Fremont, Ohio, October 6, 1904.Mr. Thomas W. Lawson,Boston, Mass.My Dear Sir: I have followed with intensest interest your discussion of "Frenzied Finance." Theexposéof the "System," and its Machiavellian performances, was highly interesting to me. I was associated with Attorney-General Monnett in his effort to get testimony and the inside facts concerning the trust and its operations in his prosecution against that corporation for violating the Ohio anti-trust law. At that time the books of the company were burned in Cleveland, and, as stated in your article, the company now relies upon the superior memory of Standard Oil.I was well aware of the connection of certain life-insurance companies with Morgan and the Rockefellers, but until your public charge, was not familiar with the details. As I had considerable money invested myself in New York Life Insurance I wrote John A. McCall a bitter letter. In this age of commercialism sentimental benevolence gets little place. The common sentiments of humanity and appreciation of responsibility admonish one in moderate circumstances or even in affluence to invite the co-operation of others in providing for those dependent upon the individual hazard of life and fortune. Life insurance has come to be a sacred thing. It is the substantial token and expression of responsibility which a reasonable man dying leaves to those dependent upon him. I so wrote Mr. McCall, and told him that if the head of a great institution like the New York Life Insurance Company would be guilty of such perfidy as charged by you, the organization which would retain him in a position of responsibility was undeserving of confidence or patronage.
Fremont, Ohio, October 6, 1904.
Mr. Thomas W. Lawson,Boston, Mass.
My Dear Sir: I have followed with intensest interest your discussion of "Frenzied Finance." Theexposéof the "System," and its Machiavellian performances, was highly interesting to me. I was associated with Attorney-General Monnett in his effort to get testimony and the inside facts concerning the trust and its operations in his prosecution against that corporation for violating the Ohio anti-trust law. At that time the books of the company were burned in Cleveland, and, as stated in your article, the company now relies upon the superior memory of Standard Oil.
I was well aware of the connection of certain life-insurance companies with Morgan and the Rockefellers, but until your public charge, was not familiar with the details. As I had considerable money invested myself in New York Life Insurance I wrote John A. McCall a bitter letter. In this age of commercialism sentimental benevolence gets little place. The common sentiments of humanity and appreciation of responsibility admonish one in moderate circumstances or even in affluence to invite the co-operation of others in providing for those dependent upon the individual hazard of life and fortune. Life insurance has come to be a sacred thing. It is the substantial token and expression of responsibility which a reasonable man dying leaves to those dependent upon him. I so wrote Mr. McCall, and told him that if the head of a great institution like the New York Life Insurance Company would be guilty of such perfidy as charged by you, the organization which would retain him in a position of responsibility was undeserving of confidence or patronage.
PHOTOGRAPH OF JOHN A. McCALL'S REPLY TO H. C. DeRAN, THE POLICYHOLDER WHO HAD ASKED FOR A DENIAL OF MR. LAWSON'S CHARGES.photograph of john a. mccall's reply to h. c. deran, the policyholder who had asked for a denial of mr. lawson's charges.
I enclose for your inspection Mr. McCall's reply. This is doubtless a sample of the sort of campaign waged throughout the country by the "System."I enclose stamped envelope for the return of the McCall letter, as I purpose continuing the correspondence until I force him to an issue.You will observe the very palpable evasion of the issue. I asked him if the details of the transaction described inEverybody's, in whichthe New York Life Insurance figured conspicuously, were true. He answered by saying that he made money out of the trust company venture and retired. The fact that New York Life money is so deposited as to suit the convenience of the "System" in its heads—I win, tails—you lose, operation, is a matter which has escaped the attention of the astute financier. I have written him further, calling his attention to the fact that his letter conveys no information not heretofore made public in circular but that my inquiry was directed to the particular transaction alluded to inEverybody's, and requesting a flat affirmation or denial.Trusting that these facts may be of assistance to you, I am,Yours very truly,(Signed)H. C. DeRan.
I enclose for your inspection Mr. McCall's reply. This is doubtless a sample of the sort of campaign waged throughout the country by the "System."
I enclose stamped envelope for the return of the McCall letter, as I purpose continuing the correspondence until I force him to an issue.
You will observe the very palpable evasion of the issue. I asked him if the details of the transaction described inEverybody's, in whichthe New York Life Insurance figured conspicuously, were true. He answered by saying that he made money out of the trust company venture and retired. The fact that New York Life money is so deposited as to suit the convenience of the "System" in its heads—I win, tails—you lose, operation, is a matter which has escaped the attention of the astute financier. I have written him further, calling his attention to the fact that his letter conveys no information not heretofore made public in circular but that my inquiry was directed to the particular transaction alluded to inEverybody's, and requesting a flat affirmation or denial.
Trusting that these facts may be of assistance to you, I am,
Yours very truly,
(Signed)H. C. DeRan.
I shall spare my readers the enclosures. They were newspaper slips, printed on fairly thick paper, reproduced from unknown publications, and obviously put forth to discredit me by implication. One, headed "A Frenzied Financial Blackmailer," from theVigilant, New York City, September 30, 1904, presented the confession, previously referred to, made by the editor of theUnited States Investors' Guardian, and an editorial denouncing the blackmail of financial corporations. Another slip was "Stamp out the Fake Financial Newspaper Publisher" from theFourth Estate, New York City, October 1, 1904, in which the wickedness of the aforesaid editor came in for further moral castigation.
At once, as I read these letters and ran over the printed slips pinned to Mr. McCall's, I realized the purpose of the blackmail editor's confession and just how so much space came to be given it in the daily papers. Insurance corporations are large advertisers[20]and enjoy great popularity in the business offices of great newspapers. It is not said in these clippings that either Mr. Lawson orEverybody's Magazinebelongs to that lowest order of criminal, the self-confessed black-mailer, but the suggestion is obvious. Every policy-holder throughout the world who received these enclosures attached to letters from the greatest insurance president in America would instantly supply the connection—"'Frenzied finance black-mailer'—that's intended for Lawson, surely; 'Frenzied financial journal'—Everybody's Magazine, beyond question."
Will my readers weigh carefully this awful charge:
"Thomas W. Lawson, in addition to being a frenzied financial black-mailer, is attacking the New York Life Insurance Company because he tried to secure insurance from that company, and that company would not give it to him. His attack is made in the interest of some competing company."
Again, I ask that it be kept in mind that all this is not said by an insignificant and irresponsible trickster, but is deliberately put forth by the greatest insurance president in America, over his signature, to his policy-holder No. 826,152 and 957,006.
Soon afterward, in its issue of October 20th, a well-known organ of the insurance companies,The Spectator, published in New York, had a long article dealing with malicious attacks on our great insurance corporations, specifically mentioning my accusation against the New York Life. "Mr. Lawson was actuated by the meanest motives," saysThe Spectator.
Extract fromThe Spectator, October 20, 1904:
Mr. Lawson, in the hypocritical rôle of a would-be-reformed-speculator, is a figure calculated to stir the risibilities of all who have watched his antics and read his articles,especially when each one of the companies he mentions has repeatedly rejected him for insurance.
Mr. Lawson, in the hypocritical rôle of a would-be-reformed-speculator, is a figure calculated to stir the risibilities of all who have watched his antics and read his articles,especially when each one of the companies he mentions has repeatedly rejected him for insurance.
Letters to policy-holders from the New York Life Insurance officers poured in on me from different parts of the country, all containing the same defence and the same accusations as the one above, and signed by vice-presidents of the company as well as President McCall, showing conclusively that this great corporation as a corporation had deliberatelyadopted this method of meeting my serious yet conservatively put business accusations.
President McCall's defence of the New York Life Insurance Company and his reply to my accusations are now completely before my readers. Let us see if there is not a chance here to determine the grave question, "Is 'the one man' who runs each of our great insurance companies honest?"
The facts are: During the past twenty years I have been importuned, begged, and hounded by the several great insurance companies of the United States to take out policies with them almost upon any terms I might name. Of this statement I could present more photographic proof than would fit in any one issue of this magazine, but most of it would have no bearing on the point at issue.
In the present year (1904)—to go no further back—John A. McCall has repeatedly urged me to come into the New York Life Insurance Company. Absolute evidence of the truth of this assertion is presented below. Mr. McCall's letter reproduced here would be accepted as complete proof in any court of justice. In the correspondence that follows this first letter it will be seen that Mr. McCall left no stone unturned in his effort to get me into the New York Life Insurance Company. A duplicate of the communication sent to my residence went on the same date to my office. To quote his own words, "I hope you may" and "I may have the pleasure of welcoming you either to new or increased membership in this great mutual insurance investment." Then, his anxiety being so great, after waiting four days for a reply he sent his special agent to argue with me, and, on the following day, his Boston manager to urge me further.
PHOTOGRAPH OF LETTER FROM JOHN A. McCALL SOLICITING INSURANCE, SENT TO MR. LAWSON'S HOUSE.photograph of letter from john a. mccall soliciting insurance, sent to mr. lawson's house.
PHOTOGRAPH OF HEADING AND SIGNATURE OF JOHN A. McCALL'S LETTER OF JANUARY 22d, SENT IN DUPLICATE TO MR. LAWSON'S OFFICE; OF SPECIAL AGENT GILLESPIE'S LETTER OF JANUARY 27th; OF MANAGER HAYES'S LETTER OF JANUARY 28th. THESE THREE LETTERS SOLICITING INSURANCE, FOLLOWED EACH OTHER WITHIN A PERIOD OF SIX DAYS.photograph of heading and signature of john a. mccall's letter of january 22d, sent in duplicate to mr. lawson's office; of special agent gillespie's letter of january 27th; of manager hayes's letter of january 28th. these three letters soliciting insurance, followed each other within a period of six days.
Is it any wonder that I called the history I am writing "Frenzied Finance"? The man who wrote the letter practically saying that I was a black-mailer and that my reason for attacking the New York Life was my anger because he would not take me into his company, and the man who wrote the ones begging me to come in, are one and the same; and he absolutely controls directly $400,000,000 of the people's savings in the New York Life, and indirectly unnumbered millions in affiliated institutions!
I think the case is complete. The policy-holders of the New York Life have an opportunity to decide whether the "one man" who runs the great institution in which their savings are invested is honest. In making up their minds,I implore them not at the present time, or at least until the question has been more fully ventilated, to allow their policies to lapse. Under any and all circumstances they should keep up the payment of their premiums, for the one thing especially desired and schemed for by some of the "frenzied finance" insurance companies is a wholesale lapse of policies.
Some few years ago the financial world learned with great interest of a new and very useful invention in finance. A group of individuals who had been buying large quantities of a certain stock at a low price, found they could not, on account of the fact of its overcapitalization having become known to the public, resell it; and they were, to use the stock-gambling term, "hung up" with it because it was too water-logged to float. It became necessary to disguise its identity. Here's how they did it: They formed a "syndicate," to which they "turned over" their stock at a good profit; the "syndicate" in its turn put it "in trust" by simply depositing the stock certificate with a trust company, which in its turn issued against the stocks thus held a new security, which it called a "bond." For these a ready market was found, for the word "bond" is still a term to conjure with in the world of finance.
This seemed such a serviceable arrangement that the originators soon had many imitators. Many "syndicates" were formed, and many so-called "bonds" were put on the market. In most cases the stocks were purchased at a low price, turned into "trusts" at double their cost, and then paid for by means of these certificates, dubbed "bonds." As one stock after another was converted into syndicate certificates—"bonds"—the familiarity of the procedure robbed it of its novelty and these "bonds" were quoted and dealt in much as other and more tangible securities bearing the same name. Perhaps this is why the startling announcement of the New York Life Insurance Company made about this time, that it proposed to sell all its stocks and thereafter hold nothing but bonds, created so much less of a sensation than was anticipated. The term "bond" had become vulgarized.
This excellent example would undoubtedly have had many followers but for the humor of the Tobacco Trust. This robust institution, with an immense amount of watered stock, audaciously poured it all but a small amount into bonds, $157,000,000 of them, and with a fine trumpet-blast proclaimed these "bonds" safe investments for widows, orphans, and insurance companies. Even Wall Street, with its frenzied votaries and its frenzied environment, was staggered. The culmination of these conversion performances was the brilliant plan evolved by George W. Perkins, the junior partner in the firm of J. Pierpont Morgan & Co., vice-president of the New York Life Insurance Company and expert investor of its vast surplus, to have the United States Steel Trust purchase some $200,000,000 worth of its own water-logged stock and convert the same into more "absolutely safe bonds"; for its most valuable services in the turning-over process the Morgan firm was to have a commission of some forty millions of dollars. At this juncture "frenzied finance" became gagged with its own froth, and I have not space here to go further into the subject.
The New York Life Insurance Company declares to its agents, policy-holders, and prospective policy-holders that it no longer holds stock securities. In its last report to the Insurance Commissioners there are set forth stock securities of the kind I have described above, to the amount of fifty millions of dollars. I will give one illustration:
"Northern Pacific—Great Northern—C., B. & Q. collateral 4s, book value—$12,057,132.59, market value—$11,375,000."—(From the official report to Insurance Commissioners.)
Now, these bonds are nothing more nor less than Chicago, Burlington and Quincy stock of a par value of $100 per share, which shares were purchased by individuals, and had "bonds" issued against them at $200 per share. (Northern Pacific and Great Northern stock in about the same proportion.) In the sense in which the public look upon the old bonds of railroads this "bond" is no more a bond than it is a Government bond. It is nothing more nor less than a stock security,and yet President McCall says in his letter printedabove and sent by him to policy-holder DeRan that the New York Life does not and cannot invest its surplus in stock securities.
THE TRUE STORY OF HOW I WAS "BLACK-LISTED"
The publication of President McCall's letter and the charges which accompanied it attracted so much attention that the "Big Three" were flooded with letters from policy-holders demanding information. In the January, 1904, issue ofEverybody's Magazine, I continued the controversy. After reviewing the conditions of the previous month's argument, I went on:
In entering upon the exposure of the most powerful body of men in the world, I knew quite well what I was "up against," and deliberately decided that in the conduct of my fight I would use such strategy as I believed proper to outwit so strong and so unscrupulous an adversary. One can hang a dog as well with a cord as with a hawser, and in proving my assertions I am quite willing that the insurance companies should believe each play is my best card. I decline, however, to show my hand.
In reply to the charge that I was attacking the New York Life because I had been refused insurance by that company, as positively stated in Mr. McCall's letter, I reproduced a letter written and signed by President John A. McCall, dated 1904, soliciting me to take out insurance in his company. I printed parts of three other letters, one directed to my office, also signed by Mr. McCall, another from the special agent, and a third from the Boston agent of the New York Life, supplementing Mr. McCall's letter and requesting the privilege of an interview.
This correspondence was put forth with a thorough understanding of its nature. The publishers ofEverybody's Magazineand my own lawyers, to whom I submitted it, both pointed out that the insurance companies would undoubtedly take the ground that the McCall letter was no more than a circular that had been sent out to a number of capitalists and had gone to me by mistake. I replied that such a rejoinder would practically amount to an admission that the statement and signature of the highest officials of the New York Life were valueless and without significance, which would place President McCall in an untenable position. If his signature were valueless and without significance when appended to a letter addressed to me, why not in other instances if the interests of his corporation seemed to require such a disclaimer? Considering my argument, would not such a confession have a pregnant bearing on the proposition—is the "one man" honest, especially as I was equipped with additional documents to offset further attempts on the part of the insurance companies to show me up as a disappointed seeker after their policies?
Here, specifically, are the details of my encounter with the life-insurance institutions, and I pledge my word to my readers that they constitute all the facts in this connection. They are well known to the prominent men associated with the great companies whose duty it is to keep track of just such transactions. Whoever knows by experience of the incessant pursuit of business by the important insurance corporations need not be told that a man in my position has had his share of importuning by agents great and small. I have never sought life insurance, for it has not appealed to me as an investment, but on three separate occasions I have yielded to the persuasions of a friend connected with one of the big institutions and have considered the subject. The first time was in 1887, following a breakdown from overwork. This illness my friend used as an argument to induce me to take out insurance, and I went so far as to agree to submit to a private medical examination by the leading physicians of his company for the purpose of ascertaining if my breakdown, which for a brief time had left a trace of paralysis in my left side, would bar me. This examination was at my own expense, and it was expressly understood that, being private, it should not constitute a record. The physician pronounced me a perfect risk, but advised against going further inasmuch as a rigid rule of the company precluded them from granting insurance to any one who had suffered from this form of illness untilseven years after the attack. I was not disappointed except on account of my friend.
Five years later his solicitation was renewed and I was assured that the officials of his company were so eager to have me that they would waive the seven-year rule, which still had two years to run. This time I went up before another medical examiner, and after the usual tests, was asked the stereotyped question if I had ever previously been rejected for life insurance. My friend replied for me—no. I, however, in spite of his protests stated fully the conditions of my previous examination, which the doctor assured me did not constitute an official rejection, and the application was filled out. In the conversation that ensued, the doctor said that it was safer to await the expiration of the seven years, and I being still indifferent, except to my friend's interest, accepted the apologies of the several people concerned for the trouble I had taken and let it go at that.
Four years later, in 1896, after the attack of appendicitis which I described in the December, 1904, instalment of "Frenzied Finance," again my good friend the agent came to me and used the incident of my narrow escape from death to impress upon me once more the desirability of having a large policy of life insurance. Those who have read the "System's" disclaimer, will remember that I had been blacklisted since 1892. There were the usual consultations with high officials of the corporation, and when all preliminary bargains had been arranged, I underwent a thorough examination in New York. This time, the seven-year term having expired, I was pronounced a perfect risk. But my latest illness had brought me up against another waiting rule, and once more the subject was abandoned after the usual expressions of regret and good-will. Since 1896 my connection with life-insurance companies has been about the same as that of a molasses barrel with the industrious flies in summer.
The interviews of 1892 and 1896 are both matters of record. My position in each instance was well understood, and several insurance officials who know the facts as well as I do have, since the publication of the company's statement,come to me and offered to back up my assertions with their own. American manhood is certainly not extinct when men are willing to sacrifice their careers to set a wrong right.
The manner in which the great companies have met my rejoinder to President McCall will afford my readers an excellent illustration of how the "System" goes after a man who has excited its antagonism.
A few days after the publication of the December issue ofEverybody's Magazine, containing my fac-simile of President McCall's letter to policy-holder DeRan and his two letters to me, the Life Insurance Underwriters met and "resoluted" that I had applied for insurance in the New York Life Insurance Company in 1892, and being asked if I had ever been refused insurance, had replied in the negative. Investigation showed that I had been refused four years before by two other companies, whereupon my application was rejected and I was practically black-listed, and so could not secure life insurance in any American company. By way of corroborating this plausible story two letters, purporting to have been written by agents of the two companies to their head officers without my knowledge, were incorporated in the resolution. The letters stated that the writers could secure me for a large amount of insurance if the companies would accept the risk. The virtuous corporations were alleged to have replied that Mr. Lawson had been refused life insurance before, and for good reasons was not desired as a risk. This resolution was then published throughout the press of America in the news columns, and to all but those initiated in the desperate practices of the "System" and its votaries, it was conclusive evidence that an unprincipled man had been convicted, red-handed, of fraud.
You who read this statement of mine doubtless found the resolutions in your own paper, and thought it ordinary news-matter printed because of its public interest. This notice was an advertisement disguised as news, and inserted through the "System's" professional character assassinator, whose head-quarters are in Boston, a person who will occupy a prominent part in the chapters of my story wherein I treat of the crimes of Amalgamated. The publication cost theinsurance companies $2.50 per line of the policy-holders' money, while advertisements that I insert in the course of my private business cost me but 75 cents per line.
HOW THE "SYSTEM" MAKES ITS PROFITS
It appeared that I had sinned still further, for had I not questioned the virtue and integrity of the New York Life's securities? To policy-holder DeRan, Mr. McCall had stated, over his own signature, that the New York Life did not and could not own stock securities. (See the DeRan letter on page 428.) I proved from the regular insurance reports that millions of the New York Life's bonds were no more than disguised stock securities, created by the new device of depositing stocks with a trust company at an inflated price and issuing against them a receipt which is arbitrarily called a "bond." I mentioned, as an illustration, the Northern Pacific-Great Northern-C., B. & Q. Collateral 4s, created out of the stock of the Chicago, Burlington & Quincy and other railroads. I could have selected a much worse type of security, just as, instead of the typewritten letter of Mr. McCall, I might have published others of a more personal nature.
Against me out sallied 2d Vice-President Perkins, brother of George W. Perkins, 1st Vice-President of the New York Life (J. Pierpont Morgan's partner), and at a banquet in Philadelphia boldly answered my aspersions by declaring that the bonds I named "are printed in the list of holdings which the company publishes in detail, and has published for the last five years, in order that its policy-holders may be informed of its affairs in the minutest detail." The convincing logic of this rejoinder the dullest will appreciate, but for a moment I must stop to remind Mr. Perkins that the publicity on which he plumes himself is really not an expression of the New York Life's individual frankness, but merely an observance compelled by the law.
All this recapitulation has been for a purpose. My readers will bear in mind before taking hold of my next exhibit that the great insurance companies have published me as afalsifier, who since 1892 has been refused insurance and black-listed for good reasons, and have claimed that Mr. McCall's letters were circulars sent me by mistake. We are still considering the problem—are the men who run our great insurance companies honest?Well, look at the reproduction on page 442 of a document that is now in my possession and has always been since the date when it was delivered to me by one of the three great representatives of the "System," the Equitable Life Insurance Company.
This document speaks for itself. My readers are aware of the negotiations and investigations which precede the making of an insurance contract. To them and to the "System's" votaries I recommend the exhibit and the underwriters' resolutions as a simple lesson in frenzied finance.
My charge that the directors of the great life-insurance corporations of America use the funds of the companies they control in stock speculation for their personal benefit is but one contention in my argument against the character of their management. Here I formally add another charge: It is that in the placing of loans, in the purchase of properties and securities, and in the underwriting of enterprises, there are enormous profits made, directly and indirectly, which are pocketed by individuals and are never shown on the books of the corporation.
The basis of life insurance is security. A policy-holder pays his premium to enable the corporation accepting it to make good its contract with him when death or time matures it. The vast sums in the possession of the three great companies are accumulated to safeguard their policy-holders, and should be invested only in securities of tried and solid worth, which will bring in no more nor less than the going rate of interest. There must be no experiments and, above all, no speculation. But what do we find? The positions of managers and manipulators of these huge hoards of the people's money have become the greatest financial prizes of the day. New and ingenious methods of graft have been devised in connection with them. The vast revenues of the insurance companies have become the "System's" most potent instrument in working its will in the stock world.
Their investments, largely in the securities of properties or corporations in which the "System's" votaries have large interests, are fertile sources of profit to the "insiders." The groups of banks and trust companies affiliated with them are the medium through which access to the coveted insurance funds is obtained, for these institutions are allowed by law to use money for speculative purposes, which the insurance concerns are prohibited from doing.
The immense opportunities for profit afforded by the control of these great money hoards are taken advantage of in various ways. Let me illustrate one or two of them. Rogers, Rockefeller, Stillman, and Morgan buy the capital stock of three railways at a fair valuation, say, $20,000,000 apiece, $60,000,000 for the three. Owning all, or nearly all, the stock, they can put its price on the stock-exchanges to any figure they desire, say, $60,000,000 for each railway, or $180,000,000 in all. They proceed to deposit the stocks of the three roads in a trust company, issuing against them $180,000,000 of what they call "bonds." An "underwriting" syndicate is then organized. This is composed of certain individuals and corporations who agree that when these bonds are offered to the public at $180,000,000, the portion the public does not buy, they (the "underwriters") will purchase on the basis of $120,000,000; in other words, they guarantee the sale of the bonds at $180,000,000. In return they "make" on all the bonds sold the difference between the price to them, $120,000,000, and the price the public pays, $180,000,000. Let us assume that the public takes up the issue greedily and the full price, $180,000,000, has been secured. The original owners, Rogers, Rockefeller, etc., have made $60,000,000, the difference between the first cost and $120,000,000, the cost to the "underwriters," while the "underwriters" have made $60,000,000, the difference between $120,000,000 and the $180,000,000, the cost to the people. In looking over the list of subscribers to these bonds, you will note that the largest purchases have been made for the great insurance corporations and the banks and trust companies owned or controlled by them and "The System." If, in the instance I am using for illustration, apresident or vice-president of one of the great insurance companies is known to be willing to subscribe for, say, $10,000,000 for his insurance company; $5,000,000 for his principal trust company, which is owned by the insurance company; $1,000,000 apiece for five other banks and trust companies, also owned or controlled by the insurance company; and can influence five other affiliated institutions to subscribe for $1,000,000 apiece, he controls, as will readily be seen, a purchasing power of $25,000,000, and is sought for as an underwriter, if he is not already an owner. For this $25,000,000 which his institutions buy he "draws down," as his personal profit, 33-1/3 per cent. "underwriters'" commission, or over eight millions of dollars.
In taking this amount, he is notrobbinghis insurance company, in the common acceptance of the term in this era of "frenzied finance," though he has absolutely appropriated to himself a profit which belongs to it and not to him.
It must not be supposed that such transactions as this I have outlined are conducted in the simple ABC fashion I have set down here for purpose of illustration. No "one man" appears through any deal. The purchases and sales are usually made through dummies, and the final recipient of the "made millions" carefully conceals all the phases of his participation.
Let us take another type of transaction. An insurance company owns two adjoining pieces of unimproved city real estate, for which it paid $250,000 apiece, but which are now worth $500,000 each. The directors of the corporation formally decide to dispose of these holdings, and sell the first piece to a trust company, which is owned or controlled by the insurance company. One of the "System's" dummies or an officer or director of the corporation agrees to take the other at the same price. This is a perfectly legitimate transaction, and the insurance company shows a half-million profit on its investment. The next step is this. On its piece the trust company erects a two-million-dollar building, procuring the money from the insurance company at a low rate of interest. Thereupon the value of the adjoining piece bought by the "System's" votary jumps fifty per cent., so he hasmade $250,000 without risking a dollar. At the same time there have been several other profitable transactions between institutions and individuals. The agent who disposed of the two pieces of real estate and who is "in" the transaction receives a generous commission for making the sales; the trust company's representative has his own "draw-down," and there are further commissions to the agents who borrow and loan the money and control the erection of the building.
My readers may well ask, Are these merely illustrations, or do such things really take place? I unqualifiedly reply that deals similar to these have occurred repeatedly and that the principle and procedure set forth are the rule and not exceptional. Here is a minor episode of which I have personal knowledge. A well-known man made direct application to the Mutual Life Insurance Company for a loan of $400,000 on a valuable city business block which he owned. He was told that the corporation had no funds available for that purpose. The refusal was authoritative and definite. A few days later a lawyer and real-estate agent came to his office and said to him: "I'm informed that you want $400,000 on your property. I can let you have it, or $500,000 if you need that much."
"Good," said the would-be borrower, "I will take it. Whose money is it?"
"The Mutual's."
"My dear fellow," said the would-be borrower, "how can that be? I was there at the office a few days ago and was assured I could not have the money."
"That's all right," was the answer. "Of course you could not get the money. The right party did not see the right party. D'ye understand?"
He understood.
A recent issue of theInsurance Register, of Philadelphia, in criticizing my comments on President McCall and life insurance, makes the following significant admissions in regard to the conduct of these great corporations:
While riding on the train on my way to my office this morning a lawyer told me the following story: A client of his, a real-estate agent, represented a corporation owning and wishing to sell a valuableChestnut Street property. The price asked was $750,000. A representative of a New York corporation called upon him and agreed to take the property, but stipulated that the price named in the deed and receipted for should be $850,000, the difference covering his commission of $100,000. The Philadelphian, finding it impossible to induce his clients to make this concession, and the New York agent insisting upon it as indispensable to the purchase, made a trip to New York to see the principal, acquaint it with the facts, and find out whether or not some arrangement could be made by which the buyer could take care of its agent's commission. He was received by the manager of the New York corporation, but when he stated that he represented the owner of the Philadelphia property he was instantly bowed out of the office, with the assurance: "We never interfere with business in the hands of our agent." The outcome was that the sale was not consummated, because the officers of the Philadelphia corporation would not receipt for $850,000 when they were to receive only $750,000, for the reason that they could not square the transaction with their stockholders, and the buyer's agent would not consummate the deal without such a receipt, because he could not square with his client and its stockholders the payment of $850,000 with the consideration of $750,000 mentioned in the deed. This story was told to illustrate the proposition that every action has its prompting motive, and my fellow-passenger imparted to me his conclusion that the motive of the manager of the New York corporation for refusing to listen to his client was that "the scoundrel was in cohoots with the agents to share in the commission and cheat his own company." The public will in time come to look for motives, and we, fellow-editors, and the managers of mutual life-insurance companies, will be judged by what seems the most apparent motive for our actions....Any alliance between life insurance and this modern speculative frenzy cannot be too deeply deprecated, nor too strongly reprobated. Every true friend of honest life insurance among insurance journals will demand that this great business, of all businesses, must be kept free from the contagion of corruption that has shamed finance, is covering commerce with a blighting mildew, and threatens our whole land with disaster as well as dishonor.
While riding on the train on my way to my office this morning a lawyer told me the following story: A client of his, a real-estate agent, represented a corporation owning and wishing to sell a valuableChestnut Street property. The price asked was $750,000. A representative of a New York corporation called upon him and agreed to take the property, but stipulated that the price named in the deed and receipted for should be $850,000, the difference covering his commission of $100,000. The Philadelphian, finding it impossible to induce his clients to make this concession, and the New York agent insisting upon it as indispensable to the purchase, made a trip to New York to see the principal, acquaint it with the facts, and find out whether or not some arrangement could be made by which the buyer could take care of its agent's commission. He was received by the manager of the New York corporation, but when he stated that he represented the owner of the Philadelphia property he was instantly bowed out of the office, with the assurance: "We never interfere with business in the hands of our agent." The outcome was that the sale was not consummated, because the officers of the Philadelphia corporation would not receipt for $850,000 when they were to receive only $750,000, for the reason that they could not square the transaction with their stockholders, and the buyer's agent would not consummate the deal without such a receipt, because he could not square with his client and its stockholders the payment of $850,000 with the consideration of $750,000 mentioned in the deed. This story was told to illustrate the proposition that every action has its prompting motive, and my fellow-passenger imparted to me his conclusion that the motive of the manager of the New York corporation for refusing to listen to his client was that "the scoundrel was in cohoots with the agents to share in the commission and cheat his own company." The public will in time come to look for motives, and we, fellow-editors, and the managers of mutual life-insurance companies, will be judged by what seems the most apparent motive for our actions....
Any alliance between life insurance and this modern speculative frenzy cannot be too deeply deprecated, nor too strongly reprobated. Every true friend of honest life insurance among insurance journals will demand that this great business, of all businesses, must be kept free from the contagion of corruption that has shamed finance, is covering commerce with a blighting mildew, and threatens our whole land with disaster as well as dishonor.
All this is preliminary to treating the case of the Prudential Insurance Company. I want to say here that I do not know the corporation, any of its officers, nor any one interested in the control or management of it, and personally have never had the slightest connection with its officers. I desire to prove through an outsider, some one of unquestioned authority, that the great insurance companies are part of the "System" and are engaged in manipulating the stock-market with the funds their policy-holders put in theirhands as a sacred trust. In so far as the Prudential is concerned, rank and unsound as are the transactions I am about to speak of, my investigations have proved to me that this insurance corporation is only as a baby-carriage to a runaway automobile compared with the three great representatives of the "System," the New York Life, the Mutual, and the Equitable. Certain critics have accused me of being unduly emphatic in my strictures on the doings of the corporations of which I am treating. I will confess to a secret amusement at being able, in this instance, to quote the language of one of the most conservative insurance officials in America, Frederick L. Cutting, for many years Insurance Commissioner for the State of Massachusetts.
The Prudential Life Insurance Company has $2,000,000 capital stock. The stock is owned and the company absolutely controlled by a few men. This capital of $2,000,000 represents only $91,000 paid in in cash; the balance has been derived from stock dividends; that is, profits that have been made out of policy-holders. In addition to this enormous amount, there has been paid ten per cent. in cash dividends annually, so that for every thousand dollars paid in the stockholders hold $22,000 of stock, upon which they receive annually $2,200, or, as Commissioner Cutting puts it, "each year for ten years the stockholders have received in cash dividends more than twice the original investment." I commend to the policy-holders of the Prudential and other insurance corporations, and to other honest men, these tremendous figures: every $1,000 invested turned into $22,000, not in a gold or diamond mine, but in a life-insurance company where every dollar comes from the policy-holder who is supposed to pay in only enough to insure a promised payment plus provision for honest expense.
The Prudential Company owned the stock of the Fidelity Trust Company, the capital of which was $1,500,000, and the directors came before Commissioner Cutting and informed him that they proposed to double up the stock of the Fidelity Trust Company to $3,000,000; that the new $1,500,000 at a par value of $100 was to be sold for $750 per share; that the new stock was to be bought by the Prudential Company and the Equitable Company; and that with the proceeds of the sale, the Trust Company was to buy a control of the Prudential Company from its directors. The motive of this transaction was as follows: The set of men who absolutely controlled the Prudential, with its sixty millions of assets belonging to its policy-holders, proposed to control it for all time, but without tying up $7,000,000 of their own money in the business. In other words, they desired to eat their pudding and yet have it for continuous re-eating, and had found a way to accomplish this heretofore impossible feat.
By this plan the men who controlled the Prudential Company, and thereby the Trust Company, at the time the plan went into force, would forever continue to manage and control both institutions, although not one of them held a policy or any investment in the insurance company beyond the one share of stock required by law to qualify as director.
If this scheme had been consummated it would have borne to "frenzied finance" the same relationship that perpetual motion does to mechanics. By it a few men could gamble forever with the entire assets of the policy-holders of this corporation for their own personal benefit. If my readers will imagine the same scheme applied to several other great insurance companies and the men controlling them, the "System's" votaries, they will recognize the "System's" ideal world, with all the people in a condition of ideal servitude. However, this ingenious plan was forestalled because there happened to be in control of the life-insurance affairs of Massachusetts one of those old-fashioned relics of American honesty—a man who thought more of the interests of the people intrusted to his care than of the prospect of innumerable "made dollars" which might have been his had he proved more amenable. It is regrettable that he was not able to deprive the conspirators of their power to juggle with the property of the corporation, for only two weeks later they developed and executed an alternative device which practically accomplished the result which the Massachusetts authorities had declared illegal and the courts of New Jersey had enjoined.
There is food for thought here for the policy-holders of American insurance corporations who have intrusted to the "System" and its upholders the billions of their savings, to which they are adding every year hundreds of millions. To them I recommend a reading of the Forty-eighth Annual Report of the Massachusetts Insurance Commissioner, dated January 1, 1903, and the decision of the New Jersey judge who passed on the case. These men are surely not to be accused of exploiting my story. Under the head of "Control of Life Insurance Companies" in the Massachusetts Report will be found the following:
The Insurance Commissioner had the honor of addressing the insurance committee of the General Court relative to the control of life-insurance companies by other corporations or by syndicates. For some years it has seemed to impartial observers who are conversant with life-insurance matters, and have also seen the eager quest by promoters for funds to finance all kinds of enterprises, and the determined struggle to grasp every opportunity for speculation, that there would be no cause for wonder if covetous glances should be turned toward the massive accumulations of life-insurance companies. It is well, therefore, to pause and ask what would be the chances for obtaining control of them, and what might be the result of such control, and in general whether the funds of such companies are imperilled by modern methods.Insurance corporations on a capital stock basis, on the other hand, give their policy-holders no voice in their management. To obtain control of such a company it is necessary only to control by purchase or otherwise a majority of its capital stock. If a "king of finance" should start out with the determination to secure a majority of the stock of such corporations, the chances are that in some cases at least he would be successful. He might, it is true, be obliged to pay more than the "book value" of the shares; but perhapscontrolof a company's assets would well be worth twice or thrice or even more than what could be figured out as the value of the stock on the books of the company. On no other theory can the figure offered for life-insurance company stock in some cases be accounted for, since these offers are not warranted by the surplus nor by the dividends paid, nor by both combined.Is there aught to prevent a bold manipulator from entering this inviting field and purchasing a controlling interest in the stock of enough such life-insurance companies to make their combined assets aggregate one hundred million dollars of the more than six hundred millions of assets of stock life-insurance companies doing business in Massachusetts? This accomplished, he transfers his rights to a "trust," or an association, or trust company, which is not only a bankof deposit, but is also engaged in brokerage schemes, in financing large enterprises and promoting all kinds of corporate consolidations, and underwriting their stock for a consideration. The central controlling trust company, or whatever it may be, becomes a medium through which the investments of the controlled insurance companies are made; all sales of their securities pay tribute to its treasury; all funds awaiting investment are deposited in its keeping; the most valuable of their securities are turned into cash, and then used by the controlling power for such purpose as it sees fit. All these things are conceivable, and their accomplishment would be a no greater task, seemingly, than some of the gigantic "operations in finance" of the last few years.Judged by what has happened in other fields, this trust would not only control these vast assets, if the plan should be executed, but would control them without individual liability on the part of its managers.The Prudential Merger CaseIs there really any danger, it may be asked, that any trust or syndicate will attempt to control the stock and assets of life insurance in this way, or is this simply the presentation of possibilities? As an answer to that question here follows a plain, unvarnished story of what has been attempted and what has taken place within the past year between one of the life-insurance companies doing business in Massachusetts and a trust company with which it has close relations.In October, 1902, the Insurance Commissioner received from the president of the Prudential Insurance Company of America a letter, transmitting a copy of a circular letter addressed "To the field and home office staff" of the company. That circular letter disclosed a plan of mutual control between the insurance company and the Fidelity Trust Company, a corporation organized under the laws of New Jersey. It stated that:"The capital of the Fidelity Trust Company is about to be increased from $1,500,000 to $3,000,000, the new stock being sold at $750 per share. This will result in giving the Fidelity Trust Company a capital of $3,000,000, a surplus of $13,000,000, and a considerable amount of undivided profits, making this company, from the standpoint of capital and surplus, as large if not larger than any similar institution in the country. Sufficient of this stock will be taken by the Prudential Insurance Company to give it, together with its present very large holdings of Fidelity stock, absolute control of that company. A very large portion of the balance of said stock is to be taken by the Equitable Life Assurance Society of New York, which will give to that company a very substantial interest in the Fidelity Company, and therefore justify it in materially increasing its business with the Fidelity. The bulk of the new money thus to be received by the Fidelity Trust Company is to be used by it in the acquisition of a controlling interestin the entire capital stock of the Prudential Insurance Company.... A contract has been entered into between the Fidelity Trust Company and a large majority of stockholders in interest of the Prudential, in which the latter have contracted to sell their holdings of Prudential stock, or as much as may be necessary, to the Fidelity Trust Company on or before May 1st next, at $600 for every $100 of par value.... While by this arrangement the Prudential Company will control the Fidelity, and, on the other hand, the Fidelity will own a majority of the capital stock of the Prudential, the annual meetings of the two companies will be so arranged and other arrangements be so made that the Prudential will forever be the dominant factor, as of course it should be. The officers of the Prudential are united in their belief that this move is of the greatest possible interest to its stockholders, as well as to all of its policy-holders and its great army of employees. The consummation of this arrangement insures the continuance of the present management of the Prudential, both in its home office and in the field. The advantages of the plans of the trust company are too obvious to need comment. It is expected to consummate this entire transaction between the two companies on or about February 1, 1903."
The Insurance Commissioner had the honor of addressing the insurance committee of the General Court relative to the control of life-insurance companies by other corporations or by syndicates. For some years it has seemed to impartial observers who are conversant with life-insurance matters, and have also seen the eager quest by promoters for funds to finance all kinds of enterprises, and the determined struggle to grasp every opportunity for speculation, that there would be no cause for wonder if covetous glances should be turned toward the massive accumulations of life-insurance companies. It is well, therefore, to pause and ask what would be the chances for obtaining control of them, and what might be the result of such control, and in general whether the funds of such companies are imperilled by modern methods.
Insurance corporations on a capital stock basis, on the other hand, give their policy-holders no voice in their management. To obtain control of such a company it is necessary only to control by purchase or otherwise a majority of its capital stock. If a "king of finance" should start out with the determination to secure a majority of the stock of such corporations, the chances are that in some cases at least he would be successful. He might, it is true, be obliged to pay more than the "book value" of the shares; but perhapscontrolof a company's assets would well be worth twice or thrice or even more than what could be figured out as the value of the stock on the books of the company. On no other theory can the figure offered for life-insurance company stock in some cases be accounted for, since these offers are not warranted by the surplus nor by the dividends paid, nor by both combined.
Is there aught to prevent a bold manipulator from entering this inviting field and purchasing a controlling interest in the stock of enough such life-insurance companies to make their combined assets aggregate one hundred million dollars of the more than six hundred millions of assets of stock life-insurance companies doing business in Massachusetts? This accomplished, he transfers his rights to a "trust," or an association, or trust company, which is not only a bankof deposit, but is also engaged in brokerage schemes, in financing large enterprises and promoting all kinds of corporate consolidations, and underwriting their stock for a consideration. The central controlling trust company, or whatever it may be, becomes a medium through which the investments of the controlled insurance companies are made; all sales of their securities pay tribute to its treasury; all funds awaiting investment are deposited in its keeping; the most valuable of their securities are turned into cash, and then used by the controlling power for such purpose as it sees fit. All these things are conceivable, and their accomplishment would be a no greater task, seemingly, than some of the gigantic "operations in finance" of the last few years.
Judged by what has happened in other fields, this trust would not only control these vast assets, if the plan should be executed, but would control them without individual liability on the part of its managers.
The Prudential Merger Case
Is there really any danger, it may be asked, that any trust or syndicate will attempt to control the stock and assets of life insurance in this way, or is this simply the presentation of possibilities? As an answer to that question here follows a plain, unvarnished story of what has been attempted and what has taken place within the past year between one of the life-insurance companies doing business in Massachusetts and a trust company with which it has close relations.
In October, 1902, the Insurance Commissioner received from the president of the Prudential Insurance Company of America a letter, transmitting a copy of a circular letter addressed "To the field and home office staff" of the company. That circular letter disclosed a plan of mutual control between the insurance company and the Fidelity Trust Company, a corporation organized under the laws of New Jersey. It stated that:
"The capital of the Fidelity Trust Company is about to be increased from $1,500,000 to $3,000,000, the new stock being sold at $750 per share. This will result in giving the Fidelity Trust Company a capital of $3,000,000, a surplus of $13,000,000, and a considerable amount of undivided profits, making this company, from the standpoint of capital and surplus, as large if not larger than any similar institution in the country. Sufficient of this stock will be taken by the Prudential Insurance Company to give it, together with its present very large holdings of Fidelity stock, absolute control of that company. A very large portion of the balance of said stock is to be taken by the Equitable Life Assurance Society of New York, which will give to that company a very substantial interest in the Fidelity Company, and therefore justify it in materially increasing its business with the Fidelity. The bulk of the new money thus to be received by the Fidelity Trust Company is to be used by it in the acquisition of a controlling interestin the entire capital stock of the Prudential Insurance Company.... A contract has been entered into between the Fidelity Trust Company and a large majority of stockholders in interest of the Prudential, in which the latter have contracted to sell their holdings of Prudential stock, or as much as may be necessary, to the Fidelity Trust Company on or before May 1st next, at $600 for every $100 of par value.... While by this arrangement the Prudential Company will control the Fidelity, and, on the other hand, the Fidelity will own a majority of the capital stock of the Prudential, the annual meetings of the two companies will be so arranged and other arrangements be so made that the Prudential will forever be the dominant factor, as of course it should be. The officers of the Prudential are united in their belief that this move is of the greatest possible interest to its stockholders, as well as to all of its policy-holders and its great army of employees. The consummation of this arrangement insures the continuance of the present management of the Prudential, both in its home office and in the field. The advantages of the plans of the trust company are too obvious to need comment. It is expected to consummate this entire transaction between the two companies on or about February 1, 1903."
The Insurance Commissioner of Massachusetts, on receipt of this circular, wrote United States Senator John H. Dryden, president of the Prudential Insurance Company of America, declining to approve of the proposed exchange of stock on the ground that the merger was antagonistic to the interests of policy-holders, inasmuch as it forever deprived them of the power to dislodge the management from the control of the institution. The minority stockholders petitioned the New Jersey courts for an injunction to restrain the Prudential and the Trust Company's directors from carrying out the proceeding for mutual control, and Vice-Chancellor Stevenson enjoined the corporation from executing its project. However, the reciprocal control was effected by the sale of enough Prudential stock to the Fidelity, whose capital was increased for the purpose of purchasing it, so that the Fidelity lacks but eight shares to control absolutely the Prudential. As the situation stands now, the Prudential directors control the Fidelity, and the Fidelity holdings, with eight shares more, control the Prudential. Practically the ring is about as hard to break into as the plan enjoined. Those who control the Fidelity can always "dominate" the insurance company. Minority stockholders and policy-holders alike are practically in the hands of the trust company for all time, and the insurance company's assets can be managed as the majority of the trust company's directors dictate.
The director goes on to explain the relations between a life-insurance company and a trust company, which, in the light of recent exposures, seems prophetic.