Such practices—and they were widespread—were defended on the ground that they offered a logical opportunity for profit to the men whose imagination had foreseen new industrial opportunities and whose enterprise had transformed them into actualities. But they also constituted an almost ideal system for building up potential claims upon the future fruits of industry and preventing these fruits from being distributed in wages or lowered prices (or, if option warrants were issued, from being distributed in increased dividends). Let us see for a moment how this system operated.
Suppose the company whose common shares had been distributed to insiders for little or nothing began to do well. The stock was listed on an exchange; it was tossed about by speculators; it was bought by investors. An investor who paid one hundred dollars a share for such common stock usually imagined that he had put one hundred dollars a share into the business; that he was justly entitled to a return upon these shares from the business; that if it failed to give him such a return because it was lowering prices or raising wages, an outrage was being perpetrated upon him; the sacred rights of property were at stake. He did not realize that very little of the one hundred dollars a share which he had paid represented money which had ever gone into the business at all—had been used, let us say, for the building of factories; most if not all of it had gone into the pockets of the insiders and of the speculators and other investors who had preceded him in the ownership of this stock.
Nor was the investor in common stock without justification in feeling that a return upon what he had paid was due him. For as the stock passed from investor to investor, its curious origin seemed to have less and less to do with the merits of his claim. Common stock which had once been thought of simply as a bit of possible velvet for the insiders should their plans prove to have been well devised, became by gradual degrees something quite different in the public mind when it had passed through successive trades into the hands not only of the rich and powerful but of thrifty salary-earners, wage-earners, indigent gentlewomen, and the widows and orphans of orthodox financial apologetics. Its acquired value had been built into the economic and social structure so securely that to deny to this value a reasonable return in income would work real injustice to thousands.
A very remarkable system indeed, which could thus transform the slenderest into the stoutest of rights! How widespread it was—in other words, how large a proportion of the common stock outstanding represented money actually invested in industry or business, and how much represented merely insiders’ and subsequent speculators’ and investors’ profits—no one apparently knows exactly. Yet if an exhaustive research were made into the origin of the common stocks listed on the New York Stock Exchange in 1929, it would probably show that the bulk of their value did not represent—as did the value of bonds and most preferred stocks—the bricks and mortar and steel and machines with which these corporations did business. Studies in the financing of the leading companies in certain industries are embodied in John T. Flynn’s volume on Security Speculation: they confirm this hypothesis impressively.
As the public appetite for securities became keener and keener during the nineteen-twenties, it was not surprising that some investment bankers should have leaped at every opportunity, favorable or unfavorable, to form a new company, to merge two or three old ones, or to expand a company’s business. The fruits of financial activity were so inviting that bankers began to operate with more and more regard for these fruits and with less and less regard for the effect of such activity upon the businesses involved. The feet of the gentlemen of Wall Street began to leave the hard ground upon which stood factories and shops; these gentlemen began to float higher and higher in a stratospheric region of sheer financial enterprise—a region of reorganizations and mergers and stock split-ups and trading syndicates and super-super-holding companies and investment trusts.
The perfect illustration of this stratospheric activity was the wild proliferation of investment trusts which took place during 1927, 1928, and 1929. Now the investment trust, in theory and sometimes in practice, was a valuable financial institution, especially for the small investor, enabling him to achieve well managed and diversified investment. But as soon as the public began to show an interest in the shares of investment trusts, innumerable men in Wall Street and other financial centers saw a great light. Here was the perfect opportunity to form a new corporation, with all the benefits to themselves attendant upon such activity, without ever having to bother about manufacturing and selling at all. Here was the Wall Street answer to prayer; a company which need have no business at all outside of Wall Street!
All it had to do was to invest in other companies—and to sell its own stock. And incidentally, if the trust were so capitalized that control remained with the insiders even though millions of dollars’ worth of securities were distributed to the public, it might become an agency which would aid the investment bankers in gaining financial control of this concern or that, with further benefits.
We need examine only one conspicuous example from among innumerable trusts to show how the formation of such concerns could profit the bankers on the inside. In the year 1924, when the investment trust idea was still a novelty to Americans, the investment banking firm of Dillon, Read & Co. formed what was known as the United States and Foreign Securities Corporation. The first preferred stock and a quarter of the common stock were sold to the general public for twenty-five million dollars. The second preferred stock and another quarter of the common stock were sold to Dillon, Read & Co. for five million dollars—a considerably smaller sum than twenty-five millions, it will be noticed. And the other half of the common stock went (through somewhat complicated channels) to Clarence Dillon and his associates, for a mere one hundred thousand dollars—a very small sum indeed by comparison with the others. This small sum was equivalent to twenty cents a common share; and the number of shares which went to these men personally was half a million. Some years later, after the stock-market had been churning a long time, some of these men decided to sell some of this stock. So Dillon, Read & Co. made an arrangement with a firm of stockbrokers who in 1928 and 1929 churned the market some more, and disposed of 74,198 of these shares for approximately four million dollars; they also sold additional shares to the customers of Dillon, Read & Co., bringing their profits on this common stock which they had purchased (from themselves as the organizers of the trust) at twenty cents a share, to well over six million dollars.
(In fairness to Mr. Dillon and his associates it should be added that the figure of twenty cents a share was nominal; they considered their purchase of preferred and common shares as a single transaction. The point, however, is clear anyhow: men who had got their stock very cheap sold it for millions; and but little of the price paid by those to whom they sold it represented money originally invested in the Corporation.)
Needless to say, this is a somewhat extreme example; it suggests, nevertheless, one reason why investment bankers formed investment trusts by the score and why some of them could support racing stables, hunting preserves, and yachts.
With the investment banking business went power, too; the power that came from sitting on boards of directors, keeping a finger on what was being done, putting in a suggestion here and a word of warning there; the power that came from being able to hint that orders might well be placed with this or that other corporation within the charmed circle of one’s influence; the power, sometimes, in foreign affairs that came from having huge commitments in foreign countries, which were supposed to be borne in mind by a State Department not always well-informed but usually anxious not to displease entrenched interests; and a further power—or rather, perhaps, an intangible influence—that could not be measured in terms of directorships or stock ownerships, but as we noted in an earlier chapter of this book was better measured in terms of the prestige which accompanies success.
The two most important of the private banking houses which dominated investment banking were Kuhn, Loeb & Co.—the firm whic
h old Jacob Schiff had built up, and of which Otto Kahn was now the senior partner—and the House of Morgan. Jew and Gentile; the division between them was sharp. The Kuhn, Loeb business in securities was as large as that of the House of Morgan if not larger, but the Morgan influence was far more pervasive.
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No longer, of course, did Morgan the Younger and his partners stand in the strategic position which had been theirs in 1915 and 1916, when they were selling bonds for the British and French and acting as purchasing agents for the war materials for which the proceeds of these bonds were to go. Nor was there anybody now in that solid, fortress-like building at the corner of Broad and Wall Streets—that building so modest in size, so massive in effect—who wielded the colossal personal authority which had been in the mighty hand of Morgan the Elder. He was gone; yes, and Davison, who during the war years had been the most vital personality at 23 Wall Street, was gone too. Yet the tradition of the firm went on. A partnership in the House was as high a prize as a financier could hope for; it meant terrific work, arduous responsibility, yet it meant also great wealth and something more than that: it was a place on the general staff of what the business world considered the headquarters of financial power.
Morgan the Younger, the head of the firm, set the tone of the establishment; listened to the counsels of partners more brilliant than himself, and put in the last word. A quiet and substantial gentleman, courteous and affable, he had the simplicity of assured position: seeing him, one thought of a constitutional monarch in mufti. In essence he was the good patrician: a little stiff, a little remote; contemptuous of democratic blunderings and vulgarities and proletarian clamor; quite unable to imagine what the world would look like to the eyes of a fifteen-dollar-a-week steel worker; yet straightforward, genuine, agreeable to those who were fortunate enough to penetrate his reserve, and far more conscious than most financiers of the imperial obligations which accompanied imperial power. At his right hand stood Thomas Lamont, the diplomat of the firm both abroad and at home—a man who could charm Chinese officials, Middle-Western bank presidents, and liberal editors into feeling that they saw eye to eye with him and that the power of the House of Morgan must be beneficent. About them were clustered veterans like Steele and Cochran and able juniors like George Whitney and Parker Gilbert.
The private offices on the second floor of 23 Wall Street were islands of modesty and quiet in the splendor and uproar of Wall Street. Their atmosphere was subtly British and old-fashioned. Wood fires burned in the fireplaces on chilly days; the well-worn easy chairs and couches were restful; a financial discussion there was like a chat in a gentleman’s club. Whether or not the hand of the House of Morgan was a hand of iron, it wore a velvet glove of persuasiveness.
Was it a hand of iron? There were stories abroad to the effect that it was—stories of magnates to whom the law had been laid down in very positive terms: this is what you had better do. Yet the answer to the question was veiled in a becoming mystery. When directors of corporations were meeting in Wall Street and wished to refer to the influence or possible displeasure of the firm, they were often almost as hesitant to name it as an Italian would be to name Mussolini. In their euphemistic language, the House of Morgan became “the Corner.” “How will the Corner like that?” one director would say to another. Minor officials of banks and corporations would sometimes be even more vague. “I don’t know whether They’ll like that,” these men would say, as if the very walls had ears and might tell somebody who would tell a Morgan partner.
An influence so indefinable cannot be charted in a graph, to show its ups and downs. Yet there seems to have been a subtle change in it during these years. It was generally considered a conservative influence, skeptical of strange new financial devices and of the careers of young financial Napoleons. When, for example, Lamont spoke out about the preposterous competition in foreign financing in 1927, he was speaking in what had come to be regarded as the customary Morgan role. The House was thought of as a balance wheel. Yet as the financial Napoleons of the nineteen-twenties—the Mitchells, Dillons, Insulls, Van Sweringens, Gianninis, Wiggins—rose higher and higher in prestige and in confidence, and some of them began apparently to bother less about what might be said on the Corner, the weight of this balance wheel became a matter of some question. Presently the Morgan firm was flirting with the brothers Van Sweringen; then it was backing them; by 1929 it was floating their giant Alleghany Corporation; and in that same year it entered the competition for influence over the public utility systems by forming another giant of the new finance, the United Corporation, a super-holding company for public utility stocks (with a little of the flavor of an investment trust too). Apparently the change in the atmosphere of Wall Street had had its effect. “It was the times.”
Yes, the reader may say, but suppose the House of Morgan had really wanted to call a halt in the wild financial proceedings? Could it have done so?
The answer, I believe, must be no. The influence which was referred to with such bated breath in Wall Street was after all limited in scope. Over the financial policy of corporations within the Morgan orbit it was great; in contests with strictly business or financial rivals it could be great. But it was not so great that the firm could risk a pitched battle with an Insull, let us say, or a Mitchell, unless he were to tread on Morgan ground, and thus offend against the accepted principle of mutual tolerance among financiers. Only to a very moderate extent could it be exerted on behalf of a general principle of finance. It was by no means a police power. The House of Morgan was primus inter pares among the financial powers of the day: unquestionably primus, but not a dictator. There was no dictator.
A great deal has been said in these pages about the concentration of economic power into a few hands. But in essentials those few hands were mutually independent. Indeed, one of the strange things about the capitalist system in America was that, although it had undergone a revolutionary change as more and more devices were discovered and widely utilized by which the men at the top could acquire power and wealth, it was not really a system at all; not a hierarchy, but a free-for-all-insiders; not an order, but a disorder of irresponsible forces.
On certain things these men might agree and act together. They could unite, after a fashion, for the defense of their common prerogatives against radical assault. Yet broadly speaking they could not unite upon any positive economic program. Least of all could they have united upon a program which might interrupt or endanger the financial enterprises in which individuals among them were engaged. Even had any one group of men in Wall Street had the time to think steadily about the possible economic and social effects of what was going on, or the capacity to understand what these might mean to ordinary men and women, this group would have been virtually powerless to stop the mad rush toward the edge of the abyss.
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In a vacant lot in the dreariest part of the dreary town of Cambridgeport, Massachusetts, there used to stand, many years ago, a huge bedraggled-looking signboard on which was printed the single phrase, VOICI LE CENTRE DU MONDE. What forgotten enterprise it had once advertised, few of those who saw it from the lumbering Boston-bound trolley cars had any idea. It stood there, in a dust-swept waste, as an ironical reminder of the vanity of some promoters’ dreams.
There have been times in recent years when such a sign would have seemed almost as out of place in the hall of the New York Stock Exchange. Yet during the nineteen-twenties, and above all during the years 1928 and 1929, that great hall on the western side of Broad Street, just below the corner of Wall Street and just opposite the quiet Morgan fortress, was in a very real sense the center of the world.
The trading in securities, and especially in common stocks, which took place here had become the most powerful engine of American economic expansion. The enthusiasm generated here by an extravagant uprush in prices was driving financiers and industrialists forward into vast and perilous schemes for the development and control of industry and trade. We have seen it shapin
g the schemes of men like Insull and the Van Sweringens and Mitchell and Dillon; what it did for them it did also for hundreds of others. The money which changed hands here was flowing out into the market-places of the country and providing one of the chief stimuli to business. The theories of American prosperity which were forced in this hot-house were finding their way into the thinking of men and women all over the country—even men and women who had never owned a share of stock—and were determining more and more surely the economic temper of the land. The roar which rose here from the throats of hundreds of jostling brokers as they made their purchases and sales, and the chatter of the tickers in innumerable scattered brokers’ offices, had become the leit-motifs of American life.
Nor was America the only country to feel the power of this mighty engine of inflation. Money from abroad was tempted here; the prices established here influenced prices on the European bourses; profits made here found their way to foreign countries; and as in a hundred subtle ways the New York level of security prices affected the flow of international trade, the sales made by brokers on the paper-littered floor of this arena altered the fortunes of Zulu miners in the Rand and Malayan rubber-growers in the islands of the East.
Lords of Creation Page 33
