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 speculating 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. The law should require every person to accompany his vote with an oath that he is the beneficial owner.

280. CONCENTRATION THROUGH REORGANIZATION

A1

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.

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 other 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.

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

Taken by permission from an address delivered by Samuel Untermyer at a meeting of the Commercial Law League, July 27, 1916, pp. 19–22.

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.

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 court just about enough to pay the receiver's certificates that have been issued by the court against the property and the vast expenses of foreclosure.

Our archaic, extravagant, and utterly indefensible procedure for the reorganization of insolvent railroads has 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 thirty years the bulk of our railways have gone through insolvency and receivership. The proceedings are sometimes instigated by the management through a friendy creditor (and are then generally collusive in their inception) or through the trustees for bondholders with the co-operation of the company. The railway company admits its insolvency, consents to the receivership, and one or more of the officers under whose administration insolvency was brought about,

Adapted from the Report of Committee to Investigate the Concentration of Control of Money and Credit, February 28, 1913, pp. 148-49.

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-consituted committee is announced, frequently consisting of men well known in the financial world, most of whom have no interest in the property, selected by a leading banking house. They invite the deposit of securities for mutual protection.

This committee in due course presents a plan for the organization of the property. If the securityholders do 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 securityholders take whatever plan is offered, however unjust, as against the alternative of being entirely wiped out through the sale of the property under foreclosure. These plans have usually provided that the securities of the new or reorganized company shall be placed for a term of years in a voting trust named by the bankers. In that way and as the 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 Kuhn, Loeb & Co.:

First. The Baltimore and 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 of 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.

Tenth. The Union Pacific, which was reorganized by Kuhn, Loeb & Co.

281. INTERLOCKING DIRECTORATES AND ASSOCIATED CORPORATIONS A1

An interlocking directorate seems by its terms to denote mutual exchange of directors between associated corporations, each corporation being represented designedly on the board of the other. But if the term ever was so narrowly used, it has now been widened materially in scope. It no longer necessarily suggests the practice of exchange of representatives. Two corporations would be interlocked in their directorates were a member of one board to secure his election on another; that is, were a member of the board of Corporation A to be made a member of the board of Corporation B without B of its own volition seeking any representation on the directorate of A. By a strict use of terms these two corporations would be locked but not interlocked. I shall confine myself to "associated" corporations, for while interlocking can be said to exist whenever directorates contain the same individuals, no matter how remotely related the two corporations may be, yet such remote affiliations have no great economic significance. The essence of the relationship which I propose to discuss lies in the mutuality of interest of the connected corporations.

Taken by permission from F. H. Dixon, "Interlocking Directorates in Railway Finance," Journal of Political Economy, XXII (1914), 937-38.

But we shall not reach the heart of the problem if we confine our attention to service as directors by the same individuals on boards of associated corporations. We should be regarding the mere form of things and overlooking the substance. What concerns us is the interlocking of interests in such manner as to effect a substantial influence upon the policy of both corporations. To be sure this may be most directly accomplished by the election of the same individual to both boards; but it may also be attained in some indirect manner, as by a substantial stock ownership resulting in a request for representation on the directorate. Such representative may be a person of capacity and initiative or a mere dummy, but the desired interlocking is effective in either case. It therefore seems proper to widen our definition so as to bring under our consideration not only the individuals with large interests in associated corporations but their representatives as well. Finally, for any adequate treatment of the question it is necessary to include not only directors of corporations but also officers, for many of the problems of interlocking now occupying attention arise out of situations with which directors of a corporation as such have had little to do.

Confining our attention to the problem of interlocking as it concerns the railways, our discussion falls naturally into four divisions, according to the purpose in mind in the creation of the interlocking relationship: (1) interlocking for financial or credit purposes; (2) interlocking for industrial and commercial purposes, of which the principal one is the purchase of supplies; (3) interlocking for the purpose of railway construction and operation; (4) interlocking to restrain competition.

B'

Combined power of Morgan & Co., the First National, and National City banks. First, as regards banking resources: The resources of Morgan & Co. are unknown; its deposits are $163,000,000. The resources of the First National Bank are $150,000,000 and those of its appendage, the First Security Co., at a very low estimate, $35,000,000. The resources of the National City Bank are $274,000,000; those of its appendage, the National City Co., are unknown, though the capital of the latter is alone $10,000,000. Thus, leaving out of account the very considerable part which is unknown, the institutions composing this group have resources of upward of $632,000,000, aside Adapted from the Report of the Committee to Investigate the Concentration of Control of Money and Credit, February 28, 1913, pp. 86-89.

I