BIG MEN AND LITTLE
BUSINESS
147
combining the Thomson-Houston and the Edison.
combining the Thomson-Houston and the Edison.
Louis Brandeis - 1914 - Other People's Money, and How Bankers Use It
hathitrust.
org/access_use#pd-google
? BIG MEN AND LITTLE BUSINESS 137
companies. The New Haven Railroad owns
and leases 1,996 miles of line; but it is a compos-
ite of 112 separate railroad companies. The
necessary capital to build these little roads was
gathered together, partly through state, county
or municipal aid; partly from business men or
landholders who sought to advance their special
interests; partly from investors; and partly from
well-to-do public-spirited men, who wished to
promote the welfare of their particular communi-
ties. About seventy-five years after the first of
these railroads was built, J. P. Morgan & Co.
became fiscal agent for all of them by creating the
New Haven-Boston & Maine monopoly.
STEAMSHIPS
The history of our steamship lines is similar.
In 1807, Robert Fulton, with the financial aid of
Robert R. Livingston, a judge and statesman--not
a banker--demonstrated with the Claremont,
that it was practicable to propel boats by steam.
In 1833 the three Cunard brothers of Halifax
and 232 other persons--stockholders of the
Quebec and Halifax Steam Navigation Com-
pany--joined in supplying about $80,000 to
build the Royal William,--the first steamer to
cross the Atlantic. In 1902, many years after
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? 138 OTHER PEOPLE'S MONEY
individual enterprises had developed practically-
all the great ocean lines, J. P. Morgan & Co.
floated the International Mercantile Marine
with its $52,744,000 of 4 1/2 bonds, now selling
at about 60, and $100,000,000 of stock (pre-
ferred and common) on which no dividend has
ever been paid. It was just sixty-two years after
the first regular line of transatlantic steamers--
The Cunard--was founded that Mr. Morgan
organized the Shipping Trust.
TELEGRAPH
The story of the telegraph is similar. The
money for developing Morse's invention was
supplied by his partner and co-worker, Alfred
Vail. The initial line (from Washington to Balti-
more) was built with an appropriation of $30,000
made by Congress in 1843. Sixty-six years later
J. P. Morgan & Co. became bankers for
the Western Union through financing its pur-
chase by the American Telephone & Telegraph
Company.
HARVESTING MACHINERY
Next to railroads and steamships, harvesting
machinery has probably been the most potent
factor in the development of America; and most
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? BIG MEN AND LITTLE BUSINESS 139
important of the harvesting machines was Cyrus
H. McCormick's reaper. That made it possible
to increase the grain harvest twenty- or thirty-
> fold. No investment banker had any part in in-
troducing this great business man's invention.
McCormick was without means; but William
Butler Ogden, a railroad builder, ex-Mayor and
leading citizen of Chicago, supplied $25,000 with
which the first factory was built there in 1847.
Fifty-five years later, J. P. Morgan & Co. per-
formed the service of combining the five great
harvester companies, and received a commission
of $3,000,000. The concerns then consolidated
as the International Harvester Company, with
a capital stock of $120,000,000, had, despite
their huge assets and earning power, been pre-
viously capitalized, in the aggregate, at only
$10,500,000--strong evidence that in all the
preceding years no investment banker had
financed them. Indeed, McCormick was as able
in business as in mechanical invention. Two
years after Odgen paid him $25,000 for a half
interest in the business, McCormick bought it
back for $50,000; and thereafter, until his death
in 1884, no one but members of the McCormick
family had any interest in the business.
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? 140 OTHER PEOPLE'S MONEY
THE BANKER ERA
It may be urged that railroads and steamships,
the telegraph and harvesting machinery were
introduced before the accumulation of investment
capital had developed the investment banker,
and before America's "great banking houses"
had been established; and that, consequently, it
would be fairer to inquire what services bankers
had rendered in connection with later industrial
development. The firm of J. P. Morgan & Co.
is fifty-five years old; Kuhn, Loeb & Co. fifty-
six years old; Lee, Higginson & Co. over fifty
years; and Kidder, Peabody & Co. forty-eight
years; and yet the investment banker seems to
have had almost as little part in "initiating"
the great improvements of the last half century,
as did bankers in the earlier period.
STEEL
The modern steel industry of America is forty-
five years old. The "great bankers" had no part
in initiating it. Andrew Carnegie, then already
a man of large means, introduced the Bessemer
process in 1868. In the next thirty years our
steel and iron industry increased greatly. By
1898 we had far outstripped all competitors.
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? BIG MEN AND LITTLE BUSINESS 141
America's production about equalled the aggre-
gate of England and Germany. We had also
reduced costs so much that Europe talked of the
"American Peril. " It was 1898, when J. P.
Morgan & Co. took their first step in forming the
Steel Trust, by organizing the Federal Steel
Company. Then followed the combination of
the tube mills into an $80,000,000 corporation,
J. P. Morgan & Co. taking for their syndicate
services $20,000,000 of common stock. About
the same time the consolidation of the bridge and
structural works, the tin plate, the sheet steel, the
hoop and other mills followed; and finally, in
1901, the Steel Trust was formed, with a capitali-
zation of $1,402,000,000. These combinations
came thirty years after the steel industry had
been "initiated".
THE TELEPHONE
The telephone industry is less than forty years
old. It is probably America's greatest contri-
bution to industrial development. The bankers
had no part in "initiating" it. The glory belongs
to a simple, enthusiastic, warm-hearted, business
man of Haverhill, Massachusetts, who was willing
to risk his own money. H. N. Casson tells of
this, most interestingly, in his "History of the
Telephone":
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? 142 OTHER PEOPLE'S MONEY
"The only man who had money and dared to
stake it on the future of the telephone was
Thomas Sanders, and he did this not mainly for
business reasons. Both he and Hubbard were
attached to Bell primarily by sentiment, as Bell
had removed the blight of dumbness from San-
ders' little son, and was soon to marry Hubbard's
daughter. Also, Sanders had no expectation, at
first, that so much money would be needed. He
was not rich. His entire business, which was
that of cutting out soles for shoe manufacturers,
was not at any time worth more than thirty-
five thousand dollars. Yet, from 1874 to 1878,
he had advanced nine-tenths of the money that
was spent on the telephone. The first five
thousand telephones, and more, were made with
his money. And so many long, expensive months
dragged by before any relief came to Sanders,
that he was compelled, much against his will and
his business judgment, to stretch his credit
within an inch of the breaking-point to help Bell
and the telephone. Desperately he signed note
after note until he faced a total of one hundred
and ten thousand dollars. If the new 'scientific
toy' succeeded, which he often doubted, he would
be the richest citizen in Haverhill; and if it failed,
which he sorely feared, he would be a bankrupt.
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? B? G MEN AND LITTLE BUSINESS 143
Sanders and Hubbard were leasing telephones two
by two, to business men who previously had been
using the private lines of the Western Union
Telegraph Company. This great corporation
was at this time their natural and inevitable
enemy. It had swallowed most of its competi-
tors, and was reaching out to monopolize all
methods of communication by wire. The rosiest
hope that shone in front of Sanders and Hubbard
was that the Western Union might conclude to
buy the Bell patents, just as it had already bought
many others. In one moment of discourage-
ment they had offered the telephone to President
Orton, of the Western Union, for $100,000; and
Orton had refused it. 'What use,' he asked
pleasantly, 'could this company make of an elec-
trical toy? '
"But besides the operation of its own wires, the
Western Union was supplying customers with
various kinds of printing-telegraphs and dial-
telegraphs, some of which could transmit sixty
words a minute. These accurate instruments, it
believed, could never be displaced by such a scien-
tific oddity as the telephone, and it continued to
believe this until one of its subsidiary companies
--the Gold and Stock--reported that several of
its machines had been superseded by telephones.
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? 144 OTHER PEOPLE'S MONEY l
"At once the Western Union awoke from its
indifference. Even this tiny nibbling at its
business must be stopped. It took action quickly,
and organized the 'American Speaking-Tele-
phone Company,' and with $300,000 capital, and
with three electrical inventors, Edison, Gray, and
Dolbear, on its staff. With all the bulk of its
great wealth and prestige, it swept down upon
Bell and his little body-guard. It trampled
upon Bell's patent with as little concern as an
elephant can have when he tramples upon an
ant's nest. To the complete bewilderment of
Bell, it coolly announced that it had the only
original telephone, and that it was ready to sup-
ply superior telephones with all the latest
improvements made by the original inventors--
Dolbear, Gray, and Edison.
"The result was strange and unexpected. The
Bell group, instead of being driven from the field,
were at once lifted to a higher level in the business
world. And the Western Union, in the endeavor
to protect its private lines, became involuntarily
a 'bell-wether' to lead capitalists in the direction
of the telephone. "
Even then, when financial aid came to the Bell
enterprise, it was from capitalists, not from bank-
ers, and among these capitalists was William H.
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? BIG MEN AND LITTLE BUSINESS 145
Forbes (son of the builder of the Burlington) who
became the first President of the Bell Telephone
Company. That was in 1878. More than twenty
years later, after the telephone had spread over
the world, the great house of Morgan came
into financial control of the property. The
American Telephone & Telegraph Company was
formed. The process of combination became
active. Since January, 1900, its stock has
increased from $25,886,300 to $344,606,400. In
six years (1906 to 1912), the Morgan associates
marketed about $300,000,000 bonds of that com-
pany or its subsidiaries. In that period the vol-
ume of business done by the telephone companies
had, of course, grown greatly, and the plant
had to be constantly increased; but the proceeds
of these huge security issues were used, to a large
extent, in effecting combinations; that is, in
buying out telephone competitors; in buying
control of the Western Union Telegraph Com-
pany; and in buying up outstanding stock
interests in semi-independent Bell companies.
It is these combinations which have led to the
investigation of the Telephone Company by the
Department of Justice; and they are, in large
part, responsible for the movement to have the
government take over the telephone business.
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? 146 OTHER PEOPLE'S MONEY
ELECTRICAL MACHINERY
The business of manufacturing electrical
machinery and apparatus is only a little over
thirty years old. J. P. Morgan & Co. became
interested early in one branch of it; but their
dominance of the business today is due, not to
their "initiating" it, but to their effecting a com-
bination, and organizing the General Electric
Company in 1892. There were then three
large electrical companies, the Thomson-Hous-
ton, the Edison and the Westinghouse, besides
some small ones. The Thomson-Houston of
Lynn, Massachusetts, was in many respects the
leader, having been formed to introduce, among
other things, important inventions of Prof. Elihu
Thomson and Prof. Houston. Lynn is one of the
principal shoe-manufacturing centers of America.
It is within ten miles of State Street, Boston; but
Thomson's early financial support came not from
Boston bankers, but mainly from Lynn business
men and investors; men active, energetic, and
used to taking risks with their own money.
Prominent among them was Charles A. Coffin,
a shoe manufacturer, who became connected with
the Thomson-Houston Company upon its organi-
zation and president of the General Electric when
Mr. Morgan formed that company in 1892, by
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?
BIG MEN AND LITTLE BUSINESS 147
combining the Thomson-Houston and the Edison.
To his continued service, supported by other
Thomson-Houston men in high positions, the
great prosperity of the company is, in large part,
due. The two companies so combined controlled
probably one-half of all electrical patents then
existing in America; and certainly more than
half of those which had any considerable value.
In 1896 the General Electric pooled its patents
with the Westinghouse, and thus competition was
further restricted. In 1903 the General Electric
absorbed the Stanley Electric Company, its
other large competitor; and became the largest
manufacturer of electric apparatus and machinery
in the world. In 1912 the resources of the Com-
pany were $131,942,144. It billed sales to the
amount of $89,182,185. It employed directly
over 60,000 persons,--more than a fourth as many
as the Steel Trust. And it is protected against
"undue" competition; for one of the Morgan
partners has been a director, since 1909, in the
Westinghouse,--the only other large electrical
machinery company in America.
THE AUTOMOBILE
The automobile industry is about twenty
years old. It is now America's most prosperous
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? 148 OTHER PEOPLE'S MONEY
business. When Henry B. Joy, President of the
Packard Motor Car Company, was asked to
what extent the bankers aided in "initiating"
the automobile, he replied:
"It is the observable facts of history, it is also
my experience of thirty years as a business man,
banker, etc. , that first the seer conceives an oppor-
tunity. He has faith in his almost second sight.
He believes he can do something--develop a
business--construct an industry--build a railroad
--or Niagara Falls Power Company,--and make
it pay!
"Now the human measure is not the actual
physical construction, but the 'make it pay'!
"A man raised the money in the late '90s and
built a beet sugar factory in Michigan. Wise-
acres said it was nonsense. He gathered together
the money from his friends who would take a
chance with him. He not only built the sugar
factory (and there was never any doubt of his
ability to do that) but he made it pay. The next
year two more sugar factories were built, and
were financially successful. These were built by
private individuals of wealth, taking chances
in the face of cries of doubting bankers and
trust companies.
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? BIG MEN AND LITTLE BUSINESS 149
"Once demonstrated that the industry was a
sound one financially and then bankers and trust
companies would lend the new sugar companies
which were speedily organized a large part of
the necessary funds to construct and operate.
"The motor-car business was the same.
"When a few gentlemen followed me in my
vision of the possibilities of the business, the
banks and older business men (who in the main
were the banks) said, 'fools and their money soon
to be parted'--etc. , etc.
"Private capital at first establishes an industry,
backs it through its troubles, and, if possible,
wins financial success when banks would not lend
a dollar of aid.
"The business once having proved to be prac-
ticable and financially successful, then do the
banks lend aid to its needs. "
Such also was the experience of the greatest of
the many financial successes in the automobile
industry--the Ford Motor Company.
HOW BANKERS ARREST DEVELOPMENT
But "great banking houses" have not merely
failed to initiate industrial development; they
have definitely arrested development because to
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? 150 OTHER PEOPLE'S MONEY
them the creation of the trusts is largely due.
The recital in the Memorial addressed to the
President by the Investors' Guild in November,
1911, is significant:
"It is a well-known fact that modern trade
combinations tend strongly toward constancy of
process and products, and by their very nature
are opposed to new processes and new products
originated by independent inventors, and hence
tend to restrain competition in the development
and sale of patents and patent rights; and con-
sequently tend to discourage independent inven-
tive thought, to the great detriment of the nation,
and with injustice to inventors whom the Con-
stitution especially intended to encourage and
protect in their rights. "
And more specific was the testimony of the
Engineering News:
"We are today something like five years behind
Germany in iron and steel metallurgy, and such
innovations as are being introduced by our iron
and steel manufacturers are most of them merely
following the lead set by foreigners years ago.
"We do not believe this is because American
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? BIG MEN AND LITTLE BUSINESS 151
engineers are any less ingenious or original than
those of Europe, though they may indeed be
deficient in training and scientific education com-
pared with those of Germany. We believe the
main cause is the wholesale consolidation which
has taken place in American industry. A huge
organization is too clumsy to take up the develop-
ment of an original idea. With the market
closely controlled and profits certain by following
standard methods, those who control our trusts
do not want the bother of developing anything
new.
"We instance metallurgy only by way of illus-
tration. There are plenty of other fields of indus-
try where exactly the same condition exists. We
are building the same machines and using the
same methods as a dozen years ago, and the real
advances in the art are being made by European
inventors and manufacturers. "
To which President Wilson's statement may
be added:
"I am not saying that all invention had been
stopped by the growth of trusts, but I think it is
perfectly clear that invention in many fields has
been discouraged, that inventors have been
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? 152 OTHER PEOPLE'S MONEY
prevented from reaping the full fruits of their
ingenuity and industry, and that mankind has
been deprived of many comforts and con-
veniences, as well as the opportunity of buying
at lower prices.
"Do you know, have you had occasion to
learn, that there is no hospitality for invention,
now-a-days? "
TRUSTS AND FINANCIAL CONCENTRATION
The fact that industrial monopolies arrest
development is more serious even than the
direct burden imposed through extortionate
prices. But the most harm-bearing incident of
the trusts is their promotion of financial con-
centration. Industrial trusts feed the money
trust. Practically every trust created has de-
stroyed the financial independence of some
communities and of many properties; for it has
centered the financing of a large part of whole
lines of business in New York, and this usually
with one of a few banking houses. This is well
illustrated by the Steel Trust, which is a trust of
trusts; that is, the Steel Trust combines in one
huge holding company the trusts previously
formed in the different branches of the steel
business. Thus the Tube Trust combined 17
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? BIG MEN AND LITTLE BUSINESS 153
tube mills, located in 16 different cities, scat-
tered over 5 states and owned by 13 different
companies. The wire trust combined 19 mills;
the sheet steel trust 26; the bridge and structural
trust 27; and the tin plate trust 36; all scattered
similarly over many states. Finally these and
other companies were formed into the United
States Steel Corporation, combining 228 com-
panies in all, located in 127 cities and towns,
scattered over 18 states. Before the combina-
tions were effected, nearly every one of these
companies was owned largely by those who
managed it, and had been financed, to a large
extent, in the place, or in the state, in which it
was located. When the Steel Trust was formed
all these concerns came under one management.
Thereafter, the financing of each of these 228
corporations (and some which were later ac-
quired) had to be done through or with the
consent of J. P. Morgan & Co. That was the
greatest step in financial concentration ever taken.
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.
? BIG MEN AND LITTLE BUSINESS 137
companies. The New Haven Railroad owns
and leases 1,996 miles of line; but it is a compos-
ite of 112 separate railroad companies. The
necessary capital to build these little roads was
gathered together, partly through state, county
or municipal aid; partly from business men or
landholders who sought to advance their special
interests; partly from investors; and partly from
well-to-do public-spirited men, who wished to
promote the welfare of their particular communi-
ties. About seventy-five years after the first of
these railroads was built, J. P. Morgan & Co.
became fiscal agent for all of them by creating the
New Haven-Boston & Maine monopoly.
STEAMSHIPS
The history of our steamship lines is similar.
In 1807, Robert Fulton, with the financial aid of
Robert R. Livingston, a judge and statesman--not
a banker--demonstrated with the Claremont,
that it was practicable to propel boats by steam.
In 1833 the three Cunard brothers of Halifax
and 232 other persons--stockholders of the
Quebec and Halifax Steam Navigation Com-
pany--joined in supplying about $80,000 to
build the Royal William,--the first steamer to
cross the Atlantic. In 1902, many years after
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? 138 OTHER PEOPLE'S MONEY
individual enterprises had developed practically-
all the great ocean lines, J. P. Morgan & Co.
floated the International Mercantile Marine
with its $52,744,000 of 4 1/2 bonds, now selling
at about 60, and $100,000,000 of stock (pre-
ferred and common) on which no dividend has
ever been paid. It was just sixty-two years after
the first regular line of transatlantic steamers--
The Cunard--was founded that Mr. Morgan
organized the Shipping Trust.
TELEGRAPH
The story of the telegraph is similar. The
money for developing Morse's invention was
supplied by his partner and co-worker, Alfred
Vail. The initial line (from Washington to Balti-
more) was built with an appropriation of $30,000
made by Congress in 1843. Sixty-six years later
J. P. Morgan & Co. became bankers for
the Western Union through financing its pur-
chase by the American Telephone & Telegraph
Company.
HARVESTING MACHINERY
Next to railroads and steamships, harvesting
machinery has probably been the most potent
factor in the development of America; and most
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? BIG MEN AND LITTLE BUSINESS 139
important of the harvesting machines was Cyrus
H. McCormick's reaper. That made it possible
to increase the grain harvest twenty- or thirty-
> fold. No investment banker had any part in in-
troducing this great business man's invention.
McCormick was without means; but William
Butler Ogden, a railroad builder, ex-Mayor and
leading citizen of Chicago, supplied $25,000 with
which the first factory was built there in 1847.
Fifty-five years later, J. P. Morgan & Co. per-
formed the service of combining the five great
harvester companies, and received a commission
of $3,000,000. The concerns then consolidated
as the International Harvester Company, with
a capital stock of $120,000,000, had, despite
their huge assets and earning power, been pre-
viously capitalized, in the aggregate, at only
$10,500,000--strong evidence that in all the
preceding years no investment banker had
financed them. Indeed, McCormick was as able
in business as in mechanical invention. Two
years after Odgen paid him $25,000 for a half
interest in the business, McCormick bought it
back for $50,000; and thereafter, until his death
in 1884, no one but members of the McCormick
family had any interest in the business.
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? 140 OTHER PEOPLE'S MONEY
THE BANKER ERA
It may be urged that railroads and steamships,
the telegraph and harvesting machinery were
introduced before the accumulation of investment
capital had developed the investment banker,
and before America's "great banking houses"
had been established; and that, consequently, it
would be fairer to inquire what services bankers
had rendered in connection with later industrial
development. The firm of J. P. Morgan & Co.
is fifty-five years old; Kuhn, Loeb & Co. fifty-
six years old; Lee, Higginson & Co. over fifty
years; and Kidder, Peabody & Co. forty-eight
years; and yet the investment banker seems to
have had almost as little part in "initiating"
the great improvements of the last half century,
as did bankers in the earlier period.
STEEL
The modern steel industry of America is forty-
five years old. The "great bankers" had no part
in initiating it. Andrew Carnegie, then already
a man of large means, introduced the Bessemer
process in 1868. In the next thirty years our
steel and iron industry increased greatly. By
1898 we had far outstripped all competitors.
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? BIG MEN AND LITTLE BUSINESS 141
America's production about equalled the aggre-
gate of England and Germany. We had also
reduced costs so much that Europe talked of the
"American Peril. " It was 1898, when J. P.
Morgan & Co. took their first step in forming the
Steel Trust, by organizing the Federal Steel
Company. Then followed the combination of
the tube mills into an $80,000,000 corporation,
J. P. Morgan & Co. taking for their syndicate
services $20,000,000 of common stock. About
the same time the consolidation of the bridge and
structural works, the tin plate, the sheet steel, the
hoop and other mills followed; and finally, in
1901, the Steel Trust was formed, with a capitali-
zation of $1,402,000,000. These combinations
came thirty years after the steel industry had
been "initiated".
THE TELEPHONE
The telephone industry is less than forty years
old. It is probably America's greatest contri-
bution to industrial development. The bankers
had no part in "initiating" it. The glory belongs
to a simple, enthusiastic, warm-hearted, business
man of Haverhill, Massachusetts, who was willing
to risk his own money. H. N. Casson tells of
this, most interestingly, in his "History of the
Telephone":
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? 142 OTHER PEOPLE'S MONEY
"The only man who had money and dared to
stake it on the future of the telephone was
Thomas Sanders, and he did this not mainly for
business reasons. Both he and Hubbard were
attached to Bell primarily by sentiment, as Bell
had removed the blight of dumbness from San-
ders' little son, and was soon to marry Hubbard's
daughter. Also, Sanders had no expectation, at
first, that so much money would be needed. He
was not rich. His entire business, which was
that of cutting out soles for shoe manufacturers,
was not at any time worth more than thirty-
five thousand dollars. Yet, from 1874 to 1878,
he had advanced nine-tenths of the money that
was spent on the telephone. The first five
thousand telephones, and more, were made with
his money. And so many long, expensive months
dragged by before any relief came to Sanders,
that he was compelled, much against his will and
his business judgment, to stretch his credit
within an inch of the breaking-point to help Bell
and the telephone. Desperately he signed note
after note until he faced a total of one hundred
and ten thousand dollars. If the new 'scientific
toy' succeeded, which he often doubted, he would
be the richest citizen in Haverhill; and if it failed,
which he sorely feared, he would be a bankrupt.
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? B? G MEN AND LITTLE BUSINESS 143
Sanders and Hubbard were leasing telephones two
by two, to business men who previously had been
using the private lines of the Western Union
Telegraph Company. This great corporation
was at this time their natural and inevitable
enemy. It had swallowed most of its competi-
tors, and was reaching out to monopolize all
methods of communication by wire. The rosiest
hope that shone in front of Sanders and Hubbard
was that the Western Union might conclude to
buy the Bell patents, just as it had already bought
many others. In one moment of discourage-
ment they had offered the telephone to President
Orton, of the Western Union, for $100,000; and
Orton had refused it. 'What use,' he asked
pleasantly, 'could this company make of an elec-
trical toy? '
"But besides the operation of its own wires, the
Western Union was supplying customers with
various kinds of printing-telegraphs and dial-
telegraphs, some of which could transmit sixty
words a minute. These accurate instruments, it
believed, could never be displaced by such a scien-
tific oddity as the telephone, and it continued to
believe this until one of its subsidiary companies
--the Gold and Stock--reported that several of
its machines had been superseded by telephones.
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? 144 OTHER PEOPLE'S MONEY l
"At once the Western Union awoke from its
indifference. Even this tiny nibbling at its
business must be stopped. It took action quickly,
and organized the 'American Speaking-Tele-
phone Company,' and with $300,000 capital, and
with three electrical inventors, Edison, Gray, and
Dolbear, on its staff. With all the bulk of its
great wealth and prestige, it swept down upon
Bell and his little body-guard. It trampled
upon Bell's patent with as little concern as an
elephant can have when he tramples upon an
ant's nest. To the complete bewilderment of
Bell, it coolly announced that it had the only
original telephone, and that it was ready to sup-
ply superior telephones with all the latest
improvements made by the original inventors--
Dolbear, Gray, and Edison.
"The result was strange and unexpected. The
Bell group, instead of being driven from the field,
were at once lifted to a higher level in the business
world. And the Western Union, in the endeavor
to protect its private lines, became involuntarily
a 'bell-wether' to lead capitalists in the direction
of the telephone. "
Even then, when financial aid came to the Bell
enterprise, it was from capitalists, not from bank-
ers, and among these capitalists was William H.
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? BIG MEN AND LITTLE BUSINESS 145
Forbes (son of the builder of the Burlington) who
became the first President of the Bell Telephone
Company. That was in 1878. More than twenty
years later, after the telephone had spread over
the world, the great house of Morgan came
into financial control of the property. The
American Telephone & Telegraph Company was
formed. The process of combination became
active. Since January, 1900, its stock has
increased from $25,886,300 to $344,606,400. In
six years (1906 to 1912), the Morgan associates
marketed about $300,000,000 bonds of that com-
pany or its subsidiaries. In that period the vol-
ume of business done by the telephone companies
had, of course, grown greatly, and the plant
had to be constantly increased; but the proceeds
of these huge security issues were used, to a large
extent, in effecting combinations; that is, in
buying out telephone competitors; in buying
control of the Western Union Telegraph Com-
pany; and in buying up outstanding stock
interests in semi-independent Bell companies.
It is these combinations which have led to the
investigation of the Telephone Company by the
Department of Justice; and they are, in large
part, responsible for the movement to have the
government take over the telephone business.
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? 146 OTHER PEOPLE'S MONEY
ELECTRICAL MACHINERY
The business of manufacturing electrical
machinery and apparatus is only a little over
thirty years old. J. P. Morgan & Co. became
interested early in one branch of it; but their
dominance of the business today is due, not to
their "initiating" it, but to their effecting a com-
bination, and organizing the General Electric
Company in 1892. There were then three
large electrical companies, the Thomson-Hous-
ton, the Edison and the Westinghouse, besides
some small ones. The Thomson-Houston of
Lynn, Massachusetts, was in many respects the
leader, having been formed to introduce, among
other things, important inventions of Prof. Elihu
Thomson and Prof. Houston. Lynn is one of the
principal shoe-manufacturing centers of America.
It is within ten miles of State Street, Boston; but
Thomson's early financial support came not from
Boston bankers, but mainly from Lynn business
men and investors; men active, energetic, and
used to taking risks with their own money.
Prominent among them was Charles A. Coffin,
a shoe manufacturer, who became connected with
the Thomson-Houston Company upon its organi-
zation and president of the General Electric when
Mr. Morgan formed that company in 1892, by
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?
BIG MEN AND LITTLE BUSINESS 147
combining the Thomson-Houston and the Edison.
To his continued service, supported by other
Thomson-Houston men in high positions, the
great prosperity of the company is, in large part,
due. The two companies so combined controlled
probably one-half of all electrical patents then
existing in America; and certainly more than
half of those which had any considerable value.
In 1896 the General Electric pooled its patents
with the Westinghouse, and thus competition was
further restricted. In 1903 the General Electric
absorbed the Stanley Electric Company, its
other large competitor; and became the largest
manufacturer of electric apparatus and machinery
in the world. In 1912 the resources of the Com-
pany were $131,942,144. It billed sales to the
amount of $89,182,185. It employed directly
over 60,000 persons,--more than a fourth as many
as the Steel Trust. And it is protected against
"undue" competition; for one of the Morgan
partners has been a director, since 1909, in the
Westinghouse,--the only other large electrical
machinery company in America.
THE AUTOMOBILE
The automobile industry is about twenty
years old. It is now America's most prosperous
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? 148 OTHER PEOPLE'S MONEY
business. When Henry B. Joy, President of the
Packard Motor Car Company, was asked to
what extent the bankers aided in "initiating"
the automobile, he replied:
"It is the observable facts of history, it is also
my experience of thirty years as a business man,
banker, etc. , that first the seer conceives an oppor-
tunity. He has faith in his almost second sight.
He believes he can do something--develop a
business--construct an industry--build a railroad
--or Niagara Falls Power Company,--and make
it pay!
"Now the human measure is not the actual
physical construction, but the 'make it pay'!
"A man raised the money in the late '90s and
built a beet sugar factory in Michigan. Wise-
acres said it was nonsense. He gathered together
the money from his friends who would take a
chance with him. He not only built the sugar
factory (and there was never any doubt of his
ability to do that) but he made it pay. The next
year two more sugar factories were built, and
were financially successful. These were built by
private individuals of wealth, taking chances
in the face of cries of doubting bankers and
trust companies.
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? BIG MEN AND LITTLE BUSINESS 149
"Once demonstrated that the industry was a
sound one financially and then bankers and trust
companies would lend the new sugar companies
which were speedily organized a large part of
the necessary funds to construct and operate.
"The motor-car business was the same.
"When a few gentlemen followed me in my
vision of the possibilities of the business, the
banks and older business men (who in the main
were the banks) said, 'fools and their money soon
to be parted'--etc. , etc.
"Private capital at first establishes an industry,
backs it through its troubles, and, if possible,
wins financial success when banks would not lend
a dollar of aid.
"The business once having proved to be prac-
ticable and financially successful, then do the
banks lend aid to its needs. "
Such also was the experience of the greatest of
the many financial successes in the automobile
industry--the Ford Motor Company.
HOW BANKERS ARREST DEVELOPMENT
But "great banking houses" have not merely
failed to initiate industrial development; they
have definitely arrested development because to
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? 150 OTHER PEOPLE'S MONEY
them the creation of the trusts is largely due.
The recital in the Memorial addressed to the
President by the Investors' Guild in November,
1911, is significant:
"It is a well-known fact that modern trade
combinations tend strongly toward constancy of
process and products, and by their very nature
are opposed to new processes and new products
originated by independent inventors, and hence
tend to restrain competition in the development
and sale of patents and patent rights; and con-
sequently tend to discourage independent inven-
tive thought, to the great detriment of the nation,
and with injustice to inventors whom the Con-
stitution especially intended to encourage and
protect in their rights. "
And more specific was the testimony of the
Engineering News:
"We are today something like five years behind
Germany in iron and steel metallurgy, and such
innovations as are being introduced by our iron
and steel manufacturers are most of them merely
following the lead set by foreigners years ago.
"We do not believe this is because American
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? BIG MEN AND LITTLE BUSINESS 151
engineers are any less ingenious or original than
those of Europe, though they may indeed be
deficient in training and scientific education com-
pared with those of Germany. We believe the
main cause is the wholesale consolidation which
has taken place in American industry. A huge
organization is too clumsy to take up the develop-
ment of an original idea. With the market
closely controlled and profits certain by following
standard methods, those who control our trusts
do not want the bother of developing anything
new.
"We instance metallurgy only by way of illus-
tration. There are plenty of other fields of indus-
try where exactly the same condition exists. We
are building the same machines and using the
same methods as a dozen years ago, and the real
advances in the art are being made by European
inventors and manufacturers. "
To which President Wilson's statement may
be added:
"I am not saying that all invention had been
stopped by the growth of trusts, but I think it is
perfectly clear that invention in many fields has
been discouraged, that inventors have been
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? 152 OTHER PEOPLE'S MONEY
prevented from reaping the full fruits of their
ingenuity and industry, and that mankind has
been deprived of many comforts and con-
veniences, as well as the opportunity of buying
at lower prices.
"Do you know, have you had occasion to
learn, that there is no hospitality for invention,
now-a-days? "
TRUSTS AND FINANCIAL CONCENTRATION
The fact that industrial monopolies arrest
development is more serious even than the
direct burden imposed through extortionate
prices. But the most harm-bearing incident of
the trusts is their promotion of financial con-
centration. Industrial trusts feed the money
trust. Practically every trust created has de-
stroyed the financial independence of some
communities and of many properties; for it has
centered the financing of a large part of whole
lines of business in New York, and this usually
with one of a few banking houses. This is well
illustrated by the Steel Trust, which is a trust of
trusts; that is, the Steel Trust combines in one
huge holding company the trusts previously
formed in the different branches of the steel
business. Thus the Tube Trust combined 17
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? BIG MEN AND LITTLE BUSINESS 153
tube mills, located in 16 different cities, scat-
tered over 5 states and owned by 13 different
companies. The wire trust combined 19 mills;
the sheet steel trust 26; the bridge and structural
trust 27; and the tin plate trust 36; all scattered
similarly over many states. Finally these and
other companies were formed into the United
States Steel Corporation, combining 228 com-
panies in all, located in 127 cities and towns,
scattered over 18 states. Before the combina-
tions were effected, nearly every one of these
companies was owned largely by those who
managed it, and had been financed, to a large
extent, in the place, or in the state, in which it
was located. When the Steel Trust was formed
all these concerns came under one management.
Thereafter, the financing of each of these 228
corporations (and some which were later ac-
quired) had to be done through or with the
consent of J. P. Morgan & Co. That was the
greatest step in financial concentration ever taken.
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.
