Baker is a common
director in the six railroads which haul 80 per
cent.
director in the six railroads which haul 80 per
cent.
Louis Brandeis - 1914 - Other People's Money, and How Bankers Use It
org/access_use#pd-google
? INTERLOCKING DIRECTORATES 65
discretion in the granting or denying of loans.
But that discretion should be exercised, not only
honestly as it affects stockholders, but also
impartially as it affects the public. Mere
honesty to the stockholders demands that the
interests to be considered by the directors be
the interests of all the stockholders; not the profit
of the part of them who happen to be its direct-
ors. But the general welfare demands of the
director, as trustee for the public, performance of
a stricter duty. The fact that the granting of
loans involves a delicate exercise of discretion
makes it difficult to determine whether the rule
of equality of treatment, which every public-
service corporation owes, has been performed.
But that difficulty merely emphasizes the im-
portance of making absolute the rule that banks
of deposit shall not make any loan nor engage in
any transaction in which a director has a private
interest. And we should bear this in mind:
If privately-owned banks fail in the public
duty to afford borrowers equality of opportunity,
there will arise a demand for government-owned
banks, which will become irresistible.
The statement of Mr. Justice Holmes of the
Supreme Court of the United States, in the
Oklahoma Bank case, is significant:
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? 66 OTHER PEOPLE'S MONEY
"We cannot say that the public interests to
which we have adverted, and others, are not
sufficient to warrant the State in taking the whole
business of banking under its control. On the
contrary we are of opinion that it may go on from
regulation to prohibition except upon such con-
ditions as it may prescribe. "
Nor would the requirement that banks shall
make no loan in which a director has a private
interest impose undue hardships or restrictions
upon bank directors. It might make a bank
director dispose of some of his investments and
refrain from making others; but it often happens
that the holding of one office precludes a man
from holding another, or compels him to dispose
of certain financial interests.
A judge is disqualified from sitting in any
case in which he has even the smallest financial
interest; and most judges, in order to be free to
act in any matters arising in their court, proceed,
upon taking office, to dispose of all investments
which could conceivably bias their judgment
in any matter that might come before them. An
Interstate Commerce Commissioner is prohibited
from owning any bonds or stocks in any corpora-
OFFICIAL PRECEDENTS
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? INTERLOCKING DIRECTORATES 67
tion subject to the jurisdiction of the Commission.
It is a serious criminal offence for any executive
officer of the federal government to transact
government business with any corporation in the
pecuniary profits of which he is directly or
indirectly interested.
And the directors of our great banking in-
stitutions, as the ultimate judges of bank credit,
exercise today a function no less important to the
country's welfare than that of the judges of our
courts, the interstate commerce commissioners,
and departmental heads.
SCOPE OP THE PROHIBITION
In the proposals for legislation on this subject,
four important questions are presented:
1. Shall the principle of prohibiting inter-
locking directorates in potentially competing
corporations be applied to state banking insti-
tutions, as well as the national banks?
2. Shall it be applied to all kinds of corpora-
tions or only to banking institutions?
3. Shall the principle of prohibiting corpora-
tions from entering into transactions in which the
management has a private interest be applied to
both directors and officers or be confined in its
application to officers only?
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? 68 OTHER PEOPLE'S MONEY
4. Shall the principle be applied so as to
prohibit transactions with another corporation in
which one of its directors is interested merely as
a stockholder?
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? CHAPTER IV
SERVE ONE MASTER ONLY
The Pujo Committee has presented the
facts concerning the Money Trust so clearly
that the conclusions appear inevitable. Their
diagnosis discloses intense financial concentra-
tion and the means by which it is effected.
Combination,--the intertwining of interests,--
is shown to be the all-pervading vice of the
present system. With a view to freeing in-
dustry, the Committee recommends the enact-
ment of twenty-one specific remedial provisions.
Most of these measures are wisely framed to
meet some abuse disclosed by the evidence; and
if all of these were adopted the Pujo legislation
would undoubtedly alleviate present suffering
and aid in arresting the disease. But many of
the remedies proposed are "local" ones; and a
cure is not possible, without treatment which is
fundamental. Indeed, a major operation is
necessary. This the Committee has hesitated
to advise; although the fundamental treatment
required is simple: "Serve one Master only. "
80
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? 70 OTHER PEOPLE'S MONEY
The evils incident to interlocking director-
ates are, of course, fully recognized; but the
prohibitions proposed in that respect are re-
stricted to a very narrow sphere.
First: The Committee recognizes that po-
tentially competing corporations should not
have a common director;--but it restricts this
prohibition to directors of national banks,
saying:
"No officer or director of a national bank
shall be an officer or director of any other bank
or of any trust company or other financial or
other corporation or institution, whether or-
ganized under state or federal law, that is author-
ized to receive money on deposit or that is engaged
in the business of loaning money on collateral or
in buying and selling securities except as in this
section provided; and no person shall be an
officer or director of any national bank who is
a private banker or a member of a firm or partner-
ship of bankers that is engaged in the business of
receiving deposits: Provided, That such bank,
trust company, financial institution, banker, or
firm of bankers is located at or engaged in busi-
ness at or in the same city, town, or village as
that in which such national bank is located or
engaged in business: Provided further, That a
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? SERVE ONE MASTER ONLY 71
director of a national bank or a partner of
such director may be an officer or director of
not more than one trust company organized
by the laws of the state in which such national
bank is engaged in business and doing business
at the same place. "
Second: The Committee recognizes that a
corporation should not make a contract in which
one of the management has a private interest;
but it restricts this prohibition (1) to national
banks, and (2) to the officers, saying:
"No national bank shall lend or advance
money or credit or purchase or discount any
promissory note, draft, bill of exchange or other
evidence of debt bearing the signature or in-
dorsement of any of its officers or of any partner-
ship of which such officer is a member, directly
or indirectly, or of any corporation in which
such officer owns or has a beneficial interest
of upward of ten per centum of the capital
stock, or lend or advance money or credit to,
for or on behalf of any such officer or of any such
partnership or corporation, or purchase any se-
curity from any such officer or of or from any
partnership or corporation of which such officer
is a member or in which he is financially inter-
ested, as herein specified, or of any corporation
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? 72 OTHER PEOPLE'S MONEY
of which any of its officers is an officer at the
time of such transaction. "
Prohibitions of intertwining relations so re-
stricted, however supplemented by other pro-
visions, will not end financial concentration.
The Money Trust snake will, at most, be
scotched, not killed. The prohibition of a
common director in potentially competing cor-
porations should apply to state banks and trust
companies, as well as to national banks; and
it should apply to railroad and industrial cor-
porations as fully as to banking institutions.
The prohibition of corporate contracts in which
one of the management has a private interest
should apply to directors, as well as to officers,
and to state banks and trust companies and
to other classes of corporations, as well as to
national banks. And, as will be hereafter shown,
such broad legislation is within the power of
Congress.
Let us examine this further:
THE PROHIBITION OF COMMON DIRECTORS IN PO-
TENTIALLY COMPETING CORPORATIONS
1. National Banks. The objection to com-
mon directors, as applied to banking institutions,
is clearly shown by the Pujo Committee.
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? SERVE ONE MASTER ONLY 73
"As the first and foremost step in applying a
remedy, and also for reasons that seem to us
conclusive, independently of that consideration,
we recommend that interlocking directorates
in potentially competing financial institutions
be abolished and prohibited so far as lies in
the power of Congress to bring about that re-
sult. . . . When we find, as in a number
of instances, the same man a director in half a
dozen or more banks and trust companies all
located in the same section of the same city,
doing the same class of business and with a like
set of associates similarly situated, all belong-
ing to the same group and representing the
same class of interests, all further pretense
of competition is useless. . . . If banks
serving the same field are to be permitted
to have common directors, genuine competition
will be rendered impossible. Besides, this prac-
tice gives to such common directors the un-
fair advantage of knowing the affairs of bor-
rowers in various banks, and thus affords
endless opportunities for oppression. "
This recommendation is in accordance with
the legislation or practice of other countries.
The Bank of England, the Bank of France, the
National Bank of Belgium, and the leading
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? 74 OTHER PEOPLE'S MONEY
banks of Scotland all exclude from their boards
persons who are directors in other banks. By-
law, in Russia no person is allowed to be on the
board of management of more than one bank.
The Committee's recommendation is also in
harmony with laws enacted by the Common-
wealth of Massachusetts more than a genera-
tion ago designed to curb financial concentra-
tion through the savings banks. Of the great
wealth of Massachusetts a large part is repre-
sented by deposits in its savings banks. These
deposits are distributed among 194 different
banks, located in 131 different cities and towns.
These 194 banks are separate and distinct; not
only in form, but in fact. In order that the
banks may not be controlled by a few financiers,
the Massachusetts law provides that no execu-
tive officer or trustee (director) of any savings
bank can hold any office in any other savings
bank. That statute was passed in 1876. A few
years ago it was supplemented by providing that
none of the executive officers of a savings bank
could hold a similar office in any national bank.
Massachusetts attempted thus to curb the power
of the individual financier; and no disadvantages
are discernible. When that Act was passed the
aggregate deposits in its savings banks were
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? SERVE ONE MASTER ONLY 75
$243,340,642; the number of deposit accounts
739,289; the average deposit to each person of
the population $144. On November 1, 1912,
the aggregate deposits were $838,635,097. 85;
the number of deposit accounts 2,200,917; the
average deposit to each account $381. 04. Mas-
sachusetts has shown that curbing the power of
the few, at least in this respect, is entirely
consistent with efficiency and with the prosperity
of the whole people.
2. State Banks and Trust Companies. The
reason for prohibiting common directors in
banking institutions applies equally to national
banks and to state banks including those trust
companies which are essentially banks. In New
York City there are 37 trust companies of which
only 15 are members of the clearing house; but
those 15 had on November 2, 1912, aggregate
resources of $827,875,653. Indeed the Bankers'
Trust Company with resources of $205,000,000,
and the Guaranty Trust Company, with re-
sources of $232,000,000, are among the most
useful tools of the Money Trust. No bank in
the country has larger deposits than the latter;
and only one bank larger deposits than the
former. If common directorships were permitted
in state banks or such trust companies, the
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? 76 OTHER PEOPLE'S MONEY
charters of leading national banks would doubt-
less soon be surrendered; and the institutions
would elude federal control by re-incorporating
under state laws.
The Pujo Committee has failed to apply the
prohibition of common directorships in po-
tentially competing banking institutions rigor-
ously even to national banks. It permits the
same man to be a director in one national bank
and one trust company doing business in the
same place. The proposed concession opens the
door to grave dangers. In the first place the
provision would permit the interlocking of any
national bank not with one trust company only,
but with as many trust companies as the bank
has directors. For while under the Pujo bill no
one can be a national bank director who is di-
rector in more than one such trust company,
there is nothing to prevent each of the directors
of a bank from becoming a director in a differ-
ent trust company. The National Bank of Com-
merce of New York has a board of 38 directors.
There are 37 trust companies in the City of New
York. Thirty-seven of the 38 directors might
each become a director of a different New York
trust company: and thus 37 trust companies
would be interlocked with the National Bank of
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? SERVE ONE MASTER ONLY 77
Commerce, unless the other recommendation of
the Pujo Committee limiting the number of
directors to 13 were also adopted.
But even if the bill were amended so as to
limit the possible interlocking of a bank to a
single trust company, the wisdom of the conces-
sion would still be doubtful. It is true, as the
Pujo Committee states, that "the business that
may be transacted by" a trust company is of "a
different character" from that properly trans-
acted by a national bank. But the business
actually conducted by a trust company is, at
least in the East, quite similar; and the two
classes of banking institutions have these vital
elements in common: each is a bank of deposit,
and each makes loans from its deposits. A
private banker may also transact some business
of a character different from that properly con-
ducted by a bank; but by the terms of the
Committee's bill a private banker engaged in
the business of receiving deposits would be
prevented from being a director of a national
bank; and the reasons underlying that prohi-
bition apply equally to trust companies and to
private bankers.
3. Other Corporations. The interlocking of
banking institutions is only one of the factors
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? 78 OTHER PEOPLE'S MONEY
which have developed the Money Trust. The
interlocking of other corporations has been an
equally important element. And the prohibi-
tion of interlocking directorates should be ex-
tended to potentially competing corporations
whatever the class; to life insurance companies,
railroads and industrial companies, as well as
banking institutions. The Pujo Committee has
shown that Mr. George F.
Baker is a common
director in the six railroads which haul 80 per
cent. of all anthracite marketed and own 88
per cent. of all anthracite deposits. The Mor-
gan associates are the nexus between such sup-
posedly competing railroads as the Northern
Pacific and the Great Northern; the Southern,
the Louisville & Nashville and the Atlantic
Coast Line, and between partially competing
industrials like the Westinghouse Electric and
Manufacturing Company and the General Elec-
tric. The nexus between all the large poten-
tially competing corporations must be severed,
if the Money Trust is to be broken.
PROHIBITING CORPORATE CONTRACTS IN WHICH THE
MANAGEMENT HAS A PRIVATE INTEREST
The principle of prohibiting corporate contracts
in which the management has a private interest
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? SERVE ONE MASTER ONLY 79
is applied, in the Pujo Committee's recom-
mendations, only to national banks, and in them
only to officers. All other corporations are to be
permitted to continue the practice; and even in
national banks the directors are to be free to
have a conflicting private interest, except that
they must not accept compensation for promoting
a loan of bank funds nor participate in syndicates,
promotions or underwriting of securities in which
their banks may be interested as underwriters or
owners or lenders thereon: that all loans or other
transactions in which a director is interested shall
be made in his own name; and shall be authorized
only after ample notice to co-directors; and that
the facts shall be spread upon the records of the
corporation.
The Money Trust would not be disturbed by a
prohibition limited to officers. Under a law of
that character, financial control would continue
to be exercised by the few without substantial
impairment; but the power would be exerted
through a somewhat different channel. Bank
officers are appointees of the directors; and
ordinarily their obedient servants. Individuals
who, as bank officers, are now important factors
in the financial concentration, would doubtless
resign as officers and become merely directors.
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? 80 OTHER PEOPLE'S MONEY
The loss of official salaries involved could be
easily compensated. No member of the firm of
J. P. Morgan & Co. is an officer in any one of
the thirteen banking institutions with aggregate
resources of $1,283,000,000, through which as
directors they carry on their vast operations. A
prohibition limited to officers would not affect the
Morgan operations with these banking institu-
tions. If there were minority representation on
bank boards (which the Pujo Committee wisely
advocates), such a provision might afford some
protection to stockholders through the vigilance
of the minority directors preventing the dominant
directors using their power to the injury of the
minority stockholders. But even then, the pro-
vision would not safeguard the public; and the
primary purpose of Money Trust legislation is
not to prevent directors from injuring stockhold-
ers; but to prevent their injuring the public
through the intertwined control of the banks.
No prohibition limited to officers will materially
change this condition.
The prohibition of interlocking directorates,
even if applied only to all banks and trust com-
panies, would practically compel the Morgan
representatives to resign from the directorates of
the thirteen banking institutions with which they
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? SERVE ONE MASTER ONLY 81
are connected, or from the directorates of all the
railroads, express, steamship, public utility, manu-
facturing, and other corporations which do busi-
ness with those banks and trust companies.
Whether they resigned from the one or the other
class of corporations, the endless chain would be
broken into many pieces. And whether they re-
tired or not, the Morgan power would obviously be
greatly lessened: for if they did not retire, their
field of operations would be greatly narrowed.
APPLY THE PRIVATE INTEREST PROHIBITION TO ALL
KINDS OP CORPORATIONS
The creation of the Money Trust is due quite
as much to the encroachment of the investment
banker upon railroads, public service, industrial,
and life-insurance companies, as to his control of
banks and trust companies. Before the Money
Trust can be broken, all these relations must be
severed. And they cannot be severed unless
corporations of each of these several classes are
prevented from dealing with their own directors
and with corporations in which those directors
are interested. For instance: The most potent
single source of J. P. Morgan & Co. 's power is
the $162,500,000 deposits, including those of 78
interstate railroad, public-service and industrial
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? 82 OTHER PEOPLE'S MONEY
corporations, which the Morgan firm is free to
use as it sees fit. The proposed prohibition, even
if applied to all banking institutions, would not
affect directly this great source of Morgan power.
If, however, the prohibition is made to include
railroad, public-service, and industrial corpora-
tions, as well as banking institutions, members of
J. P. Morgan & Co. will quickly retire from
substantially all boards of directors.
APPLY THE PRIVATE INTEREST PROHIBITION TO
STOCKHOLDING INTERESTS
The prohibition against one corporation enter-
ing into transactions with another corporation in
which one of its directors is also interested,
should apply even if his interest in the second
corporation is merely that of stockholder. A
conflict of interests in a director may be just
as serious where he is a stockholder only in
the second corporation, as if he were also a
director.
One of the annoying petty monopolies, con-
cerning which evidence was taken by the Pujo
Committee, is the exclusive privilege granted to
the American Bank Note Company by the New
York Stock Exchange. A recent $60,000,000
issue of New York City bonds was denied listina
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? SERVE ONE MASTER ONLY 83
on the Exchange, because the city refused to
submit to an exaction of $55,800 by the Ameri-
can Company for engraving the bonds, when the
New York Bank Note Company would do the
work equally well for $44,500. As tending to
explain this extraordinary monopoly, it was
shown that men prominent in the financial world
were stockholders in the American Company.
Among the largest stockholders was Mr. Morgan,
with 6,000 shares. No member of the Morgan
firm was a director of the American Company;
but there was sufficient influence exerted some-
how to give the American Company the stock
exchange monopoly.
The Pujo Committee, while failing to recom-
mend that transactions in which a director has a
private interest be prohibited, recognizes that a
stockholder's interest of more than a certain size
may be as potent an instrument of influence
as a direct personal interest; for it recommends
that:
"Borrowings, directly or indirectly by . . .
any corporation of the stock of which he (a bank
director) holds upwards of 10 per cent. from the
bank of which he is such director, should only be
permitted, on condition that notice shall have
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? 84 OTHER PEOPLE'S MONEY
been given to his co-directors and that a full
statement of the transaction shall be entered
upon the minutes of the meeting at which such
loan was authorized. "
As shown above, the particular provision for
notice affords no protection to the public; but
if it did, its application ought to be extended
to lesser stock-holdings. Indeed it is difficult to
fix a limit so low that financial interest will not
influence action. Certainly a stockholding in-
terest of a single director, much smaller than 10
per cent. , might be most effective in inducing
favors. Mr. Morgan's stockholdings in the
American Bank Note Company was only three
per cent. The $6,000,000 investment of J. P.
Morgan & Co. in the National City Bank repre-
sented only 6 per cent. of the bank's stock;
and would undoubtedly have been effective,
even if it had not been supplemented by the
election of his son to the board of directors.
SPECIAL DISQUALIFICATIONS
The Stanley Committee, after investigation of
the Steel Trust, concluded that the evils of inter-
locking directorates were so serious that repre-
sentatives of certain industries which are largely
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? SERVE ONE MASTER ONLY 85
dependent upon railroads should be absolutely
prohibited from serving as railroad directors,
officers or employees. It, therefore, proposed to
disqualify as railroad director, officer or employee
any person engaged in the business of manufactur-
ing or selling railroad cars or locomotives, railroad
rail or structural steel, or in mining and selling
coal. The drastic Stanley bill, shows how great
is the desire to do away with present abuses and
to lessen the power of the Money Trust.
Directors, officers, and employees of banking
institutions should, by a similar provision, be
disqualified from acting as directors, officers or
employees of life-insurance companies. The
Armstrong investigation showed that life-in-
surance companies were in 1905 the most potent
factor in financial concentration. Their power
was exercised largely through the banks and
trust companies which they controlled by stock
ownership and their huge deposits. The Arm-
strong legislation directed life-insurance com-
panies to sell their stocks. The Mutual Life and
the Equitable did so in part. But the Morgan
associates bought the stocks. And now, instead
of the life-insurance companies controlling the
banks and trust companies, the latter and the
bankers control the life-insurance companies.
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? 86 OTHER PEOPLE'S MONEY
HOW THE PROHIBITION MAT BE LIMITED
The Money Trust cannot be destroyed unless
all classes of corporations are included in the
prohibition of interlocking directors and of
transactions by corporations in which the man-
agement has a private interest. But it does not
follow that the prohibition must apply to every
corporation of each class. Certain exceptions
are entirely consistent with merely protecting the
public against the Money Trust; although pro-
tection of minority stockholders and business
ethics demand that the rule prohibiting a cor-
poration from making contracts in which a di-
rector has a private financial interest should be
universal in its application. The number of
corporations in the United States Dec. 31, 1912,
was 305,336. Of these only 1610 have a capi-
tal of more than $5,000,000. Few corporations
(other than banks) with a capital of less than
$5,000,000 could appreciably affect general credit
conditions either through their own operations
or their affiliations. Corporations (other than
banks) with capital resources of less than $5,000,-
000 might, therefore, be excluded from the scope
of the statute for the present. The prohibition
could also be limited so as not to apply to any
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? SERVE ONE MASTER ONLY 87
industrial concern, regardless of the amount of
capital and resources, doing only an intrastate
business; as practically all large industrial cor-
porations are engaged in interstate commerce.
This would exclude some retail concerns and
local jobbers and manufacturers not otherwise
excluded from the operation of the act. Like-
wise banks and trust companies located in cities
of less than 100,000 inhabitants might, if thought
advisable, be excluded, for the present if their
capital is less than $500,000, and their resources
less than, say, $2,500,000. In larger cities even
the smaller banking institutions should be sub-
ject to the law. Such exceptions should over-
come any objection which might be raised that
in some smaller cities, the prohibition of inter-
locking directorates would exclude from the
bank directorates all the able business men of
the community through fear of losing the oppor-
tunity of bank accommodations.
An exception should also be made, so as to
permit interlocking directorates between a cor-
poration and its proper subsidiaries. And the
prohibition of transactions in which the manage-
ment has a private interest should, of course, not
apply to contracts, express or implied, for such
services as are performed indiscriminately for
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? 88 OTHER PEOPLE'S MONEY
the whole community by railroads and public
service corporations, or for services, common to
all customers, like the ordinary service of a bank
for its depositors.
THE POWER OF CONGRESS
The question may be asked: Has Congress
the power to impose these limitations upon the
conduct of any business other than national
banks? And if the power of Congress is so lim-
ited, will not the dominant financiers, upon the
enactment of such a law, convert their national
banks into state banks or trust companies^ and
thus escape from congressional control?
The answer to both questions is clear. Con-
gress has ample power to impose such prohibitions
upon practically all corporations, including state
banks, trust companies and life insurance com-
panies; and evasion may be made impossible.
While Congress has not been granted power to
regulate directly state banks, and trust or life
insurance companies, or railroad, public-service
and industrial corporations, except in respect to
interstate commerce, it may do so indirectly
by virtue either of its control of the mail privilege
or through the taxing power.
Practically no business in the United States can/
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? SERVE ONE MASTER ONLY 89
be conducted without use of the mails; and Con-
gress may in its reasonable discretion deny the
use of the mail to any business which is con-
ducted under conditions deemed by Congress
to be injurious to the public welfare. Thus,
Congress has no power directly to suppress lot-
teries; but it has indirectly suppressed them by
denying, under heavy penalty, the use of the
mail to lottery enterprises. Congress has no
power to suppress directly business frauds; but
it is constantly doing so indirectly by issuing
fraud-orders denying the mail privilege. Con-
gress has no direct power to require a newspaper
to publish a list of its proprietors and the amount
of its circulation, or to require it to mark paid-
matter distinctly as advertising: But it has thus
regulated the press, by denying the second-class
mail privilege, to all publications which fail to
comply with the requirements prescribed.
The taxing power has been resorted to by Con-
gress for like purposes: Congress has no power
to regulate the manufacture of matches, or the
use of oleomargarine; but it has suppressed the
manufacture of the "white phosphorous" match
and has greatly lessened the use of oleomargarine
by imposing heavy taxes upon them. Congress
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? 90 OTHER PEOPLE'S MONEY
has no power to prohibit, or to regulate directly
the issue of bank notes by state banks, but it
indirectly prohibited their issue by imposing a
tax of ten per cent. upon any bank note issued by
a state bank.
The power of Congress over interstate com-
merce has been similarly utilized. Congress
cannot ordinarily provide compensation for ac-
cidents to employees or undertake directly to
suppress prostitution; but it has, as an inci-
dent of regulating interstate commerce, enacted
the Railroad Employers' Liability law and the
White Slave Law; and it has full power over
the instrumentalities of commerce, like the
telegraph and the telephone.
As such exercise of congressional power has
been common for, at least, half a century, Con-
gress should not hesitate now to employ it where
its exercise is urgently needed. For a compre-
hensive prohibition of interlocking directorates is
an essential condition of our attaining the New
Freedom. Such a law would involve a great
change in the relation of the leading banks and
bankers to other businesses. But it is the very
purpose of Money Trust legislation to effect a
great change; and unless it does so, the power of
our financial oligarchy cannot be broken.
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? INTERLOCKING DIRECTORATES 65
discretion in the granting or denying of loans.
But that discretion should be exercised, not only
honestly as it affects stockholders, but also
impartially as it affects the public. Mere
honesty to the stockholders demands that the
interests to be considered by the directors be
the interests of all the stockholders; not the profit
of the part of them who happen to be its direct-
ors. But the general welfare demands of the
director, as trustee for the public, performance of
a stricter duty. The fact that the granting of
loans involves a delicate exercise of discretion
makes it difficult to determine whether the rule
of equality of treatment, which every public-
service corporation owes, has been performed.
But that difficulty merely emphasizes the im-
portance of making absolute the rule that banks
of deposit shall not make any loan nor engage in
any transaction in which a director has a private
interest. And we should bear this in mind:
If privately-owned banks fail in the public
duty to afford borrowers equality of opportunity,
there will arise a demand for government-owned
banks, which will become irresistible.
The statement of Mr. Justice Holmes of the
Supreme Court of the United States, in the
Oklahoma Bank case, is significant:
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? 66 OTHER PEOPLE'S MONEY
"We cannot say that the public interests to
which we have adverted, and others, are not
sufficient to warrant the State in taking the whole
business of banking under its control. On the
contrary we are of opinion that it may go on from
regulation to prohibition except upon such con-
ditions as it may prescribe. "
Nor would the requirement that banks shall
make no loan in which a director has a private
interest impose undue hardships or restrictions
upon bank directors. It might make a bank
director dispose of some of his investments and
refrain from making others; but it often happens
that the holding of one office precludes a man
from holding another, or compels him to dispose
of certain financial interests.
A judge is disqualified from sitting in any
case in which he has even the smallest financial
interest; and most judges, in order to be free to
act in any matters arising in their court, proceed,
upon taking office, to dispose of all investments
which could conceivably bias their judgment
in any matter that might come before them. An
Interstate Commerce Commissioner is prohibited
from owning any bonds or stocks in any corpora-
OFFICIAL PRECEDENTS
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? INTERLOCKING DIRECTORATES 67
tion subject to the jurisdiction of the Commission.
It is a serious criminal offence for any executive
officer of the federal government to transact
government business with any corporation in the
pecuniary profits of which he is directly or
indirectly interested.
And the directors of our great banking in-
stitutions, as the ultimate judges of bank credit,
exercise today a function no less important to the
country's welfare than that of the judges of our
courts, the interstate commerce commissioners,
and departmental heads.
SCOPE OP THE PROHIBITION
In the proposals for legislation on this subject,
four important questions are presented:
1. Shall the principle of prohibiting inter-
locking directorates in potentially competing
corporations be applied to state banking insti-
tutions, as well as the national banks?
2. Shall it be applied to all kinds of corpora-
tions or only to banking institutions?
3. Shall the principle of prohibiting corpora-
tions from entering into transactions in which the
management has a private interest be applied to
both directors and officers or be confined in its
application to officers only?
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? 68 OTHER PEOPLE'S MONEY
4. Shall the principle be applied so as to
prohibit transactions with another corporation in
which one of its directors is interested merely as
a stockholder?
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? CHAPTER IV
SERVE ONE MASTER ONLY
The Pujo Committee has presented the
facts concerning the Money Trust so clearly
that the conclusions appear inevitable. Their
diagnosis discloses intense financial concentra-
tion and the means by which it is effected.
Combination,--the intertwining of interests,--
is shown to be the all-pervading vice of the
present system. With a view to freeing in-
dustry, the Committee recommends the enact-
ment of twenty-one specific remedial provisions.
Most of these measures are wisely framed to
meet some abuse disclosed by the evidence; and
if all of these were adopted the Pujo legislation
would undoubtedly alleviate present suffering
and aid in arresting the disease. But many of
the remedies proposed are "local" ones; and a
cure is not possible, without treatment which is
fundamental. Indeed, a major operation is
necessary. This the Committee has hesitated
to advise; although the fundamental treatment
required is simple: "Serve one Master only. "
80
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? 70 OTHER PEOPLE'S MONEY
The evils incident to interlocking director-
ates are, of course, fully recognized; but the
prohibitions proposed in that respect are re-
stricted to a very narrow sphere.
First: The Committee recognizes that po-
tentially competing corporations should not
have a common director;--but it restricts this
prohibition to directors of national banks,
saying:
"No officer or director of a national bank
shall be an officer or director of any other bank
or of any trust company or other financial or
other corporation or institution, whether or-
ganized under state or federal law, that is author-
ized to receive money on deposit or that is engaged
in the business of loaning money on collateral or
in buying and selling securities except as in this
section provided; and no person shall be an
officer or director of any national bank who is
a private banker or a member of a firm or partner-
ship of bankers that is engaged in the business of
receiving deposits: Provided, That such bank,
trust company, financial institution, banker, or
firm of bankers is located at or engaged in busi-
ness at or in the same city, town, or village as
that in which such national bank is located or
engaged in business: Provided further, That a
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? SERVE ONE MASTER ONLY 71
director of a national bank or a partner of
such director may be an officer or director of
not more than one trust company organized
by the laws of the state in which such national
bank is engaged in business and doing business
at the same place. "
Second: The Committee recognizes that a
corporation should not make a contract in which
one of the management has a private interest;
but it restricts this prohibition (1) to national
banks, and (2) to the officers, saying:
"No national bank shall lend or advance
money or credit or purchase or discount any
promissory note, draft, bill of exchange or other
evidence of debt bearing the signature or in-
dorsement of any of its officers or of any partner-
ship of which such officer is a member, directly
or indirectly, or of any corporation in which
such officer owns or has a beneficial interest
of upward of ten per centum of the capital
stock, or lend or advance money or credit to,
for or on behalf of any such officer or of any such
partnership or corporation, or purchase any se-
curity from any such officer or of or from any
partnership or corporation of which such officer
is a member or in which he is financially inter-
ested, as herein specified, or of any corporation
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? 72 OTHER PEOPLE'S MONEY
of which any of its officers is an officer at the
time of such transaction. "
Prohibitions of intertwining relations so re-
stricted, however supplemented by other pro-
visions, will not end financial concentration.
The Money Trust snake will, at most, be
scotched, not killed. The prohibition of a
common director in potentially competing cor-
porations should apply to state banks and trust
companies, as well as to national banks; and
it should apply to railroad and industrial cor-
porations as fully as to banking institutions.
The prohibition of corporate contracts in which
one of the management has a private interest
should apply to directors, as well as to officers,
and to state banks and trust companies and
to other classes of corporations, as well as to
national banks. And, as will be hereafter shown,
such broad legislation is within the power of
Congress.
Let us examine this further:
THE PROHIBITION OF COMMON DIRECTORS IN PO-
TENTIALLY COMPETING CORPORATIONS
1. National Banks. The objection to com-
mon directors, as applied to banking institutions,
is clearly shown by the Pujo Committee.
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? SERVE ONE MASTER ONLY 73
"As the first and foremost step in applying a
remedy, and also for reasons that seem to us
conclusive, independently of that consideration,
we recommend that interlocking directorates
in potentially competing financial institutions
be abolished and prohibited so far as lies in
the power of Congress to bring about that re-
sult. . . . When we find, as in a number
of instances, the same man a director in half a
dozen or more banks and trust companies all
located in the same section of the same city,
doing the same class of business and with a like
set of associates similarly situated, all belong-
ing to the same group and representing the
same class of interests, all further pretense
of competition is useless. . . . If banks
serving the same field are to be permitted
to have common directors, genuine competition
will be rendered impossible. Besides, this prac-
tice gives to such common directors the un-
fair advantage of knowing the affairs of bor-
rowers in various banks, and thus affords
endless opportunities for oppression. "
This recommendation is in accordance with
the legislation or practice of other countries.
The Bank of England, the Bank of France, the
National Bank of Belgium, and the leading
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? 74 OTHER PEOPLE'S MONEY
banks of Scotland all exclude from their boards
persons who are directors in other banks. By-
law, in Russia no person is allowed to be on the
board of management of more than one bank.
The Committee's recommendation is also in
harmony with laws enacted by the Common-
wealth of Massachusetts more than a genera-
tion ago designed to curb financial concentra-
tion through the savings banks. Of the great
wealth of Massachusetts a large part is repre-
sented by deposits in its savings banks. These
deposits are distributed among 194 different
banks, located in 131 different cities and towns.
These 194 banks are separate and distinct; not
only in form, but in fact. In order that the
banks may not be controlled by a few financiers,
the Massachusetts law provides that no execu-
tive officer or trustee (director) of any savings
bank can hold any office in any other savings
bank. That statute was passed in 1876. A few
years ago it was supplemented by providing that
none of the executive officers of a savings bank
could hold a similar office in any national bank.
Massachusetts attempted thus to curb the power
of the individual financier; and no disadvantages
are discernible. When that Act was passed the
aggregate deposits in its savings banks were
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? SERVE ONE MASTER ONLY 75
$243,340,642; the number of deposit accounts
739,289; the average deposit to each person of
the population $144. On November 1, 1912,
the aggregate deposits were $838,635,097. 85;
the number of deposit accounts 2,200,917; the
average deposit to each account $381. 04. Mas-
sachusetts has shown that curbing the power of
the few, at least in this respect, is entirely
consistent with efficiency and with the prosperity
of the whole people.
2. State Banks and Trust Companies. The
reason for prohibiting common directors in
banking institutions applies equally to national
banks and to state banks including those trust
companies which are essentially banks. In New
York City there are 37 trust companies of which
only 15 are members of the clearing house; but
those 15 had on November 2, 1912, aggregate
resources of $827,875,653. Indeed the Bankers'
Trust Company with resources of $205,000,000,
and the Guaranty Trust Company, with re-
sources of $232,000,000, are among the most
useful tools of the Money Trust. No bank in
the country has larger deposits than the latter;
and only one bank larger deposits than the
former. If common directorships were permitted
in state banks or such trust companies, the
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? 76 OTHER PEOPLE'S MONEY
charters of leading national banks would doubt-
less soon be surrendered; and the institutions
would elude federal control by re-incorporating
under state laws.
The Pujo Committee has failed to apply the
prohibition of common directorships in po-
tentially competing banking institutions rigor-
ously even to national banks. It permits the
same man to be a director in one national bank
and one trust company doing business in the
same place. The proposed concession opens the
door to grave dangers. In the first place the
provision would permit the interlocking of any
national bank not with one trust company only,
but with as many trust companies as the bank
has directors. For while under the Pujo bill no
one can be a national bank director who is di-
rector in more than one such trust company,
there is nothing to prevent each of the directors
of a bank from becoming a director in a differ-
ent trust company. The National Bank of Com-
merce of New York has a board of 38 directors.
There are 37 trust companies in the City of New
York. Thirty-seven of the 38 directors might
each become a director of a different New York
trust company: and thus 37 trust companies
would be interlocked with the National Bank of
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? SERVE ONE MASTER ONLY 77
Commerce, unless the other recommendation of
the Pujo Committee limiting the number of
directors to 13 were also adopted.
But even if the bill were amended so as to
limit the possible interlocking of a bank to a
single trust company, the wisdom of the conces-
sion would still be doubtful. It is true, as the
Pujo Committee states, that "the business that
may be transacted by" a trust company is of "a
different character" from that properly trans-
acted by a national bank. But the business
actually conducted by a trust company is, at
least in the East, quite similar; and the two
classes of banking institutions have these vital
elements in common: each is a bank of deposit,
and each makes loans from its deposits. A
private banker may also transact some business
of a character different from that properly con-
ducted by a bank; but by the terms of the
Committee's bill a private banker engaged in
the business of receiving deposits would be
prevented from being a director of a national
bank; and the reasons underlying that prohi-
bition apply equally to trust companies and to
private bankers.
3. Other Corporations. The interlocking of
banking institutions is only one of the factors
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? 78 OTHER PEOPLE'S MONEY
which have developed the Money Trust. The
interlocking of other corporations has been an
equally important element. And the prohibi-
tion of interlocking directorates should be ex-
tended to potentially competing corporations
whatever the class; to life insurance companies,
railroads and industrial companies, as well as
banking institutions. The Pujo Committee has
shown that Mr. George F.
Baker is a common
director in the six railroads which haul 80 per
cent. of all anthracite marketed and own 88
per cent. of all anthracite deposits. The Mor-
gan associates are the nexus between such sup-
posedly competing railroads as the Northern
Pacific and the Great Northern; the Southern,
the Louisville & Nashville and the Atlantic
Coast Line, and between partially competing
industrials like the Westinghouse Electric and
Manufacturing Company and the General Elec-
tric. The nexus between all the large poten-
tially competing corporations must be severed,
if the Money Trust is to be broken.
PROHIBITING CORPORATE CONTRACTS IN WHICH THE
MANAGEMENT HAS A PRIVATE INTEREST
The principle of prohibiting corporate contracts
in which the management has a private interest
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? SERVE ONE MASTER ONLY 79
is applied, in the Pujo Committee's recom-
mendations, only to national banks, and in them
only to officers. All other corporations are to be
permitted to continue the practice; and even in
national banks the directors are to be free to
have a conflicting private interest, except that
they must not accept compensation for promoting
a loan of bank funds nor participate in syndicates,
promotions or underwriting of securities in which
their banks may be interested as underwriters or
owners or lenders thereon: that all loans or other
transactions in which a director is interested shall
be made in his own name; and shall be authorized
only after ample notice to co-directors; and that
the facts shall be spread upon the records of the
corporation.
The Money Trust would not be disturbed by a
prohibition limited to officers. Under a law of
that character, financial control would continue
to be exercised by the few without substantial
impairment; but the power would be exerted
through a somewhat different channel. Bank
officers are appointees of the directors; and
ordinarily their obedient servants. Individuals
who, as bank officers, are now important factors
in the financial concentration, would doubtless
resign as officers and become merely directors.
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? 80 OTHER PEOPLE'S MONEY
The loss of official salaries involved could be
easily compensated. No member of the firm of
J. P. Morgan & Co. is an officer in any one of
the thirteen banking institutions with aggregate
resources of $1,283,000,000, through which as
directors they carry on their vast operations. A
prohibition limited to officers would not affect the
Morgan operations with these banking institu-
tions. If there were minority representation on
bank boards (which the Pujo Committee wisely
advocates), such a provision might afford some
protection to stockholders through the vigilance
of the minority directors preventing the dominant
directors using their power to the injury of the
minority stockholders. But even then, the pro-
vision would not safeguard the public; and the
primary purpose of Money Trust legislation is
not to prevent directors from injuring stockhold-
ers; but to prevent their injuring the public
through the intertwined control of the banks.
No prohibition limited to officers will materially
change this condition.
The prohibition of interlocking directorates,
even if applied only to all banks and trust com-
panies, would practically compel the Morgan
representatives to resign from the directorates of
the thirteen banking institutions with which they
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? SERVE ONE MASTER ONLY 81
are connected, or from the directorates of all the
railroads, express, steamship, public utility, manu-
facturing, and other corporations which do busi-
ness with those banks and trust companies.
Whether they resigned from the one or the other
class of corporations, the endless chain would be
broken into many pieces. And whether they re-
tired or not, the Morgan power would obviously be
greatly lessened: for if they did not retire, their
field of operations would be greatly narrowed.
APPLY THE PRIVATE INTEREST PROHIBITION TO ALL
KINDS OP CORPORATIONS
The creation of the Money Trust is due quite
as much to the encroachment of the investment
banker upon railroads, public service, industrial,
and life-insurance companies, as to his control of
banks and trust companies. Before the Money
Trust can be broken, all these relations must be
severed. And they cannot be severed unless
corporations of each of these several classes are
prevented from dealing with their own directors
and with corporations in which those directors
are interested. For instance: The most potent
single source of J. P. Morgan & Co. 's power is
the $162,500,000 deposits, including those of 78
interstate railroad, public-service and industrial
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? 82 OTHER PEOPLE'S MONEY
corporations, which the Morgan firm is free to
use as it sees fit. The proposed prohibition, even
if applied to all banking institutions, would not
affect directly this great source of Morgan power.
If, however, the prohibition is made to include
railroad, public-service, and industrial corpora-
tions, as well as banking institutions, members of
J. P. Morgan & Co. will quickly retire from
substantially all boards of directors.
APPLY THE PRIVATE INTEREST PROHIBITION TO
STOCKHOLDING INTERESTS
The prohibition against one corporation enter-
ing into transactions with another corporation in
which one of its directors is also interested,
should apply even if his interest in the second
corporation is merely that of stockholder. A
conflict of interests in a director may be just
as serious where he is a stockholder only in
the second corporation, as if he were also a
director.
One of the annoying petty monopolies, con-
cerning which evidence was taken by the Pujo
Committee, is the exclusive privilege granted to
the American Bank Note Company by the New
York Stock Exchange. A recent $60,000,000
issue of New York City bonds was denied listina
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? SERVE ONE MASTER ONLY 83
on the Exchange, because the city refused to
submit to an exaction of $55,800 by the Ameri-
can Company for engraving the bonds, when the
New York Bank Note Company would do the
work equally well for $44,500. As tending to
explain this extraordinary monopoly, it was
shown that men prominent in the financial world
were stockholders in the American Company.
Among the largest stockholders was Mr. Morgan,
with 6,000 shares. No member of the Morgan
firm was a director of the American Company;
but there was sufficient influence exerted some-
how to give the American Company the stock
exchange monopoly.
The Pujo Committee, while failing to recom-
mend that transactions in which a director has a
private interest be prohibited, recognizes that a
stockholder's interest of more than a certain size
may be as potent an instrument of influence
as a direct personal interest; for it recommends
that:
"Borrowings, directly or indirectly by . . .
any corporation of the stock of which he (a bank
director) holds upwards of 10 per cent. from the
bank of which he is such director, should only be
permitted, on condition that notice shall have
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? 84 OTHER PEOPLE'S MONEY
been given to his co-directors and that a full
statement of the transaction shall be entered
upon the minutes of the meeting at which such
loan was authorized. "
As shown above, the particular provision for
notice affords no protection to the public; but
if it did, its application ought to be extended
to lesser stock-holdings. Indeed it is difficult to
fix a limit so low that financial interest will not
influence action. Certainly a stockholding in-
terest of a single director, much smaller than 10
per cent. , might be most effective in inducing
favors. Mr. Morgan's stockholdings in the
American Bank Note Company was only three
per cent. The $6,000,000 investment of J. P.
Morgan & Co. in the National City Bank repre-
sented only 6 per cent. of the bank's stock;
and would undoubtedly have been effective,
even if it had not been supplemented by the
election of his son to the board of directors.
SPECIAL DISQUALIFICATIONS
The Stanley Committee, after investigation of
the Steel Trust, concluded that the evils of inter-
locking directorates were so serious that repre-
sentatives of certain industries which are largely
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? SERVE ONE MASTER ONLY 85
dependent upon railroads should be absolutely
prohibited from serving as railroad directors,
officers or employees. It, therefore, proposed to
disqualify as railroad director, officer or employee
any person engaged in the business of manufactur-
ing or selling railroad cars or locomotives, railroad
rail or structural steel, or in mining and selling
coal. The drastic Stanley bill, shows how great
is the desire to do away with present abuses and
to lessen the power of the Money Trust.
Directors, officers, and employees of banking
institutions should, by a similar provision, be
disqualified from acting as directors, officers or
employees of life-insurance companies. The
Armstrong investigation showed that life-in-
surance companies were in 1905 the most potent
factor in financial concentration. Their power
was exercised largely through the banks and
trust companies which they controlled by stock
ownership and their huge deposits. The Arm-
strong legislation directed life-insurance com-
panies to sell their stocks. The Mutual Life and
the Equitable did so in part. But the Morgan
associates bought the stocks. And now, instead
of the life-insurance companies controlling the
banks and trust companies, the latter and the
bankers control the life-insurance companies.
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? 86 OTHER PEOPLE'S MONEY
HOW THE PROHIBITION MAT BE LIMITED
The Money Trust cannot be destroyed unless
all classes of corporations are included in the
prohibition of interlocking directors and of
transactions by corporations in which the man-
agement has a private interest. But it does not
follow that the prohibition must apply to every
corporation of each class. Certain exceptions
are entirely consistent with merely protecting the
public against the Money Trust; although pro-
tection of minority stockholders and business
ethics demand that the rule prohibiting a cor-
poration from making contracts in which a di-
rector has a private financial interest should be
universal in its application. The number of
corporations in the United States Dec. 31, 1912,
was 305,336. Of these only 1610 have a capi-
tal of more than $5,000,000. Few corporations
(other than banks) with a capital of less than
$5,000,000 could appreciably affect general credit
conditions either through their own operations
or their affiliations. Corporations (other than
banks) with capital resources of less than $5,000,-
000 might, therefore, be excluded from the scope
of the statute for the present. The prohibition
could also be limited so as not to apply to any
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? SERVE ONE MASTER ONLY 87
industrial concern, regardless of the amount of
capital and resources, doing only an intrastate
business; as practically all large industrial cor-
porations are engaged in interstate commerce.
This would exclude some retail concerns and
local jobbers and manufacturers not otherwise
excluded from the operation of the act. Like-
wise banks and trust companies located in cities
of less than 100,000 inhabitants might, if thought
advisable, be excluded, for the present if their
capital is less than $500,000, and their resources
less than, say, $2,500,000. In larger cities even
the smaller banking institutions should be sub-
ject to the law. Such exceptions should over-
come any objection which might be raised that
in some smaller cities, the prohibition of inter-
locking directorates would exclude from the
bank directorates all the able business men of
the community through fear of losing the oppor-
tunity of bank accommodations.
An exception should also be made, so as to
permit interlocking directorates between a cor-
poration and its proper subsidiaries. And the
prohibition of transactions in which the manage-
ment has a private interest should, of course, not
apply to contracts, express or implied, for such
services as are performed indiscriminately for
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? 88 OTHER PEOPLE'S MONEY
the whole community by railroads and public
service corporations, or for services, common to
all customers, like the ordinary service of a bank
for its depositors.
THE POWER OF CONGRESS
The question may be asked: Has Congress
the power to impose these limitations upon the
conduct of any business other than national
banks? And if the power of Congress is so lim-
ited, will not the dominant financiers, upon the
enactment of such a law, convert their national
banks into state banks or trust companies^ and
thus escape from congressional control?
The answer to both questions is clear. Con-
gress has ample power to impose such prohibitions
upon practically all corporations, including state
banks, trust companies and life insurance com-
panies; and evasion may be made impossible.
While Congress has not been granted power to
regulate directly state banks, and trust or life
insurance companies, or railroad, public-service
and industrial corporations, except in respect to
interstate commerce, it may do so indirectly
by virtue either of its control of the mail privilege
or through the taxing power.
Practically no business in the United States can/
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? SERVE ONE MASTER ONLY 89
be conducted without use of the mails; and Con-
gress may in its reasonable discretion deny the
use of the mail to any business which is con-
ducted under conditions deemed by Congress
to be injurious to the public welfare. Thus,
Congress has no power directly to suppress lot-
teries; but it has indirectly suppressed them by
denying, under heavy penalty, the use of the
mail to lottery enterprises. Congress has no
power to suppress directly business frauds; but
it is constantly doing so indirectly by issuing
fraud-orders denying the mail privilege. Con-
gress has no direct power to require a newspaper
to publish a list of its proprietors and the amount
of its circulation, or to require it to mark paid-
matter distinctly as advertising: But it has thus
regulated the press, by denying the second-class
mail privilege, to all publications which fail to
comply with the requirements prescribed.
The taxing power has been resorted to by Con-
gress for like purposes: Congress has no power
to regulate the manufacture of matches, or the
use of oleomargarine; but it has suppressed the
manufacture of the "white phosphorous" match
and has greatly lessened the use of oleomargarine
by imposing heavy taxes upon them. Congress
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? 90 OTHER PEOPLE'S MONEY
has no power to prohibit, or to regulate directly
the issue of bank notes by state banks, but it
indirectly prohibited their issue by imposing a
tax of ten per cent. upon any bank note issued by
a state bank.
The power of Congress over interstate com-
merce has been similarly utilized. Congress
cannot ordinarily provide compensation for ac-
cidents to employees or undertake directly to
suppress prostitution; but it has, as an inci-
dent of regulating interstate commerce, enacted
the Railroad Employers' Liability law and the
White Slave Law; and it has full power over
the instrumentalities of commerce, like the
telegraph and the telephone.
As such exercise of congressional power has
been common for, at least, half a century, Con-
gress should not hesitate now to employ it where
its exercise is urgently needed. For a compre-
hensive prohibition of interlocking directorates is
an essential condition of our attaining the New
Freedom. Such a law would involve a great
change in the relation of the leading banks and
bankers to other businesses. But it is the very
purpose of Money Trust legislation to effect a
great change; and unless it does so, the power of
our financial oligarchy cannot be broken.
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