A History of Money and Banking in the United States: The Colonial Era to World War II (47 page)

It was also yet another case in history of one of the leaders of a revolution (in this case the New Deal Revolution), here the aging Brandeis, being left behind by a movement that had become too radical for him. On Brandeis and Frankfurter, see the illuminating Bruce Allen Murphy,
The Brandeis-Frankfurter Connection: The Secret Political Connection of Two Supreme Court
Justices
(New York: Anchor Press, [1982] 1983), pp. 130–38 and passim.

75In recent years, historians have fortunately been able to shake off the hagiographical tradition, depicting Brandeis as a saintly “people’s lawyer” and devotee of free competition—a tradition typified in Alpheus Thomas Mason,
Brandeis: A Free Man’s Life
(New York: Viking, 1946).

Instead, we are beginning to find a duplicitous statist and advocate of retail cartelization at the expense of consumers. For excellent revisionist works on Brandeis, in addition to Murphy, see Allon Gal,
Brandeis of
Boston
(1980), and Thomas K. McCraw, “Brandeis and the Origins of the FTC,” in
Prophets of Regulation
(Cambridge, Mass.: Harvard University Press, 1984), pp. 80–142. The later revisionist works were inspired by the publication of the letters and papers of Brandeis during the 1970s, a task completed in 1980.

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The Colonial Era to World War II

collectivist views. Thus, Kennedy not only enthusiastically endorsed the New Deal, he went beyond it to advocate a general federal incorporation law, as well as the abolition of private investment banking. In addition, during his buccaneering period in the 1920s, he had repeatedly clashed with the Morgan interests. The extent of Kennedy’s collectivism is seen by his assertion, similar to all collectivist planners: An organized functioning economy requires a planned economy. The more complex the society the greater the demand for planning. Otherwise there results a haphazard and inefficient method of social control, and in the absence of planning the law of the jungle prevails.76

Though Kennedy was a buccaneer, he was scarcely the lone ranger. In the late 1920s and the 1930s, Kennedy worked closely with various Hollywood film corporations, particularly those such as Paramount Pictures, dominated by Lehman Brothers.77

As for Landis, on the other hand, businessmen expecting a socialistic antibusiness force at the helm of the SEC were pleas-antly surprised to find Landis a conscious and deliberate creator of governmental cartelization, of a government-business partnership in behalf of “industrial self-government” under the benign aegis of federal regulation. Landis charmed the financial groups by overcoming his personal dislike of bankers, brokers, and accountants in order to include them in his well of support and regulation. Thus, as early as 1934, Landis wrote in the
Year-book of the Encyclopedia Britannica
: 76Seligman,
Transformation of Wall Street
, p. 105.

77Burch,
Elites,
3, p. 32. Chernow writes of Joseph Kennedy as a Morgan “hobgoblin,” who had been repeatedly snubbed by J.P. Morgan, Jr., in the late 1920s. In fact, Chernow sees the New Deal clash with Morgan in ethnic terms: “The money changers had indeed been chased from the Temple, by the Irish, the Italians, and the Jews—the groups excluded from WASP Wall Street in the 1920s.” Chernow,
House of
Morgan
, p. 379.

From Hoover to Roosevelt:

325

The Federal Reserve and the Financial Elites
In all its efforts the [Securities and Exchange] Commission has sought and obtained the cooperation not only of the exchanges, but also of brokerage houses, investment bankers, and corporation executives, who in turn recognize that their efforts to improve financial practices are now buttressed by the strong arm of the government.78

Landis also shrewdly won over the accounting profession, which had been fearful of New Deal attempts to dictate to and penalize the nation’s accountants. Instead, Landis explicitly offered that profession, previously resentful of domination by corporate clients, the opportunity to cartelize and rule the securities roost, under the benevolent aegis of the SEC. As historian Thomas McCraw puts it,

[I]t struck him [Landis] as far preferable to use their [the accountants’] existing expertise and to make their professional institutions the vehicle of change, rather than attempting to force results with direct government action.79

As a result, the accounting profession took to Landis and the SEC with alacrity. The American Institute of Accountants quickly formed a Special Committee on Cooperation with the Securities and Exchange Commission, and this group functioned as a permanent liaison with the SEC. A leading scholar of accountancy soon noted that, with the establishment of the SEC policy, the control function of accounts takes on a new and quite different form. Instead of being merely a tool of control by business enterprise they become a tool for the control of business enterprise itself.

78McCraw, “Landis and the Statecraft of the SEC,” in
Prophets of
Regulation
, p. 188. Ferdinand Pecora, however, resisted this new Landis dispensation, which he regarded as a sellout to Wall Street. After six months as an SEC commissioner, Pecora resigned to accept an appointment as a justice on the New York State Supreme Court.

79As McCraw puts it, “When the leaders of the profession realized that a unique opportunity to gain respect lay at hand, their hostility to regulation abruptly ceased.” Ibid., p. 190.

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

In other words, the scholar, D.R. Scott, was noting the won-drous fact that whereas until the SEC, accountants were forced to subordinate themselves to their private business clients on the market, the SEC was enabling accountancy to enter a new era: where accountants could turn the tables by serving the central government to control and dominate their clients.80

In particular, Landis set up a special accounting subdivision headed by a chief accountant, who quickly became the most important auditing regulator in the United States. The chief accountant happily accepted the charge of driving toward more rigorous audits, cracking down against violators, and setting up compulsory uniform accounting standards. In 1937, the chief accountant began the practice of issuing much-vaunted

“Accounting Series Releases,” laying down a network of stan-dardized accounting practices for the profession. Much of the SEC’s power to enforce guidelines was deliberately delegated to the professional associations of accountants, thus further enlisting the organized profession as surrogate cartelists and enforcers.

One charm the SEC regulations had for the accountants is that the SEC acts required a large number of new financial statements by “an independent public or certified accountant”—

provisions that created a welcome substantial increase in the demand for accountants. As a result, while the number of lawyers and physicians in the nation increased by about 71 percent between 1930 and 1970, the number of accountants swelled by no less than 271 percent.81

Finally, Landis’s shrewd strategy induced the New York and other regional stock exchanges to collaborate and run their own regulation, under the wing, of course, of the federal government. In a series of addresses to the New York Stock Exchange Institute during 1935, Landis called for “self-government” as the crucial principle. Indeed, Landis carefully 80Ibid.

81Ibid., pp. 191–92.

From Hoover to Roosevelt:

327

The Federal Reserve and the Financial Elites
worked out the SEC rules in a series of negotiations with the exchanges. In early 1937, Landis outlined his strategy candidly in a major address. Regulation, Landis noted, welded together existing self-regulation and direct control by government. In so doing, it followed lines of institutional development, buttressing existing powers by the force of government, rather than absorbing all authority and power to itself. In so doing, it made the loyalty of the institution to the broad objectives of government a condition of its continued existence, thus building from within as well as imposing from without.82

James M. Landis left the SEC in alleged triumph in 1938 to attain the coveted post of dean of Harvard Law School.83 He was succeeded as SEC chairman by commission member William O. Douglas, an old friend of Roosevelt’s, who had developed his own network at Yale Law School. Douglas, even more left-wing and anti-Morgan than Landis, felt that Landis had been lax in hounding Morgan’s Richard Whitney out of his post as head of the New York Stock Exchange. Douglas proceeded to pursue this goal with vigor. But even Douglas was no simple antibusiness socialist, preferring to continue cartelization by working with dissident anti-Morgan groups within the stock exchange, led by the Rockefeller-oriented E.A. Pierce. Douglas was particularly able to work with the retail commission brokers, led by young St. Louis stockbroker William McChesney 82Ibid., p. 192

83In McCraw’s worshipful account, Landis’s brilliant achievement, achieving the status of a living “legend” before he was 40 (Landis was born in 1899) and apparently slated for the Supreme Court, was succeeded by tragic decline. Burnt out and unhappy in academia, Landis gradually but surely went into decline, marked by alcoholism. Finally, Landis was jailed for failure to file income tax returns for six years, and suspended from the practice of law for a year in July 1964. Shortly afterward, Landis died in his pool, either of heart attack or suicide. Landis’s house and effects were promptly seized by the IRS, and sold to settle his tax claims. Some may call this denouement a terrible tragedy; others, poetic justice. McCraw,
Prophets of Regulation
, pp. 203–09.

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

Martin, Jr., who resented the elite floor traders led by Whitney and the Morgans. It was these dissidents who ousted Whitney and took over the stock exchange, and whose tough new disclosure rules unexpectedly turned up the financial irregularities of Richard Whitney, that were to send him to the penitentiary for embezzlement in 1938. As Douglas exclaimed at this stroke of good fortune: “The Stock Exchange was delivered into my hands.”

Douglas cunningly used the Whitney crisis, coming on top of widespread denunciations of short-sellers allegedly causing a stock collapse during the 1938 recession, to complete the anti-Morgan and cartelizing coup at the New York Stock Exchange.

William McChesney Martin was named head of the exchange in a new, full-time salaried post as president, and Douglas and Martin proceeded to conduct what Professor McCraw correctly terms a “carefully orchestrated” series of negotiations to hammer out a new cooperative SEC–Stock Exchange structure. Both men used time-honored tactics: Douglas employing severe pressure to force his desired changes; Martin pretending to oppose the changes, but “rais[ing] the specter of direct SEC

intervention to persuade his recalcitrant colleagues to accept the new system.” In the end, both men effected a cartelizing revolution, achieving their common goals. As McCraw concludes: “Again, the SEC had used the circumstances of an evanescent crisis to work permanent change, insisting all the while that the exchange itself propose and adopt the new rules as its own.”84, 85

The New Dealers completed their financial revolution as well as their successful multipronged assault against the Morgans, 84McCraw,
Prophets of Regulation
, pp. 352–53. See also ibid., pp. 193–96.

851938 saw the extension of federal regulation and cartelization to the once free, decentralized and unregulated over-the-counter market. In 1933, the elite investment bankers in the Investment Bankers’ Association, eager to cartelize and regulate the over-the-counter market, seized the opportunity offered by the National Recovery Administration (NRA) to
From Hoover to Roosevelt:

329

The Federal Reserve and the Financial Elites
with their most implacably radical piece of legislation: the Public Utility Holding Act of August 1935. Urged on by Roosevelt himself, the administration insisted on driving through the drastic “death sentence” clause, abolishing all holding company systems in the public utility industry. By 1932, the public utility industry, formerly mired in separate locations, had been producing almost 50 percent of its output in three efficient nationwide holding companies. One was Samuel Insull’s independent draft a very strict “Code of Fair Competition.” The association then established an Investment Bankers Code Committee that could pursue stringent enforcement of the code using the powers of the federal government.

There was one weakness of the cartel, however: it did not include the smaller but numerous noninvestment-bank over-the-counter dealers.

When the Supreme Court ruled the NRA unconstitutional in the
Schechter
decision in May 1935, Landis promptly stepped in to try to reconstitute the code under the aegis of the SEC. The code committee, now reconstituted in an Investment Bankers Conference Committee, engaged in lengthy negotiations with the SEC, to try to replicate the SEC

structure for the organized stock exchanges. Finally, in early 1938, Senator Frank Maloney (D-Conn.), a friend of Chairman Douglas, pushed through the Maloney Act, which provided that the over-the-counter industry could establish its own private association that would be invested with the power, under SEC supervision, to fine, suspend, or expel those dealers found in violation of rules jointly worked out with the SEC.

This new association, so reminiscent of the NRA, was specifically declared exempt from the antitrust laws.

The over-the-counter industry happily responded to the Maloney Act by creating the National Association of Securities Dealers (NASD), a private association invested with government power. The NASD promptly fixed a uniform dealer commission rate of 5 percent—an open measure of cartelization—and, while no broker or dealer was required to join the NASD, nonmembers were prohibited by law from engaging in any securities underwriting. In effect, membership was compulsory, and the NASD “assumed the functions and structure of a regulatory agency.” At the SEC’s insistence, the NASD strengthened this regulatory function by hiring its own professional staff of several hundred examiners and inves-tigators, and the SEC habitually ratified stern disciplinary measures, including suspension and expulsion, meted out over the years by the NASD. McCraw,
Prophets of Regulation
, pp. 197–200.