"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 a.s.sets 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 inst.i.tution 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 advertis.e.m.e.nt 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 advertis.e.m.e.nt 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 s.p.a.ce, 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 inst.i.tution. 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 acc.u.mulated 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 rest.i.tution 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 a.s.sociates, who have hitherto swayed the destinies of the inst.i.tution, are accused by the other party of conspiring to mutualize the inst.i.tution, 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 tr.i.m.m.i.n.g 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 pa.s.sage 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 pa.s.sage of some simple laws regulating their investments. The relationship between these inst.i.tutions 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 a.s.sets 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 a.s.sociated).

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 inst.i.tutions, 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 ca.n.a.l 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 quant.i.ties. 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 acc.u.mulated 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 inst.i.tutions, 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 inst.i.tutions 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 compet.i.tion--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 a.s.sured 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 a.s.sets 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 Ma.s.sachusetts 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 Ma.s.sachusetts 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 a.s.sets. This led to a prompt request from the Ma.s.sachusetts 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 Ma.s.sachusetts 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 Ma.s.sachusetts 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.

Now for the moral, or the iniquity, rather, of the preceding, the wrong to policy-holders, which has been so completely ignored and pa.s.sed over by the insurance press and all hands: Either the company had, as at least supposedly it has in all such cases, ample security for its advances to agents in the pledges of their renewal contracts, or it had not. On the former hypothesis, that $1,900,000-odd was a sound and valid a.s.set, earning a good rate of interest. On the latter, the company simply squandered this amount of trust funds belonging to its trusting policy-holders in its mad rush for business at whatever cost; or--In either case the money has gone from sight so far as any sign or indication appears to the contrary since.

And before leaving this point, it may be well to ask, "Has the New York Life Insurance Company altogether discontinued these advances to agents?" If not, how and where are they accounted for? An answer may be found, possibly, in the comparatively meagre underwriting profits of the company, growing relatively smaller and beautifully less with each succeeding year. I say it may possibly be found here, because this is the only place the item could be buried; but I am reasonably sure that it is not buried here, and that these advances to agents are being continued on a scale as large as, or larger than ever, for the agents could not have been shut off and the business increased at one and the same time.

Again, during the last two months of 1904, or at a time when my story, "Frenzied Finance," began to get in its work all over the world, I received from many quarters information that the Big Three had instructed their leading agents to get in a great lot of new risks "at any cost," so that the total business for the year would show such increase as to discredit my claim that the policy-holders were getting "scared." I watched the game with much interest, knowing that bunco would out in time, by whomever worked. During these months I read from week to week of this great policy, or that record-breaking risk just landed by this or that agent. One in particular made me chuckle at its transparency. A certain friend of the New York Life, a Wall Street man, "has just taken out a $2,000,000 policy." About the same time I began to receive information of the remarkable offers that were being made to prospective customers, offers which probably meant an indirect rebate of perhaps the full first year's premium; and I got to thinking and reaching back into my memory-box, and I raked out a number of instances of the same kind of offers which had been made to me in the past, and I ruminated to myself how all this was possible; for even if the Big Three were bold enough to get around the law against such practices, it puzzled me how they could pay to their agent the big cash commissions that new business called for. Presently as I waited I read, as did the rest of the world, the big January full-page advertis.e.m.e.nts of the New York Life to its policy-holders, calling their attention to the increase of $15,000,000 new business over the year before. Then I took another think and did a little work, with the following result:

A JOLT FOR THE NEW YORK LIFE

The "Brown Book of Life Insurance Economics" shows that the sum laid by annually for future tontine or other dividends ranged in the ten years ending with 1903 from $2,936,026 to a minimum of $956,597, these amounts being savings after payment of dividends. In 1904, however, for the first time in the tontine history of the company--also the first year of maturity of non-forfeitable tontine contracts with their largely reduced dividends--the dividends paid and credited, $6,018,202, actually exceeded the year's earnings, as shown by the company's sworn statement, by $76,595.

I want to call policy-holders' attention right here to what this means to those who are now being beguiled into taking policies on the strength of "adjusted" estimates placed by the company in its agents' hands, showing dividend results ranging from fifteen to fifty per cent. higher than those of 1904, with, however, the saving (?) clause that, depending upon future unforeseeable conditions, the same "may be higher or may be lower." It may be added that, but for a profit realized from sale of securities, the company's gross surplus would have shown shrinkage.

In order to realize what such a showing means, let us make a comparison, using the figures of a well-known Western company (partly tontine, but operated on diametrically opposite lines from the New York Life), for the three years 1901-03, this company being barely four-tenths the size of the New York Life as regards outstanding business:

COMPARISON OF TOTALS, THREE YEARS, 1901-03

Dividend Laid by for future earnings. Dividends. dividends.

New York Life $16,826,289 $13,189,278 $3,636,091 Western Company 17,788,820 12,284,255 5,504,565 ----------- ----------- ---------- -$962,531 +$905,023 -$1,867,574

After mulling these over, I dug further in regard to the "prosperity" as shown by the business of 1904. The company boasts of its enormous volume of new business, $345,722,000, which is $15,000,000 in excess of the 1903 business. Here is the story: While this new business was being secured, the

Total terminations were $162,326,114 Less those inevitable terminations by death or maturity of endowments 26,767,873 ------------ Waste by lapse, surrender, etc. $135,558,241 And when we add the lapsed policies which continued in force, under the "extended-insurance"

provision 89,938,500 ------------ We have the total waste of $225,496,741

and this, reduced to its actual significance, means that of the total actual terminations, 83.6 per cent. was _actual waste_ and only 16.4 per cent. legitimate terminations, while the great bulk of the last item of $89,938,500, upon which premium payments have ceased, must run off the books in the near future; and this is what goes on from year to year, more than keeping pace with the boasted increase in volume of new business. The public never sees this side of the question.

When I got to this point in my deductions, I was brought face to face with the tremendous expense of acquiring new business. Then I saw the light--why it was necessary to wipe off the books nearly two millions of what were considered good a.s.sets, that is, pledges from agents of their renewal commissions against which advances had been made, and where the new business came from, and how it was possible to make rebates when the law says they shall not be made. An agent induces a friend to have a policy written, for which the agent practically pays the premium out of his commission, and thereupon has advanced to him large sums against the future premiums which are to be paid by the policy-holder, who has no intention of paying them, and allows his policy to lapse. Heavens! What a vista of plundering opportunities the bare thought opens up! Somebody has to pay.

THE MILLION-DOLLAR POLICY

In the May number I inserted the following letter:

FORT WORTH, TEXAS, February 16, 1905.