Other People's Money, And How The Bankers Use It - free ebook by Louis Dembitz Brandeis

Read as playlist

Other People's Money, And How The Bankers Use It

Louis Dembitz Brandeis

92 chapters

4 hour read

Read as playlist

Selected Chapters

92 chapters

OTHER PEOPLE’S MONEY AND HOW THE BANKERS USE IT

OTHER PEOPLE’S MONEY AND HOW THE BANKERS USE IT

OTHER PEOPLE’S MONEY AND HOW THE BANKERS USE IT BY LOUIS D. BRANDEIS NEW YORK FREDERICK A. STOKES COMPANY PUBLISHERS Copyright, 1913, 1914, by The McClure Publications Copyright, 1914, by Frederick A. Stokes Company All rights reserved FASCo March, 1914...

18 minute read

Read Chapter

PREFACE

PREFACE

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 without such urgence through the mail, however, it would have been clear that these articles inevitably 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 re

9 minute read

Read Chapter

OTHER PEOPLE’S MONEY AND HOW THE BANKERS USE IT

OTHER PEOPLE’S MONEY AND HOW THE BANKERS USE IT

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 nec

2 minute read

Read Chapter

THE DOMINANT ELEMENT

THE DOMINANT ELEMENT

The dominant element in our financial oligarchy is the investment banker. Associated banks, trust companies and life insurance companies are his tools. Controlled railroads, public service and industrial corporations are his subjects. 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 participation or approval. These bankers are, of course, able men possessed of large fort

2 minute read

Read Chapter

THE PROPER SPHERE OF THE INVESTMENT BANKER

THE PROPER SPHERE OF THE INVESTMENT BANKER

The original function of the investment banker was that of dealer in bonds, stocks and notes; buying mainly at wholesale from corporations, municipalities, states and governments which need money, and selling to those seeking investments. 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 permanent capital of corporations is represented by bonds and stocks. The bonds and

2 minute read

Read Chapter

CONTROLLING THE SECURITY MAKERS

CONTROLLING THE SECURITY MAKERS

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 &amp; 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 secu

2 minute read

Read Chapter

CONTROLLING SECURITY BUYERS

CONTROLLING SECURITY BUYERS

Such control of railroads, public service and industrial corporations assures to the investment bankers an ample supply of securities at attractive 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. Th

4 minute read

Read Chapter

CONTROLLING OTHER PEOPLE’S QUICK CAPITAL

CONTROLLING OTHER PEOPLE’S QUICK CAPITAL

The goose that lays golden eggs has been considered 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 bankers’ 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.

3 minute read

Read Chapter

HAVING YOUR CAKE AND EATING IT TOO

HAVING YOUR CAKE AND EATING IT TOO

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 &amp; 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 purchase price; and still do not part with their money. This is accomplished by the simple device of becoming the bank of deposit of the co

55 minute read

Read Chapter

POWER AND PELF

POWER AND PELF

The operations of so comprehensive a system of concentration necessarily developed in the bankers overweening power. And the bankers’ power grows by what it feeds on. Power begets wealth; and added wealth opens ever new opportunities for the acquisition of wealth and power. The operations of these bankers are so vast and numerous that even a very reasonable compensation for the service performed by the bankers, would, in the aggregate, produce for them incomes so large as to result in huge accum

2 minute read

Read Chapter

WHY THE BANKS BECAME INVESTMENT BANKERS

WHY THE BANKS BECAME INVESTMENT BANKERS

These large profits from promotions, underwritings and security purchases led to a revolutionary change in the conduct of our leading banking institutions. It was obvious that control 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

2 minute read

Read Chapter

RAMIFICATIONS OF POWER

RAMIFICATIONS OF POWER

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 ramifications 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

2 minute read

Read Chapter

TWENTY-TWO BILLION DOLLARS

TWENTY-TWO BILLION DOLLARS

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 billions of dollars is more than three times the assessed 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 assessed value of all the property i

2 minute read

Read Chapter

CEMENTING THE TRIPLE ALLIANCE

CEMENTING THE TRIPLE ALLIANCE

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 $6,000,000 investment in the stock of the National City Bank. Then J. P. Morgan &amp; Co., the National City, and

52 minute read

Read Chapter

THE PROVINCIAL ALLIES

THE PROVINCIAL ALLIES

Thus equipped and bound together, J. P. Morgan &amp; 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 &amp; Co. is J. P. Morgan &amp; Co. under another name. But there are two other important money centers in America, Boston and Chicago. In Boston ther

2 minute read

Read Chapter

THE AUXILIARIES

THE AUXILIARIES

Such are the primary, such the secondary powers which comprise the Money 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 &amp; Co., White, Weld &amp; Co., and Harvey Fisk &amp; Sons, who receive large and lucrative patronage from the dominating groups, and are used by the latter as jobbers or distributors of s

1 minute read

Read Chapter

THE SATELLITES

THE SATELLITES

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 guaranteeing the sale of securities offered to the public, and who also act as distributors of such securities. It was impossible to learn the identity of these corporations, owing to the unwillingness of the members of the inner group to disclose the names of their underwriters, but sufficient

2 minute read

Read Chapter

THE PROTECTION OF PSEUDO-ETHICS

THE PROTECTION OF PSEUDO-ETHICS

The organization of the Money Trust is intensive, 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 political, 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 striving for freedom be made to seem immoral. Long ago monarchs invented, as

1 minute read

Read Chapter

THE EVILS RESULTANT

THE EVILS RESULTANT

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 Committee, “which of course enters universally into the price of commodities and of service, is thus in effect determined by agreement amongst those supplying

4 minute read

Read Chapter

THE ENDLESS CHAIN

THE ENDLESS CHAIN

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 &amp; Hartford Railroad, causes that company to sell to J. P. Morgan &amp; Co. an issue of bonds. J. P. Morgan &amp; 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 &amp; Co. sell the

4 minute read

Read Chapter

NULLIFYING THE LAW

NULLIFYING THE LAW

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 commerce. 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 corporation was represented by independent directors and that the vote of the interested director was unnecessary to carry the

3 minute read

Read Chapter

THE ESSENTIALS OF PROTECTION

THE ESSENTIALS OF PROTECTION

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

1 minute read

Read Chapter

BANKS AS PUBLIC-SERVICE CORPORATIONS

BANKS AS PUBLIC-SERVICE 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 system. 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 regulates it in many ways. The functi

2 minute read

Read Chapter

OFFICIAL PRECEDENTS

OFFICIAL PRECEDENTS

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 directors. 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 int

59 minute read

Read Chapter

SCOPE OF THE PROHIBITION

SCOPE OF THE PROHIBITION

In the proposals for legislation on this subject, four important questions are presented: 1. Shall the principle of prohibiting interlocking directorates in potentially competing corporations be applied to state banking institutions, as well as the national banks? 2. Shall it be applied to all kinds of corporations or only to banking institutions? 3. Shall the principle of prohibiting corporations from entering into transactions in which the management has a private interest be applied to both d

3 minute read

Read Chapter

THE PROHIBITION OF COMMON DIRECTORS IN POTENTIALLY COMPETING CORPORATIONS

THE PROHIBITION OF COMMON DIRECTORS IN POTENTIALLY COMPETING CORPORATIONS

1. National Banks. The objection to common directors, as applied to banking institutions, is clearly shown by the Pujo Committee. “As the first and foremost step in applying a remedy, and also for reasons that seem to us conclusive, independently of that consideration, we recommend that interlocking directorates in potentially competing financial institutions be abolished and prohibited so far as lies in the power of Congress to bring about that result.... When we find, as in a number of instanc

5 minute read

Read Chapter

PROHIBITING CORPORATE CONTRACTS IN WHICH THE MANAGEMENT HAS A PRIVATE INTEREST

PROHIBITING CORPORATE CONTRACTS IN WHICH THE MANAGEMENT HAS A PRIVATE INTEREST

The principle of prohibiting corporate contracts in which the management has a private interest is applied, in the Pujo Committee’s recommendations, only to national banks, and in them only to officers. All other corporations are to be permitted to continue the practice; and even in national banks the directors are to be free to have a conflicting private interest, except that they must not accept compensation for promoting a loan of bank funds nor participate in syndicates, promotions or underw

2 minute read

Read Chapter

APPLY THE PRIVATE INTEREST PROHIBITION TO ALL KINDS OF CORPORATIONS

APPLY THE PRIVATE INTEREST PROHIBITION TO ALL KINDS OF CORPORATIONS

The creation of the Money Trust is due quite as much to the encroachment of the investment banker upon railroads, public service, industrial, and life-insurance companies, as to his control of banks and trust companies. Before the Money Trust can be broken, all these relations must be severed. And they cannot be severed unless corporations of each of these several classes are prevented from dealing with their own directors and with corporations in which those directors are interested. For instan

47 minute read

Read Chapter

APPLY THE PRIVATE INTEREST PROHIBITION TO STOCKHOLDING INTERESTS

APPLY THE PRIVATE INTEREST PROHIBITION TO STOCKHOLDING INTERESTS

The prohibition against one corporation entering into transactions with another corporation in which one of its directors is also interested, should apply even if his interest in the second corporation is merely that of stockholder. A conflict of interests in a director may be just as serious where he is a stockholder only in the second corporation, as if he were also a director. One of the annoying petty monopolies, concerning which evidence was taken by the Pujo Committee, is the exclusive pri

2 minute read

Read Chapter

SPECIAL DISQUALIFICATIONS

SPECIAL DISQUALIFICATIONS

The Stanley Committee, after investigation of the Steel Trust, concluded that the evils of interlocking directorates were so serious that representatives of certain industries which are largely dependent upon railroads should be absolutely prohibited from serving as railroad directors, officers or employees. It, therefore, proposed to disqualify as railroad director, officer or employee any person engaged in the business of manufacturing or selling railroad cars or locomotives, railroad rail or

56 minute read

Read Chapter

HOW THE PROHIBITION MAY BE LIMITED

HOW THE PROHIBITION MAY BE LIMITED

The Money Trust cannot be destroyed unless all classes of corporations are included in the prohibition of interlocking directors and of transactions by corporations in which the management has a private interest. But it does not follow that the prohibition must apply to every corporation of each class. Certain exceptions are entirely consistent with merely protecting the public against the Money Trust; although protection of minority stockholders and business ethics demand that the rule prohibit

1 minute read

Read Chapter

THE POWER OF CONGRESS

THE POWER OF CONGRESS

The question may be asked: Has Congress the power to impose these limitations upon the conduct of any business other than national banks? And if the power of Congress is so limited, will not the dominant financiers, upon the enactment of such a law, convert their national banks into state banks or trust companies, and thus escape from congressional control? The answer to both questions is clear. Congress has ample power to impose such prohibitions upon practically all corporations, including sta

3 minute read

Read Chapter

WEALTH

WEALTH

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 investment banker is also a factor. And with the extraordinary 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 So

1 minute read

Read Chapter

EXCESSIVE BANKERS’ COMMISSIONS

EXCESSIVE BANKERS’ COMMISSIONS

The Pujo Committee was unfortunately prevented 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. Nothing 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 investig

2 minute read

Read Chapter

HOW SHALL EXCESSIVE CHARGES BE STOPPED?

HOW SHALL EXCESSIVE CHARGES BE STOPPED?

The Pujo Committee recommends, as a remedy for such excessive charges, that interstate corporations 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 competitive bids, or under regulations to be prescribed by the Commission with ful

1 minute read

Read Chapter

THE STRIKE OF CAPITAL

THE STRIKE OF CAPITAL

A recent British experience supports this view. In a brief period last spring nine different 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 hand

1 minute read

Read Chapter

PUBLICITY AS A REMEDY

PUBLICITY AS A REMEDY

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, considering the skill and risk involved, ther

2 minute read

Read Chapter

REAL DISCLOSURE

REAL DISCLOSURE

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 manufacturer 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

1 minute read

Read Chapter

DISCLOSE SYNDICATE PARTICULARS

DISCLOSE SYNDICATE PARTICULARS

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 objectionable. It may be ent

4 minute read

Read Chapter

BANKER AND BROKER

BANKER AND BROKER

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

1 minute read

Read Chapter

HOW THE BANKER CAN SERVE

HOW THE BANKER CAN SERVE

The banker’s services include three distinct functions, and only three: First: Specifically as expert. The investment banker has the 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 judgment without aid. The purchase by the investor of most corporate securities is little bet

1 minute read

Read Chapter

WHERE THE BANKER SERVES NOT

WHERE THE BANKER SERVES NOT

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 possible investors who reside in the particular state or city whose bonds are in question. Where the financial facts are not generally known, they are so simple, that they can

4 minute read

Read Chapter

CITIES THAT HELPED THEMSELVES

CITIES THAT HELPED THEMSELVES

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. Municipalities were unwilling to pay the high rates demanded of them. And many cities were prohibited 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

3 minute read

Read Chapter

THE ST. PAUL EXPERIMENT

THE ST. PAUL EXPERIMENT

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 Johnson 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

2 minute read

Read Chapter

SALESMANSHIP AND EDUCATION

SALESMANSHIP AND EDUCATION

Such success as has already been attained is largely due to the unpaid educational work of leading progressive newspapers. But the educational 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

1 minute read

Read Chapter

SAVINGS BANKS AS CUSTOMERS

SAVINGS BANKS AS CUSTOMERS

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 market 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 no

59 minute read

Read Chapter

COÖPERATION

COÖPERATION

Bankers obtained their power through combination. Why should not cities and states by means of coöperation free themselves from the bankers? For by coöperation between the cities and the state, the direct marketing of municipal bonds could be greatly facilitated. Massachusetts has 33 cities, each with a population 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

2 minute read

Read Chapter

CORPORATE SELF-HELP

CORPORATE SELF-HELP

Strong corporations with established reputations, 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

45 minute read

Read Chapter

BANKER PROTECTORS

BANKER PROTECTORS

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,

2 minute read

Read Chapter

RAILROADS

RAILROADS

We have come to associate the great bankers with railroads. But their part was not conspicuous in the early history of the Eastern railroads; and in the Middle West the experience was, to some extent, similar. The Boston &amp; Maine Railroad owns and leases 2,215 miles of line; but it is a composite of about 166 separate railroad companies. The New Haven Railroad owns and leases 1,996 miles of line; but it is a composite of 112 separate railroad companies. The necessary capital to build thes

42 minute read

Read Chapter

STEAMSHIPS

STEAMSHIPS

The history of our steamship lines is similar. In 1807, Robert Fulton, with the financial aid of Robert R. Livingston, a judge and statesman—not a banker—demonstrated with the Claremont , that it was practicable to propel boats by steam. In 1833 the three Cunard brothers of Halifax and 232 other persons—stockholders of the Quebec and Halifax Steam Navigation Company—joined in supplying about $80,000 to build the Royal William ,—the first steamer to cross the Atlantic. In 1902, many years after i

39 minute read

Read Chapter

TELEGRAPH

TELEGRAPH

The story of the telegraph is similar. The money for developing Morse’s invention was supplied by his partner and co-worker, Alfred Vail. The initial line (from Washington to Baltimore) was built with an appropriation of $30,000 made by Congress in 1843. Sixty-six years later J. P. Morgan &amp; Co. became bankers for the Western Union through financing its purchase by the American Telephone &amp; Telegraph Company....

17 minute read

Read Chapter

HARVESTING MACHINERY

HARVESTING MACHINERY

Next to railroads and steamships, harvesting machinery has probably been the most potent factor in the development of America; and most important of the harvesting machines was Cyrus H. McCormick’s reaper. That made it possible to increase the grain harvest twenty- or thirty-fold. No investment banker had any part in introducing this great business man’s invention. McCormick was without means; but William Butler Ogden, a railroad builder, ex-Mayor and leading citizen of Chicago, supplied $25,000

54 minute read

Read Chapter

THE BANKER ERA

THE BANKER ERA

It may be urged that railroads and steamships, the telegraph and harvesting machinery were introduced before the accumulation of investment capital had developed the investment banker, and before America’s “great banking houses” had been established; and that, consequently, it would be fairer to inquire what services bankers had rendered in connection with later industrial development. The firm of J. P. Morgan &amp; Co. is fifty-five years old; Kuhn, Loeb &amp; Co. fifty-six years old; L

31 minute read

Read Chapter

STEEL

STEEL

The modern steel industry of America is forty-five years old. The “great bankers” had no part in initiating it. Andrew Carnegie, then already a man of large means, introduced the Bessemer process in 1868. In the next thirty years our steel and iron industry increased greatly. By 1898 we had far outstripped all competitors. America’s production about equalled the aggregate of England and Germany. We had also reduced costs so much that Europe talked of the “American Peril.” It was 1898, when J. P.

46 minute read

Read Chapter

THE TELEPHONE

THE TELEPHONE

The telephone industry is less than forty years old. It is probably America’s greatest contribution to industrial development. The bankers had no part in “initiating” it. The glory belongs to a simple, enthusiastic, warm-hearted, business man of Haverhill, Massachusetts, who was willing to risk his own money. H. N. Casson tells of this, most interestingly, in his “History of the Telephone”: “The only man who had money and dared to stake it on the future of the telephone was Thomas Sanders, and h

3 minute read

Read Chapter

ELECTRICAL MACHINERY

ELECTRICAL MACHINERY

The business of manufacturing electrical machinery and apparatus is only a little over thirty years old. J. P. Morgan &amp; Co. became interested early in one branch of it; but their dominance of the business today is due, not to their “initiating” it, but to their effecting a combination, and organizing the General Electric Company in 1892. There were then three large electrical companies, the Thomson-Houston, the Edison and the Westinghouse, besides some small ones. The Thomson-Houston of

1 minute read

Read Chapter

THE AUTOMOBILE

THE AUTOMOBILE

The automobile industry is about twenty years old. It is now America’s most prosperous business. When Henry B. Joy, President of the Packard Motor Car Company, was asked to what extent the bankers aided in “initiating” the automobile, he replied: “It is the observable facts of history, it is also my experience of thirty years as a business man, banker, etc., that first the seer conceives an opportunity. He has faith in his almost second sight. He believes he can do something—develop a business—c

1 minute read

Read Chapter

HOW BANKERS ARREST DEVELOPMENT

HOW BANKERS ARREST DEVELOPMENT

But “great banking houses” have not merely failed to initiate industrial development; they have definitely arrested development because to them the creation of the trusts is largely due. The recital in the Memorial addressed to the President by the Investors’ Guild in November, 1911, is significant: “It is a well-known fact that modern trade combinations tend strongly toward constancy of process and products, and by their very nature are opposed to new processes and new products originated by in

1 minute read

Read Chapter

TRUSTS AND FINANCIAL CONCENTRATION

TRUSTS AND FINANCIAL CONCENTRATION

The fact that industrial monopolies arrest development is more serious even than the direct burden imposed through extortionate prices. But the most harm-bearing incident of the trusts is their promotion of financial concentration. Industrial trusts feed the money trust. Practically every trust created has destroyed the financial independence of some communities and of many properties; for it has centered the financing of a large part of whole lines of business in New York, and this usually with

1 minute read

Read Chapter

STOCK EXCHANGE INCIDENTS

STOCK EXCHANGE INCIDENTS

The organization of trusts has served in another way to increase the power of the Money Trust. Few of the independent concerns out of which the trusts have been formed, were listed on the New York Stock Exchange; and few of them had financial offices in New York. Promoters of large corporations, whose stock is to be held by the public, and also investors, desire to have their securities listed on the New York Stock Exchange. Under the rules of the Exchange, no security can be so listed unless th

1 minute read

Read Chapter

TRUST RAMIFICATIONS

TRUST RAMIFICATIONS

But the potency of trusts as a factor in financial concentration is manifested in still other ways; notably through their ramifying operations. This is illustrated forcibly by the General Electric Company’s control of water-power companies which has now been disclosed in an able report of the United States Bureau of Corporations: “The extent of the General Electric influence is not fully revealed by its consolidated balance sheet. A very large number of corporations are connected with it through

3 minute read

Read Chapter

THE SHERMAN LAW

THE SHERMAN LAW

The Money Trust cannot be broken, if we allow its power to be constantly augmented. To break the Money Trust, we must stop that power at its source. The industrial trusts are among its most effective feeders. Those which are illegal should be dissolved. The creation of new ones should be prevented. To this end the Sherman Law should be supplemented both by providing more efficient judicial machinery, and by creating a commission with administrative functions to aid in enforcing the law. When tha

2 minute read

Read Chapter

THE HARRIMAN PACIFICS

THE HARRIMAN PACIFICS

J. P. Morgan &amp; Co., in urging the “need of large banks and the coöperation of bankers,” said: “The Attorney-General’s recent approval of the Union Pacific settlement calls for a single commitment 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 co

48 minute read

Read Chapter

UNION PACIFIC IMPROVEMENTS

UNION PACIFIC IMPROVEMENTS

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 supply funds for engaging in illegal combinations or stock speculation. The extraordinary improvements and additions that raised the Union Pacific Railroad to a high stat

1 minute read

Read Chapter

HOW THE SECURITY PROCEEDS WERE SPENT

HOW THE SECURITY PROCEEDS WERE SPENT

The $375,000,000 securities (except to the extent of about $13,000,000 required for improvements, and the amounts applied for refunding 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

2 minute read

Read Chapter

THE AFTERMATH

THE AFTERMATH

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

1 minute read

Read Chapter

A BANKERS’ PARADISE

A BANKERS’ PARADISE

Kuhn, Loeb &amp; 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 vicissitudes in stock speculations. But the investment bankers prospered amazingly; and financial concentration proceeded without abatement. The bankers and their associates received the commi

2 minute read

Read Chapter

THE BURLINGTON

THE BURLINGTON

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 the Chicago, Burlington &amp; Quincy, in 1901, to the Morgan associates, presents a striking example of this

3 minute read

Read Chapter

THE NEW HAVEN MONOPOLY

THE NEW HAVEN MONOPOLY

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

1 minute read

Read Chapter

THE NEW HAVEN BANKERS

THE NEW HAVEN BANKERS

Few, if any, of those 121 companies which the New Haven acquired had, prior to their absorption by it, been financed by J. P. Morgan &amp; Co. The needs of the Boston &amp; 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 &amp; Western—the next largest of the acquired railro

1 minute read

Read Chapter

THE COAL MONOPOLY

THE COAL MONOPOLY

Proof of the “coöperation” 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 Lackawanna, the Lehigh, the Erie, and the New York, Susquehanna &amp; Western railroads, which together 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 Department of Justice with fundame

56 minute read

Read Chapter

OTHER RAILROAD COMBINATIONS

OTHER RAILROAD COMBINATIONS

The cases of the Union Pacific and of the New Haven are typical—not exceptional. Our railroad 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 s

1 minute read

Read Chapter

THE PENNSYLVANIA

THE PENNSYLVANIA

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 Chesapeake &amp; Ohio, the Baltimore &amp; Ohio, and the Norfolk &amp; Western. In 1906 it sold all its Chesapeake &amp; Ohio stock, and a majority of its Baltimore &amp; Ohio and Norfolk &amp; Western holdings. Later it reversed its policy and

1 minute read

Read Chapter

RECOMMENDATIONS

RECOMMENDATIONS

Six years ago the Interstate Commerce Commission, 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 managers

2 minute read

Read Chapter

BANKER CONTROL

BANKER CONTROL

For years J. P. Morgan &amp; Co. were the fiscal 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 stockholders’ meeting of other companies in which he was a director. But it was his habit, when in America, to be present at meetings

1 minute read

Read Chapter

THE BANKERS’ RESPONSIBILITY

THE BANKERS’ RESPONSIBILITY

Bankers are credited with being a conservative force in the community. The tradition lingers that they are preëminently “safe and sane.” And yet, the most grievous fault of this banker-managed railroad has been its financial recklessness—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 community where its railroad stocks have for generations been deemed absolutely safe investments

3 minute read

Read Chapter

WHY BANKER-MANAGEMENT FAILED

WHY BANKER-MANAGEMENT FAILED

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 controlling the transportation facilities of New England. In the accomplishment of that purpose it bought what mus

59 minute read

Read Chapter

UNDIVIDED LOYALTY

UNDIVIDED LOYALTY

The banker should be detached from the business for which he performs the banking service. This detachment is desirable, in the first place, in order to avoid conflict of interest. The relation of banker-directors to corporations which they finance has been a subject of just criticism. Their conflicting interests necessarily prevent 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 himsel

47 minute read

Read Chapter

DETACHMENT AN ESSENTIAL

DETACHMENT AN ESSENTIAL

But the objection to banker-management does not rest wholly, or perhaps mainly, upon the importance of avoiding divided loyalty. A complete detachment of the banker from the corporation 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 financial advice which the railroad needs. Long ago

3 minute read

Read Chapter

SEEMING SUCCESSES

SEEMING SUCCESSES

There are numerous seeming exceptions to these rules; and a relatively few real ones. Of course, many banker-managed properties have been prosperous; some for a long time, at the expense of the public; some for a shorter time, because of the impetus attained before they were banker-managed. It is not difficult to have a large net income, where one has the field to oneself, has all the advantages privilege can give, and may “charge all the traffic will bear.” And even in competitive business the

47 minute read

Read Chapter

WHY OLIGARCHY FAILS

WHY OLIGARCHY FAILS

Banker-management fails, partly because the private interest destroys soundness of judgment and undermines loyalty. It fails partly, also, because banker directors are led by their occupation (and often even by the mere fact of their location remote from the operated properties) to apply a false test in making their decisions. Prominent in the banker-director mind is always this thought: “What will be the probable effect of our action upon the market value of the company’s stock and bonds, or, i

1 minute read

Read Chapter

THE ELEMENT OF TIME

THE ELEMENT OF TIME

The banker, with his multiplicity of interests, cannot ordinarily give the time essential to proper supervision and to acquiring that knowledge of the facts necessary to the exercise of sound judgment. The Century Dictionary tells us that a Director is “one who directs; one who guides, superintends, governs and manages.” Real efficiency in any business in which conditions are ever changing must ultimately depend, in large measure, upon the correctness of the judgment exercised, almost from day t

50 minute read

Read Chapter

AVOCATIONS OF THE OLIGARCHS

AVOCATIONS OF THE OLIGARCHS

The New Haven System is not a railroad, but an agglomeration of a railroad plus 121 separate corporations, control of which was acquired by the New Haven after that railroad attained its full growth of about 2000 miles of line. In administering the railroad and each of the properties formerly managed through these 122 separate companies, there must arise from time to time difficult questions on which the directors should pass judgment. The real managing directors of the New Haven system during t

1 minute read

Read Chapter

SUBSTITUTES

SUBSTITUTES

It has been urged that in view of the heavy burdens which the leaders of finance assume in directing Business-America, we should be patient of error and refrain from criticism, lest the leaders be deterred from continuing to perform this public service. A very respectable Boston daily said a few days after Commissioner McChord’s report on the North Haven wreck: “It is believed that the New Haven pillory repeated with some frequency will make the part of railroad director quite undesirable and ha

1 minute read

Read Chapter

ENGLAND’S BIG BUSINESS

ENGLAND’S BIG BUSINESS

England, too, has big business. But her big business is the Coöperative Wholesale Society, with a wonderful story of 50 years of beneficent growth. Its annual turnover is now about $150,000,000—an amount exceeded by the sales of only a few American industrials; an amount larger than the gross receipts of any American railroad, except the Pennsylvania and the New York Central systems. Its business is very diversified, for its purpose is to supply the needs of its members. It includes that of whol

1 minute read

Read Chapter

INDUSTRIAL DEMOCRACY

INDUSTRIAL DEMOCRACY

Now, how are the directors of this great business chosen? Not by England’s leading bankers, or other notabilities, supposed to possess unusual wisdom; but democratically, by all of the people interested in the operations of the Society. And the number of such persons who have directly or indirectly a voice in the selection of the directors of the English Coöperative Wholesale Society is 2,750,000. For the directors of the Wholesale Society are elected by vote of the delegates of the 1399 retail

1 minute read

Read Chapter

A REMEDY FOR TRUSTS

A REMEDY FOR TRUSTS

Albert Sonnichsen, General Secretary of the Coöperative League, tells in the American Review of Reviews for April, 1913, how the Swedish Wholesale Society curbed the Sugar Trust; how it crushed the Margerine Combine (compelling it to dissolve after having lost 2,300,000 crowns in the struggle); and how in Switzerland the Wholesale Society forced the dissolution of the Shoe Manufacturers Association. He tells also this memorable incident: “Six years ago, at an international congress in Cremona, D

44 minute read

Read Chapter

COÖPERATION IN AMERICA

COÖPERATION IN AMERICA

America has no Wholesale Coöperative Society able to grapple with the trusts. But it has some very strong retail societies, like the Tamarack of Michigan, which has distributed in dividends to its members $1,144,000 in 23 years. The recent high cost of living has greatly stimulated interest in the coöperative movement; and John Graham Brooks reports that we have already about 350 local distributive societies. The movement toward federation is progressing. There are over 100 coöperative stores in

1 minute read

Read Chapter

PEOPLE’S SAVINGS BANKS

PEOPLE’S SAVINGS BANKS

The German farmer has achieved democratic banking. The 13,000 little coöperative credit associations, with an average membership of about 90 persons, are truly banks of the people, by the people and for the people. First: The banks’ resources are of the people. These aggregate about $500,000,000. Of this amount $375,000,000 represents the farmers’ savings deposits; $50,000,000, the farmers’ current deposits; $6,000,000, the farmers’ share capital; and $13,000,000, amounts earned and placed in th

1 minute read

Read Chapter

BANKERS’ SAVINGS BANKS

BANKERS’ SAVINGS BANKS

The saving banks of America present a striking contrast to these democratic banks. Our savings banks also have performed a great service. They have provided for the people’s funds safe depositories with some income return. Thereby they have encouraged thrift and have created, among other things, reserves for the proverbial “rainy day.” They have also discouraged “old stocking” hoarding, which diverts the money of the country from the channels of trade. American savings banks are also, in a sense

2 minute read

Read Chapter

PROGRESS

PROGRESS

Alphonse Desjardins of Levis, Province of Quebec, has demonstrated that coöperative credit associations are applicable, also, to at least some urban communities. Levis, situated on the St. Lawrence opposite the City of Quebec, is a city of 8,000 inhabitants. Desjardins himself is a man of the people. Many years ago he became impressed with the fact that the people’s savings were not utilized primarily to aid the people productively. There were then located in Levis branches of three ordinary ban

2 minute read

Read Chapter