bankers are ordinarily chosen to negotiate the sale of stocks and bonds, and very frequently they are persuaded also for a consideration more or less large to underwrite the stock. By this "underwriting" is ordinarily meant an agreement to secure the sale, at a named price, of a certain amount of the stock of the company. If persons not connected with the company or the banker concerned purchase all of the stock under the agreement at a price as high as that named in the contract, the banker has no further responsibility. If, on the other hand, all has not been sold at the time agreed upon, the banker takes the remainder at the rate mentioned and furnishes the cash to pay for it. In that case, his profits or losses will depend upon the price at which he may be able thereafter to sell the stock; or in case he holds it, upon the dividends that may be paid by the company in its regular course of business. It is commonly believed that the sums asked by the underwriter are as high or higher than those of the promoter. A banker agreeing to furnish millions of dollars to a company in order to enable it to enter upon a line of business in the way in which its promoters prefer, often takes, of course, considerable risk, and will wish corresponding pay. The pay of the underwriters in the organization of the Standard Distilling and Distributing Company has already been noted. High officers in some of the industrial combinations have stated that the cost of organization, including the pay of the promoter and financier, amounts often to from 20 to 40 per cent. of the total amount of stock issued, dividends having therefore, if possible, to be paid upon this amount of stock at least in addition

to that which represents the cost value of the plants or the amounts paid for them.

7

Not infrequently the work of the financier and that of the promoter are combined, the profits depending upon the terms at which the stocks are bought and sold. The case of the Distilling Company of America is one in point. Its authorized capital was $55,000,000 of per cent. cumulative preferred stock, and $70,000,000 of common stock. Of this total sum, $31,250,000 of preferred stock and $46,250,000 of common stock were put into the hands of the organizers or promoters of the combination for the purpose of bringing about the organization. The company was incorporated to purchase and hold the stocks of four existing companies, each in itself a combination, and to secure control of certain rye distilleries. The organizers or promoters were to use the stocks placed in their hands to exchange in certain named proportions for the entire stock of each of the existing combinations, to furnish also $1,500,000 in cash for working capital, and to buy two rye distilleries owned by the Hannis Distilling Company and a rye distillery in St. Paul. A large proportion of the stocks of these different companies were as a matter of fact secured, considerably more than 90 per cent. in each case. It was testified that the rye distilleries cost some $2,000,000. If the entire stocks of all of the four companies had been exchanged at the rates agreed upon, there would have remained in the hands of the organizers $10,710,000 of preferred and $13,360,000 of common stock, for which they were to secure the $3,500,000 needed for purchasing the rye distilleries and furnishing the $1,500,000 to be used for working

capital. At the rate at which the stocks of the new company sold very soon after its organization, these stocks would have given a net profit to the promoters and financiers, had they been able to sell them promptly, of from $3,000,000 to $4,000,000 for their services; but one must remember, of course, that the effect on the market of an attempt to sell these promptly would probably have been very depressing. The speculative nature of such a business is readily seen, when one notes that the stocks declined rapidly in value, so that if the organizers had them left in their hands six months later, they would have barely sufficed to furnish the $3,500,000 necessary to enable them to fulfil their contract.

There can be little doubt that many of the promoters and financiers have in the past agreed to aid in the organization of industrial combinations with the hope of securing large profits by the sale of stocks without themselves taking any material interest in the business. This method of furthering combinations has, beyond question, proved one of the greatest evils connected with them, inasmuch as it has given a decidedly speculative turn to industrial stocks, such as was found in the market for railroad stocks and bonds fifteen or twenty years ago.

Those companies that have been organized with a fair degree of conservatism have often assumed the debts of the constituent companies or have compelled them to pay off their debts before the parent company began business. The effect of this policy in large sections of the country has been to relieve many small banks of the burden of carrying, with considerable risk

at times, the business of these companies. At the same time it has deprived many of these small banks of their best customers. On the other hand, many of the large city banks, from underwriting or accepting as collateral the stocks of the new parent companies, at times found themselves carrying a heavy burden which it was very difficult to shift. They were carrying to their great discomfort and at times with peril a mass of "undigested securities." The instability of these securities, with the large numbers of them thrown upon the market, has tended of late years to make bankers much more conservative in accepting the stocks as collateral for loans, or in attempting to place the stocks upon the market; so that the worst period of such speculative organization in all probability passed with the early years of the great Trust organizations (say between 1885 and 1905).

Perhaps the worst feature from the social point of view, connected with this method of promotion of industrial companies, was the practice (a practice commonly stated and believed to be exceedingly common, although rarely proved) of securing the influence of bank officials-presidents, cashiers, or directors— through the payment to themselves individually of large amounts of stocks or even of cash, to persuade their banks to accept these securities as collateral on loans, or to underwrite the stocks and thus furnish cash for the companies. It seems most unfortunately to be true that in many cases officials of banks and trust companies failed to realize to the full the nature of their trusteeship as it concerns their stockholders and deposi

tors.

Nor can we overlook the indirect influence of

such acts by these prominent financiers. The mere fact that a prominent bank or a successful capitalist is willing to invest in the stock of a company is enough to lead hundreds of small investors to follow, often to their injury. And beyond the financial evil, in the long run, is to be feared most of all the lowering of moral tone in business circles if such practices were to continue. The essence of successful business as well as of social and. political success of the highest type is faithfulness to a trust, a keen sense of honor. This evil of speculation, coming from the work of the promoter and financier, which has led to the substantial bribery of bank officials and to excessive stock watering on the part of the industrial combinations, is to be counted among the great evils which have attended their organization. They should be so conservatively capitalized and managed that their stocks will prove as safe an investment as farm mortgages, and a far more convenient one for the man of small means.

Happily the experiences of the last few years has led to much greater conservatism in both promoting and underwriting. Banks and investors are more cautious and legislators and courts have shown an inclination to be more severe. The experiences and laws of foreign countries-especially Great Britain and Germany -in which more careful supervision of issues of stock is maintained have also clearly had a beneficial effect.