Bigness has been an important factor in the rise of the Money Trust: Big railroad systems, Big industrial trusts, Big public service companies; and as instruments of these Big banks and Big trust companies. J. P. Morgan & Co. (in their letter of defence to the Pujo Committee) urge the needs of Big Business as the justification for financial concentration. They declare that what they euphemistically call “coöperation” is “simply a further result of the necessity for handling great transactions”; that “the country obviously requires not only the larger individual banks, but demands also that those banks shall coöperate to perform efficiently the country’s business”; and that “a step backward along this line would mean a halt in industrial progress that would affect every wage-earner from the Atlantic to the Pacific.” The phrase “great transactions” is used by the bankers apparently as meaning large corporate security issues.
Leading bankers have undoubtedly coöperated during the last 15 years in floating some very large security issues, as well as many small ones. But relatively few large issues were made necessary by great improvements undertaken or by industrial development. Improvements and development ordinarily proceed slowly. For them, even where the enterprise involves large expenditures, a series of smaller issues is usually more appropriate than single large ones. This is particularly true in the East where the building of new railroads has practically ceased. The “great” security issues in which bankers have coöperated were, with relatively few exceptions, made either for the purpose of effecting combinations or as a consequence of such combinations. Furthermore, the combinations which made necessary these large security issues or underwritings were, in most cases, either contrary to existing statute law, or contrary to laws recommended by the Interstate Commerce Commission, or contrary to the laws of business efficiency. So both the financial concentration and the combinations which they have served were, in the main, against the public interest. Size, we are told, is not a crime. But size may, at least, become noxious by reason of the means through which it was attained or the uses to which it is put. And it is size attained by combination, instead of natural growth, which has contributed so largely to our financial concentration. Let us examine a few cases:
THE HARRIMAN PACIFICS
J. P. Morgan & Co., in urging the “need of large banks and the coöperation of bankers,” said:
“The Attorney-General’s recent approval of the Union Pacific settlement calls for a single commitment on the part of bankers of $126,000,000.”
This $126,000,000 “commitment” was not made to enable the Union Pacific to secure capital. On the contrary it was a guaranty that it would succeed in disposing of its Southern Pacific stock to that amount. And when it had disposed of that stock, it was confronted with the serious problem—what to do with the proceeds? This huge underwriting became necessary solely because the Union Pacific had violated the Sherman Law. It had acquired that amount of Southern Pacific stock illegally; and the Supreme Court of the United States finally decreed that the illegality cease. This same illegal purchase had been the occasion, twelve years earlier, of another “great transaction,”—the issue of a $100,000,000 of Union Pacific bonds, which were sold to provide funds for acquiring this Southern Pacific and other stocks in violation of law. Bankers “coöperated” also to accomplish that.
UNION PACIFIC IMPROVEMENTS
The Union Pacific and its auxiliary lines (the Oregon Short Line, the Oregon Railway and Navigation and the Oregon-Washington Railroad) made, in the fourteen years, ending June 30, 1912, issues of securities aggregating $375,158,183 (of which $46,500,000 were refunded or redeemed); but the large security issues served mainly to supply funds for engaging in illegal combinations or stock speculation. The extraordinary improvements and additions that raised the Union Pacific Railroad to a high state of efficiency were provided mainly by the net earnings from the operation of its railroads. And note how great the improvements and additions were: Tracks were straightened, grades were lowered, bridges were rebuilt, heavy rails were laid, old equipment was replaced by new; and the cost of these was charged largely as operating expense. Additional equipment was added, new lines were built or acquired, increasing the system by 3524 miles of line, and still other improvements and betterments were made and charged to capital account. These expenditures aggregated $191,512,328. But it needed no “large security issues” to provide the capital thus wisely expended. The net earnings from the operations of these railroads were so large that nearly all these improvements and additions could have been made without issuing on the average more than $1,000,000 a year of additional securities for “new money,” and the company still could have paid six per cent. dividends after 1906 (when that rate was adopted). For while $13,679,452 a year, on the average, was charged to Cost of Road and Equipment, the surplus net earnings and other funds would have yielded, on the average, $12,750,982 a year available for improvements and additions, without raising money on new security issues.
HOW THE SECURITY PROCEEDS WERE SPENT
The $375,000,000 securities (except to the extent of about $13,000,000 required for improvements, and the amounts applied for refunding and redemptions) were available to buy stocks and bonds of other companies. And some of the stocks so acquired were sold at large profits, providing further sums to be employed in stock purchases.