A History of US Economic Law Part 10: The Pujo Committee

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It has been awhile since I put this project on pause. For those who were not around when I started, this series is in response to claims made by numerous people that the Great Depression was caused by laissez-faire capitalism. My sole goal is to demonstrate that the economic conditions prior to the depression were not laissez-faire. In fact, during the 40 years leading up to the Great Depression the federal government was taking an increasingly large role in our economic system. The approach I am using is to simply summarize every major economic law passed from the year 1890 through the Great Depression and provide a little bit of background information. I am attempting to keep my personal biases out of it and simply stick to the facts of what was passed and to the extent I am able to provide quotes from people of that time period. Of course, I am biased and have strong opinions about all of these laws so I encourage anyone interested to follow the links and do some research for themselves. I think this is a period of history that many people don't really know a lot about and I believe it is better to know than to remain ignorant. 




In 1913 Congress passed the Federal Reserve Act creating a form of central banking in the United States. While it wasn’t the first attempt to create a central bank it was the first attempt that lasted for a significant amount of time. One uniquely American institution- free banking- was replaced by another, the Federal Reserve. At the time, the US was the only modernized country that did not have a central bank and the Federal Reserve is a unique institution that resulted from an attempt to compromise between the idea of a government controlled central bank and strong resistance from private business. The resulting institution remains to this day unique and fundamentally different from any other central bank in the world. 


To best understand the creation of the Federal Reserve it is necessary to explore why, after 137 years of Americans rejecting the idea of central banking the Federal Reserve Act was passed with rather large majorities (282-60 in the House and 43-23 in the Senate).


I have already discussed some of the events that motivated Congress to act on the issue. I have touched on several of the monetary panics and the instability of the currency supply that plagued the late 19th and early 20th centuries. The progressive movement was becoming increasingly popular and increasingly powerful having influence in both major political parties. Much of the political debate centered on the rhetoric of class conflict and the voting public was increasingly receptive to the idea that many of their problems were caused by the super wealthy, large monopolies, banks and Wall Street. 


Prior to the Federal Reserve Act regulation of banks was extremely limited. The only federal law was the National Banking Act of 1863 created nationally chartered banks which circulated notes backed by U.S. Government Securities. In an effort to create a uniform currency the act imposed a tax on all state and private bank notes but not on federal notes. It was quite common at the time for banks to issue their own notes which were redeemable at the bank for gold or specie (hard currency- usually federal notes or coins). 


One of the main difficulties in banking was dealing with the reality of conducting commerce among different states, different banks and the impracticality of physically moving gold or silver from one bank to another every time a depositor made a withdrawal. One of the solutions to this problem was the creation of  clearing house associations. A group of banks in a local area would get together and set up a system where once a day they would have representatives all meet in the same room and systematically sort through all of the checks, figure out which banks were owed money and which owed money. Rather than shipping gold back and forth to each other- a time consuming process that created a lot of risk for robbery- the banks would trade ownership of the gold in the clearinghouse and exchange IOUs rather than transport gold or currency. Membership to clearinghouses was controlled by the association to ensure that the member banks were solvent and able to meet their promised obligations. Detractors accused the clearing house associations of blocking small banks from being members in order to increase their own control over the industry since a bank belonging to the association could clear checks much faster than those that were not. 


By the 1900’s an informal structure emerged in the banking community. Generally, there were three types of banks “country banks” which were rural banks that kept enough cash in their vault for daily demands and would store the rest of their reserve in a “reserve” or “central reserve” bank. 


Reserve banks were chartered national banks, by 1913, 47 cities had at least one reserve bank. Reserve banks would store deposits for country banks to aid with state to state transfers and minimize the difficulty and risk of transporting large amounts of cash or gold from one bank to another. Reserve banks kept large reserves on hand but also kept reserves with “central reserve” banks.


Central reserve banks were chartered national banks in the cities of New York, Chicago and St. Louis. These were the national centers of finance and New York was a center of significant international trade as well. Central reserve banks kept all of their reserves on hand, so when they ran low there was nowhere to turn to. 


The inherent problem of the system was during periods when country banks required a large amount of cash, usually during the harvest season when farmers were selling their crops or in the spring when farmers borrowed cash to plant their crops. The country banks would draw on the reserve banks which in turn would draw on the central reserve banks. Large amounts of cash would be sent to rural areas. Then if something happened that caused high demand for cash in the major cities such as a market crash, the central reserve banks were at risk of experiencing a bank run. Many bank failures occurred not because banks were insolvent, but because the banks cash was in another state when its local depositors started to panic and withdraw all their money, or in an attempt to get cash to meet the demand of their depositors banks would sell bonds when their value was low and become insolvent because of a temporary lull in the bond market. As such, financial panics occurred at fairly regular intervals.    


The Panic of 1907 was the spark that lit the fuse, leading first to the Aldrich-Vreeland act that I discussed in the previous post and next to the Pujo Committee. The Pujo Committee was a special subcommittee convened by the Chairman of the House Banking and Currency Committee, Arsene P. Pujo. From May 1912 to February of 1913 the committee held an investigation into the “money trust”. The committee concluded that a small number of bankers and business tycoons had too much control over the United State’s economy and financial system. 


The Pujo Committee focused on three main topics: Clearing house associations, the New York Stock Exchange and the concentration of money and credit. The committee questioned several prominent financial men including J.P. Morgan; the man that was usually portrayed as the architect and puppet master behind the money trust. 


The Pujo committee expressed concern over the clearing house associations for many reasons. First was the issue of membership. Clearing house associations were allowed to accept/decline membership or expel membership by any method they chose. As with most of the inquiry, the committee focused on New York and the clearing house association there. 


Membership in the New York Clearing House Association (and most if not all of the 242 clearing house associations in the country) was divided into two types. Member banks and non-member banks. Member banks had full voting rights in the association to vote on policy, vote to admit new member banks or expel member banks. Non-member banks were banks that a member bank vouched for but did not have voting rights. They belonged under the privileges of a member bank and should they default on their obligations, the member bank they were under was responsible for any funds they owed under threat of expulsion from the clearing house. 


The Pujo report said of clearing house associations 

It will thus be seen that the clearing house performs a most useful

and important function in the financial system, if confined to its

legitimate purpose. In the complex affairs of our great cities, with

their numerous institutions and vast daily exchanges, the privileges

of a clearing house are virtually a necessity and could not be dispensed

with, if at all, without great waste and loss and serious

impairment of the efficiency of the local banking system. So essential

are their facilities that no large bank doing an active business of

receiving deposits could conduct operations independently of the

clearing house. In the principal cities, especially in the city of

New York, these associations have become a power for good or evil.


(Pujo Report, 19)


It is worth noting that William Sherer, the manager of the New York Clearing House Association disputed the idea that the clearing house association had complete control over banks because they could not exist independent of the association.


Sherer wrote:

I do not remember just all the positions I have taken

in answering you questions in that matter, but this is what I would

like to say, that I do not think the independence of the banks is taken

away from them when they voluntarily come together and adopt

rules for their government and fix penalties for the violation of the

same, any more than is the case when any number of people get together

for a common object and voluntarily place the control of

the details in the hands of those whom they choose to conduct them.

The governing committee makes regulations to which they unanimously agree and which they all indorse. I do not think they are,

in that case, sacrificing or jeopardizing their independence, when

the right is still open to them, should those rules be arbitrary or

unjust, to retreat honorably and assume an independent position.

(Money trust testimony, 143-144)



However, the only bank that Sherer could point to that existed in New York without belonging to the clearing house was JP Morgan and Co. which engaged in private banking with limited and only extremely wealthy depositors. The answer was in respect to questioning about a rule that required banks to charge a fee for collecting out of town checks, which detractors claimed were outside the purview of the associations rightful powers and limited competition at the expense of consumers (although it is a rule enforced by the federal reserve which has compulsory membership, so I guess it is ok if the government does it using compulsion but not ok for a voluntary group). Other clearing house associations across the country had attempted (and failed) to fix interest rates (which the federal reserve also attempts to do) and have other anti-competitive rules. 



Despite the testimony of Sherer to the contrary the committee concluded,



As a result clearing-house associations in the great cities have

acquired a power and position in the financial system so commanding

that in any ordinary case a bank or trust company having the required

capital which should be admission to or expelled from

one of them would at once lose public coniidence, with all that that

means to such an institution.

(Pujo Report, 22)



The committee also expressed concern that during a time of panic the clearing house could choose which banks survived and which didn’t. Referring to a book written by James G. Cannon, a respected expert on clearing house associations at the time. 



Q. Mr. Cannon, I would like you to look at page 12 of this very enlightening

book of yours and tell me what you mean by this. Referring to times of panic, you


"In such an emergency the other members of the clearing house are usually willing

to render assistance until the strain is relaxed. To secure such aid, however, a bank

must be sound in its management and of good repute in every respect. Otherwise

the members of the clearing house "—

This is all in times of panic, mind you—

"are likely to decline assistance, being quite willing to get rid of a weak and illmanaged


A. I think that speaks for itself.


Cannon’s book is available as a free e-book




In the Panic of 1907, the New York Clearing House Association issued loans to banks that were short on cash in the form of clearing house certificates. There was some question of the legality of the certificates and whether or not they should have been taxed but beyond that, the committee was concerned about a private association having that much power. 



It is nevertheless true that such issues involve a partial suspension

of specie payments, which is humiliating if not actually injurious to the

credit of the country. (Hepburn, R., 302, 303.) in the absence of

governmental control, as at present, they also place a dangerous power

m the hands of clearing-house associations, which determine to whom

the certificates shall be issued and when they shall be retired. As

the associations in this regard act through small committees, a bank

will often find the decision upon its application for assistance resting

with its keenest competitors, with no right of review.

(Pujo Report, 27)



Next the committee turned its attention to the New York Stock Exchange, the largest stock exchange in the country. Membership to the NYSE was limited to 1100 and in order to directly trade you had to be a member. Similar to the clearing house associations, the committee expressed concern over its ability to admit or deny members in the same fashion as a private club. 



A special committee on speculation appointed Gov. Hughes,

reporting in 1909, referred to this exchange as "to-day probably the

most important financial institution in the world." If that be true,

membership in such an institution should be an office of distinction

and public usefulness.

(Pujo Report, 33)


 However, the main concern with the stock exchange was with its listing practices and its ability to list or de-list stocks and bonds at will. The committee viewed the listing process as unfair and arbitrary. For example, the NYSE required extensive financial information from most companies applying to be listed on the exchange. However, certain companies were allowed to be on the exchange without providing similar information. Generally it was companies with ties to the very wealthy such as Amalgamated Copper Co. a trust organized by JP Morgan. 



There was also concern that the power to remove a bond from the list was used to coerce small stockholders to sell out to the wealthy.



It follows from what has been said of the value of listing that

taking a security from the list injures the holders by depriving them

in large part of a market and making borrowing upon such security

more difficult.

Mabon (R., 466):

Q. We have already discussed the privilege of having the stock on the list, have

we not?

A. Yes.

Q. And there is no question about its great value and advantage in the ordinary

run of cases. When a security is once upon the regular list and is an active security,

and is being taken as collateral in the banks, and is therefore readily the subject of

loans, it is a severe loss to the investor to have it taken from the list, is it not?

A. I should say so.

• * * • • * •

Pomroy (R., 474, 483):

Q. If a stock is upon the list and has been an active stock on the list, you realize,

do you not, that its removal from the list is a great hardship upon the owners of

that stock?

A. I do.

* * * * * * *

A. On the question of the removal of stocks from the list, the governing committee

realizes that the question of removing a security from the list is a very Berious one.

As I have testified, we realize that it deprives a stock of a certain amount of its

value, and of its borrowing power, and therefore they consider each case very carefully

before the move takes place.



Obviously, therefore, the effect of prohibiting further dealings in

the stock of a corporation when the great bulk of it has been acquired

by one person, group, or corporation, is, whether intentionally oi not.

to coerce small stockholders into selling out to the majority holders.

Striking illustrations of the operation of this regulation were

brought out at the hearings. Thus, on the reorganization of the

Southern Railway Co. by J. P. Morgan & Co., a majority of its stock was

placed in a voting trust, which deprived the stockholders of all representation

and voting powers and vested the absolute control of the

company in the trustees, J. P. Morgan, George F. Baker, and Charles

Lamer, who, upon the transfer of the stock into their names, issued

the usual trust certificates, which were listed and traded in on the

exchange instead of the stock certificates. When this voting trust

expired in September, 1902, the trustees, through J. P. Morgan &

Co., requested certificate holders to extend the trust and not

require the surrender of their stock, which would have restored to

the stockholders their control over the property. New trust certificates

were issued to those assenting to the extension, and these were

listed on the exchange. In March, 1903, the old trust certificates

were removed from the list, although there were at that time, which

was six months after Messrs. Morgan had requested the extension of

the voting trust, certificates representing 183,938 shares, whose holders

were apparently unwilling further to resign their voting powers.

The result was that those not assenting to the extension of the trust,

and hence not taking new trust certificates, found themselves with

a security not listed on the exchange, and, therefore, without a ready

market and not available as collateral. (Pomroy, R., 474-477; Ex.

224, R., 1955.) The listing of the extended certificates and the removal

from the list of the old ones, whether so intended or not, operated

as a means of coercing the holders of these 183,938 shares into

exchanging their old certificates in order to get a listed security

which could be sold or made available for borrowing purposes. It is

now 19 years since that voting trust was created, and it has not yet

been dissolved.

(Pujo Report, 40, 41)



The report continues on to point out the “evils” of speculation in words that sound like something that could be taken out of a democrats campaign rhetoric 100 years after they passed a law that was supposed to solve the problem.



But it is in respect of the extent and character of the speculation

in securities for which it is the agency that the New York Stock

Exchange touches most vitally the affairs of the people of the entire

country. This subject was investigated in 1909 by a committee on

speculation in securities and commodities appointed by Gov. Hughes,

of New York, and its complete report is annexed to the record as

Exhibit No. 27. That committee had. however, no power to sub-

poena witnesses or to send for books and papers. It was compelled

to rely largely on statements formulated by the governors of the

exchange in consultation with their counsel in answer to written

questions. While opinions will differ as to the wisdom or adequacy

of the recommendations of that committee, its distinguished personnel

and exceptional qualifications are a guaranty of the thoroughness

and accuracy of its findings of fact.

It found, among other things, that—

It is unquestionable that only a small part of the transactions upon the exchange

is of an investment character; a substantial part may be characterized as virtually


The rules of all the exchanges forbid gambling * * * but they make so easy a

technical delivery of the property contracted lor that the practical effect of such

speculation, in point of form legitimate, is not greatly different from that of gambling.

Contracts to buy may be privately offset by contracts to sell. The offsetting may

be done in a systematic way, by clearing houses, or by "ring settlements." Where

deliveries are actually made, property may be temporarily borrowed for the purpose.

In these ways, speculation which has the legal traits of legitimate dealing may go on

almost as freely as mere wagering, and may nave most of the pecuniary and immoral

effects of gambling on a large scale.

A real distinction exists between speculation which is carried on by persons of

means and experience, and based on an intelligent forecast, and that which is carried

on by persons without these qualifications. The former is closely connected with

regular business. While not unaccompanied by waste and loss, this speculation

accomplishes an amount of good which offsets much of its cost. The latter does but

a small amount of good and an almost incalculable amount of evil. In its nature it

is in the same class with gambling upon the race track or at the roulette table, but is

practiced on a vastly larger scale. Its ramifications extend to all parts of the country.

It involves a practical certainty of loss to those who engage in it. A continuous

stream of wealth, taken from the actual capital of innumerable persons of relatively

small means, swells the income of brokers and operators dependent on this class of

business; and in so far as it is consumed, like most income, it represents a waste of

capital. The total amount of this waste is rudely indicated by the obvious cost of

the vast mechanism of brokerage and by manipulators' gains, of both of which it is a

large constituent element. But for a continuous influx of new customers, replacing

those whose losses force them out of the "street," this costly mechanism of speculation

could not be maintained on anything like its present scale.

(Pujo Report, 42,43)


 The committee questioned several trading practices such as buying on margin, short selling and how the market could be manipulated by the wealthy. I won’t go more in depth with it here since doing so could take up several pages and similar complaints are regularly leveled by those who criticize the market today. The testimony of Frank Sturgis is worth reading for anyone interested in the subject and begins on page 781 of the testimony I link to below.


Now we arrive at the main allegations of the committee, that there was a consolidation and concentration of capital so that a handful of people exerted great control over the finances of the entire country and that they did so to the detriment of the country for their personal profit. 



This increased concentration of control of money and credit has

been effected principally as follows:

First, through consolidations of competitive or potentially competitive

banks and trust companies, which consolidations in turn have

recently been brought under sympathetic management.

Second, through the same powerful interests becoming large stockholders

in potentially competitive banks and trust companies. This

is the simplest way of acquiring control, but since it requires the

largest investment of capital, it is the least used, although the recent

investments in that direction for that apparent purpose amount to

tens of millions of dollars in present market values.

Third, through the confederation of potentially competitive banks

and trust companies by means of the system or interlocking


Fourth, through the influence which the more powerful banking

houses, banks, and trust companies have secured in the management

of insurance companies, railroads, producing and trading corporations,

and public utility corporations, by means of stockholdings, voting

trusts, fiscal agency contracts, or representation upon their boards of

directors, or through supplying the money requirements of railway,

industrial, and public utilities corporations and thereby being enabled

to participate in the determination of their financial and business


Fifth, through partnership or joint account arrangements between

a few of the leading banking houses, banks, and trust companies in

the purchase of security issues of the great interstate corporations,

accompanied by understandings of recent growth—sometimes called

"banking ethics"—which have had the effect of effectually destroying

competition between such banking houses, banks, and trust companies

in the struggle for business or in the purchase and sale of large

issues of such securities.


It is a fair deduction from the testimony that the most active agents

in forwarding and bringing about the concentration of control of

money and credit through one or another of the processes above

described have been and are—

J. P. Morgan & Co.

First National Bank of New York.

National City Bank of New York.

Lee, Higginson & Co., of Boston and New York.

Kidder, Peabody & Co., of Boston and New York.

Kuhn, Loeb & Co

(Pujo Report, 55,56)



From page 56 to page 106 of the committees report it lays out the connections that it argues constitutes a dangerous concentration of wealth with JP Morgan as the main guilty party. 


 The Pujo Committee was widely reported on in newspapers across the country and many of the recommendations were adopted in the Federal Reserve Act putting the final nail in the coffin of free banking and creating one of the most powerful financial organizations in the world. I will address some more of the details of exactly what the Federal Reserve does and how it is set up in my next post. 



http://fraser.stlouisfed.org/publication/?pid=80 (Transcripts of the Pujo Committee hearings and their final report)


http://www.bos.frb.org/about/pubs/begin.pdf (A short history of the Federal Reserve)








If, if a white man puts his arm around me voluntarily, that's brotherhood. But if you - if you hold a gun on him and make him embrace me and pretend to be friendly or brotherly toward me, then that's not brotherhood, that's hypocrisy.- Malcolm X