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

- 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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Other people's money, and how the bankers use it 1914
CHAPTER 3 - INTERLOCKING DIRECTORATES

- By Justice Louis Brandeis

The practice of interlocking directorates is the root of many evils. It offends laws human and divine. Applied to rival corporations, it tends to the suppression of competition and to violation of the Sherman law. Applied to corporations which deal with each other, it tends to disloyalty and to violation of the fundamental law that no man can serve two masters. In either event it tends to inefficiency; for it removes incentive and destroys soundness of judgment. It is undemocratic, for it rejects the platform: "A fair field and no favors,"—substituting the pull of privilege for the push of manhood. It is the most potent instrument of the Money Trust. Break the control so exercised by the investment bankers over railroads, public-service and industrial corporations, over banks, life insurance and trust companies, and a long step will have been taken toward attainment of the New Freedom.

The term "Interlocking directorates" is here used in a broad sense as including all intertwined conflicting interests, whatever the form, and by whatever device effected. The objection extends alike to contracts of a corporation whether with one of its directors individually, or with a firm of which he is a member, or with another corporation in which he is interested as an officer or director or stockholder. The objection extends likewise to men holding the inconsistent position of director in two potentially competing corporations, even if those corporations do not actually deal with each other.

THE ENDLESS CHAIN

A single example will illustrate the vicious circle of control—the endless chain—through which our financial oligarchy now operates:

J. P. Morgan (or a partner), a director of the New York, New Haven & Hartford Railroad, causes that company to sell to J. P. Morgan & Co. an issue of bonds. J. P. Morgan & Co. borrow the money with which to pay for the bonds from the Guaranty Trust Company, of which Mr. Morgan (or a partner) is a director. J. P. Morgan & Co. sell the bonds to the Penn Mutual Life Insurance Company, of which Mr. Morgan (or a partner) is a director. The New Haven spends the proceeds of the bonds in purchasing steel rails from the United States Steel Corporation, of which Mr. Morgan (or a partner) is a director. The United States Steel Corporation spends the proceeds of the rails in purchasing electrical supplies from the General Electric Company, of which Mr. Morgan (or a partner) is a director. The General Electric sells supplies to the Western Union Telegraph Company, a subsidiary of the American Telephone and Telegraph Company; and in both Mr. Morgan (or a partner) is a director. The Telegraph Company has an exclusive wire contract with the Reading, of which Mr. Morgan (or a partner) is a director. The Reading buys its passenger cars from the Pullman Company, of which Mr. Morgan (or a partner) is a director. The Pullman Company buys (for local use) locomotives from the Baldwin Locomotive Company, of which Mr. Morgan (or a partner) is a director. The Reading, the General Electric, the Steel Corporation and the New Haven, like the Pullman, buy locomotives from the Baldwin Company. The Steel Corporation, the Telephone Company, the New Haven, the Reading, the Pullman and the Baldwin Companies, like the Western Union, buy electrical supplies from the General Electric. The Baldwin, the Pullman, the Reading, the Telephone, the Telegraph and the General Electric companies, like the New Haven, buy steel products from the Steel Corporation. Each and every one of the companies last named markets its securities through J. P. Morgan & Co.; each deposits its funds with J. P. Morgan & Co.; and with these funds of each, the firm enters upon further operations.

This specific illustration is in part suppositious; but it represents truthfully the operation of interlocking directorates. Only it must be multiplied many times and with many permutations to represent fully the extent to which the interests of a few men are intertwined. Instead of taking the New Haven as the railroad starting point in our example, the New York Central, the Santa Fe, the Southern, the Lehigh Valley, the Chicago and Great Western, the Erie or the Père Marquette might have been selected; instead of the Guaranty Trust Company as the banking reservoir, any one of a dozen other important banks or trust companies; instead of the Penn Mutual as purchaser of the bonds, other insurance companies; instead of the General Electric, its qualified competitor, the Westinghouse Electric and Manufacturing Company. The chain is indeed endless; for each controlled corporation is entwined with many others.

As the nexus of "Big Business" the Steel Corporation stands, of course, preeminent: The Stanley Committee showed that the few men who control the Steel Corporation, itself an owner of important railroads, are directors also in twenty-nine other railroad systems, with 126,000 miles of line (more than half the railroad mileage of the United States), and in important steamship companies. Through all these alliances and the huge traffic it controls, the Steel Corporation's influence pervades railroad and steamship companies—not as carriers only—but as the largest customers for steel. And its influence with users of steel extends much further. These same few men are also directors in twelve steel-using street railway systems, including some of the largest in the world. They are directors in forty machinery and similar steel-using manufacturing companies; in many gas, oil and water companies, extensive users of iron products; and in the great wire-using telephone and telegraph companies. The aggregate assets of these different corporations—through which these few men exert their influence over the business of the United States—exceeds sixteen billion dollars.

Obviously, interlocking directorates, and all that term implies, must be effectually prohibited before the freedom of American business can be regained. The prohibition will not be an innovation. It will merely give full legal sanction to the fundamental law of morals and of human nature: that "No man can serve two masters." The surprising fact is that a principle of equity so firmly rooted should have been departed from at all in dealing with corporations. For no rule of law has, in other connections, been more rigorously applied, than that which prohibits a trustee from occupying inconsistent positions, from dealing with himself, or from using his fiduciary position for personal profit. And a director of a corporation is as obviously a trustee as persons holding similar positions in an unincorporated association, or in a private trust estate, who are called specifically by that name. The Courts have recognized this fully.

Thus, the Court of Appeals of New York declared in an important case:

"While not technically trustees, for the title of the corporate property was in the corporation itself, they were charged with the duties and subject to the liabilities of trustees. Clothed with the power of controlling the property and managing the affairs of the corporation without let or hindrance, as to third persons, they were its agents; but as to the corporation itself equity holds them liable as trustees. While courts of law generally treat the directors as agents, courts of equity treat them as trustees, and hold them to a strict account for any breach of the trust relation. For all practical purposes they are trustees, when called upon in equity to account for their official conduct."

NULLIFYING THE LAW

But this wholesome rule of business, so clearly laid down, was practically nullified by courts in creating two unfortunate limitations, as concessions doubtless to the supposed needs of commerce.

First: Courts held valid contracts between a corporation and a director, or between two corporations with a common director, where it was shown that in making the contract, the corporation was represented by independent directors and that the vote of the interested director was unnecessary to carry the motion and his presence was not needed to constitute a quorum.

Second: Courts held that even where a common director participated actively in the making of a contract between two corporations, the contract was not absolutely void, but voidable only at the election of the corporation.

The first limitation ignored the rule of law that a beneficiary is entitled to disinterested advice from all his trustees, and not merely from some; and that a trustee may violate his trust by inaction as well as by action. It ignored, also, the laws of human nature, in assuming that the influence of a director is confined to the act of voting. Every one knows that the most effective work is done before any vote is taken, subtly, and without provable participation. Every one should know that the denial of minority representation on boards of directors has resulted in the domination of most corporations by one or two men; and in practically banishing all criticism of the dominant power. And even where the board is not so dominated, there is too often that "harmonious cooperation" among directors which secures for each, in his own line, a due share of the corporation's favors.

The second limitation—by which contracts, in the making of which the interested director participates actively, are held merely voidable instead of absolutely void—ignores the teachings of experience. To hold such contracts merely voidable has resulted practically in declaring them valid. It is the directors who control corporate action; and there is little reason to expect that any contract, entered into by a board with a fellow director, however unfair, would be subsequently avoided. Appeals from Philip drunk to Philip sober are not of frequent occurrence, nor very fruitful. But here we lack even an appealing party. Directors and the dominant stockholders would, of course, not appeal; and the minority stockholders have rarely the knowledge of facts which is essential to an effective appeal, whether it be made to the directors, to the whole body of stockholders, or to the courts. Besides, the financial burden and the risks incident to any attempt of individual stockholders to interfere with an existing management is ordinarily prohibitive. Proceedings to avoid contracts with directors are, therefore, seldom brought, except after a radical change in the membership of the board. And radical changes in a board's membership are rare. Indeed the Pujo Committee reports:

"None of the witnesses, (the leading American bankers testified) was able to name an instance in the history of the country in which the stockholders had succeeded in overthrowing an existing management in any large corporation. Nor does it appear that stockholders have ever even succeeded in so far as to secure the investigation of an existing management of a corporation to ascertain whether it has been well or honestly managed."

Mr. Max Pam proposed in the April, 1913, Harvard Law Review, that the government come to the aid of minority stockholders. He urged that the president of every corporation be required to report annually to the stockholders, and to state and federal officials every contract made by the company in which any director is interested; that the Attorney-General of the United States or the State investigate the same and take proper proceedings to set all such contracts aside and recover any damages suffered; or without disaffirming the contracts to recover from the interested directors the profits derived therefrom. And to this end also, that State and National Bank Examiners, State Superintendents of Insurance, and the Interstate Commerce Commission be directed to examine the records of every bank, trust company, insurance company, railroad company and every other corporation engaged in interstate commerce. Mr. Pam's views concerning interlocking directorates are entitled to careful study. As counsel prominently identified with the organization of trusts, he had for years full opportunity of weighing the advantages and disadvantages of "Big Business." His conviction that the practice of interlocking directorates is a menace to the public and demands drastic legislation, is significant. And much can be said in support of the specific measure which he proposes. But to be effective, the remedy must be fundamental and comprehensive.

THE ESSENTIALS OF PROTECTION

Protection to minority stockholders demands that corporations be prohibited absolutely from making contracts in which a director has a private interest, and that all such contracts be declared not voidable merely, but absolutely void.

In the case of railroads and public-service corporations (in contradistinction to private industrial companies), such prohibition is demanded, also, in the interests of the general public. For interlocking interests breed inefficiency and disloyalty; and the public pays, in higher rates or in poor service, a large part of the penalty for graft and inefficiency. Indeed, whether rates are adequate or excessive cannot be determined until it is known whether the gross earnings of the corporation are properly expended. For when a company's important contracts are made through directors who are interested on both sides, the common presumption that money spent has been properly spent does not prevail. And this is particularly true in railroading, where the company so often lacks effective competition in its own field.

But the compelling reason for prohibiting interlocking directorates is neither the protection of stockholders, nor the protection of the public from the incidents of inefficiency and graft. Conclusive evidence (if obtainable) that the practice of interlocking directorates benefited all stockholders and was the most efficient form of organization, would not remove the objections. For even more important than efficiency are industrial and political liberty; and these are imperiled by the Money Trust. Interlocking directorates must be prohibited, because it is impossible to break the Money Trust without putting an end to the practice in the larger corporations.

BANKS AS PUBLIC-SERVICE CORPORATIONS

The practice of interlocking directorates is peculiarly objectionable when applied to banks, because of the nature and functions of those institutions. Bank deposits are an important part of our currency system. They are almost as essential a factor in commerce as our railways. Receiving deposits and making loans therefrom should be treated by the law not as a private business, but as one of the public services. And recognizing it to be such, the law already regulates it in many ways. The function of a bank is to receive and to loan money. It has no more right than a common carrier to use its powers specifically to build up or to destroy other businesses. The granting or withholding of a loan should be determined, so far as concerns the borrower, solely by the interest rate and the risk involved; and not by favoritism or other considerations foreign to the banking function. Men may safely be allowed to grant or to deny loans of their own money to whomsoever they see fit, whatsoever their motive may be. But bank resources are, in the main, not owned by the stockholders nor by the directors. Nearly three-fourths of the aggregate resources of the thirty-four banking institutions in which the Morgan associates hold a predominant influence are represented by deposits. The dependence of commerce and industry upon bank deposits, as the common reservoir of quick capital is so complete, that deposit banking should be recognized as one of the businesses "affected with a public interest." And the general rule which forbids public-service corporations from making unjust discriminations or giving undue preference should be applied to the operations of such banks.

Senator Owen, Chairman of the Committee on Banking and Currency, said recently:

"My own judgment is that a bank is a public-utility institution and cannot be treated as a private affair, for the simple reason that the public is invited, under the safeguards of the government, to deposit its money with the bank, and the public has a right to have its interests safeguarded through organized authorities. The logic of this is beyond escape. All banks in the United States, public and private, should be treated as public-utility institutions, where they receive public deposits."

The directors and officers of banking institutions must, of course, be entrusted with wide discretion in the granting or denying of loans. But that discretion should be exercised, not only honestly as it affects stockholders, but also impartially as it affects the public. Mere honesty to the stockholders demands that the interests to be considered by the directors be the interests of all the stockholders; not the profit of the part of them who happen to be its directors. But the general welfare demands of the director, as trustee for the public, performance of a stricter duty. The fact that the granting of loans involves a delicate exercise of discretion makes it difficult to determine whether the rule of equality of treatment, which every public-service corporation owes, has been performed. But that difficulty merely emphasizes the importance of making absolute the rule that banks of deposit shall not make any loan nor engage in any transaction in which a director has a private interest. And we should bear this in mind: If privately-owned banks fail in the public duty to afford borrowers equality of opportunity, there will arise a demand for government-owned banks, which will become irresistible.

The statement of Mr. Justice Holmes of the Supreme Court of the United States, in the Oklahoma Bank case, is significant:

"We cannot say that the public interests to which we have adverted, and others, are not sufficient to warrant the State in taking the whole business of banking under its control. On the contrary we are of opinion that it may go on from regulation to prohibition except upon such conditions as it may prescribe."

OFFICIAL PRECEDENTS

Nor would the requirement that banks shall make no loan in which a director has a private interest impose undue hardships or restrictions upon bank directors. It might make a bank director dispose of some of his investments and refrain from making others; but it often happens that the holding of one office precludes a man from holding another, or compels him to dispose of certain financial interests.

A judge is disqualified from sitting in any case in which he has even the smallest financial interest; and most judges, in order to be free to act in any matters arising in their court, proceed, upon taking office, to dispose of all investments which could conceivably bias their judgment in any matter that might come before them. An Interstate Commerce Commissioner is prohibited from owning any bonds or stocks in any corporation subject to the jurisdiction of the Commission. It is a serious criminal offence for any executive officer of the federal government to transact government business with any corporation in the pecuniary profits of which he is directly or indirectly interested.

And the directors of our great banking institutions, as the ultimate judges of bank credit, exercise today a function no less important to the country's welfare than that of the judges of our courts, the interstate commerce commissioners, and departmental heads.

SCOPE OF THE PROHIBITION

In the proposals for legislation on this subject, four important questions are presented:

1. Shall the principle of prohibiting interlocking directorates in potentially competing corporations be applied to state banking institutions, as well as the national banks?

2. Shall it be applied to all kinds of corporations or only to banking institutions?

3. Shall the principle of prohibiting corporations from entering into transactions in which the management has a private interest be applied to both directors and officers or be confined in its application to officers only?

4. Shall the principle be applied so as to prohibit transactions with another corporation in which one of its directors is interested merely as a stockholder?

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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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