Other people's money, and how the bankers use it 1914
CHAPTER 6 - WHERE THE BANKER IS SUPERFLUOUS

Illustration from Harper's Weekly December 27, 1913 by Walter J. Enright

- By Justice Louis Brandeis -

The abolition of interlocking directorates will greatly curtail the bankers' power by putting an end to many improper combinations. Publicity concerning bankers' commissions, profits and associates, will lend effective aid, particularly by curbing undue exactions. Many of the specific measures recommended by the Pujo Committee (some of them dealing with technical details) will go far toward correcting corporate and banking abuses; and thus tend to arrest financial concentration. But the investment banker has, within his legitimate province, acquired control so extensive as to menace the public welfare even where his business is properly conducted. If the New Freedom is to be attained, every proper means of lessening that power must be availed of. A simple and effective remedy, which can be widely applied, even without new legislation, lies near at hand: Eliminate the banker-middleman where he is superfluous.

Today practically all governments, states and municipalities pay toll to the banker on all bonds sold. Why should they? It is not because the banker is always needed. It is because the banker controls the only avenue through which the investor in bonds and stocks can ordinarily be reached. The banker has become the universal tax gatherer. True, the pro rata of taxes levied by him upon our state and city governments is less than that levied by him upon the corporations. But few states or cities escape payment of some such tax to the banker on every loan it makes. Even where the new issues of bonds are sold at public auction, or to the highest bidder on sealed proposals, the bankers' syndicates usually secure large blocks of the bonds which are sold to the people at a considerable profit. The middleman, even though unnecessary, collects his tribute.

There is a legitimate field for dealers in state and municipal bonds, as for other merchants. Investors already owning such bonds must have a medium through which they can sell their holdings. And those states or municipalities which lack an established reputation among investors, or which must seek more distant markets, need the banker to distribute new issues. But there are many states and cities which have an established reputation and have a home market at hand. These should sell their bonds direct to investors without the intervention of a middleman. And as like conditions prevail with some corporations, their bonds and stocks should also be sold direct to the investor. Both financial efficiency and industrial liberty demand that the bankers' toll be abolished, where that is possible.

BANKER AND BROKER

The business of the investment banker must not be confused with that of the bond and stock broker. The two are often combined; but the functions are essentially different. The broker performs a very limited service. He has properly nothing to do with the original issue of securities, nor with their introduction into the market. He merely negotiates a purchase or sale as agent for another under specific orders. He exercises no discretion, except in the method of bringing buyer and seller together, or of executing orders. For his humble service he receives a moderate compensation, a commission, usually one-eighth of one per cent. (12 ½ cents for each $100) on the par value of the security sold. The investment banker also is a mere middleman. But he is a principal, not an agent. He is also a merchant in bonds and stocks. The compensation received for his part in the transaction is in many cases more accurately described as profit than as commission. So far as concerns new issues of government, state and municipal bonds, especially, he acts as merchant, buying and selling securities on his own behalf; buying commonly at wholesale from the maker and selling at retail to the investors; taking the merchant's risk and the merchant’s profits. On purchases of corporate securities the profits are often very large; but even a large profit may be entirely proper; for when the banker's services are needed and are properly performed, they are of great value. On purchases of government, state and municipal securities the profit is usually smaller; but even a very small profit cannot be justified, if unnecessary.

HOW THE BANKER CAN SERVE

The banker's services include three distinct functions, and only three:

First: Specifically as expert. The investment banker has the responsibility of the ordinary retailer to sell only that merchandise which is good of its kind. But his responsibility in this respect is unusually heavy, because he deals in an article on which a great majority of his customers are unable, themselves, to pass intelligent judgment without aid. The purchase by the investor of most corporate securities is little better than a gamble, where he fails to get the advice of some one who has investigated the security thoroughly as the banker should. For few investors have the time, the facilities, or the ability to investigate properly the value of corporate securities.

Second: Specifically as distributor. The banker performs an all-important service in providing an outlet for securities. His connections enable him to reach possible buyers quickly. And good-will—that is, possession of the confidence of regular customers—enables him to effect sales where the maker of the security might utterly fail to find a market.

Third: Specifically as jobber or retailer. The investment banker, like other merchants, carries his stock in trade until it can be marketed. In this he performs a service which is often of great value to the maker. Needed cash is obtained immediately, because the whole issue of securities can thus be disposed of by a single transaction. And even where there is not immediate payment, the knowledge that the money will be provided when needed is often of paramount importance. By carrying securities in stock, the banker performs a service also to investors, who are thereby enabled to buy securities at such times as they desire.

Whenever makers of securities or investors require all or any of these three services, the investment banker is needed, and payment of compensation to him is proper. Where there is no such need, the banker is clearly superfluous. And in respect to the original issue of many of our state and municipal bonds, and of some corporate securities, no such need exists.

WHERE THE BANKER SERVES NOT

It needs no banker experts in value to tell us that bonds of Massachusetts or New York, of Boston, Philadelphia or Baltimore and of scores of lesser American cities, are safe investments. The basic financial facts in regard to such bonds are a part of the common knowledge of many American investors; and, certainly, of most possible investors who reside in the particular state or city whose bonds are in question. Where the financial facts are not generally known, they are so simple, that they can be easily summarized and understood by any prospective investor without interpretation by an expert. Bankers often employ, before purchasing securities, their own accountants to verify the statements supplied by the makers of the security, and use these accountants' certificates as an aid in selling. States and municipalities, the makers of the securities, might for the same purpose employ independent public accountants of high reputation, who would give their certificates for use in marketing the securities. Investors could also be assured without banker-aid that the basic legal conditions are sound. Bankers, before purchasing an issue of securities, customarily obtain from their own counsel an opinion as to its legality, which investors are invited to examine. It would answer the same purpose, if states and municipalities should supplement the opinion of their legal representatives by that of independent counsel of recognized professional standing, who would certify to the legality of the issue.

Neither should an investment banker be needed to find investors willing to take up, in small lots, a new issue of bonds of New York or Massachusetts, of Boston, Philadelphia or Baltimore, or a hundred other American cities. A state or municipality seeking to market direct to the investor its own bonds would naturally experience, at the outset, some difficulty in marketing a large issue. And in a newer community, where there is little accumulation of unemployed capital, it might be impossible to find buyers for any large issue. Investors are apt to be conservative; and they have been trained to regard the intervention of the banker as necessary. The bankers would naturally discourage any attempt of states and cities to dispense with their services. Entrance upon a market, hitherto monopolized by them, would usually have to be struggled for. But banker-fed investors, as well as others could, in time, be brought to realize the advantage of avoiding the middleman and dealing directly with responsible borrowers. Governments, like private concerns, would have to do educational work; but this publicity would be much less expensive and much more productive than that undertaken by the bankers. Many investors are already impatient of banker exactions; and eager to deal directly with governmental agencies in whom they have more confidence. And a great demand could, at once, be developed among smaller investors whom the bankers have been unable to interest, and who now never buy state or municipal bonds. The opening of this new field would furnish a market, in some respects more desirable and certainly wider than that now reached by the bankers.

Neither do states or cities ordinarily need the services of the investment banker to carry their bonds pending distribution to the investor. Where there is immediate need for large funds, states and cities—at least the older communities—should be able to raise the money temporarily, quite as well as the bankers do now, while awaiting distribution of their bonds to the investor. Bankers carry the bonds with other people's money, not with their own. Why should not cities get the temporary use of other people's money as well? Bankers have the preferential use of the deposits in the banks, often because they control the banks. Free these institutions from banker-control, and no applicant to borrow the people's money will be received with greater favor than our large cities. Boston, with its $1,500,000,000 of assessed valuation and $78,033,128 net debt, is certainly as good a risk as even Lee, Higginson & Co. or Kidder, Peabody & Co.

But ordinarily cities do not, or should not, require large sums of money at any one time. Such need of large sums does not arise except from time to time where maturing loans are to be met, or when some existing public utility plant is to be taken over from private owners. Large issues of bonds for any other purpose are usually made in anticipation of future needs, rather than to meet present necessities. Modern efficient public financiering, through substituting serial bonds for the long term issues (which in Massachusetts has been made obligatory) will, in time, remove the need of large sums at one time for paying maturing debts, since each year's maturities will be paid from the year's taxes. Purchases of existing public utility plants are of rare occurrence, and are apt to be preceded by long periods of negotiation. When they occur they can, if foresight be exercised, usually be financed without full cash payment at one time.

Today, when a large issue of bonds is made, the banker, while ostensibly paying his own money to the city, actually pays to the city other people's money which he has borrowed from the banks. Then the banks get back, through the city's deposits, a large part of the money so received. And when the money is returned to the bank, the banker has the opportunity of borrowing it again for other operations. The process results in double loss to the city. The city loses by not getting from the banks as much for its bonds as investors would pay. And then it loses interest on the money raised before it is needed. For the bankers receive from the city bonds bearing rarely less than 4 per cent. interest; while the proceeds are deposited in the banks which rarely allow more than 2 per cent. interest on the daily balances.

CITIES THAT HAVE HELPED THEMSELVES

In the present year some cities have been led by necessity to help themselves. The bond market was poor. Business was uncertain, money tight and the ordinary investor reluctant. Bankers were loth to take new bond issues. Municipalities were unwilling to pay the high rates demanded of them. And many cities were prohibited by law or ordinance from paying more than 4 per cent. interest; while good municipal bonds were selling on a 4 1/2 to 5 per cent. basis. But money had to be raised, and the attempt was made to borrow it direct from the lenders instead of from the banker-middleman. Among the cities which raised money in this way were Philadelphia, Baltimore, St. Paul, and Utica, New York.

Philadelphia, under Mayor Blankenburg's inspiration, sold nearly $4,175,000 in about two days on a 4 per cent. basis and another "over-the-counter" sale has been made since. In Baltimore, with the assistance of the Sun, $4,766,000 were sold "over the counter" on a 4 1/2 per cent. basis. Utica's two "popular sales" of 4 1/2 per cent. bonds were largely "over-subscribed." And since then other cities large and small have had their "over-the-counter"' bond sales. The experience of Utica, as stated by its Controller, Fred G. Reusswig, must prove of general interest:

"In June of the present year I advertised for sale two issues, one of $100,000, and the other of $19,000, bearing interest at 4 1/2 per cent. The latter issue was purchased at par by a local bidder and of the former we purchased $10,000 for our sinking funds. That left $90,000 unsold, for which there were no bidders, which was the first time that I had been unable to sell our bonds. About this time the ‘popular sales’ of Baltimore and Philadelphia attracted my attention. The laws in effect in those cities did not restrict the officials as does our law and I could not copy their methods. I realized that there was plenty of money in this immediate vicinity and if I could devise a plan conforming with our laws under which I could make the sale attractive to small investors it would undoubtedly prove successful. I had found, in previous efforts to interest people of small means, that they did not understand the meaning of premium and would rather not buy than bid above par. They also objected to making a deposit with their bids. In arranging for the ‘popular sales’ I announced in the papers that, while I must award to the highest bidder, it was my opinion that a par bid would be the highest bid. I also announced that we would issue bonds in denominations as low as $100 and that we would not require a deposit except where the bid was $5,000 or over. Then I succeeded in getting the local papers to print editorials and local notices upon the subject of municipal bonds, with particular reference to those of Utica and the forthcoming sale. All the prospective purchaser had to do was to fill in the amount desired, sign his name, seal the bid and await the day for the award. I did not have many bidders for very small amounts. There was only one for $100 at the first sale and one for $100 at the second sale and not more than ten who wanted less than $500. Most of the bidders were looking for from $1,000 to $5,000, but nearly all were people of comparatively small means, and with some the investment represented all their savings. In awarding the bonds I gave preference to residents of Utica and I had no difficulty in apportioning the various maturities in a satisfactory way.

"I believe that there are a large number of persons in every city who would buy their own bonds if the way were made easier by law. Syracuse and the neighboring village of Ilion, both of which had been unable to sell in the usual way, came to me for a program of procedure and both have since had successful sales along similar lines. We have been able by this means to keep the interest rate on our bonds at 4 1/2 per cent., while cities which have followed the old plan of relying upon bond houses have had to increase the rate to 5 per cent. I am in favor of amending the law in such a manner that the Common Council, approved by the Board of Estimate and Apportionment, may fix the prices at which bonds shall be sold, instead of calling for competitive bids. Then place the bonds on sale at the Controller's office to any one who will pay the price. The prices upon each issue should be graded according to the different values of different maturities. Under the present law, as we have it, conditions are too complicated to make a sale practicable except upon a basis of par bids."

THE ST. PAUL EXPERIMENT

St. Paul wisely introduced into its experiment a more democratic feature, which Tom L. Johnson, Cleveland's great mayor, thought out (but did not utilize), and which his friend W. B. Colver, now Editor-in-Chief of the Daily News, brought to the attention of the St. Paul officials. Mayor Johnson had recognized the importance of reaching the small savings of the people; and concluded that it was necessary not only to issue the bonds in very small denominations, but also to make them redeemable at par. He sought to combine practically, bond investment with the savings bank privilege. The fact that municipal bonds are issuable ordinarily only in large denominations, say, $1,000, presented an obstacle to be overcome. Mayor Johnson's plan was to have the sinking fund commissioners take large blocks of the bonds, issue against them certificates in denominations of $10, and have the commissioners agree (under their power to purchase securities) to buy the certificates back at par and interest. Savings bank experience, he insisted, showed that the redemption feature would not prove an embarrassment; as the percentage of those wishing to withdraw their money is small; and deposits are nearly always far in excess of withdrawals.

The St. Paul sinking fund commissioners and City Attorney O'Neill approved the Johnson plan; and in the face of high money rates, sold on a 4 per cent. basis, during July, certificates to the net amount of $502,300; during August, $147,000; and during September, over $150,000, the average net sales being about $5,700 a day. Mr. Colver, reporting on the St. Paul experience, said:

"There have been about 2,000 individual purchasers making the average deposit about $350 or $360. There have been no certificates sold to banks. During the first month the deposits averaged considerably higher and for this reason: in very many cases people who had savings which represented the accumulation of considerable time, withdrew their money from the postal savings banks, from the regular banks, from various hiding places and deposited them with the city. Now these same people are coming once or twice a month and making deposits of ten or twenty dollars, so that the average of the individual deposit has fallen very rapidly during September and every indication is that the number of small deposits will continue to increase and the relatively large deposits become less frequent as time goes on.

"As a matter of fact, these certificate deposits are stable, far more than the deposits and investments of richer people who watch for advantageous reinvestments and who shift their money about rather freely. The man with three or four hundred dollars savings will suffer almost anything before he will disturb that fund. We believe that the deposits every day here, day in and day out, will continue to take care of all the withdrawals and still leave a net gain for the day, that net figure at present being about $5,700 a day."

Many cities are now prevented from selling bonds direct to the small investors, through laws which compel bonds to be issued in large denominations or which require the issue to be offered to the highest bidder. These legislative limitations should be promptly removed.

SALESMANSHIP AND EDUCATION

Such success as has already been attained is largely due to the unpaid educational work of leading progressive newspapers. But the educational work to be done must not be confined to teaching "the people"—the buyers of the bonds. Municipal officials and legislators have quite as much to learn. They must, first of all, study salesmanship. Selling bonds to the people is a new art, still undeveloped. The general problems have not yet been worked out. And besides these problems common to all states and cities, there will be, in nearly every community, local problems which must be solved, and local difficulties which must be overcome. The proper solution even of the general problems must take considerable time. There will have to be many experiments made; and doubtless there will be many failures. Every great distributor of merchandise knows the obstacles which he had to overcome before success was attained; and the large sums that had to be invested in opening and preparing a market. Individual concerns have spent millions in wise publicity; and have ultimately reaped immense profits when the market was won. Cities must take their lessons from these great distributors. Cities must be ready to study the problems and to spend prudently for proper publicity work. It might, in the end, prove an economy, even to allow, on particular issues, where necessary, a somewhat higher interest rate than bankers would exact, if thereby a direct market for bonds could be secured. Future operations would yield large economies. And the obtaining of a direct market for city bonds is growing ever more important, because of the huge increase in loans which must attend the constant expansion of municipal functions. In 1898 the new municipal issues aggregated $103,084,793; in 1912, $380,810,287.

SAVINGS BANKS AS CUSTOMERS

In New York, Massachusetts and the other sixteen states where a system of purely mutual savings banks is general, it is possible, with a little organization, to develop an important market for the direct purchaser of bonds. The bonds issued by Massachusetts cities and towns have averaged recently about $15,000,000 a year, and those of the state about $3,000,000. The 194 Massachusetts savings banks, with aggregate assets of $902,105,755.94, held on October 31, 1912, $90,536,581.32 in bonds and notes of states and municipalities. Of this sum about $60,000,000 are invested in bonds and notes of Massachusetts cities and towns, and about $8,000,000 in state issues. The deposits in the savings banks are increasing at the rate of over $30,000,000 a year. Massachusetts state and municipal bonds have, within a few years, come to be issued tax exempt in the hands of the holder, whereas other classes of bonds usually held by savings banks are subject to a tax of one-half of one per cent. of the market value. Massachusetts savings banks, therefore, will to an increasing extent, select Massachusetts municipal issues for high-grade bond investments. Certainly Massachusetts cities and towns might, with the coöperation of the Commonwealth, easily develop a "home market" for "over-the-counter" bond business with the savings banks. And the savings banks of other states offer similar opportunities to their municipalities.

COOPERATION

Bankers obtained their power through combination. Why should not cities and states by means of cooperation free themselves from the bankers? For by cooperation between the cities and the state, the direct marketing of municipal bonds could be greatly facilitated.

Massachusetts has 33 cities, each with a population of over 12,000 persons; 71 towns each with a population of over 5,000; and 250 towns each with a population of less than 5,000. Three hundred and eight of these municipalities now have funded indebtedness outstanding. The aggregate net indebtedness is about $180,000,000. Every year about $15,000,000 of bonds and notes are issued by the Massachusetts cities and towns for the purpose of meeting new requirements and refunding old indebtedness. If these municipalities would cooperate in marketing securities, the market for the bonds of each municipality would be widened; and there would exist also a common market for Massachusetts municipal securities which would be usually well supplied, would receive proper publicity and would attract investors. Successful merchandising obviously involves carrying an adequate, well-assorted stock. If every city acts alone, in endeavoring to market its bonds direct, the city's bond-selling activity will necessarily be sporadic. Its ability to supply the investor will be limited by its own necessities for money. The market will also be limited to the bonds of the particular municipality. But if a state and its cities should cooperate, there could be developed a continuous and broad market for the sale of bonds "over-the-counter." The joint selling agency of over three hundred municipalities,—as in Massachusetts—would naturally have a constant supply of assorted bonds and notes which could be had in as small amounts as the investor might want to buy them. It would be a simple matter to establish such a joint selling agency by which municipalities, under proper regulation of, and aid from the state, would cooperate.

And cooperation among the cities and with the state might serve in another important respect. These 354 Massachusetts municipalities carry in the aggregate large bank balances. Sometimes the balance carried by a city represents unexpended revenues; sometimes unexpended proceeds of loans. On these balances they usually receive from the banks 2 per cent. interest. The balances of municipalities vary like those of other depositors; one having idle funds, when another is in need. Why should not all of these cities and towns cooperate, making, say, the State their common banker, and supply each other with funds as farmers and laborers cooperate through credit unions? Then cities would get, instead of 2 per cent. on their balances, all their money was worth.

The Commonwealth of Massachusetts holds now in its sinking and other funds nearly $30,000,000 of Massachusetts municipal securities, constituting nearly three-fourth of all securities held in these funds. Its annual purchases aggregate nearly $4,000,000. Its purchases direct from cities and towns have already exceeded $1,000,000 this year. It would be but a simple extension of the state's function to cooperate, as indicated, in a joint, Municipal Bond Selling Agency and Credit Union. It would be a distinct advance in the efficiency of state and municipal financing; and what is even more important, a long step toward the emancipation of the people from banker-control.

CORPORATE SELF-HELP

Strong corporations with established reputations, locally or nationally, could emancipate themselves from the banker in a similar manner. Public-service corporations in some of our leading cities could easily establish "over-the-counter" home markets for their bonds; and would be greatly aided in this by the supervision now being exercised by some state commissions over the issue of securities by such corporations. Such corporations would gain thereby not only in freedom from banker-control and exactions, but in the winning of valuable local support. The investor's money would be followed by his sympathy. In things economic, as well as in things political, wisdom and safety lie in direct appeals to the people.

The Pennsylvania Railroad now relies largely upon its stockholders for new capital. But a corporation with its long-continued success and reputation for stability should have much wider financial support and should eliminate the banker altogether. With the 2,700 stations on its system, the Pennsylvania could, with a slight expense, create nearly as many avenues through which money would be obtainable to meet its growing needs.

BANKER PROTECTORS

It may be urged that reputations often outlive the conditions which justify them, that outlived reputations are pitfalls to the investors; and that the investment banker is needed to guard him from such dangers. True; but when have the big bankers or their little satellites protected the people from such pitfalls?

Was there ever a more be-bankered railroad than the New Haven? Was there ever a more banker-led community of investors than New England? Six years before the fall of that great system, the hidden dangers were pointed out to these banker-experts. Proof was furnished of the rotting timbers. The disaster-breeding policies were laid bare. The bankers took no action. Repeatedly, thereafter, the bankers' attention was called to the steady deterioration of the structure. The New Haven books disclose 11,481 stockholders who are residents of Massachusetts; 5,682 stockholders in Connecticut; 735 in Rhode Island; and 3,510 in New York. Of the New Haven stockholders 10,474 were women. Of the New Haven stockholders 10,222 were of such modest means that their holdings were from one to ten shares only. The investors were sorely in need of protection. The city directories disclose 146 banking houses in Boston, 26 in Providence, 33 in New Haven and Hartford, and 357 in New York City. But who, connected with those New England and New York banking houses, during the long years which preceded the recent investigation of the Interstate Commerce Commission, raised either voice or pen in protest against the continuous mismanagement of that great trust property or warned the public of the impending disaster? Some of the bankers sold their own stock holdings. Some bankers whispered to a few favored customers advice to dispose of New Haven stock. But not one banker joined those who sought to open the eyes of New England to the impending disaster and to avert it by timely measures. New England's leading banking houses were ready to "cooperate" with the New Haven management in taking generous commissions for marketing the endless supply of new securities; but they did nothing to protect the investors. Were these bankers blind? Or were they afraid to oppose the will of J. P. Morgan & Co.?

Perhaps it is the banker who, most of all, needs the New Freedom.

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Other people's money, and how the bankers use it 1914
CHAPTER 5 - WHAT PUBLICITY CAN DO

Illustration from Harper's Weekly December 20, 1913 by Walter J. Enright

- By Justice Louis Brandeis -

Publicity is justly commended as a remedy for social and industrial diseases. Sunlight is said to be the best of disinfectants; electric light the most efficient policeman. And publicity has already played an important part in the struggle against the Money Trust. The Pujo Committee has, in the disclosure of the facts concerning financial concentration, made a most important contribution toward attainment of the New Freedom. The battlefield has been surveyed and charted. The hostile forces have been located, counted and appraised. That was a necessary first step—and a long one—towards relief. The provisions in the Committee's bill concerning the incorporation of stock exchanges and the statement to be made in connection with the listing of securities would doubtless have a beneficent effect. But there should be a further call upon publicity for service. That potent force must, in the impending struggle, be utilized in many ways as a continuous remedial measure.

WEALTH

Combination and control of other people's money and of other people's businesses. These are the main factors in the development of the Money Trust. But the wealth of the investment banker is also a factor. And with the extraordinary growth of his wealth in recent years, the relative importance of wealth as a factor in financial concentration has grown steadily. It was wealth which enabled Mr. Morgan, in 1910, to pay $3,000,000 for $51,000 par value of the stock of the Equitable Life Insurance Society. His direct income from this investment was limited by law to less than one-eighth of one per cent. a year; but it gave legal control of $504,000,000 of assets. It was wealth which enabled the Morgan associates to buy, from the Equitable and the Mutual Life Insurance Company the stocks in the several banking institutions, which, merged in the Bankers' Trust Company and the Guaranty Trust Company, gave them control of $357,000,000 deposits. It was wealth which enabled Mr. Morgan to acquire his shares in the First National and National City banks, worth $21,000,000, through which he cemented the triple alliance with those institutions.

Now, how has this great wealth been accumulated? Some of it was natural accretion. Some of it is due to special opportunities for investment wisely availed of. Some of it is due to the vast extent of the bankers' operations. Then power breeds wealth as wealth breeds power. But a main cause of these large fortunes is the huge tolls taken by those who control the avenues to capital and to investors. There has been exacted as toll literally "all that the traffic will bear."

EXCESSIVE BANKERS' COMMISSIONS

The Pujo Committee was unfortunately prevented by lack of time from presenting to the country the evidence covering the amounts taken by the investment bankers as promoters' fees, underwriting commissions and profits. Nothing could have demonstrated so clearly the power exercised by the bankers, as a schedule showing the aggregate of these taxes levied within recent years. It would be well worth while now to reopen the Money Trust investigation merely to collect these data. But earlier investigations have disclosed some illuminating, though sporadic facts.

The syndicate which promoted the Steel Trust, took, as compensation for a few weeks' work, securities yielding $62,500,000 in cash; and of this, J. P. Morgan & Co. received for their services, as Syndicate Managers, $12,500,000, besides their share, as syndicate subscribers, in the remaining $50,000,000. The Morgan syndicate took for promoting the Tube Trust $20,000,000 common stock out of a total issue of $80,000,000 stock (preferred and common). Nor were monster commissions limited to trust promotions. More recently, bankers' syndicates have, in many instances, received for floating preferred stocks of recapitalized industrial concerns, one-third of all common stock issued, besides a considerable sum in cash. And for the sale of preferred stock of well established manufacturing concerns, cash commissions (or profits) of from 7 1/2 to 10 per cent. of the cash raised are often exacted. On bonds of high-class industrial concerns, bankers' commissions (or profits) of from 5 to 10 points have been common.

Nor have these heavy charges been confined to industrial concerns. Even railroad securities, supposedly of high grade, have been subjected to like burdens. At a time when the New Haven's credit was still unimpaired, J. P. Morgan & Co. took the New York, Westchester & Boston Railway first mortgage bonds, guaranteed by the New Haven at 92 1/2; and they were marketed at 96 1/4. They took the Portland Terminal Company bonds, guaranteed by the Maine Central Railroad—a corporation of unquestionable credit—at about 88, and these were marketed at 92.

A large part of these underwriting commissions is taken by the great banking houses, not for their services in selling the bonds, nor in assuming risks, but for securing others to sell the bonds and incur risks. Thus when the Interboro Railway—a most prosperous corporation—financed its recent $170,000,000 bond issue, J. P. Morgan & Co. received a 3 per cent. commission, that is, $5,100,000, practically for arranging that others should underwrite and sell the bonds.

The aggregate commissions or profits so taken by leading banking houses can only be conjectured, as the full amount of their transactions has not been disclosed, and the rate of commission or profit varies very widely. But the Pujo Committee has supplied some interesting data bearing upon the subject: Counting the issues of securities of interstate corporations only, J. P. Morgan & Co. directly procured the public marketing alone or in conjunction with others during the years 1902-1912, of $1,950,000,000. What the average commission or profit taken by J. P. Morgan & Co. was we do not know; but we do know that every one per cent. on that sum yields $19,500,000. Yet even that huge aggregate of $1,950,000,000 includes only a part of the securities on which commissions or profits were paid. It does not include any issue of an intrastate corporation. It does not include any securities privately marketed. It does not include any government, state or municipal bonds.

It is to exactions such as these that the wealth of the investment banker is in large part due. And since this wealth is an important factor in the creation of the power exercised by the Money Trust, we must endeavor to put an end to this improper wealth getting, as well as to improper combination. The Money Trust is so powerful and so firmly entrenched, that each of the sources of its undue power must be effectually stopped, if we would attain the New Freedom.

HOW SHALL EXCESSIVE CHARGES BE STOPPED?

The Pujo Committee recommends, as a remedy for such excessive charges, that interstate corporations be prohibited from entering into any agreements creating a sole fiscal agent to dispose of their security issues; that the issue of the securities of interstate railroads be placed under the supervision of the Interstate Commerce Commission; and that their securities should be disposed of only upon public or private competitive bids, or under regulations to be prescribed by the Commission with full powers of investigation that will discover and punish combinations which prevent competition in bidding. Some of the state public-service commissions now exercise such power; and it may possibly be wise to confer this power upon the interstate commission, although the recommendation of the Hadley Railroad Securities Commission are to the contrary. But the official regulation as proposed by the Pujo Committee would be confined to railroad corporations; and the new security issues of other corporations listed on the New York Stock Exchange have aggregated in the last five years $4,525,404,025, which is more than either the railroad or the municipal issues. Publicity offers, however, another and even more promising remedy: a method of regulating bankers' charges which would apply automatically to railroad, public-service and industrial corporations alike.

The question may be asked: Why have these excessive charges been submitted to? Corporations, which in the first instance bear the charges for capital, have, doubtless, submitted because of banker-control; exercised directly through interlocking directorates, or kindred relations, and indirectly through combinations among bankers to suppress competition. But why have the investors submitted, since ultimately all these charges are borne by the investors, except so far as corporations succeed in shifting the burden upon the community? The large army of small investors, constituting a substantial majority of all security buyers, are entirely free from banker control. Their submission is undoubtedly due, in part, to the fact that the bankers control the avenues to recognizedly safe investments almost as fully as they do the avenues to capital. But the investor's servility is due partly, also, to his ignorance of the facts. Is it not probable that, if each investor knew the extent to which the security he buys from the banker is diluted by excessive underwritings, commissions and profits, there would be a strike of capital against these unjust exactions?

THE STRIKE OF CAPITAL

A recent British experience supports this view. In a brief period last spring nine different issues, aggregating $135,840,000, were offered by syndicates on the London market, and on the average only about 10 per cent. of these loans was taken by the public. Money was "tight," but the rates of interest offered were very liberal, and no one doubted that the investors were well supplied with funds. The London Daily Mail presented an explanation:

"The long series of rebuffs to new loans at the hands of investors reached a climax in the ill success of the great Rothschild issue. It will remain a topic of financial discussion for many days, and many in the city are expressing the opinion that it may have a revolutionary effect upon the present system of loan issuing and underwriting. The question being discussed is that the public have become loth to subscribe for stock which they believe the underwriters can afford, by reason of the commission they receive, to sell subsequently at a lower price than the issue price, and that the Stock Exchange has begun to realize the public's attitude. The public sees in the underwriter not so much one who insures that the loan shall be subscribed in return for its commission as a middleman, who, as it were, has an opportunity of obtaining stock at a lower price than the public in order that he may pass it off at a profit subsequently. They prefer not to subscribe, but to await an opportunity of dividing that profit. They feel that if, when these issues were made, the stock were offered them at a more attractive price, there would be less need to pay the underwriters so high commissions. It is another practical protest, if indirect, against the existence of the middleman, which protest is one of the features of present-day finance."

PUBLICITY AS A REMEDY

Compel bankers when issuing securities to make public the commissions or profits they are receiving. Let every circular letter, prospectus or advertisement of a bond or stock show clearly what the banker received for his middleman-services, and what the bonds and stocks net the issuing corporation. That is knowledge to which both the existing security holder and the prospective purchaser is fairly entitled. If the bankers' compensation is reasonable, considering the skill and risk involved, there can be no objection to making it known. If it is not reasonable, the investor will "strike," as investors seem to have done recently in England.

Such disclosures of bankers' commissions or profits is demanded also for another reason: It will aid the investor in judging of the safety of the investment. In the marketing of securities there are two classes of risks: One is the risk whether the banker (or the corporation) will find ready purchasers for the bonds or stock at the issue price; the other whether the investor will get a good article. The maker of the security and the banker are interested chiefly in getting it sold at the issue price. The investor is interested chiefly in buying a good article. The small investor relies almost exclusively upon the banker for his knowledge and judgment as to the quality of the security; and it is this which makes his relation to the banker one of confidence. But at present, the investment banker occupies a position inconsistent with that relation. The bankers' compensation should, of course, vary according to the risk he assumes. Where there is a large risk that the bonds or stock will not be promptly sold at the issue price, the underwriting commission (that is the insurance premium) should be correspondingly large. But the banker ought not to be paid more for getting investors to assume a larger risk. In practice the banker gets the higher commission for underwriting the weaker security, on the ground that his own risk is greater. And the weaker the security, the greater is the banker's incentive to induce his customers to relieve him. Now the law should not undertake (except incidentally in connection with railroads and public-service corporations) to fix bankers' profits. And it should not seek to prevent investors from making bad bargains. But it is now recognized in the simplest merchandising, that there should be full disclosures. The archaic doctrine of caveat emptor is vanishing. The law has begun to require publicity in aid of fair dealing. The Federal Pure Food Law does not guarantee quality or prices; but it helps the buyer to judge of quality by requiring disclosure of ingredients. Among the most important facts to be learned for determining the real value of a security is the amount of water it contains. And any excessive amount paid to the banker for marketing a security is water. Require a full disclosure to the investor of the amount of commissions and profits paid; and not only will investors be put on their guard, but bankers' compensation will tend to adjust itself automatically to what is fair and reasonable. Excessive commissions—this form of unjustly acquired wealth—will in large part cease.

REAL DISCLOSURE

But the disclosure must be real. And it must be a disclosure to the investor. It will not suffice to require merely the filing of a statement of facts with the Commissioner of Corporations or with a score of other officials, federal and state. That would be almost as ineffective as if the Pure Food Law required a manufacturer merely to deposit with the Department a statement of ingredients, instead of requiring the label to tell the story. Nor would the filing of a full statement with the Stock Exchange, if incorporated, as provided by the Pujo Committee bill, be adequate.

To be effective, knowledge of the facts must be actually brought home to the investor, and this can best be done by requiring the facts to be stated in good, large type in every notice, circular, letter and advertisement inviting the investor to purchase. Compliance with this requirement should also be obligatory, and not something which the investor could waive. For the whole public is interested in putting an end to the bankers' exactions. England undertook, years ago, to protect its investors against the wiles of promoters, by requiring a somewhat similar disclosure; but the British act failed, in large measure of its purpose, partly because under it the statement of facts was filed only with a public official, and partly because the investor could waive the provision. And the British statute has now been changed in the latter respect.

DISCLOSE SYNDICATE PARTICULARS

The required publicity should also include a disclosure of all participants in an underwriting. It is a common incident of underwriting that no member of the syndicate shall sell at less than the syndicate price for a definite period, unless the syndicate is sooner dissolved. In other words, the bankers make by agreement, an artificial price. Often the agreement is probably illegal under the Sherman Anti-Trust Law. This price maintenance is, however, not necessarily objectionable. It may be entirely consistent with the general welfare, if the facts are made known. But disclosure should include a list of those participating in the underwriting so that the public may not be misled. The investor should know whether his adviser is disinterested.

Not long ago a member of a leading banking house was undertaking to justify a commission taken by his firm for floating a now favorite preferred stock of a manufacturing concern. The bankers took for their services $250,000 in cash, besides one-third of the common stock, amounting to about $2,000,000. "Of course," he said, "that would have been too much if we could have kept it all for ourselves; but we couldn’t. We had to divide up a large part. There were fifty-seven participants. Why, we had even to give $10,000 of stock to ———— (naming the president of a leading bank in the city where the business was located). He might some day have been asked what he thought of the stock. If he had shrugged his shoulders and said he didn't know, we might have lost many a customer for the stock. We had to give him $10,000 of the stock to teach him not to shrug his shoulders."

Think of the effectiveness with practical Americans of a statement like this:

A. B. & CO.

We have today secured substantial control of the successful machinery business heretofore conducted by -- at --, Illinois, which has been incorporated under the name of the Excelsior Manufacturing Company with a capital of $10,000,000, of which $5,000,000 is Preferred and $5,000,000 Common.

As we have a large clientele of confiding customers, we were able to secure from the owners an agreement for marketing the Preferred stock--we to fix a price which shall net the owners in cash $95 a share.

We offer this excellent stock to you at $100.75 per share. Our own commission or profit will be only a little over $5.00 per share, or say, $250,000 cash, besides $1,500,000 of the Common stock, which we received as a bonus. This cash and stock commission we are to divide in various proportions with the following participants in the underwriting syndicate:

C. D. & Co., New York

E. F. & Co., Boston

L. M. & Co., Philadelphia

I. K. & Co., New York

O. P. & Co., Chicago

Were such notices common, the investment bankers would "be worthy of their hire," for only reasonable compensation would ordinarily be taken.

For marketing the preferred stock, as in the case of Excelsior Manufacturing Co. referred to above, investment bankers were doubtless essential, and as middlemen they performed a useful service. But they used their strong position to make an excessive charge. There are, however, many cases where the banker's services can be altogether dispensed with; and where that is possible he should be eliminated, not only for economy's sake, but to break up financial concentration.

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Other people's money, and how the bankers use it 1914
CHAPTER 4 - SERVE ONE MASTER ONLY

Illustration from Harper's Weekly December 13, 1913 by Walter J. Enright

- By Justice Louis Brandeis -

The Pujo Committee has presented the facts concerning the Money Trust so clearly that the conclusions appear inevitable. Their diagnosis discloses intense financial concentration and the means by which it is effected. Combination,—the intertwining of interests,—is shown to be the all-pervading vice of the present system. With a view to freeing industry, the Committee recommends the enactment of twenty-one specific remedial provisions. Most of these measures are wisely framed to meet some abuse disclosed by the evidence; and if all of these were adopted the Pujo legislation would undoubtedly alleviate present suffering and aid in arresting the disease. But many of the remedies proposed are "local" ones; and a cure is not possible, without treatment which is fundamental. Indeed, a major operation is necessary. This the Committee has hesitated to advise; although the fundamental treatment required is simple: "Serve one Master only."

The evils incident to interlocking directorates are, of course, fully recognized; but the prohibitions proposed in that respect are restricted to a very narrow sphere.

First: The Committee recognizes that potentially competing corporations should not have a common director;—but it restricts this prohibition to directors of national banks, saying:

"No officer or director of a national bank shall be an officer or director of any other bank or of any trust company or other financial or other corporation or institution, whether organized under state or federal law, that is authorized to receive money on deposit or that is engaged in the business of loaning money on collateral or in buying and selling securities except as in this section provided; and no person shall be an officer or director of any national bank who is a private banker or a member of a firm or partnership of bankers that is engaged in the business of receiving deposits: Provided, That such bank, trust company, financial institution, banker, or firm of bankers is located at or engaged in business at or in the same city, town, or village as that in which such national bank is located or engaged in business: Provided further, That a director of a national bank or a partner of such director may be an officer or director of not more than one trust company organized by the laws of the state in which such national bank is engaged in business and doing business at the same place."

Second: The Committee recognizes that a corporation should not make a contract in which one of the management has a private interest; but it restricts this prohibition (1) to national banks, and (2) to the officers, saying:

"No national bank shall lend or advance money or credit or purchase or discount any promissory note, draft, bill of exchange or other evidence of debt bearing the signature or indorsement of any of its officers or of any partnership of which such officer is a member, directly or indirectly, or of any corporation in which such officer owns or has a beneficial interest of upward of ten per centum of the capital stock, or lend or advance money or credit to, for or on behalf of any such officer or of any such partnership or corporation, or purchase any security from any such officer or of or from any partnership or corporation of which such officer is a member or in which he is financially interested, as herein specified, or of any corporation of which any of its officers is an officer at the time of such transaction."

Prohibitions of intertwining relations so restricted, however supplemented by other provisions, will not end financial concentration. The Money Trust snake will, at most, be scotched, not killed. The prohibition of a common director in potentially competing corporations should apply to state banks and trust companies, as well as to national banks; and it should apply to railroad and industrial corporations as fully as to banking institutions. The prohibition of corporate contracts in which one of the management has a private interest should apply to directors, as well as to officers, and to state banks and trust companies and to other classes of corporations, as well as to national banks. And, as will be hereafter shown, such broad legislation is within the power of Congress.

Let us examine this further:

THE PROHIBITION OF COMMON DIRECTORS IN POTENTIALLY COMPETING CORPORATIONS

1. National Banks. The objection to common directors, as applied to banking institutions, is clearly shown by the Pujo Committee.

"As the first and foremost step in applying a remedy, and also for reasons that seem to us conclusive, independently of that consideration, we recommend that interlocking directorates in potentially competing financial institutions be abolished and prohibited so far as lies in the power of Congress to bring about that result… When we find, as in a number of instances, the same man a director in half a dozen or more banks and trust companies all located in the same section of the same city, doing the same class of business and with a like set of associates similarly situated, all belonging to the same group and representing the same class of interests, all further pretense of competition is useless... If banks serving the same field are to be permitted to have common directors, genuine competition will be rendered impossible. Besides, this practice gives to such common directors the unfair advantage of knowing the affairs of borrowers in various banks, and thus affords endless opportunities for oppression."

This recommendation is in accordance with the legislation or practice of other countries. The Bank of England, the Bank of France, the National Bank of Belgium, and the leading banks of Scotland all exclude from their boards persons who are directors in other banks. By law, in Russia no person is allowed to be on the board of management of more than one bank.

The Committee's recommendation is also in harmony with laws enacted by the Commonwealth of Massachusetts more than a generation ago designed to curb financial concentration through the savings banks. Of the great wealth of Massachusetts a large part is represented by deposits in savings banks. These deposits are distributed among 194 different banks, located in 131 different cities and towns. These 194 banks are separate and distinct; not only in form, but in fact. In order that the banks may not be controlled by a few financiers, the Massachusetts law provides that no executive officer or trustee (director) of any savings bank can hold any office in any other savings bank. That statute was passed in 1876. A few years ago it was supplemented by providing that none of the executive officers of a savings bank could hold a similar office in any national bank. Massachusetts attempted thus to curb the power of the individual financier; and no disadvantages are discernible. When that Act was passed the aggregate deposits in its savings banks were $243,340,642; the number of deposit accounts 739,289; the average deposit to each person of the population $144. On November 1, 1912, the aggregate deposits were $838,635,097.85; the number of deposit accounts 2,200,917; the average deposit to each account $381.04. Massachusetts has shown that curbing the power of the few, at least in this respect, is entirely consistent with efficiency and with the prosperity of the whole people.

2. State Banks and Trust Companies. The reason for prohibiting common directors in banking institutions applies equally to national banks and to state banks including those trust companies which are essentially banks. In New York City there are 37 trust companies of which only 15 are members of the clearing house; but those 15 had on November 2, 1912, aggregate resources of $827,875,653. Indeed the Bankers' Trust Company with resources of $205,000,000, and the Guaranty Trust Company, with resources of $232,000,000, are among the most useful tools of the Money Trust. No bank in the country has larger deposits than the latter; and only one bank larger deposits than the former. If common directorships were permitted in state banks or such trust companies, the charters of leading national banks would doubtless soon be surrendered; and the institutions would elude federal control by re-incorporating under state laws.

The Pujo Committee has failed to apply the prohibition of common directorships in potentially competing banking institutions rigorously even to national banks. It permits the same man to be a director in one national bank and one trust company doing business in the same place. The proposed concession opens the door to grave dangers. In the first place the provision would permit the interlocking of any national bank not with one trust company only, but with as many trust companies as the bank has directors. For while under the Pujo bill no one can be a national bank director who is director in more than one such trust company, there is nothing to prevent each of the directors of a bank from becoming a director in a different trust company. The National Bank of Commerce of New York has a board of 38 directors. There are 37 trust companies in the City of New York. Thirty-seven of the 38 directors might each become a director of a different New York trust company: and thus 37 trust companies would be interlocked with the National Bank of Commerce, unless the other recommendation of the Pujo Committee limiting the number of directors to 13 were also adopted.

But even if the bill were amended so as to limit the possible interlocking of a bank to a single trust company, the wisdom of the concession would still be doubtful. It is true, as the Pujo Committee states, that "the business that may be transacted by" a trust company is of "a different character" from that properly transacted by a national bank. But the business actually conducted by a trust company is, at least in the East, quite similar; and the two classes of banking institutions have these vital elements in common: each is a bank of deposit, and each makes loans from its deposits. A private banker may also transact some business of a character different from that properly conducted by a bank; but by the terms of the Committee's bill a private banker engaged in the business of receiving deposits would be prevented from being a director of a national bank; and the reasons underlying that prohibition apply equally to trust companies and to private bankers.

3. Other Corporations. The interlocking of banking institutions is only one of the factors which have developed the Money Trust. The interlocking of other corporations has been an equally important element. And the prohibition of interlocking directorates should be extended to potentially competing corporations whatever the class; to life insurance companies, railroads and industrial companies, as well as banking institutions. The Pujo Committee has shown that Mr. George F. Baker is a common director in the six railroads which haul 80 per cent. of all anthracite marketed and own 88 per cent. of all anthracite deposits. The Morgan associates are the nexus between such supposedly competing railroads as the Northern Pacific and the Great Northern; the Southern, the Louisville & Nashville and the Atlantic Coast Line, and between partially competing industrials like the Westinghouse Electric and Manufacturing Company and the General Electric. The nexus between all the large potentially competing corporations must be severed, if the Money Trust is to be broken.

PROHIBITING CORPORATE CONTRACTS IN WHICH THE MANAGEMENT HAS A PRIVATE INTEREST

The principle of prohibiting corporate contracts in which the management has a private interest is applied, in the Pujo Committee's recommendations, only to national banks, and in them only to officers. All other corporations are to be permitted to continue the practice; and even in national banks the directors are to be free to have a conflicting private interest, except that they must not accept compensation for promoting a loan of bank funds nor participate in syndicates, promotions or underwriting of securities in which their banks may be interested as underwriters or owners or lenders thereon: that all loans or other transactions in which a director is interested shall be made in his own name; and shall be authorized only after ample notice to co-directors; and that the facts shall be spread upon the records of the corporation.

The Money Trust would not be disturbed by a prohibition limited to officers. Under a law of that character, financial control would continue to be exercised by the few without substantial impairment; but the power would be exerted through a somewhat different channel. Bank officers are appointees of the directors; and ordinarily their obedient servants. Individuals who, as bank officers, are now important factors in the financial concentration, would doubtless resign as officers and become merely directors. The loss of official salaries involved could be easily compensated. No member of the firm of J. P. Morgan & Co. is an officer in any one of the thirteen banking institutions with aggregate resources of $1,283,000,000, through which as directors they carry on their vast operations. A prohibition limited to officers would not affect the Morgan operations with these banking institutions. If there were minority representation on bank boards (which the Pujo Committee wisely advocates), such a provision might afford some protection to stockholders through the vigilance of the minority directors preventing the dominant directors using their power to the injury of the minority stockholders. But even then, the provision would not safeguard the public; and the primary purpose of Money Trust legislation is not to prevent directors from injuring stockholders; but to prevent their injuring the public through the intertwined control of the banks. No prohibition limited to officers will materially change this condition.

The prohibition of interlocking directorates, even if applied only to all banks and trust companies, would practically compel the Morgan representatives to resign from the directorates of the thirteen banking institutions with which they are connected, or from the directorates of all the railroads, express, steamship, public utility, manufacturing, and other corporations which do business with those banks and trust companies. Whether they resigned from the one or the other class of corporations, the endless chain would be broken into many pieces. And whether they retired or not, the Morgan power would obviously be greatly lessened: for if they did not retire, their field of operations would be greatly narrowed.

APPLY THE PRIVATE INTEREST PROHIBITION TO ALL KINDS OF CORPORATIONS

The creation of the Money Trust is due quite as much to the encroachment of the investment banker upon railroads, public service, industrial, and life-insurance companies, as to his control of banks and trust companies. Before the Money Trust can be broken, all these relations must be severed. And they cannot be severed unless corporations of each of these several classes are prevented from dealing with their own directors and with corporations in which those directors are interested. For instance: The most potent single source of J. P. Morgan & Co.'s power is the $162,500,000 deposits, including those of 78 interstate railroad, public-service and industrial corporations, which the Morgan firm is free to use as it sees fit. The proposed prohibition, even if applied to all banking institutions, would not affect directly this great source of Morgan power. If, however, the prohibition is made to include railroad, public-service, and industrial corporations, as well as banking institutions, members of J. P. Morgan & Co. will quickly retire from substantially all boards of directors.

APPLY THE PRIVATE INTEREST PROHIBITION TO STOCK HOLDING INTERESTS

The prohibition against one corporation entering into transactions with another corporation in which one of its directors is also interested, should apply even if his interest in the second corporation is merely that of stockholder. A conflict of interests in a director may be just as serious where he is a stockholder only in the second corporation, as if he were also a director.

One of the annoying petty monopolies, concerning which evidence was taken by the Pujo Committee, is the exclusive privilege granted to the American Bank Note Company by the New York Stock Exchange. A recent $60,000,000 issue of New York City bonds was denied listing on the Exchange, because the city refused to submit to an exaction of $55,800 by the American Company for engraving the bonds, when the New York Bank Note Company would do the work equally well for $44,500. As tending to explain this extraordinary monopoly, it was shown that men prominent in the financial world were stockholders in the American Company. Among the largest stockholders was Mr. Morgan, with 6,000 shares. No member of the Morgan firm was a director of the American Company; but there was sufficient influence exerted somehow to give the American Company the stock exchange monopoly.

The Pujo Committee, while failing to recommend that transactions in which a director has a private interest be prohibited, recognizes that a stockholder's interest of more than a certain size may be as potent an instrument of influence as a direct personal interest; for it recommends that:

"Borrowings, directly or indirectly by … any corporation of the stock of which he (a bank director) holds upwards of 10 per cent. from the bank of which he is such director, should only be permitted, on condition that notice shall have been given to his co-directors and that a full statement of the transaction shall be entered upon the minutes of the meeting at which such loan was authorized."

As shown above, the particular provision for notice affords no protection to the public; but if it did, its application ought to be extended to lesser stock holdings. Indeed it is difficult to fix a limit so low that financial interest will not influence action. Certainly a stock holding interest of a single director, much smaller than 10 per cent., might be most effective in inducing favors. Mr. Morgan’s stock holdings in the American Bank Note Company was only three per cent. The $6,000,000 investment of J. P. Morgan & Co. in the National City Bank represented only 6 per cent. of the bank's stock; and would undoubtedly have been effective, even if it had not been supplemented by the election of his son to the board of directors.

SPECIAL DISQUALIFICATIONS

The Stanley Committee, after investigation of the Steel Trust, concluded that the evils of interlocking directorates were so serious that representatives of certain industries which are largely dependent upon railroads should be absolutely prohibited from serving as railroad directors, officers or employees. It, therefore, proposed to disqualify as railroad director, officer or employee any person engaged in the business of manufacturing or selling railroad cars or locomotives, railroad rail or structural steel, or in mining and selling coal. The drastic Stanley bill, shows how great is the desire to do away with present abuses and to lessen the power of the Money Trust.

Directors, officers, and employees of banking institutions should, by a similar provision, be disqualified from acting as directors, officers or employees of life-insurance companies. The Armstrong investigation showed that life-insurance companies were in 1905 the most potent factor in financial concentration. Their power was exercised largely through the banks and trust companies which they controlled by stock ownership and their huge deposits. The Armstrong legislation directed life-insurance companies to sell their stocks. The Mutual Life and the Equitable did so in part. But the Morgan associates bought the stocks. And now, instead of the life-insurance companies controlling the banks and trust companies, the latter and the bankers control the life-insurance companies.

HOW THE PROHIBITION MAY BE LIMITED

The Money Trust cannot be destroyed unless all classes of corporations are included in the prohibition of interlocking directors and of transactions by corporations in which the management has a private interest. But it does not follow that the prohibition must apply to every corporation of each class. Certain exceptions are entirely consistent with merely protecting the public against the Money Trust; although protection of minority stockholders and business ethics demand that the rule prohibiting a corporation from making contracts in which a director has a private financial interest should be universal in its application. The number of corporations in the United States Dec. 31, 1912, was 305,336. Of these only 1610 have a capital of more than $5,000,000. Few corporations (other than banks) with a capital of less than $5,000,000 could appreciably affect general credit conditions either through their own operations or their affiliations. Corporations (other than banks) with capital resources of less than $5,000,000 might, therefore, be excluded from the scope of the statute for the present. The prohibition could also be limited so as not to apply to any industrial concern, regardless of the amount of capital and resources, doing only an intrastate business; as practically all large industrial corporations are engaged in interstate commerce. This would exclude some retail concerns and local jobbers and manufacturers not otherwise excluded from the operation of the act. Likewise banks and trust companies located in cities of less than 100,000 inhabitants might, if thought advisable, be excluded, for the present if their capital is less than $500,000, and their resources less than, say, $2,500,000. In larger cities even the smaller banking institutions should be subject to the law. Such exceptions should overcome any objection which might be raised that in some smaller cities, the prohibition of interlocking directorates would exclude from the bank directorates all the able business men of the community through fear of losing the opportunity of bank accommodations.

An exception should also be made, so as to permit interlocking directorates between a corporation and its proper subsidiaries. And the prohibition of transactions in which the management has a private interest should, of course, not apply to contracts, express or implied, for such services as are performed indiscriminately for the whole community by railroads and public service corporations, or for services, common to all customers, like the ordinary service of a bank for its depositors.

THE POWER OF CONGRESS

The question may be asked: Has Congress the power to impose these limitations upon the conduct of any business other than national banks? And if the power of Congress is so limited, will not the dominant financiers, upon the enactment of such a law, convert their national banks into state banks or trust companies, and thus escape from congressional control?

The answer to both questions is clear. Congress has ample power to impose such prohibitions upon practically all corporations, including state banks, trust companies and life insurance companies; and evasion may be made impossible. While Congress has not been granted power to regulate directly state banks, and trust or life insurance companies, or railroad, public-service and industrial corporations, except in respect to interstate commerce, it may do so indirectly by virtue either of its control of the mail privilege or through the taxing power.

Practically no business in the United States can be conducted without use of the mails; and Congress may in its reasonable discretion deny the use of the mail to any business which is conducted under conditions deemed by Congress to be injurious to the public welfare. Thus, Congress has no power directly to suppress lotteries; but it has indirectly suppressed them by denying, under heavy penalty, the use of the mail to lottery enterprises. Congress has no power to suppress directly business frauds; but it is constantly doing so indirectly by issuing fraud-orders denying the mail privilege. Congress has no direct power to require a newspaper to publish a list of its proprietors and the amount of its circulation, or to require it to mark paid-matter distinctly as advertising: But it has thus regulated the press, by denying the second-class mail privilege, to all publications which fail to comply with the requirements prescribed.

The taxing power has been restored to by Congress for like purposes: Congress has no power to regulate the manufacture of matches, or the use of oleomargarine; but it has suppressed the manufacture of the "white phosphorous" match and has greatly lessened the use of oleomargarine by imposing heavy taxes upon them. Congress has no power to prohibit, or to regulate directly the issue of bank notes by state banks, but it indirectly prohibited their issue by imposing a tax of ten per cent. upon any bank note issued by a state bank.

The power of Congress over interstate commerce has been similarly utilized. Congress cannot ordinarily provide compensation for accidents to employees or undertake directly to suppress prostitution; but it has, as an incident of regulating interstate commerce, enacted the Railroad Employers' Liability law and the White Slave Law; and it has full power over the instrumentalities of commerce, like the telegraph and the telephone.

As such exercise of congressional power has been common for, at least, half a century, Congress should not hesitate now to employ it where its exercise is urgently needed. For a comprehensive prohibition of interlocking directorates is an essential condition of our attaining the New Freedom. Such a law would involve a great change in the relation of the leading banks and bankers to other businesses. But it is the very purpose of Money Trust legislation to effect a great change; and unless it does so, the power of our financial oligarchy cannot be broken.

But though the enactment of such a law is essential to the emancipation of business, it will not alone restore industrial liberty. It must be supplemented by other remedial measures.

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