On the
contrary we are of opinion that it may go on from
regulation to prohibition except upon such con-
ditions as it may prescribe.
contrary we are of opinion that it may go on from
regulation to prohibition except upon such con-
ditions as it may prescribe.
Louis Brandeis - 1914 - Other People's Money, and How Bankers Use It
The Baldwin, the Pull-
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? 54 OTHER PEOPLE'S MONEY
man, the Reading, the Telephone, the Telegraph
and the General Electric companies, like the
New Haven, buy steel products from the Steel
Corporation. Each and every one of the com-
panies last named markets its securities through
J. P. Morgan & Co. ; each deposits its funds with
J. P. Morgan & Co. ; and with these funds of
each, the firm enters upon further operations.
This specific illustration is in part suppositi-
tious; but it represents truthfully the operation of
interlocking directorates. Only it must be multi-
plied many times and with many permutations
to represent fully the extent to which the interests
of a few men are intertwined. Instead of taking
the New Haven as the railroad starting point in
our example, the New York Central, the Santa
F6, the Southern, the Lehigh Valley, the Chicago ?
and Great Western, the Erie or the Pere Mar-
quette might have been selected; instead of the
Guaranty Trust Company as the banking reser-
voir, any one of a dozen other important banks or
trust companies; instead of the Penn Mutual as
purchaser of the bonds, other insurance compa-
nies; instead of the General Electric, its qualified
competitor, the Westinghouse Electric and Manu-
facturing Company. The chain is indeed end-
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? INTERLOCKING DIRECTORATES 55
less; for each controlled corporation is entwined
with many others.
As the nexus of "Big Business" the Steel
Corporation stands, of course, preeminent. The
Stanley Committee showed that the few men who
control the Steel Corporation, itself an owner of
important railroads, are directors also in twenty-
nine other railroad systems, with 126,000 miles
of line (more than half the railroad mileage of the
United States), and in important steamship
companies. Through all these alliances and the
huge traffic it controls, the Steel Corporation's
influence pervades railroad and steamship com-
panies--not as carriers only--but as the largest
customers for steel. And its influence with
users of steel extends much further. These same
few men are also directors in twelve steel-using
street railway systems, including some of the
largest in the world. They are directors in forty
machinery and similar steel-using manufacturing
companies; in many gas, oil and water com-
panies, extensive users of iron products; and
in the great wire-using telephone and telegraph
companies. The aggregate assets of these differ-
ent corporations--through which these few men
exert their influence over the business of the
United States--exceeds sixteen billion dollars.
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? 56 OTHER PEOPLE'S MONEY
Obviously, interlocking directorates, and all
that term implies, must be effectually prohibited
before the freedom of American business can be
regained. The prohibition will not be an in-
novation. It will merely give full legal sanction
to the fundamental law of morals and of human
nature: that "No man can serve two masters. "
The surprising fact is that a principle of equity so
firmly rooted should have been departed from at
all in dealing with corporations. For no rule
of law has, in other connections, been more rigor-
ously applied, than that which prohibits a trustee
from occupying inconsistent positions, from deal-
ing with himself, or from using his fiduciary
position for personal profit. And a director of a
corporation is as obviously a trustee as persons
holding similar positions in an unincorporated
association, or in a private trust estate, who are
called specifically by that name. The Courts
have recognized this fully.
Thus, the Court of Appeals of New York de-
clared in an important case:
"While not technically trustees, for the title
of the corporate property was in the corporation
itself, they were charged with the duties and
subject to the liabilities of trustees. Clothed
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? INTERLOCKING DIRECTORATES 57
with the power of controlling the property and
managing the affairs of the corporation without
let or hindrance, as to third persons, they were its
agents; but as to the corporation itself equity
holds them liable as trustees. While courts of
law generally treat the directors as agents, courts
of equity treat them as trustees, and hold them
to a strict account for any breach of the trust
relation. For all practical purposes they are
trustees, when called upon in equity to account
for their official conduct. "
NULLIFYING THE LAW
But this wholesome rule of business, so clearly
laid down, was practically nullified by courts
in creating two unfortunate limitations, as
concessions doubtless to the supposed needs of
commerce.
First: Courts held valid contracts between a
corporation and a director, or between two
corporations with a common director, where it
was shown that in making the contract, the cor-
poration was represented by independent direct-
ors and that the vote of the interested director
was unnecessary to carry the motion and his pres-
ence was not needed to constitute a quorum.
Second: Courts held that even where a com-
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? 58 OTHER PEOPLE'S MONEY
mon director participated actively in the making
of a contract between two corporations, the
contract was not absolutely void, but voidable
only at the election of the corporation.
The first limitation ignored the rule of law that
a beneficiary is entitled to disinterested advice
from all his trustees, and not merely from some;
and that a trustee may violate his trust by in-
action as well as by action. It ignored, also, the
laws of human nature, in assuming that the in-
fluence of a director is confined to the act of
voting. Every one knows that the most effective
work is done before any vote is taken, subtly,
and without provable participation. Every one
should know that the denial of minority repre-
sentation on boards of directors has resulted in
the domination of most corporations by one or
two men; and in practically banishing all criti-
cism of the dominant power. And even where
the board is not so dominated, there is too often
that "harmonious cooperation" among directors
which secures for each, in his own line, a due share
of the corporation's favors.
The second limitation--by which contracts,
in the making of which the interested director
participates actively, are held merely voidable
instead of absolutely void--ignores the teachings
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? INTERLOCKING DIRECTORATES 59
of experience. To hold such contracts merely
voidable has resulted practically in declaring
them valid. It is the directors who control
corporate action; and there is little reason to
expect that any contract, entered into by a
board with a fellow director, however unfair,
would be subsequently avoided. Appeals from
Philip drunk to Philip sober are not of frequent
occurrence, nor very fruitful. But here we lack
even an appealing party. Directors and the
dominant stockholders would, of course, not
appeal; and the minority stockholders have
rarely the knowledge of facts which is essential
to an effective appeal, whether it be made to
the directors, to the whole body of stockholders,
or to the courts. Besides, the financial burden
and the risks incident to any attempt of individual
stockholders to interfere with an existing manage-
ment is ordinarily prohibitive. Proceedings to
avoid contracts with directors are, therefore, sel-
dom brought, except after a radical change in the
membership of the board. And radical changes
in a board's membership are rare. Indeed the
Pujo Committee reports:
"None of the witnesses (the leading American
bankers testified) was able to name an instance in
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? 60 OTHER PEOPLE'S MONEY
the history of the country in which the stock-
holders had succeeded in overthrowing an exist-
ing management in any large corporation. Nor
does it appear that stockholders have ever even
succeeded in so far as to secure the investigation
of an existing management of a corporation to
ascertain whether it has been well or honestly
managed. "
/ Mr. Max Pam proposed in the April, 1913,
I Harvard Law Review, that the government come
to the aid of minority stockholders. He urged
that the president of every corporation be re-
quired to rejport annually to the stockholders, and
to state and federal officials every contract made
by the company in which any director is inter-
ested; that the Attorney-General of the United
States or the State investigate the same and take
proper proceedings to set all such contracts
aside and recover any damages suffered; or
without disaffirming the contracts to recover
(rom the interested directors the profits derived
therefrom. And to this end also, that State and
National Bank Examiners, State Superintend-
ents of Insurance, and the Interstate Commerce
Commission be directed to examine the records
of every bank, trust company, insurance com-
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? INTERLOCKING DIRECTORATES 61
pany, railroad company and every other corpora-
tion engaged in interstate commerce. Mr. Pam's
views concerning interlocking directorates are
entitled to careful study. As counsel promi-
nently identified with the organization of trusts,
he had for years full opportunity of weighing the
advantages and disadvantages of "Big Business. "
His conviction that the practice of interlocking
directorates is a menace to the public and demands
drastic legislation, is significant. And much can
be said in support of the specific measure which
he proposes. But to be effective, the remedy
must be fundamental and comprehensive.
THE ESSENTIALS OP PROTECTION
Protection to minority stockholders demands
that corporations be prohibited absolutely from
making contracts in which a director has a
private interest, and that all such contracts be
declared not voidable merely, but absolutely
void.
In the case of railroads and public-service
corporations (in contradistinction to private
industrial companies), such prohibition is de-
manded, also, in the interests of the general
public. For interlocking interests breed in-
efficiency and disloyalty; and the public pays,
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? 62 OTHER PEOPLE'S MONEY
in higher rates or in poor service, a large part of
the penalty for graft and inefficiency. Indeed,
whether rates are adequate or excessive cannot
be determined until it is known whether the
gross earnings of the corporation are properly
expended. For when a company's important
contracts are made through directors who are
interested on both sides, the common presump-
tion that money spent has been properly spent
does not prevail. And this is particularly true
in railroading, where the company so often lacks
effective competition in its own field.
But the compelling reason for prohibiting
interlocking directorates is neither the protection
of stockholders, nor the protection of the public
from the incidents of inefficiency and graft.
Conclusive evidence (if obtainable) that the
practice of interlocking directorates benefited all
stockholders and was the most efficient form of
organization, would not remove the objections.
For even more important than efficiency are in-
dustrial and political liberty; and these are
imperiled by the Money Trust. Interlocking
directorates must be prohibited, because it is impos-
sible to break the Money Trust without putting an
end to the practice in the larger corporations.
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? INTERLOCKING DIRECTORATES 68
y
? ^f BANKS AS PUBLIC-SERVICE CORPORATIONS
The practice of interlocking directorates is
peculiarly objectionable when applied to banks,
because of the nature and functions of those
institutions. Bank deposits are an important
part of our currency system. They are almost
as essential a factor in commerce as our railways.
Receiving deposits and making loans therefrom
should be treated by the law not as a private
business, but as one of the public services. And
recognizing it to be such, the law already regu-
lates it in many ways. The function of a bank
is to receive and to loan money. It has no more
right than a common carrier to use its powers
specifically to build up or to destroy other
businesses. The granting or withholding of a
loan should be determined, so far as concerns the
borrower, solely by the interest rate and the risk
involved; and not by favoritism or other con-
siderations foreign to the banking function.
Men may safely be allowed to grant or to deny
loans of their own money to whomsoever they
see fit, whatsoever their motive may be. But
bank resources are, in the main, not owned by the
stockholders nor by the directors. Nearly three-
fourths of the aggregate resources of the thirty-
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? 64 OTHER PEOPLE'S MONEY
four banking institutions in which the Morgan
associates hold a predominant influence are rep-
resented by deposits. The dependence of com-
merce and industry upon bank deposits, as the
common reservoir of quick capital is so complete,
that deposit banking should be recognized as
one of the businesses "affected with a public
interest. " And the general rule which forbids
public-service corporations from making unjust
discriminations or giving undue preference should
be applied to the operations of such banks.
Senator Owen, Chairman of the Committee
on Banking and Currency, said recently:
"My own judgment is that a bank is a public-
utility institution and cannot be treated as a
private affair, for the simple reason that the
public is invited, under the safeguards of the
government, to deposit its money with the bank,
and the public has a right to have its interests
safeguarded through organized authorities. The
logic of this is beyond escape. All banks in the
United States, public and private, should be
treated as public-utility institutions, where they
receive public deposits. "
The directors and officers of banking institu-
tions must, of course, be entrusted with wide
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? INTERLOCKING DIRECTORATES 65
discretion in the granting or denying of loans.
But that discretion should be exercised, not only
honestly as it affects stockholders, but also
impartially as it affects the public. Mere
honesty to the stockholders demands that the
interests to be considered by the directors be
the interests of all the stockholders; not the profit
of the part of them who happen to be its direct-
ors. But the general welfare demands of the
director, as trustee for the public, performance of
a stricter duty. The fact that the granting of
loans involves a delicate exercise of discretion
makes it difficult to determine whether the rule
of equality of treatment, which every public-
service corporation owes, has been performed.
But that difficulty merely emphasizes the im-
portance of making absolute the rule that banks
of deposit shall not make any loan nor engage in
any transaction in which a director has a private
interest. And we should bear this in mind:
If privately-owned banks fail in the public
duty to afford borrowers equality of opportunity,
there will arise a demand for government-owned
banks, which will become irresistible.
The statement of Mr. Justice Holmes of the
Supreme Court of the United States, in the
Oklahoma Bank case, is significant:
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? 66 OTHER PEOPLE'S MONEY
"We cannot say that the public interests to
which we have adverted, and others, are not
sufficient to warrant the State in taking the whole
business of banking under its control.
On the
contrary we are of opinion that it may go on from
regulation to prohibition except upon such con-
ditions as it may prescribe. "
Nor would the requirement that banks shall
make no loan in which a director has a private
interest impose undue hardships or restrictions
upon bank directors. It might make a bank
director dispose of some of his investments and
refrain from making others; but it often happens
that the holding of one office precludes a man
from holding another, or compels him to dispose
of certain financial interests.
A judge is disqualified from sitting in any
case in which he has even the smallest financial
interest; and most judges, in order to be free to
act in any matters arising in their court, proceed,
upon taking office, to dispose of all investments
which could conceivably bias their judgment
in any matter that might come before them. An
Interstate Commerce Commissioner is prohibited
from owning any bonds or stocks in any corpora-
OFFICIAL PRECEDENTS
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? INTERLOCKING DIRECTORATES 67
tion subject to the jurisdiction of the Commission.
It is a serious criminal offence for any executive
officer of the federal government to transact
government business with any corporation in the
pecuniary profits of which he is directly or
indirectly interested.
And the directors of our great banking in-
stitutions, as the ultimate judges of bank credit,
exercise today a function no less important to the
country's welfare than that of the judges of our
courts, the interstate commerce commissioners,
and departmental heads.
SCOPE OP THE PROHIBITION
In the proposals for legislation on this subject,
four important questions are presented:
1. Shall the principle of prohibiting inter-
locking directorates in potentially competing
corporations be applied to state banking insti-
tutions, as well as the national banks?
2. Shall it be applied to all kinds of corpora-
tions or only to banking institutions?
3. Shall the principle of prohibiting corpora-
tions from entering into transactions in which the
management has a private interest be applied to
both directors and officers or be confined in its
application to officers only?
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? 68 OTHER PEOPLE'S MONEY
4. Shall the principle be applied so as to
prohibit transactions with another corporation in
which one of its directors is interested merely as
a stockholder?
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? CHAPTER IV
SERVE ONE MASTER ONLY
The Pujo Committee has presented the
facts concerning the Money Trust so clearly
that the conclusions appear inevitable. Their
diagnosis discloses intense financial concentra-
tion and the means by which it is effected.
Combination,--the intertwining of interests,--
is shown to be the all-pervading vice of the
present system. With a view to freeing in-
dustry, the Committee recommends the enact-
ment of twenty-one specific remedial provisions.
Most of these measures are wisely framed to
meet some abuse disclosed by the evidence; and
if all of these were adopted the Pujo legislation
would undoubtedly alleviate present suffering
and aid in arresting the disease. But many of
the remedies proposed are "local" ones; and a
cure is not possible, without treatment which is
fundamental. Indeed, a major operation is
necessary. This the Committee has hesitated
to advise; although the fundamental treatment
required is simple: "Serve one Master only. "
80
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? 70 OTHER PEOPLE'S MONEY
The evils incident to interlocking director-
ates are, of course, fully recognized; but the
prohibitions proposed in that respect are re-
stricted to a very narrow sphere.
First: The Committee recognizes that po-
tentially competing corporations should not
have a common director;--but it restricts this
prohibition to directors of national banks,
saying:
"No officer or director of a national bank
shall be an officer or director of any other bank
or of any trust company or other financial or
other corporation or institution, whether or-
ganized under state or federal law, that is author-
ized to receive money on deposit or that is engaged
in the business of loaning money on collateral or
in buying and selling securities except as in this
section provided; and no person shall be an
officer or director of any national bank who is
a private banker or a member of a firm or partner-
ship of bankers that is engaged in the business of
receiving deposits: Provided, That such bank,
trust company, financial institution, banker, or
firm of bankers is located at or engaged in busi-
ness at or in the same city, town, or village as
that in which such national bank is located or
engaged in business: Provided further, That a
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? SERVE ONE MASTER ONLY 71
director of a national bank or a partner of
such director may be an officer or director of
not more than one trust company organized
by the laws of the state in which such national
bank is engaged in business and doing business
at the same place. "
Second: The Committee recognizes that a
corporation should not make a contract in which
one of the management has a private interest;
but it restricts this prohibition (1) to national
banks, and (2) to the officers, saying:
"No national bank shall lend or advance
money or credit or purchase or discount any
promissory note, draft, bill of exchange or other
evidence of debt bearing the signature or in-
dorsement of any of its officers or of any partner-
ship of which such officer is a member, directly
or indirectly, or of any corporation in which
such officer owns or has a beneficial interest
of upward of ten per centum of the capital
stock, or lend or advance money or credit to,
for or on behalf of any such officer or of any such
partnership or corporation, or purchase any se-
curity from any such officer or of or from any
partnership or corporation of which such officer
is a member or in which he is financially inter-
ested, as herein specified, or of any corporation
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? 72 OTHER PEOPLE'S MONEY
of which any of its officers is an officer at the
time of such transaction. "
Prohibitions of intertwining relations so re-
stricted, however supplemented by other pro-
visions, will not end financial concentration.
The Money Trust snake will, at most, be
scotched, not killed. The prohibition of a
common director in potentially competing cor-
porations should apply to state banks and trust
companies, as well as to national banks; and
it should apply to railroad and industrial cor-
porations as fully as to banking institutions.
The prohibition of corporate contracts in which
one of the management has a private interest
should apply to directors, as well as to officers,
and to state banks and trust companies and
to other classes of corporations, as well as to
national banks. And, as will be hereafter shown,
such broad legislation is within the power of
Congress.
Let us examine this further:
THE PROHIBITION OF COMMON DIRECTORS IN PO-
TENTIALLY COMPETING CORPORATIONS
1. National Banks. The objection to com-
mon directors, as applied to banking institutions,
is clearly shown by the Pujo Committee.
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? SERVE ONE MASTER ONLY 73
"As the first and foremost step in applying a
remedy, and also for reasons that seem to us
conclusive, independently of that consideration,
we recommend that interlocking directorates
in potentially competing financial institutions
be abolished and prohibited so far as lies in
the power of Congress to bring about that re-
sult. . . . When we find, as in a number
of instances, the same man a director in half a
dozen or more banks and trust companies all
located in the same section of the same city,
doing the same class of business and with a like
set of associates similarly situated, all belong-
ing to the same group and representing the
same class of interests, all further pretense
of competition is useless. . . . If banks
serving the same field are to be permitted
to have common directors, genuine competition
will be rendered impossible. Besides, this prac-
tice gives to such common directors the un-
fair advantage of knowing the affairs of bor-
rowers in various banks, and thus affords
endless opportunities for oppression. "
This recommendation is in accordance with
the legislation or practice of other countries.
The Bank of England, the Bank of France, the
National Bank of Belgium, and the leading
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? 74 OTHER PEOPLE'S MONEY
banks of Scotland all exclude from their boards
persons who are directors in other banks. By-
law, in Russia no person is allowed to be on the
board of management of more than one bank.
The Committee's recommendation is also in
harmony with laws enacted by the Common-
wealth of Massachusetts more than a genera-
tion ago designed to curb financial concentra-
tion through the savings banks. Of the great
wealth of Massachusetts a large part is repre-
sented by deposits in its savings banks. These
deposits are distributed among 194 different
banks, located in 131 different cities and towns.
These 194 banks are separate and distinct; not
only in form, but in fact. In order that the
banks may not be controlled by a few financiers,
the Massachusetts law provides that no execu-
tive officer or trustee (director) of any savings
bank can hold any office in any other savings
bank. That statute was passed in 1876. A few
years ago it was supplemented by providing that
none of the executive officers of a savings bank
could hold a similar office in any national bank.
Massachusetts attempted thus to curb the power
of the individual financier; and no disadvantages
are discernible. When that Act was passed the
aggregate deposits in its savings banks were
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? SERVE ONE MASTER ONLY 75
$243,340,642; the number of deposit accounts
739,289; the average deposit to each person of
the population $144. On November 1, 1912,
the aggregate deposits were $838,635,097. 85;
the number of deposit accounts 2,200,917; the
average deposit to each account $381. 04. Mas-
sachusetts has shown that curbing the power of
the few, at least in this respect, is entirely
consistent with efficiency and with the prosperity
of the whole people.
2. State Banks and Trust Companies. The
reason for prohibiting common directors in
banking institutions applies equally to national
banks and to state banks including those trust
companies which are essentially banks. In New
York City there are 37 trust companies of which
only 15 are members of the clearing house; but
those 15 had on November 2, 1912, aggregate
resources of $827,875,653. Indeed the Bankers'
Trust Company with resources of $205,000,000,
and the Guaranty Trust Company, with re-
sources of $232,000,000, are among the most
useful tools of the Money Trust. No bank in
the country has larger deposits than the latter;
and only one bank larger deposits than the
former. If common directorships were permitted
in state banks or such trust companies, the
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? 76 OTHER PEOPLE'S MONEY
charters of leading national banks would doubt-
less soon be surrendered; and the institutions
would elude federal control by re-incorporating
under state laws.
The Pujo Committee has failed to apply the
prohibition of common directorships in po-
tentially competing banking institutions rigor-
ously even to national banks. It permits the
same man to be a director in one national bank
and one trust company doing business in the
same place. The proposed concession opens the
door to grave dangers. In the first place the
provision would permit the interlocking of any
national bank not with one trust company only,
but with as many trust companies as the bank
has directors. For while under the Pujo bill no
one can be a national bank director who is di-
rector in more than one such trust company,
there is nothing to prevent each of the directors
of a bank from becoming a director in a differ-
ent trust company. The National Bank of Com-
merce of New York has a board of 38 directors.
There are 37 trust companies in the City of New
York. Thirty-seven of the 38 directors might
each become a director of a different New York
trust company: and thus 37 trust companies
would be interlocked with the National Bank of
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? SERVE ONE MASTER ONLY 77
Commerce, unless the other recommendation of
the Pujo Committee limiting the number of
directors to 13 were also adopted.
But even if the bill were amended so as to
limit the possible interlocking of a bank to a
single trust company, the wisdom of the conces-
sion would still be doubtful. It is true, as the
Pujo Committee states, that "the business that
may be transacted by" a trust company is of "a
different character" from that properly trans-
acted by a national bank. But the business
actually conducted by a trust company is, at
least in the East, quite similar; and the two
classes of banking institutions have these vital
elements in common: each is a bank of deposit,
and each makes loans from its deposits. A
private banker may also transact some business
of a character different from that properly con-
ducted by a bank; but by the terms of the
Committee's bill a private banker engaged in
the business of receiving deposits would be
prevented from being a director of a national
bank; and the reasons underlying that prohi-
bition apply equally to trust companies and to
private bankers.
3. Other Corporations. The interlocking of
banking institutions is only one of the factors
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? 78 OTHER PEOPLE'S MONEY
which have developed the Money Trust. The
interlocking of other corporations has been an
equally important element. And the prohibi-
tion of interlocking directorates should be ex-
tended to potentially competing corporations
whatever the class; to life insurance companies,
railroads and industrial companies, as well as
banking institutions. The Pujo Committee has
shown that Mr. George F. Baker is a common
director in the six railroads which haul 80 per
cent. of all anthracite marketed and own 88
per cent. of all anthracite deposits. The Mor-
gan associates are the nexus between such sup-
posedly competing railroads as the Northern
Pacific and the Great Northern; the Southern,
the Louisville & Nashville and the Atlantic
Coast Line, and between partially competing
industrials like the Westinghouse Electric and
Manufacturing Company and the General Elec-
tric. The nexus between all the large poten-
tially competing corporations must be severed,
if the Money Trust is to be broken.
PROHIBITING CORPORATE CONTRACTS IN WHICH THE
MANAGEMENT HAS A PRIVATE INTEREST
The principle of prohibiting corporate contracts
in which the management has a private interest
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? SERVE ONE MASTER ONLY 79
is applied, in the Pujo Committee's recom-
mendations, only to national banks, and in them
only to officers. All other corporations are to be
permitted to continue the practice; and even in
national banks the directors are to be free to
have a conflicting private interest, except that
they must not accept compensation for promoting
a loan of bank funds nor participate in syndicates,
promotions or underwriting of securities in which
their banks may be interested as underwriters or
owners or lenders thereon: that all loans or other
transactions in which a director is interested shall
be made in his own name; and shall be authorized
only after ample notice to co-directors; and that
the facts shall be spread upon the records of the
corporation.
The Money Trust would not be disturbed by a
prohibition limited to officers. Under a law of
that character, financial control would continue
to be exercised by the few without substantial
impairment; but the power would be exerted
through a somewhat different channel. Bank
officers are appointees of the directors; and
ordinarily their obedient servants. Individuals
who, as bank officers, are now important factors
in the financial concentration, would doubtless
resign as officers and become merely directors.
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? 54 OTHER PEOPLE'S MONEY
man, the Reading, the Telephone, the Telegraph
and the General Electric companies, like the
New Haven, buy steel products from the Steel
Corporation. Each and every one of the com-
panies last named markets its securities through
J. P. Morgan & Co. ; each deposits its funds with
J. P. Morgan & Co. ; and with these funds of
each, the firm enters upon further operations.
This specific illustration is in part suppositi-
tious; but it represents truthfully the operation of
interlocking directorates. Only it must be multi-
plied many times and with many permutations
to represent fully the extent to which the interests
of a few men are intertwined. Instead of taking
the New Haven as the railroad starting point in
our example, the New York Central, the Santa
F6, the Southern, the Lehigh Valley, the Chicago ?
and Great Western, the Erie or the Pere Mar-
quette might have been selected; instead of the
Guaranty Trust Company as the banking reser-
voir, any one of a dozen other important banks or
trust companies; instead of the Penn Mutual as
purchaser of the bonds, other insurance compa-
nies; instead of the General Electric, its qualified
competitor, the Westinghouse Electric and Manu-
facturing Company. The chain is indeed end-
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? INTERLOCKING DIRECTORATES 55
less; for each controlled corporation is entwined
with many others.
As the nexus of "Big Business" the Steel
Corporation stands, of course, preeminent. The
Stanley Committee showed that the few men who
control the Steel Corporation, itself an owner of
important railroads, are directors also in twenty-
nine other railroad systems, with 126,000 miles
of line (more than half the railroad mileage of the
United States), and in important steamship
companies. Through all these alliances and the
huge traffic it controls, the Steel Corporation's
influence pervades railroad and steamship com-
panies--not as carriers only--but as the largest
customers for steel. And its influence with
users of steel extends much further. These same
few men are also directors in twelve steel-using
street railway systems, including some of the
largest in the world. They are directors in forty
machinery and similar steel-using manufacturing
companies; in many gas, oil and water com-
panies, extensive users of iron products; and
in the great wire-using telephone and telegraph
companies. The aggregate assets of these differ-
ent corporations--through which these few men
exert their influence over the business of the
United States--exceeds sixteen billion dollars.
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? 56 OTHER PEOPLE'S MONEY
Obviously, interlocking directorates, and all
that term implies, must be effectually prohibited
before the freedom of American business can be
regained. The prohibition will not be an in-
novation. It will merely give full legal sanction
to the fundamental law of morals and of human
nature: that "No man can serve two masters. "
The surprising fact is that a principle of equity so
firmly rooted should have been departed from at
all in dealing with corporations. For no rule
of law has, in other connections, been more rigor-
ously applied, than that which prohibits a trustee
from occupying inconsistent positions, from deal-
ing with himself, or from using his fiduciary
position for personal profit. And a director of a
corporation is as obviously a trustee as persons
holding similar positions in an unincorporated
association, or in a private trust estate, who are
called specifically by that name. The Courts
have recognized this fully.
Thus, the Court of Appeals of New York de-
clared in an important case:
"While not technically trustees, for the title
of the corporate property was in the corporation
itself, they were charged with the duties and
subject to the liabilities of trustees. Clothed
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? INTERLOCKING DIRECTORATES 57
with the power of controlling the property and
managing the affairs of the corporation without
let or hindrance, as to third persons, they were its
agents; but as to the corporation itself equity
holds them liable as trustees. While courts of
law generally treat the directors as agents, courts
of equity treat them as trustees, and hold them
to a strict account for any breach of the trust
relation. For all practical purposes they are
trustees, when called upon in equity to account
for their official conduct. "
NULLIFYING THE LAW
But this wholesome rule of business, so clearly
laid down, was practically nullified by courts
in creating two unfortunate limitations, as
concessions doubtless to the supposed needs of
commerce.
First: Courts held valid contracts between a
corporation and a director, or between two
corporations with a common director, where it
was shown that in making the contract, the cor-
poration was represented by independent direct-
ors and that the vote of the interested director
was unnecessary to carry the motion and his pres-
ence was not needed to constitute a quorum.
Second: Courts held that even where a com-
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? 58 OTHER PEOPLE'S MONEY
mon director participated actively in the making
of a contract between two corporations, the
contract was not absolutely void, but voidable
only at the election of the corporation.
The first limitation ignored the rule of law that
a beneficiary is entitled to disinterested advice
from all his trustees, and not merely from some;
and that a trustee may violate his trust by in-
action as well as by action. It ignored, also, the
laws of human nature, in assuming that the in-
fluence of a director is confined to the act of
voting. Every one knows that the most effective
work is done before any vote is taken, subtly,
and without provable participation. Every one
should know that the denial of minority repre-
sentation on boards of directors has resulted in
the domination of most corporations by one or
two men; and in practically banishing all criti-
cism of the dominant power. And even where
the board is not so dominated, there is too often
that "harmonious cooperation" among directors
which secures for each, in his own line, a due share
of the corporation's favors.
The second limitation--by which contracts,
in the making of which the interested director
participates actively, are held merely voidable
instead of absolutely void--ignores the teachings
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? INTERLOCKING DIRECTORATES 59
of experience. To hold such contracts merely
voidable has resulted practically in declaring
them valid. It is the directors who control
corporate action; and there is little reason to
expect that any contract, entered into by a
board with a fellow director, however unfair,
would be subsequently avoided. Appeals from
Philip drunk to Philip sober are not of frequent
occurrence, nor very fruitful. But here we lack
even an appealing party. Directors and the
dominant stockholders would, of course, not
appeal; and the minority stockholders have
rarely the knowledge of facts which is essential
to an effective appeal, whether it be made to
the directors, to the whole body of stockholders,
or to the courts. Besides, the financial burden
and the risks incident to any attempt of individual
stockholders to interfere with an existing manage-
ment is ordinarily prohibitive. Proceedings to
avoid contracts with directors are, therefore, sel-
dom brought, except after a radical change in the
membership of the board. And radical changes
in a board's membership are rare. Indeed the
Pujo Committee reports:
"None of the witnesses (the leading American
bankers testified) was able to name an instance in
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? 60 OTHER PEOPLE'S MONEY
the history of the country in which the stock-
holders had succeeded in overthrowing an exist-
ing management in any large corporation. Nor
does it appear that stockholders have ever even
succeeded in so far as to secure the investigation
of an existing management of a corporation to
ascertain whether it has been well or honestly
managed. "
/ Mr. Max Pam proposed in the April, 1913,
I Harvard Law Review, that the government come
to the aid of minority stockholders. He urged
that the president of every corporation be re-
quired to rejport annually to the stockholders, and
to state and federal officials every contract made
by the company in which any director is inter-
ested; that the Attorney-General of the United
States or the State investigate the same and take
proper proceedings to set all such contracts
aside and recover any damages suffered; or
without disaffirming the contracts to recover
(rom the interested directors the profits derived
therefrom. And to this end also, that State and
National Bank Examiners, State Superintend-
ents of Insurance, and the Interstate Commerce
Commission be directed to examine the records
of every bank, trust company, insurance com-
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? INTERLOCKING DIRECTORATES 61
pany, railroad company and every other corpora-
tion engaged in interstate commerce. Mr. Pam's
views concerning interlocking directorates are
entitled to careful study. As counsel promi-
nently identified with the organization of trusts,
he had for years full opportunity of weighing the
advantages and disadvantages of "Big Business. "
His conviction that the practice of interlocking
directorates is a menace to the public and demands
drastic legislation, is significant. And much can
be said in support of the specific measure which
he proposes. But to be effective, the remedy
must be fundamental and comprehensive.
THE ESSENTIALS OP PROTECTION
Protection to minority stockholders demands
that corporations be prohibited absolutely from
making contracts in which a director has a
private interest, and that all such contracts be
declared not voidable merely, but absolutely
void.
In the case of railroads and public-service
corporations (in contradistinction to private
industrial companies), such prohibition is de-
manded, also, in the interests of the general
public. For interlocking interests breed in-
efficiency and disloyalty; and the public pays,
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? 62 OTHER PEOPLE'S MONEY
in higher rates or in poor service, a large part of
the penalty for graft and inefficiency. Indeed,
whether rates are adequate or excessive cannot
be determined until it is known whether the
gross earnings of the corporation are properly
expended. For when a company's important
contracts are made through directors who are
interested on both sides, the common presump-
tion that money spent has been properly spent
does not prevail. And this is particularly true
in railroading, where the company so often lacks
effective competition in its own field.
But the compelling reason for prohibiting
interlocking directorates is neither the protection
of stockholders, nor the protection of the public
from the incidents of inefficiency and graft.
Conclusive evidence (if obtainable) that the
practice of interlocking directorates benefited all
stockholders and was the most efficient form of
organization, would not remove the objections.
For even more important than efficiency are in-
dustrial and political liberty; and these are
imperiled by the Money Trust. Interlocking
directorates must be prohibited, because it is impos-
sible to break the Money Trust without putting an
end to the practice in the larger corporations.
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? INTERLOCKING DIRECTORATES 68
y
? ^f BANKS AS PUBLIC-SERVICE CORPORATIONS
The practice of interlocking directorates is
peculiarly objectionable when applied to banks,
because of the nature and functions of those
institutions. Bank deposits are an important
part of our currency system. They are almost
as essential a factor in commerce as our railways.
Receiving deposits and making loans therefrom
should be treated by the law not as a private
business, but as one of the public services. And
recognizing it to be such, the law already regu-
lates it in many ways. The function of a bank
is to receive and to loan money. It has no more
right than a common carrier to use its powers
specifically to build up or to destroy other
businesses. The granting or withholding of a
loan should be determined, so far as concerns the
borrower, solely by the interest rate and the risk
involved; and not by favoritism or other con-
siderations foreign to the banking function.
Men may safely be allowed to grant or to deny
loans of their own money to whomsoever they
see fit, whatsoever their motive may be. But
bank resources are, in the main, not owned by the
stockholders nor by the directors. Nearly three-
fourths of the aggregate resources of the thirty-
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? 64 OTHER PEOPLE'S MONEY
four banking institutions in which the Morgan
associates hold a predominant influence are rep-
resented by deposits. The dependence of com-
merce and industry upon bank deposits, as the
common reservoir of quick capital is so complete,
that deposit banking should be recognized as
one of the businesses "affected with a public
interest. " And the general rule which forbids
public-service corporations from making unjust
discriminations or giving undue preference should
be applied to the operations of such banks.
Senator Owen, Chairman of the Committee
on Banking and Currency, said recently:
"My own judgment is that a bank is a public-
utility institution and cannot be treated as a
private affair, for the simple reason that the
public is invited, under the safeguards of the
government, to deposit its money with the bank,
and the public has a right to have its interests
safeguarded through organized authorities. The
logic of this is beyond escape. All banks in the
United States, public and private, should be
treated as public-utility institutions, where they
receive public deposits. "
The directors and officers of banking institu-
tions must, of course, be entrusted with wide
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? INTERLOCKING DIRECTORATES 65
discretion in the granting or denying of loans.
But that discretion should be exercised, not only
honestly as it affects stockholders, but also
impartially as it affects the public. Mere
honesty to the stockholders demands that the
interests to be considered by the directors be
the interests of all the stockholders; not the profit
of the part of them who happen to be its direct-
ors. But the general welfare demands of the
director, as trustee for the public, performance of
a stricter duty. The fact that the granting of
loans involves a delicate exercise of discretion
makes it difficult to determine whether the rule
of equality of treatment, which every public-
service corporation owes, has been performed.
But that difficulty merely emphasizes the im-
portance of making absolute the rule that banks
of deposit shall not make any loan nor engage in
any transaction in which a director has a private
interest. And we should bear this in mind:
If privately-owned banks fail in the public
duty to afford borrowers equality of opportunity,
there will arise a demand for government-owned
banks, which will become irresistible.
The statement of Mr. Justice Holmes of the
Supreme Court of the United States, in the
Oklahoma Bank case, is significant:
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? 66 OTHER PEOPLE'S MONEY
"We cannot say that the public interests to
which we have adverted, and others, are not
sufficient to warrant the State in taking the whole
business of banking under its control.
On the
contrary we are of opinion that it may go on from
regulation to prohibition except upon such con-
ditions as it may prescribe. "
Nor would the requirement that banks shall
make no loan in which a director has a private
interest impose undue hardships or restrictions
upon bank directors. It might make a bank
director dispose of some of his investments and
refrain from making others; but it often happens
that the holding of one office precludes a man
from holding another, or compels him to dispose
of certain financial interests.
A judge is disqualified from sitting in any
case in which he has even the smallest financial
interest; and most judges, in order to be free to
act in any matters arising in their court, proceed,
upon taking office, to dispose of all investments
which could conceivably bias their judgment
in any matter that might come before them. An
Interstate Commerce Commissioner is prohibited
from owning any bonds or stocks in any corpora-
OFFICIAL PRECEDENTS
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? INTERLOCKING DIRECTORATES 67
tion subject to the jurisdiction of the Commission.
It is a serious criminal offence for any executive
officer of the federal government to transact
government business with any corporation in the
pecuniary profits of which he is directly or
indirectly interested.
And the directors of our great banking in-
stitutions, as the ultimate judges of bank credit,
exercise today a function no less important to the
country's welfare than that of the judges of our
courts, the interstate commerce commissioners,
and departmental heads.
SCOPE OP THE PROHIBITION
In the proposals for legislation on this subject,
four important questions are presented:
1. Shall the principle of prohibiting inter-
locking directorates in potentially competing
corporations be applied to state banking insti-
tutions, as well as the national banks?
2. Shall it be applied to all kinds of corpora-
tions or only to banking institutions?
3. Shall the principle of prohibiting corpora-
tions from entering into transactions in which the
management has a private interest be applied to
both directors and officers or be confined in its
application to officers only?
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? 68 OTHER PEOPLE'S MONEY
4. Shall the principle be applied so as to
prohibit transactions with another corporation in
which one of its directors is interested merely as
a stockholder?
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? CHAPTER IV
SERVE ONE MASTER ONLY
The Pujo Committee has presented the
facts concerning the Money Trust so clearly
that the conclusions appear inevitable. Their
diagnosis discloses intense financial concentra-
tion and the means by which it is effected.
Combination,--the intertwining of interests,--
is shown to be the all-pervading vice of the
present system. With a view to freeing in-
dustry, the Committee recommends the enact-
ment of twenty-one specific remedial provisions.
Most of these measures are wisely framed to
meet some abuse disclosed by the evidence; and
if all of these were adopted the Pujo legislation
would undoubtedly alleviate present suffering
and aid in arresting the disease. But many of
the remedies proposed are "local" ones; and a
cure is not possible, without treatment which is
fundamental. Indeed, a major operation is
necessary. This the Committee has hesitated
to advise; although the fundamental treatment
required is simple: "Serve one Master only. "
80
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? 70 OTHER PEOPLE'S MONEY
The evils incident to interlocking director-
ates are, of course, fully recognized; but the
prohibitions proposed in that respect are re-
stricted to a very narrow sphere.
First: The Committee recognizes that po-
tentially competing corporations should not
have a common director;--but it restricts this
prohibition to directors of national banks,
saying:
"No officer or director of a national bank
shall be an officer or director of any other bank
or of any trust company or other financial or
other corporation or institution, whether or-
ganized under state or federal law, that is author-
ized to receive money on deposit or that is engaged
in the business of loaning money on collateral or
in buying and selling securities except as in this
section provided; and no person shall be an
officer or director of any national bank who is
a private banker or a member of a firm or partner-
ship of bankers that is engaged in the business of
receiving deposits: Provided, That such bank,
trust company, financial institution, banker, or
firm of bankers is located at or engaged in busi-
ness at or in the same city, town, or village as
that in which such national bank is located or
engaged in business: Provided further, That a
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? SERVE ONE MASTER ONLY 71
director of a national bank or a partner of
such director may be an officer or director of
not more than one trust company organized
by the laws of the state in which such national
bank is engaged in business and doing business
at the same place. "
Second: The Committee recognizes that a
corporation should not make a contract in which
one of the management has a private interest;
but it restricts this prohibition (1) to national
banks, and (2) to the officers, saying:
"No national bank shall lend or advance
money or credit or purchase or discount any
promissory note, draft, bill of exchange or other
evidence of debt bearing the signature or in-
dorsement of any of its officers or of any partner-
ship of which such officer is a member, directly
or indirectly, or of any corporation in which
such officer owns or has a beneficial interest
of upward of ten per centum of the capital
stock, or lend or advance money or credit to,
for or on behalf of any such officer or of any such
partnership or corporation, or purchase any se-
curity from any such officer or of or from any
partnership or corporation of which such officer
is a member or in which he is financially inter-
ested, as herein specified, or of any corporation
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? 72 OTHER PEOPLE'S MONEY
of which any of its officers is an officer at the
time of such transaction. "
Prohibitions of intertwining relations so re-
stricted, however supplemented by other pro-
visions, will not end financial concentration.
The Money Trust snake will, at most, be
scotched, not killed. The prohibition of a
common director in potentially competing cor-
porations should apply to state banks and trust
companies, as well as to national banks; and
it should apply to railroad and industrial cor-
porations as fully as to banking institutions.
The prohibition of corporate contracts in which
one of the management has a private interest
should apply to directors, as well as to officers,
and to state banks and trust companies and
to other classes of corporations, as well as to
national banks. And, as will be hereafter shown,
such broad legislation is within the power of
Congress.
Let us examine this further:
THE PROHIBITION OF COMMON DIRECTORS IN PO-
TENTIALLY COMPETING CORPORATIONS
1. National Banks. The objection to com-
mon directors, as applied to banking institutions,
is clearly shown by the Pujo Committee.
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? SERVE ONE MASTER ONLY 73
"As the first and foremost step in applying a
remedy, and also for reasons that seem to us
conclusive, independently of that consideration,
we recommend that interlocking directorates
in potentially competing financial institutions
be abolished and prohibited so far as lies in
the power of Congress to bring about that re-
sult. . . . When we find, as in a number
of instances, the same man a director in half a
dozen or more banks and trust companies all
located in the same section of the same city,
doing the same class of business and with a like
set of associates similarly situated, all belong-
ing to the same group and representing the
same class of interests, all further pretense
of competition is useless. . . . If banks
serving the same field are to be permitted
to have common directors, genuine competition
will be rendered impossible. Besides, this prac-
tice gives to such common directors the un-
fair advantage of knowing the affairs of bor-
rowers in various banks, and thus affords
endless opportunities for oppression. "
This recommendation is in accordance with
the legislation or practice of other countries.
The Bank of England, the Bank of France, the
National Bank of Belgium, and the leading
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? 74 OTHER PEOPLE'S MONEY
banks of Scotland all exclude from their boards
persons who are directors in other banks. By-
law, in Russia no person is allowed to be on the
board of management of more than one bank.
The Committee's recommendation is also in
harmony with laws enacted by the Common-
wealth of Massachusetts more than a genera-
tion ago designed to curb financial concentra-
tion through the savings banks. Of the great
wealth of Massachusetts a large part is repre-
sented by deposits in its savings banks. These
deposits are distributed among 194 different
banks, located in 131 different cities and towns.
These 194 banks are separate and distinct; not
only in form, but in fact. In order that the
banks may not be controlled by a few financiers,
the Massachusetts law provides that no execu-
tive officer or trustee (director) of any savings
bank can hold any office in any other savings
bank. That statute was passed in 1876. A few
years ago it was supplemented by providing that
none of the executive officers of a savings bank
could hold a similar office in any national bank.
Massachusetts attempted thus to curb the power
of the individual financier; and no disadvantages
are discernible. When that Act was passed the
aggregate deposits in its savings banks were
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? SERVE ONE MASTER ONLY 75
$243,340,642; the number of deposit accounts
739,289; the average deposit to each person of
the population $144. On November 1, 1912,
the aggregate deposits were $838,635,097. 85;
the number of deposit accounts 2,200,917; the
average deposit to each account $381. 04. Mas-
sachusetts has shown that curbing the power of
the few, at least in this respect, is entirely
consistent with efficiency and with the prosperity
of the whole people.
2. State Banks and Trust Companies. The
reason for prohibiting common directors in
banking institutions applies equally to national
banks and to state banks including those trust
companies which are essentially banks. In New
York City there are 37 trust companies of which
only 15 are members of the clearing house; but
those 15 had on November 2, 1912, aggregate
resources of $827,875,653. Indeed the Bankers'
Trust Company with resources of $205,000,000,
and the Guaranty Trust Company, with re-
sources of $232,000,000, are among the most
useful tools of the Money Trust. No bank in
the country has larger deposits than the latter;
and only one bank larger deposits than the
former. If common directorships were permitted
in state banks or such trust companies, the
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? 76 OTHER PEOPLE'S MONEY
charters of leading national banks would doubt-
less soon be surrendered; and the institutions
would elude federal control by re-incorporating
under state laws.
The Pujo Committee has failed to apply the
prohibition of common directorships in po-
tentially competing banking institutions rigor-
ously even to national banks. It permits the
same man to be a director in one national bank
and one trust company doing business in the
same place. The proposed concession opens the
door to grave dangers. In the first place the
provision would permit the interlocking of any
national bank not with one trust company only,
but with as many trust companies as the bank
has directors. For while under the Pujo bill no
one can be a national bank director who is di-
rector in more than one such trust company,
there is nothing to prevent each of the directors
of a bank from becoming a director in a differ-
ent trust company. The National Bank of Com-
merce of New York has a board of 38 directors.
There are 37 trust companies in the City of New
York. Thirty-seven of the 38 directors might
each become a director of a different New York
trust company: and thus 37 trust companies
would be interlocked with the National Bank of
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? SERVE ONE MASTER ONLY 77
Commerce, unless the other recommendation of
the Pujo Committee limiting the number of
directors to 13 were also adopted.
But even if the bill were amended so as to
limit the possible interlocking of a bank to a
single trust company, the wisdom of the conces-
sion would still be doubtful. It is true, as the
Pujo Committee states, that "the business that
may be transacted by" a trust company is of "a
different character" from that properly trans-
acted by a national bank. But the business
actually conducted by a trust company is, at
least in the East, quite similar; and the two
classes of banking institutions have these vital
elements in common: each is a bank of deposit,
and each makes loans from its deposits. A
private banker may also transact some business
of a character different from that properly con-
ducted by a bank; but by the terms of the
Committee's bill a private banker engaged in
the business of receiving deposits would be
prevented from being a director of a national
bank; and the reasons underlying that prohi-
bition apply equally to trust companies and to
private bankers.
3. Other Corporations. The interlocking of
banking institutions is only one of the factors
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? 78 OTHER PEOPLE'S MONEY
which have developed the Money Trust. The
interlocking of other corporations has been an
equally important element. And the prohibi-
tion of interlocking directorates should be ex-
tended to potentially competing corporations
whatever the class; to life insurance companies,
railroads and industrial companies, as well as
banking institutions. The Pujo Committee has
shown that Mr. George F. Baker is a common
director in the six railroads which haul 80 per
cent. of all anthracite marketed and own 88
per cent. of all anthracite deposits. The Mor-
gan associates are the nexus between such sup-
posedly competing railroads as the Northern
Pacific and the Great Northern; the Southern,
the Louisville & Nashville and the Atlantic
Coast Line, and between partially competing
industrials like the Westinghouse Electric and
Manufacturing Company and the General Elec-
tric. The nexus between all the large poten-
tially competing corporations must be severed,
if the Money Trust is to be broken.
PROHIBITING CORPORATE CONTRACTS IN WHICH THE
MANAGEMENT HAS A PRIVATE INTEREST
The principle of prohibiting corporate contracts
in which the management has a private interest
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? SERVE ONE MASTER ONLY 79
is applied, in the Pujo Committee's recom-
mendations, only to national banks, and in them
only to officers. All other corporations are to be
permitted to continue the practice; and even in
national banks the directors are to be free to
have a conflicting private interest, except that
they must not accept compensation for promoting
a loan of bank funds nor participate in syndicates,
promotions or underwriting of securities in which
their banks may be interested as underwriters or
owners or lenders thereon: that all loans or other
transactions in which a director is interested shall
be made in his own name; and shall be authorized
only after ample notice to co-directors; and that
the facts shall be spread upon the records of the
corporation.
The Money Trust would not be disturbed by a
prohibition limited to officers. Under a law of
that character, financial control would continue
to be exercised by the few without substantial
impairment; but the power would be exerted
through a somewhat different channel. Bank
officers are appointees of the directors; and
ordinarily their obedient servants. Individuals
who, as bank officers, are now important factors
in the financial concentration, would doubtless
resign as officers and become merely directors.
