Other people's money, and how the bankers use it 1914
CHAPTER 2 - HOW THE COMBINERS COMBINE

- By Justice Louis Brandeis

Among the allies, two New York banks—the National City and the First National—stand preeminent. They constitute, with the Morgan firm, the inner group of the Money Trust. Each of the two banks, like J. P. Morgan & Co., has huge resources. Each of the two banks, like the firm of J. P. Morgan & Co., has been dominated by a genius in combination. In the Na­tional City it is James Stillman; in the First National, George F. Baker. Each of these gentlemen was for­merly President, and is now Chairman of the Board of Directors. The resources of the National City Bank (including its Siamese-twin security company) are about $300,000,000; those of the First National Bank (including its Siamese-twin security company) are about $200,000,000. The resources of the Morgan firm have not been disclosed. But it appears that they have available for their operations, also, huge deposits from their subjects; deposits reported as $162,500,000.

The private fortunes of the chief actors in the combination have not been ascertained. But sporadic evidence indicates how great are the possibilities of accumulation when one has the use of "other people's money." Mr. Morgan's wealth became proverbial. Of Mr. Stillman's many investments, only one was specifically referred to, as he was in Europe during the investigation, and did not testify. But that one is significant. His 47,498 shares in the National City Bank are worth about $18,000,000. Mr. Jacob H. Schiff aptly described this as "a very nice investment."

Of Mr. Baker's investments we know more, as he testified on many subjects. His 20,000 shares in the First National Bank are worth at least $20,000,000. His stocks in six other New York banks and trust companies are together worth about $3,000,000. The scale of his investment in railroads may be inferred from his former holdings in the Central Railroad of New Jersey. He was its largest stockholder—so large that with a few friends he held a majority of the $27,436,800 par value of outstanding stock, which the Reading bought at $160 a share. He is a director in 28 other railroad companies; and presumably a stock­holder in, at least, as many. The full extent of his fortune was not inquired into, for that was not an issue in the investigation. But it is not surprising that Mr. Baker saw little need of new laws. When asked:

"You think everything is all right as it is in this world, do you not?"

He answered, "Pretty nearly."

RAMIFICATIONS OF POWER

But wealth expressed in figures gives a wholly inadequate picture of the allies' power. Their wealth is dynamic. It is wielded by geniuses in combination. It finds its proper expression in means of control. To comprehend the power of the allies we must try to visualize the ramifications through which the forces operate.

Mr. Baker is a director in 22 corporations having, with their many subsidiaries, aggregate resources or capitalization of $7,272,000,000. But the direct and visible power of the First National Bank, which Mr. Baker dominates, extends further. The Pujo report shows that its directors (including Mr. Baker's son) are directors in at least 27 other corporations with resources of $4,270,000,000. That is, the First National is represented in 49 corporations, with aggregate resources or capitalization of $11,542,000,000.

It may help to an appreciation of the allies’ power to name a few of the more prominent corporations in which, for instance, Mr. Baker's influence is exerted—visibly and directly—as voting trustee, executive com­mittee man or simple director.

1. Banks, Trust, and Life Insurance Companies: First National Bank of New York; National Bank of Commerce; Farmers' Loan and Trust Company; Mutual Life Insurance Company.

2. Railroad Companies: New York Central Lines; New Haven, Reading, Erie, Lackawanna, Lehigh Valley, Southern, Northern Pacific, Chicago, Burlington & Quincy.

3. Public Service Corporations: American Telegraph & Telephone Company, Adams Express Company.

4. Industrial Corporations: United States Steel Corporation, Pullman Company.

Mr. Stillman is a director in only 7 corporations, with aggregate assets of $2,476,000,000; but the directors in the National City Bank, which he dominates, are directors in at least 41 other corporations which, with their subsidiaries, have an aggregate capitalization or resources of $10,564,000,000. The members of the firm of J. P, Morgan & Co., the acknowledged leader of the allied forces, hold 72 directorships in 47 of the largest corporations of the country.

The Pujo Committee finds that the members of J. P. Morgan & Co. and the directors of their controlled trust companies and of the First National and the National City Bank together hold:

"One hundred and eighteen directorships in 34 banks and trust companies having total resources of $2,679,000,000 and total deposits of $1,983,000,000.

"Thirty directorships in 10 insurance companies having total assets of $2,293,000,000.

"One hundred and five directorships in 32 transportation systems having a total capitalization of $11,784,000,000 and a total mileage (excluding express companies and steamship lines) of 150,200.

"Sixty-three directorships in 24 producing and trading corporations having a total capitalization of $3,339,000,000.

"Twenty-five directorships in 12 public-utility corporations having a total capitalization of $2,150,000,000.

"In all, 341 directorships in 112 corporations having aggregate resources or capitalization of $22,245,000,000"

TWENTY-TWO BILLION DOLLARS

Twenty-two billion dollars is a large sum—so large that we have difficulty in grasping its significance. The mind realizes size only through comparisons. With what can we compare twenty-two billions of dollars? Twenty-two billions of dollars is more than three times the assessed value of all the property, real and personal, in all New England. It is nearly three times the assessed value of all the real estate in the City of New York. It is more than twice the assessed value of all the property in the thirteen Southern states. It is more than the assessed value of all the property in the twenty-two states, north and south, lying west of the Mississippi River.

But the huge sum of twenty-two billion dollars is not large enough to include all the corporations to which the "influence" of the three allies, directly and visibly, extends, for

First: There are 56 other corporations (not included in the Pujo schedule) each with capital or resources of over $5,000,000, and aggregating nearly $1,350,000,000, in which the Morgan allies are represented accord­ing to the directories of directors.

Second: The Pujo schedule does not include any corporation with resources of less than $5,000,000. But these financial giants have shown their humility by becoming directors in many such. For instance, members of J. P. Morgan & Co., and directors in the National City Bank and the First National Bank are also directors in 158 such corporations. Available publications disclose the capitalization of only 38 of these, but those 38 aggregate $78,669,375.

Third: The Pujo schedule includes only the corporations in which the Morgan associates actually appear by name as directors. It does not include those in which they are represented by dummies, or otherwise. For instance, the Morgan influence certainly extends to the Kansas City Terminal Railway Company, for which they have marketed since 1910 (in connection with others) four issues aggregating $41,761,000. But no member of J. P. Morgan & Co., of the National City Bank, or of the First National Bank appears on the Kansas City Terminal directorate.

Fourth: The Pujo schedule does not include all the subsidiaries of the corporations scheduled. For instance, the capitalization of the New Haven System is given as $385,000,000. That sum represents the bond and stock capital of the New Haven Railroad. But the New Haven System comprises many controlled corporations whose capitalization is only to a slight extent included directly or indirectly in the New Haven Railroad balance sheet. The New Haven, like most large corporations, is a holding company also; and a holding company may control subsidiaries while owning but a small part of the latters' outstanding securities. Only the small part so held will be represented in the holding company's balance sheet. Thus, while the New Haven Railroad's capitalization is only $385,000,000—and that sum only appears in the Pujo schedule—the capitalization of the New Haven System, as shown by a chart submitted to the Committee, is over twice as great; namely, $849,000,000.

It is clear, therefore, that the $22,000,000,000, referred to by the Pujo Committee, understates the extent of concentration effected by the inner group of the Money Trust.

CEMENTING THE TRIPLE ALLIANCE

Care was taken by these builders of imperial power that their structure should be enduring. It has been buttressed on every side by joint ownerships and mutual stock holdings, as well as by close personal re­lationships; for directorships are ephemeral and may end with a new election. Mr. Morgan and his partners acquired one-sixth of the stock of the First National Bank, and made a $6,000,000 investment in the stock of the National City Bank. Then J. P. Morgan & Co., the National City, and the First National (or their dominant officers—Mr. Stillman and Mr. Baker) acquired together, by stock purchases and voting trusts, control of the National Bank of Commerce, with its $190,000,000 of resources; of the Chase National, with $125,000,000; of the Guaranty Trust Company, with $232,000,000; of the Bankers' Trust Company, with $205,000,000; and of a number of smaller, but important, financial institutions. They became joint voting trustees in great railroad systems; and finally (as if the allies were united into a single concern) loyal and efficient service in the banks—like that rendered by Mr. Davison and Mr. Lamont in the First National—was rewarded by promotion to membership in the firm of J. P. Morgan & Co.

THE PROVINCIAL ALLIES

Thus equipped and bound together, J. P. Morgan & Co., the National City and the First National easily dominated America's financial center, New York; for certain other important bankers, to be hereafter men­tioned, were held in restraint by "gentleman's" agreements. The three allies dominated Philadelphia too; for the firm of Drexel & Co. is J. P. Morgan & Co. under another name. But there are two other important money centers in America, Boston and Chicago.

In Boston there are two large international banking houses—Lee, Higginson & Co., and Kidder, Peabody & Co.—both long established and rich; and each possessing an extensive, wealthy clientele of eager investors in bonds and stocks. Since 1907 each of these firms has purchased or underwritten (principally in conjunction with other bankers) about 100 different security issues of the greater interstate corporations, the issues of each banker amounting in the aggregate to over $1,000,000,000. Concentration of banking capital has proceeded even further in Boston than in New York. By successive consolidations the number of national banks has been reduced from 58 in 1898 to 19 in 1913. There are in Boston now also 23 trust companies.

The National Shawmut Bank, the First National Bank of Boston and the Old Colony Trust Co., which these two Boston banking houses and their associates control, alone have aggregate resources of $288,386,294, constituting about one-half of the banking resources of the city. These great banking institutions, which are themselves the result of many consolidations, and the 21 other banks and trust companies, in which their directors are also directors, hold together 90 per cent. of the total banking resources of Boston. And linked to them by interlocking directorates are 9 other banks and trust companies whose aggregate resources are about 2 1/2 per cent. of Boston's total, Thus of 42 banking institutions, 33, with aggregate resources of $560,516,239, holding about 92 1/2 per cent. of the aggregate banking resources of Boston, are interlocked. But even the remaining 9 banks and trust companies, which together hold but 7 1/2 per cent. of Boston banking resources, are not all independent of one another. Three are linked together; so that there appear to be only six banks in all Boston that are free from interlocking directorate relations. They together represent but 5 per cent. of Boston’s banking resources. And it may well be doubted whether all of even those 6 are entirely free from affiliation with the other groups.

Boston's banking concentration is not limited to the legal confines of the city. Around Boston proper are over thirty suburbs, which with it form what is popularly known as "Greater Boston." These suburban municipalities, and also other important cities like Worcester and Springfield, are, in many respects, within Boston's "sphere of influence." Boston's inner banking group has interlocked, not only 33 of the 42 banks of Boston proper, as above shown, but has linked with them, by interlocking directorships, at least 42 other banks and trust companies in 35 other municipalities.

Once Lee, Higginson & Co. and Kidder, Peabody & Co. were active competitors. They are so still in some small, or purely local matters; but both are devoted co­operators with the Morgan associates in larger and interstate transactions; and the alliance with these great Boston banking houses has been cemented by mutual stockholdings and co-directorships. Financial concentration seems to have found its highest expression in Boston.

Somewhat similar relations exist between the triple alliance and Chicago’s great financial institutions—its First National Bank, the Illinois Trust and Savings Bank, and the Continental & Commercial National Bank—which together control resources of $561,000,000. And similar relations would doubtless be found to exist with the leading bankers of the other important financial centers of America, as to which the Pujo Committee was prevented by lack of time from making investigation.

THE AUXILIARIES

Such are the primary, such the secondary powers which comprise the Money Trust; but these are supplemented by forces of magnitude.

"Radiating from these principal groups," says the Pujo Committee, "and closely affiliated with them are smaller but important banking houses, such as Kissel, Kinnicut & Co., White, Weld & Co., and Harvey Fisk & Sons, who receive large and lucrative patronage from the dominating groups, and are used by the latter as jobbers or distributors of securities, the issuing of which they control, but which for reasons of their own they prefer not to have issued or distributed under their own names. Lee, Higginson & Co., besides being partners with the inner group, are also frequently utilized in this service because of their facilities as distributors of securities."

For instance, J. P. Morgan & Co. as fiscal agents of the New Haven Railroad had the right to market its securities and that of its subsidiaries. Among the numerous New Haven subsidiaries, is the New York, Westchester and Boston—the road which cost $1,500,000 a mile to build, and which earned a deficit last year of nearly $1,500,000, besides failing to earn any return upon the New Haven's own stock and bond investment of $8,241,951. When the New Haven concluded to market $17,200,000 of these bonds, J. P. Morgan & Co., "for reasons of their own," "preferred not to have these bonds issued or distributed under their own name." The Morgan firm took the bonds at 92 1/2 net; and the bonds were marketed by Kissel, Kinnicut & Co. and others at 96 1/4.

THE SATELLITES

The alliance is still further supplemented as the Pujo Committee shows:

"Beyond these inner groups and sub-groups are banks and bankers throughout the country who co­operate with them in underwriting or guaranteeing the sale of securities offered to the public, and who also act as distributors of such securities. It was impossible to learn the identity of these corporations, owing to the unwillingness of the members of the inner group to disclose the names of their underwriters, but sufficient appears to justify the statement that there are at least hundreds of them and that they extend into many of the cities throughout this and foreign countries.

"The patronage thus proceeding from the inner group and its sub-groups is of great value to these banks and bankers, who are thus tied by self-interest to the great issuing houses and may be regarded as a part of this vast financial organization. Such patronage yields no inconsiderable part of the income of these banks and bankers and without much risk on account of the facilities of the principal groups for placing issues of securities through their domination of great banks and trust companies and their other domestic affiliations and their foreign connections. The under­writing commissions on issues made by this inner group are usually easily earned and do not ordinarily involve the underwriters in the purchase of the underwritten securities. Their interest in the transaction is generally adjusted unless they choose to purchase part of the securities, by the payment to them of a commission. There are, however, occasions on which this is not the case. The underwriters are then required to take the securities. Bankers and brokers are so anxious to be permitted to participate in these transactions under the lead of the inner group that as a rule they join when invited to do so, regardless of their approval of the particular business, lest by refusing they should thereafter cease to be invited."

In other words, an invitation from these royal bankers is interpreted as a command. As a result, these great bankers frequently get huge commissions without themselves distributing any of the bonds, or ever having taken any actual risk.

"In the case of the New York subway financing of $170,000,000 of bonds by Messrs. Morgan & Co. and their associates, Mr. Davison [as the Pujo Committee reports] estimated that there were from 100 to 125 such underwriters who were apparently glad to agree that Messrs. Morgan & Co., the First National Bank, and the National City Bank should receive 3 per cent.,—equal to $5,100,000—for forming this syndicate, thus relieving themselves from all liability, whilst the under­writers assumed the risk of what the bonds would realize and of being required to take their share of the unsold portion."

THE PROTECTION OF PSEUDO-ETHICS

The organization of the Money Trust is intensive, the combination comprehensive; but one other element was recognized as necessary to render it stable, and to make its dynamic force irresistible. Despotism, be it financial or political, is vulnerable, unless it is believed to rest upon a moral sanction. The longing for freedom is ineradicable. It will express itself in protest against servitude and inaction unless the striving for freedom be made to seem immoral. Long ago monarchs invented, as a preservative of absolutism, the fiction of "The divine right of kings." Bankers, imitating royalty, invented recently that precious rule of so-called "Ethics," by which it is declared unprofessional to come to the financial relief of any corporation which is already the prey of another "reputable" banker.

"The possibility of competition between these banking houses in the purchase of securities," says the Pujo Committee, "is further removed by the understanding between them and others, that one will not seek, by offering better terms, to take away from another, a customer which it has theretofore served, and by corollary of this, namely, that where given bankers have once satisfactorily united in bringing out an issue of a corporation, they shall also join in bringing out any subsequent issue of the same corporations. This is described as a principle of banking ethics."

The "Ethical" basis of the rule must be that the interests of the combined bankers are superior to the interests of the rest of the community. Their attitude reminds one of the "spheres of influence" with ample "hinterlands" by which rapacious nations are adjusting differences. Important banking concerns, too ambitious to be willing to take a subordinate position in the alliance, and too powerful to be suppressed, are accorded a financial "sphere of influence" upon the understanding that the rule of banking ethics will be faithfully observed. Most prominent among such lesser potentates are Kuhn, Loeb & Co., of New York, an international banking house of great wealth, with large clientele and connections. They are accorded an important "sphere of influence" in American railroading, including among other systems the Baltimore & Ohio, the Union Pacific and the Southern Pacific. They and the Morgan group have with few exceptions preempted the banking business of the important railroads of the country. But even Kuhn, Loeb & Co. are not wholly independent. The Pujo Committee reports that they are "qualified allies of the inner group"; and through their "close relations with the National City Bank and the National Bank of Commerce and other financial institutions" have "many interests in common with the Morgan associates, conducting large joint-account operations with them."

THE EVILS RESULTANT

First: These banker-barons levy, through their excessive exactions, a heavy toll upon the whole community; upon owners of money for leave to invest it; upon railroads, public service and industrial companies, for leave to use this money of other people; and, through these corporations, upon consumers.

"The charge of capital," says the Pujo Committee, "which of course enters universally into the price of commodities and of service, is thus in effect determined by agreement amongst those supplying it and not under the check of competition. If there be any virtue in the principle of competition, certainly any plan or arrangement which prevents its operation in the performance of so fundamental a commercial function as the supplying of capital is peculiarly injurious."

Second: More serious, however, is the effect of the Money Trust in directly suppressing competition. That suppression enables the monopolist to extort excessive profits; but monopoly increases the burden of the consumer even more in other ways. Monopoly arrests development; and through arresting development, prevents that lessening of the cost of production and of distribution which would otherwise take place.

Can full competition exist among the anthracite coal railroads when the Morgan associates are potent in all of them? And with like conditions prevailing, what competition is to be expected between the Northern Pacific and the Great Northern, the Southern, the Louisville and Nashville, and the Atlantic Coast Line; or between the Westinghouse Manufacturing Company and the General Electric Company? As the Pujo Committee finds:

"Such affiliations tend as a cover and conduit for secret arrangements and understandings in restriction of competition through the agency of the banking house thus situated."

And under existing conditions of combination, relief through other banking houses is precluded.

"It can hardly be expected that the banks, trust companies, and other institutions that are thus seeking participation from this inner group would be likely to engage in business of a character that would be dis­pleasing to the latter or would interfere with their plans or prestige. And so the protection that can be afforded by the members of the inner group constitutes the safest refuge of our great industrial combinations against future competition. The powerful grip of these gentlemen is upon the throttle that controls the wheels of credit, and upon their signal those wheels will turn or stop."

Third: But far more serious even than the suppression of competition is the suppression of industrial liberty, indeed of manhood itself, which this overweening financial power entails. The intimidation which it effects extends far beyond "the banks, trust companies, and other institutions seeking participation from this inner group in their lucrative underwritings"; and far beyond those interested in the great corporations directly dependent upon the inner group. Its blighting and benumbing effect extends as well to the small and seemingly independent business man, to the vast army of professional men and others directly dependent upon "Big Business," and to many another; for

1. Nearly every enterprising business man needs bank credit. The granting of credit involves the exercise of judgment of the bank officials; and however honestly the bank officials may wish to exercise their discretion, experience shows that their judgment is warped by the existence of the all-pervading power of the Money Trust. He who openly opposes the great interests will often be found to lack that quality of "safe and sane"-ness which is the basis of financial credit.

2. Nearly every enterprising business man and a large part of our professional men have something to sell to, or must buy something from, the great cor­porations to which the control or influence of the money lords extends directly, or from or to affiliated interests. Sometimes it is merchandise; sometimes it is service; sometimes they have nothing either to buy or to sell, but desire political or social advancement. Sometimes they want merely peace. Experience shows that "it is not healthy to buck against a locomotive," and "Business is business."

Here and there you will find a hero,—red-blooded, and courageous,—loving manhood more than wealth, place or security,—who dared to fight for independence and won. Here and there you may find the martyr, who resisted in silence and suffered with resignation. But America, which seeks "the greatest good of the greatest number," cannot be content with conditions that fit only the hero, the martyr or the slave.

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Other people's money, and how the bankers use it 1914
CHAPTER 1 - OUR FINANCIAL OLIGARCHY

- By Justice Louis Brandeis

President Wilson, when Governor, declared in 1911: "The great monopoly in this country is the money monopoly. So long as that exists, our old variety and freedom and individual energy of development are out of the question. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men, who, even if their actions be honest and intended for the public interest, are necessarily concentrated upon the great undertakings in which their own money is involved and who, necessarily, by every reason of their own limitations, chill and check and destroy genuine economic freedom. This is the greatest question of all; and to this, statesmen must address themselves with an earnest determination to serve the long future and the true liberties of men."

The Pujo Committee--appointed in 1912--found:

"Far more dangerous than all that has happened to us in the past in the way of elimination of competition in industry is the control of credit through the domination of these groups over our banks and industries."...

"Whether under a different currency system the resources in our banks would be greater or less is comparatively immaterial if they continue to be controlled by a small group."...

"It is impossible that there should be competition with all the facilities for raising money or selling large issues of bonds in the hands of these few bankers and their partners and allies, who together dominate the financial policies of most of the existing systems. . . . The acts of this inner group, as here described, have nevertheless been more destructive of competition than anything accomplished by the trusts, for they strike at the very vitals of potential competition in every industry that is under their protection, a condition which if permitted to continue, will render impossible all attempts to restore normal competitive conditions in the industrial world. . . .

"If the arteries of credit now clogged well-nigh to choking by the obstructions created through the control of these groups are opened so that they may be permitted freely to play their important part in the financial system, competition in large enterprises will become possible and business can be conducted on its merits instead of being subject to the tribute and the good will of this handful of self-constituted trustees of the national prosperity."

The promise of New Freedom was joyously proclaimed in 1913.

The facts which the Pujo Investigating Committee and its able Counsel, Mr. Samuel Untermyer, have laid before the country, show clearly the means by which a few men control the business of America. The report proposes measures which promise some relief. Additional remedies will be proposed. Congress will soon be called upon to act.

How shall the emancipation be wrought? On what lines shall we proceed? The facts, when fully understood, will teach us.

THE DOMINANT ELEMENT

The dominant element in our financial oligarchy is the investment banker. Associated banks, trust companies and life insurance companies are his tools. Controlled railroads, public service and industrial corporations are his subjects. Though properly but middlemen, these bankers bestride as masters America's business world, so that practically no large enterprise can be undertaken successfully without their participation or approval. These bankers are, of course, able men possessed of large fortunes; but the most potent factor in their control of business is not the possession of extraordinary ability or huge wealth. The key to their power is Combination--concentration intensive and comprehensive--advancing on three distinct lines:

First: There is the obvious consolidation of banks and trust companies; the less obvious affiliations--through stock holdings, voting trusts and interlocking directorates--of banking institutions which are not legally connected; and the joint transactions, gentleman's agreements, and "banking ethics" which eliminate competition among the investment bankers.

Second: There is the consolidation of railroads into huge systems, the large combinations of public service corporations and the formation of industrial trusts, which, by making businesses so "big" that local, independent banking concerns cannot alone supply the necessary funds, has created dependence upon the associated New York bankers.

But combination, however intensive, along these lines only, could not have produced the Money Trust--another and more potent factor of combination was added.

Third: Investment bankers, like J. P. Morgan & Co., dealers in bonds, stocks and notes, encroached upon the functions of the three other classes of corporations with which their business brought them into contact. They became the directing power in railroads, public service and industrial companies through which our great business operations are conducted-the makers of bonds and stocks. They became the directing power in the life insurance companies, and other corporate reservoirs of the people's savings-the buyers of bonds and stocks. They became the directing power also in banks and trust companies-the depositaries of the quick capital of the country-the life blood of business, with which they and others carried on their operations. Thus four distinct functions, each essential to business, and each exercised, originally, by a distinct set of men, became united in the investment banker. It is to this union of business functions that the existence of the Money Trust is mainly due.*

The development of our financial oligarchy followed, in this respect, lines with which the history of political despotism has familiarized us:-usurpation, proceeding by gradual encroachment rather than by violent acts; subtle and often long-concealed concentration of distinct functions, which are beneficent when separately administered, and dangerous only when combined in the same persons. It was by processes such as these that Caesar Augustus became master of Rome. The makers of our own Constitution had in mind like dangers to our political liberty when they provided so carefully for the separation of governmental powers.

* Obviously only a few of the investment bankers exercise this great power; but many others perform important functions in the system, as hereinafter described.

THE PROPER SPHERE OF THE INVESTMENT BANKER

The original function of the investment banker was that of dealer in bonds, stocks and notes; buying mainly at wholesale from corporations, municipalities, states and governments which need money, and selling to those seeking investments. The banker performs, in this respect, the function of a merchant; and the function is a very useful one. Large business enterprises are conducted generally by corporations. The permanent capital of corporations is represented by bonds and stocks. The bonds and stocks of the more important corporations are owned, in large part, by small investors, who do not participate in the management of the company. Corporations require the aid of a banker-middleman, for they lack generally the reputation and clientele essential to selling their own bonds and stocks direct to the investor. Investors in corporate securities, also, require the services of a banker-middleman. The number of securities upon the market is very large. Only a part of these securities is listed on the New York Stock Exchange; but its listings alone comprise about sixteen hundred different issues aggregating about $26,500,000,000, and each year new listings are made averaging about two hundred and thirty-three to an amount of $1,500,000,000. For a small investor to make an intelligent selection from these many corporate securities--indeed, to pass an intelligent judgment upon a single one--is ordinarily impossible. He lacks the ability, the facilities, the training and the time essential to a proper investigation. Unless his purchase is to be little better than a gamble, he needs the advice of an expert, who, combining special knowledge with judgment, has the facilities and incentive to make a thorough investigation. This dependence, both of corporations and of investors, upon the banker has grown in recent years, since women and others who do not participate in the management, have become the owners of so large a part of the stocks and bonds of our great corporations. Over half of the stockholders of the American Sugar Refining Company and nearly half of the stockholders of the Pennsylvania Railroad and of the New York, New Haven & Hartford Railroad are women.

Good-will--the possession by a dealer of numerous and valuable regular customers--is always an important element in merchandising. But in the business of selling bonds and stocks, it is of exceptional value, for the very reason that the small investor relies so largely upon the banker's judgment. This confidential relation of the banker to customers--and the knowledge of the customers' private affairs acquired incidentally--is often a determining factor in the marketing of securities. With the advent of Big Business such good-will possessed by the older banking houses, preeminently J. P. Morgan & Co. and their Philadelphia House called Drexel & Co., by Lee, Higginson & Co. and Kidder, Peabody, & Co. of Boston, and by Kuhn, Loeb & Co. of New York, became of enhanced importance. The volume of new security issues was greatly increased by huge railroad consolidations, the development of the holding companies, and particularly by the formation of industrial trusts. The rapidly accumulating savings of our people sought investment. The field of operations for the dealer in securities was thus much enlarged. And, as the securities were new and untried, the services of the investment banker were in great demand, and his powers and profits increased accordingly.

CONTROLLING THE SECURITY MAKERS

But this enlargement of their legitimate field of operations did not satisfy investment bankers. They were not content merely to deal in securities. They desired to manufacture them also. They became promoters, or allied themselves with promoters. Thus it was that J. P. Morgan & Company formed the Steel Trust, the Harvester Trust and the Shipping Trust. And, adding the duties of undertaker to those of midwife, the investment bankers became, in times of corporate disaster, members of security-holders' "Protective Committees"; then they participated as "Reorganization Managers" in the reincarnation of the unsuccessful corporations and ultimately became directors. It was in this way that the Morgan associates acquired their hold upon the Southern Railway, the Northern Pacific, the Reading, the Erie, the Père Marquette, the Chicago and Great Western, and the Cincinnati, Hamilton & Dayton. Often they insured the continuance of such control by the device of the voting trust; but even where no voting trust was created, a secure hold was acquired upon reorganization. It was in this way also that Kuhn, Loeb & Co. became potent in the Union Pacific and in the Baltimore & Ohio.

But the banker's participation in the management of corporations was not limited to cases of promotion or reorganization. An urgent or extensive need of new money was considered a sufficient reason for the banker's entering a board of directors. Often without even such excuse the investment banker has secured a place upon the Board of Directors, through his powerful influence or the control of his customers' proxies. Such seems to have been the fatal entrance of Mr. Morgan into the management of the then prosperous New York, New Haven & Hartford Railroad, in 1892. When once a banker has entered the Board--whatever may have been the occasion--his grip proves tenacious and his influence usually supreme; for he controls the supply of new money.

The investment banker is naturally on the lookout for good bargains in bonds and stocks. Like other merchants he wants to buy his merchandise cheap. But when he becomes director of a corporation, he occupies a position which prevents the transaction by which he acquires its corporate securities from being properly called a bargain. Can there be real bargaining where the same man is on both sides of a trade? The investment banker, through his controlling influence on the Board of Directors, decides that the corporation shall issue and sell the securities, decides the price at which it shall sell them, and decides that it shall sell the securities to himself. The fact that there are other directors besides the banker on the Board does not, in practice, prevent this being the result. The banker, who holds the purse-strings, becomes usually the dominant spirit. Through voting-trusteeships, exclusive financial agencies, membership on executive or finance committees, or by mere directorships, J. P. Morgan & Co., and their associates, held such financial power in at least thirty-two transportation systems, public utility corporations and industrial companies--companies with an aggregate capitalization of $17,273,000,000. Mainly for corporations so controlled, J. P. Morgan & Co. procured the public marketing in ten years of security issues aggregating $1,950,000,000. This huge sum does not include any issues marketed privately, nor any issues, however marketed, of intra-state corporations. Kuhn, Loeb & Co. and a few other investment bankers exercise similar control over many other corporations.

CONTROLLING SECURITY BUYERS

Such control of railroads, public service and industrial corporations assures to the investment bankers an ample supply of securities at attractive prices; and merchandise well bought is half sold. But these bond and stock merchants are not disposed to take even a slight risk as to their ability to market their goods. They saw that if they could control the security buyers, as well as the security-makers, investment banking would, indeed, be "a happy hunting ground"; and they have made it so.

The numerous small investors cannot, in the strict sense, be controlled; but their dependence upon the banker insures their being duly influenced. A large part, however, of all bonds issued and of many stocks are bought by the prominent corporate investors; and most prominent among these are the life insurance companies, the trust companies, and the banks. The purchase of a security by these institutions not only relieves the banker of the merchandise, but recommends it strongly to the small investor, who believes that these institutions are wisely managed. These controlled corporate investors are not only large customers, but may be particularly accommodating ones. Individual investors are moody. They buy only when they want to do so. They are sometimes inconveniently reluctant. Corporate investors, if controlled, may be made to buy when the bankers need a market. It was natural that the investment bankers proceeded to get control of the great life insurance companies, as well as of the trust companies and the banks.

The field thus occupied is uncommonly rich. The life insurance companies are our leading institutions for savings. Their huge surplus and reserves, augmented daily, are always clamoring for investment. No panic or money shortage stops the inflow of new money from the perennial stream of premiums on existing policies and interest on existing investments. The three great companies-the New York Life, the Mutual of New York, and the Equitable-would have over $55,000,000 of new money to invest annually, even if they did not issue a single new policy. In 1904--just before the Armstrong investigation--these three companies had together $1,247,331,738.18 of assets. They had issued in that year $1,025,671,126 of new policies. The New York legislature placed in 1906 certain restrictions upon their growth; so that their new business since has averaged $547,384,212, or only fifty-three per cent. of what it was in 1904. But the aggregate assets of these companies increased in the last eight years to $1,817,052,260.36. At the time of the Armstrong investigation the average age of these three companies was fifty-six years. The growth of assets in the last eight years was about half as large as the total growth in the preceding fifty-six years. These three companies must invest annually about $70,000,000 of new money; and besides, many old investments expire or are changed and the proceeds must be reinvested. A large part of all life insurance surplus and reserves are invested in bonds. The aggregate bond investments of these three companies on January 1, 1913, was $1,019,153,268.93.

It was natural that the investment bankers should seek to control these never-failing reservoirs of capital. George W. Perkins was Vice-President of the New York Life, the largest of the companies. While remaining such he was made a partner in J. P. Morgan Co., and in the four years preceding the Armstrong investigation, his firm sold the New York Life $38,804,918.51 in securities. The New York Life is a mutual company, supposed to be controlled by its policy holders. But as the Pujo Committee finds "the so-called control of life insurance companies by policy-holders through mutualization is a farce" and "its only result is to keep in office a self-constituted, self-perpetuating management."

The Equitable Life Assurance Society is a stock company and is controlled by $100,000 of stock. The dividend on this stock is limited by law to seven per cent.; but in 1910 Mr. Morgan paid about $3,000,000 for $51,000, par value of this stock, or $5,882.35 a share. The dividend return on the stock investment is less than one-eighth of one per cent.; but the assets controlled amount now to over $500,000,000. And certain of these assets had an especial value for investment bankers;-namely, the large holdings of stock in banks and trust companies.

The Armstrong investigation disclosed the extent of financial power exerted through the insurance company holdings of bank and trust company stock. The Committee recommended legislation compelling the insurance companies to dispose of the stock within five years. A law to that effect was enacted, but the time was later extended. The companies then disposed of a part of their bank and trust company stocks; but, as the insurance companies were controlled by the investment bankers, these gentlemen sold the bank and trust company stocks to themselves.

Referring to such purchases from the Mutual Life, as well as from the Equitable, the Pujo Committee found:

"Here, then, were stocks of five important trust companies and one of our largest national banks in New York City that had been held by these two life insurance companies. Within five years all of these stocks, so far as distributed by the insurance companies, have found their way into the hands of the men who virtually controlled or were identified with the management of the insurance companies or of their close allies and associates, to that extent thus further entrenching them."

The banks and trust companies are depositaries, in the main, not of the people's savings, but of the business man's quick capital. Yet, since the investment banker acquired control of banks and trust companies, these institutions also have become, like the life companies, large purchasers of bonds and stocks. Many of our national banks have invested in this manner a large part of all their resources, including capital, surplus and deposits. The bond investments of some banks exceed by far the aggregate of their capital and surplus, and nearly equal their loanable deposits.

CONTROLLING OTHER PEOPLE'S QUICK CAPITAL

The goose that lays golden eggs has been considered a most valuable possession. But even more profitable is the privilege of taking the golden eggs laid by somebody else's goose. The investment bankers and their associates now enjoy that privilege. They control the people through the people's own money. If the bankers' power were commensurate only with their wealth, they would have relatively little influence on American business. Vast fortunes like those of the Astors are no doubt regrettable. They are inconsistent with democracy. They are unsocial. And they seem peculiarly unjust when they represent largely unearned increment. But the wealth of the Astors does not endanger political or industrial liberty. It is insignificant in amount as compared with the aggregate wealth of America, or even of New York City. It lacks significance largely because its owners have only the income from their own wealth. The Astor wealth is static. The wealth of the Morgan associates is dynamic. The power and the growth of power of our financial oligarchs comes from wielding the savings and quick capital of others. In two of the three great life insurance companies the influence of J. P. Morgan & Co. and their associates is exerted without any individual investment by them whatsoever. Even in the Equitable, where Mr. Morgan bought an actual majority of all the outstanding stock, his investment amounts to little more than one-half of one per cent. of the assets of the company. The fetters which bind the people are forged from the people's own gold.

But the reservoir of other people's money, from which the investment bankers now draw their greatest power, is not the life insurance companies, but the banks and the trust companies. Bank deposits represent the really quick capital of the nation. They are the life blood of businesses. Their effective force is much greater than that of an equal amount of wealth permanently invested. The 34 banks and trust companies, which the Pujo Committee declared to be directly controlled by the Morgan associates, held $1,983,000,000 in deposits. Control of these institutions means the ability to lend a large part of these funds, directly and indirectly, to themselves; and what is often even more important, the power to prevent the funds being lent to any rival interests. These huge deposits can, in the discretion of those in control, be used to meet the temporary needs of their subject corporations. When bonds and stocks are issued to finance permanently these corporations, the bank deposits can, in large part, be loaned by the investment bankers in control to themselves and their associates; so that securities bought may be carried by them, until sold to investors. Or these bank deposits may be loaned to allied bankers, or jobbers in securities, or to speculators, to enable them to carry the bonds or stocks. Easy money tends to make securities rise in the market. Tight money nearly always makes them fall. The control by the leading investment bankers over the banks and trust companies is so great, that they can often determine, for a time, the market for money by lending or refusing to lend on the Stock Exchange. In this way, among others, they have power to affect the general trend of prices in bonds and stocks. Their power over a particular security is even greater. Its sale on the market may depend upon whether the security is favored or discriminated against when offered to the banks and trust companies, as collateral for loans.

Furthermore, it is the investment banker's access to other people's money in controlled banks and trust companies which alone enables any individual banking concern to take so large part of the annual output of bonds and stocks. The banker's own capital, however large, would soon be exhausted. And even the loanable funds of the banks would often be exhausted, but for the large deposits made in those banks by the life insurance, railroad, public service, and industrial corporations which the bankers also control. On December 31, 1912, the three leading life insurance companies had deposits in banks and trust companies aggregating $13,839,189.08. As the Pujo Committee finds:

"The men who through their control over the funds of our railroads and industrial companies are able to direct where such funds shall be kept and thus to create these great reservoirs of the people's money, are the ones who are in position to tap those reservoirs for the ventures in which they are interested and to prevent their being tapped for purposes of which they do not approve. The latter is quite as important a factor as the former. It is the controlling consideration in its effect on competition in the railroad and industrial world."

HAVING YOUR CAKE AND EATING IT TOO

But the power of the investment banker over other people's money is often more direct and effective than that exerted through controlled banks and trust companies. J. P. Morgan & Co. achieve the supposedly impossible feat of having their cake and eating it too. They buy the bonds and stocks of controlled railroads and industrial concerns, and pay the purchase price; and still do not part with their money. This is accomplished by the simple device of becoming the bank of deposit of the controlled corporations, instead of having the company deposit in some merely controlled bank in whose operation others have at least some share. When J. P. Morgan & Co. buy an issue of securities the purchase money, instead of being paid over to the corporation, is retained by the banker for the corporation, to be drawn upon only as the funds are needed by the corporation. And as the securities are issued in large blocks, and the money raised is often not all spent until long thereafter, the aggregate of the balances remaining in the bankers' hands are huge. Thus J. P. Morgan & Co. (including their Philadelphia house, called Drexel & Co.) held on November 1, 1912, deposits aggregating $162,491,819.65.

POWER AND PELF

The operations of so comprehensive a system of concentration necessarily developed in the bankers overweening power. And the bankers' power grows by what it feeds on. Power begets wealth; and added wealth opens ever new opportunities for the acquisition of wealth and power. The operations of these bankers are so vast and numerous that even a very reasonable compensation for the service performed by the bankers, would, in the aggregate, produce for them incomes so large as to result in huge accumulations of capital. But the compensation taken by the bankers as commissions or profits is often far from reasonable. Occupying, as they so frequently do, the inconsistent position of being at the same time seller and buyer, the standard for so-called compensation actually applied, is not the "Rule of reason", but "All the traffic will bear." And this is true even where there is no sinister motive. The weakness of human nature prevents men from being good judges of their own deservings.

The syndicate formed by J. P. Morgan & Co. to underwrite the United States Steel Corporation took for its services securities which netted $62,500,000 in cash. Of this huge sum J. P. Morgan & Co. received, as syndicate managers, $12,500,000 in addition to the share which they were entitled to receive as syndicate members. This sum of $62,500,000 was only a part of the fees paid for the service of monopolizing the steel industry. In addition to the commissions taken specifically for organizing the United States Steel Corporation, large sums were paid for organizing the several companies of which it is composed. For instance, the National Tube Company was capitalized at $80,000,000 of stock; $40,000,000 of which was common stock. Half of this $44,000,000 was taken by J. P. Morgan & Co. and their associates for promotion services; and the $20,000,000 stock so taken became later exchangeable for $25,000,000 of Steel Common. Commissioner of Corporations Herbert Knox Smith found that:

"More than $150,000,000 of the stock of the Steel Corporation was issued directly or indirectly (through exchange) for mere promotion or underwriting services. In other words, nearly one-seventh of the total capital stock of the Steel Corporation appears to have been issued directly or indirectly to promoters' services."

The so-called fees and commissions taken by the bankers and associates upon the organization of the trusts have been exceptionally large. But even after the trusts are successfully launched the exactions of the bankers are often extortionate. The syndicate which underwrote, in 1901, the Steel Corporation's preferred stock conversion plan, advanced only $20,000,000 in cash and received an underwriting commission of $6,800,000.

The exaction of huge commissions is not confined to trust and other industrial concerns. The Interborough Railway is a most prosperous corporation. It earned last year nearly 21 per cent. on its capital stock, and secured from New York City, in connection with the subway extension, a very favorable contract. But when it financed its $170,000,000 bond issue it was agreed that J. P. Morgan & Co. should receive three per cent., that is, $5,100,000, for merely forming this syndicate. More recently, the New York, New Haven & Hartford Railroad agreed to pay J. P. Morgan & Co. a commission of $1,680,000; that is, 2 1/2 per cent., to form a syndicate to underwrite an issue at par of $67,000,000 20-year 6 per cent. convertible debentures. That means: The bankers bound themselves to take at 97 1/2 any of these six per cent. convertible bonds which stockholders might be unwilling to buy at 100. When the contract was made the New Haven's then outstanding six per cent. convertible bonds were selling at 114. And the new issue, as soon as announced, was in such demand that the public offered and was for months willing to buy at 106 bonds which the Company were to pay J. P. Morgan & Co. $1,680,000 to be willing to take at par.

WHY THE BANKS BECAME INVESTMENT BANKERS

These large profits from promotions, underwritings and security purchases led to a revolutionary change in the conduct of our leading banking institutions. It was obvious that control by the investment bankers of the deposits in banks and trust companies was an essential element in their securing these huge profits. And the bank officers naturally asked, "Why then should not the banks and trust companies share in so profitable a field? Why should not they themselves become investment bankers too, with all the new functions incident to `Big Business'?" To do so would involve a departure from the legitimate sphere of the banking business, which is the making of temporary loans to business concerns. But the temptation was irresistible. The invasion of the investment banker into the banks' field of operation was followed by a counter invasion by the banks into the realm of the investment banker. Most prominent among the banks were the National City and the First National of New York. But theirs was not a hostile invasion. The contending forces met as allies, joined forces to control the business of the country, and to "divide the spoils." The alliance was cemented by voting trusts, by interlocking directorates and by joint ownerships. There resulted the fullest "cooperation"; and ever more railroads, public service corporations, and industrial concerns were brought into complete subjection.

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Our Financial Oligarchy, Other People's Money, and How The Criminal Bankers use it, 1914

- By Justice Louis Brandeis

Louis Dembitz Brandeis was an American lawyer and the Supreme Court justice of the United States from 1916 to 1939.

In 1912, Woodrow Wilson campaigned for President using many Progressive ideas about strengthening the economy: banking reform, tariff reduction and the elimination of monopolies and trusts. The consolidation of these ideas became known as the New Freedom.

After Wilson's election, Louis Brandeis (who was responsible for many of Wilson's ideas in the first place) wrote a series of articles for Harper's Weekly which outlined why the New Freedom was necessary and how best to implement it. In 1914, the articles were collected in book form and published under the title Other People's Money--and How the Bankers Use It.

Brandeis' central thesis was that the large banking houses were colluding with businessmen to create trusts in America's major industries. Brandeis felt that not only did trusts stifle competition, but also they became so large that they became unable to operate efficiently.

Brandeis backed up his arguments with facts--copious facts gleaned from his battles against J. P. Morgan and Charles Mellen in the New Haven Railroad merger battle and from the Pujo Committee--a House committee report that investigated the abuses of the "Money Trust."

Wilson was able to push through a number of laws regarding the regulation of business and trusts, but in many ways, due to mergers and stock manipulation, conditions in the business world today remain the same. Many of the details in Other People's Money may be dated, but its central ideas remain relevant--so much so that is still in print almost 90 years after it was first published.

Chapter 1: Our Financial Oligarchy

Chapter 2: How The Combiners Combine

Chapter 3: Interlocking Directorates

Chapter 4: Serve One Master Only!

Chapter 5: What Publicity Can Do

Chapter 6: Where The Banker Is Superfluous

Chapter 7: Big Men And Little Business

Chapter 8: A Curse Of Bigness

Chapter 9: The Failure Of Banker-Management

Chapter 10: The Inefficiency Of The Oligarchy

Note: All illustrations on these web pages are from the original Harper's Weekly articles that made up Other People's Money.

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Justice Louis D. Brandeis, who had been a brilliant attorney, had no previous judicial experience before being named to the United States Supreme Court. Justice Brandeis is generally regarded as a great thinker and a judicial pioneer. He also was the first Jewish member of the United States Supreme Court. Read more...