CHAPTER XXVIII

THE CONCENTRATION OF CONTROL OF MONEY AND CREDIT

HAVE WE A MONEY TRUST?

[227]If by a "money trust" is meant--

An established and well-defined identity and community of interest between a few leaders of finance which has been created and is held together through stock holdings, interlocking directorates, and other forms of domination over banks, trust companies, railroads, public-service and industrial corporations, and which has resulted in a vast and growing concentration of control of money and credit in the hands of a comparatively few men--

your committee has no hesitation in asserting as the result of its investigation that this condition, largely developed within the past five years, exists in this country to-day.

The parties to this combination or understanding or community of interest, by whatever name it may be called, may be conveniently classified, for the purpose of differentiation, into four separate groups.

First. The first, which for convenience of statement we will call the inner group, consists of J. P. Morgan & Co., the recognised leaders, and George F. Baker and James Stillman in their individual capacities and in their joint administration and control of the First National Bank, the National City Bank, the National Bank of Commerce, the Chase National Bank, the Guaranty Trust Co., and the Bankers Trust Co., with total known resources, in these corporations alone, in excess of $1,300,000,000, and of a number of smaller but important financial institutions. This takes no account of the personal fortunes of these gentlemen.

Second. Closely allied with this inner or primary group, and indeed related to them practically as partners in many of their larger financial enterprises, are the powerful international banking houses of Lee, Higginson & Co. and Kidder, Peabody & Co., with three affiliated banks in Boston--the National Shawmut Bank, the First National Bank, and the Old Colony Trust Co.--having at least more than half of the total resources of all the Boston banks; also with interests and representation in other important New England financial institutions.

Third. In New York City the international banking house of Messrs. Kuhn, Loeb & Co., with its large foreign clientele and connections, whilst only qualifiedly allied with the inner group, and only in isolated transactions, yet through its close relations with the National City Bank and the National Bank of Commerce and other financial institutions with which it has recently allied itself has many interests in common, conducting large joint-account transactions with them, especially in recent years, and having what virtually amounts to an understanding not to compete, which is defended as a principle of "banking ethics." Together they have with a few exceptions pre-empted the banking business of the important railways of the country.

Fourth. In Chicago this inner group associates with and makes issues of securities in joint account or through underwriting participations primarily with the First National Bank and the Illinois Trust & Savings Bank, and has more or less friendly business relations with the Continental & Commercial National Bank, which participates at times in the underwriting of security issues by the inner group. These are the three largest financial institutions in Chicago, with combined resources (including the two affiliated and controlled state institutions of the two national banks) of $561,000,000.

Radiating from these principal groups 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. Messrs. Lee, Higginson & Co., besides being partners with the inner group, are also frequently utilised in this service because of their facilities as distributors of securities.

Beyond these inner groups and subgroups are banks and bankers throughout the country who co-operate 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 subgroups is of great value to these banks and bankers, who are thus tied by self-interest to the great issuing houses and may be regarded as a part of this vast financial organisation. 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.

It can hardly be expected that the banks, trust companies, and other institutions that are thus seeking participations from this inner group would be likely to engage in business of a character that would be displeasing to the latter or that would interfere with their plans or prestige. And so the protection that can be offered by the members of this inner group constitutes the safest refuge of our great industrial combinations and railroad systems 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.

In the case of the pending New York subway financing of $170,000,000 of bonds by Messrs. Morgan & Co. and their associates, Mr. Davison 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 realise and of being required to take their share of the unsold portion. This transaction furnishes a fair illustration of the basis on which this inner group is able to capitalise its financial power.

It may be that this recently concentrated money power so far has not been abused otherwise than in the possible exaction of excessive profits through absence of competition. Whilst no evidence of abuse has come to the attention of the committee from impartial sources, neither has there been adequate proof or opportunity for proof on the subject. Here again the data have not been available.

Sufficient has, however, been developed to demonstrate that neither potentially competing banking institutions nor competing railroad or industrial corporations should be subject to a common source of private control.

Your committee is convinced that however well founded may be the assurances of good intentions by those now holding the places of power which have been thus created, the situation is fraught with too great peril to our institutions to be tolerated.

THE BORROWER AND THE MONEY TRUST

[228]Some trusts are denounced because of their attitude toward their employes. Many trusts are efficient or inefficient because of the way their millions of labourers work. But let us be fair to Big Business. Why not examine its one branch where labour is almost absent, where there is no brawn and all brain?

BANKING THE MOST LOGICAL OF TRUSTS

A bank in New York City gave its employes a Christmas present equal to half their annual salary. The bank had assets of $100,000,000. A fine example, you say, to other great business concerns! But the bank had only fifty employes. In the entire country there are probably not more than 100,000 persons engaged in banking, either directly or indirectly.

The banker has, relatively speaking, no human factor to consider. And that factor with a concern like the United States Steel Corporation or the Pennsylvania Railroad is mammoth, almost baffling. The banker deals not in the production or distribution of wealth itself (in both of which much labor is needed), but solely in the paper representatives of wealth, money, and credit. Thus he can apply far more directly than the manufacturer or railroad manager the economies and efficiencies of Big Business.

Banking--the business of dealing in money and credit--is the most logical of trusts. And in practice it has justified the theory. Where banks have become larger they have become stronger, where co-operation and concentration have gone far, there safety and effectiveness have reached a high pitch.... Banking is the one central business of all--it is the business of businesses. So if it has become more efficient as the trust idea, or at least the principle of concentration, has gained sway, how can we have too much concentration and who is there to complain?...

If the bankers have, faithfully and well, handled the trust of extending credit to the limit of their ability, yet when the president of the second bank in size in the country acknowledges himself to be one of about a dozen men in whose hands the power of extending credit is, in the last analysis, concentrated--then it is high time, seriously and fearlessly, to consider the subject....

Three main factors are in the main responsible for the concentration of the control of credit and they are the growth of big banks, the growth of big industries, and the financial laws of the country....

NO LACK OF BANKING FACILITIES

However great the concentration of money power in this country, it cannot truthfully be said that banking facilities are not also increasing. Figures taken from the reports of the National Monetary Commission and other official sources show that the number of banks is mounting up faster than either wealth or population....

WHERE THE MONEY HAS GONE

When one first realises the extent of this country's banking resources he is properly astonished. But how evenly are these resources distributed? It is commonly known that banking facilities in the Southern and Western sections of the country are small indeed as compared with the New England, Eastern, Central, and Pacific Coast sections, where large cities abound. To illustrate, in 1909, when the total banking power was close to twenty-one billions, more than half was represented by forty-seven cities, and close to one-quarter was held by the two hundred banks in New York and Chicago. In other words about 1 per cent. of the country's banks held close to one-quarter of the country's banking power.

Now it is a well-known fact that an individual or corporation with large resources and large business exerts an influence in his particular field far in excess of his actual mathematical percentage of the total resources or business. Thus the dominating position of the big banks is even greater than mere figures indicate. But there is still another fact which centralises and cements their power. The only banks which are really large are in a few cities, and the larger they are, the more they tend to the very greatest centres of population. Thus toward the end of 1911, there were 183 banking institutions with deposits of $10,000,000 or more, of which sixty-two were in New York City. There were thirty-six institutions with deposits of $25,000,000 or more. Sixteen of these were in New York City and four in Chicago. There were ten with deposits of $75,000,000 or more, and of these, seven were in New York and two in Chicago. Of the ten largest trust companies six were in New York, three in Chicago, and one in Boston.

These great banks and trust companies are of very recent growth. Twenty years ago the deposits of our largest bank were one-twentieth of what they are to-day. At the first inauguration of President McKinley, which was really not so far back as the Dark Ages, there was no bank in New York with more than $30,000,000 of deposits. Now there are six banks each with more than $100,000,000 of deposits. A trust company in New York City, which had deposits of $20,000,000 five years ago, now has deposits of $166,000,000 and its twenty-eight directors sit [1912] in boards of other banking institutions with resources of $1,250,000,000. When it comes to actual cash we find the position of the New York and Chicago banks even more dominant....

CONSOLIDATION--A STEADY PROCESS

Despite the disproportionate size of New York and Chicago banks their number is steadily decreasing. This is because the process of consolidation proceeds just as steadily. In 1853 there were fifty-three banks in the New York Clearing House Association, and in 1911 there were fifty, although in the meantime the amount of business had increased twenty times. There are now less than 130 banks in New York, or ten less than ten years ago, although in that time cash holdings have doubled and deposits have increased a third. In ten years no less than 103 banks have gone out of existence, generally through absorption into larger institutions.... In Chicago the same process of consolidation has gone on. One Chicago trust company has absorbed six others in eight years.

New York and Chicago are by no means the only cities in which the obvious tendency is to have fewer but larger banks. Look about at random. Akron, Ohio, where the rubber industry has recently become of more than local importance, has felt the necessity of banks large enough to carry on its trade, and consolidation has resulted. In Detroit, where the automobile trade has set in motion a great industrial development, the Old Detroit National has absorbed the American Exchange National. In Seattle, Nashville, Wilmington, Portland, Philadelphia, Baltimore, San Francisco, and Louisville there have been many recent mergers and absorptions. In Cincinnati one of the largest institutions in the Ohio Valley has been formed by the absorption of the Merchants' National by the First National. As for Boston the desire of her capitalists to make New England more powerful in the business life of the country has led to the recent absorption of the City Trust Company by the Old Colony and the steady growth of three financial institutions, the Shawmut National Bank, the First National Bank, and the Old Colony Trust Company, these three far exceeding all others in size....

HOW THE LAW HAS FOSTERED AFFILIATION

... One great cause of the concentration of banking and financial power into a few hands has been the consolidation of banking resources into a few great units and the friendly affiliations of these units. But these units have not grown big merely because their managers or owners willed it so. The banking and currency laws of the country have forced money into a few centres. The banks of New York City employ--mainly in financial or stock market loans--about $600,000,000 which belongs to banks in other parts of the country. Naturally this concentration of money in a few banks "places these banks in a position to control the issuing or granting of credit"--to use the exact words of the president of one of them--"thereby placing the money power in the hands of a comparatively small number of men."

But this gravitation of money to New York is because the money is idle and is hunting a job, and not because of any process of usurpation, manipulation, or combination. It naturally arises under and by virtue of the reserve requirements of our National Banking Act.... The bulk of idle country bank cash which finds employment in New York comes here because of the existing reserve system, and there are several great banks in both New York and Chicago which have few customers other than the thousands of country banks whose "correspondents" they are.

THE CORPORATION AND THE BANK

Thus banking and financial power is concentrated in a few hands not only by the growth of great banks and by the laws of the country, but also by the legitimate business practices which have grown up under these laws. But the massing of this power in a few vast, centralised units has been a development of the last ten or fifteen years only. That is, it has been coincident with the development of trusts and combinations. Big Business and Big Banking have gone hand in hand. Each has made the other possible. By law a bank cannot loan more than one-tenth of its capital and surplus to any one customer. But the customers have grown into behemoths. How then could the banks fail to grow?

Before trusts existed and before small railroads were united into large systems the few banking houses of magnitude which existed in Wall Street had engaged in merchant banking, for the industries and railroads had not been large enough to attract their attention. These small industries and railroads were controlled by their owners, and their capital requirements were supplied largely in the localities in which they were situated. But as railroads and industries were consolidated it was found necessary to apply to the larger New York banking firms to supply the funds. These bankers had European connections as well as close affiliations with the big national banks and life insurance companies, and were able not only to furnish the needed capital but also undertook to market the securities of the newly formed combinations.

Thus a few banking houses, of which J. P. Morgan & Co. is the chief example, became in a way responsible for these new creations and naturally assumed charge not only of their finances, but to some extent of their other affairs. Thus the headquarters of the trusts and railroads gradually moved to New York. In the treasuries of these companies were vast sums of money to be banked, and it was inevitable that most of it should be placed in New York banks. The average daily balance of the United States Steel Corporation is about $75,000,000 and the American Tobacco Company has perhaps $20,000,000. There is also the Standard Oil Company, whose balance is perhaps as large.

These few financial groups, J. P. Morgan & Co., Kuhn, Loeb & Co., and the capitalists identified with the National City Bank and the First National Bank, along with a few others, are primarily in the business of selling securities and loaning money upon them. In fact they may be described as the great security issuing houses. Such influence as their members or directors may exert over railroad and other corporations is largely due to their ability to dispose of securities and to give these securities the stamp of soundness and conservatism. Here it may be added that men like J. P. Morgan would not be directors in so many corporations if their advice and assistance were not eagerly sought.

In the small village a small group of men own the bank, the coal yard, the ice-plant, the trolley line, the gas plant, and the little factories. Every day of the year these men, in their different capacities, have to trade with themselves in the purchase of supplies, etc., for their different companies, one from another. No one thinks of accusing them of double dealing, and yet the situation differs not a whit from the vast system of interlocking bank and corporate directors in New York except in degree and in fact, which, however, is vital, that the New York system affects the whole commonwealth whereas the business convolutions of Deacon Jones of Jones' Corners do not.

Now it must not be supposed that bankers such as Mr. Morgan and his partners are usually large owners in the companies they influence or even control. Often they do not own 15 per cent. of the stock of the banks they dominate. Often they become directors with but a few shares of qualifying stock. Still more often their influence is exerted merely as financial advisers. Often they nominate the president of a railroad or manufacturing company as Morgan & Co. nominated the president of the Atlas Portland Cement Company. Often the bankers take no part in the direction of companies until these companies have shown incapacity or have had for any reason, business or governmental, to be reorganised, either in form or management. Recent cases which come under one or the other of these heads are the Wabash Railroad, the United States Motors Co., the Westinghouse Electric & Manufacturing Company, the International Paper Company, the American Tobacco Company and the American Sugar Refining Company.

HARMONY THE WATCHWORD

There is little evidence to show any actual agreement or even arrangement among the great financial groups. Through interlocking directors and the wide following of smaller firms which each of the big groups has, the whole big banking situation in New York is closely knit together. There is a carefully fostered community of interest even among hostile groups, each group having a director or two, like a financial ambassador, in the other banks.[229] In the past there has been keen rivalry. Historically the Morgan and First National Bank groups have long been close, and two members of the Morgan firm were taken from the First National Bank. At one time these two groups bitterly fought the other two powerful groups--the Kuhn, Loeb-National City Bank interests. But in recent years harmony has prevailed....

It must be remembered that the four banking groups are now managed for the most part by young men. These young men are more accustomed to the ways of conciliation than were the late E. H. Harriman, and John D. Rockefeller and J. P. Morgan. The younger men trouble themselves little with the former conflicts of Morgan, Hill, Rockefeller, Schiff, Stillman, Harriman, and Ryan. They have forgotten even the accusations and charges which the life insurance scandals made public. Their aim is more impersonal--it is to "develop business," and the surest way to do that is by working harmoniously together.

MONEY POWER NOT DISTINCTLY AMERICAN

Striking as the concentration of banking, money, and financial power seems, it is no greater here than abroad, perhaps not so great. In London there are banks with fifty millions of capital, or twice as much as our one largest bank, and deposits of nearly four hundred millions of dollars, or twice as much as our largest bank. Even Canada, with a population less than one-tenth of ours, has a bank as great as our greatest. Relatively its big banks are bigger than ours. Concentration in Canada has gone much farther than here. Six banks in the Dominion hold half its entire banking resources. The autocratic power wielded by the score of great Canadian banks would start a revolution in this country. Germany and France long ago went through the process of bank consolidation.

WHY, THEN, DO WE HEAR FEW COMPLAINTS FROM ABROAD?

Here is a problem to be faced with intellectual honesty. Money power may be a bad thing, but let us not be so dishonest as to declare it a new thing. The New York Clearing House Association may wield power too autocratic, but let it not be overlooked that a similar organisation in London, with only one-third as many members, has long exercised as great power without raising any hue and cry of a Money Trust. Also consider Germany. If you have the time and courage to undertake such a task, go through the ponderous volume issued by the National Monetary Commission telling of the actual results of the great bank system in that country. It is a weary task reading the long-winded testimony of Herr Professor Doctor Governor this and that, but it is worth the labour.

We are told that great banks are more amenable to public opinion than smaller scattered institutions, that the Government is more ably assisted in its financial operations, that fewer reckless loans are made. Quicker prognostication of crises, whether on the Bourse or in commerce and industry, quicker adoption of preventive measures thereby lessening the effects of crises, are other services rendered by concentrated banking in Germany....

In 1907, when there was far less both of co-operation and concentration among the banks of this country than there is to-day, each bank standing weakly isolated and alone, frantically grasped all the cash it could muster. When the panic storm broke banks struggled to call in loans and line their vaults with cash. Business was crippled; industry was squeezed dry of its lifeblood. Last year when Germany was threatened with both war and panic, trouble was averted by the German "Money Trust," which loaned more than $200,000,000. It takes no expert knowledge of finance or banking to perceive that a few great, strong banks, or many smaller ones (provided they are welded closely together) can meet a storm more calmly than scattered, unconnected institutions.

WHERE IS THE VITAL DIFFERENCE?

If concentration is a good thing, how can there be too much of it? Here is the answer. Concentrated power without responsibility may be the worst possible thing. The other great financial nations have money trusts ... too, but each is capped by a vast central bank, more or less a government institution, and from the necessity of the case operated not only with a view to the general welfare but more or less openly and publicly.... The American "Money Trust" is strictly private, responsible to no one. It may act philanthropically if it chooses, but it is governed by nothing but choice. The money kings can, if they wish, exact any price.

R. H. Thomas, former president of the New York Stock Exchange, told the Pujo committee how Wall Street had finally to turn to one man, J. P. Morgan, in the panic of 1907, to save it from complete disaster. He did not know where the relief came from, in what form, nor with what conditions. It just came. Since at that time the entire country was dependent upon Wall Street because its surplus money was there, there is no escaping the fact that the whole financial situation of the country was at the mercy of one man. A 200 per cent. rate for loans would be inconceivable in one of the European financial centres because the central banks of Europe are the guarantors of the stability of the money market. The central banks of Europe depend upon no man, selfish or altruistic. They are the public financial regulators of the whole nation.

Has the Money Power been used to crush and squeeze?... Suppose that it has not been so used. Nevertheless, its control is in the hands of a few men. Even if their action be honest and intended for the public interest, they are necessarily most interested in the great undertakings in which we have seen them to be engaged. By reason of these limitations they must check and limit, if they do not destroy, genuine economic freedom and competition.... A handful of men, responsible to no one but themselves and God, have become masters of the lifeblood of commerce and industry. That this power has been more rapidly concentrated into their hands than the people have supposed is the unavoidable conclusion of this article.

From private persons, acting in private, and dominated in the main by private motives there cannot be expected the wisest and broadest direction of the flow of money--the lifeblood of business. These men have not asked for this power. They know it is too great for them. On the whole they have behaved with singular restraint. But only a fool would suppose that the best system for financing the small farmer in Florida or the small tin can manufacturer in Oregon is to turn over the entire money power of the nation to J. P. Morgan and a few other private persons. How under such a system could the great trusts fail to thrive at the expense of the small man?

THE BANKS AND RAILWAY FINANCE

[230]Close relationships of railways with banks or other credit institutions have grown up naturally through the need for new capital constantly imposed upon an expanding railway system. Some railways have been fortunate enough to possess a relatively stable body of stockholders whose confidence in the management is so complete that new funds can be raised by direct appeal of the management to the stockholders without the intervention of outside financial interests. But these cases have thus far been rare in American railway finance. When the policy calls for the raising of funds by the issuance of bonds rather than stock, the appeal is to a wider and to an anonymous public rather than to a corporation's own stockholders. Frequently the appeal must be to a class of investors situated in another section of the country or even in a foreign country. Most railways have not the technical organization nor the established market necessary to handle their issues easily, and usually it is found that in spite of the often exorbitantly high commissions which the bankers exact for their services, the net result is more satisfactory than that secured through the railway's own efforts. To the extent that this is the case, the bankers are performing a service of genuine economic value, and it must be concluded that under present conditions such service cannot readily be dispensed with.

Assuming this service as a necessity, the next step is for the banker to seek representation upon the railway board. His house has made itself responsible for a large issue of securities. It appeals to the investing public, not technically guaranteeing the issue, but practically doing so because of solicitude that its reputation for the handling of high-grade securities shall not be impaired. It seeks therefore to protect its own standing, and at the same time to make the securities more attractive to its customers, by demanding a place on the board of directors from which it can follow in detail the employment of the funds secured through its assistance. Large investors like life insurance companies, savings banks, fire insurance companies, guaranty companies, trust companies, demand as a prerequisite to purchase of securities that the underwriting house shall be represented on the board. The railway's credit--its ability to sell its issues--is dependent frequently upon the presence on its directorate of this representative. However, the banker is not in the position solely of a spectator or a detective. His expert advice is sought and usually followed. Often he is in a position where he can stipulate conditions under which alone he will undertake to provide the funds required, and such stipulations are frequently of immense influence in furthering efficient railway management. A recent example is found in the furnishing of money to the Chesapeake and Ohio Railway Company by Kuhn, Loeb & Co. under a stipulation that the road must put back into its property each year a certain amount of its earnings. Instances might be multiplied in which railway corporations have been saved from disaster and set upon their feet through the aid of those who have furnished the funds, and who have stipulated in connection therewith that in order to insure their knowledge of all transactions, and to give them a position from which they might bring their influence to bear, they should be granted representation on the railway board.

Of course it must be admitted that the power of the banker may be misused to his own private advantage. The power is there--the power to refuse funds--the power that comes from command of enormous sources of capital, the prestige gained by years of successful experience. Men who have attained such a position have the personal qualities that give them naturally a commanding place in any council of business men. When such men dominate the policy of a railway and the results are disastrous, it is exceedingly difficult fairly to fix the responsibility and assess the blame. The line between good faith and good judgment or between personal ambition that amounts to breach of trust, and a misplaced optimism concerning the outcome of a specific policy, is a very difficult line to draw. Although praise and blame cannot be assigned with any precision between Mr. Morgan and Mr. Mellen in the unfortunate New Haven situation, it is the prevailing opinion of the New England public that it has not been benefited greatly by the presence on the New Haven board of the distinguished banker member. Generally speaking, however, the powerful banking interests have thrown their influence in the direction of railway efficiency and the public advantage. If our judgment as to the desirability of the relationship of railways and credit institutions is to be determined solely by results, we must conclude that the balance swings heavily in favor of the continuance of the present policy.

However, opposition to the close association of financial houses and railways has not sprung from any such favorable relationships as we have here described. It grows rather out of the concentration and monopolization of credit. A powerful banking house which has identified its interests with that of one railway system is in position, because of its direct influence on the railway and its close affiliation with all other sources of credit, seriously to hamper if not altogether to prevent the securing of credit by a rival interest. This power over credit is not confined to one city or to one section of the country, but it reaches every section and even extends beyond national boundaries into the foreign sources of investment funds. Local or small enterprises requiring only moderate underwriting are frequently financed independently, but it is an acknowledged fact testified to by the large bankers themselves that with rare exceptions issues of securities in large amounts, except when taken up by the stockholders, must receive at least the tacit approval of the big financial group. Participation by the smaller banking houses in future underwritings depends upon loyalty to the syndicate in whatever enterprises are now being offered. The little fellows are inclined to respect a suggestion not to assist an enterprise of a character likely to interfere with undertakings already financed by the large interests. This informal but none the less effective network of alliances tends to destroy the competitive market for capital, and to restrict the railways to one source of credit. There does not appear to be any serious competition among the large bankers, but rather an understanding in the nature of a division of the field. A railway obtains the services of a single banking house which acts as its fiscal agent, underwrites its securities, receives its deposits, and has a representative on the railway's board of directors. When the railway becomes involved in financial difficulties, the same banking house organizes protective committees, devises reorganization schemes, and creates voting trusts. As Mr. Brandeis has put it, it adds to its duty as midwife also that of undertaker.

Is this relationship potentially dangerous for the railways and the public? The late Mr. Morgan, in his illuminating testimony in the money trust investigation, took the position that the situation might be dangerous in the hands of the wrong men, but he clearly implied that there had been no bad results thus far and there were not likely to be in the future with a continuance of the present leadership. His argument reminds one of the young lady who "when she was good was very, very good, and when she was bad she was horrid." Yet this view is that of most of the financial leaders who appeared before the Pujo committee....

Mr. Davison and Mr. Schiff both opposed the policy of concentration through interlocking at the point where the representative of the two interests might wield a dominating influence, but they found it difficult to fix that point.

Mr. Baker, who took the position that safety lies in the personnel of the men, that in good hands interlocking could not do any harm, but in bad hands would be very bad, concluded nevertheless that the movement of concentration had gone about far enough. And Mr. George M. Reynolds, of Chicago, thus frankly expressed himself: "I am inclined to think that the concentration, having gone to the extent it has, does constitute a menace." And again, "I think a more wide distribution of the power of credit ... would really be better in the long run." When asked the direct question, "Do you approve of the identity of directors or interlocking directorates in potentially competing institutions?" he replied, "Personally I do not believe that is the best policy."

It should be kept in mind that there is no evidence on record that this power has been used oppressively otherwise than in the rate of commission charged. Many of the bankers insist that the monopolization of credit is a physical impossibility.... There is, nevertheless, a concentration of credit in comparatively few hands.

If the conclusions thus far established are sound, it becomes clear that the real evil resulting from the interlocking of railways and credit houses, if any evil exists, arises primarily out of the relation of credit institutions to each other, rather than out of their relation to the railways through representation on railway boards. Were this interlocking of railways and banks to be wholly prohibited without any alteration in the organization of the credit market, I am unable to see how the situation would be changed materially. The tendency on the part of the bankers would still be to follow the law of "banking ethics" and divide the field; a railway would still employ a single banking house as its fiscal agent, and this banking house would still exercise a powerful influence in determining the policy of the railway. At the same time the railway would be deprived of the presence on its board of a financial expert whose experience might be drawn upon in the detail of management day by day.

As Mr. Reynolds has admitted, the menace is in the concentration of credit. Such power may not thus far have been misused. But as the Pujo committee has said, "whenever the incentive is at hand, the machinery is ready." Those who have the public welfare at heart have no right to assume that such power will never be used to the personal interest of the bankers themselves and to the injury of the public. While I have no great enthusiasm for the popular pastime of rushing to Washington for a statute whenever the economic machinery fails to run smoothly, I am in sympathy with those who are studying the problem of the restoration of an open competitive market for capital.

However, this is a problem of extraordinary difficulty, and I do not myself see the way at present to its solution. I am aware that Congress has enacted legislation with the purpose of destroying this concentration of credit, and that many look upon the Clayton Act, so far as it touches our problem, as a distinct step in advance. Personally I am sceptical as to its efficacy in its present form. The opportunities for evasion are too numerous. However, it can be laid down as a general rule that all statutory enactment which really endures is a product of successive increments of legislation--the result of experimental tests and the knowledge that is gained by experience. It is no argument against the interlocking provisions of the Clayton Act that they do not solve the problem and that they can be evaded readily. Such an attitude of timidity and pessimism assumed twenty-five years ago would never have given us our present air-tight Interstate Commerce Act. It may well be, however, that no relief can be found short of the radical step of employing government credit in aid of public-service industries. So vital is the necessity of the service to the people that the time may come when government loans to transportation corporations will appear to be a logical and natural step. But this is a digression.

Once this free market for capital is assured, the question again arises, Shall the railway board of directors contain banker members? Obviously the only purpose that the railway could then have in admitting bankers to its directorate would be the opportunity to utilize their experience in the direct management of the property. Quite as obviously the principal motive of the banker in accepting membership on a railway board would be to represent the underwriters and to act as fiscal agent. But with the capital market competitive, I can find no serious objection to such relationship. Even under present conditions the banker in the majority of cases respects his trust, refuses to vote on questions involving his personal interest, and performs loyally his service to the railway; but his mere presence on the board as the embodiment of the railway's only source of credit may be sufficient to control the situation in his behoof. However, with a free credit market, the dominating position of the banker largely disappears and he becomes what he ought to be, an expert adviser on financial matters. It may be asked why, if the banker is now to confine his activities to what Mr. Loree has called the "necessarily intimate relation between the banker and the seeker for accommodation," this cannot be accomplished in the same manner as in unincorporated businesses without putting the banker on the directorate. In reply attention may be called to the fact that even in the case of unincorporated businesses, the credit departments of the large banks are virtually in the position of directors, so intimate and comprehensive is their influence and advice. But more than this the business of a railroad is so complex and extensive, its activities are so multifarious, that an intimacy with its affairs sufficient to make the banker's counsel of value would be impossible except by actual presence on the directorate.

Under these changed conditions of credit, I can see greater opportunity for the utilization of the service of expert bankers in railway management. Directorships which have been monopolized in the hands of a few banker specialists in railway securities should then be more widely distributed. It is quite impossible to believe that expert banking talent available for this service is as rare as the present situation would suggest, in which the abilities of a relatively few men are made to do duty in dozens of corporations. This absurd situation springs not from a scarcity of talent but from the narrow market for credit. A liberation of that market would bring latent ability from its hiding-places, and by the infusion of new blood would stimulate the management of our railway enterprises. It would open this field of activity to men "who have been obliged to serve when their abilities entitled them to direct."

FOOTNOTES:

[227] Adapted from the _Report of the Committee Appointed to Investigate the Concentration of Control of Money and Credit_, 62d Congress, 3d Session, pp. 130-33.

[228] Adapted from Albert W. Atwood, _The Borrower and the Money Trust, Review of Reviews_, Vol. 46, August. 1912, pp. 207-218.

[229] [Interlocking directorates among the more important banks were prohibited by the Clayton Act, passed in 1914. See p. 624.]

[230] Frank Haigh Dixon, _The Economic Significance of Interlocking Directorates in Railway Finance, The Journal of Political Economy_, Vol. 23, No. 2, February, 1915, pp. 938-946.