 CHAPTER 1 OUR FINANCIAL OLIGARCHY President 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 statesmen 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 happened 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 competition 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 anything 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 render impossible all attempts to restore normal competitive conditions in the industrial world. If the arteries of credit now clogged well-nighter 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 the subject to the tribute and the goodwill of this handful of self-constituted trustees of the national prosperity. The promise of new freedom was joyously proclaimed in 1913. The facts which the Pujo Investigating Committee and its Abel Council, Mr. Samuel Luntemeier, have laid before the country, show clearly the means by which a few men control the business of America. The report proposes measures which promise some relief, additional remedies 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. THE DOMINANT ELEMENT The dominant element in our financial oligarchy is the investment banker. Associated trust, trust companies and life insurance companies are his tools. Controlled railroads, public service and industrial corporations are his subjects. No properly, but middlemen, these bankers bestride as masters America's business world, so that practically no large enterprise can be undertaken successfully without their participation 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 comprehensive, advancing on three distinct lines. First, there is the obvious consolidation of banks and trust companies, the less obvious affiliations, through stock holdings, voting trusts and interlocking directorates, of banking institutions, which are not legally connected, and the joint transactions, gentleman's agreements and banking ethics, which eliminate competition among the investment bankers. Second, there is the consolidation of railroads into huge systems, the large combinations of 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 and company Dealers in Bond, Stocks and Notes encroached 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 depositories of the quick capital of the country, the lifeblood of business with which they and others carried on their operations. Thus four distinct functions, each essential to business 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. Note, obviously only a few of the investment bankers exercise this great power, but many others perform important functions in the system, as herein after described. The development of our financial oligarchy followed in this respect lines by which the history of political despotism has familiarised us, usurpation proceeding by gradual encroachment 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 Caesar 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 Proper Sphere of the Investment Banker The original function of the investment banker was that of a dealer in bonds, stocks and notes, buying mainly at wholesale from corporations, municipalities, states and governments which need money and selling to those seeking investments. 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 permanent capital of corporations is represented by bonds and stocks. The bonds and stocks of more important corporations are owned, in large part, by small investors who do not participate in the management of the company. Corporations require the aid of a banker middleman, for they lack generally the reputation and clientele 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 securities is listed on the New York Stock Exchange. But its listings alone comprise about sixteen hundred different issues, aggregating about twenty-six point five billion dollars. And each year new listings are made averaging about two hundred and thirty-three to an amount of one point five billion dollars. For a small investor to make an intelligence election from these many corporate securities, indeed to pass an intelligent judgment upon a 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 facilities and incentive to make a thorough investigation. This dependence, both of corporations and of investors upon the banker, has grown in recent years, since women and others who do not participate in the management have become the owners of so larger 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 and Hartford Railroad, are women. Goodwill, the possession by a dealer of numerous 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 customer's private affairs acquired incidentally, is often a determining factor in the marketing of securities. With the advent of big business, such goodwill possessed by the older banking houses, prominently J.P. Morgan & Company and their Philadelphia House called Drexel & Company, by Lee Higginson & Company, and Kidder Peabody & Company of Boston, and by Coon Loeb & Company 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 particularly 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 & 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' protective 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 Bir Marquette, the Chicago and Great Western, and the Cincinnati Hamilton and Dayton. Often they ensured 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 reorganization. It was in this way also that Coon-Loban Company became potent in the Union Pacific and in the Baltimore and Ohio. But the bankers' participation in the management 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 bankers entering a board of directors. Often without even such excuse, the investment banker has secured a place upon the board of directors through his powerful influence or the control of his customers' proxies. Such seems to have been the fatal entrance of Mr. Morgan into the management of the then prosperous New York, New Haven and Hartford Railroad in 1892. When once a banker has entered the board, whatever may have been the occasion, his grip proves tenacious 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 director 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 board 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, membership on executive or finance committees, or by mere directerships, J. P. Morgan and Company and their associates held such financial power in at least thirty-two transportation systems, public utility corporations and industrial companies, companies with an aggregate capitalization of 17.273 billion. Mainly for corporations so controlled, J. P. Morgan and Company procured the public marketing in ten years of security issues aggregating 1.95 billion dollars. This huge sum does not include any issues marketed privately, nor any issues however marketed of inter-state corporations. Coon-Loban Company and a few other investment bankers exercise similar control over many other corporations. Controlling Security Buyers Such control of railroads, public surface and industrial corporations assures to the investment bankers an ample supply of securities at attractive 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 ability to market their goods. They saw that if they could control the security buyers as well as 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 ensures they are being duly influenced. A large part, however, of all bonds issued and of many stocks, are bought by the prominent corporate investors, and most prominent 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 maybe particularly accommodating ones. While investors are moody, they buy only when they want to do so. They are sometimes inconveniently reluctant. Corporate 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. 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 clamouring for investment. No panic or money shortage stops the inflow of new money from the perennial stream of premiums on existing policies and interest on existing investments. The three great companies, the New York Life, the Mutual of New York, and the Equitable, should have over 55 million of new money to invest annually, even if they did not issue a single new policy. In 1904, just before the Armstrong investigation, these three companies had together 1,247,331,738 and 18 cents 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 their new business since has averaged 547,384,212 dollars, or only 53% of what it was in 1904. The aggregate assets of these companies increased in the last eight years, to 1,817,052,260 dollars and 36 cents. At the time of the Armstrong investigation, the average age of these three companies was 56 years. The growth of assets in the last eight years was about half as large as the total growth in the preceding 56 years. These three companies must invest annually about 70 million dollars 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 reserves are invested in bonds. The aggregate bond investments of these three companies on January 1,1913 was 1,019,153,268 dollars and 93 cents. It was natural that the investment bankers should seek to control these never-failing reservoirs 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. Morgannon Company, and in the four years preceding the Armstrong investigation, his firm sold the New York Life, 38,804,918 dollars and 51 cents. In securities, the New York Life is a mutual company, supposed to be controlled by its policy holders, but as the Pujo Committee finds, the so-called control of life insurance companies by policy holders through mutualisation is a farce, and its only result is to keep in office a self-constituted self-perpetuating management. The Equitable Life Assurance Society is a stock company, and is controlled by a hundred thousand dollars' worth of stock. The dividend on this stock is limited by law to seven percent, but in 1910 Mr. Morgan paid about three million dollars for fifty-one thousand dollars' worth par value of this stock, or five thousand eight hundred and eighty-two dollars thirty-five cents a share. The dividend return on the stock investment is less than one-eighth of one percent, but the assets controlled amount to now over five hundred million dollars, and certain of these assets had a special value for investment bankers, namely, the large holdings of stock in banks and trust companies. The Armstrong investigation disclosed the extent of financial powers 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 Pugio Committee found. Here then were stocks of five important trust companies, and one of our largest national 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 controlled, or were identified with the management of the insurance companies, or of their close allies and associates. To that extent, thus further enriching them. The banks and trust companies are depositories 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 purchases of bonds and stocks. Many of our national banks have invested in this manner a large part of all their resources, including capital, surplus and deposits. The bank investments of some banks exceed by far the aggregate of their capital and surplus, and nearly equal their loanable deposits. Controlling Other People's Quick Capital The goose that lays golden eggs has been considered a most valuable possession, but even more profitable is the privilege of taking the golden eggs and laid by somebody else's goose. The investment bankers and their associates now enjoy that privilege. They control the people through the people's own money. If the bankers' power were commensurate only with their wealth, they would have relatively little influence on American business. Vast fortunes like those of the asters are no doubt regrettable. They are inconsistent with democracy. They are unsocial, and they seem particularly unjust when they represent largely unearned increment. But the wealth of the asters 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 Aster wealth is static. The wealth of the Morgan associates is dynamic. The power and the growth of power in our financial oligarchs comes from wielding the savings and quick capital of others. In two or three great life insurance companies, the influence of J.P. Morgan and company and their associates is exerted without any individual investment by them whatsoever. Even in the equitable, where Mr. Morgan bought an actual majority of all the outstanding stock, his investment amounts to little more than one half of one percent of the assets of the company. The fetters which bind the people are forged from 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 trust companies. Bank deposits represent the really quick capital of the nation. They are the lifeblood of businesses. 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 interests. These huge deposits can, in the discretion 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 deposits can, in large part, be loaned by the investment bankers in control to themselves and their associates, so that securities bought may be carried by them until sold to investors. All 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 market for money by lending or refusing to lend on the stock exchange. In this way, among others, they have the 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 on whether the security is favoured or discriminated against when offered to the banks and trust companies as collateral for loans. Furthermore, it is the investment bankers' access to other people's money in controlled banks and trust companies, which alone enables any individual banking concern to take so large a part of the annual output of bonds and stocks. The bankers' own capital, however large, would soon be exhausted, and even the loanable 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 leading life insurance companies had deposits in banks and trust companies aggregating $13,839,189.08. As the Pujo Committee finds, the men who threw 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 those 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. 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 and company achieve the supposedly impossible feat of having 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 accomplished 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 and company 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 and company, including their Philadelphia house called Drexel and company, held on November 1, 1912, deposits aggregating $162,491,819.65. The operations of so comprehensive a system of concentration are necessarily developed in the banker's overweening power. And the banker's power grows by what it feeds on. Power begets wealth, and added wealth opens ever new opportunities for the acquisition of wealth and power. The operations of these bankers are so vast and numerous that even a very reasonable compensation for the service performed by the bankers would, in the aggregate, reduce for them incomes 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 frequently 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 when there is no sinister motive. The weakness of human nature prevents men from being good judges of their own deserving. The syndicate formed by J.P. Morgan and Company to underwrite the United States Steel Corporation took for its services securities which netted $62,500,000 in cash. Of this huge sum, J.P. Morgan and Company 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 part of the fees paid for the service of monopolizing the steel industry. 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. The stock of this $44,000,000 was taken by J.P. Morgan and Company 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 steel corporation was issued directly or indirectly through exchange for mere promotion 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 promoter's services. The so-called fees and commissions taken by the bankers and associates upon the organization of the trusts have been exceptionally large. But even after the trusts are successfully launched, the exaction of the bankers are often 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 confined to trusts and other industrial concerns. The Interboro Railway is a most prosperous corporation. It earned, last year, nearly 21% on its capital stock, and secured from New York City, in connection with the subway extension, a very favorable contract. But when it financed its $170 million bond issue, it was agreed that J. P. Morgan & Company should receive 3%, that is, $5,100,000 for merely forming this syndicate. More recently, the New York, New Haven and Hartford Railroad agreed to pay J. P. Morgan & Company a commission of $1,680,000, that is, 2.5%, to form a syndicate to underwrite an issue at par of $67 million, 20 years, 6% convertible debentures. That means the bankers bound themselves to take at 97.5%, any of these 6% convertible bonds which stockholders might be unwilling to buy at 100%. When the contract was made, the New Haven's then outstanding 6% convertible bonds were selling at 114%. And the 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 & Company $1,680,000 to be willing to take at par, why the banks became investment bankers. These large profits from promotions, underwritings and security purchases led to a revolutionary change in the conduct of our leading banking institutions. It was obvious that control 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 departure from the legitimate sphere of the banking business, which is the making of temporary loans to business concerns. But the temptation was irresistible. The invasion of the investment banker into the bank's field of operation was followed by a counter-invasion by the banks into the realm of the investment 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 defy the spoils. The alliance was cemented by voting trusts, by interlocking 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. End of Chapter 1 Chapter 2 of Other People's Money This is a LibriVox recording. All LibriVox recordings are in the public domain. For more information, or to volunteer, please visit LibriVox.org. Recording by Richard Kilmer Other People's Money By Louis D. Brandeis Chapter 2 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.P. Morgan and Company, has huge resources. Each of the two banks, like the firm of J.P. Morgan and Company, has been dominated by a genius in combination. In the national city, it is James Stillman, and in the first national, George F. Baker. Each of these gentlemen was formerly president and is now chairman of the board of directors. The resources of the national city bank, including its Siamese Twin Security Company, are about $300 million. Those of the first national bank, including its Siamese Twin Security Company, are about $200 million. The resources of the Morgan firm have not been disclosed. But it appears that they have available for their operations, also huge deposits from their subjects. Deposits reported has $162,500,000. The private fortunes of the chief actors in the combination have not been ascertained. But sporadic evidence indicates how great are the possibilities of accumulation when one has the use of other people's money. Mr. Morgan's wealth became proverbial. Of Mr. Stillman's many investments, only one was specifically referred to as he was in Europe during the investigation and did not testify. But that one is significant. His 47,498 shares in the national city bank are worth about $18 million. Mr. J. H. Schliff aptly describes this as a very nice investment. Of Mr. Baker's investments, we know more, as he testified on many subjects. His 20,000 shares in the first national bank are worth at least $20 million. His stock and six other New York banks and trust companies are together worth about $3 million. The scale of his investment in railroads may be inferred from his former holdings into Central Railroad of New Jersey. He was its largest stockholder. So large that with a few friends, he held a majority of the $27,436,800 par value of outstanding stock, which the redding bought at $160 a share. He is a director in 28 other railroad companies and presumably a stockholder in at least as many. The full extent of his fortune was not inquired into. For that was not an issue in the investigation. But it is not surprising that Mr. Baker saw little need of new laws. When asked, you think everything is all right as it is in the world, do you not? He answered, pretty nearly. But wealth expressed in figures gives a wholly inadequate picture of the ally's power. Their wealth is dynamic. It is wielded by geniuses in combination. It finds its proper expression in means of control. To comprehend the power of the allies, we must try to visualize the ramifications through which the forces operate. Mr. Baker is a director in 22 corporations, having, with their many subsidiaries, an aggregate resource or capitalization of $7,272 million. But the direct and visible power of the First National Bank, which Mr. Baker dominates, extends further. The Pujo report shows that its directors, including Mr. Baker's son, are directors in at least 27 other corporations with resources of $4,270,000,000. That is, the First National is represented in 49 corporations with aggregate resources or capitalization of $11,542,000,000. It may help to an appreciation of the ally's power to name a few of the more prominent corporations in which, for instance, Mr. Baker's influence is exerted, visibly and directly, as voting trustee, executive committeeman, or simple director. One, banks, trusts, and life insurance companies. First National Bank of New York, National Bank of Commerce, Farmers Loan and Trust Company, Mutual Life Insurance Company. Two, railroad companies. New York Central Lines, New Haven, Redding, Erie, Lackawanna, Lehigh Valley, Southern, Northern Pacific, Chicago, Burlington, and Quincy. Three, Public Service Corporations, American Telegraph and Telephone Company, Adams Express Company. Four, Industrial Corporations, United States Steel Corporation, Pullman Company. Mr. Stillman is a director in only seven corporations, with aggregate assets of $2,476,000,000,000, but the directors in the National City Bank, which he dominates, are directors in at least 41 other corporations, which, with their subsidiaries, have an aggregate capitalization, or resource, of $10,564,000,000,000. The members of the firm of J.P. Morgan and Company, the acknowledged leader of the Allied Forces, hold 72 directorships in 47 of the largest corporations of the country. The Pujo Committee finds that members of J.P. Morgan and Company, and the directors of their controlled trust companies, and of the First National and the National City Bank, together hold 118 directorships in 34 banks and trust companies, having total resources of $2,679,000,000,000,000, and total deposits of $1,983,000,000,000. 30 directorships in 10 insurance companies, having total assets of $2,293,000,000,000. 105 directorships in 32 transportation systems, having a total capitalization of $11,784,000,000,000, and a total mileage excluding express companies and steamship lines of $150,200,000. 63 directorships in 24 producing and trading corporations, having a total capitalization of $3,339,000,000,000. 25 directorships in 12 public utility corporations, having a total capitalization of $2,150,000,000,000. In all, 341 directorships in 112 corporations, having aggregate resources or capitalization of $22,245,000,000. $22 billion is a large sum, so large that we have difficulty in grasping its significance. The mind realizes size only through comparisons. With what can we compare $22 billions of dollars? $22 billions of dollars is more than three times the assessed value of all the property real and personal in all New England. It is nearly three times the assessed value of all the real estate in the city of New York. It is more than twice the assessed value of all the property in the 13 southern states. It is more than the assessed value of all the property in the 22 states north and south, lying west of the Mississippi River. But the huge sum of $22 billion is not large enough to include all the corporations to which the influence of the three allies directly and visibly extends. For first, there are 56 other corporations, not included in the Pujo schedule, each with capital or resources of over $5,000,000,000,000,000,000,000, and aggregating nearly $1,350,000,000,000,000,000, in which the Morgan allies are represented according to the directories of directors. Second, the Pujo schedule does not include any corporation with resources of less than $5,000,000, but these financial giants have shown their humility by becoming directors in many such. For instance, members of J.P. Morgan and company and directors in the National City Bank and the First National Bank are also directors in 158 such corporations. Available publications disclose the capitalization of only 38 of these, but those 38 aggregate $78,669,375. Third, the Pujo schedule includes only the corporations in which the Morgan associates actually appear by name as directors. It does not include those in which they are represented by dummies or otherwise. For instance, the Morgan influence certainly extends to the Kansas City Terminal Railway Company, for which they have marketed since 1910 in connection with others, four issues aggregating $41,761,000, but no member of J.P. Morgan and company, of the National City Bank, or of the First National Bank appears on the Kansas City Terminal Directorate. Fourth, the Pujo schedule does not include all the subsidiaries of the corporation scheduled. For instance, the capitalization of the New Haven system is given as $385,000,000. That sum represents the bond and stock capital of the New Haven Railroad, but the New Haven system comprises many controlled corporations whose capitalization is only to a slight extent include it directly or indirectly in the New Haven Railroad balance sheet. The New Haven, like most large corporations, is a holding company also, and a holding company may control subsidiaries while owning but a small part of the latter's outstanding securities. Only the small part so held will be represented in the holding company's balance sheet. Thus, while the New Haven Railroad's capitalization is only $385,000,000,000,000, and that sum only appears in the Pujo schedule, the capitalization of the New Haven system has shown by a chart submitted to the committee is over twice as great, namely $849,000,000,000. It is clear therefore that the $22 billion, referred to by the Pujo committee, understates the extent of the concentration affected by the inner group of the money trust. Cementing the Triple Alliance. Care was taken by these builders of imperial power that their structure should be enduring. It has been buttressed on every side by giant ownerships and mutual stock holdings, as well as by close personal relationships, for directorships are ephemeral and may end with a new election. Mr. Morgan and his partners acquired one sixth of the stock of the First National Bank and made a $6 million investment in the stock of the National City Bank. Then JP Morgan and Company, the National City and the First National, or their dominant officers Mr. Stillman and Mr. Baker acquired together by stock purchases and voting trusts, control of the National Bank of Commerce with its $190 million of resources, of the Chase National with $125 million of the Guarantee Trust Company with $232 million of the Bankers Trust Company with $205 million and of a number of smaller but important financial institutions. They became joint voting trustees in great railroad systems and finally as if the allies were united into a single concern, loyal and efficient service in the banks, like that rendered by Mr. Davidson and Mr. Lamont in the First National, was rewarded by promotion to membership in the firm of JP Morgan and Company. The Provincial Allies thus equipped and bound together JP Morgan and Company, the National City and the First National easily dominated America's Financial Center, New York. For certain other important bankers to be here after mentioned, were held in restraint by gentlemen's agreements. The three allies dominated Philadelphia too, for the firm of Drexel and Company is JP Morgan and Company under another name, but there are two other important money centers in America, Boston and Chicago. In Boston there are two large international banking houses, Lee Higginson and Company and Kitter Peabody and Company, both long established and rich and each possessing an extensive wealthy clientele of eager investors in bonds and stocks. Since 1907 each of these firms has purchased or underwritten principally in conjunction with other bankers about 100 different security issues of the greater interstate corporations, the issues of each banker amounting in the aggregate to over one billion dollars. Concentration of banking capital has proceeded even further in Boston than in New York. By successive consolidations the number of national banks has been reduced from 58 in 1898 to 19 in 1913. There are in Boston now also 23 trust companies. The National Schwammat Bank, the first national bank of Boston and the old Colony Trust Company, which these two Boston banking houses and their associates control alone have aggregate resources of 288,386,294 dollars constituting about one half of the banking resources of the city. These great banking institutions which are themselves the result of many consolidations and the 21 other banks and trust companies in which their directors are also directors hold together 90 percent of the total banking resources of Boston and linked to them by interlocking directorates are nine other banks and trust companies whose aggregate resources are about two and one half percent of Boston's total. Thus the 42 banking institutions, 33 with aggregate resources of 560,516,239 dollars holding about 92 and a half percent of the aggregate banking resources of Boston are interlocked. But even the remaining nine banks and trust companies which together hold but seven and a half percent of Boston's banking resources are not all independent of one another. Three are linked together so that there appeared to be only six banks in all Boston that are free from interlocking directorate relations. They together represent but five percent of Boston's banking resources and it may well be doubted whether all of even those six are entirely free from affiliations with the other groups. Boston's banking concentration is not limited to the legal confines of the city. Around Boston proper are over 30 suburbs with which it forms what is popularly known as Greater Boston. These suburban municipalities and also other important cities like Worcester and Springfield are in many respects within Boston's sphere of influence. Boston's inter banking group has interlocked not only 33 of the 42 banks of Boston proper as above shown but it has linked with them by interlocking directorate ships at least 42 other banks and trust companies in 35 other municipalities. Once Lee Higginson and company and Kidder Peabody and company were active competitors. They are so still in some small or purely local matters but both are devoted cooperators with the Morgan associates in larger and interstate transactions and the alliance with these great Boston banking houses has been cemented by mutual stock holdings and co-director ships. Financial concentration seems to have found its highest expression in Boston. Somewhat similar relations exist between the Triple Alliance and Chicago's great financial institutions. Its First National Bank, the Illinois Trust and Savings Bank and the Continental and Commercial National Bank which together control resources of 561 million dollars and similar relations would doubtlessly be found to exist with leading bankers of the other important financial centers of America as to which the Pujo committee was prevented by lack of time from making investigation. The auxiliaries such are the primary such the secondary powers which compromise the money trust but these are supplemented by forces of magnitude radiating from these principal groups says the Pujo committee and closely affiliated with them are smaller but important banking houses such as Kissel, Kinnecott and Company White Weld and Company and Harvey Fisk and Sons who receive large and lucrative patronage from the dominating groups and are used by the latter as jobbers or distributors of securities the issuing of which they control but for which reasons of their own they prefer not to have issued or distributed under their own names Lee Higginsons and Company besides being partners with the intergroup are also frequently utilized in this service because of their facilities as distributors of securities for instance JP Morgan and Company has fiscal agents of the New Haven Railroad had the right to market its securities and that of its subsidiaries among the numerous New Haven subsidiaries is the New York Wichester and Boston the road which cost $1,500,000 a mile to build and which earned a deficit last year of nearly $1,500,000 besides failing to earn any return upon the New Haven's own stock and bond investment of $8,241,951 when the New Haven concluded to market $17,200,000 of these bonds JP Morgan and Company for reasons of their own preferred not to have these bonds issued or distributed under their own name the Morgan firm took the bonds at 92 and a half net and the bonds were marketed by Kissel Kinnecott and Company and others at 96 and a quarter the satellites the alliance is still further supplemented as the Pujo committee shows beyond these intergroups and subgroups are banks and bankers throughout the country who cooperate with them in underwriting or guaranteeing the sales of securities offered to the public and who also act as distributors of such securities it was impossible to learn the identity of these corporations owing to the unwillingness of the members of the intergroup to disclose the names of their underwriters but sufficient appears to justify the statement that there are at least hundreds of them and that they extend in the many of the cities throughout this and foreign countries the patronage thus proceeding from the intergroup and its subgroups is of great value to these banks and bankers who are thus tied by self-interest to the great issuing houses and may be regarded as part of this vast financial organization such patronage yields no inconsiderable part of the income of these banks and bankers and without much risk on the account of the facilities of the principal groups for placing issues of securities through their domination of great banks and trust companies and their other domestic affiliations and their foreign connections the underwriting commissions on issues made by this intergroup are usually easily earned but do not ordinarily involve the underwriters in the purchase of the underwritten securities their interest in the transaction is generally adjusted unless they choose to purchase part of the securities by the payment to them of a commission there are however occasions on which this is not the case the underwriters are then required to take the securities bankers and brokers are so anxious to be permitted to participate in these transactions under the lead of the intergroup that has a rule they join when invited to do so regardless of their approval of the particular business least by refusing they should thereafter cease to be invited in other words an invitation from these royal bankers is interpreted as a command as a result these great bankers frequently get huge commissions without themselves distributing any of the bonds or even haven't taken any actual risk in the case of the new york subway financing one hundred seventy million dollars of bonds by messers morgan and company and their associates mr. davison as the pujo committee reports estimated that there were from one hundred to one hundred twenty five such underwriters who were apparently glad to agree that messers morgan and company the first national bank and the national city bank should receive three percent equal to five million one hundred thousand dollars for forming this syndicate thus relieving themselves from all liability whilst the underwriters assumed the risk of what bonds would realize and of being required to take their share of the unsold portion the protection of pseudo ethics the organization of the money trust is intensive the combination comprehensive but one other element was recognized as necessary to render it stable and to make its dynamic force irresistible despotism be it financial or political is vulnerable unless it is believed to rest upon a moral sanction the longing for freedom is ineradicable it will express itself in protest against servitude and inaction unless the striving for freedom be made to seem immoral long ago monarchs invented has a preservative of absolutism the fiction of the divine right of kings bankers imitating royalty invented recently the precious rule of so-called ethics by which it is declared unprofessional to come to the financial relief of any corporation which is already the prey of another reputable banker the possibility of competition between these banking houses in the purchase of securities says the Pujo commission is further removed by the understanding between them and others that one will not seek by offering better terms to take away from another a customer which it has there to force served and by corollary of this namely that we're given bankers having once satisfactorily united in bringing out an issue of a corporation they shall also join in bringing out any subsequent issue of the same corporations this is described as a principle of banking ethics the ethical basis of the rule must be that the interests of the combined bankers are superior to the interests of the rest of the community their attitude reminds one of the spear of influence with ample hinterlands which rapacious nations are adjusting differences important banking concerns too ambitious to be willing to take a subordinate position in the alliance and too powerful to be suppressed are accorded a financial sphere of influence upon the understanding that the rule of banking ethics will be faithfully observed most prominent among such lesser potentates are Kuhn Loeb and company of New York an international banking house of great wealth with large clientele and connections they are accorded an important sphere of influence in American railroading including among other systems the Baltimore and Ohio the Union Pacific and the Southern Pacific they and the Morgan group have with few exceptions preempted the banking business of the important railroads of the country but even Kuhn Loeb and company are not wholly independent the Pujo committee reports that they are qualified allies of the inner group and through their close relations with the national city bank and the national bank of commerce and other financial institutions have many interests in common with the Morgan associates conducting large joint account operations with them the evils resultant first these banker barons Levy through their excessive exactions a heavy toll upon the whole community upon owners of money for leave to invest it upon railroads public service and industrial companies for leave to use this money of other people and through these corporations upon consumers the charge of capital says the Pujo committee which of course enters universally into the price of commodities and of service is thus in effect determined by agreement among those supplying it and not under the check of competition if there be any virtue in the principle of competition certainly any plan or arrangement which prevents its operation in the performance of so fundamental a commercial function as the supplying of capital is peculiarly injurious second more serious however is the effect of the money trust and directly suppressing competition that suppression enables the monopolists to exhort excessive profits but monopoly increases the burden of the consumer even more in other ways monopoly arrest development and through arresting development prevents the lessening of the cost of production and of distribution which would otherwise take place can full competition exist among the anthraite coal railroads when the Morgan associates are potent in all of them and with like conditions prevailing what competition is to be expected between the northern pacific and the great northern the southern the louisville and nashville and the atlantic coastline or between the westinghouse manufacturing company and the general electric company as the pujo committee finds such affiliations tend as a cover and conduit for secret arrangements and understandings in restriction of competition through the agency of the banking house thus situated and under existing conditions of combination relief through other banking houses is precluded it can hardly be expected that the banks trust companies and other institutions that are thus seeking participation from this inner group would be likely to engage in business of a character that would be displeasing to the latter or would interfere with their plans or prestige and so the protection that can be afforded by the members of the inner group constitutes the safest refuge of our great industrial combinations against future competition the powerful grip of these gentlemen is upon the throttle that controls the wheels of credit and upon their signal those wheels will turn or stop third but far more serious even than the suppression of competition is the suppression of industrial liberty indeed of manhood itself which this overweening financial power entails the intimidation which it affects extends far beyond the banks trust companies and other institutions seeking participation from this inner group in their lucrative underwritings and far beyond those interested in the great corporations directly dependent upon the inner group its blighting and benumbing effect extends as well to the small and seemingly independent businessman to the vast army of professional men and others directly dependent upon big business and to many another four one nearly every enterprising businessman needs bank credit the granting of credit involves the exercise of judgment of the bank officials and however honestly the bank officials may wish to exercise their discretion experience shows that their judgment is warped by the existence of the all-pervading power of the money trust he who openly opposes the great interests will often be found to lack that quality of safe and sameness which is the basis of financial credit to nearly every enterprising businessman and a large part of our professional men have something to sell to or must buy something from the great corporations to which the control or influence of the money lords extends directly or from or to affiliated interests sometimes it is merchandise sometimes it is service sometimes they have nothing either to buy or to sell but desire political or social advancement sometimes they want merely peace experience shows that it is not healthy to buck against a locomotive and business is business here and there you will find a hero red blood and courageous loving manhood more than wealth place or security who dared to fight for independence and won here and there you may find the martyr who resisted in silence and suffered with resignation but america which seeks the greatest good of the greatest number cannot be content with conditions that fit only the hero the martyr or the slave end of chapter two recording by richard kilmer real madina texas chapter three of other people's money this is a liber vox recording all liber vox recordings are in the public domain for more information or to volunteer please visit liber vox.org other people's money by luis d brandeis chapter three interlocking directorates the practice of interlocking directorates is the root of many evils it offends laws human and divine apply to rival corporations it tends to the suppression of competition and to violation of the sherman law applied to corporations which deal with each other it tends to disloyalty and to violation of the fundamental law that no man can serve to masters in either event it tends to inefficiency for it removes incentive and destroys soundness of judgment it is undemocratic for it rejects the platform a fair field and no favors substituting the pull of privilege for the push of manhood it is the most potent instrument of the money trust break the control so exercised by the investment bankers over railroads public service and industrial corporations over banks life insurance and trust companies and a long step will have been taken toward attainment of the new freedom the term interlocking directorates is here used in a broad sense as including all intertwined conflicting interests whatever the form and by whatever device effected the objection extends alike to contracts of a corporation whether with one of its directors individually or with a firm of which he is a member or with another corporation in which he is interested as an officer or director or stockholder the objection extends likewise to men holding the inconsistent position of director in two potentially competing corporations even if those corporations do not actually deal with each other the endless chain a simple example will illustrate the vicious circle of control the endless chain through which our financial oligarchy now operates J.P. Morgan or a partner a director of the New York New Haven and Hartford Railroad causes that company to sell to J.P. Morgan and company an issue of bonds J.P. Morgan and company borrow the money with which to pay for the bonds from the guarantee trust company of which Mr. Morgan or a partner is a director J.P. Morgan and company sell the bonds to the Penn Mutual Life Insurance Company of which Mr. Morgan or a partner is a director the New Haven spends the proceeds of the bonds in purchasing steel rails from the United States Steel Corporation of which Mr. Morgan or a partner is a director the United States Steel Corporation spends the proceeds of the rails in purchasing electrical supplies from the General Electric Company of which Mr. Morgan or a partner is a director the General Electric sells supplies to the Western Union Telegraph Company a subsidiary of the American Telephone and Telegraph Company and in both Mr. Morgan or a partner is a director the Telegraph Company has an exclusive wire contract with the reading of which Mr. Morgan or a partner is a director the reading buys its passenger cars from the Pullman Company of which Mr. Morgan or a partner is a director the Pullman Company buys for local use locomotives from the Baldwin Locomotive Company of which Mr. Morgan or a partner is a director the reading the General Electric the Steel Corporation and the New Haven like the Pullman buy locomotives from the Baldwin Company the Steel Corporation the Telephone Company the New Haven the Reading the Pullman and the Baldwin Companies like Western Union buy electrical supplies from the General Electric the Baldwin the Pullman the Reading the Telephone the Telegraph and the General Electric Companies like the New Haven buy steel products from the Steel Corporation each and every one of the company's last named markets its securities through JP Morgan and Company each deposits its funds with JP Morgan and Company and with these funds of each the firm enters upon further operations the specific illustration is in part sepiscious but it represents truthfully the operation of interlocking directorates only it must be multiplied many times and with many permutations to represent fully the extent to which the interests of a few men are intertwined instead of taking the New Haven as the railroad starting point in our example the New York Central the Santa Fe the Southern the Lehigh Valley the Chicago and Great Western the Erie or the Paramarquette might have been selected instead of the guarantee trust company as the banking reservoir any one of a dozen other important banks or trust companies instead of the pen mutual as purchaser of the bonds other insurance companies instead of the General Electric its qualified competitor the Westinghouse Electric and Manufacturing Company the chain is indeed endless for each controlled corporation is entwined with many others as the nexus of big business the Steel Corporation stands of course preeminent the Stanley Commission showed that the few men who control the Steel Corporation itself an owner of important railroads are directors also in 29 other railroad systems with 126,000 miles of line more than half the railroad mileage of the United States and in important steamship companies through all these alliances and the huge traffic it controls the Steel Corporation's influence pervades railroad and steamship companies not as carriers only but as the largest customers for steel and its influence with users of steel extends much further the same few men are also directors in 12 steel using street railway systems including some of the largest in the world they are directors in 40 machinery and similar steel using manufacturing companies in many gas oil and water companies extensive users of iron products and in the great wire using telephone and telegraph companies the aggregate assets of these different corporations through which these few men exert their influence over the business of the United States exceeds 16 billion dollars obviously interlocking directorates and all that term implies must be effectually prohibited before the freedom of American business can be regained the prohibition will not be an innovation it will merely give full legal sanction to the fundamental law of morals and of human nature that no man can serve two masters the surprising fact is that a principle of equity so firmly rooted should have been departed from it all in dealing with corporations for no rule of law has in other connections been more rigorously applied than that which prohibits a trustee from occupying inconsistent positions from dealing with himself or from using his fiduciary position for personal profit and a director of a corporation is as obviously a trustee as persons holding similar positions in an unincorporated association or in a private trust estate who are called specifically by that name the courts have recognized this fully thus the court of appeals of new york declared in an important case while not technically trustees for the title of the corporate property was in the corporation itself they were charged with the duties and subject to the liabilities of trustees clothed with the power of controlling the property and managing the affairs of the corporation without letter hindrance as to third persons they were its agents but as to the corporation itself equity holds them liable as trustees while courts of law generally treat the directors as agents courts of equity treat them as trustees and hold them to a strict account for any breach of the trust relation for all practical purposes they are trustees when called upon in equity to account for their official conduct nullifying the law but this wholesome rule of business so clearly laid down was practically nullified by courts in creating two unfortunate limitations as concessions doubtless to the supposed needs of commerce first courts held valid contracts between a corporation and a director or between two corporations with a common director where it was shown that in making the contract the corporation was represented by independent directors and that the vote of the interested director was unnecessary to carry the motion and his presence was not needed to constitute a quorum second the courts held that even where a common director participated actively in the making of a contract between two corporations the contract was not absolutely void but voidable only at the election of the corporation the first limitation ignored the rule of law that a beneficiary is entitled to disinterested advice from all his trustees and not merely from some and that a trustee may violate his trust by an action as well as by action it ignored also the laws of human nature and assuming that the influence of a director is confined to the act of voting everyone knows that the most effective work is done before any vote is taken subtly and without provable participation everyone should know that the denial of minority representation on boards of directors has resulted in the domination of most corporations by one or two men and in practically banishing all criticism of the dominant power and even where the board is not so dominated there is too often that harmonious cooperation among directors which secures for each in his own line a due share of the corporation's favors the second limitation by which contracts and the making of which the interested director participates actively are held merely voidable instead of absolutely void ignores the teachings of experience to hold such contracts merely voidable has resulted practically in declaring them valid it is the directors who control corporate action and there is little reason to expect that any contract entered into by a board with a fellow director however unfair would be subsequently avoided appeals from Philip drunk to Philip sober are not a frequent occurrence nor very fruitful but here we lack even an appealing party directors in the dominant stockholders would of course not appeal and the minority stockholders have rarely the knowledge of facts which is essential to an effective appeal whether it be made to the directors to the whole body of stockholders or to the courts besides the financial burden and the risks incident to any attempt of individual stockholders to interfere with an existing management is ordinarily prohibitive proceedings to avoid contracts with directors are therefore seldom brought except after a radical change in the membership of the board and radical changes in a board's membership are rare indeed the Pujo committee reports none of the witnesses the leading American bankers testified was able to name an instance in the history of the country in which the stockholders had succeeded in overthrowing an existing management in any large corporation nor does it appear that stockholders have ever even succeeded in so far as to secure the investigation of an existing management of a corporation to ascertain whether it has been well or honestly managed Mr. Max Pam proposed in the April 1913 Harvard Law Review that the government come to the aid of minority stockholders he urged that the president of every corporation be required to report annually to the stockholders and to state and federal officials every contract made by the company in which any director is interested that the attorney general of the United States or the state investigate the same and take proper proceedings to set all such contracts aside and recover any damages suffered or without disaffirming the contracts to recover from the interested directors the profits derived there from and to this end also that state and national bank examiners state superintendents of insurance and the interstate commerce commission be directed to examine the records of every bank trust company insurance company railroad company and every other corporation engaged in interstate commerce Mr. Pam's views concerning interlocking directorates are entitled to careful study as counsel prominently identified with the organization of trusts he had for years full opportunity of weighing the advantages and disadvantages of big business his conviction that the practice of interlocking directorates is a menace to the public and demands drastic legislation is significant and much can be said in support of the specific measure which he proposes but to be effective the remedy must be fundamental and comprehensive the essentials of protection protection to minority stockholders demands that corporations be prohibited absolutely from making contracts in which a director has a private interest and that all such contracts be declared not voidable merely but absolutely void in the case of railroads and public service corporations in contra distinction to private industrial companies such prohibition is demanded also in the interests of the general public for interlocking interests breed inefficiency and disloyalty and the public pays in higher rates or in poor service a large part of the penalty for graft and inefficiency indeed whether rates are adequate or excessive cannot be determined until it is known whether the gross earnings of the corporation are properly expended for when a company's important contracts are made through directors who are interested on both sides the common presumption that money spent has been properly spent does not prevail and this is particularly true in railroading where the company so often lacks effective competition in its own field but the compelling reason for prohibiting interlocking directorates is neither the protection of stockholders nor the protection of the public from incidents of inefficiency and graft conclusive evidence if obtainable that the practice of interlocking directorates benefited all stockholders and was the most efficient form of organization would not remove the objections for even more important than efficiency are industrial and political liberty and these are imperiled by the money trust interlocking directorates must be prohibited because it is impossible to break the money trust without putting an end to the practice in the larger corporations banks as public service corporations the practice of interlocking directorates is peculiarly objectionable when applied to banks because of the nature and functions of those institutions bank deposits are an important part of our currency system they are almost as essential a factor in commerce as our railways receiving deposits and making loans there from should be treated by the law not as a private business but as one of the public services and recognizing it to be such the law already regulates it in many ways the function of a bank is to receive and to loan money it has no more right than a common carrier to use its powers specifically to build up or to destroy other businesses the granting or withholding of a loan should be determined so far as concerns the borrower solely by the interest rate and the risk involved and not by favoritism or other considerations foreign to the banking function men may safely be allowed to grant or to deny loans of their own money to whomsoever they see fit whatsoever their motive may be but bank resources are in the main not owned by the stockholders nor by the directors nearly three fourths of the aggregate resources of the 34 banking institutions in which the Morgan Associates hold a predominant influence are represented by deposits the dependence of commerce and industry upon bank deposits as the common reservoir of quick capital is so complete that deposit banking should be recognized as one of the businesses affected with a public interest and the general rule which forbids public service corporations from making unjust discriminations or giving undue preference should be applied to the operation of such banks Senator Owen Chairman of the Committee on Banking and Currency said recently my own judgment is that a bank is a public utility institution and cannot be treated as a private affair for the simple reason that the public is invited under the safeguards of the government to deposit its money with the bank and the public has a right to have its interests safeguarded through organized authorities the logic of this is beyond escape all banks in the United States public and private should be treated as public utility institutions where they receive public deposits the directors and officers of banking institutions must of course be entrusted with wide discretion in the granting or denying of loans but that discretion should be exercised not only honestly as it affects stockholders but also impartially as it affects the public mere honesty to the stockholders demands that the interests to be considered by the directors be the interests of all the stockholders not the profit of the part of them who happen to be its directors but the general welfare demands of the director as trustee for the public performance of a stricter duty the fact that the granting of loans involves a delicate exercise of discretion makes it difficult to determine whether the rule of equality of treatment which every public service corporation owes has been performed but that difficulty merely emphasizes the importance of making absolute the rule that banks of deposit shall not make any loan nor engage in any transaction in which a director has a private interests and we should bear this in mind if privately owned banks fail in the public duty to afford borrowers equality of opportunity there will arise a demand for government owned banks which will become irresistible the statement of Mr. Justice Holmes of the Supreme Court of the United States in the Oklahoma bank case is significant we cannot say that the public interest to which we have inverted and others are not sufficient to warrant the state in taking the whole business of banking under its control on the contrary we are of the opinion that it may go on from regulation to prohibition except upon such conditions as it may prescribe official precedence nor would the requirement that banks shall make no loan in which a director has a private interest impose undue hardships or restrictions upon bank directors it might make a bank director dispose of some of his investments and refrain from making others but it often happens that the holding of one office precludes a man from holding another or compels him to dispose of certain financial interests a judge is disqualified from sitting in any case in which he has even the smallest financial interest and most judges in order to be free to act in any matters arising in their court proceed upon taking office to disclose of all investments which could conceivably bias their judgment in any matter that might come before them an interstate commerce commissioner is prohibited from owning any bonds or stocks in any corporation subject to the jurisdiction of the commission it is a serious criminal offense for any executive officer of the federal government to transact government business with any corporation in the pecuniary profits of which he is directly or indirectly interested and the directors of our great banking institutions as the ultimate judges of bank credit exercise today a function no less important to the country's welfare than that of the judges of our courts the interstate commerce commissioners and department heads scope of the prohibition in the proposals for legislation on this subject four important questions are presented one shall the principle of prohibiting interlocking directorates and potentially competing corporations be applied to state banking institutions as well as the national banks two shall it be applied to all kinds of corporations or only to banking institutions three shall the principle of prohibiting corporations from entering into transactions in which the management has a private interest be applied to both directors and officers or be confined in its application to officers only four shall the principle be applied so as to prohibit transactions with another corporation in which one of its directors is interested merely as a stockholder end of chapter three recording by Kathleen Nelson austin texas may 2010