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

232. THE SATELLITES OF THE "MONEY TRUST”
BY THE PUJO COMMITTEE

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

The patronage thus proceeding from the inner group and its subgroups is of great value to these banks and bankers, who are thus tied by self-interest to the great issuing houses and may be regarded as a part of this vast financial organization. Such patronage yields no inconsiderable part of the income of these banks and bankers without much risk on account of the facilities of the principal groups for placing issues of securities through their domination of great banks and trust companies and their other domestic affiliations and

'Adapted from Report of the Committee Appointed to Investigate the Concentration of Control of Money and Credit, 62d Cong., 3d sess., No. 1593, pp.

132-33.

their foreign connections. The underwriting commissions on issues made by this inner group are easily earned and do not ordinarily involve the underwriters in the purchase of the underwritten securities. Their interest in the transaction is generally adjusted, unless they choose to purchase part of the securities, by the payment to them of a commission. There are, however, occasions on which this is not the case. The underwriters are then required to take the securities. Bankers and brokers are so anxious to be permitted to participate in these transactions under the lead of the inner group that as a rule they join when invited to do so, regardless of their approval of the particular business, lest by refusing they should thereafter cease to be invited.

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

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

233. THE DEFENSE OF FINANCIAL CONCENTRATION' By J. P. MORGAN & CO.

We venture to point out that such "concentration" as has taken place in New York and other financial centers has been due, not to the purpose and activities of men, but primarily to the operation of our antiquated banking system, which automatically compels interior banks to "concentrate" in New York City hundreds of millions of

Adapted from a letter in response to the invitation of the Pujo Committee, February 25, 1913, pp. 3-26.

reserve funds, and, next, to economic laws which in every country create some one city as the great financial center, and which draw to it, in enormous volume, investment funds for the development of industrial enterprises throughout the country.

Just as grain and cotton and manufactures are commodities subject to the unchanging laws of supply and demand, so, in the same way, money and credits are commodities subject to the same unvarying laws, but far more intensely; for while bulky merchandise is not always immediately transferable upon demand, money and credits are so liquid as to be transferable by telegraph all over the world. Since the beginning of organized industry and commerce covering more than two centuries in England, France, and Germany and one hundred years in America, men never yet have succeeded in overriding economic law; and, further, such an achievement is impossible, even though one were willing to attribute sinister motives to the leading men of business in the chief cities of this country.

In the preamble to the House Resolution under which your Committee acts we find this statement: "Whereas it has been further charged and is generally believed [the italics are our own] that these same groups of financiers are enabled to regulate the interest rates for money, to create, avert, and compose panics, etc." The factors which determine interest rates are not local in their source, but are world-wide, being determined and-owing to the freedom of international exchange-being regulated by the average demand for credit throughout the world's money markets. If any man or group of men had the ability and resources-which they have not-to withhold credits in any one market, like New York, the situation would ordinarily be promptly relieved by the automatic inflow of credits from some altogether foreign source.

We regret that a belief so incredible, so abhorrent, and so harmful to the country as that the panic of 1907 was actually due to the machinations of certain powerful men should for a moment have found lodgment anywhere.

No one will deny that men frequently are selfish, ambitious, and reckless, but in order to sustain the theory that the panic of 1907 was "engineered" one must attribute some motive for their assumed achievements. And by no process of reasoning can such motive be imagined, because of the fact that men possessing even a fraction of the influence and resources attributed to them always are the ones holding the largest amounts of fixed investments which, by disturbed

financial conditions, always suffer most severely. It is impossible, therefore, to imagine a motive on the part of such persons as would lead to a campaign of self-destruction.

The resolution under which your Committee acts further states that a comparatively small group of men "have wielded a power over the business, commerce, credits, and finances of the country that is despotic and perilous and is daily becoming more perilous to the public welfare."

For the maintenance of such an impossible economic theory there have been spread before your Committee elaborate tables of so-called interlocking directorates from which exceedingly mistaken inferences have been publicly drawn. In these tables it is shown that 180 bankers and bank directors serve upon the boards of corporations having resources aggregating twenty-five billion dollars, and it is implied that this vast aggregate of the country's wealth is at the disposal of these 180 men. But such an implication rests solely upon the untenable theory that these men, living in different parts of the country, in many cases personally unacquainted with each other, and in most cases associated only in occasional transactions, vote always for the same policies and control with united purpose the directorates of the 132 corporations on which they serve. The testimony failed to establish any concerted policy or harmony of action binding these 180 men together, and as a matter of fact no such policy exists. The absurdity of the assumption of such control becomes more apparent when one considers that on the average these directors represent only one-quarter of the memberships of their boards. It is preposterous to suppose that every "interlocking" director has full control in every organization with which he is connected, and that the majority of directors who are not "interlocking" are mere figureheads, subject to the will of a small minority of their boards.

Perhaps the greatest harm in the presentation referred to lay in the further unwarranted inference, to which has been given wide publicity, that the vast sum of $25,000,000,000 was in cash or liquid form, subject to the selfish use or abuse of individuals. Such an idea excites the public mind to demand the correction of a fancied situation which does not exist.

The steady growth in the size of banks in New York and Chicago and the frequent merger of two or more banks into one institution have erroneously been designated before your Committee as "concentration." This steady growth and these mergers, however, are a

development due simply to the demand for larger banking facilities to care for the growth of the country's business. As our cities double and treble in size and importance, as railroads extend and industrial plants expand, not only is it natural, but it is necessary, that our banking institutions should grow in order to care for the increased demands put upon them. Perhaps it is not known as well as it should be that in New York City the largest banks are far inferior in size to banks in the commercial capitals of other and much smaller countries. The largest bank in New York City today has resources amounting to only three-fifths of the resources of the largest bank in England, to only one-fourth of the resources of the largest bank in France, and to less than one-fifth of the resources of the largest bank in Germany. As the Committee is aware, in New York City there are only three banks with resources in excess of $200,000,000, while there are ten such institutions in London, five in Berlin, and four in Paris.

It is also perhaps not sufficiently recognized that, even as it is, American banks have not fully kept pace with the development of American business. Hundreds of the financial transactions of today are so large that no single bank commands sufficient resources to handle them. This is especially true with respect to the great public utilities which are essential for the development and welfare of the community. Even our largest banks are seldom able separately to extend the credit which such undertakings require, no one national bank being permitted by law to loan in excess of 10 per cent of its capital and surplus to any one individual or concern. When it is remembered that literally hundreds of corporations in this country are now obliged to borrow annually sums of a million dollars and upward apiece, it is obvious that the size of our banks must grow to keep pace with this demand.

Likewise, with respect to the tendency to co-operation among banks, noted especially since the panic of 1907, we believe that further statistics of interest on this point can be made available, such facts going to show, first, that since 1907 co-operation has been more active by reason of the lesson which banks in all large cities then learned, that, for self-preservation, they could not-as is possible in other countries rely upon a strong and elastic banking system, but must gain such protection by concurrent action; and, second, that such co-operation is simply a further result of the necessity for handling great transactions. There are not a few railroad bond issues each