For
them, even where the enterprise involves large
expenditures, a series of smaller issues is usually
more appropriate than single large ones.
them, even where the enterprise involves large
expenditures, a series of smaller issues is usually
more appropriate than single large ones.
Louis Brandeis - 1914 - Other People's Money, and How Bankers Use It
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.
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
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? 154 OTHER PEOPLE'S MONEY
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
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? BIG MEN AND LITTLE BUSINESS 155
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
Exchange.
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 its subsidiaries and
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? 156 OTHER PEOPLE'S MONEY
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
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? BIG MEN AND LITTLE BUSINESS 157
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 light and gas plants in other
towns. Though many of these communities,
particularly those served with light only, are
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? 158 OTHER PEOPLE'S MONEY
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, Mont. ; St. Louis, Mo. ; Winona,
Minn. ; Milwaukee and Racine, Wis. ; Elmira,
N. Y. ; Asheville 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
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? BIG MEN AND LITTLE BUSINESS 159
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 like 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. . . .
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? 160 OTHER PEOPLE'S MONEY
"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 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 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
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? BIG MEN AND LITTLE BUSINESS 161
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.
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? CHAPTER VIII
A CURSE OF BIGNESS
Bigness has been an important factor in the
rise of the Money 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 undoubtedly cooperated
during the last 15 years in floating some very
162
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? A CURSE OF BIGNESS 163
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
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? 164 OTHER PEOPLE'S MONEY
combination, instead of natural growth, which
has contributed so largely to our financial con-
centration. Let us examine a few cases:
THE HAKEIMAN PACIFICS
J. P. Morgan & Co. , in urging the "need of
large banks and the cooperation of bankers,"
said:
"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 "great transaction,"--the issue of a
$100,000,000 of Union Pacific bonds, which were
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? A CURSE OF BIGNESS 165
sold to provide funds for acquiring this Southern
Pacific and other stocks in violation of law.
Bankers "cooperated" also to accomplish that.
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 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 fine, and still other improvements and
betterments were made and charged to capital
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? 186 OTHER PEOPLE'S MONEY
account. These expenditures aggregated $191,-
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 $1,000,000 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.
HOW THE SECUBITT PROCEEDS WERE SPENT
The $375,000,000 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.
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? A CURSE OF BIGNESS 167
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
Pacific.
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
stock.
7. $8,946,781, in acquiring Chicago & Alton stock.
8. $11,610,187, in acquiring Chicago, Milwaukee & St. Paul
stock.
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:
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? 168 OTHER PEOPLE'S MONEY
"Mr. Harriman may 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
are being invested in stocks like the New York
Central and other lines having only a remote
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? A CURSE OF BIGNESS 169
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 line; and they
extended from the Atlantic to the Pacific; from
the Great Lakes to the Gulf of Mexico.
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 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 associates
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? 170 OTHER PEOPLE'S MONEY
acquired control. The Pere Marquette 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
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? A CURSE OF BIGNESS 171
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.
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? 172 OTHER PEOPLE'S MONEY
Harriman's death, two partners in Kuhn, Loeb <k
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 McReynolds, under the
Court's decree. Thus the illegal purchase of
Southern Pacific stock yielded directly four
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? A CURSE OF BIGNESS 178
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 effecting the
severance of this illegal merger, both the company
and the bankers have declined to disclose.
Furthermore the Interstate Commerce Com-
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?
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.
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
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? 154 OTHER PEOPLE'S MONEY
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
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? BIG MEN AND LITTLE BUSINESS 155
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
Exchange.
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 its subsidiaries and
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? 156 OTHER PEOPLE'S MONEY
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
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? BIG MEN AND LITTLE BUSINESS 157
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 light and gas plants in other
towns. Though many of these communities,
particularly those served with light only, are
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? 158 OTHER PEOPLE'S MONEY
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, Mont. ; St. Louis, Mo. ; Winona,
Minn. ; Milwaukee and Racine, Wis. ; Elmira,
N. Y. ; Asheville 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
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? BIG MEN AND LITTLE BUSINESS 159
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 like 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. . . .
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? 160 OTHER PEOPLE'S MONEY
"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 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 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
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? BIG MEN AND LITTLE BUSINESS 161
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.
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? CHAPTER VIII
A CURSE OF BIGNESS
Bigness has been an important factor in the
rise of the Money 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 undoubtedly cooperated
during the last 15 years in floating some very
162
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? A CURSE OF BIGNESS 163
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
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? 164 OTHER PEOPLE'S MONEY
combination, instead of natural growth, which
has contributed so largely to our financial con-
centration. Let us examine a few cases:
THE HAKEIMAN PACIFICS
J. P. Morgan & Co. , in urging the "need of
large banks and the cooperation of bankers,"
said:
"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 "great transaction,"--the issue of a
$100,000,000 of Union Pacific bonds, which were
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? A CURSE OF BIGNESS 165
sold to provide funds for acquiring this Southern
Pacific and other stocks in violation of law.
Bankers "cooperated" also to accomplish that.
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 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 fine, and still other improvements and
betterments were made and charged to capital
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? 186 OTHER PEOPLE'S MONEY
account. These expenditures aggregated $191,-
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 $1,000,000 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.
HOW THE SECUBITT PROCEEDS WERE SPENT
The $375,000,000 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.
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? A CURSE OF BIGNESS 167
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
Pacific.
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
stock.
7. $8,946,781, in acquiring Chicago & Alton stock.
8. $11,610,187, in acquiring Chicago, Milwaukee & St. Paul
stock.
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:
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? 168 OTHER PEOPLE'S MONEY
"Mr. Harriman may 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
are being invested in stocks like the New York
Central and other lines having only a remote
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? A CURSE OF BIGNESS 169
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 line; and they
extended from the Atlantic to the Pacific; from
the Great Lakes to the Gulf of Mexico.
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 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 associates
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? 170 OTHER PEOPLE'S MONEY
acquired control. The Pere Marquette 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
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? A CURSE OF BIGNESS 171
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.
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? 172 OTHER PEOPLE'S MONEY
Harriman's death, two partners in Kuhn, Loeb <k
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 McReynolds, under the
Court's decree. Thus the illegal purchase of
Southern Pacific stock yielded directly four
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? A CURSE OF BIGNESS 178
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 effecting the
severance of this illegal merger, both the company
and the bankers have declined to disclose.
Furthermore the Interstate Commerce Com-
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?
