No More Learning

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
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? BANKER-MANAGEMENT 199
passing judgment on himself. Of course de-
tachment does not imply lack of knowledge.
The banker should act only with full knowledgef
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 as
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
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? 200 OTHER PEOPLE'S MONEY
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
management?
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? CHAPTER X
THE INEFFICIENCY OF THE OLIGARCHS
We must break the Money Trust or the Money
Trust will break us.
The Interstate Commerce Commission said
in its report on the most disastrous of the recent
wrecks on the New Haven Railroad:
"On this directorate were and are men whom
the confiding public recognize as magicians in
the art of finance, and wizards in the 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
201
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? 202 OTHER PEOPLE'S MONEY
of human limitations: First, that no man can
serve two masters; second, that a man cannot
at the same time do many things well.
SEEMING SUCCESSES
There are numerous seeming exceptions to
these rules; and a relatively few real ones.
Of course, many banker-managed properties
have been prosperous; some for a long time,
at the expense of the public; some for a shorter
time, because of the impetus attained before
they were banker-managed. It is not difficult
to have a large net income, where one has the
field to oneself, has all the advantages privilege
can give, and may "charge all the traffic will
bear. " And even in competitive business the
success of a long-established, well-organized 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.
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? THE OLIGARCH INEFFICIENT 203
"It is only," says Goethe, "when working within
limitations, that the master is disclosed. "
WHY OLIGARCHY FAILS
Banker-management fails, partly because the
private interest destroys soundness of judgment
and undermines loyalty. It fails partly, also,
because banker directors are led by their 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
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? 204 OTHER PEOPLE'S MONEY
of the belief that the making of them now,
would (by showing smaller net earnings), create
a bad, and even false, impression on the market.
Dividends are paid which should not be, because
of the effect which it is believed reduction or
suspension would have upon the market value of
the company's securities. To 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 ELEMENT OP 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 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
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? THE OLIGARCH INEFFICIENT 205
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. "
AVOCATIONS OP 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 prop-
erties formerly managed through these 122 sep-
arate companies, there must arise from time to
time difficult questions on which the directors
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? 206 OTHER PEOPLE'S MONEY
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 Mr. 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-
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? THE OLIGARCH INEFFICIENT 207
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
concerns.
SUBSTITUTES
It has been urged that in view of the heavy
burdens which the leaders of finance assume in
directing Business-America, we should be patient
of error and refrain from criticism, lest the 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
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? 208 OTHER PEOPLE'S MONEY
in business as in politics. There are thousands
of men in America who could have performed
for the New Haven stockholders the task of
one "who guides, superintends, governs and
manages," better than did Mr. Morgan. Mr.
Baker and Mr. Rockefeller. For though pos-
sessing less native ability, even the average
business man would have done better than they,
because working under proper conditions. There
is great strength in serving with singleness of
purpose one master only. There is great strength
in having time to give to a business the 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,
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? THE OLIGARCH INEFFICIENT 209
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-
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? 210 OTHER PEOPLE'S MONEY
mark and Sweden. It owns steamers plying
between Continental and English ports. It has
an important banking department; it insures the
property and person of its members. Every
one of these departments is conducted in 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.
INDUSTRIAL DEMOCRACY
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
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? THE OLIGARCH INEFFICIENT 211
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
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? 212 OTHER PEOPLE'S MONEY
countries. The Scotch Society (which William
Maxwell has served most efficiently as President
for thirty years at a salary never exceeding $38
a week) has a turn-over of more than $50,000,000
a year.
A BEMEDT FOR TRUSTS
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 Muller, 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. Muller proposes to the assem-
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? THE OLIGARCH INEFFICIENT 213
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. '"
COOPERATION IN AMERICA
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
affiliated. In New York City 83 organizations
are affiliated 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-
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? 214 OTHER PEOPLE'S MONEY
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 bureau 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 buying,
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' 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' cur-
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? THE OLIGARCH INEFFICIENT 215
rent deposits; $6,000,000, the farmers' share
capital; and $13,000,000, amounts earned and
placed in the reserve. Thus, nearly nine-tenths
of these large resources belong to the farmers--
that is, to the members of the banks.
Second: The banks are managed by the people
--that is, the members. And membership is
easily attained; for the average amount of paid-
up share capital was, in 1909, less than $5 per
member. Each member has one vote regardless
of the number of his shares or the amount of
his deposits. These members elect the officers.
The committees and trustees (and often even,
the treasurer) serve without pay: so that the 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:
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? 216 OTHER PEOPLE'S MONEY
"Propagating themselves by their own merits,
little people's cooperative banks have overspread
Germany, 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 start. Ireland has substantial
first-fruits to show of her economic sowings.
"South Africa is groping its way to the same
goal. Egypt has discovered the necessity of
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 are trying to acclimatize
the more perfected organizations of Schulze-
Delitzsch and Raffeisen. 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
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? THE OLIGARCH INEFFICIENT 217
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 of 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 by the people, nor, in the full
sense, for 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
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? 218 OTHER PEOPLE'S MONEY
extent, public-spirited citizens. Among them
(at least in the larger cities) there is apt to be a
predominance of investment bankers, and bank
directors. Thus the three largest savings banks
of Boston (whose aggregate deposits exceed
those of the other 18 banks) have together 81
trustees. Of these, 52 are investment bankers or
directors in other Massachusetts banks or trust
companies.
Second: The funds of our savings banks
(whether stock or purely mutual) are not used
mainly for the people. The depositors are
allowed interest (usually from 3 to 4 per cent. ).
In the mutual savings banks they receive 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
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? THE OLIGARCH INEFFICIENT 219
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-seventh 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.
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? 220 OTHER PEOPLE'S MONEY
PROGRESS
Alphonse Desjardins of Levis, Province of
Quebec, has demonstrated that cooperative 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 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 $80,000 in resources. It had made 2900
loans to its members, aggregating $350,000; the
loans averaging $120 in amount, and the interest
rate 6 1/2 per cent. In all this time the bank
had not met with a single loss. Then Desjardins
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? THE OLIGARCH INEFFICIENT 221
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
assistance.