A History of Money and Banking in the United States: The Colonial Era to World War II (45 page)

56Ibid., pp. 312–15; Ferguson, “The Coming of the New Deal,” pp. 14–15; and Chernow,
House of Morgan
, pp. 206–09, 362.

From Hoover to Roosevelt:

311

The Federal Reserve and the Financial Elites
not paying income taxes during the depression—the public not being willing to understand the legitimacy of deducting severe stock losses from one’s income. The Morgans were also pilloried for having a “preferred list” of financiers and politicians for purchasing new stock issues in advance of public sale. The list made juicy reading as a clear attempt to curry favor, and it was in vain that the Morgans remonstrated that this opportunity can only be profitable in a rising stock market.57

57The Roosevelt administration was embarrassed by the appearance on the Morgan preferred list of its secretary of the Treasury, William H.

Woodin of the American Car and Foundry Company, and Vice President John Nance Garner led a campaign at a Cabinet meeting to fire Woodin.

Roosevelt, however, refused to fire his friend, who resigned from the Cabinet in late 1933 on account of illness. The Cabinet was also disturbed by the appearance on the Morgan list of another of FDR’s old friends, Norman H. Davis, a roving ambassador in the State Department. Davis, however, was able to retain his place in the administration, and used his post later to enable the Morgans to recoup their political fortunes in the later New Deal. Chernow,
House of Morgan
, pp. 369–74. Other notables on the Morgan preferred list included former President Calvin Coolidge; Charles Francis Adams of the famed Boston Adams family, secretary of the Navy under Hoover and father-in-law of Harry Morgan, son of J.P.

Morgan, Jr.; John J. Raskob of DuPont, Democratic National Committee chairman; former Secretary of the Treasury William Gibbs McAdoo, a senator actually sitting on the Pecora committee; and many others.

Norman Davis, son of a successful Tennessee businessman and a millionaire from financial dealings in Cuba before World War I, was known, correctly, as a longtime friend of the Morgans. Davis had been a close friend of key Morgan partner Henry P. Davison, and was made Morgan’s representative to Cuba in 1912, negotiating a $10 million Morgan loan to the Cuban government two years later. Davis became a financial adviser on foreign loans to Secretary of the Treasury McAdoo during World War I, and after the war worked with Morgan partner Thomas W. Lamont as a financial adviser to the American delegation to the Paris Peace Conference. During the Wilson administration, Davis had become undersecretary of state and was a director of the American Foreign Banking Corporation, headed by Albert Wiggin of Chase. See G. William Domhoff,
The Power Elite and the State: How Policy Is Made in America
(New York: Aldine de Gruyter, 1990), pp. 115–16.

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The Colonial Era to World War II

Similarly, Pecora was able to put Wiggin in the dock for profitably short-selling Chase stock on a loan from Chase.58 He badgered and ridiculed J. P. Morgan himself, and drove McCain into resigning from the bank. Aldrich used this crisis to become the dominant force at Chase, and to assume the post of chairman of the board in January 1934.

Ferdinand Pecora has received little but adulation from the media and historians. Ironically, his harassment and persecu-tion of Wall Street originated with Herbert Hoover. As early as 1919, Hoover had called for government regulation of the stock market to eliminate “vicious speculation.” In 1928 and 1929, Hoover had pioneered in the view that the problem of bank credit was that too much of it was going
to the stock market
rather than that there was too much bank credit, period. After the crash, President Hoover naturally segued into charging that the collapse of stock prices was caused by the vicious action of short-sellers, forgetting that for every short-seller there must be a buyer. Under threat of regulation, Hoover forced Morgan man Richard Whitney, head of the New York Stock Exchange, to agree “voluntarily” to withhold loans of stock for purposes of short-selling.

After forcing the stock exchange to restrict short-selling in the crisis of late 1931 and yet again in February 1932, but being dis-satisfied with continuing declines in stock prices, President Hoover finally carried out his threat and pressured the U.S. Senate to investigate the New York Stock Exchange, even though he admitted that the federal government had no constitutional jurisdiction over the exchange, which was a New York institution. Hoover continually and hysterically denounced what he termed “sinister” and “systematic bear raids” on stocks, as well as “vicious pools . . . pounding down” security prices, 58The Rockefeller forces, noted their friendly biographers, had

“thrown [Wiggin] to the wolves.” Peter Collier and David Horowitz,
The
Rockefellers: An American Dynasty
(New York: Holt, Rinehart and Winston, 1976), p. 161; and Burch,
Elites
, 3, p. 39.

From Hoover to Roosevelt:

313

The Federal Reserve and the Financial Elites

“deliberately making a profit from the losses of other people”—

which of course is what bulls and bears always do from each other. Angrily replying to the protest of New York bankers, Hoover used some crystal ball of his own to assert that current prices of securities did not represent “true values”; instead, he declared, the vicious “propaganda that values should be based on earnings at the bottom of a depression is an injury to the country and to the investing public.” Mr. Hoover’s preferred alternative criterion? The absurd one of the public being “willing to invest on the basis of the future of the United States.”59

Hoover, lacking any knowledge of the market, was foolishly convinced that all-powerful Democratic speculators, headed by John J. Raskob of DuPont and Bernard Baruch, were conducting bear raids to drive down the prices of stocks. It was in vain that Whitney and the Morgans tried to pooh-pooh these fantasies.

Hoover kept pressing the Senate Banking and Currency Committee to conduct hearings on “short-selling in the stock exchange,” beginning his pressure in late February 1932. Sensing disaster from these bull-in-a-china-shop tactics, Thomas Lamont vainly pleaded with Hoover to suspend his campaign.

Finally, the hearings got under way in April 1932, the first witness, Richard Whitney, terming Hoover’s charges “purely ridiculous.” When, in private, Hoover told Lamont that short-selling by bears was responsible for all economic ills, including business stagnation and falling prices, and that “real values” were being destroyed by bear raids, Lamont tartly replied: “But what can be called ‘real value’ if a security has no earnings and pays no dividends?”60

In late April, a new subcommittee broadened the Senate inquiry from the fruitless attempt to discover a Democratic bear conspiracy, to include pools and stock market manipulations in general. The short-selling emphasis seemed ridiculous when 59Rothbard,
America’s Great Depression
, pp. 278–79; see also, pp. 170, 219, 241.

60Chernow,
House of Morgan
, pp. 352–53.

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The Colonial Era to World War II

the Morgans stepped in to try to revive a crash in the bond market—a market where short-selling had been prohibited.

The Senate subcommittee hearings were suspended in late June, but they took on a very different, and fateful, aspect when they reopened in January 1933, with Ferdinand Pecora of New York as chief counsel. The aggressive Pecora, a former chief assistant district attorney in New York, proceeded to launch a savage and demagogic assault on Wall Street in general and on the Morgan interests in particular. Pecora had been born in Sicily, and emigrated as a child to New York. At first intending to enter the Episcopal ministry, Pecora instead became a lawyer and, at the age of 30, became a district leader of the Progressive Party in 1912, and soon became vice president of the New York State party. Joining the Wilson Democratic Party a few years later, Pecora rose in the district attorney’s office during the 1920s. Politically ambitious, Pecora ran unsuccessfully for district attorney on the Democratic ticket in 1930, and repeated his effort and failure while basking in the public limelight during the Pecora stock market practices hearings in 1933.

Pecora cultivated a media image of feisty integrity, but more astute observers noted that his angry and glaring searchlight pilloried Republican bankers, but managed to overlook such leading Democratic and pro–New Deal investment bankers on Wall Street as Brown Brothers, Harriman and Lehman Brothers. We know now, too, that President Franklin D. Roosevelt, who, in his inaugural address had ranted against “unscrupulous money changers” and in his first fireside chat to the radio public had oddly blamed
investment
bankers for the commercial banking crisis, met secretly with Pecora and with Senate Banking Committee Chairman Duncan Fletcher to urge them to go after J.P. Morgan and Company. Ferdinand Pecora was only too happy to oblige.61

61Joel Seligman,
The Transformation of Wall Street: A History of the
Securities and Exchange Commission and Modern Corporate Finance
(Boston: Houghton Mifflin, 1982), pp. 20–21, 29–30; Kennedy,
Banking
From Hoover to Roosevelt:

315

The Federal Reserve and the Financial Elites
It was the hysterical atmosphere deliberately generated by the Pecora hearings, particularly Pecora’s assaults on Albert Wiggin’s Chase National Bank and on the Morgans, that created the atmosphere that permitted the coalition of New Deal reformers and Winthrop W. Aldrich’s Rockefeller forces to drive through fateful banking and financial legislation during the “First 100 Days” of 1933, legislation that overturned and destroyed the economic power of the Morgan empire. In particular, the Roosevelt administration managed to pass the Banking Act (Glass-Steagall Act) of 1933 and the Securities Act of 1933. In a thorough and illuminating analysis of the Pecora hearings, Professor George Benston has demonstrated both the legitimacy and the economic soundness of the maligned practices of the investment bankers, as well as their complete irrelevance to the major anti-Morgan thrust of the Banking Act of 1933: the compulsory separation of investment and commercial banking.62 Benston shows that the charges were generally trumped-up, and the vaunted Pecora “findings” were usually only ad hoc speculation by individual senators.63

The Banking Act of 1933 had three major provisions: (1) the compulsory separation of commercial and investment banking; (2) the provision of federal “insurance” to guarantee all bank deposits; and (3) prohibiting commercial banks from paying interest on their demand deposits. The compulsory separation clauses (a) severely restricted commercial banks from buying
Crisis,
pp. 106–28; Chernow,
House of Morgan
, pp. 362–74; and Ferguson,

“Coming of the New Deal,” p. 16.

62This Glass-Steagall Act of 1933 is not to be confused with the Glass-Steagall Act of 1932, which had broadened the eligibility of bank assets to be rediscounted by the Fed.

63Benston points out, for example, that Albert Wiggin’s much-denounced practice of acquiring Chase stock helped align his managerial interests with that of the Chase bank, and was therefore economically helpful. See George J. Benston,
The Separation of Commercial and Investment
Banking: The Glass-Steagall Act Revisited and Reconsidered
(New York: Oxford University Press, 1990), pp. 88–89, and, more largely, pp. 1–133.

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The Colonial Era to World War II

securities—except, cleverly, that
government
securities were exempt from this restriction; (b) prohibited commercial banks from issuing, underwriting, selling, or distributing any securities (again, government securities were exempt); and (c) prohibited any investment bank, that is, a bank that does underwrite corporate securities, from ever accepting any deposits.

Provision (b), the divestment by commercial banks of underwriting, was a slap by Aldrich and the reformers against the security affiliates that large, commercial banks had developed for investment banking functions, in particular the two largest: Chase’s Chase Securities Corporation and National City Bank’s National City Company. These securities affiliates had been particularly active in the late 1920s, and it was therefore all too easy to blame them for the stock market crash.64

Aldrich had been happy to repudiate the Wiggin-Morgan regime’s Chase Securities Corporation, which was doing badly during the depression anyway, but his main thrust was provision (c), a direct death blow to J.P. Morgan and Company, a private investment bank which also accepted bank deposits. The Rockefeller commercial banks, not tied in much with investment banking anyway and content to use their allied investment banks, could happily strike at Morgan and its characteristic fusion of the two forms of banking.65

Indeed, not only did Winthrop Aldrich agitate for this latter clause, he actually drafted Section 21 of the Senate bill in Glass’s behalf!66

64Ibid., pp. 128–33. The banks set up these wholly owned affiliates by state charter because the National Banking Act, setting up national banks during the Civil War, had been interpreted as prohibiting underwriting operations carried out directly. Ibid., p. 25.

65The National City Bank, powerful rival of Chase in New York, was also unfairly pilloried at the Pecora hearings. See Bentson.

66Edward J. Kelly, III, “Legislative History of the Glass-Steagall Act,” in
Deregulating Wall Street: Commercial Bank Penetration of the Corporate
Securities Market
, Ingo Walter, ed. (New York: John Wiley and Sons, 1985), pp. 53–63.

From Hoover to Roosevelt:

317

The Federal Reserve and the Financial Elites
The Morgans fought back bitterly, William Potter of the Morgan-dominated Guaranty Trust calling Aldrich’s proposal