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tices, has been good enough to come here this morning, and I shall ask him if he will now be good enough to say a few words to the committee.

STATEMENT OF JOHN T. FLYNN, ECONOMIST, NEW YORK CITY

Mr. Flynn. Mr. Chairman and gentlemen, Sentor O'Mahoney asked me last night if I would come here today and make a statement to the committee in reference to this subject, and I said I would do so.

Senator McCARRAN. I wonder if we might have the gentleman's name and his connections and business.

Senator O’MAHONEY. If you will just make that preliminary statement, Mr. Flynn, we will appreciate it.

Mr. Flynn. My name is John T. Flynn, of New York City. I am a writer on economics. I am associated with Collier's Magazine. I write for most of the large magazines, and always on economic subjects.

Senator O’MAHONEY. How long have you been so engaged? Mr. FLYNN. About 20 years. That is as much as I would like to admit, Senator.

Senator O'MAHONEY. You may proceed with your statement.

Mr. Flynn. As I say, I was asked only last night to make this statement, and I am very happy to come here.

This bill, as I understand it, has three objectives. One is, through Federal incorporation or licensing, to reach the regulation of labor standards in corporations; second, to regulate fair and unfair trade practices of corporations; and, third, to regulate corporate practices themselves.

I would not want anything I say to be interpreted as an approval of the subject of regulating fair trade practices through a corporate law. I do not say that I am against that, but I have a congenital horror of the N. R. A., and I would hate to see this bill, in its present form or through amendments that might be put in it, become an instrument for the revival of the N. R. A. What I say will have relation only to that section or portion of the bill which deals with corporate practices.

Any attempt to regulate corporations or corporate practices through Federal legislation is bound, of course, to be opposed as an interference with business by the Federal Government, and interference with the rights of the States and with the God-given rights of property. But this whole business of corporate practices is rather a new thing. It really came into existence in 1890, or thereabouts.

About that time the Standard Oil Co. was being pursued rather hotly by Attorney General Monnett, of Ohio, to bring about the enforcement of the dissolution decree in Ohio, which I think was in 1888. So an agitation broke out rather strenuously in New Jersey for a law which would permit one corporation to hold the stock of another corporation. That was the holding law of 1890 in New Jersey. That was followed by a flocking of corporations to New Jersey to get that very highly prized provision.

The Standard Oil Co. wanted to preserve its monopoly, as well as numerous other corporations similarly situated.

That turned out to be a rather profitable thing for New Jersey, and so in a very short time Mr. John B. Dill (?), a prominent corporation lawyer, conceived the idea that he could do a very nice job for New Jersey with the cooperation of the secretary of state of West Virginia, who arrived in New York City with the statement that as a representative of West Virginia he was prepared to issue to all and sundry persons such charters upon the payment of a nominal fee, his idea being that he could get a lot of money into West Virginia. I hope there are no Senators here from West Virginia to get excited about that. They were not thinking about the social or economic features. He was a public official who saw a chance to make some money for his State, and he began peddling charters.

New Jersey conceived the idea of organizing a corporation in New Jersey which would become the agent of New Jersey corporations and would carry on the business of getting out charters. They organized that large company, which still exists in New Jersey, and immediately the revenues of New Jersey began to increase. In 1890 they collected about $202,000, but in 4 years' time it rose to $707,000, which was a pretty good profit for the Štate.

Then Delaware got to looking the situation over, and in 1896 Delaware amended her constitution so as to permit the granting of charters under a general statute. Before that time you had to go to the legislature and get a special franchise from the legislature. But in 1896 that amendment to the constitution was made, and in 1899 the legislature passed the first general corporate-practice statute, under which the secretary of state or some bureau could issue these charters without any difficulty. Then Delaware became the great chartermongering State, and since then has issued over 100,000 charters, most of them to corporations all over the United States. About 60,000 have liquidated, but there were still 48,000 some 2 or 3 years ago.

That has been a very profitable business for Delaware. In 1927 the State issued 5,400 charters and collected $824,000; in 1929 she issued 7,537 charters and collected $3,609,698. Besides that, she imposed a franchise tax on corporations something like our capitalstock tax, I think. _There were corporations in the United States that were chartered in Delaware that were exempt from Government taxation. They paid tribute to Delaware. Railroad corporations paid $38,000 in 1932, General Motors paid $39,000, another large corporation paid $38,000. Altogether they paid $3,500,000 in franchise taxes. So Delaware collected four or five million dollars for franchise taxes and fees for issuing corporate charters, all of which was used to support the public schools. No taxes were levied in support of the public-schools system. They were talking in 1932 of actually doing away with all Štate taxes, because the business had become so prosperous; but then came 1933, and since that time they have not been doing so well. Besides that, the capital-stock tax induced some of the corporations to write down their capital stock.

So here you have a State in the Union to which we have almost surrendered the power to create corporations in the United States. If you go to other States you will find corporation laws pretty nearly as bad as those of Delaware, but that is because no State can pass a decent corporation law. If it does, the corporations will move out and go to Delaware. They can enforce no kind of local regulation

may wa

or law on any of these large corporations, because they will just tell you good-bye.

In New York City we tried to impose a sales and transfer tax of one-fourth of 1 percent on stock transactions on the New York Stock Exchange. We have a 2-percent sales tax in New York, but we only wanted to impose a tax of one-fourth of 1 percent on transfers of shares on the stock exchange. After the board of aldermen had passed it the stock exchange said, "If you don't repeal that law we will tell you good-bye.” They went over to New Jersey, and Governor Moore, who is now Senator from New Jersey, said to them: "Come to New Jersey, gentlemen. Leave New York and we will free you of all kinds of taxes.” They went to Newark and made a contract for the hire of the public market and spent over $100,000 getting it ready for occupancy, getting ready to move out of New York City to escape that tax. Now, in course of time some of these corporations in New Jersey

to go to Delaware, may want to go to Oklahoma, or some other State. There will always be a few States willing to make conditions easy to have these large corporations come around and do business.

In the State of Delaware these laws have been developed under the influence of corporation lawyers. So distinguished a conservative as Nicholas Murray Butler, who likes to call himself a liberal, and who wrote a book called "The Confessions of a Liberal”, but whom I consider a great conservative, said corporations have more power and more importance than any other institutions of modern times. I was very glad to see Mr. Walter Lippmann, who started as a radical and is now a conservative, in a very brilliant series of articles in the Atlantic Monthly, say that he has come to the conclusion the most important and dangerous instrumentality in our whole civilization was a corporation with one of these liberal charters.

In the past I have frequently discussed the corporate practice subject under the control of the Federal Trade Commission and of conferences which have been held on the subject of monopoly and where corporations are used as the means of creating monopoly; but it is not the monopoly alone that is a dangerous thing. It is where the corporation says whether it is to be monopolistic or not, because men can deal with corporations and no individual can deal by himself. You cannot pass any kind of law that you can enforce against the statute laws on the books of our States.

Senator McCARRAN. I do not understand this legislation is intended to go into the respective States and affect the State laws in relation to the creation of corporations. Is that your understanding?

Mr. Flynn. Senator, I have not had ihe time to read this bill. I saw it only this morning. I do not know what it proposes to do, except that I got the impression from title II that it does propose to remedy a good many of the abuses in corporate charters, so far as those corporations may be engaged in interstate commerce.

Senator KING. It requires present corporations, if they are engaged in interstate commerce, to obtain a license.

Mr. FLYNN. It requires présent corporations, if engaged in interstate commerce, to obtain a license. That is correct.

Senator KING. And if they do not get one they cannot function.

SUBSIDIARIES AND AFFILIATES NOT LISTED ABOVE

North American Aviation, Inc., General Motors Corporation owns 29.55 percent; Transcontinental & Western Air, Inc., General Motors Corporation owns 13.03 percent; General Motors Building Corporation, wholly owned; Argonaut Realty Corporation, wholly owned ; Modern Housing Corporation, wholly owned; General Motors Holding Corporation, wholly owned; Modern Dwellings, Ltd., wholly owned ; New Departures Realty Co., wholly owned ; General Motors Management Corporation; National Bank of Detroit; General Motors Acceptance Corporation of Indiana, Inc., subsidiary of General Motors Acceptance Corporation; Vauxhall & General Finance Corporation, Ltd., London, subsidiary of General Motors Acceptance Corporation; General Motors Acceptance Corporation of Delaware, Port Elizabeth, South Africa, subsidiary of General Motors Acceptance Corporation; General Motors Acceptance Corporation de Mexico, S. A., Mexico City, subsidiary of General Motors Acceptance Corporation ; Allgemeine Finanzierungs-Gesellschaft m. b. H., Russelheim, Germany, subsidiary of General Motors Acceptance Corporation; General Motors Acceptance Corporation, Continental, Copenhagen, Denmark, subsidiary of General Motors Acceptance Corporation; Yellow Manufacturing Acceptance Corporation, subsidiary of Yellow Truck & Coach Manufacturing Co.; Yellow Manufacturing Credit Corporation, subsidiary of Yellow Manufacturing Acceptance Corporation; Bendix Aviation Corporation, incorporated in Delaware, General Motors Corporation owns 25 percent; Bendix Aviation has 15 subsidiaries, 2 affiliates.

Senator O’MAHONEY. Can anybody doubt in the face of that picture that a corporate system of such magnitude is a matter of Federal concern? We know it is a matter of Federal concern, because the entire commercial and industrial life of the United States depends upon the operations of these huge aggregations. Yet they were unable to prevent the crash of 1929. Indeed, as a matter of fact, one of the principal causes of the crash was the indefensible corporate practices which had been permitted to grow up. One corporation had been allowed to purchase the shares of another corporation and to name its own directors, who had no interest in the subsidiary corporation except to do what they were told to do by the owner of the parent corporation. A thousand and one vicious practices grew up, but there is nothing radical about the proposition I am making here. Many of the most glaring abuses which preceded the crash could have been prevented if John Sharp Williams' bill had been passed. Extensive hearings were held. At that time the Attorney General of the United States, who certainly cannot be called a radical, George W. Wickersham, made this statement in a public speech at Duluth, on July 19, 1911 :

If Congress should enact that no corporation engaged in interstate commerce shall hereafter acquire any stock of any other corporation so engaged, and that unless such corporation should dispose of all stock held by them in other corporations engaged in interstate commerce within some specified period, they should be prohibited from engaging in interstate commerce until they did so dispose of such stock, the ax would indeed be laid at the root of the trust evil.

That was not the language of any "new dealer", but of the Attorney General in the Taft Cabinet, and what he said was not only correct, but his suggestion with respect to a prohibition against ownership of corporate stock by corporations was only a restatement of original law.

Now, it may be interesting to point out just a little bit about the financial structure of the General Motors Corporation. I want to make it clear for the record and for newspapermen present that I am using this merely as an illustration of the extent to which this particular economic state has grown.

General Motors has an authorized capital of 75,000,000 shares of common stock. On December 31, 1934, there were outstanding 42,772,438. Now, of that outstanding number

Senator NORRIS (interposing). Is that in dollars or shares?
Senator O'MAHONEY. Shares.
Senator NORRIS. How much to each share?

Senator O'MAHONEY. The common stock was changed from $100 to no par in March 1920 so the value is a matter of estimate. I have here a table, which shows the assets. The assets of the General Motors Corporation in 1934, according to Moody, amounted to $1,268,532,026. In 1929 they amounted to $1,324,889,764.

Senator AUSTIN, Would not a nearer figure be the part of those assets represented by surplus that would constitute the capital stock? Do you have that figure

Senator O'MAHONEY. Not at this moment.

Senator King. Does it show the outstanding bonds of the parent company?

Senator O'MAHONEY. I do not have that information here but it can be easily obtained.

In the Washington Post of Tuesday, November 19, 1935, I find this item :

WILMINGTON, DEL., Nov. 18.—Directors of the E. I. du Pont de Nemours & Co. declared today a special dividend of 15 of a share of General Motors common stock on each share of du Pont common, payable December 27 to stockholders of record November 27.

The distribution will be made from 200,000 shares of General Motors common, acquired by du Pont in small lots as a current, temporary investment, during the last 5 years. It is entirely divorced from the permanent investment of 10,000,000 shares of General Motors held by du Pont.

The directors also declared the regular dividend of 90 cents a share on the $20 par value du Pont common, payable December 14 to stockholders of record November 27, and the regular quarterly dividend of $1.50 on the debenture stock, payable January 25 to stockholders of record January 10.

The company pointed out that the dividend of General Motors stock has no bearing on the recent 50-cent extra dividend declared by that corporation.

During the 5 years of the depression the du Pont Co. went on the market and picked up 200,000 shares from small holders, shares of stock thrown overboard by investors who had to use their little savings to keep body and soul together, and these 200,000 shares of General Motors were distributed as a stock dividend to the owners of du Pont.

We have seen the growth of these companies. We have seen the Government of the United States delving into the Treasury to help build a great national system of transportation, that system by which the corporate growth I have described was made possible. We have seen how the aviation companies, controlled by General Motors, which in turn is controlled by the 10 or 11 million shares of stock owned by du Pont, was the beneficiary of subsidies from the Government of the United States to build up the air lines in which it was interested. The story would not be complete if I did not bring to the attention of this committee an illustration of how corporations may be used by beneficiaries of our national advantages to avoid the payment of taxes which make those advantages possible.

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