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GIFT OF 
 
GIFT 
 25' 1913 
 
 T ETTER from Messrs. 
 ^ J. P. Morgan & Co., 
 
 in response to the invita- 
 tion of the Sub-Committee 
 (Hon. A. P. Pujo, Chair- 
 man) of the Committee on 
 Banking and Currency of 
 the House of Representa- 
 
 tives. 
 
 NEW YORK CITY 
 
 February 25, 1913 
 
Letter from Messrs. J. P. Morgan & Co., in response to the 
 invitation of the Sub-Committee (Hon. A. P. Pujo, Chairman) of 
 the Committee on Banking and Currency of the House of Repre- 
 sentatives. 
 
 To Honorable A. P. Pujo, Chairman, 
 Committee on Banking and Currency, 
 House of Representatives, 
 
 Washington, D. C. 
 Dear Sir: 
 
 You have invited us to supplement the recent 
 inquiry of your Committee by presenting " such con- 
 siderations as may occur to you (us) bearing upon the 
 question of concentration and control of money and 
 credit." 
 
 In presenting such considerations we find it necessary 
 to revert to the original Preamble and House Resolu- 
 tion No. 504, under which your Committee acts and at 
 the outset to suggest that, in the main, the conditions 
 described in the Preamble and Resolution, as possibly 
 existing and as calling for investigation and remedy, do 
 not and cannot exist in this or in any other country. 
 We would suggest further, with the utmost respect, that 
 a large part of the valuable time of your Committee, in 
 our belief, has been consumed in an endeavor to piece 
 out a certain theory' as to money and credit, which 
 theory it will be impossible ever to demonstrate; for 
 its establishment is, and always will be, prevented by 
 economic laws which have operated ever since the 
 beginning of barter and trade. 
 
 1 
 
 259529 
 
We suggest to you that such ills and they are 
 
 neither few nor trifling as are existent in this country's 
 
 financial affairs are the outcome of a 
 
 BANKING clumsy and outworn banking system 
 
 SYSTEM AT 
 
 FAULT rather than of the schemes of men; 
 
 and that to eradicate such ills at 
 their source, there is needed not legislation upon some 
 one or more isolated symptoms, but rather a careful 
 diagnosis of our whole banking system; a study of the 
 successful systems of other countries which for decades 
 have been free from the periodic panics which have dis- 
 tressed this country; and finally co-operation among all 
 committees in Congress which consider this subject, 
 to the one end of wise and comprehensive as contrasted 
 with piecemeal legislation. 
 
 In the following considerations, which we offer with 
 respect and with an earnest desire to co-operate with 
 your Committee, we have not hesitated to quote from, 
 and comment upon the Resolution under which your 
 Committee has acted, the language of that Resolution 
 in its assumptions being so extraordinary, and in its 
 intimations so unprecedented, as to call for especial 
 examination. But again we must beg you to believe 
 that the offered comment and suggestion are given 
 with due respect and because of our profound convic- 
 tion of the importance of the whole general subject. 
 *Jn the statement submitted to you at the close of his 
 testimony by Mr. H. P. Davison of our firm, we^ ven- 
 tured to point out to you that such "concentration" 
 
 2 
 
as has taken place in New York and other financial 
 centres has been due, not to the purposes and activi- 
 ties of men, but primarily to the operation of our 
 antiquated banking system which automatically com- 
 pels interior banks to "concentrate" in New York 
 City hundreds of millions of reserve funds; and next, 
 to economic laws which in every country create some 
 one city as the great financial centre, 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 com- 
 modities subject to the unchanging laws of supply and 
 demand, so, in the same way, money 
 and credits are commodities subject 
 
 DEMAND THE 
 
 FACTOR ^ 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. It 
 follows therefore that such " concentration " as exists 
 in New York City (except that caused by our archaic 
 banking system already alluded to) is due simply to 
 the flow of demand and supply. Internationally like- 
 wise, when the demand for money and credit in Europe 
 exceeds that in America, gold is drawn by export from 
 New York to the other side. 
 
 We lay especial stress upon this point of economic 
 rule, for the reason that not only the Resolution (H. 
 
 3 
 
Res. 504) under which your Committee acts, but many 
 questions to witnesses, indicated a belief that for their 
 own selfish ends certain men, or a group of them, have 
 succeeded in transcending the laws of supply and de- 
 mand (which operate all over the world) and in estab- 
 lishing new economic laws. We venture to point out 
 that, since the beginning of organized industry and com- 
 merce covering more than two centuries in England, 
 France and Germany and one hundred years in America, 
 men never yet have succeeded in over-riding economic 
 law; and further that such an achievement is im- 
 possible, even though one were willing to attribute 
 sinister motive to the leading men of business in the 
 chief cities of this country. 
 
 Still dwelling upon this subject, we refer to the 
 language of the Preamble which reads: " Whereas 
 AN UTTERANCE ^ nas been further charged and is 
 
 ALARMING generally believed (the italics are our 
 
 TO THE PUBLIC 
 
 financiers x x x are enabled x x to regulate the interest 
 rates for money; to create, avert and compose panics, 
 etc." Here is a specific suggestion of a novel economic 
 theory, the publication of which cannot fail to create 
 prejudice throughout the country among many citizens, 
 who fail to reflect that the factors which determine in- 
 terest 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 
 
 4 
 
money markets. If any one 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. The factor which 
 intensified the distressful conditions in October, 1907, 
 was that all the world's markets were, and during a 
 year previous had been suffering from an excessive 
 shortage of money which, as has many times been 
 pointed out by economic observers here and abroad, 
 was because of extraordinary business " booms " in 
 this country, Great Britain and Germany, as well as 
 adventitious and enormous wastes of capital such as 
 had been caused by the San Francisco fire and the 
 Russo-Japanese war. In countries other than the 
 United States, the stress of October, 1907, due to high 
 money rates and financial disturbance, was relieved by 
 the operation of banking systems devised by experience 
 to cope with precisely such conditions; whereas in this 
 country, owing to its weak banking system, acute dis- 
 turbance was greatly prolonged and caused infinite 
 distress. 
 
 Our hesitation to describe in such detail these obvious 
 
 causes for the panic of 1907 has 
 THE PANIC V"T , , , 
 
 OF 19Q7 been overcome only by reason of the 
 
 extraordinary statement in the Con- 
 gressional resolution above quoted, and by the report 
 to us that an appreciable portion of the community 
 
 5 
 
has come to believe, from this statement, from the 
 authorized interview given out by one of your asso- 
 ciate counsel upon his retirement from your service, 
 and from other similar statements that in large measure 
 the panic of 1907 was actually due to the machinations 
 of certain powerful men. We regret that a belief so 
 incredible, so abhorrent and so harmful to the country 
 should for a moment have found lodgment anywhere. 
 And we welcome your invitation as an opportunity for us 
 to state that, to the extent of our observation and exper- 
 ience, there is not even a vestige of truth in the idea that, 
 in whole or in any part the financial convulsion of 
 1907 was brought on through the design of any man or 
 men. 
 
 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 to the " engineers " not only the power, but 
 some motive for their assumed achievements. And by 
 no process of reasoning can such motive be imagined, 
 because of the fact that the 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 a fact that those in- 
 dividuals, private bankers and banks to whom alone 
 apparently, by the language of the Preamble, is attri- 
 buted the power " to create, avert and compose panics ", 
 were the ones to suffer most by the severe shrinkage in 
 
 6 
 
security values, such losses as the public records will 
 in many cases show running into many millions of 
 dollars. It is impossible, therefore, to imagine a motive 
 on the part of such persons as would lead to a campaign 
 of self-destruction. 
 
 Furthermore, our observation was that such indi- 
 viduals and corporations as were fortunate enough, when 
 the panic was raging and when se- 
 
 WHO THE 
 
 curity prices were at their lowest, to 
 
 LOSERS WERE ^^ anv cons iderable amount of 
 liquid resources, invariably devoted 
 such resources to the aid of the weaker members of 
 the community and deliberately refrained from put- 
 ting their funds into low-priced securities for the 
 purposes of profit. 
 
 It has often been observed that Mr. Morgan aided 
 actively and effectively in the efforts to " com- 
 pose " the panic of 1907. Such aid as he was able 
 to render to the situation in New York at that 
 time was due, we believe, simply to his ability 
 in securing the prompt co-operation of many divergent 
 minds which represented strong, independent banks. 
 The same kind of service always is to be commanded 
 in this country's emergencies. 
 
 If we have dwelt with more circumstance than per- 
 haps your judgment approves upon these features of 
 the Preamble, it is because we believe that the whole 
 frame-work and language of the Congressional reso- 
 lution under which you are acting implies a con- 
 
 7 
 
ception impossible in sound theory, and wholly 
 impossible in practice; such theory being that a com- 
 paratively small group of men, chiefly 
 
 AiN .CIJI>HJJViH^ 
 
 IMPOSSIBILITY centred in New York City, can and 
 do obtain such complete mastery 
 over the financial machinery of one hundred millions 
 of independent people that they have power to cause 
 this whole country incalculable distress, or as the Reso- 
 lution puts it: " 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, inter- 
 locking directorates from which ex- 
 
 STATISTICS . 
 
 PRESENTED ceedingly 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 
 
 8 
 
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 direc- 
 tors who are not " interlocking " are mere figure-heads, 
 subject to the will of a small minority of their boards. 
 
 Perhaps the greatest harm in the presentation re- 
 ferred 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 and, in our belief, 
 never can exist. 
 
 In like manner an endeavor has been made to show, 
 not by means of exact statistics which alone can tell 
 the story, but rather through dis- 
 DECENTRALIZA- jointed testimony obtained in the 
 TION THE RULE the shape of replies to hypothetical 
 questions that New York is far out- 
 stripping the rest of the country in comparative banking 
 resources. Precisely the contrary is the case. The re- 
 ports of the Comptroller of the Currency show not 
 
 9 
 
only that there has been no such tendency here, but 
 that, for some time, New York's proportion of the coun- 
 try's banking capital and resources has been declining. 
 The banking resources of forty-one (41) other States 
 have increased since 1900 more rapidly than they have 
 in New York State; and, whereas in 1900 New York 
 City Banks represented 23.2 per cent, of the banking 
 resources of the United States, now, as pointed out in 
 Mr. Davison's statement, they represent only 18.9 
 per cent, of such resources. 
 
 This striking tendency toward a greater and greater 
 diffusion of American banking is illustrated further by 
 the fact that between 1900 and 1912 the number of 
 independent banks in the country has, according to the 
 best reports obtainable, increased from 10,378 to 25,160, 
 or by more than 140%, while the population increased 
 by less than 25% in the same period. Here is complete 
 evidence of a tendency operating to-day toward the 
 decentralization of banking facilities. 
 
 Other evidence was adduced before your Committee 
 from which the inference was sought to be drawn that 
 
 during the autumn, when interest 
 INCOMPLETE (t , . XT Tr , 
 
 AND MISLEADING ***** ^ 10aM m NeW ^^ 
 FIGURES are likely to be high, interior banks 
 
 were in the habit of withholding 
 money from their local customers, who needed it for 
 agricultural and mercantile operations, and of sending 
 it to New York to be loaned against Stock Exchange 
 collateral. The evidence on this point was incomplete 
 
 10 
 
and misleading. No attempt whatever was made to 
 demonstrate whether the total amount of funds in New 
 York, belonging to interior banks, usually rises or falls 
 with the rise and fall of " call " interest rates in the 
 autumn in New York. As a matter of actual fact the 
 totals of such interior funds almost invariably fall as 
 the autumn rates rise. At every such season New York 
 institutions lend, as they ought equitably to do, large 
 sums to their interior correspondents for crop-moving 
 and other purposes. For instance as to the season just 
 past, the amount of money being loaned, as of November 
 15, 1912 to outside institutions by the eight largest New 
 York banks cultivating this business is estimated as 
 approximating upwards of $80,000,000. 
 
 Yet, although such adequate evidence was readily 
 available, the Committee's experts who testified on 
 this point gave to you and to the public figures which, 
 in their deductions, were absolutely incomplete and 
 incorrect. 
 
 In offering to you such criticisms as we have upon the 
 incompleteness of certain features of the testimony laid 
 before you, we once more beg that you will not consider 
 us as lacking in respect to your Committee, or as out 
 of harmony with its desires to examine certain features 
 which, as to the financial development of this country, 
 have attracted widespread attention. We readily 
 concur with you that many highly legitimate subjects 
 of value to the public interest have been developed. 
 One of these, to which we call particular attention, has 
 
 ll 
 
been the steady growth in the size of banks through 
 consolidation or increase of capital. Such growth in 
 the size of banks in New York and Chicago has fre- 
 quently been erroneously designated before your Com- 
 mittee as " concentration/' whereas as we have hitherto 
 pointed out the growth of banking resources in New 
 York City has been less rapid than that of the rest of 
 the country. But increase of capital and merger of two 
 or more banks into one institution (with the same 
 resources as the aggregate of the banks merging 
 into it) has been frequent, especially since January 
 1, 1908. 
 
 These mergers, however, are a development due 
 simply to the demand for larger banking facilities to care 
 
 for the growth of the country's busi- 
 DEMAND FOR ness. As our cities double and treble 
 LARGER BANKS i n 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 
 FAR BEHIND . 
 
 EUROPE a much smaller countries. The 
 
 largest bank in New York City to- 
 day has resources amounting to only three fifths 01 
 the resources of the largest bank in England, to only 
 one fourth of the resources of the largest bank in 
 
 12 
 
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 
 T business - Hundreds of the financial 
 NEEDS transactions of to-day are so large 
 
 that no single bank commands suffi- 
 cient 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 com- 
 munity. Even our largest banks are seldom able separ- 
 ately to extend the credit which such undertakings re- 
 quire, no one national bank being permitted by law 
 to loan in excess of 10% 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 upwards apiece, it is obvious that the size 
 of our banks must grow to keep pace with this 
 demand. 
 
 Yet as to this natural development, the causes for 
 which it is of vital interest to the whole country to 
 realize clearly, many of the inquiries directed to your 
 witnesses were of such a nature as to raise in the minds 
 
 13 
 
of an interested public a doubt as to whether, after all, 
 this effort by banks to keep pace with growing business 
 were not a scheme of a designing group of men, building 
 up enormous institutions in order (we quote here again 
 from House Resolution No. 504) " to augment their " 
 (" these groups of individuals ") power over the finan- 
 ces of the country and to control, etc. etc." We 
 submit for your consideration the opinion that, if time 
 had served you, far more adequate information, in- 
 cluding instructive statistics, might have been pro- 
 vided on this question for your Committee. 
 
 Likewise, with respect to the tendency to co-opera- 
 tion among banks, noted especially since the panic of 
 
 1907, we believe that further statis- 
 GREAT ISSUES tics of interest on this point can be 
 TO BE FINANCED 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 exceeding $100,000,000; the American 
 Telephone and Telegraph Co. recently has announced 
 one of $70,000,000. The two traction com- 
 panies operating the subways in Greater New York 
 
 14 
 
are planning to bring out aggregate issues of $220, 
 000,000. The Attorney General's recent approval 
 of the Union Pacific settlement, calls for a single com- 
 mitment on the part of bankers of $126,000,000. 
 So that, if transactions of such magnitude are to be 
 carried on, the country obviously requires not only the 
 larger individual banks, but demands also that those 
 banks shall co-operate to perform efficiently the coun- 
 try's business. 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. 
 
 We lay perhaps especial stress upon this point, be- 
 cause of what seemed to us a readiness upon the part of 
 
 Committee to ad P t the idea 
 
 COOPERATION 
 
 NECESSARY FOR ^ na ^ m sucn co-operation by bankers 
 
 COUNTRY'S there lies the germ of something 
 
 GROWTH 
 
 sinister and dangerous, and that, 
 to quote once more from House Resolution No. 504, 
 such co-operation has been developed to the extent 
 that, " these groups of individuals " can " prevent 
 competition with the enterprises in which they are 
 Interested, to the detriment of interstate commerce 
 and of the general public." 
 
 Nothing else certainly could be more germane to an 
 investigation like that of your Committee than an 
 inquiry as to whether, through any means exerted by 
 banks or bankers, interstate commerce is being re- 
 strained. But as establishing or even suggesting such a 
 
 15 
 
contention, we have been able to find no testimony 
 whatever upon the records of your Committee. If 
 any such evidence is available, we believe it impor- 
 tant that it should be produced. So far as our obser- 
 vation and experience go, we can make the positive 
 statement that, except under unfavorable money 
 market conditions, we have never heard of any re- 
 sponsible and deserving individual, firm or corporation 
 being unable to secure ample credit. The House Resolu- 
 tion No. 504, including its Preamble, 
 FREE-COMPETl- contains no less than five separate 
 TION THE RULE references to the possible " preven- 
 tion, " " suppression, " elimination 
 or absorption of "competition," through the activities 
 of certain individuals. Wide publicity has been 
 given to this Resolution under whose authority 
 your Committee has acted and, in the absence of any 
 proof whatsoever to support the belief that there has 
 been a supression of corporate competition, we venture 
 to hope that this idea, most insidious and harmful in 
 its effect upon the mind of the country at large, will 
 in your report be definitely dispelled. In a matter of 
 such great moment to the prejudices of our citizens, 
 we suggest, with great respect, that a positive statement 
 from your Committee that no evidence has been 
 adduced on this vital question should be given pub- 
 licity as wide as that received by the Resolution. 
 
 Testimony, on the other hand, going to show not a 
 suppression, but a development of trade throughout 
 
 16 
 
the country might have been of value, as exhibiting 
 a natural explanation of many of the financial practices 
 which your Committee has questioned. Many ques- 
 tions were asked as to the wisdom in having rep- 
 resentatives of private banking houses sit upon the 
 boards of corporations, whose securities the same 
 bankers frequently offer for sale. This practice which 
 has been in vogue abroad, ever since the creation of 
 limited companies, has arisen not from a desire on the 
 part of the banker to manage the daily affairs of the 
 corporation or to purchase its securities more cheaply 
 
 than he otherwise could ; but rather 
 RESPONSIBILITY 
 OF BANKERS because of his moral responsibility as 
 
 sponsor for the corporation's securi- 
 ties, to keep an eye upon its policies and to protect 
 the interests of investors in the securities of that cor- 
 poration. For a private banker to sit upon such a 
 directorate is in most instances a duty, not a privilege. 
 Inquiry will readily develop the fact that the members 
 of the leading banking houses in this country and 
 it was the leading houses only against which animad- 
 versions were directed are besought continually to 
 act as directors in various corporations, whose securi- 
 ties they may handle, and that in general they enter 
 only those boards which the opinion of the investing 
 public requires them to enter, as an evidence of good 
 faith that they are willing to have their names publicly 
 associated with the management. 
 
 Yet, before your Committe, this natural and eminent- 
 
 17 
 
ly desirable relationship was made to appear almost 
 
 sinister, and no testimony whatever was adduced to 
 
 show the actual working of such 
 
 relationships. It is easy to overlook 
 
 OH A 
 
 BANKING HOUSE the fact that Poetically all the 
 railroad and industrial develop- 
 ment of this country has taken place, initially 
 through the medium of the great banking houses. 
 Were it not for the opportunities provided by these 
 houses, it is difficult to imagine how the great trans- 
 portation systems and industrial plants of the country 
 could have been created. Many persons fail to realize 
 the variety of the functions performed by these banking 
 houses. If a transcontinental railway system, building up 
 the wheat farms of the west and affording employment 
 to thousands of workmen, desires to obtain $100,000,000. 
 for purposes of still further development, it goes 
 to some great banking house or institution for a 
 market for its securities. The bankers make expert 
 investigation of the property, agree to buy the 
 bonds and thus to make possible a great and important 
 development two or three thousand miles away. Next 
 the banking house serves the investing community. 
 Thousands of investors are seeking sound securities 
 for their savings. They have neither the knowledge 
 nor the opportunity for investigating a great rail- 
 road enterprise. They look to a banking house to 
 perform those functions and to give its stamp of 
 approval to that railroad's securities. In this manner 
 
 18 
 
the banking house fulfills a double duty to the com- 
 munity. 
 
 Another line of your inquiry, certainly pertinent to 
 to the general subject, was as to whether " the market- 
 ing of the securities that from time to 
 
 ow time have been issued by inter- 
 
 SECURITIES /. 
 
 ARE HANDLED state railroads and industrial cor- 
 porations has been by competitive 
 bidding or otherwise." This question is of such im- 
 portance that there must be general regret that the 
 time of your Committee did not serve for the exhaustive 
 study of the subject, which you undoubtedly desired, 
 including testimony from enough diverse sources to 
 show you the exact situation. On this matter we are 
 pleased to submit certain . onsiderations which, we are 
 confident, are borne out by the facts: First, in general 
 and over a period of time, the sale of such securities 
 is invariably subject to the competition of market con- 
 ditions. We have not heard of an instance where any 
 corporation failed to secure the benefit of a price for 
 its issues as excellent as conditions at the time 
 warranted. Second, in most of the leading commercial 
 States Public Service Commissions pass with great care 
 upon the prices at which the securities of all transporta- 
 tion and public utility corporations are sold. Third, 
 competitive bidding, in the sense of having railroad and 
 industrial securities offered practically at public auction 
 as in the case of municipal securities, is seldom or never 
 practised. 
 
 19 
 
The reasons against such practise are plain. Such 
 corporate issues have neither the security, the steadi- 
 ness nor the general confidence possessed by municipal 
 bonds, and while in good times it is possible that they 
 might be subscribed for at public auction, in bad times 
 there would be no one to bid for them. It is practi- 
 cally inconceivable that a municipality should go 
 bankrupt and make permanent default of its obliga- 
 tions. Quite otherwise is the case with railroad or 
 industrial corporations. Should these latter appeal 
 directly to the proverbially timid investor there can be 
 little question that, in times of stress, support would be 
 totally lacking. We should have the spectacle of 
 numberless corporations failing for lack of strong 
 financial or banking support. 
 
 The enlisting of such support, in the shape of fiscal 
 agencies or of other close relations with bankers, 
 
 appears sound both in principle and 
 SECURITIES BY practise. For their ultimate suc- 
 AUCTION cess, great enterprises depend almost 
 
 as much upon wise financial counsel 
 as upon technical management. A great business, 
 well conceived as to interior organization, frequently 
 goes on the rocks for failure to obtain broad and strong 
 financial guidance. Any man undertaking to build a 
 cotton mill, perfectly appointed with modern machin- 
 ery and technical skill, who should rely upon obtaining 
 the necessary funds by a public appeal to investors 
 would be deemed reckless. Yet such a principle 
 
 20 
 
is precisely that involved in the suggestion that corpor- 
 ations should refrain from making financial arrange- 
 ments and should rely upon securing their money from 
 the offer of their securities at public auction. Further- 
 more, as has been hitherto pointed out in this memor- 
 andum, a large factor which inspires confidence in the 
 investor and leads him to purchase some specific secur- 
 ity is the knowledge that banking houses of good stand- 
 ing have investigated that particular security and 
 themselves have underwritten or have invested in it. 
 
 Still another consideration inducing large corpora- 
 tions to appoint fiscal agents is that frequently such 
 corporations are obliged to undertake operations of 
 such magnitude and complexity over a series of years, 
 that they must invoke uninterruptedly the best finan- 
 cial advice obtainable. An operation like that of the 
 Pennsylvania and the Long Island Railroads in tunnell- 
 ing respectively the Hudson and the East Rivers, and 
 building an enormous terminal in the heart of New 
 York, involved the expenditure of say $200,000,000. and, 
 from inception to completion, occupied the best part of 
 
 a decade. The unwisdom of em- 
 
 FINANCIAL t i j i 
 
 barking upon such a development 
 
 ADVISERS A 
 
 REQUISITE an relying through good times 
 
 and bad, panic periods and other- 
 wise, upon the sale of $200,000,000. bonds, by auction 
 to the public, could hardly be characterized, even if it 
 were conceivable. Another example might be men- 
 tioned in the irrigation enterprises of the West. It is 
 
 21 
 
estimated that there has been expended in such devel- 
 opment not less than $200,000,000. How far would 
 such development have gone, how far would those 
 regions have been opened to agriculture had dependence 
 for obtaining that great sum been placed upon the 
 nearby communities, or even (by means of public 
 auction) upon investors in New York or Chicago who 
 know little of the safety of such investments . Persons 
 who decry the close relations existing between the 
 bankers and the great transportation and industrial 
 businesses fail to perceive that, as individuals require 
 the advice of lawyers and physicians, so great enter- 
 prises require financial diagnosticians who can give 
 counsel as to the world's investment markets, as to 
 what form of securities is best adaptable for any given 
 time, as to what financial policy for the corporation is 
 best calculated to command the confidence and the 
 steady support of the investor. 
 
 One phase of a far different feeling at present to be 
 noted in America, finds repeated expression in the 
 
 Preamble and Resolution to the 
 OFFICERS ARE . 
 
 INDEPENDENT effect that financial groups have 
 
 " control over the aforesaid railroads, 
 industrial corporations, and moneyed institutions, 
 etc.;" that such an influence is exerted powerfully 
 over the officers and management of such institu- 
 tions, and that such influence is exerted primarily 
 for the benefit of the individuals. Persons that accept 
 such a belief must fail to realize that no corporation 
 
 22 
 
could long survive if the operations of the corpora- 
 tion and the freedom of its officers were interfered with 
 by directors desiring to serve selfish interests. The 
 success of an enterprise depends largely upon the 
 ability and zeal of its officers exerted independently 
 of any interest except that of the enterprise itself. Any 
 attempt by directors working to their own ends would 
 result either in the ruining of the business, were the 
 officers to yield up their independence; or in the prompt 
 resignation of such officers if they were men of character. 
 And since when, it may be asked, has the ownership 
 of stock meant the ownership of men? 
 
 A distinction which one line of your inquiry sought 
 to establish was that as to the relative safety of banks 
 
 and banking houses as depositaries. 
 
 Your inquiries on this point, al- 
 
 BANKERS AS 
 
 DEPOSITARIES though purely tentative and with- 
 out attempt to cite any records which 
 might bear upon the subject, left the impression that 
 you doubted the wisdom of permitting corporations to 
 select, as depositaries for their funds, private bank- 
 ers as well as banks. This is a matter of less grave 
 concern to the public than many points having to do 
 with the fundamental character of our banking laws, 
 and our opinions on this particular topic are likely 
 to be accepted with considerable reserve. Yet it may 
 be of value to inquire whether experience offers any 
 data going to show that incorporated banks have proved 
 themselves in structure or in practise, more impregnable 
 
 23 
 
from failure than private banks. Incorporated banks 
 possess, from the depositor's point of view, such safe- 
 guards as are extended by existing methods of state 
 supervision. And the National Bank Act wisely pro- 
 vides that, in the event of a bank's failure, the share- 
 holders shall be liable to the extent of twice the amount 
 of the capital stock. With private banks, however, 
 the liablity for the funds of depositors is unlimited, and 
 the total private means of each partner are subject to 
 the firm's obligations. From the early days of banking 
 all over the world until about seventy-five years ago, 
 the rule was that the community used private bankers 
 as their chief depositaries. Then came in, though 
 not without great public opposition, the plan of creating 
 banks as stock corporations with the very purpose of 
 limiting the risks of the owners of these banking cor- 
 porations. Strong as such institutions have proved to 
 be, it may be said with some reason 
 
 UNLIMITED that the common law which requires 
 
 LIABILITY A 
 
 SAFEGUARD t ' any P nvate banking house 
 
 is forced to suspend, the private 
 fortune of every member of that firm shall be utterly 
 swept away before a depositor suffers the loss of a 
 penny, is unquestionably a factor tending towards 
 prudent and conservative management. In face of the 
 available records, showing a considerable number of 
 suspensions among incorporated institutions in New 
 York City, as the result of the 1907 panic, we 
 can recall no instance whatever of the similar sus- 
 
 24 
 
pension of any private banking house handling corpo- 
 rate deposits. 
 
 In view of these facts, we submit that in this matter 
 it would be wise to secure evidence from all large 
 cities, bearing upon the benefits or the actual dangers 
 shown by experience, before proposing any law, the 
 effect of which automatically might be to deprive inter- 
 state corporations from exercising their best judgment 
 as to where they may prudently extend credit. In es- 
 sence, if a corporation is to be prohibited from extending 
 a credit of $100,000 to a banking house which, it has 
 reason to believe, can return that credit upon demand, 
 why should the law not be invoked to prevent it extend- 
 ing merchandise credit of similar amount to some sol- 
 vent customer? 
 
 As the final point of this memorandum, we venture 
 to submit the consideration that in a strong public 
 opinion, such as exists in this country, there lies 
 the greatest safeguard of the community always 
 assuming that Congress will evolve a basic system 
 of banking which is scientific and sound as at 
 the present time, ours admittedly is not. The public, 
 that is the depositors, are the ones 
 
 PUBLIC OPINION w ^ en ^ rus ^ bankers with such influ- 
 ence and power as they today have in 
 every civilized land, and the public is unlikely to entrust 
 that power to weak or evil hands. Your counsel asked 
 more than one witness whether the present power held 
 by bankers in this country would not be a menace if it lay 
 
 25 
 
in evil hands. Such an inquiry answers itself. All 
 power, physical, intellectual, financial or political, is 
 dangerous in evil hands. If Congress were to fall into 
 evil hands the results might be deplorable. But to us 
 it seems as little likely that the citizens of this country 
 will fill Congress with rascals as it is that they will 
 entrust the leadership of their business and financial 
 affairs to a set of clever rogues. The only genuine 
 power which an individual, or a group of individuals, 
 can gain is that arising from the confidence reposed in 
 him or them by the community. Every town, large or 
 small, seems to choose a limited number of men (mer- 
 chants, manufacturers, lawyers and bankers) to repre- 
 sent it in the management of its chief, local industries. 
 Those men are entrusted with such heavy responsibil- 
 ities because of the confidence which their records have 
 established, and only so long as their records are 
 unblemished do they retain such trusts. 
 
 These are axioms which it seems almost idle to 
 repeat. They apply to all business, but more emphat- 
 ically, we believe, to banking than to any other form 
 of commerce. To banking the confidence of the com- 
 munity is the breath from which it 
 
 draws its life. The past is full of 
 THE LIFE OF 
 
 BANKING examples where the slightest sus- 
 
 picion as to the conservatism, or the 
 methods of a bank's management, has destroyed con- 
 fidence and drawn away its deposits over night. Much, 
 therefore, may be left to the instinct and the force of 
 
 26 
 
public opinion; and finally, in urging upon you once 
 more the establishment of a sound banking system, we 
 venture to question the wisdom of engrafting upon such 
 new system many special provisions, designed to guard 
 against particular evils but which, being restrictive in 
 their nature, are likely so to hedge 
 
 f bankin ^ to 
 
 SPECIALEGIS 
 
 LATION NEEDED curtail severely the country's devel- 
 opment. We believe that, with a 
 scientific banking system firmly established, many 
 features in our present situation, perhaps deemed ob- 
 jectionable by you, will of themselves disappear; and 
 that this country will enjoy the experience of other coun- 
 tries which, with nothing like the same amount of bank- 
 ing statutes in force as we have, are yet immeasurably 
 freer than America from banking failures, and from 
 those periodic financial disturbances which bring 
 misfortune to rich and poor alike and, except for which, 
 these United States today undoubtedly would be in 
 enjoyment of a political and national prosperity far 
 surpassing any that has been known in the world's 
 
 history. 
 
 Respectfully submitted, 
 
 (Signed) J. P. MORGAN & Co. 
 
 New York City, 
 February 25, 1913. 
 
 27 
 
UNIVERSITY OF CALIFORNIA LIBRARY 
 BERKELEY 
 
 Return to desk from which borrowed. 
 This book is DUE on the last date stamped below. 
 
 >tt 15 
 
 S 1953 
 
 ? 
 
 LD 21-100m-9,'47(A5702sl6)476 
 
259529 
 
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