POWER AND PELF
The operations of so comprehensive a system of concentration necessarily developed in the bankers overweening power. And the bankers’ power grows by what it feeds on. Power begets wealth; and added wealth opens ever new opportunities for the acquisition of wealth and power. The operations of these bankers are so vast and numerous that even a very reasonable compensation for the service performed by the bankers, would, in the aggregate, produce for them incomes so large as to result in huge accumulations of capital. But the compensation taken by the bankers as commissions or profits is often far from reasonable. Occupying, as they so frequently do, the inconsistent position of being at the same time seller and buyer, the standard for so-called compensation actually applied, is not the “Rule of reason”, but “All the traffic will bear.” And this is true even where there is no sinister motive. The weakness of human nature prevents men from being good judges of their own deservings.
The syndicate formed by J. P. Morgan & Co. to underwrite the United States Steel Corporation took for its services securities which netted $62,500,000 in cash. Of this huge sum J. P. Morgan & Co. received, as syndicate managers, $12,500,000 in addition to the share which they were entitled to receive as syndicate members. This sum of $62,500,000 was only a part of the fees paid for the service of monopolizing the steel industry. In addition to the commissions taken specifically for organizing the United States Steel Corporation, large sums were paid for organizing the several companies of which it is composed. For instance, the National Tube Company was capitalized at $80,000,000 of stock; $40,000,000 of which was common stock. Half of this $40,000,000 was taken by J. P. Morgan & Co. and their associates for promotion services; and the $20,000,000 stock so taken became later exchangeable for $25,000,000 of Steel Common. Commissioner of Corporations Herbert Knox Smith, found that:
“More than $150,000,000 of the stock of the Steel Corporation was issued directly or indirectly (through exchange) for mere promotion or underwriting services. In other words, nearly one-seventh of the total capital stock of the Steel Corporation appears to have been issued directly or indirectly to promoters’ services.”
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The so-called fees and commissions taken by the bankers and associates upon the organization of the trusts have been exceptionally large. But even after the trusts are successfully launched the exactions of the bankers are often extortionate. The syndicate which underwrote, in 1901, the Steel Corporation’s preferred stock conversion plan, advanced only $20,000,000 in cash and received an underwriting commission of $6,800,000.
The exaction of huge commissions is not confined to trust and other industrial concerns. The Interborough Railway is a most prosperous corporation. It earned last year nearly 21 per cent. on its capital stock, and secured from New York City, in connection with the subway extension, a very favorable contract. But when it financed its $170,000,000 bond issue it was agreed that J. P. Morgan & Co. should receive three per cent., that is, $5,100,000, for merely forming this syndicate. More recently, the New York, New Haven & Hartford Railroad agreed to pay J. P. Morgan & Co. a commission of $1,680,000; that is, 2 1/2 per cent., to form a syndicate to underwrite an issue at par of $67,000,000 20-year 6 per cent. convertible debentures. That means: The bankers bound themselves to take at 97 1/2 any of these six per cent. convertible bonds which stockholders might be unwilling to buy at 100. When the contract was made the New Haven’s then outstanding six per cent. convertible bonds were selling at 114. And the new issue, as soon as announced, was in such demand that the public offered and was for months willing to buy at 106 bonds which the Company were to pay J. P. Morgan & Co. $1,680,000 to be willing to take at par.