 Chapter number 7 of Other People's Money. This is the LibriVox Recording. All LibriVox recordings are in the public domain. For more information or to volunteer, please visit LibriVox.org. Recording by John Thomas Kuz, Kuzmarskiy, Chanket Thomas. Other People's Money by Louis D. Brandes, Chumper 7. Big Men and Little Business. J.P. Morgan and Co. declare in a letter to the Pujo Committee that practically all the railroad and inter-stroke development of this country has taken place initially through the medium of the Great Banking Houses. That statement is entirely unfounded, in fact. On the contrary, nearly every such contribution to our comfort and prosperity was initiated without their aid. The Great Banking Houses came into relation with these enterprises either after successes had been attained or upon reorganization after the possibility of success had been demonstrated but the funds of the hardy pioneers who had risked their all were exhausted. This is true of our early railroads, of our early street railways and of the automobile, of the telegraph and the wireless of gas and oil, of harvesting machinery and of our steel industry of textile, paper and shoe industries and of nearly every other important branch of manufacture. The initiation of each of these enterprises may properly be categorized as great transactions and the men who contributed the financial aid and business management necessary for their introduction are entitled to share equally with inventors in our gratitude for what has been accomplished but the instances are extremely rare The original financing of such enterprises was undertaken by investment bankers, great or small. It was usually done by some common businessman accustomed to taking risks or by some well-to-do friend of the inventor or pioneer who was influenced largely by considerations other than money getting. Here and there you will find that banker aid was given and usually in those cases it was a small local banking concern not a great banking house which helped to initiate the undertaking. Railroads We have come to associate the great bankers with railroads but their part was not conspicuous in the early history of the eastern railroads and in the middle west the experience was to some extent similar. The modern and main railroad owns and leases 2,215 miles of line but it is a composite of about 166 separate railroad companies. The New Haven Railroad owns and leases 1,996 miles of line but it is a composite of 112 separate railroad companies. The necessary capital to build these little roads was gathered together partly through state, county or municipal aid partly from businessmen or landholders who sought to advance their special interests partly from inventors and partly from well-to-do public spirited men who wished to promote the welfare of their particular communities. About 75 years after the first of these railroads was built J.P. Morganico became fiscal agent for all of them by creating the New Haven, Boston and Main Monopoly. Steamships The history of our steamships lines is similar in 1807 Robert Fulton with the financial aid of Robert R. Livingston a judge and statement not a banker demonstrated with the Claremont that it was practicable to propel boats by stream. In 1833 the three cunard brothers of Halifax and 232 other persons, stockholders of the Quebec and Halifax steam navigation company joined in supplying about $80,000 to build the Royal William the first steamer to cross the Atlantic. In 1902 many years after individual enterprises had developed practically all the great ocean lines J.P. Morganico floated the International Mercantile Marine with its $52,744,000 of four and a half bonds now selling at $60,000,000 of stock preferred and common on which no dividend has ever been paid. It was just 62 years after the first regular line of transatlantic steamers the cunard was founded that Mr. Morgan organized the shipping trust. Telegraph The story of the Telegraph is similar. The money for developing Morse's invention was supplied by his partner and co-worker Alfred Vale. The initial line from Washington to Baltimore was built with an appropriation of $30,000 made by Congress in 1843. Sixty-six years later J.P. Morganico became bankers for the Western Union through financing his purchase by the American Telephone and Telegraph Company. Harvesting machinery Next to arrows and steamships harvesting machinery has probably been the most potent factor in the development of America. And most important of the harvesting machines was Cyrus H. McCormick's Reaper. That made it possible to increase the grain harvest 20 or 30-fold. No investment banker had any part in introducing this great businessman's invention. McCormick was without means but William Butler Ogden, a railroad builder ex-mayor and leading citizen of Chicago supplied $25,000 with which the first factory was built there in 1847. Forty-five years later J.P. Morganico performed the service of combining the five great harvester companies and receiving a commission of $3 million. The concerns then consolidated as the international harvester company with a capital stock of $120 million had, despite their huge assets and earning power, been previously capitalized in the aggregate at only $10,500,000. Strong evidence that in all the preceding years no investment banker had financed them. Indeed, McCormick was as able in business as in mechanical invention. Two years after Ogden paid him $25,000 for a half interest in the business McCormick bought it back for $50,000 and thereafter until his death in 1884 no one but members of McCormick family had any interest in the business. The banker era. It may be urged that railroads and steamships the telegraph and harvesting machinery were introduced before the accumulation of investment capital had developed the investment banker and before America's great banking houses had been established and that consequently it would be fair to inquire what services bankers had rendered in connection with later industrial development. The firm of J.P. Morgan and Co. is 55 years old. Coon, Loeb and Co. 56 years old. Lee, Higginson Co. over 50 years. Kidder, Peabody and Co. 48 years. And yet the investment banker seems to have had almost as little part in initiating the great improvements of the last half century as did bankers in the earlier period. Steel. The modern steel industry of America is 45 years old. The great bankers had no part in initiating it. Andrew Carnegie then already a man of large means introduced the Bessemer process in 1868. In the next 30 years our steel and iron industry increased greatly. By 1898 we had far outstripped all competitors. America's production about equaled the aggregate of England and Germany. We had also reduced costs so much that Europe talked about the American peril. It was 1898 when J.P. Morgan and Co. took their first step in forming the Steel Trust by organizing the Federal Steel Company. Then followed the combination of the two mills into an $80 million corporation, J.P. Morgan and Co. Taking for their syndicate services $20 million of common stock about the same time the consolidation of the bridge and structural works, the tin plate, the sheet steel, the hoop and other mills followed and finally in 1901 the Steel Trust was formed with a capitalization of $1,402 million. These combinations came 30 years after the steel industry had been initiated. The telephone industry is less than 40 years old. It is probably America's greatest contribution to industrial development. The bankers had no part in initiating it. The glory belongs to a simple, enthusiastic, warm-hearted businessman of Haverhill, Massachusetts who was willing to risk his own money. H.N. Tassen tells of this most interestingly in his history of the telephone. The man who had money and dared to stake it on the future of the telephone was Thomas Sanders and he did this not mainly for business reasons. Both he and Hubbard were attached to Bell primarily by sentiment as Bell had removed the blight of dumbness from Sanders' little son and was soon to marry Hubbard's daughter. Also, Sanders had no expectation at first that so much money would be needed. He was not rich. His entire business, which was that of cutting out souls for shoe manufacturers, was not at any time worth more than $35,000. Yet from 1874 to 1878 he had advanced nine-tenths of the money that was spent on the telephone. The first 5,000 telephones and more were needed with his money. And so many long expensive months dragged by before any relief came to Sanders that he was compelled much against his will and his business judgment to stretch his credit within an inch of the breaking point to help Bell and the telephone. Desperately he signed note after note until he faced a total of $110,000. If the new scientific toy which he often doubted he would be the richest citizen in Haverville. And if it failed which he sorely feared he would be a bankrupt. Sanders and Hubbard were releasing telephones two by two to businessmen who previously had been using the private lines of the Western Union telegraph company. This great corporation was at this time their natural and inevitable enemy. It had swallowed most of its competitors and was reaching out to monopolize all methods of communication by wire. The rosiest hope that's shown in front of Sanders and Hubbard was that the Union the Western Union might conclude to buy the Bell patents just as it had already bought many others. In one moment of discouragement they had offered the telephone to President Orton of the Western Union for $100,000 and Orton had refused it. What use, he said pleasantly, could this company make of an electrical toy? But besides the operation of its own wires the Western Union was supplying customers with various kinds of printing telegraphs and dial telegraphs some of which could transmit 60 words a minute. These accurate instruments it believed could never be displaced by such a scientific oddity as the telephone and it continued to believe this until one of its subsidiary companies the Gold and Stock reported that several of its machines had been superseded by telephones. At once the Western Union awoke from its indifference even this tiny nibbling at its business must be stopped. It took action quickly and organized the American speaking telephone company and with $300,000 capital and with three electrical inventors Edison Gray and Dolbyr on its staff with all the bulk of its great wealth and prestige it swept down upon Bell and his little bodyguard it trampled upon Bell's patent with as little concern as an elephant can have when he tramples upon an ant's nest to the complete bewilderment of Bell it could be announced that it had the only original telephone and that it was ready to supply superior telephones with all the latest improvements made by the original inventors Dolbyr, Gray and Edison the result was strange and unexpected. The Bell group instead of being driven from the field were at once lifted to a higher level in the business world and the Western Union in the endeavor to protect its private lines voluntarily a Bell weather to lead capitalists in the direction of the telephone even then when financial aid came to the Bell enterprise it was from capitalists, not from bankers and among these capitalists was William H. Forbes son of the builder of the Burlington who became the first president of the Bell telephone company in 1878, more than 20 years later after the telephone had spread over the world the great house of Morgan came into financial control of the property the American telephone and telegraph company was formed the process of combination became active since January 1900 its stock has increased from 25,886,300 to 344,606,400 in six years 1906 to 1912 the Morgan associates marketed about 300 million dollars bonds of that company or subsidiaries in that period the volume of business done by the telephone companies had of course grown greatly and the plant had to be constantly increased but the proceeds of these huge security issues were used to a large extent in effecting combinations that is in buying out telephone competitors in buying control of the western union telegraph company and in buying up outstanding stock interests in semi independent bell companies it is these combinations which have led to the investigation of the telephone company by the department of justice and they are in large part responsible for the movement to have the government take over the telephone business electrical machinery the business of manufacturing electrical machinery and apparatus is only a little over 30 years old JP Morgan and Co. became interested early in one brand of it but their dominance of the business today is due not to their initiating it but to their effecting a combination and organizing the general electric company in 1892 there were then three large electrical companies the Thompson Houston the Edison and the Westinghouse besides some small ones the Thompson Houston of Lynn Massachusetts was in many respects the leader having been formed to introduce among other things important inventions of Professor Thompson and Professor Houston Lynn is one of the principle shoe manufacturing centers of America it is within 10 miles of State Street Boston but Thompson's early financial support came not from Boston bankers but mainly from Lynn businessmen active energetic and used to taking risks with their own money prominent among them was Charles a coffin a shoe manufacturer who became connected with the Thompson Houston company upon his organization and president of the general electric when Mr. Morgan formed that company in 1892 by combining the Thompson Houston and the Edison to his continued service supported by other Thompson Houston men in high positions the great prosperity of the company is in large part do the two companies so combined controlled probably one half of all electrical patents then existing in America and certainly more than half of those which had any considerable value in 1896 the general electric pool its patents with the Westing house and this competition was further restricted in 1903 the general electric absorb the Stanley electric company its other large competitor and became the largest manufacturer of electric apparatus and machinery in the world in 1912 the resources of the company were 131 million 182,144 it builds sales to the amount of 89,182,185 it employed directly over 60,000 persons more than a fourth as many as the steel trust and it is protected against undue competition for one of the Morgan partners has been a director since 1909 in the Westing house the only other large electrical machinery company in America the automobile industry is about 20 years old it is now America's most prosperous business when Henry B. Joy president of the Packard Motor Car Company was asked to what extent the bankers aided in initiating the automobile he replied it is the observable facts of history it is also my experience of 30 years as a businessman banker etc at first the seer conceives an opportunity he has faith in his almost second sight he believes he can do something develop a business construct an industry, build a railroad or Niagara Falls power company and make it pay now the human measure is not the actual physical construction but the make it pay a man raised the money in the late 90s and built a beat sugar factory in Michigan Wiseacres said it was nonsense he gathered together the money from his friends who would take a chance with him he not only built the sugar factory and there was never any doubt of his ability to do that he made it pay the next year two more sugar factories were built and were financially successful these were built by private individuals of wealth taking chances in the face of cries of doubting bankers and trust companies once demonstrated that the industry was a sound one financially and then bankers and trust companies would lend the new sugar companies which were speedily organized a large part of the necessary funds to construct and operate the motor car business was the same when a few gentlemen followed me in my vision of the possibilities of the business the banks and older businessmen who in the main were the banks said fools and their money soon be parted etc etc private capital at first establishes an industry through its troubles and if possible wins financial success when banks would not lend a dollar of aid the business once having proved to be practical and financially successful then do the banks lend aid to its needs such also was the experience of the greatest of the many financial successes in the automobile industry the Ford Motor Company how bankers arrest development but great banking houses have not merely failed to initiate industrial development they have definitely arrest development because to them the creation of the trust is largely due the recital in the memorial address to the president by the investors guild in November 1911 is significant it is a well known fact that modern trade combinations tend to strongly toward constancy of process and products and by their very nature are opposed to new processes and new products originated by independent inventors and hence tend to restrain competition in the development and sale of patents and patent rights and consequently tend to discourage independent inventive thought to the great detriment of the nation and with injustice to inventors whom the constitution especially intended to encourage and protect in their rights and more specific was the testimony of the engineering news we are today something like five years behind Germany in iron and steel metallurgy and such innovations as are being introduced by our iron and steel manufacturers are most of them the following the lead set by foreigners years ago we do not believe this is because American engineers are any less ingenious or original than those of Europe though they may indeed be deficient in training and scientific education compared with those in Germany we believe the main cause is the wholesale consolidation which has taken place in American industry a huge organization is too clumsy to take up the development of an original idea with a market closely controlled and profits certain by following standard methods those who control our trusts do not want the bother of developing anything new we instance metallurgy only by way of illustration there are plenty of other fields of industry where exactly the same condition exists we are building the same machines and using the same methods as a dozen years ago the inventories in the art are being made by European inventors and manufacturers to which President Wilson's statement may be added I am not saying that all invention had been stopped by the growth of trusts but I think it is perfectly clear that invention in many fields has been discouraged that inventors have been prevented from reaping the full fruits of their ingenuity and industry and their confidence and convenience as well as the opportunity of buying at lower prices do you know have you had occasion to learn that there is no hospitality for invention nowadays trusts and financial concentration the fact that industrial monopolies or rest development is more serious even than the direct burden imposed through production at prices but the most harm-bearing instance of the trusts is their promotion of financial concentration industrial trusts feed the money trust practically every trust created has destroyed the financial independence of some communities and of many properties for it has centered the financing of a large part of whole lines of business in New York this usually with one of a few banking houses this is well illustrated by the steel trust which is a trust of trusts that is the steel trust combines in one huge holding company the trust previously formed in the different branches of the steel business thus the tube trust combines 17 tube mills located in 16 different cities scattered over 5 states and owned by 13 different companies the wire trust combined 19 mills the sheet steel trust 26 the bridge and structural trust 27 and the tin plate trust 36 all scattered similarly over many states finally these and other companies were formed into the United States Steel Corporation combining 228 companies in all located in 127 cities and towns scattered over 18 states before the combinations were affected nearly every one of these companies was owned largely by those who managed it and had been financed to a large extent in the place or in the state in which it was located when the steel trust was formed all these concerns came under one management thereafter the financing of each of these 228 corporations and some which were later acquired had to be done through or with the consent of JPMorgan Co that was the greatest step in financial concentration ever taken stock exchange the organization of trusts has served in another way to increase the power of the money trust few of the independent concerns out of which the trusts have been formed were listed on the New York Stock Exchange and few of them had financial offices in New York promoters of large corporations whose stock is to be held by the public and also investors desire to have their securities listed on the New York Stock Exchange under the rules of the exchange no security can be so listed unless the corporation has a transfer agent and registrar in New York City furthermore the partnerships have contributed largely to the establishment of the financial offices of the trusts in New York City that alone would tend to financial concentration but the listing of the stock enhances the power of the money trust in another way an industrial stock once listed frequently becomes the subject of active speculation the money trust indirectly in many ways it draws the money of the country to New York the New York bankers handle the loans of other people's money on the stock exchange and members of the stock exchange receive large amounts from commissions for instance there are 5,084,952 shares of United States Steel Commons stock outstanding but in the five years ending in 1931,1912 speculation in that stock was so extensive that there were sold on the exchange an average of 29,380,888 shares a year or nearly 6 times as much as there is steel common in existence except where the transactions are by or for the brokers sales on the exchange involve the payment of 25 cents in commission for each share of stock sold that is 12½ by the seller and 12½ by the buyer thus the commission from the steel common alone afforded a revenue averaging many millions a year the steel preferred stock is also much traded in and there are 138 other industrials largely trusts listed on the New York stock exchange trust ramifications but the potency of trusts as a factor in financial concentration is manifested in still other ways notably through their ramifying operations this is illustrated forcibly by the general electric companies control of water power companies which has now been disclosed in an able report of the United States Bureau of Corporations the extent of the general electric influence is not fully revealed by its consolidated balance sheet a very large number of corporations are connected with it through its subsidiaries and through corporations controlled by the subsidiaries or affiliated with them there is a still wider circle of influence due to the fact that officers and directors of the general electric and its subsidiaries are also officers or directors of many other corporations some of whose securities are owned by the general electric company the general electric company holds in the first place all the common stock in three security holding companies the United Electric Securities Company the Electrical Securities Corporation and the Electric Bond and Share Company directly and through these corporations and their officers the general electric controls a large part of the water power of the United States the water power companies in the general electric group are found in 18 states these 18 states have 2 million 325,757 commercial horsepower developed or under construction and this total the general electric group includes 939,115 HP or 40.4% the greatest amount of power controlled by the companies in the general electric group in any state is found in Washington this is followed by New York Pennsylvania, California Montana, Iowa, Oregon and Colorado in five of the states shown in the table the water power companies included in the general electric group control more than 50% of the commercial power developed and under construction the percentage of power in the states included in the general electric group ranges from a little less than 2% in Michigan to nearly 80% in Pennsylvania in Colorado they control 72% in New Hampshire 61% in Oregon 58% and in Washington 55% besides the power developed and under construction water power concerns included in the general electric group own in the states shown in the table 641,600 HP undeveloped this water power control enables the general electric group control other public service corporations the water power companies subject to general electric influence control the street railways in at least 16 cities and towns the electric light plants in 78 cities and towns gas plants in 19 cities and towns and are affiliated with the electric light and gas plants in other towns though many of these communities particularly those served with light only are small several of them are the most important in the states where these water power companies operate the water power companies in the general electric group own control or are closely affiliated with the street railways in Portland and Salem, Oregon Spokane, Washington Great Falls Montana, St. Louis, Missouri Corona, Minnesota Milwaukee and Racine Wisconsin, Elmira New York, Asheville and Raleigh, North Carolina and other relatively less important towns the towns in which the lighting plants electric or gas are owned or controlled include Portland, Salem Astoria and other towns in Oregon Bellingham in other towns in Washington Butte, Great Falls, Bozeman and other towns in Montana Leadville and Colorado Springs in Colorado St. Louis, Missouri Milwaukee Racine and several small towns in Wisconsin Hudson and Rent, Salaire, New York, Detroit, Michigan Asheville and Raleigh, North Carolina and in fact one or more towns in practically every community where developed water power is controlled by this group in addition to the public service corporations thus controlled by the water power companies subject to general electric influence there are numerous public service corporations in other municipalities that purchase power from the hydroelectric developments controlled by or affiliated with the general electric company This is true of Denver, Colorado which has already been discussed in Baltimore, Maryland a water power concern in the general electric group namely the Pennsylvania Water and Power Company sells 20,000 HP to the consolidated gas, electric light and power company which controls the entire light and power business of that city the power to operate all the electric street railway systems of Buffalo, New York and the general electric company through the financing of public service companies exercises a like influence in communities where there is no water power it or its substories has acquired control of or an interest in the public service corporations of numerous cities where there is no water power connection and it is affiliated with still others by virtue of common directors this vast network of relationships between hydroelectric corporations through prominent officers and directors the largest manufacturer of electrical machinery and supplies in the United States is highly significant it is possible that this relationship to such a large number of strong financial concerns through common officers and directors affords the general electric company an advantage that may place rivals at a corresponding disadvantage whether or not this great financial power has been used to the particular disadvantage of any rival water power concern is not so important as the fact that such power exists and that it might be so used at any time the Sherman law the money trust cannot be broken if we allow its power to be constantly augmented to break the money trust we must stop that power at its source the industrial trusts are among its most effective feeders those which are illegal should be dissolved the creation of new ones should be prevented to this end the Sherman law should be supplemented both by providing more efficient judicial machinery and by creating a commission with administrative functions to aid in enforcing the law when that is done another step will have been taken towards securing the new freedom but restrictive legislation alone will not suffice we should bear in mind the admonition with which the commissioner of corporations closes his review of our water power development there is presented such a situation in water powers and other public utilities as might bring about at any time under a single management the control of a majority of the developed water powers in the United States and similar control of public utilities in a vast number of cities and towns including some of the most important in the country we should conserve all rights which the federal government and the states now have in our natural resources and there should be a complete separation of our industries from railroads and public utilities end of chapter 7 recruiting by John Thomas www.validateyourlife.com Chapter 8 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 Lewis D Brandeis Chapter 8 A Curse of Bigness Bigness has been an important factor in the rise of the money trust big railroad systems big industrial trusts big public service companies and as instruments of these big banks and big trust companies JP Morgan and company in their letter of defense to the Pujo Committee urged the needs of big business has the justification for financial concentration they declare that what they euphemistically call cooperation is simply a further result of the necessity for handling great transactions that the country obviously requires not only the larger individual banks but demands also that those banks shall cooperate to perform efficiently the country's business and that a step backward along this line would mean a halt in industrial progress that would affect every wage earner from the Atlantic to the Pacific the phrase great transactions is used by the bankers apparently as meaning large corporate security issues leading bankers have undoubtedly cooperated during the last 15 years in floating some very large security issues as well as many small ones relatively few large issues were made necessary by great improvements undertaken or by industrial development improvements and development ordinarily proceed slowly for them even where the enterprise involves large expenditures a series of smaller issues is usually more appropriate than a single large one this is particularly true in the east where the building of new railroads was relatively ceased the great security issues in which bankers have cooperated were with relatively few exceptions made either for the purpose of effecting combinations or as a consequence of such combinations furthermore the combinations which made necessary these large security issues or under writings were in most cases either contrary to existing statute law or recommended by the interstate commerce commission or contrary to the laws of business efficiency so both the financial concentration and the combinations which they have served were in the main against the public interest size we are told is not a crime but size may at least become noxious by reason of the means through which it was attained or the uses to which it is put and it is size attained by combination instead of natural growth which has contributed so largely to our financial concentration let us examine a few cases the Harriman Pacifics JP Morgan & Company in urging the need of large banks and the cooperation of bankers said the attorney general's recent approval of the Union Pacific settlement calls for a single commitment on the part of bankers of $126 million this $126 million commitment was not made to enable the Union Pacific to secure capital on the contrary it was a guarantee that it would succeed in disposing of its southern Pacific stock to that amount and when it had disposed of that stock it was confronted with a serious problem to do with the proceeds this huge underwriting became necessary solely because the Union Pacific had violated the Sherman law it had acquired that amount of southern Pacific stock illegally and the Supreme Court of the United States finally decreed that the illegality cease this same illegal purchase had been the occasion 12 years earlier of another great transaction the issue of a $100 million of Union Pacific bonds which were sold to provide funds for acquiring the southern Pacific and other stocks in violation of law bankers cooperated also to accomplish that Union Pacific improvements the Union Pacific and its auxiliary lines the Oregon short line the Oregon railway and navigation and the Oregon Washington railroad made in the 14 years ending June 30, 1912 issues of securities aggregating $375 million $158,183 of which $46,500,000 were refunded or redeemed but the large security issues served mainly to supply funds for engaging in illegal combinations or stock speculation the extraordinary improvements and additions that raised the Union Pacific railroad to a high state of efficiency were provided mainly by the net earnings from the operation of its railroads and note how great the improvements and additions were tracks were straightened grades were lowered bridges were rebuilt heavy rails were laid old equipment was replaced by new and the cost of these was charged largely as operating expenses additional equipment was added new lines were built or acquired increasing the system by 3,524 miles of line and still other improvements and betterments were made and charged to capital account these expenditures aggregated $191,512,328 but it needed no large security issues to provide the capital thus wisely expended the net earnings from the operations of these railroads were so large that nearly all these improvements and additions could have been made without issuing on the average more than $100 million a year of additional securities for new money and the company still could have paid 6% dividends after 1906 when that rate was adopted for a while $13,679,452 a year on the average was charged to cost of road and equipment the surplus net earnings and other funds would have yielded on the average $1,750,982 a year available for improvements and additions without raising money on new security issues how the security proceeds were spent the $375 million securities except to the extent of about $13 million required for improvements and the amounts applied for refunding and redemptions were available to buy stocks and bonds of other companies and some of the stocks so acquired were sold at large profits providing further sums to be employed in stock purchases the $375 million Union Pacific line security issues therefore were not needed to supply funds for Union Pacific improvements nor did these issues supply funds for the improvement of any of the companies in which the Union Pacific invested except that certain amounts were advanced later to aid in financing the Southern Pacific they served substantially no purpose save to transfer the ownership of railroad stocks from one set of persons to another here are some of the principal investments one $91,657,500 in acquiring and financing the Southern Pacific two $89,391,401 in acquiring the Northern Pacific stock and stock of the Northern Securities Company three $45,466,960 in acquiring Baltimore and Ohio stock four $37,692,256 in acquiring Illinois Central stock five $23,205,679 in acquiring New York Central stock six $10,395,000 in acquiring Echeson Topeka and Santa Fe stock seven $8,946,781 in acquiring Chicago and Alton stock eight $11,610,187 in acquiring Chicago, Milwaukee and St. Paul's stock nine $6,750,400 $123 in acquiring Chicago and Northwestern stock ten $6,936,696 in acquiring Railroad Securities Company stock Illinois Central stock the immediate effect of the stock acquisitions has stated by the Interstate Commerce Commission in 1907 was merely this government made journey by steamship from New York to New Orleans then by rail to San Francisco across the Pacific Ocean to China and returning by another route to the United States may go to Ogden by any one of three rail lines and then to Kansas City or Omaha without leaving the deck or platform of a carrier which he controls and without duplicating any part he has further what appears to be a dominant control in the Illinois Central Railroad running directly north from the Gulf of Mexico to the Great Lakes parallel to the Mississippi River and 2000 miles west of the Mississippi River he controls the only line of railroad parallel to the Pacific Coast and running from the Colorado River to the Mexican border the testimony taken at this hearing shows that about 50,000 square miles of territory in the state of Oregon surrounded by the lines of the Oregon Short Line Railroad Company the Oregon Railroad and Navigation Company and the Southern Pacific Company is not developed while the funds of those companies which could be used for that purpose are being invested in stocks like the New York Central and other lines having only a remote relation to the territory in which the Union Pacific System is located Mr. Harriman succeeded in becoming director of 27 railroads with 39,354 miles of line and they extended from the Atlantic to the Pacific from the Great Lakes to the Gulf of Mexico the aftermath on September 9th, 1909 less than 12 years after Mr. Harriman became director in the Union Pacific he died from overwork at the age of 61 but it was not death only that had set a limit to his achievements the multiplicity of his investments prevented him from performing for his other railroads the great service that had won him a worldwide reputation as manager and rehabilitator of the Union Pacific and the Southern Pacific within a few months after Mr. Harriman's death the serious equipment scandal on the Illinois Central became public culminating in the probable suicide of one of the vice presidents of that company the Chicago and Alton in the management of which Mr. Harriman was prominent from 1899 to 1907 as president chairman of the board or executive committeeman has never regained the prosperity before he and his associates acquired control the Pierre Marquette has passed again into receiver's hands long before Mr. Harriman's death the Union Pacific had disposed of its Northern Pacific stock because the Supreme Court of the United States declared the Northern Securities Company illegal and dissolved the Northern Pacific Great Northern merger three years after his death the Supreme Court of the United States ordered the Union Pacific Southern Pacific merger dissolved by a strange irony the law has permitted the Union Pacific to reap large profits from its illegal transactions in Northern Pacific and Southern Pacific stocks but many other stocks held as investments have entailed large losses stocks in the Illinois Central and other companies the Union Pacific 129,894,991.72 had on November 15, 1913 a market value of only 87,851,500 showing a shrinkage of 42,043,491.72 and the average income from them while held was only about 4.30% on their cost a bankers paradise Coon Loeb & Company were the Union Pacific bankers it was in pursuance of a promise which Mr. Jacob H. Schliff the senior partner had given pending the reorganization that Mr. Harriman first became a member of the executive committee in 1897 thereafter combinations grew and crumbled and there were vicitudes in stock speculations but the investment bankers prospered amazingly and financial concentration proceeded without abatement the bankers and their associates received the commissions paid for purchasing the stocks which the Supreme Court holds and have retained them the bankers received commissions for underwriting the securities issued to raise the money which to buy the stocks which the Supreme Court holds to have been illegally acquired and have retained them the bankers received commissions paid for floating securities of the controlled companies while they were thus controlled in violation of law and have of course retained them finally when after years a decree is entered to end the illegal combination these same bankers are on hand to perform the services of undertaker and receive further commissions for their banker aid in enabling the law breaking corporation to end its wrongdoing and to comply with the decree of the Supreme Court and yet throughout nearly all this long period both before and after Mr. Harriman's death two partners in Coon-Loban Company were directors or members of the Executive Committee of the Union Pacific and as such must be deemed responsible with the others for the illegal acts indeed these bankers have not only received commissions for the underwritings of transactions accomplished though illegal they have received commissions also for merely agreeing to underwrite a great transaction that would not permit to be accomplished the $126 million underwriting that the single commitment on the part of the bankers to which J. P. Morgan and Company refer as being called for by the Attorney General's approval of the Union Pacific settlement never became effective because the Public Service Commission of California refused to approve the terms of the settlement but the Union Pacific nevertheless paid the Coon and Lobe Syndicate a large underwriting fee for having been ready and willing to serve should the opportunity arise and another underwriting commission was paid when the Southern Pacific stock was finally distributed with the approval of Attorney General McReynolds under the court's decree thus the illegal purchase of the Southern Pacific stock yielded directly four crops of commissions required and two when it was disposed of and during the intervening period the illegally controlled Southern Pacific yielded many more commissions to the bankers for the schedules filed with the Pujo Committee show that Coon and Lobe and Company marketed in addition to the Union Pacific securities above referred to $334 million of Southern Pacific and Central Pacific securities in 1903 and 1911 the aggregate amount of the commissions paid to these bankers in connection with the Union Pacific Southern Pacific transaction is not disclosed it must have been very large for not only were the transactions great but the commissions were liberal the Interstate Commerce Commission finds that bankers received about 5% on the purchase price for buying the first 50,000 shares of Southern Pacific stock and the Underwriting Commission on the first $100 million of Union Pacific bonds issued to make that and other purchases was $5 million how large the two Underwriting Commissions were which the Union Pacific paid in affecting the severance of this illegal merger both the company and the bankers have declined to disclose more the Interstate Commerce Commission showed clearly while investigating the Union Pacific's purchase of the Chicago and Alton stock that the bankers profits were by no means confined to commissions the Burlington such railroad combinations produced injury to the public far more serious than the heavy tax of bankers commissions and profits for in nearly every case absorption into a great system of there to for independent railroad has involved the loss of financial independence to some community property or men who thereby become subjects or satellites of the money trust the passing of the Chicago Burlington and Quincy in 1901 to the Morgan Associates presents a striking example of this process after the Union Pacific acquired the Southern Pacific stock in 1901 it sought control also of the Chicago, Burlington and Quincy a most prosperous railroad having then 7,912 miles of line the Great Northern and Northern Pacific recognized that Union Pacific control of the Burlington would exclude them from much of Illinois Missouri Wisconsin, Kansas Nebraska, Iowa and South Dakota the two Northern roads which were already closely allied with each other and with J.P. Morgan and Company there upon purchased for $215,227,000 of their joint 4% bonds nearly all of the $100,324,000 par value outstanding Burlington stock a struggle with the Union Pacific ensued which yield it soon to harmonious cooperation the Northern securities company was formed with $400,000,000 capital thereby merging the Great Northern the Northern Pacific and the Burlington and joining the Harrowman Coon Loeb with the Morgan Hill interests obviously neither the issue of $215,000,000 joint 4s nor the issue of the $400,000,000 Northern securities stock supplied $1 of funds for improvements of or addition to any of the 4 Great Railroad Systems concerned in these large transactions the sole effect of issuing $615,000,000 of securities was to transfer stock from one set of persons to another the resulting harmonious cooperation was soon interrupted by the government proceedings which ended with the dissolution of the Northern securities company but the evil done outlived at the combination the Burlington had passed forever from its independent Boston owners to the Morgan allies who remained in control the Burlington one of Boston's finest achievements was the creation of Morgan M. Forbes he was a builder not a combiner or banker or wizard of finance he was a simple hardworking businessman he had been a merchant in China at a time when China's trade was among America's big business he had been connected with shipping and with manufacturers he had the imagination of the Great Merchant the patience and perseverance of the Great Manufacturer and the broad view of the statesman bold but never reckless scrupulously careful of other people's money he was ready after due weighing of chances to risk his own in enterprises promising success he was in the best sense of the term a great adventurer thus equipped Mr. Forbes entered in 1852 upon those railroad enterprises which later developed into the Chicago, Burlington, and Quincy largely with his own money and that of friends who confided in him he built these railroads and carried them through the panic of 57 when the great banking houses of those days lacked courage to assume the burdens of a struggling, ill-constructed line, staggering under financial difficulties under his wise management and that of the men whom he trained Burlington became a great system it was built on honor and managed honorably it weathered every other great financial crisis as it did that of 1857 it reached maturity without reorganization or the sacrifice of a single stockholder or bondholder investment bankers had no place on the Burlington board of directors nor had the banker practice of being on both sides of a bargain I am unwilling said Mr. Forbes early in his career to run the risk of having the imputation of buying from a company in which I am interested about twenty years later he made his greatest fight to rescue the Burlington from the control of certain contractor directors whom his biographer, Mr. Pearson describes as persons of integrity who had conceived that in their bold capacity as contractors and directors they were fully able to deal with themselves justly Mr. Forbes thought otherwise the stockholders whom he had aroused sided with him and he won Mr. Forbes was the pioneer among Boston Railroad builders his example and his success inspired many others for Boston was not lacking then in men who were builders Boston lacked his wisdom and some his character her enterprise and capital constructed in large part the Union Pacific the Atchison the Mexican Central the Wisconsin Central and 24 other railroads in the west and south one by one these western and southern railroads passed out of Boston control the greater part of them into the control of the Morgan allies when Wellington was surrendered Boston had begun the loser Dominion even over the railroads of New England in 1900 the Boston and Albany was leased to the New York Central a Morgan property and a few years later another Morgan railroad the New Haven acquired control of nearly every other transportation line in New England now nothing is left of Boston's railroad Dominion in the west and south the eastern Kentucky railroad a line 36 miles long and her control of the railroads of Massachusetts is limited to the Grafton Upton with 19 miles of line and the Boston Revere Beach and Lynn a passenger road 13 miles long the New Haven Monopoly the rise of the New Haven Monopoly presents another striking example of combination as a developer of financial concentration and it illustrates also the use to which large security issues are put in 1892 when Mr. Morgan entered the New Haven directorate it was a very prosperous little railroad with capital liabilities of 25 million dollars paying 10% dividends and operating 508 miles of line by 1899 the capitalization had grown to 80 million 477,600 dollars but the aggregate mileage had also grown mainly through merger or lease of other lines to 2017 14 years later in 1913 when Mr. Morgan died and Mr. Mellon resigned the mileage was 1097 just 20 miles less than in 1899 but the capital liabilities had increased to 425,935,000 of course the business of the railroad had grown largely in those 14 years the road bed was improved bridges built additional tracks added and much equipment purchased and for all this new capital was needed also because the company paid out in dividends more than it earned but of the capital increase over 200 million dollars was expended in the acquisition of stock or other securities of some 120 other railroads steamships street railway electric light gas and water companies it was these outside properties which made necessary the much discussed $10,6% bond issue as well as other large and expensive security issues for in these 14 years the improvements on the railroad including new equipment have cost on the average only $10 million a year the new haven bankers few if any of those 121 companies which the new haven acquired had prior to their absorption by it financed by J.P. Morgan and company the needs of the Boston and Maine and Maine Central the largest group had for generations been met mainly through their own stockholders or through Boston banking houses no investment banker had been a member of the board of directors of either of those companies the New York, Ontario and western the next largest of the acquired railroads had been financed in New York but by persons apparently entirely independent of the Morgan allies the smaller Connecticut railroads now combined into central New England had been financed mainly in Connecticut or by independent New York bankers the financing of the street railway companies had been done largely by individual financiers or by small and independent bankers in the states or cities where the companies operate some of the steamship companies had been financed by their owners some through independent bankers as a result of the absorption of these 121 companies into the new haven system the financing of all of these railroads steamship companies street railways and other corporations were made tributary to J.P. Morgan and company and the independent bankers were eliminated or became satellites and this financial concentration was proceeded with although practically every one of the 121 companies was acquired by the new haven in violation of either of the state or federal law or of both enforcement of the Sherman act will doubtless result in dissolving this unwieldy illegal combination the coal monopoly proof of the cooperation of the anthracite railroads is furnished by the ubiquitous presence of George F. Baker on the board of directors of the reading the Jersey Central the Lackawanna, the Lehigh, the Erie and the New York, Susquehanna and western railroads which together control nearly all the unmind anthracite as well as the actual tonnage these roads have been an important factor in the development of the money trust they are charged by the department of justice with fundamental violations of both the Sherman law and the commodity clause of the Hepburn act which prohibits a railroad from carrying in interstate trade any commodity in which it has an interest direct or indirect nearly every large issue of securities made in the last 14 years by any of these railroads except the Erie has been in connection with some act of combination the combination of the anthracite railroads to suppress the construction through the Temple Iron Company of a competing coal road has already been declared illegal by the Supreme Court of the United States and in the bituminous coal field the Kanawa district the United States Circuit Court of Appeals has recently decreed a combination by the lake shore the Chesapeake in Ohio and the Hawking Valley be dissolved other railroad combinations the cases of the Union Pacific and of the New Haven are typical not exceptional our railroad history presents numerous instances of large security issues made wholly or mainly to affect combinations some of these combinations have been proper as a means of securing natural feeders or extensions of main lines but far more of them have been dictated by the desire to suppress active or potential competition or by personal ambition or greed or by the mistaken belief that efficiency grows with size thus the monstrous combination of the Rock Island and the St. Louis and San Francisco with over 14,000 miles is recognized now to have been obviously inefficient it was severed voluntarily but had it not been must have crumbled soon from inherent defects if not as a result of proceedings under the Sherman law both systems are suffering now from the effects of this unwise combination the Frisco itself greatly over combined has paid the penalty in receivership Rock Island, a name once expressive of railroad efficiency and stability, has through its excessive recapitalizations and combinations become a football of speculators and a source of great apprehension to confiding investors the combination of the Cincinnati, Hamilton and Dayton and the Pierre Marquette led to several receiverships there are of course other combinations which have not been disastrous to the owners of the railroads but the fact that a railroad combination has not been disastrous does not necessarily justify it the evil of the concentration of power is obvious and has combination necessarily involves such concentration of power, the burden of justifying the combination should be placed upon those who seek to effect it for instance, what public good has served by allowing the Atlantic coastline railroad company to issue $50 million of securities to acquire control of the Louisville and Nashville railroad a widely extended self-sufficient system of 5,000 miles which under the wise management of president Milton H. Smith had prospered continuously for many years before the acquisition and which has gross earnings as large as those of the Atlantic coastline the legality of this combination has been recently challenged by Senator Lee and an investigation by the Interstate Commerce Commission has been ordered the Pennsylvania the reports from the Pennsylvania suggest the inquiry whether even this generally well managed railroad is not suffering from excessive bigness after 1898 it too bought in large amounts stock in other railroads including the Chesapeake and Ohio the Baltimore and Ohio and the Norfolk and western in 1906 it sold all its Chesapeake and Ohio stock and a majority of its Baltimore and Ohio and Norfolk and western holdings later it reversed its policy and resumed stock purchases requiring among others more Norfolk and western and New York, New Haven and Hartford and on December 31, 1912 held securities valued at 331,909,154.32 of which however a large part represents Pennsylvania system securities these securities mostly stocks constitute about one-third of the total assets of the Pennsylvania railroad the income on these securities in 1912 averaged only 4.30% on their valuation while the Pennsylvania paid 6% on its stock but the cost of carrying these foreign stocks is not limited to the difference between this income and outgo to raise money on these stocks the Pennsylvania had to issue its own securities and there is such a thing as an oversupply even of Pennsylvania securities oversupply of any stock depresses market values and increases the cost to Pennsylvania of raising new money recently came the welcome announcement of the management that it will dispose of its stocks in the anthracite coal mines and it is intimated that it will divest itself into buildings and companies like the Cambria Steel Company extraneous to the business of railroading this policy should be extended to include the disposition also of all stocks in other railroads like the North Fork and Western the Southern Pacific and the New Haven which are not part of the Pennsylvania system recommendations 6 years ago the interstate commerce commission after investigating Pacific transaction above referred to recommended legislation to remedy the evils there disclosed upon concluding recently its investigation of the New Haven the commission repeated and amplified those recommendations saying no student of the railroad problem can doubt that a most prolific source of financial disaster and complication to railroads in the past has been the desire of the authority of railroad managers to engage in enterprises outside the legitimate operations of their railroads especially by the acquisition of other railroads and their securities the evil which results first to the investing public and finally to the general public cannot be corrected after the transaction has taken place it can be easily and effectively prohibited in our opinion the following propositions lie at the foundation of all adequate regulation of interstate railroads 1 every interstate railroad should be prohibited from spending money or incurring liability or acquiring property not in the operation of its railroad or in the legitimate improvement, extension or development of that railroad 2 no interstate railroad should be permitted to lease or purchase any other railroad nor to acquire the stocks or securities of any other railroad nor to guarantee the same directly or indirectly without the approval of the federal government 3 no stocks or bonds should be issued by an interstate railroad except for the purpose sanctioned in the two preceding paragraphs and none should be issued without the approval of the federal government it may be unwise to attempt to specify the price at which and the manner in which railroad stocks and securities shall be disposed of but it is easy and safe to define the purpose for which they may be issued and to confine the expenditure of the money realized to that purpose these recommendations are in substantial accord with those adopted by the national association of railway commissioners to be enacted into law and they should be supplemented by amendments of the commodity clause of the Hepburn Act so that railroads will be effectively prohibited from owning stock in corporations whose products they transport 2 such corporations will be prohibited from owning important stock holdings in railroads and 3 holding companies will be prohibited as does the reading both the railroad and corporations whose commodities it transports if laws such as these are enacted and duly enforced we shall be protected from a reoccurrence of tragedies like the New Haven of domestic scandals like the Chicago and Alton and of international ones like the Frisco we shall also escape from that inefficiency which is attended upon excessive size but what is far more important we shall by legislation remove a potent factor in financial concentration decentralization will begin the liberated smaller units will find no difficulty in financing their needs without bowing the knee to money lords and a long step will have been taken toward attainment of the new freedom End of Chapter 8 Recording by Richard Kilmer Rio Medina, Texas Chapter 9 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 Other People's Money by Louise D. Brandes Chapter 9 The Failure of Banker Management There is not one moral but many to be drawn from the decline of the New Haven and the fall of Mellon that history offers texts for many sermons it illustrates the evils of monopoly the curse of bigness the futility of lying and the pitfalls of law breaking but perhaps the most impressive lesson that it should teach to investors is the failure of banker management Banker Control For years Mr. Morgan and Company were the fiscal agents of the New Haven For years Mr. Morgan was the director of the company He gave to that property probably closer personal attention than to any other of his many interests Stockholders meetings are rarely interesting or important and few indeed must have been the occasions when Mr. Morgan attended any stockholders meeting of other companies in which he was a director of his habit when in America to be present at meetings of the New Haven in 1907 when the policy of monopolistic expansion was first challenged and again in the meeting of 1909 after Massachusetts had unwisely accorded its sanction to the Boston and Maine merger Mr. Morgan himself moved the large increases of stock which were unanimously voted Of course he attended the important sector's meeting His will was law President Mellon indicated this in his statement before Interstate Commerce Commissioner Proudy while discussing the New York Westchester in Boston The railroad without a terminal in New York which cost the New Haven $1,500,000 a mile to acquire and was then costing it in operating deficits and interest charges $100,000 a month to run I am in a very embarrassing position Mr. Commissioner regarding the New York Westchester in Boston I have never been enthusiastic or at all optimistic of its being a good investment for our company in the present or in the immediate future but people in whom I had greater confidence than I have in myself thought it was wise and desirable I yielded my judgment Indeed I don't know that it would have made much difference if I yielded or not The Banker's Responsibility Bankers are credited with being a conservative force in the community The tradition lingers that they are preeminently safe and sane and yet the most grievous fault of this banker-managed railroad has been its financial recklessness a fault that has already brought heavy losses to many thousands of small investors and for whom bankers are supposed to be natural guardians in a community where its railroad stocks have for generations been deemed absolutely safe investments the passing of the New Haven and of the Boston and Maine dividends after an unbroken dividend record of generations comes as a disaster This disaster is due mainly to enterprises outside the legitimate operations of these railroads for no railroad company has equaled the New Haven in the quantity and extravagance of its outside enterprises But it must be remembered that neither the president of the New Haven nor any other railroad manager could engage in such transactions without the sanction of the Board of Directors It is the directors, not Mr. Mellon, who should bear the responsibility Close scrutiny of the transactions discloses no justification On the contrary, scrutiny serves only to make more clear the gravity of the errors committed Not merely were recklessly extravagant acquisitions made in mad pursuit of monopoly but the financial judgment the financiering itself was conspicuously bad To pay for property several times what it is worth to engage in grossly unwise enterprises are errors of which no conservative directors should be found guilty For perhaps the most important function of directors is to test the conclusions and curb by calm council the excessive zeal of two ambitious managers But while we have no right to expect from bankers exceptionally good judgment in ordinary business matters we do have a right to expect from them prudence reasonably good financiering and insistence upon straightforward accounting And it is just the lack of these qualities in the New Haven management to which the severe criticism of the interstate commerce commission is particularly directed Commissioner Prudy calls attention to the vast increase of capitalization during the nine years beginning July 1 1903 the capital of the New York New Haven and Hartford Railroad Company itself increased from ninety three million dollars to about four hundred seventeen million dollars excluding premiums that fact alone would not convict the management of reckless financiering but the fact that so little of the new capital was represented by stock might well raise a question as to its conservativeness for the indebtedness including guarantees was increased over twenty times from about fourteen million dollars to three hundred million dollars while the stock outstanding in the hands of the public was not doubled eighty million dollars to one hundred fifty eight million dollars still in these days of large things even such growth of corporate liabilities might be consistent with safe and sane management but what can be said in defense of the financial judgment of the banker management under which these two railroads find themselves confronted in the fateful year 1913 with the most disquieting floating indebtedness on march thirty one the new haven had outstanding forty three million dollars in short time notes the boston in main had then outstanding twenty four million five hundred thousand which have been increased since to twenty seven million dollars and additional notes have been issued by several of its subsidiary lines mainly to meet its share of these loans the new haven which before its great expansion would sell at par three and a half percent bonds convertible into stock at one hundred fifty dollars a share was so eager to issue at par sixty seven million five hundred thousand dollars of its six percent twenty year bonds convertible into stock as to agree to pay J.P. Morgan and company a two and a half percent underwriting commission true money was tight then but is it not very bad financing to be so prepared for the tight money market which had long been expected indeed the new haven's management particularly ought to have avoided such an error for it committed a similar one in the tight money market of nineteen hundred seven to nineteen oh eight when it had to sell at par thirty nine million dollars of its six percent forty year bonds these huge short time borrowings of the system were not due to expected emergencies or to their monetary conditions they were of gradual growth on June thirty nineteen ten the two companies in short term notes only ten million one hundred eighty thousand three hundred sixty four dollars by June thirty nineteen eleven the amount had grown to thirty million seven hundred fifty nine thousand nine hundred fifty nine dollars by June thirty nineteen twelve forty five million three hundred ninety five thousand dollars and in nineteen thirteen to over seventy million dollars of course the rate of interest on the loans increased also very largely and these loans were incurred unnecessarily they represent in the main not improvements on the new haven or on the Boston and main railroads but money borrowed either to pay for stocks in other companies or to not afford to buy or to pay dividends which had not been earned in five years out of the last six the new haven railroad has on its own showing paid dividends in excess of the year's earnings and the annual deficits disclosed would have been much larger if proper charges for depreciation of equipment and of steamships had been made in each of the last three years the absolute control of the Boston and main the latter paid out in dividends so much in excess of earnings that before April nineteen thirteen the surplus accumulated in earlier years had been converted into a deficit surely these facts show at least an extraordinary lack of financial prudence why banker management failed now how can the failure of the banker management of the new haven be explained a few have questioned the ability a few the integrity of the bankers commissioner prudy attributed the mistakes made to the company's pursuit of a transportation monopoly the reason says he quote is as apparent as the fact itself the present management of that company started out with the purpose of controlling the transportation facilities of new england in the accomplishment of that purpose it bought what must be had and paid what must be paid to this purpose and its attempted execution can be traced every one of these financial misfortunes and derelictions end quote but it still remains to find the cause of the bad judgment exercised by the eminent banker management in entering upon and in carrying out the policy of monopoly for there were as grave errors in the execution of the policy of monopoly as in its adoption indeed it was the aggregation of important errors of detail which compelled first the reduction then the passing of dividends and which ultimately impaired the company's credit the failure of the banker management of the new haven cannot be explained as the shortcomings of individuals the failure was not accidental it was not exceptional it was the natural result of infusing the functions of banker and businessman undivided loyalty the banker should be detached from the business for which he performs the banking service this detachment is desirable in the first place in order to avoid conflict of interest the relation of banker directors to corporations which they finance has been a subject of just criticism their conflicting interests necessarily prevent single-minded devotion to the corporation when a banker director of a railroad decides as railroad man that it shall issue securities and then sells them to himself as banker fixing the price at which they are to be taken there is necessarily grave danger that the interests of the railroad may suffer suffer both through issuing of securities which ought not to be issued and from selling them at a price less favorable to the company than should have been obtained for it is ordinarily impossible for a banker director to judge impartially between the corporation and himself even if he succeeded in being impartial the relation would not conduce to the best interests of the company the best bargains are made when buyer and seller are represented by different persons detachment and essential but the objection to banker management does not rest wholly or perhaps mainly upon the importance of avoiding divided loyalty a complete detachment of the banker from the corporation is necessary in order to secure for the railroad the benefit of the clearest financial judgment for the banker's judgment will be necessarily clouded by participation in the management or by ultimate responsibility for the policy actually pursued it is outside financial advice which the railroad needs long ago it was recognized that quote a man who is his own lawyer has a fool for a client and quote the essential reason for this is that soundness of judgment is easily obscured by self-interest similarly it is not the proper function of the banker to construct purchase or operate railroads or to engage in industrial enterprises the proper function of the banker is to give to or withhold credit from other concerns to purchase or to refuse to purchase securities from other concerns and to sell securities to other customers the proper exercise of this function demands that the banker should be wholly detached from the concern whose credit or securities are under consideration his decision to grant or to provide credit to purchase or not to purchase securities involves passing judgment on the efficiency of the management or the soundness of the enterprise and he ought not to occupy a position where in so doing he is passing judgment on himself of course detachment does not imply a lack of knowledge the banker should act only with full knowledge just as a lawyer should act only with full knowledge the banker who undertakes to make loans to or purchase securities from a railroad for sale to his other customers ought to have as full knowledge of its affairs as does its legal advisor but the banker should not be in any sense his own client he should not in the capacity of banker pass judgment upon the wisdom of his own plans or acts as railroad man such a detached attitude on the part of the banker is demanded also in the interest of his other customers the purchasers of corporate securities the investment banker stands toward a large part of his customers in a position of trust which should be fully recognized the small investors particularly the women who are holding an ever increasing proportion of our corporate securities commonly by on the recommendation of their bankers the small investors do not and in most cases cannot ascertain for themselves the facts on which to base a proper judgment as to the soundness of securities offered and even if these investors were furnished with the facts they lack the business experience essential to forming a proper judgment such investors need and are entitled to have the bankers advice and obviously their unbiased advice and the advice cannot be unbiased by anchor as part of the corporation's management has participated in the creation of the securities which are the subject of sale to the investor is it conceivable that the great house of Morgan would have aided in providing the new haven with the hundreds of millions so unwisely expended if its judgment had not been clouded by participation in the new haven's management end of chapter nine