The practice of interlocking directorates is the root of many evils. It offends laws human and divine. Applied to rival corporations, it tends to the suppression of competition and to violation of the Sherman law. Applied to corporations which deal with each other, it tends to disloyalty and to violation of the fundamental law that no man can serve two masters. In either event it tends to inefficiency; for it removes incentive and destroys soundness of judgment. It is undemocratic, for it rejects the platform: "A fair field and no favors," - substituting the pull of privilege for the push of manhood. It is the most potent instrument of the Money Trust. Break the control so exercised by the investment bankers over railroads, public-service and industrial corporations, over banks, life insurance and trust companies, and a long step will have been taken toward attainment of the New Freedom.

The term "Interlocking directorates" is here used in a broad sense as including all intertwined conflicting interests, whatever the form, and by-whatever device effected. The objection extends alike to contracts of a corporation whether with one of its directors individually, or with a firm of which he is a member, or with another corporation in which he is interested as an officer or director or stockholder. The objection extends likewise to men holding the inconsistent position of director in two potentially competing corporations, even if those corporations do not actually deal with each other.

The Endless Chain

A single example will illustrate the vicious circle of control - the endless chain - through which our financial oligarchy now operates:

J. P. Morgan (or a partner), a director of the New York, New Haven & Hartford Railroad, causes that company to sell to J. P. Morgan & Co. an issue of bonds. J. P. Morgan & Co. borrow the money with which to pay for the bonds from the Guaranty Trust Company, of which Mr. Morgan (or a partner) is a director. J. P. Morgan & Co. sell the bonds to the Pens Mutual Life Insurance Company, of which Mr. Morgan (or a partner) is a director. The New Haven spends the proceeds of the bonds in purchasing steel rails from the United States Steel Corporation, of which Mr. Morgan (or a partner) is a director. The United States Steel Corporation spends the proceeds of the rails in purchasing electrical supplies from the General Electric Company, of which Mr. Morgan (or a partner) is a director. The General Electric sells supplies to the Western Union Telegraph Company, a subsidiary of the American Telephone and Telegraph Company; and in both Mr. Morgan (or a partner) is a director. The Telegraph Company has an exclusive wire contract with the Reading, of which Mr. Morgan (or a partner) is a director. The Reading buys its passenger cars from the Pullman Company, of which Mr. Morgan (or a partner) is a director.

The Pullman Company buys (for local use) locomotives from the Baldwin Locomotive Company, of which Mr. Morgan (or a partner) is a director. The Reading, the General Electric, the Steel Corporation and the New Haven, like the Pullman, buy locomotives from the Baldwin Company. The Steel Corporation, the Telephone Company, the New Haven, the Reading, the Pullman and the Baldwin Companies, like the Western Union, buy electrical supplies from the General Electric. The Baldwin, the Pullman, the Reading, the Telephone, the Telegraph and the General Electric companies, like the New Haven, buy steel products from the Steel Corporation. Each and every one of the companies last named markets its securities through J. P. Morgan & Co.; each deposits its funds with J. P. Morgan & Co.; and with these funds of each, the firm enters upon further operations.

This specific illustration is in part supposititious; but it represents truthfully the operation of interlocking directorates. Only it must be multiplied many times and with many permutations to represent fully the extent to which the interests of a few men are intertwined. Instead of taking the New Haven as the railroad starting point in our example, the New York Central, the Santa Fe, the Southern, the Lehigh Valley, the Chicago and Great Western, the Erie or the Pere Marquette might have been selected; instead of the Guaranty Trust Company as the banking reservoir, any one of a dozen other important banks or trust companies; instead of the Penn Mutual as purchaser of the bonds, other insurance companies; instead of the General Electric, its qualified competitor, the Westinghouse Electric and Manufacturing Company. The chain is indeed endless; for each controlled corporation is entwined with many others.

As the nexus of "Big Business" the Steel Corporation stands, of course, preeminent. The Stanley Committee showed that the few men who control the Steel Corporation, itself an owner of important railroads, are directors also in twenty-nine other railroad systems, with 126,000 miles of line (more than half the railroad mileage of the United States), and in important steamship companies. Through all these alliances and the huge traffic it controls, the Steel Corporation's influence pervades railroad and steamship companies - not as carriers only - but as the largest customers for steel. And its influence with users of steel extends much further. These same few men are also directors in twelve steel-using street railway systems, including some of the largest in the world. They are directors in forty machinery and similar steel-using manufacturing companies; in many gas, oil and water companies, extensive users of iron products; and in the great wire-using telephone and telegraph companies. The aggregate assets of these different corporations - through which these few men exert their influence over the business of the United States - exceeds sixteen billion dollars.

Obviously, interlocking directorates, and all that term implies, must be effectually prohibited before the freedom of American business can be regained. The prohibition will not be an innovation. It will merely give full legal sanction to the fundamental law of morals and of human nature: that "No man can serve two masters." The surprising fact is that a principle of equity so firmly rooted should have been departed from at all in dealing with corporations. For no rule of law has, in other connections, been more rigorously applied, than that which prohibits a trustee from occupying inconsistent positions, from dealing with himself, or from using his fiduciary position for personal profit. And a director of a corporation is as obviously a trustee as persons holding similar positions in an unincorporated association, or in a private trust estate, who are called specifically by that name. The Courts have recognized this fully.

Thus, the Court of Appeals of New York declared in an important case:

"While not technically trustees, for the title of the corporate property was in the corporation itself, they were charged with the duties and subject to the liabilities of trustees. Clothed with the power of controlling the property and managing the affairs of the corporation without let or hindrance, as to third persons, they were its agents; but as to the corporation itself equity holds them liable as trustees. While courts of law generally treat the directors as agents, courts of equity treat them as trustees, and hold them to a strict account for any breach of the trust relation. For all practical purposes they are trustees, when called upon in equity to account for their official conduct."