Invention holding company J. P. Morgan and partners

The beginning of the twentieth century ( 1900) brought a great legal invention, the "holding company," that made possible the financial capitalism in the United States, which expanded and then collapsed in 1929. The holding company was invented in the offices of my lawyer friend, James B. Dill, in the financial district of New York. The problem of Dill's clients, the great financiers J. P. Morgan and partners, was how to eliminate Andrew Carnegie, the outstanding industrial capitalist, from competing with Morgan's steel industry in the United States, yet without violating the antitrust laws. Dill devised the holding company for the use of J. P. Morgan & Co., and induced the legislature of New Jersey to legalize it. Corporations had previously, indeed, bought and owned the stocks of other corporations, for the purpose of investment of their own surplus savings not immediately useful in expanding their own business. But Dill invented the scheme of expanding these investment holdings into control holdings of competing corporations without the expenditure of any additional cash by the holding company. The holding company thereby became the financial company. The invention consisted in creating shares of stock of the holding company, with the familiar limited liability, and then exchanging these created shares for at least a majority of the shares of each of the industrial corporations in order to vote the stock and elect the board of directors of each industrial corporation by the management of the financial company. The scheme, as was intended by the Morgan company, brought under the management of the financial corporations, organized as the holding company, all the competitors of the Carnegie company.

But Carnegie demanded cash, or its equivalent, if he were to accept the "dismissal wage" which would eliminate him from the steel industry. This cash equivalent was, therefore, arranged in the form of bonds, to be sold to the general public, obligating the holding company to pay future cash upon termination of the bonds. The bonds became, in fact, an obligation of the entire steel industry to Carnegie. It was estimated and reported afterwards that Carnegie was paid three hundred million dollars in bonds for his properties whose cost of reproduction was estimated not to exceed seventy-five million dollars. Since these are estimates, they indicate the "order of magnitude" rather than the exact measurements. And this was somewhat the order of magnitude in the exchange of holding company stock for the industrial corporation stock, a ratio, in some cases, of three shares of holding stock for one share of industrial corporation stock.

Thus the holding company stock was "watered stock" legalized by the legislature of New Jersey, but it had the financial solidity of a legalized cartel. By controlling the industry as a whole and maintaining prices of steel, it was able eventually to build up physical extensions to the production plant by "plowing back" excess profits into the plant. Other states copied and expanded the legislation of New Jersey, in view of the high fees paid to the state for incorporation of holding companies by the state governments. This profitable union of corporate and political management in an entirely legal enlargement of both state revenues and corporation revenues, during the years 1900 to 1929, indicates what I mean by the peak of capitalism in the United States.