Prohibitions of intertwining relations so restricted, however supplemented by other provisions, 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 corporations should apply to state banks and trust companies, as well as to national banks; and it should apply to railroad and industrial corporations 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 POTENTIALLY COMPETING CORPORATIONS
1. National Banks. The objection to common directors, as applied to banking institutions, is clearly shown by the Pujo Committee.
“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 result.... 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 belonging 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 practice gives to such common directors the unfair advantage of knowing the affairs of borrowers 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 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 Commonwealth of Massachusetts more than a generation ago designed to curb financial concentration through the savings banks. Of the great wealth of Massachusetts a large part is represented 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 executive 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 $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. Massachusetts 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 resources 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 charters of leading national banks would doubtless 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 potentially competing banking institutions rigorously 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 director 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 different trust company. The National Bank of Commerce 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 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 concession 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 transacted 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 conducted 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 prohibition apply equally to trust companies and to private bankers.