The Money Trust

“The great monopoly in this country is the money monopoly.”

— Governor Woodrow Wilson, 1911, quoted in Other Peoples Money by Louis Brandeis

Wilson was no hippie, and Brandeis later became a justice on the U.S. Supreme Court. Among other inhumane depredations, Wilson presided over the imprisonment of Eugene Debs, the latter for merely criticizing U.S. participation in the first world war. Nevertheless, the distance from the popular animus towards the heights of capitalist finance to the more recent tendency to bend the knee to the rich is great. How did it happen? How did we get from widespread hatred of bankers and speculators to whatever you’d like to call the current attitudes? Why do our most celebrated liberal politicians feel bound to assert, “I believe in the Market,” or “I’m a Capitalist.” Nobody is welcoming the hatred of the wealthy.

Brandeis’s book is easy to find online, easy to download for free, well-written, and short. For the reference I have Steve Fraser to thank. Brandeis focused on the pattern of interlocking directorships that concentrated control of industries in a narrow elite. At the pinnacle of this elite was J.P. Morgan. Why was this a problem?

One flagrant factor was the opportunity for self-dealing and associated fraud. Companies and governments that actually produce goods and services need credit to function. The mass of individual citizens have savings they need to invest. Whoever commands the intermediation of this process has enormous opportunities for the grift, if they are not content to simply become incredibly rich by honest means. (They never are.)

I have a friend who wrote code for the big New York banks. COBOL, in this case. (We’re old.) He mentioned to me decades ago that a coder could contrive to shave a fraction of a penny off of each transaction and send it into his own pocket. It would never be noticed, but a person could accumulate enough to abscond to South America and live like a king. The coders are the intermediaries of the intermediaries. (He’s in Chicago, so I presume he never did it himself.)

A simplified version of the money trust’s financial shenanigans is this. A company could be solvent and profitable but still need funds from outside sources. (Some firms could self-finance out of their own earnings.) They engage a bank to market their securities, either stock or bonds. The bank has access to its own sources of credit, such as insurance companies, who also need a place to invest. The bank borrows from the insco to compensate the issuing company for its stock or bonds. Along the way, it takes generous commissions and possibly a share of the stock. It deposits its borrowed funds in another bank, which are replaced by proceeds from sale of the securities. Until it spends the funds, the initial company might use the same bank.

Every party involved excepting the retail customers of the securities — the issuing corporation, the bank, the insurance company, the other bank(s) — are married to each other by shared directors. At every stage the intermediaries take fat fees for their participation. They can also set the prices for each stage of the transaction. At the same time, with the benefit of their inside, real-time knowledge of the transactions, principals in the intermediaries can speculate in the market in related shares and bonds. The net result is reduced returns to the retail savers and higher prices for consumers of the products of the original borrower, not to mention rigged markets in the securities.

Of perhaps greater concern to Wilson and other members of the ruling class was the impact of the “money trust” on overall national economic growth. Businesses have an interest in reducing competition, the better to charge monopoly prices. One means to this end is to stifle innovation outside of their own firms, either by purchasing patents or by less wholesome practices.

The most common way to eliminate competition was to just buy the competitor, financed in the manner described in the previous paragraph, which increases concentration in the industry. Hence a wave of buyouts and mergers in the early years of the 20th Century resulted in vast combinations of hundreds of firms that ended up monopolizing major industries. A leading case was the formation of U.S. Steel. Brandeis explains that a firm enjoying a monopolistic position in an industry is resistant to new ways of doing things, even if they are improvements. The implication is for a sclerotic economy. Brandeis suspected that industrial concentration in the U.S. steel industry caused it to lag behind the technology of its German counterpart.

The U.S. economy in the early 20th Century was anything but sclerotic, based on a wave of inventions in transportation (railroads, steamships), communications (the telegraph and telephone), and power (electrification, steam). After all, there were the Roaring 20s. Absent the trusts, however, by the perspective of the original critics of the money trust, it could have been all the greater.

Fast forward a hundred years to the Great Meltdown of 2008 and the ensuing Great Recession. Everything has changed, and nothing has changed. The march of financial regulation after the crash of ‘29 in the 1930s under the administration of Franklin D. Roosevelt has been partially unwound.

I found it instructive to read Jane D’Arista’s paper on the meltdown against the background of the Brandeis book. Factors in the meltdown included:

Lack of transparency, much like the secret machinations of the Money Trust principals in the early 1900s.

Inordinate leverage in financial markets, this time in mortgage-backed securities and derivatives in general. In the 1920s, there were scant requirements that financiers maintain reserves in the event of losses. Deregulation more recently allowed firms to segregate speculative operations out of the view of the authorities.

Nobody speaks much of monopoly these days. It is more or less accepted as part of the landscape. Another rabbit-hole to go down is the devolution of anti-monopoly sentiment and academic commentary over the course of the 20th Century.

My pet peeve is that the interest in anti-trust policy, limited though it may be, obscures a potentially more fruitful consideration of social ownership of selected industries. I wrote about this in my paper on the U.S. Postal Service. I’d say the most relevant candidates are the “public” utilities (typically in thrall to private interests), broadband, and big tech. Brandeis thought of banks themselves as public utilities.

It is interesting to note that Brandeis suggested that determined anti-trust action to break up the banks would usefully forestall their replacement by public banks. At the same time, he celebrated the growth of cooperatives and the practice of local governments circumventing private financiers to sell their own bonds. In other words, governments themselves ought to perform banking functions.

By the way, among the most notorious monopolies are patents themselves, particularly in the field of pharmaceuticals. Imagine the benefits to consumers if their prices were capped. (There would remain ways to spur the invention of new drugs.)