And they seem
peculiarly
unjust when
they represent largely unearned increment.
they represent largely unearned increment.
Louis Brandeis - 1914 - Other People's Money, and How Bankers Use It
This dependence, both of corporations and
of investors, upon the banker has grown in recent
years, since women and others who do not par-
ticipate in the management, have become the
owners of so large a part of the stocks and bonds
of our great corporations. Over half of the
stockholders of the American Sugar Refining
Company and nearly half of the stockholders of
the Pennsylvania Railroad and of the New York,
New Haven & Hartford Railroad are women.
Good-will--the possession by a dealer of num-
erous and valuable regular customers--is always
an important element in merchandising. But in
the business of selling bonds and stocks, it is of
exceptional value, for the very reason that the
small investor relies so largely upon the banker's
judgment. This confidential relation of the
banker to customers--and the knowledge of the
customers' private affairs acquired incidentally--?
? ? Generated for (University of Chicago) on 2014-06-10 03:28 GMT / http://hdl. handle. net/2027/uc1. 32106000978228 Public Domain, Google-digitized / http://www. hathitrust. org/access_use#pd-google
? OUR FINANCIAL OLIGARCHY 9
is often a determining factor in the marketing of
securities. With the advent of Big Business
such good-will possessed by the older banking
houses, preeminently J. P. Morgan & Co. and
their Philadelphia House called Drexel & Co. ,
by Lee, Higginson & Co. and Kidder, Peabody,
& Co. of Boston, and by Kuhn, Loeb & Co. of
New York, became of enhanced importance. '
The volume of new security issues was greatly
increased by huge railroad consolidations, the
development of the holding companies, and par-
ticularly by the formation of industrial trusts.
The rapidly accumulating savings of our people
sought investment. The field of operations for
the dealer in securities was thus much enlarged.
And, as the securities were new and untried, the
services of the investment banker were in great
demand, and his powers and profits increased
accordingly.
CONTROLLING THE SECURITY MAKERS
But this enlargement of their legitimate field
of operations did not satisfy investment bankers.
They were not content merely to deal in securities.
They desired to manufacture them also. They
became promoters, or allied themselves with
promoters. Thus it was that J. P. Morgan &
? ? Generated for (University of Chicago) on 2014-06-10 03:28 GMT / http://hdl. handle. net/2027/uc1. 32106000978228 Public Domain, Google-digitized / http://www. hathitrust. org/access_use#pd-google
? 10 OTHER PEOPLE'S MONEY
Company formed the Steel Trust, the Harvester
Trust and the Shipping Trust. And, adding the
duties of undertaker to those of midwife, the
investment bankers became, in times of corporate
disaster, members of security-holders' "Pro-
tective Committees"; then they participated as
"Reorganization Managers" in the reincarnation
of the unsuccessful corporations and ultimately
became directors. It was in this way that the
Morgan associates acquired their hold upon the
Southern Railway, the Northern Pacific, the
Reading, the Erie, the Pere Marquette, the
Chicago and Great Western, and the Cincinnati,
Hamilton & Dayton. Often they insured the
continuance of such control by the device of the
voting trust; but even where no voting trust was
created, a secure hold was acquired upon re-
organization. It was in this way also that Kuhn,
Loeb & Co. became potent in the Union Pacific
and in the Baltimore & Ohio.
But the banker's participation in the manage-
ment of corporations was not limited to cases
of promotion or reorganization. An urgent or
extensive need of new money was considered a
sufficient reason for the banker's entering a
board of directors. Often without even such
excuse the investment banker has secured a
? ? Generated for (University of Chicago) on 2014-06-10 03:28 GMT / http://hdl. handle. net/2027/uc1. 32106000978228 Public Domain, Google-digitized / http://www. hathitrust. org/access_use#pd-google
? OUR FINANCIAL OLIGARCHY 11
place upon the Board of Directors, through his
powerful influence or the control of his customers'
proxies. Such seems to have been the fatal en-
trance of Mr. Morgan into the management of
the then prosperous New York, New Haven &
Hartford Railroad, in 1892. When once a
banker has entered the Board--whatever may
have been the occasion--his grip proves tena-
cious and his influence usually supreme; for he
controls the supply of new money.
The investment banker is naturally on the
lookout for good bargains in bonds and stocks.
Like other merchants, he wants to buy his
merchandise cheap. But when he becomes di-
rector of a corporation, he occupies a position
which prevents the transaction by which he
acquires its corporate securities from being
properly called a bargain. Can there be real
bargaining where the same man is on both sides
of a trade? The investment banker, through his
controlling influence on the Board of Directors,
decides that the corporation shall issue and sell
the securities, decides the price at which it shall
sell them, and decides that it shall sell the
securities to himself. The fact that there are
other directors besides the banker on the Board
? ? Generated for (University of Chicago) on 2014-06-10 03:28 GMT / http://hdl. handle. net/2027/uc1. 32106000978228 Public Domain, Google-digitized / http://www. hathitrust. org/access_use#pd-google
? 12 OTHER PEOPLE'S MONEY
does not, in practice, prevent this being the result.
The banker, who holds the purse-strings, becomes
usually the dominant spirit. Through voting-
trusteeships, exclusive financial agencies, mem-
bership on executive or finance committees, or by
mere directorships, J. P. Morgan & Co. , and their
associates, held such financial power in at least
thirty-two transportation systems, public utility
corporations and industrial companies--com-
panies with an aggregate capitalization of $17,-
273,000,000. Mainly for corporations so con-
trolled, J. P. Morgan & Co. procured the public
marketing in ten years of security issues aggre-
gating $1,950,000,000. This huge sum does not
include any issues marketed privately, nor any
issues, however marketed, of intra-state cor-
porations. Kuhn, Loeb & Co. and a few other
investment bankers exercise similar control over
many other corporations.
CONTROLLING SECURITY BUYERS
Such control of railroads, public service and
industrial corporations assures to the investment
bankers an ample supply of securities at attract-
ive prices; and merchandise well bought is half
sold. But these bond and stock merchants are
not disposed to take even a slight risk as to their
? ? Generated for (University of Chicago) on 2014-06-10 03:28 GMT / http://hdl. handle. net/2027/uc1. 32106000978228 Public Domain, Google-digitized / http://www. hathitrust. org/access_use#pd-google
? OUR FINANCIAL OLIGARCHY 18
ability to market their goods. They saw that if
they could control the security-buyers, as well as
the security-makers, investment banking would,
indeed, be "a happy hunting ground"; and they
have made it so.
The numerous small investors cannot, in the
strict sense, be controlled; but their dependence
upon the banker insures their being duly in-
fluenced. A large part, however, of all bonds
issued and of many stocks are bought by the
prominent corporate investors; and most promi-
nent among these are the life insurance companies,
the trust companies, and the banks. The purchase
of a security by these institutions not only relieves
the banker of the merchandise, but recommends
it strongly to the small investor, who believes
that these institutions are wisely managed. These
controlled corporate investors are not only large
customers, but may be particularly accommo-
dating ones. Individual investors are moody.
They buy only when they want to do so. They
are sometimes inconveniently reluctant. Cor-
porate investors, if controlled, may be made to
buy when the bankers need a market. It was
natural that the investment bankers proceeded to
get control of the great life insurance companies,
as well as of the trust companies and the banks.
? ? Generated for (University of Chicago) on 2014-06-10 03:28 GMT / http://hdl. handle. net/2027/uc1. 32106000978228 Public Domain, Google-digitized / http://www. hathitrust. org/access_use#pd-google
? 14 OTHER PEOPLE'S MONEY
The field thus occupied is uncommonly rich.
The life insurance companies are our leading
institutions for savings. Their huge surplus and
reserves, augmented daily, are always clamoring
for investment. No panic or money shortage
stops the inflow of new money from the perennial
stream of premiums on existing policies and inter-
est on existing investments. The three great
companies--the New York Life, the Mutual of
New York, and the Equitable--would have over
$55,000,000 of new money to invest annually,
even if they did not issue a single new policy.
In 1904--just before the Armstrong investiga-
tion--these three companies had together $1,247,-
331,738. 18 of assets. They had issued in that
year $1,025,671,126 of new policies. The New
York legislature placed in 1906 certain restrictions
upon their growth; so that their new business
since has averaged $547,384,212, or only fifty-
three per cent. of what it was in 1904. But the
aggregate assets of these companies increased in
the last eight years to $1,817,052,260. 36. At the
time of the Armstrong investigation the average
age of these three companies was fifty-six years.
The growth of assets in the last eight years was about
half as large as the total growth in the preceding
fifty-six years. These three companies must
? ? Generated for (University of Chicago) on 2014-06-10 03:28 GMT / http://hdl. handle. net/2027/uc1. 32106000978228 Public Domain, Google-digitized / http://www. hathitrust. org/access_use#pd-google
? OUR FINANCIAL OLIGARCHY 15
invest annually about $70,000,000 of new money;
and besides, many old investments expire or are
changed and the proceeds must be reinvested. A
large part of all life insurance surplus and re-
serves are invested in bonds. The aggregate
bond investments of these three companies on
January 1, 1913, was $1,019,153,268. 93.
It was natural that the investment bankers
should seek to control these never-failing reser-
voirs of capital. George W. Perkins was Vice-
President of the New York Life, the largest of
the companies. While remaining such he was
made a partner in J. P. Morgan & Co. , and in
the four years preceding the Armstrong investi-
gation, his firm sold the New York Life $38,804,
918. 51 in securities. The New York Life is a
mutual company, supposed to be controlled by
its policy-holders. But, as the Pujo Committee
funds "the so-called control of life insurance com-
panies by policy-holders through mutualization
is a farce" and "its only result is to keep in
office a self-constituted, self-perpetuating man-
agement. "
The Equitable Life Assurance Society is a
stock company and is controlled by $100,000 of
stock. The dividend on this stock is limited by
law to seven per cent. ; but in 1910 Mr. Morgan
? ? Generated for (University of Chicago) on 2014-06-10 03:28 GMT / http://hdl. handle. net/2027/uc1. 32106000978228 Public Domain, Google-digitized / http://www. hathitrust. org/access_use#pd-google
? 16 OTHER PEOPLE'S MONEY
paid about $3,000,000 for $51,000, par value of
this stock, or $5,882. 35 a share. The dividend
return on the stock investment is less than one-
eighth of one per cent. ; but the assets controlled
amount now to over $500,000,000. And certain
of these assets had an especial value for invest-
ment bankers;--namely, the large holdings of
stock in banks and trust companies.
The Armstrong investigation disclosed the
extent of financial power exerted through the
insurance company holdings of bank and trust
company stock. The Committee recommended
legislation compelling the insurance companies
to dispose of the stock within five years. A law
to that effect was enacted, but the time was later
extended. The companies then disposed of a
part of their bank and trust company stocks;
but, as the insurance companies were controlled
by the investment bankers, these gentlemen
sold the bank and trust company stocks to
themselves.
Referring to such purchases from the Mutual
Life, as well as from the Equitable, the Pujo
Committee found:
"Here, then, were stocks of five important
trust companies and one of our largest national
? ? Generated for (University of Chicago) on 2014-06-10 03:28 GMT / http://hdl. handle. net/2027/uc1. 32106000978228 Public Domain, Google-digitized / http://www. hathitrust. org/access_use#pd-google
? OUR FINANCIAL OLIGARCHY 17
banks in New York City that had been held by
these two life insurance companies. Within
five years all of these stocks, so far as distributed
by the insurance companies, have found their
way into the hands of the men who virtually con-
trolled or were identified with the management
of the insurance companies or of their close allies
and associates, to that extent thus further en-
trenching them. "
The banks and trust companies are deposi-
taries, in the main, not of the people's savings,
but of the business man's quick capital. Yet,
since the investment banker acquired control
of banks and trust companies, these institutions
also have become, like the life companies, large
purchasers of bonds and stocks. Many of our
national banks have invested in this manner a
large part of all their resources, including cap-
ital, surplus and deposits. The bond invest-
ments of some banks exceed by far the aggre-
gate of their capital and surplus, and nearly
equal their loanable deposits.
CONTROLLING OTHEB PEOPLE'S QUICK CAPITAL
The goose that lays golden eggs has been con-
sidered a most valuable possession. But even
more profitable is the privilege of taking the
? ? Generated for (University of Chicago) on 2014-06-10 03:28 GMT / http://hdl. handle. net/2027/uc1. 32106000978228 Public Domain, Google-digitized / http://www. hathitrust. org/access_use#pd-google
? 18 OTHER PEOPLE'S MONEY
golden eggs laid by somebody else's goose.
The investment bankers and their associates now
enjoy that privilege. They control the people
Lthrough the people's own money. If the bank-
ers' power were commensurate only with their
wealth, they would have relatively little influence
on American business. Vast fortunes like those
of the Astors are no doubt regrettable. They
are inconsistent with democracy. They are un-
social.
And they seem peculiarly unjust when
they represent largely unearned increment. But
the wealth of the Astors does not endanger
political or industrial liberty. It is insignificant
in amount as compared with the aggregate wealth
of America, or even of New York City. It lacks
significance largely because its owners have only
the income from their own wealth. The Astor
wealth is static. The wealth of the Morgan
associates is dynamic. The power and the
growth of power of our financial oligarchs comes
from wielding the savings and quick capital of
others. In two of the three great life insurance
companies the influence of J. P. Morgan & Co.
and their associates is exerted without any in-
dividual investment by them whatsoever. Even
in the Equitable, where Mr. Morgan bought an
actual majority of all the outstanding stock, his
? ? Generated for (University of Chicago) on 2014-06-10 03:28 GMT / http://hdl. handle. net/2027/uc1. 32106000978228 Public Domain, Google-digitized / http://www. hathitrust. org/access_use#pd-google
? OUR FINANCIAL OLIGARCHY 19
investment amounts to little more than one-half
of one per cent. of the assets of the company.
The fetters which bind the people are forged fronfl
the people's own gold. --'
But the reservoir of other people's money,
from which the investment bankers now draw
their greatest power, is not the life insurance
companies, but the banks and the trust companies.
Bank deposits represent the really quick capital
of the nation. They are the life blood of busi-
nesses. Their effective force is much greater than
that of an equal amount of wealth permanently
invested. The 34 banks and trust companies,
which the Pujo Committee declared to be directly
controlled by the Morgan associates, held $1,983,-
000,000 in deposits. Control of these institutions"]
means the ability to lend a large part of these
funds, directly and indirectly, to_ themselves; and
what is often even more important, the power
to prevent the funds being lent to any rival in-
terests. These huge deposits can, in the dis-
cretion of those in control, be used to meet the
temporary needs of their subject corporations^
When bonds and stocks are issued to finance
permanently these corporations, the bank depos-
its can, in large part, be loaned by the investment
? ? Generated for (University of Chicago) on 2014-06-10 03:28 GMT / http://hdl. handle. net/2027/uc1. 32106000978228 Public Domain, Google-digitized / http://www. hathitrust. org/access_use#pd-google
? 20 OTHER PEOPLE'S MONEY
bankers in control to themselves and their asso-
ciates; so that securities bought may be carried
by them, until sold to investors. Or these bank
deposits may be loaned to allied bankers, or
jobbers in securities, or to speculators, to enable
them to carry the bonds or stocks. Easy money
tends to make securities rise in the market.
Tight money nearly always makes them fall.
The control by the leading investment bankers
over the banks and trust companies is so great,
that they can often determine, for a time, the mar-
ket for money by lending or refusing to lend on
the Stock Exchange. In this way, among others,
they have power to affect the general trend of
prices in bonds and stocks. Their power over a
particular security is even greater. Its sale on
the market may depend upon whether the secur-
ity is favored or discriminated against when
offered to the banks and trust companies, as
collateral for loans.
Furthermore, it is the investment banker's
access to other people's money in controlled
banks and trust companies which alone enables
any individual banking concern to take so large
part of the annual output of bonds and stocks.
The banker's own capital, however large, would
soon be exhausted. And even the loanable
? ? Generated for (University of Chicago) on 2014-06-10 03:28 GMT / http://hdl. handle. net/2027/uc1. 32106000978228 Public Domain, Google-digitized / http://www. hathitrust. org/access_use#pd-google
? OUR FINANCIAL OLIGARCHY 21
funds of the banks would often be exhausted,
but for the large deposits made in those banks
by the life insurance, railroad, public service, and
industrial corporations which the bankers also
control. On December 31, 1912, the three lead-
ing life insurance companies had deposits in
banks and trust companies aggregating $13,839,-
189. 08. As the Pujo Committee finds:
"The men who through their control over the
funds of our railroads and industrial companies
are able to direct where such funds shall be kept,
and thus to create these great reservoirs of the
people's money, are the ones who are in position
to tap those reservoirs for the ventures in which
they are interested and to prevent their being
tapped for purposes of which they do not approve.
The latter is quite as important a factor as the
former. It is the controlling consideration in its
effect on competition in the railroad and industrial
world. "
HAVING TOUR CAKE AND EATING IT TOO
But the power of the investment banker over
other people's money is often more direct and
effective than that exerted through controlled
banks and trust companies. J. P. Morgan & Co. ~~~"
achieve the supposedly impossible feat of having
? ? Generated for (University of Chicago) on 2014-06-10 03:28 GMT / http://hdl. handle. net/2027/uc1. 32106000978228 Public Domain, Google-digitized / http://www. hathitrust. org/access_use#pd-google
? 22 OTHER PEOPLE'S MONEY
their cake and eating it too. They buy the bonds
and stocks of controlled railroads and industrial
concerns, and pay the purchase price; and still
do not part with their money. This is accom-
plished by the simple device of becoming the bank
of deposit of the controlled corporations, instead
of having the company deposit in some merely
controlled bank in whose operation others have
at least some share. When J. P. Morgan & Co.
buy an issue of securities the purchase money,
instead of being paid over to the corporation, is
retained by the banker for the corporation, to
be drawn upon only as the funds are needed by
the corporation. And as the securities are issued
in large blocks, and the money raised is often not
all spent until long thereafter, the aggregate of
the balances remaining in the banker's hands are
huge. Thus J. P. Morgan & Co. (including their
Philadelphia house, called Drexel & Co. ) held
on November 1, 1912, deposits aggregating
$162,491,819. 65.
POWER AND PELF
The operations of so comprehensive a system
of concentration necessarily developed in the
bankers overweening power. And the bankers'
power grows by what it feeds on. Power begets
? ? Generated for (University of Chicago) on 2014-06-10 03:28 GMT / http://hdl. handle. net/2027/uc1. 32106000978228 Public Domain, Google-digitized / http://www. hathitrust. org/access_use#pd-google
? OUR FINANCIAL OLIGARCHY 23
wealth; and added wealth opens ever new oppor-
tunities for the acquisition of wealth and power.
The operations of these bankers are so vast and
numerous that even a very reasonable compensa-
tion for the service performed by the bankers,
would, in the aggregate, produce for them in-
comes so large as to result in huge accumulations
of capital. But the compensation taken by the
bankers as commissions or profits is often far
from reasonable. Occupying, as they so fre-
quently do, the inconsistent position of being at
the same time seller and buyer, the standard for
so-called compensation actually applied, is not
the "Rule of reason", but "All the traffic will
bear. " And this is true even where there is no
sinister motive. The weakness of human nature
prevents men from being good judges of their
own deservings.
The syndicate formed by J. P. Morgan & Co.
to underwrite the United States Steel Corpora-
tion took for its services securities which netted
$62,500,000 in cash. Of this huge sum J. P.
Morgan & Co. received, as syndicate managers,
$12,500,000 in addition to the share which they
were entitled to receive as syndicate members.
This sum of $62,500,000 was only a part of the fees
paid for the service of monopolizing the steel in-
? ? Generated for (University of Chicago) on 2014-06-10 03:28 GMT / http://hdl. handle. net/2027/uc1. 32106000978228 Public Domain, Google-digitized / http://www. hathitrust. org/access_use#pd-google
? 24 OTHER PEOPLE'S MONEY
dustry. In addition to the commissions taken
specifically for organizing the United States
Steel Corporation, large sums were paid for
organizing the several companies of which it is
composed. For instance, the National Tube
Company was capitalized at $80,000,000 of
stock; $40,000,000 of which was common stock.
Half of this $40,000,000 was taken by J. P.
Morgan & Co. and their associates for promotion
services; and the $20,000,000 stock so taken
became later exchangeable for $25,000,000 of
Steel Common. Commissioner of Corporations
Herbert Knox Smith, found that:
"More than $150,000,000 of the stock of the
Steel Corporation was issued directly or in-
directly (through exchange) for mere promo-
tion or underwriting services. In other words,
nearly one-seventh of the total capital stock
of the Steel Corporation appears to have been
issued directly or indirectly to promoters'
services. "
The so-called fees and commissions taken by
the bankers and associates upon the organiza-
tion of the trusts have been exceptionally
large. But even after the trusts are successfully
launched the exactions of the bankers are often
? ? Generated for (University of Chicago) on 2014-06-10 03:28 GMT / http://hdl. handle. net/2027/uc1. 32106000978228 Public Domain, Google-digitized / http://www. hathitrust. org/access_use#pd-google
? OUR FINANCIAL OLIGARCHY 25
extortionate. The syndicate which underwrote,
in 1901, the Steel Corporation's preferred stock
conversion plan, advanced only $20,000,000 in
cash and received an underwriting commission
of $6,800,000.
The exaction of huge commissions is not con-
fined to trust and other industrial concerns.
The Interborough Railway is a most prosperous
corporation. It earned last year nearly 21 per
cent. on its capital stock, and secured from New
York City, in connection with the subway ex-
tension, a very favorable contract. But when it
financed its $170,000,000 bond issue it was agreed
that J. P. Morgan & Co. should receive three
per cent. , that is, $5,100,000, for merely forming
this syndicate. More recently, the New York,
New Haven & Hartford Railroad agreed to pay
J. P. Morgan & Co. a commission of $1,680,000;
that is, 2 1/2 per cent. , to form a syndicate to
underwrite an issue at par of $67,000,000 20-
year 6 per cent. convertible debentures. That
means: The bankers bound themselves to take
at 97 1/2 any of these six per cent. convertible
bonds which stockholders might be unwilling to
buy at 100. When the contract was made the
New Haven's then outstanding six per cent. con-
vertible bonds were selling at 114. And the
? ? Generated for (University of Chicago) on 2014-06-10 03:28 GMT / http://hdl. handle. net/2027/uc1. 32106000978228 Public Domain, Google-digitized / http://www. hathitrust. org/access_use#pd-google
? 26 OTHER PEOPLE'S MONEY
new issue, as soon as announced, was in such
demand that the public offered and was for
months willing to buy at 106 bonds which the
Company were to pay J. P. Morgan & Co. $1,-
680,000 to be willing to take at par.
WHY THE BANKS BECAME INVESTMENT BANKERS
These large profits from promotions, under-
writings and security purchases led to a revolu-
tionary change in the conduct of our leading
banking institutions. It was obvious that con-
trol by the investment bankers of the deposits
in banks and trust companies was an essential
element in their securing these huge profits.
And the bank officers naturally asked, "Why
then should not the banks and trust companies
share in so profitable a field? Why should not
they themselves become investment bankers
too, with all the new functions incident to 'Big
Business'? " To do so would involve a de-
parture from the legitimate sphere of the
banking business, which is the making of tem-
porary loans to business concerns. But the
temptation was irresistible. The invasion of
the investment banker into the banks' field of
operation was followed by a counter invasion
by the banks into the realm of the investment
? ? Generated for (University of Chicago) on 2014-06-10 03:28 GMT / http://hdl. handle. net/2027/uc1. 32106000978228 Public Domain, Google-digitized / http://www. hathitrust. org/access_use#pd-google
? OUR FINANCIAL OLIGARCHY 27
banker. Most prominent among the banks
were the National City and the First National
of New York. But theirs was not a hostile
invasion. The contending forces met as allies,
joined forces to control the business of the
country, and to "divide the spoils. " The al-
liance was cemented by voting trusts, by inter-
locking directorates and by joint ownerships.
There resulted the fullest "cooperation"; and
ever more railroads, public service corporations,
and industrial concerns were brought into
complete subjection.
? ? Generated for (University of Chicago) on 2014-06-10 03:28 GMT / http://hdl. handle. net/2027/uc1. 32106000978228 Public Domain, Google-digitized / http://www. hathitrust. org/access_use#pd-google
? CHAPTER II
HOW THE COMBINERS COMBINE
Among the allies, two New York banks--
the National City and the First National--
stand preeminent. They constitute, with the
Morgan firm, the inner group of the Money
Trust. Each of the two banks, like J.
of investors, upon the banker has grown in recent
years, since women and others who do not par-
ticipate in the management, have become the
owners of so large a part of the stocks and bonds
of our great corporations. Over half of the
stockholders of the American Sugar Refining
Company and nearly half of the stockholders of
the Pennsylvania Railroad and of the New York,
New Haven & Hartford Railroad are women.
Good-will--the possession by a dealer of num-
erous and valuable regular customers--is always
an important element in merchandising. But in
the business of selling bonds and stocks, it is of
exceptional value, for the very reason that the
small investor relies so largely upon the banker's
judgment. This confidential relation of the
banker to customers--and the knowledge of the
customers' private affairs acquired incidentally--?
? ? Generated for (University of Chicago) on 2014-06-10 03:28 GMT / http://hdl. handle. net/2027/uc1. 32106000978228 Public Domain, Google-digitized / http://www. hathitrust. org/access_use#pd-google
? OUR FINANCIAL OLIGARCHY 9
is often a determining factor in the marketing of
securities. With the advent of Big Business
such good-will possessed by the older banking
houses, preeminently J. P. Morgan & Co. and
their Philadelphia House called Drexel & Co. ,
by Lee, Higginson & Co. and Kidder, Peabody,
& Co. of Boston, and by Kuhn, Loeb & Co. of
New York, became of enhanced importance. '
The volume of new security issues was greatly
increased by huge railroad consolidations, the
development of the holding companies, and par-
ticularly by the formation of industrial trusts.
The rapidly accumulating savings of our people
sought investment. The field of operations for
the dealer in securities was thus much enlarged.
And, as the securities were new and untried, the
services of the investment banker were in great
demand, and his powers and profits increased
accordingly.
CONTROLLING THE SECURITY MAKERS
But this enlargement of their legitimate field
of operations did not satisfy investment bankers.
They were not content merely to deal in securities.
They desired to manufacture them also. They
became promoters, or allied themselves with
promoters. Thus it was that J. P. Morgan &
? ? Generated for (University of Chicago) on 2014-06-10 03:28 GMT / http://hdl. handle. net/2027/uc1. 32106000978228 Public Domain, Google-digitized / http://www. hathitrust. org/access_use#pd-google
? 10 OTHER PEOPLE'S MONEY
Company formed the Steel Trust, the Harvester
Trust and the Shipping Trust. And, adding the
duties of undertaker to those of midwife, the
investment bankers became, in times of corporate
disaster, members of security-holders' "Pro-
tective Committees"; then they participated as
"Reorganization Managers" in the reincarnation
of the unsuccessful corporations and ultimately
became directors. It was in this way that the
Morgan associates acquired their hold upon the
Southern Railway, the Northern Pacific, the
Reading, the Erie, the Pere Marquette, the
Chicago and Great Western, and the Cincinnati,
Hamilton & Dayton. Often they insured the
continuance of such control by the device of the
voting trust; but even where no voting trust was
created, a secure hold was acquired upon re-
organization. It was in this way also that Kuhn,
Loeb & Co. became potent in the Union Pacific
and in the Baltimore & Ohio.
But the banker's participation in the manage-
ment of corporations was not limited to cases
of promotion or reorganization. An urgent or
extensive need of new money was considered a
sufficient reason for the banker's entering a
board of directors. Often without even such
excuse the investment banker has secured a
? ? Generated for (University of Chicago) on 2014-06-10 03:28 GMT / http://hdl. handle. net/2027/uc1. 32106000978228 Public Domain, Google-digitized / http://www. hathitrust. org/access_use#pd-google
? OUR FINANCIAL OLIGARCHY 11
place upon the Board of Directors, through his
powerful influence or the control of his customers'
proxies. Such seems to have been the fatal en-
trance of Mr. Morgan into the management of
the then prosperous New York, New Haven &
Hartford Railroad, in 1892. When once a
banker has entered the Board--whatever may
have been the occasion--his grip proves tena-
cious and his influence usually supreme; for he
controls the supply of new money.
The investment banker is naturally on the
lookout for good bargains in bonds and stocks.
Like other merchants, he wants to buy his
merchandise cheap. But when he becomes di-
rector of a corporation, he occupies a position
which prevents the transaction by which he
acquires its corporate securities from being
properly called a bargain. Can there be real
bargaining where the same man is on both sides
of a trade? The investment banker, through his
controlling influence on the Board of Directors,
decides that the corporation shall issue and sell
the securities, decides the price at which it shall
sell them, and decides that it shall sell the
securities to himself. The fact that there are
other directors besides the banker on the Board
? ? Generated for (University of Chicago) on 2014-06-10 03:28 GMT / http://hdl. handle. net/2027/uc1. 32106000978228 Public Domain, Google-digitized / http://www. hathitrust. org/access_use#pd-google
? 12 OTHER PEOPLE'S MONEY
does not, in practice, prevent this being the result.
The banker, who holds the purse-strings, becomes
usually the dominant spirit. Through voting-
trusteeships, exclusive financial agencies, mem-
bership on executive or finance committees, or by
mere directorships, J. P. Morgan & Co. , and their
associates, held such financial power in at least
thirty-two transportation systems, public utility
corporations and industrial companies--com-
panies with an aggregate capitalization of $17,-
273,000,000. Mainly for corporations so con-
trolled, J. P. Morgan & Co. procured the public
marketing in ten years of security issues aggre-
gating $1,950,000,000. This huge sum does not
include any issues marketed privately, nor any
issues, however marketed, of intra-state cor-
porations. Kuhn, Loeb & Co. and a few other
investment bankers exercise similar control over
many other corporations.
CONTROLLING SECURITY BUYERS
Such control of railroads, public service and
industrial corporations assures to the investment
bankers an ample supply of securities at attract-
ive prices; and merchandise well bought is half
sold. But these bond and stock merchants are
not disposed to take even a slight risk as to their
? ? Generated for (University of Chicago) on 2014-06-10 03:28 GMT / http://hdl. handle. net/2027/uc1. 32106000978228 Public Domain, Google-digitized / http://www. hathitrust. org/access_use#pd-google
? OUR FINANCIAL OLIGARCHY 18
ability to market their goods. They saw that if
they could control the security-buyers, as well as
the security-makers, investment banking would,
indeed, be "a happy hunting ground"; and they
have made it so.
The numerous small investors cannot, in the
strict sense, be controlled; but their dependence
upon the banker insures their being duly in-
fluenced. A large part, however, of all bonds
issued and of many stocks are bought by the
prominent corporate investors; and most promi-
nent among these are the life insurance companies,
the trust companies, and the banks. The purchase
of a security by these institutions not only relieves
the banker of the merchandise, but recommends
it strongly to the small investor, who believes
that these institutions are wisely managed. These
controlled corporate investors are not only large
customers, but may be particularly accommo-
dating ones. Individual investors are moody.
They buy only when they want to do so. They
are sometimes inconveniently reluctant. Cor-
porate investors, if controlled, may be made to
buy when the bankers need a market. It was
natural that the investment bankers proceeded to
get control of the great life insurance companies,
as well as of the trust companies and the banks.
? ? Generated for (University of Chicago) on 2014-06-10 03:28 GMT / http://hdl. handle. net/2027/uc1. 32106000978228 Public Domain, Google-digitized / http://www. hathitrust. org/access_use#pd-google
? 14 OTHER PEOPLE'S MONEY
The field thus occupied is uncommonly rich.
The life insurance companies are our leading
institutions for savings. Their huge surplus and
reserves, augmented daily, are always clamoring
for investment. No panic or money shortage
stops the inflow of new money from the perennial
stream of premiums on existing policies and inter-
est on existing investments. The three great
companies--the New York Life, the Mutual of
New York, and the Equitable--would have over
$55,000,000 of new money to invest annually,
even if they did not issue a single new policy.
In 1904--just before the Armstrong investiga-
tion--these three companies had together $1,247,-
331,738. 18 of assets. They had issued in that
year $1,025,671,126 of new policies. The New
York legislature placed in 1906 certain restrictions
upon their growth; so that their new business
since has averaged $547,384,212, or only fifty-
three per cent. of what it was in 1904. But the
aggregate assets of these companies increased in
the last eight years to $1,817,052,260. 36. At the
time of the Armstrong investigation the average
age of these three companies was fifty-six years.
The growth of assets in the last eight years was about
half as large as the total growth in the preceding
fifty-six years. These three companies must
? ? Generated for (University of Chicago) on 2014-06-10 03:28 GMT / http://hdl. handle. net/2027/uc1. 32106000978228 Public Domain, Google-digitized / http://www. hathitrust. org/access_use#pd-google
? OUR FINANCIAL OLIGARCHY 15
invest annually about $70,000,000 of new money;
and besides, many old investments expire or are
changed and the proceeds must be reinvested. A
large part of all life insurance surplus and re-
serves are invested in bonds. The aggregate
bond investments of these three companies on
January 1, 1913, was $1,019,153,268. 93.
It was natural that the investment bankers
should seek to control these never-failing reser-
voirs of capital. George W. Perkins was Vice-
President of the New York Life, the largest of
the companies. While remaining such he was
made a partner in J. P. Morgan & Co. , and in
the four years preceding the Armstrong investi-
gation, his firm sold the New York Life $38,804,
918. 51 in securities. The New York Life is a
mutual company, supposed to be controlled by
its policy-holders. But, as the Pujo Committee
funds "the so-called control of life insurance com-
panies by policy-holders through mutualization
is a farce" and "its only result is to keep in
office a self-constituted, self-perpetuating man-
agement. "
The Equitable Life Assurance Society is a
stock company and is controlled by $100,000 of
stock. The dividend on this stock is limited by
law to seven per cent. ; but in 1910 Mr. Morgan
? ? Generated for (University of Chicago) on 2014-06-10 03:28 GMT / http://hdl. handle. net/2027/uc1. 32106000978228 Public Domain, Google-digitized / http://www. hathitrust. org/access_use#pd-google
? 16 OTHER PEOPLE'S MONEY
paid about $3,000,000 for $51,000, par value of
this stock, or $5,882. 35 a share. The dividend
return on the stock investment is less than one-
eighth of one per cent. ; but the assets controlled
amount now to over $500,000,000. And certain
of these assets had an especial value for invest-
ment bankers;--namely, the large holdings of
stock in banks and trust companies.
The Armstrong investigation disclosed the
extent of financial power exerted through the
insurance company holdings of bank and trust
company stock. The Committee recommended
legislation compelling the insurance companies
to dispose of the stock within five years. A law
to that effect was enacted, but the time was later
extended. The companies then disposed of a
part of their bank and trust company stocks;
but, as the insurance companies were controlled
by the investment bankers, these gentlemen
sold the bank and trust company stocks to
themselves.
Referring to such purchases from the Mutual
Life, as well as from the Equitable, the Pujo
Committee found:
"Here, then, were stocks of five important
trust companies and one of our largest national
? ? Generated for (University of Chicago) on 2014-06-10 03:28 GMT / http://hdl. handle. net/2027/uc1. 32106000978228 Public Domain, Google-digitized / http://www. hathitrust. org/access_use#pd-google
? OUR FINANCIAL OLIGARCHY 17
banks in New York City that had been held by
these two life insurance companies. Within
five years all of these stocks, so far as distributed
by the insurance companies, have found their
way into the hands of the men who virtually con-
trolled or were identified with the management
of the insurance companies or of their close allies
and associates, to that extent thus further en-
trenching them. "
The banks and trust companies are deposi-
taries, in the main, not of the people's savings,
but of the business man's quick capital. Yet,
since the investment banker acquired control
of banks and trust companies, these institutions
also have become, like the life companies, large
purchasers of bonds and stocks. Many of our
national banks have invested in this manner a
large part of all their resources, including cap-
ital, surplus and deposits. The bond invest-
ments of some banks exceed by far the aggre-
gate of their capital and surplus, and nearly
equal their loanable deposits.
CONTROLLING OTHEB PEOPLE'S QUICK CAPITAL
The goose that lays golden eggs has been con-
sidered a most valuable possession. But even
more profitable is the privilege of taking the
? ? Generated for (University of Chicago) on 2014-06-10 03:28 GMT / http://hdl. handle. net/2027/uc1. 32106000978228 Public Domain, Google-digitized / http://www. hathitrust. org/access_use#pd-google
? 18 OTHER PEOPLE'S MONEY
golden eggs laid by somebody else's goose.
The investment bankers and their associates now
enjoy that privilege. They control the people
Lthrough the people's own money. If the bank-
ers' power were commensurate only with their
wealth, they would have relatively little influence
on American business. Vast fortunes like those
of the Astors are no doubt regrettable. They
are inconsistent with democracy. They are un-
social.
And they seem peculiarly unjust when
they represent largely unearned increment. But
the wealth of the Astors does not endanger
political or industrial liberty. It is insignificant
in amount as compared with the aggregate wealth
of America, or even of New York City. It lacks
significance largely because its owners have only
the income from their own wealth. The Astor
wealth is static. The wealth of the Morgan
associates is dynamic. The power and the
growth of power of our financial oligarchs comes
from wielding the savings and quick capital of
others. In two of the three great life insurance
companies the influence of J. P. Morgan & Co.
and their associates is exerted without any in-
dividual investment by them whatsoever. Even
in the Equitable, where Mr. Morgan bought an
actual majority of all the outstanding stock, his
? ? Generated for (University of Chicago) on 2014-06-10 03:28 GMT / http://hdl. handle. net/2027/uc1. 32106000978228 Public Domain, Google-digitized / http://www. hathitrust. org/access_use#pd-google
? OUR FINANCIAL OLIGARCHY 19
investment amounts to little more than one-half
of one per cent. of the assets of the company.
The fetters which bind the people are forged fronfl
the people's own gold. --'
But the reservoir of other people's money,
from which the investment bankers now draw
their greatest power, is not the life insurance
companies, but the banks and the trust companies.
Bank deposits represent the really quick capital
of the nation. They are the life blood of busi-
nesses. Their effective force is much greater than
that of an equal amount of wealth permanently
invested. The 34 banks and trust companies,
which the Pujo Committee declared to be directly
controlled by the Morgan associates, held $1,983,-
000,000 in deposits. Control of these institutions"]
means the ability to lend a large part of these
funds, directly and indirectly, to_ themselves; and
what is often even more important, the power
to prevent the funds being lent to any rival in-
terests. These huge deposits can, in the dis-
cretion of those in control, be used to meet the
temporary needs of their subject corporations^
When bonds and stocks are issued to finance
permanently these corporations, the bank depos-
its can, in large part, be loaned by the investment
? ? Generated for (University of Chicago) on 2014-06-10 03:28 GMT / http://hdl. handle. net/2027/uc1. 32106000978228 Public Domain, Google-digitized / http://www. hathitrust. org/access_use#pd-google
? 20 OTHER PEOPLE'S MONEY
bankers in control to themselves and their asso-
ciates; so that securities bought may be carried
by them, until sold to investors. Or these bank
deposits may be loaned to allied bankers, or
jobbers in securities, or to speculators, to enable
them to carry the bonds or stocks. Easy money
tends to make securities rise in the market.
Tight money nearly always makes them fall.
The control by the leading investment bankers
over the banks and trust companies is so great,
that they can often determine, for a time, the mar-
ket for money by lending or refusing to lend on
the Stock Exchange. In this way, among others,
they have power to affect the general trend of
prices in bonds and stocks. Their power over a
particular security is even greater. Its sale on
the market may depend upon whether the secur-
ity is favored or discriminated against when
offered to the banks and trust companies, as
collateral for loans.
Furthermore, it is the investment banker's
access to other people's money in controlled
banks and trust companies which alone enables
any individual banking concern to take so large
part of the annual output of bonds and stocks.
The banker's own capital, however large, would
soon be exhausted. And even the loanable
? ? Generated for (University of Chicago) on 2014-06-10 03:28 GMT / http://hdl. handle. net/2027/uc1. 32106000978228 Public Domain, Google-digitized / http://www. hathitrust. org/access_use#pd-google
? OUR FINANCIAL OLIGARCHY 21
funds of the banks would often be exhausted,
but for the large deposits made in those banks
by the life insurance, railroad, public service, and
industrial corporations which the bankers also
control. On December 31, 1912, the three lead-
ing life insurance companies had deposits in
banks and trust companies aggregating $13,839,-
189. 08. As the Pujo Committee finds:
"The men who through their control over the
funds of our railroads and industrial companies
are able to direct where such funds shall be kept,
and thus to create these great reservoirs of the
people's money, are the ones who are in position
to tap those reservoirs for the ventures in which
they are interested and to prevent their being
tapped for purposes of which they do not approve.
The latter is quite as important a factor as the
former. It is the controlling consideration in its
effect on competition in the railroad and industrial
world. "
HAVING TOUR CAKE AND EATING IT TOO
But the power of the investment banker over
other people's money is often more direct and
effective than that exerted through controlled
banks and trust companies. J. P. Morgan & Co. ~~~"
achieve the supposedly impossible feat of having
? ? Generated for (University of Chicago) on 2014-06-10 03:28 GMT / http://hdl. handle. net/2027/uc1. 32106000978228 Public Domain, Google-digitized / http://www. hathitrust. org/access_use#pd-google
? 22 OTHER PEOPLE'S MONEY
their cake and eating it too. They buy the bonds
and stocks of controlled railroads and industrial
concerns, and pay the purchase price; and still
do not part with their money. This is accom-
plished by the simple device of becoming the bank
of deposit of the controlled corporations, instead
of having the company deposit in some merely
controlled bank in whose operation others have
at least some share. When J. P. Morgan & Co.
buy an issue of securities the purchase money,
instead of being paid over to the corporation, is
retained by the banker for the corporation, to
be drawn upon only as the funds are needed by
the corporation. And as the securities are issued
in large blocks, and the money raised is often not
all spent until long thereafter, the aggregate of
the balances remaining in the banker's hands are
huge. Thus J. P. Morgan & Co. (including their
Philadelphia house, called Drexel & Co. ) held
on November 1, 1912, deposits aggregating
$162,491,819. 65.
POWER AND PELF
The operations of so comprehensive a system
of concentration necessarily developed in the
bankers overweening power. And the bankers'
power grows by what it feeds on. Power begets
? ? Generated for (University of Chicago) on 2014-06-10 03:28 GMT / http://hdl. handle. net/2027/uc1. 32106000978228 Public Domain, Google-digitized / http://www. hathitrust. org/access_use#pd-google
? OUR FINANCIAL OLIGARCHY 23
wealth; and added wealth opens ever new oppor-
tunities for the acquisition of wealth and power.
The operations of these bankers are so vast and
numerous that even a very reasonable compensa-
tion for the service performed by the bankers,
would, in the aggregate, produce for them in-
comes so large as to result in huge accumulations
of capital. But the compensation taken by the
bankers as commissions or profits is often far
from reasonable. Occupying, as they so fre-
quently do, the inconsistent position of being at
the same time seller and buyer, the standard for
so-called compensation actually applied, is not
the "Rule of reason", but "All the traffic will
bear. " And this is true even where there is no
sinister motive. The weakness of human nature
prevents men from being good judges of their
own deservings.
The syndicate formed by J. P. Morgan & Co.
to underwrite the United States Steel Corpora-
tion took for its services securities which netted
$62,500,000 in cash. Of this huge sum J. P.
Morgan & Co. received, as syndicate managers,
$12,500,000 in addition to the share which they
were entitled to receive as syndicate members.
This sum of $62,500,000 was only a part of the fees
paid for the service of monopolizing the steel in-
? ? Generated for (University of Chicago) on 2014-06-10 03:28 GMT / http://hdl. handle. net/2027/uc1. 32106000978228 Public Domain, Google-digitized / http://www. hathitrust. org/access_use#pd-google
? 24 OTHER PEOPLE'S MONEY
dustry. In addition to the commissions taken
specifically for organizing the United States
Steel Corporation, large sums were paid for
organizing the several companies of which it is
composed. For instance, the National Tube
Company was capitalized at $80,000,000 of
stock; $40,000,000 of which was common stock.
Half of this $40,000,000 was taken by J. P.
Morgan & Co. and their associates for promotion
services; and the $20,000,000 stock so taken
became later exchangeable for $25,000,000 of
Steel Common. Commissioner of Corporations
Herbert Knox Smith, found that:
"More than $150,000,000 of the stock of the
Steel Corporation was issued directly or in-
directly (through exchange) for mere promo-
tion or underwriting services. In other words,
nearly one-seventh of the total capital stock
of the Steel Corporation appears to have been
issued directly or indirectly to promoters'
services. "
The so-called fees and commissions taken by
the bankers and associates upon the organiza-
tion of the trusts have been exceptionally
large. But even after the trusts are successfully
launched the exactions of the bankers are often
? ? Generated for (University of Chicago) on 2014-06-10 03:28 GMT / http://hdl. handle. net/2027/uc1. 32106000978228 Public Domain, Google-digitized / http://www. hathitrust. org/access_use#pd-google
? OUR FINANCIAL OLIGARCHY 25
extortionate. The syndicate which underwrote,
in 1901, the Steel Corporation's preferred stock
conversion plan, advanced only $20,000,000 in
cash and received an underwriting commission
of $6,800,000.
The exaction of huge commissions is not con-
fined to trust and other industrial concerns.
The Interborough Railway is a most prosperous
corporation. It earned last year nearly 21 per
cent. on its capital stock, and secured from New
York City, in connection with the subway ex-
tension, a very favorable contract. But when it
financed its $170,000,000 bond issue it was agreed
that J. P. Morgan & Co. should receive three
per cent. , that is, $5,100,000, for merely forming
this syndicate. More recently, the New York,
New Haven & Hartford Railroad agreed to pay
J. P. Morgan & Co. a commission of $1,680,000;
that is, 2 1/2 per cent. , to form a syndicate to
underwrite an issue at par of $67,000,000 20-
year 6 per cent. convertible debentures. That
means: The bankers bound themselves to take
at 97 1/2 any of these six per cent. convertible
bonds which stockholders might be unwilling to
buy at 100. When the contract was made the
New Haven's then outstanding six per cent. con-
vertible bonds were selling at 114. And the
? ? Generated for (University of Chicago) on 2014-06-10 03:28 GMT / http://hdl. handle. net/2027/uc1. 32106000978228 Public Domain, Google-digitized / http://www. hathitrust. org/access_use#pd-google
? 26 OTHER PEOPLE'S MONEY
new issue, as soon as announced, was in such
demand that the public offered and was for
months willing to buy at 106 bonds which the
Company were to pay J. P. Morgan & Co. $1,-
680,000 to be willing to take at par.
WHY THE BANKS BECAME INVESTMENT BANKERS
These large profits from promotions, under-
writings and security purchases led to a revolu-
tionary change in the conduct of our leading
banking institutions. It was obvious that con-
trol by the investment bankers of the deposits
in banks and trust companies was an essential
element in their securing these huge profits.
And the bank officers naturally asked, "Why
then should not the banks and trust companies
share in so profitable a field? Why should not
they themselves become investment bankers
too, with all the new functions incident to 'Big
Business'? " To do so would involve a de-
parture from the legitimate sphere of the
banking business, which is the making of tem-
porary loans to business concerns. But the
temptation was irresistible. The invasion of
the investment banker into the banks' field of
operation was followed by a counter invasion
by the banks into the realm of the investment
? ? Generated for (University of Chicago) on 2014-06-10 03:28 GMT / http://hdl. handle. net/2027/uc1. 32106000978228 Public Domain, Google-digitized / http://www. hathitrust. org/access_use#pd-google
? OUR FINANCIAL OLIGARCHY 27
banker. Most prominent among the banks
were the National City and the First National
of New York. But theirs was not a hostile
invasion. The contending forces met as allies,
joined forces to control the business of the
country, and to "divide the spoils. " The al-
liance was cemented by voting trusts, by inter-
locking directorates and by joint ownerships.
There resulted the fullest "cooperation"; and
ever more railroads, public service corporations,
and industrial concerns were brought into
complete subjection.
? ? Generated for (University of Chicago) on 2014-06-10 03:28 GMT / http://hdl. handle. net/2027/uc1. 32106000978228 Public Domain, Google-digitized / http://www. hathitrust. org/access_use#pd-google
? CHAPTER II
HOW THE COMBINERS COMBINE
Among the allies, two New York banks--
the National City and the First National--
stand preeminent. They constitute, with the
Morgan firm, the inner group of the Money
Trust. Each of the two banks, like J.
