The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
INDEX
ADDRESSES OP
MR. SAHUEL UNTSRKYER
(in print)
April 9, 1910
"EVI1S AND REMEDIES IN THE
ADMINISTRATION OP THE CRIMINAL
LAW". American Academy of Political and Social Science,
Philadelphia, Pa.
Jan. 11, 1911
"EXTERMINATION vs. REGULATION
OP THE TRUSTS". National Civic
Federation, New York.
July
"MEANING AND EFFECT OF THE
ANTI-TRUST LAW DECISIONS"(art.
North American Review.
1911
Nov. 22, 1911
"GOVERNMENT REGULATION OF THE
TRUSTS" (Sherman Act).
Economic Club of Nev; York,
Hotel Astor.
Dec. 27, 1911
"IS THERE A MONEY TRUST?"
Finance Forum, Nev; York.
Jan. 5, 1914
"LEGISLATIVE PROGRAM TO RESTORE BUSINESS FREEDOM AND
CONFIDENCE". Illinois Association Manufacturers, Hotel
LaSalle, Chicago, 111.
April 15, 1914
"RELATION OF THE FARMER TO
THE TRUST QUESTION" Western
Economic Society, 2nd Nat'l.
Conference on Farm Credits.
Chicago, 111.
May
22, 1914
"REASONS AND REMEDIES FOR OUR
BUSINESS TROUBLES". Commercial
Club, Pittsburgh, Pa.
Dec.
29, 1914
"SPECULATION ON THE STOCK EXCHANGES AND PUBLIC REGULATION
OF THE EXCHANGES".
American Economic Association
Princeton, N. J.
July 27,
1916
"THE LAY/YER-CITIZEN, HIS ENLARGING RESPONSIBILITIES".
Commercial Law League,
Atlantic City, N. J.
Sept. 7,
1916
"SHALL INVISIBLE GOVERNMENT
BE RESTORED? THE ONLY REAL
ISSUE." An Answer to Mr.
Roosevelt, Portland, Maine.
Oct. 30,
1916
"AN HISTORICAL REVIEW OF MR.
HUGHES SURRENDER TO INVISIBLE
GOVERNMENT."
New Star
Casino, New York City
Sept. 24, 1918
• "THE OPERATING CONTRACT AND
THE FUTURE OF RAILROAD SECU*
KITIKS THEREUNDER". American
Bankers Association. Chicago.
Sept. 25, 1918
"WHAT WILL THE WAR DO FOR
AMERICA?" Fourth Liberty Loan
Campaign, Chicago, 111.
Oct. 29, 1918
"AN ANSWER TO COL. ROOSEVELT"
In defense of Wilson's plea for
re-election of Democratic Administration. Tammany Hall,
New York City.
Oct.
1,
Oct. 7,
1921
"THE IDEALS OF ZIONISM"
Jewish Telegraphic Agency,
Hotel Brevoort, New York.
1921,
"HOW TO SUPPRESS COMBINATIONS
AND STIMULATE HOUSING".
State Association of Real Estate Boards, Syracuse, N. Y.
Oct.
13, 1921
"CONSTRUCTIVE CRITICISM OF
THE TRANSIT PLAN". City Club
Nev/ York City
Jan.
4,
1922
"CAN WE SUPPRESS OR MUST WE
TOLERATE AND REGULATE TRADE
CONSPIRACIES?" City Club,
Boston
April 23, 1922
"HONEST AND DISHONEST TRADE
ASSOCIATIONS."
Temple Beth-El, New York.
May
"HOW TO STRENGTHEN LABOR
UNIONISM" Paul Revere Lodge
1,
1922
March 11, 1924
"HOW WE AMERICANS BLUNDER
AND MUDDLE ALONG" Rotary
Club,West Palm Beach, Fla.
Nov.
"ARMISTICE DAY", Temple
Rodeph Sholem, New York City
11, 1924
June 18,
1927
"WHO IS ENTITLED TO THE CREDIT
FOR THE FEDERAL RESERVE ACT?"
Answer to Sen. Glass (art.)
Oct-
28,
1927
"THE MOST URGENT ECONOMIC AND
POLITICAL ISSUE OF THE DAY."
Water Power- Public ownership
Erie Co.League-'Women Voters,
Buffalo, N.Y.
Jan.
14,
1928
"RESOLVED, THAT CAPITAL PUNISHMENT SHOULD BE ABOLISHED."
Steuben Society,Brooklyn.N.Y.
Evils and Remedies in the Administration
of the Criminal Law
Address
Delivered before the American Academy of Political
and Social Science at Philadelphia
on April 9th, 1910
By
Samuel Untermyer
of New York
EVILS AND REMEDIES IN THE ADMINISTBATION OF THE
CRIMINAL. LAW.
MR. CHAIRMAN, LADIES AND GENTLEMEN :
None of the many difficult problems that confront the present generation is more urgent or
perplexing than the reform of the administration
of the criminal law in our country. Our wealth
and importance in the financial world have increased by such leaps and bounds that we have
completely outgrown the laws which were enacted
to meet the earlier conditions in our history.
It will be no easy task to secure the changes
that are necessary to meet and curb the cupidity
of the criminal rich, nor to enforce those laws
when enacted.
Strange to say the chief obstruction to the administration of justice in criminal cases lies in
the undue shelter afforded by our Constitution.
The prescribed remedies against crimes of violence are, on the whole, fairly administered,
though there are still many abuses capable of correction. I t is in the attempts to punish the crimes
born of greed and cunning in the financial world
that the machinery of Justice has b±oken down
and the law is administered in a spasmodic and
hysterical way.
I think it will be admitted by all fair-minded
critics of our Institutions that our people have
2
not that respect for the law which pervades foreign countries. Is it not because the enforcement
of the law with us is not entitled to the same respect? It is either not made to reach the powerful or has been found incapable of enforcement
against them. This discrimination is not due to
the dishonesty of our people or public officials,
nor to their unwillingness to punish rich offenders. It is owing largely to the character of the
proof necessary to establish the commission of
a crime involving complicated financial transactions and to the difficulty of securing such proof,
because of the impassable barriers thrown around
the offender by what are known as the Constitutional rights and immunities of a person charged
with crime.
Even at the risk of being considered guilty of
heresy I question the wisdom of these provisions,
which are embodied in the Fourth and Fifth
Amendments to the Federal Constitution and of
like provisions in the Constitutions of the various
States as they have been construed by the Courts.
(In the few States, like New Jersey, which
have no provisions in their Constitutions to the
effect that in a criminal case no person shall be
bound to incriminate himself the courts have held
that the right is one inherited from the common
law and have accordingly read the provision into
the organic law of the State.)
The language of the Fourth Amendment so far
as applicable to this discussion is:
"The right of the people to be secure in their
persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no warrants shall issue, but upon probable cause, supported by oath or affirmation, and
3
particularly describing the place to be searched,
and the person or things to be seized.'/
That of the Fifth Amendment is that
"No person shall #
* * be compelled
in any criminal case to be a witness against himself/'
It is hardly necessary to remind you of the
history of the oppression that led to the enactment of these Amendments, as described by Mr.
Justice Bradley in Boyd v. United States, 116
U. S., 624-626:
" I n order to ascertain the nature of the proceedings intended by the Fourth Amendment to
the Constitution under the terms * unreasonable
searches and seizures,' it is only necessary to recall the contemporary or then recent history of
the controversies on the subject, both in this country and in England. The practice had obtained
in the colonies of issuing writs of assistance to
the revenue officers, empowering them, in their
discretion, to search suspected places for smuggled goods, which James Otis pronounced 'the
worst instrument of arbitrary power, the most
destructive of English liberty, (and 'the fundamental principles of law, that ever was found in
an English law book;' since they placed 'the liberty of every man in the hands of every petty
officer.' This was in February, 1761, in Boston,
and the famous debate in which it occurred was
perhaps the most prominent event which inaugurated the resistance of the colonies to the oppressions of the mother country. 'Then and there,'
said John Adams, 'then and there was the first
scene of the first act of opposition to the arbitrary
claims of Great Britain. Then and there the
child Independence was born/
4
'' These things, and the events which took place
in England immediately following the argument
about writs of assistance in Boston, were fresh
in the memories of those who achieved our independence and established our form of government. In the period from 1762, when the 'North
Briton' was started by John "Wilkes, to April,
1766, when the House of Commons passed resolutions condemnatory of general warrants, whether
for the seizure of persons or papers, occurred the
bitter controversy between the English government and Wilkes, in which the latter appeared as
the champion of popular rights, and was, indeed,
the pioneer in the contest which resulted in the
abolition of some grievous abuses which had
gradually crept into the administration of public
affairs. Prominent and principal among these
was the practice of issuing general warrants by
the Secretary of State, for searching private
houses for the discovery and seizure of books and
papers that might be used to convict their owner
of the charge of libel. Certain numbers of the
'North Briton,' particularly No. 45, had been
very bold in denunciation of the government, and
were esteemed heinously libellous. By authority
of the secretary's warrant Wilkes's house was
searched, and his papers were indiscriminately
seized. For this outrage he sued the perpetrators and obtained a verdict of £1,000 against
Wood, one of the party who made the search, and
£4,000 against Lord Halifax, the Secretary of
State who issued the warrant.
The case, however, which will always be celebrated as being the occasion of Lord Camden's
memorable discussion of the subject, was that of
Entick v. Cartington and Three Other King's
Messengers, reported at length in 19 Howell's
State Trials, 1029. The action was trespass for
entering the plaintiff's dwelling house in November, 1762, and breaking open his desks, boxes,
&c, and searching and examining his papers. The
jury rendered a special verdict, and the case was
twice solemnly argued at the barf Lord Cam
5
den pronounced the judgment of the court in
Michaelmas Term, 1765, and the law as expounded by him has been regarded as settled from that
time to this, and his great judgment on that occasion is considered as one of the landmarks of
English liberty. It was welcomed and applauded by the lovers of liberty in the colonies as well
as in the mother country. It is regarded as one
of the permanent monuments of the British Constitution, and is quoted as such by the English
authorities on that subject down to the present
time."
Until the decision in 1885 in the Boyd case it
was not generally supposed that the provision
against unreasonable search and seizure applied to
the enforced production of books and papers under subpoena for use in a criminal case, so as to
permit a man who was able to secure possession
of evidence of this character to thwart the ends
of justice. It was, to say the least, a surprise to
the legal profession to find that to reqnire obedience to a lawful mandate for the production of
such books, was a "search of seizure" and more
surprising still to learn that it was an "unreasonable" seizure. But such is the law unless the
recent decisions of the Court can be said to have
modified the rule in the Boyd case.
Yet it is not clear to me that the framers of our
Constitution ever meant that the Fourth Amendment should be held to forbid the courts to use the
written evidence of a criminal act against the person charged with the commission of the crime,
where that evidence can be secured from him
through the orderly process of subpoena.
In, the last few years the Supreme Court has
been face to face with the difficulty of proving
crime where the defendant can be permitted to
6
withhold his books and papers from the operation
of a subpoena and has found it necessary to "distinguish" the Boyd case so as to mitigate, in so
far as possible, the many difficulties to which it
gave rise. That great Court realizes the necessity, above all things, of certainty in the law and
so it rarely overrules its own decisions. But it is
a progressive court. Progress is more necessary
than consistency, and so it has begun the process
of "limiting" and "distinguishing" the Boyd
case. The next stage will be to "forget" it. Let
us hope so.
I need hardly say that I intend no disrespect to that greatest of the world's judicial
tribunals. We should be forever thankful for its
vast powers and especially for the power which
it has taken unto itself of judicial legislation.
The Nation owes much of its greatness to the
brave exercise of that power at critical times.
As evidence of the departure from the Boyd
case permit me to call your attention to Hale v.
Henkel, 201 U. S., where the Secretary of the
American Tobacco Company was subpoenaed to
produce the books of the Company, which was under investigation for violating the Anti-Trust Law.
A person testifying against himself is entitled
to immunity under that statute. The Supreme
Court held that the Secretary could not plead the
priviledge of the corporation against incriminating itself. Some of the Judges were in favor of
holding that a corporation was not a person, within
the protection of the Constitution so as to get
rid of the prohibition once and for all so far as
concerned corporations although that Court had
previously repeatedly held that under the Fourteenth Amendment a corporation was a person, en
7
titled to the equal protection of the laws with an
individual, and some members of the Court had
said that a corporation was equally within the
meaning of the Fourth and Fifth Amendments.
In the case of Al Adams, charged with owning
and operating policy-shops, the Supreme Court
affirmed the action of the lower court in allowing
his books to be used against him, although the
particular evidence complained of had been forcibly and unlawfully seized, thus literally violating the protection that was clearly intended to be
afforded by the Fourth Amendment. The Court
held that the violation of the defendant's rights
presented no Federal question and that in any
event it made no difference how the evidence had
been secured, so long as it had been made available. So that whilst a man could not be compelled to produce his books in answer to a subpoena in a criminal case against him, they could
be forcibly taken from him or stolen from him,
and used as evidence.
In the Twining case the Court decided that although a defendant on trial for larceny had been
compelled to incriminate himself, no Federal right
had been violated and no Federal question was
involved, and that it was for the State Court to
determine whether its law had been thus violated
in that respect.
Within the past few days the U. S. Circuit
Court in New York decided in the case of U. S.
v. American Sugar Co. that the corporation could
be forced to produce its books without granting
immunity to anyone.
These cases are cited as illustrating the lengths
to which the Court has been driven in order to
preserve even a vestige of its machinery to detect
s
and punish crime, with these Constitutional provisions in its way.
I submit, but with hesitation,—not because of
doubt as to the wisdom of the suggestion, but because it will appear like sacrilege to the uncompromising worshippers of our Constitution—that
the first and greatest existing evil in the administration of the criminal law, and one that should
be corrected, is the undue protection still afforded
to persons charged with crime by these provisions
of the Constitution and like provisions in the State
constitutions.
We may somewhat mitigate the evil by bold
judicial legislation. That is the process we are now
undergoing with respect to corporations. But the
prosecution of corporations, which can result only
in a fine is a farce—we cannot strike at the root
of the trouble without amending our Constitution.
But for the fear of being charged with treason
against this fetich which all lawyers are expected
to worship, I should be tempted to say that the
difficulty put in the way of the punishment of crime
is not the only disability under which that great
Document of Compromises has placed us.
When we consider how helpless we are under it to
regulate Divorce, or to tax wealth (through an
Income Tax), instead of taxing poverty or to secure uniform Corporation Laws or to prevent the
States from bidding against one another for "business" in the laxity of administering Divorce and
Corporation laws, perhaps we may be pardoned
for suggesting that great as was the wisdom of
our Fathers, they did not foresee all the possibilities of the future.
The occasion that gave rise to these clauses in
the Fourth and Fiffh Amendments can never
9
again arise. These disabilities to punish crime
do not pertain in other countries; they are no protection to the innocent, but they are the cause of
miscarriage of justice and the escape of the guilty
in nine cases out of ten. They lead to all sorts of
dishonest expedients by the prosecuting officers
and bring the administration of Justice into contempt. No device, however unlawful, by which
a man's papers can be seized or stolen from him
will prevent their use against him, and yet, he
himself cannot be forced to produce them. (We
have sacrificed the substance of the Bill of Eights
and are clinging to the shadow.)
I t must not be forgotten that the rule that a defendant in a criminal case cannot be compelled to
incriminate himself was enacted at a time when
the defendant was not allowed to be a witness in
his own behalf.
I would not only remove the existing restrictions but would go further and permit the defendant to be called by the Prosecutor for crossexamination, but only in open Court and at a time
when he is represented by counsel. Subject to
the limitation that the Presiding Judge should
not put questions or turn Prosecutor, which is
the vice of the Continental system, I would adopt
that system, with the further qualification that
there should be no private or "star-chamber" interrogation of the defendant. Nine out of ten
crimes go unpunished because of this tradition,
which found is birth in the abuses of the Dark
Ages.
We have the most striking illustration of the
vice of this rule in the pending prosecutions for
violation of the Anti-Trust Law. The most
flagrant of these violators are practically immune
10
because they cannot be forced to disclose the "gentlemen's agreements" and other forms of unlawful combinations, as the result of which every
human soul in the country is daily paying tribute
to them. We have the sad spectacle of the courts
of the country passing solemn judgments in civil
suits enjoining and dissolving these monopolies
as the enemies of commerce and decreeing that
the leaders and owners of these vast industries
are guilty of criminal violation of the law and yet
we find the Government powerless to enforce the
criminal law against the individuals who gave
them birth, who conduct them and are the beneficiaries of their criminal existence. Such exhibitions, repeated day by day, are bound to educate the people to a contempt for the law and to a
feeling that it discriminates between the weak
and the powerful.
How long could these gigantic pools last, many
of which are evidenced by the written admissions
of the parties if the culprits could be put upon the
witness-stand and forced to testify and produce
the written evidence of their crimes ? If they are
innocent can anybody conceive how they could be
harmed?
There are a half dozen offices in the City of
New York of men engaged in the business of acting as so-called "commissioners'' of these criminal pools and as expert accountants under whose
direction the profits are distributed, that could be
made to yield up the written evidence of a hundred or more of these vast conspiracies involving thousands of influential business men
who are supposed to be reputable, law-abiding
citizens but who do not scruple to commit this
form of crime. The only thing that protects them
11
from the enforcement of the law is the construction that has been placed upon these Constitutional limitations.
If trusts and monopolies are good things for
the country, and the laws that have been enacted
to suppress them are mere demagogic class legislation born of the envy of the poor against the
rich, as some of our plausible friends in and
around Wall Street, living in a "Fool's Paradise/ ' still seem to think, they should be wiped
from the statute books. If, on the other hand,
these trusts are an economic curse to the country,
are destroying opportunity for the rising generation, paralyzing the economic laws of supply and
demand and levying tribute upon us by sheer
brute force, more cruel and ruthless than the
forced tribute exacted by the robber barons of
old, we shall never be able to rid ourselves of
this blight so long as there is such a thing as
human greed, without the stern application of the
criminal law to the men who guide and control
them.
For that purpose the entire inquisitorial machinery of justice should be available. Every barrier that has been thrown in the way should be
removed unless it is seen to be necessary for the
protection of the innocent against oppression.
The provisions quoted from the Fourth and
Fifth Amendments of the Constitution (not the
entire amendments), and like provisions in the
State Constitutions, constitute today the great and
only barrier between the people and the execution
of their will against these violators of the law.
The second great evil in the administration of
the criminal law and for that matter of all
12
laws in our country, is the prevalence of perjury
due to the non-enforcement of the laws enacted
for its punishment. I think it will be generally
admitted that in no civilized country is wilful
false-swearing so prevalent as here,—due largely
to the fact that the penalty imposed under the
laws of the various States is too severe, and that
it is therefore a crime rarely punished.
In the State of New York, perjury and subornation of perjury in a criminal case are each punishable by a maximum term of twenty years imprisonment, and in a civil case by a maximum
term of ten years.
It has been said, and I think rightly that the
crime of perjury is committed in at least three out
of every five cases tried in the courts in which an
issue of fact is involved. It has become so general
that the Courts regard it almost as a part of the
inevitable accompaniment of a trial.
Again, contrasting our conditions in this respect with those prevailing in foreign countries,
no fair-minded observer of the administration of
Justice in those countries will deny that in neither
England, Germany or France is there committed
a fraction of the perjury that is prevalent in our
courts. In none of those countries is perjury
punishable with the severity provided by our law,
which renders conviction well-nigh impossible.
The German courts are exceptionally free from
this pollution of the judicial system. Most cases
in which there is a sharply defined issue of fact
that cannot be explained as the result of mistake
or honest difference of recollection, are followed
by prosecution. The dread of the law is upon
every man who goes upon the witness-stand there.
13
Permit me to suggest at least a partial remedy
for this ever-increasing danger.
It should be made obligatory upon the Court on
the trial of every issue of fact before a jury to
require the jury, in addition to its general verdict, to answer the question as to whether any
party or witness has been guilty of wilful falseswearing, and if so, to name the party or parties
or witnesses so guilty. Where the trial takes
place before the Court without a jury, the Court
should be required to answer such a question. If
the Court or jury (as the case may be) finds that
there has been perjury, it should be incumbent
upon the Prosecuting Officer to act upon such
finding.
The knowledge of the parties and their witnesses that the jury will be required to answer
such a question will in itself be a most powerful
deterent against reckless false-swearing. Unfortunately there are many in the community who
have more regard for their reputations than for
the sanctity of their oaths and a far greater regard for their liberty than for either.
If the submission of the question be left to the
discretion of the Court, or its answer be made
discretionary with the jury, nothing will be accomplished. It should be mandatory, and a like
mandate should apply to the prosecuting officer to
place the evidence of perjury in every such case'
before the Grand Jury.
The third evil to which I desire to refer is the
unbridled license of the Press in commenting upon
and often trying cases in the public prints. This
is a prolific source of the niiscariage of justice
and is most prejudicial to the rights of defendants
14
•charged with crime. Its effect upon the administration of justice is baneful and far-reaching:
(a) It creates a sentiment in the community as
to the guilt or innocence of the accused, which
'makes it well-nigh impossible to secure an impartial jury. It may be that jurors can dismiss
their preconceived impressions from their minds
and be guided solely by the evidence but that is
not the experience of most men. Even if that were
true why should we tolerate a practice that has
in it such elements of danger? Strangers to us
who do not realize the difficulties under which we
labor from the pre-judging of cases through the
license of the press have made this part of our
judicial system the subject of ridicule and not
without reason. Imagine weeks of time being
consumed in securing twelve men whose minds
have not been so poisoned by newspaper stories
concerning a case in the Courts that they are unable impartially to weigh the evidence! It should
be impossible to find anything in a newspaper except what transpires in the court-room until after
the conclusion of the trial. Consider also the expense to the State and the additional cost to the
accused of these protracted trials brought about
b>y this pernicious practice. In the face of public
clamour, which means the goading of the press
against the accused, frequently for sensational
purposes, justice is rarely done.
If it be said that the courts frequently need
that spur to prevent undue influence by powerful
criminals, the answer is that it is an illegitimate
and dangerous expedient as an aid to justice.
(b) The atmosphere and sentiment thus created
around a case are bound to, and do affect not only
15
the jury but the Court as well. A man does not'
lose his ambitions or human nature by climbing
from the Bar onto the Bench. Most of our public
men are known to us only as they are pictured by
the newspapers, which make and unmake men. It
is well-nigh impossible to exclude entirely the subconscious influence of press comments on the
Judge as reflecting the views of the community
in which he lives be he ever so upright. He would
rather go with the tide than against it, and he,
too, is not infrequently already impregnated with
the atmosphere of the community gathered from
the press.
(c) The prosecutor, who should be impartial,
seeking only the truth and not bent upon conviction unless the facts satisfy him beyond a reasonable doubt, is put to a test that few men in public
office are able to resist.
Imagine such a prosecutor, in a case that has
attracted general attention due to its sensational
features and the efforts of the press to exploit and
magnify them, rising in open court at the close of
such a case and recommending to the Court to acquit the defendant, as it is the duty of a prosecutor to do if he believes that a conviction would be
unjust. It is done every day in the criminal courts
in cases with which the newspapers do not concern
themselves, but it would take a brave man to do so
in what is known in the parlance of the criminal
courts, as " s t a r " cases.
The abuses that have arisen under this head
have become well-nigh intolerable. Prosecuting
officers, who are ambitious for further honors,
maintain elaborate Press Bureaus for the distribution of news concerning their offices. The re-
16
porters who want to stand well with the prosecuting officer and get all the news that is to be had
fall into the habit of taking the prosecutor's version. Of late years nothing is sacred. A witness
is called before the Grand Jury, and the testimony
given there in important cases manages "to leak
out" day by day. The secrecy of the Grand Jury
Room is a thing of the past. The law against disclosing occurrences there is a dead letter. The prosecuting attorney is generally the chief offender
and frequently the only one. The main concern
of a modern prosecutor in one of the great cities
of this country seems to have become to keep himself before the public, which he does by seeing to*
it that the public is informed of everything that
happens in his office from his own point of view.
I do not mean to assert that this shocking condition is universal but it is not uncommon and isgrowing more frequent.
Three poor, helpless, old women are about to be
tried in one of our sister States on a charge of"
murder. The issue for the jury is whether the*
deceased was murdered or committed suicide.
From the day that case came into the office of the*
Prosecutor and for weeks thereafter, so long as
public interest could be aroused or sustained,
whilst these poor women were under lock and key,,
the Prosecutor was day by day issuing or inspiring statements in the press in the community in>
which they are to be tried, tending to show or
arguing that they were guilty and presenting such
proofs and innuendoes as he had at hand to support these ex parte arguments. All this was onthe eve of the assembling of a Grand Jury to consider the case.
17
The Grand Jury, of course, promptly indicted
these poor women and now they will have to be
tried in a community in which public sentiment
has been crystalized against them through the
energies of the press ably seconded by the Prosecutor. These women are not being tried. They
are being hounded. It is little better than mob
law and in some respects not quite so fair for it
is masquerading under the forms of law.
The following are suggested as remedies for
this condition:
1. The enactment of laws, similar to those prevailing in England, prohibiting a newspaper from
publishing anything concerning a case that is in
the courts other than a verbatim report of the
proceedings in open court.
2. Prohibiting any newspaper from commenting, either editorially or otherwise, upon the evidence in judicial proceedings until after final
judgment.
3. Prohibiting any prosecuting officer, under
penalty of removal and punishment for a misdemeanor, from expressing or suggesting for publication an opinion as to the guilt or innocence of
a person accused, or from disclosing any of the
proceedings of a Grand Jury, or from publishing
or being privy to the publication of any evidence
in his possession bearing on any case under his
control. If an assistant or other person in his
office is guilty of any of the acts charged it should
be ground for the removal of the Prosecutor and
the punishment of the assistant, or any other person connected with the office, so offending.
18
When we consider the far-reaching effect of
these press campaigns against persons under
criminal charges, such regulations should be regarded as very mild compared with the evils that
are sought to be remedied. The expense to which
the State is put in securing impartial jurors is
alone more than sufficient to justify these reasonable precautions.
The next evil, but to my mind not the greatest
by far, but the one that has received most attention from the public and those in authority, relates to the law's delays.
Some of the remedies that have been suggested
seem to me far worse than the disease. Chief
among them, and the one that appears most generally to be favored is that of restricting the
right of appeal in criminal cases. At a time
when other nations are granting and enlarging
this right we are considering abridging it.
There should be the most generous right of appeal in criminal cases,—far more liberal than
when we are dealing with mere questions of
money. And yet the supporters of this change
would be shocked at the suggestion that there be
no appeals allowed in civil cases. How much
greater the need where the liberty and reputation,
not only of the man but of all those about him,
are involved?
Nor is there force in the plausible, but unsound,
suggestion that no judgment in a criminal case
shall be reversed except for errors that can be
affirmatively shown to have materially prejudiced
the defendant on the merits of the charge, and
that all so-called "technical" errors are to be
disregarded.
19
If a mistake of law committed during the trial
is not too technical and trifling to be overlooked
and is such that it is regarded by the law as error it must be because the rule that has been violated in the commission of it is considered in the
light of human experience as essential, or at least
material to the protection of the rights of one of
the parties. If such a rule has been violated the
defendant has not been fairly tried and there
should be no latitude about allowing such a judgment to stand.
One of the worst abuses of the present system
is not the delay in executing the judgment, but the
undue and indecent haste in requiring a defendant to undergo the sentence whilst his appeal is
pending. We have constant object lessons in the
brutality of the law in that respect in the cases
of those who have undergone all or most of their
terms of punishment, to find that the judgment
under which they were disgraced and imprisoned
was without lawful authority.
It sometimes happens, as in a comparatively
recent case in New York of an official of a lifeinsurance company that the appellate court decides as matter of law that no offense whatever
was committed after the man has served nearly
the entire term for which he was sentenced. The
cases of this kind are not infrequent. Is not that
paying too great a penalty for certainty of punishment ?
Both these evils—that of delay and unjust punishment, can and should be prevented by
1. Allowing a stay of sentence as a matter of
right and not of discretion, until the defendant
has exhausted every remedy by appeal that the
law permits;
20
2. Providing that unless the appeal is moved by
the appellant for hearing within a given number
of days after judgment has been pronounced the
stay of sentence is automatically vacated.
3. The printing of the papers or record on the
appeal should be under the control of the Court
through its clerk. It will then rest entirely with
the Court to regulate the time when the appeal
is to be argued. The parties will no longer control
that subject as they do now in many of our states.
This change will do away with a most prolific
cause of the existing delays. There is no reason
why there should be a delay of more than from two
to four months between the sentence and the determination of the appeal.
4. Where the defendant makes proof satisfactory to the Court that he is unable to pay the expenses of the appeal the state should pay them.
The right and opportunity of the fullest defense
should not depend on the ability of a man to,pay.
It is not in the interest of the state to convict
where there is doubt. It is in its interest to give
to every man the fullest opportunity to establish
his innocence.
This brings me to the next suggestion I have
to offer which is that there should be an office
established as part of the machinery of the criminal law to be known as that of the Public Defender.
Unjust convictions among the poor and helpless and especially among our ignorant foreign
population are far more frequent than we fortunates care to admit. This is especially true in the
great cities where the courts are crowded with
business, the pressure is great and justice is necessarily hurriedly administered in obscure cases.
21
The most prolific abuses occur in what are
known as "assigned" causes in which the defendants and their families and friends are too poor
to furnish bail or employ counsel. In those cases
the Court assigns counsel who serve without pay
except that in some states a moderate fee is allowed in capital cases only. The counsel assigned
in these cases are with rare exceptions almost
necessarily young and inexperienced men or lawyers without standing or ability.
Yet these are the cases above all others in
which the defendants are already at the
greatest disadvantage being incarcerated, unable to go about to look up witnesses and
too poor to employ anyone to do so for
them. If they are first offenders of previous
good reputation, as they generally are (for experience has shown that professional criminals
are generally able to secure counsel), their prison
experience has taken the courage out of them by
the time they are placed on trial.
They come to the bar of justice crushed
in spirit, and if innocent, in mortal terror
of the law and resigned to any fate. Their
assigned counsel whose retained clients are
his chief concern easily convinces himself
that he has done his duty to his pauper client
if the prosecutor will accept a plea of guilty to a
lesser form of crime or be content to recommend
a moderate sentence. And so before the poor fellow knows what has happened to him he has consented on less notice and in less time than it requires to tell the story, to take the advice hurriedly given him as he stands quivering at the
bar and so he finds himself on the way to prison.
There is hardly a day in the year when this scene
is not enacted in the Courts of our great cities.
22
That such a system results in innocent men being
branded and punished as criminals admits of no
doubt. That the number of such crimes against
justice and humanity is very much underestimated
is beyond question to anyone who has observed
the system in operation. The judges do what
they can to minimize the evil but from the nature
of the case they must rely on counsel.
What then is the remedy?
The State has its Public Prosecutor. Why not
its Public Defender to care for those who are unable to defend themselves? It is quite as much to
the interest of the State to rescue the innocent as
to punish the guilty. There is no danger of the
privilege being abused. Every man who can afford to defend himself will exhaust every resource
to select a champion of his own choice. The most
helpless and unfortunate of all our citizens should
liaf^te be forced to go virtually undefended.
Nowhere in our social fabric is the discrimination between the rich and poor so emphasized to
the average citizen as at the bar of justice. Nowhere should it be less. In an ideal state of government the lines would be made to disappear
here of all places. Money secures the ablest and
most adroit Counsel whose characters and reputations are powerful factors in their client's
cause. Evidence can be gathered from every
source and all the legitimate expedients of the
law availed of. The poor must be content to forego all these advantages but surely the State
should not take an unfair advantage of his helplessness.
With experienced Counsel and the entire organized machinery of the criminal law at its command it should not seek to disarm him complete
23
ly, thus accentuating the power of money in the
struggle for liberty between the State and its
citizens.
It is with sincere regret and reluctance that I
assert that save in rare instances the modern Prosecutor does not stand between the People and the
accused. He and his assistants too often measure
the success of their labors by the number of convictions they have secured. It is a false and
brutal conception of duty that is responsible for
grave injustice but it is none the less true that it
exists. Under its influence the Ptosecutor becomes a partisan advocate, blind to the strength
of the defence, unwilling to voluntarily expose the
weakness of the People's case.
The People are as deeply interested in proving
the innocence of the accused where he is unable to
defend himself as to prove his guilt. By all means
let us have a Public Defender in the interest of fair
play and common humanity.
Many more instances of evils that may be reformed could be cited if time permitted. I have
not attempted to deal with the minor abuses that
weigh so heavily upon the poor who come into
contact with our magistrates' Courts nor with the
ever perplexing question of the relative merits of
an elective or appointive Judiciary nor with a
host of other problems that present themselves.
That there are such problems pressing for solution cannot be denied. In every other branch of
human endeavor we are forging ahead. Why
should we stand still, clinging to tradition in the
field of usefulness most important of all in a progressive civilization?
Extermination vs. Regulation of the Trusts
WHICH SHALL IT BE?
An Address
Delivered at the Annual Meeting of the National Civic
Federation, at New York City on January 12th, 1911
By
Samuel Untermyer
of New York
EXTERMINATION vs. REGULATION OF THE
TRUSTS.
WHICH SHALL IT BE?
My text deals with a very technical question,
but it involves the great problem of our day
and one of ever increasing perplexity. Its discussion is perhaps better adapted to the contentious atmosphere of a convention of constitutional
lawyers as affording endless opportunities for
legal construction and differences of opinion. But
in its final analysis and broadest aspects it is primarily economic. That is my apology for presenting it to you. I trust that the discussion will
not prove too wearisome.
The subject will be presented on the assumption
that the Judgments of the Circuit Courts of Appeal in the two important cases now pending in
the U. S. Supreme Court will be affirmed by that
Court.
Judging from the uniform trend of the decisions of that Court for the past five years,
it is not unlikely that the principle announced by
the lower Courts in those cases will be not only
affirmed but emphasized in the most sweeping
fashion by our highest tribunal and that every
form of combination the direct purpose and effect of which is to hamper or limit competition
will be condemned.
2
Unfortunately for the welfare of the people
I am not however satisfied that the decisions will
afford any substantial relief from the dangers that
are threatening us or that they will either furnish or point out a practical solution. The provisions of the Judgments are drastic but it does
not follow that they are enforceable in practical
operation. The companies appear to me to
have nothing to fear from the result beyond possible changes in the forms of their organizations.
The properties and businesses are there, tliey
belong to the shareholders and there is no way
of confiscating them even if there were a disposition to do so, which happily there is not. The
thought of disbanding the central organizations
and resolving the constituent companies into their
original parts presents an impossible problem. It
bears no analogy to the simple situation presented
in the Northern Securities case. Here the constituent parts and in some cases everything in the
way of property that represents them has long
since disappeared or lost its identity.
The shares that were issued for the properties
were not earmarked or identified and have changed
hands possibly hundreds of times. They have
been scattered broadcast among innumerable innocent investors.
I repeat that we need therefore apprehend
neither relief from the Trusts nor business chaos
or other dire consequences from the decisions. If
it is in favor of the Government the victory for
the People will be mainly academic, with the injection into the present problem of nothing beyond
temporary uncertainty and confusion, of which
the "knowing ones" will not be slow to avail themselves at the expense of the timid, frightened investors.
3
The situation is likely to be very similar to that
of many years ago when the original Sugar Trust
was declared unlawful and the property ordered
sold and the Trust dissolved. The property had
to go somewhere. It could not be thrown into the
sea or otherwise made to disappear. It was accordingly sold under the Judgment of the Court,
was purchased by the old holders, who had deposited their trust certificates with a Committee
for the purpose, was paid for by these same certificates which the Court had declared unlawful
and was turned over to the present American
Sugar Eefining Company which the old owners
organized to take it over. The only effects of
the long struggle were to unsettle the value of the
stock, shake out the weak holders and panic
stricken investors and to enable the same interests to continue lawfully and under the protection of a Judicial decree the same business that
had theretofore been declared unlawful.
A like result followed the dissolution of the
original Standard Oil Trust by the Supreme
Court of Ohio. After the lapse of many years
consumed in the "liquidation" of the Trust by
the original Trustees the property was handed
over by the owners to the present Standard Oil
Company of New Jersey. Nothing was accomplished by the Judgments.
Under the above. general title the following
propositions will be treated in the order stated:
1. The attitude of the Courts during the first
ten years of the existence of the Anti-Trust Law
of 1890 in construing the Statute in a way that
rendered its enforcement during those years almost impossible is largely responsible for the
growth and development of the existing trusts.
4
This is especially true as to what are now recognized to be the most permanent and powerful
forms of Trusts, to wit: combinations by
actual ownership and through holding Companies as distinguished from Pools, Selling Agencies and Trade Agreements, which are temporary
in character and operation and are easily dissolved without affecting vested interests.
2. The Government failed or was unable by
reason of the construction placed upon the Statute to prevent and suppress these offenders
against Inter-State and International commerce at a time when it might have been done
without public injury. As the result of this construction it tacitly assented to their continuance
and expansion and thereby encouraged the formation of others. It would therefore be wrong
to now attempt to exterminate them even if any
such result could be accomplished (which is denied) with the accompanying destruction of public confidence amounting almost to financial and
industrial chaos provided there is any other,
course open that will abate the evil.
I assert with confidence that the attitude of the
Courts toward the Anti-Trust Law of 1890 for
at least ten years next succeeding the passage of
the law is mainly responsible for the growth and
development of the trusts.
Mr. Walker in his recent ''History of the Sherman Law" has ably performed the useful service
of reviewing and analyzing the accomplishments
of each administration in the enforcement of the
law.
It appears:
1. That during the Harrison Administration
which ended March 4th, 1893, nothing was ac
5
complished except in a single insignificant case
which involved no debatable question.
The Government instituted during that time five
cases in all:
(a) A criminal proceeding against the
Whiskey Trust which ended in the dismissal
of the indictments without trial.
# (b) A criminal proceeding against a combination of lumber dealers in which the Court
held that mutual restraint between the defendants against competing with one another
was not an offense so long as it did not involve extraneous restraint against others.
The decision and others that followed it, all of
which have since been in effect repudiated
by the Courts had much to do with many organizations of consolidations and holding
Companies that followed. So long as that remained the law the industrial world was
rightly advised that combinations did not offend against the first section and were legal
so long as they did not constitute monopolies and thus offend against the second section of the Act.
Judge NELSON said on that subject in the lumber
case last referred to:
" A n agreement between a number of dealers
and manufacturers to raise prices unless they
practically control the entire commodity cannot
operate as a restraint upon trade. Competition
is not stifled by such an agreement and other
dealers will soon force the parties to the agreement to sell at a reasonable price.'*
(c) A suit in equity against the TransMissouri Freight Association in which Judge
EINER in the U. S. Court in Wyoming held
that the Sherman Law did not apply to InterState transportation and that even if it did,
it should be construed as not applying to any
reasonable regulation of freight rates be
6
tween competing common carriers. On the
first appeal taken by the Government in this
case the majority of the Judges of the Circuit Court of Appeals agreed with the Court
below that the prohibition of Section 1 of the
Sherman Law was limited to unreasonable
restraints.
Judge SHIRAS, who afterwards became a member of the Supreme Court in a dissenting opinion
sounded the alarm against the emasculation of
the Act which was involved in that view.
Here then was another step taken by the Court
;in inviting the formation of trade agreements in
lestraint of competition, even among our great
public service corporations so long as they were
not unreasonable.
(d) A criminal prosecution against the
members of the combination formed to control
the price of cash registers in which there
were fourteen counts to the indictment ten of
which were dismissed on demurrer. Before
the defendants were required to defend themselves against the remaining counts they extended their combination by receiving into
the fold the six competitors for interfering
with whom the indictment had been found.
Thereupon the then Attorney-General dropped
the case on the then generally recognized view that
a consolidation of previously competing industries
under a single ownership did not violate the law
even though the effect was to restrain competition!
To-day we all know that this is not the law and
that the form of the restraint is immaterial. We
also know that these permanent consolidations
which were regarded as lawful as against the temporary trade agreements in the form of Pools
7
(which were considered illegal) are far more
harmful than the latter. But in determining the
attitude of the Courts toward the Law we must
consider how these consolidations were then regarded.
2. During the Cleveland Administration from
1893 to 1897 ten cases were brought or prosecuted
on behalf of the United States. Five of them were
against transportation and labor strikes of which
four were successful. Two of the ten cases were
brought against the trusts, one the now celebrated
Knight case against the Sugar Trust and the other
against the Cast Iron Pipe Trust. Both of these
failed. Nothing substantial was accomplished toward the enforcement of the law and nothing encouraging in the construction of the statute during these four years except in the Trans-Missouri
Freight Association case; but the effect of that
decision was lost by reason of the fact that after
the consolidation had been held legal by the Circuit Court of Appeals and before the reversal of
the decision by the Supreme Court it was voluntarily dissolved.
The only forms of combination which the Courts
were successful in reaching during these years
were the labor unions. I t was a surprise to the
legal profession to learn that they were within
the scope of the Act. From the debates in Congress when the law was under consideration it
seemed that labor organizations were not intended to be affected, yet the victories of the
Government in enforcing the law for the first ten
years were mainly against them.
3. Under the McKinley administration from
1897 to 1901 there were six cases prosecuted by
the United States. The only substantial progress
8
made during these four years was in two cases,
one against the Cast Iron Pipe combination and
the other the Joint Traffic Association case to
which reference has been made; in the last mentioned case four of the nine Justices dissented.
Both involved mere trade agreements.
During that same period there were eleven
litigations between private parties involving the
application of the Law. In only one of those
cases did the plaintiff secure relief.
The fact is that for more then eleven years after
the enactment of the law and up to the close of the
McKinley Administration on September 14th,
1901, not a single case was brought by the Government against a consolidation, and only two such
prosecutions had been begun against holding
Companies, known as the Whiskey Trust and the
Sugar Trust. Both of these failed.
The decision of the TJ. S. Supreme Court in
the Knight case (the Sugar Trust case), in which
it was held that the acquisition by the Sugar Company of its competitors did not constitute a combination to restrain or monopolize Inter-State
commerce in that it related solely to the manufacture of refined sugar in one city of the State y
doubtless did much to discourage the prosecuting
officers from further attempts to enforce the law
and to stimulate the formation of other great consolidations.
Looking back upon the situation at this distance we can readily see that for many years the
Courts failed to recognize the economic importance of this law or the dangers it was intended to
avert. It seems to have been regarded rather as
a sort of "freak" statute born of popular fear
of imaginary evils.
9
And so we find the Law emasculated in every
direction until the Courts were finally awakened
by the public demand and the increasing oppression of the Trusts, to a realization of the perils
it was wisely intended to avert. Then with the
advent of President Roosevelt in 1901 began the
first energetic attempts to enforce the law as
other laws are enforced and as this should have
been from the beginning. His hard common
sense and marvellous intuition of public sentiment scented the real dangers and blazed the way
for a genuine test of the effectiveness of the Act.
But it was already too late as a deterrent measure. Whilst the present administration is honestly and energetically striving to the same end
it acts like a man who knows he is on the wrong
road but who lacks the courage to confess his
error and retrace his steps.
Meantime Trusts in all forms had been growing like mushrooms, under the apparent sanction
of the Government prior to the beginning of President Roosevelt's campaign against them. Most
of these were organized toward the close of the
McKinley Administration after the law had been
for over eleven years on the statute books—a
dead letter so far as concerned its application to
the greatest of the evils against which it was
aimed.
Huge combinations like the Steel Corporation,
in the form of holding companies, the organization of which was openly advertised and discussed
for months prior to the formation were generally
regarded as lawful, and rightly so, as the law was
then being construed by the Courts. Advertisements were inserted for weeks in the newspapers
inviting shareholders in the constituent companies to exchange their shares for those of the hold
10
ing company on a basis of exchange outlined in
the notice.
All this time there was no suggestion on
the part of the Government that there was
claimed to be anything unlawful in the transaction. These shares were placed upon the official
lists of the Stock Exchanges here and abroad and
were distributed amongst and are now owned by
hundreds of thousands of innocent investors all
over the world.
Why was no attempt ever made to enjoin the
consummation of any of these vast combinations
if they were unlawful? That was the time to
stop them without affecting innocent people—before the new securities were issued.
The Sherman Law expressly and significantly
points out the remedy by injunction as the central idea of that statute. What conclusion could
the Bar and the industrial and financial world
draw from the attitude of the Government during all these years except that it construed the
decision of the Supreme Court in the Knight case
and the many other adjudications in the lower
courts as establishing that industrial consolidations were not within the scope of the Sherman
Law?
Under these circumstances the attempt at this
late day to rid ourselves of this economic danger
by the ruthless method of confiscating the private
property of innocent investors even if it can be
accomplished, is without justification or excuse if
any other means can be found to abate the evil.
3. The most permanent of the Trusts can no
longer be effectively destroyed or disbanded by
the Courts under the limitations of our Federal
Constitution, which forbids the destruction or
confiscation of property rights.
11
4. It is questionable whether it would be advisable to continue the abortive attempts at extermination that have characterized the enforcement of the Statute during the past twenty years
even if it were possible.
5. The present activities of the Government
and those which it threatens by way of criminal prosecution are misdirected, oppressive and
unjustly discriminative against the weak and in
favor of the strong. The existence of those combinations most inimical to the community because
they are the most permanent in form will not be
imperilled and no attempt has been made to reach
them by criminal process against individuals.
The criminal prosecutions of recent years
(except that against the Sugar Company direc*
tors which arose out of an exceptional transaction
and does not depend on the Statute) have been directed against the members of Pools and trade
agreements for regulating prices or production
or both. The Window-Glass, Bathtub, Fibre and
Manilla and Paper and Pulp Association cases
are all of that character. In all of them
the various concerns maintained 'their ownership and independence except that in order to
regulate prices and production they either sold
through a common agency or reported to a
"Commissioner" and in some cases deposited
money to assure the performance of their obligations.
They were of course all of them clearly illegal
devices to control competition and were stupidly
evidenced by written agreements which made it
a simple matter for the Government to reach
them. Literally hundreds of them have been more
or less openly operating and flourishing for at least
ten years. They had resulted mainly from fierce
12
competition between a large number of small concerns that had brought many of them to the verge
of ruin and they had been forced to band together
in this temporary form for self-preservation. In
some cases they had been brought together to
resist the competition of some one or few outside
concerns as large as all of them combined. In none,
of the cases had they grown rich or reaped excessive profits nor did they represent anything like a
control of the industry. They were little fellows
trying to save themselves. Those are the cases
which the Government is prosecuting criminally
and announcing in advance through the press that
jail sentences will be "demanded" and that the
Government will not be "satisfied" with less.
These trade arrangements cover almost every
known field of industry today. Many are still
evidenced by these tell-tale writings but they are
mainly the less important men who have not had
the benefit of the best legal advice. The larger and
more important ones have grown cautious and
have substituted secret methods for their former
open operations. Some are in the form of luncheonclubs where competitors "talk over" prices and
production and "exchange views." Others are regularly organized Associations that meet at stated
intervals; their ostensible function is to gather
"trade statistics" for the use of members and
disseminate "useful information." The minutes
of their meetings read like those of a social club—
prices and production are scrupulously avoided.
In the great industries there is frequently one
dominating factor so powerful as to be able
to regulate prices and production without a
line in writing or a money forfeit. There are
many of these all of whose understandings are
reached by barely more than a word or a sign—
they are known as "gentlemen's agreements."
13
ffhey are the most effective of all the price arrangements because these agreements are kept
and they generally include the entire industry.
They are quite as unlawful and any one of them
is far more powerful than those of all the weak
little fellows combined. Does one hear that any
of them are being prosecuted?
Very recently the Government found it necessary to enjoin the Railroad Association from carrying out a conspiracy to increase rates. The
proofs were so convincing that the railroads
had combined to advance rates in violation of
the Anti-Trust Law that they promptly surrendered. The same proof that entitled the Government to its injunction would have answered
for a criminal proceeding.
Is there any one familiar with this general subject who does not know how the uniformity of
prices and the shutting down of factories and
otherwise curtailing of production in the great industries is arranged? Why are these transactions
immune whilst the little fellows are being pursued
with a brass band and the greatest press bureau
that was ever put in action to keep up " a tempest
in a teapot?"
I do not mean to suggest that it would be good
policy to prosecute the members of these "gentlemen's agreements'' in our leading industries.
That depends on whether they are taking advantage of their power to unduly restrict production
or to exact unreasonable profits on the invested
capital.
My point is that the pending criminal prosecutions of the men who are struggling merely to keep
their heads above water, in the light of all we
know of existing conditions, amounts in practice
to a monstrous sham no matter how sincere may
be the intention to enforce the law (which T do
14
not question) and that such manifest discrimination tends strongly to bring the administration
of justice into contempt.
But above and beyond all these considerations
the most conclusive argument against the justice
and efficacy of this procedure lies in the fact that
the consolidations by ownership and through holding companies are so much more formidable than
these temporary expedients that the action of
the Government in pursuing the latter criminally
whilst suffering the former to continue, gives
one the uncomfortable feeling that our officials are floundering about and are trying to appease the public demand for the enforcement of
the law by sacrificing the smaller offenders be^
cause it is impossible for them to reach the big
ones.
6. There is nothing practicable in the recent
suggestions that these great problems can be dealt
with by the several states. They are essentially
national and international in their scope and effect
and can only be effectively handled by Federal
action for many reasons that will occur to any
lawyer.
The catch-phrase that "guilt is personal"
sounds well and is doubtless valuable political capital but like much of that sort of capital it is often
insincere. It cannot withstand the most cursory
analysis and comes far short of solving the trustquestion. General and impartial enforcement of
the law would involve such a substantial proportion of our most prominent and successful men
and useful citizens that it would be like indicting
the entire nation. Spasmodic prosecution on the
other hand is still worse.
The past history and present undignified
attitude of our sovereign States in bidding
15
against one another in laxity of requirements in the granting of improper powers and
privileges to corporations would seem to indicate that those who believe in restricting the
existing license of the great corporation have
little to expect from State regulation. We could
never hope for anything like uniformity even in
a general policy of dealing with the subject. The
attempt would simply furnish another opportunity for a humiliating scramble between the
States for corporate patronage in return for unwise legislative license. We are fortunate that
the entire subject is removed from their jurisdiction.
The movement for Uniform Laws among the
States in which your association is taking such
prominent part is a wise and necessary step, and
I sincerely wish for it the success that it deserves.
There are many subjects on which it will doubtless succeed, but I fear that this is not one of them.
7. Rigid regulation under Federal Law is the
only just solution.
I t is possible and practicable and would do
away with the grave existing evils which are constantly becoming more serious. As substantially
all the combinations that affect the public welfare
are engaged in Inter-State or International Commerce within the enlarged definition of those
terms under recent adjudications, there could be
no serious question of the Constitutional right of
the Federal Government to regulate and control
their activities by a Federal license if not by a
Federal incorporation. Such regulation would
however in order to be effective have to take a
very much wider scope than has yet been suggested.
16
8. In any event and without deciding the question of compulsory Federal license or incorporation mere permissive Federal regulation would
answer every practical purpose under existing
conditions. It would afford the corporations that
come within the requirements of the law, or that
will so modify their existing methods as to bring
themselves within it, a refuge against prosecution
by the Federal Government, except for violation of
the new law. It would leave those who do not
avail themselves of the privilege or who are not
able to do so by reason of their unlawful methods
subject to criminal and civil prosecution. Whilst
permissive in form so as to overcome all Constitutional objections, it would be compulsory in
fact by singling out for prosecution "under the
existing law those that do not subject themselves
to regulation.
I do not mean to suggest that any affirmative immunity can be assured to those who take advantage of the provisions of the Federal law but that
would be the practical result of administering the
law. It would involve nothing like the unjust discrimination which now characterizes prosecutions
under the Act in which the small merchants who are organized into temporary Pools
under written agreements without the benefit of
skilful legal advice are being relentlessly pursued
whilst the great, powerful, permanent monopolies that are holding the public by the throat
have been thus far immune and are likely to remain so if I am right as to the practical results
in the pending cases.
9. Regulation would secure to the public whatever advantages are to be derived from the economic benefits of combination, of which there will
17
be many, such as the elimination of destructive
competition. It would at the same time prevent
unfair advantage being taken of that situation.
If we were satisfied that unlimited competition
and overproduction are on the whole in the interest of the company our problem would not
be difficult. We could then unreservedly apply
ourselves to the destruction and punishment of
every attempt to stem the tide of ruinous trade
war. On that theory the more small merchants
who are driven into bankruptcy the better for
the prosperity of the country. If this is true
as to our manufacturers it is equally true as to
the products of our mines and forests and as to
all our natural resources; upon that theory the
less profit our citizens realize from the use and
exhaustion of those resources and the more of
them we exhaust in that way the more prosperous
we will be as a nation.
If on the contrary it is more to our interest that
our citizens shall be permitted to secure reasonable returns on invested capital so as to encourage our business development, then ruinous competition is a condition to be avoided rather than
insisted upon. In that event the only question
is as to how to prevent the evils of overproduction
and ruinous competition, and at the same time
protect the public against the dangers of combination and co-operation among competitors through
which alone this result may be achieved. That
necessarily involves the most drastic Governmental supervision and control.
10. Such regulation would necessarily have to
recognize the fundamental factors
(1) That these combinations so tolerated
and licensed are quasi-public agencies with
18
corresponding duties and responsibilities to
the public.
(2) That many of them are profiting by
our Protective Tariff System which is based
on the theory that home competition will protect the people against the extortion that
might otherwise be practiced under cover of
the Tariff.
(3) That since the combination is impairing home competition it must" consent that
something be put in its place; and
(4) That in return for the privilege of being permitted to exist in contravention of the
economic laws forbidding interference with
competition they must su,bmit to Governmental supervision as privately owned public
agencies, somewhat after our methods of regulating the Railroads.
11. Such regulation must therefore include as
its most essential feature the power to prohibit
by summary process all business oppression and
other unfair methods and particularly the exaction of excessive profits. This involves the power
to limit the prices that may be charged for any
commodity beyond a fair profit.
The determination of the question of whether
a party subject to the operation of the law is
so offending would follow under the plan 1 have
in mind upon the complaint of the Government or
of any State or Municipality or of a given number
of citizens to be presented to a judicial tribunal
to be constituted for that purpose with powers
similar to those that are now possessed by our
Interstate Commerce Commission.
The procedure might profitably be assimilated
in its main features to the admirable law on the
subject that was passed by the Canadian Parliament on May 4th, 1910, entitled " A n Act to Provide for the Investigation of Combines, Monopol
19
ies, Trusts and Mergers", which will be explained
by the eminent gentleman from that country who
will follow me. There should also be vested in
the President authority similar to that conferred
on the Governor in Council of Canada by Section
21 of the Act in question, as follows:
"Whenever from or as the result of an investigation under the provisions of this Act or from
or as a result of a judgment of the Supreme Court
(or Exchequer Court of Canada or of any Superior Court or Circuit, District or County Court in
Canada) it appears to the Satisfaction of the Governor in Council that with regard to any article
there exists any combine to promote unduly the
advantage of the manufacturers or dealers at the
expense of the consumers and it appears to the
Governor in Council that such disadvantage to
the consumer is facilitated by the duties of customs imposed on the article or on any like article
the Governor in Council may direct either that
such article be admitted into Canada free of duty
or that the duty thereon be reduced to such amount
or rate as will in the opinion of the Governor in
Council give the public the benefit of reasonable
competition."
12. The practical difficulties of regulating
prices to the extent indicated are more imaginary
than real.
The proposition has never had a hearing.
Wherever any notice whatever has been taken of
it the subject has been almost impatiently dismissed although other countries whose judgment
on economic questions is entitled to our respect
have adopted the plan and find it practicable.
The problem though beset with difficulties is
one that we must solve. I therefore appeal
for an approach to its discussion with an open
mind.
20
When we come to analyze the subject we find
that the task is not nearly so complicated a&
that of framing a Tariff, which must presumably
take into account not only the cost of production in this country but also such cost as compared
with costs in one or more foreign countries. It is
surely not nearly so complicated as will be the
duty of the proposed Tariff Commission which is>
expected to undertake a scientific study of and
report upon the domestic and foreign costs of
every known commodity.
The present proposal would apply only in cases
in which a responsible complaint is lodged of undue profits or unfair business methods. Only
then can the judicial power of regulation be invoked. The burden is upon the complainant to
establish the claim but the books of the defendant
should be available for that purpose. The judgment would establish only maximum prices. The
determination of cost and of what is a fair maximum profit in a given commodity should be quite
as readily ascertainable as is the cost of Railroad
transportation of freight and passengers or of
gas, water, telephone service or electric current
for light and power.
The factors that enter into the problem are not
more and are frequently less complicated.
It has been objected (1) that costs are not uniform and are we to penalize the manufacturer who
produces most cheaply by limiting him to the same
percentage of profit as his less skilful competitor
and thus destroy the incentive to reduce cost of
production? and (2) that costs are variable, dependent on a variety of changing conditions
so that a judgment fixing a maximum price at
one time would be inapplicable to other conditions.
21
The answers to these objections are (1) That
the power to fix prices would not apply to cases
in which the field of competition is open and that
proof of this fact satisfactory to the tribunal
would end its jurisdiction; but where an industry
is dominated by one Company although there is
competition of a kind the tribunal would presumably fix a maximum price based on the cost of
the least favored competitor which wosld give the
full benefits of skill and economies to those who
are entitled to them. Besides it is not conceivable that the tribunal would so abuse its powers
in fixing the maximum price as to go further than
to protect the public against extortionate profit
in the nature of an attempt by the offending corporation to levy tribute upon the public by reason
of its control of the industry. All such judgments
~would presumably be the subject of review.
(2) All danger of oppression resulting from
change of conditions since the rendition of any
such judgment can be obviated by giving the tribunal the most liberal power of reviewing such
judgments at stated periods of say not less than
one year upon the application of the party claiming to be aggrieved.
There is no inherent difficulty in setting up the
machinery necessary to carry out this plan of
regulating maximum prices if the principle be
•once admitted. The rights of the producer to a
reasonable profit are safeguarded and secured to
him by the Constitution so that there is no danger
of the confiscation of his property.
Experience with our Public Service corporations has taught us that hyper-sensitive concern
for their welfare lest we confiscate their property
is quite unnecessary. No legislation anywhere approaching the line of confiscation has stood the
22
tests of the Courts and very little of it has been
attempted. If the public were half as well able
to take care of itself, as the corporations have
shown themselves able to resist encroachments
upon their rights there would be far less need for
legislation. The people have never yet quite
come into their own in*their struggles with the
corporations.
Laws of Foreign Countries.
The successful experiments of other Governments in legislating on this subject should encourage us to believe that we, too, can solve the
problem, getting out of th^se corporations whatever there is of public benefit by restrictive rather
than destructive legislation.
(1) In Germany trade combinations in various
forms have been in existence for many years.
They are extending their influence and new ones
are being constantly organized. Some are in the
form of consolidations or holding Companies of
which the Steel, Sugar, Harvester, Locomotive
and Standard Oil Companies (to name only a few
out of the hundreds in our own country) are
illustrations. The bulk of them, however,
are what are known as "Kertelle" or
Syndicates which correspond to what we
know as "Pools" or Selling Agencies or Sales
Syndicates except that they are organized under
authority of law. They absolutely control their
respective industries and are encouraged by the
Government subject to rigid regulation.
The
constituent members of the Kartelle, like the
members of our Pools, retain the title to their
properties and the control of their businesses. By
written agreements sanctioned by law they regu
23
late production and apportion the sales among
their members. They are sometimes organized under separate Legislative Charter of
which the Potash (Kali) Syndicate is an
example, naming the members who constitute the Kartelle and apportioning among
them their respective fractions of permitted production. The great bulk of them are however
formed under the general corporation laws of the
country or by agreements in the form of Syndicates.
The essential features of the law constituting
the Potash Syndicate are (1) the fixing of
the maximum price upon each quality of the
product so as to protect the public against oppression; (2) the apportionment of the output to home
consumption and for export; (3) the penalizing
of each member of the Syndicate, who produces in excess of his permitted share of
production by imposing upon such excess a tax
or duty that is practically prohibitive; (4) the
constitution of a tribunal which regulates production and price as often as is necessary; (5) provisions for allowing new members of the Syndicate and for reapportionment of the production
to include such new members under designated restrictions.
This is briefly the general scheme, and it
applies in some of its main particulars,
with proper modifications to other like combinations in sugar, spirits, coal, iron, electric appliances and the like.
An illustration of the influence of the Socialist
members of the Reichstag in framing these laws
is found in the Act of May, 1910, establishing the
Potash Syndicate in which the safeguarding of
the workmen's rights is a prominent feature.
24
(1) If the wages paid in a mine are below the
average of the two preceding years the participating figure of that mine is proportionately reduced.
(2) If the hours of work are extended there is
a further reduction.
(3) If the owner disproves such charges of reduction the proportion will be restored.
(4) Mine owners may make special contracts
with laborers. The contracts must not forbid the
right of laborers to unite.
The German Civil Code (par. 138) provides that
transactions which offend against good morals
are void. These Kartels or Syndicates and trade
agreements regulating competition are held not
to be contrary to this provision. They may however by the manner of using their powers bring
themselves within the prohibition of this section.
The use of such means as boycotting, cutting
prices with competitors with intent to ruin the
latter, and other unlawful and unfair business
practices, will bring them within the condemnation of the penal laws. The Supreme Court at
Leipzig decided in 1904 that a more rigid moral
standard must be applied to the operations and
practices of these Kartells and Syndicates because
of the power of the economic interests they represent.
The law is directed only against the misuse of
the powers and franchises of these organizations
which is generally regarded as sufficient protection to the public.
(2) In Austria there is a law dating back to
1870 known as the "Law of Coalition/' which dedares illegal agreements of employers to raise
25
prices of commodities to the disadvantage of the
public.
In Austria, as in Germany, there are no consolidations through ownership or holding Companies. They are in substantially the same form
as the German Trusts or Pools. Instances of
them are the Sugar Kartelle, which regulates the
quota of sugar beets to be supplied to each refinery and controls production and maintains
prices; the Petroleum Block, which is a combination of producers and refiners of crude oil which
regulates output and prices of oil and comprises
nearly all the large oil interests of the Empire*,
and the Iron Kartelle which regulates the production of steel andiron.
These combinations are not only known to the
authorities, but have the approval of the Government although they have no formal legal recognition.
Until within the past few days the Vacuum Oil
Company, which is a Hungarian corporation
owned mainly by Americans and is a large independent oil producer and refiner, was the object
of embarrassing Governmental discrimination apparently with a view on the part of the Government to force it to join the Petroleum Block. This
has now been arranged.
Under the Austrian administrative system the
Governmental authorities have the power through
bureaucratic administrative measures to regulate,,
control and suppress the operation of trade combinations without preliminary judicial process.
The Austrian Consul-General writes me on this
subject that
"The Austrian view as to Trusts is in effect that they cannot be legislated against because clever minds can always devise ways to
circumvent the law."
26
To that view I do not agree.
(3) Combinations exist also in France in the
form of Pools or Kartelle much the same as in
Germany and Austria. They are not formed pursuant to any special statute, but are the subject
of agreement.
They are found (1) in the iron trade covering
the output of the product in the interior, which
has been in existence since 1876, and which in
1900 included eleven factories and various distributing agents; (2) the salt works of the East
have been combined in what are known as Kartelle for the sale of the product since 1865; (3)
there are also selling agents which control the
product of the metal industries for small beams,
sheet iron, axle trees and what is known as
Thomas steel; (4) there are also Kartelle in the
form of selling agencies or otherwise covering the
manufacture of china, champagne bottles, looking
glasses, bricks, white lead chemical products, life
and fire insurance and a variety of other industries.
The petroleum refineries which have been in a
Pool since 1888, with an arrangement with the
Standard Oil Company, are a complete monopoly
protected by the customs.
The sugar refineries of France have been in a
Syndicate since 1883 with agreements among
themselves dividing the market and affecting the
prices. The recent exactions of the Sugar Combine have been such as to lead to requests for
Government action and for the amendment of
Articles 419 and 420 of the French Penal Law
regulating combinations.
These are criminal enactments against combinations which cause the
27
"Increase or decrease of the price of merchandise or commodities or of public values
of securities above or below the price at
which the free and natural competition of
commerce would have established."
The other provision of the statute is aimed
against combined attempts to manipulate or increase the price of grain, seeds, flour, meal,
cereals, bread, wine or any other drink. The extreme penalty for any such offense is imprisonment for from two months to two years, a fine of
from one thousand to twenty thousand francs and
banishment from the country for from five to ten
years.
Combinations are tolerated in France provided
the provisions of the Penal Code are not transgressed. I t is not contrary to the law for manufacturers or dealers to dispose of their product at
an agreed price provided no attempt is made to
increase the price above the then existing price.
Such agreements may be made to guard against
ruinous competition and to preserve a proper
ratio between supply and demand.
Monopoly in itself is not contrary to the French
law provided the power is not used to increase the
price or as it is called in the. Code "falsifying the
market p r i c e / '
(4) In England there is no statute law on the
subject of Trusts. The common law against conspiracies in restraint of trade is still applicable
although no occasion has presented itself in
recent times for the application of the rule. Public sentiment there is very potent. It has prevented the formation of any such consolidations
and has led to the abandonment of some that were
in process of formation.
An attempt was made three or four years ago
to combine the soap manufacturers. Messrs.
28
Lever Brothers were the leaders in the movement
but public indignation was aroused to such an
extent as soon as the first details of the proposed
arrangement were published that the promoters
were forced to abandon the project. The mere
attempt to do so was most disastrous to the
leaders. It appeared from the testimony in a
libel suit recently tried that their business had
suffered enormously.
It is true that there was a combination of the
manufacturers of cigarettes effected in England
some years ago which was supported by public
sentiment. That however was due to the fact that
the American Tobacco Company had purchased
one of the largest factories and had begun a war
of competition which forced the others to combine
and which unfortunately resulted eventually in
an arrangement between the English Company
and the American Tobacco Company under which
they divided the rest of the world between them.
There was also an attempt on the part of threeprominent Railway Companies in England to wit:
the Great Northern, the Great Eastern and the*
Great Central Railway Companies to combine but
as any such combination was subject to the consent of the Government through the Board of
Trade it was disapproved and rejected.
Possibly the fact that England is a free-frade
country has had much to do with its immunity
from all forms of Trusts and combinations. Theincentive to combine the industries of a country is
not so great when the combined company must in
any event compete with other countries.
It will be observed that of all the countries (all
of which save England have protective tariffs)
England alone is free of trusts.
I have already referred to the Canadian law onthis subject which is a model for legislation bub
29
refrain from its further discussion as I understand that it is to be exhaustively explained and
discussed by an eminent gentleman from that
country.
I t will be gathered from the above brief resume
of the laws of other countries bearing on this
subject that in all of them save our own (except in
England where these combinations do not exist
and where public sentiment has been sufficiently
powerful to prevent their obtaining a foothold)
these Trusts are mainly in temporary form and
can be disbanded at any moment without injury
to investors; that in one form or another they are
the subject of Govermental regulation and control
which prevents them from extorting undue profits
from the public and that the chief purposes of
their existence are to secure the benefits of economies and to prevent over production.
In no other part of the world have they had to
contend with precisely the problem that confronts
us as affecting the rights of investors. Herein
lies one of the fundamental distinctions between
mere Pools or trade agreements regulating prices
a n d output on the one hand and combinations or
consolidations through direct ownership or
through holding companies, on the other. The
dissolution of the pool affects none but the parties
directly concerned and responsible for its operations. It can be promptly almost summarily accomplished and without injury to vested interests.
T h e parties concerned have not parted with their
property. They are simply required to resume
suspended competition.
The attempt to dissolve the consolidation on
the other hand involves every investor in
t h e country. In the case of the Steel Comp a n y it would mean that nearly 200,000 innocent
30
investors would be injured who were led to put
their money into its securities in reliance on
the fact that for twelve years the Government has
tolerated its existence, collected taxes from it, permitted it to openly acquire other properties and
to more or less openly dictate and regulate not
only the prices and output of its controlled compaTiles but of its competitors. During all that
time it has gone unchallenged. The same is true •
to a ^roiiler or lesser extent of most of the others.
Yet they are all practically "in the same boat.".
The fact is that the Government will never try
to disband them except in form and no Court
could accomplish any such task. The real alternative is between forcing regulation of them or
permitting them unbridled license and trying to
temporize with the people from time to time by
uneven spasmodic enforcement of the law against
the weaker, more vulnerable ones whilst leaving
the most powerful and dangerous offenders undisturbed from fear of precipitating financial
panics.
The time is close at hand when we must choose.
Which shall it be?
THE MEANING AND EFFECT OF
THE ANTI-TRUST LAW DECISIONS
AND THE REMEDY.
BY
SAMUEL UNTERMYER
of New York
Published in the July, 1911 Number of
The North American Review
T H E MEANING AND EFFECT OF T H E ANTITRUST LAW DECISIONS AND
T H E REMEDY.
The decisions mark a most important epoch in our political and economic history. They have breathed new life and
vitality into the Law. Even so, we are at last brought face
to face with the question of whether, at this late day and
after all the vast and irreparable injury has been done which
the statute was intended to prevent and would have prevented if it had been honestly enforced, this Law is still capable of solving the problems it was intended to meet.
The fact that it has taken us over 20 years to begin
(if we really have begun) the carrying out of a solemnly
enacted National policy is a self-condemnation of our capacity for government more scathing and deserved than any
criticism ever passed upon us by our most malignant enemies.
In all that time we have made no impression upon the evil
at which the Law was aimed except to see it spread and
accentuated, until its baneful influence is felt in almost every
department of human endeavor and has infected our entire
body politic. It has been allowed to become a cancerous growth
which can no longer be uprooted and eliminated without
shaking the foundations of our credit and prosperity.
The most formidable of the Trusts have had their birth
and development under the very shadow of the law which
was intended to destroy the few that then existed and to
prevent and punish the creation of others.
When Congress in its great wisdom and foresight enacted
this law and entrusted its administration to the executive and
judicial departments of the government the problem could
have been easily solved by the use of the effective machinery
which was provided and which has proven itself to have been
2
admirably adapted to the purpose. The Law is a model of
simplicity. Within its brief compass are contained four distinct, comprehensive and independent remedies—(1) to enjoin
the creation of the combination; (2) to punish for its formation or continuance; (3) to seize its property in inter-state
transit wherever found; and (4) to destroy and dissolve it
by the judgment of the Court.
The last remedy is the most difficult and unsatisfactory
and the least effective, although it is the sole remedy that has
until very recently to any extent been invoked, and then only
in the most unequal and spasmodic way.
Whilst these cases were under consideration by the Court,
in an,Address delivered on January 12th, 1911, at the Annual
Meeting of the National,Civic Federation entitled "Extermination vs. Eegulation of the Trusts, Which Shall It Be?"
the writer summarized the then .existing situation as follows:
"Judging from the uniform trend of the decisions of that Court for
the past five years, it is not unlikely that the principle announced by the
lower Courts in those Cases will be not only affirmed but emphasized in
the most sweeping fashion by our highest tribunal and that every form
of combination the direct purpose and effect of which Is to hamper or
limit. competition will be condemned.
"Unfortunately for the welfare of. the people I am not however satisfied
that the decisions will afford any substantial relief from the dangers that
are threatening us or that they will either furnish or point out a practical
solution. The provisions of the Judgments are drastic but it does not follow
that they are enforceable in practical operation. The companies appear
to me to have nothing to fear from the result beyond possible changes in
the forms of their organizations.
"The properties and business are there, they belong to the shareholders,
and there is no way of confiscating them even if there were a disposition
to do so, which happily there is not. The thought of disbanding the
central organizations and resolving the constituent companies into their
original parts presents an impossible problem."
A further study of the subject in the Jight of the decisions
confirms the views then expressed.
From the very beginning the execution of the law was
entrusted to unfriendly hands and so it has continued to this
day. That is the key to all our present difficulties and to the
many worse ones that are to come.
Throughout five successive administrations the enforcement of the Law has been shirked, evaded and treated with
a degree of insincerity that surpasses anything of the kind
3
in our National existence, until by reason of the long immunity and encouragement to its continued violation we are
today confronted with the danger that because of the vast
power of the offenders and the magnitude of the interests
involved the task has grown beyond control and we shall be
forced to resort to other methods to supplement those that
were then furnished and were at that time adequate for the
purpose.
This criticism applies with equal force to the single Democratic Administration as to the Eepublican Administrations
that preceded and followed it, and especially to the present
Administration, which is concentrating upon the " Anti-Trust
Department" of its marvellous Press Bureau and upon the
beginning of aimless, never-ending but utterly ineffective
suits purporting to be directed against the dissolution of the
offenders, all the energy that should have been directed to
the prompt and genuine enforcement of the remedy by injunction and the criminal sections of the Law.
During all these years there has not been a single case
out of the many that have been inaugurated in which the
evidence produced by the Government in the civil suits and
which formed the basis of an academically successful outcome
would not have been equally conclusive in a criminal prosecution or through the summary process of seizure under
Section 6 of the Act.
To those who regard the recent decisions as instilling
new strength into the statute and who are so confiding as to
have preserved their faith in the desire of the Government
to enforce the Law impartially the semi-official announcement
of the Chief Law Officer of the Government, made a few
weeks ago following the decisions, that no criminal prosecutions would be considered until after the expiration of the
time fixed for compliance with the decrees of the Court, will
come as a surprise. To the "doubting Thomases" it may
appear like a continuation of the policy of procrastination
to the accompaniment of much noise and fuss and feathers,
and ending in nothing.
It is at least difficult to understand the relation between
the dissolution of the corporation and the long delay in the
enforcement of the criminal section of the statute.
4
It is not usual for the Government to*stay criminal prosecutions whilst invoking its civil remedies, especially where,
as in these cases, it may be inviting the plea of the Statute
of Limitations with respect to some of the offenses charged.
The Government did not find this course necessary in its
recent prosecutions of the Beef Packers or in the case of the
American Sugar Refining Company, in both of which it first
brought the criminal prosecution for violation of the AntiTrust Law and followed it later with the suit for dissolution
of the corporation—both" of which are now pending.
Here we have two cases in which the Government has
judgments of the Court dissolving the corporations whilst
in the Packing and Sugar eases it has no judgment. Yet
we are told that we must continue to wait. Why these discriminations? The reason assigned is a trifle obscure. Is
this way of administering the Law calculated to add to the
respect or confidence of the community for Governmental
methods ?
I do not mean to imply that there should be criminal
prosecutions in any of these cases at this late day in view
of the encouragement and tacit assent to their legality that
have been given to the formation and development of the
Trusts during all these years. Such of the Companies as
are willing in good faith and to the fullest extent of their
ability to assist in executing the judgment of the Court
segregating and dissolving them ought to be relieved from
criminal prosecution, under the circumstances. But there
should be no such peculiar processes as have characterized
the enforcement of the law.
Equally unconvincing is the assertion made by the able
and distinguished Attorney General in this same announcement, by way of apology for past inaction, to the effect that
juries have been reluctant to convict and Courts have been
unwilling to impose prison sentences in these cases.
Have not cause and effect been rather confused in the
making of these statements? If juries have been unwilling
to convict or Courts to impose prison sentences in the isolated instances of insignificant offenders in which prosecutions have been undertaken was it not because of the apparent
5
unfairness of the selection of cases for prosecution? Is it
not true that the small and helpless and comparatively harmless combinations, in the temporary form of Pools and Trade
Agreements were the ones thus pursued, whilst the powerful, dominating combinations that were in the permanent
and most dangerous forms of consolidations were left undisturbed?
Insofar as the criminal sections of the statute have been
invoked it has savored of persecution. Courts and juries
have rightly refused to lend themselves to the perpetration
of such manifest injustice.
How could any Court or jury with the common instinct
of human justice have been expected or asked by a public
officer to send these small fellows to prison when every Judge
and juror knew from his daily experience, of the immunity
from prosecution that was being extended or permitted to
the big fellows?
Note, for instance, the easy frankness, cheerfulness and
unconcern with which the chief officer of the Steel Corporation has been testifying before the Senate Committee concerning the way in which prices are regulated in that industry.
The only difference between the facts of that case and the
pooling and trade agreements whose members have been prosecuted is that the Steel Corporation dominates the industry,
it almost controls the railroad situation indirectly, and it has
many ways with which most of us are familiar, of compelling
obedience to the "gentlemen's agreements" made with it,
whilst in the other case there is no remedy against the member who breaks or repudiates the agreement, for it is recognized to be illegal and cannot be enforced by any of the parties.
Yet Mr. Gary has told us nothing that we have not known for
many years and that is not applicable to other businesses, for
these things have been done by the Company in the open light
of day and with no attempt at concealment. Everybody understood the Steel Company and the independents have for
years been fixing prices.
The reason assigned by the learned Attorney General for
the continued non-enforcement of the Law is more than amazing—but for one's respect for his high office it might be justly
6
characterized as frivolous. Why not admit at once what
everyone familiar with the subject feels—that the Government has by its action (or non-action) in years past misled the
business, financial and investing world into the belief that
they were acting within their legal rights in embarking upon
these enterprises and that it is more largely than the offenders
responsible for the present situation? The condition is rendered the more inexcusable by reason of the fact that whenever in the past ten or fifteen years the law has come before
the Supreme Court it has been sustained and strengthened;
There has at no time been any justification in the attitude
of the Courts for the contemptuous treatment accorded the
Law at the hands of the Government.
It will be time enough for our officials to complain that
the enforcement of the statute is unpopular or that it is not
supported by public sentiment when they have made the
effort to enforce it impartially. The fact is that they are
rapidly, however reluctantly, awakening to the knowledge
that it is the most popular Law upon our statute books and
that the people are insisting upon its vigorous and impartial
enforcement.
With every desire to avoid injustice to the authorities
having in charge the execution of the Law, it is impossible
to resist the conclusion that they have not been in sympathy
with and were not really anxious to support the economic
policy announced by the Law. How can we otherwise account
for the failure during all the years in which these gigantic
combinations were forming to resort to the simple and comprehensive remedy of enjoining their creation by injunction
as pointed out by Section 4 of the Act or of seizing their
property in transit under Section 6?
Here again the case of the Steel Corporation by way of
illustration is a fair test of the justice of this criticism. Its
formation was heralded for months in advance throughout
the news columns of the Press of the country. Formal and
official notices that it was about to be launched were published broadcast as advertisements by Messrs. J. P. Morgan
& Co., who were the official Bankers and promoters of the
enterprise, in the newspapers, addressed to the shareholders
7;
of the constituent Companies, containing the fullest details
of the basis on which the ^stockholders. were to be; allowed
to participate in the exchange of ;their securities for those
of the colossal New Company, with its one and a half billions
of new stock and bond issues in addition to the hundreds*
of millions of underlying bonds and of'floating debt of the
constituent Companies.
The Steel Corporation and its shareholders have a just
grievance at this belated attack upon it, for its bold and
astounding plan of inflation and illegality were fully and
frankly exposed in all their amazing details.,,',The, organization of the Company could readily have been prevented
by injunction under the broad powers conferred' by Section
4 of the Act in the same way in which; that section was,"
recently invoked to prevent the increase of freight rates by.
the Railroads. But there was no crystallized public senti-,
ment at that time against the movement. It is true that?
few of us quite appreciated the extent of the dangers as'
they have since been realized, although they had been plainly:
foreseen and were understood by those who had studied the
problem, as is apparent from the fact that the Sherman,
Law had then been for eight years in existence. It is manifest that it was enacted primarily as a criminal statute to
prevent further combinations and incidentally to rid us of.
the existing ones.
The creation of the Steel Corporation and of the hundreds of other combinations that were organized during that
period could have been prevented by the use of this remedy
by injunction or by the least sign of activity on the part
of the officials charged with the execution of the Law. Notice
that the criminal section of the Act would be applied would
have been sufficient. Both of these sections—which together
with Section 6 constitute the bone and sinew of the L a w were left unapplied through all these years, whilst the
Government contented itself with the most perfunctory, inadequate and manifestly insincere and circuitous procedure
looking to the undoing of combinations that might easily
have been prevented from coming into existence.
8
The encouragement which the lax administration or nonadministration of the Law has given to the formation of
these Trusts and the extent to which the Government is responsible for the distribution of their securities over the
entire civilized world should rightly be considered by our
Courts and Legislative bodies in determining how to deal
with the Companies. At this late day we are not foot-loose
to inaugurate, a policy such as might have been enforced to
prevent them from being brought into existence, even though
we recognize the injury they have done and are doing and
the evil and danger they constitute to our institutions.
In dealing with this vast and complex subject we should
first determine whether the Sherman Law as now construed
is sufficient to meet the present situation, and if not whether
it should be superseded or supplemented. It may safely be
assumed that neither public sentiment nor good reason would
support the repeal of the Law or the relaxation of any of
its provisions. The only sentiment in favor of amending
the Law comes from those engaged in violating it.
It was inevitable that the Courts would be forced to take
some such construction as has now been announced. To have
held that every combination that had the effect of restricting
competition, however remote and indirect, was within its
condemnation would have reduced the Law to an economic
absurdity and have made it applicable to such a variety of
proper and necessary business arrangements as to have rendered its enforcement destructive to legitimate business and
to have placed a most dangerous power of discrimination in
the hands of the Government.
Every agreement or combination between business men
for their protection the purpose of which is possibly to save
the parties to it from business destruction would have been
brought within the prohibition of the Act. Such a construction would have led to the most grotesque results, some of
which have already been realized, as above stated, in the few
criminal prosecutions against temporary Pools and Trade
Agreements that have been " successfully" concluded.
There is no force in the contention that is being made
in some quarters that the Law as now construed is too in
9
definite to be applied as a criminal Statute. The argument
advanced is, that what is or is not a reasonable restraint of
trade now depends upon such a variety of conditions and
is so uncertain in its definition that no criminal offense can
be predicated of its violation. It is said in this connection
that intent to commit a crime which forms so essential a part
of a criminal offense will be predicated of an act when the
party charged with its commission cannot know whether he
had a criminal intent until so informed by a jury as a result
of his trial for the crime.
The manifest answer is that we are all conclusively presumed to know the Law, and that convictions would only be
asked in cases in which the jury could readily be satisfied
that the main purpose of the combination, and that which
it accomplished, was a substantial control of the particular
industry so as to be able to regulate both prices and output.
Those pools, agreements, consolidations and other forms
of combination that were entered into for self-preservation
or to prevent ruinous competition or to protect the small
dealers against extermination by their powerful competitors
and those which in their operations demonstrated that they
were not levying tribute upon the public would be in no peril.
The question in each case may safely be left to the good
sense and business judgment of a jury to determine, under
instructions of the Court, whether upon the particular facts
of that case the parties had a criminal or a lawful intent.
The one would be defined as having for its purpose the
control of the industry so as to be able to regulate prices.
That would necessarily be evidenced in many ways, among
others by the manner of dealing with outside competition;
whether competing plants were purchased and dismantled
or prices arranged in certain sections of the country so as
to destroy competitors and in a variety of other ways that
are well known to those who have had to deal with this subject. The earmarks that distinguish the one from the other
class of arrrangements are not to be mistaken. There need
be no fear of difficulty, with the facts before the Court, in
enforcing the Law so as to avoid injustice.
10
The criminal section has been rendered more and not less
easy of enforcement by the sane construction placed upon
the Statute.
To those who believe in the economic policy of keeping
free from restraint the arteries and channels of inter-State
commerce, a close study of the opinions will tend to dispel
much of the misapprehension that followed the announcement
of the first decision. That the Court has retraced its steps
and has unsaid and undone much of what was decided in the
Trans-Missouri and Joint Traffic Association cases is, however, hardly open to discussion. No one can read the opinions
in those cases and the arraignment of Mr. Justice Harlan
without conceding, that the logic of the argument, based on
precedent, is on his side.
With all due respect to that August Tribunal which the
members of the Bar so justly reveres, the progressive, constructive policy of which we so profoundly admire, one is at
times disposed to regret that the traditions of the Court do
not seem to permit that it admit its fallibility and frankly
announce that it has decided to reject, overrule or change
the Law laid down in its earlier decisions, when that is in fact
its real purpose, instead of resorting to circumlocution and
to distinctions that do not always distinguish.
Would it not be better to recognizei that the Law is a
progressive science, possessing all the elasticity necessary to
meet changed economic conditions, and that the rules of Law
must be formulated and applied in the light of those conditions? We may if we please criticize,and denounce that exercise of power as judicial legislation and as being, in theory
lawless and dangerous and contrary to the spirit of our institutions, as Mr. Justice Harlan and other eminent jurists of
that great Court have from time to time arraigned it. The
fact, however, remains that the bold and at times ruthless
exercise of that power has averted many a grave crisis in the
history of our country which could not otherwise have been
met under the limitations and imperfections of our Constitution, and has made possible the fabulous growth, expansion
and prosperity of our country.
11
The danger from the arrogation of such power as supplementing and developing rather than construing our Constitution is more fancied than real, more theoretical than practical,
as experience has shown, for never in the history of the Court
has the power been used except where the urgency was great
and never in a way'that has not distinctly made for progress
and justice.
If the strict constructionists are to prevail, most of the
insidious and dangerous crimes of modern finance would have
to go unpunished and the criminal provisions* of the AntiTrust Law will continue to be a dead letter.
I refer, of course, to the impediments to prosecution
formerly existing by reason of the Fourth Amendment to the
Constitution prohibiting the right of search and seizure of
papers, and by reason of the Fifth Amendment that no person
shall be bound to incriminate himself—which have now been
removed. Under the earlier decisions and until it became
manifest that the class of crimes which the Law is now
earnestly but not yet successfully trying to reach, could not
be punished if the individual or corporation was allowed to
withhold the books and papers that contained the evidences
of the crime, there was no way in which the proof could be
made. But when the urgency became pressing the Court met
it by practically reversing the rule that had been laid down
by it in U. S. v. Boyd, 116 U. S. (1) in the Al Adams case,
where it affirmed the principle that even though the books
and private papers of a person charged with crime were unlawfully seized in violation of his Constitutional rights, the
Court would close its eyes to the means employed and would
allow them to be used against him. That was a departure
from precedent, although the Court cited authority to sustain
its position; but the changed conditions required it, and they
were met. (2) Later in the Sugar Trust and Tobacco Trust
cases (Hale v. Henkel, 201 U. &), and again within the past
few weeks in the Wireless Telegraph Co. case (Wilson v.
U. &), the Court denied the applicability of the Constitutional
Amendments to individuals, officers of the corporations which
were charged with crimes with respect to corporate books
that were in their custody, even where they contained entries
12
of personal transactions. (3) In the case of Twining v. New
Jersey, where it was decided that the Fourth and Fifth
Amendments to the Constitution did not apply to prosecutions in the State Courts under State Statutes, and that a
defendant charged with crime might be there compelled to
testify against himself at his trial. (4) Still later and within
the past few months we find the Law officers of the Federal
Government, with the apparent sanction of the Law as now
construed, inaugurating the practice of arresting individuals
under indictment and simultaneously with the arrest breaking
into their places of business and seizing and holding their
private books and papers, as in the cases of Duveen Brothers,
Sheftel and various brokerage houses.
The last remnant of these Constitutional safeguards are
disappearing before our very eyes. With the limitations that
are found to be in the way of the administration of justice
thus removed, why hesitate at merely "moulding" or "construing" the Acts of Congress so that they shall read as they
ought to have read rather than as they do read, especially
when the Court is satisfied that it is impracticable to procure
their amendment so as to make them workable according to
the "rule of reason."
I do not want to be understood as criticising the decisions
referred to that appear to change the Fourth and Fifth
Amendments "in the light of reason" and expediency. On
the contrary, I approve the result, but fail to appreciate the
reasoning and attempts at justification that accompany the
decisions. They have blazed the way for the enforcement of
the criminal section of the Anti-Trust Law and for the punishment of crimes more dangerous to our institutions than all
the ordinary offenses combined and that must of necessity
otherwise go unpunished.
When we consider the history of the enactment of the laws
on this subject and the circumstances under which these provisions were ijiserted in our Constitution, and that the defendant was at that time barred from being a witness in his
own defense, there is just ground in the interest of the punishment of the most insidious forms of crime and those most
difficult of proof, for welcoming the abolition of this fetish
13
of protecting a man against incriminating himself. The innocent man no longer requires it, since he may now testify in his
own behalf. The guilty should not be permitted to have it.
If it were possible—which it is not as yet under our system
of jurisprudence—I would advocate the right of the prosecution to place the defendant on the witness stand, as in Continental countries, but only in open Court and in the presence
of his counsel and subject to many other modifications of their
system, in order to protect this right against the abuses that
exist there.
But we have somewhat strayed from our text in the desire
to add our tribute to the Court for its broad and statesmanlike
construction of the Sherman Law as against the narrow and
literal reading that was pressed upon its attention and which
it had adopted in its early decisions before the value and
necessity of that Law were fully realized.
The Court was confronted with a difficult alternative. If
it adhered to the words, as distinguished from the spirit or
meaning of the Act, it would have to hold that every agreement or combination that tended to restrain trade was unlawful. Such construction would render the Law unjust, unpopular, unworkable and ridiculous.
To have attempted to enforce the Law under the previously announced construction would have been tantamount
to indicting a large proportion of the law-abiding business
community of the country. I t would have played into the
hands of the interests against which it was aimed by rendering
the criminal sections impossible of enforcement.
Now that the Court has, however, applied to the Law the
sensible meaning that it is only intended to cover a direct
restraint of trade, its scope and justice are made apparent
and it will reach the evils at which it is aimed.
It had, however, been hoped and expected that in applying
this doctrine of the " r u l e of r e a s o n " in the construction of
the statute the Court would have avoided the use of the ambiguous words "reasonable" and "unreasonable" as applied
to restraints of trade and that it would have adopted the distinction that has been so ably discussed in a recent editorial
in The New York Times, between the restriction of competi
14
i
/
tion and the restraint of trade. The Court might well have
justified its conclusions by pointing out that the Law was
aimed only against the restraint of inter-State trade; that it
was intended to reach every form and manner of such restraint; that there is no such thing as a reasonable restraint
of trade; that every direct restraint put upon inter-State
trade is in and of itself unreasonable.
On the other hand, every restriction of competition does
not directly restrain trade. There are many wholesome restrictions of competition that have no appreciable effect on
the course of trade, in the sense of directly affecting or restraining it.
The construction now placed upon the Law will render it
effective, for it will be applied only against combinations,
whether in the form of consolidations, pools, or agreements
("gentlemen's" or otherwise) that clearly operate in direct
restraint of inter-State trade.
Those are the evils against which the Law was directed.
Against those it will be applied without bringing upon the
administration of justice the reproach that it is being enforced
against a few whilst applicable to the great mass of business
enterprise. It is to be hoped that we have seen the end of
the spectacle of the Department of Justice engaging in the
prosecution and punishment, as criminals, of little fellows
banded together through temporary trade arrangements for
self-preservation against their formidable competitors, whilst
leaving undisturbed the powerful offenders against whom the
Law was directed.
The excuse heretofore given that every agreement, however innocent and necessary, that tended to restrain competition was in violation of Law will no longer answer.
This I take to be the scope and meaning of the decisions.
Nothing more salutary, nothing better adapted to promote respect for the law has been accomplished by this great
tribunal. No greater peril was ever averted than that of rescuing the law from the contempt into which it was in danger
of falling by reason of the spasmodic and unfair method in
which the authorities were floundering about in their aimless
efforts to make the people believe that they were enforcing
the Law.
15
Will the decisions accomplish any substantial, practical
results in restoring competition between the various constituent Companies that were combined and which are now sought
to be separated?
With great regret, but with eqnal confidence, we assert
that they will not.
The judgments are very comprehensive in form. If they
were literally enforced,' so far from restoring competition,
their tendency would be to further cripple it by prohibiting
the parent Company from engaging in inter-State commerce,
because it will be impossible for it to comply with the decree.
As a concrete example which would equally apply to the
Steel Corporation arid many of the others, let us examine for
a moment the practical operation of the judgment in the Tobacco case. Following the able and illuminating recital of
facts in the opinion of the learned Chief Justice we find that
beginning with the combination of the cigarette factories,
continuing through the absorption of the smoking tobacco,
pjug tobacco, licorice, tinfoil,'snuff, cigar and kindred branches
of the industry, ending in the amalgamation of these various
branches under one vast corporate ownership through its
various holding and constituent Companies, at every stage
factories were closed, machinery shifted and such a transformation of property and assets effected that the reinstatement
or rehabilitation of the constituent industries as separate and
independent entities is generally conceded to be impossible.
In the same way brands, trademarks, patents and secret
processes that represented the main assets of various of the
businesses acquired have been discontinued or abandoned or
have disappeared with the factories that were absorbed, or
have been transferred and mingled with the general fund.
But suppose the Court concludes to deal only with existing
properties and assets, if that is possible. How and to whom
are they to be distributed? Are the plants to be separately
sold at public auction? If so, in connection with what brands
or trademarks? Is that to be arbitrarily apportioned, or are
the brands to be sold independently of the factories with which
they are now connected?
16
The control of the share capital of, let us say, the United
Cigar Company, which owns the innumerable retail stores,
is owned by the parent Company. How are these stocks to
be taken out of its control? Is the Court going to assume the
task of finding a purchaser for the shares representing the
ownership of these stores who will not operate them in conjunction with the factories controlled by the parent Company?
Hardly a likely contingency.
Are the present stockholders of the parent Company to
have the right to combine through committees or otherwise
to bid on these various properties? I understand that the
judgment forbids that course.
The procedure adopted in the Northern Securities case,
which has been cited as a precedent for the course to be followed here, presents no analogy and offers no guide or suggestion. The holding Company had there to deal only with the
distribution of the shares of its constituent Railway Companies and a given amount of cash. It distributed the assets
pro rata among its shareholders. The proceeding was exceedingly simple; and yet even in that case questions arose as
between a distribution in specie and a pro rata division in
which the aid of the Court had to be invoked.
Properties that were originally represented by 67 Companies are involved here in one way or another. It would be
quite impossible within the limits of this Article to convey a
conception of the situation in all its manifold complications.
Suppose, however, that it were far more simple and that
the parent Company held in its Treasury the shares of only
five Companies, each representing directly (which it does
not) the ownership or control of the properties of a given
industry—the cigarette business, the smoking tobacco business, the plug tobacco business, the cigar business, the foreign
business, etc. It has been suggested that a distribution by the
parent Company of the shares of each*of these Companies
among the stockholders of the parent Company in the proportion of their holdings in the latter would answer the purposes of the judgment, by analogy to the procedure in the
Northern Securities case.
17
But that would accomplish nothing, even if it could be
done (which it could not), for here the chief industries were
merged by ownership into one Company (the present American Tobacco Company), so that they can no longer be divided
into separate ownership by stock distribution; but if this
could be done the result would be to nominally separate five
monopolies that are now held under one charter so that they
will be thereafter held by the same owners and in the same
proportions under five different charters. That would only
give each partner five pieces of paper instead of one to represent his participation. The Cigarette Company will still have
the monopoly of the cigarette business to the same extent as
before. Although it would no longer be owned by the same
Company as owned the snuff or tin foil industry, its domination of the cigarette industry and over the consumer would be
quite as great and as objectionable as before. The same is
true of the others.
But the problem is still more complicated. We have not
yet begun to encounter the real difficulties. There are approximately $100,000,000 of bonds outstanding, divided into two
separate issues. They constitute a debt of the parent Company. They are held by the investing public and are scattered
ali over the world. If the bondholders can be compelled to
take their money before it is due, how can the Company provide the funds? If the present controlling owners are to be
forbidden to buy the properties representing a given industry
as an entirety and are unwilling to buy certain dismembered
parts, how is the money to be secured to pay the bonds; and
until they are paid how can the Company move in the direction of dismemberment?
Assuming that this difficulty is overcome by the co-operation of the defendants (and that is the only way in which it
can be overcome), how are the cigarette, plug tobacco and
smoking tobacco properties and industries to be segregated?
They are not separate Companies. The properties are owned
directly by the parent Company through a consolidation effected in 1904 between the Continental, Consolidated and the
old American Tobacco Companies. There are no stocks of
constituent Companies to be distributed so far as those Com
18
panics are concerned, and they constitute the bulk of the
assets. They own factories, merchandise, brands, trademarks, etc., amounting to hundreds of millions of dollars
scattered all over the world.
Suppose the Court subdivides the properties into the three
separate industries as they existed before the Companies
were consolidated and directs that each be again organized
under a separate charter and the new share capital deposited
with the parent Company and then distributed among its
shareholders. What has then been accomplished? We have
three monopolies, each owned by the same people and in the
same proportions, operating separately, if you please, but in
the same general interests and ownership as before. Are the
stockholders in these now segregated Companies to be permitted to exercise their right as stockholders to select their
Directors, or are they to be perpetually prevented from enjoying the prerogatives attaching to ownership? Shall we not
have in fact the same real Boards of Directors in each of the
ten Companies or the same dominating factors behind
4
'dummy" Boards so long as the Companies continue to be
owned by the same people?
This bare outline does not begin to summarize or to give a
faint conception of the complexities inherent in the situation
which the Court has undertaken to solve. We have not sought
to deal (1) with the interest of the parent Company in the
foreign Companies; (2) with the many constituent Companies the shares of which are wbolly or partially held by
the parent Company; (3) with the properties acquired directly
by the present parent Company since its organization in 1904;
(4) with any attempt to segregate any one of the seven or
more distinct industries that were consolidated with the present Company either through direct ownership or stock control.
Suffice it to say that when we look into the problem of
separating the constituent Companies with a view of loosening
the grip of the combination on any one of the industries, the
difficulties increase at every step.
With the genuine and hearty consent and co-operation of
the defendants and of the general body of security holders
who would presumably follow them, but not otherwise, the
19
thing becomes possible on the surface and to a very limited
extent. But even then the measure of the possible relief
would be negligible. It is idle to expect much of a judgment
that must depend for its efficiency upon the aid of the defendants against whom it is directed.
What, then, is likely to happen? What must happen?
When the six or eight months allowed for solving this
hopeless problem have passed, is the Court going to enforce
the injunction contained in the decree against the Company
engaging in inter-State trade, without pointing out a way in
which it can obey the judgment? If so, the decree will in itself
effect a restraint of inter-State trade far greater than that
accomplished by the Company, besides working a confiscation
of vast property interests belonging to innocent investors who
had every reason to believe from the attitude of the Government that they were embarking their money in a lawful enterprise.
The final outcome is as likely as not to be that the architects of this unlawful structure will be afforded the opportunity to reap as rich a harvest out of its attempted " disintegration" as they secured from its organization, if they
are so disposed, of which I do not, however, for a moment
believe them capable of taking advantage.
The thing attempted to be done by this judgment simply
cannot be done. The Court will of necessity be forced to temporize with the situation. Something will doubtless be
accomplished with the co-operation of the Company toward
avoiding the appearance of continued monopoly. A few of
the plants in each branch of the industry, or perhaps one or.
two branches of the entire industry, may be put through the
form of sale to outside interests or of distribution through
the shares, but it will be at best a mere pretext. Courts are
not constituted to deal adequately with questions of this character and should not be asked to do so.
Instead of open ownership of the constituent branches of
the industry we shall have "community of interest" with
"gentlemen's agreements" wherever continued open ownership will not be tolerated; but we shall never again have
actual competition Uetween any of the properties that were
20
constituent parts of the parent Company no matter how much
those concerned may now desire in all sincerity to comply
with the judgment of the Court.
Assuming this to be true, even to a qualified extent, the
question is presented:
Is there a remedy, and what is itf
Our success in dealing with this great problem depends
upon our recognizing that there is no complete remedy that
will absolutely and completely rid us of the existing Trusts
and combinations. But there is much that may be done to
correct, mitigate and minimize the existing evil and prevent
it from spreading into the industries that are not already
controlled.
This, of course, involves first and foremost but merely as
a step preliminary to regulation and not as affording in and
of itself a remedy the enforced organization under the Federal law of every corporation engaged in inter-State trade.
There is no reason for resorting to the temporizing measure of Federal license from doubt of the power of Congress
to compel Federal incorporation. There must be complete
and undivided Federal control free from charter tinkering
and other interference by the States in order to render any
scheme effective. "We are unable to appreciate any force to
the contention that Congress has not full power in the premises where the corporation is engaged in inter-State trade.
It is now axiomatic that the power to regulate commerce
includes the power to control all the agencies and instrumentalities of commerce. Congress can at any time take unto
itself the sole right to charter those engaged in inter-State
commerce.
It is time the power was taken from the States wherever
possible in any event. In the fierce and undignified competition between them for the privilege of granting unrestricted
license to prey upon their sister States to corporations which
conduct no business within their borders and with which they
have no concern they have so relaxed the safeguards surrounding the issue of corporate securities and have granted
such extraordinary and unjustified powers that it has long
21
since become and is a National scandal. The stability of
investments and the good name of the Nation require the
restriction and regulation of corporate powers and uniformity
in the form of charters.
The prohibition of the holding Company and the protection
of the rights of minority stockholders through compulsory
•cumulative voting and other safeguards are among the urgent
reforms that may be incidentally accomplished through a National Incorporation Law. Corporations should never have
been allowed to own the stocks of other corporations. It is
.only in recent years that any such improper privilege has been
-accorded them. It is an outcome of the charter-trafficking
referred to and has been the prolific source of innumerable
swindles that are being constantly perpetrated upon minority
stockholders.
It is to this abuse that we owe the existence of our most
powerful Trusts. Through it the pressure has been brought
to bear on the helpless minority stockholder to part with his
securities at the price fixed by the holder of the majority.
The character of the laws enacted in recent years in the
various States creating short Statutes of Limitations in favor
of corporate wrongdoers against their stockholders and otherwise legislating stockholders out of remedies that would otherwise now be open to them for wrongs inflicted by promotersand controlling interests in corporations, makes it necessary
that there be restriction and uniformity and greater caution
in legislation affecting corporations.
The next step in the process of regulating this subject
would be the creation of a Court of Commission similar in its
powers over industrial corporations engaged in inter-State
trade to those of the Inter-State Commerce Commission over
Railroads, giving to that tribunal the power to restrict prices,
to permit and approve temporary Trade Agreements that
would be enforcible in the Courts similar to those that exist
in Germany, Austria and France, and which are known as
Pools, Kartels or Syndicates.
The writer begs to repeat in this connection the recommendations suggested by him on this subject in the address
above referred to on January 12,1911, as follows:
22"Rigid regulation under Federal Law is the only just solution.
"It is possible and practicable and would do away with the grave existing evils which are constantly become more serious. As substantially
all the combinations that affect the public welfare are engaged in InterState or International Commerce within the enlarged definition of those
terms under recent adjudications, there could be no serious question of the
Constitutional right of the Federal Government to regulate and control
their activities by a Federal license, if not by a Federal incorporation. Such
regulation would however in order to be effective have to take a very much
wider scope than has yet been suggested. * * *
"Such regulation must include as its most essential feature the power
to prohibit by summary process all business oppression and other unfair
methods and particularly the exaction of excessive profits. This involves
the power to limit the prices that may be charged for any commodity beyond
a fair profit. * * *
"The practical difficulties of regulating prices to the extent indicated
are more imaginary than real.
"The proposition has never had a hearing. Wherever any notice whatever has been taken of it the subject has been almost impatiently dismissed
although other countries whose judgment on economic questions is entitled
to our respect have adopted the plan and find it practicable.
"The problem though beset with difilculties is one that we must solve.
I therefore appeal for an approach to its discussion with an open mind.
"When we come to analyze the subject we find that the task is not
nearly so complicated as that of framing a Tariff, which must presumably
take into account not only the cost of production in this country but also
such cost as compared with costs in one or more foreign countries. It is
surely not nearly so complicated as will be the duty of the proposed
Tariff Commission which is expected to undertake a scientific study of and
report upon the domestic and foreign costs of every known commodity."
It is not suggested that this system shall supersede the
enforcement of remedies or penalties under the Anti-Trust
Law. They should on the contrary be merely complementary
and supplementary to that Law. When a judgment is rendered against an existing offender it is proposed that it
should be the province of the Commission thus constituted
to determine the manner in which the judgment shall be
executed. If after doing away with the violations, so far
as this can be accomplished to the satisfaction of the Commission, the offending corporation continues to be engaged
in inter-State commerce its future operations would be subject to the direction of this Commission.
The effective cry that has been raised by the powerful
advocates of so-called "business co-operation" and "community of interest," and the one argument that has been
pressed upon the students of the economic problem has been
that the only alternative is ruinous competition and that
this is not to the interest of any country.
Of the two evils, ruinous competition is the less disastrous.
If the alternative is between the two and the Trusts are to
23
be uncontrolled the people will not hesitate to accept the
former.
But is it true that this is the alternative? We venture
to suggest that it is not. The Sherman Law may be enforced to prevent future combinations in direct restraint of
trade, the Courts may do what they can toward dissolving
and curbing the existing violations, and we may still through
National regulation of the agencies of inter-State trade develop a system that will ameliorate the harshness of competition, permit of co-operation and secure reasonable profits with full justice to the public if this subject, can be
taken out of the realm of partisan politics and dealt with
on broad, economic, statesmanlike lines.
This may be partly accomplished through Pooling or
Trade Agreements between the members of a given industry,
regulating prices and production between them—subject to
the approval of the National Commission or tribunal to be
created, somewhat after the general scheme of the German
Potash Law of May, 1910.
It would not be necessary to amend or take away from
the Sherman law in order to reach this result by independent
legislation. The law creating the Commission would provide that no agreement or combination in direct restraint of
inter-State trade should be sanctioned, and that all agreements thus permitted would be held to be in reasonable restriction of competition and as not in direct restraint of
trade.
The Commission would necessarily determine the extent
to which production might be curtailed and the maximum
prices permitted to be charged, which would be subject to
change from time to time in its discretion. Any corporation
desiring to acquire the business of a competitor would be
required to secure the permission of* the Commission, which
would be granted where it appeared that there were legitimate
business reasons to support the application and that no
direct restraint of trade was involved.
In like manner every contract accompanying a sale by
an individual or corporation engaged in inter-State commerce of the good-will of his business which restricted him
24
from engaging in competing business should receive the approval of the Commission in order to be enforcible.
The plan suggested would not by any means involve the
fixing of prices in every industry or anything nearly so comprehensive. The action of the Commission would only be
invoked by those engaged in a given industry in the instances
in which the competition had reached an unhealthy stage.
Only in those cases could it hope to succeed and then only
to the extent necessary for reasonable protection. Within
the limits fixed by the Commission competition would still
continue but it would no longer be enforced ruinous trade
war if the parties willed it otherwise and were able to agree.
It would of course only apply where invoked by the parties
and only to those joining in the petition.
There would be many great and manifest advantages to
the public in sanctioning these Kartels or Trade arrangements; among others—(1) the permission thus given would
involve each owner retaining his own property; (2) it would
destroy one of the incentives and the only plausible pretext
for Trusts and Consolidations in the form of a single ownership; (3) inflated stock issues, oppression of competitors,
closing of factories and all the greatest of the evils incident
to concentrated ownership in the form of a Trust or consolidation would be avoided by permitting these agreements.
There would no longer be an excuse for their existence. Such
a system would also do away with the most cruel of all kinds
of competition—that which is resorted to for the purpose
of forcing the weaker competitor to choose between facing
ruin and selling his property to his stronger rival on the
latter's terms.
Under this arrangement the stronger man would know
that he could not acquire his weaker competitor except with
the assent of the Commission and that this would not be
accorded if the situation were brought about by unlawful
or oppressive methods.
None of the oppressive expedients to crush competition
that are resorted to where the former competing interests
have been firmly and indissolubly banded together would
characterize the operation of these Pools or Trade Agree
25
ments for the plain reason that the interests of the parties
are not permanent or identical. They are still competitors
subject to certain restricted interests in common. Each
party to the arrangement operates his own factory at his
own risk and for his own benefit. The agreement is limited
as to time. They may resume open and unrestricted competition upon the termination of the agreement. They cannot afford to exchange trade secrets or to go into co-operative
schemes to cripple outside competition even if they were
permitted to do so. On all these points their methods and
operations would be in marked contrast with those of Trusts
and Consolidations, where there is a single, permanent ownership with all the concentrated power and unity of interest
involved.
The proposed remedy may be summarized as follows:
(1) The compulsory Federal incorporation of all corporations engaged in trade or commerce between the States or
with foreign countries.
(2) The creation of a Commission similar in its powers
over business corporations to those now possessed by the
Inter-State Commerce Commission over Railroads and the
utilization in that connection, so far as possible, of the present
Commerce Court.
(3) That this Commission pass upon the right of every
applicant for a Federal charter, and that where violations
of law exist which would prevent the granting of such a
charter such violations should be first removed.
(4) That the Commission have power to authorize and
approve Agreements that will be enforcible in the Courts in
the form of Pools, Kartels or Syndicate arrangements for
regulating competition in any industry provided such Agreement does not have the effect of unreasonably restricting
competition or of operating as a direct restraint of trade;
that in that connection it be empowered from time to time
to determine the extent to which prices may be fixed or production restricted and particularly to prevent any interfer
26
ence by the parties to the Agreement with outside competition.
(5) That the Sherman Anti-Trust Law be enforced against
existing offenders and that the execution of the details of the
judgment be entrusted to the Commission, subject (whereever necessary by reason of Constitutional limitations) to
the approval by the Court and the adoption by the latter of
the findings of the Commission.
(6) That (a) the criminal section of the Anti-Trust Law,
(b) the provisions allowing an injunction against the creation or continuance of violations, and (c) provisions for the
summary seizure and confiscation under Section 6 of all property in inter-State transit of any corporation operating in
violation of the Statute be rigidly enforced.
With such a programme and an administration in sympathy with it and with the energy and ability necessary to
carry it out every existing violation of the law would soon
be corrected, so far as that would be possible, and we would
have a consistent, workable plan instead of the present intolerable condition, floundering and insincerity on the part
of the Administration and chaotic from the point of view of
the business community.
It is hoped that the pending agitation will continue with
all the light that can be had from every direction until the
necessary reforms are embodied in constructive legislation
that will remove this question from the domain of Party
strife. Its early solution is too essential to the general welfare to be made the football of political contentions and ambitions.
The Congressional investigations now under way will
assist in educating the people to an understanding of the
peril and urgency of the situation. The testimony taken at
the future sessions of the Committee of Inquiry into the Steel
Corporation (which has not yet scratched the surface and
from which it would appear that the investigators are,thus
far uninformed as to the important facts concerning the
organization of the Company) has already keenly aroused
27
public curiosity. The huge sums involved and the dramatic
human interest attaching to the chief actors in the boldest
and most gigantic financial and industrial operation that the
world has ever known are bound to hold public attention.
It is important that the investigation shall be thorough
and that the reports of the testimony as distributed shall be
comprehensive and free from bias, color and influence (no
easy task in these days). The Committee should not be compelled to rely upon the accountants and experts of the corporation. It should be furnished its own experts and accountants and all the assistants necessary for an exhaustive inquiry.
The uniform record of the corporation from the beginning has been one of entire frankness and of the fullest publicity in dealing both with the public and with its shareholders. In that respect its conduct has been a wholesome
object-lesson to the Trusts and corporations that had been
operating in the dark as blind pools and had been for years
permitted to do so to the amazement of every other civilized
country.
The example of the Steel Company more than any other
factor forced the abandonment of these "dark-lantern*'
methods of finance. For that service the country owes it a
great debt of gratitude for its power is so great that no such
concession, however just or necessary, could have been wrested
from it by the Law whilst the Stock Exchange, which is responsible for its securities, has ever been a willing servant
of the interests that dominate the Trust.
Judging therefore by the praiseworthy past record of the
Steel Company, the Committee is justified in expecting every
aid. We should thus learn of the community and identity of
interest and control between the Company and its dominating
owners and Directors on the one hand and (1) the Kailroads
of the Country; (2) the great Banks, Trust Companies and
Life Insurance Companies with their billions of dollars of
other people's money and all that this means; (3) the inexhaustible reserves of iron ores that the Company owns and
which together with its Eailroad and financial connections
places many of the so-called "independents" at its mercy.
28
In the last analysis it will be found that the peril to the
country from these vast accumulations of wealth and power
has been greatly underestimated.
Without stopping to criticize the way in which this new
found power, so fearful in its potentialities for evil and oppression that the brain fairly reels at the effort to realize it,
has been or is being exercised, we are confronted with the
problem of how to encompass its destruction and to prevent
its recurrence. It may be conceded for the sake of argument
that the power now happily rests in the safest possible hands
with the highest sense of responsibility to the State—a benign,
well-meaning, public-spirited monarch of the financial destinies
of the Nation, if you please, although there are conflicting
opinions as to his disinterestedness and public spirit.
But a monarch none the less and not even a constitutional
one at that for he confessedly has all the power of a despot
to make or destroy. How long will we patiently contemplate
or tolerate the possibilities of such a condition of vassalage
no matter what may be the present realities. No one can say
how soon the power may drift into more ambitious and less
scrupulous hands. It is incredible and intolerable that it
should rest with any one man or group of men by a word
to make and unmake men who have no relations with them,
to close Banks and Trust Companies, precipitate and avert
and compose panics in the financial world, control the security and commodity markets, dominate the Eailroad and
industrial world so that by a word the channels of credit are
dried up and shrivelled as if by magic against any individual
or enterprise whose property he may covet or that it is his
will to destroy.
The picture is not exaggerated. If anything it is understated, for there is a brotherhood of self-interest between
this modern King of finance and all that serve under him
in the same cause that welds them together as one regardless
of personal jealousies and enmities. The endless ramifications
of this money Trust will be found in every Legislative Hall,
whilst its headquarters have been until very lately not far
away from the seat of our National Government.
29
Whenever in the past our country has faced a great crisis
the man to meet it has been found among us. Let us hope
that we shall now find the constructive statesman and patriot
to rid us of this fatal blight and put in its place a healthy
industrial and financial freedom under which we may live
and prosper. We need him now. His first work will be to
lead us safely out of the clutches of the Trust that with our
aid and encouragement have been fastened upon us and have
kept us all these years in their grip. That accomplishment
will be the best and highest test of his statesmanship. The
rest will be easy.
K
Government Regulation of the Trusts
WITH
Special Reference to the Sherman Act
Address
Delivered at the Dinner of the Economic Club of
New York at the Hotel Astor November 22nd, 1911
By
Samuel Untermyer
of New York
GOVERNMENT REGULATION OF THE
TRUSTS WITH SPECIAL REFERENCE
TO THE SHERMAN ACT.
If after the ceaseless deluge of oratory and
literature with which we self-constituted amateur
economists have inundated a long-suffering nation
of patient listeners for the past few years, any
new thought, however fantastic, from Bryanism
to Eooseveltism can be added to the discussion
then we are indeed a people of boundless resourcefulness and versatility. If there is such a thing
as an exhausting and an exhausted subject, here
we have both. The Trusts is one and you are
the other. Such wide range and diversity of view
were never known. If only we were all able to
share the cheerful confidence of our optimistic
President in the simple way of solving this problem our troubles would be over before they began.
To him it is already solved by the mere enforcement of existing laws. To others all restrictive
laws in any way regulating or affecting trade and
especially the Sherman Law, are mistaken, unjust
and unnecessary. Some of these economists—
happily few in number—still regard Governmental
interference as mere officious intrusion into private affairs. Less than two weeks ago one such
speaker argued from this platform with the manifest approval of his distinguished audience that
the remarkable thing about this question of the
relation of Government to business was that anybody should ever be called upon even to discuss it.
His idea seemed to be that the Government had
no concern with business. To him apparently the
2
mandate of the Constitution to Congress to regu+
late commerce meant nothing. True, Congress
might enact tariff, shipping, currency, banking
and other laws to promote and stimulate business,
but no laws to regulate it or prevent abuses. It
is so many generations since that proposition
passed beyond the realm of debate that I leave it
without further comment. The regulation of business is of course one of the most important functions of Government, and one without the constant
exercise of which business would not be possible.
To some of us on the other hand this seems
the most difficult and complicated economic
question that ever confronted a progressive
Nation and one that while clamoring for immediate settlement cannot be solved without further
legislation, as is evidenced by the recent pitiful
and humiliating fiasco resulting from the first
serious attempt of the Courts to deal with it.
There is no use trying to blink the fact that the
administration of the Act has completely broken
down at its most vital point.
And yet, instead of being disheartened by the
magnitude and difficulty of dealing with this great
problem we should esteem ourselves fortunate to
be living in an age teeming with such gigantic issues. No economic question has ever commanded
such general attention or received such study.
I take it that we are here to discuss measures of
practical policy and relief rather than to rail at
and denounce a Law which is manifestly and increasingly supported by the almost unanimous
sentiment of the country as one of its most
cherished possessions.
The supplementary legislation that the people
are demanding is in the direction of strengthening
the law and making it more effective. Whatever
may be said of the President's economic views on
3
the subject, he certainly has his "ear to the
ground" when he announces that the Law is here
to stay and that the business community will have
to "square itself" with that situation.
We must therefore assume, as is the fact, if we
are to make any progress with the discussion, that
the country is definitely committed to the rigid enforcement of the Sherman Law insofar as that
Law is capable of securing practical results in the
way of punishing offenders and of disbanding and
disintegrating these corporate outlaws. It is the
most popular Law on the Statute Books to-day,
notwithstanding the opinion of Wall Street to the
contrary.
It is often said, and I think justly, that the men
who conduct business below Fulton Street in the
City of New York and who control the financial
destinies of the country, know less about the temper and sentiment of the people of the country
and their views on public questions than the average village citizen*
If the handful of men in the East in control of
great aggregations of capital really understood
what the ninety millions of people are thinking
about how could they even have contemplated the
possibility of a repeal of the Law or any amendment that would weaken its operation ?
It remains to be seen whether the President
with this object-lesson of the abortive outcome of
the Tobacco case before him will continue to maintain the untenable position that further legislation is unnecessary.
On his recent speaking tour he issued many
brave challenges to jurists, publicists and political economists and others who have been criticising existing conditions to name a single offending
corporation whose unlawful activities could not be
4
effectively ended by applying the Law as constructed by the Supreme Court.
If an humble citizen may without disrespect
consider himself included in that broad and oftrepeated challenge I venture by way of a complete and conclusive answer to refer him
to this sorry result of the first attempt
of the Court to deal with the first complicated
case of violation, as representing the impotent
limit of legal redress under the existing Law.
I respectfully insist that by maintaining this attitude the President is unwittingly playing into the
hands of the demagogue. His insistence is likely
to further accentuate unreasoning demands for
enforcing the strict' letter of the criminal law
in the prosecution of men who unknowingly transgressed with the silent connivance of the
Government. It is right and necessary that violations since the law has been made plain and continued acts of oppression and wilful violations at
any time should be visited with prompt punishment. But whatever may be the momentary impulse of the people due to the hopeless impotence
of present methods of enforcing the law their
sense of justice will in the end condemn criminal prosecutions for mere technical acts that
were generally believed by everybody to be lawful
when done.
We now see clearly that the enforcement of the
Law from the beginning would have rescued us
from the evils from which we are suffering and
from the greater dangers with which we are
threatened.
But recrimination over the past is idle. Both
political Parties were at fault, but neither is much
to blame.
There was no public sentiment to support the
Law and we did not understand the question or re
5
alize the peril. There was no reason why we
should. It was a new theory of business.
We do not understand it yet, for we are chasing
the shadow with aimless ineffective prosecutions,
whilst the substance of the corrective sought to be
attained by the Law is as far as ever from solution. We are in hot pursuit of the combinations
with no result except to change their forms and
unsettle business, but the hundreds of secret Pools
and Agreements that are to a far wider extent
than the Trusts the real regulators and suppressors of competition go on in the main undisturbed.
I think most of us would agree in the light of
experience that these combinations are not the
unmixed economic blessing that was prophesied
of them. Some of us believe that they are a peril
to the country, with few if any compensating advantages and that on the whole we would be better
off if they had never been permitted.
However that may be, it is no longer a question
of whether the Trusts are an evil or a blessing.
The policy of the Law on that subject seems to be
settled and I am one of those who believe that
it has been wisely settled. The Trusts have been
allowed to form and grow in defiance of that
policy. They are with us and the question is what
to do with them and what if anything should be
put in their place if they are to be destroyed provided that impossible operation can ever be
brought about.
The people are beginning to realize that the
methods now being adopted for the enforcement
of the Law will accomplish nothing beyond mere
changes in the form of organization and new devices for evading the spirit of the Law.
Kecent events have brought them face to face
with the startling conviction of the truth of that
6
fact which some of us have been pointing out ever
since these aimless prosecutions began.
I approach the delicate subject of the discussion
of the decision of the Tobacco case by the United
States Circuit Court of Appeals with hesitation
not because there is any impropriety in such a discussion, for I believe it to be one of the highest
and most sacred duties and prerogative of the Bar
in the interest of the people. To criticise the
reasoning of the Court is a very different thing
from assailing or criticising the Judges because
of their decisions, which is reprehensible. My
hesitation is due to my respect for the judgment
and learning of the Court.
The disposition made by the Court unless
promptly corrected on appeal or by further legislation will go far toward accentuating these demands for criminal prosecutions. It demonstrates
that the years of litigation are to be barren of
practical results. Nothing could be more amazing
or unsatisfactory to those who are looking to a
settlement of the existing agitation than this
puerile outcome.
I intend no (Jisrespect to the Court that has
just approved the so-called Plan of Disintegration, when I say that the public will be worse
off under it than before. The old monopoly will
be rejuvenated with the judicial approval. One
can well understand the hesitation with which the
Judgment was rendered, the apologies and confessions of helplessness to render adequate relief
that accompanied the decision and the reluctant
assent of the Attorney-General to the main features of the Plan.
The more one examines the unfortunate results
that must follow, the more inexplicable seems the
action of the learned Attorney-General in allow*
ing himself to be beguiled into any sort of as
7
sent. His attitude should have been one of uncompromising hostility and opposition until every
legal resource had been exhausted to enforce a
result that would have vindicated the majesty of
the law.
Is the learned Presiding Justice right in his
apology for approving the Plan when he says in
effect that the Court had no option but was bound
as an alternative to directing a Keceivership to
approve any Plan that was satisfactory to the
securityholders because no Plan could be put into
effect to which they did not assent? Is it not possible that if the Court had withheld its approval
from the Plan, of which it is manifest that it did
not in fact approve, and had outlined the form of
Plan, which alone would meet its requirements
with the alternative of acceptance by the securityholders or a Receivership and actual dissolution, that the securityholders would have found
a way of conforming to the views of the Court
instead of forcing their Plan upon the Court under
the implied threat of submitting to a Receivership.
Surely the Court might well have placed that
responsibility on the securityholders where it belonged, instead of feeling itself constrained to
save them at the cost of denying adequate relief
to the people.
Could there be a more humiliating spectacle of
impotence in the administration of Justice than
that which the Court was forced to confess?
And yet such results are not now and will not
be hereafter entirely the fault of the Courts. They
are not adapted to the solution of these questions. The Law in its present condition does
not furnish them with the necessary machinery
for the performance of the task that was imposed
upon them.
8
If the rule announced in this case is to prevail
and to serve as a precedent it will always rest
largely with the members of the convicted corporation to say whether and in what form the
corporation shall resume its activities. If the
Court is unable to compel the adoption of a form
which it believes will meet the case it must be
because the alternative remedy by the appointment of a Keceiver is not adequate or that on
account of the magnitude of the interests involved
and the effects on business and securities of applying the remedy the Court is afraid to do so and
therefore leaves the Government without redress.
As the result of this reasoning the bigger and
more powerful the unlawful combination, the more
dangerous to the public welfare, the more helpless the Courts will be to give relief. There is no
trouble about administering stern and swift justice to the little fellows who are banded together
to save themselves from ruin. Their little Pools
and Agreements are scattered and disbanded in
short order by the application of the criminal
law. But when it comes to dealing with the dangerous aggregations of capital that strike at
the very vitals of the Laws of Trade, and
that have been solemnly adjudged to be outlaws, the plea of expediency by the vested interests against business disturbance that would result from impartially administering the Law is
permitted to drown the people's cry for the justice
to which the Courts admit them entitled but tell
them that they are powerless to award.
Suppose the Attorney-General should to-morrow find four great corporations about equal in
size together monopolizing the business of the
country in a particular industry and that they
have the same common stockholders owning shares
in each of them in equal amounts and the same
9
officers and management Would not such a situation constitute as plain a violation of the Act as
could be conceived? Yet that will be the precise
situation here after this disintegration and resurrection have been accomplished? How could he
prosecute such a violation with this precedent
staring him in the face creating exactly that situation by solemn judicial decree? If this is to be
the last word the effectiveness of the Law has been
destroyed.
The country will never be content with such an
answer. It is not right that it should be. It is
announced from Washington that the Government
will not appeal. I believe that decision will have
to be reconsidered no matter how embarrassing
that course may be to the Attorney General in
view of the prominent part he played in formulating this abortive judgment. The power of public opinion will force him to take action no matter
how great may be his reluctance to do so. The
case should be taken to the Supreme Court that
pronounced the Judgment of Dissolution, It
should be there determined whether this molehill of result is to be the outcome of the mountains
of agitation and prosecution of the past seven
years or more. Let that Court say whether this
is the meaning of its Judgment.
I am so thoroughly convinced that public sentiment is permanently crystallized in favor of
exterminating the existing Trusts and preventing the births of others that such suggestions as
I shall venture to advance will be predicated on
the assumption that Congress will not consider
any scheme of regulation which involves the reorganization of any corporation that cannot
prove itself outside the pale of the condemnation
of the Sherman Law as now construed.
10
Even on this assumption there are radical differences of opinion as to the method of dealing
with this subject, assuming that we all agree to
go as far as the Courts are able to go in dissolving existing violations.
On the one hand the President, if I correctly
interpret his expressions, favors the restoration
of unrestricted competition and the prevention
and punishment of every attempt to circumvent
that result as a wise economic policy which he
would not change if it were possible to do so.
There he and Mr. Bryan meet on common ground.
The President helieves this can be accomplished
under existing laws. He would not, if I correctly
understand his attitude, approve any additional
or supplemental legislation that would permit
the making of Agreements restraining the free
flow of competition under any conditions. Until
within the past ten days he has repeatedly
and emphatically expressed himself as fully satisfied that the problem can be worked out through
the present Anti-Trust Act under the recent Supreme Court decisions without aid from Congress.
Nor do I understand his latest suggestion as
meaning that he recants on the crucial question of
unrestricted competition although the unofficial
press despatches of the past few days from Washington indicate that each day brings forth a new
point of view until we are lost in bewilderment
at the Administration's kaleidoscopic changes.
On the other hand there are those—of whom I
am one—who respectfully take issue with the
President at every point except with his policy of
enforcing the Sherman Law. We believe and respectfully insist:
1. That whilst the Law should be rigidly enforced so as to bring about the actual disintegra-
11
tion of the corporations that are existing in violation of it, insofar as that result can be accomplished, yet
2. That the Law is inadequate and the machinery of the Courts is ill-adapted to the genuine
enforcement of Judgments of Dissolution. That
as supplementing the Sherman Law there is
needed and should be constituted a body with
powers over Inter-State industrial corporations
similar to the powers of the present Inter-State
Commerce Commission over Bailroads, to which
shall be entrusted the disintegration of all corporations adjudged to be existing in violation of
the Law, subject to review and control by the
Courts by which the Judgments were rendered.
This Commission would have the duty of supervising the execution of the Judgment and enforcing obedience to it; of seeing to it that the disintegration is not merely Pickwickian, but that it
is made and kept real and effective.
3. That there can be no genuine enforcement
of any Law that compels competition to the point
of ruin; that if such a Law could be enforced it
would embody an unsound economic principle,
would lead to legalized monopoly and tend in the
direction of Socialism.
It is worse than idle—it is dishonest and distinctly harmful—to attempt to correct an industrial evil or to build an industrial structure
upon a manifest impossibility. Everybody knows
that the Law is being every day violated in hundreds of cases in every part of the country to the
knowledge of the Administration and that it
always will be under existing conditions.
Kailroads in every section are openly agreeing
on rates. In fact, that is the main business of the
various Traffic Associations, such as the Central
12
Traffic Association, the Western Traffic Associa^
tion, the Trans-Continental Traffic Association,
the Trunk Line Association and.the Southeastern
Association.
When the Government recently brought suit to
enjoin a general advance in rates that had been
agreed upon at one of these meetings did it have
any difficulty in establishing the facts by proof
that would have sustained a conviction in a criminal Court? I do not criticize the failure to prosecute these men criminally. My complaint is that
in this spasmodic, irresponsible enforcement of a
criminal statute the Government should not
be permitted to discriminate against the weak offenders whilst fearing to attack the powerful ones
whose prosecution might cause business disturbance.
i t was because of the enforced recognition of
the patent fact that Eailroads were defying the
Law and that it was impossible of enforcement
that President Boosevelt in two messages
to Congress wisely recommended an amendment
to permit Eailroads to agree on rates subject to
the approval of the Inter-State Commerce Commission.
The Eepublican Platform of 1908, if I remember
rightly, made the same recommendation. Yet the
President now tells us that competition has been
and should be good enough for us and that he opposes any sort of regulation or interference with
its free and destructive operation. I must and do
assume that he is sincere in that belief, strange
as it appears to some of us. But is it possible that
he may be wrong?
Imagine the new constituents of the Tobacco
Company, with their identical stock ownership,
each equipped with a complete line of goods,
plunging into this war of competition until the
13
stronger has annihilated the weaker—the stronger
and the weaker being, by the way, the same
interest.
Remember, there can be no agreements or understandings, just honest uncompromising competition until the owners of one property have annihilated or crippled the other properties which
they also own in the same proportions.
It is a little difficult to imagine and still more
difficult to believe and quite impossible to realize.
.Unless something is done immediately by way of
legislation to relieve the situation the uselessness
and absurdity of these Judgments of Disintegration will be exposed to our utter humiliation.
If we could only get this question out of politics and into the realm of economics where it belongs and where there are no questions of Party
policy or Party responsibility to be taken into account we would find little difficulty in dealing effectively with it. As it is the Administration is
handicapped, as would be any Administration, by
differing views and political exigencies within
the Party.
Mr. Bryan's recent utterance on this subject is
a fair illustration of the extent of the political
handicap to the discussion. As a consistent
Democrat, he considers himself bound to
keep to the traditional faith of States' Eights,
even over Inter-State affairs. It apparently makes
no difference to him that the question is one that
the States could not regulate if they had the
power. His opposition to Federal Incorporation
is squarely put upon the untenable ground of
States' Eights.
^The only practical result of substituting Federal License is to prevent the enactment of a sane
Corporation Law that would destroy the illegitimate franchises and immunities now enjoyed by
14
corporations through the disgraceful bartering
between the States for the patronage of corporations with which they have no concern. Every
such perversion of the doctrine of States' Eights
to include matters which the States are powerless to control simply weakens the doctrine itself,
obstructs just regulation and plays into the hands
of the stock waterers and dishonest promoters of
the worst types of corporate evils.
All of which is the outcome of the attempt to
appease the champions of a contorted and impossible view of the sanctity of States' Rights.
The solution of this problem will be the work
of far-sighted unselfish statesmen and economists
who can rise above Party spirit and Party
traditions.
My proposition involves the enforcement of the
Sherman Law and that every corporation operating in violation of it should be effectively disbanded.
But there must be at the same time some protection, somewhere, against the alternative of
ruinous competition unless we are prepared to
substitute secret evasions for the existing open
violations which the Government is now seeking
to correct at such great sacrifices to the business
and financial world. The sort of Federal Regulation for which I contend by way of a palliative
from the rigors of the Sherman Law would require
that the books and affairs of every Inter-State
corporation would be subject to scrutiny and approval so that secret violations would be impossible. It would however give to the persons in
an industry the right, by Agreement, to limit production and to fix prices within a prescribed maximum under certain conditions, among which I
would suggest:
15
(a) That the Agreement be approved by the Industrial Commission to which I have referred.
(b) That it be for a limited term not exceeding
three years but subject to renewal by the parties
to it who choose to renew, and subject to modification or rescission upon the order of the Commission
on proof of oppressive methods or changed conditions.
(c) That any competitor desiring to become a
party to the Agreement may do so and that it
shall be enforcible in the Courts by and against
the parties to it.
(d) That the Agreement will be approved by the
Commission only when it is satisfied that the industry has become generally unprofitable and that
the maximum prices fixed in the Agreement will
not permit more than a reasonable profit.
(e) That any unfair or oppressive methods of attempting to force competitors to become parties
to the Agreement should be prohibited and visited
with severe penalties.
(f) That every corporation engaged in Inter*
State Commerce be required to take out a Federal
Charter or a Federal License but that no such Charter or License would be granted to any corporation
that is now existing in violation of the Sherman
Law.
(g) That the Commission have power to determine, subject to review by the Commerce Court,
whether any applicant is entitled to such a Charter
or License. If it exists in violation of the Law the
Commission would have power to approve such a
Plan of Reorganization as might be submitted for
removing such violation before permitting it to
engage in Inter-State Commerce.
(h) That if it were determined that the Regulation should be by License rather than by Charter
in order to avoid "opposition from the representatives
of the States in Congress it would be necessary that
many of the illegitimate privileges and immunities
from liability incident to existing Charters should
be surrendered by corporations applying for a Federal License, so that their powers and obligations
would be substantially uniform.
16
A m o n g t h e p o w e r s which should be r e q u i r e d to
be t h u s s u r r e n d e r e d would b e :
1. The right of a corporation to hold shares in
another Company.
The holding Company is an intolerable fraud
upon the rights of minority stockholders. The prohibition of the holding Company should not, however, prevent the acquisition by one Company of
the physical property and effects of another Company, subject to the approval of the Commission
and provided they may be otherwise lawfully acquired. I t would prohibit only the holding by one
Company of a part of the shares of another Company which is so prolific of injustice.
2. The illicit and disgraceful protection which
the States in their competition with one another
for the organization and franchise fees and patronage of corporations have been extending in the
way of immunity from stock liability or the payment of unearned dividends on account of stock
issued without value and a variety of other immunities of like character.
3. The right to make future issues of securities
except with the approval of the Federal Commission.
4. The right of any corporation acting under
such a -License to acquire any competing business or
property or merge or consolidate with a competitor
without the previous permission of the Commission,
after investigation and hearing.
The difference between requiring a Charter
and a License is not fundamental. It is largely
fanciful.
If a prescribed form of State Charter be required as a condition of Federal license the same
purpose will be accomplished as by Federal Incorporation. The inter-state corporations would in
that way be compelled by amending their existing
Charters to relinquish the illegitimate privileges
that they now enjoy. We might then have a permissive Federal Incorporation law in addition to
17
Federal license which could be made a model of
what a Companies Act should be. But a Federal:
Corporation law alone or except as part of some
such comprehensive scheme is meaningless.
The proposal to permit competitors to agree on
prices within limits that will protect the public
has never had a fair or patient hearing. It is persistently misrepresented as a proposition to have
the Government fix the prices of commodities and
as being in the nature of State Socialism, when in
fact it is the only logical escape from that condition.
The President is responsible for adding to this
misunderstanding.
In a speech of September 29th at Waterloo,..
Iowa, he discussed that question as follows:
" I have seen arguments based upon the attitude of
foreign Governments toward great enterprises in which
it is pointed out that they have encouraged, fondled
and protected combinations of this character. That is
true. There is a tendency among some foreign Governments to encourage what they call trusts, to take part
themselves in the management of the trusts, to fix prices,
and to depend upon Governmental control to secure
their reasonable conduct; but such a system with us is
absolutely impossible, and it might as well be understood. The countries to which reference is made are
veering toward State Socialism.
This is hardly a just or accurate statement of
the situation although I am sure it is meant to be
fair as is every statement of our President..
The foreign Governments that have undertaken to regulate these Pools or Kartels (there
are no Trusts as we understand the term) do not
take part in the management except where it happens, as in two cases in Germany that the Prussian Government owns two of the fifty-four
IS
plants included in the Agreement. In those cases
it became a party on the same basis as the other
parties. In no case is any person bound to become
a party. Each plant must be operated to the extent of its allotted production in order to retain
that allotment. The wages of the laborers
engaged in the industry are jealously guarded but otherwise the parties are in no way
handicapped in their operations by Government
supervision.
It is quite the fashion for us to consider the
lessons to be learned from the experience of other
countries with tolerant indifference or ill-concealed
contempt. "That may be good enough for them,
but it is not good enough for u s " is the spirit in
which we are apt to treat these suggestions. "With
all due respect to our President he seems not
above following that fashion in the manner in
which he dismisses the arguments based on Continental methods of dealing with this problem. He
says it is paternalism, that it is an evidence
of their tendency toward Socialism and waves
aside the whole broad subject of regulation as
successfully practiced in France, Austria and Germany with scant consideration.
With all our insufferable provincial narrowness
and egotism we generally manage in the end to
begin about where they leave off on these question of Government. It takes us some time but we
get there eventually, and so we shall, I hope, in
course of time have an Employers' Liability Law;
and a National Insurance Law such as England
is now copying from Germany.
In time I have no doubt we shall get a scientific
Corporation Law that will enforce publicity
and protect the investor instead of the present
jumble of laws that are a premium upon
19
corporate laxity and dishonesty. We may
even reach the point of just and civilized
methods of taxation in the form of income tax
and inheritance laws such as are enjoyed in those
countries, that will place the burdens of taxation
where they belong. We may even, when we become
sufficiently wise, learn from them how to govern
our Cities so that they will cease to be nests of
corruption and be fit for human habitation. But
we must first cease scoffing at what we do not
understand and begin to realize that unparalleled
as is our genius as money grubbers and in many
more laudable directions we are still children in
the science of Government. If our experience
with this question has not convinced us of that
fact we are indeed hopeless.
Under the Plan now suggested the Government
would have nothing to do with the internal affairs of any lawful industry beyond the supervision incident to the granting of a Federal Charter unless the jurisdiction of the Commission is invoked by the presentation of the proposed Agreement accompanied by a Petition for its approval.
There is nothing complicated about ascertaining
whether a given industry needs the protection
invoked. It is no more difficult to ascertain
the profits in any business than is now experienced by the Inter-State Commerce Commission and the various Public Service Commissions, or than the Courts in reviewing their conclusions have found in fixing the cost and profits
of steam and street railroads, gas, water, electric
light and other public utilities. It is not nearly
so difficult nor so inquisitorial as has been the
work of framing Tariffs to cover every known industry or as the labors of the present Tariff
Commission.
20
Only those industries that need and appeal for
protection and regulation are brought under thissort of control. Like every other new suggestion
in Government the complexities of the problem
are magnified by a mere superficial observation.
The plan does not involve forcing any competitor to join in the Agreement. It merely permits
that to be done lawfully and with due regard to
public protection which is being done and will
continue to be done secretly and unlawfully in disregard of the public interest and to the point of
extortion, unless some sort of necessary relief is
given.
The failure to furnish this relief offers a pretext for circumventing the Law, of which many
otherwise law-abiding citizens now avail themselves only because forced to do so by the intolerable situation created by an impossible Law
which attempts to compel unrestricted competition.
It is not in the interest of the State that people should be forced by Statute to ruin themselves
and one another and it is not in human nature
that they should do so with relief in sight, even
if they must violate the Law.
The ultimate result of enforced unrestricted
competition is to destroy competition by eliminating the weaker competitor and in the last analysis
to bring about a condition of legalized monopoly.
The more small competitors can be eliminated,
the more the field will be restricted to a few big
ones, the easier it will be for those that remain
to levy tribute upon the people by secret understandings and agreements upon prices, division
of territory and the many other expedients that
are now almost uniformly practiced in the industrial world in the very teeth of the Law.
21
The trouble with the discussion of this subject
of Regulation of Prices is that as soon as it is
mentioned somebody shouts "Socialism/ 7 and that
ends the discussion. We never really get to the
examination of the merits of the question. I have
been for some years vainly endeavoring to secure a hearing.
That bugaboo has, however, been robbed of its
effectiveness by our experience with the Regulation of the Railroads and by the success of the
States in dealing with its public utilities. Most
of us remember the persistency with which that
cry was raised during the early life of the Commerce Commission. The speaker from this platform a few weeks ago to whom I have referred
urged as an argument against Federal control of
industries that it had taken twenty-five years for
the present Commission to become respectable.
Even that was an unexpected concession from
Mm. What he really meant was that it .took that
time to enforce upon him that respect for the
laws under which the Commission is acting and
to which he should have accorded respect and
•obedience from the beginning. Judging from his
•experience with our local Public Service Commission he is being taught more rapidly. We
are now not without hope that they too will receive his august certificate of respectability in
the very near future.
The accomplishments of the Inter-State Commerce Commission is the greatest triumph of
modern times in scientific Government. No one
who has watched at close range our progress in
securing control over the Railroads will doubt our
capacity for progressive Government in that direction, It saved us from Government ownership of the Railroads, as the like Regulation of
22
Industrial Corporations will save us from Socialism.
Of all the accomplishments of President Roosevelt's Administrations the standards he set in the
selection of the personnel of the Commission and
the working out of that problem will be an
enduring monument to his courage, foresight and
constructive genius.
It seems strange that in the face of this experience Mr. Bryan should oppose an Industrial Commission with like powers on the ground that it
would be subject to the danger of domination by
the capitalistic interests and might be made a medium of political oppression. No one has ever
charged the present Commission with any such
tendency. The faith of the country in its integrity and independence is as great as that in any of
our institutions.
Is there any greater paternalism in supervising
Agreements of the kind I have outlined so as to
protect the Public than in closing our eyes to them
or winking at them where they are secretly made
with all the accompanying evils of extortion
practiced upon the public and oppression against
those who are not parties to them? That is the
real alternative.
But even if there were no such alternative; even
if it were possible to destroy at one fell swoop all
existing combinations in violation of the Law, to
dissolve and disband the hundreds of Pools, understandings and "Gentlemen's Agreements'*
that are today operating throughout the country
in almost every line of industry, to make sure of
the impossible situation in which there are not
and would not exist any of these "Gentlemen's
Agreements" or understandings—and to enforce
ruinous competition, I submit that it would be dis-
23:
aatrous not to provide a refuge, and that the regulations proposed would still be in the public interest.
The public loses in the end by thkt sort of competition. People cannot go on indefinitely losing
money in business. After the weaker competitors
have been eliminated the stronger ones necessarily recoup themselves out of the consumer, and
then they take whatever more the "traffic will
bear."
Instability and uncertainty of prices is always
the aftermath of disastrous commercial war.
Over-production, which is the fore-runner of this
sort of competition is invariably followed by under-production.
Let us test the operation of this proposed Law
by reference to a few industries:
We mine and supply, let us say, about four-fifths
of the copper production of the world. For the
last few years there has been an over-production of
copper of from 10% to 15%, which has reduced the
price to a point at which the margin of profit is
very small. In some mines it has dwindled to
nothing. The great bulk of this copper is sold
abroad, but owing to over-production it yields an
insignificant and inadequate profit.
Meantime our mineral resources of copper are
being exhausted. The deposits have been so thoroughly exploited that it is safe to say that the
period.of exploitation is about over. It is estimated
that the average life of the copper mines of
the country is less than thirty-five years. The
result of this enforced over-production is to exhaust our resources and to give us nothing in
return.
If there could be an agreement among the mine
owners to reduce their output so as to supply all
24
tbe world's legitimate demands, we should avoid
this 10% of over-production that carries down the
price of the entire product and would husband our
natural resources to that extent, besides giving
us some return for the wealth that is going from
us.
Yet such an Agreement would be a crime under
existing Law. Is this a wise policy? Would it
not be better to permit the Agreement between
the mine-owners subject to the approval of the
Commission, conditioned upon their fixing the
maximum price of copper at a sum which in the
judgment of the Commission would keep the
value of it stable and would allow no more than
a reasonable profit? Would it not perhaps be
good business for the Commission to have the
power to go even further and permit the owners
to fix a higher price for export than for home
consumption if they saw fit to do so, thus stimulating home manufactures in the industries of
which copper forms a substantial factor?
That is precisely what other Governments are
doing in imposing export duties. All the coffee
we consume is subject to such a duty and the same
is true of a great number of other articles.
In like manner is there any advantage to the
community in having the price of barley 60 cents
a bushel one year, and $1.15 the next; or cotton
15 cents last year and 9 cents this year; or in
having the farmers burn their corn for fuel one
year because they cannot get a market for it,
whilst the next year they have none to sell? Why
should not the cotton growers be permitted, if they
see fit, to enter into Agreements so that the surplus from a year of over-abundant crops would
be carried over and made valuable in years when
the crop is short?
25
Such agreements if unregulated and permitted
without restriction might prove oppressive and
dangerous because of the, undue restrictions
or the extortionate prices that could be exacted; but where their legality depends upon
Government supervision and approval, so that
they have the effect of simply steadying the industry, there can be no real objection to them and
they are capable of indefinite use and extension in
the public interest.
The allowance of such Agreements would enable the farmer and the producer to reap the full
benefit of their toil and investment. It would not
be a good thing for the speculative middleman and
it would put an end to the gambler's paradise.
Then and only then will it be possible to enforce
the criminal law against secret agreements in restraint of trade.
In all the discussion of this problem of restoring and maintaining free and unrestricted competition it has been assumed that the Trusts constitute the chief impediment to be overcome and
that if they can be destroyed the problem is
solved. The fact is that the monopolies and substantial domination of industries created in that
form could be counted on the fingers of your
hands.
It is through the Pools and "Gentlemen's Agreements" that competition has been and is being
throttled to a far greater extent than by the consolidated corporations in the form of Trusts. For
every Trust that affects competition to-day there
are twenty pools, agreements or understandings.
If all the Trusts were disintegrated and resolved
into their original competitive parts to-morrow we
would have the country honeycombed with secret
Trade Agreements in those industries within,
26
twelve months as they in fact exist today in the.
bulk of the great industries that are not consolidated and are supposed to be competing.
We are therefore misdirecting and wasting our
energies in concentrating them on the comparatively few Trusts that are able to affect the free
flow of competition. We shall accomplish nothing
helpful until we bring all Inter-State corporations
under supervision where their books and dealings
are subject to scrutiny so that the Government can
ferret out and punish the far more insidious and
dangerous secret (pools and trade understandings.
*
The obstructions to the wise solution of this
question come on the one hand from the political
partisans who seek to make personal and Party
capital out of demagogic appeals to the unthinking for extreme measures and on the other from
the equally selfish or unwise leaders in the financial and industrial world who refuse to recognize
the existence of grave evils and the necessity for
repressive laws of supervision, control and punishment.
From neither of these extremes can we hope
for relief. It must come from the education of
the people through constant agitation and discussion in the forum of public opinion by disinterested citizens of all classes who have made a study
of the subject and who are acquainted not only
with the laws of political economy but with the
practical conditions as well, which is quite another
matter. The efforts of a certain insignificant section of the Press which considers itself alone
qualified to deal with the question to belittle and
discourage discussion as meddlesome and useless
is petty and unpatriotic. We need and should
welcome all the light obtainable.
27
Recent events have in my judgment much hastened the solution by demonstrating the futility of
present methods as evidenced by the breakdown
in the Tobacco case with the accompanying demonstration of the total misconception by the
Attorney General of the requirements of
the situation. Much has been gained by having at last found that we have lost our way
and are barking up the wrong tree. It is but a
step further to put ourseJves upon the right
track and we shall soon be in sight of home.
Is THERE A MONEY TRUST?
An Address
Delivered before the FINANCE FORUM in the City
of New York, December 27th, 1911.
Samuel Untermyer
of New York
IS THERE A MONEY TRUST?
I was asked to address you this evening on the
everlasting problem of the Trusts, but before taking up that inexhaustable topic I want to say
something on the branch of it that I have selected
as the title of my Address.
I think every candid observer familiar with
financial conditions will agree that within the past
ten years there has been an amazing concentration
of the "money power'' in a few hands. There are
men among our leading financiers whose citizenship rises above self-interest and among them are
many who see a peril to the Nation in this rapid
concentration of power brought about by the control over other people's money.
If it is expected that any Congressional or other
investigation will expose the existence of a
"Money Trust" in the sense in which we use the
word " T r u s t " as applied to unlawful industrial
combinations, that expectation will not be realized.
Of course there is no such thing. There is no
definite union or aggregation of the money powers
in the financial world. There certainly is none
that can be said to be in violation of existing law.
If, however, we mean by this loose elastic term
" T r u s t " as applied to the concentration of the
"Money Power" that there is a close and welldefined "community of interest" and understanding among the men who dominate the financial
destinies of our country and who wield fabulous
power over the fortunes of others through their
2
control of corporate funds belonging to other
people, our investigators will find a situation confronting us far more serious than is popularly
supposed to exist.
It is the greatest and most diffcult of our many
perplexing economic problems. This is so although and perhaps largely because nothing is
being done in fastening this power upon the people that is actually illegal. It is therefore difficult to find an adequate remedy, though much
may be accomplished through improved Currency
and Banking Laws and in other ways that will be
hereafter outlined to mitigate. the constantly increasing danger.
"What I shall have to say involves no reproaches
or charges of wrongdoing against the men who
have achieved this power and no serious criticism
against the methods they have employed to secure
their ends. They have exercised the power with
exceptional justice and self-restraint except
where the interests under their protection are
threatened. My criticism is leveled against the
business and financial system that has made such
results possible and which if not corrected is
likely to lead to a moneyed oligarchy more
despotic and more dangerous to industrial freedom than anything civilization has ever known.
A somewhat extended explanation of current
methods of financing the money requirements of
our great Eailway and Industrial Corporations
and of placing corporate securities with the investing public is essential to an understanding of
the origin of this vast power and of the means by
which it retains and increases its hold and becomes more and more concentrated.
We will say that a great Railroad System or
Industrial Corporation requires money through
3
an issue of bonds or stock or that its debt must
be readjusted or its property reorganized. This
may be done to best advantage through a Banking House. If the requirements are large it can
only be done in that way and only through one of
the three or four great institutions in New York
City that are recognized as International agencies
for the issue and distribution of securities. The
clientele of this Banking House consists largely of
financial institutions that are underwriters or
purchasers of securities and of the smaller bankers who have their own clientele of investors.
These bankers and financial institutions are invited by the so-called "Issuing House" to participate in what is known as the underwriting of
the securities that are to be sold. By this is
meant that each participant agrees with the Issuing House, for a stated commission, to take and
pay for the amount of securities for which he has
subscribed, if the Issuing House fails to sell them
within the time fixed by the Agreement.
The Issuing House having thus secured itself
against loss by means of this guaranty or underwriting, thereupon proceeds to endeavor to dispose of the securities. To that end it utilizes its
connections with the financial institutions and
Life Insurance Companies and other large corporate investors here and abroad with which it
must have influence in order to dominate this
class of business.
In practical operation the Issuing House frequently knows where it will place the securities
before it agrees to finance them or to have them
underwritten. It sometimes happens however
that the underwriters are obliged to take and
pay for the securities which the Issuing House
was unable to sell privately and for which it failed
4
to "make a market" through sales on the Stock
Exchange. ("Making a market" for securities
by the way, is the euphonius phrase for describing the process of selling them to the public
at a profit. It has been known in the past to be
accompanied by "wash" sales, newspaper
•' puffs'' and other technical < < details.'' That was
the work of specialists like Keene and Grates, who
were entrusted with this delicate task of "making
the market.")
)
The remarkable feature of this system is that
in practice the Issuing House does not solicit the
subscriptions or ask the underwriters whether
they want to underwrite or for what amount, but
on the contrary it fills out without notice or request a printed form advising each underwriting
banker or institution that it has allotted to him
or it a given amount of underwriting. It is considered by the underwriters a privilege to get the
opportunity. Those to whom it is offered are
taken from a list of Banking friends and adherents of the Issuing House. If the issue is sufficiently large the list generally includes all the
financial interests that are adherents of or are
not unfriendly to and who have not offended the
Issuing House by their officious independence or
by supporting enterprises that were not approved
by the Issuing House.
It often happens that the Banker to whom the
offer is made does not want the business or wo aid
prefer to decline the underwriting or to take less
than offered but he rarely does this, as it might
mean his elimination from the list and the loss of
future opportunities in the way of underwriting
commissions.
5
These commissions that are thus distributed by the Issuing House to the Bankers
constitute a substantial item of the incomes of
banking firms and institutions and are generally
earned without involving any investment. This
patronage and the lively sense of favors to come
make it reasonably sure that the small concerns
will do nothing to interfere with the plans of the
big ones.
In like manner the few big fish in the puddle
have an understanding by which the business that
belongs to each of them is "labelled," so to speak,
and the others take precious good care to leave
these customers to those to whom they have been
allotted.
This arrangement is lived up to regardless of
the jealousies or enemies of the "High Contracting Parties." It is the unwritten law of the
"community of interest" code. It is seldom
broken. Whenever that happens the entire system gets out of joint until scores are settled and
interests readjusted.
If a property for which one of these great
Banking Houses acts as Banker—generally with
a representation on the Board of Directors or a
dominating voice in the management—wants to
make an issue of securities, there is rarely a suggestion of competition. The terms are generally
made between the banker and the officers of the
Company who are often the mere nominees of the
banker. It would be regarded as "subversive of
all precedent and discipline in the financial world
for another banker to compete for such business.
In point of fact the chance is rarely presented. If
it were he would not dare unless he were very
.6
powerful and wanted to invite bitter controversy
and enmity.
The great Issuing Houses on the other hand
leave or direct the minor security issues to their
friends among the less prominent bankers.
These underwriting lists to which I have referred include among the adherents of the great
Issuing Houses the leading financial institutions,
bankers and large investors in every City in the
United States and in the principal Cities of
Europe. The underwriters . act as the distributors of the securities among financial institutions and private investors, but a large part of
the securities are placed by the Issuing House
with the Banks and Trust Companies in which it
has a dominating voice even though no member
of its firm may be upon the Board.
Such are their power and patronage that it is
not necessary for any of the members of the firm
to be officers or even Directors in the financial institutions that they control. The clumsy and expensive antiquated methods of by-gone days of
depending on control through majority stock
ownership and the presence of the owners on the
Board have been largely discarded. The up-todate financier selects his President and the
officers of the institution that he controls. They
take the legal responsibilities and conduct the
current business in return for big salaries whilst
he directs the policy of the corporation and the
disposition of its funds. It is upon the patronage of the corporations that are under his wing
and which he dispenses that the institution owes
its vast deposits which are the chief source of its
profits and influence.
7
The use and disposition of the bulk of the
enormous resources of our great National Banks
and Trust Companies in New York and in many
other Cities are directed by the financial powers
in this way. There are a few notable exceptions.
They are notable because they are exceptions.
How long they will be permitted to remain so it is
difficult to say. At the present rate of absorption it will not take long to bring them into the
fold.
There has been greater concentration of the
money power in the past five or ten years through
the control acquired by these few men over corporate funds that are deposited under their direction.in our financial institutions than in the entire
preceding fifty years. The process of absorption
is likely to continue until a few groups absolutely
dominate the entire financial situation of the
country unless some way can be found to check
their march of progress. The way is not easy to
find for, as before stated, we are not dealing with
acts or methods or with a situation that conflicts
with any existing law.
The organization of the Trusts and the absorption of the small Railroads by the big systems and the accompanying increasing influence
of these great Banking Houses in our Railway
Systems and Industrial Corporations are largely
responsible for the appalling concentration of
this power, although our archaic money system
must bear its.share of the blame for a condition
that is growing steadily worse and that now seriously threatens our industrial liberty.
It was through the organization of the Trusts
that these bankers secured their recently acquired
power over our industries, which had previously
8
been controlled by their individual owners. Their
money requirements were supplied either in the
localities in which they were situated or through
the sale of their commercial paper by note brokers and otherwise. Their funds were deposited
largely in local Banks although the large concerns
occasionally carried balances in the money centres.
They had no dealings with the great Banking
Houses and no occasion for them. Individually
they were generally too small to be of interest to
the Bankers. With consolidation and the organization of the Trusts the Banking Houses assumed
the direction of the affairs of the new Companies,
They formed the combination, put their hall-mark
upon its securities, marketed them on the Exchanges of the world, and having thus become
responsible for the New Company, they naturally
took an active part in its affairs and assumed control of its finances wherever they were of sufficient importance to attract them.
In that way New York City became the financial
headquarters of the Trusts, and the Bankers took
charge of the distribution of the patronage involved in the deposits of the money of the Trust
among the Banks and Trust Companies.
It is said that the average daily bank balance
of the United States Steel Company is about $75,000,000; that of the Tobacco Trust is said to be
$20,000,000 or more, whilst the average daily balances of deposits of the many other Trusts whose
financial headquarters have been transferred to
New York, must amount conservatively stated to
many hundreds of millions of dollars. When to
this is added the influence of these bankers in
designating or directing the depositaries of the
funds of the principal Railroads of the country
into the institutions controlled by the respective
9
Issuing Houses we begin to get some faint conception of the sources of their power.
The strength of a financial institution is of
course measured by the character and amount of
its deposits rather than by its capital and surplus.
It is but natural that the Banking House that directs and dispenses these deposits should practically be able to control the disposition of them
by the Banks and Trust Companies in which they
place these moneys, since the growth and prosperity of the institution are measured so largely
by this element.
Thus it has come to pass that less than a dozen
men in the City of New York are for all practical purposes in control of the direction of at least
75% of the deposits of the leading Trust ComT
panies and National Banks in the City of New
York and of allied institutions in various parts
of the country.
This is true notwithstanding the fact that these
men do not own a majority of the share capital of
these institutions, although in the past few years
they have become large owners in some of them.
Their control is not however dependent upon
their stock ownership. It rests upon the power
they get from the use of other people's money
—the money of millions of shareholders in the
railroad and industrial corporations over whose
destinies they preside in point of fact though
they may not be themselves officers or directors.
By those unfamiliar with the situation it will
be asked how it is possible for these men to wield
such autocratic power over corporations whose
shares they do not control and which have Boards
of Directors composed of representative men in
the community.
10
The answers are—
(1) That the current business of lending money
is in the hands of the officers and that they are
with a very few notable exceptions nominees of
the particular Banking House with which the institution is known to be affiliated; and
(2) The Directors, and particularly the Executive Committee, which is usually the only part
of the institution that knows the details of the
business, is made up largely of bankers and men
who (however wealthy) are themselves either
large borrowers from kindred institutions or are
the recipients of patronage from the dominating
Banking House in the form of underwriting or
subscriptions, and are frequently both.
I do not mean to imply that the officers and Directors of these institutions are violating their
duty in thus placing the funds at the disposal of
the Issuing House. Experience up to this time
has shown on the contrary that this method of
doing business whilst it may prove disastrous to
the country, has been very profitable for the institutions concerned and that they are growing
daily more prosperous under this system.
It is however none the less true that this power
is built, not upon the use of their money nor of
the individual money of their friends and clients,
but upon the money that belongs to the Stockholders of the corporations whose finances they direct
and from which they derive this enormous patronage.
No fault could be found with the most unrestricted use by these men of their own money
within lawful limits. It is quite as important to
our prosperity that we permit and encourage the
free play of enterprise in the men of wealth in
11
all departments of human endeavor, as that we
seek to restrain their activities in the use of the
moneys entrusted to them by the people in the
accomplishment of their vaulting ambition to
rule the finances of the country. So long as they
use only their own money we have nothing to fear
from their mad race for power. It is when they
tap the resources of the merchants in our Banks
and the savings of the people in our Life Insurance Companies and industrial and railroad corporations that we must stay their hand no matter
how well-meaning may be their purpose.
From what has been said it follows of course
that these same institutions thus controlled besides
lending their moneys as so directed are naturally
inclined to buy the securities that are issued or
dealt in by the Banking House—thus adding to
the ability of the latter to handle and digest vast
amounts of securities which they would not otherwise be able to do.
Nor must we in dealing with this subject lose
sight of the endless ramifications of power that
lead from this network of conditions. The financial institutions throughout the country still look
mainly to New York for their investments.
Through these connections the great New York
Banks and Trust Companies whose operations I
have been describing are able to act in a sense
as agents for the Banking House with which they
are identified in distributing the securities of the
latter among the smaller institutions and through
them among the investors throughout this country and abroad.
With this situation now in mind it is easy to understand that the stock market and commodity
markets of the country are at the mercy of this
small body of men who thus control the deposits
12
of these Banks and Trust Companies. They can
at will put money rates up and down, make and
unmake "bull" markets and " b e a r " markets,
create and compose panics, prevent new enterprises and destroy existing ones by reducing or
curtailing credits, and in a thousand ways rule
the fortunes and destinies of the business men and
smaller financial institutions of the country.
To what extent they have as yet used their comparatively new-found power we need not now inquire. They have been irresponsibly charged with
having precipitated a recent panic but there was
no evidence to sustain the charge. If it were true,
the victim would probably be the last one to utter
a complaint and perhaps he would not know in
what way his ruin had been brought about. If he
did know and ever expected to "get on his feet"
again he would be the last one to tell.
I do not intend to imply that any of these
charges are true. Personally I do not believe they
are. We are bound honestly to assume that these
men notwithstanding their inordinate ambitions
and all the temptations that surround them realize the stupendous public responsibility that rests
upon them.
But assuming all this to be true and that they
have gone unscathed through the crucible of temptations under which most men would fall, what
assurances have we for the future, when they
have passed away—what right have we to permit
such irresponsible power to continue unchecked
and unregulated?
No matter what may have been their genius or
how well they may deserve of us, no man or body
of men in private life and without defined obligations to the public or legal restraints should be
13
permitted to enjoy such an orgy of power if a way
can be found to avert it.
I am sure these gentlemen will be the first to
agree with that proposition, for I can find nothing
in the manner in which this perilous situation has
been created to justify the slightest imputation
upon their methods in bringing about the result.
And yet how easy it is to see now what a potent
force is wielded by the Banking House so situated
to prevent new competition against any Trust that
is under its protecting care! It will certainly not
invite competition against the industry for which
it has assumed responsibility with the public and
may fairly be expected to fight every time its
prestige is threatened. It would be a brave man
or body of men who could withstand that sort of
an attack. It would require almost equal courage,
for an existing competitor to refuse to follow the
lead of the corporation that is under that sort of
protection in regulating prices and restricting
production.
No writings, agreements or understandings are
needed. The competitor knows that the power is
there. If he requires credits he knows too, that
there are a thousand good reasons for which they
may be curtailed. The power to direct to whom
money may be loaned includes of course the
equally important function of directing to whom
it shall not be loaned. If he is dependent—as he
must be—on railway transportation for his raw
material and for his finished product, it is not
necessary to tell him the difference between what
it means to his business to have prompt facilities
or delayed transportation, even though he be under the protection of the Interstate Commerce
Commission.
14
To those who are contemplating new competition the path can be made so thorny and impossible by the use of this financial power that no
body of men would care to tread it. If they are
engaged in other industries reprisals are easy
and many. They may want to make bond issues
or sell stock or get large credits from the Banks—
all of which are out of the question if it is known
that they are unfriendly to the "powers that be."
With the protection of the Issuing House taken
from the Trusts the argument is not without force
that they will invite competition if they levy excessive tribute upon the people but in omitting
this proviso the champions of the Trust leave out
the controlling factor.
Here again I do not intend to assert that any
such methods have yet been used. It may not be
necessary to use them. The knowledge that the
power is there is sufficient without an overt act.
Congress is grappling with the question of endeavoring to particularize prohibited acts of oppression on the part of the Trusts as grounds
for criminal prosecution. The attempt seems to
me impracticable. It would not in any event be
necessary to resort to such acts where the Trust
is the creature of any one of these great financial
powers and is under its protection. That fact
alone would ensure it against competition.
To the extent to which the further formation of
Trusts may be allowed or tolerated the danger
will be accentuated for it will result in adding to
the concentration of the control of money in these
few hands. They are the people who in the ordinary course of things w^ould be selected to organize and finance a great combination. They are
best fitted to distribute the securities and to make
15
and maintain markets for them. Upon them
would rest the responsibility for the success of
these ventures and they would naturally control
them and their patronage.
The same is true though to a lesser extent of
Railway consolidations. The direction of their
funds drifts into the hands of their financial
sponsors and from that control radiates the power
over the funds and over the institutions that receive and use those funds in the manner described.
A scientific money system with a Reserve National Bank as its central idea would tend to relieve the danger of the situation provided the
Bank is operated by the Government as a part of
the Treasury system and is not allowed to fall
under the domination of the great financial interests whose operations we have been discussing.
There are however so many powerful selfish interests attempting to influence this question of
Monetary Reform that we are not likely to obtain
what we need without a fierce struggle. That will
take a long time.
It will mean that our representatives in Congress must undergo a liberal education on a most
difficult and technical subject before they will be
able to avoid the pitfalls that have been set for
them.
Meantime something may be accomplished by
placing the Clearing House Associations under
the direction of the Comptroller of the Currency
and of the Federal Courts so far as concerns their
jurisdiction over National Banks and under
that of the Superintendent of Banks and of the
State Courts so far as these Associations deal
with State Banks and Trust Companies.
16
It is amazing that we should have continued all
these years to permit this important public function to be performed by a self-constituted private
body free from judicial and legislative control.
It is not necessary to charge that these gentlemen have not properly performed their duties,
nor to discuss that phase of the subject. It is
sufficient to say that it ought not rest with any
body of men to say whether or when or under
what circumstances a Bank should have the necessary privileges of the Clearing House given to
or taken from it. It is not proper to vest in any
body of men—however responsible, respectable
and public-spirited—the uncontrolled power of
determining when a public institution shall be
compelled to close its doors. That should be a
Governmental function where the institution has
been permitted by the Government to receive the
deposits of the people.
The despotic control exercised by the Clearing
House Association is archaic and dangerous. The
same money power that controls the Banks who
dominate its management can control the Association.
We are cursed with so much useless and vicious
legislation that every time the subject is broached
of passing a new law, however necessary it may
be, our people instinctively turn away with misgiving, if not in dread. We do not stop to consider how little legislative control we have over
the most important parts of our financial system,
and especially over those that most require supervision, such as the Stock Exchange and the
Clearing House Association. They are performing public functions and it is high time that they
were recognized and treated as subject to legis-
17
lative and judicial control. Thus far they have
existed and they are now existing above and beyond the law.
Surely every one will admit that it should not
rest with a body of Bank officers to summarily put
one of their competitors out of business without
redress or right of review by any public official.
There are some things that we can do by legislation to ameliorate existing conditions and to
prevent them from growing worse. Among them
I suggest the following:
1. Limit the class of securities other than commercial paper that Banks may purchase.
2. Prohibit them from becoming Syndicate underwriters as Life Insurance Companies were disqualified from such participations by the Act of
1906.
3. Limit the proportion of capital and surplus
that may be loaned Bankers and Brokers on
Stock Exchange securities, so that ample funds
will always be available for commercial credits
instead of being at times diverted to speculative
Wall Street purposes to the injury of legitimate
business.
4. Prohibit every Bank from owning or loaning upon the stock of any other Bank or of any
Trust Company. It was never intended that a
Bank should be a "holding" company.
5. Further restrict the investments of our great
Life Insurance Companies by State legislation so
as to limit them in the purchase of bonds to those
that have been continuously paying interest for
at least five successive years. There are over
one billion dollars in the three great New York
18
Companies. No policyholder cares to have his
Company speculate with his savings in new and
untried bond issues, especially with the disastrous
results of which we know and which may recur at
any time. The more of their money is required
to be invested in first mortgage on unencumbered
improved real estate and the further they are
kept away from Wall Street the better for the
policyholders.
6. Prohibit any Bank or Trust Company from
acting as an Issuing House for the sale of securities to the public. That is not its proper province. A disastrous enterprise may so destroy the
credit of an institution as to force its liquidation,
to the injury of depositors and the inconvenience
of business.
7. By all means prevent the enactment of the
provision of the pending Aldrich Bill, which would
permit the establishment of branch Banks.
8. No person or firm should be permitted directly or through "dummies" to be a Director of
more than one Bank or Trust Company in the
same city where the institutions would be naturally competitive but for the community of interest thus created.
9. All corporations having securities for sale
should be required in the interest of the shareholders to sell them in competition in the same
way in which the Federal and State Governments
and the Municipalities are now required by law to
sell their securities.
10. Place the Clearing House Association under
the direction of the Comptroller of the Currency
and the Secretary of the Treasury with respect
19
to the National Banks and under that of the State
Banking Department with respect to State institutions.
11. Place the issue of securities of Interstate
Eailway Corporations under the control of the
Interstate Commerce Commission and those of
industrial corporations under that of an Industrial Commission, with ample requirements for
full publicity as to all security issues before they
are authorized. This would involve a full disclosure of all bankers' commissions, similar to
the requirements of the English "Companies'
Acts." It would also enable the Commission to
determine whether the proposed arrangement
had been reached as a result of competition. In
that way much could be accomplished toward securing independence in corporate financing.
The admirable and comprehensive Eeport of
the Eailroad Securities Commission advising
against Federal control of security issues of Interstate Eailroad corporations at this time seems
to me unnecessarily timid and is unfortified by
the logic that characterizes other features of that
instructive document. The chief arguments, that
it might precipitate conflicts with the State Commissions and might be construed as vouching for
the value of the securities, answer themselves
without comment and are answered in other parts
of the Eeport.
It is not claimed that these remedies would
obliterate the existing dangers any more than it
is believed that we can ever get rid of the Trusts.
All we can now do is to regulate them and to
keep a watchful eye upon them to see that they
do not further encroach upon our business freedom.
20
For the reasons above stated, the proposed
Congressional investigation of the situation, that
has been miscalled the "Money Trust," is to my
mind important as the basis of pointing to legislation affecting the Trusts and our Monetary
System. Congress should know the extent to
which the National Banks and the Trust Companies are under the control of these banking
firms, the reasons why competition between the
great and small Bankers is practically non-existent and the financial system that has brought us
to our present plight, with a view of proposing
such corrective and preventive measures as the
situation may demand.
I have dealt so much more fully than I had expected with the title of my Address that little
time is left for the discussion of the general subject of the Trust Problem. Its importance and
complexities require extended and independent
treatment. I shall accordingly confine myself
this evening to a few observations upon the very
able Address that was delivered from this platform two weeks ago by Mr. Victor Morawetz, who
is a recognized authority on all questions relating
to corporations, and for whose opinions I need
hardly say I share the high regard entertained
by our entire profession.
I differ however from Mr. Morawetz in his main
contentions and particularly from his construction of the meaning and effect of the recent decisions of the United States Supreme Court in the
Oil and Tobacco cases and from his implied prognostications as to the outcome of the pending suit
against the Steel Company.
The arguments which he has consistently been
advancing along this line for some time past seem
21
to me to put too narrow a construction upon the
First Section of the Anti-Trust Act.
If I correctly understand his able presentation
and its subtle reasoning he would confine the operation of the First Section of the Law to the
cases in which the acts of the parties operate to
restrain the trade of others and would not consider that Section as applying to the acts of the
parties to the Agreement. The only limitation
which under his construction is placed on the
freedom of competitors in an industry to combine
is that imposed by the Second Section of the Act,
which prevents them from creating or attempting to create a monopoly.
No combination between competitors however
effective in restricting competition among themselves would, according to this construction, come
within the prohibition of the Act unless it had the
effect of absolutely restraining the trade of
others not engaged in that industry or of creating a monopoly.
In support of this conclusion Mr. Morawetz
points out that the Law does not attempt in words
to prevent the restriction of competition. Its
only purpose is to prohibit restraints of trade as
distinguished from contracts that merely restrict
or diminish competition.
I agree that every restriction of competition
does not amount to a restraint of trade or commerce between the States or with foreign countries. Every restriction of competition is not unlawful.
It seems to me however that any restriction of
competition that affects the particular industry
and which is of such character and extent as to
operate as a direct restraint of trade, whether ac-
22
complished by the act of the parties to the
Agreement or of others, is within the meaning
and condemnation of the First Section of the
Act, even though such restraint does not amount
to a monopoly or an attempt to create a monopoly.
There are many restrictions of competition
created by the parties to an Agreement or by
consolidation that whilst not constituting a monooly or an attempt to monopolize are so comprehensive and far-reaching that they materially and
directly affect and restrain the trade of every person dealing with the industry. In fact most combinations have that effect.
If for instance fifty competitors should combine into two independent competing Companies,
each controlling one-half of the business of the
industry, I should insist that this would be such
a restriction of competition as would constitute a
direct restraint of trade within the prohibition of
the Act. The public, instead of enjoying the
benefit of competition among fifty dealers, would
be limited to two.
In answer to the inquiry as to where we would
place the line of demarkation between lawful and
unlawful combinations according to this view of
the Law my answer is that it would not be difficult in the practical administration of the Act to
determine to what extent restriction of competition constitutes mere incidental and immaterial
restraint and when it amounts to a direct restraint
of trade. It seems a more workable and wholesome construction than to say that no restriction
of competition constitutes a direct restraint of the
trade of others unless it constitutes a monopoly.
23
It is difficult to see how under Mr. Morawetz's
reading of the decisions the Supreme Court could
have reached the conclusion that the Standard Oil
Company was an unlawful combination in all its
parts. There were certainly some branches of
the business as to which neither it nor the Tobacco Company could be said to be monopolies.
If he has correctly read these decisions he may
be right in his conclusion that the Steel Company
is a lawful organization but to me both the form
and substance of the organization are clearly
contrary to the Law as interpreted by the Court.
The Act does not say that a complete restraint of
trade amounting to a virtual monopoly must be
accomplished in order to bring the offending corporation within its prohibition. Any arrangement or agreement that tends to restrain trade is
prohibited.
A partial restraint is sufficient so long as it is
not merely incidental. It must be a direct restraint.
It is easy to understand why our ablest corporation lawyers believed the organization of
the Steel Company to be legal at the time it
was accomplished, in the light of the Knight case
and the state of the authorities at that time. To
some of us it is not however so easy to understand
why they should adhere to that opinion in the face
of the adjudications of the past ten years, every
one of which seems to me to be opposed to that
view. Nor should we lose sight of the fact that
at the time of the organization of the Steel. Company it was made up of constituted Companies,
some of which were in themselves combinations
that were virtually monopolies within the defini-
24
tion of that term as laid down by the Supreme
Court.
Mr. Morawetz doubts the Constitutionality of a
National Incorporation Law and of the requirement of a Federal License and he opposes the suggestion that Congress vest in a Commission the
power to regulate prices on the two grounds that
it would also be unconstitutional jmd would be
productive of greater evils than any resulting
from Trusts and Monopolies.
There has been no suggestion so far as I know
to have Congress delegate to a Commission the
power to fix prices. The proposal has been persistently misunderstood or misrepresented
although it has been for the past year under discussion and has been repeatedly set forth in precise terms.
It assumes the power of Congress at its option
to enact a National Incorporation or License Law
to which corporations engaged in Interstate trade
may be compelled to conform. It involves also the
appointment of a Commission with power over
Interstate Industrial Corporations similar to the
powers of the Interstate Commerce Commission
over Railroads and with the additional power to
take charge of the disintegration of corporations
that have been adjudged unlawful and to determine whether corporations seeking a Federal
Charter or License are organized and operating
in conformity with law.
Wherever the persons engaged in an industry
are able to demonstrate to the satisfaction of tins
Commission that competition has reached a ruinous- stage, such of them as see fit to do so may
enter into an Agreement fixing prices and limiting production. This Agreement is subject to the
25
approval of the Commission. If it finds that the
terms are reasonable, that the condition of the industry warrants such an arrangement, that the
prices proposed to be charged admit only of a
reasonable profit and that the intended restriction of output is sufficient to meet all legitimate
demands the Commission may permit the making
of the Agreement for such term and under such
circumstances as it shall approve. Every existing
and every future competitor may become a party
to the Agreement by application to the Commission.
The purpose of the arrangement is to enable
competitors who are engaged in a ruinous and
compulsory warfare of competition to rescue
themselves by an open arrangement under
legal restrictions and supervision, instead of
forcing them to the alternative of either driving
one another out of business or of making some
secret arrangement in violation of law that permits of no supervision or protection to the public. Its object is to permit that to be done openly
which would be done in any event, and to avoid
making criminals of our business men. It is intended to allow the weak lawfully to save themselves from annihilation by the strong.
If such an arrangement can be said to be the
vesting in Congress of the power to fix prices,
I respectfully insist that there can be no Constitutional question as to the right to regulate Interstate Commerce to that extent.
If such a contract as that which Mr. Morawetz
recommends on page 23 of his Address, subject
to the approval of a Federal Commission, is not
to provide for pooling of profits, fixing of prices,
distribution of territory, restriction of output or
26
for some like arrangement, it is difficult to understand to what the recommendation refers.
This general subject has reached the stage of
discussion at which few will differ from the statement that a permissive Federal Incorporation Law
can serve no useful purpose. There is no objection, however, to such a law in connection with
a compulsory Federal License.
Whilst the statement has frequently been
made that a compulsory National Incorporation
or License Law as applied to corporations engaged in Interstate trade would or might be unconstitutional, our attention has not been called
to any pursuasive argument in support of that
view.
The Constitution reserves to Congress the
power
1
' To regulate commerce between the States
and with foreign Nations."
The right of the States to issue Charters is of
course subject to that reserved power. If it is
necessary in order to regulate Interstate commerce that corporations engaged in it shall be
required to be chartered under Federal Law that
requirement necessarily overrides the State Charter so far as concerns Interstate corporations.
The distinction in principle between the right
of Congress to delegate power to approve Agreements of the character described and the delegation of powers to the Interstate Commerce Commission over Eailroads that has been sustained by
the Courts is not apparent upon the face of the
argument as presented.
The recent utterances in favor of the Federal
Eegulation of Interstate Industrial Corporations
27
by public men and from high authorities within the
ranks of the great corporations as contrasted with
the criticism and denunciation with which these
suggestions were met from the same quarters only
a few years ago, are most encouraging. It is
manifest from this rapidly changing attitude that
the early champions of Federal Regulation will
see their expectations realized, and far sooner
than they had hoped or anticipated.
It cannot come too soon for the general welfare. It will mark the passing of an era of unexampled lawlessness, to be succeeded by radical
and much needed reforms in corporate management and by a revived and wholesome respect for
and observance of the law.
It is only a few years ago, and yet it seems like
a message from a past age of semi-barbarism,
since the New York Stock Exchange had on its
regular list, and as its most active securities, such
stocks as Amalgamated Copper, American
Sugar Refining Company and others in its socalled "Unlisted" Department, that made no
statements of their affairs, gave their shareholders no information as to their property and were
operated as blind gambling pools for the benefit
of the "insiders.'*
For a time all agitation against that scandalous condition by which the public was fairly swindled out of hundreds of millions of dollars by false
rumors, stock jobbing and similar methods was
denounced by eminent and conservative Bankers
as hurtful to business and the work of demagogues
and by other epithets similar to those by which
every attempted reformer of financial methods
has been characterized.
2S
Would such practices be tolerated to-day? The
answer to that question demonstrates how rapidly
and satisfactorily our financial system is coming
into harmony with the spirit of the times.
A LEGISLATIVE PROGRAM
TO RESTORE BUSINESS FREEDOM
AND CONFIDENCE
A n Address
DeKvered before the ILUNOIS MANUFACTURERS'
ASSOCIATION at the Hotel La Salle,
Chicago, January 5th, 1914.
By
Samuel Untermyer
of New York
A LEGISLATIVE PROGKAM TO RESTORE BUSINESS
FREEDOM AND CONFIDENCE.
M R . P R E S I D E N T AND GENTLEMEN :
Permit me to congratulate you upon the enlightened patriotism of your action of a few days ago as embodied in the
Resolution passed by your distinguished and influential body
and forwarded to the Interstate Commerce Commission approving and urging the granting to the railroads of the increase in rates for which they are asking. This reversal of
your previous action on the same subject is evidence of
rare courage and far-sightedness on your part. It was
largely due to your effective protest that the previous
application was denied. It would not be quite accurate to
characterize your present attitude as entirely unselfish since
you must have reached the conclusion, which is shared today by most of us who have studied the subject and want to
be just, that unless rates are increased the railroads will
have no sufficient basis of earnings to attract the capital that
they need to maintain effective service and to meet the increasing demands for transportation facilities.
You have doubtless become convinced, as have many of
us, that the railroads are not a thing apart. Our industrial
prosperity is so interwoven with theirs that the former cannot exist without the latter. It is however none the less of a
tribute to your breadth of vision that you, who will have to
bear this burden, were able to cast aside the smaller immediate selfish considerations and to look beyond to the eventual
outcome. That was no mean accomplishment in the face of
the intensely competitive conditions under which you are
operating*
It is true that great wrongs have been perpetrated
upon the community by the railroad managements of the
past with rare exceptions; that in their present staggering load of debt and capitalization, dishonesty, reckless
waste and misguided ambition are largely represented and
2
that if the modern standards of public accountability to which
it is proposed to subject them hereafter were applied, their
present rates would yield a munificent return on the capital
invested.
But that is all in the past. We must face the conditions
as we find them instead of trying to evade our problem by
harping back upon the wrongs and blunders that have been
perpetrated. The experience will be well worth all that it
has cost us if we know how to profit by it. The country owes
you a debt of gratitude for the courage with which you have
met this new responsibility. It is upon this big outlook on
the part of our business men that we may confidently rely for
our industrial growth. Your action again furnishes gratifying evidence that our confidence is amply justified.
Now that Congress is about to deal with the great problems of regulating corporations and suppressing unlawful
combinations it becomes important that we approach this difficult subject with an open mind and that all doubts as to the
purely constructive purpose of the work shall be set at rest.
The reactionary advocates of a "let-alone" policy fail to
realize that we cannot build an enduring structure upon
rotten foundations and that the clearing of the debris is as
important a part of the work of construction as is the rearing
of the new structure.
It is characteristic of the blindness and timidity of predatory capital that the impending legislation, like all innovations and restrictions, however wholesome, should be regarded with unreasoning dread and foreboding, as though
our National legislators could have any other wish or purpose than to safeguard legitimate enterprise.
If our leaders in the world of affairs, profiting by your
inspiring example, will cooperate in the work of readjustment
and reform, with their minds purged of the prejudices imbedded by the years of imperfect laws and oppressive practices in the interest of special privilege under which business
has been permitted, the results will be accomplished without
friction and in their eventual interest. If they will meet but
half way the men who are impersonally and unselfishly seeking only the public welfare, our business and finance will be
speedily put upon the firm ground of new moral standards
8
and public accountability that will square with the spirit of
the times and they will soon wonder why they ever tolerated
the practices against which the country has risen in angry
protest.
If we are to secure the best results the alarmists who
profess to see in the impending legislation a cause for unsettling legitimate business must be sent to the rear. Our
recent experience with the Currency Bill should once more
have reminded us that we must not permit ourselves to be
moved by the cries that come from a boisterous little corner
of our country, where the special interests are concentrated.
They always display these false distress signals at every attempted economic reform on the theory that so far as they
are concerned it is always a good thing to "let well enough
alone" and that every change involves an interference with
their privileges. Their voices have been more potent with
us than has been accorded the same class in any other part
of the civilized world because our legislators are less responsive to the public will and far more timid than the popular representatives of other nations in curbing the excesses
and unjust prerogatives of capital.
Ours is the most reactionary of all civilized countries in
the pending peaceful revolution for the readjustment of the
division between Capital and Labor. England and Germany
are half a century in advance of us in all that pertains to the
proper protection of labor and the scientific distribution of
the burdens of taxation. Their systems of insurance against
accident, old age, sickness and unemployment and the new
English land tax laws are the models of constructive legislation that we shall follow when we have reached their stage
in the onward march toward industrial and economic liberty.
This small but powerful privileged class of ours postponed
the levying of an income tax for almost a quarter of a century, although it had long been recognized the world over
to be the most just form of taxation. With their vast power
and machinery to manufacture and mislead public opinion
through their press bureaus and subsidized organs they are
enabled to make an amount of noise and to stir up a degree
of uncertainty and alarm over every attempt at progressive
legislation that are grossly disproportioned to their real
influence and that are dangerously misleading.
4
We are afflicted with lamentably short memories for the
pranks that are played upon us and are being continually
exploited on that account. But even we can remember that
only a few weeks ago Congress was solemnly warned by National and State Bankers Associations in their innumerable
Conventions assembled, and speaking in suspicious unison
as though inspired from a common fountain head, that if it
should enact a Currency Bill based on the principle of a
Government currency or under exclusive Government control or if we divided the system into eight or more regional
banks the country would be plunged into financial chaos and
ruin.
Leaders in the financial world with a supposed sense of
responsibility vouched for statements and predictions that
they must blush to find recorded. Truly we have short and
charitable memories!
If these leaders and the influential Metropolitan newspapers that voice their views and that are now lauding the
Currency legislation they were so busy in denouncing had
dealt patriotically and impartially with the subject the country would have been spared an anxious period of business
uncertainty.
This and other experiences, such as the denunciation of
the Income Tax Law during the early years of its agitation
as a socialistic measure intended to confiscate property and
the recent extravagant claims and absurd prophecies made
during the discussion of the Tariff Bill, should warn us not
to take too much to heart what may be said during the heat
of argument where great selfish interests are arrayed against
proposed legislation.
And yet we are in danger of again finding ourselves listening to their advice as to the best way of curbing their
unlawful activities as though they were the most disinterested of onlookers. It is this tendency that is largely responsible
for so much of the inefficient patchwork of compromise legislation that is the almost invariable result of the hard-fought
battles for industrial reform between the people and "the
interests."
The underlying principles that should guide us in dealing
with this question of corporate regulation are surprisingly
simple but the subject is so technical and full of perplexity
5
in the working out of the details that the field of debate and
opportunities to mislead are boundless.
It goes without saying that we should embark on no policy and should include in our program no measure that is not
purely constructive and that does not look solely to the future.
The objects should be to cure existing defects, eliminate
abuses and make the laws under which business is to be conducted so plain that " h e who runs may read." Nothing is
to be gained by reprisals in the way of criminal prosecutions
for past violations that were committed before the Courts
had construed the law as we now understand it and that
have been remedied and definitely abandoned. Continued
violations should be severely punished but there should be
complete amnesty and a clean slate so far as concerns criminal prosecution as to those of the past.
The proposition on which these prosecutions are threatened, that crime can ever be perpetrated innocently or unconsciously or without criminal intent is so revolting to the sense
of justice that it was not surprising to find that juries would
not convict for acts done when the law was uncertain except
where actual wrong and oppression were established.
The history of the Cash Register case furnishes a striking illustration of the complete change in judicial construction and popular understanding of the law since the XL S.
Supreme Court created the confusion and put back the enforcement of the Sherman Law for more than a decade by its
unfortunate decision in the Knight case.
The Government had brought criminal proceedings in
the IT. S. Court at Boston against the Cash Register Company
and its officers based on the complaint of three competitors
of an attempt to destroy them by oppressive and unfair business methods. Whilst the indictment was pending the Cash
Register Trust actually bought out its competitors, thus securing a complete monopoly. This apparently met with the
full approval of the Cleveland Administration, for strange
as it may now seem the then Attorney-General moved in open
Court and secured the dismissal of the indictment on the
ground that the violation of law had been removed by absorbing the complaining competitors! Thus was the law in the
early years of its sporadic and imperfect enforcement made
6
the instrument of blackmail with apparently no adequate conception of its public purpose or usefulness.
AVhilst "ignorance of the law is no excuse" as bearing
upon the plain duty of the Government to effectively disintegrate the unlawful combinations that were formed during
this period and that are still being maintained in violation
of the law as we now understand it, the pursuit by criminal
process of the men who organized and are conducting these
combinations based solely on ivhat they then did in organizing them is quite another question. They acted on the best
legal advice based on what had been announced as the law
by the highest Court in the land. To prosecute them criminally on that ground alone for acts committed prior to 1909,
when the law was fairly settled, would be vindictive and monstrous.
That is quite a different matter from disbanding and removing the violations which it is the duty of the Government
to do—not merely in form, but in substance and practical
effect, which has as yet hardly been seriously attempted and
is not believed to be possible with the present defective legal
machinery.
What then should be the lines along which to frame
legislation to carry out the declared policy of the Nation for
the suppression of the Trusts and the more effective regulation of our interstate corporations?
The legislation will have to deal with three classes of
corporations, railroad, industrial and financial—besides the
elusive secret arrangements and agreements in the form of
pools and for the fixing of prices and output between competitors.
Laws are needed for the corporations that are equally
well adapted for all three classes but there are other laws
applicable to one class that are not adapted to the others.
The first and preliminary need is to actually and effectively dissolve existing violations among the railroad and industrial corporations and to provide adequate machinery for
that purpose. The railroads should be required to part with
their interests in coal, iron and other properties whose products they are engaged in transporting and to confine themselves strictly to the business of transportation. They must"
cease to act as "holding companies" owning the securities of
7
competitive roads. Where they hold stocks of competitive
roads they should be absolutely divested of them. Where the
securities held are those of connecting or non-competitive lines
they should be deprived of all voting power on their holdings
and given a limited time either to acquire the outstanding interests on terms to be fixed by the Interstate Commerce
Commission and thus to own the property if it is a legitimate
part of their business, or to* part with their holdings. It is
against the public interest and a fraud upon the minority
stockholders that a railroad property should be managed or
its policy dictated by another railroad Company.
Railroads are not intended as security-holding Companies. If they have accumulated profits that are not likely
to be needed in the future development of their own properties they should distribute them to their shareholders instead of using them to augment the power and opportunities
for illegitimate profit of the men who have secured control of
the Company. It may be a good thing for the railroad magnate and for the banker to make such use of the Company's
funds but it is a bad thing for the shareholders and the public. The shareholders can do their own speculating. Not
the least healthful and encouraging sign of the approaching
44
New Freedom'' is to find that our financiers are at last
awakening to the realization of that fact. But what a pity
that they are so slow to feel the public pulse!
Experience has demonstrated that the procedure of the
Court is not adapted and is wholly inadequate to the work
of disintegrating outlaw corporations whether in the railroad or industrial world. They must not only be segregated
but kept segregated.
The accomplishments thus far of the
Courts in that direction are utterly inadequate and must
continue so until we have an executive body to supervise
the work, to study each situation separately, to formulate
and recommend to the Court a comprehensive plan of disintegration, to have constant access to the books of the outlaw corporation and its segregated parts and see to it that
genuine competition is restored.
This is not an impossible task but it is an exceedingly
difficult one that will involve constant vigilance and that cannot be accomplished by mere judicial fiat or decree nor by a
8
series of decrees. It is peculiarly the task of an executive
body as distinguished from a judicial tribunal.
Whilst freely conceding to the learned Attorney-General
and to his able and distinguished predecessor the best intentions, the fact remains that the execution of the judicial decrees thus far rendered have proven generally inadequate.
The outcome in the Standard Oil case is especially flagrant
and pitififl. It is a standing reproach to the administration
of justice and serves only to bring the Courts into general
contempt. There has been no restoration of competition between any of the severed parts of the old Trust. The lines
of territory are as rigidly adhered to as before the decree.
None of the supposedly "segregated" Companies invades
the territory of the others. It would have been wiser never
to have prosecuted the suit than to have rested with such a
puerile outcome as an object-lesson.
The recent experience in the case of the Union PacificSouthern Pacific is not much of an.improvement in point of
practical effectiveness, however well it may work out on
paper. Much as I respect and admire the ability, earnestness and sincerity of the learned Attorney-General I am
unable to share his optimism on this supposed achievement.
To me it gives promise of being another in the list of mountains of litigations that have labored to bring forth mice of
achievement.
Many lawyers were surprised at the determination of the
Supreme Court that the control of the Southern Pacific by the
Union Pacific constituted a violation. They were generally
regarded as primarily connecting lines complementing one
another and together constituting a through line rather than
as competitors, although there are minor respects in which
they indirectly compete through their connections.
But after the Court had determined that they were actual
and potential competitors it surely could not have been contemplated that the Union Pacific before relinquishing control of the Southern Pacific would be permitted to select and
instal the entire Board of Directors and official management
of the competitor whose control it was required to surrender.
Yet, strange to say, that is precisely what was done and done
after the decision of the Supreme Court. And still more
strange, that extraordinary action was permitted, to stand
9without question when the decree was finally entered with its
elaborate provisions for Trusteeing the stock, depriving the
U. P. stockholders of their voting power on the S*. P. stock,
etc.
The superstructure was changed but the common foundation and basis of control has been permitted to stand. And
so Ave have the anomalous situation that although no U. P.
stockholder who holds S. P. stock is permitted to vote the
latter, the officers and directors of the S. P. are, and I predict
always will be in effect, barring death, the identical persons
who were selected by the Union Pacific board after the union
had been ordered severed. Of what earthly use was it to
prevent U. P. stockholders from voting on their S. P. holdings merely because they also held U. P. stock when the U. P.
management had already designated the entire S. P. directory
and management?
Notwithstanding the fanciful theories of academic gentlemen as to control of corporations by their shareholders it
is common knowledge among men of affairs who are familiar
witli corporate management that it is practically impossible
to change the control of a great corporation with widely
scattered stockholdings. The one or two banking houses that
dominate the managements of most of our vast trans-continental railroad systems have rarely a substantial stock interest and yet their control has remained indefinitely undisturbed. One of the best known and safest factors in corporate management and the one on which the banking interest
knows from experience it can most confidently rely, is what I
would christen stockholder inertia. It is incurable, unchangeable, immovable. It survives mismanagement, dishonesty and
every form of corporate abuse. It is more than all other
causes combined responsible for the corporate distrust and
other ills from which we are suffering.
The Messrs. Morgan have for years dominated and still
control and will doubtless continue to control the policy of
the New Haven system as effectually as if they personally
owned it, notwithstanding the great wrongs, and flagrant
blunders and violations of law that have been perpetrated
during their management and yet they own only a
few thousand shares of the stock. * True, there is a block
of about 46,000 shares held by the Mutual Life Insurance
1-0
Company in which the Morgan-Baker influence is potent
and that the proxy on this stock has always been at the
beck and call of that interest. It should have been sold
years ago when the Life Insurance Companies were directed
to dispose of their stockholdings and the policyholders would
have been $5,000,000 better off if it had been done. But that
is another story.
The 46,000 shares thus held are however a mere trifle
as against the hundreds of thousands of shares of small
scattered holdings that feel the utter hopelessness of trying
to protect themselves. The helplessness and supineness .of
American shareholders are proverbial. They do not understand cooperation as it is practiced in other countries. Every
attempt to organize them for their protection is cried down
as "blackmail" by the great interests whose power and safety
lie in the continued helplessness of shareholders and these
interests are assisted by an important part of the Metropolitan press that sometimes consciously but more often unconsciously voices their views and wishes.
If when the Government undertakes the separation of
the New Haven properties it permits the New Haven directors
to select from their own number and instal the officers and
directors of the competing Companies of which they are ordered to relinquish control, can it be fairly expected that this
will accomplish practical segregation or that competition will
result?
Yet that is precisely what has been done in the Union
Pacific case and we must expect it to prove ineffective in practice no matter how it may work out in theory. It is a historical fact that no board of directors of a great corporation with
widely scattered stockholdings has ever been dislodged, no
matter how great may have been the provocation for a
change.
It is possible that where, as in the case of the contested
election of the Illinois Central Railroad, the struggle for control was between financial giants, the stockholders may be
partly aroused from their lethargy into making a slight impress upon the result but even in that solitary instance the
greater banking power triumphed over its weaker rival and
the management remained unchanged.
The outcome of the Mutual and New York Life Insurance
11
Companies' elections in 1906 furnished another instance of
the permanency of a self-constituted board of directors. The
most distinguishd body of public-spirited citizens ever banded
together organized as a "Policyholders' Committee," with
Hon. Bichard Olney at their head and with five then Governors of States among their number to secure a change of
management as the result of disclosures of the Hughes-Armstrong Investigations. The old managements had been selfconvicted, their heads had been forced to resign and vast
sums were unselfishly expended to arouse the policyholders
but it was of no use. Less than 40% of them took the trouble
to vote and of those a majority did so upon the solicitation
of agents of the discredited managements who dominated the
election. In any other country the discredited men would
have been swept from office over-night. They would not have
dared to make the fight and their subservient agents would
not have dared assist.
Xo disintegration of unlawful combinations can be accomplished by the Government or the Courts that does not
take these controlling factors into account.
If there had been in existence a Commission such as is
here suggested to which the Court could have referred the decree in the U. P.—S. P. case for execution or if the Interstate
Commerce Commission had been given power, (as it should
be so far as concerns railroads) the first and fundamental
duty of the Commission would have been to supervise an election for directors of the S. P. Co. from which the U. P. management and its agents would have been excluded. It would
have invited prominent independent stockholders to form a
Committee, to name a ticket and to circularize and secure the
•cooperation of their associate shareholders. The result thus
achieved would have represented the will of the independent
owners instead of, as now, recording merely the will of the
IT. P. as to who should constitute the Board of Directors of
their liberated competitor.
There can never be an effective or impartial enforcement
of the Anti-Trust Law without the aid of a Commission or
like executive body and for the following reasons in addition
t o those above stated:
12
1, The cases thus far selected for prosecution have necessarily been chosen at random either because by their size or
prominence they have challenged public attention or in consequence of specific complaint lodged with the Department
of Justice. They are said to constitute an infinitesimal fraction of existing violations.
2. It is impossible for any prosecuting officer to cope,
unaided, with the herculean task of enforcing this law against
violations that have been accumulating over a period of 23
years. The cases are selected for prosecution after a necessarily haphazard fashion that invites and accomplishes an
unequal enforcement of the law and thus breeds contempt for
the administration of justice.
Inasmuch as the Courts by their earlier rulings and the
Government by its inaction may be said to have sanctioned
the formation of the Trusts that are now found to have been
illegal, at a time when their organization might readily have
been enjoined and prevented, the policy of the present Administration in assisting those against which proceedings
have been begun or are impending to remove violations and
bring themselves within the law through the procedure of
"consent decrees" is right and just and highly commendable
provided such a policy can be made effective. The trouble
about this plan is, that however plausible it may appear and
however it may impress the theorist, these decrees are not
and cannot be made workable in practical operation. There
is no constituted authority charged with the duty of looking
after the continued obedience to the judgments.
Besides, if the remaining tenure of office of the AttorneyGeneral were twenty years instead of three years at the present rate of progress he would leave office at the end of his
term without having dealt with more than a fraction of the
cases requiring his attention. This would not be due to lack
of energy and industry but to the gigantic proportions of the
task.
The impossible is being attempted with the inevitable result. Those who are agitating to let the present law alone
and against supplementing it by the necessary machinery are
either seeking its failure or are unable to appreciate the limitations of judicial processes and procedure.
13
3. The number of open or known violations is trifling as
compared with those that rest in secret agreements or understandings. The latter are by far the more dangerous to the
community because the tribute thus levied is accomplished
without our knowledge. The country is honeycombed with
cases of trade understandings in which no specific agreement
is provable.
These violations are far more difficult to reach than the
Trusts. They are discoverable only by a body with power
to examine the books and papers of all interstate corporations
and to require their officers and directors to testify under
oath. In that way suspicious uniformity of price and division
of territory among competitors and other earmarks may be
discovered, as the giving of rebates hj railroads is now traced
and is rapidly being ended by the Interstate Commerce Commission, No Court and no form of judicial process could
uncover such acts. Courts were not intended for any such
purpose. Their function is to redress established wrongs,
not to ferret out secret violations. No one should be haled
into Court except to answer a specific charge or claim. This
character of investigation is peculiarly within the province
of an executive body. In the absence of the requisite machinery the Attorney-General has been compelled to and is
constantly making use of Grand Juries for that purpose. It
is now his only alternative but he should be supplied with
the legitimate means to execute the laws.
4. I t is quite as important in the public interest to supervise the future conduct and operations 'of corporations that
have been declared unlawful and segregated as to segregate
them in the first instance. The natural tendency of former
associates will be to find ways of cooperation rather than to
be forced to compete. So long as it continues to be the policy
of our law as now settled to compel unrestricted competition
and forbid cooperation even to and beyond the point of the
financial ruin of all the competitors it will require a constant and watchful eye with the broadest inquisitorial
powers to prevent competitors from exercising the natural instinct of self-preservation and to detect the endless
subterfuges to which they have successfully resorted in the
14
past and present and will doubtless continue to employ in the
future.
No such vast power of determining corporate life or
death as is now being forced upon the Attorney-General in
the "consent decrees" which he is negotiating should be
lodged in any appointive executive officer of the Government
however devoted he may be to the public interest. The precedent is vicious. Ours ceases to be a Government of laws
restricted by rules prescribed by the representatives of the
people, and becomes a fitful, uncertain and irresponsible government of men with every case as a law unto itself, to be
decided by the whim of one man and subject to no fixed rule
or right of appeal. But it is a condition and not a theory
that confronts the learned Attorney-General. There is
no intention to minimize the work that is being accomplished by the Department of Justice in anything that I have
said. Never in my time has the head of that great department
been occupied by a man of higher purpose or with greater
resourcefulness, progressiveness and concern for the public
welfare or more in sympathy with the laws he is called upon
to enforce. No incumbent has been intellectually and temperamentally better fitted for that great post. But not even
he can accomplish the impossible as I believe this task to be
without the aid of an executive body to assist him.
I know that he is assuming this vast responsibility with
great reluctance and that it could not be in safer hands if it
is to be entrusted to any one man, overburdened as he already
is with responsibilities that no man should be asked to bear.
He is compelled to take upon himself duties that should not
be thrust upon him and that from the very nature of the
case he cannot properly perform or supervise.
For the reasons stated I regard the establishment of an
Industrial Commission (into which the present Bureau of
Corporations should be merged) and the enlargement of the
powers of the Interstate Commerce Commission as fundamental requisites to any effective scheme for enforcing the
segregation of unlawful combinations under the Sherman Act
Such a body would not supersede the Attorney-General. It
would supplement his work and greatly lighten his intolerable responsibilities. It is the only means of supervising the
execution of these decrees and of supplementing them if ex
15
perience shows that they are not accomplishing the expected
results.
Whether the Interstate Commerce Commission should
be authorized to permit reasonable pooling agreements between railroads and whether the proposed Industrial Commission should be empowered to approve contracts between
business competitors fixing prices and output between the
contracting parties to protect them against ruinous competition are debatable questions that must be met and solved in
the near future though they are not a necessary part of the
immediate program.
A large and influential class of our students of economics
claims that the law should compel uncompromising and unrestricted warfare between competitors to the annihilation
of the weaker if necessary. They argue that to sanction
agreements between competitors, no matter how restricted and safeguarded, would amount to having1
the Government fix the prices of commodities and that
this is a long step in the direction of State Socialism. On
the other hand it is denied that the program involves any
such proposition. It is argued (1) that only those competitors will join in such an arrangement as choose to do so,
leaving the others still free to compete; (2) that the Commission would be authorized only to approve agreements
where the price fixed is not above actual cost and that the
agreements thus approved would operate only to furnish business a lawful refuge against ruinous and annihilating competition and only to those who invoke aid; (3) that compulsory
destructive competition is an economic curse and not a benefit ; that it must inevitably end in monopoly; that competitors
will not in any event obey and cannot be forced to respect a
law that compels them to ruin themselves and that unless
they are furnished open, lawful means of relief they will
shield themselves behind secret illicit methods, as is now
being done; (4) that as distinguished from the results of
Trusts or consolidations competition will still be maintained
between the parties to such agreements in reducing the cost
of production, as each will reap the benefits of his own economies and will thus have the incentive to utilize the most improved appliances and other means of reducing costs; (5)
that none of the evils of stock watering or exploitation, clos
16
ing of plants, etc., that have been attendant upon the organization and flotation of the Trusts and that have served as
the incentives for exacting huge profits to pay dividends on
fictitious capital would be involved in or be permissible under
these arrangements and that they would do away with the
excuses that have been urged in favor of combinations as a
necessary measure of self-protection.
It is further argued that as such agreements would nee-,
essarily be approved only for short periods and subject to
constant revision by the Commission the parties would be
forced to retain their separate organizations in effective condition in constant readiness to resume unrestrained competition whenever the)^ fail to agree among themselves or to
subscribe to the conditions imposed by the Commission.
These are briefly the reasons presented in support of
these agreements similar to the German " K a r t e l s " but I
doubt whether Congress is prepared at this time to enter
upon any such revolutionary scheme of trade regulation nor
is it, as before stated, a necessary p a r t of the present program involving the inauguration of an Industrial* Commission.
I firmly believe that such regulation is bound to come
and within the present decade, but the Industrial Commission
will have quite enough to do in the early years of its existence without having such comprehensive and far-reaching
powers thrust upon it. Congress will probably want to feel
its Avay slowly and to develop the system guardedly as was
done in dealing with the Interstate Commerce Commission.
The powers of the latter have been gradually enlarged year
by year until it is today the most effective regulating body
in the world. It has averted Government ownership of the
railroads, which in my judgment would be a National catastrophe and from every point of view represents the greatest
triumph in popular government yet achieved.
When the recommendations of the Pujo Committee for
the exclusive regulation by that Commission of the issue and
sale of securities of interstate roads have been enacted into
law and when the segregation of unlawful combinations
among the railroads and the reorganization of insolvent
roads have been placed under the control of the Commission
we will have reached the final stage of the journey m
17
railway regulation. The long years of controversy on that
subject are nearly ended and the country is to be congratulated that we are on the eve of the successful fruition of the
most enlightened body of legislative and administrative
accomplishment ever known.
With such an inspiring object-lesson why should Congress hesitate to repeat the experience in dealing with Industrial regulation? Is there less constructive statesmanship now than there was in 1887? Our present problem is
child's play as compared with that which we have so successfully solved.
It is part of the proposed plan that every corporation engaged in interstate commerce having a gross annual business
exceeding a given amount, say $2,000,000 or a capital or assets
exceeding, say, $1,000,000, should be required to take out a
Federal License under rules to be prescribed by the Commission and thus subject itself and its affairs to the jurisdiction
of the Commission. In that way and not until that is done
will the secret violations of the Anti-Trust Law be discoverable and an equal and impartial administration of the law
secured against all offenders for the suppression and punishment of future offenses. Such punishment must not, as now,
be directed against the innocent shareholders. It must reach
the individuals who are the real perpetrators and who now
hide behind the flimsy corporate cloak. I t should leave no
room for uncertainty as to what is the law.
Having now set up the Industrial Commission and clothed
it with the broadest inquisitorial powers, what further laws
a*re needed to liberate business from the thraldom under
which it has been suffering and to prevent like abuses in the
future?
Twenty-two separate Eecommendations for constructive
laws covering the subject are set forth in the Eeport of the
Pujo Committee. Some of them are embodied in proposed
Bills that are attached to the Eeport. The Committee explained that owing to the expiration of the then Congress
there was not time to formulate the Bills embodying the
others.
There are also pending in the Senate and House a number 'of Bills embodying proposed remedies. Many of these
18
a r e valuable, some a r e essential a n d t h e r e a r e others t h a t
seem to me impracticable a n d u n s o u n d . T h e limits of this Add r e s s will r e q u i r e m e to confine myself to t h e m o s t cursory
e n u m e r a t i o n , a n d w i t h o u t extended a r g u m e n t in s u p p o r t of
the p r o p o s i t i o n s , of those t h a t I r e g a r d a s a n i m p o r t a n t p a r t
of a body of constructive laws t h a t is t o d e s t r o y the existing
d a n g e r o u s concentration of t h e control of credit in t h e h a n d s
of a few men a n d to r e s t o r e business freedom a n d confidence.
I a p p r e c i a t e t h a t this is a wide field to cover b u t a m satisfied
i t can be successfully accomplished, w h e n the. i n t e r e s t s conc e r n e d know t h a t the G o v e r n m e n t is in d e a d e a r n e s t a n d t h a t
makeshifts will not answer.
ADDITIONAL R E M E D I E S .
As
A F F E C T I N G GENERALLY B A N K S AND ALL CLASSES OF I N T E R -
STATE CORPORATIONS :
(a) Interlocking officers and directors should, be prohibited:
(1) No person should be eligible as an officer or director
of a National Bank who is an officer or director of any
actually or potentially competing bank or trust company
in the same city, town or village.
(2) No state bank or trust company located in any city
of 100,000 inhabitants or over should be permitted the use
of the mails or telegraph in interstate business which has
upon its board of "directors any person who is also an officer
or director of any such competing bank or trust company.
(3) No National bank shall own or hold and no state
bank or trust company located in any city of 100,000 inhabitants or over should be permitted the use of the mails
or telegraph in interstate business that owns or holds any
of the shares of stock of any other bank or trust company.
(4) No railroad or industrial corporation should be
granted a " license to engage in interstate business and it
should be made unlawful for it to continue in such business if any of its officers or directors are officers or directors
of any actually or potentially competing business or if any
of its shareholders are the registered or beneficial owners of
more than five per cent of the share capital of any such
competing corporation.
(5) No person engaged in business as a private banker
taking deposits should be an officer or director of a bank
nor should any person interested in the business of furnishing railroad supplies be an officer or director of a railroad corporation nor should any officer or director be per-
19
mitted to make a profit or commission on any transactions
with the corporation of which he is such officer or director.
(6) The "dummy" director should be eliminated by requiring every director to have a substantial beneficial interest in his own name and right, free from claim. He
should be in the actual and exclusive possession of the
certificate of stock.
(7) It should be the duty of all the officers and directors .
of every such corporation to file annually a sworn statement showing compliance with the above conditions.
What Mr. Brandeis aptly describes as the rule that "No
man shall serve two m a s t e r s " should be written into every
line of the law 'of corporations and its observance rigidly enforced. Mr. Brandeis has performed a conspicuous public
service by his illuminating educational campaign, in his'interesting and instructive series of Articles in Harper's Weekly entitled "Breaking the Money Trust".
The very recently and belatedly announced change of
policy on this subject on the part of our leading banking
house gives gratifying evidence of the power of public sentiment, provided the offer of surrender is genuine. It is to be
regretted that the announced conversion is not more complete. The action thus far taken by that firm is most unsubstantial and unconvincing.
The published list of resignations is significant for its
omissions. It does not include any of the great institutions
of which the First National Bank, The National Bank of
Commerce and the National City Bank are instances. Again,
whilst some of the partners of the firm resign from the Board
of a given Company one or more remain, which seems to indicate that the move is more in the nature of a business convenience than a surrender to public sentiment.
Doubtless it will all come in time. Let us be patient and
trustful in the hope that this is only the beginning, otherwise
it is misleading and useless.
The' public will do well not to exaggerate the significance of this widely heralded step. Even if it be followed by the expected further resignations by the members
of the firm from all the Boards of -potentially competing
banks and railroads and industrial corporations, it may mean
very little in and of itself. I t may, so far as concerns at
least the bank resignations, be prompted more largely by the
20
provisions of the new Currency Bill that prevents directors
from making a profit out of their banks, than by -any other
consideration.
It is possible also that this is regarded as an opportune
moment to sever formal official relations with the tottering
New Haven structure and with other like ventures that are
marked for judicial investigation and discipline. It is significant in this connection that the only three Companies in which
the entire representation is surrendered are the New Haven,
New York Central and the Telephone Companies—all of
which are now under fire by the Government. It so happens
'that questions of rate increase or decrease are under consideration in these particular cases.
It is also noticeable that the. potentially competing Companies in which partners of the Morgan firm retain their
directorships are far more numerous and important than the
few from which they part official company and that the extent to which Congress proposes to apply the prohibitions
against directors and others occupying conflicting trust relations is not yet realized by those who are to be affected. It is
still further worthy of observation that whilst the Voting
Trusts of the Guaranty and Bankers Trust Companies are
dissolved "in deference to public sentiment", the Voting
Trust is still retained in the Southern Kailway, under which
the Morgan-Baker alliance have absolutely controlled the
property for twenty years, to the exclusion of the stockholders and without ever having paid a dividend on the common
stock during all that time and that all other Voting Trusts
carrying complete control are likewise retained by them.
The people are likely to require far more convincing evidence of a desire to defer to public sentiment than appears
from the action thus far taken. I have no doubt such evidence will shortly be forthcoming although the announcement
made furnishes no encouragement of the voluntary solution
which it was hoped would be forthcoming.
There is the further-fact that the re-financing of the only
three properties 'from which all the Morgan partners have
resigned is. likely to involve a vast amount of profitable
•financing for a banking house. The new code of corporate
ethics.is not going to permit the banker to sit on the Board
and fix his own bargains with the Company whose stock
21
holders, he is supposed to represent. Messrs. Morgan doubtless realize this and it may have had its effect in deciding
them to retire from those particular Boards so as to be free
to participate in financing the new requirements. Everything is grist that comes to the banker's mill. Even where he
finances a property on to the shoals he creates business for
himself in pulling it off!
In advancing these suggestions I have no intention of
impugning the good faith of the action taken. On the cont r a r y I believe in its sincerity and must accordingly assume
that it ifc but the inception of a really comprehensive policy.
But assuming this to be the fact, as I do, the mere abatement of the evil of interlocking directorates will not by any
means eliminate or even correct the concentration of the control of credit and industry from which the country is
suffering.
The interlocking director is but one -of the many symptoms of the disease, which lies far deeper. Its importance
has been exaggerated. There are others equally significant.
You cannot eradicate the disease by merely treating one of
the symptoms. All the evils complained of may exist without the interlocking director. In eliminating him we must
see to it that he is not supplanted by the " d u m m y " director.
That would be an aggravation of the disease rather than a
cure. The Voting Trust, the fiscal agency agreements, the
depositary arrangements by which private bankers hold
the deposits of the corporation that they dominate in one
way or another and the secret understandings that masquerade under the name of "banking ethics", all of which were uncovered by the Pujo Committee, are vastly more effective as
means of control. It is the interlocking of various forms of
control rather than any one practice that together constitute
the system. And so we must not exaggerate the importance
of any single factor or mistake the symptom for the disease
in treating the fundamental problem.
{!)) Holding Companies:
(1) No corporation should be permitted to own or hold
the shares of or be interested in the business of an actual
or potential competitor.
(2) No corporation should acquire, own or hold any
shares or interests in any other corporation whatever, even
though non-eompetitive except with the express consent pre*
22
viously obtained in each instance of the Interstate Commerce Commission or the Industrial Commission as the case
may be. Wherever permission is granted a corporation to
acquire or assume the practical control of another by stock
holdings or otherwise, it should be made conditional upon
the full and continued protection of all the outstanding
holdings in the controlled corporation and to that end the
dominating corporation should be required to assure to
the minority or outstanding stockholders the option to sell
their holdings on the same terms as were paid for such practical control. In cases in which the control is secured
through the purchase of junior securities the Commission
should have power to require that the principal, interest or
dividends upon the prior securities of the Company thus
controlled should be effectively guaranteed by the controlling Company. Nor should the latter have the right to dismantle the property or discontinue or divert the business
of the controlled Company without the unanimous consent
of the security holders and shareholders of the latter.
I do not agree with those who would absolutely prohibit
all corporations from acquiring or holding the stocks of
•other Companies. There are many cases in which this sweeping prohibition is neither wise nor practicable. It would prevent the organization of purely security-holding Companies
which are very desirable as a means of equalizing the risks
of investment for small holders. It would also prevent many
useful co-operative enterprises for exploiting mines, patents, etc.
The prohibition against holding Companies should be
directed against and confined to the stocks of competing companies and to protecting minority holders against the injustice and oppression that have been and are. being extensively
practiced upon them by the use of their property in the interest of the controlling Company. No stockholder should
•ever be compelled to submit to control of the property in
which he is a partner by another company in the same line
of business. Every corporation should be maanged and its
policies directed solely in its own interest and never in the
interest of another Company.
(c) To prohibit stock watering:
This is one of the most difficult of the problems with
wdiich Congress will have to deal especially in its relation to
23
industrial corporations. It is important on the one hand
that good-will shall be recognized as property. It is the
most valuable form of property. Without it the tangible assets in a manufacturing business are worth 'only a fraction
of their cost. Tools and machinery have value only insofar
as they represent a profit-earning capacity. I t would be
fc>olhardy and misleading to base capitalization solely on
tangible assets. A business that can earn $100,000 a year
over a term of years on an investment in plant of $500,000
is intrinsically worth more than the same class of business
t h a t earns the same amount on double the investment. There
should be no absolute prohibition against issuing stock for
good-will.
There should however be rigid restriction and supervision of such issues, among which I suggest the following:
(1) The stock so issued should not exceed in amount the
tangible assets of the Company at a fair value.
(2) It should represent good-will that is reflected in the
actual and ascertained net profits-averaged over a number
of consecutive past years on a basis of an average amount
of profit of not less than 6% as determined and certified by
independent public accountants and should not include anything for future prospects or undetermined earnings.
(3) All certificates representing stock issued for goodwill should be stamped as so issued and should be known
and dealt in as "good-will" stock.
(4) No stock so issued should be salable publicly or privately or available as * collateral to any bank loan or subject to listing or dealings on any public exchange for the
term of two years after it has been issued.
(d) To require disclosure of profits on selling
securities:
To accomplish this purpose the carrying through the
mails or other interstate agencies of any letter, circular, advertisement, inducement or representation soliciting or affecting the purchase or sale or offer to purchase or sell any
securities of a corporation should be prohibited unless each
such letter, circular, advertisement, inducement or representation fully sets forth the character and value of the assets represented by such securities, the total liabilities and
net earnings of the corporation; in the case of a newly organized company there should also be required a full disclosure of the amount paid to the vendor in cash, and secur
24
ities, and the fees, profits, gains and commissions of all bankers, brokers, promoters and intermediaries.
(e) Cumulative
Voting:
In order to secure representation for the minority stockholders on the Boards of Directors the Federal power should
be exercised to the uttermost limit. To that end National
Banks and all corporations that can be brought within Federal jurisdiction either through the Commerce or Post Roads
clauses of the Constitution should be required as a condition
of doing interstate .business or of using the mails to so amend
their charters as to provide for cumulative voting, thus securing to each interest in the Company the representation to
which it is equitably entitled. By this means if there are,
we will say, nine directors to be elected, each one-ninth of the
stock will be able to elect one director. The majority will
still control, as it should, but the intolerable situation of 51%
taking unto itself the entire representation to the exclusion
of any voice for the remaining 49% will be ended. This
equitable method is now made compulsory by the Constitutions of a number of the States such as Pennsylvania and
Missouri. I t is an important reform in the direction of assuring honest management. I t enables the minority to know
what is going on and thus in a measure to protect itself. The
fact that it has been so long delayed is in itself a most severe
arraignment of our corporate system.
(/) Voting
Trusts:
No adequate reason for their existence has ever been
offered except as an incident to the reorganization of insolvent corporations. In banking corporations they are a cainparatively recent and exceptionally vicious form of government. The bank widely advertises an imposing array of
men of reputation as an inducement to attract deposits. The
depositor assumes that these directors are elected by the
shareholders. He finds to his surprise that the shareholders
have shirked their duty by surrendering the power and the
obligation to select the directors to two or three bankers who
are active or potential competitors (generally the former)
and who by the exercise of this power control the funds of
25
the institution. In the two cases that were discovered by the
Pujo Committee the existence of the Voting Trusts through
which over $400,000,000 of resources were controlled was
generally unknown to the depositors or to the financial community in which the Companies conducted their business.
They are inexcusable.
Nor is there any excuse far permitting them in railroad
or industrial Companies except in rare instances in which
they have been useful to prevent a big, powerful competitor
or a banking interest representing such a competitor from
securing control of a weak property during the period of
strain following its reorganization and they have seldom
proven an effective protection in such case. They have very
generally been oppressively imposed by large interests upon
a prostrate defenseless property in course of reorganization
where the interests were scattered, unable to protect themselves and virtually forced to surrender their voting power
upon the demand of the reorganizers.
The Southern Railway Company came under the control of Messrs. J. P. Morgan & Co. in that way nearly 20
years ago and has ever since been and still is so held.
In like manner over 100,000 miles of railroad properties
came under the domination of a few of our leading bankers
to the exclusion of the true owners.
These Voting Trusts should be prohibited except when
allowed by the appropriate Government Commission, for
cause.
(g) Against
Fiscal
Agents.
This practice cannot be too severely condemned. Its
purpose is to place the financial management under the control of the bankers who whilst not themselves bound to furnish the money requirements of the corporation are yet in
the position to dictate terms and to prevent the corporation
from borrowing elsewhere, as "banking ethics", so-called,
forbids any other banking house from interfering. The result of these arrangements is to render competition impossible and to secure to the fiscal agent a "rake-off" on every
financial transaction of the corporation. It is a practice that
belongs to the crude moral standards of a by-gone generation. No corporation should be permitted to enter into any
26
agreement that interferes with its entire freedom in supplying its needs for money or supplies in the open market as occasion requires or that compels it to pay tribute for so doing.
Here again it is gratifying to note that the practice is being
discontinued following its exposure and condemnation in the
Keport of the Pujo Committee.
Perhaps I may be pardoned for digressing here to remark that the power of the great financial interests through
their vast press organizations to at least temporarily poison
the public mind was never better illustrated than in its inspired attacks upon the work of that Committee and the abuseand persecution of all who were concerned with it. The aims
and purposes of the Committee were persistently and systematically misrepresented from the beginning of its labors
and no stone was left unturned in the effort to discredit its
findings. It is surprising to what extent the press of the country unconsciously takes its cue from New York on certain
subjects. The Committee was denounced for having dared to
so much as attempt to examine one witness who had been
evading its jurisdiction and whose illness appears to have
disappeared with the termination of the life of the Committee.
Again it was arraigned for having courteously examined a
witness who voluntarily appeared before it in apparent perfect health because in the course of events he died in a foreign country some months later. No pretext was too farfetched to be seized upon as a basis of attack and this campaign was so cunningly waged that the country did not realize the means by which the poison was being injected into-its system. I t has taken almost a year of education to remove the false impressions thus created in the minds of
members of Congress and others who were unable to follow
the official record. But as the Eecord is being more generally read and the subject studied the work is at last being*
judged upon its merits. The public, also, is awakening to an
understanding of the extent to which it has been misled by
this press campaign.
It stimulates and revives one's faith in justice and n*
our institutions to reflect upon the final and complete recognition of the value of this work in the face of the overwhelming:
and almost impossible odds that were arrayed against it.
27
(h) Private bankers as depositaries of the funds of
interstate
corporations.
Here is another vicious practice that the law should prohibit. So far as concerns the deposits of funds of interstate
railroad corporations with private bankers it is quite as
legitimate a subject for regulation as affecting rates as is
the control of bond and stock issues. Private bankers are*
subject to no supervision, they are required to keep no reserves, no publicity of their affairs is exacted of them and
they are under no' restrictions as to the use they may make
of the funds on deposit with them. They are at liberty to
use the funds of interstate corporations secretly and for their
own profit as they see fit and without accountability. The
situation is incongruous and intolerable. It amounts to a
National scandal. I t appeared in evidence in the Pujo investigation that a single banking house held over
$160,000,000 on deposit in that way at the date of
the inquiry, including the deposits of 78 interstatecorporations. The Committee was unable to learn the names
of the corporations, the amounts of their deposits or how the
funds were invested. I t was simply a "blind pool", so far
as concerned the depositors. The officers and directors of
the corporations who had dared to thus dispose of its moneys
represented upwards of a million shareholders, who doubtlessnever suspected any such abuse by them of their official duty..
The most recent object-lesson of the result of this absenceof supervision of private bankers occurred a few days ago<
in New York City where one such "private bank" failed owing its depositors $2,500,000 and with no discernable assets.
Whilst the State of New York had been quick to regulate
the petty, insignificant, and uninfluential little bankers it had
not dared to include the powerful ones.
If railroad companies suffer losses the public service
suffers. No corporation should be licensed to do interstate
business whose funds are deposited in any place other than
a duly incorporated bank or trust company. There should
be no such thing as a private bank of deposit. We should
abolish it as we have done away with private life, fire an(J
casualty insurance.
28
(i) Compel the incorporation of Stock Exchanges:
The intimate and fundamental bearing of this requirement upon the entire subject of corporate reform is not generally understood. Yet there is no aspect of the question
that is of greater importance. It lies at the foundation of
all corporate reform. The release of our corporations from
banking control depends upon the ability to secure for them
an open market for their securities. That involves setting
up the machinery that will enable them to appeal directly to
the public. So long as the Stock Exchange remains an irresponsible, unincorporated body, subject to no public control, the public will have no confidence in its published reports of sales and purchases as representing genuine transactions." Until Government protection is furnished against
wash sales, matched orders and manipulation of prices the
Exchange cannot be helpful as the medium between the corporations and the investing public which it can and should
be made. So long as its members may with impunity rehypothecate the securities of their customers in excess of the
debt owing them and pay one another in full out of the proceeds of the membership seat in case of insolvency to the exclusion of the defrauded customers, the Stock Exchange is
no fit instrument for carrying out the great reforms in corporate management for which it might otherwise be used.
The laws passed in New York State in 1913 on this subject are worse than worthless. Since the exposure of its
methods by the Pujo Committee and under the spur of public condemnation following these exposures the Exchange has
inaugurated many reforms. I believe it is anxious to conform to public sentiment but this furnishes no reason for
permitting it to remain above and beyond the law—a law
unto itself. There should be no disposition to impose any
conditions that would unduly hamper its disciplinary control
over its members or reduce the value of membership nor
would any such results follow from incorporation. The great
body of the membership is composed of men as honorable as
in any other calling. In some respects its code of ethics is
exceptionally high but in others it has in the past been most
deplorable. There are men in its ranks who will compare
favorably with our most public spirited citizens. Its power
29
and usefulness can be greatly enlarged. Through its agency
the requirement for publicity as to corporations whose securities have a public market can be enforced through its listing
department and the entire system unified. Full disclosure
of profits, fees, commissions of bankers, brokers and intermediaries can be enforced as to new issues and the investing public can be thus made to feel safe in buying securities
in response to public offers by advertisement without the
mediation of bankers, as in other countries. No step that
could be taken wTould be so effective toward securing the independence of corporations but the Exchange must be under
rigid supervision before it can perform this service.
It must be incorporated and subjected to Governmental
control so that the books of its members may be open to inspection by the authorities at any time to detect and punish
frauds upon the public; to expose manipulation of values; to
prevent the conversion of customers' securities and unjust
preferences in case of insolvency. Then and only then will
its listing of a security and the publication by a corporation
of a prospectus under its auspices inspire confidence.
The books of members are now subject to the summary
inspection of the Committee 'of the Exchange for any purpose.
The suggestion that the authorities are not to have a like
power in the public interest to detect frauds upon the public
interest is indefensible.
Why should the greatest National and International security market be permitted to spread broadcast all over the
world through the mails, cables, telegraphs and telephones
the records of transactions over which there is no public
supervision. They may be true or fictitious records. Courts
of justice, trustees and the public act upon them as evidence
of genuine values and yet we are told that the operations of
this body should be regarded as the transactions of a private
club with which the public has no concern!
Surely the day for that attitude has passed. The Stock
Exchange is an integral and essential part of the mechanism
of our National financial system. I t has large public duties
and responsibilities and must be made amenable to public
control. I t should be the recognized and responsible instrumentality of complete publicity in corporate affairs and its
hall-mark upon a prospectus should be a guaranty of honesty
30
;and genuineness. No plausible argument against its enforced
Incorporation has ever been advanced.
The proposed suggestion a few days ago of the so-called
""Association of Stock Exchange Partners" that proxies be
masked from owners of stock whose shares are pledged with
brokers for use in corporate elections is amazing for its
audacity. It demonstrates once more the blindness of
these gentlemen to the public sentiment of the country concerning their usefulness as a factor in general corporate reform. Investors will not be slow to resent the proposal that
their securities are to be used to strengthen the grip of Wall
Street upon the control of the corporations of the country by
.giving to the brokers the power to elect directors.
It requires no great stretch of the imagination to predict
what would happen with such proxies so controlled whenever
a great bank or banking house made known its wishes as to
how the stock should be voted. The brokers are dependent
on the banks for accommodations and the latter in turn are
largely dominated by private bankers. This is especially true
-of the few great banks that specialize in loans on Stock
Exchange securities.
The tendency of the times is and will continue to be
further and further away from that sort of control. It is to
be hoped that eventually such control will rest with the shareholders. This latest proposal should go far toward stimulating such a movement in self-protection against the threatened action. In order to accomplish this, cooperation will
be needed but of a very different sort and under very different auspices from that which has been suggested. Publicspirited men, who are free from entangling alliances and
whose motives will be above suspicion, will have to organize
protective and cooperative organizations of bondholders and
stockholders and policyholders to advise and guard the interests of those concerned to see to it that the boards of directors represent the. interests that own the corporation and
not the mere fiat of a self-constituted authority, as is now
largely the case.
If the Stock Exchange wants to test public sentiment on
this subject let it exercise any such power in a single instance
and we shall see how long it will take to arouse the body of
31
shareholders into active and emphatic protest. It will require some such incentive to arouse them.
There is however a wide field of genuine usefulness for
such an Association and one in which its motives cannot be
misinterpreted, if its purpose is to assist the shareholders.
I refer to the task of securing protection and representation
of the minority stockholder and to the furtherance of the
other reforms .above indicated. Such efforts would be recognized as public spirited and disinterested and would go
far toward rehabilitating the Exchange in public confidence
and esteem.
But they had better keep their hands off the manipulation of the proxies of their customers. There is far too much
of that sort of thing going on now. Too many corporations
-are controlled in that irregular way. If the rules of the Exchange were formulated in the public interest, as they will be
before long, they would prohibit under penalties aUeast as
severe as that now prescribed for splitting commissions, the
now common practice of brokers of voting or giving proxies
to vote on stock belonging to their customers that is registered in the brokers' names without the written consent of the
•customer. If such a rule is not soon enacted the law will
take care of that matter for them.
(j) Compel the incorporation of Clearing House
Associations by prohibiting a National Bank from
being a member of any such Association that is not
incorporated.
This action has been approved by such financial experts
*as Messrs. Jacob H. Schiff, of Kuhn, Loeb & Co., and James
G. Cannon. President of the Fourth National Bank of New
York. Mr. Sherer, Manager of the New York Clearing
House Association, Mr. Frew, who was Chairman of its Committee, Mr. Reynolds, President of the Continental & Commercial National Bank of Chicago and other prominent men
i n the financial world could see no objection to it.
These associations have served a useful purpose in times
of stress but they exercise a despotic control over the destinies of the banks in their localities. Exclusion and expulsion of a competitor from membership mean ruin to the bank
32
and disaster to its depositors. It is within the arbitrary
power of a few men. It has at times been most unwisely and
even cruelly exercised, notably in New York City in 1907.
Through its agency new competition can be stifled. No such
power of corporate life and death should rest in the hands of
an irresponsible body that is accountable to no public authority for its acts. Under cover of this great power it has inaugurated rules for the compulsory suppression of competition among^ its members under penalty of expulsion and ruin
for their violation.
Its regulations go to the incredible length of requiring
non-member banks that must have the facilities of the Association and are not permitted a voice on its management or
the other privileges of membership, and who must act through
members, to observe all the regulations applicable to members such as the enforced charging of a fixed commission to
their customers for the collection of out-of-town checks and
the examination of their books and the disclosure of the names
of borrowers and the character of collateral to their competitors.
The most extreme form of restraint of trade existing today is that which is embodied in the regulations of the New
York Clearing House Association with respect to the charges
on check collections. The member and non-member banks are
forced to maintain an illegal combination under penalty ot
ruin. They have no choice. They must either violate the law
or get out of the Association and they cannot exist under the
latter alternative.
Under the new Currency Bill these local Associations may
be rendered unnecessary as the law permits the Reserve Banks
to perform the service of clearing checks between its members.
It would be the logical channel for that purpose. The Associations should not be permitted to continue in existence as a
cover for imposing illegal exactions and restrictions upon the
commerce of the country.
(Tc) Stop the migration of_
'^a^pe^hag^cqrpo^
tions into Stales that offer illicit
inducement^inj^
ivay of lax laws.
No corporation should be granted a license to engage in
that is not incorporated under the laws oi a
interstate trade
33
State in which a substantial part of its businesses located.
Here is an opportunity for Congress to perform a great service in putting an end to the National scandal of the States
competing against one another in laxity of administration. I t
is to this illicit competition that we owe our "wildcat" corporations and loose laws. The conservatively disposed States
have been driven into a policy of radicalism in order to p r e serve the control over and the legitimate revenues from the
corporations within their borders. Stock watering, holding
companies and many of the other evils incident to corporate
regulation owe their existence to this abuse.
PROPOSED REFORMS ESPECIALLY APPLICABLE TO BANKS.
1. They should be required to disclose their assets in detail (except the names of borrowers and the collaterals for
loans) in the same way in which the Life Insurance Companies in New York State are now required to make disclosure.
Depositors and stockholders as well as the general public
are entitled to know how the business of a bank is being conducted—whether its management is conservative or reckless.
It is ridiculous that National banks should be able to withhold
the character of their investments from the public and from
their own stockholders. Yet this is what has been done and
has been sought to be justified. It was with the greatest difficulty that the Pujo Committee succeeded in securing from
the Comptroller a list of the assets of the leading banks for
the purpose of a Congressional investigation and then only
on the understanding that the information was not to be made
public. If this data had been accessible it would not have
been so easy for the great banking interests to have sold
such quantities of their securities to their affiliated banks.
The Pujo Report recommends that National banks shall
be limited in their fixed investments in bonds to 25% of their
capital and surplus and that only bonds that have paid their
interest for five years should be eligible, thus excluding speculative investments. The assets of a bank should be liquid.
I t is chartered to accommodate the needs of legitimate commerce and not as an investment Company.
2. Another equally important recommendation of the
Pujo Committee that should be embodied in legislation is that
34
which would prevent banks from engaging in any promotion,
guaranty or underwriting that involves the purchase, sale,
public offering or issue of securities. It should not be permitted to be an issuing house. This is peculiarly the business
of private bankers. Any unfortunate venture of that kind
might destroy public confidence in the bank to the irreparable injury of depositors. No institution that receives deposits should be permitted to do anything other than a strictly
banking business. Our great New York banks have entirely
lost sight of that rule.
3. Another reform and one of still greater moment both
as an Anti-Trust measure and as a necessary protection to
the shareholders is the regulation of the Reorganization of
insolvent interstate railroad and industrial corporations.
The evils of the present system and the remedy are set forth
on pages 148-150 of the Report of the Pujo Committee, in
the following language:
Our archaic, extravagant and utterly indefensible procedure for the reorganization of insolvent railroads lias furnished these banking groups the opportunities of which they
have not been slow to avail themselves, of securing the
dominating relation that they now hold to many of^ our
leading railroad systems. At one time or another within
the past 30 years the bulk of our railways have gone through
insolvency and receivership. The proceedings are sometimes instigated by the management through a friendly
creditor (and are then generally collusive in their inception) or through the trustee for bondholders with the cooperation of the company. The railway company admits its
insolvency, consents to the receivership, and one or more ot
the officers under whose administration insolvency was
brought about, or their nominees, is made a receiver, and
sometimes the sole receiver. Neither creditors nor stockholders, who are the parties really interested, are notified
or have an opportunity to be heard either on the question
of insolvency or of the personnel of the receivers. The
stage has been set in advance, and so we find that simultaneously with the appointment of the receivers, or perhaps before, a self-constituted committee is announced, frequently
consisting of men well known in the financial world, most
of whom-have no interest in the property, selected by ji
leading banking house. They invite the deposit of securities for mutual protection.
This committee in due course presents a plan for the reorganization of the property. If the security holders do
35
not like it, their only alternative is to form another committee. If they can arrange to combine their scattered'
forces and find influential men who have the courage to oppose the banking house and who can finance the cash requirements of these colossal transactions in hostility to the
banking house that was first in the field. It is not easy to
find such men. It is becoming daily more difficult and it
is well-nigh impossible to find rival banking houses to lead
the opposition.
The usual outcome has been that the defenseless security
holders take whatever plan is offered, however unjust, as;
against the alternative of being entirely wiped out through
the sale of the property under foreclosure. There have
been rare exceptions, before the power of these banking
houses became irresistible, when the security holders have
wrung concessions through revolt.
These plans have usually provided that the securities of
the new or reorganized company shall be placed for a termof years in a voting trust named by the bankers. In that
way and as a result, also, of reorganizations in which there
was no voting trust, but in which the initial officers and
directors were named by the bankers as reorganization managers, banking domination of the following railroad systems was secured by Messrs. Morgan and -Euhn, Loeb &
Co.:
First. The Baltimore & Ohio, where Kuhn, Loeb & Co.,.
with Speyer & Co., were the reorganization managers, the
plan of reorganization being approved by J. P. Morgan &Co., and Mr. Coster, of that firm, becoming a voting trustee.
Second. The Chesapeake & Ohio, where the reorganization managers were Drexel, Morgan & Co., as the present
firm J. P. Morgan & Co. was formerly named.
Third. The Cincinnati, Hamilton & Dayton, where Morgan & Co. were the reorganization managers and Mr. Morgan is a voting trustee, the voting trust being still in force.
Fourth. The Chicago Great Western, where Morgan &;
Co. were the reorganization managers and Mr. Morgan and
his associate, Mr. Baker, are voting trustees, the voting trust
being still' in force.
Fifth. The Erie, where Morgan & Co. were the reorganization managers and Mr. Morgan became a voting trustee.
Sixth. The Northern Pacific, where Morgan & Co. were
the reorganization managers and Mr. Morgan became a voting trustee.
Seventh. The Pere Marquette, which was reorganized by
Morgan & Co.
.
Eighth. The Southern, which was reorganized by Morgan
& Co., Mr. Morgan and Mr. Baker becoming voting trustees
and still continuing as such.
Ninth. The Reading, which was reorganized by Morgan,
& Co., Mr. Morgan becoming a voting trustee.
36
Tenth. The Union Pacific, which was reorganized by
Kuhn, Loeb & Co.
During all this time the property is in the possession of
the court through the receivers. The reorganization proceedings are purely extrajudicial. The court has nothing
to do with them. Meantime the court authorizes the receivers to borrow money for all sorts of purposes and to
issue receivers' certificates, which are usually negotiated
through the committee or its bankers, who have in the interim gathered in the bonds and stock of the security holders, who have nowhere else to go.
Generally, after years of delay, the property is put
through the form of a sale, but there is no bid except that
of the committee, which pays by surrendering deposited securities. If a security holder has failed to deposit with the
committee he gets nothing or whatever pittance may represent his infinitesimal share of the upset or minimum price
fixed by the court. The cost to the security holders of the
proceeding in any of the cases named is estimated to be anywhere between'$500,000 and $1,000,000 for receivers, bankers, committee fees, lawyers, etc.
Nowhere is any protection offered to the security holders
against oppression or injustice in the plan or its execution
or otherwise. No constituted authority supervises the vast
expenses he is required to pay. The bankers and the committee are made the sole judges on that and on every other
conceivable question, including their own commissions and
charges and those of the committee. The court has nothing
to do with the arrangement and is powerless to control it.
This is briefly an outline of the process by which, as the
result of real or fancied insolvency, these banking houses
have come into control of many railroad systems. The remedy is simple if the Federal Government has the power to
apply it to railroads and industrial corporations (for the
processes and abuses in the latter class are the same) engaged in interstate commerce. I t is as follows: Enact the
procedure provided under the Companies Act of Great Britain, whereby the plan of reorganization is placed under the
direction and control of the courts. If the plan is just and
receives the consent of three-fourths of each class of security holders it becomes binding on the others. If it is unjust a single share can defeat it. No foreclosure or pretended sale is necessary. The years of delay that disgrace
our administration of these properties by the courts is unknown. The receivers, instead of being selected, as is usually
the case with us, by a combination of the choice of the discredited management and nominee of the court, in which
real owners of the property have no voice, is selected under
the English law by the votes of those interested in the property. If they fail to agree the official receiver acts at a
comparatively nominal cost. No sale of the property is in volved. The reorganization is accomplished without it. Six
37
months is the average duration of such a proceeding in
England, and the cost is well below 10 per cent of what it
is with us. The owners of the property get back their property and with it their right to control it, and no voting
trusts are found necessary.
In so far as concerns interstate railroads we recommend
that the Interstate Commerce Commission be empowered,
subject to review by the courts, to supervise every plan of
reorganization and the issue of securities thereunder, to
hear objections and to disapprove any plan that it may
find equitable in its issue or distribution of securities. Congress, in our judgment, has the unquestioned power to delegate this duty as an important feature of interstate ratemaking as affected by security issues.''
E E M E D I E S THAT ABE PROPOSED TO STRENGTHEN THE ADMINISTRATION OF T H E S H E R M A N A C T :
1. Wherever the corporate or other form of combination has been declared unlawful at the instance of the Government either in civil or criminal proceedings, the judgment thus rendered should be binding against the corporation in any future proceedings brought against it by any aggrieved party. In the present state of the law anyone seeking a remedy under the Act must prove independently the
illegality of the combination. The enormous expense of such
an undertaking renders redress practically impossible.
2. Every stockholder, creditor or person otherwise interested in a business, firm or corporation that becomes a
party to an unlawful combination and every competitor who
may daim to be injured should have the independent right
to enjoin the proposed violation. If that right had existed
from the inception of the law, most of the Trusts would
have been prevented. In the present state of the Law the
Attorney-General alone can maintain such an action. The
Department of Justice is unable to cope with the vast number of violations. It is slow to act. It has never ,yet enjoined the formation of a Trust, no matter how ample the
notice. All danger of using the proposed process for blackmailing purposes can be avoided by requiring that the United States be made a party and that a suit once begun cannot
be dismissed without the consent of the Government, so that
38
the latter may at any time assume the conduct of the litigation.
3. Any person aggrieved by the existence of an unlawful combination should likewise be permitted to intervene in
any suit by the Government and to secure in that action the
relief to which he is entitled. This permission should be
broad enough to include minority stockholders 'of any corporation. To that end the present Equity Eule of the U. S.
Supreme Court which prevents the minority from enforcing
remedies in behalf of the corporation until all sorts of onerous conditions have been met should be abrogated. Such
suits should be encouraged as a wholesome check upon unlawful acts of the majority.
4. It should be unlawful and regarded as conclusive evidence of illegality for any corporation to do business under
a name other than its own or to hold out to the public any
business controlled by it as a competitor.
5. A combination among the owners of competing patents should render the patents void.
6. Give to the Interstate Commerce Commission exclusive control over the bond and stock issues of interstate
corporations, the manner of disposing of the securities and
the prices at which they shall be sold, as recommended by the
Pujo Committee and as I have been consistently urging for
the past four years.
7. I do not agree to the wisdom or justice of unconditionally requiring industrial companies to sell their goods at
a uniform price throughout the country even after allowing
for differences in freight charges as is proposed in a number
of the pending bills. It puts them at the mercy of every
local or intra-state competitor. If in order to meet competition at a given point it is found necessary to sell at cos
they ought not be required to do so throughout the country.
Such a rule tends to destroy rather than to stimulate competition. A limitation against thus selling below cost would
39
furnish ample protection against the form of oppression that
is sought to be prevented.
8. Nor should they be prohibited from selling abroad
more cheaply than at home, unless the article is protected by
•the tariff. In the latter event there should be such a prohibition.
9. There is also grave doubt as to the economic soundness of the proposed regulation that permits the manufacturer of an article not protected by patent, to fix the price at
which it shall be sold.
This looks like a very formidable program. It furnishes
the reactionaries with the time-worn argument against all
progress, that we have too many laws and that there is
ample law if we would enforce what we have. That sounds
plausible and misleads many well-meaning people. It is true
that Congress and our State Legislatures enact too many
laws. They deal with too many trivial matters of purely
local or individual concern that clog our Statute books. It
is not true that we have too many laws or any sufficient body
of law for the regulation of corporations. These artificial
octopuses have grown so rapidly under our very eyes that
we have not had time until now to sufficiently study their
operations or to realize the extent to which they overshadow
our economic system to formulate a comprehensive body of
laws to control them.
The Banking Law has not been revised in fifty years.
It bears no intelligent relation to existing conditions. Industrial interstate corporations are absolutely unregulated
except insofar as the Sherman Law applies to those that are
unlawful. The States under whose laws they are organized
have been brazenly competing with one another in the unrestrained license to prey upon the rest of the country, BO as
to get the revenues that the corporations are willing to pay
to the State that offers the highest illicit inducements in the
form of laxity of responsibility and administration.
Every other country has a comprehensive code of laws
enforcing restrictions and fixing rigid liability. The time
40
has come for us to supply our corporations with rules so
that they may know what they can and cannot do.
It is to be hoped that we are not to be swerved from the
performance of that imperative duty to the legitimate business of the country by the meaningless taunt that " there is
too much law". So long as we have the spectacle that we
are witnessing every day of looted corporations, unlawful
combinations and victimized minority stockholders without
redress it is idle for the interests that have been fattening
upon this era of lawlessness to prate about "too much law".
If there had been more law there would have been less lawlessness as they will find when Congress has equipped the
Government with the legal machinery with which to cope
with the crimes of high finance. Upon the thorough and fearless discharge of that duty depends our future business freedom and prosperity. It will tax the patience and courage of
our public men to the limit. Truly a great responsibility,
but one that must now be met.
THE RELATION OF THE FARMER TO
THE TRUST QUESTION
An Address
Delivered before The Western Economic Society and the Second
National Conference on Marketing and Farm Credits
at Chicago, April 15th, 1914.
By
Samuel Untermyer
of New York
M R . CHAIRMAN AND GENTLEMEN :
Before taking up the subject assigned to me, and yet not
entirely unrelated to it, I would like the privilege of repeating
to you the appeal made by me in this city three months ago
to the Illinois Manufacturers Association that you use your
vast influence in favor of a moderate increase in freight rates
on the Eastern lines. The railroads are facing a grave crisis
—far graver than we realize. There is no exaggertion in the
statements of their officers to the Interstate Commerce Commission nor is there any foundation for the suspicion that the
wholesale discharge of men is part of a spectacular play to
influence public opinion. The figures of reduced business, neglected improvements and increased expenses speak for themselves. They are appalling. There must be prompt relief.
The delays thus far suffered have had their part in demoralizing business and accentuating an already difficult situation. Concede, if you please, that some of the railroads have
been brought to their present plight through mismanagement, dishonesty, exploitation or what not. By all means
punish the guilty if you can reach them and let Congress see
to it that the misdeeds of the past are rendered impossible
in the future but do not paralyze the industries of the country
by denying the roads the opportunity to live and meet their
responsibilities. The public interest demands that they be afforded a basis of earnings on which to finance their money
requirements for equipment and improvements. This plea
is not made primarily out of sympathy for the plight of the
stockholders. If they have permitted their properties to be
exploited and mismanaged it is right that they and not the
public should pay the penalty if they were alone concerned.
But it is the public that suffers from inefficient and dangerous
operation and from the inability to meet transportation requirements. I am satisfied that the era of railroad dishonesty, fiscal agencies and banker-managements is nearing its
end. The time is close at hand when the victimized share
holders
http://fraser.stlouisfed.org/ will take their properties out of the hands of recreant
Federal Reserve Bank of St. Louis
9
Trustees and will assume control of their own. But for their
unbelievable inertia we would have been saved these long*
years of exploitation that have destroyed confidence in our
securities the world over.
The railroads are however now at last about to come under complete Government control. The intolerable spectacle
is over of directors sitting on both sides of the table, selling
securities of their Companies to themselves at prices fixed
by them and selling at vast profits properties purchased by
I hem for the purpose to the corporations that they control
but do not own. The time has also passed when directors
can with impunity further use the machinery of the
Stock Exchange to manipulate the prices of their securities on advance inside information.
The carnival
of exploitation on which the vast fortunes of some,
of our most pious and "distinguished'' citizens are so
largely founded is at an end. They now realize that the new
standards of honesty and obligation of Trustees have come
to stay. When we reflect upon the abuses that have been
perpetrated we cannot but sympathize with the impatience
and' resentment of the people but the resentment is unfortunately being vented upon the victims and is not reaching
the offenders. The pendulum of public opinion and official
mistrust has swung too far against the roads. This is no
time for reprisals. Some of the roads are tottering on the
verge of bankruptcy. Maturing obligations must be refinanced and vast sums are needed for replacements and improvements. They cannot be had under existing conditions.
If you agree to the importance of immediate action I trust
you will promptly so announce yourselves and thus do your
share toward relieving the business depression and stagnation that are upon us. The increase asked is just and necessary and the need is urgent but of far greater importance
will be the sentimental effect, if the relief does not come too
late. It will furnish to capital the much needed assurance
that Government control does not mean confiscation or injustice. There can be no general revival of business prosperity at this juncture without that assurance. Sentiment is a
far more important factor in business than we realize. And
so I again urge upon you that you do your part. With your
permission I will now take up the main thread of our discussion.
3
I expressed to your Secretary my hesitation in accepting
your invitation to address you on the ground that my views
on the topic on which you have asked me to speak are likely
to prove unacceptable to many of the members of this,Conference. He assured me however that the purpose of the
meeting was to be instructed upon all aspects of the questions
involved and that you are not wedded to any given point of
view. I am accordingly here to speak very frankly.
The relation of the farmer to the Trust Question is of
course one of the most direct personal and pecuniary interest and concern. If it can be made possible by the enforcement of existing law or by supplementary legislation to restore and maintain the free flow of normal competition and
to so regulate it by law as to prevent unfair and ruinous competition, the farmer will share with the rest of the community
in the benefits that should flow from the reduced cost of living.
I t is not however with the relation that the farmer should
bear to the Trust Question nor with his relation to the question as a consumer that I care particularly to deal. There
is no occasion for extended discussion on that point. There
can be no doubt as to what that relation should be. As the
chief consumer of the country, it is manifestly in his interest
that the value of everything he buys shall be fixed in an open
and stable market where there will be no opportunity to levy
tribute upon him. Ruinous cutthroat competition is no more
in his interest or in that of any other class of the consumer
community than is monopoly.' I t is an economic curse. I t
disturbs the natural currents of trade, leads 'to spasmodic periods of over-production and under-production and consequent
instability of prices and is the highroad to monopoly. I t is
quite as important to regulate competition as to suppress
monopolies and trusts.
The questions for discussion may be stated thus:
What is the real attitude of the Farmer as a producer to
the Trust Question? Is it just sincere, consistent or public
spirited? What should be his. attitude both in his own interest and as a citizen? To these questions I answer, and
shall endeavor to prove, that his attitude is unjust, inconsistent and Unwise.
4
This broad indictment is based upon (1) the drastic character of the Anti-Trust laws in the farming States as applied
to all forms of industry other than farming; (2) the exemptions .that have been engrafted upon these laws in favor of
the farmers; (3) the failure to enforce the laws against them
in States in which the exemptions do not exist; (4) the attitude of their Representatives in Congress and (5) the many
open violations of the Federal Anti-Trust Law that exist by
sufferance in the various forms of pooling and selling arrangements among the farmers in the different sections of
the country.
As illustrating these unfair discriminatory laws, that are
sometimes cloaked under the euphonious disguise of "Co-operative" laws for Marketing Farm Products", the Kentucky
Act of 1906 expressly exempts the growers of wheat, corn,
oats, hay, tobacco and other farm products from the operation of its Anti-Trust statute and legalizes pools and selling
agencies in the farm products.
In California in 1907, and again in Colorado in 1913, laws
were passed expressly authorizing, pools, combinations and
agreements that would permit of reasonable profits through
co-operation and the elimination of competition.
The license to discriminate in the enforcement of the
Federal Anti-Trust Law in favor of the farmers is impliedly involved in the rider that was attached to the $300,000
appropriation of 1913 for the enforcement of the Sherman
law, by the terms of which the Attorney-General is forbidden
to apply any part of the fund in the prosecution of—
(b) Producers of farm products and associations of farmers who co-operate and organize in an effort to and for the
purpose of obtaining and maintaining a fair and reasonable
price for their product.
It is common knowledge that price-fixing agreements in
the form of selling agencies are in active operation in intrastate and interstate commerce in farm products all over
the country, of which those in cotton and fruits are conspicuous examples. In a few staples, of which that of the
cranberry growers is the most generally cited, a virtual monopoly is maintained in the form of a common selling agency
which exacts for the growers whatever price they see fit
to fix.
5
In none of the States in which these combinations (all of
which are within the condemnation of the Sherman Law) are
expressly legalized and exempted from the operation of the
State Anti-Trust Law, is there provision for their regulation
by public authority. In none of them is any relief provided
against their levying undue tribute except in the vague requirement that .the combination may exact only reasonable
profits—whatever that may mean in the absence of an executive body to protect the public.
The country is honeycombed with these pools, trade agreements and gentlemen's understandings under cover of selling
agencies, trade associations, social clubs, information bureaus
and innumerable other disguises embracing most of the departments of trade and industry. Every now and then the
Government pounces upon some unfortunate industry, like
the members of the wire, window glass, turpentine, bath-tub,
straw-board; wood-pulp and wrapping paper pools, in a spasmodic and haphazard fashion, selecting its victims at random, collects fines from the little fellows and sometimes—
generally unsuccessfully—tries to send them to jail—only to
find them getting together again after the storm has blown
over, but in a more elusive form as the result of their expensive and uncomfortable experience.
We all know that the dealers in anthracite coal in the
larger cities agree on rates every year, which are publicly
announced. There is no such thing- as competition between
them and the Anthracite Coal Trust would not tolerate it.
When in 1912 the Government concluded to enjoin the
Western railroads from advancing their freight rates it found
no difficulty in making proof of the agreement, which had
heen negotiated and effected in open convention. The same
is true of the passenger rates and time schedules between
the great Trunk Line systems that are supposed to be competitive. It is generally conceded that there is a,substantial
profit in the present price of steel rails. Is there any competition in the price of rails or of any of the other staples
in the steel trade as between the different manufacturers?
All these arrangements are in plain violation of the Sherman
Law. But does any Federal official attempt to enforce the
law?
6
These are the daily object-lessons that tend to make of
us a lawless nation.
This anomalous condition of insubordination and defiance
of law by our men of affairs to whom Ave look up as constituting our best and most enterprising citizenship is the inevitable outcome of an unsound and destructive economic policy,
from the effects of which the farmers by reason of their vast
political power, are seeking to exempt themselves whilst imposing that policy upon the rest of the country.
The only possible excuse for such a position on the part
of the farmer is that he, as the most valuable and the greatest wealth-producing and least-protected element in our industrial life, is entitled to exemptions and immunities at the
expense of the rest of the community.
It is not intended here to suggest that these trade arrangements should not be permitted under given restrictions. That
question will be discussed later. But I insist that if they are
to continue under the ban of the law, as they now are, that
prohibition should be generally applicable to all industries,
including that of the farmer.
There is no basic principle upon which any such exemption or discrimination can be justified. "Why should the cotton-growers be suffered to combine in the marketing of their
product so as to regulate the price and output, whilst that
right is denied to the manufacturers 'of cotton goods? Or
why should not the coal operators have the same privilege?
Why have the cranberry growers been openly permitted to
maintain a selling agency in New York City through which
about 90% of the product of the entire country is handled,
whilst the milk dealers are sent to prison for doing the same
thing? Surely such unequal enforcement of the 'law cannot
be in the public interest.
The injustice and inconsistency of the farmers' attitude
to which I,have referred consist in his insistence on denying
to every other industry the right of cooperation to restrict
competition whilst he insists upon exemption for his own occupation and is seeking to punish as crimes when committed
by others acts which when perpetrated by him are not considered as inimical to the public welfare.
I t is difficult to see in the mental processes that can bring
about such a result anything beyond the blindness of self-
7
interest. I t is not surprising that under such circumstances
Courts and juries refuse to enforce the criminal provisions
of this statute unless they find proof of actual oppression or
unfair business methods accompanying the technical violations
of the law.
What, then, should the farmers in all fairness do in the
circumstances? What should be their attitude to the Trust
Question? What is the wise public policy? Is there any tenable ground on which they should be exempted from the general rule ? Should all arrangements and devices for regulating
prices and output between competitors, including those applying to their own business, be forbidden? Or should they all
be permitted? If the latter, should such permission be within
given limitations and what should they be? The answers to
these questions point the only just way of approaching and
seeking to solve this problem.
The discussion of this question involves only the various
forms of temporary agreements and understandings between
actual or potential competitors in a given industry > having for
their purpose uniformity of price or regulation of output
whether expressed through pools, selling agencies or otherwise. They are not usually in corporate form or represented
by capital stock.
The proposal does not include any change in the existing
program for dealing with the Trusts and combinations that
are in corporate form and with which the Government and
the Courts have been mainly concerned except to render their
prosecution and dissolution more effective. The impression
that there has. been anything like a general prosecution of
unlawful combinations in interstate commerce is a mistaken
one. The suits that have begun are trivial in number and
aggregate importance as compared with the known violations.
They have been directed mainly against the more conspicuous
consolidations that are in corporate form and the practical
results have been negligible.
There are many reasons why the arguments for the suppression and extermination of these Trusts should not apply
to the pools, agreements, understandings and price-fixing
and output-regulating devices, provided the latter are placed
under rigid Government regulation and restriction as to the
terms and conditions of the agreement so as to effectively
8
protect the public against all danger of extortion or oppression.
1. The latter do not involve stock watering, exploiting the
investing public, change of ownership or closing of mills or
factories.
2. There is not the same power or incentive to exact exorbitant prices; no excessive dividends are required to be
earned on inflated capital to be used as a basis for unloading
stocks at exaggerated prices and there is the constant peril
of inviting new competition and thus disrupting the agreement
3. The element of individuality is preserved; there is no
permanency to the arrangement; each of the parties must
continue to maintain his plant and selling force in condition
to resume competition at any moment. He must accordingly
avail himself of all new inventions.
4. There is a continuing competition in costs of production between the parties to the arrangement resulting in
economy of manufacture and distribution and of general management, since each party secures the sole benefit of such
economies.
5. There is not the inducement or opportunity for the acts
of oppression that are practiced by the Trusts in order to
maintain their supremacy. The interests of the latter are permanently and indestructibly merged whilst under these temporary arrangements such acts of oppression are dangerous
and unlikely. The friendly co-operators of to-day may be
the bitter competitors of tomorrow.
6. They offer a means of escape from destructive competition without driving competitors to combination with all
its attendant evils.
These arrangements should not, however, be longer tolerated in their present furtive unlawful form, whether they apply to the product of the farmer, the manufacturer or the
middleman. They are a standing invitation to extortion and
exploitation of the public and a menace to industrial freedom.
There is only one way of exterminating them and that is by
substituting in their place permissive public agreements that
shall be subject to Federal approval and supervision.
9
In dealing with the Trusts an entirely different policy
should be pursued. I favor their enforced dissolution and
actual and complete segregation, as nearly as may be, into
their original parts and the enactment of legislation that will
ensure their being kept segregated. None of the plausible
arguments that were urged in favor of their organization have
materialized. The extermination of the vital element of individuality and the substitution of bigness and bureaucracy
have more than counterbalanced their supposed advantages.
They can hold their supremacy only when they virtually control the industry, and they can continue to control it only
through unfair practices.
It is to be hoped that this vexatious problem of subduing
and eliminating the trusts is in a fair way toward eventual
solution and that we are at last within sight of industrial
peace. True, little has yet been actually accomplished in the
way of effectual legislation, we are still as tightly as ever in
the grip of the Money Trust and the laws now under consideration by Congress are as yet disappointing in that they
do not adequately meet the situation. But the issues are
framed in concrete form and I am encouraged to believe
that the long struggle between Big Business and the
people is happily nearing its end notwithstanding the reports of the past few days from Washington to the effect
that comprehensive legislation is to be postponed until the
next session.
The rumor is incredible. It is gratifying to note that
the President is not in sympathy with • any such policy.
It would be the worst kind of political blunder and
almost a National misfortune if after all this agitation and investigation there is to be further delay in
the settlement of this question. The reason offered in
favor of the proposed action is the most conclusive argument
against it. The obvious dictates of business sense and political expediency require that the agitation be ended. That
can be done only by the enactment of the necessary comprehensive legislation. The other method serves only to prolong the existing uncertainty, unless the party in power intends to abandon its program and violate its campaign
pledges, which seems to be the hope of the interests that are
now urging delay.
10
The same effort was made and the same u public sentim e n t " was sought to be manufactured when currency legislation was under consideration. Fortunately the scheme
did not work and we now know how absurdly the effect on
business of the then pending legislation was exaggerated for
the purpose of defeating the reform. Surely we cannot be
so blind as to fail to detect the same influences behind this
demand.
If action is to be postponed the Democratic Anti-Trust
policy may as well be considered dead. Every Congressional
contest this autumn will be conducted on the plea that the
election of the Democratic candidates involves the reopening of the question, with its accompanying continuance of
business unsettlement. I t will also be urged that the party
has no definite views on the subject and is incapable of framing intelligent legislation. These pleas cannot fail to be effective and may lead to the defeat of the party that frittered
away its opportunity to settle this question. There is nothing to be gained and everything to be lost both to the business community and to the party by such a procrastinating
policy.
Unless Congress now falters or permits its judgment to
be beguiled by the same old false predictions of disaster that
have so often in the past turned it from its plain path of duty
into enacting mere palliatives instead of remedies we will
soon have heard the last echoes of the conflict.
The contest seemed at one time hopelessly unequal. On
one side are arrayed the most resourceful and powerfully entrenched interests the wprld has ever known, a magnificently
trained army with colossal stakes to protect and the single
fixed purpose to retain its vast special privileges at all costs;
on the other hand nothing but the disorganized hosts, apparently working aimlessly and at cross-purposes in the effort to batter down this citadel of entrenched power.
The subject-matter of the contest is of exceeding intricacy
and highly specialized, with well-nigh all the expert knowledge in the camp of the invaders upon the domain of industrial freedom. But the intuition of our people sooner or later
penetrates beyond disguises and subterfuges into the economic truth of every proposition that affects them. I t is an
unfailing reliance and an endless source of wonder and ad
miration. We grope and blunder along in the darkness
li
through difficult problems that we only half understand, but
always into the light.
And so within an incredibly short time since we began to
realize our peril we find ourselves well on the way toward
the solution of this problem that only a few years ago threatened to Qverwhelm us, if. the President and Congress can
only resist the subterranean influences that are being exerted
from every direction to end the struggle in a series of weak
compromises resulting in colorless legislation that will settle
nothing.
The first and an important step, but only one of many
steps that we shall have to travel toward breaking the power of the uMoney T r u s t / ' has been accomplished in the
enactment of the Currency Law. The " Money T r u s t " lies
at the foundation of all our troubles with the Trusts. It is
the corner-stone upon which they rest. Its destruction is the
only key to their solution. From it the other Trusts and
combinations radiate and on it they depend. They would
disintegrate of their own topheaviness but for the menace to
new competition and the shield and protection against such
competition that the "Money Trust'' provides.
Business cannot be liberated so long as it is overshadowed
by this octopus. Competition will not rear its head to give
battle to the entrenched interests that are under the protecting wing of the men who wield this destructive power. No
overt act is necessary on their part. The mere existence of
the power is a continuing threat. So long as they dominate
the sources of credit and can terrorize every new venture so
long will it continue useless to attempt the emancipation of
business. Disintegration of existing combinations will not
in itself solve the problem. I t must be supplemented by new
competition with fresh young blood and comparatively small
beginnings. That is not possible whilst the present concentration of the control of credits continues in a few hands.
All legislation must be directed primarily against its destruction and toward thus restoring freedom throughout the arteries of trade and finance.
Our present predicament is aptly described in the Report
of the- House Committee on Banking and Currency of 1913
now commonly known as the Report of Pujo Committee, in
the following words:
12
" F a r more dangerous than all that has happened to us
in the past in the way of elimination of competition in industry is the control of credit through the domination of
these groups over our banks and industries." * * *
' ' Whether under a different currency system the resources
in our banks would be greater or less is comparatively immaterial if they continue to be controlled by a small group."
" I t is impossible that there should be competition with
all the facilities for raising money or selling large issues of
bonds in the hands of these few bankers and their partners
and allies, who together dominate the financial policies of
most of the existing systems. * * * The acts of this
inner group, as here described, have been more destructive
of competition than anything accomplished by the trusts,
for they strike at the very vitals of potential competition
in every industry that is under tljeir protection, a condition
which if permitted to continue, will render impossible all
attempts to restore normal competitive conditions in the
industrial world." * * *
" I f the arteries of credit now clogged well-nigh to choking by the obstructions created through the control of these
groups are opened so that they may be permitted freely to
play their important part in the financial system, competition in large enterprises will become possible and business
can be conducted on its merits instead of being subject to
the tribute and the good will of this handful of self-constituted trustees of the national prosperity."
The Democratic party is taunted on the one hand by the
enemies of these reforms with unsettling business and shaking confidence in the stability of securities by the continued
agitation of this subject. On the other hand the party is
charged by the impatient radicals in its own ranks and in the
ranks of the opposition parties with having made no headway toward destroying the existing dangerous conditions and
that the various investigations and exposures that it has made
have had as yet no outcome other than the disturbance of
business.
. In answer to our insistence that the mad gallop into the
abyss toward which we were furiously driving has at least
been checked, that moral standards have been raised and
many objectionable methods abandoned in the financial world
as the preliminary results of this agitation, the radicals challenge us to point to any case in which the grip of the ''Money
Trust" has been relaxed or its power weakened and we are
bound to concede that no such results have yet been achieved.
13
But the ground has been cleared and all the preliminary work
has been done.
The public at last knows the facts and realizes the evils.
It has located and diagnosed the abuses that so long eluded
discovery and is thoroughly aroused and determined to exterminate them. Therefore I say we are in sight of industrial
peace, since there remains now only the question of applying
the appropriate remedies. We know that although our Anti-Trust law has been for
24 years upon the statute books in its present form, the evils
it condemns have continuously grown and thrived until they
have threatened the very existence of our institutions and that
even now, when the law in its present form has been enforced
to the limit of its capacity as the result of an insistent public
sentiment, the practical results fail to meet our needs.
We know that the legal machinery furnished by the Act
is defective and that the violations cannot be effectually reached, abated and punished without supplementing that machinery. We realize that our laws for the regulation of corporations are archaic and inadequate. They were framed before we. were alive to the abuses that are sapping our industrial independence and at a time when the power of the special
interests dominated our legislative bodies and dictated our
laws to suit their purposes. We know that under the blighting influence of these laws and because of the absence of the
protection to which we Avere entitled there has been foisted
upon business and finance this concentration of the control
of the credits of the country in a few hands that has come
to be known by the misleading name of the "Money Trust"
and that has made these few men the masters of our financial
destinies; that it has paralyzed initiative and destroyed independent action, that it constitutes to-day the most dangerous
financial despotism the world has ever known and that if
permitted to continue it will be destructive of our progress.
We recognize that in the train of these evils and as the
result of this lawlessness, due to lack of law, have come cor-*
porate corruption, waste and irresponsibility that have blinded the moral perspective of the leaders and of their satellites
in the financial world.
All these things we know; but we do not know and it is
not conducive to our peace of mind that we should know the
extent to which we have been and are still being ruled and
14
exploited, for the patience even of our people has its limits.
We are intensely practical and so, without harking back to the
mistakes or misdeeds of the past or wasting our energies in
trying to settle scores with those who have brought us to this
plight, our faces are set to the future to find a remedy that
shall be so effective and all-embracing that the wrongs shall
be undone and their repetition in the future rendered impossible. The people are not in quest of punishment or revenge.
With a remedy in sight they are content to let bygones be
bygones and to proclaim a general amnesty as to the past.
The legislation now under consideration by Congress represents a constructive policy. The main criticism of it is that
it does not go far enough on the constructive side in the regulation of competition in the direction to which I shall in conclusion now refer.
The only aspect of the pending legislation with which we
have here to deal is that which relates to the various forms
of co-operative arrangements for marketing the products of
the farms, factories and other industries. Under the proposed legislation they remain under the ban of the law, are
made more easily discoverable and are more severely punished. They include farm products, as they should, if the
prohibition of such agreements is to continue to be the policy
of the Government. They include also organizations of labor,
which I consider wrong. The statute was never intended to
apply to them and there are other reasons that are to my mind
conclusive in favor of their exclusion. But that is another
story and one with which we are not now concerned.
The time must soon come when with the aid of the Industrial Trade Commission the Jaw, whatever it may be decided it shall be, will be generally and impartially enforced.
This incredible situation of extending general immunity to the
farmers to violate the law whilst they are demanding and
securing its enforcement against the industrial world will
not and should not be longer tolerated.
Agreements between competitors that have for their sole
purpose the prevention of ruinous competition and the securing of a reasonable profit should be made possible and lawful
in all industries, subject to the approval and regulation of
the new Trade Commission for which provision is made in the
pending legislation. No one need become a party to such an
15
agreement unless he sees fit to do so but competitors should
no longer be compelled to ruin themselves and one another
under penalty of being branded and punished as criminals.
They will not do it, law or no law. The instinct of self-preservation will prevent it. This perverse policy will simply result
in making of us a nation of hypocrites and lawbreakers with
a criminal code of honor in which nods and understandings
will take the place of tell-tale writings. Every crossroads
will have its " G a r y dinners" at which "the state of the
weather" will be the subject of discussion and which the law
will never be able to reach.
Unrestricted ruinous competition should be superseded
by regulated competition. The former inevitably leads to
monopoly. The latter does away with the oppression of
weak competitors" and .with every vestige of pretext for
combination. The distinction between co-operation and
combination is fundamental. The former is distinctly beneficient if so supervised and restricted that the levying of tribute upon the public is prevented. The latter is economically
unsound and oppressive.
Instead of the innumerable secret and unlawful arrangements that are now tolerated, under cover of which there is
now taken from the people "all that the traffic will b e a r " it
will be the duty of the parties to submit their agreement to the Trade Commission. The latter, with the aid
of its expert accountants, will determine whether the conditions are reasonable and fair to the public, in the same
way that the Interstate Commerce Commission now determines the far more complicated question of rates. With such
relief at hand public sentiment will support the rigid enforcement of the criminal law against all Trusts and secret arrangements.
I offer, as I have for the past five years repeatedly offered
this programme as an answer to your question of what should
be the relation of the farmer to the Trust Question. I t enables the farmer to retire with honor from his now indefensible position of using the brute force of superior numbers and
political power to perpetuate an act of glaring and unprecedented injustice upon every other industry, involving the
most offensive form of class legislation, the constitutionality
of which is subject to- the gravest doubt.
This is his opportunity to solve the problem. Will he be
sufficient!v wise* -mat and far-seeing to grasp it?
REASONS AND REMEDIES FOR OUR
BUSINESS TROUBLES
AN ADDRESS
DELIVERED BEFORE THE COMMERCIAL CLUB AND THE
PITTSBURGH INDUSTRIAL DEVELOPMENT COMMISSION
AT PITTSBURGH, MAY 22NDf 1914
By
SAMUEL UNTERMYER
of New York
REASONS AND REMEDIES FOR OUR BUSINESS
TROUBLES.
I t is useless to blink the fact that we are in serious trouble.
At the end of a long series of years of bountiful crops and
with a record-breaking harvest for the present year assured,
when optimism should be rampant, we are confronted everywhere by business contraction and depression. The New York
banks are overflowing, call money on Stock Exchange collateral
is a drug in the market, as is always the case when business is
languishing, and yet it is impossible to secure loans on improved
unencumbered real estate or investment funds for new enterprises on any terms. Capital is everywhere hoarding its resources for some emergency and the small investor seems to have
disappeared.
Why? Until we have diagnosed the disease it would be
dangerous to attempt to apply the remedy. There are doubtless contributing world-causes but they arc so remote as to
be almost negligible. There are such things as world cycles
of business and financial depression due to destructive wars,
widespread famine, panics brought about by over-straining the
world's capital resources and by over-speculation—but no such
conditions confront us at the moment.
True, the Balkan War and the demands upon European centres for funds with which to refinance the Balkan States are
and will for some time continue to be a severe drain and will
divert European capital from us, as do the attractions of the
vast new enterprises in Russia, South America and the F a r
East.
But Ave have accumulated wealth so rapidly that we are
year by year less dependent on the investment of new foreign
capital in our country, although it is still very important to
us that existing investments shall not be withdrawn as they
have been recently.
2
Our troubles do not however lie primarily in that direction.
!STor is the Tariff Bill to any appreciable extent responsible
for our plight. A downward revision was demanded by the
people and recognized as necessary by all parties. The change
has been from an average of about 4 3 % to an average of
about 26% and has been on the whole wisely distributed. It
is the first* Tariff Bill enacted in our history that was unselfish
and uninfluenced by the demands of special interests, which
have heretofore dictated this class of legislation. If with that
percentage of protection Ave are unable to meet foreign competition in our OAVII country and stimulate our export business, Ave may as Avell count ourselves "out of the game" in the
AVorkVs markets.
The statistics for the first eight months of the operation of
the neAV laAV show far less disturbance in the currents of trade
than was fairly to be expected. We have been a shiftless,
prodigal and unscientific people in our methods of manufacturing and marketing our goods. The undue shelter of the Tariff
and the elimination of home competition through the Trusts
and trade agreements haAre weakened our business virility, encouraged extravagance, substituted bureaucracy for individuality in our Trust-controlled industries and have thereby
crippled our competitive power. With our superior labor and
vast natural resources we should be leading the world as an
expert manufacturing nation instead of which Ave are in imminent peril of ceasing to be a factor.
If, as I believe, time shall demonstrate that with the return
to individuality in business and the practice of skill and economy and with the resourcefulness that are ours we are able to
meet foreign competition with the aid of the generous protection AVC now enjoy, the struggle will have been wholesome
and stimulating. There is no basis for charging our present
conditions to the Tariff.
What then are the reasons assigned and where lies the
truth?
First and foremost, it is insisted in certain influential quarters that the policies of the Administration are responsible.
Its economic program is simple—to destroy the Trusts and
curb existing corporate abuses—which is said to be unsettling
business. Our newspapers are feeling the effect of business
3
contraction and financial stagnation in their advertising col'umns. In casting about for an explanation they have adopted
the views of the supposed financial experts, whose interest
it is to divert blame from themselves, especially when it offers
them the opportunity at the same time to fasten it upon an
Administration that is pledged to correct their excesses. And
so Ave have the great power of the press honestly, but I think
mistakenly, generally supporting the cry that the demoralization is due to impending legislation.
If this is an erroneous view it is doing incalculable harm.
Like every treatment based upon a false diagnosis, the real
disease continues to develop and progress through neglect,
whilst the healthy organs are weakened by the irritation resulting from mistaken treatment.
It is therefore of the highest importance that we get at the
actual facts. Our National prosperity is involved in reaching
the right answer. Party spirit and party advantage should
play no part in such an inquiry. In the interest of the country as well as for our own sakes let us be absolutely fair in
seeking the solution. Nothing is to be gained and much will
be lost if we are diverted to false leads.
I am an ardent admirer of our Chief Magistrate, but not a
blind worshipper or follower of his or any other man's policies.
Like all of us his judgment is fallible, but he has shown himself exceptionally responsive to the public will and has made
surprisingly few if any mistakes in dealing with the stupendous
problems that have been thrust upon him and in carrying out
the program that he was commissioned to execute,
In fourteen months of power the party has been confronted1,
with more grave and sudden International and National emergencies than have come to previous Administrations in asmany years. The President has met the situations as they
arose with candor, courage and splendid judgment and hasgrown day by day in the confidence and affections of the country. I believe in his high ideals of public duty and in M*>
intense patriotism; but he has no monopoly of those virtues..
They have characterized every President in the history of our
Nation. That is our proud boast and the fact that it is true
is the best proof of the success of Republican institutions.
Let us briefly analyze what the Administration has thus far
done and what it is proposing so that we may determine
4
whether there is any basis for the charge that it is to any extent
accountable for the present distressing business unrest and
uncertainty.
Its critics claim that our Mexican policy has been wavering
and provocative of war; that we should either have recognized
Huerta at the outset and thus assisted him to restore order in
his country or have intervened in short order to that end with
the prospect of a long and bloody conflict that would have
confirmed and concentrated upon us the suspicion and hatred
of our South American neighbors whose confidence and friendship we are anxious to secure.
When the history of the events that preceded the present
Administration is written and the story of wholesale assassination, treachery and chicanery by which Huerta secured and
maintained power, and his savage disregard of the decencies
necessary to diplomatic intercourse in his dealings not only
with us but with the representatives of all the Powers is told,
it will be seen that quite apart from the fact that we were
asked to encourage on our borders a Government founded on
assassination it would have been for many other reasons impossible to have diplomatic relations with that sort of Dictatorship.
Posterity will in my judgment give high praise for the splendid evidence furnished by this incident of the depth of sincerity
of our desire for world peace, as evidenced by our rare patience
and self-abnegation. We have at last made our neighbors realize that Ave shall never wage a war of conquest. The lesson
we have taught by our attitude under intolerable provocation
that a giant nation need not use its strength as a giant is well
worth the price. We are about to witness the triumph of a
new diplomacy on this Continent that will render war hereafter
well-nigh impossible and will advance the cause of humanity
by centuries. No greater service was ever performed. Our
Nation will head the roll of honor in the cause of universal
peace.
The situation was in any event unavoidable. I t was a legacy
to the present Administration from its predecessor. There is
nothing in it to account for the troubles we are now discussing.
They were with us before the Mexican crisis arose and have
not been altered by it. War would stimulate rather than depress business, temporarily at least. So we may dismiss that
consideration and take up in order the domestic causes that
5
are assigned; all of which are based on the past accomplishments and present proposals of the Administration by way of
legislation.
Apart from the Tariff Bill, and yet a part of it, there has
been enacted the Income Tax Law. Surely none will deny the
wisdom of that legislation or contend that it has tended to
impair confidence or unsettle business. It was a cruelly longdelayed act of justice to the toiling masses upon whom all the
burdens of government had been laid. Let us hope that the
present law is only an entering wedge. I believe the time is
not far distant when the revenues of the Government from that
source will develop our vast natural resources, convert our
deserts into rich agricultural gardens, widen and deepen our
rivers and harbors, maintain an army and navy that will make
for universal peace, furnish prosperous employment for hundreds of thousands of our people and inaugurate, with the cooperation of employers of labor, a vast system of social reforms
that shall include old-age pensions and insurance against sickness And unemployment. The enactment of this program will
be the answer of Capitalism to the impracticable theories of
Socialism.
The passage of the Currency Law is the other momentous
accomplishment of the Administration within its brief life.
Nothing more distinctively constructive and reassuring to business and nothing more necessary to its safety, stability and
independence has ever been accomplished. Its detractors have
been forced to recognize its value and have been converted into
unwilling champions in the face of their dire prophecies of
disaster. The rich harvests of the privileged few and the sufferings of the many from financial panics are things of the past,
thanks to the courage and wisdom of this legislation.
Yet it is only a few months since our troubles were being
charged to the pendency of the Currency Bill and a formidable niovement was under way to postpone action upon it, for the
same reason that is now being urged for delaying the settlement of the Trust Question. Would it have made for the betterment of conditions if Currency legislation had been left
"hanging in the air" for another year? The same reasoning
applies in favor of now ending the agitation and uncertainty
over the problem now under consideration.
There is nothing revolutionary or unsettling in the proposals embodied in the pending Trust Bills. The only just crit-
6
icism is that in their present form they are too largely made
up of compromises—weak, superficial, ineffective and innocuous. They will not as they stand eradicate the intolerable
evils against which they are supposed to be directed. The
sub-Committee by which they were drafted and which has been
for months faithfully and industriously struggling with its
complicated problems has mistaken the boisterous activity of
a small, selfish, powerful group, working their now familiar
publicity campaign, for the voice of the business world and
has timidly surrendered to the outcry. The objections that
appear to come from the business community are genuine only
to the extent to which they too have been misled by this campaign in which they have been cleverly thrust forward as pawns
in the game that the Big Interests are playing under cover
of legitimate business. The protesting resolutions of Chambers
of Commerce against this, that and the other feature of the
Bill, with which Congress is being inundated are old acquaintances. We now know how they are engineered. They have
lost their terrors unless supported by reason. The article they
furnish is now recognized as the purchasable commodity of
a new but already well-organized industry that has been happily christened by one of its chief practitioners as the "acceleration of public opinion."
Comprehensive regulative laws, covering this entire field,
are essential to the continued existence of small business and
to restore its independence. We are constantly being deluded
by the cry that we have too many laws and that what we need
is a proper enforcement of those we have. This is not true
in the field under discussion. Our corporate form of business
has developed so rapidly and on such a vast scale that the laws
to regulate it have not kept pace with the growth and development of corporate government. The absence of these restrictions is largely responsible for the corporate corruption from
which we are suuffering, the evidences of which are gradually
coming to light.
The public has been for years warned of its existence and
of the necessity for relief by those who are familiar with the
facts and who have had the courage and public spirit to speak
out, but their voices have been drowned by the power of the
entrenched interests and they have been rewarded chiefly with
inspired abuse and misrepresentation of their motives. Nothing
7
has been disclosed within the past year that was not plainly
foreshadowed by the testimony and report of the Pujo Committee. The time has at last come when legitimate business
and the community that have so long been victimized are beginning to recognize the peril. Substantially all the pending legislation is outlined in the Recommendations of the Report.
We need laws:
1. Prohibiting all forms of interlocking control of big
competitive businesses, of which interlocking directors is but
one of its many manifestations, but it is not necessary to interfere with small business or to bring it under Federal regulation.
2. Prohibiting holding companies that are in restraint of
competition. Here again small companies should be excluded
from the operation of the Act.
3. Regulating competition with a view of preventing the
practice of unfair business methods by Big Business to the
injury of small competitors.
4. Prohibiting the "dummy" director and all other forms
of secret control so that the responsibility for corporate action shall be fixed upon those who in fact dominate and guide
the corporate policy and benefit by its lawless acts.
5. For the protection and proper representation of minority
stockholders.
6. Rigidly regulating and supervising the issue of corporate
securities through the agency of Federal Commissions and
requiring complete publicity of the purposes to which the proceeds are to be applied and of the profits of the bankers, promotors and intermediaries.
7. Abolishing the "graft" of constituting private bankers
as the sole fiscal agents and depositaries of the funds of the
corporations whose policies they dictate and requiring that
their funds be placed in banks where they will be subject to
supervision.
8. Placing the operations of the Stock Exchange under Federal supervision so as to put an end to the long era of shameless manipulation of security prices through the use of the
Inachinery of the Exchange and to which dishonest practice
many of our vast fortunes may be traced.
9. Releasing the grip of the handful of men constituting
the "Money Trust" over our great interstate railway and indus
8
trial systems by abolishing voting trusts, reforming our methods of appointing Receivers of insolvent corporations and by
placing Reorganizations under the control of the Courts and
of Federal Commissions.
10. For a systematic and impartial enforcement of the AntiTrust Law, which has never been and is not now being generally enforced.
11. Taking out of the hands of the Attorney-General and
furnishing the necessary legal and executive machinery for the
enforcement of the decrees of the Courts for the dissolution
of combinations that have been adjudged to be unlawful and
for actually disintegrating and keeping segregated such corporations and thus ending the farce in which our AttorneyGenerals have been engaged and that is bringing the administration of justice into deserved contempt.
12. Giving to every party who is injured by the existence
of an unlawful combination the independent remedy to enjoin
the illegal acts or suing to dissolve the combination without
awaiting the slow, uncertain and spasmodic processes of the
Department of Justice. This right should however be safeguarded against abuse by allowing the Government to assume
control of any such action at its pleasure and by preventing any
settlement or other disposition of the action between the parties without its consent.
These are the more urgent of the many subjects that it is
hoped to include in the pending program when perfected, as
it should be and as I have every reason to believe it will be.
I t is not so formidable a program as would appear at first
glance, but the entire field is so highly technical and specialized that the opportunities to mislead are endless. There is
nothing in any feature of the program that should disturb or
unsettle legitimate business or finance; nothing that is not
distinctly wholesome and constructive. Its enactment will
protect and reassure honest investment and should give a new
impetus to independent enterprise.
^ In order to determine whether the pendency of this legislation is in fact injuriously affecting business, it might be worth
while to analyze briefly the objections that have been urged
against it. They are directed mainly against the prohibition
of interlocking directors and holding companies and they come
apparently from many sections of the country.
9
The necessity for this legislation was developed as the result
of the investigation of the Pujo Committee, from which it was
demonstrated that these were the most formidable instrumentalities through which the "Money Trust" obtained its grip
upon the finances of the country. Through the medium of
interlocking control many of the great banks, railway systems
and industrial combinations were welded together into a single
"community-of-interest" against which independent enterprise
found it impossible to contend and which still remains undisturbed. We shall never achieve industrial independence or
peace until it has been destroyed, root and branch.
It was through the agency of the holding company and the
supineness of the Department of Justice that the organization
of the great Trusts became possible. The idea of any corporation being controlled by another corporation—a puppet
moved at the direction of a power other than of its own governing body—is repugnant to all conceptions of justice. It
was not intended that a corporation should ever be governed
by another corporation. That form of management involves
on its face a breach of trust toward the outstanding stockholders, who are entitled to have the benefit of the undivided
judgment of their managing trustees in the soleJ interest of
their own corporation and without regard to the interests of
any other agency. Under this system of government the management of the controlled company is necessarily conducted
primarily for the benefit of the controlling or holding company, which may be and often is opposed to the welfare of the
controlled company.
The claimed embarrassment to business that will result
from unlocking these interlocking interests is more fancied
than real, provided the operation of the law is confined, as
it should be, to the larger corporations. A reduction in the
number of Directors will answer the important purpose of
concentrating responsibility. The large corporations are managed mainly by their Executive Committees. The Boards, con*
sisting of from 20 to 40 Directors, are unwieldy and a distinct impediment to effective administration. They are mere
registering machines for the Executive Committee. Their
names are advertised to the public as a guaranty of management, which is in fact misleading and intended so to be. In
financial institutions they are meant to attract business without attending to it. With the reduction of Boards to a work-
10
•able body the interest and activities of each man will be centered in his own institution and we shall have a consequent
resumption of competition.
The disintegration of the holding company can be accomplished with still less friction or disturbance, by merely distributing the shares so held among the shareholders of the
holding company. The only "disturbance" to business that
would thus be involved would be to restore the competition
that has been thus restrained. If the stoclc-holdings involve
no restraint of competitive conditions the pending Senate Bill
^offers complete relief through application to the Trade Commission, or in the case of common carriers to the Interstate
Commerce Commission, which has power to permit holdings
-of that character.
I agree however and have earnestly urged that these prohibitions against interlocking directors and holding companies
•should be limited to cases in which the interlocking of directors
ov stockholdings would substantially affect the public interest
and that the smaller corporations be accordingly eliminated
from the provisions of the Bill. There is no reason for hampering small business. None of the perils sought to be avoided
lurk within its borders. The operations of the small corporations are not charged with a public use and do not affect the
public welfare in the sense that applies to the larger ones.
The suggestion for restricting, the jurisdiction of the Trade
Commission in these respects has been embodied in the form
of proposed amendments, limiting the Bill to interstate corporations having $1,000,000 capital or $2,000,000 of gross assets
or $3,000,000 of gross annual business. Such an amendment
will confine the operations of the Bill to a comparatively few
cases. I t will eliminate at least 90% of the corporations that
do an interstate business.
I cannot conceive why any business readjustment, embarrassment or inconvenience would be involved in enacting any of the
other reforms that are now under consideration. The dummy
director and the secret and indirect control cannot be justified.
No defense of these practices has ever been attempted. No
one has the right to accept the benefits and attempt to escape
the responsibilities of corporate management through such
devices.
11
Nor has there ever yet been any justification attempted of
the failure to enforce minority representation in corporations
through cumulative voting. Some of the State Constitutions
of which those of Missouri and Pennsylvania are ready illustrations, make it compulsory to provide such representation, as it should be in every State. If for instance a Board
of Directors is composed of nine members, there is no reason
why the owners of each one-ninth of the stock should not be
represented by one Director, which is automatically accomplished through what is known as cumulative voting. The
majority would still control but the minority would have the
privilege of knowing what is being done, of protecting itself
against unlawful acts and of having its voice heard on questions of business policy in which it is vitally interested.
The supervision of the issue of bonds and stocks of interstate corporations by Federal authority, which is now proposed, is still another of the Recommendations of the Pujo
Committee. I t is a tardy recognition of the right of the pub
lie to be protected against exploitation through banking control or by the sale of worthless and inflated securities, to secure an accounting of corporate expenditures and to prevent
the use of corporate funds in the corruption of public officers
and legislative bodies. If these safeguards had been in existence in past years we should have been saved the National
scandals that are being from time to time unearthed to the
destruction of our credit and reputation abroad and at home.
The Bill to require the incorporation of Stock Exchanges
and to place them under Federal supervision is an essential
p a r t of any comprehensive program for corporate reform.
No legislation will be thoroughly constructive that omits to
take this factor into account. Its overshadowing importance
is unfortunately-little understood by Congress. The manipulation of securities through the machinery of the Exchange
and their wide distribution under cover of such manipulation
has been the most prolific incentive for the organization of
Trusts. I t has cost the public more hundreds of millions
than they have suffered through any other of the many devices through which they have been plundered.
The remaining provisions that are intended to secure the
general and impartial enforcement of the Anti-Trust Act, the
effective execution of the judgments of the Court and the
12
remedies to individuals who are injured by violations of law,
can hardly be claimed as disturbing elements. If the Act as
originally framed had secured to individuals aggrieved by its
violation—as it should have done—the right to prevent the
organization of unlawful combinations or to enjoin their operations, the country would have escaped this vexatious problem. Few if any of the Trusts would have been permitted to
come into existence. Threatened private interests would have
realized their peril and would have been alert to protect
themselves. The Government stood idly by and by its silence
lent consent and encouragement. The sole remedy allowed by
the Seventh Section of the Anti-Trust Act to private interests,
to recover treble damages for such injury, has proven inadequate, as might have been expected. The burden of conducting such litigation is in itself prohibitive and the necessity of
proving the damages under our rules of evidence requiring
that it must be the proximate cause of the injury, renders relief
impossible.
The only reason that has ever been assigned for not permitting an aggrieved party to sue in equity to enjoin or dissolve the combination, that it would give rise to blackmailing
suits, has never seemed to me a sufficient answer. Anybody
can be sued without cause and must defend himself. Corporations as well as individuals are now subject to suit on every
other conceivable ground. Why should the Courts have been
so solicitous to protect them against attack on this particular
ground in which the public is so vitally interested when it is
notorious that the Department of Justice has never attempted
to enforce the law except in a comparatively few spasmodic
cases of conspicuous corporations out of the thousands of
known open violations. I t would be physically impossible for
the Department to enter upon any general, enforcement of
the law even if it were disposed to do so and it has never shown
any such disposition.
I t must have been manifest from the beginning that if the
enforcement of the law was really desired the only way to
secure it would be to permit it to be done by private individuals
who are affected by its violation.
The proposed amendment meets the objection that has
been made, in that it requires any individual who sues in
equity, to join the Government as a party so that the suit
13
cannot be discontinued or dismissed by agreement between the
parties without the consent of the Government. The latter is
given the right also to assume the prosecution of the case at
any stage of the proceedings, or to withdraw from the suit
and is not to be bound by the judgment unless it assumes the
prosecution and continues in it to the end.
Is there anything in these provisions that should be disturbing to business? Or in the further requirement that the
new Trade Commission shall be consulted and its approval
obtained in determining the manner of dissolving unlawful
combinations and the form of the decree and that it shall
see to the proper execution of that decree? These requirements will doubtless be very disturbing to certain classes of
business, especially to the Trusts that have been declared unlawful, have been decreed to be dissolved and that are still
flourishing as though nothing had happened. I t may also
prove somewhat disconcerting to the public officials who have
frittered away the practical results of hard-earned Government victories through meaningless decrees of dissolution.
I t is high time that we did away with these performances. I
venture to predict that if this amendment is passed the Trade
Commission will find a way of securing an actual dissolution
of the Standard Oil Company and of numerous other violations that have been dissolved in form but not in fact.
If, then, it be true that the pending legislation involves no
disturbance of legitimate business, we return to the inquiry
as to the reason for the existing unsettlement and depression.
There has never been any doubt in my mind as to the true
reason.
I t is due to the lawlessness and corruption in the management of our great corporations and to the destruction of the
confidence of our home and foreign investors following the exposures of a few of the many instances that have characterized the conduct of our corporate affairs in the past.
There is nothing exceptional or that should be considered surprising about the disclosures with respect to
the management of the JSTew Haven road that have recently
been engaging public attention. In this particular instance the investigation thus far has barely scratched the
surface. I t relates mainly to a single phase of the New Haven
road and involves the diversion of only about $11,000,000 out
14
of a total of over $200,000,000 that will have to be accounted,
for some day, provided the comatose shareholders will ever
awaken and have the sense or can summon the courage to assert their rights. If the investigation of the Interstate Commerce Commission is extended into the other transactions so
as to include the vast purchases of comparatively worthless
competing properties at fabulous prices for the purpose of
destroying competition, the dimensions of the offenses committed against the stockholders of that Company will be of a
character to render the exposures incident to the French Panama Canal scandal as a moonlight silhouette compares to a
volcanic eruption.
I do not mean to suggest that the bankers or the body of
dummy directors have been guilty of or actively privy to any
actual dishonesty or that they have personally profited by the
transactions in any illegitimate way. I do not believe that
they have. But in the final analysis the reckless waste of
corporate funds for unlawful purposes has brought about the
same result so far as concerns the shareholders.
I believe also it will be found that if the affairs of a number
of other equally or still more prominent railway systems that
might be mentioned ever come under the scrutiny of an executive or legislative investigation or of a Court of Justice, we
shall find facts far more startling than anything that has
l3een or will be exposed in the investigation of the New Haven
road.
It is however to be hoped that the Government will not embark upon any such general crusade. Our credit and reputation have already suffered sufficiently from the mere suggestion of the general corruption that lies underneath the
surface of past corporate management. These are things of
the past that should be prevented for the future. The country seems sufficiently aroused to the realization of its disgrace
to offset the machinations of the interests that would ordinarily be able to prevent reformatory legislation and it is
not worth while to further disturb confidence by turning up
any more of the horrible facts. We know in a general way
enough of the evils to be able to apply the remedy.
None of these things could have happened under proper
Federal supervision, nor if we had laws as in other civilized
countries prohibiting Directors from dealing with themselves
15
or lining their pockets at the expense of their shareholders
or "rigging" the stock markets in their own securities or gambling on inside information..
These mentors of the business and financial world sternly
admonish us that every attempt to expose or correct these
evils is "disturbing" business. Until that kind of business
was disturbed and destroyed by exposure and by the legislation that is needed to punish it as it deserves, we would not
have and have no right to expect the return of public confidence. There is one aspect in which the shareholders of these
corporations and the public deserve just the kind of treatment
they have been receiving at the hands of the men who dominate
these corporations solely by reason of the supineness of the
real owners. If they know how to protect their rights they have
never given any indication of it.
Here again the case of the New Haven is only one of a
hundred striking illustrations of the criminal inertia of stockholders. When the trouble first arose they sat aimlessly b>
and saw a highly respectable decoy "Protective" Committee
organized apparently in protection of the management to ward
off real investigation.
What has become of that Committee? If there was any
member upon it who really represented the true interest of
the stockholders why was nothing ever done to uncover the
recklessness of the management? If they made an examination
of the accounts why did they not report the existing conditions
to the stockholders? Why did they permit the investing public to go on buying the shares in ignorance of the
facts ? Why have the stockholders never organized and elected
their own representatives k> protect their rights and to secure
restitution? What is the matter with these people who have
had the intelligence and frugality to amass these interests
that they lack the common instinct of self-preservation? They
have been told that over $60,000,000 in unearned dividends
have been paid; that a huge corruption fund has been used
to procure franchises for a worthless property and that there
has been more corrupt politics than there has been of railroading; that a large part of $200,000,000 that has been expended has been devoted to the buying of competing properties at fabulous prices in violation of law and that almost
every crime in the calendar against corporate management has
16
been perpetrated under the very eyes of their Trustees. Thousands of these stockholders acquired their interests in recent
years upon the faith of the inducement of the dividends that
were being paid and of the representations contained in the
annual statements to the effect that the earnings were
in excess of these dividends. What right have these men
and women who are idly standing by with knowledge of these
facts to expect sympathy or consideration? If they have no
regard for their own investments they have at least a public
duty to perform which none of them seem willing to undertake.
For years past our leaders in the financial world have been
educating the public to the belief that every attempt to uncover corporate rottenness or enforce accountability for
the sacred trusts reposed in the officers and directors of these
corporations was a "strike" or an attempt at blackmail. No
stone has been left unturned to crush and disgrace the few
men of courageous spirit who have tried to protect the shareholders and the public. When Mr. Louis D. Brandeis led the
assault upon the New Haven management and tried to open
the eyes of the stockholders to the situation, when he told
them that they were being deceived, that the dividends were
not being earned, he was denounced and traduced as an enemy
to society. Almost every Representative from his State in
Congress and prominent men in public life from adjoining
States banded together, largely through the influence of the
New Haven road, to prevent him from securing an entrance
into public life in the position in which he would have been
of inestimable aid to the Nation and which he would have
graced and honored by his acceptance. It has been notorious
that for decades the New Haven road has practically owned
the Legislatures of certain of the New England States. It regarded these exhibitions of its power to punish enemies and
reward its friends with high public office as essential and it
has never hesitated to give such object lessons whenever occasion presented itself.
I repeat that we are getting just the kind of corporate management we deserve and that so long as this spirit is permitted
to pervade the public mind we shall continue to get that sort
of management and none other.
And yet we continue to permit ourselves to be beguiled as
17
to the cause of our present troubles. Is it any wonder that
the investors of other nations have been throwing our securities back upon us at any price they can get for them, glad to
be rid of us on any terms? Or that we are unable to sell any
more securities abroad? Or that our markets are depressed
and we find difficulty in financing the requirements of the
maturing obligations of our public service corporations? Why
should the small investor entrust his hard-earned savings to
the men who have mercilessly exploited and betrayed him
whilst moralizing in public upon the importance of character
as the essential to success, to the chorus of a worshipping press
led by their chosen press bureaus?
This only begins to tell the story of the callousness and
stupidity of our people. Not even when their eyes have been
opened against their wills and in the face of their resentment
at the exposure of the faithlessness of their chosen trustees,
do they begin to see or act. They go on permitting and en*
couraging these same men to manage the trusts they have betrayed. The powers behind the throne that have named the
presidents and trustees of the looted corporation proceed to
discipline their tools by removing the chief scapegoat and selecting another 'man, always of previous untarnished reputation, but always pliant to their will, in his place, not even taking
the trouble to change the minor puppets. At the next election
of shareholders the proxies are gathered with the same ease
by the same people and the old order of things is continued
without' even a semblance of change, except in the nominal
directing head, but subject to the same mysterious control.
We had a like disheartening experience following the exposure of Life Insurance corruption in 1906. The nominal
heads were deposed but the power behind the throne and the
old disciples remain. Yet none of these men had or has had
a single dollar of actual investment in the companies.
As indicating the close relations of the operations of the
various departments of the "Money Trust" to one another, I
call your attention in this connection to a few significant facts.
Prior to the insurance upheaval Mr. George F. Baker was
the Chairman of the Finance Committee and the dominating
spirit in the Mutual Life Insurance Company. He is now
more firmly than ever in control. Mr. Baker is and has been
for many years a partner of Mr. Morgan in all of the great
18
enterprises. They together dominate or control the Equitable
Life Assurance Society, the First National Bank, the National
Bank of Commerce, the Bankers Trust Company, the Guaranty Trust Company and numerous other great financial institutions. When Mr, McCurdy was forced to resign as the
result of the Life Insurance exposures there was placed in
the Presidency of that Company with 1500,000,000 and more
of assets the law partner of Mr. Baker's uncle who was incidentally Mr. Baker's private Counsel and the Counsel for
his bank. The Mutual Life held 35,640 shares of New Haven
stock. The law passed in 1906 as the result of the scandal required them to dispose of all their stocks within five years,
which they subsequently had extended for a further term of
five years, to the disgrace of our Legislature. The New
Haven stock, which is now selling at $68 per share, could
readily have been. marketed during those years at |200 or
thereabouts. The Company has not parted with a share. The
difference in price means a loss of over $4,000,000 to the policyholders of the Mutual Life Insurance Company, but this
large block of stock is important to Messrs. Baker and Morgan
in their control of the New Haven road and it is steadily voted
from year to year as they direct.
But I have digressed.
With a few exceptions the Presidents of these roads and
great industrial organizations and all the Directors are named
by the same authority. The shareholders have no real voice
in their selection.
The Interstate Commerce Commission is doing the
right thing in ripping the lid from this nest of corruption to the extent * necessary to guide Congress in legislating to correct these evils, even though it involves immunity
to the chief puppet of the men who guided the destinies of the
Company, I am not so sure that it is necessary or advisable to extend the immunity further or that any valuable results will come from so doing, but the inaction of the Department of Justice has been so exasperating and its purposes so
unfathomable that everyone has despaired of results in that
direction.
With such conditions surrounding us we ought not be surprised to find these men "advising" us that if we seek to correct the evils for which they are responsible and which have
19
destroyed public confidence the Administration, will be chastised by the "business" community for which they assume to
speak. The proposition that we continue to permit ourselves
to be guided by them is so staggering in its temerity that one
is at a loss for words to characterize it.
The remedy is simple. Public confidence in corporate management must be restored. The existing legal machinery
does not assure responsibility and punishment for the misdeeds of Big Business. The enactment of the pending Bills
properly strengthened will help accomplish that result. Ours
is a rich country. Our wealth is fairly well distributed, notwithstanding the many hundreds of millions that have been
confiscated by these men in one way or another by way of
tribute or through gross neglect. A fraction of it can still be
recovered by the shareholders if they will stand together in
each of these great corporations to enforce restitution and protection for the future.
If the lessons of the past have taught them to manage their
own affairs hereafter it will have been worth the fearful cost.
When they are able to do that as in former years, when these
great properties were built up and operated by their real
owners, and not until then, the investing public here and abroad
will again interest itself in our enterprises. Meantime we can
do our share toward reassuring the civilized world that we
are not a Nation of freebooters and that we have sufficient
of the capacity for self-government left to end the recklessness
and lawlessness of High Finance so that capital will hereafter
be as safe with us as in other countries.
SPECULATION ON THE STOCK
EXCHANGES AND PUBLIC REGULATION
OF THE EXCHANGES
An Address
DeUvered before the AMERICAN ECONOMIC
ASSOCIATION at Princeton, N. J.,
December 29th, 1914.
By
Samuel Untermyer
of New York.
SPECULATION ON THE STOCK EXCHANGES AND
PUBLIC KEGULATION OF THE EXCHANGES.
It is fortunate for the country that we are at last to have a
dispassionate consideration of this vastly important subject
in a forum where economic problems are fearlessly, dispassionately and impartially discussed and analyzed on their
merits. There has been so much of honest misunderstanding,
senseless hysteria and ignorant, demagogic denunciation of
the Stock Exchange on the one hand and on the other such a
long, unbroken record of intemperate and misleading propaganda by the interested champions of the Exchange to justify
the abuses of the system and its irresponsible form of organization and such persistent misrepresentation of its critics,
that it is a positive relief to find ones-self in an atmosphere
where the subject will receive the judicial treatment that its
commanding public importance demands.
The partisan and disjointed discussions heretofore had
have been conducted under the unsatisfactory conditions under
which much of our ill-digested legislation is considered, amid
the heat, hurry and confusion of Committee hearings, distorted by bitterness and abuse of the champions of the reforms by
the vast personal interests that conceive that their privileges
are being attacked. There has been no opportunity for proper
study and understanding. The merits of a proposed change
of broad public policy can never be properly developed under
such conditions. This is especially true where, as here, there
is arrayed on one side the most powerful body of financial interests in the land, with their endless business, social and
political influences and ramifications, resisting reforms that
are sought to be forced upon them, with unlimited funds and
vast advertising patronage at their disposal and with incredible facilities for influencing public opinion through the nationwide press bureau they are able to maintain.
The other side is represented only by a few scattered,
disorganized volunteers with no personal interest in the question at issue, whose labors are prompted only by j ^ e public
concern and whose sole reward for their thankless champion
http://fraser.stlouisfed.org/
ship is the enmity of the powerful army whose privileges are
Federal Reserve Bank of St. Louis
2
being assailed. I repeat that it is therefore a privilege to
find such a forum as this for the discussion.
I shall take the liberty of reversing the order in which
the two questions have been submitted for consideration, so
that they will read as follows:
1. Should the Stock Exchange be subjected to regulation?
and
2. Should such regulation include the suppression or restriction of speculation?
The New York Stock Exchange towers above all the Exchanges of the country, exceeding many times in importance
and in the magnitude of its dealings all the others combined.
It absolutely controls the transmission and distribution
throughout the country of the quotations of all the securities
that are dealt in upon its floor, by exclusive contract with the
Western Union Telegraph Company. All other Exchanges
are guided by its quotations. Their forms of organization
and regulations are in the main framed on the lines of the
New York Exchange and I shall accordingly discuss the subject with reference to the New York Stock Exchange, intending thereby to include the others.
Permit me to explain at the outset that I have no patience
with the legislators, agitators, demagogues and ignoramuses
throughout the country who regard the Exchange as a sort
of gambling den or its membership as a coterie of gamblers
whose activities should be suppressed. The Exchange is a
wholesome public necessity. Without a legitimate public
security market which is furnished by its machinery, properly
controlled, no great business or financial enterprises would be
possible. We can no more get along without it than without
banks. It is in fact 'more important than any other agency
of finance. Our ventures have reached a magnitude that
private capital cannot supply. Its elimination would soon
paralyze the wheels of industry. It is not healthful or desirable that a few banking houses should monopolize the
prestige and profit of acting as intermediaries between those
who need the capital for these enterprises and the investors
who are able to supply it. That need should be supplied by a
public market for securities. It is because of its important
place in the economic system that the greatest care should
be exercised to confine it to its legitimate functions. Its
Digitized for power
FRASER for usefulness is unlimited. Its disrepute is a loss and
http://fraser.stlouisfed.org/
a misfortune to the entire community.
Federal Reserve Bank of St. Louis
3
Judged by the standards of the past no more honorable
men than the general body of the membership of the Exchange
can be found anywhere in any branch of industry. In some
respects the code of ethics is above that encountered in any
other calling. Transactions involving fabulous sums are conducted and obligations incurred without a scratch of the pen
and are concluded and discharged day by day without friction
or question.
Like every industry and profession, it contains black
sheep within its fold but unlike others its regulations and
practices have heretofore held out to them and to the gamblers
whose tools they are temptations, inducements and immunities
of which they have freely availed themselves, to the great
detriment of the Exchange and the injury of the great body
of its members.
There are phases of the business conducted on the Exchange constituting at times the bulk of its dealings, that involve the most reckless and unconscionable forms of gambling,
dishonesty, misrepresentation and manipulation, which have
been so long tolerated that the members are obsessed on the
subject of their right to continue these illicit transactions.
Their state of mind is not unlike that which had taken possession of officers and Directors of railroad corporations as
to their duties and obligations to the public and to their shareholders, until within a very recent time and from which they
are now slowly and painfully recovering. The same sort of
awakening is in store for the Exchange, but its members will
not see it. Methods that were considered legitimate ten years
ago and that are still practiced in many quarters of the financial world are now seen to be intolerable. Others, such as the
dealings of officers and directors with their corporations that
are still permitted, will soon be defined as crimes, as they are
in other countries. It will not, for instance, be long before
bank officers and directors will be prohibited from exploiting
their banks and other corporate officers will be prevented from
withholding information and speculating on advance knowledge.
The Exchange, properly regulated and administered, performs an invaluable service in our economic system and is
destined to still greater public usefulness if it can be rid of
the abuses that inevitably attend its present irresponsible
form of organization and can bo placed under responsible pub
4
I believe also that except for the blunders of remaining
open for two days in July after the world's other Exchanges
had closed their doors and of permitting the evils of
short selling and manipulation, our Exchange has on the whole
met the exceptional conditions arising out of the war with
wisdom and conservatism. True, it has assumed powers over
the property and destinies of the millions of securityholders
of the country that are not tolerated by any other body on
earth, public or private and that seem incredible; but that
arrogation of power, as I shall endeavor to show, is due to .
the absence of the Governmental regulation to which the Exchange should be subjected. There are other criticisms as
to its present attitude in permitting short selling within the
minimum prices fixed by its self-imposed regulations and
there are fundamental abuses which it refuses to and will
never voluntarily correct and which can only be removed
through Government supervision, to which reference will be
hereafter made.
There have however been many minor reforms inaugurated within the past two years under the spur of the exposures
and public criticism of its practices that were made in the
so-called "Money Trust Investigation'' by the Committee of
Congress known as the Pujo Committee. "Whilst the Exchange
ungraciously refuses to admit that these reforms have been
forced by the public agitation due to this investigation, that
is now generally recognized to be the fact. The Exchange
has at last partially awakened to a realization of its sense
of public responsibility but it strangely continues to resist all
attempts to so control it as to permit any public authority to
inform itself of violations of law by its members or of abuses
that now exist or that may hereafter arise from time to time
or to enforce responsibility. Through the elaborate press
bureau that it maintains under the name of the " Library
Committee" its reforms are exaggerated and its abuses and
defects are hidden as never before in its history. As the
result of this systematic propaganda and of the temporary
diversion of public interest to international affairs, it is becoming daily more difficult to secure the necessary attention
to this subject that so nearly affects the fortunes of the entire
community.
The oft-repeated warnings of the advocates of Govern
mental
regulation of our Stock Exchanges of the perils to the
5
by recent events to have been prophetic and grossly understated, notwithstanding the fact that we have fortunately thus
far passed through the present crisis without encountering the
disasters that we have invited by the absence of public control.
Like flashes of lightning illuminating the landscape on a dark
night the experiences that have come to us from this world
cataclysm have lighted up the obscure corners of this problem
and have exposed the specious arguments against regulation
that have so long been permitted to pass uncorrected. The
community at last begins to get a glimmer of the important
mission of the Exchange; to realize that it is a public institution and an integral part of our National financial system and
not a private business; that it is ridiculous that it should pose
—as it has up to this time—as a mere convenient meeting
place between the members of an unincorporated association
in the transactions of which the public has no interest or at
most a remote, academic concern.
We are at last able to appraise at their true value the
claims of its members to which, strange to say, they have in
the past been able to secure the sanction of the Courts, that
the rights and obligations of membership are to be likened to
those of a private Club.
In the light of recent events, demonstrating its dominating influence in our National and International financial structure, it seems incredible that its discipline, regulations and
transactions are subject to no judical or administrative scrutiny or review, that it is governed by no law other than its
own unrestrained will and that it and its operations have by
the mere fiat of its self-made rules been consecrated and set
apart, outside and beyond the law—a law unto themselves.
Yet such is the amazing situation in which the country
finds itself. Applying every possible test to the determination
of whether this is or is not an accurate and moderate statement of the actual conditions, what do we find?
1. The Exchange is unincorporated and is as such subject to no legal regulations or restrictions other than those
imposed by its own members. Although there is and has
been for many years upon our books a statute entitled
"An Act for the Incorporation of Boards of Trade and
Exchanges"
it has not been found necessary to comply with that statute
6
2. Its membership is limited to 1100 persons. This limit
was reached about forty years ago and has not since been
permitted to be increased, notwithstanding the revolutionary
changes in conditions of business and finance since that time.
No public authority has any supervision over the selection or
expulsion of members, the increase of membership or over
any matter connected with the formulation of its rules of
trading or other features of its management. Not even the
Courts are permitted to review its regulations for conducting
the public business or any other feature of its organization
or manner of discharging its public duties. "When a vacancy
in its membership occurs through death, bankruptcy, resignation or sale of the right of membership, it can be filled only
by a two-thirds vote of the Board of Governors, ratified by a
majority vote of the Association. This action is also final and
unreviewable by judicial authority or otherwise. By reason
of this limitation of membership a seat has of late years varied
in price from $30,000 to $95,000, dependent upon conditions
of business; and no securities can be bought or sold on the
Exchange except through a member.
3. The exclusive power of discipline is vested in the Association through its Committees. It may expel or suspend a
member and thus destroy his reputation and occupation and
deprive him of the right to earn a livelihood, on any grounds
that it deems sufficient and he has no right to review its
action in the Courts and can get no redress so long as he has
had the opportunity of a hearing, without Counsel, before the
body composed of his competitors.
.4. In the exercise of its unrestricted right of discipline,
great abuses have developed. The Association requires every
member to charge a fixed commission upon all purchases and
sales for customers of securities that are listed on the Exchange, regardless of the price of the security. A share of
stock that costs $11 is charged with the same compulsory
commission as one that costs $200. Any member who violates
or evades this rule or attempts by indirection to do so is subject to expulsion. The infraction of this regulation was characterized under oath by one of the most distinguished ex-Presidents of the Exchange as
"the most heinous offense a member can commit"
7
more heinous than frauds perpetrated by a member upon his
customers, as is evidenced by the fact that the penalties
which have at times been imposed for this offense have been
more severe than those inflicted for obvious fraud. Expulsions and suspensions on this ground have been held not reviewable by the Courts.
In the exercise of this unrestrained power of discipline
the Exchange may expel a member for having had any dealings or communications whatever with or for even writing a
letter to or speaking over the telephone with a respectable
member of a reputable rival Exchange or for buying securities
for or from or selling them to or for such a person, even
though the securities are not listed or dealt in on the rival
Exchange, or for that matter on any Exchange. Incredible
as this may seem, members have in fact been severly disciplined on that account. It has resulted in the most effective
boycott of men who have dared to accept membership in
another Exchange. As a result, men in good standing in the
community have found themselves unable to dispose of securities owned by them that are listed on the New York Stock
Exchange and not listed on the Exchange of which they are
members, solely because they have been guilty of membership
in a rival Exchange.
5. The Exchange is the sole judge of the conditions
under which it will permit securities to be placed upon the
official list of those that may be dealt in on its floor and
it may at its own discretion strike from the list securities that
have been so listed, without notice either to the corporation
or to its investors, whp bought on the faith of the fact that
the securities were so listed. The far-reaching effect upon the
value and marketability of listing a security or striking it
from the list is not generally appreciated. Its quotations
constitute evidence of value and the securities become available as collateral for loans at the banks. When not listed the
security largely loses this important element of availability.
Such action on the part of the Exchange is likewise not the
subject of review or redress by the Courts. The character and
extent of the data that the Exchange shall from time to
time exact from the corporations whose securities are
thus listed for the information ^of the public rests
solely with it. There is no protection to the public other
than that which it chooses to afford and.no power to review
or revise its action. Banks, Life Insurance Companies, guar
8
dians, Trustees and others who hold, buy and sell these
securities are forced to rely entirely upon the voluntary and
unreviewable action of the Exchange as affecting such securities. It formerly maintained on its official list securities of
corporations that refused to furnish information of their affairs or even to disclose their earnings and that were conducted as "blind pools'' for the benfit of the insiders, who
were thus enabled to manipulate the price on rumors and
"inside information." Amalgamated Copper and American
Sugar Befining are illustrations of this class of dealings that
were permitted. They had their alphabetical position on the
list with the Companies that were required to furnish information for public guidance. The only differentiating sign
was an asterisk placed before the names of the so-called ''unlisted' f corporations. They were placed there for gambling
purposes and were at times by far the most active stocks on
the list. That practice, happily, became a nightmare of the
past some years ago but its discontinuance was not accomplished without a struggle. The men who foisted it upon the
Exchange and kept it there for their own profit, many of
whom were leaders in the world of finance, were permitted for
years to exploit the public in that way to the extent of many
millions. It is only when we reflect upon the extent of these
buccaneering projects that we realize the vast and growing improvement in the morale of the Exchange.
6. The so-called "continuous quotations" of prices of securities are not available to any individual or corporation in
the United States except with the express permission of the
Exchange and there is no right of review from its fiat to the
Courts or to any public authority. It may at any time suspend the publication of quotations and leave the securityholders of the country to their own devices, without information as
to* the transactions in this public security market.
The latest recorded revolt illustrating the extent of this
despotic power is in the form of a suit instituted within the
past two weeks at Pittsburgh by John L. Moore & Co., a
brokerage house of that City, against the Western Union
Telegraph Company in which the plaintiff alleges that in the
exercise of the agreement between the Telegraph Company
and the Exchange forbidding the Telegraph Company to fur
nish quotations to any person not sanctioned by the Exchange,
http://fraser.stlouisfed.org/
theBank
Telegraph
Federal Reserve
of St. LouisCompany has been instructed by the Exchange
9
not to furnish the plaintiff with quotations and as a result
the plaintiff's brokerage business will be ruined.
In the present state of the law on this subject Moore &
Co. can probably get no redress. The pretext under which the
Exchange exercises such power to control the action of an
interstate common carrier is its desire to suppress " bucketshops/ > which admittedly cannot conduct their illicit operations without the aid of these quotations. The same, however, is true of a broker doing a legitimate business. It is
said, for instance (I know nothing of the merits) that Moore
& Co. buy and sell stocks and bonds only for cash and that
unlike most members of the Exchange, they deal only in the
actual stock certificates and do not even buy or sell on margin. For years and until the Exchange closed on July 30th
they received these quotations that are essential to their business. Now they.are arbitrarily refused.
While the suppression of bucket-shops is a consummation quite as devoutly to be wished (and quite as far from
realization) as would be the actual and permanent
prevention of manipulation of prices on the New
York Stock Exchange, the bucketing of orders is a
criminal offense and can be detected and punished
as such like every other offense. It should not rest in the unrestricted power of any body of private citizens through their
control over the operations of an interstate Telegraph Company to determine for itself and without the right of appeal
to the Courts or to any public authority and without even giving a reason or the opportunity of a hearing, who is and who
is not lawfully conducting a brokerage business and who shall
or shall not receive the information that is necessary to his
business existence. It should not be permitted to maintain a
dangerous monopoly under the pretext of acting as a selfconstituted policeman, with the added power of judge and
jury to determine the fate of citizens in this ex parte fashion.
The sworn complaint of Moore & Co. may be untrue and
the purpose of the Exchange may be commendable. The
point is that the Exchange may, under existing law, admit its
truth and still Moore & Co. can get no relief; To concede any
such despotic power over the life of a legitimate business is
a situation too perilous to be tolerated.
By the express terms of the agreement recently executed
between the Exchange and the Western Union Telegraph
10
upon its floor and by it transmitted to the Telegraph
Company, which distributes them only to such persons
and agencies as the Exchange may direct, so that these quotations that are at the foundation of the business of the brokers and investors throughout the country remain at all times
under the exclusive control of the Exchange.
Assuming that this vast power of business life and death
over the brokers throughout the country is at present being
honestly and judiciously exercised, does that fact justify its
existence? Is it within the spirit of Democratic institutions?
I t is not so long since the power was used in the effort
to destroy a small competitor in New York City—the Consolidated Exchange—and the latter was compelled to conduct
a long struggle for existence.
The following instances fairly illustrate the character of
some of the powers recently assumed and exercised by the
Exchange over the business of this country and the destinies
of securityholders, growing out of the pending European
war:
(a) It forbade its members, under pain of expulsion,
from buying, selling or dealing in any class of securities,
whether^ bonds or stocks, whether listed on the Exchange or
unlisted, except with the express approval of a special Committee selected by the Governors and then only under certain regulations and restrictions as to the price, terms of
delivery and other conditions promulgated by the Committee
from time to time.
(b) If you or I happened to own securities on which
we were forced to realize to meet our obligations or chose for
any other reason to do so, there was no way of selling them
on or off the Exchange, through any memDer, publicly or
privately, below the prices fixed by this Committee, nor
except through its consent. Anyone who was concerned
in such a purchase or sale was subject to discipline.
Other powers quite as drastic and comprehensive were
assumed relating to the operations of what is known as the
" C u r b M a r k e t / ' with which the Exchange has no more legitimate concern than " t h e man in the s t r e e t " .
The Curb is also a public security market, entirely separate from the New York Stock Exchange, with an independent membership, but such is the power of the Exchange that
the members of the Curb are not allowed by the Exchange to
deal in any securities that are listed on the Exchange or that
the latter may at any time choose to place upon its list- F o r
11
bers dealing with any Curb member or buying or selling any
security listed on the Curb. That would mean the instant
extinction of the Curb.
The members of the Curb conduct their business in the
open street, within a roped line fixed by the police. They are
subject to the inconvenience and interruptions of business
due to the inclemencies of the weather and the passing traffic. They are well able and have long desired to locate under
the shelter of a roof, but there is a regulation of the Exchange
which would in that event prevent a Stock Exchange member
from dealing with a Curb member. The Exchange shows no
disposition to relent or relax that rule* Hence the Curb Association, a body with its own regulations (to which it adheres quite as rigidly as does the Exchange to its rules) is
forced to remain in the street and to surrender to the big Exchange whatever business in securities the latter may from
time to time elect to take from the Curb and unto itself. It
is hard to believe that such things are possible.
. Within the past few days we have read of a meeting of
the Exchange, widely advertised through its press bureau,
at which resolutions were passed congratulating and thanking the Committee of Five for its services in the late emergency and showering praises upon themselves for the
manner in which they conducted the public business in
that crisis. On that same day and the preceding
day the "shorts" smashed the minimum panic prices of
July 30th to such an extent that this same Committee was
forced to reduce the'minimum.in certain active speculative
stocks. But for the wisdom of the Committee in establishing
a TrrininmiTn these short-selling gamblers would have been free
to precipitate a panic as they have often before done. The
resolutions were fairly well deserved but they would have
been better earned if the Committee had entirely prohibited
short-selling in this crisis, as they could well have done and as
has been done by the London Stock Exchange by its recent
rules since it has been, as it now is, under rigid Government
regulation.
I am not discussing the wisdom or necessity of the recently adopted rules restricting dealings in securities in the
crisis through which we are passing, nor the arbitrary control by the Exchange over the transactions of its own members for private account in securities with which the Ex
12
inate the outside bond and Curb markets and the entire
course of security dealings throughout the Country, as reflected from its fountain head in New York. These may or may
not be wise restrictions if enacted under the supervision of
responsible officials or subject to the veto of some such
authority. It is not necessary to enter upon the merits of
that discussion. The fact that the Exchange is physically
able without outside assistance to inaugurate and enforce
such far-reaching regulations affecting the tens of millions of
individual securityholders and all the great corporations
throughout the country and that there is now no legal restraint upon its action is the most eloquent argument in favor
of the necessity for public regulation.
My criticism is not of what has been done to meet this
emergency but of a financial system that not only permits
but which it is claimed by its authors and those who are executing it self-made law to render it necessary for a handful
of private citizens to seize and exercise such vast powers
because there is no constituted authority to protect the public
or with the right to restrain, direct or review their action.
Herein lies the anomaly of our situation—unlike anything
of its kind in the civilized world. If these gentlemen had
chosen to permit dealings to continue after July 30th, as many
of them were desirous of doing and as they are said to have
decided to do the night before, there would have been no
public authority anywhere to restrain them. They would probably have bankrupted the banks, Life Insurance Companies
and other public institutions. Fortunately for us these particular men at this particular juncture had the enlightened
selfishness to realize that in the tottering markets which they
would have encountered the following day if the Exchange
had been opened, the margins on their pledged collateral with
the banks would have been exhausted and they would have
bankrupted themselves. If the banks and brokers had been
comparatively free of stocks and with plenty of cheap, "easy"
money in hand and a band of rich, reckless speculators had
been in control, as has happened and may well happen again,
imagine what a catastrophe could have been precipitated upon
us with the cheerful, ever-ready aid of the "short sellers"!
I do not mean to imply that any such brutal thing would have
been done, although we have had some unfortunate experi
ences of that Mnd on a smaller scale at times. The fact that
13
any public officer to control such a situation isr the point I
want to make in this connection.
The necessity for regulation is not to be tested by what
was done but by what may be lawfully done under existing
law without fear or opportunity of discovery or punishment
under given conditions and in the absence of regulative and
restrictive laws. Security markets have been habitually raided and manipulated in the past and there has been no legal
responsibility or redress. Assuming this did not happen to
any extent in this emergency,—does that fact render it any
less essential to ensure legal protection against its recurrence,
especially now that we know the extent of the peril? Why
have we any repressive laws if we can rely on people refraining from public injury without fear of punishment?
Does anyone doubt that the crashing of values during the two
days the Exchange unwisely remained open, was assisted if
not precipitated by short-selling? Or that it would have been
more acute if speculators had been a trifle more daring or
inside information had happened to be available? Or that it
would have happened anyway if the Exchange had not
closed when it did? Why should the determination of such
vital public policies be left in private arid interested hands?
It is incongruous and unthinkable no matter how well the
power may have been exercised. Banks, Trust Companies,
railroads, Life and Fire Insurance Companies and a vast
number of other industries in which "the public is far less interested than in the Stock Exchange were formerly regarded
as purely private enterprises. It seems a long time and yet
it is not so long since anyone would be so bold as to question
the wisdom of their regulation. The Pure Food Law, Packing-House Inspection Law, Factory Inspection Laws are a few
of the multitude of instances that will occur to you of the
growth and recognition of the modern demand for supervision
of industries involving the public welfare and protection.
The Stock Exchange and Clearing House Associations,
the operations of which are more important to the public
credit, security and stability than any of them, are the only
ones that have managed to remain immune. It is a great
tribute to their power and is due also largely to the fact that
their activities are highly specialized and no one has been
sufficiently interested to educate legislative bodies to the perils
of the situation. The present crisis has done much to aecom-
r\lio
14
will in time so far supplant the Clearing Houses or curtail
their powers as to render them a negligible quantity in the
financial system.
How differently these things are done "on the other side."
And how much we yet have to learn from them! Immediately
following the declaration of war and before England entered
the conflict, the British Government, through the Treasury
Department, promptly stepped in and closed the London Stock
Exchange and it has ever since determined its policy. It will
be for the British Government and not for the Governors or
members of the London Stock Exchange to say when and
under what conditions it shall reopen. The French and German Exchanges are and always have been essentially Government institutions. All their operations are at all times under
the most rigid and minute Governmental regulation. There
are elaborate statutes providing the conditions under which
securities may be listed and dealt in and for the active participation of Government officials in the conduct of the Exchanges.
In like manner the Dutch Government at the outbreak of
hostilities promptly took control over the Amsterdam Stock
Exchange and has ever since directed its policy, although Holland is not at war. We alone permit this vast power to remain
in private and interested hands.
Much that is confusing and misleading has been said and
written in the course of the discussion of this subject as to the
constitution of the Continental Exchanges and more particularly as to the experience of Germany in its attempts to
stop speculation. The manifest purpose of this argument has
been to lead the uninformed to believe that the efficacy of
the then and now existing German Government regulation and jurisdiction over the general business of
the Stock Exchange was in some way involved in that controversy, that it had proven a failure and that the regulatory
law had been repealed or materially changed so that it now
conforms more nearly to the claims of the opponents of Gpvernment control.
In order to make it entirely clear that there is no basis
for any of these contentions and at the same time to demonstrate the wisdom, efficiency and success of Government control, it may be proper at this point to refer briefly to the
German and French systems and to the change that was found
http://fraser.stlouisfed.org/
advisable
the German laws that had been passed for the
Federal Reserve
Bank of St. in
Louis
15
purpose of restricting speculation and that had reference
solely to that branch of the subject. There has never been
any change in the situation of the German and French Stock
Exchanges as essentially Government institutions. They are
and have been as completely a part of the machinery of the
government as is our Treasury Department or the Bureau
of Commerce or any other of our governmental agencies.
Their membership consists of private individuals, although
that of the Paris Bourse is limited to seventy members, all
of whom are Government appointees and enjoy a Government
monopoly of the business.
In 1896 the German Agrarian party procured the enactment of a law that was intended to modify the then existing
Governmentally approved regulations so as to curb speculation in grain, commodities and mining and industrial securities. The subject of the legislation is admirably treated by
Professor Henry 0. Emery, of Yale University, to whom we
are to have the pleasure and privilege of listening today, in a
carefully considered Article published in the Yale Review of
May, 1908, under what seems to me the misleading title of
"Ten Years Regulation of the Stock Exchange in Germany."
The features of the law discussed by Professor Emery had
to do entirely with the attempts to limit speculation in stocks
of mining and industrial Companies. It did not seek to do
away with or modify the complete Government control of the
machinery and operation of the Exchanges, which were then
and ever since have been and are now a part,of the fundamental statute law of the German Empire. It was increased
and amplified rather than restricted by the law of 1908 to
which Professor Emery refers as the Act repealing the law
of 1896.
The course of the legislation of 1896 is thus accurately
described by Professor Emery:
It should be said, however, that the original bill was the
result of a very remarkable inquiry made by a special commission, whose report constitutes the most important body of
material on the whole subject of speculation. The proposals
of the commission, recognizing as they did the necessity and
legitimate function of speculation in modern business, were
relatively moderate. In the Reichstag, however, the Agrarian
party had the upper hand and much more radical provisions
were included in the act asfinallypassed. Without considering the regulations providing for a closer government su-
16
pervision of exchange dealings, we may note at once the three
most important provisions.
(1) All "Exchange dealings for future delivery"
(Borsentermingeschafte) in grain and flour were forbidden.
(2) All "Exchange dealings for the account" (Borsentermingeschafte) in the shares of mining and industrial companies were forbidden.
(3) An "Exchange Register" was established in which
was to be entered the name of every person who wished
to engage in exchange transactions for future delivery. Contracts made by two persons entered in the.register were declared binding and exempt from the defense of wager.
Where either party was an unregistered person the contract
was void.
It is claimed that the effect of this legislation was (1)
to prevent dealings in commodities for future delivery and in
mining and industrial shares for the "accounts,'' (which
means transactions that are to be adjusted at the next monthly settlement), and (2) thus to divert German capital to the
fianncial centres of other countries and to build up the great
banking houses at the expense of the smaller and less prominent bankers by reason of the fact that the latter, who also
received money on deposit feared the injury to their reputations as conservative bankers from the placing of their names
on the register.
The result of the prohibition against dealings in mining
and industrial shares "for the account" was to require them
to be settled for and taken up the following day. This is now
and always has been the rule with us as to all transactions
on the Exchange but in Germany the settlement of these transactions is made monthly and in England semi-monthly. In
order to meet this requirement the course of business had
to be altered so that the brokers could borrow from the banks
or bankers with the securities as collateral the money with
which to pay for the purchases made, as is done with us. The
only effect of the modification in 1908 of these provisions of
the law of 1896 was to reverse this practice and to reinstate
the method of monthly settlements as being better adapted
to the customs prevailing in Germany.
Whilst the history of this legislation and its effects may
be instnictive on the merits of permitting speculation within
certain limits on public Exchnges, it is difficult to understand
what it has to do with the main proposition we are here to dis
cuss "whether there should be some form of Government
http://fraser.stlouisfed.org/
supervision,
Federal Reserve
Bank of St. Louisregulation and control of the Stock Exchange."
17
Whether, to what extent and under what restrictions
speculation shall be permitted has nothing to do with the
determination of that fundamental question.
Let us not be misled on this point. There has long been
the most effective Governmental regulation in the Continental
countries and there is no proof of failure or friction from that
cause. From all accounts it has been wholesome and in the
public protection, except where it has gone the length of attempting to outlaw all forms of speculation. Whether the
extension of such regulations to the extreme points to which
it was attempted in Germany by the law of 1896 was wise or
proved effective is a debatable question with which we have
nothing to do as bearing upon this branch of the discussion.
The first six sections of the German law of 1908 (the present law) consisting of 38 sections and occupying 79 pages of
TL S. Senate Document No. 574, which is said to have modified
and superseded the law of 1896 on the subject of speculation
and which is the existing law regulating Stock Exchanges in
Germany, read as follows:
SECTION 1. Exchanges may be established only with the
permission of the State governments (by which is meant
the governments of the Federal States of the German Empire). The latter may also order the suspension of operating
exchanges.
The state governments exercise supervision over the exchanges, which supervision may be intrusted to commercial
organizations (the chambers of commerce and commercial
corporations).
Notifying offices, clearing banks, clearing associations and
similar institutions connected with the exchanges are also'
subject to the supervision of the state governments or the
commercial organizations exercising the direct supervision.
SEC. 2. The state governments are to be represented on
the exchanges by state commissioners, who shall control, in
accordance with the detailed instructions given to them by
the state governments, the transactions on the exchanges, and
enforce the laws and provisions concerning the latter. The
commissioners are authorized to be present at the business
conferences of the members of the exchange, and to call the
attention of the said members to any abuse which may take
place. They are also required to report all abuses on the
exchange and to suggest preventive measures.
The activities of the state commissioners in particular exchanges may, with the approval of the Bundesrat, be restricted to cooperation in the proceedings of theXourts of
honor, or, in case of small exchanges, the appointment of
state commissioners may be entirely dispensed with.
SEC. 3. An expert exchange committee (Borsenausschuss)
is to be formed with the purpose of reporting upon matters
18
the Bundesrat The exchange committee Is authorized to
tender its motions to the Imperial Chancellor and to consult
with experts.
The exchange committee is to consist of not less than 30
members, who are to elected by the Bundesrat for a period
of five years. Members of the Committee are eligible for
re-election. One-half of the members are to be elected upon
nomination by the members of the exchange. The Bundesrat
is to determine the number of candidates which the individual exchange departments may nominate. The election
of the other half is to take place with special consideration
of the conditions of agriculture and industry.
The regulations for the committee shall be enacted, after
a conference with the latter, by the Bundesrat. The daily
remuneration and travelling expenses to be allowed to the
members of the committee are to be fixed by the Bundesrat.
SEC. 4. Regulations must be issued for each exchange
separately.
The regulations must be approved by the state government. The latter may demand the incorporation of certain
provisions in the regulations of the exchange, and particularly the incorporation of the provision which stipulates that
the interests of agriculture and allied trades be adequately
represented in the boards of directors of the produce exchanges.
SEC 5. The exchange regulations shall contain provisions
concerning (1) the administration and the departments of
the exchange; (2) the transactions authorized on the exchange; (3) the admission of the exchange; and (4) the
quotations of prices and rates.
SEC. 6. The regulations may allow the use of the exchange for branches of business outside of those designated
in section 5, figure 2, unless particular sections of this law
(sees. 42, 43 and 51) provide to the contrary. In the latter
case the persons concerned may lay no claim to the exchange
for any purpose other than that for which it was established.
The Bundesrat is authorized to prohibit either completely
or partially the use of the exchange for particular branches
of business.
The Bundesrat is a Department of the Imperial Government. The regulations that have been established under this
authority cover in the most minute detail every feature of
administration—
"Suspension over the brokers shall be exercised by the
Chamber of Brokers (in which the Government is represented) and the State Commissioner."
Elaborate provisions are made for the trial of a member
for violation of the rules by a so-called "Court of Honor", in
which the Government representatives participate (which
must be approved by the Government) and for the right of
appeal. The requirements for the listing of securities con
ifit sio-nifirtfl-nt. ai\ci oar*vfn 11 v wnrked out—-as_theV
19
are by all means the most important to the public—of all the
features of {his splendid body of laws. They involve the fullest disclosure of all the details orthe corporate assets, securities, business, earnings, etc., and the issue of a public prospectus containing the details required by law to be specified
when the securities are offered for sale.
Time will not permit and it will serve no useful purpose
to discuss the many other particulars of this body of model
legislation. Suffice it to say that at every step tire public safety
and welfare are considered and its interest is safeguarded.
The same is true of the French law, which is equally exacting
in its demands for official supervision of the Exchange and
publicity of the affairs of all corporations whose securities
are there listed.
The contrast between the solicitude and protection with
which the transactions on the Continental Exchanges are surrounded in the public interest and the reckless disregard of
the public that has characterized our failure to deal with this
subject is not flattering to our capacity for self-government.
A passing survey of the intimate public relations of the
Stock Exchange to our National and International financial
life will demonstrate the enormity of the offense of omission
of which Congress has been guilty in permitting its organization, management and operations to be conducted throughout
all these years without supervision or control. Many of the
vast illegitimate fortunes that have debauched our citizenship
are attributable directly to that cause. For many years the
pretended market prices of securities of our greatest corporations have been "rigged'' and manipulated at the will of a
handful of gamblers and operators and the people of the country have been literally robbed of hundreds of millions of dollars through such transactions. Some of the best known
names in the country were those of men who amassed great
fortunes from the recognized business of "operators" in the
securities of given corporations that they were employed to
manipulate, sometimes on the "bear" side and sometimes on
the " b u l l " side of the "market". Nowhere was there any
restraint upon the malign activities of these men or their
powerful and respectable principals, among whom were numbered the greatest financiers of the country.
The following from the testimony of the late Frank K.
then Governors and a former President of
Sturgis, one of the
20
the Exchange, before the Pujo Committee, is instructive on
this point:
Q. How do you justify as legitimate the transactions of a
pool or syndicate in giving out buying and selling orders to
brokers for the purpose of lifting the price of the stock or
of depressing it?
A. Those are the acts of individuals. I cannot be responsible for what thousands of people throughout the country do.
Q. Do you seek to justify it?
A. It depends entirely upon circumstances. I have already said that under certain conditions, orders given out,
commissions paid, no collusion whatsoever, the broker who
buys not having the slightest idea where the order comes
from that the broker executes to sell—I say it is not an illegitimate transaction.
*F
^*
T*
*r
*1*
Q. * * * Will you be good enough to answer that
question? Is not the operation, at times, resorted to to depress prices and at other times to lift prices?
A. Yes; I can consistently answer that.
* * * * *
Q. You approve of those transactions, do you?
A. I approve of transactions that pay their proper commissions and are properly transacted. You are asking me
a moral question and I am answering you a stock-exchange
question.
Q. What is the difference?
A. They are very different things.
Q. I thought so. There is no relation between a moral
question, then, and a stock-exchange question?
A. Sometimes.
Another witness (Mr. Morse at p. 719) described the
mechanism of manipulation as practiced on the Exchange as
follows:
He is the gentleman who manipulates the stock, giving the
buying and selling orders.
If he merely wishes to make a stock appear active, he
gives buying and selling orders in about equal volume; if
he wishes to put up the price, he gives an excess of buying
orders; if he wishes to depress, he gives an excess of selling
orders*
Statistics were presented to the Pujo Committee of thirteen selected active stocks dealt in on the Exchange, showing
day by day, month by month and year by year for many years
and np to the time of the inquiry in 1913, the character and
extent of the dealings, by way of illustrating .the fabulous
proportions
to which manipulation had been permitted as the
result
of
the
absence of regulation by public authority. It is
•
_
j »
-»-i
i
-•
...
,
-
-
•
•
*
*j.
21
claimed t h a t all these transactions represented manipulation,
b u t t h e following S u m m a r y from the E e p o r t of t h e Committee,
based on t h a t evidence, will give a faint conception of the ext e n t t o which this orgy of gambling was c a r r i e d :
Stating the results shown, only in the most general way,
it appears:
(1) That there has not been a year since January 1, 1906,
when the Reading Co/s entire common stock issue listed
and subject to sale was not sold at least 20 times over and
from that on up to 43 times; that in a single month of that
period it was sold 6 times over and that in only two months
of the entire period was it sold less than once over in a
single month; and that although it is a dividend-paying
stock the number of shares transferred on the company's
books averaged for the period 8.6 per cent of the shares sold.
In 1906 and 1907 there were in all 1,400,000 shares of
Reading Common stock listed. There were over eigthy-one
million shares sold in that time, starting at $164 per share
and ending at $90. Those transactions represented over
eleven billion dollars in money in sales and the same amount
in purchases.
(2) Summarily stated, it further appears that in each
year since January 1, 1906, the entire listed common stock
issue of the United States Steel Corporation has been sold
5 times over each year on the average, while the number of
shares transferred on the company's books has averaged 25
per cent of the number sold.
In U. S. Steel with 5,084,000 shares of common stock outstanding there were 74 million shares sold and the same
number bought in 1909 and 1910. ^ In a single month (January, 1910) there were over 6 million shares sold.
It will be said that this largely represents speculation.
But is it honest speculation or speculative excitement brought
about by pool manipulation? What part of it is pure manipulation?
Here again there have been selected by way of objectlesson only a few of the instances that might be multiplied
but prominent cases have been taken to illustrate the point.
Until these practices are made discoverable and punishable
there is no reason why they should not be repeated when
conditions are again favorable.
Many of our great fortunes have been amassed by these
methods. Who first knew when U. S. Steel-common stock
was to be put upon a dividend basis? Or when Union
Pacific was to increase its dividend to 10%? Or when
Amalgamated Copper would reduce or pass its dividend?
Or when and on what basis it would resume dividends? The
determination of these questions generally rests with one
or at most a few men in each Company. It was natural
that they should mate use of their advance knowledge so
long as there was no law or public sentiment to restrain
them. But the temptation to force dividends and to suspend
dividends and otherwise to use their vast power are too great.
22
It may be that under the new order of things we shall
not have the same class of men in our Boards of Directors.
That is probably true. The incentives will no longer be
there. They were dishonest incentive? but strange to say
it was not considered dishonest for a trustee to exploit his
shareholders. It was considered rather clever even to the
point of selling the stock of his own Company "short" and
shaking out his shareholders.
It should be made impossible for the men who are in control
of these vast enterprises to go on fleecing the public. It is
high time that they were brought to realize that they are
trustees for their shareholders.
(3) That in the same period the entire common stock
issue of the Amalgamated Copper Co. has been sold 8 times
over each year, on the average, while the numbers of shares
transferred has averaged about 20 per cent of the number
sold ;
(4) That since January 1, 1906, the entire listed common
stock issued of the Union Pacific Railroad Co. has been sold
l l j ^ times over each year, while in 1912 the number of
shares transferred was only 16 per cent of the number sold.
(5) That in 1512 the entire listed common stock of the
American Can Co. was sold 8 1-3 times over, while the number of shares transferred was 25 per cent of the number
sold.
(6) That since January 1, 1906, the entire listed common
stock issue of the Rock Island Co. has been sold twice over
each year on the average, while the number of shares transferred has averaged a little more than 27 per cent of the
number sold.
(7) That since January 1, 1906, the entire common stock
issue of the American Smelting & Refining Co. has been
sold twelve times over each year on the average, while the
number of shares transferred has averaged about 18 per
cent of the number sold.
(8) That since January 1, 1906, the entire listed common
stock issue of the Erie Railroad Co. has been sold more than
twice over each year on the average, while the number of
shares transferred has averaged only 30 per cent of the
number sold.
(9) That since January 1, 1906, the entire listed common
stock issue of the Consolidated Gas Co. has been sold more
than once over each year on the average, while the number
of shares transferred has averaged only about 40 per cent
of the number sold.
(10) That since January 1, 1906, the entire listed common
stock issue of the Brooklyn Rapid Transit Co. has been
sold six times over each year on the average, while the number of shares transferred has averaged 23 per cent of the
number sold.
(11) That since January 1, 1903, the entire listed common
stock of the Colorado Fuel & Iron Co. has been sold five
times over each year on the average—in 1906 18 times over—
while the number of shares transferred has averaged less
than 20 per cent of the number sold.
23
the common stock of the California Petroleum Co. was
listed, the entire issue was sold more than three and one-half
times over; and
(13) That in the seven months from April (when it was
listed) to October, 1912, the entire common stock issue of the
Mexican Petroleum Co. was sold nearly nine times over.
In answer to this showing we are told,
(a) That these statistics do not prove the manipulation
of prices since there is no way of determining which of the
transactions represented honest speculation and which represented dishonest speculation in the form of manipulation
or fictitious purchases and sales; and
(b) That these transactions are now made unlawful in
the State of New York through the enactment in 1913, following the disclosures of the Pujo Committee, of a bill entitled "Manipulation of Securities", by which statute such
acts are constituted misdemeanors.
In point of fact the law in question is a mere blind. It
does not define manipulation. On the contrary, it legalizes
and perpetuates the existing abuse by excluding the worst
features of manipulation from tixe definition, which should
have included them. The offense is made to apply only to
cases in which no simultaneous change of ownership is effected. It is confined by the terms of the Act to
all pretended purchases or sales \fhereby no simultaneous
change of ownership is effected.
The bill is aimed only at fictitious transactions. Manipulation of securities is not now accomplished to any appreciable
extent by fictitious transactions, although it was formerly
conducted at times by that means. As now practiced it does
result in a change of ownership, so that the most widespread
forms of manipulation practiced on the Exchange are not
reached by this Bill. It stands in the way of effective legislation to prevent manipulation.
I do not propose to discuss here at any length the ethics
or merits of speculation except insofar as it is accompanied
by manipulation or short selling. There is much to be said
in support of the argument that there can be no broad and
active public market in the absence of speculation. If it can
be established that there should be regulation, the public authorities will determine the subsidiary question of whether
and if so to what extent and under what conditions specula-
24
An interesting and instructive pamphlet has been published on this subject within the present year by Mr. John
Henry Piper entitled " T h e Technology of Stock Market
Manipulations."
The author quotes as follows from the book of Mr. W. C.
Van Antwerp (now one of the Governors of the Stock Exchange, who conducts its vast press bureau), entitled " T h e
Stock Market from Within: 7 '
The great evil of speculation consists in the buying of
securities by uninformed people who cannot afford to lose.
He analyzes and dissects that assertion with great skill,
evidencing an intimate knowledge of stock market technique
and concludes with the suggestion that he has proved that
Mr. Van Antwerp should revise this statement so as to read
as follows:
The great evil of speculation consists in the buying and
short selling of securities by the people who cannot afford
to lose all the time, who do not lose all the time but who
do lose all, in time.
Or:
The great evil of speculation in Wall Street is the buying
and short selling of stock by people deluded with the idea
that they speculate in values, whereas they only gamble in
manipulated prices; and this evil will never be corrected
until the people are informed that the essential thing for a
speculator to know is the technical or manipulated position
of the price of a stock in relation to the plan of campaign
that is being engineered by outside financial powers who
have the public, the Stock Exchange, especially the heads
of it, under their heel.
Summarizing Mr. P i p e r ' s deductions, they are based on
the following premises, which I believe are in the main correct as applied to the small operators and people of limited
means who speculate in stocks and who are not members of
pools or " i n s i d e r s ' ' with unlimited means for manipulating
or controlling the market in the particular stock:
1. That about 98% of those who speculate in Wall Street
sooner or later come to grief.
2. That with the development of "high finance" (which
he characterizes as synonymous with dishonest finance), the
dealings on the Exchange have become mainly speculative
and that prices are regulated, not by intrinsic values, but
by the technical phase of the market created by the manipulation of the particular security by the big interests that
http://fraser.stlouisfed.org/
ann
Pn t o f ^ i n f ^ r ^ c f ^ in n n P n t '
Federal Reserve Bank ofnSt.
Louis
in if- i t
thf>
timf
PTi
25
cept as to the small proportion of dealings that are of a
strictly investment character.
3. That the man who bases his speculative operations in
a given stock upon a study and mastery of the past, present
or future merits of the property is bound to lose as against
the speculator who ignores those factors, but acquaints himself with the identity and purposes of the individuals or
men constituting the pool who are dealing in the stock;
that jf they are operating without price limits or within
certain limits to bring about a rise or fall in the price or
to make money trading back and forth and have the necessary ^ means or financial support, the stock will fluctuate
within those limits regardless of its merits so long as that
sort of activity is being continued.
I n the main these propositions are true in normal times.
They may not be true at the moment but when confidence,
activity and speculation revive they will be as true in the
future as they have been in the past unless they are checked
by regulation that will furnish the means of discovering and
punishing them,
Manipulation of prices is the great curse of the Exchange.
I t paralyzes its usefulness. The arguments in favor
of speculation are destroyed by the presence of manipulation* I t is said by the defenders of speculation that it
represents the collective judgment of the value of a security;
that besides creating an active market it furnishes the supreme
test of value. Whether that be true as applied to honest
speculation it is not necessary to determine so long as manipulation is tolerated. Manipulation is dishonest speculation.
I t is playing with marked cards to defraud the investor as
well as the speculator. I t converts the Stock Exchange into a
mock auction. If there were no other reason for demanding
Governmental supervision of the Exchange (and there are
many apart from those already discussed) the fact that without regulation manipulation cannot be discovered would be
conclusive of its necessity.
There may be said to be three principal forms of manipulation, apart from those that were formerly conducted through
what are konwn as "wash sales" and fictitious transactions,
which have largely been abandoned, and others which it will
not be necessary to discuss :
1. The most common and most vicious form is effected by
what are in substance bogus purchases and sales to create a
false appearance of activity for the purpose of unloading
the
stock on the public at high prices. The same person or
http://fraser.stlouisfed.org/group gives buying orders to one set of brokers and jelling
Federal Reserve Bank of St. Louis
26
orders to another, but the selling orders exceed in volume
the buying orders until the stock is marketed. The apparent
purchases and sales may and often do exceed the actual
purchases by the public ten or twenty times over. In order
to actually unload 100 shares on the public the manipulator
may have to apparently deal in thousands of shares. So long
as commissions are paid on these sham transactions on both
sides of the bargain the Exchange has regarded them as entirely legitimate, even though the real nature of the dealings
is apparent from their volume and from general report and
can readily be verified from the books of the brokers to which
the Exchange has free access at all times .
2. A series of transactions conducted for the purpose of
acquiring or selling a large block of the stock of a given
corporation not for investment but with the intent of realizing an immediate profit, brought about by purchases and
sales that are calculated to affect the price in the way best
adapted to accomplish the end in view. If the purpose be
to accumulate stock so as to sell at a substantially higher
level, the plan involves selling part of the accumulations as
the stock rises so as to depress the price and then make
larger purchases. If the intention is to sell the opposite
course is adopted. The ultimate object is to buy stock that
you do not want or to sell stock that you do not want with
the view of affecting the price.
3. Where a new security is to be introduced: Instead of
advertising its merits by the publication of a prospectus or
by open solicitation the security is here again given a false
appearance of activity to attract dealings. After the public
has been led to buy on the assumption that it is acquring
a security with an active market that is readily saleable
those who were interested in creating this impression and
who have probably disposed of the stock they had to sell,
find it unnecessary to continue the heavy expense of paying
commissions on what are in effect fictitious transactions and
the buyers' apparently active market gradually and sometimes suddenly fades away.
Under the head of "Manipulation of P r i c e s " the eminent
Commission appointed by Gov. Hughes in 1909 had the following to say:
A subject to which we have devoted much time and thought
is that of the manipulation of prices by large interests.
This falls into two general classes:
(1) That which is resorted to for the purpose of making
a market for issues of new securities.
(2) That which is designed to serve merely speculative
purposes in the endeavor to make a profit as the result of
fluctuations which have been planned in advance.
The first kind of manipulation has certain advantages
and when not accompanied by "matched orders" is unobjectionable per se. It is essential to the organization and
carrying through of important enterprises, such as large corporations, that the organizers should be able to raise the
http://fraser.stlouisfed.org/
Federal Reserve Bank ofmoney
St. Louisnpressarv
to rnmnletp thpm
This ran hp fan* nnlv
27
by the sale of securities. "Large blocks of securities, such
as are frequently issued by railroad and other companies,
cannot be sold over the counter or directly to the ultimate
investor, whose confidence in them can, as a rule, be only
gradually established. They must therefore, if sold at all,
be disposed of to some syndicate, who will in turn pass them
on to middlemen or speculators, until in the course of time
they find their way into the boxes of investors. But prudent
investors are not likely to be induced to buy securities which
are not regularly quoted on some exchange, and which they
cannot sell, or on which they cannot borrow money at their
pleasure. If the securities are really good and bids and
offers bona fide, open to all sellers and buyers, the operation
is harmless. It is merely a method of bringing new investments into public notice.
The second kind of manipulation mentioned is undoubterly open to serious criticism. It has for its object either
the creation of high prices for particular stocks, in order
to draw in the public as buyers and to unload upon them the
holdings of the operators, or to depress the prices and induce the public to sell. There have been instances of gross
and unjustifiable manipulation of securities, as in the case
of American Ice stock. While we have been unable to discover any complete remedy short of abolishing the Stock
Exchange itself, we are convinced that the Exchange can
prevent the worst forms of this evil by exercising its influence and authority over the members to prevent them.
When continued manipulation exists it is patent to experienced observers.
The fact is that manipulation is dishonest whether
resorted to for the purpose of introducing a new security or for any other purpose. True, it is six years
since the Hughes Commission made its report and there were
many things then tolerated in corporate management and in
the financial world generally that would not dare be attempted
to-day, thanks to the exposure of corporate abuses by the
much-despised " reformers" and to the improvements in
moral standards of business for which their unwelcome activities are responsible. But it is still inconceivable that even
in 1909 a body of New York gentlemen as distinguished as
were the members of this Commission should have become so
permeated with the customs and atmosphere of the financial
world in which they moved as to have been led into putting in
an official document the statement that manipulation
which is resorted to for the purpose of making a market for
issues of new securities is unobjectionable per se
or that
It is essential to the organization and carrying through
28
It is nothing of the kind. It is distinctly disreputable
and the Exchange will shortly be made to see it in that light
as they have been taught to see other practices that they once
thought to be legitimate.
Is it to be wondered at that no legislation looking to the
correction of the abuses that were pointed out by this Commission followed its report and that nothing was done in that
direction until July, 1913, following the public exposure by
the Pujo Committee of the same conditions that this Commission privately investigated? Is there any occasion for surprise that there was no abatement of the practice of manipulation in view of the quasi-encouragement lent to it by this Report? It is no exaggeration to say that the bulk of the securities on the list has been at one time or another manipulated—
not for the purpose of creating a market or an appearance
of activity in a new security, but, as stated in the Hughes
Report, either
to create high prices for particular stocks in order to draw
in the public as buyers or to unload upon them the holdings
of the operators or to depress the prices and induce the public to sell.
The greatest sufferers from this form of swindling are
notv the speculators but the small honest investors.
The use of the market-news columns of the newspapers is an invariable accompaniment and a necessary part of the equipment in playing the game.
The payment of dividends represented to be earned
but only too frequently not earned and the publication
of articles calculated to show the prosperous and growing
condition of the property attract the conservative investor.
With such instances in mind as Rock Island, Metropolitan
Street Railway, Third Avenue Railroad and New Haven, all
selling at one time over $200 per share and paying large dividends and all of them since bankrupt or nearly so, what
chance has an outsider of getting a square deal? What had
become of the "insiders" investments in these properties
when they came to grief. True, they still held control of the
management but the dear public, the widows and orphans and
men and women of small means who through years of toil and
self-sacrifice had scraped together the money with which to
buy
what they were led to believe was a safe, conservative
http://fraser.stlouisfed.org/
investment, held the securities.
Federal Reserve Bank of St. Louis
29
If manipulation can be made disreputable and can be
discovered and punished it can be prevented. If it can be prevented there will be no incentive for concealment and misrepresentation of the conditions of a property. It can never be
discovered until the transactions on the Exchange can be officially supervised and the books of its members subjected to
inspection of some public authority. The Postmaster General is the logical official to whom to delegate this duty. These
quotations on which the investors of the whole country rely
are distributed through the mails, by telegraph and in the
newspapers. If they are fraudulent and fictitious, representing bogus or manipulated transactions intended to deceive investors, the originators of the frauds should be punished
through the same machinery as the Post Office Department
so successfully employs to detect and prosecute other false
statements that are carried in the mails. What is the difference between falsely describing the merits and value of stock
representing a mine or a patent or any other form of business venture by means of a circular or advertisement and
the use by these captains of high finance of the machinery and
published quotations of the Exchange and of market "puffs''
and press bureaus, which is their means of advertisement to
attract investors to stocks that they are selling by having it
appear that vast quantities of the stock are being daily
bought and sold at given prices, thus deliberately representing that the general investing public believes that they have
that value and are actively buying and selling them when in
point of fact there are no such transactions to any extent except such as are being manipulated by them for the express
purpose of deceiving and drawing in the unwary?
The methods of the big operator, that are now considered
legitimate, are far more insidious, dangerous and effective
than are those of the man who plies his disreputable and precarious trade through circulars and advertisements. The latter is at least forced to disclose his identity and to be reasonably cautious lest he bring himself within the clutches of
the Federal law, which is ever on the alert to discover these
violations; but the powerful men of high finance who have for
years practised this game with immunity are able to hide behind respectable and influential brokers and the machinery of
the Exchange. For every investor who is swindled by the
former method tens of thousands are victimized by the latter.
The former generally lands in jail; the latter are financial
30
giants, philanthropists, leading citizens and pillars of society.
Their offense is the same—only their methods are slightly
different. It is the prostitution of the machinery of the Exchange that renders their raids on the public possible.
Paul Clifford's occupation was humane and courageous
beside theirs. He was at least kind and generous-hearted
and took his chances. They "keep prayerfully within the
law"—a law that is a disgrace to a community that rests in
the smug self-complacency that it is civilized. The Exchange
can put an end to this colossal confidence game whenever it
chooses, but it is evident from its attitude in opposing regulation that it will never choose except spasmodically, when it
is under fire, until it is compelled. It can never be compelled
to do so until the books of the brokers can be opened and the
facts exposed.
In view of the overwhelming evidence as to the existence
of manipulation and the reports of various Committees on the
subject, I fail to understand why it is constantly asserted that
there is no proof of the existence of manipulation, nor why
we are constantly challenged in the face of these findings to
disclose "when, where or how these alleged transactions manifest themselves/'
It matters not whether the work of Federal supervision be in charge of the Post Office Department or of
the Treasury Department as part of the financial system, as
in Continental countries, or of the Bureau of Commerce so
far as concerns the quotations of shares of interstate corporations or of the Interstate Commerce Commission as applied
to railroads, except that under our Constitution the authority
to regulate through the Post Office is less open to legal question.
Unless the power to unearth these frauds is lodged somewhere they cannot be discovered and manipulation cannot be
stopped. The Exchange now has that power through its control over the books of its own members but to ask or expect
them to expose the law-breaking of their own members,
by which they have in the past earned a large part
of their income and which the Exchange encourages
and has at public hearings and through the testimony of its
officers insisted to be within the rights of its members is
hardly a reasonable proposition for discussion.
Mr. Sturgis said that paying commissions to manipulate
http://fraser.stlouisfed.org/
a market was like spending so much money for advertising
Federal Reserve Bank of St. Louis
31
the security. He was quite oblivious of the fact that a man
who in the ordinary course of business should sell stock by
advertising that so many thousand shares were actually being bought and sold day by day at a given price, and who was
actually "going through the motions" and paying commissions on both sides of the transaction for the sole purpose of
deceiving would-be purchasers whom he was thereby seeking
to attract into the belief that such purchases and sales were
genuine, would clearly be guilty of larceny. Yet that is precisely the intent and effect of these manipulated transactions
that have heretofore formed so large a part of the business of
the Exchange. It is passing strange that the members are so
obsessed by self-interest that they cannot appreciate the
perfect analogy in principle between the two transactions.
Anyone who is interested in creating an active market
in a given security should hereafter be required to frankly
set forth his purpose over his own signature, advising its
purchase, for which someone can be held responsible, instead
of continuing the underhand methods of false rumors of impending developments, ''melons" to be cut, dividends to be
increased, large earnings, great market activity (manufactured for the purpose of misleading), etc., that are the accompaniments of "creating activity," "stimulating speculation"
and of the various other forms of manipulation.
Successful manipulation of established securities depends
on these methods. In order to get the speculative public interested in the stock there must be "something doing" in it.
They must be made to believe that they are getting advance information of what is "doing." The whole performance when
thus conducted is essentially in the nature of a "confidence
game."
When manipulation has ceased or effective means for its
discovery have been supplied, the time will have arrived to
take up the question of speculation. Then and not until then
can we have open, honest speculation based upon conceptions
of value. Then and only then will speculative transactions
furnish a guide to values.
I have read with interest the Articles, Addresses and testimony of Professor Emery on this subject and would be at
many points in accord with his views as to the value of speculation if it could be disassociated from manipulation; but I
am unable to agree to his argument that there should be no
limit even upon honest speculation.
32
I take issue with him in his championship of unrestricted
short selling and insist upon the necessity for Governmental
regulation of all transactions on Stock Exchanges, which he
opposes.
Here again the events of the past five months have demonstrated the peril of unrestricted short selling. The Exchange
has been forced to admit that it is an evil that should be
guarded against in troublous times by the enactment and rigid
enforcement of a rule, now in force, under which an arbitrary
minimum price has been fixed upon the bulk of its listed
securities, so that they cannot be dealt in below that figure*
Now that the London Exchange is under the control of the
Treasury Department all short selling is forbidden. The Stock
Exchange view of short selling that prevailed before the experiences brought about by the war, is fairly set forth in the
testimony of the late Mr. Sturgis before the Pujo Committee,
as follows:
Q. What is the purpose of short selling?
A. Generally speaking, to make a profit.
Q. To make a profit by what process?
A. By repurchasing the short sale at a declining price.
Q. That is, by selling a security that you have not got
and gambling on the proposition that you can get it cheaper
and deliver the thing that is sold. Is not that it?
A. That is the usual process—selling when you think the
price is too high and repurchasing when you think it has
reached the proper level.
Q. But is it, or not, the process of selling a thing you
have not got?
A. It is.
Q. And is it, or not, with the idea that it will go lower,
or can be depressed down, and bought cheaper and delivered ?
A. Truly.
Q. Do I understand that you regard that as legitimate
and defensible?
A. Do you wish my personal expression of opinion?
Q. Yes.
A. I think it depends entirely upon circumstances.
Q. Under what circumstances would you regard that sort
of short selling as legitimate and proper?
A. I would regard it so if there was a panic raging over
the country and it was desirable to protect interests which
could not be sold. I think it would be a perfectly legitimate
thing to do.
Q. Let us see about that. If there was a panic raging
over the country and. a man sold stocks short, would not
that simply add to the panic?
http://fraser.stlouisfed.org/ A. It might. Self-preservation is the first law of nature.
* * * * *
Federal Reserve Bank of St. Louis
33
Q. But, as I understand it, if there is a panic raging over
the country, you think it is defensible for a man to depress
stocks by selling stocks he has not got, with the idea of
adding to the panic?
A. Mr. Untermyer, if a person has property which is absolutely unsaleable and he can, so to speak, protect his position by selling something for which there is a broad market—
Q. That he has not got?
A. (Continuing). I do not consider it wrong.
Q. Mr. Sturgis, let us just analyze that, because I do not
think I understand you. You do not want to be misunderstood, do you ?
A. It is not my wish.
Q. And I do not want you to be misunderstood. Do you
mean to say that if there is a panic raging it is a defensible
thing for a man, under any circumstances, to sell stock that
he has not got, with the idea of getting it back cheaper?
A. I do think it is defensible. I certainly think it is defensible.
Q. For what purpose does he do that except to try to
make money?
A. To try to save his credit, perhaps.
Q. How does he save his credit in a panic by selling stocks
that he has not got, with the idea of adding to the panic
and getting them cheaper?
A. Because if he can make a profit on that sale it may
repair the loss that he has made on stocks he cannot sell.
Q. I see. You know that that would simply accentuate
the fierceness of the panic, do you not?
A. It could not be otherwise.
Q. Certainly. And his only purpose in doing a thing of
that kind in time of panic would be to make money, would
it not?
A. To protect himself."
Q. It would be to make money, would it not?
A. Yes; and that would protect him.
Q. Of course it always protects a man to make money,
no matter how he makes it, does it not?
A. Yes, sir.
Q. And that you think, is justifiable?
A. I think under those circumstances it is.
Q. You do not want to make any further explanation of
that proposition, do you?
A. I do not.
Q. Is it any more justifiable for a man to sell short in a
panic than in a normal market?
A. It depends very much upon his financial necessities.
Q. Do you regard it as justifiable in a normal market for
a man to sell a thing he has not got, with the idea of depressing prices in order to buy in the stock at a lower level?
A. I think it is a question between a man and his own
34
A. I think a great many people deprecate it. Others approve it.
Q. Do you approve it?
A. You ask me personally?
Q. Yes.
A. I never sold a share of stock short in my life.
Q. Then you do not approve of it, do you?
A. I just happen not to have done it. My private business, if you please, I beg you to omit.
Q. I have not asked you your private business.
A. Yes; you asked me what I did myself.
Q. I did not ask you that, sir; I asked you what you
thought about it.
* * * * *
Q. Do you approve of short selling in others?
A. Under what conditions?
Q. Under any conditions.
A. Yes; under some conditions.
Q. Do you approve of short selling in a normal market?
A. I will answer that question by saying it is a moral
question with the individual himself. It is not up to me to
express my opinion upon it.
Q. Do you personally approve of short selling in a normal
market ?
A. Not I, personally, no.
Q. You do not. And is it or not the fact that the bulk
of the short selling is done in a normal market?
A. I should say no; more often on an excited market.
Q. It is done every day, is it not?
A. Oh, yes; to some extent.
Q. And it is done in large volume, is it not?
A. At times. •
Q. The stock exchange does not discourage it, does it?
A. The stock exchange does not enter into it at all.
Q. The stock exchange does not discourage short selling,
does it?
A. The stock exchange takes no position in the matter
at all.
Q. Has the stock exchange any rule or regulation against
short selling?
A. None.
Q. Why is it not just as simple a matter for them to have
a regulation against short selling as to have a regulation
against a broker splitting his commissions ?
A. There is no regulation against short selling; that is all
I can say to you about it.
The Stock Exchange can of course restrict or stop short
selling whenever it sees fit to do so. It is doing so now to a
limited extent. There are many other ways in which it can
be more effectively accomplished.
(1) It can be limited as provided by the pending Owen
Bill by forbidding a broker to lend his customers' stock in
http://fraser.stlouisfed.org/
satisfaction
of short sales. Or,
Federal Reserve
Bank of St. Louis
35
(2) It can require each member to deliver at the Stock
Exchange Clearing House certificates representing all the
stock he has sold and take and pay for all the stock he has
purchased the preceding day instead of merely settling differences between total purchases and sales and taking or delivering the balance, as is now done,—in the same way in
which the Clearing House for banks now requires every bank
to surrender all the checks payable to it and receives all that
are paid by it.
The present regulations of the Stock Exchange Clearing
House facilitate and are intended to facilitate gambling and
especially short selling. Without them it could not be conducted on a large scale.
Or
(3) The selling broker can be required to disclose the
numbers of the certificates. If he is selling for foreign account there is no difficulty in cabling the numbers of the
certificates with the order.
Or
(4) The Exchange can simply enact a rule forbidding it
and enforce it just as it now enforces the rule for a uniform
commission and far more readily, for it is more easy to
control.
There is not time to review the arguments for and against
short selling nor is it germane to the present discussion. It
bears, not on the question of whether there should be regulation but as to what shall be the character of such regulation.
I may, however, be permitted to say in passing that the
champions of short selling studiously ignore the main argument against its legitimacy. They insist that it is a safety
valve against undue inflation and depression, in that it tends
to check an undue rising and falling market in a security.
It is said that the short-seller sells when in his judgment
a stock is too high and is compelled to cover his sale by buying when it has reached what he believes to be its real value.
That sounds well in theory. In practice short-selling is a
dangerous factor in times of depression. It is a direct incentive toward creating and accentuating panics in the security
market.
But above and beyond this, it is not in fact to any extent
employed,
as is claimed, as a test of the value of a given secur
36
ity, and does not in practical operation perform any such
useful function, except in rare cases. Speculation is the main
feature of the stock market. The bulk of its transactions are
in the nature of gambling, the brokers being themselves and
for their own account the chief speculators and the customers
who trade through them buying and selling from day to day
making up the remaining speculative contingent.
Mr. Sturgis testified on this subject as follows:
Q. We are speaking of transactions that are made^ by
members of your exchange in the way of short selling.
Would not their books show whether or not they were selling
short ?
A. If the broker is operating for his own account, yes.
Q. And you say from a quarter to a half of the transactions on the exchange are for the broker's own account?
A. We agreed upon a third, I think.
The Commission appointed by Governor (now Mr. Justice) Hughes found:
It is unquestionable that only a small part of the transactions upon the Exchange is of an investment character.
A substantial part may be characterized as virtual gambling.
3c
%
sf;
$
sji
The patrons of the Exchange may be divided into the following groups.
(1) Investors, who personally examine the facts relating
to the value of securities or act on the advice of reputable
and experienced financiers, and pay in full for what they
buy.
(2) Manipulators, whose connection with corporations issuing or controlling particular securities enables them under
certain circumstances to move prices up or down, and who
are thus in some degree protected from dangers encountered
by other speculators.
(3) Floor traders, who keenly study the markets and^ the
general conditions of business and acquire early information concerning the changes which affect the values of securities. From their familiarity with the technique of dealings on the Exchange, and ability to act in concert with
others, and thus manipulate values, they are supposed to
have special advantages over other traders.
(4) Outside operators having capital, experience and
knowledge of the general conditions of the business. Testimony is clear as to .the result which, in the long run, attends their operations; commissions and interest charges
constitute a factor always working against them. Since
good luck and bad luck alternate in time, the gains # only
stimulate these men to larger ventures, and they persist in
them till a serious or ruinous loss forces them out of the
"Street".
(5) Inexperienced persons, who act on interested advice,
"tips",
advertisements in newspapers, or circulars sent by
http://fraser.stlouisfed.org/
'1
Federal Reserve Bank of St. Louis
i> i n
H • -fa^»*—ii
liimiuIuliniiWllliifr
37
confidence in their luck.
eventually lose.
Almost without exception they
A "short-selling'' movement is not ordinarily directed
against a particular security on its merits. La order to be
successful on a substantial scale it attacks the entire market.
The big operator sells, without owning, a number of the most
active securities on the list without regard to their merits or
whether they are intrinsically worth more or less than their
then selling price. There is rarely a substantial selling
movement that does not attack and depress prices in the
active stocks all along the line. The market prices move up
and down by sympathy. That being true, explodes most of the
fine-spun theories as to the justification for short-selling in
fixing and steadying the value of a given security.
Unless I wholly misapprehend the operations of our
financial system the regulation by law of the Stock Exchange
is an indispensable condition precedent to the destruction of
the control of great financial credits by a few men or to any
effective corporate reform in this country. It is by the illegitimate use of the facilities of this, the world's greatest security market, that many of the vast predatory fortunes have
been filched from the public. The relation and importance of
the Exchange to corporate independence of banking domination are little understood. We shall accomplish nothing substantial in the direction of the coveted goal of financial emancipation toward which we are striving until this factor is appreciated and dealt with as an essential factor in the general
scheme of reform.
The reasons in favor of Federal regulation and control of
the Exchange are vastly more weighty than those appertaining to any of the many occupations that are now required to
be incorporated and are so regulated and controlled. As before stated, the Exchange is in no sense a private or local enterprise. It is grossly misleading to say, as has been argued
by the defenders of its present irresponsible form of association, that it is not engaged in business and that its only function is to provide a meeting place where its members may
deal with one another under prescribed rules.
The Exchange is engaged in business and of a highly important and distinctly National character. It owns the entire stock of the New York Quotation^Co., which for a speci
38
Street, New York City, with a ticker service that registers,
impartially and without earmarks, every genuine and manipulated or fictitous transactions that takes place on its floor. For
$100,000 a year, under contract terminable upon one day's notice, it sells these quotations to a subsidiary of the Western
Union, the Gold & Stock Telegraph Company, which also
maintains a like ticker service. The latter, however, can supply the quotations to such persons only as the Exchange approves and under no circumstances to members' offices south
of Chambers Street or to any competing Exchange in New
York City. The quotations are gathered upon the floor of the
Exchange by its employees and transmitted by its own operators to the officers of the New York Quotation Co. and the
Gold & Stock Co. and thence distributed throughout the
United States and by cable to foreign countries, but the Exchange retains the right to determine absolutely who shall
and who shall not receive these quotations throughout the
length and breadth of the land and all over the globe. There
is no other method by which quotations of transactions on the
Exchange are obtainable (a new agreement is said to have
been recently effected with the Western Union that places
these quotations still more completely in the control of the
Exchange, if such a thing be possible).
The Exchange is the market place of the entire country
and of foreign countries for securities and the only public
market in the United States where money is loaned and borrowed.
The business transacted by its members has no relation
to State lines. It comes to them from almost every corner of
the civilized world. Its members maintain private wires to all
the principal Cities of the United States and the transactions
conducted on this open Board are for the account of customers from all parts of the country and from foreign countries.
Its hall-mark as to the genuineness of a certificate of interest in a corporation passes current everywhere and it is
rightly supervised with jealous care and at considerable expense to the corporations concerned.
It undertakes to prescribe the form and conditions of
every corporate security in which it authorizes dealings and
its determination is final through its control over the listing
of such securities. It reserves the right to exact the minutest
details of the business and affairs of the issuing corporation,
39
such corporation shall declare and pay interest and dividends
and in the matter of the transfer agents and registrar and
as regards endless other details; all this very properly on the
ground that it is performing a public function national in its
scope.
It jealously controls the reports of every transaction on
its floor, issues and distributes the records of every purchase
and sale, or offer of purchase and sale, which it thereby impliedly represents as an honest and genuine transaction.
Courts of Justice, Trustees, financial institutions, tax officials,
State Superintendents of Banks, Trust Companies and Fire
and Life Insurance Companies and other corporations that
are subject to supervision in the several States throughout
the country and the Comptroller of the Currency in fixing
the value of securities of National Banks and the public the
world over, act on this information. It exacts compensation
for the service of listing securities, sells the quotations to
interstate and international telegraph companies for large
sums of money and scatters them broadcast through the newspapers, over the telephone and telegraph, but always under
its control.
In the face of this array of undisputed facts, this stupendously powerful National and International agency of
finance contends that it would not be a reasonable or legitimate exercise of the power of Congress to prevent the use of
the mails, telephone and telegraph in interstate business as a
means of perpetuating frauds upon the public. Congress not
only has the unquestioned power—it has become an imperative duty. It is a necessity of modern finance from which
there is no escape. Ours is the only country that has failed to
realize our duty and to do it.
Eegulation is not only needed as a preventive of fraud.
It will accomplish still greater results as a constructive measure.
Great and much-needed reforms in the organization and
methods of our corporations may be legitimately worked out
through the power wielded by the Stock Exchange over the
listing of securities. Much of the confusion and many of the
defects in corporate regulation due to the diversity of State
laws and the bidding of the States against one another in
laxity of administration in order to attract corporations within their borders may be corrected and uniformity of methods
40
Thus complete publicity as to all the affairs of a corporation may be uniformly enforced. It may and should require
as a condition of listing a security that all the intermediate
profits and commissions of bankers, brokers and middlemen
shall be fully disclosed, thus throwing about the investor the
protection afforded by the "Companies Act" of Great Britian
and of other civilized countries* Every new security should
be required to be publicly issued and offered to the public
through the publication of a prospectus so as to eliminate
the secret profits of the middleman as far as possible. It is
the only way to create confidence in and to popularize investments in corporate securities.
Detailed annual statements should be exacted from all
corporations whose securities are listed, disclosing all payments made or prbfits or emoluments received, directly or indirectly, by officers, directors, bankers and brokers from the
corporation, so that every security holder may know whether
and to what extent his Company is being exploited.
The scandalous practices of officers and directors in speculating upon inside and advance information on the action
of their corporations may be curtailed, if not stopped, by requiring that the officers shall make full disclosures of all their
transactions in buying and selling securities of their Companies. The Act incorporating the Exchanges should provide
that all statements required to be made by corporations shall
be under oath and that false swearing shall constitute perjury.
At present they are extra-judicial.
In short, the opportunities of the Exchange as an agency
of corporate reform are almost endless, provided its own
practices can be reformed so as to entitle it to exercise these
broad powers. Instead of the investment business of the country abandoning the Exchange as is now and has been to an extent the case for some time past, it will become necessary to the
reputation and salability of a security that it should be listed
by reason of the protection thereby afforded the investor.
The general public, which has grown to look upon the Exchange with distrust because of the practices that have been
tolerated in the past, will be given new confidence in it when
it is under legal supervision.
The argument as to the effect of this legislation in enlarging the usefulness of the Exchange has been referred to
as an admission that the ultimate purpose is to secure pubhttp://fraser.stlouisfed.org/
aaite
Mof^ St.
M Louis
iiM^lwiiiii
ill i i^iiuii.riiiij^^i! i. u a»,ii,,i.^Li)i».W T ^1^
Federal Reserve Bank
41
corporate reform through the use of the Post Office Department. It is nothing of the kind, although it would not be a
misfortune if it should indirectly lead to uniformity in requiring publicity of the affairs of corporations and to restricting the bidding of the States against one another in
laxity of administration. If it incidentally reduces the incentives for the organization of "carpet-bag" and "wildcat" corporations it will hardly be objectionable on that
ground if it is otherwise a legitimate exercise of power.
It is as essential to protect the mails against being used
as an agency for facilitating the perpetration of fraud to require that the public market whose quotations are to be carried by the mails shall be restricted to the listing of securities
that conform to given requirements of publicity of their affairs
as it is that the quotations of those securities shall represent
only actual and not fictitious or manipulated transactions.
There is no ulterior purpose in the first requirement,
even though it may serve another useful purpose. The intended protection of the public cannot be secured without compliance with both requirements.
If there has been any argument advanced to justify our
permitting this unincorporated association to determine, without public supervision, when and under what conditions these
great security markets shall be opened and closed, it has
not been brought to my attention. The action thus taken
is of the most distinctive public concern. It directly affects
the fortunes of every business and financial institution in the
country. Why should we tolerate its being longer subject to
the whims or the judgment, good or bad, of a few interested
men who are responsible to no one for its far-reaching results ?
Incorporation is not, however, the only means of regulation. It has been put forward as the most practicable means
and as rendering regulation effective with the least possible
interference with the liberty of the members of the Exchange.
The suggestion that the members be required to keep separate books containing entries of transactions on the Stock
Exchange and that these books be subject to inspection by
public authority for the purpose of discovering manipulation
and other violations of law has met with a great outcry from
the gentlemen whose transactions are thus sought to be subjected to supervision. They entirely overlook the fact that
there are innumerable occupations, only remotely affecting
42
the interests of the public, in which such inspection is provided for by State and Federal authority. Manipulation can
no more be discovered without such power of supervision than
could the practice of rebates have been repressed and punished without access by the Interstate Commerce Commission
to the books of the railroads. The same is in a degree true
of the violations of the Anti-Trust Law. Only in isolated instances have they heretofore been discoverable but with the
aid of the Trade Commission Bill it will be possible to reach
the secret agreements and arrangements in restraint of trade
that have thus far eluded detection.
With few exceptions the members of the Exchange are
mere puppets of the big operators and financiers with inside
information, in the practice of manipulation. They can be
reached only through the brokers' books.
It was established before the Pujo Committee that many
of these accounts are kept on the books of the brokers by
numbers and that the names of the principals were unknown
to those in charge of the accounts. In that way the identity
of the men who were "rigging the markets" was effectively
hidden. One of the first acts of the regulating body would
be to put an end to such practices and to require that the
books of the brokers should state the facts, through which the
operations of their principals would be discoverable.
Certain objections have been urged against the regulation
of the Exchange by public authority which should now be considered.
Mr. Van Antwerp has been the chief spokesman in voicing
these objections. They were summarized by him a few weeks
ago from his press bureau as follows:
1. That the subject of incorporating the Exchange was
considered by the New York State Senate in 1913 and there
overwhelmingly rejected.
The fact is that the Bill that was then presented was opposed by me before the Senate Committee as a mere subterfuge and as intended to defeat effective regulation by applying a quack remedy. As bearing on the conclusiveness of this
"argument'9 it may not be out of place to remark here parenthetically that the body which defeated the Bill is the same
legislative body that, by an overwhelming vote, acquitted one
of its members (Senator Stilwell) of the charge of bribery
http://fraser.stlouisfed.org/
OBBank
identically
Federal Reserve
of St. Louis the same evidence on which he was a few wee^s
43
later convicted in a criminal court and for which he is notf
serving a term in the State Prison.
2. I t is next said that there is no public demand for this
reform.
In evidence of that fact Mr, Van Antwerp asserts that at
the hearing before the TL S. Senate Committee on the pending
Owen Bill for the enforced incorporation and regulation of
the Exchange:
36 witnesses appeared against the Bill and only one lfiU
favor of it—the latter the lawyer who drew the Bill.
The reference to " t h e lawyer who drew the Bill" is intended for me; but Mr. Van Antwerp omits to state that it
was prepared by the House Committee on Banking and Currency; that it was revised by the Committee; that it was
irecommended by it and that the same Bill has been introduced
Iby Senator Owen in the Senate and by Congressman Henry,
ithe Chairman of the Committee on Eules of the House (who is
mot a member of the House Committee on Banking and Currency) and that this Bill is now pending in both Houses..
The facts are further:
1. That there were in all 18 and not 36 witnesses heard
before the Committee, as appears from the official record of
the proceedings.
2. That none of them were under oath or subject to crossexamination.
3. That 3 of the 18 appeared in favor of the Bill and,
;and of the 14 who argued against the Bill in its then form
.a number of them directed their arguments to the particular
iphraseology of certain parts of the Bill and that of this number 7 were Presidents, ex-Presidents, Governors or members
of the Stock Exchange, whose abuses were sought to be corrected by the Bill; 1 was the General Counsel for the New
York Stock Exchange and another the General Counsel for
:the Consolidated Stock Exchange. They were there in the
.capacity of Counsel and made oral arguments and filed
.Briefs and are by reason of that fact—and that alone—indeluded in Mr. Van Antwerp's "list of witnesses". 2 were
tthe President and Counsel for the Boston Chamber of Comiinerce, both of whom admitted the wisdom and necessity
«of Federal regulation and presented a proposed Bill em*
sbodying their views of the form of regulation they deemed
.desirable. One was a merchant who had been a member of
ithe Hughes Commission and whose testimony was directed
ilargely to explaining and justifying the virtues of watered
.stock; and the three others were financial experts, including
Professor Emery.
4. That the Bill which is described by Mr. Van Antwerp
44
"only one in favor of it—the lawyer who drew the Bill"—
is the identical Bill that was favorably reported by the Pujo
Committe of the House of Representatives in February,
1913, after a long investigation in which many witnesses
were examined and cross-examined under oath, with the
recommendation of 10 of the 11 members of that Committee,
including all the 7 Democratic members and three out of
the four Republicans,
and
5. and finally,—That it is the same Bill that has received
the unqualified approval of five of the seven Democratic
members of the present Senate Committee on Banking and
Currency.
Inasmuch as it is nobody's particular business except
that of the general public, which has no spokesman, to press
this reform, whilst it is the particular business of the Stock
Exchange and its officers and specially employed Counsel to
defeat every attempt to bring the Exchange under legal regulation, the consensus of independent opinion in favor of regulation as represented in the Committees of Congress would
hardly seem to justify the implication that there is no public
sentiment in favor of this reform.
3. The most surprising and, if I may say so, the most
misleading of the arguments urged against regulation, is to
the effect that if the Exchange were now incorporated or
under Federal regulation, its action during the recent crisis
arising out of the war in prohibiting its members from trading privately in stocks that were not listed on the Exchange
and with which the latter has no more concern than a stranger
and with respect to which it has legitimately no more power
to control its members than is possessed by a stranger, would
have been rendered impossible and that such action would in
that event have been preventable through injunctions issued
by the Courts against the exercise of its unauthorized restraint upon the free action of its members in matters not
the concern of the Exchange.
There is no means of knowing on what this fanciful assertion is based. It has no legal warrant so far as can be ascertained. The fact that the Exchange has been able to enforce
this unauthorized action against its members does, however,
shed a flood of light upon the extent of its unlawful domination and the despotism that it is able to wield over its members with respect to their -dealings in securities that are not
listed or dealt in or on the Exchange and with which the latter
http://fraser.stlouisfed.org/
has no concern.
Federal Reserve Bank of St. Louis
45
I do not criticize the fact of the general acquiescence by
the members in the action it has taken, however arbitrary it
may have been. It was an act of self-preservation and would
probably have been agreed to for that reason whether the
Exchange was or was not subject to regulation by the authorities. But there is no reason why that act or any other act
of a body of this character gratuitously exercising public
functions without public authority should not be subject to
the scrutiny of the Courts if any member felt that his legal
rights had been invaded, without subjecting him to arbitrary
expulsion for daring to invoke the law of the land. The suggestion that this, the most important link in our financial
structure, should be set apart and permitted to be a law unto
itself, lest the Courts might otherwise interfere to review its
action and redress grievances, is inadmissible in any community that professes to be governed by law.
The Governors of the Stock Exchange are obsessed with
the lawless notion that the great peril against which they
must jealously guard their institutions is the possibility of
reserving to a member the right of appeal to the Courts from
their judgments—however unrighteous and despotic they may
be. Unfortunately the decisions of the Courts based upon
their present peculiarly irresponsible form of organization,
have encouraged them to believe that they are a law unto
themselves. It is largely because of this current of judicial
authority that the law requires change.
The Exchange dreads regulation because, as it naively
admits, regulation would interfere with that despotism which
they call their "disciplinary" powers that are not subject to
review, as they should be. Why should not a member have
the right to a determination by a Court of whether his engaging in a private transaction for the purchase or sale of stock
not listed on the Exchange and with which the latter has nothing to do, either for his own account or for others, is within
his rights as a citizen, without being summarily expelled for
his temerity in daring to appeal to a Court of justice?
I am not now discussing the wisdom of this particular
regulation under the exceptional circumstances under which it
was put into effect nor do I believe that it would have been
questioned, whatever may have been the right of members to
secure a judicial review. A rule that might be wise and justifiable under certain conditions may be intolerable under
46
overturn it; if it is wrong the power should be lodged somewhere to correct it.
I am objecting to the principle involved in the arbitrary
contention that the Exchange must be permitted to remain
unregulated so that its acts, however, ill-considered or oppressive, shall not in any event be subject to judicial review.
It is a plea for mob law. No more insidious form of anarchy
was ever preached.
We are finally told that as the result of the foolish, muckraking agitation for regulation which the Exchange has never
tired of denouncing, there was enacted in 1913 a law against
manipulation and that anyway none has been practiced during
the past few weeks of stagnant business since the Exchange
reopened. Granted, though I doubt it. In the absence of
regulation there is no way of proving or disproving this statement and as before stated the law is a humbug and it would
in the absence of regulation be a dead letter in any event.
The Exchange has openly and heatedly defended the practice so long and so recently that it does not seem reasonable
that it would now go out of its way to end it, especially as it
has been an important source of profit to so many of its members, who do not yet consider it morally wrong.
If this argument is sound, we should repeal all supervisory and visitorial powers over our banks, trust companies,
railroads, life insurance companies, packing houses, factories
and other businessess having a quasi-public relation, for
have we not stringent penal laws against their unlawful doings and those of their officers?
Officers of corporations may then with impunity steal
from their banks, packing-houses may be in a state of filth
breeding disease, all health regulations and safety appliances
in factories may be disregarded and every penal law affecting
their safety defeated, since there would be no way of ascertaining the extent of the violations.
The Superintendents of Banks and Insurance may now
overhaul all the accounts and transactions of the institutions
under their charge and may examine the officers and directors
of the corporations under oath as to all matters pertaining to
the corporation and thus discover violations of law. The Exchange indignantly persists that to subject its members to
like visitation involves an imputation upon their honor and
they resent it with as much heat as if there were no precedent
47
In the absence of these powers of visitation and regulation over banks, life insurance companies and other businesses
we would be in the same predicament as to them that the Exchange claims we now are with respect to it—we might have
ample repressive and punitive laws to reach illicit practices,
when discovered, but no means of discovering them and so we
may as well have no laws whatever.
Lastly, It is said that incorporation or regulation of the
Exchange would necessarily involve the right of the Court to
review the discipline of the members, which must at all costs
be prevented since it would mean the granting of injunctions
to stay the action of the Exchange pending review and that
this would be destructive of effective control over the members. Summary action is claimed to be necessary to enforce
discipline.
It by no means follows that regulation would involve
undue interference with the discipline of the members.
That would rest in the judgment of the public body having the regulation in charge. All would depend on the
form of the legislation. The Exchange has no right to assume that anything would be done to interfere with its
efficiency. This is believed to be a* pretext. Its real fears are
(1) that the limitation upon its membership, its rigidly enforced rule requiring the charging of uniform commissions,
its at present unreviewable discipline of members for action
involving no moral delinquency, its unwarranted control over
public quotations of securities and its despotic rule over the
smaller Exchanges will be ended; and (2) that its transactions
involving the manipulation-of prices, would come under the
ban of the law and be discoverable and punishable. In this
it is entirely right.
Such of these practices and regulations as are found to be
contrary to the general interest would be ended by regulation,
but it does not follow that reasonable limitations upon its
membership, nor a fair uniform rate of commission, nor just
discipline of its members, would meet with interference.
The continued assertion by the Exchange that it and it
alone shall continue to determine when the doors of its great
public security market shall open and when they shall close,
is a fair illustration df the extent of its obsession on this subject. The fact of its great public position and responsibility
having now been brought home to the Exchange, it continues.
43
view of the manner in which it discharges its public functions.
Its only answer is that being at the moment on its good behavior, whilst it is under public scrutiny, it should be allowed
to contiune to do as it pleases in the discharge of this stupendous public trust that so vitally affects the entire country
and all its business and financial interests.
It rightly scents the danger to its illicit transactions and
lawless arrogation of power from regulation, hence the desperate struggle it is waging against the inevitable.
I believe it fails, however, to appreciate the broader aspects of this important public question and the eventual gain
to it in increased stability and revived public confidence.
In this connection I take the liberty of repeating the statement made by me before the IT. S. Senate Committee:
I am convinced that the time will come, and before long,
after regulation has been enforced, when those who are now
bitterly assailing the champions of this legislation in the
vain hope of thereby diverting the issue will find that "it -has
marked the dawn of a new era of usefulness and prosperity
for them and that the Exchange will feel grateful to those
who have pointed the way.
THE LAWYER-CITIZENHIS ENLARGING RESPONSIBILITIES
An Address
Delivered at the Meeting of the COMMERCIAL
LAW LEAGUE, at the Hotel Breakers,
Atlantic City, N. J., on
July 27th. 1916.
By
Samuel Untennyer
«{ N.w York
THE LAWYER-CITIZEN—
HIS ENLARGING RESPONSIBILITIES.
There have been revolutionary changes in the field
of activities of our profession since I began the practice of the law in the City of New York 37 years ago.
The evolution has been more4 marked in the great
cities and especially in the metropolis of the country
than in other sections but it has everywhere involved
the development of qualities that were not required as
part of the equipment of the lawyer of the earlier days.
The conveyancer has been replaced by the Title
Company; co-operative commercial bodies and collection agencies have taken the place of the lawyer whose
practice was devoted largely to claim-collections;
Chambers of Commerce and Boards of Trade, with
their enforced and voluntary Committees of Arbitration are happily reducing the volume of important litigation to a minimum. The Casualty Companies, the
Employers' Liability and Workmen's Compensation
Acts and the numberless other forms of co-operative
and Governmental devices for dealing with claims
arising out of personal injuries are rapidly eliminating this field of legal activity; whilst the simplification
of procedure and of legal documents and the abolition
of cumbersome technicalities, that were an impedi-
1
ment and a reproach to the administration of justice
in all branches of the law, mark the passing of the
technical specialist-practitioner.
In the olden days advocacy was the chosen field of
the giants of our Bar, There and there alone was the
arena in which, free to all and without fear or favor,
reputations were won. Our greatest advocate was our
acknowledged leader. No man aspired to leadership
except through his work in the Courts, which was the
supreme test of his right to lead.* In our community
as in yours the men who rose to eminence were without exception advocates who owed their material and
professional success wholly to their eloquence and
legal learning. Charles O'Connor, William M. Evarts,
William A. Beach, James C. Carter, Joseph H.
Choate, Francis N. Bangs, John K. Porter and William Fullerton were national figures and names to conjure with in my early days and solely by reason of
their reputations as advocates. Not one of them
was a money-maker or a business man. Many
of them died poor and some of them penniless.
All this is now changed. We have nothing to
compare with them to-day. Advocacy is with us almost an extinct art. The work in the Courts is regarded as a necessary evil of the practice. The men
who engage in it are, with rare exceptions, mere pigmies in learning and eloqeunce as compared with the
men of the last generation. In great offices the "business" is either farmed out to specialists in trial work,
or entrusted to junior partners whose ambition is to
2
escape from its arduous labors by promotion to the
more lucrative work of acting as highly paid clerks to
financiers in guiding them to keep "prayerfully within
the law."
Nowadays we rarely find a leading advocate at the
head of or connected with a great Metropolitan law
firm. The flower of our Bar in the great cities have
been seduced by the temptations of business and
money-making from the proud position once held by
the leading advocate. What was the primary and legitimate function of the lawyer has become a very subordinate part of his professional life, whilst his office is
conducted more on the lines of a business organization than a profession.
With every year that parses, men who have achieved
distinction in our profession are drafted out of it to
lead great banks, banking houses, railroad systems or
industrial concerns of national and international importance because of the specialized knowledge and
training that have come to them from the practice of
the law at their desks under modern conditions. Some
of our present so-called "leaders" have never tried or
argued any kind of a case whilst others who have
on rare occasions tried, or tried to try, or argue a case
have been such strangers to the atmosphere of the
Court and have done it so badly that they have injured
rather than helped their reputations in the attempt.
The fault is not ours nor is it due to a declining
love of our profession. It is because the Courts are
too busy and there is a lessening relative importance
3
to the controversial side of the law as compared with
the growth and magnitude of business and finance requiring the aid of the lawyer.
Our big and successful business men have no time
or disposition to litigate. They are not much concerned with abstract principles of right and wrong.
They are looking impatiently for results. They cannot afford the delays and uncertainties of the law in
large affairs. Important litigation is therefore exceedingly rare as compared with the complexity of modern
affairs. The old way of settling differences is rapidly
being supplanted by arbitration in this as in the other
relations of life, and so we must not look to. advocacy
as the forum for the larger activities of the lawyer
of the future.
Whilst therefore our scope of private endeavor is
being more and more circumscribed, I venture to suggest that the field for public usefulness has been constantly broadening and on bigger and more constructive lines than at any time in the past, and that we are
confronted by boundless opportunities and new responsibilities that we cannot escape.
Our profession has been conservative to the point
of reaction. Instead of bending our powerful influence
and expert knowledge to correcting the abuses and defects in the law, we seem to regard such service as the
exclusive province of the legislator, which is far too
narrow a conception of our professional duties.
The influence of the lawyer is waning and justly so
on economic questions. We are too much inclined to
4
permit our views to be moulded by the selfish interests
of the clients whom we happen to represent. We have
no right to allow the source of our retainers to blind
us to our duties of citizenship or to destroy our independence. It would not be a reproach to be known
in the community as.a corporation lawyer if those
among us who specialize in corporation law were fearless in our denunciation of corporate abuses and earnest in championing reforms. We above all others are
familiar with the weak spots. Upon us as specialists and as sworn officers of the law devolves primarily the, duty of pointing out the
need for corrective legislation and the public
has the right to rely upon us for guidance. When we
sell our expert knowledge to our clients our opinions of what is right and wrong in existing law
do not go with it. It does not follow that because we
advise the client as to what the law is that we should
insist that it is as it should be, or should fail to exert
ourselves to change it if it is not as it should be.
We are today face to face with the task of moulding
our antiquated laws to meet modern conditions,
which is a vastly more important service than
that of mere interpretation. One of the many needed
steps in that direction has been taken by the American Bar Association through its Committee on Uniform Laws, but it has hardly scratched the surface
of the urgent reforms that must be accomplished before ours will be entitled to be classed among the progressive sciences.
5
Whilst much may be done through such agencies
where there is substantial agreement among the members upon the wisdom of the proposed change, the controversial reforms, which are generally the most important, cannot be effectively accomplished by the concerted action of a large body of men of differing opinions, however wise or patriotic. They must be the result of independent, individual conviction and agitation where each man may be as radical in his program
as he believes to be necessary, unhampered by the inevitable compromises and perils of non-action that are
the outcome of the divergent views of collective bodies.
We must invade the realms of economic and social
and industrial reform wherever the skill of the lawyer
is required to translate the principle into action. Yet
every Bar Association has studiously refrained from
encroaching upon this, which is peculiarly the province
of the public-spirited lawyer.
The number and importance of such subjects of reform that occur to one are so great that it would be
impossible fully to discuss any one of them within the
compass of a single Address. I will confine myself today to indicating briefly a few of the many such subjects, in which we are to-day stumbling along under
intolerably obsolete conditions, far in the rear of other
civilized nations. They include our Corporate Laws;
Social Justice; and the Administration of the Criminal
Law*
Our corporation laws are without exception the
loosest, most unjust and inadequate and in every way
6
the worst with which any civilized nation is
afflicted. They are a snare to the investor, minorities are helpless, they offer a premium upon dishonesty and furnish the safest and most fruitful field
to the criminally disposed exploiter for the practice of
fraud and oppression upon the public. Every safeguard that other countries have thrown about their
citizens has been rejected by us. From the birth to the
death of the corporation, the system is utterly wrong
and designedly so. It is the creature of the long line
of powerful men (under the guidance of their clever
advisers) who framed the legislation to serve the ends
of thefinancialbuccaneer to the exclusion of the public
protection. Under normal conditions it would not
have been possible in a justice-loving country such as
ours. For this unspeakable situation we are primarily
indebted to our form of Government. Upon the fetish
of the sovereignty of the States rests the main responsibility. It is one of the many penalties that has been .
and is being inflicted upon us for this worship of the
empty shell of States' rights.
The clever men who have been profiting by
-the continuance of the lax administration of our corporations have not been slow to seize upon this prejudice and to exploit it wherever their interests have
been threatened., The politicians who are the creatures of these selfish interests have taken refuge behind this appeal.
I am and have been for thirty years an avowed Nationalist, for I believe that there is only one great
7
issue that separates the parties to-day and that is the
issue of Democracy—that of the privileged and predatory Classes vs. the Masses and that the rights of
the Masses can only be worked out through Federal
action.
Whatever merit there was in the doctrine of State
Soverignty in past times—it was a virile and
compelling issue—has been long since outgrown
and is completely overshadowed by the interstate character of modern business which cannot be
conducted within State lines. The country is more
unified and smaller in the sense that transportation
and communication have drawn it together in closer
and more intimate relations. It required as many
weeks to reach one another as is now accomplished in
days.
In analyzing the reason for our anomalous corporation laws, we find that to each State there
is reserved the sovereign right to grant corporate
charters regardless of the residence or place of
business or actual domicile of the corporation or of its
officers, directors or stockholders and without reference to the interstate character of the business. The
granting of such charters assures substantial revenues
to the State for the franchise and valuable perquisites
to lawyers and others within its boundaries for organizing the corporation and keeping alive the corporate
existence. It also assures important business for
the Courts of the State, since litigants must ordinarily
come there to redress their grievances against the cor-
8
poration, regardless of the fact that the corporation
has all its property and conducts all its business in another State.
The organizers of the corporation, grotesque as it
would appear to the "man from Mars" have the choice
between the forty-eight States of the Union, as to
where they will select their corporate home, regardless of the place of actual domicile. They naturally select the State whose laws offer the least restrictions
and the greatest freedom from personal liability for
the acts of the officers and directors. Incidentally, the
policies of the Courts of the various States toward corporations and their stockholders are important factors in determining the State that is to be selected. If,
for instance, as was formerly the case, the laws of
Massachusetts or Ohio should require the stock to
be in fact fully paid to avoid personal liability and
stockholders were held liable to creditors in an
amount equal to the par of their stock, those States are
boycotted even by the corporations that operate exclusively within their borders in favor of a State with less
rigid regulations. Thus the many States that were
anxious to assure reasonable corporate responsibility
and proper protection to stockholders and creditors
and. to the public and clung to decent laws as long as
they could, have been literally driven into enacting
reckless, irresponsible legislation in order to "get their
fair share of the business" of harboring wildcat
corporations or to retain within their own borders the
legal domicile of the Companies to which they were
legitimately entitled.
Even the great State of New York, finding itself
unable longer to withstand the cut-throat competition
of its enterprising neighbor States, was finally forced
to throw conservatism to the winds and "went its Sister States one better/' It placed its merchandise on
the bargain counter by offering to issue unlimited
shares of stock without par value and free from all
personal liability, without regard to the actual values
behind the shares, as the result of which it has secured
very large customers whose "patronage" was supposed to be firmly held by its New Jersey neighbor.
What New Jersey will now do in the way of charteroffering or in the line of favorable judicial decisions
or in reducing or remitting its incorporation or annual franchise dues remains to be seen. That it will do
something to retain or increase its threatened "trade"
is a foregone conclusion.
Whilst this auctioning of the dignity of the States
is thus merrily proceeding is it likely that the
Courts of the States which have thus bartered
away their birthright and in which the revenues
from this source have become valuable will incur
the hostility of the corporations whose patronage
they secured at such sacrifice, by decisions that will
unduly protect creditors and stockholders? Or will
they, wherever possible, so construe the laws as to
attract to themselves corporations whose legitimate
homes are elsewhere, by illicit methods of which the
average honest business man would scorn to avail
himself?
10
And so we find ourselves in the intolerable, humiliating situation in which our States, which should
have a' uniform law, are bidding against one
another in laxity of administration on a subject where
public protection is essential and none is to be had under existing conditions. The States that are profiting
by this traffic will not surrender it, so that uniform
laws by concerted action is out of the question. We
are deliberately playing into the hands of dishonest
exploiters by adhering to the present system. The
remedy is obvious.
1. Enact a National Corporation Law. President
Taft recommended such a law under the advice of his
Attorney-General. I have been contending for such a
law for the past ten years and have never doubted its
constitutionality. Most of the important corporations,
except banks and local utilities could be reached by it,
as being engaged in foreign or interstate commerce as
now understood.
To those who are still so wedded to the academic,
idea of States' rights that they are • content
that the country shall continue to suffer from this
intolerable condition that strikes at the very foundations of business integrity, we might if necessary offer
by way of compromise a system by which the States
may continue to issue charters subject to the restriction that corporations engaged in interstate commerce
be required to secure a license from the Federal Government to conduct interstate business. In this way
Congress might prescribe such uniform conditions as
11
to the form of charter and the protection of securityholders as would secure civilized corporate administration. Whether the result be accomplished by direct
National incorporation or through the indirect method
of Federal license and control is immaterial as compared with the inestimable advantages of either method over the prevailing lawless situation which constitutes a reproach to our institutions. Substantial
progress might also be made through the agency of
the Stock Exchanges by placing them under the supervision of the Federal Government as is now the law
in every European country.
The New York Stock Exchange is the great security market of the world. Its far-reaching power
over the business and finances of the country is not
understood. It is essentially a public agency international in its scope. Its quotations of the prices at
which securities are supposed to be bought and sold
day by day are scattered broadcast all over the world.
These quotations are accepted by Courts of Justice
in all matters of litigation, by the Federal and State
banking officials in determining the solvency and
standing of banks, trust companies, insurance companies and other corporate bodies, by our National and
State authorities for the many purposes of taxation,
by trustees of estates and in short in all the complex
affairs affecting the values of properties whose securities are listed on the Exchange. Yet, strange to say,
such is the power of the Exchange over legislation,
that is has managed to circumvent all efforts at super-
12
vision and to remain an unincorporated, irresponsible,
self-governing body which has maintained the status
before the law of a private club with which the public
. is supposed to have<no concern. Its members may with
impunity manipulate securities on its list, depress
and inflate values by fictitious transactions and
use its vast and powerful machinery to defraud
the public through dishonest gambling. It stands
alone among our public institutions above and beyond
the law—a law unto itself. As now constituted it is a
sinister influence, but it has potentialities for invaluable public service if properly regulated by law.
If its operations and the listing of its securities
were subject to supervision as are the transactions of
banks, trust companies, life, fire and casualty insurance companies and other corporations having recognized quasi-public functions and responsibility, whose
transactions affect the public far less than do those of
the Stock Exchange, Congress might as a condition of
permitting its quotations to be carried in interstate
commerce by the mails and over the telegraph and
telephone, exact supervision over its operations for
the public security which would include certain charter provisions and a measure of publicity of the affairs
of the corporations in whose securities the Exchange
is permitted to deal. The swindles that are being perpetrated through the abuse of its machinery and without redress or fear of detection would be impossible.
Among the other urgent corporate reforms there
may be mentioned:
13
A uniform law for corporations engaged in foreign and interstate commerce on the general lines of
the "British Companies Acts/' which requires among
its other drastic provisions, (1) that the organizers
fully disclose and deposit at the public office designated
for the purpose, all contracts showing the profits of
bankers, brokers, promoters, underwriters and middlemen under severe criminal penalties for violating these
requirements; (2) that the stock be publicly offered
and fairly allotted among the subscribers before it can
be listed or dealt in on the Stock Exchange; (3) that
the books be audited by independent public chartered
accountants, who must prepare and send to the stockholders annually in advance of the annual meeting a
statement of the accounts for the year. These accountants must be elected annually by the shareholders. They cannot hold over. (4) The directors must
make full disclosure to the stockholders of the business
of the corporation and must attend at the annual meetings to answer such questions as may be put to them.
The compensation payable to them is voted by the
shareholders and under the English customs they cannot gamble in the securities of the Company to which
they hold a trust relation that is regarded as sacred
everywhere save with us.
There is no such thing in England or on the Continent, under their laws, as a director making money
out of his corporation directly or indirectly, whilst with
us it is the rule rather than the exception and nothing
is thought of the vicious practice.
14
They have no banking houses that name the directors, control the policies, buy from the companies the
securities thus controlled at pricesfixedby themselves,
sell them at a profit to themselves and act as fiscal
agents by putting the funds into their own bank accounts on their own terms and then solemnly pass resolutions ratifying all they have done.
A director who did the things there that are tolerated with us would be disgraced and drummed out
of the community.
2. The entire procedure affecting insolvency and
the reorganization of insolvent corporations must be
revolutionized and reversed.
It is an invitation and encouragement to the practice of fraud and oppression, to which the Courts are
parties. It has reached the proportions of a National
scandal and is a standing reproach to our administration of justice. Yet the Bar, that must realize the extent of the evil and is a beneficiary of the system, sits
supinely by without lifting a hand to correct it. The
wide-spread injustice and the far-reaching injury to
our National credit that are wrought by the present
practice may prehaps be most conveniently illustrated
by selecting at random one of the many recent railroad
receiverships and by following the recognized procedure.
They are all inaugurated and conducted on substantially the same lines whether they relate to rail-
15
ways or great industrial concerns engaged in interstate commerce and any one of them is typical of the
others.
The directors, under whose management the corporation has come to grief, or to whose interest
it is found that it should be taken out of the
hands of its owners — the stockholders — are the
only ones who know of its predicament or of their
intention to create a crisis in its affairs. One would
suppose that under such circumstances they would
be required to come frankly into Court, state their case
and place the property under the protection of the law
after notice to the stockholders, creditors and securityholders and to the Interstate Commerce Commission
or other constituted authorities, there to be dealt with
after an opportunity to all parties interested to be
heard. Nothing of the kind happens. What does
in fact happen is the following:
One or more of the officers, sometimes with and
sometimes without the knowledge or consent of the
Board of Directors or any of its members, and always
without the knowledge of the creditors, securityholders or stockholders or of any of the public authorities charged with the supervision of the affairs of the
Railway, selects a friendly creditor, who at the request
of this officer and on a petition that is usually prepared
by the Company's lawyer, becomes a plaintiff in a collusive suit ostensibly against the Railway, in which it
is charged that the Railway is or will be unable to meet
its matured or maturing obligations. This allegation
16
is conveniently admitted by an answer, verified by this
same officer of the Railway, who procures the action
of the petitioning creditor, t h e petition and answer
are not infrequently drawn by the same lawyer—both
selected by this same officer of the.Company.
Armed with these formidable documents the Counsel for "both parties" select the Judge to whom they
are to apply for Receivers for the Company, sometimes taking the precaution of discussing the application and exchanging views with him as to the
personnel of the Receivers, before making the formal
application. The Receivers not infrequently include
one or more of the officers under whose management
the Receivership became necessary or was found advisable.
Not an inkling of what is contemplated is required to be given to any of the real parties in interest
whose rights are so vitally involved or to the public
authority that should be afforded the opportunity to
protect the public and the parties in interest and more
particularly to be heard on the crucial questions of
whether there is any necessity for taking the property
out of the hands of its owners without their consent
and if so, as to the personnel of the Receivers to whose
care it is to be entrusted- It is safe to say that the
owners would rarely, if ever, elect to hand it over to
the tender/mercies of the men under whom it was
wrecked, if they had the chance to be heard- But,
strange to say, it is never considered essential or
proper to consult them or even to have them learn in
17
advance of the impending calamity to their property.
Meantime the "insiders" who alone are in possession of knowledge of the intended action are enabled
to "rig" the stock market in anticipation of the impending catastrophe and the victimized stockholders
are at their mercy. In a recent case the stock was
driven up within a few days of such a secret Receivership from $20 to $36 per share an<J dropped to under
$18 on the announcement of the Receivership, on enormous transactions. It was subsequently established
on an investigation before the Interstate Commerce
Commission that the Receivership papers were in
preparation for a week or more whilst these wild transactions in the stock on the Exchange were going on,
to the extent of hundreds of thousands of shares, and
that a number of the "insiders" were in the secret.
The naming of Receivers at the instigation of the
management through this circuitous and dishonest
method means that the management have decided that
there should be a reorganization of the property. Reorganization under such circumstances in turn means,
that the stockholders will be required to supply more
money to save their present investment. The fact that
the Receivers in charge or one or more of them are
nominees of the old management, gives to the latter a
great advantage in controlling the Reorganization and
in dictating its terms.
One of the many anomalies of the intolerable
practice that has grown up in these cases is,
18
that notwithstanding the collusive character of the
suit on which the jurisdiction of the Court is invoked
and secured and that the whole thing is the act of the
discredited management, the control of the suit is from
beginning to end leftabsolutely in its hands to the exclusion of the real owners. In most jurisdictions the
latter are not even allowed to intervene or become parties to the action or to secure any standing in Court or
right to be heard or to protect themselves at any stage
of the proceedings. They are not consulted or even
notified of the issuance of Receivers' Certificates that
are often negotiated to the extent of many millions in
priority to their interest in the property, to purchase
equipment or make improvement and for other purposes—all to be disbursed by the Receivers in whose
choice they have not been consulted.
The next step in this incredibly oppressive and inexplicable game of prostituting justice under the
forms of law is that of reorganizing the property.
It is not unusual for the interests that prompt the
Receivership to set the stage for Reorganization before the appointment of the Receivers is made. This
is done by selecting a Committee of eminently respectable figureheads, usually composed of bankers and
men connected with financial institutions who
are named by the prominent banking house
which controls the Reorganization as Syndicate Manager. The members of the Committee rarely have
any substantial interest in the property. They lend
the'use of their names in return for generous compen-
19
sation, the amount of which they fix and collect from
the securityholders.
The Committee publishes a call for the deposit
of securities with them under a drastic form of
agreement, containing extraordinary powers. The influence of the banking house and of the members
of the Committee in the financial world is such
that with the aid of the brokers who hold the
securities as collateral to loans and in others ways,
they secure such a hold upon the securities that the
scattered securityholders have usually no alternative
but to assent to the Plan of Reorganization. This ordinarily involves the raising of new money by way of assessment from the securityholders. These cash requirements are underwritten for a commission by a syndicate formed by the banking house or the Committee.
Unless there happens to be a concerted movement
among the securityholders for their protection, which
is very difficult and rarely happens, these Reorganization Committees begin their activities as self-constituted guardians of other people's property. When the
securities have been deposited with them, they secure
such a grip on the property that the scattered owners
have in effect no voice in the formulation of the plan
for the reorganization of their property. No matter
how unjust the Plan may be to a given class of securityholders, or how unfairly it may discriminate between one class and another, they are helpless because
of the large sums usually required to rehabilitate the
property and the difficulty of concerted action.
20
The proceeding is extra-judicial from beginning to
end. The Courts have no control over it. If a securityholder does not happen to like the way in which
his property is being dealt with by strangers to it,
whose only interest is in making money out of his misfortunes, his only remedy is to attend the sale and bid
upon the property in competition with the Committee,
which alone holds the bulk of the securities and can
deliver them in payment of the purchase price. This
means that his position is impossible and that he is
forced to subscribe to any terms that the Committee
may impose on his participation in the Reorganization.
The Committee controls the judicial proceedings.
When it is ready to reorganize the Court is asked
to sell the property at public auction. As the Committee then speaks for the securityholders, the Court has
no alternative. The so-called "sale" under these conditions is always a farce. The property is invariably
bought by the Committee at the upset price fixed by
the Courts-just about enough to pay the Receivers'
Certificates that have been issued by the Court against
the property and the vast expenses of foreclosure.
Neither the Interstate Commerce Commission nor the
Courts have any jurisdiction over the Plan or power
to pass upon its justice.
Throughout the legal proceedings resulting in the
elimination of the stockholders, and often of the creditors and bondholders, the voice of those interested in
the property is not permitted to be heard. If it be
said that the Committee merely executes the trust re-
21
posed in it by the depositing securityholders, the
answer is that the securityholders have been stripped
of all ability and opportunity to protect themselves
under the stupid and antiquated processes of law that
govern these proceedings. If, as often happens, the
property is located in different States, the Courts of
each State go through the mummery of conducting
"sales" that are ancillary or subsidiary to the sale in
the main jurisdiction. The entire procedure is so cumbersome, complicated and expensive that not even the
large securityholders could afford to take an active
part if the opportunity were afforded them to do so.
The cost of Reorganization of the average trunk
line system is anywhere from $1,000,000 to $3,000,000,
which comes out of the pockets of the securityholders,
either in cash or by way of further burdens on the reorganized road. It is easily ten times as large as in
any other country and necessarily so because of the
complications of the procedure.
This grotesque condition can readily be remedied
if the lawyers who understand this branch of the law
would sink their private interests and take a hand in
the work of reforming an intolerable system of which
they are partly beneficiaries.
(a) A National Incorporation Law is the first necessary step in the process of simplification of the procedure.
(b) The Court proceedings for the appointment of
Receivers should be instituted by the Interstate
22
Commerce Commission, somewhat after the fashion in
which the Comptroller of the Currency appoints Receivers for insolvent banks. The inauguration of that
method of dealing with National Banks and in the
several States in which the Bank Superintendent acts
for State Banks and Trust Companies and the Super-'
intendent of Insurance for insolvent Insurance Corporations, resulted in minimizing the expenses and in expediting the closing out of insolvent Companies in
their respective jurisdictions.
(c)' Notice of the application for Receivers should
be given by publication or otherwise to all securityholders, with the opportunity to them to be heard as
to the necessity for the Receivership and the personnel of the Receivers.
(d) The Plan of Reorganization should be subject
to the approval of the Interstate Commerce Commission and of the Court in the case of railway companies
and to the Trade Commission and the Court where industrial corporations are concerned. If it is just it
should be put into effect upon the approval of threefourths of each class of securityholders. If it is oppressive any securityholder should be able to defeat it.
(e) The farce of selling a property of this character should be aboUshed. Upon the approval of the
Plan by the Court, the new or Reorganized Company
should take the place of the old Company. Every securityholder would be bound by the Plan and the securities of the new Company would stand pledged and
liable to sale for the payment of such assessment as
23
the Court may deem necessary to rehabilitate the
property.
(f) All the expenses of Reorganization as well as
the amount and character of new securities to be issued, should be subject to the approval of the Commission. The entire procedure should be under its
control, subject to review by the Courts.
The Commission would call together the securityholders, who would form their own Committees, select
their bankers and eliminate the graft and manipulation that now characterize the proceedings. It would
incidentally put an end to the perilously increasing
concentration of our great corporations in the hands
of a few men which is now proceeding at a rate that
will startle our people into protecting themselves when
they learn the facts. But it will then be too late.
3. Representation and Protection of Minority
Stockholders.
It is manifestly right that the majority should control, but it is fundamentally wrong that the minority
should have no representation in corporate management and no opportunity to inform itself of the way
in which the majority is administering its trust. Compulsory cumulative voting, which means proportional
representation on the Board of Directors, should be
a condition of every corporate charter. This means
that if, for instance, the governing body consists of
nine members, each one-ninth of the stock should be
able to elect a director. Five-ninths of the stock would
thus elect five of the nine directors but the minority
24
would be able to participate in the management, to
know what is going on and to prevent illegal and oppressive action by the majority which is now impossible because it has no means of knowing what is contemplated. Some of the States require cumulative
voting by their Constitutions. The Bar should agitate
its enactment by the others but has taken no step in
that direction. It has on the contrary permitted without protest the partial emasculation of this salutary
provision by the corporations through laws classifying
the directors and thus requiring a larger proportion
of stock in order to elect a minority director.
Many of the worst scandals and most cruel wrongs
that have characterized corporate management would
have been averted if minority representation had been
made compulsory.
4. The existing methods of electing Directors
should be abolished and an entirely new system substituted, by (1) requiring the Board of Directors to
nominate its candidates before the election and to
advise the stockholders of such nominations; (2)
abolishing proxy voting; (3) permitting stockholders
to vote by mail as well as in person, but not by .proxy
and (4) prohibiting any one other than the true owner
from voting the shares.
In great corporations where the stock is widely
scattered the control is frequently retained for a decade or more.by interests that have little or no financial
stake in the corporation.except to exploit it for their
own gain and it has been found well-nigh impossible
25
to dislodge them in the face of their demonstrated unfitness. This is especially true with respect to railroad
corporations and great interstate industrial combinations. It is due partly to the secrecy that is tolerated in
corporate affairs and the difficulty experienced by
stockholders in discovering what is being done with
their property. It is however mainly due to the
antiquated election machinery; the absence of minority representation; and the vice of proxy voting.
The stocks of the so-called "public" corporations—
the stocks that are listed and actively dealt in on the
Stock Exchange—are usually to a considerable extent
in the hands of brokers who have bought them for customers on margin and hold them as security for the
payment of the balances owing them on the purchase.
These stocks are the pawns in the "gambling game that
constitutes the great bulk of the dealings on the Exchange. They are usually carried on the books of the
corporation in the brokers' names, although the stock
certificates are constantly passing from hand to hand
among the brokers without apparent change of ownership on the stock books of the Company.
In the very rare instances in which disgusted stockholders outside the Wall Street circle, driven to desperation by mismanagement or worse by their Trustees, are so reckless or foolish as to imagine that they
can change the control under existing law, the "insiders" gather in the proxies from the brokers in whose
names these pawns are registered and in which the
brokers have no interest except as pledgees. The specu-
26
lating owner who owes his broker money on the stock
for which, by the way, the broker sees to it that he is
and remains amply secured, has no voice in the matter.
The broker should not be permitted to vote this stock
without the written consent of the owner and the
Stock Exchange, instead of encouraging him to do so,
should not permit it. J The law should require every
person to accompany his vote with an oath that he is
the beneficial owner.
The stockholders are widely scattered. They cannot attend elections at distant places. Under the
present vicious system they are asked to give a
proxy to some one connected with or representing
the Company to vote for them for directors whose
identity is never disclosed and being helpless to protect themselves or be otherwise represented they adopt
the only course open to them. Why should not directors be nominated in advance of the election by the
management and by any outside interest that chooses
to contest and the stockholders advised in ample time
to make their choice? Why require them to act in the
dark? And why should they not be permitted to vote
by mail instead of being virtually compelled to entrust
the exercise of their rights to others? When this is
done the abolition of proxy voting will logically follow.
All the machinery surrounding these elections has
been designed to throttle the will of the true owners
in the management of their properties and to perpetuate the rule of the exploiter with its attendant ills that
are the outcome of secrecy.
27
It is to be hoped that the Joint Committee just appointed by Congress to investigate the railway situation will address itself to these problems and that
in doing so it will embark upon a course of independent inquiry and will hear all sides. The infirmity of
these investigations in the past has been that the committees have neither the time, experience nor expert
knowledge for research work and that they get only
one side of the question—the corporation side. Their
interest is such that they can prepare their case in its
most attractive form but the public gets no fair hearing, since what is everybody's business is nobody's
business.
So much of the time you have so kindly allotted to
me has been consumed in merely scratching the surface of the subject of Corporate Reform, that I must
reluctantly surrender my purpose of discussing the big
work of Social Justice that demands the immediate attention of our Bar. My study of Socialism has satisfied me that it is a beautiful, iridescent dream of the
idealist and not a practicable working program. The
agitation of its principles by the splendid, earnest, unselfish scholars and thinkers who are championing its
cause has done much to wring concessions that would
not otherwise have been obtained. Its continuance as
a standing protest against existing injustice is invaluable.
If the Capitalist System is to continue, it must be
reconstructed upon lines that offer to the workers a
greater measure of protection and a fairer distribu-
28
tion of the industrial wealth to which the Masses contribute by far the greater proportion.
A long stride in the direction of progress was made
when Congress wrote into the Clayton Act the sentiment that human labor is not a commodity in connection with certain exemptions of labor organizations
from the laws aimed at the Trusts.
That Act has other important progressive features
which the railroads are engaged in attempting to destroy by an amendment that is now pending in Congress.
It is the part of good bookkeeping to carry a depreciation account to cover the wear and tear on mechanical machinery in a manufacturing business as a
part of the cost,of the product. The time has come
when provision must be made for the wear and tear
on the human machinery engaged in the industry
which is quite as much a part of the cost of
production as is the wear and tear on the plant.
We are accordingly getting Workmen's Compensation
Laws to protect the laborer to a slight extent against
accident and to provide for his family in case of death
in the course of his employment. We must now have
laws to protect him against Old Age, Sickness and Enforced Unemployment, such as have long prevailed in
other countries.
It is a field of constructive legislation in which the
skill of the lawyer will be taxed to the limit, for there
is no subject so beset with ramifications and complications. Our conditions differ from those prevailing in
29
the countries in which those laws are being administered, so that the subject will perhaps require other
treatment; but the problem is one that will have to be
met. We must now apply ourselves to it.
The imposition of the Income Tax and especially of
the graduated super-tax on large incomes was a step
in the right direction. The doubling of the tax that is
now impending is another salutary step and the
imposition of a substantial tax on munitions is
still another. The toiling masses are at last
being encouraged to believe that the taxes of
the future will be imposed on wealth, where they
belong, and that hereafter their backs will not
be bent under the ever-increasing burdens of government to the exclusion of those who should be made
to bear them but have thus far escaped their just
share. It is gratifying and encouraging to feel that
the greater preparedness of which we are so sadly in
need is to be accomplished through taxing the men
who receive the lion's share of its benefits and to whom
its payment involves no hardship. The tax on incomes,
and especially the heavy super-tax on great incomes, is
the most just and the least burdensome of all forms
of taxation.
The lawyer understands the inequalities that have
so long been suffered. He should have been the first
to demand justice.
In the field of the Reform of the Criminal Law,
much remains to be done and still more that has been
done must be undone. We must cut loose from some
30
of our cherished prejudices. I am among'those who
believe that our Grand Jury System should be
discarded. It served a useful purpose but it
has become a prolific source of oppression. It
ought not to be possible in these days to brand a fellowbeing by an indictment resulting from a star chamber
proceeding, in which only one side has had the opportunity of being heard. Every criminal prosecution
should be inaugurated by a complaint supported in
open Court by sufficient legal proof to make out a
prima facie case. The defendant should not be permitted to waive examination. It is in the interest of
the State that the Court should be satisfied that such
a case has been presented and that the defendant
should have the privilege of testing the sufficiency of
the evidence before being called upon to answer before
a trial jury.
Either party should have the right of appeal from
an adjudication that there is or is not sufficient evidence to warrant placing the defendant on trial.
The State should on the other hand have the right
to place the defendant on the witness stand in such a
preliminary hearing or at the trial. The ancient
rule that the defendant cannot be compelled to
incriminate himself should be abolished. It also served
a useful purpose in the olden days but has long
since been outgrown. It is a prolific cause of unpunished crimes. There is no good reason to-day why
the commission of a crime should not be proven out
of the mouth of the defendant. It is often the only
31
way in which it can be established, especially in complicated cases such as those arising under the Banking
and Anti-Trust Laws.
There is more that I would like to say but I must
not detain you longer.
Permit me in concluding to express the hope that
we will realize the broader conception of our duties
that demands of us as lawyers to take our part in the
public work of formulating and perfecting the laws as
well as interpreting them in the private interest.
When we do our share of the creative constructive
work we shall no longer be subject to the reproach of
being counted among the parasites of society. Herein
lies our field of future usefulness. Will we see and
embrace our opportunities?
32
An Answer to Mr. Roosevelt
"The Only True American
of Us All"
Delivered at Newfield, Maine
September
4th,
1916
Shall Invisible Government Be
Restored? —
The Only .Real Issue
Delivered at Portland, Maine
September
7tk>
1916
Addresses bj
SAMUEL UNTERMYER
of New York
INDEX
AN ANSWER TO MR. ROOSEVELT,—
"The Only True American of Us All"
.
SHALL INVISIBLE GOVERNMENT BE RESTORED?—
The Only Real Issue
*
.
i
3*
An Answer to Mr. Roosevelt,
"The Only True American of Us All."
I propose to analyze the speech delivered by Col.
Roosevelt at Lewiston on Thursday last, to take
issue with his facts and conclusions and to discuss the conduct of our foreign relations by the
present Administration insofar as is possible within
the brief limits of an address of this character; but
before doing so there is one very serious criticism
which I shall venture to make upon the temper of the
Lewiston speech and of previous utterances from
the same source. I do so with reluctance because of
my great respect fo^r the exalted office of President
of the United States and for. any man who has occupied that high place of honor, and also because of
my recognition of Col. Roosevelt's aggressive public
spirit, of the public services he has performed and of
his many admirable qualities as against the defects
which we have learned to deplore, but with which the
country has patiently borne, although at times sorely
tried.
There are times when in the heat of partisan
excitement our people appear brutally unmindful of
the feelings and ungrateful for the services of their
public men to whom they are under the deepest debt
of gratitude. In no other country are such bitter
vituperation and misrepresentation permitted to go
unchecked and unpunished. The ordeals through
which our public servants must pass is cruel and at
1
times heartbreaking. It is not a wise system, for it
deprives us of the services of sensitively constituted
men and it does not truly represent our real attitude
toward those who bear for us the burdens of government. We are not really an ungrateful people, however much we may on occasion appear to be when
our passions are aroused. We are in truth at heart
kind, tolerant, forgiving and appreciative.
That this is true is abundantly proved by the attitude that we have managed to maintain toward
the vagaries, recklessness in statement, bad temper
and indiscriminate partisan abuse of public men by
Col. Roosevelt since he retired from the Presidency.
The great party to which he owes the honors that
have come to him has with forbearance and good
nature forgiven him his disloyalty in attempting to
destroy it from motives of hatred, revenge and disappointed ambition and, stranger still, his actions
have been covered by the mantle of charity from all
sides. Such is the glamour that still surrounds the
name of this magnetic, impetuous, arrogant personality that I doubt not that many of the millions of
earnest, sincere men who were betrayed into deserting their party in 1912 to further his personal ambition under pretense of a great moral movement,
have already half forgiven him for hauling down the
flag and deserting the standard when his personal
fortunes could no longer be served through that
agency. What better evidence could there be of the
loyalty and gratitude of our people than the forbearance they have repeatedly shown Col. Roosevelt
under the most serious and persistent provocation ?
But there is, I believe, a limit to patient consideration beyond which our people will not go, and I
want to stop here to inquire whether that limit has
2
hot now been reached, with all due allowance for the
growing infirmities of temper to which we have become accustomed.
I refer, of course, to the unbridled and inexcusable abuse and the unexampled malice and hatred of
his successful rival of 1912, with which Col. Roosevelt has for some time past and again on Thursday last assailed the President of the United
States, against whom and against whose Administration no breath of scandal has been uttered by his
most bitter partisan adversaries. In all of his long,
distinguished public career, Col. Roosevelt has not
yet learned that invective is not argument. We have
never before tolerated an equally intolerant man in
the public life of the nation. Everyone who differs
from him is a liar and everyone who questions "My
Policies" is un-American and little short of a traitor.
If there are any real issues in this campaign, it
should be possible to discuss them temperately and
with due respect to the great office of President of
the United States. Gratuitous insult of your adversary lends nothing to the force of your argument.
It generally indicates the absence of merit in your
own contention. Here are some of the "gems of persuasiveness" from ^ol. Roosevelt's Lewiston speech.
They were not words impetuously spoken in the heat
of debate, but were deliberately planned baseless insults, carefully penned and widely distributed for
publication throughout the country in printed form
long in advance of the date fixed for formal delivery
of the speech:
Hundreds (of Americans in Mexico) have been killed
and Mr Wilson has watched their fortunes as disinterestedly as if they had been rats pursued by terriers. This
Administration has displayed no more feeling of responsibility for the women who have been raped and for the
3
American men, women and children who have been killed
in Mexico than a farmer shows for the rats killed by his
dogs when the hay is taken from the barn.
Does that appeal to you as a truthful or temperate statement in the light of the anxious days and
months and years that have been devoted by the
President by day and night in and out of season to
the patient effort to restore peace to Mexico ?
Has any President since or before Lincoln's time
been as sorely tried? Has any of them or have all
of them combined been confronted with problems so
many or so vital to the life of the Republic? Have
you ever felt, regardless of your political faith, such
ease of mind that they would be honestly, justly and
rightly studied and solved? Col. Roosevelt knows
that the revolting picture he there draws is cruelly
and wilfully false. He knows that no man of ordinary sensibilities could be callous to the loss of lives
of our citizens in Mexico and that the heart of the
entire country bleeds in sympathy for them. H6
must know, fatuously partisan and intemperate in
speech as he is at all times, that the President is
a peculiarly sensitive nature, with an exalted sense
of responsibility. Unless I mistake the sense of justice of our people, it will not be easy to forgive even
him such wanton insults to our Chief Magistrate.
Mistakes may have been made in the many years
during which we have had to contend with this anxious Mexican problem by the present Administration and by the predecessor Administration from
which this legacy of care was inherited.
I assume that is inevitable so long as we are
human, although my study of the situation and understanding of the idealism that underlies our policy
have failed to disclose any from my point of view,
4
for I believe it would have been a crime and would
today be a still greater crime against humanity for
us to intervene so long as there is any alternative or
experiment that may avoid it. ^ Men who make no
mistakes make nothing else. No one could foresee
the kalaedoscopic shifts and changes in the scene of
action that have convulsed that unhappy country or
anticipate the treachery and selfishness of successive
leaders. The common scold and fault-finder who can
always do things better than the people who are
charged with the responsibility of doing them and
who is accordingly always dissatisfied with whatsoever has been done and that cannot be undone, makes
up in hindsight what he lacks in foresight.
In his denunciation of hyphenated Americans
and divided allegiance, with which everyone will
agree (except possibly Mr. Hughes and the Republican party that are appealing to that vote), after
venturing the startling intelligence that "some of the
very best Americans I have ever known were men
who were born abroad," Col Roosevelt, by a process
of reasoning which I find myself unable to comprehend,, calmly places the responsibility for the existance of the hyphenated American at the door of
President Wilson in the following words:
During the last two years we have seen an evil revival
in this country of non-Arrierican and anti-American
division along- politico-racial lines, and we owe this primarily to the fact that President Wilson has lacked the
courage and the vision to lead this nation in the path of
high duty—
from which I gather we are to assume that if the
President had meddled in the quarrels of Europe by
protesting against the invasion of Belgium and if he
had gone to war with Germany, the German-Americans, who are said to be so deeply offended because
5
he forced a settlement of the submarine controversy,
would have felt no resentment whatever at his having thus violated the laws of neutrality and arrayed
us on the side of the Allies.
In all seriousness I ask you, my fellow-citizens,
with what degree of patience you would have listened
to an unknown man who should go to such extreme
lengths to offend your intelligence? Is any further
evidence required of the generous tolerance and of
the forgiving spirit that we accord our public men?
That is the kind of criticism that constitutes the
sum total of Col Roosevelt's arraignment of the
President's foreign policy. But we shall have occasion to refer to that later. What I want to emphasize
now is the shameless villification of the President
before the country involved in the brutal slander that
the President had no more concern over Americans
who have been killed in Mexico than if they had been
"rats pursued by terriers."
But this is by no means all. In speaking of our
European relations and our omission to protest
against the violation of Belgian neutrality, Col.
Roosevelt makes the following pleasing comparison
of the President with Pontius Pilate, who condemned
Christ to death:
Such neutrality has been compared to the neutralit) r
of Pontius Pilate. This is unjust to-Pontius Pilate, who
at least gently urged moderation on the wrongdoers. The
President's fine words were used merely to cloak ignoble
action and ignoble inaction.
In that connection it will be recalled that of
Pontius Pilate it is recorded in the Scriptures that
"he mingled the blood of some unknown Gallileans
with their sacrifices"; that "he slew the Samaritans
who came to Mount Gerizum to dig up sacred vessels
hidden by Moses there," and that Agrippa defines
6
him, according to the Encyclopaedia Britannica, as a
man "inflexible, merciless, obstinate."
If anybody believes that Col Roosevelt—bitter
partisan that he is, who has never been able to see
anything commendable in his political adversariesis sincere in a single word of the wild, reckless invective he has launched against our President, he
has a poorer opinion than I have of him; but it is
right that we should test the extent of his insincerity
in weighing what he has to say.
In the sentence next succeeding the one from
which I have read, Col. Roosevelt quotes a statement
by "ah American with exceptional international
knowledge" whom he does not name, but who happens to be his former friend and adviser, Mr. Elihu
.Root.
The speech in question was delivered by Mr.
Root in the Senate on* the occasion of the debate on
the resolution justifying the Vera Cruz expedition.
In speaking to that resolution, Mr. Root said of the
President:
I have the highest respect—more than respect, I have
regard and admiration—for the President of the United
States. I have entire confidence in the sincerity of his
purposes, in the loftyquality of the ideals which he pursues, and in the genuineness of his adherence to peace.
Is Mr. Root right in his conception of the "sincerity of the President's purposes, the lofty quality
of the ideals, that he pursues and the genuineness of
his adherence to peace" in dealing with the Mexican
situation, or is Col. Roosevelt right in ascribing to
him ignoble action and the same interest in our citizens in Mexico "as if they had been rats pursued by
terriers"?
7
In that same debate, Senator Lodge said:
I have no desire to criticize the President for his
refusal to recognize General Huerta. The President no
doubt proceeded on grounds which seemed to him good
and sufficient. I condemn as strongly as he can the
methods of treachery and bloodshed by which General
Huerta has reached his present position.
The resolution was passed in the Senate on April
21st, 1914, by 72 votes, including many Republicans,.
and with only 13 dissenting votes, including those of
Messrs. Root and Lodge, who counselled more drastic
action.
This action is significant as illustrating the utter
futility of the criticism now made of the Vera Cruz
incident. It demonstrates anew how hard pressed
our adversaries now are by the facts in their efforts
to manufacture an issue out of the Mexican situation. Both Senators Root and Lodge were members
of the Committee on Foreign Relations, which is especially charged with the subject. If they or their
Republican colleagues advocated or now advocate intervention, which always and inevitably meant and
means war or a different treatment of the situation,
why did they not have the courage to offer such a
proposal and in language that could not be mistaken?
If the Republican party or Col. Roosevelt or Mr.
Hughes favors intervention or any policy other than
that we have been and are pursuing, why in the name
of common honesty do they not frankly say so and
take the verdict of the country? Then we would at
least have an issue. They keep their ears pretty close
to the ground and they dare not. If a given policy L
wrong there must be some other line of action that is
right. Why has none ever been concretely suggested
in Congress? It is so much easier to criticize and
destroy than to upbuild!
8
The speech begins with the re-assertion by Col.
Roosevelt of his sole title to be the discoverer of the
idea that America should be first in the thoughts and
hearts of Americans. There are some of us who
might be disposed to question that title and even to
become a little impatient at the absurd attempt to
make a political issue out of the slogan "America
First," as though there were any citizen within the
borders of our land in whose mind and heart the welfare of "America First, Last and All the Time" were
not the first and uppermost consideration. Is any
further comment needed upon the barrenness of this
campaign than that we should be found discussing
such a question? You might as well try to base a
great National political contest upon the issue of
whether two and two make four or whether honesty
is the best policy or whether treason should be a
punishable offense. You cannot get a civilized people
excited by the empty high-sounding platitudinous
truisms that make up the bulk of this appeal.
It is quite on a par with his argument that because some of our brave soldiers have been killed
by bandits who crossed our borders or because in our
punitive expeditions against these bandits we have
sustained losses through mob-action, we now are actually at war with the Mexican people whose government is exhausting every resource at its command
to capture and punish these murderous marauders,
who are our common enemies.
From the time of Washington, extending down
to the date of the second Harrison Administration,
our history is replete with instances in which we
have invaded the rights of neutrality of other nations
or our rights of neutrality have been violated and
thousands of our soldiers, sailors and civilians in the
9
aggregate have been killed, seized, captured or
forced into foreign service and our ships and other
property to the extent of hundreds of millions of
dollars have been wantonly confiscated by one or
more of the great European powers and sometimes
by a number of them in combination. When we violated neutrality the nation against which we offended did not find it necessary to go to war nor
have we adopted any such course. Wrongs inflicted
by us and those suffered by us have been settled by
negotiation through the recognized channels of
diplomacy as President Wilson has endeavored to do
today.
In 1891 we were in serious danger of disruption
of our relations with Italy, with whom we had a
treaty by the terms of which our Government guaranteed to protect Italian subjects in our country. In
March of that year nine Italians, resident in New
Orleans, who were members of a secret oath-bound
society known as the Mafia, and were supposed to
have been in a plot to murder the Chief of Police of
New Orleans, were awaiting trial. The jury acquitted six of the nine and disagreed as to the remaining three; but before the prisoners could be released the jail was surrounded by a Vigilance Committee consisting of prominent members of New
Orleans and the prisoners were seized and lynched.
The Italian Government, finding itself unable to
obtain any redress from us, recalled its then Minister. Finally the difference was compromised by
the payment by us of $25,000 to the families of the
victims and diplomatic relations were resumed.
During the Administration of Abraham Lincoln
our neutral rights were openly flaunted and trampled
upon on every side and our lives and property de10
strqyed, to such an extent in turn by France, Russia,
England, Spain and at times by all of them acting in
concert, that we were on the eve of declaring war on
all these countries at the same time, and our then
Secretary of State, William H. Seward, prepared a
plan to that end.
France went to the- borderline to injure us.
Among other things she permitted war vessels to be
built and equipped for the Confederacy in her Government yards and supplied them from her Government arsenal. England allowed the invasion of our
territory by a band of Southern sympathizers from
Canada, who killed one of our citizens, wounded several and looted our homes.
Again and again we protested and called England to account for flagrant and deliberate violations
of our neutrality in connection with the seizure of
the U. S. S. Chesapeake on the high seas, bound from
New York to Portland; the burning of the U. S. S.
Roanoke off Bermuda, the seizure on Lake Erie of
the ship Philo Parsons, the scuttling of the Island
Queen and the shooting of its engineer and the
wounding of its passengers. We finally protested
against tin use of British ports and British borders
as a base for felonious depredations against the citizens of the United States.
The outcome of the arbitration of our claims
against England arising out of the depredations
upon our commerce by the,Alabama is still.within
the memory of the present generation. Over $100,000,000 of our property was destroyed, 84 of our
vessels were captured and our flag was virtually
driven from the sea. After many years of waiting
we secured a measure of reparation for these
11
wrongs, but we did not find it necessary to go to
war to redress our injuries.
These instances might be many times multiplied
if time permitted. It is sufficient to remind you that
they were all settled by negotiation.
If when nations with which we are at peace are
at war with one another in what they believe to be a
struggle for their national existence, we are to regard every violation by them of our neutrality and
every breach of international law against us in their
desperation as a ground for war, we would be in a
state of perpetual war. When we are satisfied that
the act was not prompted by any unfriendly motives
for us or as an affront to our honor or sovereignty,
but is an act of self-preservation, however unjustified, the invariable policy of all civilized nations has
been to adjust such injuries through the channels
of diplomacy.
I would like now to take up the task of answering the attacks made by Col. Roosevelt on our foreign policy and shall endeavor to demonstrate to you
that it has been strong, just, consistent, humane and
unselfish; that it has been an inspiration to a higher
and better humanity; that it has removed the cloud
of suspicion of our motives that hung over our heads;
has converted enemies into friends; has cemented
the relations of the nations of the Western Hemiphere into bonds of everlasting friendship, and that
it should go down to posterity as one of the brightest
pages in history at a time when all the rest of the
world is being turned into a charnel house and is running red with the blood of martyred humanity.
Let us first deal briefly with this Mexican question out of which our adversaries are desperately
trying to create a political issue. It presents no-pol12
itical issue, for the reason that whilst Col. Roosevelt
and Mr. Hughes are loud in their indiscriminate and
unreasoning denunciation of everything that has
been done, they persistently refuse our challenge
to take the public into their confidence and tell them
whether and if so how they would change the existing policy and if so what they propose to do.
In the face of the crisis that still confronts us,
is it fair or statesmanlike or worthy of a great party
to play this "dog-in-the-manger" part and to go before the people without a definite program and with
nothing beyond carping criticism? Is it possible
that with no better policy to offer in place of that
which they assail the nation will be so blind and reckless as to turn out of power and deprive ourselves of
the knowledge, experience and faithful service of the
pilot who is at the helm, who has carefully charted
and knows every foot of the perilous course and has
throughout the long, trying period of the past three
years of storm and hurricane thus far guided us
safely between the rocks and shoals ? It is inconceivable. Our people are not such fools. They want to
know why they should make a change and at such a
time above all others. They realize that if Mr. Wilson is defeated there will be five perilous months between November and March when we shall be rudderless and adrift with our present policy repudiated
and none formulated in its place. That may well
prove to be the most crucial and perilous period in
our national history.
Is this new and untried candidate a super-man
to whom we must blindly trust our fate? What is
the exigency that calls for such reckless action on
our part? Of all the great nations of the earth, we
are, happily, at peace with the world and likely to
remain so. If we had been driven into war we would
not think of making a change, but because the statesmanship of our President has averted that calamity
it is assailed by these querulous, fault-finding pinpricks of this army of clamorous, office-seeking
fault-finders. Lincoln went through the same experience during his struggle for our national existence, but the people made short shrift of the men
who tried to overthrow him.
What are the superior qualifications of the candidate who asks that we displace our tried and loyal
servant in this crisis, when above all times we most
need his statesmanlike and experienced guidance?
Has Mr. Hughes any cure-all to offer us for our
troubles? If so, let us see to it that it is not a quack
remedy. Let him submit his plan and we will scrutinize it, for we have not yet seen any reason to
steer by any course other than the one we are now
following with honor and in safety.
"But," says the candidate, "I have no remedy to
offer. True, I do not know the course or for what
port you should steer other than the one for which
you are headed, but you must take my assurance
and that of my champions that you will be safer in
my hands than with the pilot who has brought you
within sight of port. I want you to trust yourselves
to me, for although I have never steered a ship of
state and have no greater knowledge of the treacherour shoals that surround the shores of foreign lands
than the average intelligent land-lubber, please remember that I was at one time, many years ago, in
charge of a tug-boat and I guess that should be sufficient evidence of my qualifications and should answer all your doubts."
14
Isn't that a fair statement of the attitude of the
Republican party in this campaign?
I insist:
(1) That the President was right when, to his
everlasting honor and that of our country, he laid
down the principle that we would not recognize a
military dictatorship based upon the overthrow of
lawful government by assassination and accordingly
refused to accord recognition to the bandit and murderer in the person of the dictator.
(2) He was right when he occupied Vera Cruz.
(3) He was, right and marvellously wise and
far-seeing when he agreed to the offer of mediation
extended by the Republics of Argentina, Brazil and
Chile and accepted the agreement reached with them.
(4) He was right to withdraw from Vera Cruz
after Huerta had been driven from power, and was
no longer in position to force us into intervention
and thus extend his reign of despotism by heaping
insults upon us. The purpose of our expedition had
been accomplished.
(5) He was right when, as a,result of the decision of the Niagara Falls Conference, he recognized Carranza.
(6) He was right when, in response to the insistent public demand and with the consent of the
de facto Mexican Government, he sent our troops"
into Mexico to avenge the murderous bandit raid on
Columbus.
(7) He will be right in withdrawing our troops
when we have either wholly or partly accomplished
our purpose or find its further accomplishment impossible or contrary to the best interests of the Mexican people and ourselves.
The President's policy has been throughout
15
dominated by the consistent determination that
whilst we will take every reasonable step that will
not invade the sovereignty of our neighbors to protect the lives of our citizens we shall not intervene
and force our will upon this people, weak, helpless
and stricken as they are. Just because they are
defenseless against our will we shall not put this
wrong upon them so long as we have reason to believe that they will work out their own salvation in
their own way. It is a noble and exalted conception
of the duty of a great, rich and powerful nation
toward a poor, distracted neighbor that is bravely
struggling toward liberty.
Perhaps ours is not the easiest way, but it is the
right, the just, the generous way and the only road
toward lasting peace. It is the way in which we can
make our actions square with our professions of
Pan-American friendship and unity. It is an objectlesson to the world in its unselfish grandeur.. Like
most big, fine, just, generous things done by men and
nations, it will incidentally pay in the end. Whatever it may have cost in lives and property will be the
merest bagatelle as compared with the intolerable
burden of misery from the ravages of war and of the
heritage of hate and bitterness that would follow
and would be handed down to our children's children,
Whether it pays in terms of dollars and cents is
not to be considered. The President has truly described his policy in that phrase that will always be
a memorable one. He is "playing for the verdict of
mankind."
Whether that policy shall be now approved or
condemned and with nothing to offer in its place, is a
decision we shall be shortly called upon to make. It
is fraught with far-reaching consequences that will
16
be felt for generations to come. Shall history write
us down as the Conquerors or the Deliverers of
Mexico?
^ That is the real question we are called upon to
decide.
No true understanding of the problem that confronts us is possible without a knowledge of comparatively recent Mexican history.
Diaz was the most absolute military despot of
modern days. He ruled with an iron hand by force
and fear and so there was a long period of the peace
that comes from poverty, misery, ignorance and oppression of the masses. They had as much liberty as
though they were literally sold into slavery. They
were virtually slaves to the absentee land-owners.
They had no representation in the Government and
not even the fundamentals of Constitutional rule.
THe mockery of justice was administered virtually
by Executive favor and decree; The land and mineral resources had been parcelled out to a favored
few in vast holdings. Corruption was rampant in
every department of the Government.
Huerta had been trained under Diaz, but he
lacked the education and the rare genius for government that stamps Diaz as one of the greatest
men of the past century. Huerta inherited Diaz's
conception that Mexico could only be governed by a
despot with the aid of a small ruling class in whose
hands should be concentrated the wealth and power
of the nation through the ignorance, poverty and
helplessness of the people. When Madero became
President, Huerta was his Commander-in-Chief.
Madero was a man of education, but he was weak.
His dream was to liberate the people and to return
to them the land that had been their heritage and
17
had been taken from them. His ambition was to establish popular government.
When Madero and his Vice-President, Suarez,
were murdered, Huerta seized the reins of government, announced himself dictator and advised our
Department of State that he had "overthrown the
government." The evidence of his responsibility for
the assassination of his chief and of Suarez is overwhelming.
Felix Diaz, a nephew of the former President,
had begun a revolutionary movement and Huerta,
who was the leader of Madero's army, treacherously
joined forces with him to overthrow Madero. On
February 16th, 1913, Madero and Suarez were taken
from the prison in which they had been confined by
Huerta's order and put to death. All this happened
within a few weeks before Mr. Wilson's inauguration. President Taft, to whom this problem had been
a source of great concern for a long time prior to the
murder of Madero, growing out of the depredations
on our border under the Huerta regime, properly refused to pass judgment on Huerta's demand for recognition, as he did not feel justified in binding the
action of the incoming Administration.
In that connection' it should be stated as an important part of the history of the Mexican question
that in March, 1912, just one year before,Mr. Wilson
assumed office, a resolution calling for our intervention had been introduced in the Senate, following the
killing of a number of American citizens on the
Arizona border and that President Taft had vigorously opposed the proposed action.
It has been widely suggested that under these
conditions we should have recognized Huerta; that
the means by which he had seized the Government
18
was none of our concern and that all our troubles are
traceable to our refusal of such recognition.
How could we, as the world's greatest republic,
recognize a military despotism based on murder?
Would it not have been notice to every Latin-American State that the reward of murder and despotism
would be recognition and support at our hands?
Would that have been a service to humanity?
Would it have advanced the cause of popular government? By withholding such recognition and
using every legitimate means at our command to discourage the overthrow of constitutional government
by military despotism, we are exerting our influence
in the direction of stable, orderly constitutional government.
It is idle in the face of the facts to say that our
recognition of Huerta would have secured peace for
Mexico. The revolution against him began immediately on the announcement of Madero's death. It
spread like wildfire throughout Northern Mexico as
soon as the manner of and the responsibility for his
murder became known. To have taken sides with
Huerta and bolstered up that sort of despotism
against the brave and patriotic struggle for liberty
that was being waged against him would indeed have
been a poor part for us to play. It- would have involved supplying Huerta with arms and destroying
the last hope of the Constitutionalists. That would
truly have been taking sides—and the wrong side,
at that.
If you want to know whether General Carranza
—stubborn and unreasoning as he may be and has
been at times, and suspicious of our motives—is a
real patriot, and whether he is waging an unselfish
struggle, read the correspondence between him and
19
Huerta just after the latter had seized the reins of
government. Every advance and every inducement
was indignantly put aside.
If it had been possible to have saved the lives
and property interests of our citizens in Mexico by
the recognition of Huerta and the suppression of
the revolution for liberty, it would have meant the
inevitable death-knell of democratic rule and the
lending of our powerful aid toward establishing a
hateful despotism in the Western Hemisphere and
on our borders. Without our aid it could not have
been done and even with our assistance I do not believe it would have been possible so long as a spark
of the holy fire of liberty was left still burning in
the hearts of the Mexican people.
It is a mistake to characterize the President's
action with respect to the refusal to recognize
Huerta as interference. He was bound to act one
way or the other. Recognition under the circumstances under which Huerta came into power would
have been quite as active interference as was the refusal to recognize. When the President accepted the
alternative of non-recognition, he was quite as much
bound to enforce his position as though he had
adopted the other alternative. No one has the right
to assert or assume that the consequences of recognition would have been less disastrous .than the
course which was adopted.
If we had had.in mind only the easy way of protecting the lives and property of our citizens and
were willing to surrender all our ideals by placing
our h^el upon the necks of the patriots who were
sacrificing their lives in the struggle to rescue their
country from the rule of despotism and assassination, it by no means follows that we could have
20
crushed the revolution. We would have succeeded
only in making ourselves a party to the crime.
In this connection I cannot refrain from expressing my deep mortification at the unenviable
part that has been played by Mr.' Henry Lane Wilson, our Ambassador to Mexico. The publication by
him of the confidential correspondence, marked
"Confidential," that passed between him and our
Secretary of State during the Taft Administration,
is one of the most shameful incidents in our diplomatic history. The fact reported from time to time
in the newspapers that Mr. Hughes has been in consultation with that gentleman, in the face of such a
performance and has apparently gotten his information concerning Mexican affairs from that source, is
the most surprising development of this campaign.
Nobody who knows Mr. Hughes can understand it.
Apart from the gratuitous and deliberate insult
that was perpetrated upon our sailors and our flag,
the President was right in occupying Vera Cruz.
Huerta had been heaping insults upon us after the
refusal to recognize him. He had tried to force intervention so as to solidify the warring elements.
The expedition was not made against the Mexican
people, but against him; and it was necessary to have
them understand that he could not humiliate us with
impunity, to whatever lengths we might be willing
to go in our sympathy with a weak and powerless
nation.
Col. Roosevelt and Mr. Hughes have repeatedly
given the misleading impression that we went to
Mexico merely to enforce the salute to our flag and
that we left there without having accomplished our
purpose.
We went there (1) to make it plain that Huerta
21
must go. Huerta was driven from power on July
16th, 1914, and we left Vera Cruz on November 23rd
following, as the result of the plan of mediation with
the A. B. C. countries agreed upon at Niagara Falls.
(2) To prevent the landing of a great consignment
of arms from Germany which was about due at
Vera Cruz whilst our fleet was on the way.
If when Huerta was deposed the Revolutionists
had held together, we should have had peace in
Mexico. The circumstances under which Villa's
break from his Chief (©arranza) occurred and the
starting of a revolution on his own account are fairly
familiar to us all.
That unfortunate break upset the President's
well-matured plans for restoring peace. Then followed conflicting claims of sovereignty on our border and it became necessary to determine to whom
recognition should be given. It was essential that
we have some constituted authority with which to
deal and which could be held to accountability.
Thereupon a conference was called by our State Department of the representatives of Argentina,
Bolivia, Brazil, Chile, Guatamala and Uruguay for
the purpose of getting the benefit of their knowledge
of the situation and their advice.
The despicable eifort in some quarters to make
political capital out of Carranza's alleged treatment
of the Catholic Church in Mexico and to charge the
President with the responsibility for having recognized him is sufficiently answered—if answer is
necessary—by the fact that these six Catholic countries, upon whose advice Carranza was recognized,
were unanimous in the decision that this would be
the proper course and recognition was accordingly
given to him by all the Pan-American countries.
22
After referring to Huerta as a bandit, this is the
nearest Col, Roosevelt, in August, 1916, approaches
the announcement of a policy that he would have
adopted in February, 1913:
There was much to be said in favor of the policy of
recognizing Huerta and avoiding intervention. There
was also much to be said in favor of the policy of refusing
to recognize Huerta, which was intervention and.then of
fully accepting the responsibility implied in intervention.
But there is nothing to be said in favor of wabbling
between the two policies. * * * There was no excuse
for the recognition of Carranza in view of Mr. Wilson's
failure to recognize Huerta. All the objections to Huerta
apply with greater force to Carranza.'
You will note how carefully Col Roosevelt refrains from deciding even now, with the aid of hindsight, which course he would have pursued. There
was no such "wabbling" and dodging the issue on the
part of the President as is here evidenced by Col.
Roosevelt more than three years after the event
which he is criticizing.
Here again Mr. Roosevelt is wrong in his facts.
The President did not "wabble" for a moment On
February 26th, 1913, six days before he was inaugurated, in a speech at Washington;he said:
W e must avoid in every way that which is called
intervention and use all the patience possible, with the
prayer that some power may arise there to bring about
peace throughout that great country; but I have no sympathy—none at all, and the charge of cowardice does not
frighten me—with that which prompts us for purposes
of exploitation and gain to invade another country and
involve ourselves in a war the extent of which we cannot
realize and the sacrifice of thousands of lives and of
millions of treasure.
On March 12th, 1913—eight days after his inauguration—the President issued a formal statement of his Administration's policy in which he said:
Co-operation is possible, only when supported at
every turn by the orderly processes of just government,
23
based upon law, not upon arbitrary or irregular force.
* * * We cannot have sympathy with those who
seek to seize the power of government to advance their
own personal interests or ambitions. W e are the friends
of peace, but we know that there can be no lasting or
stable peace in such circumstances.
Thus the President gave notice to the world that
he would not recognize the Huerta dictatorship.
Within two weeks thereafter the Revolution aimed
at the overthrow of Huerta resulted in the establishment of a constitutional government headed by Carranza, the Governor of Coahuila, who had from the
outset refused to recognize the Huerta Government.
Before the end of March Carranza had published
the declaration of the purposes of the Constitutionalist movement and had assumed the leadership. As
soon as the advice of the six Latin-American Governments above mentioned could be secured, Carranza was recognized.
The statement that because the President had
refused to recognize Huerta there was no excuse for
his recognition of Carranza requires no comment.
The one was loyally struggling for constitutional
government; the other had sought to destroy it.
It is apparent from what Col. Roosevelt states
later on that he favors and would then have favored
intervention although he has not quite the courage
to say so. He rather unsuccessfully attempts to
draw a comparison between the case of Mexico and
that of Cuba. The same considerations of humanity that have moved the President to steadily set his
face against Mexican intervention called for the contrary action in Cuba. To intervene in Mexico means
certain war with the Mexican people. They insist on
solving their own problems.- They suspect us of
selfish motives. No one has done so much to arouse
24
and keep alive that suspicion among the LatinAmerican people as did Col. Roosevelt when, to use
his own words,- he "took Panama"—stole it from
Colombia. That is the foulest stain upon our country's history. One cannot but wonder at the blind
egotism of a man who, knowing the great wrong he
perpetrated upon poor, weak Colombia descants in
high moral accents upon our failure to plunge into
the maelstrom of the European conflict by protesting
against the invasion of "poor little Belgium."
We went to Cuba at the earnest solicitation of
the Revolutionists to aid them in their brave struggle
for liberty. If Carranza and his people were to ask
the same of us there would be some analogy between
the two cases.
I quote from Col. Roosevelt's speech against
himself as follows:
It is rarely morally wise to do the thing one thinks
unjust. It is never morally right to enter on a course of
action as to the justice of which the actor is himself in
douibt. These principles are as applicable to nations as to
individuals.
To those, of you who have followed the President's course in international affairs no argument is
needed to refute the assertion that the President's
determination and consistent refusal to intervene
were prompted by fear of consequences. He has
again and again made it plain that we are and intend to remain the firm and helpful friend of the
people of that stricken land and of all Latin America.
We want to serve Mexico. We cannot do so in our
own way by friendly intervention with her consent,
since her way is not our way. We must therefore
show the depth of our friendship by helping her in
her own way. That is true magnanimity. The other
is amiable despotism. She suspects our offers, of
25
friendship. She does not understand and we have
not been able to make her understand.
That suspicion has until the advent of the present Administration been shown by all of our sister
Republics in this Hemisphere. Col. Roosevelt is
mainly responsible for having aroused that suspicion
and for having kept it alive. Every time he discusses Pan-American affairs, every time he swings
his "Big Stick" and clenches his mailed fist, the suspicion deepens. They do not realize that his bark is
worse than his bite, and that back of his brave words
there is somewhere hidden a big bump of precaution,
for he knows that we are not quite prepared to fight
the world.
It is fortunate for us that we are not, for if we
were I have no doubt he would promptly "get on the
job," cause or no cause. With the spirit of conquest
that moves him, he would soon find a cause, just as
he found a way to take the Panama Canal when
- Colombia did not like his terms.
Nothing short of three and one-half years of the
generous, humane policy of the Wilson Administration and our forgiving, magnanimous sympathetic
treatment of Mexico could have allayed the hatreds
and suspicions that he has aroused and is trying to
re-kindle. We have progressed far toward a better
understanding in those three and one-half years, but
not until we have redressed the wrong he did Colombia will the breach be entirely healed.
In the present state of mind of the Mexican
people, we have nothing to gain and everything to
lose by intervention. By this I do not mean material
gain. I mean that we have nothing to gain for the
cause of humanity by adding the blood of our brave
soldiers to the soil of that blood-stained land.
26
There is nothing we can do for Mexico against her
will to recompense us for the loss of life, the blight
of plague^ the years of guerilla warfare with mountain bandits that it would require to conquer and
pacify that land, leaving behind us a heritage of
hatred and revenge.
All that duty now requires of us is that we shall
protect our border and patiently, with helpful hands
outstretched to Mexico, await the day that is now
dawning when she will be blessed with a lasting
peace, based upon true liberty of her own choosing,
worked out in her own way.
There is much more I would like to say to make
it plain to you how wise and just and generous has
been the treatment of this subject by the Administration and how proud we should be of its record.
Permit me to say a few words regarding Col.
Roosevelt's fault-finding at our European policy.
Little need be said because the fruits of that policy
speak for themselves and need no vindication.
He arraigns the President for not having protested against the invasion of Belgium and for the
slow processes of diplomacy that failed to put an end
to Cermany's warfare overnight.
Whilst he scores the President for having succeeded far beyond our most sanguine hopes (but too
slowly for his impatient disposition) in our controversy with Germany, he significantly omits to
criticize our failure thus far to bring Great Britain
to terms for its persistent and long-continued
flagrant violations of international law. He does
not even mention that phase of our difficult problems. I wonder why? Is it perchance because he
loves Great Britain more or because he loves Germany less? I greatly fear that the Colonel forgot
27
his slogan of "America First" in his tender sympathy
for the Allies' cause—but perhaps that is because he,
too, like his friend and protege Mr. Bacon, is .frankly
unneutrally pro-British. Has he forgotten that Mr.
Hughes is deftly angling for the hyphenated vote
and has so framed his campaign that he is in a fair
way to get it unless Col. Roosevelt upsets the apple
cart for him? It is high time for these two eminent
statesmen to get together and agree upon a modus
vivendi, as we lawyers say. The hyphenated vote is
a sensitive plant. It may yet get away from them,
after all.
But to return to Belgium. Her territory was
invaded within a few weeks after hostilities began.
If I remember rightly (I am here speaking from
memory) the President had just issued his Proclamation of Neutrality. Belgium had been invaded. We
could no longer prevent it, if we chose. Were we to
follow that Proclamation by plunging headlong into
the mad vortex of the barbarous conflict or to array
ourselves on one side? True, we were in a sense
formal parties to the Treaty, but we were not real
or interested parties. The matter was not one that
concerned us, except in the altruistic sense in which
all civilized countries are concerned that treaty obligations shall be observed. But with our experience
of the way in which International law, which is the
highest form of obligation, has been observed in this
conflict, as affecting our rights or when we contemplate Great Britain's treatment of Greece or the sordid conditions under which Italy entered the war or
the trading that has been going on in the Balkans as
to the side on which the nations will align themselves, it is not easy for those of us who really think
in terms of "America First" to get very much ex28
cited over the breach of treaty rights. All of them
over there seem to be scraps of paper and of blank
paper at that. The sight is truly sickening. We
should thank God and bow down in gratitude to our
President every day of our lives that we have not
been drawn into the maelstrom instead of itching and
nagging our representatives to force Us into it.
Of what use would it have been anyway to protest? According to Col. Roosevelt, when we have
protested again and again without avail against the
seizure of our mail, the blacklisting of our merchants, the destruction of our neutral commerce and
against innumerable other infractions of interna-,
tional law by the various belligerents it has done no
earthly good. We are told by Col. Roosevelt and
Mr. Hughes with fine sarcasm that phrase-making
and letter-writing are the President's specialty and
that words without action are worse than useless.
What sort of action do these gentlemen suggest
to back up our protest? Why don't they tell us?
Surely we are entitled to know, so as to judge for
ourselves whether their advice is wise or otherwise.
In justice to themselves as patriots and as sole possessors of the title of "America First" they should
enlighten us, for we are quite in the dark.
Of course, the President did wisely in not protesting against the invasion of Belgium or against
the beginning or continuance of hostilities by any of
the European countries against any of the others.
We have held firmly to our traditional policy of keeping aloof from European complications and of maintaining a strict neutrality. What would have become of the Monroe Doctrine if we had followed Col.
Roosevelt's advice? Suppose he had been President
29
and had carried out his pet plan of intervening in
Mexico (perhaps of "taking" Mexico as he "took"
the Canal), Suppose Germany, which has large interests in Mexico (I refrain from saying Great
Britain, for obvious reasons), objected to our intervening and particularly to our annexing Mexico.
With what saving grace could he have invoked the
Monroe Doctrine and have told her that it was none
of her concern ? Suppose Germany had followed her
protest by action on the ground that she had the
same right to make effective her protest against our
invasion of Mexico as we had to protest against her
invasion of Belgium. How would the ever-resourceful Colonel have justified himself except by the use
of the "Big Stick"?
We have strengthened the Monroe Doctrine by
refraining from protesting. It was wise statesmanship.
What does Col Roosevelt mean by saying that
America "has stood an idle spectator" "of the sinking of the Lusitania, of the constant slaughter of our
own citizens and of the anarchy, rapine and murder
in Mexico"?
Human foresight could not visualize the disaster
and could not bring the lamented dead to life again.
Everything short of that within the power of human
agency has been done and most effectively done, with
honor and without bloodshed. What we have accomplished through that disaster reaches the proportions of the most noteworthy bloodless victory in the
service of humanity in the annals of history. ^
He tells us that "the next four years may well be
years of tremendous national strain" and concludes
with the non-sequiter that because of that we should
30
replace the man who has guided us with honor and
unharmed through this labyrinth of fire and blood,
under whom we have reached a state of prosperity
never before known, by an untried pilot.
Perhaps so, but not until the moral and intellectual senses of the American people have been
chloroformed into insensibility.
31
Shall Invisible Government Be
Restored?—
The Only Real Issue.
The European war has brought us many problems
that are yet to be solved. Among them must be reckoned the temporary increased cost of living due partly to the abnormal European demands for our products but more particularly to the fact that the Trade
Commission has not yet had time to unearth and
scatter the secret trade combinations that are extorting exorbitant prices under cover of the unexampled,
prosperity we are enjoying. Thanks to the constructive statesmanship of the present Administration we
now have in existence an executive body properly
equipped to investigate, uncover and deal adequately
with these conspiracies against the public welfare.
Courts of justice were not intended and are not
adapted for that sort of inquisitorial service. Their
decrees dissolving unlawful combinations have in the
main been a farce.
It is doubtful whether the temporary material
benefits that have come to us as a result of the war
are not more than offset by corresponding evils. The
foreign business in munitions has been grossly exaggerated. It constitutes less than two and one-half
per cent, of our total exports for the past year ending June 30th. Our prosperity is based primarily on
the tremendous revival of our domestic business of
32
which munitions amounts to less than one-half of,
one per cent.
It must never be forgotten that we have by far
the greatest mineral and agricultural resources of
any country on earth and that we have free trade
between our 48 States to an extent that is a hundred
fold more important than our entire normal foreign
trade. Herein lies the real sources of the permanent
prosperity that is under way.
The advent of peace in Europe will give an additional stimulus lo business which we will be unable
to meet for years to come. The idea that these
stricken and devastated countries, with their depleted population, disorganized industries and intolerable burden of debt will be able to rehabilitate
themselves and rush over night into the markets of
the world in competition with us is too grotesque for
the serious consideration of grown men. Tor years
to come they must rely upon us to assist with our
products in their upbuilding and rehabilitation—
slowly and gradually, as they are able to pay for
them. We will be the creditor nation of the world.
The balance of trade is with us and will so remain.
Their credit is gravely impaired and will so continue
for a long time to come and they must accumulate
new capital in place of the billions that have been
destroyed, in the face of the staggering load of taxation and other obstacles that await them.
The only cloud upon our horizon is the approaching National election. If we now fly in the face of
fortune bv ruthlessly disrupting our present fiscal
and financial system we shall unsettle business conations and bring down upon our heads the house thst
is now built upon the rock of sound prosperity. It
we are so fatuous as to be beguiled into doing tins
33
evil thing at the behest of the selfish interests that
for so long controlled ou:r law-making power and
used it to enrich themselves at our expense, we shall
richly deserve the fate that awaits us. Do not allow
yourselves to be deceived into believing that the tariff
or due protection of our industries is or can be made
an issue in this campaign. The Wilson Administration has taken the tariff out of politics and taken
politics out of the tariff forever. President Taft said
we should have a non-partisan tariff commission for
that purpose. The Democrats agree with him.
The revenue bill that passed yesterday and is to
be signed today or tomorrow provides over $200,000,000 in revenue by doubling the income tax, and
by placing a substantial tax on the profits from munitions and puts a large protective duty on dyestuffs
to permit of establishing that industry so that we
shall no longer be at the mercy of a foreign country
for the things we use in manufacture. Above and
beyond all this it establishes a Tariff Commission
that will impartially and in a systematic way gather
the facts as to each industry as a basis for a scientific
tariff based on actual conditions. Unless this happy
solution is disturbed we shall have seen the last of
the long years of business unsettlement resulting
from the periodical dickering at the behest of special
interests in return for campaign contributions. It is
right that our industries should be amply protected
against enforced competition with European and
Asiatic labor conditions. We have no free trade
party in this country and never had or will have.
Our great and increasing needs for revenue have always assured us against that contingency. It has
always been merely a question as to the measure of
such protection and the way in which it should be
34
imposed. Just protection equitably distributed is a
very different proposition from the corrupt "fat frying" methods that characterized such indefensible
corruption as found its expression in the PayneAldrich bill, which was repudiated by the best elements of the Republican party. The hasty, haphazard, superficial, misleading methods by which this
delicate and intricate function of government has
been administered has been unworthy of us. In the
memorable words of General Hancock, "the tariff became a local issue." The locality that had the greatest pull and the biggest campaign fund to its credit
secured undue and often prohibitive protection at the
expense of localities and industries that were not so
favored. No one was heard except the interested
parties and there was no opportunity or inclination
for investigation or study. The people never had a
hearing. All this is now changed.
But I did not come here to discuss the tariff.
That has fortunately been placed beyond the' range
of political discussion. I want to point out to you
that there is one great overshadowing issue in this
campaign and only one, and that your attention has
not yet been directed to it. It is not Mexico. That is
no issue, for neither the Republican candidate nor
his champions will tell you what they would do with
the Mexican question different from what is now being done. All efforts to prevail upon them to outline
a policy have failed. Would they intervene which
means certain war and an undying legacy of hatred
and revenge after we have spent years spilling the
blood of our brave men upon that unhappy, bloodstained land. The Mexican troubles are in a fair way
of peaceful solution. Surely the European'situation
presents no issue. It has been solved with peace and
35
honor by diplomatic statesmanship unequalled in the
annals of history. If our adversaries, in their vain
and desperate hunt for an issue, want to make one
out of the eight hour law that did justice to the laborers' demands and prevented the most disastrous
paralysis of industry ever known to us, we will meet
it with confidence in our ability to demonstrate that
it was a wise and statesmanlike solution.
The one great issue to which I refer is the
struggle between invisible government and the
people. Shall Invisible Government, the phantom,
that stood behind the throne of visible government
and ruled its action for many years until it has almost wrecked our experiment in self-government, be
restored in this land of ours? Or shall we, having at
last shaken the shackles from our benumbed feet and
well-nigh exhausted frames again offer our body
politic to the monster to be again enslaved in a
tyranny more complete than ever before known?
What then is meant by the intangible thing
called Invisible Government? It is the most real, the
most subtle peril that confronts the people today, but
it takes many shapes and is not easy to define. It
means rule under hidden influence, by a handful of
the most ambitious money kings with which any
country has ever been afflicted, bound together by a
common malign purpose to exploit our great wealth
and resources for their own selfish ends. It means
that through their control over the lawmakers they
mould our policies of tariffs, taxation, finance, railroads and business and that we must pay tribute to
them in known and unknown ways in almost every
phase of our industrial life. Six body blows have
been dealt this invisible monster under the present
Administration:
36
(1) When the Federal Reserve Act was enacted, which took the control of the country's money
out of their hands and placed it where it belonged so
that they could no longer create money panics at will.
We shall never again have the sort of panic we had
in 1907. It has been made impossible.
(2) When the election of Senators by the
people was substituted for election by Legislatures
that they were able to control. The Senate will soon
cease to be the rich man's club subject to the dictation of these men. It has already become more responsive to the popular will and will become more so
as time goes on.
(3) When the income tax law was passed and
again when it-was amended yesterday to require
that wealth pay its just share of the burdens of taxation, which has heretofore escaped taxation.
(4) When the parcels post was established and
extended which did away with the abominable express company monopoly.
(5) When the Sherman anti-trust law was galvanized into life by the enactment of the Clayton
anti-trust bill and the bill establishing a Trade Commission, which together have made the law capable
of genuine practical enforcement.
(6) When the Farm Credit bill was passed that
will prevent the exaction of usurious and ruinous interest rates and will in time render farm lands available as security for loans.
Do you wonder that nowhere in the length and
breadth of this land can there be found a great financier, railroad or trust magnate or captain of big
business who is not relentlessly, malignantly on the
warpath to defeat President Wilson and the Demo37
cratic Administration at all costs by hook or crook
and to restore Invisible Government?
Do you want a government that has come to
power through the active aid and support of these
influences, or one in the open light of day that can
go forward with this work of reform, for there is
much that remains to be done? Are you prepared
to encompass your own undoing? That is the one
and real issue of the campaign.
38
A HISTORICAL REVIEW OF
MR. HUGHES' SURRENDERS
TO INVISIBLE GOVERNMENT
AN ADDRESS DELIVERED AT
THE NEW STAR CASINO, NEW
YORK CITY, OCTOBER 30, 1916
BY
SAMUEL UNTERMYER
OF NEW YORK
A HISTORICAL REVIEW OF MR. HUGHES'
SURRENDERS TO INVISIBLE GOVERNMENT
Address by Samuel Untermyer at the. New Star
Casino, New York City, October 30,1916.
Mr. Hughes takes vigorous exception to the
charge that he is a friend of the predatory financial
interests that dominated the Federal Government
for a generation or more until the advent of President Wilson and that have become very aptly known
as "Invisible Government." The fact that these
powerful interests have adopted him as their candidate and are his enthusiastic champions and that
the men who have for years been their recognized
spokesmen are his closest advisers and in charge of
his campaign cannot be gainsaid. If a man's consistent public record and associations are to determine his classification as against his unsupported
protestations, I insist and shall endeavor to demonstrate to you that the charge is overwhelmingly
proved and that the most complete and disastrous
surrender of the people's interest ever made by a
high public official was made by Mr. Hughes as Governor of the State of New York to "Invisible Government" in its most discreditable form.
What, then, is meant by this intangible thing
called "Invisible Government?" It is the most real,
the most subtle peril that confronts the people today, but it takes many shapes and is not easy to define. It means rule under hidden influence, by a
handful of the most ambitious money kings with
which any country has ever been afflicted, bound together by the common malign purpose to exploit our
great wealth and resources for their own selfish
ends. It means that through their control over the
lawmakers they mould our policies of tariffs, taxation, finance, railroads and business and that we
must pay tribute to them in known and unknown
ways in almost every phase of our industrial life.
We have heard so much from Mr. Hughes by
way of criticism of the President for having yielded
to the demands of organized labor and of assertion
of his greater courage to withstand legislative pressure and he has made so many protestations of his
freedom from the control of "Invisible Government"
that it is about time for us to call a halt, whilst we
engage in that impartial analysis of Mr. Hughes'
record, which he has so persistently challenged and
which it is therefore entirely proper and respectful
to undertake. Mr. Hughes' speeches extolling his
2
>wn wisdom, firmness and many other virtues renind one of the story of the trombone player to
vhom one of his friends said one day, "They tell
ne you claim to be the greatest trombone player in
;he world," to which he, being devoid of the sense
)f humor replied, in all seriousness, "I do not claim
it. I admit it."
If Mr. Hughes' estimate 6f himself is correct,
he is the only man in the United States who now
knows exactly how, if he had been President, he
would have met every one of the many crises that
have confronted the country in the eventful years
since the war began; and he also knows and assures
us that he would have met every such crisis with
superhuman foresight and never would he have
blundered or faltered, and that this is true not only
as to the past but for the future. In a speech delivered by him at Youngstown, 0., on Thursday last,
he gave to his audience the following delightfully
modest assurance:
"A vote for me means a vote for national selfrespect."
A man with such pre-vision belongs not among
us frail humans. He should be enshrined among the
prophets. Any common mortal who should lay
claim to such prescience and venture to practice his
talents in our State would come within the condemnation of our penal code. One would expect that
3
a man so gifted would at least be able to tell us
something about his policies as to our existing foreign relations in which we are more deeply interested than in what has passed and gone, but at that
crucial point Mr. Hughes' extraordinary talents
seem to have deserted him and he stands mute.
What can we do with a man with such naive egotism
and absence of sense of humor? Vice-President
Marshall wittily said in a speech a few days ago,
apropos of Mr. Hughes' marvellous hindsight, that
he (Mr. Marshall) really could not say whether he
would have eaten the apple if he had been in the
Garden of Eden. I am sure Mr. Hughes would confess to no such doubts. Of course he would not only
have refrained but would have prevented Eve from
partaking of the fruit of the tree of knowledge.
In his desperate hunt for an issue Mr. Hughes
recklessly seizes upon the enactment of the Eight
Hour law (which Lam sure he has many times since
regretted as having handed himself a gold brick)
and has been travelling up and down and across the
country, violently denouncing the legislative program of the President by which the greatest industrial calamity of our times was happily averted. It
was possible for Congress to carry out only a part
of that program in the few remaining days of the
unusually long session that was about ended when
that crisis arose. The program, taken in its en-
4
tirety, gives added evidence of the rare vision and
statesmanship of our President* It will when completed constitute a just and enlightened solution of
our most difficult industrial problem and will render
labor strikes on interstate railroads hereafter impossible as they should be.
Mr. Hughes insists that no matter how just may
be the cause of labor, it has no right to enforce its
demands by a strike, which is the only means of
redress at its disposal unless it is willing to surrender by accepting the kind of so-called "arbitration" that the railroads choose to offer. He denounces the action of the brotherhoods in ordering
the strike and in thereafter accepting by way of
compromise the legislation enacted by Congress. He
bluntly characterizes the action of our President and
Congress in protecting the public against the disaster that would have resulted from the failure of the
men and the roads to agree, as a "cowardly surrender" to organized labor and as a submission to
virtual blackmail.
I am not at the moment concerned with a discussion of the merits of that preposterous charge.
You have doubtless many times heard it so fully
argued that it requires no justification at the hands
of myself or anyone else.
These violent denunciations of surrender to organized labor and the brave talk of what he would
5
have done in this or that emergency revive active
recollections of a page in the history of Mr. Hughes
as Governor of New York, when he was guilty of
a very different kind of surrender, and a discreditable one, if I may say so, that drags into bold relief
the difference between promise and performance on
his part. True, his was not a surrender in the interest of labor or of the conservation of human life
or health. No such weakness was involved in that
surrender. There was no exigency confronting him,
He was not faced with the alternative of a general
paralysis of trade and industry or of starving millions of his fellow citizens or of the cataclysm that
would have followed the threatened action for in
his case there was no action threatened or impending.
The surrender to which I refer was complete
and ignoble and without excuse. It was consistent
with every act of Mr. Hughes whilst Governor. It
was made to the gambling element of the Stock Exchange and enabled them to continue their dishonest
practices unrestrained by the law and was made
under the following circumstances:
The so-called "washing" and manipulation of
stocks and the fictitious transactions on the Stock
Exchange and the practice of all manner of fraud
and oppression upon the investing public through
the machinery of the Exchange had reached the pro-
6
portions of a National scandal. Various bills had
been introduced in the Legislature looking to a public investigation of the operations of the exchange.
In response to insistent public demands, Governor
Hughes had, in a message to the Legislature in 1907
and again in 1908, recommended the appointment of
a legislative committee
to inquire into the facts relating to speculation in securities and commodities, with the view of ascertaining the
manner in which illegitimate transactions may be prevented and legitimate transactions safeguarded.
Strange to say, the Exchange had been and
stranger yet and to our shame be it said, it is still
an unincorporated body, responsible to no public
authority, immune against visitation, supervision or
regulation and with almost unlimited power over the
security markets of the country. It is above and
beyond the law—a law unto itself. Whilst banks,
trust companies, insurance companies and other
quasi-public bodies are required to be incorporated
and are subject to inspection and regulation,, the
transactions on the Stock Exchange which are scattered broadcast over the world and constitute the
guide to values, are a closed book and there is no
means of detecting fraud or of protecting the public.
Courts of Justice, the Comptroller of the Currency,
Bank and Insurance Superintendents and other pub-
•7
lie officers are virtually forced to accept the quotations of the Exchange as fixing the values of securities and yet there is no method of safeguarding the
integrity of those quotations, although it has been
overwhelmingly shown that they have been permeated with fraud and manipulation by which the
public have for years been victimized to the extent
of hundreds of millions of dollars.
The agitation to place the dealings of the Exchange under some form of Governmental control
was widespread throughout the country but as its
operations were conducted in the State of New York
its regulation was supposed to be primarily the concern of the State. It was the occasion of recommendations by Governor Hughes for a public Legislative investigation with power to subpoena witnesses and compel the production of books and
papers.
The malign power of the. Exchange over legislation was however, as it still is, so great that the Governor's recommendations went unheeded. Unlike
our President, his influence over his own party was
not sufficient to enable him to secure favorable consideration upon his recommendations and so his first
term of office drew to a close without action.
The date for his renomination was near. It
looked for a time as if the great financial interests
represented by the Stock Exchange would align
8.
themselves against him from fear of this investigation. Governor Hughes was committed to a public
investigation. If he persisted in that determination,
he would meet with the opposition of these interests.
He had to choose whether he would fight or surrender—and he made a compromise with these interests that was regarded and characterized by his
political friends and supporters at the time as a political straddle and that amounted to a palpable and
ignominious surrender to the Exchange of the vital
public interests. Instead of defying this powerful
clique and pressing his demand for a public investigation to be conducted with the aid of Counsel and
with power *to compel the attendance of witnesses
and the production of books and papers such as had
been conferred on the' Committees he had represented in conducting like legislative inquiries, Mr.
Hughes on December 15th, 1908, just after his reelection and on the eve of the assembling of the Legislature at the beginning of his second term of office,
when he should have repeated his demand, virtually
capitulated and invited the Stock Exchange to investigate itself in secret session in order to head
off the inevitable public investigation that public
opinion would have forced. To that end he appointed
a Committee of nine highly respectable well intentioned gentlemen to superintend the performance.
They were a voluntary, self-constituted body who
9
had no commission from any source, no official standing whatever whom the Governor had no more power
to appoint than you or L It was an attempt to anticipate the action of the Legislature and to pretend
to appease the public demand whilst doing nothing
to disturb the serenity of,the Exchange. The socalled "Commission" had no legal existence, no right
to enforce the attendance of witnesses or the production of books or papers or to administer an oath.
They had no appropriation even for their necessary
expenses and it is today a mystery whether the members personally or the Exchange paid these expenses.
The Stock Exchange was not under the slightest obligation to take any notice of their existence and
when the Exchange did so it was done in their own
way and on their own terms. The Commission could
secure just such information as the Exchange chose
to furnish them and none other. The entire farce
was generally regarded at the time as the result of
a deal made before the election and it was openly
so charged. Every surface indication justified that
conclusion. The way in which the Committee went
to work demonstrated its helplessness and ineffectiveness, if demonstration were needed, beyond the
manner of its appointment.
Whilst the question of Governor Hughes' renomination was trembling in the balance there were
many newspaper comments upon the reason for his
10
mysterious refusal to press for the investigation that
he had been recommending in his messages to the
Legislature. The following is a fair sample of such
comments:
There are many instances to justify the belief that he
does not favor a public investigation because of the certainty that the Wall Street interests will attempt to influence the Republican organization, with a fair prospect of success.
It appears from the testimony taken by the Pujo
Committee in 1912 that the Hughes Commission
examined no witnesses and took no oral testimony.
It went through the mummery of preparing a list of
written questions with the aid of the members and
Counsel for the Exchange. These questions were
submitted to the Counsel and Governing Committee
of the Exchange and written answers were prepared
after days of consideration and discussion of the
questions by the Governing Committee in secret session and with the aid of their Counsel. A fine kind
of investigation! No more transparent "whitewashing" was ever attempted by the most subservient
political hack. No wonder that it proved ineffective
to alleviate the evils at which it was pretended to be
aimed or to prevent the real investigation that Congress felt impelled to undertake three years later.
The Exchange had not availed itself of the invitation of Governor Hughes' Commission to reform it-
11
self at the sacrifice of the bulk of its business, which
was illegitimate. And so the scandals of stock manipulation and other abuses continued to grow until
they culminated in the Pujo investigation whose Report contains a full exposure of the character of the
Exchange, accompanied by recommendations for
compulsory incorporation and other legislation calculated to correct the evils that were uncovered.
Following this investigation and as a result of it,
the New York Legislature in 1913 enacted laws
aimed at stock manipulation and other of the abuses
that had been exposed but here again the malign influence of the Exchange proved too powerful to permit of the genuine and drastic reforms that are required whilst the Bill recommended by the Pujo
Committee is still held fast in Committee. But to
resume my story. Upon the showing made by the
Stock Exchange itself, the Commission found itself
forced to report among other things as follows:
It is unquestionable that only a small pu *t of the
transactions upon the Exchange is of an investment character. A substantial part may be characterized as virtual
gambling.
The patrons of the Exchange may be divided into the
following groups: * * * * *
(2) Manipulators, whose connection with corporations issuing or controlling particular securities enables
them in certain instances to move prices up or down and
who are thus in some degree protected from dangers.encountered by other speculators.
12
(3) Floor traders, who keenly study the markets and
the general conditions of- business and acquire early information concerning the changes which affect the values
of securities. From their familiarity with the technique
of dealings on the Exchange, and ability to act in concert
with others, and thus manipulate values, they are supposed to have special advantages over other traders.
(4) Outside operators having capital, experience and
knowledge of the general conditions of the business.
Testimony is clear as to the result which, in the long run,
attends their operations; commissions and interest
charges constitute a factor always working against them.
Since good luck and bad luck alternate in time, the gains
only stimulate these men to larger ventures, and they persist in them till a serious or ruinous loss forces them out
of the "Street."
(5) Inexperienced persons, who act on interested advise, "tips," advertisements in newspapers, or circulars
sent by mail, or "take flyers" in absolute ignorance, and
with blind confidence in their luck. Almost without exception they eventually lose.-
The following are some of the newspaper comments made upon the Report at the time:
Upon the publication of the Report, the*New
York World (which was at the time an ardent supporter of Governor Hughes), published an article
entitled:
Wall Street Grins at that Report to Governor
Hughes. Recommendations Virtually are Nothing but a
Transcript of Suggestions made by the Governors of the
Stock Exchange.
The Article continues:
Wall Street grinned yesterday. The reason was that
13
the report made by Governor Hughes' Committee on Securities and Commodities was found to be virtually nothing more than a transcript of a long list of suggestions
made to the Governor's Commission by a Committee from
the Board of Governors of the Stock Exchange.
The Saratoga Sun, in its issue of June 19th, 1909,
said:
The report of the Commission as regards the organization and operations of the New York Stock Exchange is
as near a whitewashing report as it well can be and save
the face of the Governor for having secured its appointment.
Another contemporaneous issue reads:
The Governor never appealed to the race track
gamblers to reform themselves. No Commission ever
urged the pool rooms to reform themselves. Mr. Hughes
is not imploring the political bosses of this State to reform themselves; yet the public has been asked to believe that some superhuman virtue attaches to the trade
of stock jobbing by which the New York Stock Exchange
will place the general welfare above its own pocket-book.
Another paper contained the following:
Governor Hughes can hardly afford to leave the reform of the Stock Exchange where his Commission left
it. Too .much is known, too much has .been said, to drop
the matter now. He has before him the example of every
enlightened nation of Europe.
On March 29th, 1910, in an article entitled, "The
Governor's Hesitation," the following appeared:
The Governor was an opponent of race track gambling, but he has not been greatly disturbed by the Stock
Exchange game. He has seen clearly enough the evils
14
of the caucus and convention system, by means of which
a few insiders dominate politics, but the Wall Street device has never drawn his fire.
It will be said in many places and with, some truth
that the Legislature has been compelled by Mr. Hughes
to accept his measures, most of which are worthy. Why
should not that body give its constituents an opportunity
to say that it compelled him to accept the popular judgment that Wall Street should be thoroughly exposed,
radically reformed and completely stripped of the privileges which it now engages?
Later, when it appeared that the Exchange was
still abusing the immunity from investigation that
it owed to the surrender of Governor Hughes, the
New York World said editorially:
It is more than a year since the Hughes Wall Street
Commission was appointed. More than eight months ago *
it favored leaving to the Stock Exchange the duty of reformation. * Its iridescent dream has been shattered; the
Stock Exchange remains what it was. The time is ripe
for the Legislature to act decisively.
But not a move did Governor Hughes make in
that direction during his second term of office. The
Exchange had been convicted on its own showing by
the verdict of his own Commission of knowingly
countenancing and permitting transactions that constituted a large part of its dealings that were not
more respectable than those of a crooked gambling
house but the investing public to whom its legitimate
facilities were essential and who were the victims of
16
these dishonest practices was sentenced by the Governor's action to be left without redress until such
time as the Exchange should see fit to reform itself,
which would involve cutting off the bulk of the business of its members! Does anybody believe that the
Governor or his Commission ever expected any such
voluntary renunciation?
The following is an extract from another newspaper article on the subject at the time which fairly
reflects the situation:
Confidence men who operate elsewhere than in Wall
Street arc pursued by law. Gambling contracts elsewhere are not enforcible in the Courts. Will Governor
Hughes and the members of the Legislature explain why
an exception should be made in behalf of Wall Street?
The New York American on June 17th, 1909, said
with respect to the Report:
It (the Commission) made not a loud but a muffled
report. But the public would be vastly enlightened to
hear from him on the subject of the villains being the
lambs that are sheared.
The comment of the Niagara Falls Gazette of June.
19th, 1909, upon the Report was:
W h a t is especially satisfactory to the Street is the
fact that there is no recommendation in the report demanding legislative action.
The Brooklyn Union of June 17th, 1909, commented
as follows:
Everybody understood when Governor Hughes ap16
pointed his Committee on Speculation in Commodities
and Securities nearly six months ago," that the act was
political rather than administrative; or, to put it more
• plainly, that it was the answer to the demand that Wall
Street and the Stock Market should be regulated and
fraud suppressed.
Why did Governor Hughes voluntarily make
this abject surrender at that critical time? Why did
he not stand upon his messages to the Legislature
calling for the usual public legislative investigation?
He knew that he could have secured such an investigation if he had forced the issue.
Governor Hughes was not without experience
in legislative investigations. He had been Counsel
for the Stevens Gas Investigating Committee and
for the Armstrong Life Insurance Investigation.
They were both Legislative inquiries, conducted in
the open with him as Counsel and with the fullest
power to compel the attendance of witnesses and
the production of books and papers. No one knew
better than he that in a secret inquiry of that kind,
relying entirely on the information that the Exchange chose to furnish, without Counsel or funds
or the aid of publicity or the right to subpoepa witnesses or place them under oath or to require the
production of books or papers he could never expect
substantial results. The net outcome must necessarily have been worse than no investigation (no
17
matter how independent of the influence of the Exchange or how well-intentioned his Commission may
have been) and this proved to be the fact. Why then
did he become a party to choking off this much
needed inquiry?
The Gas Company was not invited to voluntarily reduce the price of gas after secretly investigating itself to determine whether it should do so. It
was compelled to do so. Neither was it left to the
Life Insurance Companies to determine whether
their management and methods required reform.
They were publicly pitilessly investigated, frauds in
their management were exposed and the necessary
remedies applied by the Legislature. Why this tender discrimination in favor of the Stock Exchange
that resulted in its complete immunity and the
death-knell of the much needed reforms?
This incident in the public career of Mr. Hughes
is quite consistent with other parts of his record.
Throughout his terms as Governor he generally
managed to land on the side of the vested interests.
He always found a plausible pretext for doing so.
They always do. He did everything in his power
whilst Governor to defeat the enactment of a Federal Income Tax whilst professing that he favored
such a tax. When in April, 1910, the State of New
York was called upon through its Legislature to
vote upon the amendment to the Federal Constitu-
-18
tion that would permit Congress to tax incomes,
Governor Hughes in transmitting the resolution of
Congress proposing the amendment, concluded as
follows:
I therefore deem it my duty as Governor of the State
to recommend that this proposed amendment should not
be ratified.
Five days later he was appointed to the United
States Supreme Court by President Taft. The pretext assigned by him for his opposition was trivial
and proved to be frivolous. He based his opposition
on the ground that under the amendment as framed
and as it had already been accepted by a number of
the States, allowing the taxation of incomes "from
whatever source derived," Congress would have the
power to tax the incomes derived from State and
Municipal bonds. No other Governor or Legislature
had raised any such question. The amendment as
adopted and as now a part of the Constitution contains the provision on account of which Governor
Hughes attempted to defeat the Income Tax. Yet
nobody has ever heard of Congress attempting to
tax incomes derived from State and Municipal bonds
and nobody ever will.
But Governor Hughes in his anxiety to defeat
the law apparently assumed that if he could succeed in that contention he would put back the enactment of an income tax for another ten years or
19
more, as it would then be necessary to frame another
amendment and have it re-passed by the several
States that had already acted* His Republican Legislature, acting upon his recommendation, refused
to ratify the amendment but the succeeding Democratic Governor and Democratic Legislature of New
York ratified it and thus the power of the Federal
Government to tax incomes—the most just form of
taxation—became part of the law of the land in
spite of the attempts of Governor Hughes to defeat it.
Again, when the New York Legislature in 1908
passed a law known as the Coney Island Five Cent
Fare Bill, Governor Hughes vetoed it on the ground
that there had been no investigation to show that
to limit the fare to five cents would not be confiscatory, thus overturning every precedent as to the
burden of proof, in the attempt to defeat this law.
He repeated the same exploit in his veto of the two
cent railroad fare bill and on the same untenable
ground. Since when has it become the right or duty
of the Governor to impose upon the State the burden
of proving that a law passed by the Legislature will
not be confiscatory? The Legislature is presumed
to know and to do its duty. If Governor Hughes had
signed the Bills the burden would have been upon
the corporations to show affirmatively that they
were confiscatory before they could have been de-
20
clared unconstitutional By vetoing the Bill, the
people were deprived of the opportunity of having
their day in Court on the question of whether the
law was or was not confiscatory. The most narrow
and rabid corporation partisan could not have done
worse by the people of the State.
Where and how anyone ever conceived the idea
that there was anything progressive in the makeup
or record of Mr. Hughes is beyond conception. True,
he temporarily stopped gambling on.the race course,
which has since been resumed; but there was not
much in the way of power behind that form of vice.
When it came to investigating or stopping the dishonest gambling on the Stock Exchange, which is
like playing with loaded dice or marked cards but
which has the charmed protection and support of
Invisible Government, he tackled the job before he
realized the powerful influences that were behind
the game but when he was confronted with the peril
to himself that lurked in the championship of what
appeared at first blush to be a popular measure, discretion took the place of valor and he ran away from
the problem with even greater alacrity than he had
undertaken it.
If the President had the same keen scent of
danger from the enmity of Invisible Government
or feared their emnity he would not have taken the
banking system out of their control or signed the
21
Clayton Bill or the Eight Hour Law or any of the
other progressive legislation for which he is responsible and he would now be enjoying their powerful support instead of their bitter hatred and opposition. The enemies he has made and the way he
has made them establish his right to the gratitude
and support of all right-thinking men. By the same
token and judging Mr. Hughes by his friends and
champions, the people who have no special interests
to serve will do well to be on their guard no matter
how well intentioned they may believe, him to be.
No man is sufficiently strong to withstand such influences in his own camp'.
It may be that the false conceptions of the progressiveness of Governor Hughes are due to his activities just prior to his election as Governor. He
had been concerned in the two important investigations above referred to, first as Counsel for the
Stevens Gas Investigating Committee and then for
the Insurance Committee. Having been retained by
the State, he had done his duty as a lawyer. If he
had been retained by the corporations he would
doubtless have been equally loyal and efficient in the
championship of their rights.' His action in those
two cases may be evidence of his efficiency, which no
one questions, but they constitute no evidence of
public spirit or public service. It is the natural in-
22
stinct of the lawyer to serve his client to the best of
his ability.
By way of parenthesis, the record in the Gas
case throws a strong light upon the good faith of
these public-service corporations in their dealings
with the court and public and affords us a guide of
the measure of the sincerity of the assertions of the
railroads of the effect of the eight hour law on their
earnings. It will be remembered that the Consolidated Gas Company contested the Constitutionality
of the eighty cent gas bill through the Courts and
to and through the United States Supreme Court,
on the ground that to limit them to a charge of
eighty cents for gas would be confiscatory and would
destroy them. The Gas Company was defeated and
eighty cent gas has now been in existence for over
ten years. The stock of the Gas Company is now
selling at $140 per share, is paying 8% dividends and
earning vastly more. Perhaps the railroads will find
themselves equally "mistaken" as to the effect of
the Eight Hour Law.
Mr. Hughes was paid for his services to the
State—modestly, it is true, but he was paid; and no
lawyer is entitled to credit for such a service performed for his client, whether that client be the
State or a private individual. Perhaps if Mr.
Hughes had been Governor instead of Counsel for
the Committee that drew the Bill when the Legisla-
23
ture passed the eighty cent gas law he would have
vetoed the law as he did the Coney Island five cent
fare bill and the two cent railroad fare bill, on the
ground that it was confiscatory, and the Courts
would never have had the opportunity to decide (as
they did) to the contrary* I have yet to learn'of
any public professional service than was performed
by Mr. Hughes at the Bar without compensation or
of any reform or public movement to which he volunteered his time or service. It is not injustice to
him to say that the record of his service at the Bar
is exceptionally barren of any incident of that kind.
The Act creating the Public Service Commissions for New York State and City is referred to by
the supporters of Mr. Hughes as evidence of his progressiveness. The personnel of his appointments
does not sustain that contention. Whether the existence of such a Commission is to prove a blessing or
a curse to the people depends entirely on the men
who are named, for they have vast discretionary
powers that are not subject to review either by the
Courts or elsewhere. If they are faithful public servants they are a protection against the rapacity of
the corporations they are intended to supervise but
if they are the creatures of those corporations they
render far more easy the exploitation of the public
than if they did not exist. There are two Commissions in our State, The jurisdiction of the Commissi
sion for the first district covers the City of New
York and that of the second district includes the
balance of the State.
The New York Central and New Haven roads,
among others, are under the jurisdiction of the Commission for the second district. In a speech before
the Republican Club of New York City on January
7th, 1912,1 said of this Commission:
Whether rightly or wrongly one of the Public Service
Commissions for this State is generally regarded as an
annex to the New York Central and New York and New
Haven roads.
I then proceeded to instance a case of gross
abuse that had come under my professional observation.
The chairman of that Commission, who was the
appointee of Governor Hughes, as were all the members, went into the employ of the New York Central
immediately upon being succeeded by the appointee
of a Democratic Governor and has been there ever
since. Other appointees of Governor Hughes found
similar employment with corporations that had been
subject to their jurisdiction upon the expiration of
their terms of office. In drawing his Bill the Governor took no such precaution as will be found in
the Federal Reserve Act which disqualifies a member of the Board from entering the employment of
25
a National Bank for a given number of years after
the expiration of his term of office.
In common with many members of our Bar
throughout the country I regard the candidacy of
Mr. Hughes as peculiarly unfortunate in its effect on
the United States Supreme Court. I do not believe
that the Court will ever recover in the public esteem
from the cruel blow that was struck at it when Mr.
Hughes accepted the nomination for which his
friends had been long and adroitly angling. The
men who had been put into that exalted office were
supposed to have dedicated their lives beyond recall
to the work of that great tribunal. There was no
suspicion in the public mind that their decisions
might even unconsciously be swayed or colored by
the ambitions of office or that their opinions would
ever be dragged into the arena of political discussion. Yet we now find these decisions criticised from
the stump whilst Mr. Hughes and his party are engaged in the humiliating spectacle of defending
them. If Mr. Hughes should be elected, the Court
would become the hatching nest for political ambition. It would be the signal to draw upon it for candidates for political office and all the traditions that
have surrounded that great post and have enshrined
it in the reverence of the people will have been swept
away. The very integrity of the Court requires his
Gverwhelming defeat. The greatest service he could
26
have done the country would have been to have refused to drag the tribunal that had so greatly honored him into the arena of political controvery. The
idea that'there was any National exigency that required his sacrifice of the Court is the veriest rubbish. We have very short memories in this country,
but they are not so hopelessly short for us already
to have forgotten the methods by which his nomination was brought about nor the alacrity with
which the 100% Judge—for he was in every sense a
100% Judge—became the 100% Candidate.
The tone of the campaign has been a sad disillusionment to the many admirers of Mr. Hughes.
The nominations gave birth to high hopes. At last
we were to have a truly educational campaign covering the great economic problems of our time, conducted by both candidates on a high moral and intellectual plane, free from the personalities that
have been so humiliating to our National pride. It
never occurred to us before the meeting of the National Republican Convention that either party
would be so devoid of patriotism as to dare drag
delicate pending questions of foreign policy into the
arena of political controversy thus paralyzing the
efforts of the party in power to deal with them.
So far as concerns the President we have not
been disappointed. He has maintained the discussions on the high plane that was expected of both
candidates.
27
In these exceptional times there must necessarily
be many things connected with our past and pending
negotiations with foreign governments upon which
his lips are sealed regardless of the consequences to
his party and himself, but he has discussed such
issues as it was possible seriously to discuss in a
dignified, impersonal way .and with the restraint
that becomes his high office that has commanded the
unqualified respect and admiration of the Nation,
including those who are not in agreement with his
political views and policies.
It was left for Mr. Hughes and Col. Roosevelt
at this time, when patriotism should have risen above
party expediency to conduct a campaign based upon
nothing more substantial than petty, querulous
fault-finding with the conduct of our foreign relations and in a way that has manifestly embarrassed
and weakened the President in the performance of
his delicate tasks.
All his policies are under fire. Foreign nations
no longer regard him as the spokesman for the country since everything that he has done is assailed as
wrong. If, however, the President wins his decisions
will be taken as the voice of the country. If he is
defeated it is impossible to exaggerate the far-reaching effects. Pandemonium will reign in our foreign
relations. His policies will rightly be regarded as
condemned, whilst nothing will have been substi-
28
tuted in their place, especially since his adversary
has no policy that he dares announce from fear of
alienating some one or more of the mongrel, conflicting elements of discontent upon which he is depending for success. And so the triumph of Mr.
Hughes will mean a perilous state of chaos for at
least four months that may well prove to be the
most critical time in our history, with all existing
policies discarded, all .pending negotiations suspended and none others capable of being effectively
undertaken.
Such is the situation that these gentlemen are
willing to take the responsibility of creating and that
they invite you to bring about in the affairs of our
Nation. In order to accomplish this result Col.
Roosevelt is not only permitted without protest by
Mr. Hughes, but is encouraged to stalk about the
country comparing our President to Pontius Pilate,
likening his concern for our ^citizens who have lost
their lives in Mexico and in the Lusitania disaster
to that for "a rat caught by a terrier" and emptying
the vials of his vitriolic abuse upon the head of our,
Chief Magistrate with a disregard for the truth and
for that great office that is bound to do permanent
harm, although we should by this time have become
accustomed to the irresponsible intemperate language of that broken idol.
29
THE OPERATING CONTRACT AND THE
FUTURE OF RAILROAD SECURITIES
THEREUNDER
AN ADDRESS DELIVERED BEFORE
THE AMERICAN BANKERS ASSOCIATION
AT CHICAGO. SEPTEMBER 24. 1918
SAMUEL UNTERMYER
OF NEW YORK
A d d r e s s of Mr, S a m u e l U n t e r m y e r before T h e
A m e r i c a n Bankers* A s s o c i a t i o n at C h i c a g o
September 24, 1918
T h e O p e r a t i n g Contract a n d the Future of
Railroad Securities thereunder
The question you have invited me to answer is one of exceeding perplexity, that is more easily put than answered. It
involves so many unknown factors and depends so largely
upon the manner in which the Railroad Administration will
administer its sweeping autocratic powers under the Operating contract that any conclusion must necessarily rest largely
upon conjecture. The logic of the situation and the plans
that have already been put into execution would however
indicate that these powers are intended to be exercised and
I accordingly feel impelled to discuss the subject on that
assumption.
Fortunately for the country we have at this time at the
head of this great venture, in the person of the distinguished
Director-General, not only a man of affairs who has with
conspicuous brilliancy and success administered the most
difficult, delicate and important public office in the Nation, next
to that of his great Chief, but one who is a close student of
the intricacies of finance, with exceptional subtlety, infinite
tact, wide experience with his subject and statesmanlike
vision. His courage, the swiftness and accuracy of his decisions and the rapidity with which his horizon has widened under the spur of staggering responsibilities are fairly bewildering.
Therein lies a wide margin of safety. On the other hand
his advisers have construed the Federal Control Act as requiring the contract to delegate undreamed-of powers over
the credit and future of the roads, almost as unrestricted as
9
if the Government had paid for and owned them and we must
confront the further peril that the destiny of the roads is
now more than ever plunged into the vortex of political strife
and that their future will be largely determined by the political ambitions and exigencies that will become inseparable
from the intrinsic merits of the problems involved.
This is not meant to imply that the present Eailroad
Administration will be swayed by any such considerations,
except insofar as may be necessary to conform to the limitations that may be placed upon it by Congress. Thus far the
indications are that the Director-General will ignore party
considerations, if the selection of his aids and advisers is any
guide to his policy, for he has both here and in the recent
choice of leading Treasury assistants made his selections
largely from men who happen to be conspicuous in the opposition party—or more accurately speaking, he has in a spirit
of broad, wise statesmanship ignored party considerations.
But with every allowance for the fair start that has been
made with this experiment in that respect it would be unsafe
and unsound to predicate the final outcome upon the human
or political life and power of any single individual. We are
here today and are gone tomorrow. The problem must be
analyzed in its wider aspects, from the standpoint of the powers that have been delegated by the Contract. We have no
right to assume that they will not be exercised. The status
of the security holders must be judged by what may he lawfully done under the contract and not by speculating on what
will he done.
Viewed in that aspect I greatly regret that I have no
very cheerful or encouraging answer to your question to
bring you, in the light of the Operating Contracts that are
being entered into with the Government, and for reasons that
will be hereafter stated. There is however ample ground for
consolation in the reflection that the future is shrouded in
uncertainty and that the opinion of the individual is valuable only to the extent of the validity of the arguments by
which it is supported.
o
Before presenting these arguments it may not be out
of place to refer briefly to the history of the railroads as
bearing upon their present unfortunate situation, due largely
to the public attitude towards them as reflected in the hostile State and Federal legislation and regulation of the past
two decades.
The debt we owe to the bold adventurers to whose
enterprise and enlightened selfishness we are in large
part indebted for the magic rapidity with which this vast
country has been brought and tied together in one indissoluble bond, space annihilated and its resources and industries developed, has never been properly recognized by our
people except in the mere monetary rewards that only a few,
and those the least deserving, were able to. reap, and which
the span of life was too short to permit those few
to enjoy. The reasons for this want of recognition
and for the hostility that followed are well understood. The
era of railroad construction was followed by a long trail of
official and political debauchery that constitute a lasting disgrace in the history of our National development. Vast
trunk-lines that were built with Government money, were
further subsidized by gifts of millions upon millions of acres
of our most fertile lands and most valuable forest and
mineral resources, in addition to their rights-of-way. In*
credible fortunes were harvested from issues of reams of
bonds and stocks that were printed by the promoters at will
and without restriction or supervision and sold to the public
based largely on these gifts of land and loans of money from
the Government; stations and town sites were located along
the lines of those new highways carved out of the public domain without Governmental restriction, and the "insiders"
were thus permitted to pre-empt for their personal profit
great tracts of land and mineral resources that were the heritage of the people. All this was accompanied and followed
by an orgy of political despotism and personal corruption
that made of our Government the by-word of the world.
In order to further their schemes and to encompass the
many others that followed in close succession, the public life
4
of the Nation as well as of the States was debauched, the
Courts were corrupted, the press was subsidized or silenced
and our moral standards were brought to the lowest possible
ebb. For generations the money influence of these men and
their associates and successors placed and kept men in high
public office who recorded their wills and furthered their unholy deeds. Of those who were not in one way or another in
their pay, the fear of their destructive power and the hope of
their powerful political support kept many in check.
Meantime there were no such things as rate regulations,
limitations upon bond and stock issues or restrictions upon
favoritism in the way of rebates and freight discriminations,
by means of which they and their friends and allies were rewarded and their enemies were ruined. It was truly a reign
of terror in the business, financial and political worlds of the
country.
The awakening and reaction that were bound to
come, at first came slowly and painfully—not because the
people were not ready to turn, upon their enemies when their
eyes were opened but because the power of these interests
had been gradually expanding and was sufficient to hold the
political movement in abeyance for a long time and until the
real offenders were safely under cover. They got "out from
under" by selling their holdings upon the then greatest and
most crooked gambling pit that the world has ever seen.
" W a s h " sales upon fictitious and manipulated security markets and other scandalous devices were created through
which the paper proceeds from these ill-gotten gains were
dumped upon an ever-credulous public at fabulous prices as
compared with intrinsic values.
It is however but just to say in this connection that under
pressure of the threat of Government regulation of the StockExchanges these evils have been largely eliminated. These
gentlemen had the wisdom to take their own house-cleaning in
hand before it was done for them so that their present situation, whilst still leaving much to be desired and more that
could only be accomplished if they were, as they should be,
subject to regulation, is vastly different from what it was in
5
the olden days. It now, with occasional lapses, approaches
more nearly the conception of the legitimate security market
that is so integral and necessary a part of our financial system
and should be subject to the same character of supervision and
control.
The era of constructive railroad legislation began with
the creation of the Interstate Commerce Commission. Their
powers at the beginning were practically negligible but were
expanded from time to time until they are now all-embracing
but none too broad if wisely administered.
The States followed with remedial laws, not without violent opposition from the railroad men, who in many of the
States, and particularly in the East, still firmly held the reins
of political domination, so that the West, as usual, far outstripped the East in placing restrictive regulations upon their
Statute books.
The people were at last beginning to fully know their
power. As flashes of lightning from a clear sky illumine the
darkness, they were now able to see the foul spots and that
their hands were free and they lost no further time in throwing off the yoke that had been so long wound around their
necks that they had believed it to-be one of the natural and
incurable ills of existence. Then they arose in their new-found
wrath and began to wreak their vengeance in response to this
awakened public sentiment, and the pendulum started swinging violently the other way.
But, alas, it fell and has ever since continued to fall upon
the victims and not upon the offenders. The latter had reaped
their harvest and had it securely tucked away, protected by
Statutes of Limitation, memories that were a blank, books
of account that were lost or destroyed and the many other
devices against which predatory wealth has managed to keep
prayerfully outside the grip of the law. When the storm
broke the torrents of indignation fell upon the helpless, inert
and scattered security holders, who have never known and
probably can never be taught to protect themselves. They
never really try and they never strike back. They do not even
remember their wrongs long enough to seek to right them. In
6
the face of repeated disclosures of corruption and gross mismanagement of these companies there is hardly an instance on
record of the ousting of these recreant trustees although they
rarely own any substantial part of the securities of the properties they are administering. With all these experiences
before them the shareholders of the roads are today without a
protective organization. Their supineness is a characteristic
upon which experience has shown that the unconscionable
promoter can safely rely. Above all others he realizes their
impotence and has never failed to count upon that knowledge.
Resuming our historical review, the Interstate Commerce
Commission and the State Commissions were now given authority to regulate rates, to put an end to rebates and to investigate the accounts of the carriers and examine witnesses
under oath, thus enabling them to discover violations. After
more than ten years of indefatigable effort and innumerable
prosecutions they have (to their great credit be it said) fairly
exterminated the evils of freight discriminations and rebates,
but not until after many of the greatest fortunes of the country and its most colossal monopolies had been built up from
that evil and had become so powerful and so firmly rooted in
our soil that they could no longer be effectively reached.
These reforms were closely followed by restrictions upon and
supervision of security issues by the States, which also exercise co-ordinate jurisdiction with the Federal Government
in the rate-making power as to the roads within their borders
and to such an extent as to have created innumerable coniflicts of jurisdiction that have unduly hampered the operations and prosperity of the roads.
Having long since reached the boundary of just regulation and reform (except as to security-issues by the Interstate Commerce Commission as to which authority should
have been granted), the Commission apparently believes that
the pendulum of public opinion has continued to swing against
the roads, which in my judgment is not the fact.
It has accordingly, in response to what I regard as a
mistaken conception of public sentiment, continued to pursue
a consistent policy of keeping the roads on the verge of starva
7
tion and barely within the Constitutional limitations against
the confiscation of property in the fixing of rates, until as the
result of that policy they were, at the time the control and
operation of the properties were taken over by the Government, in the financial condition graphically described by the
Director-General in the following language:
" These conditions, together with the necessity
railroads would have faced for raising wages and the
difficulty of borrowing money, would probably have
resulted in the failure of some of the most important
railroad companies in the country to meet their obligations under private management."
If that be true as to prosperous roads (and it is unfortunately only too true—and more), what shall be said of the
less prosperous roads that together constitute the great bulk
of mileage of the country!
Whatever may have been the past sins of the companies
they have long since been more than expiated by their victims,
upon whom these sins have been visited, as the sins of the
fathers are said to be visited upon their children and their
children's children, except that here the punishment has not
been visited upon the offenders or upon their children but
upon the children and children's children of their victims—
which is not according to the Scriptures. For many years
the roads have been far more sinned against than sinning.
Fortunately in one respect and unfortunately in others,
they have been under such rigid Governmental regulation that
their power to offend against the public has been destroyed.
No such emergency as is said by the Director-General to
have confronted the roads when Government control intervened could have been brought about if the public and Congress and the Commission could have been made to realize
that the ownership of these properties does not rest to any
extent in the hands of their officers and directors. I venture
to say that all of them do not together own anything like as
much as one per cent, of the securities of the roads they are
administering. The ownership of the remaining ninety-nine
per cent, and upwards, is scattered among 50,000,000 people
8
or about une-half the population of the country, distributed
approximately as follows:
There are more than 33,000,000 industrial and agricultural workers in the United States to whom solely and directly belong the railroad securities that are held by the industrial life insurance companies that have outstanding policies held by that number of human beings (unduplicated)
against death and casualty; there are additional life insurance policies held by well upwards of 3,000,000 people for
larger sums, in what are known as the "old line" life insurance companies such as the Mutual, New York, Equitable,
Home, Connecticut, Northwestern, etc. All of these are now
mutual companies. No one other than the policy-holders has
any interest in them. These companies hold billions of dollars of railroad securities for their policy holders, bought
with the money belonging to the latter and out of which
these death and accident claims must be paid. All insurance
rates of premiums are based upon the stability and maintenance of the values of these securities. The very solvency
and existence of the companies depend on maintaining these
values. There are upwards of 10,000,000 depositors in the
savings banks in the same situation, whose sole safety rests
upon these securities. When to these figures are added the
individual holders of railroad bonds and stocks throughout
the country, the amounts held by the State and National
Banks and Trust Companies, Fire, Casualty and other Institutions, by the Universities and Colleges, it will be seen that
the statement of the number of persons interested in railroad securities is ultra-conservative and that the National
credit and stability are inextricably involved in their fate,
to an extent that was little realized until the taking over of
the operation of the roads forced a study of the subject.
I now propose with your permission to discuss
the Contract from five points of view, but it must
be clearly understood that nothing that I may say is
intended to carry by words or implication any criticism
upon the Railroad Administration for the present form
of contract. The security holders have fought their
9
fight for better protection against the rigors of the contract
and have, received long, patient and painstaking consideration, have won on many relatively minor points that are now
embodied in the contract but have been unable to secure relief
on two vital and fundamental features on which the greatest
insistence was placed.
The failure to secure relief on these two points
is said to be due mainly to differences between t h e .
Government advisers and the security holders in the construction of the Federal Control Act, in the judicial determination of which the Railroad Administration (doubtless for
what the latter regarded as valid reasons) declined to cooperate with the security holders. The latter were on the
other hand unwilling at this time to become responsible for
a controversy that might even remotely disturb financial conditions and thus possibly affect the success of the impending
Government loan. The points that were at issue were, however, crucial, as will hereafter appear. I t accordingly remains now only to discuss and speculate upon the probable
effect of the document as an accomplished fact.
1. Does the contract conform to the President's Proclamation on which the roads were taken over? If not, to what
extent is it a departure?
2. What assurance does the contract furnish of the continuance during Federal control of (a) interest payments and
(2) of dividends?
3. What may be and what is likely to be the financial
condition of the roads upon their return to private control,
if they are returned?
4. Are they likely to be returned? Or is Federal ownership to be the probable outcome?
5. If we are to have Federal ownership what will be the
probable basis of compensation payable to the roads for
their properties and to what extent will the measure of compensation be injuriously affected by the provisions of the
contract?
10
The following is from the Proclamation of December 26,
1917, pursuant to which the roads immediately passed under
Federal control:
"The director shall, as soon as may be after having
assumed such possession and control, enter upon negotiations with the several companies looking to agreements for just and reasonable compensation for the possession, use, and control of their respective properties
on the basis of an annual guaranteed compensation
above accruing depreciation and the maintenance of
their properties equivalent, as nearly as may be, to the
average of the net operating income thereof for the
three-year period ending June 30, 1917, the results of
such negotiations to be reported to me for such action as
may be appropriate and lawful.
But nothing herein contained, expressed, or implied, or hereafter done or suffered hereunder, shall be
deemed in any way to impair the rights of the stockholders, bondholders, creditors, and other persons having interests in said systems of transportation or in the
profits thereof to receive just and adequate compensation for the use and control and operation of their
property hereby assumed.
Regular dividends hitherto declared and maturing
interest upon bonds, debentures, and other obligations
may be paid in due course; and such regular dividends
and interest may continue to be paid until and unless the
said director shall from time to time otherwise bv general or special orders determine; and, subject to the approval of the director, the various carriers may agree
upon and arrange for the renewal and extension of maturing obligations."
The authority for that action is contained in the last
paragraph of the Army Appropriation Bill of 1916 and reads
as follows:
ttr'The President in time of war is empowered,
through the Secretary of War, to take possession and
assume control of any system or systems of transportation, or any part thereof, and to utilize the same, to the
•exclusion as far as may be necessary, of all other traffic
thereon, for the transfer or transportation of troops,
11
war material, and equipment, or for such other purposes connected with the emergency as may be needful or desirable."
Owing to doubt as to the authority of the President to
agree with the roads upon the compensation as an incident
of the power to take qver the properties, as to which there
were varying opinions,, Congress was asked to legislate on
the subject. That legislation is embodied in the Federal Control Act, which is obscure, in its main features and will require judicial interpretation as to the roads that do not enter
into contracts with the Government. But where contracts
are made all doubts are thereby conclusively resolved in favor
of the Government's construction, since the roads are required by the contract to stipulate not to question either the
Constitutionality of the law or the interpretation placed upon
it by the Government.
Briefly stated, the Act, after ratifying the action of the
President in taking over the properties, divides itself into
two principal parts:
1. Such of the carriers as elect to do so may enter into
agreements with the Director-General; By these agreements
the compensation for "the use, possession, control and operation of their properties'' is fixed at a sum not exceeding in
each case the average annual net operating revenue of the
three year period from July 1, 1914, to June 30, 1917, which
is known as .the test period. The agreement is to contain—
"adequate and appropriate provisions for the maintenance,, repair, renewals and depreciation of the property, for the creation of any reserves or, reserve funds
found necessary in connection therewith, and for such
accounting and adjustments of charges and payments,
both during and at the end of Federal control as may
be requisite in order that the property of each earner
may be returned to it in substantially as good repair
and in substantially as complete equipment as it was in
at the beginning of Federal control."
12
2. The carriers that do not elect to make the agreement
may have their compensation for "the use, possession, control
and operation of their properties' 7 during Federal control
fixed by a board of referees of three members who may be selected by the Interstate Commerce Commission from its own
staff or members, subject to review in the Court of Claims, but
the decision of this Board is presumptive evidence in'the Court
of Claims of the amount payable as just compensation and of
the facts stated in its report. Pending such determination
the roads may be paid not exceeding 90 per cent, of their just
compensation.
Section 6 of the Act, the construction of which has been
one of the important points of contention, provides as follows:
"The President may also make or order any carrier
to make any additions, betterments, or road extensions,
and to provide terminals, motive power, cars and other
equipment necessary or desirable for war purposes or
in the public interest on or in connection with the property of any carrier. He may from said revolving fund
advance to such carrier all or any part of the expense
of such additions, betterments, or road extensions, and
to provide terminals, motive power, cars, and other necessary equipment so ordered and constructed by such
carrier or by the President, such advances to be charged
against such carrier.''
The fundamental questions upon which the security holders asked that the Government join with them in securing a
friendly judicial construction of the law, which the Government declined to do, are as follows:
(a) By the terms of subdivision (a) of Section 3 of the
Contract, known as the "Acceptance Clause'' the carrier is
required to accept the annual compensation which the security holders say was intended as an equivalent only for the
proper use, possession, control and operation of the property during Federal control, not only
13
"in full adjustment, settlement, satisfaction and discharge of any and all claims and rights at law or in
equity which it now has or hereafter can have for the
taking possession of its property and for the use, control and operation thereof during Federal control,"
to which there is no objection, but further (to which there
has been the gravest objection)—
"and for any loss and damage to its business or traffic
by reason of the diversion thereof orotlierivise, which
has been or may he caused by said taking or by said
possession, use, control and operation."
It will at once be seen that this provision expressly sanctions not only the diversion of traffic but the abandonment of
operations, the abrogation of all traffic agreements and connections and the complete dismemberment of the property and
destruction of its business and good will that may have cost
decades of labor ajid millions of expenditure to upbuild.
Under it the bare physical properties may be returned
stripped of everything that made them valuable, with their
future operation converted into a liability instead of a source
of profit. In the execution of the program of unification upon
which the Government is embarking, spurs and connections
with other roads may have been built and other changes made,
by which the business has been forever diverted to other
roads that are not required to pay for it.
This is only a part of the story of what may and is likely
to happen under this contract to many of the smaller roads
that have been in successful competition with great trunklines that will'now obsorb their business.
If Federal ownership should be the outcome of Federal
control the security holders may well fear that this provision
will also prove disastrous to the roads when they are called
upon to make their claims for compensation. It may then be
contended by the Government that when the carrier agreed
that its physical property might be returned to it with its operations abandoned, its traffic diverted and its value as a going
concern destroyed, it can no longer claim compensation for
14
those intangible values without which the roadbed and equipment have a mere scrap value, and that in any of these events
even its physical assets may be valued as abandoned property.
The Director-General, whilst admitting that this may be
the effect of the provision, replies that he is advised that the
compensation fixed by the Act was intended to include such
a use of the property; to which the security holders rejoin by
pointing to the express provision of the law that the agreement shall provide
"in order that the property of each carrier may be returned to it in substantially as good repair and in substantially as complete equipment as it was in at the
beginning of Federal control,"
which they construe to mean that the Government is not to
return the mere shell with the kernel extracted but is to restore the property to normal conditions, and that the twentyone months' period after the war allowed for the return of
the property was provided for that specific purpose.
The demand for protection against the effect of this provision in its bearing on the award of compensation in the
event of Government ownership was denied on the same
ground.
(b) As the result of the construction placed upon section 6 of the Act above quoted, the contract requires that
there be charged against the carrier the cost of all additions,
extensions, motive power, equipment, etc., that the DirectorGeneral may see fit to put upon or add to the property for
purely war purposes or in the process of unification or for
other purposes from which the Government gets the entire
revenues arid benefits during Federal control and which the
carrier may not want or be able to use if the property is
returned to private ownership. Under the contract the only
remedy of the carrier (if that can be said to be a remedy) is
to establish its loss in the Court of Claims after all these
expenditures have been made at its expense and the property has been turned back to it burdened with these charges,
15
possibly then due, or represented by short-term obligations
that it may be nnable to meet.
"When it seeks to prove these damages for burdens placed
upon its property without its consent it is met by another
provision of the contract to the effect that the prices paid
for these war improvements, extensions and equipment in
these abnormal times, and not their fair value to the carrier,
is to be taken as the basis of determining the extent of the
eventual charge against the carrier.
"With this understanding of the relative rights and obligations of the parties under the contract before us we may
proceed to the discussion of the questions above enumerated.
1. There is a reasonable assurance that the fixed charges
will be met in most cases where the annual standard return,
which is to be written into the contract in so many dollars
and cents, is sufficient to pay them. The certificate of net
operating revenue during the test period, which the law provides shall be given by the Interstate Commerce Commission, is to be the basis of the standard return. That in turn
will be based upon the figures that have been from month to
month filed by the carrier with the Interstate Commerce Commission and published by it, except that where there have
been clerical errors in accounting or the figures have been
arrived at by violating or ignoring the Interstate Commerce
Commission Rules of Accounting, they will be corrected accordingly. They will not, however, be subject to change, as
was at first insisted by the Government, by revision or readjustments of the accounts by the Commission either on the
subject of depreciation or maintenance.
As the contract was originally framed and as was for a
long time demanded, expenditures for additions .and betterments might be deducted in priority to fixed charges, but this
was changed so that all these charges are now still deductible
out of the standard return when not made for the benefit of
the United States, in priority to dividends but after fixed
charges. As the result of a final hearing before the Director
16
General, after protracted and unsuccessful negotiations with
his representatives, charges for excess maintenance that were
likewise deductible in priority to fixed charges, are now
placed behind such charges but still in priority to dividends.
There were many other conditions that made the future
payment of fixed charges an uncertain and undependable factor that were eliminated in the last two or three drafts of the
contract, so that it may now be assumed with reasonable
safety that where interest charges were fully earned during
the test period they will continue to be paid during Federal
control, provided the carrier is able to re-finance its maturing
obligations.
2. The continuance of dividend payments rests upon an
entirely different basis. There are a few roads whose margin
of standard return over fixed charges is so generous and
whose ability to finance the onerous Government requirements
for additions and betterments is so unquestioned that their
future dividends are reasonably assured so long as they consider it sound business policy to continue their payment;
but as to the others, my own guess is that they will be forced
to gradually reduce and finally to discontinue their payment
and that this will apply to roads that have paid dividends
continuously for many years.
3. There is not in my judgment the remotest prospect of
increased dividends as to the solvent roads that have been
paying dividends nor in any case in which the contract has
been based on the standard return—no matter how largely
the return may exceed the dividends heretofore paid, except
possibly from revenues from sources outside the operating
properties. In no case are increased dividends permissible,
even from outside resources, without special dispensation
from the railroad administration, which is not likely to be
forthcoming, in view of the right reserved to the Government by the contract to use the entire standard return over
fixed charges for additions and betterments not chargeable
against the United States and the authority it acquires by
17
the same document to commandeer the entire financial credit
and resources of the carrier for its war and other purposes.
I refrain from expressing an opinion as to the wisdom
or unwisdom of the roads, or of any of them, in electing to
make the contract as against resting upon their Constitutional
right to just compensation. That too would depend to some
extent upon whether in the absence of an agreement, Section
6 can be construed as granting to the Government the right
to charge the cost of additions and extensions for purely war
purposes against the carrier, without its consent and against
its protest, at current prices of labor and materials, and
whether if so construed, the Section violates the Constitutional prohibition even though the carrier is permitted thereafter to prove and recover its loss, measured, not by the fair
value to it of such additions and expenditures, but by the
cost thereof to the Government. .We are here dealing with
the problem on the assumption that the contract has been
made and these questions become pertinent only in their
bearing on the future of the carriers on that assumption.
It may be said without appearing to criticise the action
of the Government in insisting upon the contract in this form
that it is a wide departure from the terms impliedly held out
by the Proclamation, which did so much to quiet the fears of
investors and to steady the security market, when the President said
* 'Begular dividends hitherto declared and maturing interest upon bonds, debentures and other obligations may continue to be paid in due course."
To this the Railroad Administration answers (1) that if
there be such a departure it has been due to the action of
Congress for which the Director-General is not responsible,
and (2) that it was not possible to settle the terms of the
agreement in the Proclamation since the President admittedly had no power to do so, and that it would have been in
any event impracticable.
18
4. The probable operating and financial condition of the
roads at the end of Federal control are of course the chief
concerns of those interested in them, vastly more important
to them than the amount of compensation payable during the
uncertain tenure of Federal control. There is room for all
manner of speculation on these subjects. That the roads that
are continued in operation will be in at least as good physical
condition as when taken over to the extent to which they are
not dismembered, except as to the business that is diverted
from them may, I think, be reasonably assumed. The danger
is rather that many of them will be in better condition and
with more equipment, better roadbed and heavier rails than
they can afford and better than their normal requirements
demand.
These improved conditions will be largely represented
by charges against their properties that they may be unable
to meet. Added to these burdens will be the expenditures
that may be made for their account for additions, extensions,
equipment, etc., for war and other purposes for which it
may eventually be determined that they are not liable.
But meantime the obligations have been fastened upon them
whilst it may take years of litigation for them to judicially
establish the negative proposition that they are not liable
for them, the burden of establishing which is placed upon
them. If they fail to successfully carry that burden they must
take and pay for these additions and extensions on the basis
of their cost to the Government at inflated prices.
It would seem as though in most cases this would destroy
their credit and render them unable to finance these onerous
requirements. If the systems of transportation are unified
and co-ordinated, parallel and competing lines discontinued
or diverted into other channels, new connections and other
changes made that will unquestionably result in greater efficiency and economy in the operation of all the systems taken
as an entirety, some roads will benefit whilst others will be
virtually destroyed. Even of those that are benefited the
burdens may be too great to carry. I can see little hope for
19
most of them except through Federal ownership on almost
any terms that the Government may impose.
5. For me Government ownership has no terrors. I include in that statement not only the railroads, but the telegraphs, telephones and the natural resources, such as our
deposits of coal, iron, copper and oil and our forests, that of
right are the heritage of the entire people and should never
have been allowed to go from them. This view is, I know,
opposed to that held by most of you as it is contrary to that
of the Security Holders Committee that I have been representing in negotiating the contract between the Government
and the railroads and I would not refer to it here but for the
fact that to my mind it is an essential feature of the discussion, as I am sure you will agree after hearing what I have
to say. After all, whilst the lawyer sells his services to his
client he does not sell his views on economic questions nor
his freedom to be a loyal, sincere citizen according to his own
lights.
I have, as is well known and was well known to my
clients when they employed me, long been an advocate of
Government ownership but have always hoped and expected
that it would come through just and adequate compensation
and not through quasi-confiscation. The good faith of our
Government, the rules of fair dealing and the sanctity of
property rights alike demand that it shall not be less. Whether
these utilities and resources, or which of them, shall be operated or developed, as the case may be, by the Government or
leased to private enterprise to be conducted under Government regulation is another question which need not be here
discussed.
We may as well realize that as an aftermath of this war
much of the inequality and injustice of the old social order
will be gone, never to return and begin now to adjust ourselves to the new conditions that are upon us.
Pray do not misunderstand me—I am opposed to Socialism—To my mind it is an impracticable, unworkable
scheme of Government, a beautiful, idealistic, iridescent
L'O
dream, the exploitation of which in opposition to existing
theories has done much toward liberalizing our views of
human rights. We should be grateful to the Socialists for
what they have accomplished as an educational and restraining factor, but as a constructive policy their tenets will not
bear analysis. Government ownership of the instrumentalities and resources that belong to the people and are not the
result of human effort, such as the public domain, is not socialistic. Wherever the Government has permitted and encouraged them to be used and developed by human effort it would
be bad faith on its part to take them away either by open, or
«till worse, by covert and dishonest forms of confiscation.
But to return to our subject: How are the security holders of the railroads likely to fare under Government ownership in the light of this contract, if I am right in assuming
that they will be in a helpless condition because of its sweeping powers and of what is necessarily intended to be done
under it?
Here again the entire field of conjecture is open but there
are signposts along the road. Eeference has already been
made to the possible effect of the provisions of the contract on
those properties, the operations of which are destroyed, abandoned or materially curtailed. Not only will the Government
be able to return the properties bereft of their chief element
of value and be furnished the basis for valuing them for the
purpose of acquisition on that quasi-confiscatory basis but
far more serious in its results may be the valuation placed
upon the tangible assets in the light of these provisions.
It may well be doubted that the courts would hold that
as to properties the operations of which have been abandoned,
the rails, yards, shops, stations, roundhouses, elevators, warehouses, &c, would be valued at their scrap value, and yet this
is not beyond the range of possibility having regard to the
fact that the carriers that have signed the contract have
thereby agreed to such abandonment and have given express
permission for their return in that condition. It was largely
in order to avoid that construction that a persistent effort
was made to safeguard against such a contingency, the result
21
of which is embodied in the document but in a somewhat
equivocal form that is far from satisfactory.
6. Assuming that the peril from this source has been
overcome and that the properties will be justly valued the
next question that occurs to the present and future investor
is as to the basis and method of compensation that will
in that event be adopted. Here we have something of a premonition as to the attitude of the I. C. 0. if, as is probable,
the valuation is placed under its jurisdiction, in what is being
done in connection with the valuation of the properties that
is now and has been for four years or more under way by the
Commission under the Act of Congress providing for such a
valuation.
The chief purpose of that Act was apparently to furnish
an accurate basis for the regulation of rates in place of the
haphazard method that has prevailed in the absence of accurate data. A vast organization with corps of engineers, field
forces and accountants is employed in this service; many
millions of Government money have already been expended
and many more millions will be required, in addition to the expenditures already made and that must be made by the roads
in the preparation of data, &c, toward accomplishing this
stupendous task. Tentative valuations of several of the smaller
roads have now been completed and others are well on the
way to completion but it will take years to finish the work.
Certain principles have been tentatively announced by
the Commission whcih, if adhered to and upheld by the courts,
will seriously impair property values as at present understood
but I do not believe that they will be sustained. The subject
is exceedingly technical and complex and there is neither time
nor inclination to complicate this discussion by attempting to
explain the many important questions that are at issue. Suffice it to say that if the views of the Commission as to values
and elements of value as there announced are adopted in the
acquisition of the roads the recovery may be limited mainly
to replacement cost, which does not begin to represent the
present cost of acquisition.
00
7. Having ascertained the basis of compensation, in what
way is the Government likely to offer to pay for the properties 1 To pay outright in cash would seem impracticable in
view of our financial condition at the end of the war, nor
would it be necessary or profitable to either party. The most
logical and probable method would seem to be to guarantee
interest and dividends on the outstanding securities to an
amount that would yield a reasonable rate of return on the
values of the properties, or for the Government to issue in
exchange its own long term securities at rates of interest
that would give to them a par value having regard to their
greater market and intrinsic value as Government obligations.
If, for instance, a high class four per cent railroad bond
normally sells at 90, a long term Government bond or guarantee at 21/2 per cent should under peace conditions have
an equal value. If a stock paying 6 per cent and earning an
average of twice that amount over a long series of years has
commanded an average price of par, shareholders would
doubtless be willing to accept a 4 per cent or even a 3 per
cent Government obligation as an equivalent in market value.
There should be no difficulty in carrying out such a plan as
to the prosperous road. It would be fair to the securityholders and highly profitable to the Government. If a road
has been paying, say, 4 per cent on $50,000,000 bonds and
earning and paying 6 per cent on an equal amount of stock,
or $5,000,000 in all, and the Government would guarantee 2y2
per cent on the bonds and 4 per cent on the stock, the annual
charge to the Government would be $3,500,000, leaving it an
annual profit of $1,500,000 or equal to a profit of 30 per cent,
and the securities would have at least as great a market
value as those of the company paying the higher rates. I
am assuming that the value of the properties is fairly represented by the outstanding securities inasmuch as rates are
supposed to be based upon a fair return on capital investment.
8. The difficulties will be encountered when it comes to
fixing values on properties representing capital investment
23
that are out of proportion to their net operating revenues.
Will their compensation be regulated by the investment or
the returns? Probably by a combination of both elements.
Whatever the result, they could also be compensated by Government guarantees equivalent to a return on whatever is
found to be the selling or condemnation value.
In any event even if the Government pays generously
for the properties its net revenues will be greatly augmented
by reason of the greater value of the low interest bearing
securities it may issue by way of payment or guarantee on
acquiring the properties. If ten billion dollars par value of
securities of privately owned roads now yielding an average
return of $400,000,000 per year have a market value of, say,
five billion dollars, would not six billions of these securities
with a Government guarantee of 3%% have an equal or
greater aggregate value? Assuming a continuation of the
same net operating revenues this would leave to the Government a net profit of $190,000,000 per year.
There is no occasion for driving an oppressive
bargain with the security holders. Assuming that a fair
price is paid, sufficient to maintain at least the present market
values of the securities, the savings in interest and dividends
by reason of the lower rate required to command the same
market price would alone constitute a sinking fund sufficient
to pay for the roads in from thirty to forty years without a
dollar of actual cost or outlay to the Government, and this
without taking into account the vast economies from operations made possible through unification of the systems, the
elimination of parallel lines, the coordination of traffic and
the thousand and one other directions in which savings can
be effected, thus eventually decreasing the cpst of transportation without depleting revenues.
Government ownership at a fair price will be far more
advantageous for the Government and infinitely better and
vastly more just to the security holders than Federal control
under the onerous conditions of this contract. Strange to
say the time has come when instead of looking forward to
it with dread and misgiving as the entering wedge of a
24
Socialist state we should contemplate it as a relief from
intolerable hardship.
Inasmuch as on such a plan the properties would cost
the Government nothing, the difference between acquiring on
a niggardly quasi-confiscatory basis and on a just compensatory basis would mean only that on the latter basis it would
take a little longer—possibly five years longer—to pay for
them out of their own surplus earnings.
Common stocks of the safest and most prosperous of
the roads the continuance of whose dividends arc the best
secured and where standard returns show margins of from
40 per cent to 60 per cent over the dividends that are being
paid are to-day selling on a basis of between 7 per cent and 8
per cent return. Can there be any doubt that with a 4 per
cent Government guarantee they would command a higher
price?
Reviewing the problem in all its various aspects there
may be reasonably deduced from the situation the conclusions
(1) that the well secured bonds of prosperous roads are not
likely to suffer substantial shrinkage; (2) that the, at present,
indifferently secured bonds will be subject to serious deterioration in value; (3) that the established dividend paying
stocks will be somewhat injuriously affected, and (4) that the
values of the non-dividend earning stocks will to a large
extent be eliminated.
The prospects cannot be said to be alluring but if we
are prepared to meet the worst there is always the hope that
we have been taking counsel of our fears and that after all
they may not be realized. There is also the cold consolation,
which I do not believe will be the result, that Government
operation may prove so expensive and unpopular or so unsuccessful that the roads will be returned and that the Government having by experience learned something of the injustice that has been done to the roads and the public by a
policy of inadequate rates, will conclude that it is good business to treat them fairly and thus to attract investors and
secure the best service. Let us therefore, whilst prepared
for the worst, hope for the best outcome of this stupendous
epochal experiment.
WHAT THE WAR WILL DO FOR AMERICA
ADDRESS
BEFORE MEETING OF SPEAKERS FOR THE
FOURTH LIBERTY LOAN AT CHICAGO
WEDNESDAY. SEPTEMBER 25, 1918
(By
SAMUEL UNTERMYER
OF NEW YORK
WHAT THE WAR WILL DO FOR AMERICA
With your imaginations aroused and your hearts aflame
with the fire and glow of patriotism inspired by the presence
among us of these youthful battle-scarred veterans and heroes
of the world-famed Foreign Legions of France and the bloodcurdling stories of their heroic achievements, it is no easy
task for you or for me to descend to the reasoning commonplaces of discussing the arguments by which you are to encompass the work that lies before you, and I shall not attempt
to do so.
The Government has worked for months over the valuable
handbook that presents them in concrete form and sets forth
many persuasive suggestions that are to be put before your
audiences. It would indeed be presumptuous of me to expect
to be able to contribute anything of moment. When I was
asked in New York, whilst here addressing the American
Bankers Association, to speak to you on the Liberty Loan
I assumed that what I had to say was to be spoken before
an audience of bond-buyers and jotted down my ideas on the
train for such a speech. I now find myself confronted by a
body of expert bondsellers who, judging from past performances, know far more than I do of the arguments that will
sell bonds. Having been one of you on all the previous loans,
as I shall be again this time, I have what amounts in effect
to a single suggestion to add that may or may not be of value
to you.
Throughout this war we are recounting with justified pride
what America has done and is doing for the unborn generations of humanity. But the debt is not so much on one side
as this line of reasoning would imply and I propose now to
ask you to turn the thoughts of your audiences to the proposal
suggested by the theme of my discourse.
The time has long since passed for discussing the now
threadbare theme, Why we entered the war, or, What are
our war aims, now that we are in it to the bitter end. If
2
there is any one in the country who does not understand he
never will. It has been well said that we now have but one
war aim and that is our aim to win the war, no matter how
long it may take nor what may be the sacrifices in blood and
treasure and we cannot close our eyes to the grim fact that
the toll will indeed be heavy. But the stake is so much higher
that we cannot consider the price. It is higher than material
prosperity, higher than mere human life, higher even than
National honor. The stake is civilization itself, the future
peace of the world and the freedom and happiness of all
mankind.
Who would have imagined, how could the human mind
have visualized only a few short years ago that it would be
possible for the whole world to be enveloped in flame and that
it would be the proud destiny of this peace-loving Nation by
the brute force of arms to become the champion and saviour
of civilization!
Everyone now knows that we are in this bloodiest of all
wars in history only because we were not permitted to keep
out of it. But now that all this horror and sacrifice have
come to pass and more, much more, is to follow, can it be
said that it is wrong of us, in order that we may steel our
hearts and take counsel of our courage to gird ourselves to
further sacrifice, to now pause and take account of what will
come to the Nation by way of return?
I think not, for we are not speaking in terms of
territory to be wrested from a fallen foe, nor indemnities that we shall exact, nor of any of those sordid
material gains for which past wars have been fought.
None of these things are for us. We will have none
of them, no matter how heavy the burdens we must bear, nor
how glorious may be our victory on the field of battle. Ours
is the most unthinkably unselfish struggle ever conceived by
the brain and soul of man or Nation. To such transcendent
heights of grandeur and self-sacrifice have we risen, that the
heart of the Nation fairly leaps with joy and pride at the
conception.
The biggest thing that will be done by the crucible
of fire through which we are passing will be to spiritual
3
ize our people, who were steeped in materialism and commercialism. The whole world believed that we were a
Nation of mere money-makers to whom wealth was the
chief ambition of life and the sole standard of individual
success and it was at least to some extent true. The mad
race for money was becoming every day fiercer, when we
were almost without warning dragged into the war to save
the national honor. The European conflict had then reached
the stage at which our farms and mills and factories were
toiling day and night to supply their needs and we were
draining their centuries of accumulated wealth to the dregs.
The country was drunk and mad with the fever of moneymaking; extravagance and self-indulgence ran riot as never
before and we were well on the road to our spiritual undoing.
Suddenly, as if by magic, with the declaration of war the
whole face of the earth changed for us. And the change has
continued to grow day by day ever since, until the gruesome
reality is gradually entering our consciousness in all its
horror and grandeur.
It was natural that it should have been impossible at the
beginning in our then frivolous and wealth-worshipping state
of mind and with the realities of war so many thousands of
miles away, to grasp the enormity of the task to which
we had dedicated our lives and fortunes and all, save honor,
that we held dear. It is no disparagement to us to say that
if we could have visualized the future as we now see it we
would have hesitated, for we are after all but human, though
our mission is divine.
The event has demonstrated that the spirit of the Nation
would have forced us into the struggle in the end, but all has
been ordained for the best, for perhaps we would have been
too late. Under the guidance of a divine Providence
"Who sees with equal eye as God of all
A hero perish or a sparrow fall,
Systems and atoms into ruin hurled
And now a bubble burst and now a world,"
we builded far better than we knew in making that momentous
decision. Picture, if you can, what would have been our
4.
position today if, like the small nations that were forced to
do so by reason of their helplessness, we had meekly submitted to the dishonor of complying with the insolent demand that we take our commerce off the seas and tie up our
ships in our ports at the command of Germany as though
we were a conquered province. Besides being forever disgraced in the eyes of the world, we would have been so dishonored in our own estimation that the morale of the Nation
would have been gone.
Every ideal for which we stood and for which our forefathers suffered and every reason for our existence would
have been destroyed. Our heads would have been bowed in
.shame and our spirit broken. As has been eloquently said
by Secretary Lane:
"American is not the name of so much territory.
It is a living spirit, born in travail, grown in the rough
school of bitter experience, a living spirit which has
purpose and pride and conscience—knows why it wishes
to live and to what end, knows how it comes to be respected of the world, and hopes to retain that respect
by living on with the light of Lincoln's love of man as
its Old and New Testament. It is more precious that
this America should live than that we Americans should
live."
And so it is now known of all men (and that is the first
thing this war has done for America) that here we have taken
our irrevocable stand. The soul of America has spoken.
Never could it have been truly said of us and no longer will
it ever be said, even by the ignorant and unthinking, that
we hesitated to suffer and die in the defense of the great
principles on which this Republic was founded.
May I not in this connection suggest to you that you convey
to your audiences just one word of caution and reminder at
this time, when in our anxiety for the dear ones who are bearing the brunt of this bloody struggle, passion runs high and
there is danger lest in our frenzy of pain and longing we
say and do things that are unworthy of the sacred cause in
which we are embarked? I refer to the disposition in some
5
directions to stir up hate and prejudice against our loyal
citizens of German birth and ancestry whose brothers and
sons are fighting side by side with ours. I appeal also, though
not in the same way, for the law-abiding German citizens
who have made their homes with us. Our great President has
repeatedly reminded us that we are warring, not upon the
German people but upon their autocratic rulers who forced
them into this Avar, and that we ought not add to the burdens
of these people. "Within the past few weeks the State Department announced the appointment of a Commission of
distinguished Americans with Dr. Norman Bridge of Washington as Chairman. The purpose of the Commission is
stated by Secretary Lansing as follows:
"The duties of this Commission while few and relatively simple are of a delicate nature and require the
greatest care in their accomplishment. For the present
these are twofold. First, the recording and control of
assistance given to the families of interned aliens by
the legations of Sweden and Switzerland; and second,
rendering of aid and assistance both financial and social
to the vastly greater number of law-abiding industrious
and discreet subjects of Germany and Austria-Hungary
in the United States. Many of this latter group, although
loyal to the United States are through unjust and unfounded suspicion or prejudice of which they are the
victims, prevented from or seriously handicapped in earning their livelihood and are in consequence reduced to
great financial straits."
That, it seems to me is the temper in which we should deal
with this subject. It is incongruous and unthinkable that a
people engaged as we are in this great cause of humanity
should visit the sins of the War Lords of the Central Empires upon the heads of their victims who happen to be under
our hospitable roof where they were invited and welcomed,
merely because of the accident of their birth in a country
which they have forsaken for ours and with which we were
at peace when they came to us.
Hate is always unreasoning and intemperate. We have
truly a grim business to execute and we propose to keep at
6
it until we finish it in a way that will render it impossible
of repetition. But the cause is too big and too holy to make
room for hate. The upright Judge Avho sentences the criminal to death or penal serviture is not moved by hate or
revenge. He is more often stirred by pity, but he has a stern
duty to perform in which neither hate nor pity must play a
part. He, like this Nation, is a High Priest in the sacred
temple of justice. He is protecting society as we are safeguarding civilization. We have nothing to gain and much
to lose in self-esteem by giving way to impulses of which
we may hereafter be ashamed. The self-restraint that we
practice now will add to the lustre of our victory. To be
truly great the Nation must be just, generous and merciful.
It is not brave or fine to strike at men who are harmless,
unarmed and defenseless. We are not bullies.
The next great lesson has been to revolutionize our standards of men and values. In one short year our people have
learned that money does not make the man or add one jot to
his title to the respect of his fellowmen. Whilst money will
not cease to buy comforts and luxuries, it will never again
be possible for any single person to amass it in fabulous and
unusable amounts and it will be still less possible to
transmit it so as to perpetuate an indefinite aristocracy of
wealth. The aristocracy of the future will be an aristrocracy
based on Service. That will be the sole test and men will
prosper or fail in their life's work, in the estimation of their
neighbors and of the country, in the proportion in which they
meet that test of public usefulness.
Our system of Federal taxation prior to the war
was the most crude, unscientific and blindly unjust
of that of any Nation on earth. We were a half century
behind other countries in enacting an income tax law. Whilst
they were collecting their chief revenues from that source
without interfering with their successfully competing with us
in the markets of the world, our statesmen were still loudly
denouncing the proposal as Socialistic. It required over
twenty-five years of agitation to get an enforceable law on
the statute books and even then the tax was trifling. We had
7
been placing all the burdens of government oil the shoulders
of the workers. The rich who are necessarily the main beneficiaries of Governmental protection, since they have more to
be safeguarded, escaped, whilst the protective tariffs furnished the revenues.
I believe in a tariff for protection but the existence of
that source of revenue constitutes no reason for exempting
wealth from its just burden. The necessities of the war have
taught us that the burdens of taxation can without difficulty
be placed upon those who can best bear them. They should
have been so placed and the money should have been employed
for the benefit of those by whom the wealth was created and
in building for the future; in the irrigation and reclamation of
hundreds of millions of waste lands; the preservation of our
forests; the utilization for the whole people of our vast water
powers and other undeveloped natural resources; the construction of great national highways by land and water; the
acquisition by purchase or condemnation of the lands that
were shortsightedly given to the railroads and of the coal,
iron and copper mines and the oil fields, that are the heritage
of the people and should never have been permitted to go
from them. These are some of the many uses to which the
taxes from untaxed wealth that should have been taxed might
have been and will be put as one of the results of what we
have learned from this war.
When to the expenditures for these purposes there are
added the untold hundreds of millions of annual revenue that
will be required to care for the men who have been injured
and the families of those who have died in our cause and
the further sums that will be needed to carry out the longdeferred program of Social reform that will be justly demanded, it is easy to see that the Government will urgently
need every dollar that can be raised from a substantial tax
on incomes and from inherited wealth, in addition to the
revenues from customs duties.
The necessities of the war have involved the temporary surrender of an undue proportion of incomes and profits. I say
this, not by way of criticism or complaint, for the money must
8
be raised and the least oppressive way of securing it is by the
means that has been provided. Patriotism and the National
credit are being strained to the uttermost to provide the
larger proportion of our needs through bond issues. No other
method of taxation has been suggested that would involve
less real hardship. If men of independent means were asked
in such a crisis to contribute every dollar of their entire
incomes and business profits and to live upon their capital for
the duration of the war the sacrifice would be negligible as
compared with those that are being made by the millions of
our countrymen who are contributing their lives and the
happiness of those more dear to them than life, as well as
their earning power, to the Great Adventure upon which Ave
are embarked.
It is only from the point of view of the effect of the retention of such taxation upon enterprise in normal times that
the rates provided by the pending bill would be unwise and
oppressive. If they would accomplish the result of permanently raising the required income, they would be justified
in view of the better purposes to which the money could be
put. But if their effect would be to relax effort and initiative
and drive capital into hiding, they would be unjustified from
the economic point of view, since they would fail of the purpose for which they were intended and that would doubtless
be their effect.
The people who from motives of patriotism, or because
they know existing conditions to be temporary, are willing
to forego the rewards of their risks and labors would not
go on with such sacrifices indefinitely under normal conditions
with an alternative open to them. Whilst these burdens will
therefore be substantially lightened when our stupendous war
requirements are ended, we need not expect and I sincerely
hope that we shall never live to see anything like a return
to the old basis of taxation. Large incomes and inheritances
will have to be heavily and permanently curtailed by taxation unless we are to have continuous warfare between capital
and labor.
9
I t is necessary for the encouragement of thrift and enterprise that men shall be able to reap the reward, but it is not
necessary that their children and their children's children
shall be permitted to live lives of idleness and become parasites upon the community because of the thrift of their ancestors. In my judgment the time is near at hand when the
bulk of every great fortune will revert to the State upon the
death of the man who amassed it.
Let us hope and pray that world-disarmament will be the
blessed outcome of this brutal war. If we achieve a complete
victory that is likely to be our main contribution to humanity.
But even then we will have to provide our share of the cost
of armament for " T h e Nation of Nations" that will in some
form constitute an International Police to keep the peace of
the world. Again we shall need money to pay generous pensions to the men who were disabled and to the dependents of
those who were killed and in order to spread our commerce
over the world in our own government-owned bottoms, and
to answer the demands for social reform that are knocking
at our door.
These considerations suggest what to my mind is the
greatest ^service that this war will do for America. It will
usher in the era of Social Justice and will put us forward as
one hundred years of peace could not have accomplished. It
will bring about almost without a struggle and by a peaceful
revolution the changes that could not have been wrought
without civil war.
We may as well realize that the old order has gone, never
to return. By this, I do not mean that we shall enter upon
what is generally understood as a Socialist State nor that
the legitimate rights of property will be destroyed. Until men
are born and remain equal in character, intellect, endurance,
industry and resourcefulness and in all the other attributes
that make for deserving success, until they can contribute
useful service in equal proportions, the contemplation of a
Socialist State must remain an iridescent dream. There must
always be allowed full play and ample inducements for private
enterprise and initiative within legitimate bounds. The re-
10
wards must be commensurate with the risits, effort and accomplishments unless we are content to abandon our place in
the world.
May I not briefly sketch for you the rough outlines of
my mental picture of this peaceful social revolution?
1. The scourge and curse of war will be forever banished
from this fair earth and there will be ushered in the era of
International Justice to be administered through a " Nation
of Nations" that will maintain the peace of the world. That
will be our glorious contribution to posterity. The world
will owe that priceless gift to America and to it alone for
until we were forced into this war the contest was mainly
for commercial and territorial supremacy. We have eliminated those sordid issues and have lifted the struggle into
the transcendental realms of idealism and world-service.
And so we will have earned the proud position that we
shall maintain of being the recognized leader of the moral
forces of the earth. From a reputed nation of money-getters
we will have evolved into the spiritual crusaders of the world
and thus this war of all wars will have justified itself. And
all this we shall owe largely to the inspired leadership of
one master-mind. What a debt!
2. We will have been converted from a nation of prodigal
spendthrifts that has been squandering the most bountiful
gifts ever bestowed by nature upon man, into a fairly thrifty
provident people. In a few generations the ravages of this
war will thus have been made good to us a hundred-fold.
3. The National purposes will be purified and spiritualized and men of all classes and nationalities will be united
as never before into one indissoluble bond of true Americans.
The hyphen will be no more. No matter whence we or our
ancestors have come we shall be known hereafter only as
Americans, for we have together been baptized in American
blood in a common cause.
11
4. The cost of Government will be raised largely f^om
taxes on incomes and inheritances.
5. The public domain, the public utilities and the natural
resources of the country, among which I include our deposits
of coal, iron and copper and our forests, all fields and water
powers, will revert to the people; they will be administered
for their benefit and will not be longer exploited for the profit
of any individual or aggregation of individuals.
6. Child labor will be contraband throughout the land;
every child will be truly the ward of the State, which will
see to it that it is properly nourished, clothed and educated
and equipped with a means of livelihood.
7. The law will not permit of labor being longer
regarded as a mere salable commodity subject only to
the economic laws of supply and demand. There will
be compulsory arbitration, binding alike on the employer and the employed, to the end that the men and
women who create the wealth in a given industry shall
be paid in wages their just share, no more and no less, of
the wealth that they create, after proper allowance for the
risks and value of capital and initiative.
8. The reserves that are made by conservative business
by way of depreciation for wear and tear on buildings, plant,
machinery and tools as part of the cost of doing business,
before calculating profits, will be made to apply to and include
the human machine as well. The law will see to it that the
interest of the employer is directed just as much to securing
sanitary working conditions and promoting the health of the
workers as though he were conserving his mechanical appliances. To that end he must provide, or at least join in
providing, reserves as p a r t of his operating expenses, for
insurance against illness and unemployment and old age pensions, to which the State, the employee and the employer shall
be required to contribute.
12
9. So far as possible unemployment will also be guarded
against by Government undertakings in times of industrial
and agricultural depression, in which the surplus unemployed
labor will be employed.
10. The vast land grants still held by the railroads will
be opened up to settlement.
11. Monopolies and combinations will be punished and
suppressed and ruinous competition will be prohibited. To
that end competitors who choose so to do will be permitted
to agree on prices subject to Government regulation and
approval as to their reasonableness.
I t will be said, as it has long been argued, that even if
this ambitious program were in the interest of the people,
the Government is not adapted and can never be equipped
to carry it into successful execution. That is what many of
us believed but believe no longer. The incredible accomplishments of the past eighteen months must have satisfied
the most sceptical of the unlimited organizing efficiency of
our people. Almost as if by magic we are well on the way
to perfecting the most stupendous war machine of which
the world has ever dreamed, overcoming obstacles that men
of the widest vision regarded as insurmountable, as though
they had not existed. To us nothing is longer impossible
with the united will of the Nation behind us. Never again
will this country take counsel of its doubts or fears when once
satisfied that its cause is just. Not by far the least valuable
of the many lessons of the war is the confidence to dare and
do that has been instilled in us by the marvels that have
been done. In the light of our bewildering experiences no
one can predict the heights of accomplishment we shall reach
in the next twelve months, and we are fully justified in casting all doubts behind us. At last the people know their
strength and it is idle to believe that they will not use it to
wipe out the injustices of the existing order.
Our soldiers and sailors will come home with this newfound knowledge of their power, as eager to right conditions
13
at home as they were to venture their lives to assure the
freedom of the old world. Their spirits will have been uplifted and their hearts chastened by their sufferings and by
the memories of the dead comrades they left behind. Home
and liberty will have new meanings for them. As they will
by their sacrifices have made the rest of the world a fit place
in which to live so will they see to it that their own beloved
country, for which they and their comrades have fought and
bled, shall become the guide and leader in the onward march
for Social Justice.
And they and their stricken brethren will be the heroes
of the coming days, for they are the saviours of the honor
and destiny of the Nation. What they want they will get
for they will have paid the price of the unselfish victory that
will emancipate the world. The country will be divided into
just two classes when this war is over—not into white men
and black men, nor Jews and Gentiles—but into those who
did their duty and those who did not. And woe be to those
who did not!
All of us are not privileged to risk our lives and the future
of our homes. Many of us are too old and others are needed
at home to take care of the men at the front by supplying
food, ships, ammunition and what not. Still others must
direct the activities of the war and yet others must furnish
the money without which it cannot be prosecuted, but theirs
happen to be the safe and easy tasks.
The Government has done and is doing its duty nobly,
beyond all hopes and expectations. Its accomplishments are
the wonder of the world and the pride of every man and
woman. All of us are a part of that Government and are
sharers in that honor. Let us ask ourselves now, and again
and again, how far we have deserved to share. Our boys
have offered to give and many have already and others, alas,
will be called upon to give all, every drop, of their blood.
We are asked to give nothing. Our duty is done, not when
we give all our dollars but when we lend them upon the best,
safest and most profitable investment of its character in
existence.
14
The meanest of all slackers is the man who can save and
lend his share and fails to do so because his Government
generously refuses to force him to do so. He is worse than
the fellow who takes his motor car out on Sundays because
the Government has merely requested him to keep it at
home instead of compelling him to do so. The difference between the two is that the motor car man must expose his
want of patriotism in the sight of his neighbors and face their
just indignation and contempt, whilst the other can escape
observation.
In either case the Government has the power to order the
one to keep this car at home and the other to buy the bonds
that he can afford to buy. In both cases the Government
relies upon the honor, spirit and patriotism of each man to
do his duty and I am satisfied that the result will not prove
a disappointment.
If I am wrong it will be necessary to commandeer the
money, for nothing will be permitted to stand in the way of
protecting the men who are carrying our flag and fighting
our fight and winning this war and these things cannot be
done without the money. To fail at this time when we are
on the highroad to victory would be betrayal. We need not
fear, for we are not traitors.
I congratulate you, gentlemen, upon the high privilege
that has come to you of being selected to educate and arouse
public sentiment so that all will know and do their duty.
The war spirit and the determination of our people to see
this thing through to the end have at last become so universal
throughout the land that I believe your task will not be so
difficult as with previous loans. Your enthusiasm in the
justice of your cause is bound to bring success and I wish you
Godspeed in your unselfish mission to make possible the
greatest service to mankind ever undertaken by man.
AN ANSWER TO COLONEL ROOSEVELT
AN ADDRESS
BY
MR. SAMUEL UNTERMYER
AS PRESIDING OFFICER
AT A MEETING AT TAMMANY HALL
OCTOBER 29, 1918
An Answer to Col. Roosevelt.
We are met tonight at the supreme moment in our
history when victory is within our reach and we have
but to garner its fruits with the aid of the same superb
leadership and guided by the same masterly statesmanship that have carried us triumphantly through this great
ordeal. It is well-nigh incredible that it is this critical
moment just as we are on the eve of triumph and the fuU
fillment of our fondest dreams for the future of humanity
that the Republican party has selected to precipitate this
petty, ignoble broil, in the hope of sowing the seeds of
discord and of undermining the confidence of the Nation
and of our allies in our Commander-in-Chief by launching a series of bitter, partisan attacks against his leadership.
The effort is to rob our leader, who is now the acknowledged spokesman of the civilized world and whose
vision and organizing genius have made this result
possible, of his magnificent handiwork, and to dim the
glory and prestige of the Nation, lest the opposition party
thereby suffer in influence. It is a spectacle that should
bow our heads in shame.
A more wicked, distorted, vitriolic assault would be
difficult to imagine. It represents the climax of years
of pent-up gall, hatred and jealousy, and I predict that it
will prove a ghastly failure and will react as it deserves.
We need have no fear that this State and country will not
stand behind their President at such a time.
Chief among the offenders is a man, who, notwithstanding his intense partisanship and his faults of
temperament, has long held a high place in the affections
of the people. Much has been forgiven him in the past
and at this particular time much more will be forgiven
him because of his past services and the sacrifices that
have been made by his brave and patriotic sons, for which
they, and not he, are entitled to the glory. But there is
a limit to the forbearance of even the most generous of
people, and I believe he has passed that limit, for we are
2
in no mood to permit either political expediency or personal jealousy and animosity to play havoc with the grim
business that the Nation has in hand. His intemperate
partisanship, fanned into flame by personal hatred and
envy, appears to know no bounds. His attitude has been
throughout this war one of continuous, blind, bitter carping and ungenerous fault-finding at a time when support,
encouragement and calm and discriminating criticism
constitute the highest duties of citizenship. At no time
since we entered the war, in fact at no time since the outbreak of the European war, has he had a kind, just or encouraging word to say concerning any of the many colossal, constructive things that have been done and that
have evoked the wonder and the enthusiastic praise of
the world. If he could not or dared not openly condemn,
he maintained a sullen silence,—and silence is no easy
task for that gentleman under any conditions.
His has been, throughout, the highest discordant note
among the men of his party who hold the public attention.
He is the self-appointed ringleader of the little band of
malcontents in whom the national pride and admiration
that they should have felt and voiced for the great deeds
that have been done by this administration have been
stifled by hate and jealousy, and who have blindly refused
to accord to this world-leader the credit that is his just
due.
Here is a sample of the diatribes that have been dripping from his pen. This particular fulmination was let
loose throughout the land on Friday morning (the day
before the President felt forced to issue his appeal),
through the Associated Press, under cover of a telegram
to leaders of his party in the Senate.
"The language of the fourteen points and the subsequent statement explaining or qualifying them is neither
straightforward nor plain, but if construed in its probable
sense, many and possibly most of these fourteen points are
thoroughly mischievous, and if made the basis of a peace
such peace would represent not the unconditional surrender
of Germany, but the conditional surrender of the United
States. Naturally, they are entirely satisfactory to Germany
and equally naturally, they are in this country satisfactory
to every pro-German and* pacifist and #Socialist and antiAmerican so-called internationalist. *
* Moreover, we
should find out what the President means by continually
referring to this country merely as the associate instead of
3
the ally of the nations with whose troops our own troops are
actually brigaded in battle. * * * When the German
people repudiate the Hohenzollerns, then and not until then
it will be time to discriminate between them and their
masters.''
What can he mean by this screed criticising the President for referring to our Allies as our "associates,'' except to be painfully hypercritical at every opportunity?
And what, pray, is the point of "the German people repudiating the Hohenzollerns" in view of the President's
note to Germany that appeared in the press of the preceding day, the concluding paragraph of which is as follows
and to which this telegram was supposed to be a reply:
" I f it (America) must deal with the military masters
and the moharchial autocrats of Germany now, or if it is
likely to have to deal with them later with regard to the
international obligations of the German Empire, it must
demand not peace negotiations but surrender. Nothing can
be gained by leaving this essential thing unsaid."
Has he not voiced and repeated the same sentiment as
that announced by the President and—as though he had
discovered the thought! If, in the use of intemperate
and offensive language and in this and other similar outpourings on the same subject, Colonel Eoosevelt is speaking for his party, the country should know it so as to
understand where to place the responsibility. If he is
not speaking for his party, he should be repudiated.
These are the gentlemen who are now appealing to
the country to elect a Republican Congress to " a s s i s t "
the President in the prosecution of the war on the ground
that their party is "standing by the President"! Every
Republican candidate and party leader is loud in his protestations to that effect, but their utter insincerity requires no comment.
Is that the brand of " f r i e n d s " with whom you
think we should surround our Chief Magistrate at
such a time! Is that the sort of support you want
him to havef Is it not necessary for us, and is he not
entitled at this crisis to have about him men who are
sympathetic with his aims? Or do you want him surrounded by political enemies who are more intent upon
destroying him than upon helping him solve the stagger-
4
ing problems that are confronting him? When you send
troops to the front, do you surround your commanding
officer with that kind of an army, or do you think he is
entitled to have men who confide in his judgment?
When one contrasts some of the assertions in the
speech delivered by Colonel Roosevelt last evening, with
the facts, one is reminded of the old days when he was
President and was adding day by day to his Ananias
club, that grew so rapidly in membership that at the
close of his term the country wondered whether there
were any men left in public life who had not qualified
as members?
So utterly bewildered does one become in wading through this maze of disingenuous and untruthful statements and implications that it is difficult to know
where to begin the task of disproving them. Some of the
situations he attempts to create are not without their
unconscious humor, especially when he pillories the President as a partisan and an autocrat and complains of his
failure to invite Republicans into his cabinet. Imagine
Colonel Roosevelt in the guise of a preacher of nonpartisanship ! Imagine him inviting Democrats into his
Cabinet!
I t is not true that this issue has been injected into
the campaign by the President or that it was invited by
him. It has been forced upon him by the conduct of the
Republican leaders in and out of Congress, culminating
in bitter and concerted attacks upon his splendid diplomacy and leadership within a few days before he found
it necessary to issue his appeal to the patriotism of his
country for support in his policies.
I charge that the Republican leaders are conducting
a campaign of hypocrisy and misrepresentation in the
Nation as well as in the State, and that their attitude
does not represent the conscience of the rank and file
of their own party and will meet with their condemnation. To the accompaniment of loud protestations that
the party has been " s t a n d i n g behind the President", it
has been playing partisan politics day by day in the
Senate and through its organized leaders outside of that
body in the attempt to obstruct him in his efforts to bring
the war to a successful close and to discredit and undermine his influence at home and with our Allies.
5
The President's appeal to the country for the election
of a Congress that will give him its whole-hearted support instead of "back-capping" him whilst pretending
to sustain him, is the climax of months of insidious
partisan assaults upon his prestige and authority, in the
vain search for an issue on which to conduct the now
pending Congressional campaign. Within the last few
weeks, with the elections in sight, their predicament has
become desperate and so they have allowed themselves
to be persuaded to ruthlessly attack his diplomatic policy,
that is now in its most crucial stage, and at a time when
above all others it behooves good citizens to support
their Chief Executive and the Commander-in-Chief of
their Army.
As the President's brilliant conduct of the war and
his superb diplomacy in the pending crisis have been
gradually unfolded before our admiring eyes and as they
are about to bear fruit, these gentlemen of the opposition party are so disturbed by the contemplation of the
effect of his success on the political fortunes of their
P a r t y that their discomfiture threatens to outrun their
patriotism.
They profess to see in the appeal of the President to
the country a reflection upon their patriotism, although
this is expressly and categorically disclaimed in his appeal in the following words:
" I have no thought of suggesting that any political party
is paramount in matters of patriotism. I feel too deeply the
sacrifices which have been made in this war by all our citizens, irrespective of party affiliations, to harbor such an
idea. I mean only that the difficulties and delicacies of our
present task are of a sort that makes it imperatively necessary that the nation should give its undivided support to
the government under a unified leadership, and that a Republican Congress would divide the leadership. * * *
This is no time either for divided counsels or for divided
leadership. Unity of command is as necessary now in civil
action as it is upon the field of battle."
And yet, they cry that their patriotism is questioned
because he very justly says:
"At almost every turn since we entered the war, they
have sought to take the choice of policy and the conduct of
6
the war out of my hands and to put it under the control
of instrumentalities of their own choosing/'
Can there be any doubt of the truth of this statement?
Mis well-timed and well-merited strictures have cut
so deeply that the Chairman of the Republican National
Committee has felt impelled to go to the indecent length
of characterizing the action of the President by such
polite epithets as
"more wanton, more mendacious than that of the most reckless stump orator.''*
If you really want an illustration of superb mendacity,
permit me to refer you to the claim of the Republican
leaders to credit for having voted for the men and money
necessary for the conduct of the war. Having voted for
the war (at least some of them), there was nothing else
for them to do. They dared not do less. In answer to
their claim that they did this as unstintingly as the members of the President's own party, let us glance at the
record:
The McLemore resolution, which would have warned
Americans off the high seas and which was in itself a
recognition of Germany's right to sink passenger ships,
had 103 Republican House supporters and only 32 Democratic supporters who voted against tabling this resolution.
The resolution declaring the existence of a state of
war with Germany was opposed in the House by 32 Republicans and 16 Democrats.
76 Republicans and 47 Democrats in the House of
Representatives voted for the Cooper amendment which
would have prevented the arming of American ships for
defense against submarines.
On the Espionage Bill, 97 Republicans and 1 Democrat were opposed.
160 Republican members of the House and only 1
Democrat voted against the Shipping Board Bill, while
in the Senate 20 Republicans and only 1 Democrat voted
against it.
In this connection it may not be out of place to call
your attention to one of Colonel Roos2velt ? s innumerable
"specifications" of shortcomings on the part of the ad-
7
ministration, which for accuracy and reliability is on a
par with the others. He says:
"Two-thirds of the ships in which we have ferried our
troops across the ocean were from the British.'7
But forgets to mention the fact that by reason of Republican opposition the passage of the Shipping Bill was delayed for almost two years in Congress, as Secretary
Daniels reminded us in a speech at New Haven last
evening in the following words:
"Prom the day the United States entered the war unto
this hour, the neck of the bottle has been and is ships. The
number of soldiers early sent to Prance was measured only
by the tonnage. In the light of the gigantic achievements
of the Shipping Board, who will say that if Senator Weeks
and his formidable array of Republican Senators had not
blocked the way for nearly two years, the victory which is
now in sight would not have long since been achieved."
The Eepublicans are welcome to whatever comfort
they can get out of this vaunted record of theirs in
"standing by the President.' 7 I do not mean by this to
condemn the men who voted as they did. They were
doubtless animated by the highest consideration of public
duty as they saw it at the time. My objection is to the
demand that the country shall elect Republican Representatives to Congress to " a i d " the President on the
ground that thejr party is entitled to the credit of having
' * stood by the President.''
In truth, they have, as stated by him, throughout this
war and at every opportunity
"sought to take the choice of policy and the conduct of the
war out of my hands and to put it under the control of
instrumentalities of their own choosing."
:
His splendid achievements have not evoked a word of
commendation such as a just and generous political adversary would be unable to withhold if he were a patriot
first and a politician afterward.
In their fear and impatience lest the President, in
the discharge of the responsibility placed primarily upon
8
him by the Constitution, should effect a triumphant peace
without their intercession and thus deprive them of part
of the credit, they stagger from one premature, unfounded criticism into another of almost everything he
does or says or fails' to do or say, only to find themselves
checkmated at every step by his vision and statesmanship and by his intimate knowledge of situations of which,
in the every nature of things, they cannot possibly be
informed.
It is axiomatic that a successful war cannot be conducted in Town Meeting and that peril lurks in a multiplicity of counsel. Concentrated power is essential.
The same is true of diplomatic negotiations, where every
move is influenced by considerations based on information that is properly available to the President alone
and that at times cannot be disclosed. This rule applies
in equal, if not even in greater, measure to the
delicate negotiations now under way looking toward what
will amount in effect to the unconditional surrender of
the enemy—and worst still without the aid of Colonel
Roosevelt, who will then doubtless, all undaunted and
unsuppressed, transfer his irrepressible faultfinding
activities to the Peace Table.
I repeat that the Republican campaign for the election
of members of Congress is one of hypocrisy. Not daring
to refuse him men or money with which to conduct the
war, they have never lost an opportunity for carping
criticism, and one cannot resist the feeling that their
leaders in Congress are ever alert for an opportunity to
make political capital by embarrassing him whenever a
decent pretext can be found or manufactured.
If you believe, as I am sure you do, that through the
sheer force of character, statesmanship and organizing
genius of our President and his advisers, the impossible
has been accomplished and that by sheer force of character, vision and statesmanship he has become the outstanding figure of the world, what reason can any citizen, irrespective of party, have for failing to support
him at such a time?
Let us analyze what has been the provocation for this
stream of invectice: The President asserts that whilst
the Republicans in Congress have been pro-war, they
are anti-Administration, and he asks that if the people
9
approve his conduct of the war and his announced policies
of bringing it to an end, they shall so state in no uncertain terms by a vote of confidence that would strengthen his hands in the performance of the gigantic tasks that
lie before them. He tells them also that their failure to
do so at this time will weaken his influence with our
Allies and may give to the enemy the aid and comfort
that come from the appearance of divided counsels.
Every word of this is literally true and will appeal to
the patriotism and common sense of our people. Is this
outburst of indignation at his appealing to his countrymen for their well-merited support in this crisis genuine
or is it assumed? Or is it a mere outburst of fury by
these gentlemen at the thwarting of their schemes to sow
dissension for political ends?
The world knows that we ask and want no sordid or
material gains in this war in return for the sacrifices
that we have made and are prepared to make, and that
our aims are the most unselfish for which war was ever
waged. It was accordingly unnecessary for this Nation
to cloak its purposes by any of the arts of diplomacy
under which selfish aims have in the past been hidden.
It was our right and duty at all times to make known
the terms on which peace could be had. This our President has done again and again. As the statement of
these terms has been specifically endorsed by all our
Allies and has met with universal approval for more than
nine months, they constitute the generally accepted Code
of the peace terms of all the Allies as well as of ourselves.
They went for months unchallenged even by the
great Oracle who, though he happens at the moment to
be out of power, still considers himself the Government.
There was not a word of dissent from the terms thus laid
down from any quarter until the Congressional elections
loomed up before us. Then and not until then, when
the Eepublican leaders were desperately casting about
for a peg on which to hang their campaign, did it occur
to them to question what had been done and magnificently
done with their tacit approval, and now that they are
seeking to cast doubt upon the wisdom of a course that
they have never before dared to question, the President
asks the country to sustain him in his attitude and to
give him the power to continue his task unhampered by
10
the obstructions of an unfriendly Congress. This appeal
is denounced as "mendacious", and one would imagine
from the shouts of injured innocence that rend the air
that it is unprecedented.
And yet when we turn to the record, what
do we find? We find conclusive and almost unbelievable evidence of bad faith and hypocrisy.
We find that this same party and the same men,
who are now loud in their cries of anguish at
this pretended thrust at their loyalty, are the identical
party and men who, during the Spanish-American war,
made the same plea that is now being made by the President, without the provocation that has called forth this
appeal and that no criticism was directed against thorn
on account of their action. Chief among these self-convicted gentlemen is Colonel Eoosevelt, whilst there follow
in close succession Senators Lodge and Penrose and such
leading Republicans of their day as ex-President Benjamin Harrison and Senator Foraker. And the country
rightly heeded that plea, as it will heed this one.
The only differences between the two situations are
that the conduct of this war has been singularly free from
the scandals and inefficiency of the other; that our soldiers
have not been feci on embalmed beef that was unfit for
cattle, that they have not been sent forth half-clothed
and without adequate ammunition, and that the other
compared with this gigantic struggle was a tin-toy affair
not worthy the name of a war. When the terms of peace
were being concluded, which resulted in our being saddled with the Philippine Islands and penalized to the
extent of $20,000,000 for having won the war, these Republican leaders still demanded, and the, country consented, that the party that had conducted the war should
without interference negotiate the terms of peace.
Colonel Roosevelt was then a candidate for Governor
of the State of New York. Contrast what the then Roosevelt said on this subject with what the present Roosevelt says:
W hat Colonel Roosevelt
said in 1898:
4
' Remember that, whether vou will or not, vour
votes this year will be
viewed bv the nations of
What
Colonel Roosevelt
says notif':
' < Remember that t h e
terms of peace are not to
be settled by the President
alone but by the President
11
Europe from one stand- acting in conjunction with
point only. They will draw two-thirds of the Senate.
no fine distinctions. A re- Both the President and the
fusal to sustain the Presi- Senate must be responsible
dent this year will, in their to the American people.
eyes, be read as a refusal * * * This is no one-party
to sustain the war and to war. It is an American
sustain the efforts of our war and we denounce all
peace commission to secure attempts to make the supthe fruits of war. Such a port of Democratic candirefusal may not inconceiv- dates a test of loyalty."
ably bring about a rupture
of the peace negotiations.
It will give heart to our defeated antagonists, it will
make possible the interference of those doubtful
neutral nations who in this
struggle have wished us ill.
"You could get the benefits of the victories of Grant
and Sherman only by reelecting Lincoln, and we
will gain less than we
ought from the war if the
administration is not sustained at these elections.''
What Senator Lodge said in 1898:
" B u t there is one question on which I wish to say
a few words and that seems to me to cover all others.
It is whether we shall stand by the Administration
and the President at this juncture. If we give a victory to his political opponents, we say not only to
the United States, but we say to the world, we say
to the Spanish Commissioners in Paris, that the
people of the United States repudiate its result and
repudiate the man who has led us victoriously in
the war and is now leading us back to p e a c e William McKinley."
12
What Senator Penrose said in 1898:
" I n his recent speeches the President has appealed not to a partisan, but to a national spirit. He
wants Pennsylvania to remain the Keystone State
for the Republican Party. It is difficult to overestimate the supreme importance of sustaining the
President of the United States and the Republican
Party at the present critical crisis in our foreign
relations."
What ex-President Harrison said in 1898:
" I f the word goes forth that the people of the
United States are standing solidly behind the President the task of the Peace Commissioners will be
easy, but if there is a break in the ranks—if the
Democrats score a telling victory, if Democratic
Senators, Congressmen and Governors are elected—
Spain will see in it a gleam of hope, she will take a
fresh hope; and a renewal of hostilities, more war,
may be necessary to secure to us what we have
already won."
What Senator Foraker said in 1898:
" T h e war came while a Republican Administration was in power and must now be settled by that
Administration. I do not believe any fair-minded
Democrat would question the fitness of the Republican P a r t y for the discharge of this duty, but, however, it might be otherwise, the work is already in
the hands of President McKinley. What he wants
is the support of the House of Representatives. 7 '
What is your opinion of the sincerity of great party
leaders who can be thus convicted out of their own
mouths ?
If, as now appears, it is the intention of the Republican party to take issue with and attempt to repudiate
in principle the terms of peace that have been set forth
by the President in consultation with our Allies, and
with their approval, and which they have adopted as
their own, doubtless after long deliberation between
13
them, the situation thus presented takes on a significance
far transcending in importance the result of this or any
other election.
The enforcement of the demand for an effective
"League of Nations" of all the countries, belligerents,
allies and neutrals, accompanied by partial disarmament,
to enforce and assure the future peace of the world, has
been the fundamental thought in all our minds. Is the
Republican party prepared to support Colonel Roosevelt in his outspoken repudiation of that program and
all that that implies f If they are as desperate as that
for an issue, the sooner the country expresses itself on
that subject the better it will be for all concerned.
The man who put self above party to the extent that he did not hesitate to wreck his party once because his personal ambitions were thwarted and whose
sense of humor is so dormant that he berates the Presiident as a partisan, an autocrat and as making personal
loyalty his test, will doubtless be willing to shipwreck it
again upon this issue if the party is willing to follow
him? But will it do so this time? Or will it choose
self-preservation by repudiating him? He has tendered
the issue. It will be interesting to note how far the
party will steer clear of his latest effort to lead it into a
bottomless abyss. That seems a pretty quarrel as it
stands and one that we may safely leave to Colonel
Roosevelt to settle with his discomfited party when the
significance of his attitude has sunk into the public
consciousness.
He characterizes "many if not most of the fourteen
points'' that have been evolved and stated in their present form as the result of the combined thought and wisdom of the best minds of the world, as "thoroughly mischievous" and intimates that they are worse. He tells
us in fact that taken in their entirety they "represent
our conditional surrender to Germany" but we have all
been too dull to see it. It. appears that Germany alone
has had the true discrimination, for "they are entirely
satisfactory to Germany." If this be true, how are we
and our Allies to go further with this business without
him? His subtle and discerning mind is indispensable
in this emergency! Manifestly this job can never be
properly done until He does it! Whom the Gods would
destroy they first make mad!
THE IDEALS OF ZIONISM
ADDRESS
DELIVERED BEFORE THE JEWISH TELEGRAPHIC AGENCY
AT HOTEL BREVOORT
October 1f 1921
BY
SAMUEL UNTERMYER
of New York
Address of Mr. Samuel Untermyer before the Jewish
Telegraphic Agency, at Hotel Brevoort, New
York City, on October 1, 1921.
MB. CHAIRMAN AND FRIENDS:
Let me first thank yon for the honor you have done
me in inviting me to be your guest at this representative
gathering of the leaders of thought and the guides of
public opinion among the men of our race in America.
I never feel so much at home nor such warmth around
my heart as when among my own people, for in instinct
and sympathies I am an intense Jew both racially and
religiously. In connection with my recent more prominent association with Zionism to which I will, with your
kind indulgence, take the liberty of referring a little later
on, the criticism has been levelled against me by a few
of those who do not share my views on that subject that
whilst I may pass muster as a racial Jew, I am a rather
indifferent brand of Jew from the religious point of view.
Some have gone so far as to spread the rumor, that seems
to be generally believed, that I am not a professing Jew
at all.
I owe it to my people, to the cause with which I am
identified and to myself, once and for all to set these rumors at rest. To that end I ask you bear with me for a
few moments whilst I burden you with a personal explanation that may bore you but which you will find
to have a purpose that is not entirely personal.
I was reared in the Jewish faith by a mother who was
throughout her long and useful life one of the most devout and orthodox women I have ever known. Up to the
age of 13 when I became baar mitzvah I was destined to
be a rabbi and had acquired a fair knowledge of Hebrew
so that I could fluently read much of the Talmud. It was
only because of our family's necessities that I went to
Avork instead at the age of 15 and subsequently took up
the law as my profession. Our household was conducted
as a strictly Jewish home! At the age of 22 I married.
I am a member of Temple Emanu-El in New York City
and an active member and pewholder of the Synogogue at
Yonkers, where most of my time is spent, and where I
was instrumental in the organization of the Young Men's
and Young Women's Hebrew Associations of that City.
All my life I have been identified with and have been a
2
substantial supporter of the various Jewish charities and
other movements, local, national and international, and
was for many years a Director in the Montifiori Home.
There has been no Jewish movement in the last thirty
years in which I have not done my part, though my work
has until late years been done in the ranks rather than in
the limelight.
So completely misunderstood and misrepresented has
been my position in the Zionist cause that so able, accurate, temperate and fair-minded a publication as the
American Hebrew, in a leading article on the front page
of its issue of September 2nd in discussing the controversy on Zionism between Mr. Morgenthau and myself
(doubtless in entire good faith) opens the discussion in
these words:
" M r . Untermyer recently become a Zionist
through his friendship with Dr. Weismann attacks
Mr. Morgenthau with the zeal common to new converts."
This statement is hopelessly inaccurate in every particular.
1. I have been a Zionist for about ten years,
having made my first contribution of $3,000. at
that time.
2. I had never met, known or communicated
with Dr. Weizmann until his visit to this country
in the Spring of this year.
3. Before that time I had contributed $13,000.
to the cause.
And here I am represented as " a new convert to the
c a u s e " ! And that is only one and the least important
of the innumerable errors into which the distinguished
author of that article has been unconsciously led.
To me the ideals of Zionism are among the most thrilling and inspiring of which the human mind and heart
are capable and Dr. Weizmann, one of the greatest, most
unselfish and statesman-like leaders of modern times.
The hope and dream of centuries, now well nigh realized,
that our race is at last to re-inhabit its ancient home,
surrounded by the religious and historic traditions and
landmarks so dear to us and is there to resume its industrial life and cultural development in the interest of
world-progress on a broader and more comprehensive
3
scale than could have been forecast by our forefathers in
their wildest dreams, is one that must inspire the imagination of every Jew.
In that blessed land we are about to establish ourselves as a Nation and the nightmare of the "wandering
J e w " kicked and buffeted about the world from pillar
to post by the Hosts of hate, bigotry, jealousy and persecution is soon to become a thing of the past to take its
place in the blackest pages of history alongside the Inquisition and the other horrors of the Dark Ages.
And when the semi-civilized nations, who have found
the outlet for their barbaric cruelty in torturing and
casting forth our people into starvation, death and worse,
awaken to the realization of the fact that we too have a
home and a national future and refuge—a center from
which we can protect and vindicate the rights of our persecuted people—and that there are at least spiritual and
political forces with which they must deal in the sight of
all the world, our brethren in these lands will know something of the protection that is their just due.
Then, too, we shall have other persuasive means of
destroying this cruel gospel of hate and bigotry or of
counteracting its outer manifestations, for our ambitions have no mean or narrow limitations. All the genius,
energy and resourcefulness of our race, all the lessons in
patience, charity and understanding that we have learned
in this bitter school of bigotry and torture of the centuries will now have their opportunity to bear sweet
fruit in the accomplishments for the uplift of the entire
human family, that are for the first time within our
reach.
Whilst our people in Palestine are being made selfsustaining and are being placed on the high r o a d t o material prosperity in agriculture and in the industries that
will be founded for them, their traditional cultural life
will enter upon a new phase that shall furnish free outlet
and expression for the manifold types of genius that we
know to be ours and that not even the centuries of the
most odious oppression to which mankind was ever subjected has been able entirely to suppress.
The inspiring and altruistic scheme has already
emerged from its nebulous state and the foundations
for its realization have been laid. I refer, of course, to
the great international University whose beginnings are
now in operation on the modest scale that befits the
4
launching of so vast an undertaking. At this center there
will he assembled a seat of learning that shall surpass in
its idealism and in the variety of its culture, anything
that the world has every known. I t will include the
leaders of Jewish thought and accomplishment in art,
science, literature, theology, law, agriculture and industry. From that cultural center will radiate to every
corner of the earth racial and religious Jews to whom the
world will be forced to acknowledge recognition for its
future inspiration, development and betterment in the
manifold fields of activity by which the world is to be
made a better and a happier abiding place for the human
race.
We know that the material is among us. This University is to be the medium for its outlet and opportunity.
Our mission is to be one of peace, liberty and good will.
Surely such a vision and to work toward its realization
are sufficient to stir the hearts of all mankind and to still
the ancient hatreds of which our race has been the victim
through all the centuries that have gone before. This is
my conception of Zionism.
In this picture there is no place for political ambitions or rivalries. No Jews out of Palestine who are
citizens of other liberty-loving countries and who are
striving to realize these ideals for their oppressed brethren will thereby lessen their loyalty and devotion to their
adopted countries by so much as a hair's breadth by assisting in the realization of these ideals. On the contrary,
they will be all the better citizens for having lent this
aid and for their continued interest in the success of this
great humanitarian enterprise. You might as well charge
our loyal and devoted American citizens of Irish birth
and descent writh treachery to our country because they
are seeking to regain the freedom of their native land.
Here within the family circle we may as well confess that
the chief obstacle to the accomplishment by the men of
our race of still greater things than we have yet done
comps from within our own ranks. Whether this spirit
of disloyalty to the cause that the overwhelming majority
of his people have so near at heart is prompted by envy
or is merely the result of the unsuppress : ible spirit of
contention or cussedness I do not know. Perhaps it is
sometimes the one and some times the other. But whatever the motive the fact remains that the discordant note
struck at such a critical time when it is the duty of every
5
self-respecting Jew at least to hold his peace, lends aid
and comfort to the enemy and is accountable for most of
our failure.
Is it thinkable that any Irishman could be found who
under such conditions could find it in his heart to lift his
voice to confound and shatter the hopes and aspirations
of his race and countrymen? That is why, thank God,
their great cause is about to triumph. In unity there is
strength. In dissension there is disaster. I do not by
this mean to refer to the little family unpleasantness
between the Brandeis-Mack and Weizmann groups for
they are all Zionists—all equally devoted to the cause. I
refer to the peculiar make-up of Mr. Morgenthau—men
who owe their prominence and are able to secure a hearing for their heresies to the fact that they pose as Jews
and to that alone and who by indicting their race the
world over keep alive and intensify the fires of bigotry
and prejudice that the patriotic leaders among our people are striving so hard to overcome and extinguish.
May I not therefore be pardoned if the plain implications of treachery contained in the article in the Worlds
Work over Mr. Morgenthau's name against Zionism and
its distinguished leaders such as Judge Brandeis, Dr.
Weizmann, Judge Mack, Mr. Wise, Nathan Straus, Lord
Rothschild, Sir Alfred Mond, Dr. Frankfurter and
scores of other leaders of Jewry because they are
Zionists impelled me to express my resentment in terms
that were perhaps more emphatic than measured.
Mr. Morgenthau is, and has been for many years reputed to be, a man of great wealth, worth many millions
of dollars. If he has devoted any part of his great
wealth toward promoting any Jewish cause whatever, I
have never heard of it. The mere giving of money by
men who can afford to give without sacrifice is not in
itself very convincing evidence of the depth of sincerity
of a man's Judaism; it is about the easiest thing he can
do. The real debt of gratitude of the Jews is to the men
who are unselfishly dedicating their lives to our cause at
great personal sacrifice, men of the type of Dr. Weizmann, Mr. Marshall, Dr. Wise and Dr. Magnes.
Of
course, money plays its part in this practical world; we
need the money as well as the men, but since neither Mr.
Morgenthau nor I have sacrificed very much except to
give money (if he has given any) tod practically nothing
in the way of real work beyond grandiloquently expound-
6
ing our views, oftentimes half-baked and unsolicited,
perhaps the best test of our relative usefulness to the
Jewish movement is measured by the amount of money
we have given in proportion to our means.
I would like to add a few words on the subject of the
unfortunate controversy that has caused what I fondly
hope and believe to be only a temporary breach in the
ranks of the Zionists of America but which while it lasts
is seriously demoralizing and crippling their world-cause
at the most critical time in its history. I have the most
intense admiration, respect and gratitude for the men
who have led the Zionist cause in America up to the time
of this breach and who I hope will again lead it, for their
splendid and unselfish work. No matter what happens
in the future, our debt of gratitude to them can never be
repaid. When I accordingly say to you that I believe
they were in the wrong in the attitude they assumed to
the World Zionist organization as represented by Dr.
Weizmann, which I shall endeavor to prove to you, it
must not be understood that I am approaching this delicate subject in a spirit of captious criticism or that I am
lacking in profound respect for the point of view or the
absolute good faith of these gentlemen. It is not only
conceivable but it is often the conceded fact that all the
parties to a controversy are acting in good faith and
from the highest motives and yet one of them must be in
the wrong otherwise there would be no controversy.
It so happens that I became the intermediary at one
stage of this controversy. I did so at the earnest solicitation of my dearly beloved friend Nathan Straus whose
devotion and sacrifices to the Zionist cause had long invoked my profound admiration and respect, for I knew
that he had given bounteously with a love and affection
for the cause and in a way that few of us, if similarly
situated, would have believed ourselves able or justified
in giving. For some reason Nathan Straus believed that
as I had not been in any way involved in the quarrels of
the warring factions, I might be able to bring peace. I
cheerfully took up the task and had the good fortune to
succeed in formulating in writing an agreement that
covered all the questions in dispute, most of which seemed
to me to involve mainly questions of administration.
This arrangement was completed on the Saturday preceding the Monday when the Cleveland Convention was
to open. I secured its approval by Dr. Weizmann and
7
his associates and was advised that it had the approval
of Judge Mack and his associates. Here is the document
which is attached marked " A " from which it will be seen
that it covered every phase of the controversy. It certainly covered every question that was then regarded by
either party as the subject of contention.
My information from all sides is that when the parties reached Cleveland the agreement thus reached was
upset upon the wholly extraneous ground that Dr.
Weizmann or one of his associates in the World Organization was reported to have insisted that the connection
of Mr. Frankfurter and Mr. DeHaas must be severed.
No such question had been raised or discussed at any
stage of the negotiations and I would have resented such
a suggestion with respect to these gentlemen, whose
years of service and usefulness in the cause were entitled
to the recognition and thanks of everybody concerned in
it.
When Judge Mack informed me over the telephone
that he understood such a condition had been imposed, 1
immediately communicated with Dr. Weizmann, who emphatically denied it and this denial was in turn put by me
before Judge Mack, so that when that question was obtruded into the situation at Cleveland I could find no
justification for such a course and I can still find none.
Whether Dr. Weizmann had or had not at any time made
such a condition or suggestion became immaterial after
it had been withdrawn and repudiated by him. It is upon
that ridiculous pretext that these splendid men were to
part. I understand it to be now claimed that there were
other reasons but am bound to say as one who is impartial between the factions that that contention seems to
me an afterthought. I have read and reread the statement signed by Judge Mack and his associates to the
delegates of the Twelfth Zionist Congress. If there is
any substantial reason why this great movement should
be split with dissension at this end nobody has yet furnished that reason. The document is filled with recriminations that always follow such a breach but when they
are analyzed the onlooker is impressed with the feeling
that they do not constitute the real cause of the controversy. Whatever may have been the mistakes or shortcomings of the administration in the past (and it would
have indeed been strange if there had been none in the
management of so huge an undertaking at so great a
8
distance) their recurrence was amply safeguarded by
the agreement that had been reached.
It is because this break occurred in the heat of passion based largely upon trivial personalities and not upon
any fundamental controversial question of principle that
I believe it can and should and will be healed. At any
rate that shall be my task. The movement cannot afford
and must not be permitted to lose the intimate aid and
guidance of these representative and unselfish leaders
of Zionism. If that can be accomplished I shall feel that
Lhave at last made the greatest contribution within my
limited power.
This is perhaps as auspicious a time and place as
could be chosen to dispel the false impression that Nationalism is or has ever been any p a r t of the program of
Dr. Weizmann or of the World Zionist Organization or
that the break between the two groups had anything to
do with a dispute as to the use of any p a r t of the funds
for *'Gegenstwartarbeit or Diaspora Nationalism".
The contention is completely disposed of by paragraph 2 of the agreement that I have read to you and
which I herewith take the liberty of re-reading. I t is in
the following words:
" T h e Keren Hayesod fund is to be used solely
in Palestine. No portion is to be used anywhere
else with the exception of such limited amounts as
it may be deemed desirable to advance to immigrants for the purpose of defraying the expenses
incidental to their voyage from their homes in
Palestine".
At no time during the negotiations did Dr. Weizmann
demur to this provision and there was no discussion upon
it.
Here is still further proof on the subject if any were
needed. I am as fundamentally opposed as any man in
the movement to any Nationalist movement outside of
Palestine and would have nothing to do with it on that
basis as was made quite plain to Dr. Weizmann before
1 consented to head the Keren Hayesod in America and
to which he readily assented.
Being somewhat disturbed on the question of whether
such an issue might be precipitated at the Karlsbad Congress and finding that I might be unable to attend the
Congress I wrote Dr. Weizmann from Karlsbad to Lon
9
don on August 2nd an extract of which is attached
marked ' l B ". I have here his reply of August 10th from
London of which an extract is attached marked " C " .
If that evidence and the proceedings of the Congress
do not dispose of this bugaboo to the satisfaction of even
so analytical a critic as the respected editor of the American Hebrew it looks to me as though it is because these
gentlemen refuse to be convinced. Does it not strike you
that way?
One further word and I have done. I have no quarrel
with the non-Zionists, such as the American Hebrew, who
by a lifetime of devotion to the cause of Jewry have
earned the right to speak. However greatly we may deplore their attitude and the injury they are doing we
know that they are sincere. My grievance is against
those eleventh-hour carping critics who held their peace
and took no part in the fight until they thought they saw
a cleavage in our ranks and then rushed in to widen the
breach; against those who whilst the power and prestige
of the great Jewish names of America were solidly arrayed on one side lacked the courage to antagonize the
cause; those pussy-footed individuals who moved very
softly lest they tread upon the toes of the great and
powerful but who roared like lions when they foolishly
imagined that our temporary family differences spelled
their opportunity.
But fortunately they reckoned without their host. I
bow to no man in my confidence in the loyalty and devotion of the Brandeis-Mack group and their followers to
Zionism. I will match it against that of any of its followers anywhere in the wide world. My sincere thanks
to you, gentlemen, for your patient and indulgent attention.
"A".
June 3rd, 1921.
1. Since under the mandate, the World Zionist Organization is recognized as the legal body to cooperate
with the mandatory, it must have the power to control
the funds contributed for the upbuilding of the Jewish
National Home in order that the activities may be effectively coordinated. It is therefore necessary,
10
(a) That the Charter of the Keren Hayesod,
Ltd., be so amended as to make it only a collecting
agency for the World Organization. The contributors are to have a voice on the Keren Hayesod
but the World Executive to have control.
(b) That the Keren Hayesod in the United
States be the Agency of the World Zionist Organization and it is hereby also approved as such
agency by the Zionist Organization of America,
for the purpose of collecting contributions to the
World Organization to be spent in upbuilding the
Jewish National Home.
(c) That a method be devised for transferring
the contributions already received in the United
States by the Keren Hayesod, Limited, to the
Keren Hayesod branch in the United States.
(d) That a method be devised for coordinating
the activities of all Zionist and non-Zionist collecting agencies for the Keren Hayesod in the different federations.
(e) That all funds collected by the Keren
Hayesod be transmitted monthly to the World
Zionist Organization which shall be the disbursing
agency.
2. The Keren Hayesod fund is to be used solely in
Palestine. No portion is to be used anywhere else with
the exception of such limited amounts as it may be
deemed desirable to advance to immigrants for the purpose of defraying* the expenses incidental to their voyage
from their home to Palestine.
3. There shall be a quarterly budget established by a
budget committee of the World' Zionist Organization for
the expenditures in Palestine. The local administrative
officers in Palestine shall have no authority to deviate
from such budget except by majority vote of the budget
committee.
4. There shall be appointed as the official auditor of
the World Zionist Organization one of the following
three firms of accountants, either Touche, Niven & Company, or Price Waterhouse Company or Sir Wm. Plunder, to be selected by the Executive of the World Zionist
Organization. Such firm of accountants shall be authorized
11
(a) To make a monthly report of the income
and disbursements of the local administrative officers. Such monthly report to be forwarded to
each of the constituent organizations of the World
Zionist Organization.
(b) To furnish quarterly audits of the books of
the World Zionist Organization, the Keren'
Hayesod and the administrative officers in Palestine, such quarterly audits to be forwarded to
each of the constituent organizations of the World
Zionist Organization.
(c) For the purpose of carrying out (a) and
(b), the. firm of accountants shall be authorized to
send out a representative to remain on the spot
in Palestine.
5. The Zionist Organization of America is to have
substantial'representation on that budget committee of
the World Zionist Organization which shall have charge
of the disbursements of funds and incidental thereto of
the formulation of the budget.
6. The World Executive is to be so constituted by the
Congress in the judgment of the Congress to command
the confidence of all Federations and all Zionists and
non-Zionists.
7. With the end in view of consolidating under one
administration all Zionist activities in Palestine, a method shall be devised in agreement with the Joint Distribution Committee for eventually transferring the American Zionist Medical Unit and its funds to the jurisdiction of the World Zionist Organization.
"B".
Extract from letter August 2, 1921, Mr. TIntermyer
to Dr. Weizmann:
" I have been quite disturbed and unsettled by the
knowledge I have gained of the point of view from which
Zionism is regarded in these Central European and
Southeastern countries and by the studies I have been
able to give to the subject by reading and otherwise during my stay here. I have also had the opportunity of
discussing the subject with a number of men identified
12
with the Zionist cause, the most intelligent of whom I
found to be Dr. Zollschan, who is a practicing physician
in Karlsbad. Dr. Zollschan has, as you know, written a
number of works and articles on certain phases of the
question which I have been privileged to read. His
point of view corresponds more nearly to my own and to
that which prevails among a large section of the American Zionists than any I have yet encountered.
I was greatly surprised to learn that in some of these
countries there is a large body of opinion that goes to
the extreme of regarding Zionism as a purely nationalistic movement even to the extent of championing and
insisting upon the view that the Jews in the various
countries should set themselves apart in their communities and constitute themselves a sort of pseudo-nation. It
is said that this view will be insisted upon at the Congress as one of the tenets of Zionism and some profess
to believe that this point of view will prevail. It is of
course contrary to all that we understand and if persisted
in, I cannot but believe that it will prove disastrous to the
cause in our country. So far as I am personally concerned (although that matters little or nothing to the
cause), I would refuse to identify myself with any such
movement or with any cause of which this view should
form an integral part. To me it seems unpatriotic and
I cannot conceive of any American or British citizen who
above all things loves his country and its institutions assenting to be identified with any movement that involves
a virtual separation or conflict in thought or feeling between his loyalty to his country and his racial aspirations, nor do I for a moment believe that you would subscribe to any such monstrous theory. I t would serve
only to divide your forces into contesting and bitterly
hostile camps and is in no sense essential to our aspirations to secure a Homeland in Palestine for the oppressed
Jews of the world which may, in time, develop into a
national home.
If I thought that any such proposal is to be seriously
considered at the Congress and that I could do anything
as voicing the American point of view in bitter hostility
to such a program, I would come to Karlsbad for that
purpose. Much as I deprecate the idea of a sort of unofficial super-government of the Jews in any country, it is a
matter not essential or germane to Zionism and with
which Zionism as such should have nothing whatever to
13
do. There is sufficient room in the movement for Zionists of all shades of opinion for men of any one shade of
opinion to intrude their nostrums upon the body as a
whole.
If you have time, it would interest and instruct me
greatly to hear from you on this subject.
Why not permit the political future that would follow the colonization of Palestine by the Jews to take
care of itself? It is not involved in the present phase
of the movement and has no just relation to it. Great
Britain has the Mandate and Palestine will be under
British rule if the Mandate is accepted as we all hope
it will be. The time for self-determination by the people
of Palestine lies in the dim future. Not even a prophet
of the olden times would undertake to predict the various
changes and contingencies that may arise before that
time arrives. Why take a chance of disrupting the work
by now attempting to discount the future?
I t is hardly necessary for me to remind you that I
am a novice or of the amateurishness of my views, but
this one point stands now and has stood from the beginning clearly before me. If the Congress so much as
touches this subject of nationalism, it will in my judgment split the entire movement into so many pieces that
no human being hereafter will again be able to put them
together.
With kind regards,
Yours sincerely,
SAM'L UNTERMYER,
"0."
Extract from letter August 10th, 1921, Dr. Weizmann
to Mr. Untermyer:
" I was sorry to read in your letter about Zollschan's
conversations and suggestion. I do not know Dr. Zollschan at all personally, although I have read his books
with great interest, particularly his first book on the
Jewish race which seems to be the best scientific attempt
at proving that there is a Jewish nation in the racial
though not in the political sense of the word. . . .
14
There is no shadow of truth in the assertion that nationalism is going to be the salient point of discussion at
the Congress. I t never has been, and it never will be.
It is all a mere bogey which has unfortunately been
started in America and is being imitated on the Continent.
I am sending separately the Agenda of the Congress
from which you will see that our hands are full with other
questions, and that we are leaving academic matters
alone. I do not remember that these questions have ever
formed the subject of discussion at the Congress.
It is quite true that certain Zionist groups, particularly the Polish one, did take part in the local political
affairs of Poland, but they did not do so as Zionists, but
as Polish Jews who happen to be Zionists. As always
happens, particularly in European countries, the Zionists
are the most active members of the Jewish communities
and therefore participate in all matters concerning Jewish life. But the Zionist Organization qua organization
has scrupulously avoided being dragged into internal political affairs, perfectly conscious of the fact that that
would mean the destruction of Zionism.
Three years ago in 1918, when there were in Paris
continuous meetings of Jewish delegates from all countries presided over by Judge Mack, and when attempts
were made to drag me into the discussion of their political affairs, and when I was hard pressed by the people
to use my political influence in favour of the various
political demands made by the Jewish communities in the
newly formed states, I flatly refused to do so on the plea
that every ounce of energy which we possess must^ be
thrown in in favour of Palestine; and that the political
struggles of each community must become the burden of
the respective Communities and not of the Zionist Organization. This line of conduct has been followed since, and
I know of no deviation from it.
m Dr. Zollschan was therefore not justified in raising
this question at all with you and in causing you this uneasiness.
With kind regards
I am,
Yours sincerely,
C H . WEIZMAKN.
HOW TO SUPPRESS COMBINATIONS
AND
STIMULATE HOUSING
jlddress (By
SAMUEL UNTERMYER
BEFORE NEW YORK STATE ASSOCIATION OF REAL ESTATE BOARDS.
AT SYRACUSE. ON OCTOBER 7th. 1921.
Address of Mr. Samuel Untermyer before New York
State Association of ReaJ Estate Boards, at
Syracuse, on October 7th, 1921.
I am here tonight at the earnest solicitation of the
Joint Legislative Committee on Housing to discuss the
Housing situation and the remedies for the present critical conditions with which your Association has such intimate concern. This is the first time I have been willing
to accede to any. one of the hundreds of invitations to
present my views on this subject or to publicly refer
to our work except in an official way at the sessions of
the Committee. You will please understand that so far
as concerns remedial legislation, they are my views and
not those of the Committee.
The silence maintained by me on this subject up to
the present time is due to my conception of the powers,
duties and province of a legislative committee which
some people may regard as a trifle old-fashioned, but
holding as I do that point of view, my presence here calls
for an explanation. That explanation is to be found in
the fact that the Committee and its Counsel are agreed
that the situation is so critical, not only in the City of
New York but in all the great cities of the country, that
this silence should be no longer maintained.
The powers of investigation lodged in the Legislature through its Committee is one of the most wholesome
and at the same time one of the most^ drastic and farreaching of any of the great legislative prerogatives.
They should never be exercised except with the sole view
of gathering the facts on which to base remedial legislation to correct evils or defects in existing laws. That
necessarily involves exposing the evils that are sought to
be remedied.
The powers thus granted should be exercised with
great caution and conservatism and with a grave sense
of responsibility, for they are vast and liable to abuse.
F o r their proper exercise they necessarily at times
involve the right to intrude into the business and private affairs of the citizens in order to be effective.
They are ex-parte except to the extent that the
Committee's sense of decency and fair-play permits
both sides to be heard. It is impossible in the very
nature of things that every witness called before a legis
•2
lative committee should have the right to be represented
by counsel. If that were permitted investigations would
be endless and none could be conducted with profit to the
State. They would develop into public wrangles and debating societies. In order to be effective and to command the public confidence they must, while conducted
with energy and aggressiveness, be permeated by a highly judicial spirit. Inasmuch as the dominant political
party is responsible for the life of the committee and the
majority of its membership represents that party, it is
not advisable that these investigations should be held
during the excitement of a political campaign. If they
are to influence the public mind and prepare it for needed
legislation as they should, they must be kept absolutely
free from the taint of partisanship or from the suspicion of political bias.
It was in that spirit that the Committee announced at
the opening the hearings that whilst it would be impossible and contrary to all precedents of legislative investigations to permit witnesses to be represented by counsel, every witness would be accorded the right upon the
conclusion of the examination of Committee's Counsel,
to make any explanation he saw fit bearing upon his testimony and that if he so preferred he might examine the
testimony after it had been transcribed and might then
return to the witness-stand to explain it or modify it.
The Committee went also the unusual extent of advising
every person who might be implicated in any testimony
given by other witnesses, to be present at the time and
that he would be afforded the opportunity of immediately
taking the witness-stand so that both sides could be immediately placed before the public and every chance of
injustice thus avoided.
It was in the carrying out of that policy that Mayor
Hylan was invited to appear in response to the testimony
showing his transactions with Hettrick and to give any
explanation he saw fit to make concerning the remarkable correspondence that took place between them and
between him and the City officials concerning the limestone contract for the new court house, the ratification
of which was happily averted by the exposure of that
criminal transaction by the Committee.
It was on that occasion that Mayor Hvlan testified under_ oath that he did not know Hettrick, although he
"might know a man by the name of Hettrick" and as to
3
which his intimate acquaintance and correspondence with
Hettrick were afterwards overwhelmingly established.
The burden of the work of such an investigation rests
upon counsel. Having regard to the vast powers thus exercised by him, subject only to the control of the committee, it is necessary that he realize at every step his
public responsibility, that he knew neither friend
nor foe, fear nor favor, and that he exercise the utmost
restraint to avoid the appearance of sensationalism or of
exploitation for personal or political purposes. Reputations are in his keeping and at his mercy; he must
see that the scales of Justice are evenly balanced and
that no wrong is done. The besetting sin of most of
these legislative committees has been their partisan attitude and willingness to accept hearsay evidence which
in times past has done such grave injustices and has in
the end reacted, as it should, upon the committee that
has been willing to surrender to the temptation thus
to abuse its power and from whose action there is no
redress except in the forum of public opinion.
May I be pardoned the one boast that the Lockwood
Committee has kept absolutely free from every personal
or political consideration and entanglement? In our
discussions we have not known one party from another;
no hearsay evidence and no evidence that would not be
admissible in a court of justice soils the pages of our
record. So rigid and scrupulous have been the methods
of the Committee that every document has been proven
as though it were being offered in a court of justice.
Whilst this procedure has prolonged our proofs and has
seemed at times irksome and unnecessary, especially
where there was no doubt about the authenticity of the
document in question, this policy of "hewing to the line"
of legal evidence, has, I think, justified itself in the end
in the public confidence with which the work of the Committee is regarded.
It is for this same reason that I have declined to
continue the hearings of the Committee during the pending political campaign although the^ majority of the
members of the Committee were^ anxious, as was I, to
resume the sessions because the time is so short to complete our evidence and prepare our report and recommendations for legislation during the approaching legislative session. Much is to be said for their point of
view but I believe still more is to be said in favor of
4
avoiding even the appearance of activities that may be
charged and by some believed to be political, even though
it were not true.
Of all the domestic problems that confront the country at the moment that of Housing is the most critical
and urgent and the one that has received the least intelligent consideration at the hands either of the Federal
or State Government. I t is estimated that the item of
Housing represents about one-fifth of the cost of living
in all of the great cities of the United States. I t is, of
course, by far the most important of the items of cost.
A famine in Housing with its accompanying invitation
to extortion, profiteering and exploitation is therefore by far the greatest deterrent to any effort to secure
a reduction in the cost of living. Until a condition of
normalcy in that item can be restored no substantial
reduction can be expected. I t is not only far-reaching
in its direct effects but it indirectly inflates every item
that enters into the cost of living, for the reason that increased rents on business places must be added to the
cost of everything we buy.
It is, of course, impossible to separately review in detail or with accuracy conditions in all the communities
of the State within the limited time at our disposal tonight. I believe that conditions in the City of New
York, although more acute than in the smaller cities,
fairly represent general conditions throughout the great
cities of the country. We are told from time to time that
these conditions are improving. I wish it were true but
I find the contrary to be the fact. I n my judgment they
are growing worse and we are being foolishly misled and
our fears set at rest when they ought to be kept continually alive and so spur us on until the problem is on the
way to solution. A false sense of security may prove our
undoing. We should meet the situation face to face in
order to cope with it before it is too late. What then
are the facts!
Here is a statement year by year from 1910 to the
present time, of the population of Greater New York,
showing the increase or decrease in the number of tenements and apartments for each of these years, from which
you will note that whilst the population from 1918 to the
present time has increased over six per cent there has
been a large decrease due to fire, demolition or conversion in the number of available tenements and an actual
5
decrease for the past 18 months in the number of apartments.
Tear
Greater New York
1910
1911
1912
1913
1914
1915
1916
1917
1918
1919
1920
4,766,883
4,822,950
4,879,017
4,935,084
4,991,154
5,047,221
5,161,786
5,276,351
5,390,917
5,505,482
5,620,048
1921
5,734,513
Tenements
plus
80
plus
588
minus 735
minus 839
plus
73
plus
522
plus
1007
plus . 888
minus 1006
minus
62
minus
236
Jan. 1921 minus 381
July 1921 minus 156
Apartments
plus
plus
plus
plus
plus
plus
plus
plus
plus
plus
minus
minus
minus
11,702
21,495
13,894
5,326
21,557
17,094
21,507
19,923
5,451
1,297
1,616
219
209
The statistics taken in their entirety are startling and
most discouraging. In 1910, when the population of the
City was 4,766,833 there were 844,599 apartments available in New York City. In 1917 when the population was
5,276,351 there were 981,843 apartments available, being
an increase of 134,249 apartments to meet an increase of
approximately 624,034 in population.
The population in Greater New York as of July 1st,
1921, is estimated at 5,734,613 and there were then only
982,771 apartments available or an increase of only 923
apartments to meet a,n increase of 342,696 in population.
As against an increase of 157,249 apartments in 9 years
before the war, we have an increase of 923 apartments
for the last 3y2 years. There have, of course, been more
than 923 apartments constructed during that period but
the demolitions due to fire, old age and conversion to
business purposes has brought the net increase of available dwelling space in 3y2 years to less than 1,000.
From 1910 to 1917 inclusive there were net annual
gains in available dwelling space of 16,570 apartments
per year.
As against this here is a table of the net increases
and decreases of construction in apartments for the
years 1918 to July, 1921, inclusive, from which it will be
noted as above stated, that there have been actual losses
from 1920 to the present time.
6
Year
1918
1919
1920
Jan. 1 1921
July 1 1921
Number of Apartments
a gain of 5,451
a gain of 1,297
a loss of 1,616
a loss of 219
a loss of 209
The sum total of these figures shows that construction fell behind 69,797 apartments from 1917 to July 1st,
1921.
From 1910 to 1917 an average of 24,922 new apartments were built each year. From 1918 to July 1st, 1921,
the following construction in dwellings took place:
Year
1918
1919
1920
July 1st 1921
Number of Apartments
5,706
1,624
4,882
1,183
This shows an average of 3,642 new apartments constructed in the post-war period, so that the gross construction fell behind 73,832 apartments. The gross construction in 3y2 years fell behind 4,034 more than the net
construction which, as above stated, fell behind 69,797.
All these calculations are based on official figures showing a shortage of nearly 70,000 houses on July 1st, 1921.
I see a dim ray of hope, but only a dim ray, in the
record of the Department of Buildings, from which it appears that whilst in 1920 there were plans filed providing
homes for 7,345 families there have been filed up to
September of this year, plans for 25,441 families (which
is still below normal), but experience has shown that
there is a great hiatus between the plans that are filed
and the houses that are actually constructed on them.
_ Wellnigh the same situation exists in all the great
cities of the country and in all parts of the world. The
only difference is found in the fact that other countries
are doing something to correct this grave menace to our
health, growth and prosperity whilst we have as yet
done nothing. In France the Government lends money to
home-builders at 2y2% for which the Government has to
pay 7 or 8% on borrowings. The budget in England
contains an estimated loss of $100,000,000. per year for
7
60 years represented by subsidies for the construction of
houses.
I do not approve of government aid in our country. It
is not necessary. If we will put a stop to the misuse of
the billions in the savings of the people and insist upon
their being directed into the channels where they will
yield the safest investment, the best returns and the highest public service, this situation will correct itself provided the cost of building can be forced to a normal level
by putting a stop to the criminal conspiracies that are restricting jproduction and maintaining artificial, exorbitant prices for building materials. A reduction in this
overshadowing item of the cost of living through reduced
rentals will automatically bring a corresponding decrease
in the cost of labor, which is already low as compared
with the general increased cost of living.
I do not subscribe to the wholesale assaults upon labor
costs or to the view that labor is in any considerable degree responsible for retarding building. The mechanic
and the laborer can buy no more for the wages that are
paid him today than he could have bought ten years ago
for the wages he then received. It is not he who has
"screwed u p " the cost of living by his increased demands. He has done his part in a way but it has been
forced upon him by the pressure from behind in the way
of increased costs of living to him. The profiteers and
the criminal combinations have compelled him to ask
more in order to secure a living wage. They have led
the procession of rising prices and it is at them that we
must first strike to secure reduced costs of living in the
way of labor as well as of material.
Lest there be any doubt on this subject, suppose we
glance for a moment at the statistics of wholesale prices
of building materials from January, 1917, to September
1st, 1921. Mind you, this is the range of wholesale prices
only. It does not take into account the exploitation that
is still being practiced by jobbers and retailers on a large
scale and adds enormously to the inflated costs of building.
The United States Government uses 100 as a unit to
indicate wholesale prices of commodities. In April, 1920,
building materials reached a maximum of 341 while general commodities, notwithstanding the extent to which
they, too, have been exploited in every direction, were at
their highest point at 272. In December, 1920, building
8
m a t e r i a l s fell to 266 while g e n e r a l commodities fell to 189.
I n F e b r u a r y , 1921, while g e n e r a l commodities w e r e a t 177,
building m a t e r i a l s w e r e still a t 222.
The following statistics are from the Bureau of Labor Statistics of the V. S. Department of Labor. Th&y show the index
numbers of wholesale prices of lumber and building materials
and of commodities in general by months from 1917 to September, 1921:
Lumber and
Year and Month
Building
All
1917
Materials
Commodities
Average for year
124
176
January
106
151
February
108
156
March
110
161
April
114
172
May
117
182
June
127
185
July
132
186
August
133
185
September
134
183
October
134
181
November
134
183
December
135
182
1918
Average for year
January
February
March
April
May
June
July
August
September
October
November
December
151
136
138
144
146
148
150
154
157
159
158
164
164
196
185
186
187
190
190
193
198
202
207
204
206
206
1919
Average for year
January
February
March
April
May
June
192
161
163
165
162
164
175
212
203
197
201
203
207
207
9
Year and Month
July
August
September
October
November,
December
Lumber and
Building
Materials
186
208
227
231
236
253
All
Commodities
218
226
220
223
230
238
1920
January
February .. *
March
April
May
June
July
August
September
October
November
December
263
300
325
341
341
337
333
328
318
319
248
249
253
265
272
269
262
250
242
225
274
266
189
1921
January
February
March
April
May
June
July ..
August
239
222
212
203
202
202
200
198
177
167
162
154
151
148
148
152
During all this time there were no increases in labor
comparable to these,
I am and have always been a champion of organized
labor. I regard the slogan of the "open-shop'' as a
fraud. I t is the old " stop-thief' cry. In my opinion
there is no such thing. In its final analysis a shop is
either union or non-union. In times of depression when
there is an over-supply of labor, the non-union workmen
are retained and the union workmen discharged, from the
natural desire of the owner to secure a more complete
control of his business. In times of great business activity when there is an undersupply of labor, the union gets
the upper hand and forces out the non-union men.
10
The greatest enemy to our industrial life and peace
based upon a friendly understanding between capital and
labor is in my opinion the United States Steel Corporation which under the pretext of the open-shop has been
for years concentrating its vast power in the carrying
on a country-wide campaign of espionage and oppression
aimed at the destruction of all organized labor. The reports of the Interchurch Association must have convinced
any fair-minded man if he had not previously been a
student of the subject andM had been unacquainted with the
"second-story bludgeon methods of the company in
dealing with labor, that the Steel Company will sooner or
later have to be brought to a severe reckoning before we
can have industrial peace in this country.
What an impertinence for a combination, in itself illegal, to say that whilst it may maintain its strangle-hold
over industry no combination of its workmen with others
for protection against its autocratic power shall be recognized ! The mere fact that such a stand is tolerated is in
itself a grave indictment of our form of government. We
have a characteristic object-lesson of the methods of the
Steel Companies in dealing with their labor and with the
public in the testimony before our Committee. The Companies determined to destroy union labor in the building
industry in the Cities of New York and Philadelphia as a
preliminary to their campaign throughout the country.
So they organized the National Erectors' Association of
which most of the great Companies were directly or indirectly members. They also organized what is known as
the Iron League in New York City. The U. S. Steel Corporation was not directly a member either of these criminal conspiracies. It never is. But in the final analysis
it dominates them all the same whenever it suits its purpose to do so. Prior to 1919 any New York City builder
could buy his steel f. o. b. alongside the New York dock
and construct it with union or non-union labor as he chose.
The fact was, however, that as all the other industries
allied with the building trades were using union labor,
it would be necessary for the builder to erect the steel
with union labor and that is what he had been doing.
All of a sudden in 1919 he found that he could buy no
steel t o. b. and that the only way he could get steel
for his building was by purchasing it from a member of
the Iron League, (steel manufacturers), erecting it by
non-union labor. Besides thus increasing construction
11
costs iii order to wage their warfare against union labor r
the Steel Companies put the builders in the predicament:
of having strikes of organized labor on all their buildings.
That furnished Brindell his opportunity. It was the
unlawful activities of this combination that was, more
than any one factor, responsible for Brindell's meteoric
rise to power and ill-gotten wealth. He would threaten
a strike on the ostensible ground that non-union labor
was being used in the steel construction and when told
that he knew that no steel could any longer be obtained
except on that condition, he would exact and the builder
would be compelled to pay blackmail in order to permit
the construction to proceed. This Iron League and the
National Erectors' Association as shown from their own
minutes, is the most vicious form of criminal conspiracy.
Upon my insistence, the facts were placed before a Federal Grand J u r y during Attorney General Palmer's administration but strange, no—not strange—to say no indictment was found. Subsequent inquiry developed the
amazing fact that contract to the custom prevailing
throughout the country in federal investigations before
grand juries, certain of the defendants were permitted
to go before the Grand J u r y which in my opinion accounted for the failure to find an indictment.
But that is far from the end. We are now told that
this criminal conspiracy has been disbanded and that any
builder can, at least for the moment, buy his steel f. o. K
and erect it with union labor. If a man is arraigned for
having picked my pocket last year, it is no defence for him
to say that he has stopped picking pockets pending his
trial and yet some of the federal authorities seem to imagine that because these great corporations have under the
stress of this Investigation and from fear of punishment
temporarily stopped picking the public's pocket, they
have thereby absolved themselves from responsibility for
their criminal acts. If that be so why should not all criminals go merrily on until they are caught and then plead
as their sole defence, that they have stopped!
I admire and respect the patience, moderation and respect for law of the great body of organized labor in the
face of the persecution to which it has been subjected at
the hands of the United States Steel Company and its instruments. Of course there are occasional grafting and
corruption in the ranks of organized labor as there are in
12
Other industrial activities but it is rare and on a small
scale. It amounts to the most insignificant form of petty
larceny as compared
with the gigantic proportions in
which the public is tlsand-bagged*' and "held-up" by the
innumerable criminal combinations of industrial buccaneers that infest the country. The methods of these
few labor pirates are so crude and they must necessarily
work through such open agencies that it is not difficult
for the law to reach and punish them. If it were as
easy to get at the other fellows, our problems would be
readily solved. It was no great task to expose the operations of Brindell and the four lieutenants through whom
he operated in blackmailing building operations in the
City of New York to the extent of well over a million
dollars within less than a single year. It required less
than four months from the time we started upon our Investigation to land him and his lieutenants in prison.
One of the four lieutenants escaped the jurisdiction with
three indictments hanging over him and has not yet been
found but the others are safely in jail.
It was not a much more difficult task to reach the
smaller employer such as the plumbing, lime-stone, building material and other lesser dealers and contractors who
had entered into secret combinations to boost nnd keep
up the prices and restrict the output of materials, and to
lay hands upon Hettrick who was the legal architect and
manager of some of these organizations. Hettrick is now
serving a maximum sentence of three years and a number of his victims and co-conspirators to the extent of
twenty or more, have received jail sentences.
It was when we started at the big, powerful fellows
in business, financial and political life among the employers that we encountered our real problems, as I predicted from the beginning. Everybody agreed that jail
was the right place for the small offender whether a labor
leader or an employer but when it came to punishing the
big offenders, we struck a snag in every direction. We
were warned that business and finance were in a very
sensitive state and we must on no account do anything
that would look like a crusade against "big business"—as
though it were positively disloyal to bring to justice important offenders for the crimes for which the small men
were being punished with general public approval and
satisfaction! When we reached that stage even the Federal Government and members of the Cabinet took a hand
13
ajid announced that there would be no "drive'' against
big business—whatever that may mean.
The dealers in building materials were peculiarly
fortunate in the tribunal before which they were arraigned on their pleas of guilty of violating the State
law against criminal conspiracies. Against our protests and in the face of our appeals that this vicious
circle could not be broken unless these offenders were
sent to jail, the court before which they were arraigned
was of opinion that the "humiliation" of being compelled to plead guilty to a criminal offence accompanied by the payment of fines that amounted to less
than one-one hundredth of one per cent of the money
out of which they had robbed the public was sufficient
punishment. And so the thousands of other offenders
of their class who had temporarily abandoned or pretended to have abandoned their criminal practices and
had crawled into their holes to await events, emerged
boldly forth to resume their old-time activities, encouraged and re-enforced in the belief that Justice errs on
the side of mercy and is not quite so blind as it sometimes seems to be!
But I think it will be found that these gentlemen, big
and small, whose numbers are legion and who cover not
only most of the industries connected with the building
trades but a large proportion of the other activities of
the country, will find before long that they have reckoned
without their host and that there is a day of stern reckoning ahead for them.
As a result of our persistent demands, the Federal
Government has finally taken a hand with us in the game
and I am satisfied that they have become convinced of
the gravity of the situation and are at last in dead earnest. It took a long time to interest them but we are
now together on the job hand in hand. Indictments have
already been found against 150 and more individuals and
corporations constituting the Cement Trust, the Terra
Cotta combination, and the Tile, Grate and Mantel Manufacturers, jobbers, dealers and contractors, covering the
entire country. Others are under way and mil, I believe,
soon follow. Trials will soon begin in the Federal and
State Courts. Col. Hayward is sincere and enthusiastic
and has been from the beginning. He realizes the significance of this movement to force business back to the
normal healthy condition of competition. He has gath-
14
ered about him special assistants of fine ability—such
men as Messrs. Podell, Duer and Wise.
"What we most urgently need at this time in order to
press the many cases we have in hand is a large staff
of able assistants and investigators. To that end we
must have at once an appropriation from the Federal
Government to enable the Department of Justice to cope
with this vast undertaking. We must also have the force
of public opinion behind us. The Attorney General and
Col. Hayward are lending every possible aid with the
limited force and money at their disposal but they are
severely handicapped from lack of funds and it is impossible to accomplish the task without more money and
a large additional staff. If there is to be a thorough
clean-up we shall need at least $250,000 now and perhaps more later. I am satisfied that the people of
the country could make no investment that would
bring a fraction of the relief and practical results
that can be had from this expenditure, and none more
urgent. The object-lesson of 500 or 1,000 of the many
thousands of law-breakers who have been masquerading
as prominent business men, behind prison-bars will do
more to bring back business to an honest basis than anything we can do. It is the only way and unless it is done
quickly the Government will no longer be able to cope
with these forces.
At no time since the passage of the Anti-Trust Law
in 1890 have the criminal laws against conspiracies in
restraint of trade been enforced. Neither the Federal
Government nor the State Government in New York have
ever really believed in the efficacy or in the economic
wisdom of these laws; otherwise the country would not
be facing the conditions that confront it today, where a
great proportion of all the industries of the country are
dominated by these combinations. There was a time
when many of the best and most sincere experts in economics believed that combinations should be permitted
under Governmental regulation and there is still a considerable body that adheres to that belief. There^ is
another school of economics which whilst recognizing
that competitive conditions should be restored in this
country, have reached the conclusion, due to the inability
or unwillingness of the authorities to enforce the laws,
that since combinations have been permitted to grow in
number and power to such an extent that to exterminate
15
them would amount to an indictment of a large proportion
of the entire business community, and especially big business, the only alternatives remaining to us now is tolerating them and regulating them so that they do not prey
upon the public. If effective regulation were possible
that would probably be the better policy but that furnishes no excuse for failing to destroy those that are
operating secretly and in violation of existing law. We
can deal with the question of regulation as an independent proposition. We must first enforce the criminal laws
against these people as they are enforced against other
law-breakers.
My recent study of conditions in Great Britain and
Continental Europe has convinced me of the increasing
necessity for exterminating and punishing these trade
conspiracies, because I believe that this country will have
to protect itself by tariffs still more adequately than it
is now protected against foreign competition. When a
skilled workman in Germany can live comfortably with
his family at thirty cents a day of our money and on less
in Austria, Hungary, Czecho-Slovakia and other Eastern
and Southeastern countries of Europe, we shall not be
able to keep our men at work as against that sort of
competition without a protective tariff that shall be equivalent to the difference in labor costs. I have always been
a "Randall Democrat''—a believer in a tariff for protection rather than for revenue, and my experiences in
Europe have confirmed me in the opinion that at no
time in our history was it so essential as at this moment.
The necessary tariff restrictions against foreign competition renders it all the more essential that the channels
of home competition shall be kept free and open. So
long as these combinations would have to compete against
the world their peril to our country is not nearly so great
as where they would have the field to themselves in this
country. That would enable them to extort from the
people whatever prices they pleased. Even if foreign
goods are required to pay high duties we can be protected against undue exactions only if we can restore
healthful competition at home. If we permit that to be
choked or clogged, we are helpless. Herein lies the great
importance of punishing every man who under cover of
the protection he gets from his Government seeks to stifle
competition at home.
16
There will accordingly be asked from Congress as
well as from the New York State Legislature, an amendment to the Laws against trade conspiracies so as to take
from the courts the power to permit this class of offenders
to escape with lines and to require that the punishment
of imprisonment shall be imposed. The entire administration of justice has been brought into contempt by imposing fines in these cases after the expenditure of
months of effort in preparing the complicated facts for
trial and after an outlay by the Government in most of
these cases equal to many times the amount of the fines
collected.
The scarcity of building and the present abnormal
building costs are due principally to two factors, both
of which can and will be corrected if we can but bring
home to you and those like you the peril of the present
situation:
(1) To the fictitious maintenance of prices through
secret and criminal combinations among competitors in
almost every line of industry embraced within building
construction, and
(2) To the inability to obtain money for building purposes or upon improved property upon the very best of
security due to the restrictions of the loan market.
I have dealt in a general way with the former. Few departments of industry can be mentioned that are not at
some stage artificially controlled. In some of the cases
the control extends from the raw material down through
the manufacturer, the jobber, the contractor and the retailers, so that at every point an abnormal profit is taken.
As a result of the activities of the Committee, whilst that
condition is not true in the building trades to the same
extent that it was a year ago, it still exists and I attribute
its continuance largely to the want of cooperation on the
p a r t of the courts as evidenced by their refusal to send
the guilty men to jail. I can name important lines of industry essential to building where the prices are maintained at anywhere from 400 to 800% over what they
were before the war and where criminal agreements have
existed and still exist under cover and a more guarded
way between labor unions and unions of employers in a,
given line of industry, that is largely responsible for this
condition. The employer gives the union illegitimate protection while the latter safeguards the employer against
17
competition outside the Employers' Association and thus
assures the latter extortionate profit. Employers who
may want to compete are literally forced to join these
Associations and to become parties to the conspiracies
under penalty of being unable to secure skilled labor and
many who refused have been driven out of business.
But above and beyond all these considerations lies the
absence of a loan market. Without it there can be no
construction on a large scale. The principal expenditure
of the Committee in connection with this Investigation
has been in the employment of expert accountants. We
have had at times as many as fifty men working on this
stupendous undertaking and have expended upwards
of $40,000. in that direction. The significance of the
figures already produced before the Committee has never
been understood. The subject is too technical to arrest
general public attention but the results are overwhelmingly convincing. These proofs show the investment operations of all the leading life, fire and casualty insurance companies of the Uniited States and of all the savings banks in the State of New York and of New York
state banks and trust companies, all covering a period of
fifteen years and separately stated year by year. They
demonstrate to a mathematical certainty that year in and
year out throughout all the states of the union, the investments of these public corporations on bond and mortgage on improved real property have been easily the
safest and most conservative and that they have yielded
by far the lest returns of any of their investments. The
losses have been only a fraction of those suffered on investments in railroad bonds and in bonds and stocks of
industrial and other Wall Street securities and the income from them, quite independently of the question of
losses on capital, has been from 15 to 20% higher.
From these statistics it further appears that the savings banks of the State of New York have an average
of upwards of 49% of their total assets invested in this
class of security. The best, largest and most prosperous
of them have from 50 to 65% and over so invested. Every
savings bank depositor has the right to withdraw his entire deposit on sixty days' notice, whilst the life insurance
company tables show a well-defined ratio of losses per
year and this is true also with rare exceptions of fire and
casualty insurance companies.
18
And yet the great life and fire insurance companies
that are the trustees for the masses of the people and
that hold these billions of money for them are not willing
to apply 40% of their investible funds in that way. The
great fire insurance companies have practically no investments on real estate mortgages; they prefer to put
a large part of their money in "\\dld-cat" Wall Street
stocks. You will find their lists loaded down with oil,
copper and other varieties of industrial stocks, the depreciation on which has been enormous. Life insurance
companies were prevented by the Legislature of 1916
from making further investments in stocks and were required to sell their stocks within five years. Some of
them, notably the Mutual Life Insurance Company, are
still holding many of these stocks after fifteen years;
strangely (and to the discredit of the Legislature be it
said), they were able to secure further legislation permitting them to hold them indefinitely and this, too, on
the recommendation of the Superintendent of Insurance!
A few of the great life insurance companies, notably the
Metropolitan Life, have done splendid public service in
the pressing Housing emergency and have at the same
time done well for their policyholders, by making large
investments on bond and mortgage on residential construction toward assisting the building of small homes.
The investments of the Metropolitan on real estate loans
have increased from over $72,000,000 to upward of
$400,000,000 whilst companies like the Mutual Life have
been calling their loans, and decreasing their real estate
mortgage investments in the ratio on which their assets
are increasing.
The question for the citizens of this State and for
their Legislature to determine is as to whether this performance is to be permitted to continue. The men who
control these institutions, without having a dollar of financial interest in them as though the assets were their
own, and who are a self-perpetuating body subject in
practical effect to no control but their own sweet wills,
are defiantly refusing to devote any part of the policyholders' money toward the relief of this situation. Apparently no moral pressure and no sense of duty will
move them. The ability to wield power in the financial
world through the control of these vast trust funds is one
that they will not voluntarily surrender. Bond and mortgage investments carry no such power. Nothing short
19
of legislation will move them and we shall accordingly
have to resort to the Legislature where we shall need
your help.
(1) Fire insurance companies must be prevented from
investing the funds of their policyholders in "wild-cat"
stock and other securities and must be limited in their
investments, as trustees of estates and life insurance companies are now limited and are to be limited.
(2) As above stated, 49% is the average proportion
of savings banks deposits now invested on bond and mortgage on real estate but some of the banks have a greater
proportion invested and some have far less. Why should
not 45% be the minimum of the deposits to be so invested? In that.way the delinquent institutions would
be compelled, up to a certain point, to do their duty.
(3) The greatest, most successful and best managed
life insurance company in the United States, the Metropolitan Life, has note about 40% of its one billion and
over of funds invested in bond and mortgage on- real
estate and another $120,000,000 in U. S. Government
bonds. Why should there not be a minimum required for
New York companies and for other life companies doing
business in the State?
The same cry that is made against this proposal was
made in 1906 when the companies were forbidden to
make further stock investments. It has proven a wholesome reform. The companies have grown and thriven
under it. Those who have been slow to obey the law and
have secured its extension from time to time have lost
vast sums through that policy. Those who have sold in
time have been the gainers.
The same stale old line of argument that the financial
institutions urged against the Armstrong legislation,
against the Federal Reserve Act and against every reform that has been forced upon them, and to the enactment of which against their violent protests, they owe
their prosperity, is trotted out by way of opposition to
this proposed legislation. We are told that if New York
State puts any such limitation upon investments of these
companies as will require a percentage to be placed upon
bond and mortgage within the State, every State in the
Union will make a like requirement with respect to the
proportion of the dividends collected within that State.
We have no right to assume anything of the kind and
I believe it is no more true than have been many of their
false fears and prophecies in the past. New York im-
20
proved real property is recognized the country over as
an exceptionally prime and marketable class of investment. It is in a class by itself. The same is not true of
other communities, with few exceptions. We are bound to
assume that the main concern of each State is for the
safety of the dividends collected from the citizens of
that State, the welfare of their policyholders and that
no selfish consideration will control their action. The
authorities know that there is no place where there is
such certainty, profit, safety, marketability and stability
of values as there is in this class of security when limited, as it should be, to 60% of the appraised value of the
property.
But even if these familiar false alarms were true,
the statistics that are in evidence before the Committee will demonstrate that if every state in the Union
were to pass such laws as are suggested by the pretended fears of these gentlemen, we would still get
hundreds of millions of money annually for real estate
investment from those companies based on the proportion of their business in the State of New York, if we
require them so to invest a proper proportion of their
funds.
But why, may I ask, should the other states object
to such a limitation when they have never objected to
the dividends of their policyholders being invested in
all sorts of Wall Street securities and of railroad properties which have no market and in which they have no
interest or concern? Why is it not fair to assume that
since mortgage investments have proven the safest and
yielded the best returns over a long series of years, they
would rather see them so invested than that they should
be used as "chips" in the game to augment the power
and riches of their self-perpetuating trustees? It is a
mere bugaboo, to frighten the timid and unknowing.
The same line of talk is threatened by the fire insurance companies, some of whom are and have been for
years, literally gambling with their policyholders' monies
for the benefit of their stockholders and who want to
be permitted to continue to do so on the specious pleas
that their assets must be "liquid'' and that real estate
mortgages are not liquid.
The plea is not only specious; it is intellectually dishonest. They hold millions upon millions of securities
that are rarely dealt in on the Exchanges and that it
21
would be far more difficult to sell than would be a giltedged mortgage. Anything is liquid at a price. When they
talk of liquid assets do they mean that they could sell
them on short notice without loss, to cover exceptional
requirements for money? Of course not. They might be
able to sell a few of them at a great sacrifice and perhaps
not at all.
But if they wanted to sell a high-class 6% first mortgage on improved property they could always get par or
nearly par for it. If any company or number of companies wanted to sell all of that class of mortgages upon
advertisement on the auction block at a discount of 10%,
they would sell like hot-cakes! For it must be remembered that they have average due dates of less than
eighteen months. If they wanted to sell them at a 10% discount, it would mean that the purchaser would be getting
at least 12y2% on his money on the best security in the
world. It would never be necessary to make any such sacrifice and it would be criminal to do so but if it were necessary how trivial would be that sacrifice as compared with
what they would have to do in order to get rid of speculative securities or even to dispose of the average class
of high-class railway or other bonds that they hold.
I charge that there is no sincerity whatever in the
claim and that the argument is a mere cover under which
they hope to be permitted to continue in the control of
these funds to the disadvantage of their policyholders
and of the public.
There is no time here to go into detail for the purpose of illustrating this argument I ask that you consider the subject with painstaking care and if you believe we are right that you lend the impetus of your
great influence toward opening up the coffers of these
companies that contain your money and force these
astute gentlemen to use part of this money in the interest
of the owners of that money, as we have overwhelmingly
proven it to be.
[278]
A CONSTRUCTIVE CRITICISM
OF THE
TRANSIT PLAN
ADDRESS BY
SAMUEL UNTERMYER
Before The City Club
Thursday. October 13th, 1921
A Constructive Criticism of the Transit Plan
Address by Samuel Untermyer before The City Club,
Thursday, October 13th, 1921
I approach the discussion of the tentative Plan of Reorganization put forth by the distinguished members of
the Transit Commission with diffidence and with a feeling of respect and appreciation for the sincere, intelligent
and painstaking effort that is manifest in every line of
the document. It deals with one of the most complicated
problems that ever confronted a municipality and frankly meets every contingency in a way that entitles it to the
thanks and to the confidence of the community in its integrity and disinterestedness of purpose, however greatly
we may differ from its conclusions.
In the criticisms of the Plan that I shall present I realize also that there is nothing conclusive about the proposals ; that the Commission has an open mind and that
it has very wisely put forth this proposed Plan to invite
constructive criticism and correction.
It is for these reasons that I deeply deplore to find
myself at variance with the Commission on many important points and to have been impelled to the conclusion that in its present form the Plan is unsound and unjust to the City in most of its fundamental and essential
features and should be contested. It could hardly have
leaned more heavily in favor of the railway securityholders if it had emanated from their own offices, which I
know is not the case, for I unhesitatingly accept without
reservation the assurance of the Commission that, in so
far as they know, the Companies had no part in its formulation, that they have not been consulted and were not
even aware of its contents until it was publicly issued.
2
The roads and their security-holders have already
begun their publicity campaign to put through this Plan
with as few changes as possible by widely advertising
their opposition to it. We are told that public hearings
by the Commission will begin on Monday next and that
the railway officials will then testify. These hearings
should be postponed. The Commission should allow time
for the employment by the City authorities of expert
Counsel who are familiar with railway reorganizations
and who in conjunction with the Counsel for the Commission should be accorded the privilege of cross-examining these officials and every other witness who may be
called, either openly or covertly in the interest of the
roads. I have every confidence in the sincerity and integrity of purpo^ i of the learned Counsel for the Commission but he will naturally try to justify the Plan.
The City should be represented by Counsel in these proceedings who will uncover its defects.
I attribute what I shall endeavor to show to be its injustices and defects to the unfamiliarity of the distinguished members of the Commission with the intricacies
of financial reorganizations of insolvent railway corporations, which is a highly technical and specialized department of law and finance, as against the matchless wit,
resourcefulness and experience of the astute experts representing the Companies and the various Committees of
security-holders with whom the Commission has necessarily had to come in contact. In plain English, I believe
they have " h a d the wool pulled over their e y e s " but it is
fortunately not too late to restore their sight.
The following is a summary of the objections and suggestions of changes that I propose to discuss with you
this evening:
(1) I most emphatically protest against the provision
for a barometer or sliding scale of fare that will
furnish a perpetual guaranty for the payment of the
principal of the bonds that are to be issued for the
properties, thus creating at the expense of the farepayers of the City the highest grade bond anywhere
extant today, not excepting U. S. Government Bonds,
with an assured interest return of 5% and a possible
"return'' of 6i/2% per annum.
My contention is that the Plan should on the contrary
absolutely limit the fare to five cents and that if that
3
involves temporary deficits (which the Commission does
not anticipate and to which I agree), they shall be
provided for as hereinafter explained.
(2) I object to the suggested method of securing future
investments by the City for extensions (estimated at
$250,000,000. at the rate of $50,000,000. per year). The
proposal to place the security for such payments in a
position even less advantageous than the bonds that
are to be issued for the properties, or even to place
them alongside of and on a par with the purchasemoney bonds, I consider grossly inequitable, for the
reasons hereafter to be stated.
This new money should be represented by a priorlien bond ahead of the purchase-money bonds and ahead
of the bonds of the same class that should be issued to
the City for its present investment of $233,000,000. in
the City-owned subways.
(3) The accrued taxes of over $13,300,000. now past due
and all taxes that may be imposed before the Plan
takes effect, all of which the Commission proposes to
cancel and forgive, should be paid and funded in prior
lien bonds.
They are now liens ahead of all the securities on
these properties. The roads can be forced to pay them.
The properties may be sold free and clear of those
liens if they are not paid. Why should they be cancelled? If, as the Plan seems to contemplate, physical
value of the property is to be a basis and the securityholders are to get a guaranteed bond, and their damage
and tort claims are to be provided for, (as they certainly should be, in full, even at the expense of the
bonds, if necessary), what, pray, are they sacrificing
to entitle them to secure the cancellation of the
$13,300,000. of tax liens that are ahead of them?
If it be said that the $233,000,000. subway debt which
now ranks subject to the $200,000,000. of bonds
held by private investors is to rank equally with such
bonds in the Plan, my answer is—thank you—for nothing. If all the bonds are to be guaranteed by this
barometer fare and paid for by the travelling public
by increased fares it does not concern the securityholders how many bonds other than theirs are issued,
or to whom nor what are their relative priorities.
(4) I object that the $233,000,000. which the City now has
invested in its subways that are to be turned over to
" A " Company and to be subjected to the lien of the
bonds to be issued for the properties, is not to be likewise evidenced by the physical issue and delivery oE
4
bonds to that amount, at the time the bonds are issued
for the other subway properties. "Who knows whether
the City may not in the future want to sell or hypothecate these bonds without regard to its debt limit. Does
not the City's money, representing its construction investment look as good as the private money that was put
in at the same time ? True, it now stands subordinated,
which was an outrage, but we are now making a new
deal in which the Commission proposes to put it alongside. And yet the Plan goes only part of the way in
carrying out its own proposals in that respect.
At page 10 of its Report the Commission calls attention to the fact that the effect of this sliding scale
will be to relieve the debt limit to the extent of the
$233,000,000. present investment that will thus be assured its interest and amortization and so pave the way
for the necessary future investments for extensions, all
of which is true.
But at what a sacrifice, if it involves increasing
fares! If it does not and if these charges can be met
byt a five-cent fare as the Commission expresses the opinion at page 9 of its report and as I believe that they
can, this item will thereby be relieved from the debt
limit. It is difficult to imagine a more unsound or extravagant form of financing than this would be. If
the Commission's opinion proves to be justified, there
will be no deficits for the City to finance under the
plan suggested by me. If the Commission proves to be
wrong the securing of the City's new money by a prior
lien bond (which renders certain the payment of its
interest no matter what may temporarily happen to the
interest payments on the purchase-money bonds) will
relieve that $250,000,000. from the debt limit instead
of relieving the $233,000,000. of present investment. It
would be in that respect a case between tweedledum and
tweedledee except for the outstanding fact that the
five-cent fare will have been preserved without increas
ing the debt limit beyond that contemplated by an increased fare and nothing will have been gained in the
direction of the debt limit by this vicious provision for
a sliding-scale fare.
(5) I do not object to laying aside and appropriating, when
earned over and above 5% interest on the bonds, an
annual sum based on economy and efficiency of operation not to exceed 1 % % of the bond issue, as a means
of assuring the most efficient management. It is a wise
suggestion, provided all of it is to be actually distributed among the operating personnels and that none of
5
it is to go to the bondholders as such. I do, however, most strenuously protest against an additional
1% per annum over their 5% interest going to
the bondholders in any event. And that, too, presumably to the exclusion of the bonds that the City is
to or should receive for its investment. The Plan is
silent on that point but the plain inference is that the
City's debt is excluded from participation in this bonus.
Why? Surely the 25,000 investors scattered all over
the world can add nothing by way of efficiency except
through their elected boards of directors and officers
for the encouragement of whose efficiency provision is
wisely and separately made. If these bonuses can be
earned out of a five-cent fare, well and good. But if
fares are to be boosted there should at least be no
bonuses whatever to anybody or any conditions.
(6) I object to the provisions for control of " A " Company,
(the holding Company) and of " B " , " C " and " D "
Companies, (the operating Companies). Under the
Plan the Mayor is to appoint three and the securityholders three of the seven directors of " A " Company
and these six directors together to choose the seventh.
All the directors of the operating Companies are to be
chosen by their security-holders except that even where,
as in " & " Company, the City's money investment will
doubtless be greater than that of all the bondholders,
it is to have no voice in that Company except such
carefully restricted and indirect representation as it
may secure through the holding Company.
My contention is that the City should have four of
the seven directors, equal to a clear control of the
holding Company, and that it should at least have substantial representation on the boards of the operating
companies so as to be able to protect the City's vast
interests in the regulation of the action of these vital
organs of the corporate life of which the holding Company is the mere shell and outer semblance. The City
is given the shell whilst the security-holders "get away"
with the substance.
My proposal does not mean municipal operation. To
that I am opposed. It means private operation with the
City's money but with municipal participation and cooperation. It is a small part of that to which the City
would be entitled and .which it would exact if it were
a private interest, and it is entirely workable.
The idea of permitting the old traction interests with
their long, slimy trail of corruption and stock jobbing
and their record of financial disaster and inefficient
6
service, to continue to operate this system and to hand
over to them, besides, on long term leases, the subways that are to be constructed with new City money,
without so much as City representation on the directorates of the operating Companies is unthinkable. The
insistence on any such condition will be and should be
in and of itself sufficient reason to wreck any Plan
that the Commission may present. If there is no other
remedy by way of protest the aroused force of public
indignation will prevent any such disposition of these
properties.
There should be not only a clear majority of City
nominees in the holding Company besides City representation in each of the operating Companies but above
and beyond all, the holding Company should have
reserved to it a right of veto upon the continuance of
the then constituted management of any of the operating Companies and to require the holding of a new
election for directors. As the City will probably have
a larger investment than the private investors there is
no reason why it should be content with the mere perfunctory and inadequate participation in the operating
Companies that is given to the holding Company under
the Plan. The details of the regulatory powers as between the Companies, by which the City will reserve the
unquestioned right to get rid of a dishonest, inefficient
or extravagant management cannot be settled in any
plan. It must be provided for by the terms of the
various charters and leases.
I assume that in view of the overshadowing importance of this branch of the subject these document^ in
their entirety will be submitted for public inspection
and criticism at the time the formal statutory Plan is
filed and as part of that Plan.
(7) I object that the City is not to be directly represented
and is to have no voice or right of veto, except through
a State Commission, in the fixing of the values of these
properties. This the Commission can correct by providing for such representation and the Transit Act should
be so amended as to secure to the City the right of judicial review. The Federal Kailroad Valuation Act under
which the Interstate Commerce Commission is now valuing the railroads for the purpose primarily of fixing
rates and not with so comprehensive a purpose as that
of fixing the purchase price, reserves the right of appeal
to the Courts. If it should unfortunately transpire
that physical value is to be the primary basis for these
purchases great injustice is likely to be done the City,
7
however conservative may be the valuations. A business property or enterprise is never worth more than the
capitalized value of what it can earn no matter at what
sum its physical property is appraised. An industrial
plant that has no earning capacity is worth its junkvalue and no more. If the Commission should lay
down a basis or principle of valuation that the City
believes to be indefensible there should be a right of
review somehow, somewhere.
That question is bound to arise almost immediately
in valuing such (if any) of the antiquated, wornout
surface lines as the Commission may decide are needed
for a comprehensive unified system. As matters now
stand the situation is very one-sided and unjust to the
City. If the Commission's price does not suit (or they
so pretend long enough to tire out the patience of the
Commission), the Companies need not take it. If, in
the very natural desire to see its stupendous task
crowned with accomplishment, the Commission is outtraded or surrenders to these, the most clever and experienced traders anywhere to be found, the City is
helpless to protect itself against the Commission's errors
of judgment. That should not be. The City should
also have the right to be heard on the valuations of the
properties that are to be taken over and those that
should be rejected. Most of the surface roads should
be rejected. Their removal from our streets will be a
blessing. They are an obstruction to our already congested traffic and are a liability rather than an asset.
Buses should be the form of transportation for short
hauls and the subway and elevated systems should
handle the bulk of the remainder of the traffic. It will,
however, doubtless be advisable to retain some of the
surface roads, but not many of them—at a price but
not at physical values.
This complication of finding our City u n r e p r e s e n t e d
is t h e result of S t a t e interference in our affairs. I realize
t h a t this humiliating situation h a s been forced upon us by
the demagogic, drifting policy (or w a n t of policy) of our
Chief Executive d u r i n g all the y e a r s he h a s held office,
whilst our t r a n s p o r t a t i o n system h a s been d e t e r i o r a t i n g
a n d d i s i n t e g r a t i n g a n d f a r e s have been mounting t h r o u g h
the elimination of t r a n s f e r s , whilst the general discomf o r t a n d loss of time t h r o u g h b a d and insufficient service
were constantly increasing before his unseeing eyes a n d
he did not himself have, a n d did not h a v e the sense to
8
look elsewhere for, the brains to rescue it from destruction.
Even under these tragic conditions and in the face
of this provocation I opposed State action and still believe it was wrong. Hard cases make bad precedents.
We had drifted so long that we could better have afforded
to wait another year than to violate the principle of home
rule. The need of relief was urgent and yet I do not feel
that the end justified the means. If this interference in
our purely local affairs should vindicate itself (as I hope
it may, now that the deed has been done), it will be the
signal for more like incursions into our local affairs,
for there are few departments of our demoralized public
service that would not be benefited by the same kind of
intrusive absent treatment.
I have not lost faith in the hard common sense of the
people of our City. To think otherwise as to a community
of six million souls in the greatest City of the world
would be a confession of the failure of popular government. Left to our own devices, as we should have been,
I am sure the people would have awakened to their plight
and that in the end we would have elected a Mayor who
understood and was able to cope with our problem. This
particular individual is about as capable of comprehending this difficult subject as is a cow of understanding
astronomy. I doubt whether he has ever read the Commission's Eeport and Plan and am sure he would not
know what it was all about if he had done so. Considering the gravity of our predicament we had, however,
the right to hope that he would at least get a faint glimmer of the importance and complexity of the task and
would call to his aid the best available talent for their
disinterested expert advice. But we will return to that
subject later in connection with that amazing " constructive p l a n " emitted by him that must have been written
for him by a wag with a fine sense of humor.
I would like now to outline and elaborate my first
proposition. I have, as is well known, and as the Mayor,
above all others, knows from the correspondence between
us in 1919, always held to the view, which I still hold,
that the transportation system of the greater City can
be profitably operated as a unified system with universal
free transfers on the basis of a five-cent fare under mu-
9
nicipal ownership with private operation and municipal
participation to the extent necessary" to assure adequate
and efficient service, and have repeatedly so expressed
myself. I have accordingly consistently opposed every
attempted increase in fares. The proposition assumes,
of course, effective, legitimate business management; the
lopping off from the system of that part of the ancient,
dilapidated junk of such of the surface lines as are now
an incubus (and.that includes a substantial part of the
present mileage) with their worthless, water-inundated
so-called "securities'' and the elimination of the graft
and stock-jobbing that have characterized past juggling
with the properties. The security-holders of those exploited roads should be left to shift for themselves. The
Plan should be based, not upon misplaced sympathy but
upon sound business principles as though the dealings
were between private interests.
If as thus reorganized the maintenance of a five-cent
fare involves temporary deficits in operation (which as
before stated I do not believe and the Commission tells
us it does not believe will happen under anything like decent management under a drastic reorganization that will
reject the chaff and retain the substance, no matter whose
toes may be trodden on) it would be by far fairer in that
very remote event to have the City temporarily advance
the money to meet any such deficits but on a prior lien
security to be amortized and repaid out of future profits
before the purchase-money bonds are retired, than to
leave room for the possibility of at any time increasing
fares*.
But if the unexpected and well-nigh impossible should
happen at the beginning and the roads did not even pay
their operating expenses it would be wiser and more just
to have the City loan, not give, the difference, taking for
these advances a lien ahead of everything else and on a
par only with the bonds that the City should receive for
expenditures for future subway extensions and for the
arrears of taxes owning it.
If there were any deficits they would necessarily represent mainly if not entirely operations in the new outlying sections. As this transportation will add to the
growth and extension of the City, of which all the taxpayers would enjoy the ultimate benefits in the way of
10
new and increased taxable values in which they would
presumably share through the reduced tax rates thereby
created, there is no justice or wisdom in placing the burden of increased fares on the users of the system. That
burden should be distributed among the entire body of
taxpayers to whom the ultimate advantage will come.
As these prior lien bonds would unquestionably earn
their interest they should be readily saleable in normal
times on their merits without pledging the City's credit,
and would not affect the debt limit. The same is true of
the prior lien bonds which should be given the City for
future advances for construction. Giving them the priority, as new money is entitled to receive under all the
rules of the game of reorganization of insolvent corporations, would remove them from the debt limit. The Plan
erroneously gives them no tangible security and puts
them on a par with the purchase-money bonds, although
I believe, as does the Commission, that even then they
would earn their interest and sinking fund requirements
on the basis of a five-cent fare.
There is another reason why this proposal to permit
of a sliding or barometer increase in fare is in my judgment fundamentally wrong and should be resisted to the
last ditch. It is not only an encouragement but a distinct
incitement to inefficiency and extravagance. Under its
operation it is so much easier to raise fares than to
practice economies. Eemember, that it is proposed to
have the security-holders operate these properties, without even government supervision or representation on
the boards of the operating companies if the Commission
has its way—with City supervision if my suggestion is
adopted—but in either event, the security-holders will
control operations. If they are made to realize that they
must earn their interest and sinking fund requirements
on a five-cent fare basis are they not more likely to do so
than if they know that by merely failing to do so the
fare will be increased?
The improvement and values of property in the outlying sections of the City will also be adversely affected
by uncertainty in the rate of fare. A fixed, stable rate is
important to the stability and development of these
properties.
11
Incidentally, one of the peculiarities of this Plan is
that if the fare were increased to eight cents, or even
higher, and the system earned sufficient on that basis to
pay the 1%% annual bonus on the bonds and the iy2%
annual bonus to encourage efficiency both classes would
be entitled to it. The intention of thereby stimulating
efficiency becomes meaningless and an added peril to
efficiency is created unless the premium is based on earnings reckoned on a five-cent fare.
There is every reason why the security-holders should
be, and I believe will in the end be, more than satisfied
to accept for their properties bonds of the kind I have
described. They will certainly do so if they have any
faith in their professions of the values of what they are
selling. They are the shrewdest traders living. Thus
far they have ridiculously out-traded at every turn the
hopeless amateurs whom the City has put up against
them and they are more than likely to do so again. The
only property whose securities are worth serious consideration is that of the Interborough and that is operating at a huge loss when taken in connection with the disastrous Manhattan elevated road guaranty that was given
as part of a huge stock-jobbing enterprise. . The value
of the Interborough bonds and notes is partly reflected
in the market quotations. I say partly because for aught
we know the quotations may be artificially maintained
for the purpose of this negotiation. That would not surprise anyone who knows how these things are done.
Again, the quotations doubtless, and legitimately, reflect the possibility of a successful outcome of these negotiations from the point of view of the bondholders. We
know that the Manhattan guaranty and other liens are
ahead of them, that they cannot get rid of the guaranty,
that with that burden they are facing a huge annual deficit with certain ruin staring them in the face and that
the bonds are selling at 55% of their par yalue, in which
quotation there is included the capitalization of the hope
that their clever and powerful representatives will pull
them out of their predicament through this negotiation.
If the new 5% bond with a possibility of another iy2%
that the Commission proposes to give them for their
property were automatically guaranteed by this slidingscale or barometer fare it would be well worth over par.
12
even in these exceptional times of depressed security
values. The City is not yet at the mercy of these gentlemen to that extent and never will be. Probably few, if
any, will blame them for making the best bargain they
can—if they ' ' can pull it off' \ Considering the quality of
the commodity the owners of these properties have to sell
and the new money they must immediately furnish if
they do not sell, they will do a fine day's work if they can
get a bond based on a five-cent fare subject only to a prior
lien for taxes and new moneys advanced by the City. Assuming a fair value for their properties based on a combination of conservative physical values and earning
power on a five-cent fare basis, to the latter of which
they are committed by their contracts with the City, and
for which the latter has dearly paid, they can ask no more
than to be paid in bonds in a security that shall be junior
in rank to that representing the new money.
The cries of distress that will go up from these interests at these suggestions and the abuse that will follow
will not be new to me or unexpected. That always happens. We heard them in 1906 from the life insurance
companies when the legislation was passed following the
Armstrong investigation; we heard them in 1913, from
every great financial interest in the land when the Federal Eeserve Act was under consideration, solemnly
warning us of the country wide disaster that would follow if Congress were to provide in the Act for Government money and Government control instead of for banking money and banking control, which Congress promptly
and wisely did in the face of their "prophesies." Yet they
all now admit that these were wholesome reforms and
that the Federal Eeserve Act proved our salvation in the
late crisis. At the moment the Fire Insurance Companies are predicting universal upheaval if they are
stopped, as we propose to stop them, from putting their
policyholders' money into "wild-cat" and gambling securities and maintaining rates to cover their losses incurred in that way.
So we shall now hear no end of thrilling hard-luck
stories and denunciation if these traction gentlemen do
not get what they will try to make the Commission believe they think they ought to have. They should of
course receive all to which they are justly entitled and
13
no undue advantage should be taken of their manifest
predicament. On the other hand it is to be hoped that the
Commission will not take their claims too seriously or
be too much impressed by their apparent disappoint. ment.
In conclusion I have a few words to say concerning
the extraordinary statement emitted through Mayor
Hylan in his address last week accepting renomination
as Mayor, which that same wag labelled " Mayor Hylan's
Constructive P l a n " for solving our transportation problem and which is as much his plan as are the streets he
has closed and plastered all over with the sign "Mayor
Hylan's Playgrounds", his playgrounds.
Here is the precious curiosity, penned by a hand that
manifestly knows as much about the subject as does his
Honor himself except that he is perhaps able to express
his ignorance in fairly good English:
"What is the constmctive remedy for the transit crisis
in New York Cityf
"Our recommendation is that the private operators turn
the City-owned subways back to the City for municipal operation at afive-centfare. These lines carry more than twothirds of all the passengers in the City. The remainder can
can be better accommodated by the operation of modern
automobile buses. Surface lines that have become obsolete
can and should be taken off the streets of our City."
Short and simple, is it not? Parenthetically I may
interpolate here that the solitary statement of fact that
" t h e City-owned subways carry more than two-thirds of
all the passengers in the City" is not true. They carry
2/5 or 6/15, whereas 2/3 are 10/15. But that is after all
a mere detail.
There are $263,000,000 of private moneys invested in
these subways by about 25,000 investors scattered all
over the face of the earth, as against the City's investment of $233,000,000. All of these private investments
have been made within nine years and a considerable part
of them within the past two years. Without these recent
investments the subways could not have been constructed.
They are not tainted with the frauds that characterized the operations of the old surface lines managements.
These moneys were expended as honestly.as were the
City's moneys and at the same time.
14
Most of these securities were sold through the firm of
J. P . Morgan & Co. and the original investors paid an
average of over 95% of the p a r value for their securities.
Leaving out of account the many millions of dollars of
other outstanding securities against these subways, xhe
Mayor proposes to solve this perplexing problem by inviting these 25,000 investors to come together and make
a bonfire of these bonds. He will preside over the festivities, the bonds will be consumed by the flames, everybody will be happy and so the roads will go back to the
City free of all debt (even then they would not be) except the City's $233,000,000!
Is it just crass, dense ignorance that would disgrace
a schoolboy, or unexampled mendacity, or a good deal of
both, that is responsible for this absurd camouflage and
demagogy? Is it possible that our people are so stupid
and unthinking as he believes and that he can " g e t a w a y "
with such stuff? Try as one may out of respect to the
office of the Chief Executive of our unfortunate City, it
is simply impossible to discuss such drivel and cheap
political clap-trap. What a commentary upon the quality
of our citizenship when that type can be permitted to
present himself for our suffrages backed by a great
political organization! I t is incredible. But it is just
as well that the taxpayers of this City should at the
opening of this discussion that is so vital to them once
and for all realize their defenseless situation.
If the proposed Plan is to be defeated or so modified
as to safeguard the City's rights and equities it is evident that we must look elsewhere for the aid and protection that we should receive at the hands of the City's
elected representatives. The Mayor's advisers (for
he has not the faintest conception of the problem or of
any business, financial or economic proposition) have
made a sad mess of this affair. So far from doing anything toward solving it they have rather encouraged its
going from bad to worse, as so much political capital.
"Whilst fares have been constantly increasing through
the elimination of transfers and the service has been
steadily deteriorating to the point of exasperation, until
our citizens are now paying higher fares and getting
poorer service than ever in our history, this man has
stood idly by not knowing what was happening. And all
15
this notwithstanding our $233,000,000. investment in
new subways and the $13,300,000. and over arrears in
taxes that have been permitted to accumulate.
He has absorbed but one idea, and that, has been to
capitalize his own hopeless inefficiency into a political
slogan to deceive the ignorant. And so we hear him
dully, mechanically, repeating, day by day the cry—
" W e want a five-cent fare—'the interests' are abusing
me and trying to rob you". And on that record and with
that false alarm he expects to ride back into office. We
shall see whether such a thing is possible.
I charge the Mayor with the chief responsibility for
the disrupted and chaotic condition of our transit system. I realize that this is a severe indictment but it is
absolutely just, temperate and understated. This is no
time to mince words. No amount of personal vilification
by the Mayor or his satellites can change the facts. If
the Mayor believes the charge to be unjust, I challenge
him, here and now, to a joint debate on the question of
the "Solution of the Transit Problem", giving each side
one hour to state its case and each side twenty minutes
to reply to the other. He may either open or close the
debate as he chooses but it must be confined to an impersonal discussion of a constructive policy. That is what
the Commission has proposed, however wrong in principle and faulty in details it may be.
It has probably never occurred to the Mayor that
whether for better or for worse his election or defeat can
no longer make any difference in our sad situation. The
entire transit question has been taken out of the hands
of the City authorities and placed in the exclusive control
of the Commission by the Transit Act under which the
Commission is operating. That much we owe to him! If
the people can but be made to understand they will know
how to repay the debt.
But, after all, " t h a t water has gone over the d a m "
and our problem is still with us, more acutely than ever.
Fortunately we have a Commission in whose high purposes we can safely confide. ^ That act should go to the
Governor's credit in mitigation of his offense of having violated our right to home rule. These Commissioners tell us that they have open minds and we believe
them. Our immediate task is to try to persuade the
16
Commission of the justice of our cause. If that fails and
we are still satisfied that they are in the wrong and we
are in the right in our demands, we will cross that bridge
when we get to it. Of two things at least we may be
sure—that we shall get a square deal, as the Commission
sees it, and that no matter what may happen things can
never be worse and are certain to be better for our City
than they are today. And so let us do whatever lies in
our power and hope for the best.
On Sunday last Comptroller Craig issued a list of
objections to this Plan which should be considered, for
he at least knows his subject. He is the only capable man
in the City Government. If he were as intellectually
honest as he is able he would be of great aid in the solution of this perplexing problem. A speech made by the
Comptroller on Monday night before the Real Estate
Owners Protective Association after this Address had
been printed in which I had already attacked the 1*/*%
bonus to bondholders, but on other grounds, contains in
itself strong confirmation of this charge.
(1) The Comptroller's speech ignores the following
provisions on page 31 of the Plan with respect to this
bonus:
"with any increase or decrease of fare above or below the
rate of five cents, such fund, (the 3 fo fund of which one-half
is to go to the bondholders and the other half to the operating personnel), shall be decreased or increased, as the case
may be, on the basis of one per cent interest on the bonds
with each cent of fare variation."
This means that if the fare is maintained at five cents
the bonds get an additional 1%%, if at six cents, an additional % % , and if at seven cents, the bonds get no
bonus. As I understand this provision the fare must be
maintained at five cents in order to give the bonds this
1%% annual bonus. Even on that basis I am opposed to
it for the reasons heretofore stated. The bonds are getting enough at 5% on the valuation.
(2) The assertions of the Comptroller, however, that
even if this provision were to continue p a r t of the Plan,
it would be
"the wickedest device since Gould's time to plunder the investing public"
17
or that there would be anything in it that would render
the bonds in any substantial sense speculative is nothing
short of catch-phrase "play to the gallery" to attract the
unknowing and unthinking. I t is unworthy of the Comptroller. There are enough really important defects in
the Plan without attributing sinister motives to the Commission which will not bear analysis. The Comptroller
knows that a bond with a fixed rate of interest of 5%
and a bonus limited to 1%% based on the maintenance
of the five-cent fare is not in a class with a speculative
stock and that a possible spasmodic fluctuation of V/o%
in the interest rate cannot be made the basis of speculation. With so many sound arguments at hand against
the Plan in its present form, that sounds like grasping
at gnats for the purpose of immediate political expediency. The heat of a political campaign is a poor time
and place to select for this discussion, especially by the
parties most concerned as candidates. Most of the Comptroller's objections (some of them are mere repetitions)
are covered by what I have already said. With many of
them-1 agree. My complaint against him is that he lacks
the courage to propose a remedy for the existing and increasing state of chaos. He is the only man in the City
Administration with the ability to construct a Plan and
he dares not do it. It is so much more easy to criticize
than to improve. Has he a plan? If so, why has he, as
the head of the finance department of the Government,
held his silence all these years, when it was his duty to
have spoken? If he has no remedy to suggest he has no
justification for destructive criticism such as he now indulges,—from motives of mere political expediency. I
challenge my friend the Comptroller with all his resourcefulness to put forth a Plan. If he does so we may at
least be sure that he will not propose as. a solution that
the bondholders make a bonfire of their securities and
make the City a present of their huge interest in the
roads!
It is gratifying to note that since this paper was prepared Major Curran has announced his insistence upon
the maintenance of a five-cent fare and that the City
shall have a final voice in any solution of the problem.
I am, however, disappointed to find that whilst he politely condemns the Commission Plan he offers none for
18
bringing about the results upon which he rightly insists.
It is all very well to talk about five-cent fares and City
participation but how is it to be brought about? The
Transit law is with us and so is the Plan of the Commission. The latter as it stands assures us neither. It is
on the contrary on its face destructive of a five-cent fare
and unequivocally denies us any voice in the selection or
valuation of the properties that are to form p a r t of the
system in their operation. It is radically wrong in principle.
How is it to be remedied? We have had entirely too
much of the do-nothing policy. I t is idle to expect the
Legislature to help us change any Plan that the Governor and his Commission may approve. What does
Major Currari propose? Why does he not commit himself to a definite plan apart from the mere promise to
test in the Courts the Transit Act, of the legality of which
there is no question. Come, Major, you have done very
well so far but you have not gone far enough. You, too,
like the others have thus far given us mere platitudes.
Of course, everybody would like to have a five-cent fare.
The Commission says it would like and hopes to get it
but does not assure it. How do you propose to make
good that assurance? Your criticisms are just and encouraging but you, too, have failed to give us anything
constructive in place of what the Commission offers and
which you rightly condemn. What do you say to the
Plan I have outlined? That will assure it beyond question. Wherein do you differ from it?
[286]
CAN WE SUPPRESS OR MUST WE
TOLERATE AND REGULATE
TRADE CONSPIRACIES?
AN ADDRESS
delivered before the Building Trades Employers' Association and
the General Contractors* Association of Massachusetts at a
Banquet of the City Club of Boston, Mass.,
Wednesday, January 4, 1922,
kr
SAMUEL UNTERMYER
OF NEW YORK.
CAN WE SUPPRESS OR MUST WE TOLERATE
AND REGULATE TRADE CONSPIRACIES?
AN ADDRESS BY MR. SAMUEL UNTERMYER BEFORE
THE BUILDING TRADES EMPLOYERS' ASSOCIATION
AND THE GENERAL CONTRACTORS' ASSOCIATION
OF MASSACHUSETTS AT A BANQUET OF THE CITY
CLUB OF BOSTON, MASS., WEDNESDAY, JANUARY 4, 1922.
As a result of the apparently insurmountable resistance of the high cost of living to all economic laws, the
answer to the question that constitutes the text of this
Address has been suddenly driven to the front as the
foremost domestic problem of the day. Until that problem is solved the cost of living will continue to refuse to
respond to the laws of supply and demand, for it is these
trade combinations that are mainly responsible for the
present intolerable conditions.
The increased cost of labor is, of course, a contributing
factor but it is more properly an effect than a cause.
When the price of everything that labor uses to create
the product is artificially controlled it is hardly fair to
place upon labor a large share of the responsibility for
increased costs, and when, as the result, the laborer's
wage must be increased to a point where his purchasing
power will give him the same living wage as he had before, it is not just to place upon him any part of the
burden. Wages have not increased in anything like the
general increase in the cost of living.
The recent and continuing revelations of the Joint
Legislative Committee on Housing of New York State *
have riveted the attention of the country upon this problem of what to do with these combinations. It demands
instant solution. These conspiracies infest almost every
industry in the land. They have taken root in every nook
and corner of the country. They are not only nationwide,—in some industries they are international in their
2
scope and operation. They are rarely brought into being
spontaneously by the action of those engaged in the^ industry or as a result of the need for mutual protection.
They are generally the result of the solicitation of professional promoters, agitators or organizers not connected
with the industry who inject themselves into it for the
purpose of blazing the way for those in the industry to
secure higher prices by eliminating competition. They
are paid large sums for their expert services of creating
these artificial barriers to the free flow of competition and
generally become the high-salaried secretaries or managers of the Trust. The task they pretend to be able
to perform is that of "keeping the members prayerfully
within the l a w " whilst going just about as near to the
verge and skating on as thin ice as is necessary without
being caught in the net of the criminal law.
In many of the industries there has been built up an
intricate network of these combinations, beginning with
a local Association in each great city. These Local Associations are in turn banded together in a State Association and the State Associations are then bound together
in an all-embracing National Association, thus encircling
the entire country in the grip of that particular industry,
In many lines of business, of which plumbing supplies is
an illustration that occurs to me at the moment, there is
one such network of the Association for the manufacturers, one for the jobbers, another for the contractors
and still another for the retailers, the prices and terms
of sale being directly or indirectly regulated all the way
down the line.
It is to these excrescences upon our economic and industrial life that we are mainly indebted for the high
cost of living, which will never come down until these
barriers are destroyed. I t is through these operations
that the natural trend of declining prices is intercepted.
Even if at some point along the line in which there is
competition, whether between manufacturers, contractors or retailers, resulting in substantially reduced prices
at that particular point, these reductions cannot reach the
consumer if there is anywhere in the chain a place where
one of these combinations is at work to intercept and
absorb the reduction.
When we consider the combinations of this character
in the building trades alone that have been exposed by the
3
Committee within a few months (there are upwards of
2,000 individuals and corporations involved that are not
included in any of the state organizations of like character or in any of the local combinations that exist in
perhaps 25 of the cities of the State), one may gather
some idea of the extent to which the country is honeycombed with these pestilential cancers upon business enterprise. I estimate that in the lines of industry directly
connected with the building trades alone, there are 20,000
conspirators masquerading as respectable business men
engaged in these nefarious practices.
Gauging other industries that are infested in the same
way with these combinations of which we know something, it is estimated that there are more than one hundred thousand of this class of law-breakers in this country
today. It is shocking to have to confess that our business
life is so contaminated that it amounts almost to an indictment of a vast section of our citizenship. And yet
it is all too true. Worse still, the offenders are rapidly
multiplying whilst the machinery of justice has for years
stood stock-still until it is now unable to cope with this
growing evil. For ten years, with an occasional isolated
gesture of enforcing the Anti-Trust Laws by the wholly
inadequate process of injunction and civil suit, the law
has been almost a dead letter, until its violators have
now almost earned the right to assume that they would
be immune.
Such a thing as enforcing the law as a criminal statute
which it was supposed to be had not occurred either to the
Federal or State authorities in a decade or more and yet
the ordinary crimes against private property that bring
swift and sure punishment such as larceny, forgery, counterfeiting, pickpocketing and the like, are not nearly so
perilous to the public safety and. welfare as have been
these combinations. What would happen to our social
order if the same sort of moratorium were granted to
them for a single year as has been applied in the case of
these conspirators?
There was a time not so long ago when these combinations found their defenders and apologists. The
country was covered with propaganda in which cooperation and combination in business were hailed as the legitimate business evolution that was to supplant competition.
We were told that the Trust, instead of being an economic
4
curse as it is, was a blessing; that through combination
great economies were brought about in the cost of production and distribution and that it was the "stabilizer"
of prices; that so-called unfair or ruinous competition was
illegitimate and hurtful and that on the whole these combinations should be encouraged rather than outlawed, etc.,
etc., ad nauseum.
No small part of the responsibility for the rapid increase and the "strangle-hold" of these conspiracies rests
upon the Federal Government, brought about by inanition and inefficiency and further encouraged by the exigencies of the war. In that crisis it was thought necessary (very unwisely so, in my opinion) to bring together
competitors in various industries where increased production was important due to the emergency created by
the war and to stimulate such production and at the same
time prevent exorbitant profits by encouraging and assisting competitors in fixing uniform prices upon their
product.
That may or may not have been defensible as a war
measure and in order to curb extortion. I t would have
been far wiser and more logical for the Government to
have taken advantage of its war powers to limit prices,
as it did, without offering additional incentives for fastening upon the community combinations among competitors
that the Government must have known it would be difficult to disintegrate when the time came for the resumption of free competition. I t is not an easy or consistent
task for Government to denounce and punish at one time
acts that it has encouraged at another.
I t taught those who were not already "wise to the
g a m e " how to eliminate competition and to tax the public
all that the "traffic would b e a r " and they are profiting by
their teachings. The war limits upon prices to be charged
for a given commodity could have been enforced and increased production could have been stimulated without
resort to the shortsighted methods that were adopted and
that have since been continued, improved upon and perfected, to the great detriment of the community. A problem sufficiently difficult has thus been further complicated
by Government action until it well-nigh baffles solution.
Among the most vicious, ingenious and insincere of
these developments is the form of combination known
under the alluring and misleading title of " T h e Open-
5
Price Competition P l a n " or the " E d d y Open Competit i o n ' \ Many of the great industries of the country are
banded together under that wicked and hypocritical device. Its ostensible purpose is to furnish every member
of the organization with a daily, weekly, monthly and
quarter-yearly statement of all purchases and sales in
the particular industry in question, including the name of
each seller, the amount sold, the price, terms of delivery
and every other detail so that each pretended competitor
in the combination will know all about the business of
every other competitor and will be able to regulate his
business accordingly. As though sane men can be made
to believe that real competitors would enter into any such
scheme!
For instance, in a great industry such as that of the
cement manufacturers, against whom this character of
proof wras made in detail before the Lockwood Committee, the execution of the Plan throughout the country involves a large permanent organization at enormous expense. In the business of plumbers' supplies, in which
there are upwards of 550 members, the expense is still
greater.
Every vicious, illegitimate business practice can, as a
rule, be supported by some sort of an argument or pretext. The only pretext I have heard for this elaborate
machinery is that it protects the members of the organization from misrepresentations by unscrupulous buyers who
will say to a manufacturer that they have a better offer
and secure illicit advantages by the practice of fraud; as
though the seller could not ascertain the truth of such a
representation by simply communicating with his competitor over the telephone without the maintenance of a
vast permanent organization at an annual expense of
hundreds of thousands of dollars.
If the competitor is willing, as he must agree to do
under this "Open Price Competition Plan," to acquaint
his competitor or his business rival with each and every
detail of his business from day to day, he will surely
not hesitate to acquaint him with a single detail concerning an isolated transaction.
The " a r g u m e n t " is, of course, a transparent sham as
is the entire plan. Its purposes are to maintain uniform
prices and restrict production against the free flow of
competition. The objects of a given line of action are
6
best evidenced by the result. In the case of the cement
manufacturers, as in innumerable others that could be
cited, the result has been as was intended, that prices of
cement have continuously for years ever since the plan
went into effect, moved up and down with automatic uniformity. If you live in New York City and want to buy
cement, whether it comes to your dock from the manufacturer by barge from along* the Hudson River or by the
carload from Pennsylvania or by motor truck from the
adjoining town, and no matter what kind or quality of
cement, the price is precisely the same to a penny. In
the past four years the price has fluctuated from time to
time to the extent of over 200% but always on the same
day to the same extent and with clocklike uniformity.
A few of the many oppressive features of this misnamed "Open Competition P l a n " as applied to the
cement industry (and they arc illustrative of all of them
though they sometimes vary slightly as to form), a r e :
(1) The refusal to sell a dealer in excess of a
normal supply for 15 clays of business.
(2) Or to sell any goods for a given job of construction unless the purchaser will agree to return
the merchandise that is left over when the job is
completed,—the purpose being always to curtail
and control the supply so as more effectually to
regulate the price.
And yet, strange to say, many prominent lawyers^ in
various sections of the country were willing to champion
the legality of this form of combination, which was manifestly a mere "smoke-screen" behind which price-fixing
and the restriction of supply were thinly concealed. That
transparent device has at last been effectually "knocked
in the h e a d " and everlastingly put out of business by the
decision of the United States Supreme Court rendered a
few weeks ago in the Hardwood Lumber Case, although
it was about the weakest case from the point of view of
the Government in which the question could possibly have
been presented to the Court. Why that case was selected
as a test can be well understood from the point of view
of the defendants but why the Government should have
consented to accept it will always remain a mystery. The
record was made up entirely of documentary evidence.
It was practically an agreed case between the parties on
7
the facts and contained none of the overt acts of illegality
that accompany practically every one of these Open Price
Combinations.
And yet the Court (true, it was by a vote of 6 to 3)
was happily able to pierce the thin disguise and to expose
and strip bare the essentially unlawful purpose and intent
of the arrangement that lay underneath the surface. It
is a great triumph for the principle of genuine competition and a landmark in the cause of business freedom.
There are thousands of these so-called "Open-Price''
Associations operating throughout the country today.
Few industries are free from them. They have now been
judicially branded as a crime. Will they now disband
or will their members, with the aid of their resourceful
criminal promoters, succeed in evading the law by reorganization in some other form?
Since the members of the Eastern Division of the
Cement Trust's "Open Competition'' Plan (there are 3
divisions covering the country, all joined together and
operating together), have been indicted in the Federal
Court in my District as a result of our investigation, and
largely because of that action the price of cement has
been cut to less than one-half of its former price but it
is still 150% higher than it was before the war and I
insist that the price can readily be reduced another 50%
and still leave a fine profit to the manufacturer. The
same is true with respect to many other materials used
in building, such as window-glass, plate-glass, tile, terra
cotta, iron pipe, plumbing materials, trim and a dozen or
more other articles that might be mentioned that have
been boosted from 200% to 700% by means of these
" Open-Price" and similar unlawful devices.
It is preposterous to charge the high cost of building
against labor when these forms of extortion are still
being practiced.
This being our situation, what are the people of this
country going to do about it? The evil has been allowed
to run so long unchecked and has so permeated every
nook and corner of the industrial system that it has grown
to the dimensions of a Fixed Institution. Most of these
combinations are interstate and nation-wide. The judicial machinery within the jurisdiction of a State cannot
effectually reach them. It can only correct local conditions and can do that only temporarily. So long as the
8
national organizations are still active, the interruption of
these local conditions by State action that would disturb
the smooth-working of the national machine would necessarily be short-lived unless the national organization can
be suppressed, its actitvities destroyed and its members
adequately punished.
That can never be accomplished by injunctions or any
other form of civil process. Whenever the Federal Government, under the pressure of insistent demands from
a given locality (which is about the only occasion when
it ever attempts to act), takes that course, it is to me
conclusive evidence that it is not in earnest.
But whether or not the Department of Justice believes
that such efforts are serious, experience has shown that
they are futile and puerile. I regard them as mere "camouflage." The Anti-Trust laws are essentially criminal
statutes and should be enforced as such. F o r almost three
decades the authorities when pressed to enforce the law
as a criminal statute have given as their excuse for nonaction that juries will rarely indict and will never convict. They had no justification for so saying. I t is not
true.
That pretext has been exploded by the experiences of
our Committee. In no single instance of the many cases
that we have already put before Grand Juries, both State
and Federal, has there been a vote against indictment
and in no instance in which an indictment has been found
and brought to trial has the jury failed to convict. There
has not been an acquittal or disagreement of the jury.
The communities from which these juries are drawn realize apparently more thoroughly than do the public authorities the great peril to the community from this insidious
form of crime. I t strikes at the very heart of our economic system.
The half-baked views of ill-informed men in high station in the Administration, who have manifestly never
studied the subject and know just enough about it to be
dangerous to the community, have greatly complicated
the solution of this problem by lending encouragement
to the formation of these " O p e n - P r i c e " Associations.
Whilst the revelations of the Lockwood Committee were
at their height and we were denouncing the so-called
" O p e n - P r i c e ' ' Associations as not only vicious but criminal, Secretary Hoover in a public speech unburdened
himself of the following:
9
" Today many students of combination and restraint of trade are much exercised over the creation of open price associations; yet every single
one of these associations that I have been able to
investigate originated from the rightful desire to
secure accurate, complete information on the volume of production, on stocks, on consumption and
on price. The associations can only be suspected
of acting against the public interest when they use
this information for the benefit of the few and to
the exclusion of the many. The general publication of such information will go far in the cure
of this wrong in itself; in fact, it is a far more
sure cure than threats of jail. You cannot catch
an economic force with a policeman. You can only
maintain economic right by public understanding;
and by public understanding of economic facts you
can maintain public confidence, you can destroy
economic evil."
I have a high regard for Secretary Hoover, especially
as a mining engineer and a great organizer and am, in
common with millions of my fellow-countrymen, grateful
to him for his splendid public services. On this account
I wish that some one other than he had made these foolish, incoherent fulminations or that he, before delivering
himself upon grave industrial problems that he knows
nothing about, would have his speeches censored by a
lawyer or that he would at least consult one. It is true
when he says that "many students of combination and
restraint of trade are much exercised over the creation
of open price associations," but his statement as to the
reasons for the origination of these abominations is untrue. He has been badly, sadly fooled. Worse still, I
suspect that it was he who passed along his misinformation to the President who, in his Annual Message, said
something of the same kind concerning these Associations
that have now been condemned by the Supreme Court as
criminal conspiracies.
There may be some people who can understand the
balance of the high-sounding, glittering generalities contained in the speech I have quoted and their application
to the subject that Mr. Hoover was discussing, but unfortunately for me I am not one of them!
10
To those of us who have consistently opposed these
combinations in all their varying forms and# who have
insisted upon keeping free and open the arteries of competition, the Federal Trade Commission has proven a
keen disappointment. Much was expected from it. Little
has been accomplished. With its vast and expensive
organization it was its duty to have been ever on the alert
to uncover and prosecute these conspiracies in restraint
of trade. If the Commission had done a fraction of its
duty, the country would not find itself confronting this
crisis.
Its accomplishments have been puerile as compared
with its opportunties. There is no reason why there
should be so much secrecy about the results of its investigations. All of them should be an open book. The rapid
accumulation and increasing power of these criminal combinations is the most unanswerable of indictments against
the ability of the Commission to perform the tasks for
which it was created. True, it has done some good work,
notably in the case of the Meat Packers, but its accomplishments are infinitesimal as compared with its lost
opportunities. The friends of the Commission have abandoned hope of effective relief in that direction.
The question still remains,—can we suppress these
festering barnacles upon our industrial life that are fairly
choking it to death? Frankly, I doubt whether we can,
but we can and must try before resorting to makeshifts
and compromises though I fear the evil has gone too far.
At most we can select here and there a few hundred scapegoats from among the most flagrant and persistent lawbreakers whose extortions have been the most unconscionable and by sending them to prison for substantial
terms we may for a time drive tens of thousands of
other offenders to cover. Whether they will stay there
will depend upon the way in which the Courts enforce
the law in cases of conviction. If they continue, as they
have been doing in the cases brought to their attention
through the activities of our Committee, to let off most
of the offenders with innocuous fines, they will simply
encourage repetitions of the offense.
Grand Juries and Petty Juries understand the peril
and are ready to enforce the law but the Judges, both
State and Federal, seem to have a strange obsession and
want of understanding concerning the evils with which
they are called upon to deal. Thus far, they have proven
11
the worst obstructionists in the path of the prosecuting
officials. It may yet be dealt with if they can only be
brought to a realizing sense of the economic curse and
far-reaching effect of this form of crime, but not otherwise. Our experiences have determined us as a dernier
resort to ask our State Legislature and to memorialize
Congress to amend the laws so as to take it out of the
power of the Court to condone or minimize this form of
crime by inflicting this form of trifling fines or suspending prison sentence and to compel them to send these
men to jail. If that can be accomplished and the Federal
Government can be induced to furnish the funds with
which to set up a separate organization with a liberal
appropriation for the prosecution of these offenses somewhat on the lines of what is being done to enforce the
Prohibition Law, but in a smaller way, we may still be
able to cope Avith this evil.
Whether or not that will be possible even under these
conditions, can only be determined by experience. Our
present situation may be likened to what would have
been the condition if for 20 years after the enactment
of the Prohibition Amendment to the Constitution and
the Prohibition Law, no serious attempt had ever been
made to enforce that law and no machinery had been set
up for that purpose, for that is in effect what has happened with respect to the Anti-Trust Law.
On the assumption that we shall not be able to exterminate these combinations, there are two other alternatives :
(1) To grant what amounts to an amnesty to
the associations, organizations, members and parties to agreements and understandings who within
a given time make full disclosures of the existence
of such associations and agreements, together with
all the facts and documents bearing thereon, to
the public authorities and who within the time
allotted by the public authorities shall make proof
of the permanent disbanding in good faith of all
such associations and arrangements, subject, however, to the qualification and condition that no such
amnesty shall be granted in any case in which there
has been ruinous competition^ coercion or other
form of oppression of competitors or where the
combination has involved the commission of a crim-
12
inal offense other than that of violating the AntiTrust Law.
The granting of such amnesty to those applying therefor and complying with the conditions should be accompanied by the vigorous prosecution of all who do not
promptly meet these amnesty conditions and particularly
of all future offenders. For that purpose there should be
maintained by the Department of Justice and in the office
of the Attorney General of each State a separate organization with investigators and others whose duty it would
be to inquire into and prosecute violations of the law.
The suggestion of such an amnesty, I repeat, is
prompted solely by my conviction that the great mass of
the culprits are no longer reachable. They are too numerous. It would take an Army of lawyers and investigators and scores of additional Judges devoting themselves to this task alone, to cope wtih the situation so as
to do equal justice and it would require well-nigh a decade
in which to accomplish the work if it could be accomplished at all after this lapse of time. To attempt it on
a small scale by prosecuting a few unfortunates here and
there whilst allowing the others to go free would be a
travesty upon justice. The result would be likely to be,
as is usual in these cases, that the little fellows will be
ensnared in the meshes of the law whilst the big fellows
would escape. That happens far too often in the administration of Justice to maintain public respect for law
and order.
(2) If, unfortunately, experience should confirm my prophecy that these combinations can
no longer be exterminated or their members adequately and impartially punished, we are driven to
the only remaining alternative of tolerating them
in their least objectionable form and placing them
under rigid supervision and control. Surely all
must agree that to leave them in the present situation, absolutely uncontrolled and free to prey
upon the public, with their own ideas of the extent
to which they will elect to control production and
boost prices, is unthinkable.
The regulation I have in mind m i l require both Federal and State legislation. This legislation would be
13
aimed only at corporations. It would be of questionable
constitutionality as applied to individuals or partnerships, but inasmuch as these combinations are ineffective
unless they control a substantial part of an industry the
inclusion of corporations would answer every practicable
purpose. Legislation would proceed somewhat on the
following lines:
(a) The establishment of a State Trade Commission to deal with questions of intra-state trade.
The corporations engaged in interstate commerce
would come under the jurisdiction of the Federal
Trade Commission.
(b) All Trade Associations or organizations or
societies and all agreements between actual or potential competitors would be under the control of
the Commission and all their acts and doings would
be subject to supervision. This would include socalled "businessmen's clubs," "gentlemen's agreem e n t s " and every variety of activity between competitors, however loosely or informally put together.
(c) Every such Association would be required
to have the express written approval of the Commission for each of its business activities and every
agreement between competitors would have the like
approval.
(d) It would be unlawful and a misdemeanor
for which the corporation and each of its officers
and its directors shall be punishable for any corporation or Joint Stock Association to become a
member of or contribute to or act in conjunction
with any such Association or to become a party
to any agreement that has not received the approval of the Commission.
(e) No such Trade Association or other organization shall be used for the purpose of conducting
joint enterprises of any character between competitors, whether it be for the standardization of the
product or the exchange of information concerning
their respective businesses or having a tendency to
regulate or stabilize prices or output or with any
other business purpose, and no agreement shall be
entered into between competitors with any such
object in view until the same in its entirety and all
14
resolutions, bylaws, rules and regulations made
with respect to the subject matter thereof shall
have been submitted in detail to the Commission
and approved by it in writing. Any departure
from these requirements shall constitute a conspiracy injurious to trade for which all parties
concerned shall be punishable.
(f) The Commission shall be empowered
among other things to approve reasonable arrangements that are by it believed to be beneficial to
the public made through the agency of such Associations or by agreement between competitors having for their purpose: (1) the standardization of
products with a viewr to eliminating unnecessary
duplication; (2) the prevention of ruinous competition by permitting the regulation of output and
an agreement upon prices; provided, hoAvever, that
the Commission shall have no power so to regulate
the output that it will not at all times fully meet
public demand, nor to permit any agreement on
prices which allows anything beyond a very moderate profit based upon the result of the business
of the most efficient competitor -as determined by
the Commission after full investigation.
(g) The approval thus permitted to be given
by the Commission shall in all instances be for a
term not to exceed one year and only from year
to year and may be modified or rescinded by the
Commission from time to time upon proof of
changed conditions or whenever it shall appear to
the Commission that the privilege thus extended
is being abused or that it is resulting in undue
restriction of competition or is oppressive to competitors who have elected not to become parties
to the arrangement.
(h) I t shall be the unrestricted right of every
individual, partnership and corporation to conduct
business independently of any such Association or
agreement and to wage unrestricted competition
and none of the provisions of the law above referred to shall apply to anyone electing so to conduct his, their or its business. I t shall be unlawful
and shall constitute a misdemeanor for any such
Trade Association or the parties to any such agreement or any of them to do any act or thing tending
15
to oppress or discriminate against any parties that
have elected not to avail themselves of the provisions of the Act, but any competitor desiring to
become a party to any such Trade Association or
agreement and to get the benefit and protection of
the Act shall be at all times at liberty to do so.
(i) Any member of a Trade Association or any
party to any such Trade Agreement who shall exact or receive upon any business transaction a
price or compensation greater than that permitted
by the Commission shall be guilty of a misdemeanor and the privilege to do business of any
Trade Associatoin that knowingly permits such
action shall be subject to revocation by the Commission.
(j) No member of such Association shall be
bound for a term exceeding one year and no agreement between competitors shall be for a longer
period than one year nor shall any payments or
contributions be made for the support of any such
Association to further any of the objects thereof
that are not promptly reported to and approved
by the Commission every three months.
I have not here attempted to work out the details of a
plan that would necessarily be complicated in order to
carefully protect the public.
It is, in a sense, a price-fixing, output-restricting program but under such strict surveillance that the public
would be safeguarded. It is presented as a choice of
evils as against the present secret, predatory Associations and arrangements whereby production is being kept
below the demand so as to enforce exorbitant price-fixing
between competitors without limitation and so surreptitiously accomplished that the offenders cannot be or at
least have not been and are not likely to be reached.
Under this plan the profits in any given industry
would be an open book to the public and the Commission
would be forced by public opinion to condemn any plan
that allowed for excessive profits. It would have to hew
rigidly to the line of permitting price-fixing and restriction of output only to the point necessary to prevent ruinous competition. Regulation limited in that way is economically sound and is a blessing rather than an evil for
in the end there is nothing to be gained by the public
16
and much to be lost by ruinous competition. When the
stronger competitors have destroyed the weaker and
eliminated that character of competition they find no
difficulty in recouping themselves out of the public for
such temporary losses by piling on to the profits " a l l
that the traffic can bear."
In conclusion, I urge you and like Trade Associations
and commercial bodies throughout the country to awaken
to the peril of the present situation. Unless effective
steps are taken to destroy these illicit secret combinations
the cost of living will continue to mount regardless of all
economic laws and as the result our ability to compete
in the markets of the world will be destroyed as they are
already well-nigh destroyed. More than at any other
time in our history this country now needs a high tariff
to protect its industries against the pauper competition
brought about by the tragedies of the war. Such protec-.
tion involves leaving our home markets to our home producers.
So long as the channels of competition are kept open
between competitors at home, our people will be thereby
protected against extortion. But if competition at home
can be eliminated by these combinations and competition
from abroad can be shut out by a protective tariff, it is
not difficult to understand what will happen to us.
I repeat, therefore, that never has the solution of the
question I have been discussing with you been so urgent
as it is today.
HONEST AND DISHONEST TRADE ASSOCIATIONS
AN ADDRESS
DEUVERED AT TEMPLE BETH-EL, SUNDAY EVENING,
April 23rd, 1922.
BY
MR. SAMUEL UNTERMYER
HONEST AND DISHONEST TRADE ASSOCIATIONS
AN ADDRESS
DELIVERED AT TEMPLE BETH-EL, SUNDAY EVENING,
April 23d, 1922.
BY
MR. SAMUEL UNTERMYER
Of all the domestic problems that confront the country, none begins to equal in its importance and ultimate
effect upon our prosperity the determination of the
means that shall be employed to exterminate the pricefixing and other illegal combinations that now infest
almost every line of industry throughout the length and
breadth of the land.
Many of them are local, some are State-wide, more
are Nation-wide and some are international. In my
judgment their operations constitute the chief reason for
the maintenance of the present high cost of living. To
them more than to any other single factor in our industrial life and perhaps more than to all the others combined, we are indebted for the stubborn resistance to
the downward trend of living costs that should have accompanied the restoration of economic normalcy following the war.
The most vicious of them are the outgrowth of war
conditions, when the exigencies of our situation required
the artificial stimulation of production and the Government found itself forced at any cost, and regardless of
the day of reckoning that was bound to follow, to bring
competitors together so as to encourage increased production for the safety of the nation in that great crisis.
The lessons taught by that emergency and the abnormal
profits that resulted from it were learned all too
well. We are now suffering from the aftermath of that
necessary war measure and will continue to suffer in increasing degree unless the evil is promptly eradicated.
That will require heroic methods, for the vicious growth
2
that should have been extracted by a major surgical operation as soon as the patient was able to withstand the
shock has been permitted to grow until it has eaten into
our very vitals.
The extermination of that cancerous growth from the
body politic cannot be brought about by drugging the
patient with poisonous anasthetics or by any of the
coddling and 'pussy-footing' policies which certain members of the present Administration have been misguidedly but doubtlessly well-meaningly following.
At no previous time in our history has it been so
essential to enforce heroic treatment to abate the evil,
for never has it been so necessary to maintain a protective tariff that will cover the increased cost of living and
that will safeguard the workers from the destructive competition of pauperized Europe.
The grotesquely cheap cost of living and the low living standards in the highly-developed industrial centers
of Continental Europe render it imperative that, to avert
impending disaster to our industries, we adequately protect ourselves against such unequal competition. That
situation emphasizes the need for keeping free and open
the channels of competition at home. The higher we
fix our protective duties, the more important it becomes
that our industries shall not be permitted, by the elimination of home competition, to shelter themselves behind
the tariff, thereby extracting from the public everything
that can be had in the way of profit brought about by the
exclusion of foreign-made goods.
If it were possible to open wide our doors to the exterminating competition of a pauperized world there
would be less danger from home combinations and less
need for protection against them. The peril from the
3
Trusts that so justly aroused the fears of our people and
that led to the Sherman Law of 32 years ago is not comparable to those that confront us from these Trade Associations and agreements that have for their purpose
the destruction of competition.
When competitors federated together in a Trust they
divested themselves of their properties and became
merged for all time, for better or for worse, in a single
entity; the securities of the new organization, generally
waterlogged beyond all conscience or sense of decency,
were landed upon a credulous public with the air of pools,
stock manipulation and the many other devious ways
supplied by the illegitimate machinery of the Stock Exchange ; the owners usually managed to escape with their
booty and the element of individuality, having largely
disappeared, there was opportunity in the industry in
which competition was thus eliminated, for new blood
with modern appliances, free from capital inflation, and
with substituted individuality for that which had thus
been destroyed and replaced by bureaucracy, as against
the old concerns that had been thus merged.
There was also the chance, of which some of the
vendors who had parted with their securities on the market were not slow to avail themselves, to re-enter the field
against the octopi of their own creation; and so in the
course of time competition might again be made possible
against the Trust. This was especially true where the
financial and industrial power of the Trust were not so
overshadowing as to constitute a standing threat of
deadly reprisals against competition.
Not so, however, with respect to these temporary,
loosely-constructed, elastic, price-fixing, territory-dividing and output-restricting combinations between competi-
4
tors masquerading under the innocent guise of Trade Associations. They are vastly more subtle and dangerous
than were the Trusts by the very form of their organization.
Here there is no closing or consolidation of plants
or factories; no curtailment of production, except in
a temporary way and as from time to time regulated
by the members and for the sole and avowed purpose of
maintaining prices by keeping the production below the
demand; no abrogation or reduction of selling agencies
or selling force; no retirement from business of the men
whose skill and industry built up these great industrial
machines.
All these are kept intact and are readily at hand to
be hurled against the new competitor or the old one
who has been excluded from or has had the temerity
to hold aloof from the charmed circle. He finds not only
organized capital but ofttimes organized labor as well
solidly arrayed against him. The efforts of the combination are concentrated upon squeezing the last dollar out
of the consumer and so the economies that come from
consolidations in the form of Trusts are wanting whilst
the evil features of the Trust are accentuated and made
the more permanent just because of the elastic character
of the structure.
New capital is rightly timid in embarking against
such shifting, flexible arrangements that may at any
moment concentrate their combined force against him.
Time could and did to a large extent correct the evils
of the Trust. Time will serve only to emphasize and
strengthen the evils of the new form of industrial piracy
if it is permitted to continue and further to entrench
itself.
5
There was a period in the evolution of these devices
for exterminating competition when economists differed
as to their ultimate effect upon our industrial life. The
Trusts had many apologists. The bigger they were, the
more distinguished the apologists. It was said of them
that they were the logical modern form of conducting
business; the only way in which great economics could be
effected. No end of like 'stock' arguments were employed
in their defense and many honest thinkers were at one
time deluded into subscribing to these specious arguments.
The greatest of these Trusts—the Steel Trust—became and remains so all-powerful that, notwithstanding
its glaring illegality, the Courts dared not dissolve it
from fear of the national financial cataclysm that would
have followed the decree of dissolution; and so it remains
the Czar of American industries, its power ever-increasing, a fearful, standing menace, a monument to the helplessness of the law to cope with concentrated wealth and
power in their endless ramifications and their ability to
strike down with an unseen hand and at the most unexpected times and places. The decision in the Steel Trust
Case is the most humiliating defeat that the champions of
the equal enforcement of the law have ever suffered in
our history. And yet when one reflects upon the alternative that faced the Court in those critical times it is easy
to understand. The fault lay with the public authorities
that permitted this flagrant violation of law to be consummated in the open light of day.
When this Trust, with its comparatively few modern
plants was first put together and its myriads of antiquated shambles that were capitalized at preposterous
figures, its actual tangible assets were fully covered by its
6
bonded debt. Most of its then $500,000,000 of preferred
stock and all of its $550,000,000 of common stock represented neither more nor less than the capitalization of
future expectations, mainly "wind and water'', plus the
controlling asset (worth more than all the others combined) of the overshadowing financial power of the giants
of finance who stood behind it and whose very presence
there drove competitors into submission.
So stupendous has been the tribute that it has been
and is levying that, besides paying large dividends on
this $1,000,000,000 or more of "water", it has constructed
the greatest and most modern plants in the world; it has
fabulously increased its working capital and is today possessed of assets representing in value considerably more
than the par value of what was its entire phantom capital at the time of its organization.
That its business policies have been wise, generous
and far-seeing cannot be denied. Instead of mercilessly
crushing and exterminating its competitors, as it could
have done by a wave of the hand, it has kept them under
control by a paternal system of cooperation, by the hope
of rewards and by the fear of punishment which have
been so obviously within its power to administer that it
has never been necessary to strike a single blow in that
direction.
The Trade Associations of which I am speaking include those that are connected with the various branches
of the steel industry, into which the chief competitors
of the U. S. Steel Corporation have been gathered. They
are instrumentalities through which it operates to control
the industry. It has wisely refrained from becoming a
member of any of these Associations in the varied lines
of industry in which it is engaged. But it is none the
7
less the guiding hand and the dominating voice. Whilst
agreeing with those who believe that its activities are
vicious and dangerous, one cannot resist the tribute of
admiring awe at the contemplation of this wonderful
structure and of the vision that has guided its extraordinary career. One can only wish that the great constructive geniuses who conceived and are piloting this colossal
pirate-ship might have employed their superlative talents
in the public interest.
Perilous as I regard the overshadowing power and
malign activities of the Steel Corporation as such, those
dangers are insignificant as compared to the effects of
the control it wields over its potential competitors
through the Trade Associations that it dominates.
The inner history of the methods by which prices in
all the ramified branches of this great industry have
been <stabilized' has not yet been told. They are not
well-known, but no one who has studied the figures or
who understands the workings of the various Trade
Associations that are operating under the dominating
will of the Steel Trust can be in any doubt as to what
is happening, notwithstanding the widely heralded
' c u t s ' in prices that are announced from time to time.
The Steel Trust is in point of fact the parent of the
now familiar system so widely used by the members of
these "gentlemen's agreements" by which one of the
members is selected as a pacemaker in price-fixing and
prices changes and the others automatically follow by
tacit agreement or private understanding.
Where, as in this case, the leader in the industry
largely controls the raw material as well as the bulk of
the manufactured product and has through its financial
agencies a dominating voice in transportation, none of
8
the clumsy shifts and devices that are resorted to by the
price-fixing Associations that are not so fortunately situated are necessary. It possesses so many kinds and
sizes of 'clubs' with which to beat recalcitrant potential competitors into line that obedience to its slightest
wish is the highest sort of mandate and one that commands instant and obsequious obedience.
I can, however, conceive of no form of legislation,
regulation or judicial or administrative process that can
now completely dislodge an industry that has been unwisely permitted to become thus entrenched and since
there is no remedy in sight in this particular instance,
except in a modified way through the regulation of Trade
Associations, it would be unprofitable to further pursue
that feature of the discussion.
It could and should have been prevented from coming
into being. There was ample legal warrant for enjoining
its formation for its intended organization was widely
heralded. The public authorities that permitted this octopus to be fastened upon us should have been impeached.
But that is an old story. If newspaper reports are to
be credited history is about to repeat itself unless the
note of warning that I am now sounding is heeded by
the Department of Justice. We are told that seven of
the great (so-called) 'independent' companies with a
combined capacity almost equal to that of the U. S.
Steel Co. are about to consolidate with a capital of about
one billion dollars. If that be true it must be prevented,
before it is too late. It would be a mere tender or annex
to the U. S. Steel and could not be accomplished unless
financed by the latter, directly or indirectly and would
still further entrench the U. S. Steel Co. beyond hope of
future relief. The situation in that industry is truly
hopeless.
9
There are, however, many other lines of business
activity that are not yet so entrenched and that are not
managed with the superb ability and enlightened selfishness that characterize the steel industry, that may be
prevented by timely action from getting beyond the reach
of the law and it is to those that I will now more particularly address myself. In their dire extremity, when
driven to the wall and thrust beyond the pale of legitimate business by the stern judgment of the Courts, these
cunning, powerful and resourceful buccaneers in 'Big
Business,' with devilish ingenuity boldly ensconced themselves for a time under the protecting wing of the distinguished but credulous Secretary of Commerce, hoping
there to find refuge from the judicial branch of the Government by which they had been condemned.
I have a high personal regard and admiration for Mr.
Hoover and share the gratitude of my fellow-countrymen
and of the entire civilized world for his superb unforgettable services to humanity. On that account I the
more regret the part that he was for a time deluded into
playing and from which he has now fortunately partly
extricated himself. Nothing short of a realization of the
seriousness of the situation could have induced the public discussion of his attitude to which I have reluctantly
resorted in order to do my small part toward bringing
the force of public opinion to bear before it was too late
and in order to induce him to desist. There can be no
question of his public-spirited purpose but it is none the
less true that he was headed straight toward disaster.
To quote his own words:
"The problem involved is one that goes to the
very foundation of our whole social and economic
system,"
10
Fortunately for us and for him, his course has now
been changed, but it is idle for him to contend that at
the time this warning was sounded he was not steering
straight for the rocks and steaming as fast as he could
travel on his misguided course. The record as made
by himself is so "dead against him" that in my judgment he was most unwise in forcing this issue by his repeated public utterances and especially by his countrywide challenge to me to withdraw the charge I had made
that he, by his attitude had been unwittingly encouraging
these outlaw Associations and the request that he desist.
Mr. Hoover is entitled that I either prove that charge
or withdraw it. I propose to prove it by his own words,
although he has fortunately recently so completely recanted and reversed his position that the question has
become largely academic and there is no longer any substantial difference between us on this subject.
Mr. Hoover, in a public address made in New York,
is quoted as follows:
" I n my experience I have not known of one
Trade Association that did not originate in a legitimate desire to disseminate statistics as to production, stocks on hand, volume of orders, etc."
In point of fact, there is not one of the hundreds of
the class of Associations to which he refers that has
come under my observation that is engaged in exchanging information of the character referred to by him between pretended competitors that did not 'originate'
in the unlawful desire to restrict production and maintain prices in defiance not only of the law but of the
economic laws of supply and demand. The members
of one of the most important of this class of Associa-
11
tions, doing a business of about $100,000,000 per year,
is now on trial upon an indictment for this identical
offense. The members of another, also country-wide in
its scope and likewise dealing in a public necessity, composed of over 100 corporations and individuals, are about
to be tried, whilst others of the same class and engaged
in the same practices have been indicted and still others
are facing indictment.
All of these Associations were organized with the
sole object of accomplishing these unlawful purposes.
In some of them this "dissemination of statistics" resulted in the " jacking-up" of prices of these commodities
anywhere from 300% to 500% and there the prices remained until the Lockwood Committee exposed 40 or
more of them connected with the Building Trades alone.
That should furnish a fair indication of the extent to
which they have gripped the country. If there are any
of this numerous type of Associations that originated "in
a legitimate desire" it would be interesting to know
which they are.
Following the decision of the U* S. Supreme Court
in the Hardwood Lumber Case, Mr. Hoover became apparently less confident of his ground and more guarded
in his statements; and yet in an article contributed by
him to the New York "Evening Post," published on
March 18, 1922, in the nature of a foreword to a most
interesting, instructive and illuminating discussion in
the form of a series of articles contributed to The "Post"
on this important subject, we find Mr. Hoover making
the following observation:
"While some minority of Trade Associations
do things that in effect restrain competition, many
of the activities of even this residue do not have
this effect."
12
What did Mr. Hoover mean by that statement? Did
he intend to urgue that the activities of Trade Associations in doing things "that in effect restrain competition" should be permitted to continue because those Associations are also engaged in other activities that do
not result in the restraint of competition? In a letter
to Mr. Hoover protesting against that line of argument
in defense of these unlawful Associations, I suggested
that this naive bit of special pleading is very much like
arguing that a man who picks pockets or robs banks may
be a good husband and father or that a receiver of stolen
goods may be also doing an honest business on the side!
Did Mr. Hoover desire to draw the deduction that the
unlawful practices should be tolerated because the Association is also engaged in lawful practices ?
Apparently Mr. Hoover was thus championing or excusing the continued existence of these Open Price Associations even after they had been condemned by the Supreme Court, His earlier attitude, however unjustifiable, is understandable. But why he should have clung
to it after the decision of the Supreme Court in the Hardwood Lumber Case is hardly understandable, especially
in view of the fact that he had long been forewarned of
the attitude of the Administration on this subject by an
Address of the President to Congress on April 12, 1921,
in which, after referring to the failure of living costs to
decline proportionately with prices in primary markets,
the President said:
" I have asked the Federal Trade Commission
for a report on its observations and it attributes
in the main the failure to adjust consumers' costs
to basic production costs to the exchange of information by 'Open Price Associations' which op-
13
erate evidently within the law to the very great
advantage of their members and equal disadvantage to the consuming public."
The President was erroneously advised when he
stated that these Associations "operate evidently within
the law." They have always been outside the pale of the
law. Before that message was written I had been insisting before the Lockwood Committee and in the Courts
and have ever since consistently insisted long before the
decision in the Hardwood Lumber Case, that they were
defiant law-breakers and a number of them had hurriedly
agreed to disband and had in fact disbanded upon the
demand of the Committee under threat of indictment
following their exposure by the Committee. All this was
matter of public knowledge at the time Mr, Hoover wrote
his "Foreword" for the The "Post."
It is not strange that an Administration which has itself become a party to price-fixing of the most extortionate character as has the present Administration through
the Shipping Board in joining with the other Steamship
Companies in fixing and boosting the freight and passage
rates on transatlantic rates to unconscionably high sums,
should regard these Open Price Associations as operating
evidently within the law. How could an Administration that is itself a breaker of its own laws be expected
at the same time to enforce them? If our Government
cannot conduct the shipping under competitive conditions
the best thing it can do is to get out of the business as
quickly as possible. If private initiative cannot carry
on the business successfully because of our many handicaps and the country feels that they should remain in the
business so that we shall maintain a merchant marine, it
would be wiser policy to subsidize our private operators
14
to the point at which they can compete than to penalize
all shipping through boosting the rates through illegal
combinations. It requires no expert to realize that having regard to the small proportion of our shipping that
is or ever can be carried in our own bottoms we are paying ten dollars to foreigners for every dollar we illictly
save by such combinations on rates besides crippling our
ability to compete in foreign markets by helping to maintain excessive carriage charges on all our imports for the
enrichment of foreign shipping companies. The policy
is too absurd and short-sighted for words.
The facts with respect to Mr, Hoover's attitude to
these Trade Associations are:
(1) That the movement for a conference of
Trade Associations with the distinguished Secretary of Commerce was inaugurated at the covert
instance of the so-called "Open Price" and other
outlaw Associations, although Mr. Hoover may
not have been aware of that circumstance.
(2) That at that time Mr. Hoover had apparently been persuaded that their vicious and unlawful operations were lawful and beneficient.
Not being a lawyer and having unfortunately failed
to take timely legal advice until after he had made the
plunge, he did not realize that the stump speeches embodied in the constitutions of these conspiracies between
potential competitors about "stabilizing the industry,
exchanges of trade statistics of contracts, closed orders,
production demands, standardization, etc.", were mere
"camouflage'' under cover of which production was being kept below legitimate demands and price-fixing made
easy.
15
If he had consulted the Department of Justice before acting instead of afterward he would not have fallen
into this error. When he finally did so he was promptly
advised not to deal with these lawbreakers. When the
Conference of Secretaries of Trade Associations met he
finally announced that as his course and thereby saved
himself from still further embarrassment. It was not,
however, until the 19th of this month that the semi-official
announcement came from Washington that Mr. Hoover
had effected a compromise with the Attorney General
by announcing that he—
"would not and could not countenance the OpenPrice Associations. The Secretary has elicited a
willingness on the part of Mr. Daugherty to consider further proposals.''
He must indeed have been naive to have been persuaded that the astute gentlemen who were maintaining
these vast organizations at enormous expense with their
armies of statisticians and accountants and their other
complicated machinery for gathering and disseminating
statistics of their innermost business secrets, day by day,
by written reports exchanged between them, each laying bare to the others all of their business affairs and
every transaction between them and their customers,
were engaged in an innocent campaign for mutual education so that they would thereby be better equipped to
intelligently compete with one another and that there was
no selfish or ulterior object in this enormous expenditure
of time, money and energy and these disclosures to one
another. Mr. Hoover must indeed have been as credulous and confiding an official as he is a superb organizer
and a great unselfish humanitarian.
16
Let us not be misled by this cant about " regulating
competition," " cooperative competition" and like
"smoke-screens'' behind which the members of an industry seek to enforce undue tribute from the public. Competition is war. The most civilized forms of warfare are
barbaric. A war in which the combatants exhaust their
resources but in which neither side seeks to kill or cripple
the other would hardly be worth the waste of human effort and treasure. And so competition in which the lazy
are permitted to prosper equally with the industrious,
the able and resourceful with the ignorant and stupid,
in which each competitor gets the benefit of the skill and
business secrets of the others would indeed be a queer
kind of competition.
Mr. Houston of the Federal Trade Commission made
an illuminating expose of the pernicious activities of
these Associations a few days ago in a public address
that admirably sums up the situation.
This is my answer to Mr. Hoover's criticism of my
criticism of his action.
Now that the record has been set straight and the
peril from these Associations has been at least temporarily averted and Mr. Hoover is now on the right road,
we may turn our attention to the problem of how to suppress these conspiracies against prosperity that are
mainly responsible for the maintenance of the high cost
of living—provided the Government will cease to be a
part of one of them.
The Anti-Trust Laws have never been enforced. This
has been true of every Administration regardless of
party. The social, industrial and political power of 'Big
Business' have always stood in the way. There has not
been one prosecution for each 1,000 known violations. On
17
the rare occasions on which they have been invoked it
has, with few exceptions, been hesitatingly and halfheartedly done and generally in the face of roars of protest and indignation and threats of political reprisal from
the overshadowing financial interests under whose protecting wings these powerful lawbreakers have been and
are sheltered against law enforcement.
Every legislator and almost every man prominent in
public life has been repeating for 30 years—during political campaigns—that the Anti-Trust Laws are criminal
statutes; but they have not been, enforced as such. That
is the chief reason why these combinations have grown
and prospered until they can no longer be reached by
ordinary judicial process. If the law had been enforced
as a criminal statute, as it was intended, our problem
would long since have disappeared. The attempt to administer these laws by a series of judicial decrees in civil
suits,'each case involving years of effort and delay on
the part of the Department of Justice has yielded the
barren results that must have been expected.
By the time the case has reached the stage of final
judgment and the decree has run the gamut of the Courts
and of the years of intervening delay, the offending combination has had the opportunity to go through so many
varying forms of organization and reorganization that
when the time comes for executing the decree in the tame
and timid way in which the few that have been granted
have been executed, the original organization has long
ceased to be recognizable.
It was never practicable to adequately administer
these laws by any form of judicial process, whether civil
or criminal. There should have been supplementary ad-
18
ministrative machinery such as the Federal Trade Commission was intended to furnish. It is regrettable that
this wisely conceived Commission has not been given the
power, the encouragement or the appropriation that
would have permitted it to function to anything like the
extent of its potential usefulness. The criticisms levelled against it are largely unfounded. It has been an
exceptionally progressive body and most of the attacks
upon it are inspired. The work that it has been able to
perform has, on the whole, been well-done and it has accomplished much good.
The bulk of the comparatively few important prosecutions that have been undertaken by the Department of
Justice have been basd upon the investigations of the
Commission. But for its interposition these '' Open Price
Associations" would still be proclaiming their innocence
and innocuousness and would be flourishing. It was the
Commission that gathered the evidence and instigated
the Hardwood Lumber Case. To it we likewise owe the
exposure of the methods in the packing industry and a
substantial number of disclosures of other violations of
law that have been abated, whilst many unfair business
practices not amounting to criminal offenses have been
ended through its activities.
The proceedings that have been taken are, however, a
mere "drop in the bucket" as compared to what should
have been done. None of them has operated as a deterrent. A few scapegoats have been selected as the subjects of mild and long drawn out litigation whilst the
great army of law-breakers have remained undisturbed.
The proof that justified the decrees that have been made
in most of these cases would equally have justified conviction upon an indictment. The Commission's chief
19
blunder has been in failing to insist upon criminal proceedings rather than civil suits in the cases that have
been brought based upon its disclosures. A few dozen
prison sentences would have acted as a deterrent, but the
influences have apparently been sufficiently powerful to
prevent the Department, irrespective of party lines, from
adopting this obvious method of enforcing a criminal
statute. Putting into these eminently respectable buccaneers " t h e fear of the L o r d " is the only thing that
counts.
The Lockwood Committee entered upon the investigation of illegal combinations about January, 1921. It
was a State Committee, and its jurisdiction was confined
to the housing problem. Its process could not go beyond
State lines. And yet, within that limited field, with
these handicaps and in the space of a few months, it uncovered and established the existence of 40 or more including 20 nation-wide criminal conspiracies in the form
of combinations in almost every line of industry connected with building, and it instituted and prosecuted to
trial and conviction a large number of cases. And that
mind you, was in this one industry.
Time will not permit of an extended resume of this
work nor is it necessary. The facts have become reasonably familiar. Suffice it to say that until the Federal
Government was urged by the Committee to take action
and furnished with the evidence, these criminal conspiracies had remained undisturbed. Even then it was
for a time impossible to secure cooperation from the Federal Government under the previous Administration.
With the advent of the present Attorney General, a more
sympathetic disposition was shown (subject to a few glaring exceptions for which the Attorney General and not
20
the U. S. Attorney at New York is responsible), especially on the part of the District Attorney at New York
to whom this work was assigned at the urgent solicitation of Counsel for the Committee and who, with his
Special Deputy, Mr. David L. Podell, have been enthusiastic and unremitting in their labors and fairly successful in their results so far as they have gone.
Here again, however, we have been and are seriously
handicapped by an insufficient appropriation, and more
particularly by want of sufficient Judges and Grand
Juries to deal with the large number of cases that have
been called to the attention of the District Attorney and
more particularly by reason of the reluctance of the Court
to impose prison sentence even in the aggravated cases in
which fraud and other overt acts of moral turpitude
were established quite apart from violations of the antitrust laws. Although the evidence has been in his hands
for about one year of a dozen or more important cases
involving hundreds of members of these combinations
in the building industry, it has been impossible to present these cases to the Grand Jury. The inevitable result will be that the witnesses will scatter, the records
will probably be lost, the charges will become stale and
the chances of convicting these lawbreakers will have
been seriously impaired and perhaps destroyed.
I do not charge or suggest that the Federal Officers at
New York are responsible for this situation. I know
they are not. No public officials could have been more
faithful or industrious. It simply exemplifies the helpless situation of the officers of justice in endeavoring to
enforce these laws even where they are well-disposed,
as they are, especially where no powerful influence can
be exerted from above to stay their hands.
21
I am referring to these matters in support of my contention that, with our present judicial machinery, and
especially having regard to the insufficiency of Judges to
deal with the current business of the Courts and the lack
of Grand Juries and prosecutors and of adequate appropriations, no proper enforcement of law can be expected.
If the judicial machinery were as inefficient in dealing
with everyday crimes such as larceny, counterfeiting and
the like, the social fabric would go to pieces. And yet it
is, in my judgment, at least quite as important to stamp
out this form of crime as any of the others.
Adopting as a standard the accomplishments of the
Lockwood Committee as the result of a single State investigation on a limited topic such as housing (and there
has been nothing extraordinary about it), imagine, if you
can, what would be the effect of a thorough Federal inquiry where the process would reach all over the country,
conducted on the same lines, into all departments of industry. To say that it would uncover not less than 500
such combinations involving at least 20,000 individuals
and corporations, would be an ultra-conservative statement.
The Government is, of course, not equipped for any
such undertaking and if it were no political party would
dare enforce the law, especially against the worst and*
most important of the offenders. I t is all one can do by
endless prodding and public criticism to have a few of the
lesser important ones brought to trial. I should hate to
tell you what it has meant to get as far as we have gone,
and I regret to say that we have not yet gone very far,—
certainly not far enough to instil "the fear of the L o r d "
into the hearts of the men of " B i g Business" who are involved in these conspiracies and who are masquerading
22
under the guise of Trade Associations. I will give you
one striking illustration of our difficulties:
It is now almost 5 months since the criminal activities of the General Electric Co. were exposed by the
Committee. Much time was spent in the preliminary
investigation. Most of the proof came from the records
of the Company and the mouths of its officers. The
Company was invited to state its case and was given
the fullest opportunity for explanation. The evidence
establishes one of the most brazen, long-continued, firmly entrenched and iniquitous monopolies in the country.
It controls 98% of the electric light bulb business all the
way down the line from the manufacturer to the consumer and it has the remaining 2% at its mercy. In 1911,
when it controlled 60% of the business it was declared
unlawful by the Federal Court at Toletlo by a decree
entered upon its own consent. Since then it has increased
its monopoly from 60% to 98% and has continuously violated the letter and spirit of that decree. I t has also
gathered in actual and potential competing patents in violation of law and has driven its competitors out of business.
Although the business of the Company in bulbs constitutes less than l / 5 t h of its entire business, over 80% of
its entire annual net profits, admittedly, come from this
this 20% of business even after deducting all manner of
exorbitant charges with a view of reducing the apparent
profits. F o r instance, its capital account of $187,000,000
stood on its books at the end of 1920 at $66,000,000 which
was about the amount expended during the three preceding years on new construction. The stock of this Company is widely scattered, but the guiding spirit and controlling factor in the business is the great banking house
23
of J. P. Morgan & Co., under whose protecting wing this
monopoly has been fostered until it has grown to its
present colossal size and power.
The main function of these great banking houses
nowadays seems to be to act as guardians in protecting
their "wards" against the rigors of the law. This same
firm has very effectively discharged that duty with respect to the IT. S. Steel Corporation as to which Mr. J.
P. Morgan, now deceased, testified before the Congressional Money Trust Investigating Committee that he selected all the Directors. It is likewise interested in or
concerned for others of these Associations.
For months I have been endeavoring to secure action
by the Department of Justice against the General Electric Co.; (1) for contempt of the Federal Decree of 1911;
and (2) for maintaining this illegal monopoly. The Attorney General has been again and again urged to send
this case to the U. S. District Attorney at New York
under the same direction as are the other cases. This
he declined to do. I then offered on behalf of our Committee to take charge of the prosecution, if desired, without expense to the Government, in order to abate this
oppressive monopoly. That, too, has been refused, as
was his right. I have also urged that the Department
take action from Washington, but all attempts to secure
relief have thus far proven futile. At last accounts this
prosecution has been taken in hand and it looks now as
though something may be done. I hope so.
In plain English, it is my belief that these people
are being protected mainly by the influence of J. P. Morgan & Co., and that if the Attorney-General finally undertakes to prosecute it will either be some sort of ineffective
civil proceeding or, if criminal prosecution is decided
24
upon, that we shall probably get nowhere in the end. If
the Government proceeds by civil process in this aggravated case in which criminal prosecution is the manifest
and the only swift effective remedy we shall know that
we have nothing to expect. I say this in all good will,
especially as I have had a certain amount of genuine
cooperation from the present Department of Justice,
which was not accorded under the previous Administration, but when we come up against these powerful influences justice apparently goes blind or becomes paralyzed,
no matter who may happen to be the then head of the
Department of Justice. However well meaning he may
be the pressure finally overcomes him. It seems to make
no difference whether we have a Democratic or a Republican Administration, so far as concerns the power of
J. P. Morgan & Co. It was quite as potent in the last
Administration, if not more so, than in this. I trust that
this time I shall be agreeably surprised.
We had another illustration of this same sort of farreaching influence under the-previous Administration in
the effort to indict officials of Steel Companies who were
members of the National Erectors Association and the
Iron League and as such were obstructing the erection of
structural steel in New York City in which the then Department of Justice went to the unprecedented lengths
of permitting the defendants to call witnesses before the
Grand Jury, resulting in a grave miscarriage of justice.
"We have asked to have that case re-submitted. One could
go on almost ad infinitum, recounting his unsuccessful
experiences in the attempts to enforce criminal prosecution against the leaders of 'Big Business' who are backed
by these influences, no matter how serious or how clear
may be the offense.
25
These experiences have satisfied me that if the people
of this country want to exterminate these combinations,
especially the most far-reaching and most vicious of
them, Congress must furnish administrative machinery
for the purpose. It cannot be accomplished by a series of
law suits with the accompanying delays and uncertainties, even if the necessary money and legal machinery
were available, which it is not and probably never will
be. These people care nothing about civil suits. They
hand them over to their legal departments, that are maintained as an expense of the business like their rent for
which the public is made to pay and never give the subject another thought.
That brings us to the consideration* of the remedy, is
there one and, if so, what is it? I say that there is a
simple and effective remedy.
At the last Session of the Legislature, a Bill was introduced by our Committee accompanied by a ''Memorial
to Congress,". dependent upon the passage of the Bill,
which in my judgment furnishes the only solution of this
vexatious problem.
The Bill is known as the "State
Trade Commission Bill". In brief it sets up a Trade
Commission and requires every Trade Association to
secure a license. In order to secure such a license the
Association must establish that its purposes do not include any of the unlawful activities that have been condemned by the Courts and which are there enumerated.
Its constitutions and by-laws and all its rules, regulations and practices are made subject to the visitation, inspection and approval of the Commission. Any person
or corporation becoming a member of an Association thus
licensed, is protected, provided he does none of the acts
prohibited by the Act. Any person or corporation join-
26
ing a Trade Association that is not thus licensed knows
that he is doing wrong and is presumptively guilty of a
misdemeanor and the officers are punishable by imprison, without the farcical option of paying a fine.
The "Memorial to Congress" recites that New York
State is infested ivith these illegal combinations engaged
in inter-state commerce that radiate from here throughout the country and asks that the powers of the Federal
Trade Commission be enlarged in conformity with provisions of this State Trade Commission Act. The Bill
passed the Senate and had the enthusiastic approval of
the Governor, but it failed of passage in the Assembly
through the action of the Rules Committee in refusing
to permit it to be brought to a vote in that body. The
excuse given was that the Bill was introduced too late
in the Session for full consideration of so important a
measure, although it had been then two weeks before
the Legislature, there had been a public hearing upon it
and other bills of importance subsequently introduced
had been passed,
I hope and believe that the Bill will be enacted at
the next Session of the New York Legislature and that
it will be followed by like action by Congress. If enacted
in substantially its present form and if the "teeth'' are
not extracted from it, I am convinced that it will automatically exterminate these criminal conspiracies, especially as they will be under the watchful eye of the
Commission that will have authority to investigate their
books and affairs from time to time.
Senator Edge of New Jersey has introduced a Resolution in the Senate providing for an investigation of
Trade Associations. I understand its purpose to be to
27
secure the data on which to base regulatory legislation
that would permit these Open Price Associations to operate under Government supervision. It is too soon to
judge of the purpose of the proposed inquiry, but I hope
it is not intended to give encouragement to these so-called
cooperative Associations that are now outlaws. The public safety requires their prompt extermination. Legitimate Trade Associations require no investigation or
legislative assistance. There is only one way to deal
with the others and for that purpose no investigations
are required. The people of the country are warned to
be on their guard against further attempts to fasten these
destructive agencies upon them.
Its first step toward reducing the cost of living is to
destroy them, root and branch, and to restore unrestricted comeptition. We have been fed upon dangerous
sophistries about modern business methods until the
young, ambitious man seeking a business opening is confronted on all sides with these secret artificial barriers
and/the victimized consumer finds himself tied hand and
foot, whichever way he turns.
The Trade Commission Bill is our only remaining
hope of relief. It will be a new Charter of Freedom.
HOW TO STRENGTHEN LABOR UNIONISM
AN ADDRESS
DELIVERED AT PAUL REVERE LODGE, MONDAY EVENING
May 1, 1922
BY
SAMUEL UNTERMYER
HOW TO STRENGTHEN LABOR UNIONISM
AN ADDRESS
DELIVERED A T PAUL REVERE LODGE, MONDAY EVENING
May I, 1922
BY
SAMUEL UNTERMYER
"Whom the Gods would destroy they first make mad." That
thought best expresses the effect of the short-sighted and mischievous
policies of organized labor which are discouraging its friends and playing into the hands of its enemies. All the machinations of these enemies cannot do it the injury that it is inflicting upon itself.
I am a lifelong friend and champion of organized labor and am entitled by years of arduous and gratuitous service to have the workingmen hearken to my words of advice and warning as those of a tried
and sincere friend. It is not only the right but the duty of such a
friend to point out the weak spots and by helping to eliminate them
to strengthen the cause. I t is against the weakest links in the chain of
the system by which organized labor is held together that the attacks
of its enemies are naturally concentrated. If the system cannot stand
the strain at those points the structure will eventually crumble. The
man who will not do his utmost to strengthen the cause at those points
by exposing the weak links is playing into the hands of the enemy.
While my sympathy with the workers is conceded, it has been asserted that I do not understand them or their aspirations. I believe
that my record proves that I have such understanding. Certainly I
have contributed something to the cause of labor. For years I have
insisted that the workers are not receiving their just share of the wealth
they produce; that but for organized labor their lot would be one of misery and virtual serfdom; that collective bargaining is their right and
their only safety; that the privilege collectively to strike or refuse to
work is one with which the law must not interfere, and I have openly and
consistently opposed all attempted legislation, such as the Knight Bill
that was before the last legislature, that would have curtailed such
rights, and openly championed before the same legislature the bill making Workmen's Compensation Insurance a state monopoly. I have
persistently fought the Steel Trust and its satellite associated corporations in opposition to the principle of the so-called "Open Shop" on
the ground that "there ain't no'such critter" and that the cry is a
high-sounding fraud and sham; I have recently defended the West
Virginia miners against the operators before the U. S. Senate Investigating Committee; championed the cause of the Garment Workers'
Union against the employers, and that of the Actors' Equity Union
against the managers, and in a host of other struggles I have been arrayed on the side of labor because of the conviction that its cause was
just.
2
I know of the fierce uphill struggles of organized labor against the
ever-increasing power of organized capital and of what it has done for
the workers, of how hopeless would be their plight without its aid, and
my intense sympathy is with the workmen in their just aspirations for
better living conditions and for provisions that will assure them against
want in their old age and their families against dependence when they
have passed away. I was perhaps the first advocate in this country of
old age pensions and insurance against sickness and unemployment,
having studied the subject at the time of its introduction in Germany.
On the other hand, standing as I do to a certain extent aloof from
the conflict, having no personal interest in either side of this great controversy in which my sympathies are arrayed on the side of the workers, my judgment may possibly be a trifle more reliable than that of
one whose duty it is to defend whatever may be done by organized
labor.
The Courts are not free from criticism in their treatment of labor
problems that have come before them; they are ofttimes far too solicitous for the protection of property rights as against the higher claims
of human rights; there is a certain lamentable inequality as between
the rich and the poor in administering justice, and the use of the injunction in labor disputes has reached the point at which the action
of the courts comes dangerously near the line of interference with the
individual rights of the citizen to freedom of speech and action. All
this may be freely conceded for it has never been claimed that the
courts or any other form of human justice is infallible. Like all other
things in the world, it is in a state of evolution. But it is constantly
approaching a higher level, and fallible though it may be, it is the
only peaceful agency thus far devised for determining the controversies between man and man.
The infirmity of the Courts in administering justice in the controversies between capital and labor is not sufficient reason for withdrawing from or denying to the courts all jurisdiction to correct the
injuries inflicted upon capital by organized labor. It cannot be that
redress shall be denied for injuries resulting from recognized and admitted abuses wilfully inflicted upon the employers or the public by
the regulations and practices of the Unions, however indefensible they
may be.
Whilst admitting the wrongs and lamenting the helplessness of the
authorized representatives of organized labor to correct those wrongs,
a proposal is made that the community must permit them to continue
and must suffer such additional abuses as may be inflicted, whether
with or without rhyme or reason until those who are responsible for
3
these wrongs and who are practicing these abuses shall in the whirligig
of time have become so humanly.just and perfect that they will mend
their ways and will voluntarily abate the injuries of which they are
the beneficiaries. Surely no such proposal can be for a moment admissible in a civilized community. Organized society would be headed
for the rocks and would be dashed to pieces if any such revolutionary
proposal were arguable.
If labor unions are permitted to operate above and beyond the law,
practicing innumerable acts of oppression, not only against property
rights, but against the manhood and independence of their members
and against liberty itself, why should not the" same immunity be extended to organized capital ? Why should one be beyond the reach of
the law and the other subject to its restrictions ? Why should the same
quality of act be punishable as a crime when perpetrated by one element in the community and permissable when perpetrated by another?
Human and fallible as the courts may be and doubtless are, like
all other human institutions, they must continue to function as best
they can if the present social structure is to continue. The legal maxim
that "Where there is a right there is a remedy'' if the invasion of that
right has caused damage, must apply to all alike. There must be no
class in the community, whether it represents labor or capital, to which
the law does not equally apply. If manifest wrongs against life, liberty, or property have been or are being perpetrated for which there
is no remedy, it is the highest function and duty of the lawmakers To
supply the remedy. As to the application of these fundamental principles there can be no question between thinking men.
I t is sought to suspend the application of these principles so far
as concerns the correction of wrongs inflicted by organized labor, the
reason assigned being that the judicial tribunals established as an integral part of the social order have broken down and that whilst they
function with reasonable impartiality as between members of the capitalistic class and in the repression of ordinary crimes, their attitude
toward the controversies between capital and labor is so unjust to the
latter that labor feels justified in using its political power to resist the
application of those laws against them. I regard that doctrine as a
challenge to government which cannot be permitted to go unanswered.
We are told that the poor have not an equal chance in the courts
against the rich. As there are one thousand or more poor men for
every rich man, all possessing the ballot, why should not all the poor,
whether wage-earners, clerks or what not, be able to invoke the same
lawless doctrine and see to it that the jurisdiction of the courts is confined to controversies between the rich, where it is admitted that justice
4
is equally administered. If any of our human institutions are vulnerable or defective, why seek to correct them? It is so much easier
to ignore them and substitute your own sweet will—be your own prosecutor, judge and jury, if you have the power.
Everybody admits that we must have courts. If they are not doing
their duty, why not apply the corrective that is within the reach of those
who complain of their inefficiency instead of defying an arm of government that is admitted to be essential to the peace and liberty of the
nation? The disclosures of abuses made by the Lockwood Committee
have been confined to a single industry of the many that are dominated
by the labor unions and the wrongs and abuses disclosed in that industry are a mere negligible fraction of those that exist in other trades.
There is not one of the many abuses that has been disclosed in organized labor that the unions could not eliminate if they chose to do
so, writh eventual profit to themselves and their members. They admit
the abuses and the injuries thereby inflicted upon innocent people.
They do not deny that these abuses gravely interfere with individual
liberty of action within the law and that they result in grievous wrongs
for which there is now no remedy. Nor do they deny that it is within
the power of the unions to correct these abuses and that they have
promised to do so but have defiantly repudiated or refused to keep
those promises. "Might is right'* is their boastful slogan.
In the same breath that these admissions are made, they denounce
and threaten to resist the effort to bring those abuses within the condemnation and redress of the law. Their only excuse for this lawless
defiant attitude is that the courts are so biased against the principles
and policies of organized labor that if permitted to intervene to relieve
this oppression by the unions, they fear that the oppression practiced
by the courts against the unions in granting this relief will result in
still greater oppression against the unions.
There is and can be no basis for such a contention. Most of the
rules, regulations and practices sought to be abated are confessedly
unjust and oppressive. The national and international governing
bodies of the local unions confess that they would eliminate them if
they had the power but they say that their organizations are so put together that, however greatly they may deplore these conditions, they
have no jurisdiction to correct them. On that ground and on that
ground alone the public is to be left to await the sweet will of the
labor bodies that are practicing these oppressions before they can be
relaxed. Truly a fine state of society when the great labor leaders, who
include among their number the best intellects in the land, are driven
to resort to such " a r g u m e n t s " !
5
I t is fortunate for the cause of labor that it has friends outside its
ranks who have no fear of its displeasure or reprisals when it is in the
wrong, and who have the courage to come to its rescue by taking issue
with fallacious and dangerous doctrines. I, for one, emphatically protest against the view that the many admitted abuses in the policies and
practices of the labor unions should be patiently permitted to continue
unrestrained, uncorrected, and unabated until the labor movement has
reached the point in its gradual process of evolution where those who
are practicing and profiting by these abuses see fit voluntarily to exterminate them, no matter how revolting they may be to one's sense
of justice, or how dangerously they may infringe upon personal rights
and freedom, or how great may be the injury to the public. It is an
impossible and intolerable doctrine, repugnant to the natural sense of
justice and inconsistent with our conception of freedom. It offends
against the fundamental principles of organized government and
society.
A few illustrations taken at random from the testimony before the
Lockwood Committee will clarify my meaning and show where unionism is doing grave injustice, even to its own cause. The constitutions
and by-laws of most of the labor unions not only permit but provide
for (1) Limitation upon membership; (2) Expulsion of members; (3)
Limitation upon the number of apprentices who shall be permitted in
a given trade; (4) Enforced trial and disciplining of employers whose
business existence depends upon the goodwill of the unions, without
the right to them of appeal or review from the fiat of the union, however arbitrary and unjust it may be; (5) Interference with the employers' right of freedom of contract which does not affect the unions
and with which they have no concern. And there are innumerable
other equally indefensible rules and practices.
A few instances of such acts, taken from the books of minutes of
various unions and from the testimony of their officers, as appearing
from the proceedings of the Lockwood Committee, may be cited for
use as a basis for the present discussion, but let it be clearly understood that these particular instances are limited to rules and practices
of the unions connected with the building trades and that they cover
a mere negligible fraction of those that were exposed in that industry.
The following is taken from the by-laws, rules and regulations in
the Plasterers' and Cement Finishers' Union:
(1) Employers are compelled to appear before the executive board
of the union and are fined if they fail to obey the union's mandate to
appear.
6
(2) They are fined for inferior work done by the union men and
are compelled to have the work done over again at their own expense
whilst no penalty whatever is imposed upon the members by whom the
work was done.
(3) They are fined for making cornices in union shops instead of
doing the work on the premises at increased expense to them.
(4) Employers are fined for permitting members of the union,
with the consent of the men, to work overtime at the rates of extra
pay prescribed by the union if done without a special permit in each
instance from the union officials.
(5) An owner or builder is prohibited from employing a new contractor to finish a job when the previous contractor has failed or abandoned the work. In such cases the union requires that it shall supervise the completion of the job and that it be done by days work and
not by a new contract and under a union foreman designated by it;
and all this although the previous contractor has paid the union men
in full for their work and they have no claim whatever against the
owner, the builder, or the property.
(6) The owner or builder is required to run casts, plates, and molds
on the job instead of attaching them and to take down the casts if so
attached, the purpose of the regulation being to give more work to the
men and thereby add to the expense of the job because of the additional
time it would require to do this work on the job rather than in the
shop.
(7) No owner or contractor is permitted to use what is known as a
stock model from which plaster casts are made for more than one job,
the purpose being that the models cannot be sold or again used, thus
stimulating and adding to the work of the modellers who are members
of the Plasterers' Union and to the cost of building construction.
(8) Contractors engaged in plastering are forbidden to sublet any
part of their work or contract.
(9) The mixing of PIaster-of-Paris with Keene cement in the
manufacture of mantels is forbidden because of the lesser work involved for the plasterers in attaching mantels so made to the building.
As an illustration of this, it appeared that in the recent construction
of the Hotel Ambassador in this city, there were 150 of such mantels
made in a union shop, none of which were permitted to be used because
Keene cement had been used. The owner had to suffer the loss of all
these mantels and have them made over again as directed by the union
officials.
(10) On the same job in the Ambassador Hotel, it appears from
the uncontradicted evidence verified by the union officials that the
7
architect of that building, who is one of the most distinguished men
in America in his profession, finished the walls of the dining-room in
a form of plaster to conform in color and design to the Travatine
marble pillars in that room to create an artistic effect that they were,
anxious to provide. The union delegate, whose artistic taste was offended by the coloring, required that the walls be taken down, which
had to be done in order to complete the building. In both of the instances last cited the local union officers refused to heed the advice and
direction of the head official of the International Union from which
it held its charter, who had come on from Chicago, examined the work,
protested against the action of the union officials and urged them to
withdraw these absurd and arrogant demands. The delegate in question gleefully announced from the witness stand his hatred of all employers and that he "would stick the harpoon'* into all of them (as
he termed it) whenever he had the chance. That delegate is still the
controlling factor in that union.
(11) An employer was compelled to pay his men a quarter of a
day's pay for having required them to wait ten minutes beyond paytime for their wages on a single occasion.
(12) Employers are required to finish ceilings in wire lath instead
of lime and plaster, as specified and as required by the public authorities.
(13) Employers were fined for making affidavits in judicial proceedings against the union. These fines are imposed pursuant to a
provision in the constitution of the International Union.
(14) Members of the union who were Germans and. Swedes were
fined for working on St. Patrick's Day.
(15) The foreman on a job who is supposed to be the representative of the owner is required to be a member of the union.
(16) A foreman was suspended for one year for working with
tools.
(17) Membership is limited and the books are closed against the
admission of new members.
\
(18) The age and number of apprentices are strictly limited.
(19) The amount of work a member may do in a given day is
limited and specified.
One of the by-laws of the Cement Makers' Union requires that
where there are two men on a job, one must be a foreman; and that
where there are four or more men employed, the foreman must do no
work. Another prevents members from doing an -unreasonable
amount of work." Still another places in the hands of the delegate
or business agent the decision of whether an employer is justified in
8
discharging one of his men who has been selected by the union as shop
steward, but who is paid by the employer as one of his workers.
The Metallic Lathers' Union requires that there must be a foreman
on every job and if only one man is employed he must receive a foreman's wage. The most extraordinary of its requirements, however, is
that wherever reinforced concrete is fabricated at the factory, where it
can be done more cheaply than on the job, and is brought to the job,
the employer must pay to the union a bonus for that "privilege"
which goes into its sick benefit fund. This bonus is fixed at $6 a ton
for cut steel and $18 per ton for fabricated steel. The manifest purpose, of course, is to prevent the employer from fabricating the reinforced concrete in the union shop where it requires less work. Employers are compelled to be members of the union in order to secure
labor. The exactions to which they must submit are beyond belief.
The local union in New York has had its books closed against new
members since November, 1920, but in active times it has a permit
system by which non-union men are allowed to do the surplus work
on the receipt of a permit card on the payment of a given sum per
week.
In the Electrical Workers' Union there is a closed membership of
3,800 men. There are about 12,000 electrical workers in New York,
but this is the only local union. None other could be recognized. In
times of great activity it issues permit-cards to non-members at a
charge of $2.50 per week. About $150,000 was collected in cash in
this way, of which about one-half was stolen. No books were kept
and there were no regulations requiring the keeping of books or any
form of accounting to the members by the officers.
In the Bricklayers' Union no builder can contract for laying brick
unless the sub-contractor is also given the contract to furnish the materials, thus adding to the cost of building and encouraging inferior
work. No stone or marble that is cut outside the state can be set.' It
must be cut by the local yards recognized by the local union.
There are hundreds of abuses of this kind and worse, but it would
take too long to go through the list.
I have in mind a case that has been recently brought to my attention involving the existing relations between the employing Jewish
bakers and the journeymen Jewish Bakers' Union in the Greater City
of New York. The story is an extraordinary one. It is too long to
tell here in all its details but sufficient of it can be sketched to indicate
the intolerable and impossible conditions that now exist in that industry, the result of which has already been to reduce the number of employers from eight hundred to three hundred within the past few
9
years and which, if continued, threatens to eliminate the employing
class among the Jewish bakers.
The city is divided by the unions into zones. There are separate
unions in each zone that contains a considerable Jewish population,
although they are banded together by a sort of general go-between or
administrator. The unions have, however, forbidden the employers to
band together into a single organization. They make their contracts
by collective bargaining on their part but refuse to recognize collective bargaining on the part of the employers. The union insists on
dealing separately with each employer and on requiring him to make
a separate contract with his union. The contracts are at varying
wage-scales for different employers and they expire at different times.
The journeymen are assured fifty-one weeks in the year of steady employment, which includes ten Jewish holidays, enumerated in the
contract, for which full pay is required to be given. The minimum
weekly wage varies from $66 upward, but the prevailing wage is between $70 and $90 per week for an average of five hours' work per
day. In addition to this wage, each journeyman gets a certain amount
of bread or other product of the bakery, said to be worth from $5 to
$8 per week.
These local unions are affiliated with the American Federation of
Labor but they have no connection with the Christian Bakers' Unions
except indirectly through this general affiliation.
The weekly wage among the Christian unions is $37 for an eighthour day so that the Jewish bakers get considerably more than double
the pay of the Christian bakers although the skill and character of
the work are precisely the same. The members of the Jewish unions
are not allowed to join the Christian unions and by arrangement between them the latter are not permitted to join the former, nor is the
Jewish employing baker allowed to employ any men from the Christian unions. There are many other provisions in these contracts
equally oppressive.
There is no despotism on earth, so far as I am aware, comparable
with that practiced by these Jewish bakers' unions and apparently
there is no relief. If the employers were permitted to take their men
from any of the bakers' unions they could sell bread for three cents
a loaf cheaper than it is now being sold and would be glad to do so
for they could greatly enlarge their business and still further reduce
the price of bread. Even as it it, with wages among the Christian
bakers of less than one-half of those among the Jewish bakers, the
latter now sell bread at one cent per loaf less, measured by the pound
as bread is measured among wholesalers.
10
Here there is a flat refusal to the employers of the right of collective bargaining—that sacred right for which the unions are contending in other directions and for which much precious human blood
has already been shed. How can such a veritable "Reign of Terror"
be excused ? Will it be possible for organized labor to maintain itself
in the face of such conditions ? And yet there is no redress or hope of
relief except through the law.
It must be manifest that this situation cannot continue. Since the
national and international federations from which these local unions
hold their charters find it impossible to get from the local unions sufficient delegation of power to enable them to control of the local union
or are unwilling to ask for that power, the public is forced to turn
elsewhere for relief. The people can no more permit these evils to
continue unredressed than they could safely allow trusts and other combinations of capital to maintain prices and restrict output that have
done so much to increase and maintain the high cost of living. The
latter should be and will be destroyed. On the other hand, it is, in
my judgment, in the public interest that the integrity of the labor
unions should be preserved and their legitimate powers strengthened.
As has been heretofore stated, many of the unions in the building
trades, if not all, and many in other trades, place a limitation upon
membership. Practically all of them have the power to expel members
and at their discretion to impose fines that may be made so heavy as
to amount to expulsion and which have frequently had that effect.
The expulsion of a journeyman or laborer from his union may, and
often does, mean that every avenue of employment in that trade is
clo
@FedFRASER