American Commercial Banks in Corporate Finance, 1929-1941: A Study in Banking Concentration

Published by EH.NET (April 2000)

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Tian Kang Go, American Commercial Banks in Corporate Finance, 1929-1941: A Study in Banking Concentration. New York: Garland Publishing, 1999. ix + 440 pp. $90 (cloth), ISBN: 0-8153-3337-4.

Reviewed for EH.NET by Paul B. Trescott, Department of Economics, University of Southern Illinois.

The author, regularly a professor at Chuo University in Japan, taught at Peking University. This reviewer also spent a year teaching there in 1983-84. At that time, the World Economy section, to which I was attached, offered a course on The American Economy. Much of it consisted of material documenting “the concentration of economic power” in the hands of great “interest groups” such as the Rockefellers. This seemed rather quaint, harking back to a bygone era before such issues faded into insignificance in most western treatments of industrial organization. In China, of course, this was all part of explaining the “crisis of capitalism” contributing to the increasing misery of the working class, etc. Something of this sort appears to be the implied context of the present book.

In his preface, the author identifies his theme as “presenting evidence — for the first time — of the extent to which corporate managers…were beholden to major players in the financial sector — especially a small group of New York banks which served as the main suppliers of term loans…to industrial corporations. These banks…worked in close collaboration with their affiliated insurance companies and securities underwriters. By means of term loans, these bankers and their allies exerted a strong influence over the supply of money and credit — and thus over the economy throughout the years of the Great Depression. Contrary to a widely held belief, the banking reforms of the New Deal era failed to reduce Wall Street’s influence over finance and industry”(p. vii).

The main focus is on the lending activities of three major “players”: the Morgan-First National group, Chase National Bank-Rockefeller group, and National City Bank. Most of the book consists of numbers or sentences about numbers. Numerical tables account for 237 pages. Most of the remainder resembles this paragraph, selected at random:

“Another sector that absorbed a substantial part of the term loans made by [Chase] in the mid-1930s was the utility industry. From 1935 to 1937, Chase sponsored a number of loans for utility companies that had come under its control in the early years to the Depression. One of these loans was a $5,000,000 one-three year loan to American Light & Traction, a subsidiary of United Light & Power, which was then controlled by Chase. Chase headed the syndicate that financed the loan in 1935. Another utility company, Detroit City Gas, also a member of the United Light & Power group and controlled by American Light & Traction, borrowed $5,000,000 from a loan syndicate managed by Chase for a five-year period in 1935. Three banks — Chase, Mellon National Bank, and National Bank of Detroit — shared in the loan, providing for 55%, 25% and 20% respectively. Chase also sponsored, in 1937, a $8,500,000 three-year loan for Western Union, with which the bank was closely connected. Chase provided $5.5000,000[sic] and Central Hanover $3,000,000. Other utility loans sponsored by other banks in which Chase participated included those to American Water & Electric Works ($8,000,000) and Lone Star ($16,000,000)” (pp.154-55).

With few exceptions, we are not told what the loans were used for, or any other interesting or useful information about the borrowers. Discussions of loans to distillers could have been enlivened with reference to the repeal of Prohibition. One would love to know more about the activities of Ruthless Iron and Steel Co., mentioned at p. 241. Nor is there much information about the individual banks and how these lending operations fitted into their management strategies. The context of the 1930s is generally absent. We are briefly told about the separation of commercial banking from investment banking, but not much about the cascade of bank failures or the New Deal reforms (which were intended mainly to eliminate bank failures). Correspondent banking is seldom mentioned.

A large part of the lending activity scrutinized occurred in the late 1930s, when the banking system was awash in funds. In such circumstances, the large corporate borrowers had their choice among many potential lenders. How important were their connections with the big three? This would require discussion of the entire “customer relationship” ranging across the spectrum of bank services: deposit management and compensating balances, trust services, foreign-exchange activities. How much and in what ways were the lending banks involved in project design and evaluation?

Consider some of the possibilities offered by data in the appendix, which show, for 52 large firms, their total assets and total debt, and the share of that debt held by the Rockefeller and First National interests. One would not associate lending with financial power when the total debt of listed firms was only 12 per cent of assets, as for petroleum. But how about distillers (34 per cent) and tires (26 percent)?

In truth, despite the ominous tone of the introductory statement quoted above, the author barely mentions “concentration of economic power,” aside from frequent vague references to “influences” and “dominant” roles. There is no chapter giving a summary or overview.

It is probably mean to criticize an author for the things he did not do. What he has done is a tour de force of source work. He has mined the financial periodicals and other sources to an extraordinary degree. What has emerged, however, is a source book. Anyone who wants to pursue further the way in which bank loans financed particular companies, industries, or projects will find this useful as a starting point. I wish he had styled his numbers as “$8 millions” rather than the form quoted above; the world is running out of zeros and he has unduly depleted the supply. This just is not a book you can sit down and read. It is a book in which you look things up.

Paul B. Trescott is professor of economics emeritus, Southern Illinois University. His chief professional activities have involved monetary economics, but in recent years he has concentrated on China. He is working on a book on the history of the introduction of western economic ideas into China. The latest article to emerge from that project is “Graduate Study in Economics by Chinese, 1900-1950,” Taiwan Journal of Political Economy 1 (Fall, 2000).

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