Chapter XXXIII: A Retrospect and a Moral (2)

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 of _Everybody's Magazine_ and 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 until seven 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 of _Everybody'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 the insurance 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 a falsifier, 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, a president 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 not _robbing_ his 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 has made $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 the _Insurance 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 valuable Chestnut 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 their hands 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 perhaps _control_ of 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 bank
of 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 interest in 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.

"The money value of intimate relations between a majority of
the directors of a life-insurance company and a trust
company may be easily comprehended. These relations are at
the beginning based on the needs of the insurance company,
which needs it is hard to define and limit, and accordingly
hard to say just where the provision for them becomes more
of an advantage to the trust company than to the insurance
company. Standards will differ, and change, too. But here,
let us say, is a great insurance company with over
$50,000,000 of assets which it has collected from its
policy-holders, and which are needed for carrying out their
contracts, and which safety requires shall be held in sound
investments. Such an insurance company has to have a large
and active bank account. It must deposit checks and all
forms of paper promises or orders for collection, and for
the payment of expenses and claims must have a large sum of
ready money. This is the absolute need; but the directors
are not bound by any legal requirements to limit their
deposits to just what will reasonably suffice as a margin to
pay current claims and expenses, nor are they required to
patronize any particular banks. They conclude, let us say,
that 'it will be safer' to take some banking institution for
such depository which they 'know about,' and of which,
perchance, some of them are directors, or in which, at all
events, they are stockholders. If no such trust company is
at hand, it is very easy to start one, and easy for the
directors of the insurance company to be in 'on the ground
floor.' The insurance company then begins to bestow its
patronage. The trust company, which is thus supplied with
funds, begins to feel the effects of this attention; by the
use of its big deposits large dividends are earned. A 'boom'
begins, and the director who 'had the sagacity' to invest in
the stock of the trust company when it was around about par,
sees his holdings advance by rapid strides until he is
offered perhaps ten times as much for his stock as its par
value. He has seen this stock advance in value in proportion
to the amount of funds of the insurance company which the
trust company had at its command. It has been worth much to
him 'to be on the inside,' and will be worth much in the
future for him to be on the inside if any new trust company
is to be a depository; the bigger the deposit, the more it
will be worth to him."

All thinking people, after reading these extracts from Insurance Commissioner Cutting's report, will ask: "Why have we never heard of this before?" I can only answer that he found it impossible to get any part of the warning contained in it before the people. It should be remembered that the insurance companies annually spend millions of dollars with the daily, weekly, and monthly press--and it is unnecessary for me to say more. My own advertisement calling attention to the life-insurance chapters in the last issue of _Everybody's Magazine_ was refused by some of the leading dailies of New York, Boston, Cleveland, and Pittsburg. When I called on the managing editor of one of Pittsburg's leading dailies for an explanation of the publication's declination, he said: "Don't mention me or you'll get me into trouble. Our copy for the advertisement was a day late and the insurance combine had time to get in its work. The local managers sent a representative to all the papers warning them not to run your stuff, under penalty of losing the big full-page annual from each of the three big companies, as well as the numerous fliers through the year." One hears of the sagacious ostrich which, when pursued by an enemy, hides its head in the sand. The ostrich is wise in comparison with the "System's" votaries in the year 1904.

THE VULTURES FEEDING

Owing to the claims of other subjects on my space, I left the subject of life insurance for a few months. In the meantime President Alexander began his grapple with President Jimmy Hyde for the control of the millions of the Equitable Life--the historic entanglement which has had such dire consequences for all concerned. In the April, 1905, issue of The Critics I wrote as follows:

When first I touched on the subject of life insurance and called attention to the manner in which the three great companies were juggling with the immense funds entrusted to them by their policy-holders, the "System" raised a great outcry, declaring that I was unsettling the confidence of the people in a sacred institution. At this moment we have the chief officials of one of these huge organizations engaged in a desperate and disgraceful struggle among themselves for its control. All thought of the widow and the orphan, against whom they declared my hand had been raised, has been forgotten in the mad fight for supremacy over the accumulated millions in stocks, bonds, and in trust companies, from the secret manipulation of which the great private fortunes of successful underwriters are derived.

Before definitely grappling with the evils of the insurance trust, I hesitated a long time. I realized my words would cause terror or distrust among policy-holders and perhaps induce some misguided ones to abandon their insurance. After long consideration, however, I became convinced that what I had to say would in the long run benefit all policy-holders, insure the greater safety of their funds, reduce their annual premium-payments, and perhaps bring about the restitution of the vast amounts which in the past had been diverted from them to private individuals. The response to my criticism was a flood of abuse. Instead of meeting my charges, the big companies denounced me for a liar and a misrepresenter, and the insurance journals and subsidized press declared that the things I had charged were impossible. Now, the president of the Equitable Life Insurance Company is openly accusing a leading member of his board of trustees, who is one of the foremost votaries of the "System," of loading the company with twenty-two millions of securities, which, as a member of the finance committee of the corporation, he had purchased for himself in his capacity as head of a great banking-house. On the other hand, the president and his associates, who have hitherto swayed the destinies of the institution, are accused by the other party of conspiring to mutualize the institution, not for the benefit of the policy-holders, but to conceal the traces of past misdeeds. Before this chapter is in the hands of my readers the officers and directors of this great insurance company may be before the courts and a condition of affairs spread out for the public's gaze such as will make my charges seem, in comparison with the actual truth, as chestnut-burrs to porcupines' quills.

One result achieved so far is an awakening of the people's attention to the evils of present conditions; but let them beware of the remedies suggested. The "System" is quick to adjust itself to storms it cannot control, and there are many signs abroad that it is trimming its sails to fly before the present blow, ready when it shall abate to switch back to its old course, and, under fresh canvas, make up for lost time. Already we have Senator Dryden, representing New Jersey and the Prudential Life Insurance Company in the United States Senate, introducing a bill for Federal supervision of life insurance, and the "System's" hirelings throughout the land are clamorously agitating the passage of some such measure. It behooves the public to scrutinize carefully the form of reform which these patriots approve. It may be taken for granted that they will initiate nothing that will interfere with their grip on the millions of the policy-holders or will divert fat pickings and commissions from their own pockets. Once I asked a leading votary of the "System":

"What would you do if by any chance the Government decided to get into the railway business, and took a railway or so to see how government control would work?"

"Oh," was the reply, "we'd manage that all right! As soon as we saw it coming, the stocks and bonds of the roads wanted would go up, so that by the time Uncle Sam got ready to buy, it would be the fattest sale we could possibly make. After that it would not be difficult to disgust the Government with its bargain, and before long the people would be glad to sell the property back to us, and we'd find a way to get it at slaughter prices."

The reformation of the big insurance companies is sadly needed, but reformation of a more drastic kind than they'll be willing to administer to themselves. To begin with, there should be a relentless probing of their stock transactions of the last fifteen years, followed by the passage of some simple laws regulating their investments. The relationship between these institutions and the "System" would then at once of necessity terminate, and we could say good-by to the _regime_ under which the expenses of the Big Three have enormously increased and their dividends to policy-holders have steadily declined while during the same period the private fortunes of their officers and controllers have flourished amazingly.

I have been repeatedly asked to define the conditions that make it possible for these immense private fortunes to be gathered, within the law. An examination of the figures that follow will reveal the far-reaching possibilities that reside in the direction of the billion of assets of the great insurance companies.

The last issued New York report (1903) shows that the three leading companies had in uninvested funds, all told, $70,212,453. Of this sum total there was "deposited in trust companies and banks drawing interest"--at the _close_ of the year:

Equitable $25,617,668
Mutual 22,439,396
New York 17,731,710
-----------
$65,788,774

the balance, $4,423,679, being on deposit without interest.

The above aggregate represents 71.7 per cent. of the uninvested interest-bearing funds of twenty-eight companies--leaving but 28.3 per cent. for the remaining twenty-five (in which, by the way, is included $6,801,789 of the Prudential, as large in proportion as the funds of the Big Three, with which it is associated).

This sum, at the two-per-cent. interest allowed by the trust companies, returned to the insurance companies $1,315,775, while it earned for the trust companies in the different speculations in which they were engaged, from five to twenty per cent., or an annual profit of $1,973,663 to $11,184,079, over and above the interest paid the insurance companies for its use.

But who owns the trust companies? you ask. Some are owned jointly by the three great insurance corporations and their directors, others by the directors alone. The men who control the Big Three organize these flexible depositary institutions, allotting half or more of their stocks to themselves, the balance to the insurance companies, or keeping all the stock themselves, for the purpose of manipulating the stupendous sums in the treasuries of the insurance companies. The trust company is the irrigating canal of Wall Street, the insurance company the reservoir. For the development of the various schemes of consolidation, trustification, and amalgamation in which Wall Street profits are made, money is required in large quantities. When the soil is ready for the seed, when negotiations have been sufficiently matured, the trust company's sluice is tapped and the gold flows out. And gold which makes a $225 crop sprout, where previously only a $100 crop grew, is a valuable commodity, for the use of which large compensation is given the engineers. Thus the men who hold the treasury-keys of the Big Three, and who decide how the accumulated premiums of the policy-holders shall be used and where deposited, are actually the owners of these trust companies and of other corporations and trusts which borrow the money the trust companies have on deposit from the insurance companies.

The hackneyed defence of the insurance companies to this accusation is that great corporations, such as they are, must keep on hand, ready for emergencies, enormous amounts of cash. This is a futile argument, for in the nature of things the daily receipts of each of the Big Three are larger than the expenditures. We are also told "We keep large amounts, ready to take advantage of a sudden smash in the market." This sounds well, but cloaks one of the most vicious practices of these great institutions, and another of the insider's opportunities for private graft. It means that the officers of the great insurance corporations are ever ready for a stock gamble with the sacred funds of their policy-holders; that is, they admit their willingness to use the people's savings to make sure-thing gambling-profits from those unfortunates who must throw over their stocks and bonds because of the "System's" manipulations.

Imagine, my honest, old-fashioned reader, the millions of insurance funds used in this way! Let me give you a picture of how it is done. I have seen it worked a score of times. The stock-market is crashing, dropping tens of millions a minute, and business men are saying: "Oh, if we only had cash to buy, but we can not get it! The banks will not loan at any price. Rates have gone up to 100 to 150 per cent. and no cash is in sight." No one has money but the big insurance companies and the "System's" votaries.

Suddenly mysterious buying appears--hundreds of thousands of shares of stock, and bonds in million blocks. The crash has been stayed; the panic is over; stocks are bounding upward again; millions are being made by the mysterious buyers with each tick of the clock, and presently it is common knowledge that all the insurance insiders have cleaned up millions, and--of course, the company has made something, but the biggest profits have been won by the men who, having previously personally loaded up, were able to throw the unlimited buying power of the policy-holders' millions into the gap. Talk of loaded dice, or any of the sure-thing gambling devices! They are lily-white business schemes compared with this method of plundering the people.

Again we are authoritatively informed that the great companies have so much cash on hand that it is impossible to find investments for it save at a low rate of interest. The fallacy here is obvious. If these institutions have grown so unwieldy that they cannot conduct their business as ably as the smaller companies, the latter are the ones to insure with, because, right along, they are deriving larger returns from their invested funds than the big companies. There are scores of ways, however, by which the sixty-five millions could be made to earn even larger dividends than do the funds in stocks and bonds. Let the Big Three offer the use of their big cash balances by public competition--under the most conservative conditions that can be prescribed. Instantly the net returns will double.

All insurance policy-holders are familiar with the specious circulars and letters presenting statements of business done and investments made, which are sent out from the head offices of the great companies at odd intervals on the plea: "We want our policy-holders to know everything we are doing at all times." The public is assured at other intervals that there can be no secret or inside deals in the affairs of insurance companies because of the close examinations they are subjected to by the Insurance Departments of the various States. The insurance officials say: "All our facts and figures are vouched for by so many different sets of auditors and State Departments that they must be exact truths." To what extent is the public actually safeguarded by these investigations?

Some months ago I called attention to the fact that the directors of the New York Life Insurance Company had sold to themselves the stock of the New York Security & Trust Company at from three to four millions less than the property would have commanded from outsiders. Here is another transaction which requires explanation:

In 1901, ostensibly in order to maintain its position in the German states--I will explain later on what I mean by "ostensibly"--the insurance company disposed of its remaining holdings of stocks, the same having a book value of $2,965,000 and a market value of $5,471,000, as per report of 1900. These stocks, with possibly sales of some other securities, realized an actual profit of $5,839,087 instead of $3,075,392 as per the company's _sworn_ report to the several State Insurance Departments.

Rather a queer proceeding, you say. Why should it do such a thing? Had some one stolen the extra profit? Or what? This is what was done: The company had simply availed itself of the opportunity to conceal an actual cash profit of $2,763,715 in order that it might sequestrate assets to that amount unnoticed by its policy-holders or the departments. The sum so sequestrated was made up of balances due from agents--presumed, as in all such cases, to be amply secured by pledge of renewal contracts--to the amount of $1,919,734, and $843,891 charged off depreciation of real estate. (See Massachusetts Report, 1902, pages 158-159.)

This illegal suppression of most important transactions, directly affecting, as will be seen later, the interests of policy-holders, would have remained a sealed book but for the careful audit of the Massachusetts Department, which revealed the fact, unnoticed by that of any other State (note in this one instance the boasted careful supervision and boasted double and triple auditing of all accounts before publication!), that the item "Agents' Balances," amounting in the preceding year to $1,527,123, had disappeared altogether from assets. This led to a prompt request from the Massachusetts Department for explanation.

The honorable business men of the New York Life, who pay out so many hundreds of thousands of dollars each year advertising the fact that they are sitting up o' nights to find new ways to acquaint the policy-holders with the innermost secrets of the company, finding there was no avenue of escape from their dilemma, quickly realized that the Massachusetts Department meant to have the facts, and publish them, too. Their own "faked" report was already before the public in the published reports of two departments, those of Connecticut and New York.

There was but one course open to avert the terrific scandal that was inevitable upon publication of the Massachusetts Report, and that was to head off and forestall adverse comment and criticism, as far as possible, by making a clean breast of it. No time was lost in preparing a letter of explanation to the Department. This answered the purpose of the Department, which did not care to press the matter, having accomplished its main object.