The "great bankers" had no part
in initiating it.
in initiating it.
Louis Brandeis - 1914 - Other People's Money, and How Bankers Use It
If every city acts alone, in endeavoring
to market its bonds direct, the city's bond-selling
activity will necessarily be sporadic. Its ability
to supply the investor will be limited by its own
necessities for money. The market will also be
limited to the bonds of the particular municipal-
ity. But if a state and its cities should cooperate,
there could be developed a continuous and broad
market for the sale of bonds "over-the-counter. "
The joint selling agency of over three hundred
municipalities,--as in Massachusetts--would natu-
rally have a constant supply of assorted bonds
and notes which could be had in as small amounts
as the investor might want to buy them. It
would be a simple matter to establish such a
joint selling agency by which municipalities,
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? 130 OTHER PEOPLE'S MONEY
under proper regulation of, and aid from the
state, would cooperate.
And cooperation among the cities and with the
state might serve in another important respect.
These 354 Massachusetts municipalities carry in
the aggregate large bank balances. Sometimes
the balance carried by a city represents unex-,
pended revenues; sometimes unexpended pro-
ceeds of loans. On these balances they usually
receive from the banks 2 per cent. interest. The
balances of municipalities vary like those of other
depositors; one having idle funds, when another
is in need. Why should not all of these cities
and towns cooperate, making, say, the State their
common banker, and supply each other with
funds as farmers and laborers cooperate through
credit unions? Then cities would get, instead of
2 per cent. on their balances, all their money
was worth.
The Commonwealth of Massachusetts holds
now in its sinking and other funds nearly $30,000-
000 of Massachusetts municipal securities, con-
stituting nearly three-fourths of all securities held
in these funds. Its annual purchases aggregate
nearly $4,000,000. Its purchases direct from
cities and towns have already exceeded $1,000,000
this year. It would be but a simple extension of
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? SUPERFLUOUS BANKERS 131
the state's function to cooperate, as indicated, in
a joint, Municipal Bond Selling Agency an dCredit
Union. It would be a distinct advance in the
efficiency of state and municipal financing;
and what is even more important, a long step
toward the emancipation of the people from
banker-control.
Strong corporations with established reputa-
tions, locally or nationally, could emancipate
themselves from the banker in a similar manner.
Public-service corporations in some of our leading
cities could easily establish "over-the-counter"
home markets for their bonds; and would be
greatly aided in this by the supervision now being
exercised by some state commissions over the
issue of securities by such corporations. Such
corporations would gain thereby not only in
freedom from banker-control and exactions, but
in the winning of valuable local support. The
investor's money would be followed by his sym-
pathy. In things economic, as well as in things
political, wisdom and safety lie in direct appeals to
the people.
The Pennsylvania Railroad now relies largely
upon its stockholders for new capital. But a
CORPORATE SELF-HELP
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? 132 OTHER PEOPLE'S MONEY
corporation with its long-continued success and
reputation for stability should have much wider
financial support and should eliminate the banker
altogether. With the 2,700 stations on its
system, the Pennsylvania could, with a slight
expense, create nearly as many avenues through
which money would be obtainable to meet its
growing needs.
BANKER PROTECTORS
It may be urged that reputations often outlive
the conditions which justify them, that outlived
reputations are pitfalls to the investors; and that
the investment banker is needed to guard him
from such dangers. True; but when have the
big bankers or their little satellites protected the
people from such pitfalls?
Was there ever a more be-bankered railroad
than the New Haven? Was there ever a more
banker-led community of investors than New
England? Six years before the fall of that great
system, the hidden dangers were pointed out to
these banker-experts. Proof was furnished of
the rotting timbers. The disaster-breeding poli-
cies were laid bare. The bankers took no action.
Repeatedly, thereafter, the bankers' attention
was called to the steady deterioration of the
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? SUPERFLUOUS BANKERS 133
structure. The New Haven books disclose 11,-
481 stockholders who are residents of Massa-
chusetts; 5,682 stockholders in Connecticut; 735
in Rhode Island; and 3,510 in New York. Of
the New Haven stockholders 10,474 were women.
Of the New Haven stockholders 10,222 were of
such modest means that their holdings were from
one to ten shares only. The investors were
sorely in need of protection. The city directories
disclose 146 banking houses in Boston, 26 in
Providence, 33 in New Haven and Hartford,
and 357 in New York City. But who, connected
with those New England and New York bank-
ing houses, during the long years which pre-
ceded the recent investigation of the Interstate
Commerce Commission, raised either voice or
pen in protest against the continuous mismanage-
ment of that great trust property or warned the
public of the impending disaster? Some of the
bankers sold their own stock holdings. Some
bankers whispered to a few favored customers
advice to dispose of New Haven stock. But not
one banker joined those who sought to open the
eyes of New England to the impending disaster
and to avert it by timely measures. New
England's leading banking houses were ready to
"cooperate" with the New Haven management
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? 184 OTHER PEOPLE'S MONEY
in taking generous commissions for marketing the
endless supply of new securities; but they did
nothing to protect the investors. Were these
bankers blind? Or were they afraid to oppose
the will of J. P. Morgan & Co. ?
Perhaps it is the banker who, most of all,
needs the New Freedom.
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? CHAPTER VII
BIG MEN AND LITTLE BUSINESS
J. P. Morgan & Co. declare, in their letter to
the Pujo Committee, that "practically all the
railroad and industrial development of this coun-
try has taken place initially through the medium
of the great banking houses. " That statement is
entirely unfounded in fact. On the contrary
nearly every such contribution to our comfort and
prosperity was "initiated" urithont their aid.
The "great banking houses" came into relation
with these enterprises, either after success had
been attained, or upon "reorganization" after
the possibility of success had been demonstrated,
but the funds of the hardy pioneers, who had
risked their all, were exhausted.
This is true of our early railroads, of our
early street railways, and of the automobile; of
the telegraph, the telephone and the wireless;
of gas and oil; of harvesting machinery, and of
our steel industry; of the textile, paper and shoe
industries; and of nearly every other important
branch of manufacture. The initiation of each
135
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? 136 OTHER PEOPLE'S MONEY
of these enterprises may properly be character-
ized as "great transactions"; and the men who
contributed the financial aid and business man-
agement necessary for their introduction are
entitled to share, equally with inventors, in our
gratitude for what has been accomplished. But
the instances are extremely rare where the origi-
nal financing of such enterprises was undertaken
by investment bankers, great or small. It was
usually done by some common business man,
accustomed to taking risks; or by some well-to-
do friend of the inventor or pioneer, who was
influenced largely by considerations other than
money-getting. Here and there you will find
that banker-aid was given; but usually in those
cases it was a small local banking concern, not
a "great banking house" which helped to "initi-
ate" the undertaking.
RAILROADS
We have come to associate the great bankers
with railroads. But their part was not conspicu-
ous in the early history of the Eastern railroads;
and in the Middle West the experience was, to
some extent, similar. The Boston & Maine
Railroad owns and leases 2,215 miles of line; but
it is a composite of about 166 separate railroad
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? 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 market its bonds direct, the city's bond-selling
activity will necessarily be sporadic. Its ability
to supply the investor will be limited by its own
necessities for money. The market will also be
limited to the bonds of the particular municipal-
ity. But if a state and its cities should cooperate,
there could be developed a continuous and broad
market for the sale of bonds "over-the-counter. "
The joint selling agency of over three hundred
municipalities,--as in Massachusetts--would natu-
rally have a constant supply of assorted bonds
and notes which could be had in as small amounts
as the investor might want to buy them. It
would be a simple matter to establish such a
joint selling agency by which municipalities,
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? 130 OTHER PEOPLE'S MONEY
under proper regulation of, and aid from the
state, would cooperate.
And cooperation among the cities and with the
state might serve in another important respect.
These 354 Massachusetts municipalities carry in
the aggregate large bank balances. Sometimes
the balance carried by a city represents unex-,
pended revenues; sometimes unexpended pro-
ceeds of loans. On these balances they usually
receive from the banks 2 per cent. interest. The
balances of municipalities vary like those of other
depositors; one having idle funds, when another
is in need. Why should not all of these cities
and towns cooperate, making, say, the State their
common banker, and supply each other with
funds as farmers and laborers cooperate through
credit unions? Then cities would get, instead of
2 per cent. on their balances, all their money
was worth.
The Commonwealth of Massachusetts holds
now in its sinking and other funds nearly $30,000-
000 of Massachusetts municipal securities, con-
stituting nearly three-fourths of all securities held
in these funds. Its annual purchases aggregate
nearly $4,000,000. Its purchases direct from
cities and towns have already exceeded $1,000,000
this year. It would be but a simple extension of
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? SUPERFLUOUS BANKERS 131
the state's function to cooperate, as indicated, in
a joint, Municipal Bond Selling Agency an dCredit
Union. It would be a distinct advance in the
efficiency of state and municipal financing;
and what is even more important, a long step
toward the emancipation of the people from
banker-control.
Strong corporations with established reputa-
tions, locally or nationally, could emancipate
themselves from the banker in a similar manner.
Public-service corporations in some of our leading
cities could easily establish "over-the-counter"
home markets for their bonds; and would be
greatly aided in this by the supervision now being
exercised by some state commissions over the
issue of securities by such corporations. Such
corporations would gain thereby not only in
freedom from banker-control and exactions, but
in the winning of valuable local support. The
investor's money would be followed by his sym-
pathy. In things economic, as well as in things
political, wisdom and safety lie in direct appeals to
the people.
The Pennsylvania Railroad now relies largely
upon its stockholders for new capital. But a
CORPORATE SELF-HELP
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? 132 OTHER PEOPLE'S MONEY
corporation with its long-continued success and
reputation for stability should have much wider
financial support and should eliminate the banker
altogether. With the 2,700 stations on its
system, the Pennsylvania could, with a slight
expense, create nearly as many avenues through
which money would be obtainable to meet its
growing needs.
BANKER PROTECTORS
It may be urged that reputations often outlive
the conditions which justify them, that outlived
reputations are pitfalls to the investors; and that
the investment banker is needed to guard him
from such dangers. True; but when have the
big bankers or their little satellites protected the
people from such pitfalls?
Was there ever a more be-bankered railroad
than the New Haven? Was there ever a more
banker-led community of investors than New
England? Six years before the fall of that great
system, the hidden dangers were pointed out to
these banker-experts. Proof was furnished of
the rotting timbers. The disaster-breeding poli-
cies were laid bare. The bankers took no action.
Repeatedly, thereafter, the bankers' attention
was called to the steady deterioration of the
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? SUPERFLUOUS BANKERS 133
structure. The New Haven books disclose 11,-
481 stockholders who are residents of Massa-
chusetts; 5,682 stockholders in Connecticut; 735
in Rhode Island; and 3,510 in New York. Of
the New Haven stockholders 10,474 were women.
Of the New Haven stockholders 10,222 were of
such modest means that their holdings were from
one to ten shares only. The investors were
sorely in need of protection. The city directories
disclose 146 banking houses in Boston, 26 in
Providence, 33 in New Haven and Hartford,
and 357 in New York City. But who, connected
with those New England and New York bank-
ing houses, during the long years which pre-
ceded the recent investigation of the Interstate
Commerce Commission, raised either voice or
pen in protest against the continuous mismanage-
ment of that great trust property or warned the
public of the impending disaster? Some of the
bankers sold their own stock holdings. Some
bankers whispered to a few favored customers
advice to dispose of New Haven stock. But not
one banker joined those who sought to open the
eyes of New England to the impending disaster
and to avert it by timely measures. New
England's leading banking houses were ready to
"cooperate" with the New Haven management
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? 184 OTHER PEOPLE'S MONEY
in taking generous commissions for marketing the
endless supply of new securities; but they did
nothing to protect the investors. Were these
bankers blind? Or were they afraid to oppose
the will of J. P. Morgan & Co. ?
Perhaps it is the banker who, most of all,
needs the New Freedom.
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? CHAPTER VII
BIG MEN AND LITTLE BUSINESS
J. P. Morgan & Co. declare, in their letter to
the Pujo Committee, that "practically all the
railroad and industrial development of this coun-
try has taken place initially through the medium
of the great banking houses. " That statement is
entirely unfounded in fact. On the contrary
nearly every such contribution to our comfort and
prosperity was "initiated" urithont their aid.
The "great banking houses" came into relation
with these enterprises, either after success had
been attained, or upon "reorganization" after
the possibility of success had been demonstrated,
but the funds of the hardy pioneers, who had
risked their all, were exhausted.
This is true of our early railroads, of our
early street railways, and of the automobile; of
the telegraph, the telephone and the wireless;
of gas and oil; of harvesting machinery, and of
our steel industry; of the textile, paper and shoe
industries; and of nearly every other important
branch of manufacture. The initiation of each
135
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? 136 OTHER PEOPLE'S MONEY
of these enterprises may properly be character-
ized as "great transactions"; and the men who
contributed the financial aid and business man-
agement necessary for their introduction are
entitled to share, equally with inventors, in our
gratitude for what has been accomplished. But
the instances are extremely rare where the origi-
nal financing of such enterprises was undertaken
by investment bankers, great or small. It was
usually done by some common business man,
accustomed to taking risks; or by some well-to-
do friend of the inventor or pioneer, who was
influenced largely by considerations other than
money-getting. Here and there you will find
that banker-aid was given; but usually in those
cases it was a small local banking concern, not
a "great banking house" which helped to "initi-
ate" the undertaking.
RAILROADS
We have come to associate the great bankers
with railroads. But their part was not conspicu-
ous in the early history of the Eastern railroads;
and in the Middle West the experience was, to
some extent, similar. The Boston & Maine
Railroad owns and leases 2,215 miles of line; but
it is a composite of about 166 separate railroad
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? 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
? ? Generated for (University of Chicago) on 2014-06-10 03:29 GMT / http://hdl. handle. net/2027/uc1. 32106000978228 Public Domain, Google-digitized / http://www. hathitrust. org/access_use#pd-google
? 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.
