;
Asheville
and Raleigh, N.
Louis Brandeis - 1914 - Other People's Money, and How Bankers Use It
BIG MEN AND LITTLE BUSINESS 147
combining the Thomson-Houston and the Edison.
To his continued service, supported by other
Thomson-Houston men in high positions, the
great prosperity of the company is, in large part,
due. The two companies so combined controlled
probably one-half of all electrical patents then
existing in America; and certainly more than
half of those which had any considerable value.
In 1896 the General Electric pooled its patents
with the Westinghouse, and thus competition was
further restricted. In 1903 the General Electric
absorbed the Stanley Electric Company, its
other large competitor; and became the largest
manufacturer of electric apparatus and machinery
in the world. In 1912 the resources of the Com-
pany were $131,942,144. It billed sales to the
amount of $89,182,185. It employed directly
over 60,000 persons,--more than a fourth as many
as the Steel Trust. And it is protected against
"undue" competition; for one of the Morgan
partners has been a director, since 1909, in the
Westinghouse,--the only other large electrical
machinery company in America.
THE AUTOMOBILE
The automobile industry is about twenty
years old. It is now America's most prosperous
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? 148 OTHER PEOPLE'S MONEY
business. When Henry B. Joy, President of the
Packard Motor Car Company, was asked to
what extent the bankers aided in "initiating"
the automobile, he replied:
"It is the observable facts of history, it is also
my experience of thirty years as a business man,
banker, etc. , that first the seer conceives an oppor-
tunity. He has faith in his almost second sight.
He believes he can do something--develop a
business--construct an industry--build a railroad
--or Niagara Falls Power Company,--and make
it pay!
"Now the human measure is not the actual
physical construction, but the 'make it pay'!
"A man raised the money in the late '90s and
built a beet sugar factory in Michigan. Wise-
acres said it was nonsense. He gathered together
the money from his friends who would take a
chance with him. He not only built the sugar
factory (and there was never any doubt of his
ability to do that) but he made it pay. The next
year two more sugar factories were built, and
were financially successful. These were built by
private individuals of wealth, taking chances
in the face of cries of doubting bankers and
trust companies.
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? BIG MEN AND LITTLE BUSINESS 149
"Once demonstrated that the industry was a
sound one financially and then bankers and trust
companies would lend the new sugar companies
which were speedily organized a large part of
the necessary funds to construct and operate.
"The motor-car business was the same.
"When a few gentlemen followed me in my
vision of the possibilities of the business, the
banks and older business men (who in the main
were the banks) said, 'fools and their money soon
to be parted'--etc. , etc.
"Private capital at first establishes an industry,
backs it through its troubles, and, if possible,
wins financial success when banks would not lend
a dollar of aid.
"The business once having proved to be prac-
ticable and financially successful, then do the
banks lend aid to its needs. "
Such also was the experience of the greatest of
the many financial successes in the automobile
industry--the Ford Motor Company.
HOW BANKERS ARREST DEVELOPMENT
But "great banking houses" have not merely
failed to initiate industrial development; they
have definitely arrested development because to
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? 150 OTHER PEOPLE'S MONEY
them the creation of the trusts is largely due.
The recital in the Memorial addressed to the
President by the Investors' Guild in November,
1911, is significant:
"It is a well-known fact that modern trade
combinations tend strongly toward constancy of
process and products, and by their very nature
are opposed to new processes and new products
originated by independent inventors, and hence
tend to restrain competition in the development
and sale of patents and patent rights; and con-
sequently tend to discourage independent inven-
tive thought, to the great detriment of the nation,
and with injustice to inventors whom the Con-
stitution especially intended to encourage and
protect in their rights. "
And more specific was the testimony of the
Engineering News:
"We are today something like five years behind
Germany in iron and steel metallurgy, and such
innovations as are being introduced by our iron
and steel manufacturers are most of them merely
following the lead set by foreigners years ago.
"We do not believe this is because American
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? BIG MEN AND LITTLE BUSINESS 151
engineers are any less ingenious or original than
those of Europe, though they may indeed be
deficient in training and scientific education com-
pared with those of Germany. We believe the
main cause is the wholesale consolidation which
has taken place in American industry. A huge
organization is too clumsy to take up the develop-
ment of an original idea. With the market
closely controlled and profits certain by following
standard methods, those who control our trusts
do not want the bother of developing anything
new.
"We instance metallurgy only by way of illus-
tration. There are plenty of other fields of indus-
try where exactly the same condition exists. We
are building the same machines and using the
same methods as a dozen years ago, and the real
advances in the art are being made by European
inventors and manufacturers. "
To which President Wilson's statement may
be added:
"I am not saying that all invention had been
stopped by the growth of trusts, but I think it is
perfectly clear that invention in many fields has
been discouraged, that inventors have been
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? 152 OTHER PEOPLE'S MONEY
prevented from reaping the full fruits of their
ingenuity and industry, and that mankind has
been deprived of many comforts and con-
veniences, as well as the opportunity of buying
at lower prices.
"Do you know, have you had occasion to
learn, that there is no hospitality for invention,
now-a-days? "
TRUSTS AND FINANCIAL CONCENTRATION
The fact that industrial monopolies arrest
development is more serious even than the
direct burden imposed through extortionate
prices. But the most harm-bearing incident of
the trusts is their promotion of financial con-
centration. Industrial trusts feed the money
trust. Practically every trust created has de-
stroyed the financial independence of some
communities and of many properties; for it has
centered the financing of a large part of whole
lines of business in New York, and this usually
with one of a few banking houses. This is well
illustrated by the Steel Trust, which is a trust of
trusts; that is, the Steel Trust combines in one
huge holding company the trusts previously
formed in the different branches of the steel
business. Thus the Tube Trust combined 17
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? BIG MEN AND LITTLE BUSINESS 153
tube mills, located in 16 different cities, scat-
tered over 5 states and owned by 13 different
companies. The wire trust combined 19 mills;
the sheet steel trust 26; the bridge and structural
trust 27; and the tin plate trust 36; all scattered
similarly over many states. Finally these and
other companies were formed into the United
States Steel Corporation, combining 228 com-
panies in all, located in 127 cities and towns,
scattered over 18 states. Before the combina-
tions were effected, nearly every one of these
companies was owned largely by those who
managed it, and had been financed, to a large
extent, in the place, or in the state, in which it
was located. When the Steel Trust was formed
all these concerns came under one management.
Thereafter, the financing of each of these 228
corporations (and some which were later ac-
quired) had to be done through or with the
consent of J. P. Morgan & Co. That was the
greatest step in financial concentration ever taken.
STOCK EXCHANGE INCIDENTS
The organization of trusts has served in another
way to increase the power of the Money Trust.
Few of the independent concerns out of which
the trusts have been formed, were listed on the
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? 154 OTHER PEOPLE'S MONEY
New York Stock Exchange; and few of them had
financial offices in New York. Promoters of
large corporations, whose stock is to be held by
the public, and also investors, desire to have their
securities listed on the New York Stock Exchange.
Under the rules of the Exchange, no security can
be so listed unless the corporation has a transfer
agent and registrar in New York City. Further-
more, banker-directorships have contributed
largely to the establishment of the financial
offices of the trusts in New York City. That
alone would tend to financial concentration.
But the listing of the stock enhances the power
of the Money Trust in another way. An in-
dustrial stock, once listed, frequently becomes
the subject of active speculation; and speculation
feeds the Money Trust indirectly in many ways.
It draws the money of the country to New York.
The New York bankers handle the loans of other
people's money on the Stock Exchange; and
members of the Stock Exchange receive large
amounts from commissions. For instance: There
are 5,084,952 shares of United States Steel com-
mon stock outstanding. But in the five years
ending December 31, 1912, speculation in that
stock was so extensive that there were sold on ,
the Exchange an average of 29,380,888 shares
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? BIG MEN AND LITTLE BUSINESS 155
a year; or nearly six times as much as there
is Steel common in existence. Except where
the transactions are by or for the brokers, sales
on the Exchange involve the payment of twenty-
five cents in commission for each share of stock
sold; that is, twelve and one-half cents by the
seller and twelve and one-half cents by the buyer.
Thus the commission from the Steel common
alone afforded a revenue averaging many millions
a year. The Steel preferred stock is also much
traded in; and there are 138 other industrials,
largely trusts, listed on the New York Stock
Exchange.
TRUST RAMIFICATIONS
But the potency of trusts as a factor in financial
concentration is manifested in still other ways;
notably through their ramifying operations.
This is illustrated forcibly by the General Electric
Company's control of water-power companies
which has now been disclosed in an able report of
the United States Bureau of Corporations:
"The extent of the General Electric influence
is not fully revealed by its consolidated balance
sheet. A very large number of corporations are
connected with it through its subsidiaries and
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? 156 OTHER PEOPLE'S MONEY
through corporations controlled by these sub-
sidiaries or affiliated with them. There is a still
wider circle of influence due to the fact that
officers and directors of the General Electric
Co. and its subsidiaries are also officers or
directors of many other corporations, some of
whose securities are owned by the General
Electric Company.
"The General Electric Company holds in the
first place all the common stock in three security
holding companies: the United Electric Securities
Co. , the Electrical Securities Corporation, and
the Electric Bond and Share Co. Directly and
through these corporations and their officers the
General Electric controls a large part of the
water power of the United States.
. . . "The water-power companies in the
General Electric group are found in 18 States.
These 18 States have 2,325,757 commercial
horsepower developed or under construction,
and of this total the General Electric group in-
cludes 939,115 h. p. or 40. 4 per cent. The
greatest amount of power controlled by the
companies in the General Electric group in any
State is found in Washington. This is followed
by New York, Pennsylvania, California, Mon-
tana, Iowa, Oregon, and Colorado. In five of
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? BIG MEN AND LITTLE BUSINESS 157
the States shown in the table the water-power
companies included in the General Electric group
control more than 50 per cent. of the com-
mercial power, developed and under construction.
The percentage of power in the States included in
the General Electric group ranges from a little
less than 2 per cent. in Michigan to nearly 80
per cent. in Pennsylvania. In Colorado they
control 72 per cent. ; in New Hampshire 61 per
cent. ; in Oregon 58 per cent. ; and in Washington
55 per cent.
Besides the power developed and under con-
struction water-power concerns included in the
General Electric group own in the States shown
in the table 641,600 h. p. undeveloped. "
This water power control enables the General
Electric group to control other public service
corporations:
"The water-power companies subject to
General Electric influence control the street
railways in at least 16 cities and towns; the
electric-light plants in 78 cities and towns; gas
plants in 19 cities and towns; and are affiliated
with the electric light and gas plants in other
towns. Though many of these communities,
particularly those served with light only, are
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? 158 OTHER PEOPLE'S MONEY
small, several of them are the most important in
the States where these water-power companies
operate. The water-power companies in the
General Electric group own, control, or are
closely affiliated with, the street railways in
Portland and Salem, Ore. ; Spokane, Wash. ;
Great Falls, Mont. ; St. Louis, Mo. ; Winona,
Minn. ; Milwaukee and Racine, Wis. ; Elmira,
N. Y.
; Asheville and Raleigh, N. C, and other
relatively less important towns. The towns in
which the lighting plants (electric or gas) are
owned or controlled include Portland, Salem,
Astoria, and other towns in Oregon; Bellingham
and other towns in Washington; Butte, Great
Falls, Bozeman and other towns in Montana;
Leadville and Colorado Springs in Colorado;
St. Louis, Mo. ; Milwaukee, Racine and several
small towns in Wisconsin; Hudson and Rens-
selaer, N. Y. ; Detroit, Mich. ; Asheville and
Raleigh, N. C. ; and in fact one or more towns in
practically every community where developed
water power is controlled by this group. In
addition to the public-service corporations thus
controlled by the water-power companies subject
to General Electric influence, there are numerous
public-service corporations in other municipalities
that purchase power from the hydroelectric
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? BIG MEN AND LITTLE BUSINESS 159
developments controlled by or affiliated with the
General Electric Co. This is true of Denver,
Colo. , which has already been discussed. In
Baltimore, Md. , a water-power concern in the
General Electric group, namely, the Pennsylvania
Water & Power Co. , sells 20,000 h. p. to the
Consolidated Gas, Electric Light & Power Co. ,
which controls the entire light and power business
of that city. The power to operate all the
electric street railway systems of Buffalo, N. Y. ,
and vicinity, involving a trackage of approxi-
mately 375 miles, is supplied through a subsidiary
of the Niagara Falls Power Co. "
And the General Electric Company, through
the financing of public service companies, exer-
cises a like influence in communities where there
is no water power:
"It, or its subsidiaries, has acquired control of
or an interest in the public-service corporations
of numerous cities where there is no water-power
connection, and it is affiliated with still others by
virtue of common directors. . . . This vast
network of relationship between hydro-electric
corporations through prominent officers and
directors of the largest manufacturer of electrical
machinery and supplies in the United States is
highly significant. . . .
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? 160 OTHER PEOPLE'S MONEY
"It is possible that this relationship to such a
large number of strong financial concerns, through
common officers and directors, affords the General
Electric Co. an advantage that may place rivals
at a corresponding disadvantage. Whether or
not this great financial power has been used to
the particular disadvantage of any rival water-
power concern is not so important as the fact that
such power exists and that it might be so used at
any time. "
THE SHERMAN LAW
The Money Trust cannot be broken, if we
allow its power to be constantly augmented.
To break the Money Trust, we must stop that
power at its source. The industrial trusts are
among its most effective feeders. Those which
are illegal should be dissolved. The creation of
new ones should be prevented. To this end the
Sherman Law should be supplemented both by
providing more efficient judicial machinery,
and by creating a commission with administra-
tive functions to aid in enforcing the law.
When that is done, another step will have been
taken toward securing the New Freedom. But
restrictive legislation alone will not suffice. We
should bear in mind the admonition with which
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? BIG MEN AND LITTLE BUSINESS 161
the Commissioner of Corporations closes his
review of our water power development:
"There is . . . presented such a situation in
water powers and other public utilities as might
bring about at any time under a single manage-
ment the control of a majority of the developed
water power in the United States and similar
control over the public utilities in a vast number
of cities and towns, including some of the most
important in the country. "
We should conserve all rights which the Fed-
eral Government and the States now have in
our natural resources, and there should be a
complete separation of our industries from rail-
roads and public utilities.
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? CHAPTER VIII
A CURSE OF BIGNESS
Bigness has been an important factor in the
rise of the Money Trust: Big railroad systems,
Big industrial trusts, Big public service com-
panies; and as instruments of these Big banks
and Big trust companies. J. P. Morgan & Co.
(in their letter of defence to the Pujo Committee)
urge the needs of Big Business as the justification
for financial concentration. They declare that
what they euphemistically call "cooperation"
is "simply a further result of the necessity for
handling great transactions"; that "the country
obviously requires not only the larger individual
banks, but demands also that those banks shall
cooperate to perform efficiently the country's
business"; and that "a step backward along this
line would mean a halt in industrial progress
that would affect every wage-earner from the
Atlantic to the Pacific. " The phrase "great
transactions" is used by the bankers apparently
as meaning large corporate security issues.
Leading bankers have undoubtedly cooperated
during the last 15 years in floating some very
162
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? A CURSE OF BIGNESS 163
large security issues, as well as many small ones.
But relatively few large issues were made
necessary by great improvements undertaken or
by industrial development. Improvements and
development ordinarily proceed slowly. For
them, even where the enterprise involves large
expenditures, a series of smaller issues is usually
more appropriate than single large ones. This is
particularly true in the East where the building
of new railroads has practically ceased. The
"great" security issues in which bankers have
cooperated were, with relatively few exceptions,
made either for the purpose of effecting com-
binations or as a consequence of such combina-
tions. Furthermore, the combinations which
made necessary these large security issues or
underwritings were, in most cases, either contrary
to existing statute law, or contrary to laws recom-
mended by the Interstate Commerce Commis-
sion, or contrary to the laws of business efficiency.
So both the financial concentration and the
combinations which they have served were, in
the main, against the public interest. Size,
we are told, is not a crime. But size may, at
least, become noxious by reason of the means
through which it was attained or the uses to
which it is put. And it is size attained by
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? 164 OTHER PEOPLE'S MONEY
combination, instead of natural growth, which
has contributed so largely to our financial con-
centration. Let us examine a few cases:
THE HAKEIMAN PACIFICS
J. P. Morgan & Co. , in urging the "need of
large banks and the cooperation of bankers,"
said:
"The Attorney-General's recent approval of
the Union Pacific settlement calls for a single com-
mitment on the part of bankers of $126,000,000. "
This $126,000,000 "commitment" was not
made to enable the Union Pacific to secure
capital. On the contrary it was a guaranty that
it would succeed in disposing of its Southern
Pacific stock to that amount. And when it had
disposed of that stock, it was confronted with the
serious problem--what to do with the proceeds?
This huge underwriting became necessary solely
because the Union Pacific had violated the
Sherman Law. It had acquired that amount of
Southern Pacific stock illegally; and the Supreme
Court of the United States finally decreed that
the illegality cease. This same illegal purchase
had been the occasion, twelve years earlier, of
another "great transaction,"--the issue of a
$100,000,000 of Union Pacific bonds, which were
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? A CURSE OF BIGNESS 165
sold to provide funds for acquiring this Southern
Pacific and other stocks in violation of law.
Bankers "cooperated" also to accomplish that.
UNION PACIFIC IMPROVEMENTS
The Union Pacific and its auxiliary lines (the
Oregon Short Line, the Oregon Railway and
Navigation and the Oregon-Washington Railroad)
made, in the fourteen years, ending June 30,1912,
issues of securities aggregating $375,158,183 (of
which $46,500,000 were refunded or redeemed);
but the large security issues served mainly to sup-
ply funds for engaging in illegal combinations or
stock speculation. The extraordinary improve-
ments and additions that raised the Union Pacific
Railroad to a high state of efficiency were
provided mainly by the net earnings from the
operation of its railroads. And note how great
the improvements and additions were: Tracks
were straightened, grades were lowered, bridges
were rebuilt, heavy rails were laid, old equipment
was replaced by new; and the cost of these was
charged largely as operating expense. Additional
equipment was added, new lines were built
or acquired, increasing the system by 3524
miles of fine, and still other improvements and
betterments were made and charged to capital
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? 186 OTHER PEOPLE'S MONEY
account. These expenditures aggregated $191,-
512,328. But it needed no "large security
issues" to provide the capital thus wisely ex-
pended. The net earnings from the operations
of these railroads were so large that nearly all
these improvements and additions could have
been made without issuing on the average more
than $1,000,000 a year of additional securities for
"new money," and the company still could have
paid six per cent. dividends after 1906 (when that
rate was adopted). For while $13,679,452 a
year, on the average, was charged to Cost
of Road and Equipment, the surplus net
earnings and other funds would have yielded, on
the average, $12,750,982 a year available for
improvements and additions, without raising
money on new security issues.
HOW THE SECUBITT PROCEEDS WERE SPENT
The $375,000,000 securities (except to the
extent of about $13,000,000 required for im-
provements, and the amounts applied for refund-
ing and redemptions) were available to buy
stocks and bonds of other companies. And some
of the stocks so acquired were sold at large
profits, providing further sums to be employed
in stock purchases.
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? A CURSE OF BIGNESS 167
The $375,000,000 Union Pacific Lines security-
issues, therefore, were not needed to supply
funds for Union Pacific improvements; nor did
these issues supply funds for the improvement of
any of the companies in which the Union Pacific
invested (except that certain amounts were
advanced later to aid in financing the Southern
Pacific). They served, substantially, no purpose
save to transfer the ownership of railroad stocks
from one set of persons to another.
Here are some of the principal investments:
1. $91,657,500, in acquiring and financing the Southern
Pacific.
2. $89,391,401, in acquiring the Northern Pacific stock and
stock of the Northern Securities Co.
3. $45,466,960, in acquiring Baltimore & Ohio stock.
4. $37,692,256, in acquiring Illinois Central stock.
5. $23,205,679, in acquiring New York Central stock.
6. $10,395,000, in acquiring Atchison, Topeka & Santa Fe
stock.
7. $8,946,781, in acquiring Chicago & Alton stock.
8. $11,610,187, in acquiring Chicago, Milwaukee & St. Paul
stock.
9. $6,750,423, in acquiring Chicago & Northwestern stock.
10. $6,936,696, in acquiring Railroad Securities Co. stock
(Illinois Central stock. )
The immediate effect of these stock acquisi-
tions, as stated by the Interstate Commerce
Commission in 1907, was merely this:
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? 168 OTHER PEOPLE'S MONEY
"Mr. Harriman may journey by steamship
from New York to New Orleans, thence by rail
to San Francisco, across the Pacific Ocean to
China, and, returning by another route to the
United States, may go to Ogden by any one of
three rail lines, and thence to Kansas City or
Omaha, without leaving the deck or platform
of a carrier which he controls, and without
duplicating any part of his journey.
"He has further what appears to be a dominant
control in the Illinois Central Railroad running
directly north from the Gulf of Mexico to the
Great Lakes, parallel to the Mississippi River;
and two thousand miles west of the Mississippi
he controls the only line of railroad parallel to
the Pacific Coast, and running from the Colorado
River to the Mexican border. . . .
"The testimony taken at this hearing shows
that about fifty thousand square miles of terri-
tory in the State of Oregon, surrounded by the
lines of the Oregon Short Line Railroad Com-
pany, the Oregon Railroad and Navigation
Company, and the Southern Pacific Company,
is not developed. While the funds of those
companies which could be used for that purpose
are being invested in stocks like the New York
Central and other lines having only a remote
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combining the Thomson-Houston and the Edison.
To his continued service, supported by other
Thomson-Houston men in high positions, the
great prosperity of the company is, in large part,
due. The two companies so combined controlled
probably one-half of all electrical patents then
existing in America; and certainly more than
half of those which had any considerable value.
In 1896 the General Electric pooled its patents
with the Westinghouse, and thus competition was
further restricted. In 1903 the General Electric
absorbed the Stanley Electric Company, its
other large competitor; and became the largest
manufacturer of electric apparatus and machinery
in the world. In 1912 the resources of the Com-
pany were $131,942,144. It billed sales to the
amount of $89,182,185. It employed directly
over 60,000 persons,--more than a fourth as many
as the Steel Trust. And it is protected against
"undue" competition; for one of the Morgan
partners has been a director, since 1909, in the
Westinghouse,--the only other large electrical
machinery company in America.
THE AUTOMOBILE
The automobile industry is about twenty
years old. It is now America's most prosperous
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? 148 OTHER PEOPLE'S MONEY
business. When Henry B. Joy, President of the
Packard Motor Car Company, was asked to
what extent the bankers aided in "initiating"
the automobile, he replied:
"It is the observable facts of history, it is also
my experience of thirty years as a business man,
banker, etc. , that first the seer conceives an oppor-
tunity. He has faith in his almost second sight.
He believes he can do something--develop a
business--construct an industry--build a railroad
--or Niagara Falls Power Company,--and make
it pay!
"Now the human measure is not the actual
physical construction, but the 'make it pay'!
"A man raised the money in the late '90s and
built a beet sugar factory in Michigan. Wise-
acres said it was nonsense. He gathered together
the money from his friends who would take a
chance with him. He not only built the sugar
factory (and there was never any doubt of his
ability to do that) but he made it pay. The next
year two more sugar factories were built, and
were financially successful. These were built by
private individuals of wealth, taking chances
in the face of cries of doubting bankers and
trust companies.
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? BIG MEN AND LITTLE BUSINESS 149
"Once demonstrated that the industry was a
sound one financially and then bankers and trust
companies would lend the new sugar companies
which were speedily organized a large part of
the necessary funds to construct and operate.
"The motor-car business was the same.
"When a few gentlemen followed me in my
vision of the possibilities of the business, the
banks and older business men (who in the main
were the banks) said, 'fools and their money soon
to be parted'--etc. , etc.
"Private capital at first establishes an industry,
backs it through its troubles, and, if possible,
wins financial success when banks would not lend
a dollar of aid.
"The business once having proved to be prac-
ticable and financially successful, then do the
banks lend aid to its needs. "
Such also was the experience of the greatest of
the many financial successes in the automobile
industry--the Ford Motor Company.
HOW BANKERS ARREST DEVELOPMENT
But "great banking houses" have not merely
failed to initiate industrial development; they
have definitely arrested development because to
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? 150 OTHER PEOPLE'S MONEY
them the creation of the trusts is largely due.
The recital in the Memorial addressed to the
President by the Investors' Guild in November,
1911, is significant:
"It is a well-known fact that modern trade
combinations tend strongly toward constancy of
process and products, and by their very nature
are opposed to new processes and new products
originated by independent inventors, and hence
tend to restrain competition in the development
and sale of patents and patent rights; and con-
sequently tend to discourage independent inven-
tive thought, to the great detriment of the nation,
and with injustice to inventors whom the Con-
stitution especially intended to encourage and
protect in their rights. "
And more specific was the testimony of the
Engineering News:
"We are today something like five years behind
Germany in iron and steel metallurgy, and such
innovations as are being introduced by our iron
and steel manufacturers are most of them merely
following the lead set by foreigners years ago.
"We do not believe this is because American
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? BIG MEN AND LITTLE BUSINESS 151
engineers are any less ingenious or original than
those of Europe, though they may indeed be
deficient in training and scientific education com-
pared with those of Germany. We believe the
main cause is the wholesale consolidation which
has taken place in American industry. A huge
organization is too clumsy to take up the develop-
ment of an original idea. With the market
closely controlled and profits certain by following
standard methods, those who control our trusts
do not want the bother of developing anything
new.
"We instance metallurgy only by way of illus-
tration. There are plenty of other fields of indus-
try where exactly the same condition exists. We
are building the same machines and using the
same methods as a dozen years ago, and the real
advances in the art are being made by European
inventors and manufacturers. "
To which President Wilson's statement may
be added:
"I am not saying that all invention had been
stopped by the growth of trusts, but I think it is
perfectly clear that invention in many fields has
been discouraged, that inventors have been
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? 152 OTHER PEOPLE'S MONEY
prevented from reaping the full fruits of their
ingenuity and industry, and that mankind has
been deprived of many comforts and con-
veniences, as well as the opportunity of buying
at lower prices.
"Do you know, have you had occasion to
learn, that there is no hospitality for invention,
now-a-days? "
TRUSTS AND FINANCIAL CONCENTRATION
The fact that industrial monopolies arrest
development is more serious even than the
direct burden imposed through extortionate
prices. But the most harm-bearing incident of
the trusts is their promotion of financial con-
centration. Industrial trusts feed the money
trust. Practically every trust created has de-
stroyed the financial independence of some
communities and of many properties; for it has
centered the financing of a large part of whole
lines of business in New York, and this usually
with one of a few banking houses. This is well
illustrated by the Steel Trust, which is a trust of
trusts; that is, the Steel Trust combines in one
huge holding company the trusts previously
formed in the different branches of the steel
business. Thus the Tube Trust combined 17
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? BIG MEN AND LITTLE BUSINESS 153
tube mills, located in 16 different cities, scat-
tered over 5 states and owned by 13 different
companies. The wire trust combined 19 mills;
the sheet steel trust 26; the bridge and structural
trust 27; and the tin plate trust 36; all scattered
similarly over many states. Finally these and
other companies were formed into the United
States Steel Corporation, combining 228 com-
panies in all, located in 127 cities and towns,
scattered over 18 states. Before the combina-
tions were effected, nearly every one of these
companies was owned largely by those who
managed it, and had been financed, to a large
extent, in the place, or in the state, in which it
was located. When the Steel Trust was formed
all these concerns came under one management.
Thereafter, the financing of each of these 228
corporations (and some which were later ac-
quired) had to be done through or with the
consent of J. P. Morgan & Co. That was the
greatest step in financial concentration ever taken.
STOCK EXCHANGE INCIDENTS
The organization of trusts has served in another
way to increase the power of the Money Trust.
Few of the independent concerns out of which
the trusts have been formed, were listed on the
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? 154 OTHER PEOPLE'S MONEY
New York Stock Exchange; and few of them had
financial offices in New York. Promoters of
large corporations, whose stock is to be held by
the public, and also investors, desire to have their
securities listed on the New York Stock Exchange.
Under the rules of the Exchange, no security can
be so listed unless the corporation has a transfer
agent and registrar in New York City. Further-
more, banker-directorships have contributed
largely to the establishment of the financial
offices of the trusts in New York City. That
alone would tend to financial concentration.
But the listing of the stock enhances the power
of the Money Trust in another way. An in-
dustrial stock, once listed, frequently becomes
the subject of active speculation; and speculation
feeds the Money Trust indirectly in many ways.
It draws the money of the country to New York.
The New York bankers handle the loans of other
people's money on the Stock Exchange; and
members of the Stock Exchange receive large
amounts from commissions. For instance: There
are 5,084,952 shares of United States Steel com-
mon stock outstanding. But in the five years
ending December 31, 1912, speculation in that
stock was so extensive that there were sold on ,
the Exchange an average of 29,380,888 shares
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? BIG MEN AND LITTLE BUSINESS 155
a year; or nearly six times as much as there
is Steel common in existence. Except where
the transactions are by or for the brokers, sales
on the Exchange involve the payment of twenty-
five cents in commission for each share of stock
sold; that is, twelve and one-half cents by the
seller and twelve and one-half cents by the buyer.
Thus the commission from the Steel common
alone afforded a revenue averaging many millions
a year. The Steel preferred stock is also much
traded in; and there are 138 other industrials,
largely trusts, listed on the New York Stock
Exchange.
TRUST RAMIFICATIONS
But the potency of trusts as a factor in financial
concentration is manifested in still other ways;
notably through their ramifying operations.
This is illustrated forcibly by the General Electric
Company's control of water-power companies
which has now been disclosed in an able report of
the United States Bureau of Corporations:
"The extent of the General Electric influence
is not fully revealed by its consolidated balance
sheet. A very large number of corporations are
connected with it through its subsidiaries and
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? 156 OTHER PEOPLE'S MONEY
through corporations controlled by these sub-
sidiaries or affiliated with them. There is a still
wider circle of influence due to the fact that
officers and directors of the General Electric
Co. and its subsidiaries are also officers or
directors of many other corporations, some of
whose securities are owned by the General
Electric Company.
"The General Electric Company holds in the
first place all the common stock in three security
holding companies: the United Electric Securities
Co. , the Electrical Securities Corporation, and
the Electric Bond and Share Co. Directly and
through these corporations and their officers the
General Electric controls a large part of the
water power of the United States.
. . . "The water-power companies in the
General Electric group are found in 18 States.
These 18 States have 2,325,757 commercial
horsepower developed or under construction,
and of this total the General Electric group in-
cludes 939,115 h. p. or 40. 4 per cent. The
greatest amount of power controlled by the
companies in the General Electric group in any
State is found in Washington. This is followed
by New York, Pennsylvania, California, Mon-
tana, Iowa, Oregon, and Colorado. In five of
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? BIG MEN AND LITTLE BUSINESS 157
the States shown in the table the water-power
companies included in the General Electric group
control more than 50 per cent. of the com-
mercial power, developed and under construction.
The percentage of power in the States included in
the General Electric group ranges from a little
less than 2 per cent. in Michigan to nearly 80
per cent. in Pennsylvania. In Colorado they
control 72 per cent. ; in New Hampshire 61 per
cent. ; in Oregon 58 per cent. ; and in Washington
55 per cent.
Besides the power developed and under con-
struction water-power concerns included in the
General Electric group own in the States shown
in the table 641,600 h. p. undeveloped. "
This water power control enables the General
Electric group to control other public service
corporations:
"The water-power companies subject to
General Electric influence control the street
railways in at least 16 cities and towns; the
electric-light plants in 78 cities and towns; gas
plants in 19 cities and towns; and are affiliated
with the electric light and gas plants in other
towns. Though many of these communities,
particularly those served with light only, are
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? 158 OTHER PEOPLE'S MONEY
small, several of them are the most important in
the States where these water-power companies
operate. The water-power companies in the
General Electric group own, control, or are
closely affiliated with, the street railways in
Portland and Salem, Ore. ; Spokane, Wash. ;
Great Falls, Mont. ; St. Louis, Mo. ; Winona,
Minn. ; Milwaukee and Racine, Wis. ; Elmira,
N. Y.
; Asheville and Raleigh, N. C, and other
relatively less important towns. The towns in
which the lighting plants (electric or gas) are
owned or controlled include Portland, Salem,
Astoria, and other towns in Oregon; Bellingham
and other towns in Washington; Butte, Great
Falls, Bozeman and other towns in Montana;
Leadville and Colorado Springs in Colorado;
St. Louis, Mo. ; Milwaukee, Racine and several
small towns in Wisconsin; Hudson and Rens-
selaer, N. Y. ; Detroit, Mich. ; Asheville and
Raleigh, N. C. ; and in fact one or more towns in
practically every community where developed
water power is controlled by this group. In
addition to the public-service corporations thus
controlled by the water-power companies subject
to General Electric influence, there are numerous
public-service corporations in other municipalities
that purchase power from the hydroelectric
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? BIG MEN AND LITTLE BUSINESS 159
developments controlled by or affiliated with the
General Electric Co. This is true of Denver,
Colo. , which has already been discussed. In
Baltimore, Md. , a water-power concern in the
General Electric group, namely, the Pennsylvania
Water & Power Co. , sells 20,000 h. p. to the
Consolidated Gas, Electric Light & Power Co. ,
which controls the entire light and power business
of that city. The power to operate all the
electric street railway systems of Buffalo, N. Y. ,
and vicinity, involving a trackage of approxi-
mately 375 miles, is supplied through a subsidiary
of the Niagara Falls Power Co. "
And the General Electric Company, through
the financing of public service companies, exer-
cises a like influence in communities where there
is no water power:
"It, or its subsidiaries, has acquired control of
or an interest in the public-service corporations
of numerous cities where there is no water-power
connection, and it is affiliated with still others by
virtue of common directors. . . . This vast
network of relationship between hydro-electric
corporations through prominent officers and
directors of the largest manufacturer of electrical
machinery and supplies in the United States is
highly significant. . . .
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? 160 OTHER PEOPLE'S MONEY
"It is possible that this relationship to such a
large number of strong financial concerns, through
common officers and directors, affords the General
Electric Co. an advantage that may place rivals
at a corresponding disadvantage. Whether or
not this great financial power has been used to
the particular disadvantage of any rival water-
power concern is not so important as the fact that
such power exists and that it might be so used at
any time. "
THE SHERMAN LAW
The Money Trust cannot be broken, if we
allow its power to be constantly augmented.
To break the Money Trust, we must stop that
power at its source. The industrial trusts are
among its most effective feeders. Those which
are illegal should be dissolved. The creation of
new ones should be prevented. To this end the
Sherman Law should be supplemented both by
providing more efficient judicial machinery,
and by creating a commission with administra-
tive functions to aid in enforcing the law.
When that is done, another step will have been
taken toward securing the New Freedom. But
restrictive legislation alone will not suffice. We
should bear in mind the admonition with which
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? BIG MEN AND LITTLE BUSINESS 161
the Commissioner of Corporations closes his
review of our water power development:
"There is . . . presented such a situation in
water powers and other public utilities as might
bring about at any time under a single manage-
ment the control of a majority of the developed
water power in the United States and similar
control over the public utilities in a vast number
of cities and towns, including some of the most
important in the country. "
We should conserve all rights which the Fed-
eral Government and the States now have in
our natural resources, and there should be a
complete separation of our industries from rail-
roads and public utilities.
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? CHAPTER VIII
A CURSE OF BIGNESS
Bigness has been an important factor in the
rise of the Money Trust: Big railroad systems,
Big industrial trusts, Big public service com-
panies; and as instruments of these Big banks
and Big trust companies. J. P. Morgan & Co.
(in their letter of defence to the Pujo Committee)
urge the needs of Big Business as the justification
for financial concentration. They declare that
what they euphemistically call "cooperation"
is "simply a further result of the necessity for
handling great transactions"; that "the country
obviously requires not only the larger individual
banks, but demands also that those banks shall
cooperate to perform efficiently the country's
business"; and that "a step backward along this
line would mean a halt in industrial progress
that would affect every wage-earner from the
Atlantic to the Pacific. " The phrase "great
transactions" is used by the bankers apparently
as meaning large corporate security issues.
Leading bankers have undoubtedly cooperated
during the last 15 years in floating some very
162
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? A CURSE OF BIGNESS 163
large security issues, as well as many small ones.
But relatively few large issues were made
necessary by great improvements undertaken or
by industrial development. Improvements and
development ordinarily proceed slowly. For
them, even where the enterprise involves large
expenditures, a series of smaller issues is usually
more appropriate than single large ones. This is
particularly true in the East where the building
of new railroads has practically ceased. The
"great" security issues in which bankers have
cooperated were, with relatively few exceptions,
made either for the purpose of effecting com-
binations or as a consequence of such combina-
tions. Furthermore, the combinations which
made necessary these large security issues or
underwritings were, in most cases, either contrary
to existing statute law, or contrary to laws recom-
mended by the Interstate Commerce Commis-
sion, or contrary to the laws of business efficiency.
So both the financial concentration and the
combinations which they have served were, in
the main, against the public interest. Size,
we are told, is not a crime. But size may, at
least, become noxious by reason of the means
through which it was attained or the uses to
which it is put. And it is size attained by
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? 164 OTHER PEOPLE'S MONEY
combination, instead of natural growth, which
has contributed so largely to our financial con-
centration. Let us examine a few cases:
THE HAKEIMAN PACIFICS
J. P. Morgan & Co. , in urging the "need of
large banks and the cooperation of bankers,"
said:
"The Attorney-General's recent approval of
the Union Pacific settlement calls for a single com-
mitment on the part of bankers of $126,000,000. "
This $126,000,000 "commitment" was not
made to enable the Union Pacific to secure
capital. On the contrary it was a guaranty that
it would succeed in disposing of its Southern
Pacific stock to that amount. And when it had
disposed of that stock, it was confronted with the
serious problem--what to do with the proceeds?
This huge underwriting became necessary solely
because the Union Pacific had violated the
Sherman Law. It had acquired that amount of
Southern Pacific stock illegally; and the Supreme
Court of the United States finally decreed that
the illegality cease. This same illegal purchase
had been the occasion, twelve years earlier, of
another "great transaction,"--the issue of a
$100,000,000 of Union Pacific bonds, which were
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? A CURSE OF BIGNESS 165
sold to provide funds for acquiring this Southern
Pacific and other stocks in violation of law.
Bankers "cooperated" also to accomplish that.
UNION PACIFIC IMPROVEMENTS
The Union Pacific and its auxiliary lines (the
Oregon Short Line, the Oregon Railway and
Navigation and the Oregon-Washington Railroad)
made, in the fourteen years, ending June 30,1912,
issues of securities aggregating $375,158,183 (of
which $46,500,000 were refunded or redeemed);
but the large security issues served mainly to sup-
ply funds for engaging in illegal combinations or
stock speculation. The extraordinary improve-
ments and additions that raised the Union Pacific
Railroad to a high state of efficiency were
provided mainly by the net earnings from the
operation of its railroads. And note how great
the improvements and additions were: Tracks
were straightened, grades were lowered, bridges
were rebuilt, heavy rails were laid, old equipment
was replaced by new; and the cost of these was
charged largely as operating expense. Additional
equipment was added, new lines were built
or acquired, increasing the system by 3524
miles of fine, and still other improvements and
betterments were made and charged to capital
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? 186 OTHER PEOPLE'S MONEY
account. These expenditures aggregated $191,-
512,328. But it needed no "large security
issues" to provide the capital thus wisely ex-
pended. The net earnings from the operations
of these railroads were so large that nearly all
these improvements and additions could have
been made without issuing on the average more
than $1,000,000 a year of additional securities for
"new money," and the company still could have
paid six per cent. dividends after 1906 (when that
rate was adopted). For while $13,679,452 a
year, on the average, was charged to Cost
of Road and Equipment, the surplus net
earnings and other funds would have yielded, on
the average, $12,750,982 a year available for
improvements and additions, without raising
money on new security issues.
HOW THE SECUBITT PROCEEDS WERE SPENT
The $375,000,000 securities (except to the
extent of about $13,000,000 required for im-
provements, and the amounts applied for refund-
ing and redemptions) were available to buy
stocks and bonds of other companies. And some
of the stocks so acquired were sold at large
profits, providing further sums to be employed
in stock purchases.
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? A CURSE OF BIGNESS 167
The $375,000,000 Union Pacific Lines security-
issues, therefore, were not needed to supply
funds for Union Pacific improvements; nor did
these issues supply funds for the improvement of
any of the companies in which the Union Pacific
invested (except that certain amounts were
advanced later to aid in financing the Southern
Pacific). They served, substantially, no purpose
save to transfer the ownership of railroad stocks
from one set of persons to another.
Here are some of the principal investments:
1. $91,657,500, in acquiring and financing the Southern
Pacific.
2. $89,391,401, in acquiring the Northern Pacific stock and
stock of the Northern Securities Co.
3. $45,466,960, in acquiring Baltimore & Ohio stock.
4. $37,692,256, in acquiring Illinois Central stock.
5. $23,205,679, in acquiring New York Central stock.
6. $10,395,000, in acquiring Atchison, Topeka & Santa Fe
stock.
7. $8,946,781, in acquiring Chicago & Alton stock.
8. $11,610,187, in acquiring Chicago, Milwaukee & St. Paul
stock.
9. $6,750,423, in acquiring Chicago & Northwestern stock.
10. $6,936,696, in acquiring Railroad Securities Co. stock
(Illinois Central stock. )
The immediate effect of these stock acquisi-
tions, as stated by the Interstate Commerce
Commission in 1907, was merely this:
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? 168 OTHER PEOPLE'S MONEY
"Mr. Harriman may journey by steamship
from New York to New Orleans, thence by rail
to San Francisco, across the Pacific Ocean to
China, and, returning by another route to the
United States, may go to Ogden by any one of
three rail lines, and thence to Kansas City or
Omaha, without leaving the deck or platform
of a carrier which he controls, and without
duplicating any part of his journey.
"He has further what appears to be a dominant
control in the Illinois Central Railroad running
directly north from the Gulf of Mexico to the
Great Lakes, parallel to the Mississippi River;
and two thousand miles west of the Mississippi
he controls the only line of railroad parallel to
the Pacific Coast, and running from the Colorado
River to the Mexican border. . . .
"The testimony taken at this hearing shows
that about fifty thousand square miles of terri-
tory in the State of Oregon, surrounded by the
lines of the Oregon Short Line Railroad Com-
pany, the Oregon Railroad and Navigation
Company, and the Southern Pacific Company,
is not developed. While the funds of those
companies which could be used for that purpose
are being invested in stocks like the New York
Central and other lines having only a remote
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