¹ There has been a good deal of misinformation on this relationship, but recent scholarly research such as Redlich's, Fritz chapter on “Investment Banking” in his Molding of American Banking (New York: Hafner Publishing Co., 1951) has done much to place the investment banker in correct perspectiveGoogle Scholar.

² The relationship between life insurance and investment banking during this period has typically been described in one of two fashions. Following the lead of the muckrakers, the major life insurance companies have simply been listed as adjuncts of one or another investment banking house (more often than not J. P. Morgan and Co.). This is simply incorrect for the yean prior to the investigation (and is true of the Equitable alone in the yean following the investigation). Even though the New York Life had a close relationship with J. P. Morgan and Co. and the Equitable was equally close to Harriman and Kuhn, Loeb, this relationship was neither exclusive nor a dominating one. Indeed, it is a major thesis of this paper that it was the generally dependent relationship of the major life insurance companies to the investment banking community (rather than the specific ties) that explains the policies of the former.

The other type of description is equally misleading and has typified a great many business histories. Here the dependent position of the life insurance companies is minimized or ignored and consequently the bulk of their financial policies simply do not make any sense.

³ The Armstrong Investigation is looked upon as a milestone in life insurance history. Many of the practices described in this article which characterized the relationship between the big insurance companies and investment bankers were outlawed. However, the functional needs of the insurance company for outlets for its funds and the continuing pre-eminent position of the investment banker for several more decades led to a continuation of their co-operative activity along somewhat different lines. Since a description of this relationship would require a rather detailed account of the revisions in the insurance code of New York State (and their subsequent modification), it would necessitate a separate article.

⁴ Edwards, George, The Evolution of Finance Capitalism (New York: Longmans, Green and Co., 1938). p. 183.Google Scholar

⁵ Meyers, Margaret, The New York, Money Market (New York: Columbia University Press, 1931), I, 291–92, estimates total foreign investment at about $3 billion in 1888. Between 1890 and 1894 there was an average annual net withdrawal of about $60 million, and during the railroad mergers of 1899-1900 securities were repurchased by Americans and brought back to this country in great volume.Google Scholar

⁶ Temporary National Economic Committee Hearing!, Part 4, Life Insurance (Washington, D.C.: Government Printing Office, 1939), Exh. 218.Google Scholar

⁷ The assets of all level-premium life insurance companies were $524,705,494 in 1885. By the end of 1905 they were $2,924,253,848.

⁸ The most important feature of tontine insurance was that the surplus, instead of being distributed annually in the form of dividends, was retained by the company until the maturity of the policy, at which times all the survivors of the particular group were supposed to divide up the accumulated dividends. The significance for company expansion lay in their ability to keep the total accumulation, including forfeited dividends, for periods of ten to twenty years. Annual dividends provided a frequent test of the efficiency and economy of the company, whereas deferred dividends postponed accountability for surplus, thus concealing the low returns. Deferring dividends meant that companies not only did not have to worry about favorable results each year but also that they had an ever-growing surplus to borrow against in the tremendous drive for new business.

⁹ See North, Douglass, “Capital Accumulation in life Insurance Between the Civil War and the Investigation of 1905,” Men in Business, Miller, William, ed. (Cambridge: Harvard University Press, 1952).Google Scholar

¹⁰ Increase of Assets in Twenty Years of the Major Life Insurance Companies, 1885-1905

¹¹ Securities increased from 2.9 per cent of total assets in 1870 to 37.7 per cent in 1900.— Zartman, Lester W., The Investment of Life Insurance Companies (New York: Henry Holt and Co., 1907), p. 14Google Scholar.

¹² There were a few exceptions among the smaller companies. The Washington Life, for example, had been purchased by T. F. Ryan. In a short time the entire character of its investments had been altered from real estate and mortgages to favor securities mostly purchased through Ryan brokerage houses and naturally including such Ryan interests as American Tobacco Company. Armstrong Investigation, pp. 4143–48.

¹³ The Metropolitan dealt almost exclusively with one firm, Vennilye and Co. According to President Hegeman, the practice of dealing with one firm had started in 1885 when the Metropolitan had been a small company and had continued ever since. In the ten years preceding 1905, $66 million out of $73 million of securities had been purchased from them—Armstrong Investigation, pp. 1159–63. During 1905, the firm split up and the Metropolitan went with William Read, who formed a new banking house. The Metropolitan loaned him $1 million for this purpose. (They had previously made a number of loans to the older company.) Both companies were closely tied to Gould financing. The Prudential appears to have been concerned with a number of New Jersey companies, but not intimately tied to any single investment banking group.

¹⁴ From the time that James H. Hyde succeeded to the controlling interest of the Equitable (left to him in a trust fund by his father, the founder of the company) in 1889, there had been numerous attempts by various investment banking groups to get hold of this stock. In addition to four offers to purchase the stock (Armstrong Investigation, pp. 2298-99), there had been numerous concealed attempts to wrest the stock away from him.—Ibid., pp. 2295-96. When trouble broke out within the company between Hyde and other members of the management, the controversy was fanned by Harriman, Gould, Ryan, and others.—See Armstrong Investigation, p. 2292; The New York Times. June 3, 1905; and The Spectator, June 8, 1905. Ultimately this controversy and the final struggle between Ryan and Harriman for control of the company led to the Investigation.—Armstrong Investigation, pp. 3648, 3912-20.

¹⁵ Morgan created the Southern Railway out of the ruins of the Richmond Terminal system. One hundred forty million dollars' worth of bonds were issued, of which the big three absorbed approximately (17,500,000.— Campbell, E. G., The Reorganization of the American Railroad System, 1893-1900 (New York: Columbia University Press, 1938), pp. 149–60Google Scholar.

¹⁶ In addition the Mutual was a large stockholder of the New York, New Haven and Hartford Railroad and the largest stockholder of the Pennsylvania Railroad. They owned substantial holdings in twelve other railroads.—Armstrong Investigation Report, p. 30.

¹⁷ They were approximately 50 per cent of assets in the two industrial companies.

¹⁸ For an account of the growth in power of the investment banker, see Redlich, F., Molding of American Banking, chap. 21Google Scholar.

¹⁹ These consolidations resulted in the Amalgamated Copper Company, the United States Steel Company, and the International Mercantile Marine Company.

²⁰ The extent to which the investment banker actually utilized this power is a subject of some controversy. I am inclined to agree with Redlich, Fritz, Molding of American Banking, II, 378, “… once the ‘right’ men were in and as long as they ran the enterprise in question in line with an understood over all policy and with profit, the investment banker in control in effect did absolutely nothing. Industrially, to use Veblen's term, what appeared as investment banker's control meant de facto autonomous administrations. But they were autonomous only in return for success and good behavior, and the continuously recurrent need for additional funds in an expanding national economy made the captains of industry vassals of the investment bankers.”Google Scholar

²¹ For a time it appeared that the Rockefeller-National City Bank (under Stillman) group were the equals of Morgan, and Moody, John so reported them in 1904. The Truth about the Trusts (New York: Moody Publishing Co., 1904). However, shortly thereafter the Standard Oil group got out of Wall Street and James Stillman and the National City Bank became allied with MorganGoogle Scholar.

²² For Morgan's, J. P. account of this transaction see “Money Trust Investigation,” Investigation of Financial and Monetary Conditions in the United Slates under House Resolutions Numbers 429 and $04 before a Sub-committee of the Committee on Banking and Currency (Washington, D.C.: Government Printing Office, 1913), pp. 1068–70.Google Scholar

²³ For a summary of their views on die joint operation of these banking firms, see ibid., Report, pp. 102–5.

²⁴ , Redlich, Molding of American Banking, II, 380.Google Scholar

²⁵ One result of this close connection which differentiated the New York Life from the other two companies was that it engaged extensively in joint account transactions. These dealings usually consisted in the New York Life and a bond dealer jointly purchasing a part of an issue and then reselling it either through the stock exchange or through the organized channels of the bond dealer. In most of these cases the New York lif e put up all the money and the profits were split evenly. In a few cases the insurance company retired some of the bonds and the partner in the transaction received the lion's share of the profits from the remaining bonds that were marketed.

²⁶ Notably James Stillman of the National City Bank (at that time closely allied with the Rockefellers).

²⁷ dough, Shepard in his history of the Mutual, A Century of American Life Insurance (New York: Columbia University Press, 1949), pp. 195–96. leaves the distinct impression that the Mutual was the equal of Morgan and others, and cites a case in which the company outbid Morgan for an issue. The testimony of Frederick Cromwell, treasurer of the Mutual, quoted below on p. 219, indicates a quite different relationship.Google Scholar

²⁸ Representatives of other investment banking firms included Charles R. Henderson, Adrian Iselin, Jr., and Charles Lanier.

²⁹ For a description of internal organization and decision-making in the big three, see North, Douglass, “Entrepreneurial Policy and Internal Organization in the Large Life Insurance Companies at the Time of the Armstrong Investigation,” Explorations in Entrepreneurial History, V, No. 3 (March 1953)Google Scholar.

³⁰ Ibid., pp. 144-48. The upheaval caused by the disclosures of the Armstrong Investigation led to active intervention by the directors in each of the major companies.

³¹ In 1901, six days before the climax of his famous fight with Hill and Morgan over control of the Northern Pacific, Harriman received a collateral loan of £2,700,000 from the Equitable with which to buy Northern Pacific stock.—Armstrong Investigation, p. 2186. In 1902–3 he had arranged privately with Hyde for the Equitable to take $2,500,000 in a $50 million five-year holding syndicate whose purpose was to control the Union Pacific. The syndicate bad been conducted by Kuhn, Loeb with Harriman, Schiff, and Stillman (head of National City Bank) as managers. Kuhn, Loeb sold almost $50 million worth of securities to the Equitable between 1900 and 1905.—Armstrong Investigation, Exh. 1025.

³² Business control groups of stock companies in which the stock was widely dispersed faced a real problem in attempting to perpetuate their control in the face of repeated attempts by individuals and investment banking groups to get control. The Metropolitan and Prudential in particular, just becoming important factors in the securities market, went to some lengths to prevent “outside control.” The Prudential undertook to sell a majority of its stock (obtained from all the officers of the company) to the Fidelity Trust Company; and then in turn to buy a majority of the stock of the Fidelity Trust Company in the name of the Prudential.—Armstrong Investigation, pp. 3658-60. The Metropolitan permitted certain classes of policyholders to vote as well as stockholders. As the votes of the policyholders were ten-year proxies running to the president they provided a convenient method of insuring business control.—Armstrong Investigation, pp. 94–95.

³³ One of the best of the muckraking accounts of the period was Hendricks, B. J., The Story of Life Insurance (New York: McClure, Phillips and Co., 1907)Google Scholar; the most frenetic is surely contained in Thomas Lawson's Frenzied Finance (New York: The Ridgeway Thayer Co., 1905)Google Scholar.

³⁴ The role of subsidiary and affiliated financial companies is discussed in more detail in the following section.

³⁵ Armstrong Investigation, pp. 492–93.

³⁶ For an account of this purchase, see Armstrong Investigation, pp. 225–33. This was a part of Morgan's successful attempt to get the Louisville and Nashville away from Gates (although at the latter's price).— Moody, John, The Masters of Capital (New Haven: Yale University Press, 1921), pp. 106–7Google Scholar.

³⁷ Armstrong Investigation, pp. 191–92. The insurance companies would naturally have preferred to withdraw their bonds at the syndicate price. The difference between syndicate price and market price was usually about 4 per cent (of the par value) while the profits from die syndicate were usually between a per cent and 3 per cent (the difference primarily being the costs of marketing the issue). For example, in a Speyer and Co. syndicate of United States of Mexico bonds, the Mutual underwrote $4,500,000 worth of bonds at 89 with the agreement that they would purchase $4 million of the bonds at the market price of 93. Their profits on the underwriting were $136,936.87 while the difference between syndicate and market price on $4 million worth of the bonds was $160,000.

³⁸ The following excerpt from the minutes of the finance committee of the New York Life of November 7, 1904, illustrates a typical example. “The treasurer announced that the subcommittee had taken from Messrs. Harvey Fisk & Sons a participation of $2,000,000 in the purchase of $6,200,000 New York Central & Hudson River Railroad Company debenture four per cent bonds due 1934 at 99% and interest, such participation being taken with the understanding that this company can withdraw its two millions at the price paid for the entire lot or leave the bonds for sale by Messrs. Fisk & Son with the further condition that if the company withdraws its $2,000,000 it will keep them out of the market for twelve months, and in any case the sale must be made through Messrs. Fisk & Sons.”—Armstrong Investigation, pp. 233–34.

³⁹ Armstrong Investigation, p. 329.

⁴⁰ To take a typical illustration: The Equitable purchased $5 million of the Railroad Securities Company's 3?????? gold bonds syndicate.

Q. [To A. R. Winthrop, Assistant Secretary of the Equitable] Do you know what the Railroad Securities Company was?

A. A company organized for the holding of Illinois Central Railroad stock.

Q. The sole security for the bonds for the Railroad Securities Company was stock in the Illinois Central which the Railroad Securities Company had acquired?

A. Yes, sir.

Q. The Railroad Securities Company was a holding company?

A. Apparently.

Q. And acquired 77,000 shares of capital stock of the Illinois Central Railroad and then issued bonds against the shares acquired, and Kuhn, Loeb & Company, as syndicate managers undertook the sale of the bonds to various members of the syndicate underwriting the transaction?

A. Yes, sir.

—Armstrong Investigation, pp. 844–45. This was Harriman-Kuhn, Locb's successful effort to get control of the Illinois Central.

⁴¹ Morgan roads were well represented on all three major companies. Kuhn, Loeb roads were better represented in the Equitable than in the other two companies.

⁴² The New York Life had asked for five million in the International Mercantile Marine Syndicate when it had just been formed in April 190a. At that time it appeared to be a very profitable undertaking and J. P. Morgan and Co. allotted them an underwriting participation of but $3,200,000, so eager was the financial world to participate in another Morgan affair. However, by May 5 a call of $1 million was made on the company by the syndicate managers and the successive calls of the other $2,200,000 by October to indicated that the bonds were not selling. In January 1903 J. P. Morgan and Co. “asked” the New York Life to take another $400,000 and again in July another $400,000. This additional $800,000 was subsequently sold at a loss of $80,000.—Armttrong Investigation, pp. 348-51.

⁴³ While subsidiaries legally were only those in which the insurance company owned over half the voting stock, actual control often existed with much smaller blocks of stock. In fact, there is no clear line of demarcation between an actual subsidiary and a simply affiliated company. Few affiliates were big enough to be able to afford to have the insurance company withdraw its inactive deposits and accordingly in policy affiliates were as firmly wedded to the insurance giant as the latter was to the investment banker. This alliance was highly profitable for everyone concerned as a glance at the dividend rate of these financial institutions makes clear. Therefore, the affiliated financial institutions were always anxious to main^in tuch relationships. Very often, in fact, companies were affiliated with the whole investment complex, thus making control in terms of one company rather than another very difficult to ascertain (and really not too important).

⁴⁴ The Equitable actually was interested in twenty financial institutions. In ten of these companies its proportion of the total stock outstanding ranged from 10 per cent to 64 per cent The data on the subsidiary and affiliated financial institutions of the big three have been compiled from Armstrong Investigation Exhibits and Reports and from Moody's Manual of Railroad and Corporation Securities, 1905. A short summary of the relationships of the big three with financial concerns may be found in Armstrong Investigation Report, pp. 24–29, 66, 96–104.

⁴⁵ The New York Life actually controlled the New York Security and Trust Company through a voting trust arrangement which thereby showed no stock on company books.–Armstrong Investigation Report, p. 56.

⁴⁶ Not only was the dividend rate handsome, but also the market value jumped on the average about fourfold when the insurance company bought in as a result of the expected placement of large inactive balances with the financial company.—Armstrong Investigation, pp. 1596, 1615-17. While the return to the individual stockholder was exceptional, the return to the company was often nominal. The following statement from the Frick Report as quoted in the Armstrong Investigation Report, pp. 102–4, indicates the actual earnings in the case of an Equitable subsidiary.

“The book value of the society's holdings in Equitable Trust, plus its average deposits during 1904 in that institution, amounted to $17,370,000. The society's income from that investment, consisting of two per cent interest on deposits and twelve and one-half per cent dividends on the par value of its stock holdings, amounted to $399,182, or two and three-tenths per cent on the total investment”

⁴⁷ There were still other reasons why such subsidiaries were valuable to the big three, including the evasion of regulatory laws (Armstrong Investigation, p. 340), disguised political contributions (ibid., p. 2219), and sometimes direct investment (ibid., pp. 1628–37).

⁴⁸ Hughes asked H. R. Randolph of the New York Life:

Q.… What was the reason of putting up $13,000,000 with the New York Security & Trust Company?

A. It would arise from the loans that have been die subject of inquiry, moneys that they would put there by reason of reaping a higher rate of interest.

Q. The New York Security & Trust Company loaned its money on collateral?

A. Yes. …

Q. And by its arrangement with you in account 4 you get the benefit of interest within one-half of one per cent of the amount the Trust Company was getting?

A. Yes, sir.

—Armstrong Investigation, pp. 353–54. Moreover, as D. P. Kingsley testified on the following page, the New York Life could not make such collateral loans, because the collateral was usually stock which the company bylaws prohibited as a basis for such loans.

⁴⁹ For example, see Perkins' testimony regarding U. S. Steel Stock Syndicate. While the New York Life could not enter stock syndicates, it nevertheless provided the money to a subsidiary for that purpose.—Ibid., p. 2883.

⁵⁰ Cromwell of the Mutual testified in regard to the Guarantee Trust Co.:

A. The Guarantee Trust Co. buys securities for entirely different purposes than we do. … To sell them at a profit. We do not sell.—Armstrong Invettigation, p. 158.

⁵¹ Armstrong Investigation, pp. 450–51.

⁵² The insurance companies were not well organized to handle collateral loans and usually left this type of activity to their subsidiary trust companies. The loans to the investment banker were made on special occasions.

⁵³ Armttrong Investigation Report, p. 95. Year-end loans were made to the investment banking house simply to disguise illegal transactions for their annual report to the Superintendent of Insurance.

⁵⁴ Armstrong Investigation, pp. 488-89. In the case of the Pennsylvania Railroad flotation cited above, the Mutual could have taken $1,666,000 directly from die railroad at par (because of their ownership of 100,000 shares of the railroad's stock). They failed to do so (thus contributing to the “lamentable failure”), but did underwrite $4,500,000 worth of bonds in the syndicate.—Ibid., p. 4)9.

⁵⁵ Armstrong Investigation, pp. 348-51, 4736–38. However, J. P. Morgan charged the New York Life ai a differential rate of 1????? per cent for the service.—See ibid., p. 707.

⁵⁶ Armstrong Investigation, p. 3856. Paid out of U. S. Steel Syndicate profits.

⁵⁷ Clear evidence of the costs of this relationship is provided by the Spectator Yearbook's rating of insurance companies in terms of rate of interest earned. The big three were consistently at or near the bottom of the list. The 1905 Yearbook for example, which rated forty-seven level-premium life insurance companies for the year ending December 31, 1903, placed the New York Life thirty-ninth, the Mutual forty-third, and the Equitable at the bottom of the list (New York: The Spectator Co., 1905.)

⁵⁸ Prior to the ascendency of lames H. Hyde, it bad been Louis Fitzgerald and Associates or George Squire and Associates.

⁵⁹ A typical instance of the division was as follows: J. P. Morgan allotted the Equitable $1,500,000 in a Chicago, Burlington and Quincy Syndicate in May 1901. This allotment was divided as follows:

⁶⁰ As noted above, there were tome exceptions to this and certain sanctions existed regarding which bonds should be kept in the portfolio and which should be sold.

⁶¹ It is doubtful if the mortgage market, particularly with the restrictions imposed by the New York Insurance Department, could possibly hare absorbed these funds.

⁶² The independence of the large life insurance companies from investment fanHwg dominance came substantially later. It was a result not only of the declining influence of the investment banker over railroad, industrial, and public utility concerns but of the growth in assets of the insurance companies, which enabled mem to absorb substantial parts of securities issues without outside assistance. (The growth of private placements since 1930 has been a dramatic illustration of this ability to deal directly with the borrower rather than through the medium of the investment banker.—See Kemmerer, Donald L., “The Marketing of Securities 1920–51,” The Jocknal of Economic Hwroar, XII, Fall 1953, 454–68.)Google Scholar