should pass judgment. The real managing di- 
rectors 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, Presi- 
dent and then Chairman of the Board of Di- 
rectors of one of America's leading banks (the 
First National of New York), and I\Ir. Rocke- 
feller 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. Mor- 
gan, 48 corporations, including 40 railroad cor- 
porations, with at least 100 subsidiary com- 
panies, and 16,000 miles of line; 3 banks and 
trust or insurance companies; 5 industrial and 
public-service companies. Mr. Baker, 48 cor- 
porations, including 15 railroad corporations, 
with at least 158 subsidiaries, and 37,400 miles 
of track; 18 banks, and trust or insurance com- 
panies; 15 public-service corporations and in- 


dustrial concerns. Mr. Rockefeller, 37 corpora- 
tions, including 23 railroad corporations with 
at least 117 subsidiary companies, and 26,400 
miles of line; 5 banks, trust or insurance com- 
panies; 9 public service companies and industrial 


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 lead- 
ers 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 com- 
pensate 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 ]\Ir. IMorgan. Mr. 
Baker and IVIr. Rockefeller. For though pos- 
sessing less native abilit}^ 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 atten- 
tion which its difficult problems demand. And 
tens of thousands more Americans could be ren- 
dered competent to guide our important busi- 
nesses. Liberty is the greatest developer. Herod- 
otus 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 cooperation — should be substituted for in- 
dustrial absolutism, there would be no lack of 
industrial leaders. 

England's big business 

England, too, has big business. But her big 
business is the Cooperative 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 Amer- 
ican 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 manufac- 
tures woolen cloths, all kinds of men's, women's 
and children's clothing, a dozen kinds of pre- 
pared 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 Aus- 
tralia. 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, Den- 


mark and Sweden. It owns steamers plying 
between Continental and English ports. It has 
an important banking depai'tment; it insm-es the 
property and person of its members. Every 
one of these departments is conducted in com- 
petition with the most efficient concerns in their 
respective lines in Great Britain. The Coopera- 
tive Wholesale Society makes its purchases, and 
manufactures its products, in order to supply 
the 1399 local distributive, cooperative 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 Cooperative Wholesale sells at market prices. 
This the Cooperative actually does; and it is 
able besides to return to the local a fair dividend 
on its purchases. 


Now, how are the directors of this great busi- 
ness 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 Cooperative 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 mem- 
bers of the local societies; — that is, by the con- 
sumers, 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 dum- 
mies, but men who have risen from the ranks of 
cooperation; 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 Cooperative 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. 


Albert Sonnichsen, General Secretary of the 
Cooperative 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 Miillcr, a Swiss delegate, 
presented a resolution by which an international 
wholesale society should be created. Luigi Luz- 
zatti, 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. Miiller proposes to the assem- 


bly a great idea — that of opposing to the great 
trusts, the Rockefellers of the world, a world- 
wide cooperative alliance which shall become so 
powerful as to crush the trusts. ' " 


America has no Wholesale Cooperative 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 cooperative movement; and John 
Graham Brooks reports that we have already 
about 350 local distributive societies. The move- 
ment toward federation is progressing. There 
are over 100 cooperative 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 
affihated. In New York City 83 organizations 
are affihated with the Cooperative League. In 
New Jersey the societies have federated into the 
American Cooperative Alliance of Northern New 
Jersey. In California, long the seat of effective 
cooperative work, a central management com- 


mittee is developing. And progressive Wisconsin 
has recently legislated wisely to develop coopera- 
tion throughout the state. 

Among our farmers the interest in cooperation 
is especially keen. The federal government has 
just established a separate bui-eau of the Depart- 
ment of Agriculture to aid in the study, devel- 
opment and introduction of the best methods 
of cooperation in the working of farms, in buj'ing, 
and in distribution; and special attention is now 
being given to farm credits — a field of coopera- 
tion 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 cooperative 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' resom'ccs are of the people. 
These aggregate about $500,000,000. Of this 
amount S375, 000,000 represents the farmers' 
savings deposits; $50,000,000, the farmers' cur- 


rent deposits; $0,000,000, 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 ex- 
penses 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 cooperative banks: 


"Propagating themselves by their own merits, 
little people's cooperative banks have overspread 
German}', Italy, Austria, Hungary, Switzerland, 
Belgium. Russia is following up those countries; 
France is striving strenuously for the possession 
of cooperative 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 stai't. 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 
cooperative banks, even by the side of Lord 
Cromer's pet creation, the richly endowed 'agri- 
cultural bank.' India has made a begin- 
ning full of promise. And even in far Japan, 
and in China, people ai'e trying to acclimatize 
the more perfected organizations of Schulze- 
Delitzsch and Rafi'eisen. The entire world 
seems girdled with a ring of cooperative 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 deposi- 
tories 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 stock- 
ing" hoarding, which diverts the money of the 
country from the channels of trade. American 
savings banks are also, in a sense, banks oj the 
people; for it is the people's money which is 
administered by them. The $4,500,000,000 de- 
posits 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 hy the people, nor, in the full 
sense, jor the people. 

First: American savings banks are not man- 
aged by the people. The stock-savings banks, 
most prevalent in the Middle West and the 
South, are purely commercial enterprises, man- 
aged, of course, by the stockholders' representa- 
tives. 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 /or the people, 
practically a self-constituted and self-perpetuat- 
ing 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 

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 ulti- 
mately 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 ad- 
vance 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 Institu- 
tion 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-sevefith of the re- 
sources ($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. 



Alphonse Desjardins of Levis, Province of 
Quebec, has demonstrated that cooperative credit 
associations are appHcable, also, to at least 
some m-ban 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 pro- 
ductively. 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 peo- 
ple 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 SSO,000 in resources. It had made 2900 
loans to its members, aggregating $350,000; the 
loans averaging SI 20 in amount, and the interest 
rate 6 1/2 per cent. In all this time the bank 
had not met with a single loas. Then Desjardins 


concluded that democratic banking was appli- 
cable 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. Des- 
jardins 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 ordi- 
nary mechanic. And it is noteworthy that this 
rapidly extending system of cooperative 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 

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 cooperative 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 de- 
mocracy. There is reason to believe that these 
people's banks will spread rapidlj^ in the United 
States and that they will succeed. For the 
cooperative building and loan associations, man- 
aged by wage-earners and salarj^-earners, who 
joined together for systematic saving and owner- 
ship 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 nearl}^ $75,000,000. 

Thus farmers, workingmen, and clerks are 
learning to use their little capital and their sav- 
ings to help one another instead of turning over 
their money to the great bankers for safe keep- 
ing, and to be themselves exploited. And may 
we not expect that when the cooperative move- 
ment develops in America, merchants and manu- 
facturers will learn from farmers and working- 
men how to help themselves by helping one 
another, and thus join in attaining the New Free- 
dom for all? When merchants and manufacturers 
learn this lesson, money kings will lose subjcM'ts, 
and swollen fortunes may siu'ink; 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." 




University of California 


305 De Neve Drive - Parking Lot 17 . Box 951388 


Return this material to the library from which it was borrowed. 




3 1970 00068 5229 


AA 001 258 678 o