The Money Trust
PERHAPS no public question of our time has involved considerations of more dramatic possibilities — financial, industrial, social, and, therefore, political — than what is commonly known as the problem of the Money Trust. Stated in its most general terms, the proposition which is to be proved or disproved, and the proof of which, in the view of many people in the United States, has been obtained in the recent public inquiry by the sub-committee of the House of Representatives’ Banking and Currency Committee, is the proposition that a comparatively small group of wealthy financiers control in their individual interest, and can utilize for their selfish purposes, the banking machinery of this country, and, through that machinery, all of the country’s industries. They can, it has been more or less generally assumed, obstruct the progress of independent industry, can fix not only money rates, and not only prices of Stock-Exchange securities, but prices of merchandise. It has been argued on the floor of Congress, that they can create at will, and do create for their own selfish purposes, ‘booms’ and panics, prosperity and adversity. On this supposition, their power over the business fortunes and personal welfare of the country as a whole, and of every individual in the country, would be supreme.
Manifestly, if this description of the condition of things were correct, or if the tendency of existing affairs were strongly in such a direction, the problem would be fundamental to all others in social and political discussion. I propose to discuss this problem without fear or favor; with full and fair consideration of the arguments, both of those who uphold the conclusions as outlined above, and of those who deny them absolutely.
I
Before taking up the particular grounds of the present controversy, it will be advisable to inquire to what extent the indictment of the so-called Money Trust is a wholly new phenomenon of the day, and how far it is simply repetition, in a new form, of the complaint, common to all the past centuries of organized society, over the encroachments of the wealthy and moneyed classes on the interests of society at large.
The question as it is discussed today could not in fact exist before a period when credit on an enormous scale was utilized, not only for loans to governments and individuals, but for the capitalizing and equipping of great companies in the field of transportation and manufacture. It could hardly have antedated the day of the hundred - million - dollar corporation. We are accustomed to regard the crusade of President Andrew Jackson against the United States Bank as a fight with the Money Power; and so its author declared it to be. But that contest was avowedly against the Money Power in politics, not in trade. Jackson’s cabinet memorandum of 1833 asserted that if the bank were permitted longer to hold the public deposits, ‘the patriotic among our citizens will despair of struggling against its power’; and his annual message denounced it on the ground of what he considered the ‘unquestionable proof that the Bank of the United States was converted into a permanent electioneering engine,’
That episode, therefore, is something different in essential respects from the present Money-Trust agitation. An accusation, closely resembling that referred to at the beginning of this paper, was voiced with passionate emphasis in the national platform of the People’s party, at the opening of the Presidential campaign of 1892. Among its other indictments of what was then commonly styled the Money Power were the following: —
‘The newspapers are largely subsidized or muzzled; public opinion silenced; business prostrated; labor impoverished; and the land concentrating in the hands of the capitalists. . . . The fruits of the toil of millions are boldly stolen to build up colossal fortunes for a few, unprecedented in the history of mankind; and the possessors of these, in turn, despise the republic and endanger liberty. . . . Silver, which has been accepted as coin since the dawn of history, has been demonetized to add to the purchasing power of gold by decreasing the value of all forms of property as well as human labor; and the supply of currency is purposely abridged to fatten usurers, bankrupt enterprise, and enslave industry. A vast conspiracy against mankind has been organized on two continents, and it is rapidly taking possession of the world. If not met and overthrown at once, it forebodes terrible social convulsions, the destruction of civilization, or the establishment of an absolute despotism.’
At first glance, this declaration of more than twenty years ago would appear to have in mind the identical conditions alleged to exist at the present day. Close examination, however, will show some rather important divergencies. The gravamen of the charge of 1892 was the allegation that advocacy of the gold standard of currency was prompted by a wish to reduce the money supply, increase the purchasing power of gold, and thereby enable the Money Power to obtain possession of the people’s property through the resultant reduction of prices for land, commodities, and labor.
It may doubtless be argued that the prophecies of the platform of 1892 would have been fulfilled but for the then quite unanticipated discovery of new gold fields in the Transvaal, the Rocky Mountains, and the Klondike. But even if this were to be conceded, the fact would remain that the Money Trust was attacked in 1892 for its work in putting down prices, whereas it is attacked in 1913 for putting them up.
II
When we now approach the consideration of the problem as it stands today, our first difficulty is one of definition. Mr. J. Pierpont Morgan, in his testimony of December 19 before the Pujo Committee, declared that ‘all the banks in Christendom could not control money; there could be no “ Money Trust.”’ This was, to be sure, the opinion of a prejudiced witness. But the counsel of the committee, whose attitude on the general question is far from that of Mr. Morgan, said in a public address in December, 1911, —
‘If it is expected that any Congressional or other investigation will expose the existence of a “Money Trust,” in the sense in which we use the word “trust,” as applied to unlawful industrial combinations, that expectation will not be realized. Of course, there is no such thing. There is no definite union or aggregation of the money powers in the financial world. There certainly is none that can be said to be in violation of existing law.’
It is, perhaps, quite as well to emphasize this admission in the beginning; for, although to people conversant with the financial and banking methods of the day, Mr. Untermyer’s statement may seem a mere truism, there are unquestionably thousands of readers of the discussion who have regarded the alleged ‘Money Trust’ as in all respects in the class of the Standard Oil and American Tobacco trusts. We should not get far in our argument if we did not first reject and dismiss this crude conception of the problem.
It is on the floor of Congress that the most explicit charges have been made against the organization which, for the sake of convenience, I shall continue to describe as the Money Trust. On February 24, 1912, when urging the Congressional inquiry which has since been held, Mr. Henry of Texas, chairman of the Rules Committee, remarked in the House of Representatives, —
‘It is sufficient to say that, during the last five years, the financial resources of the country have been concentrated in the city of New York, until they now dominate more than 75 per cent of the moneyed interests of America, more than 75 per cent of the industrial corporations which are combined in the trusts, and practically all of the great trunk railways running from ocean to ocean; until these great forces are in such combination and agreement that it is well-nigh impossible for honest competition to be set up against them. . . .’
On December 15, 1911, Mr. Lindbergh of Minnesota, arguing before the House Rules Committee for his own resolution of inquiry, thus referred to the Money Trust and the banks controlled by it: —
‘We know that a few men and their associates control, by stock holdings and a community of interest, practically all the most important industries and also the transportation systems on which the products of all industries must be carried from producers to consumers. These same few men control the finances of the country and may bring on a panic any day that such would suit their selfish ends. We need no evidence of that fact.’
Finally, I may cite some passages from a long speech delivered in the United States Senate on March 17, 1908, shortly after the panic of 1907 had spent its force, by Mr. La Follette of Wisconsin. He began by submitting a list of one hundred men, ‘to whom I have referred as controlling the industrial life of the nation.’ The places held by these men on various company directorates amounted to ‘evidence that less than one hundred men own and control railroads, traction, shipping, cable, telegraph, telephone, express, mining, coal, oil, gas, electric light, copper, cotton, sugar, tobacco, agricultural implements, and the food-products, as well as banking and insurance.’
There was, Senator La Follette went on, ‘every inducement for those who controlled transportation and a few great basic industries, to achieve control of money in the financial centre of the country. . . . With this enormous concentration of business it is possible to create, artificially, periods of prosperity and periods of panic. Prices can be lowered or advanced at the will of the “System.” ’
‘Taking the general conditions of the country, it is difficult to find any sufficient reason outside of manipulation for the extraordinary panic of October, 1907. . . . There were no commercial reasons for a panic.
‘The panic came,’ Mr. La Follette proceeds. ‘It had been scheduled to arrive. The way had been prepared. Those who were directing it were not the men to miss anything in their way as it advanced. The historic third week of October arrived; “ the panic ” was working well. The stock market had gone to smash. Harriman was buying back Union Pacific shorts, but still smashing the market. Morgan was buying in short Steel stocks and bonds, but still smashing the market. The Morse group had been disposed of. Standard Oil had settled with Heinze. . . .
‘The smashing of the market became terrific. Still they waited. Union Pacific declined 10 1/2 points in ten sales. Northern Pacific and other stocks went down in like proportion. Five minutes passed — ten minutes past 2 o’clock. Men looked into each other’s ghastly faces. Then, at precisely 2.15, the curtain went up with Morgan and Standard Oil in the centre of the stage with money, — real money, twenty-five millions of money, — giving it away at 10 per cent. . . . And so ended the panic.’
III
It is necessary first to inquire if the declarations and descriptions are accurate. In so far as the above-cited speeches set forth what is the actual situation regarding concentrated control of manufacturing and banking institutions, they are dealing with ascertainable facts, of which I shall presently have more to say. Let it for the moment suffice to remark that a concentration of power, quite unexampled in history, over the large banking institutions of the leading cities and over the huge railway and industrial corporations, is not disputed; and has, in fact, been admitted by competent witnesses in the recent House Committee inquiry.
Mr. George M. Reynolds, president of the Continental and Commercial Bank of Chicago, the largest institution of the sort in the country outside of New York City, repeated in his evidence a previous statement of his own that, ‘the money power now lies in the hands of a dozen men,’ of whom ’I plead guilty to being one’; and he added to the committee, ‘I am inclined to think that excess of power in a limited number of men always is a menace.’ Mr. George F. Baker, chairman of the First National Bank of New York, perhaps the most powerful of the so-called ‘Morgan institutions,’ testified regarding the control of credit, represented by control of banks and trust companies, ‘I think it has gone about far enough.’ To go further ‘might not be dangerous. In good hands, I do not say that it would do any harm. If it got into bad hands, it would be very bad.’ These statements would certainly seem to prove the general allegations of concentrated control — though they do not prove, and nothing in the Pujo Committee’s hearings has proved, the sweeping declarations which place not only the banking, transportation, and manufacturing industries of the country, but its agricultural production, in the hands of a Money Trust.
But if, as Mr. Henry declares, these few capitalists ‘are the supreme dictators of the financial situation’; if, as Mr. Lindbergh assures us, they ‘may bring on a panic any day that such would suit their selfish ends,’ and if, as Senator La Follette concludes, they did, single-handed, and for purposes of selfish gain, deliberately create in 1907 a panic for which there was no other cause or explanation than their wicked purposes —then we should manifestly be confronted with a public enemy, which must be utterly destroyed before such a thing as legitimate finance and industry can again exist in the United States.
But the truth of this matter is, that no intelligent man, in the least conversant with the facts, has ever taken seriously these specific accusations of the three statesmen. To be ‘the supreme dictator of a financial situation,’ a man or a body of men must control not only supply on the security and commodity markets, but demand; not only production of iron and copper and tobacco, but of wheat and corn and cotton. Whoever is for any consecutive time arbitrarily to dictate money rates, must do so through controlling the course, not only of bank loans and liabilities, but of bank reserves, and to be the ‘supreme dictators’ in such directions, must control such matters as the world’s production of gold, the foreign exchanges, the requirements on home or foreign markets arising from war, from large harvests, from political apprehension, from destruction of capital through fire or earthquake, or from a hundred other influences familiar to the calculations of business men, in this year as in all others.
It may be briefly stated, further, in regard to a few of Mr. La Follette’s facts, that it is not at all ‘difficult to find any sufficient reason, outside of manipulation, for the extraordinary panic of 1907.’ The crisis was worldwide; it was due to a world-wide overstrain on credit. It had been predicted by European economists, on the basis of such conditions, months before it swept over the United States; and it broke out in other parts of the world — Egypt, Japan, and Hamburg, in particular — before it touched New York.
As for the picture drawn by Mr. La Follette of the panic itself, the most that can be said is that it represents in no single point anything more than the vivid imagination of an excited person almost wholly unacquainted with the facts of that particular episode, and extremely ignorant of the ordinary principles of finance. Nothing in the Pujo Committee’s lengthy examination confirmed in a single particular the Wisconsin Senator’s extraordinary version of the story. Indeed, nothing stood forth more impressively, in those critical days, than the consideration that the investments and property of no man in the money market, however powerful, were safe unless the panic itself were checked.
Mr. Woodrow Wilson, in his speech of August 7, 1912, accepting the Democratic nomination, said, ‘There are vast confederacies (as I may perhaps call them for the sake of convenience) of banks, railways, express companies, insurance companies, manufacturing corporations, power and development companies, and all the rest of the circle, bound together by the fact that the ownership of their stock and the members of their boards of directors are controlled and determined by comparatively small and closely inter-related groups of persons who, by their informal confederacy, may control, if they please, and when they will, both credit and enterprise. There is nothing illegal about these confederacies, so far as I can perceive. They have come about very naturally, generally without plan or deliberation, rather because there was so much money to be invested and it was in the hands, at great financial centres, of men acquainted with one another and intimately associated in business, than because any one had conceived and was carrying out a plan of general control. But they are none the less a potent force in our economic and financial system on that account. Their very existence gives rise to the suspicion of a Money Trust — a concentration of the control of credit which may at any time become infinitely dangerous to free enterprise.’
It will be observed that this statement of the case, though conceived in an altogether different spirit from the sweeping and detailed assertions of the Congressional orators previously cited, none the less pictures a state of affairs which calls for very serious and impartial consideration. From the temperate statement of Mr. Wilson’s speech of acceptance, and from the frank admissions, already cited, of Mr. Reynolds and Mr. Baker, one conclusion becomes inevitable; and that is, that we are in the presence of a novel and striking condition of things in American finance, whereby active or potential control of a very great part both of our financial institutions and of our industrial institutions, is concentrated in the hands of a comparatively small group of financiers. If, as President Wilson has said, this ‘came about very naturally’ and ‘without plan or deliberation,’ all the more reason is there for inquiring what were the circumstances and conditions of its origin.
IV
Notwithstanding the Populist party’s allegation of 1892, already cited, the historical fact is that the state of things in American finance and industry which is the basis of the pending discussion had its origin during the period following the panic of 1893. Low prices, over-production, agricultural depression, speculative overconstruction of railways, speculative over-capitalization of manufacturing enterprise, had brought the country into a state of very general insolvency, which, through mismanagement of the national finances, had all but touched the government. Of the country’s railways in particular, more than sixty per cent of the outstanding capital stock was receiving no dividend, and twenty-five per cent of it represented companies in the hands of receivers.
Ownership and control of these railways had been widely distributed; there was actually less of concentrated domination, by a few capitalists or groups of capitalists, than had existed a dozen years before the panic of 1893. Ownership of the comparatively new industrial trusts (a good part of which came to grief financially in 1893, or shortly afterward) was hardly concentrated at all. There was no joint control of groups of banking institutions; in New York City itself, each of the great banks was an independent power.
But the problem confronting the community when the panic of 1893 had spent its force, was one of financial reconstruction. The work was long surrounded with discouragement; for, in order to place these great corporations on their feet again, large amounts of fresh capital were necessary, and an even larger command of credit. These requirements arose at a time while the country itself was poor; when available capital was lacking, and credit hard to obtain because of the doubt and suspicion surrounding the previous history of the enterprises. It was natural, and indeed inevitable, that the owners of these insolvent properties, having failed to obtain consent of the conflicting interests to their plan of reorganization, and having failed to obtain assurance of the fresh capital required, should have asked the powerful international banking-houses to undertake the task.
It was then that the contrivance of the ‘voting trust’ — another much-discussed phenomenon of the Pujo inquiry — began to play an important part. The reasons for that departure from ordinary company management obviously were, that many of the corporations in question had lately been wrecked by incompetent managements, and that subscribers of the requisite capital for reorganization laid down the stipulation that, for a stated term of years, selection of directors and general oversight of the companies’ finances should be irrevocably placed in the hands of the banking-houses which had assumed the task of reorganization, and in whose financial sagacity and financial probity confidence was general.
So far nothing had happened which, in the light of the actual situation, was not logical and reasonable. What would have followed, had the ensuing decade been one of slow and deliberate industrial expansion, is not wholly easy to conjecture. Within half a dozen years, however — partly because of the world-wide recovery in staple prices, partly because of great good fortune of American agriculture, partly because of the disappearance of the depreciatedcurrency peril — a wave of extraordinary prosperity swept over the United States. One speedy result of this remarkable turn in the situation was that capitalists of every stamp began snatching for control of properties in some one else’s hands.
From 1899 to 1901 inclusive, three tendencies shaped the financial history of the period. One was the excited bidding of rival groups of capitalists, to get possession of one or more of the great railways and industrial corporations. Another was the effort to avert mutual hostility and destructive competition by arranging that two or more rival companies should have representation in one another’s directorate. The third was the buying-up of out right control in a group of competing corporations, either through actual purchase, by one of the companies, of the outstanding shares of its competitors, or through organization of an entirely new company, which bought and held a controlling interest in the shares of its competitors.
To what extent the second and third of these processes were, in their origin, simple protective measures, honestly adopted by conservative banking interests to safeguard a given corporation from outside attack or from capture by unscrupulous adventurers, and to what extent they were suggested by growing ambition for centralized control, it is not easy absolutely to measure. The public-spirited motive certainly played some part in dictating the policy, especially during the earlier year or two of that extraordinary period; that fact will be admitted by all who studied the episode at close range, and who knew the personal character and principles of the newly-made millionaires who were then conducting their campaign of booty. There was at least the conceivable possibility of another era of Jay Goulds, Jim Fisks, and Commodore Vanderbilts, with another orgy, on a far larger scale than that of 1869, of corrupt and dishonest administration of the affairs of corporations.
As late as 1902, one of the most important railway companies in the United States actually passed, through the medium of Stock-Exchange trading, from the control of conservative English capitalists to the control of an American gambler and speculator, who had acquired his fortune by company promotions of an altogether unscrupulous sort. It was rescued from his grasp through its purchase by another railway company controlled by conservative banking interests, and thus, apparently without any such original purpose on their part, became a link in the concentration of control over corporations. This was only one out of numerous similar instances.
V
But movements of this nature very rarely stop with the achievement of their original purpose, and there were special reasons why that movement did not stop. The period in which it occurred was itself of a character to stimulate enormously the movement of corporate concentration, and it was manifest from the start that a mixture of motives was at work in it. An era in which unprecedentedly easy credit and unprecedentedly large supplies of capital seeking investment, coincided with the letting-down of the bars against unlimited combination of corporations, was bound to arouse the activities of ambitious financiers. Some of them bought up rival companies and merged them with their own, simply to crowd aggressive competitors out of the field. Some of them grasped at such other corporations merely to insure their own personal supremacy. Some of them bought up one company, or a group of companies, in order to sell the whole property, at a large advance in price, to some one else.
On the one hand, the speculators grew to believe that they had found the philosopher’s stone of profit; on the other, the serious promoting financiers began to talk of an age in which business could no longer be done save under such auspices. It was from this period that there dated the subsequently familiar talk, repeated ad nauseam in the Anti-Trust law controversies and in the last presidential campaign, about the impossibility of America’s ‘ keeping in the race of industrial competition ’ unless equipped with these monstrous corporation mergers.
The Standard Oil, the American Tobacco, the Amalgamated Copper, the billion-dollar United States Steel, the International Mercantile Marine — these and a hundred other less celebrated ‘holding-company’ enterprises were organized and floated during a period of hardly four consecutive years, from 1899 to 1902 inclusive. The whole thing happened so suddenly and swiftly that the community scarcely seemed to be aware what was happening.
Mr. J. P. Morgan, in a certain famous statement to the court, set forth, in the manner of one inviting unqualified approval, his belief in a system of corporations so large that nobody could get control of them, and that no existing management could be dislodged. Mr. Morgan was right in assuming that, if the ‘holding company’s’ capital was large enough, there was no human possibility of its management being dislodged. It was, however, a justice of the Supreme Court who pressed the logic of this new machinery of corporations pitilessly to its real conclusion. Pending the hearing on appeal, he asked the counsel for Northern Securities— the holding company in which had been lodged two rival railways and two rival interests in one railway — why the same contrivance might not be utilized ‘until a single corporation whose stock was owned by three or four parties would be in practical control of both roads, or, having before us the possibilities of combination, the control of the whole transportation system of the country.’ The eminent lawyer who represented the holding company replied that such a thing was possible, even though improbable.
VI
Such was the situation which was coming to exist in 1902. Because it was an unprecedented situation, however, it did not necessarily follow that it was a mischievous or an undesirable situation. With their recollection fixed on the reckless and unprincipled guerillas of high finance in that and the three preceding years, the bankers who were riveting this machinery of concentration publicly contended that, so far from being cither mischievous or undesirable, it was altogether for the best interests of the investing public. But that assumption naturally remained to be proved.
It was disputed, first, by a question immediately put to the promoters of the impregnable corporate strongholds, and reflected with curious exactness, a decade afterward, in Mr. Baker’s testimony before the Pujo Committee. Even supposing the financiers, now irrevocably occupying the Seats of the Mighty, to be men so perfectly disinterested and capable in their policies that no minority shareholder would wish to dislodge them, who was to answer for their successors? For, manifestly, those successors would be virtually named by the present incumbents, and would be equally free from any fear of discipline by shareholders for blunders and malfeasance in office. The assumption appeared to be that no mistakes could be made in selecting the heirs to such responsibilities. Whether or not the public mind would have been willing to surrender itself to an inference so foreign to its ordinary instinct and experience, a highly instructive test was soon to be applied to the question of the impeccability even of existing managements of these colossal corporations.
A series of events raised the question whether the mere possession of such power had not perverted the ordinary business common-sense of the supposedly infallible directorates. Two of these companies, so organized that permanency of existing managements was insured, were the Amalgamated Copper and the United States Steel. Beginning with 1901, the career of the Amalgamated holding company was, from the copper trade’s own point of view, a story of stupidity and misjudgment such as, if practiced by the managers of a ten-thousand-dollar company, would have necessitated their summary and contemptuous ejection from office. The directorate of this corporation displayed a complete and constant misjudgment of the market for their product. When the price of copper was abnormally high, they not only held back their own metal from market, but bought the metal of their competitors. When, on the contrary, it was abnormally low, as a result of the collapse which inevitably followed, they were heavy sellers. The only principle of trade of which they ever demonstrated their mastery was the principle that copper-producing companies would pay larger dividends with copper at 16 or 20 cents a pound than with copper at 10 or 12, and their only distinct programme of policy was based on their idea that a producing company with money enough to hold back its output for an abnormally high price could make the consumer buy it at that price, in the usual quantity.
The United States Steel began by paying dividends on an inflated common stock, largely exchanged for stock of other companies on which no dividends had ever been earned or paid. When it was discovered — what conservative steel experts had predicted from the start — that the company’s preferred stock would probably, on occasion, fail to earn its stipulated dividend, the management proposed to turn something like half of the $500000,000 seven per cent preferred stock into five per cent bonds —an expedient worthy of the infancy of financial science, and yet for insuring which, millions were handed over to underwriting syndicates; an expedient which was eventually stopped by the protest of some of the company’s own directors.
These incidents I mention merely to show that there are flaws in the theory that the interests of the investing public are safe with any corporation in the hands of self-perpetuating directorates, whatever their prestige or affiliations. As events turned out, however, this tendency to the rapid and permanent massing of the agencies of production and manufacture in the hands of a few autocratic groups of financiers encountered a different and more effective challenge than that of minority shareholders or outside critics.
The Anti-Trust law of 1890 was drawn with a clear view to such future possibilities; for the process of concentrated control of various industries had begun even then. That law unquestionably voiced a public sentiment which has prevented, during the twenty-two subsequent years, any weakening of its legitimate scope or force. The Northern Securities dissolution, in accordance with the Supreme Court decision of 1904, supplemented by the Standard Oil and American Tobacco dissolutions after the decisions of 1911, put a definite end to the process of gathering productive industry into the hands of a few huge corporations, under the management of small groups of men who could never be unseated.
Now, the fact of particular importance, in the chapter of history which I have just reviewed, is that the movement, whether accidental or deliberate, toward monopoly of transportation and industrial production, has been definitely blocked. An attempt to-day to organize another holding company such as the Northern Securities or the United States Steel, would almost certainly encounter a Federal injunction which would strangle it in its cradle. New Jersey itself, whose lax and mischievous corporation laws, adopted twenty years or so ago, made of that state a nest for the new corporations — the Steel Trust, the Tobacco Trust, the Northern Securities, the Standard Oil, the Mercantile Marine — which wanted charters permitting them to do anything they should choose, has this year repealed those laws in favor of a sound incorporation statute which will surround both new and old companies with restrictions from which no American corporation ought ever to have been free. Under the proposed provisions, the ‘holding-company’ device can never be invoked again, and mergers of corporations will be permitted only subject to the approval of the Public Utilities Commission.
One after another, the most dangerous of the combinations of 1899 and 1901 have been dissolved and reduced to their component parts. It was none too soon; for although a complete private monopoly of industrial producing agencies could never have been realized, continued and unhindered progress toward such monopoly, in default of the Anti-Trust law, would probably have invoked, in the public defense, the establishment of a national bureau to fix the maximum prices for the products of such concerns. And if the maximum prices, then, in due course (as the Interstate Commerce Commission’s regulation of the railways indicates), the minimum prices also. In other words, granting the permanent supremacy of these enormous holding companies in all avenues of productive industry, we should presently have been confronted with a public declaration that the law of supply and demand no longer operated, and with governmental commissions to fix the cost of living.
That this formidable step in the direction of state socialism should actually have been proposed by the executive head of the largest of these industrial holding companies, was conclusive proof that the promoters had abandoned all hope of unimpeded control of the avenues of production. A political party and a Presidential candidate last year repeated this proposal, on the grounds, first, that disruption of the trusts meant economic chaos; and secondly, that the companies already formed out of such dissolutions were making too much money. But the very absurdity and contradiction of the reasoning showed that the country had not yet reached the necessity for any such alternative. Nothing could have demonstrated more conclusively than the sequel to such dissolutions of holding companies, without disturbance to their respective industries, that the argument from the necessity of these colossal mergers to our national progress is nonsense, that ‘Big Business’ can be conducted as successfully and as profitably without them as with them; in other words, that the‘holding company’ on the scale of the speculative decade 1899-1907 is a malignant excrescence on the economic organism.
VII
But after all this corrective process, which is still uncompleted, there was left another field for the activities of concentrated capital. A dozen years ago, when organization of the huge industrial trusts was the order of the day, the problem of having such promotions originally financed by powerful banking institutions, was a part of the calculations. Since financial rivalries, disputes as to the wisdom of the undertaking, and doubts over the propriety of devoting fiduciary funds in large amount to purposes of the sort, were bound to arise, it became a manifest advantage for the organizers of the industrial combinations to possess a voice in the councils of the banks themselves.
That such influence was an essential factor in the ambitious enterprises of the day, was never questioned or denied. In 1899, one of the largest national banks in New York City audaciously handed over its facilities to the promoters of the Copper Trust, to facilitate an operation so surrounded with questionable financial methods that even Wall Street protested angrily against it. When the utterly unsound and obnoxious plan to convert the Steel Trust’s preferred stock into bonds was intrusted to an underwriting syndicate, powerful banks were again brought in among the underwriters. Both operations, in my judgment, were illegal under the National Banking law. When Wall Street high finance became sharply divided into two contending factions, which collided with disastrous results in the famous battle of 1901 for control of Northern Pacific stock, the great banking institutions of New York were already becoming known as ‘Morgan banks,’ or ‘Harriman banks.’ No one who kept abreast of Wall Street affairs during that period, will have forgotten the extraordinary rise in the market for stock of both kinds of institutions — a rise which carried prices of such shares to heights out of all relation to the net investment-yield from dividends.
The panic of 1907 — which, like all great panics, marked the end of an epoch of whose financial extravagances it was the natural result — necessarily altered this situation. The government’s successful challenge of the movement toward industrial monopoly through holding companies would of itself have put an end to the huge railway and manufacturing promotion. No such exploits as the Northern Securities railway merger, or the Steel and Harvester combinations, have even been attempted since the Supreme Court’s dissolution decree of 1904. New laws, enacted as a result of the scandals of 1905 in the life-insurance field, and of 1907 in the domain of the trust companies, have fixed a barrier against such use of those institutions’ funds as prevailed in 1901 and 1902, and even if the old-time facilities were still open, the panic has taught an impressive lesson as to the dangers of such enterprises.
When, therefore, we talk of the concentration of banking power since 1907, we are discussing a different situation. The process of drawing powerful banking institutions under the general control of other groups or institutions has undoubtedly been pursued, since 1907, in some respects on an even more extensive and ambitious scale. But its immediate purpose has necessarily changed with the embargo on future hundred-million and thousand-million mergers.
The familiar form of indictment of our present banking organism is that it has placed, in the hands of a limited group of financiers, control of the larger machinery of credit. Mr. A. Piatt Andrew, formerly Assistant Secretary of the Treasury, has lately shown, from a compilation of official statistics, that the number of separate national banks in the United States (25,176 in 1912) had increased two and a half times in the past twelve years, and whereas, in 1900, there was one such bank on the average for every 7,357 people, in 1912, there was one for every 3,788. The cited figures also showed that percentage of increase in number, capital, and resources of the banks, during that period, had been two to four times as great in the West and South as in the East, where the Money Trust’s concentration of capital was presumed to converge.
But this does not altogether meet the question at issue, since nobody has contended that the alleged ‘Money Trust’ was controlling all of the country’s banking institutions. At the great financial centres, however, there has been in progress a quite undeniable concentration of general control over the larger institutions. The Pujo Committee presented figures showing that 6 banking firms of New York and Boston, and 12 banking institutions of those cities and Chicago, whose partners or directors numbered 180, held, through such representatives, 385 directorships in 41 banks and trust companies, 50 directorships in 11 insurance companies, 155 directorships in 31 railway systems, 6 directorships in 2 express companies, 4 directorships in one steamship company, 98 directorships in 28 producing and trading corporations, and 48 directorships in 19 public utility corporations. All told, these 16 firms and institutions, with 180 partners or directors, held 746 seats on the managing boards of 134 corporations. Without going in detail into the figures of the report regarding the capitalization, deposits, and earnings of the corporations in question, it is enough to say that they are, in their respective fields, the largest in the United States, and that, if regarded as a matter of concentrated control, they show an aggregate financial power in finance and industry never paralleled in history.
So far as the representation of these banking firms in the managing boards of the large industrial corporations is concerned, I have already shown, in discussing the financial movement from 1899 to 1902, how it came about. It was not altogether, as Mr. Wilson said last August, ‘because there was so much money to be invested’ and ‘because it was in the hands of men intimately associated in business.’ It was largely because these industrial companies wished to affiliate themselves with strong and conservative bankinghouses and to prevent their own capture by capitalists of the speculative class. Whether the process of sealing such affiliation through so general a representation of the banking-houses on the managing boards was carried too far or not, is another question.
It would also be a legitimate matter of inquiry, on general principles, first, how far these banking representatives dictated the policy of the industrial concerns; secondly, how far that, policy was wise and in the public interest; thirdly, how far such directors, if dominant in the councils of the corporations, used their power disinterestedly or turned it unfairly to the advantage of their own banking institutions. That this group of capitalists, or any other group, has through its influence in the industrial corporations managed to put up prices generally to extortionate heights, is not true. To make that assertion is to confuse the problem of manufacturing combinations, taken by itself, with the problem of banking-house representation on the boards of such corporate combinations. The question of arbitrary control of prices, through mergers, holding companies, and hundred-million-dollar corporations, is a question by itself, and the government has already dealt with it by itself. In all their dissolution suits, the federal prosecuting officers have taken no account of the personality or outside affiliations of the directors of such companies.
The question at issue was, what the industrial company was doing, or had been organized to do. That was the logical and effective way to approach the matter. It laid the heavy hand of the law on corporations, or the directors of them, not because of the composition of their directing boards, but because of the actions and powers of the companies as companies. The danger of arbitrary and artificial prices for commodities is being met in that way, and it could be effectively met in no other. The danger of arbitrary and artificially high transportation rates on the country’s railways has long since passed away. The power of the Money Trust in these directions — if we assume that there is a Money Trust — must be judged in accordance with such facts.
VIII
But the concentration in general control of the largest city banks, which dispense the greater part of the credit required for very large financial operations, remains as a problem in itself. The fact of this position of the important city institutions is, I believe, disputed nowhere. It has, in fact, been frankly recognized and defended by the financiers promoting it. Their arguments in its favor may be thus summed up: First, the consolidation of two or more banking institutions makes for greater economy of management and efficiency of operation. Next, banking institutions of larger power and resources than hitherto are required for the much larger operations involved in present-day business and finance. Further, the bank suspensions, in New York particularly, during the panic of 1907, emphasized the dangers created for the community at large by weak or ill-managed institutions in a central money market. Finally, the incidents of that panic — including the temporary breakdown of credit facilities, the distrust by banks of one another, the lack of quick and effective coöperation to relieve the crisis — taught the supreme necessity for a banking power strong enough to meet the worst emergency. Concentration of the banking resources at the country’s money centre is, in the absence of a central institution such as the Bank of England, the only means of controlling, promptly and effectively, a crisis of that kind.
The arguments are plausible and, up to a certain point, convincing. The general criticism which they invite is, however, much the same as that which converged upon the not dissimilar programme of industrial combination. Bank consolidations may promote economy and efficiency. But to that argument alone there must be some limit, as there was to the similar argument for manufacturing combinations; otherwise, the ideal state of things would be complete monopoly. Larger banks are undoubtedly needed to finance the larger needs of modern business; but this by no means proves that one already large institution must therefore be affiliated, in management or general ownership, with another. Weak institutions will naturally tend to seek the protection of union with strong and prosperous banks; but it does not follow that there must be a common control or ownership for all such combined institutions.
The argument for meeting panic is in some respects the most forcible of all. Yet two rather striking weaknesses in the argument must be noticed —one, that the strongest New York banks, with one or two exceptions, gave little ground for believing, in October, 1907, that their usefulness in meeting such emergencies is proportioned to their financial strength; the other, that the tendency for the largest banks to fall under the general domination of one financial group has been, and is, an absolute barrier to the establishment of a central banking institution on proper and scientific lines. It is argued, very properly, that only through such a semi-governmental institution can the power of a so-called ‘Money Trust’ be restricted or curtailed. But it will quite as surely be argued by Congress and the public that, in some way, directly or indirectly, a financial power which appears on its face to be getting under its own general control the largest private banks would acquire a dominating influence in a central bank as well.
I am stating the arguments, both pro and con, for what they are worth. Neither is conclusive — a fact which usually means that the truth lies somewhere between the two. I have left out of the foregoing summary, moreover, the allegation on which a great part of the pending discussion has been made to hinge. Does the movement of concentration, in the ownership or potential control of the larger banking institutions, mean that virtual control of the market’s credit facilities is passing into the hands of one strong group of financiers? Mr. Morgan’s answer to the question as to the possibility of such control of credit, that ‘all the money in Christendom and all the banks in Christendom cannot control it,’ I have already cited. When asked whether, if he himself ‘owned all the banks of New York, with all their resources,’ he would not then ‘come pretty near to having a control of credit,’ he replied emphatically, ‘Not at all,’ and further declared that, if a competitor or potential competitor of his own industrial enterprises should come to these banks to borrow money, he would get it.
Yet just at that point a question of by no means unreasonable doubt arises. Supposing the general control of the country’s greater banking institutions to be in the hands of a financial group who also dominated certain railway companies and certain industrial corporations, would it, or would it not, be possible for an important legitimate enterprise, competing with those railways or industrial corporations, to be organized as easily as before? Human nature being what it is, the answer must be in the negative.
Something of this consideration may well have been present in Mr. Baker’s mind, when he said of the machinery of concentrated banking capital that, ‘if it got into bad hands, it would be very bad.’ It has not been proved, in all the collated testimony on the question, that discrimination in granting credit, with a view to obstructing competition, has been practiced on any such scale. In one or two cases, unsuccessful projectors of railway or other enterprises, who have failed to obtain the necessary funds, have accused the ‘Money Trust’ of standing in their way; but the event has proved that the enterprises were themselves financially unsound. Nevertheless, we have to deal, not alone with what has actually been done, through unusual and abnormal powers of this nature, but with what may be done hereafter, if the existing system and tendencies are perpetuated. It is in some respects the problem with which the Supreme Court was confronted, when counsel for the Northern Securities set forth that the company had performed no overt act whatever beyond declaring dividends, and therefore could not have acted in restraint of trade; yet admitted that the logical development of its scheme of organization might enable it to own all the railways in the country.
The question what, if anything, we are to do in the way of legislation on the problem, is full of complications. It is peculiarly a subject to be approached with caution, conservatism, and a full recognition of all the facts which bear upon it; for blundering efforts at a remedy would inevitably touch the sensitive nerve of general credit. Nothing will be gained by such wild extravagances as the Congressional allegations from which I have repeated the striking passages. To deal with the problem in such fashion is the surest way to create and emphasize the impression, among thinking men, that there is nothing but malice or ignorance behind the agitation. Some new provisions in our banking laws have probably been made inevitable by the changed conditions which have arisen in the banking organism. Restrictions may be necessitated on the purchase of one fiduciary institution by another, to the extent at least of requiring the approval of responsible public officers. There is plausible argument for the regulation of banking and corporation directorates, so that the same man or group of men shall not be allowed to sit on the boards of competing institutions.
It is not my purpose here, however, to discuss the grounds for or against any specific measure of reform in the existing situation, but to show what that situation actually is. If the problem is conservatively dealt with, the banking interests of the country will have reason to be as grateful as the business community and the general public; for it is difficult not to believe that the financiers who thus far have conducted this movement of banking concentration are themselves aware that they have set in operation machinery which they cannot check or stop, and which is liable to get wholly out of their own control. That was the fact with the movement of industrial concentration. It was the head of a powerful banking and promoting interest, and a party to the suit, who said, when the Northern Securities decree put an end to that infatuation of our great Wall Street financiers, that the decision ‘is a blessing in disguise, for the movement has already gone too far.’