How shall the
emancipation
be wrought?
Louis Brandeis - 1914 - Other People's Money, and How Bankers Use It
.
.
No sound reason can be advanced for
giving Morgan & Company and Kuhn, Loeb & Com-
pany a monopoly of these securities. Plainly, they
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? PROPHET AND STATESMAN lv
should have been opened up to competitive bidding. "
It is scarcely necessary to say that Commissioner
Eastman did not wait for the collapse of 1929 to
begin his crusade against those evils of modern
financing . that came before the Commission. In 1925,
for instance, in the Missouri-Kansas-Texas Reorgan-
ization case, his comment on the uses to which reor-
ganizing is now put by the financial interests was
devastating. When a large corporation has passed
into the hands of receivers "there generally emerges
a firm or group of bankers as 'reorganization man-
agers' and 'protective committees' representing the
various groups of creditors and, where their condition
is not too hopeless, the stockholders as well. . . .
The process by which these bodies, purporting to
be representative, are evolved is somewhat obscure.
Apparently they ordinarily originate in various
nuclei of financial interest and grow in power by
accretions, as creditors or stockholders turn to them
as the only available means of protection. At the
outset they are largely self-appointed, and through-
out their existence they are largely self-guided. " In
the case he was discussing the Commission was
asked to give great weight to the fact that the com-
pensation of the reorganization managers was
approved by the 23 committees representing security
holders, but Mr. Eastman commented that the re-
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? Ivi
FOREWORD
organization managers had been made by agreement
the sole judges of the propriety of the compensation
to every one of these committees. He said:
"The reorganization managers were two large
banking houses in "New York City. It is not clearly
shown why one large banking house could not have
carried on the work satisfactorily. " The same point,
according to Commissioner Eastman, holds of the
employment of two large legal firms instead of one.
The witnesses who testified in support of the propriety
were all financially interested in the result. "I have
not," Mr. Eastman says, "been impressed by the re-
sults obtained by reorganization managers. " And he
offers a contrast between the kind of economy that
big business men are always preaching to the govern-
ment and the kind they do not encourage themselves:
"Economy in the Government service is much stressed
at present, and quite properly so, but economy in the
public service, interpreting that term broadly to in-
clude all private corporations engaged therein, is no
less important. The people of this country suffer no
less burden, directly or indirectly, from waste and ex-
travagance by a railroad company engaged in the
public service than from waste and extravagance
by a department of the Government. . . . Profes-
sional services rendered in connection with the re-
habilitation of such corporations ought, I think, to be
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? PROPHET AND STATESMAN lvii
regarded in the light of work done in the administra-
tion of a puhlic trust. "
Therefore Commissioner Eastman wished to pay
the bankers and lawyers only one half of what they
asked.
The hig banking houses on which Commissioner
Eastman concentrates are, as he points out, jobbers,
rather than retailers, of securities, and in general
they sell to other banking houses, which in turn dis-
tribute to investors; thus the big bankers of necessity
have much power over the smaller ones. "Because
of this fact," Eastman says, "it is difficult to secure
a full, frank, and public discussion of prevailing
practices in the marketing of railroad securities, by
those who are well equipped for such a discussion.
It is easy to secure a defense of these practices, but
difficult, if not impossible, to obtain a proper presen-
tation of the other side. "
Nobody will deny that Melvin A. Traylor, Presi-
dent of the First National Bank of Chicago, and also
of the First Union Trust and Savings Bank, has suf-
ficient knowledge to qualify as a witness to prevailing
practice. Speaking of those in high financial posi-
tions, and also of those in high positions in govern-
ment, industry, commerce, and agriculture, he said
in 1931: "Ambition, cupidity, and greed have dic-
tated policies, and trouble has been the result. "
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? lviii
FOREWORD
"As early as 1927," Mr. Traylor said--a very
moderate date to select, considering the dates of the
Brandeis prophecies--"it was clearly obvious to any-
one having experience with the granting of credit that
if the situation was allowed to continue, and if ex-
pansion and speculation were carried on unchecked,
there could be but one end, disaster. . . .
"Every kind and character of combination and con-
solidation was made, regardless of economic advis-
ability or the possibility of economies in management
or increased profits therefrom. Little or no consid-
eration was given to the nature of the businesses in-
volved; in one instance, for example, soaps and
candles were united. Such combinations and mergers
were promoted and securities were sold on the theory
that temporary earnings derived from a false demand
would not only continue, but would forever increase.
Furthermore, these securities were not sold to those
in a position to buy, or who could buy for investment
purposes, but rather to those less able to buy--to men
and women fascinated by high-power salesmanship
and an inborn desire to gamble for high profits. Was
such financial leadership calculated to inspire con-
fidence or make for an economic stability which
insures social welfare? I am afraid not. But finan-
cial leadership did not stop there. It actively pro-
moted the purchase of equity stocks and split its own
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? PROPHET AND STATESMAN lix
unit of stock par, in order, as it said, to bring its
market values within the reach of the small investor.
Financial leaders organized and promoted so-called
investment trusts to give the small investor a chance
to profit from wise financial leadership, made foreign
loans of speculative value, and, altogether, followed
the procession obviously intent upon getting theirs
while the getting was good. "
"I believe," Mr. Traylor says, with his usual can-
dor, "that without the proper education and direction
of human conduct, economic depressions will inevi-
tably continue to recur with ever-increasing social
and political disaster. "
In his pamphlet called "The Human Element in
Crises" Mr. Traylor states forcibly his reasons
for putting importance on the rules of the stock-
exchanges, and primarily of the New York Stock Ex-
change, for their encouragement of gambling. The
changes he advocates are technical, and we may be
content with stating his opinion that floor-trading has
few of the redeeming traits of shooting craps; that
there is needed some kind of periodic settlement that
would make possible regulation of the flow of credit;
and that there should be no sales on credit for less
than $10,000, or preferably $50,000,--this regulation
to impede stock-gambling by people of small means.
James Farrell, as President of the billion-dollar
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? lx
FOREWORD
Bteel combine, said recently to other steel-masters that
the march toward size has become a danger,--a state-
ment no man in his position would conceivably have
made in the era when bigger and better were words
that were harnessed together with scarcely an influen-
tial critic on the other side.
Even as these pages are being written there appears
an editorial by Dr. Julius Klein, of the Commerce
Department, long one of the most conspicuous leaders
in the effort to create prosperity by the methods of
Dr. Cou6; and this editorial, instead of glorifying
matter and bulk, as the author of "Individualism,"
and his followers, have too often done, now offers a
warning against faith in mere size, and even points
out some advantages that inhere in more manageable
volume.
But I would not be too optimistic. It is not pos-
sible to find conspicuous signs that financial leaders
have begun to swing into action against the evil of
confusing the wholly opposite functions and services
of different kinds of banking. The hard fight that
Senator Glass has been waging, for example, has been
largely inspired by his realization that commercial
bankers have been going into investment banking,
largely through their affiliates. We shall never go
far toward restoring soundness to banking until we
again fully recognize the sacred division between risk
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? PROPHET AND STATESMAN lxi
and safety, which in banking is of necessity marked
hy the separation between commerical banks, security
companies, and savings banks. The financiers who
have confused these three functions have been de-
stroying the bases of sound finance.
The business of the commercial banker is the
proper taking of risks. He requires careful judg-
ment, but he must take risks, and be paid for it.
The business of a savings bank is, as far as is
within human power, to take no risks at all.
The business of a security-dealer is to hold a re-
lation of absolute honesty toward the people and to
exercise merchandising judgment in a field where we
are dealing with an article that calls for judgment
that is highly expert.
Our financiers have imperiled the commercial
bank by their speculations in securities. They have
imperiled the savings bank by their loss of feeling
for its true function. In reality it takes different
classes of men for these different duties. A man who
is in the business of taking risks is not the proper
man to determine what investments are without risks.
The fatalities following 1929 came to a large ex-
tent from the failure to act on the principles sharply
drawn in "Other People's Money. "
In this book is shown the need of independent
judgment. Independence of judgment is not to be
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? lxii
FOREWORD
expected from men who are concerned about making
money for themselves. As a matter of fact bankers
of late have been out not only to make large sums of
money but to make it on the principle of "heads I
win, tails you lose. " When they get control of a
corporation they are in a position to buy and sell at
times favorable to themselves. Safety will not be in
our world of investment until there is a return to a
higher conception of duty.
The people discussed primarily in "Other People's
Money" are those who originate and deal in securities.
Since the book was first published they have gone
still further from the track to which, if their rule in
the world is to be respected, they must return.
The true statesman is a prophet. The great con-
tribution of Justice Brandeis has been to understand
our machine age, and in the irresistible advance of
technique to demand loyalty to the eternal laws of the
spirit. The one among the tributes brought out by
his seventy-fifth anniversary that, considering its
source, must have the highest value, came from the
foremost living man of science. "The development
of humanity," Einstein wrote, "rests less in the
brains of inventors than in the consciences of men
like Brandeis. "
NOBMAH HAPGOOD
September, 1932
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? OTHER PEOPLE'S MONEY
AND HOW THE BANKERS USE IT
CHAPTER I
OUR FINANCIAL OLIGARCHY
Pbesident Wilson, when Governor, declared
in 1911:
"The great monopoly in this country is the
money monopoly. So long as that exists, our
old variety and freedom and individual energy of
development are out of the question. A great
industrial nation is controlled by its system of
credit. Our system of credit is concentrated.
The growth of the nation, therefore, and all our
activities are in the hands of a few men, who,
even if their actions be honest and intended for
the public interest, are necessarily concentrated
upon the great undertakings in which their own
money is involved and who, necessarily, by every
reason of their own limitations, chill and check
and destroy genuine economic freedom. This
is the greatest question of all; and to this, statea-
l
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? 2 OTHER PEOPLE'S MONEY
men must address themselves with an earnest
determination to serve the long future and the
true liberties of men. "
The Pujo Committee--appointed in 1912--
found:
"Far more dangerous than all that has hap-
pened to us in the past in the way of elimination
of competition in industry is the control of credit
through the domination of these groups over our
banks and industries. " . . .
"Whether under a different currency system
the resources in our banks would be greater or
less is comparatively immaterial if they continue
to be controlled by a small group. " . . .
"It is impossible that there should be compe-
tition with all the facilities for raising money or
selling large issues of bonds in the hands of these
few bankers and their partners and allies, who
together dominate the financial policies of most
of the existing systems. . . . The acts of this
inner group, as here described, have nevertheless
been more destructive of competition than any-
thing accomplished by the trusts, for they strike
at the very vitals of potential competition in
every industry that is under their protection, a
condition which if permitted to continue, will
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? OUR FINANCIAL OLIGARCHY 3
render impossible all attempts to restore nor-
mal competitive conditions in the industrial
world. . . .
"If the arteries of credit now clogged well-nigh
to choking by the obstructions created through
the control of these groups are opened so that they
may be permitted freely to play their important
part in the financial system, competition in large
enterprises will become possible and business can
be conducted on its merits instead of being sub-
ject to the tribute and the good will of this hand-
ful of self-constituted trustees of the national
prosperity. "
The promise of New Freedom was joyously
proclaimed in 1913.
The facts which the Pujo Investigating Com-
mittee and its able Counsel, Mr. Samuel Unter-
myer, have laid before the country, show clearly
the means by which a few men control the busi-
ness of America. The report proposes meas-
ures which promise some relief. Additional reme-
dies will be proposed. Congress will soon be
called upon to act.
How shall the emancipation be wrought? On
what lines shall we proceed? The facts, when
fully understood, will teach us.
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? 4 OTHER PEOPLE'S MONEY
THE DOMINANT ELEMENT
The dominant element in our financial oli-
garchy is the investment banker. Associated
banks, trust companies and life insurance com-
panies are his tools. Controlled railroads, public
service and industrial corporations are his sub-
jects. Though properly but middlemen, these
bankers bestride as masters America's business
world, so that practically no large enterprise can
be undertaken successfully without their partici-
pation or approval. These bankers are, of
course, able men possessed of large fortunes;
but the most potent factor in their control of
business is not the possession of extraordinary
ability or huge wealth. The key to their power is
Combination--concentration intensive and com-
prehensive--advancing on three distinct lines:
First: There is the obvious consolidation of
banks and trust companies; the less obvious
affiliations--through stockholdings, voting trusts
and interlocking directorates--of banking insti-
tutions which are not legally connected; and
the joint transactions, gentlemen's agreements,
and "banking ethics" which eliminate competi-
tion among the investment bankers.
Second: There is the consolidation of railroads
into huge systems, the large combinations of
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? OUR FINANCIAL OLIGARCHY 5
public service corporations and the formation of
industrial trusts, which, by making businesses so
"big" that local, independent banking concerns
cannot alone supply the necessary funds, has
created dependence upon the associated New
York bankers.
But combination, however intensive, along
these lines only, could not have produced the
Money Trust--another and more potent factor
of combination was added.
Third: Investment bankers, like J. P. Morgan
& Co. , dealers in bonds, stocks and notes, en-
croached upon the functions of the three other
classes of corporations with which their business
brought them into contact. They became the
directing power in railroads, public service and
industrial companies through which our great
business operations are conducted--the makers
of bonds and stocks. They became the directing
power in the life insurance companies, and other
corporate reservoirs of the people's savings--the
buyers of bonds and stocks. They became the
directing power also in banks and trust companies
--the depositaries of the quick capital of the coun-
try--the life blood of business, with which they
and others carried on their operations. Thus
four distinct functions, each essential to business,
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? 6 OTHER PEOPLE'S MONEY
and each exercised, originally, by a distinct set of
men, became united in the investment banker.
It is to this union of business functions that the
existence of the Money Trust is mainly due. *
The development of our financial oligarchy
followed, in this respect, lines with which the
history of political despotism has familiarized us:
--usurpation, proceeding by gradual encroach-
ment rather than by violent acts; subtle and
often long-concealed concentration of distinct
functions, which are beneficent when separately
administered, and dangerous only when combined
in the same persons. It was by processes such
as these that C<<sar Augustus became master of
Rome. The makers of our own Constitution
had in mind like dangers to our political liberty
when they provided so carefully for the separation
of governmental powers.
/ THE PEOPER SPHERE OF THE INVESTMENT
BANKER
The original function of the investment banker
was that of dealer in bonds, stocks and notes;
buying mainly at wholesale from corporations,
'Obviously only a few of the investment bankers exer-
cise this great power; but many others perform important func-
tions in the system, as hereinafter described.
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? OUR FINANCIAL OLIGARCHY 7
municipalities, states and governments which
need money, and selling to those seeking invest-
ments. The banker performs, in this respect, the
function of a merchant; and the function is a
very useful one. Large business enterprises are
conducted generally by corporations. The per-
manent capital of corporations is represented by
bonds and stocks. The bonds and stocks of the
more important corporations are owned, in large
part, by small investors, who do not participate
in the management of the company. Corpora-
tions require the aid of a banker-middleman,
for they lack generally the reputation and clien-
tele essential to selling their own bonds and stocks
direct to the investor. Investors in corporate
securities, also, require the services of a banker-
middleman. The number of securities upon the
market is very large. Only a part of these se-
curities is listed on the New York Stock Ex-
change; but its listings alone comprise about
sixteen hundred different issues aggregating
about $26,500,000,000, and each year new list-
ings are made averaging about two hundred
and thirty-three to an amount of $1,500,000,000.
For a small investor to make an intelligent selec-
tion from these many corporate securities--in-
deed, to pass an intelligent judgment upon a
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? 8 OTHER PEOPLE'S MONEY
single one--is ordinarily impossible. He lacks the
ability, the facilities, the training and the time
essential to a proper investigation. Unless his
purchase is to be little better than a gamble, he
needs the advice of an expert, who, combining
special knowledge with judgment, has the facil-
ities and incentive to make a thorough investiga-
tion. 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--?
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? 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 &
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? 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
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? 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
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? 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
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? 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.
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? 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.
giving Morgan & Company and Kuhn, Loeb & Com-
pany a monopoly of these securities. Plainly, they
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? PROPHET AND STATESMAN lv
should have been opened up to competitive bidding. "
It is scarcely necessary to say that Commissioner
Eastman did not wait for the collapse of 1929 to
begin his crusade against those evils of modern
financing . that came before the Commission. In 1925,
for instance, in the Missouri-Kansas-Texas Reorgan-
ization case, his comment on the uses to which reor-
ganizing is now put by the financial interests was
devastating. When a large corporation has passed
into the hands of receivers "there generally emerges
a firm or group of bankers as 'reorganization man-
agers' and 'protective committees' representing the
various groups of creditors and, where their condition
is not too hopeless, the stockholders as well. . . .
The process by which these bodies, purporting to
be representative, are evolved is somewhat obscure.
Apparently they ordinarily originate in various
nuclei of financial interest and grow in power by
accretions, as creditors or stockholders turn to them
as the only available means of protection. At the
outset they are largely self-appointed, and through-
out their existence they are largely self-guided. " In
the case he was discussing the Commission was
asked to give great weight to the fact that the com-
pensation of the reorganization managers was
approved by the 23 committees representing security
holders, but Mr. Eastman commented that the re-
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? Ivi
FOREWORD
organization managers had been made by agreement
the sole judges of the propriety of the compensation
to every one of these committees. He said:
"The reorganization managers were two large
banking houses in "New York City. It is not clearly
shown why one large banking house could not have
carried on the work satisfactorily. " The same point,
according to Commissioner Eastman, holds of the
employment of two large legal firms instead of one.
The witnesses who testified in support of the propriety
were all financially interested in the result. "I have
not," Mr. Eastman says, "been impressed by the re-
sults obtained by reorganization managers. " And he
offers a contrast between the kind of economy that
big business men are always preaching to the govern-
ment and the kind they do not encourage themselves:
"Economy in the Government service is much stressed
at present, and quite properly so, but economy in the
public service, interpreting that term broadly to in-
clude all private corporations engaged therein, is no
less important. The people of this country suffer no
less burden, directly or indirectly, from waste and ex-
travagance by a railroad company engaged in the
public service than from waste and extravagance
by a department of the Government. . . . Profes-
sional services rendered in connection with the re-
habilitation of such corporations ought, I think, to be
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? PROPHET AND STATESMAN lvii
regarded in the light of work done in the administra-
tion of a puhlic trust. "
Therefore Commissioner Eastman wished to pay
the bankers and lawyers only one half of what they
asked.
The hig banking houses on which Commissioner
Eastman concentrates are, as he points out, jobbers,
rather than retailers, of securities, and in general
they sell to other banking houses, which in turn dis-
tribute to investors; thus the big bankers of necessity
have much power over the smaller ones. "Because
of this fact," Eastman says, "it is difficult to secure
a full, frank, and public discussion of prevailing
practices in the marketing of railroad securities, by
those who are well equipped for such a discussion.
It is easy to secure a defense of these practices, but
difficult, if not impossible, to obtain a proper presen-
tation of the other side. "
Nobody will deny that Melvin A. Traylor, Presi-
dent of the First National Bank of Chicago, and also
of the First Union Trust and Savings Bank, has suf-
ficient knowledge to qualify as a witness to prevailing
practice. Speaking of those in high financial posi-
tions, and also of those in high positions in govern-
ment, industry, commerce, and agriculture, he said
in 1931: "Ambition, cupidity, and greed have dic-
tated policies, and trouble has been the result. "
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? lviii
FOREWORD
"As early as 1927," Mr. Traylor said--a very
moderate date to select, considering the dates of the
Brandeis prophecies--"it was clearly obvious to any-
one having experience with the granting of credit that
if the situation was allowed to continue, and if ex-
pansion and speculation were carried on unchecked,
there could be but one end, disaster. . . .
"Every kind and character of combination and con-
solidation was made, regardless of economic advis-
ability or the possibility of economies in management
or increased profits therefrom. Little or no consid-
eration was given to the nature of the businesses in-
volved; in one instance, for example, soaps and
candles were united. Such combinations and mergers
were promoted and securities were sold on the theory
that temporary earnings derived from a false demand
would not only continue, but would forever increase.
Furthermore, these securities were not sold to those
in a position to buy, or who could buy for investment
purposes, but rather to those less able to buy--to men
and women fascinated by high-power salesmanship
and an inborn desire to gamble for high profits. Was
such financial leadership calculated to inspire con-
fidence or make for an economic stability which
insures social welfare? I am afraid not. But finan-
cial leadership did not stop there. It actively pro-
moted the purchase of equity stocks and split its own
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? PROPHET AND STATESMAN lix
unit of stock par, in order, as it said, to bring its
market values within the reach of the small investor.
Financial leaders organized and promoted so-called
investment trusts to give the small investor a chance
to profit from wise financial leadership, made foreign
loans of speculative value, and, altogether, followed
the procession obviously intent upon getting theirs
while the getting was good. "
"I believe," Mr. Traylor says, with his usual can-
dor, "that without the proper education and direction
of human conduct, economic depressions will inevi-
tably continue to recur with ever-increasing social
and political disaster. "
In his pamphlet called "The Human Element in
Crises" Mr. Traylor states forcibly his reasons
for putting importance on the rules of the stock-
exchanges, and primarily of the New York Stock Ex-
change, for their encouragement of gambling. The
changes he advocates are technical, and we may be
content with stating his opinion that floor-trading has
few of the redeeming traits of shooting craps; that
there is needed some kind of periodic settlement that
would make possible regulation of the flow of credit;
and that there should be no sales on credit for less
than $10,000, or preferably $50,000,--this regulation
to impede stock-gambling by people of small means.
James Farrell, as President of the billion-dollar
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? lx
FOREWORD
Bteel combine, said recently to other steel-masters that
the march toward size has become a danger,--a state-
ment no man in his position would conceivably have
made in the era when bigger and better were words
that were harnessed together with scarcely an influen-
tial critic on the other side.
Even as these pages are being written there appears
an editorial by Dr. Julius Klein, of the Commerce
Department, long one of the most conspicuous leaders
in the effort to create prosperity by the methods of
Dr. Cou6; and this editorial, instead of glorifying
matter and bulk, as the author of "Individualism,"
and his followers, have too often done, now offers a
warning against faith in mere size, and even points
out some advantages that inhere in more manageable
volume.
But I would not be too optimistic. It is not pos-
sible to find conspicuous signs that financial leaders
have begun to swing into action against the evil of
confusing the wholly opposite functions and services
of different kinds of banking. The hard fight that
Senator Glass has been waging, for example, has been
largely inspired by his realization that commercial
bankers have been going into investment banking,
largely through their affiliates. We shall never go
far toward restoring soundness to banking until we
again fully recognize the sacred division between risk
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? PROPHET AND STATESMAN lxi
and safety, which in banking is of necessity marked
hy the separation between commerical banks, security
companies, and savings banks. The financiers who
have confused these three functions have been de-
stroying the bases of sound finance.
The business of the commercial banker is the
proper taking of risks. He requires careful judg-
ment, but he must take risks, and be paid for it.
The business of a savings bank is, as far as is
within human power, to take no risks at all.
The business of a security-dealer is to hold a re-
lation of absolute honesty toward the people and to
exercise merchandising judgment in a field where we
are dealing with an article that calls for judgment
that is highly expert.
Our financiers have imperiled the commercial
bank by their speculations in securities. They have
imperiled the savings bank by their loss of feeling
for its true function. In reality it takes different
classes of men for these different duties. A man who
is in the business of taking risks is not the proper
man to determine what investments are without risks.
The fatalities following 1929 came to a large ex-
tent from the failure to act on the principles sharply
drawn in "Other People's Money. "
In this book is shown the need of independent
judgment. Independence of judgment is not to be
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? lxii
FOREWORD
expected from men who are concerned about making
money for themselves. As a matter of fact bankers
of late have been out not only to make large sums of
money but to make it on the principle of "heads I
win, tails you lose. " When they get control of a
corporation they are in a position to buy and sell at
times favorable to themselves. Safety will not be in
our world of investment until there is a return to a
higher conception of duty.
The people discussed primarily in "Other People's
Money" are those who originate and deal in securities.
Since the book was first published they have gone
still further from the track to which, if their rule in
the world is to be respected, they must return.
The true statesman is a prophet. The great con-
tribution of Justice Brandeis has been to understand
our machine age, and in the irresistible advance of
technique to demand loyalty to the eternal laws of the
spirit. The one among the tributes brought out by
his seventy-fifth anniversary that, considering its
source, must have the highest value, came from the
foremost living man of science. "The development
of humanity," Einstein wrote, "rests less in the
brains of inventors than in the consciences of men
like Brandeis. "
NOBMAH HAPGOOD
September, 1932
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? OTHER PEOPLE'S MONEY
AND HOW THE BANKERS USE IT
CHAPTER I
OUR FINANCIAL OLIGARCHY
Pbesident Wilson, when Governor, declared
in 1911:
"The great monopoly in this country is the
money monopoly. So long as that exists, our
old variety and freedom and individual energy of
development are out of the question. A great
industrial nation is controlled by its system of
credit. Our system of credit is concentrated.
The growth of the nation, therefore, and all our
activities are in the hands of a few men, who,
even if their actions be honest and intended for
the public interest, are necessarily concentrated
upon the great undertakings in which their own
money is involved and who, necessarily, by every
reason of their own limitations, chill and check
and destroy genuine economic freedom. This
is the greatest question of all; and to this, statea-
l
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? 2 OTHER PEOPLE'S MONEY
men must address themselves with an earnest
determination to serve the long future and the
true liberties of men. "
The Pujo Committee--appointed in 1912--
found:
"Far more dangerous than all that has hap-
pened to us in the past in the way of elimination
of competition in industry is the control of credit
through the domination of these groups over our
banks and industries. " . . .
"Whether under a different currency system
the resources in our banks would be greater or
less is comparatively immaterial if they continue
to be controlled by a small group. " . . .
"It is impossible that there should be compe-
tition with all the facilities for raising money or
selling large issues of bonds in the hands of these
few bankers and their partners and allies, who
together dominate the financial policies of most
of the existing systems. . . . The acts of this
inner group, as here described, have nevertheless
been more destructive of competition than any-
thing accomplished by the trusts, for they strike
at the very vitals of potential competition in
every industry that is under their protection, a
condition which if permitted to continue, will
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? OUR FINANCIAL OLIGARCHY 3
render impossible all attempts to restore nor-
mal competitive conditions in the industrial
world. . . .
"If the arteries of credit now clogged well-nigh
to choking by the obstructions created through
the control of these groups are opened so that they
may be permitted freely to play their important
part in the financial system, competition in large
enterprises will become possible and business can
be conducted on its merits instead of being sub-
ject to the tribute and the good will of this hand-
ful of self-constituted trustees of the national
prosperity. "
The promise of New Freedom was joyously
proclaimed in 1913.
The facts which the Pujo Investigating Com-
mittee and its able Counsel, Mr. Samuel Unter-
myer, have laid before the country, show clearly
the means by which a few men control the busi-
ness of America. The report proposes meas-
ures which promise some relief. Additional reme-
dies will be proposed. Congress will soon be
called upon to act.
How shall the emancipation be wrought? On
what lines shall we proceed? The facts, when
fully understood, will teach us.
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? 4 OTHER PEOPLE'S MONEY
THE DOMINANT ELEMENT
The dominant element in our financial oli-
garchy is the investment banker. Associated
banks, trust companies and life insurance com-
panies are his tools. Controlled railroads, public
service and industrial corporations are his sub-
jects. Though properly but middlemen, these
bankers bestride as masters America's business
world, so that practically no large enterprise can
be undertaken successfully without their partici-
pation or approval. These bankers are, of
course, able men possessed of large fortunes;
but the most potent factor in their control of
business is not the possession of extraordinary
ability or huge wealth. The key to their power is
Combination--concentration intensive and com-
prehensive--advancing on three distinct lines:
First: There is the obvious consolidation of
banks and trust companies; the less obvious
affiliations--through stockholdings, voting trusts
and interlocking directorates--of banking insti-
tutions which are not legally connected; and
the joint transactions, gentlemen's agreements,
and "banking ethics" which eliminate competi-
tion among the investment bankers.
Second: There is the consolidation of railroads
into huge systems, the large combinations of
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? OUR FINANCIAL OLIGARCHY 5
public service corporations and the formation of
industrial trusts, which, by making businesses so
"big" that local, independent banking concerns
cannot alone supply the necessary funds, has
created dependence upon the associated New
York bankers.
But combination, however intensive, along
these lines only, could not have produced the
Money Trust--another and more potent factor
of combination was added.
Third: Investment bankers, like J. P. Morgan
& Co. , dealers in bonds, stocks and notes, en-
croached upon the functions of the three other
classes of corporations with which their business
brought them into contact. They became the
directing power in railroads, public service and
industrial companies through which our great
business operations are conducted--the makers
of bonds and stocks. They became the directing
power in the life insurance companies, and other
corporate reservoirs of the people's savings--the
buyers of bonds and stocks. They became the
directing power also in banks and trust companies
--the depositaries of the quick capital of the coun-
try--the life blood of business, with which they
and others carried on their operations. Thus
four distinct functions, each essential to business,
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? 6 OTHER PEOPLE'S MONEY
and each exercised, originally, by a distinct set of
men, became united in the investment banker.
It is to this union of business functions that the
existence of the Money Trust is mainly due. *
The development of our financial oligarchy
followed, in this respect, lines with which the
history of political despotism has familiarized us:
--usurpation, proceeding by gradual encroach-
ment rather than by violent acts; subtle and
often long-concealed concentration of distinct
functions, which are beneficent when separately
administered, and dangerous only when combined
in the same persons. It was by processes such
as these that C<<sar Augustus became master of
Rome. The makers of our own Constitution
had in mind like dangers to our political liberty
when they provided so carefully for the separation
of governmental powers.
/ THE PEOPER SPHERE OF THE INVESTMENT
BANKER
The original function of the investment banker
was that of dealer in bonds, stocks and notes;
buying mainly at wholesale from corporations,
'Obviously only a few of the investment bankers exer-
cise this great power; but many others perform important func-
tions in the system, as hereinafter described.
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? OUR FINANCIAL OLIGARCHY 7
municipalities, states and governments which
need money, and selling to those seeking invest-
ments. The banker performs, in this respect, the
function of a merchant; and the function is a
very useful one. Large business enterprises are
conducted generally by corporations. The per-
manent capital of corporations is represented by
bonds and stocks. The bonds and stocks of the
more important corporations are owned, in large
part, by small investors, who do not participate
in the management of the company. Corpora-
tions require the aid of a banker-middleman,
for they lack generally the reputation and clien-
tele essential to selling their own bonds and stocks
direct to the investor. Investors in corporate
securities, also, require the services of a banker-
middleman. The number of securities upon the
market is very large. Only a part of these se-
curities is listed on the New York Stock Ex-
change; but its listings alone comprise about
sixteen hundred different issues aggregating
about $26,500,000,000, and each year new list-
ings are made averaging about two hundred
and thirty-three to an amount of $1,500,000,000.
For a small investor to make an intelligent selec-
tion from these many corporate securities--in-
deed, to pass an intelligent judgment upon a
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? 8 OTHER PEOPLE'S MONEY
single one--is ordinarily impossible. He lacks the
ability, the facilities, the training and the time
essential to a proper investigation. Unless his
purchase is to be little better than a gamble, he
needs the advice of an expert, who, combining
special knowledge with judgment, has the facil-
ities and incentive to make a thorough investiga-
tion. 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--?
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? 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 &
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? 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
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? 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
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? 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
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? 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.
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? 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.
