The
syndicate
which promoted the Steel Trust,
?
?
Louis Brandeis - 1914 - Other People's Money, and How Bankers Use It
P.
Morgan & Co.
will quickly retire from
substantially all boards of directors.
APPLY THE PRIVATE INTEREST PROHIBITION TO
STOCKHOLDING INTERESTS
The prohibition against one corporation enter-
ing into transactions with another corporation in
which one of its directors is also interested,
should apply even if his interest in the second
corporation is merely that of stockholder. A
conflict of interests in a director may be just
as serious where he is a stockholder only in
the second corporation, as if he were also a
director.
One of the annoying petty monopolies, con-
cerning which evidence was taken by the Pujo
Committee, is the exclusive privilege granted to
the American Bank Note Company by the New
York Stock Exchange. A recent $60,000,000
issue of New York City bonds was denied listina
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? SERVE ONE MASTER ONLY 83
on the Exchange, because the city refused to
submit to an exaction of $55,800 by the Ameri-
can Company for engraving the bonds, when the
New York Bank Note Company would do the
work equally well for $44,500. As tending to
explain this extraordinary monopoly, it was
shown that men prominent in the financial world
were stockholders in the American Company.
Among the largest stockholders was Mr. Morgan,
with 6,000 shares. No member of the Morgan
firm was a director of the American Company;
but there was sufficient influence exerted some-
how to give the American Company the stock
exchange monopoly.
The Pujo Committee, while failing to recom-
mend that transactions in which a director has a
private interest be prohibited, recognizes that a
stockholder's interest of more than a certain size
may be as potent an instrument of influence
as a direct personal interest; for it recommends
that:
"Borrowings, directly or indirectly by . . .
any corporation of the stock of which he (a bank
director) holds upwards of 10 per cent. from the
bank of which he is such director, should only be
permitted, on condition that notice shall have
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? 84 OTHER PEOPLE'S MONEY
been given to his co-directors and that a full
statement of the transaction shall be entered
upon the minutes of the meeting at which such
loan was authorized. "
As shown above, the particular provision for
notice affords no protection to the public; but
if it did, its application ought to be extended
to lesser stock-holdings. Indeed it is difficult to
fix a limit so low that financial interest will not
influence action. Certainly a stockholding in-
terest of a single director, much smaller than 10
per cent. , might be most effective in inducing
favors. Mr. Morgan's stockholdings in the
American Bank Note Company was only three
per cent. The $6,000,000 investment of J. P.
Morgan & Co. in the National City Bank repre-
sented only 6 per cent. of the bank's stock;
and would undoubtedly have been effective,
even if it had not been supplemented by the
election of his son to the board of directors.
SPECIAL DISQUALIFICATIONS
The Stanley Committee, after investigation of
the Steel Trust, concluded that the evils of inter-
locking directorates were so serious that repre-
sentatives of certain industries which are largely
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? SERVE ONE MASTER ONLY 85
dependent upon railroads should be absolutely
prohibited from serving as railroad directors,
officers or employees. It, therefore, proposed to
disqualify as railroad director, officer or employee
any person engaged in the business of manufactur-
ing or selling railroad cars or locomotives, railroad
rail or structural steel, or in mining and selling
coal. The drastic Stanley bill, shows how great
is the desire to do away with present abuses and
to lessen the power of the Money Trust.
Directors, officers, and employees of banking
institutions should, by a similar provision, be
disqualified from acting as directors, officers or
employees of life-insurance companies. The
Armstrong investigation showed that life-in-
surance companies were in 1905 the most potent
factor in financial concentration. Their power
was exercised largely through the banks and
trust companies which they controlled by stock
ownership and their huge deposits. The Arm-
strong legislation directed life-insurance com-
panies to sell their stocks. The Mutual Life and
the Equitable did so in part. But the Morgan
associates bought the stocks. And now, instead
of the life-insurance companies controlling the
banks and trust companies, the latter and the
bankers control the life-insurance companies.
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? 86 OTHER PEOPLE'S MONEY
HOW THE PROHIBITION MAT 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 man-
agement has a private interest. But it does not
follow that the prohibition must apply to every
corporation of each class. Certain exceptions
are entirely consistent with merely protecting the
public against the Money Trust; although pro-
tection of minority stockholders and business
ethics demand that the rule prohibiting a cor-
poration from making contracts in which a di-
rector has a private financial interest should be
universal in its application. The number of
corporations in the United States Dec. 31, 1912,
was 305,336. Of these only 1610 have a capi-
tal of more than $5,000,000. Few corporations
(other than banks) with a capital of less than
$5,000,000 could appreciably affect general credit
conditions either through their own operations
or their affiliations. Corporations (other than
banks) with capital resources of less than $5,000,-
000 might, therefore, be excluded from the scope
of the statute for the present. The prohibition
could also be limited so as not to apply to any
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? SERVE ONE MASTER ONLY 87
industrial concern, regardless of the amount of
capital and resources, doing only an intrastate
business; as practically all large industrial cor-
porations are engaged in interstate commerce.
This would exclude some retail concerns and
local jobbers and manufacturers not otherwise
excluded from the operation of the act. Like-
wise banks and trust companies located in cities
of less than 100,000 inhabitants might, if thought
advisable, be excluded, for the present if their
capital is less than $500,000, and their resources
less than, say, $2,500,000. In larger cities even
the smaller banking institutions should be sub-
ject to the law. Such exceptions should over-
come any objection which might be raised that
in some smaller cities, the prohibition of inter-
locking directorates would exclude from the
bank directorates all the able business men of
the community through fear of losing the oppor-
tunity of bank accommodations.
An exception should also be made, so as to
permit interlocking directorates between a cor-
poration and its proper subsidiaries. And the
prohibition of transactions in which the manage-
ment has a private interest should, of course, not
apply to contracts, express or implied, for such
services as are performed indiscriminately for
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? 88 OTHER PEOPLE'S MONEY
the whole community by railroads and public
service corporations, or for services, common to
all customers, like the ordinary service of a bank
for its depositors.
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 lim-
ited, will not the dominant financiers, upon the
enactment of such a law, convert their national
banks into state banks or trust companies^ and
thus escape from congressional control?
The answer to both questions is clear. Con-
gress has ample power to impose such prohibitions
upon practically all corporations, including state
banks, trust companies and life insurance com-
panies; and evasion may be made impossible.
While Congress has not been granted power to
regulate directly state banks, and trust or life
insurance companies, or railroad, public-service
and industrial corporations, except in respect to
interstate commerce, it may do so indirectly
by virtue either of its control of the mail privilege
or through the taxing power.
Practically no business in the United States can/
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? SERVE ONE MASTER ONLY 89
be conducted without use of the mails; and Con-
gress may in its reasonable discretion deny the
use of the mail to any business which is con-
ducted under conditions deemed by Congress
to be injurious to the public welfare. Thus,
Congress has no power directly to suppress lot-
teries; but it has indirectly suppressed them by
denying, under heavy penalty, the use of the
mail to lottery enterprises. Congress has no
power to suppress directly business frauds; but
it is constantly doing so indirectly by issuing
fraud-orders denying the mail privilege. Con-
gress has no direct power to require a newspaper
to publish a list of its proprietors and the amount
of its circulation, or to require it to mark paid-
matter distinctly as advertising: But it has thus
regulated the press, by denying the second-class
mail privilege, to all publications which fail to
comply with the requirements prescribed.
The taxing power has been resorted to by Con-
gress for like purposes: Congress has no power
to regulate the manufacture of matches, or the
use of oleomargarine; but it has suppressed the
manufacture of the "white phosphorous" match
and has greatly lessened the use of oleomargarine
by imposing heavy taxes upon them. Congress
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? 90 OTHER PEOPLE'S MONEY
has no power to prohibit, or to regulate directly
the issue of bank notes by state banks, but it
indirectly prohibited their issue by imposing a
tax of ten per cent. upon any bank note issued by
a state bank.
The power of Congress over interstate com-
merce has been similarly utilized. Congress
cannot ordinarily provide compensation for ac-
cidents to employees or undertake directly to
suppress prostitution; but it has, as an inci-
dent of regulating interstate commerce, enacted
the Railroad Employers' Liability law and the
White Slave Law; and it has full power over
the instrumentalities of commerce, like the
telegraph and the telephone.
As such exercise of congressional power has
been common for, at least, half a century, Con-
gress should not hesitate now to employ it where
its exercise is urgently needed. For a compre-
hensive prohibition of interlocking directorates is
an essential condition of our attaining the New
Freedom. Such a law would involve a great
change in the relation of the leading banks and
bankers to other businesses. But it is the very
purpose of Money Trust legislation to effect a
great change; and unless it does so, the power of
our financial oligarchy cannot be broken.
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? SERVE ONE MASTER ONLY 91
But though the enactment of such a law is
essential to the emancipation of business, it will
not alone restore industrial liberty. It must be
supplemented by other remedial measures.
*
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? CHAPTER V
WHAT PUBLICITY CAN DO
PuBiJcrnr is justly commended as a remedy for
social and industrial diseases. Sunlight is said
to be the best of disinfectants; electric light the
most efficient policeman. And publicity has
already played an important part in the struggle
against the Money Trust. The Pujo Committee
has, in the disclosure of the facts concerning
financial concentration, made a most important
contribution toward attainment of the New
Freedom. The battlefield has been surveyed and
charted. The hostile forces have been located,
counted and appraised. That was a necessary
first step--and a long one--towards relief. The
provisions in the Committee's bill concerning the
incorporation of stock exchanges and the state-
ment to be made in connection with the listing of
securities would doubtless have a beneficent effect.
But there should be a further call upon publicity
for service. That potent force must, in the im-
pending struggle, be utilized in many ways as a
continuous remedial measure.
M
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? WHAT PUBLICITY CAN DO 93
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 invest-
ment banker is also a factor. And with the ex-
traordinary growth of his wealth in recent
years, the relative importance of wealth as a
factor in financial concentration has grown
steadily. It was wealth which enabled Mr.
Morgan, in 1910, to pay $3,000,000 for $51,000
par value of the stock of the Equitable Life
Insurance Society. His direct income from this
investment was limited by law to less than one-
eighth of one per cent. a year; but it gave legal
control of $504,000,000, of assets. It was wealth
which enabled the Morgan associates to buy from
the Equitable and the Mutual Life Insurance
Company the stocks in the several banking in-
stitutions, which, merged in the Bankers' Trust
Company and the Guaranty Trust Company,
gave them control of $357,000,000 deposits.
It was wealth which enabled Mr. Morgan to
acquire his shares in the First National and
National City banks, worth $21,000,000, through
which he cemented the triple alliance with those
institutions.
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? 94 OTHER PEOPLE'S MONEY
Now, how has this great wealth been accu-
mulated? Some of it was natural accretion.
Some of it is due to special opportunities for
investment wisely availed of. Some of it is due
to the vast extent of the bankers' operations.
Then power breeds wealth as wealth breeds
power. But a main cause of these large fortunes
is the huge tolls taken by those who control the
avenues to capital and to investors. There has
been exacted as toll literally "all that the traffic
will bear. "
EXCESSIVE BANKERS' COMMISSIONS
The Pujo Committee was unfortunately pre-
vented by lack of time from presenting to the
country the evidence covering the amounts taken
by the investment bankers as promoters' fees,
underwriting commissions and profits. Noth-
ing could have demonstrated so clearly the power
exercised by the bankers, as a schedule showing
the aggregate of these taxes levied within recent
years. It would be well worth while now to re-
open the Money Trust investigation merely to
collect these data. But earlier investigations
have disclosed some illuminating, though spor-
adic facts.
The syndicate which promoted the Steel Trust,
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? WHAT PUBLICITY CAN DO 95
took, as compensation for a few weeks' work,
securities yielding $62,500,000 in cash; and of this,
J. P. Morgan & Co. received for their services, as
Syndicate Managers, $12,500,000, besides their
share, as syndicate subscribers, in the remaining
$50,000,000. The Morgan syndicate took for
promoting the Tube Trust $20,000,000 common
stock out of a total issue of $80,000,000 stock
(preferred and common). Nor were monster
commissions limited to trust promotions. More
recently, bankers' syndicates have, in many in-
stances, received for floating preferred stocks
of recapitalized industrial concerns, one-third
of all common stock issued, besides a considerable
sum in cash. And for the sale of preferred stock
of well established manufacturing concerns, cash
commissions (or profits) of from 7 1/2 to 10 per
cent. of the cash raised are often exacted. On
bonds of high-class industrial concerns, bankers'
commissions (or profits) of from 5 to 10 points
have been common.
Nor have these heavy charges been confined
to industrial concerns. Even railroad securities,
supposedly of high grade, have been subjected to
like burdens. At a time when the New Haven's
credit was still unimpaired, J. P. Morgan & Co.
took the New York, Westchester & Boston Rail-
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? 96 OTHER PEOPLE'S MONEY
way first mortgage bonds, guaranteed by the
New Haven at 92 1/2; and they were marketed
at 96 1/4. They took the Portland Terminal
Company bonds, guaranteed by the Maine Cen-
tral Railroad--a corporation of unquestionable
credit--at about 88, and these were marketed
at 92.
A large part of these underwriting commis-
sions is taken by the great banking houses, not
for their services in selling the bonds, nor in as-
suming risks, but for securing others to sell the
bonds and incur risks. Thus when the Inter-
boro Railway--a most prosperous corporation
--financed its recent $170,000,000 bond issue,
J. P. Morgan & Co. received a 3 per cent. com-
mission, that is, $5,100,000, practically for ar-
ranging that others should underwrite and sell
the bonds.
The aggregate commissions or profits so taken
by leading banking houses can only be conjec-
tured, as the full amount of their transactions
has not been disclosed, and the rate of com-
mission or profit varies very widely. But the
Pujo Committee has supplied some interesting
data bearing upon the subject: Counting the
issues of securities of interstate corporations
only, J. P. Morgan & Co. directly procured the
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? WHAT PUBLICITY CAN DO 97
public marketing alone or in conjunction with
others during the years 1902-1912, of $1,950,-
000,000. What the average commission or profit
taken by J. P. Morgan & Co. was we do not know;
but we do know that every one per cent. on that
sum yields $19,500,000. Yet even that huge
aggregate of $1,950,000,000 includes only a part
of the securities on which commissions or profits
were paid. It does not include any issue of
an intrastate corporation. It does not include
any securities privately marketed. It does not
include any government, state or municipal bonds.
It is to exactions such as these that the wealth
of the investment banker is in large part due.
And since this wealth is an important factor in
the creation of the power exercised by the Money
Trust, we must endeavor to put an end to this
improper wealth getting, as well as to improper
combination. The Money Trust is so powerful
and so firmly entrenched, that each of the sources
of its undue power must be effectually stopped,
if we would attain the New Freedom.
HOW SHALL EXCESSIVE CHAKGES BE STOPPED?
The Pujo Committee recommends, as a remedy
for such excessive charges, that interstate cor-
porations be prohibited from entering into any
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? 98 OTHER PEOPLE'S MONEY
agreements creating a sole fiscal agent to dispose
of their security issues; that the issue of the
securities of interstate railroads be placed under
the supervision of the Interstate Commerce
Commission; and that their securities should be
disposed of only upon public or private competi-
tive bids, or under regulations to be prescribed
by the Commission with full powers of investi-
gation that will discover and punish combina-
tions which prevent competition in bidding.
Some of the state public-service commissions
now exercise such power; and it may possibly
be wise to confer this power upon the interstate
commission, although the recommendation of the
Hadley Railroad Securities Commission are to
the contrary. But the official regulation as pro-
posed by the Pujo Committee would be confined
to railroad corporations; and the new security
issues of other corporations listed on the New
York Stock Exchange have aggregated in the
last five years $4,525,404,025, which is more than
either the . railroad or the municipal issues.
Publicity offers, however, another and even more
promising remedy: a method of regulating
bankers' charges which would apply automa-
tically to railroad, public-service and industrial
corporations alike.
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? WHAT PUBLICITY CAN DO 99
The question may be asked: Why have these
excessive charges been submitted to? Corpora-
tions, which in the first instance bear the charges
for capital, have, doubtless, submitted because
of banker-control; exercised directly through
interlocking directorates, or kindred relations,
and indirectly through combinations among
bankers to suppress competition. But why have
the investors submitted, since ultimately all
these charges are borne by the investors, except
so far as corporations succeed in shifting the
burden upon the community? The large army
of small investors, constituting a substantial
majority of all security buyers, are entirely free
from banker control. Their submission is un-
doubtedly due, in part, to the fact that the
bankers control the avenues to recognizedly safe
investments almost as fully as they do the
avenues to capital. But the investor's servility
is due partly, also, to his ignorance of the
facts. Is it not probable that, if each in-
vestor knew the extent to which the security he
buys from the banker is diluted by excessive
underwritings, commissions and profits, there
would be a strike of capital against these unjust
exactions?
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? 100 OTHER PEOPLE'S MONEY
THE STRIKE OF CAPITAL
A recent British experience supports this
view. In a brief period last spring nine differ-
ent issues, aggregating $135,840,000, were offered
by syndicates on the London market, and on the
average only about 10 per cent. of these loans
was taken by the public. Money was "tight,"
but the rates of interest offered were very liberal,
and no one doubted that the investors were
well supplied with funds. The London Daily
Mail presented an explanation:
"The long series of rebuffs to new loans at the
hands of investors reached a climax in the ill
success of the great Rothschild issue. It will
remain a topic of financial discussion for many
days, and many in the city are expressing the
opinion that it may have a revolutionary effect
upon the present system of loan issuing and
underwriting. The question being discussed is
that the public have become loth to subscribe
for stock which they believe the underwriters can
afford, by reason of the commission they receive,
to sell subsequently at a lower price than the
issue price, and that the Stock Exchange has
begun to realize the public's attitude. The public
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? WHAT PUBLICITY CAN DO 101
sees in the underwriter not so much one who in-
sures that the loan shall be subscribed in return
for its commission as a middleman, who, as it
were, has an opportunity of obtaining stock at
a lower price than the public in order that he
may pass it off at a profit subsequently. They
prefer not to subscribe, but to await an oppor-
tunity of dividing that profit. They feel that
if, when these issues were made, the stock were
offered them at a more attractive price, there
would be less need to pay the underwriters so
high commissions. It is another practical pro-
test, if indirect, against the existence of the
middleman, which protest is one of the features
of present-day finance. "
Compel bankers when issuing securities to
make public the commissions or profits they are
receiving. Let every circular letter, prospectus
or advertisement of a bond or stock show clearly
what the banker received for his middleman-
services, and what the bonds and stocks net
the issuing corporation. That is knowledge to
which both the existing security holder and the
prospective purchaser is fairly entitled. If the
bankers' compensation is reasonable, consider-
PUBLICITT AS A REMEDY
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? 108 OTHER PEOPLE'S MONEY
ing the skill and risk involved, there can be no
objection to making it known. If it is not
reasonable, the investor will "strike," as in-
vestors seem to have done recently in England.
Such disclosures of bankers' commissions or
profits is demanded also for another reason: It
will aid the investor in judging of the safety of
the investment. In the marketing of securities
there are two classes of risks: One is the risk
whether the banker (or the corporation) will find
ready purchasers for the bonds or stock at the
issue price; the other whether the investor will
get a good article. The maker of the security
and the banker are interested chiefly in getting it
sold at the issue price. The investor is interested
chiefly in buying a good article. The small
investor relies almost exclusively upon the banker
for his knowledge and judgment as to the quality
of the security; and it is this which makes his
relation to the banker one of confidence. But
at present, the investment banker occupies a
position inconsistent with that relation. The
bankers' compensation should, of course, vary
according to the risk he assumes. Where there
is a large risk that the bonds or stock will not be
promptly sold at the issue price, the underwriting
commission (that is the insurance premium)
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? WHAT PUBLICITY CAN DO 103
should be correspondingly large. But the banker
ought not to be paid more for getting investors
to assume a larger risk. In practice the banker
gets the higher commission for underwriting the
weaker security, on the ground that his own risk
is greater. And the weaker the security, the
greater is the banker's incentive to induce his
customers to relieve him. Now the law should
not undertake (except incidentally in connection
with railroads and public-service corporations) to
fix bankers' profits. And it should not seek to
prevent investors from making bad bargains.
But it is now recognized in the simplest mer-
chandising, that there should be full disclosures.
The archaic doctrine of caveat emptor is vanishing.
The law has begun to require publicity in aid of
fair dealing. The Federal Pure Food Law does
not guarantee quality or prices; but it helps the
buyer to judge of quality by requiring disclosure
of ingredients. Among the most important facts
to be learned for determining the real value of a
security is the amount of water it contains.
And any excessive amount paid to the banker
for marketing a security is water. Require a
full disclosure to the investor of the amount of
commissions and profits paid; and not only will
investors be put on their guard, but bankers'
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? 104 OTHER PEOPLE'S MONEY
compensation will tend to adjust itself auto-
matically to what is fair and reasonable. Ex-
cessive commissions--this form of unjustly ac-
quired wealth--will in large part cease.
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 Exchange, if incorporated, as provided
by the Pujo Committee bill, be adequate.
To be effective, knowledge of the facts must be
actually brought home to the investor, and this
can best be done by requiring the facts to be
stated in good, large type in every notice, circu-
lar, letter and advertisement inviting the investor
to purchase. Compliance with this requirement
should also be obligatory, and not something
which the investor could waive. For the whole
public is interested in putting an end to the
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? WHAT PUBLICITY CAN DO 105
bankers' exactions. England undertook, years
ago, to protect its investors against the wiles of
promoters, by requiring a somewhat similar dis-
closure; but the British act failed, in large
measure of its purpose, partly because under it
the statement of facts Was filed only with a public
official, and partly because the investor could
waive the provision. And the British statute has
now been changed in the latter respect.
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 objec-
tionable. It may be entirely consistent with the
general welfare, if the facts are made known.
But disclosure should include a list of those par-
ticipating in the underwriting so that the public
may not be misled. The investor should know
whether his adviser is disinterested.
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substantially all boards of directors.
APPLY THE PRIVATE INTEREST PROHIBITION TO
STOCKHOLDING INTERESTS
The prohibition against one corporation enter-
ing into transactions with another corporation in
which one of its directors is also interested,
should apply even if his interest in the second
corporation is merely that of stockholder. A
conflict of interests in a director may be just
as serious where he is a stockholder only in
the second corporation, as if he were also a
director.
One of the annoying petty monopolies, con-
cerning which evidence was taken by the Pujo
Committee, is the exclusive privilege granted to
the American Bank Note Company by the New
York Stock Exchange. A recent $60,000,000
issue of New York City bonds was denied listina
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? SERVE ONE MASTER ONLY 83
on the Exchange, because the city refused to
submit to an exaction of $55,800 by the Ameri-
can Company for engraving the bonds, when the
New York Bank Note Company would do the
work equally well for $44,500. As tending to
explain this extraordinary monopoly, it was
shown that men prominent in the financial world
were stockholders in the American Company.
Among the largest stockholders was Mr. Morgan,
with 6,000 shares. No member of the Morgan
firm was a director of the American Company;
but there was sufficient influence exerted some-
how to give the American Company the stock
exchange monopoly.
The Pujo Committee, while failing to recom-
mend that transactions in which a director has a
private interest be prohibited, recognizes that a
stockholder's interest of more than a certain size
may be as potent an instrument of influence
as a direct personal interest; for it recommends
that:
"Borrowings, directly or indirectly by . . .
any corporation of the stock of which he (a bank
director) holds upwards of 10 per cent. from the
bank of which he is such director, should only be
permitted, on condition that notice shall have
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? 84 OTHER PEOPLE'S MONEY
been given to his co-directors and that a full
statement of the transaction shall be entered
upon the minutes of the meeting at which such
loan was authorized. "
As shown above, the particular provision for
notice affords no protection to the public; but
if it did, its application ought to be extended
to lesser stock-holdings. Indeed it is difficult to
fix a limit so low that financial interest will not
influence action. Certainly a stockholding in-
terest of a single director, much smaller than 10
per cent. , might be most effective in inducing
favors. Mr. Morgan's stockholdings in the
American Bank Note Company was only three
per cent. The $6,000,000 investment of J. P.
Morgan & Co. in the National City Bank repre-
sented only 6 per cent. of the bank's stock;
and would undoubtedly have been effective,
even if it had not been supplemented by the
election of his son to the board of directors.
SPECIAL DISQUALIFICATIONS
The Stanley Committee, after investigation of
the Steel Trust, concluded that the evils of inter-
locking directorates were so serious that repre-
sentatives of certain industries which are largely
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? SERVE ONE MASTER ONLY 85
dependent upon railroads should be absolutely
prohibited from serving as railroad directors,
officers or employees. It, therefore, proposed to
disqualify as railroad director, officer or employee
any person engaged in the business of manufactur-
ing or selling railroad cars or locomotives, railroad
rail or structural steel, or in mining and selling
coal. The drastic Stanley bill, shows how great
is the desire to do away with present abuses and
to lessen the power of the Money Trust.
Directors, officers, and employees of banking
institutions should, by a similar provision, be
disqualified from acting as directors, officers or
employees of life-insurance companies. The
Armstrong investigation showed that life-in-
surance companies were in 1905 the most potent
factor in financial concentration. Their power
was exercised largely through the banks and
trust companies which they controlled by stock
ownership and their huge deposits. The Arm-
strong legislation directed life-insurance com-
panies to sell their stocks. The Mutual Life and
the Equitable did so in part. But the Morgan
associates bought the stocks. And now, instead
of the life-insurance companies controlling the
banks and trust companies, the latter and the
bankers control the life-insurance companies.
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? 86 OTHER PEOPLE'S MONEY
HOW THE PROHIBITION MAT 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 man-
agement has a private interest. But it does not
follow that the prohibition must apply to every
corporation of each class. Certain exceptions
are entirely consistent with merely protecting the
public against the Money Trust; although pro-
tection of minority stockholders and business
ethics demand that the rule prohibiting a cor-
poration from making contracts in which a di-
rector has a private financial interest should be
universal in its application. The number of
corporations in the United States Dec. 31, 1912,
was 305,336. Of these only 1610 have a capi-
tal of more than $5,000,000. Few corporations
(other than banks) with a capital of less than
$5,000,000 could appreciably affect general credit
conditions either through their own operations
or their affiliations. Corporations (other than
banks) with capital resources of less than $5,000,-
000 might, therefore, be excluded from the scope
of the statute for the present. The prohibition
could also be limited so as not to apply to any
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? SERVE ONE MASTER ONLY 87
industrial concern, regardless of the amount of
capital and resources, doing only an intrastate
business; as practically all large industrial cor-
porations are engaged in interstate commerce.
This would exclude some retail concerns and
local jobbers and manufacturers not otherwise
excluded from the operation of the act. Like-
wise banks and trust companies located in cities
of less than 100,000 inhabitants might, if thought
advisable, be excluded, for the present if their
capital is less than $500,000, and their resources
less than, say, $2,500,000. In larger cities even
the smaller banking institutions should be sub-
ject to the law. Such exceptions should over-
come any objection which might be raised that
in some smaller cities, the prohibition of inter-
locking directorates would exclude from the
bank directorates all the able business men of
the community through fear of losing the oppor-
tunity of bank accommodations.
An exception should also be made, so as to
permit interlocking directorates between a cor-
poration and its proper subsidiaries. And the
prohibition of transactions in which the manage-
ment has a private interest should, of course, not
apply to contracts, express or implied, for such
services as are performed indiscriminately for
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? 88 OTHER PEOPLE'S MONEY
the whole community by railroads and public
service corporations, or for services, common to
all customers, like the ordinary service of a bank
for its depositors.
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 lim-
ited, will not the dominant financiers, upon the
enactment of such a law, convert their national
banks into state banks or trust companies^ and
thus escape from congressional control?
The answer to both questions is clear. Con-
gress has ample power to impose such prohibitions
upon practically all corporations, including state
banks, trust companies and life insurance com-
panies; and evasion may be made impossible.
While Congress has not been granted power to
regulate directly state banks, and trust or life
insurance companies, or railroad, public-service
and industrial corporations, except in respect to
interstate commerce, it may do so indirectly
by virtue either of its control of the mail privilege
or through the taxing power.
Practically no business in the United States can/
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? SERVE ONE MASTER ONLY 89
be conducted without use of the mails; and Con-
gress may in its reasonable discretion deny the
use of the mail to any business which is con-
ducted under conditions deemed by Congress
to be injurious to the public welfare. Thus,
Congress has no power directly to suppress lot-
teries; but it has indirectly suppressed them by
denying, under heavy penalty, the use of the
mail to lottery enterprises. Congress has no
power to suppress directly business frauds; but
it is constantly doing so indirectly by issuing
fraud-orders denying the mail privilege. Con-
gress has no direct power to require a newspaper
to publish a list of its proprietors and the amount
of its circulation, or to require it to mark paid-
matter distinctly as advertising: But it has thus
regulated the press, by denying the second-class
mail privilege, to all publications which fail to
comply with the requirements prescribed.
The taxing power has been resorted to by Con-
gress for like purposes: Congress has no power
to regulate the manufacture of matches, or the
use of oleomargarine; but it has suppressed the
manufacture of the "white phosphorous" match
and has greatly lessened the use of oleomargarine
by imposing heavy taxes upon them. Congress
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? 90 OTHER PEOPLE'S MONEY
has no power to prohibit, or to regulate directly
the issue of bank notes by state banks, but it
indirectly prohibited their issue by imposing a
tax of ten per cent. upon any bank note issued by
a state bank.
The power of Congress over interstate com-
merce has been similarly utilized. Congress
cannot ordinarily provide compensation for ac-
cidents to employees or undertake directly to
suppress prostitution; but it has, as an inci-
dent of regulating interstate commerce, enacted
the Railroad Employers' Liability law and the
White Slave Law; and it has full power over
the instrumentalities of commerce, like the
telegraph and the telephone.
As such exercise of congressional power has
been common for, at least, half a century, Con-
gress should not hesitate now to employ it where
its exercise is urgently needed. For a compre-
hensive prohibition of interlocking directorates is
an essential condition of our attaining the New
Freedom. Such a law would involve a great
change in the relation of the leading banks and
bankers to other businesses. But it is the very
purpose of Money Trust legislation to effect a
great change; and unless it does so, the power of
our financial oligarchy cannot be broken.
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? SERVE ONE MASTER ONLY 91
But though the enactment of such a law is
essential to the emancipation of business, it will
not alone restore industrial liberty. It must be
supplemented by other remedial measures.
*
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? CHAPTER V
WHAT PUBLICITY CAN DO
PuBiJcrnr is justly commended as a remedy for
social and industrial diseases. Sunlight is said
to be the best of disinfectants; electric light the
most efficient policeman. And publicity has
already played an important part in the struggle
against the Money Trust. The Pujo Committee
has, in the disclosure of the facts concerning
financial concentration, made a most important
contribution toward attainment of the New
Freedom. The battlefield has been surveyed and
charted. The hostile forces have been located,
counted and appraised. That was a necessary
first step--and a long one--towards relief. The
provisions in the Committee's bill concerning the
incorporation of stock exchanges and the state-
ment to be made in connection with the listing of
securities would doubtless have a beneficent effect.
But there should be a further call upon publicity
for service. That potent force must, in the im-
pending struggle, be utilized in many ways as a
continuous remedial measure.
M
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? WHAT PUBLICITY CAN DO 93
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 invest-
ment banker is also a factor. And with the ex-
traordinary growth of his wealth in recent
years, the relative importance of wealth as a
factor in financial concentration has grown
steadily. It was wealth which enabled Mr.
Morgan, in 1910, to pay $3,000,000 for $51,000
par value of the stock of the Equitable Life
Insurance Society. His direct income from this
investment was limited by law to less than one-
eighth of one per cent. a year; but it gave legal
control of $504,000,000, of assets. It was wealth
which enabled the Morgan associates to buy from
the Equitable and the Mutual Life Insurance
Company the stocks in the several banking in-
stitutions, which, merged in the Bankers' Trust
Company and the Guaranty Trust Company,
gave them control of $357,000,000 deposits.
It was wealth which enabled Mr. Morgan to
acquire his shares in the First National and
National City banks, worth $21,000,000, through
which he cemented the triple alliance with those
institutions.
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? 94 OTHER PEOPLE'S MONEY
Now, how has this great wealth been accu-
mulated? Some of it was natural accretion.
Some of it is due to special opportunities for
investment wisely availed of. Some of it is due
to the vast extent of the bankers' operations.
Then power breeds wealth as wealth breeds
power. But a main cause of these large fortunes
is the huge tolls taken by those who control the
avenues to capital and to investors. There has
been exacted as toll literally "all that the traffic
will bear. "
EXCESSIVE BANKERS' COMMISSIONS
The Pujo Committee was unfortunately pre-
vented by lack of time from presenting to the
country the evidence covering the amounts taken
by the investment bankers as promoters' fees,
underwriting commissions and profits. Noth-
ing could have demonstrated so clearly the power
exercised by the bankers, as a schedule showing
the aggregate of these taxes levied within recent
years. It would be well worth while now to re-
open the Money Trust investigation merely to
collect these data. But earlier investigations
have disclosed some illuminating, though spor-
adic facts.
The syndicate which promoted the Steel Trust,
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? WHAT PUBLICITY CAN DO 95
took, as compensation for a few weeks' work,
securities yielding $62,500,000 in cash; and of this,
J. P. Morgan & Co. received for their services, as
Syndicate Managers, $12,500,000, besides their
share, as syndicate subscribers, in the remaining
$50,000,000. The Morgan syndicate took for
promoting the Tube Trust $20,000,000 common
stock out of a total issue of $80,000,000 stock
(preferred and common). Nor were monster
commissions limited to trust promotions. More
recently, bankers' syndicates have, in many in-
stances, received for floating preferred stocks
of recapitalized industrial concerns, one-third
of all common stock issued, besides a considerable
sum in cash. And for the sale of preferred stock
of well established manufacturing concerns, cash
commissions (or profits) of from 7 1/2 to 10 per
cent. of the cash raised are often exacted. On
bonds of high-class industrial concerns, bankers'
commissions (or profits) of from 5 to 10 points
have been common.
Nor have these heavy charges been confined
to industrial concerns. Even railroad securities,
supposedly of high grade, have been subjected to
like burdens. At a time when the New Haven's
credit was still unimpaired, J. P. Morgan & Co.
took the New York, Westchester & Boston Rail-
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? 96 OTHER PEOPLE'S MONEY
way first mortgage bonds, guaranteed by the
New Haven at 92 1/2; and they were marketed
at 96 1/4. They took the Portland Terminal
Company bonds, guaranteed by the Maine Cen-
tral Railroad--a corporation of unquestionable
credit--at about 88, and these were marketed
at 92.
A large part of these underwriting commis-
sions is taken by the great banking houses, not
for their services in selling the bonds, nor in as-
suming risks, but for securing others to sell the
bonds and incur risks. Thus when the Inter-
boro Railway--a most prosperous corporation
--financed its recent $170,000,000 bond issue,
J. P. Morgan & Co. received a 3 per cent. com-
mission, that is, $5,100,000, practically for ar-
ranging that others should underwrite and sell
the bonds.
The aggregate commissions or profits so taken
by leading banking houses can only be conjec-
tured, as the full amount of their transactions
has not been disclosed, and the rate of com-
mission or profit varies very widely. But the
Pujo Committee has supplied some interesting
data bearing upon the subject: Counting the
issues of securities of interstate corporations
only, J. P. Morgan & Co. directly procured the
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? WHAT PUBLICITY CAN DO 97
public marketing alone or in conjunction with
others during the years 1902-1912, of $1,950,-
000,000. What the average commission or profit
taken by J. P. Morgan & Co. was we do not know;
but we do know that every one per cent. on that
sum yields $19,500,000. Yet even that huge
aggregate of $1,950,000,000 includes only a part
of the securities on which commissions or profits
were paid. It does not include any issue of
an intrastate corporation. It does not include
any securities privately marketed. It does not
include any government, state or municipal bonds.
It is to exactions such as these that the wealth
of the investment banker is in large part due.
And since this wealth is an important factor in
the creation of the power exercised by the Money
Trust, we must endeavor to put an end to this
improper wealth getting, as well as to improper
combination. The Money Trust is so powerful
and so firmly entrenched, that each of the sources
of its undue power must be effectually stopped,
if we would attain the New Freedom.
HOW SHALL EXCESSIVE CHAKGES BE STOPPED?
The Pujo Committee recommends, as a remedy
for such excessive charges, that interstate cor-
porations be prohibited from entering into any
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? 98 OTHER PEOPLE'S MONEY
agreements creating a sole fiscal agent to dispose
of their security issues; that the issue of the
securities of interstate railroads be placed under
the supervision of the Interstate Commerce
Commission; and that their securities should be
disposed of only upon public or private competi-
tive bids, or under regulations to be prescribed
by the Commission with full powers of investi-
gation that will discover and punish combina-
tions which prevent competition in bidding.
Some of the state public-service commissions
now exercise such power; and it may possibly
be wise to confer this power upon the interstate
commission, although the recommendation of the
Hadley Railroad Securities Commission are to
the contrary. But the official regulation as pro-
posed by the Pujo Committee would be confined
to railroad corporations; and the new security
issues of other corporations listed on the New
York Stock Exchange have aggregated in the
last five years $4,525,404,025, which is more than
either the . railroad or the municipal issues.
Publicity offers, however, another and even more
promising remedy: a method of regulating
bankers' charges which would apply automa-
tically to railroad, public-service and industrial
corporations alike.
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? WHAT PUBLICITY CAN DO 99
The question may be asked: Why have these
excessive charges been submitted to? Corpora-
tions, which in the first instance bear the charges
for capital, have, doubtless, submitted because
of banker-control; exercised directly through
interlocking directorates, or kindred relations,
and indirectly through combinations among
bankers to suppress competition. But why have
the investors submitted, since ultimately all
these charges are borne by the investors, except
so far as corporations succeed in shifting the
burden upon the community? The large army
of small investors, constituting a substantial
majority of all security buyers, are entirely free
from banker control. Their submission is un-
doubtedly due, in part, to the fact that the
bankers control the avenues to recognizedly safe
investments almost as fully as they do the
avenues to capital. But the investor's servility
is due partly, also, to his ignorance of the
facts. Is it not probable that, if each in-
vestor knew the extent to which the security he
buys from the banker is diluted by excessive
underwritings, commissions and profits, there
would be a strike of capital against these unjust
exactions?
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? 100 OTHER PEOPLE'S MONEY
THE STRIKE OF CAPITAL
A recent British experience supports this
view. In a brief period last spring nine differ-
ent issues, aggregating $135,840,000, were offered
by syndicates on the London market, and on the
average only about 10 per cent. of these loans
was taken by the public. Money was "tight,"
but the rates of interest offered were very liberal,
and no one doubted that the investors were
well supplied with funds. The London Daily
Mail presented an explanation:
"The long series of rebuffs to new loans at the
hands of investors reached a climax in the ill
success of the great Rothschild issue. It will
remain a topic of financial discussion for many
days, and many in the city are expressing the
opinion that it may have a revolutionary effect
upon the present system of loan issuing and
underwriting. The question being discussed is
that the public have become loth to subscribe
for stock which they believe the underwriters can
afford, by reason of the commission they receive,
to sell subsequently at a lower price than the
issue price, and that the Stock Exchange has
begun to realize the public's attitude. The public
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? WHAT PUBLICITY CAN DO 101
sees in the underwriter not so much one who in-
sures that the loan shall be subscribed in return
for its commission as a middleman, who, as it
were, has an opportunity of obtaining stock at
a lower price than the public in order that he
may pass it off at a profit subsequently. They
prefer not to subscribe, but to await an oppor-
tunity of dividing that profit. They feel that
if, when these issues were made, the stock were
offered them at a more attractive price, there
would be less need to pay the underwriters so
high commissions. It is another practical pro-
test, if indirect, against the existence of the
middleman, which protest is one of the features
of present-day finance. "
Compel bankers when issuing securities to
make public the commissions or profits they are
receiving. Let every circular letter, prospectus
or advertisement of a bond or stock show clearly
what the banker received for his middleman-
services, and what the bonds and stocks net
the issuing corporation. That is knowledge to
which both the existing security holder and the
prospective purchaser is fairly entitled. If the
bankers' compensation is reasonable, consider-
PUBLICITT AS A REMEDY
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? 108 OTHER PEOPLE'S MONEY
ing the skill and risk involved, there can be no
objection to making it known. If it is not
reasonable, the investor will "strike," as in-
vestors seem to have done recently in England.
Such disclosures of bankers' commissions or
profits is demanded also for another reason: It
will aid the investor in judging of the safety of
the investment. In the marketing of securities
there are two classes of risks: One is the risk
whether the banker (or the corporation) will find
ready purchasers for the bonds or stock at the
issue price; the other whether the investor will
get a good article. The maker of the security
and the banker are interested chiefly in getting it
sold at the issue price. The investor is interested
chiefly in buying a good article. The small
investor relies almost exclusively upon the banker
for his knowledge and judgment as to the quality
of the security; and it is this which makes his
relation to the banker one of confidence. But
at present, the investment banker occupies a
position inconsistent with that relation. The
bankers' compensation should, of course, vary
according to the risk he assumes. Where there
is a large risk that the bonds or stock will not be
promptly sold at the issue price, the underwriting
commission (that is the insurance premium)
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? WHAT PUBLICITY CAN DO 103
should be correspondingly large. But the banker
ought not to be paid more for getting investors
to assume a larger risk. In practice the banker
gets the higher commission for underwriting the
weaker security, on the ground that his own risk
is greater. And the weaker the security, the
greater is the banker's incentive to induce his
customers to relieve him. Now the law should
not undertake (except incidentally in connection
with railroads and public-service corporations) to
fix bankers' profits. And it should not seek to
prevent investors from making bad bargains.
But it is now recognized in the simplest mer-
chandising, that there should be full disclosures.
The archaic doctrine of caveat emptor is vanishing.
The law has begun to require publicity in aid of
fair dealing. The Federal Pure Food Law does
not guarantee quality or prices; but it helps the
buyer to judge of quality by requiring disclosure
of ingredients. Among the most important facts
to be learned for determining the real value of a
security is the amount of water it contains.
And any excessive amount paid to the banker
for marketing a security is water. Require a
full disclosure to the investor of the amount of
commissions and profits paid; and not only will
investors be put on their guard, but bankers'
? ? Generated for (University of Chicago) on 2014-06-10 03:28 GMT / http://hdl. handle. net/2027/uc1. 32106000978228 Public Domain, Google-digitized / http://www. hathitrust. org/access_use#pd-google
? 104 OTHER PEOPLE'S MONEY
compensation will tend to adjust itself auto-
matically to what is fair and reasonable. Ex-
cessive commissions--this form of unjustly ac-
quired wealth--will in large part cease.
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 Exchange, if incorporated, as provided
by the Pujo Committee bill, be adequate.
To be effective, knowledge of the facts must be
actually brought home to the investor, and this
can best be done by requiring the facts to be
stated in good, large type in every notice, circu-
lar, letter and advertisement inviting the investor
to purchase. Compliance with this requirement
should also be obligatory, and not something
which the investor could waive. For the whole
public is interested in putting an end to the
? ? Generated for (University of Chicago) on 2014-06-10 03:28 GMT / http://hdl. handle. net/2027/uc1. 32106000978228 Public Domain, Google-digitized / http://www. hathitrust. org/access_use#pd-google
? WHAT PUBLICITY CAN DO 105
bankers' exactions. England undertook, years
ago, to protect its investors against the wiles of
promoters, by requiring a somewhat similar dis-
closure; but the British act failed, in large
measure of its purpose, partly because under it
the statement of facts Was filed only with a public
official, and partly because the investor could
waive the provision. And the British statute has
now been changed in the latter respect.
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 objec-
tionable. It may be entirely consistent with the
general welfare, if the facts are made known.
But disclosure should include a list of those par-
ticipating in the underwriting so that the public
may not be misled. The investor should know
whether his adviser is disinterested.
? ? Generated for (University of Chicago) on 2014-06-10 03:28 GMT / http://hdl. handle. net/2027/uc1.
