All the Presidents' Bankers (10 page)

The Bankers’ Bank

Officially the Federal Reserve was created in response to the Panic of 1907 and earlier ones. But its main purpose was to elevate the stature of the United States in global financial activities relative to European central banks, and as a result to strengthen American bankers’ dominance domestically and internationally. It served the dual role of perpetuating the power of the president and that of the bankers, and as such, despite publicized differences of opinion on the matter, it served the alliance of the two.

Though the Fed’s decisions were technically “independent,” the body would serve the bankers first, by keeping them flush with money and by acting as their lender of last resort. National banks were automatically members of the system, as are more than one-third of all US banks, including the biggest ones, today.

The role of running the New York Fed fell to one of the original Jekyll Island authors of the Aldrich plan, Bankers Trust head Benjamin Strong.
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As Ron Chernow wrote, “The New York Fed and the [Morgan] bank would share
a sense of purpose such that the House of Morgan would be known on Wall Street as the Fed bank.”
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Though Morgan was dead, his spirit, will, and legacy would live on. The Fed would not prove able to stop subsequent crashes or crises, but it would always provide financing to the big banks and their closest friends in times of need. Satisfying bankers’ international aspirations, the Federal Reserve Act removed the prohibition keeping US banks from opening overseas branches. It also allowed US banks to use the Fed to rediscount bills in order to raise money for financing foreign transactions, thereby removing the old reliance on London discount firms to provide this capital. For New York, this was a major step toward being able to rival London for global financial superiority.

Though publicly spun by Wilson and others as an “equalizing” measure that made credit available to banks of all sizes, the Fed’s initial charter didn’t even cover smaller savings banks. Additionally, state banks were disadvantaged by a requirement to maintain reserves of 32 percent, whereas the big national banks only had to hold 18 percent.
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As Fed historian William Greider observed, “the Fed may have actually preserved the financial power of those very bankers who the public thought were at last being brought under control.”
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Indeed, the mathematics of Fed operation was designed to serve the big bankers the most, and always would. The money trusts were happy.

Wilson, Morgan, and Compromises

Even so, after he signed the Federal Reserve Act, Wilson was perplexed by and somewhat suspicious about the uncharacteristically public acquiescence of Jack Morgan and the banking community to its rules forcing bankers to abandon any external directorships that could be construed as anticompetitive. (The rule was a concession to the smaller bankers, who thought the eastern establishment connections put them at a disadvantage.) Concerned he might have missed a power play, Wilson sent a telegram on January 6, 1914, to his private secretary, Joseph Patrick Tumulty, requesting his impression of Morgan’s action and asking him what the “leading business men and the public mind generally expect.”
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Tumulty examined the matter on behalf of his boss. It was simple, really. He replied, “The country accepts the Morgan announcement as an act of good faith on the part of ‘big Business’ . . . an indication of the willingness on the part of intelligent leaders in finance to put themselves in accord with the spirit of the times.” In other words, the public accepted that by establishing
the Federal Reserve, Wilson had taken power from the banks and put it in the White House, and the bankers felt it a small price to pay to relinquish the official trappings of interlocking directorships (with the men they saw socially anyway) in return for a guaranteed emergency source of money.

But there was a catch. In return for their acceptance, business leaders expected Wilson to “clear up the atmosphere of doubt surrounding the Sherman law” and cease any remaining Roosevelt-era trustbusting. They wanted him to provide “a gentle admonition” to Congress that such legislation must not be undertaken in a spirit of hostility to business, which is now showing itself “ready to meet the administration half way.”
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As Congress debated strengthening this antitrust legislation, Wilson reflected the renewed camaraderie and expected reciprocity from the banking and business community by weakening the legislation.

As an additional olive branch to the banking community, and in gratitude for the financial support that Jacob Schiff had given him during the election, on April 30, 1914, Wilson requested that Kuhn, Loeb & Company banker Paul Warburg “provide the country the great service” of accepting his appointment to the Federal Reserve Board.
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The bankers didn’t have to clamber for a spot on the board after all. The president handed it to them. Now, two of the six Jekyll Island authors were part of the Federal Reserve System leadership: Warburg in Washington and Strong in New York. Moreover, America had the currency-creation ability necessary for any rising superpower to compete for world power. This ability would soon be tested on the global stage as the United States approached World War I.

CHAPTER 2

T
HE
M
ID
-1910
S
: B
ANKERS
G
O TO
W
AR

“The war should be a tremendous opportunity for America.”

—Jack Morgan, personal letter to President Woodrow Wilson, September 4, 1914

B
OTH
F
EDERAL
R
ESERVE AND DOMESTIC ANTITRUST ISSUES WERE SOON
overshadowed by more ominous events occurring overseas. On June 28, 1914, a Slavic nationalist in Sarajevo murdered Archduke Franz Ferdinand, heir to the Austrian throne. The battle lines were drawn. Austria positioned itself against Serbia. Russia announced support of Serbia against Austria, Germany backed Austria, and France backed Russia. Military mobilization orders traversed Europe. The national and private finances that had helped build up shipping and weapons arsenals in the last years of the nineteenth century and the early years of the twentieth would spill into deadly battle.

Wilson knew exactly whose help he needed. He invited Jack Morgan to a luncheon at the White House. The media erupted with rumors about the encounter. Was this a sign of tighter ties to the money trust titans? Was Wilson
closer to the bankers than he had appeared? With whispers of such queries hanging in the hot summer air, at 12:30 in the afternoon of July 2, 1914, Morgan emerged from the meeting to face a flock of buzzing reporters. Genetically predisposed to shun attention, he merely explained that the meeting was “cordial” and suggested that further questions be directed to the president.
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At the follow-up press conference, Wilson was equally coy. “I have known Mr. Morgan for a good many years; and his visit was lengthened out chiefly by my provocation, I imagine. Just a general talk about things that were transpiring.”
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Though Wilson explained this did not signify the start of a series of talks with “men high in the world of finance,” rumors of a closer alliance between the president and Wall Street financiers persisted.

Wilson’s needs and Morgan’s intentions would soon become clear. For on July 28, Austria formally declared war against Serbia.
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The Central Powers (Germany, the Austro-Hungarian Empire, the Ottoman Empire, and Bulgaria) were at war with the Triple Entente (France, Britain, and Russia). While Wilson tried to juggle conveying America’s position of neutrality with the tragic death of his wife, domestic and foreign exchange markets were gripped by fear and paralysis.
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Another panic seemed a distinct possibility so soon after the Federal Reserve was established to prevent such outcomes in the midst of Wilson’s first term. The president had to assuage the markets and prepare the country’s finances for any outcome of the European battles.

Not wanting to leave war financing to chance, Wilson and Morgan kicked their power alliance into gear. At the request of high-ranking State Department officials, Morgan immediately immersed himself in war financing issues. On August 10, 1914, Secretary of State William Jennings Bryan wrote Wilson that Morgan had asked whether there would be any objection if his bank made loans to the French government and the Rothschilds’ Bank (also intended for the French government).
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Bryan was concerned that approving such an extension of capital might detract from the neutrality position that Wilson had adopted and, worse, invite other requests for loans from nations less allied with the United States than France, such as Germany or Austria. The Morgan Bank was only interested in assisting the Allies.

Bryan was due to speak with Morgan senior partner Henry Davison later that day. Though Morgan had made it clear that any money his firm lent would be spent in the United States, Bryan worried that “if foreign loans absorb
our
loanable money it might affect our getting government loans if we need.”
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Thus, private banks’ lending decisions could affect not just the course of international governments’ participation in the war but also that of the US government’s financial health during the war. Not much had changed since
the turn of the century, when government functions depended on the availability of private bank loans.

Wilson wasn’t going to deny Morgan’s request. He approved the $100 million loan to finance the French Republic’s war needs. The decision reflected the past, but it also had implications for the future of political-financial alliances and their applications to wars. During the Franco-German war of 1870, Jack’s grandfather, J. S. Morgan, had raised $50 million of French bonds through his London office after the French government failed to sell its securities to London bankers to raise funds. Not only was the transaction profitable; it also endeared Morgan and his firm to the French government.

Private banking notwithstanding, on August 19, 1914, President Wilson urged Americans to remain neutral regarding the combat.
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But Morgan and his partners never embraced the policy of impartiality. As Morgan partner Thomas Lamont wrote later, “From the very start, we did everything we could to contribute to the cause of the Allies.”
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Aside from Jack Morgan’s personal views against Germany and the legacy of his grandfather’s decisions, the Morgan Bank enjoyed close relations with the British and French governments by virtue of its sister firms—Morgan, Grenfell & Company, the prestigious merchant bank in London; and Morgan, Harjes & Company in Paris. The bank, like a country, followed the war along the lines of its past financial alliances, even to the point of antagonizing firms that desired to participate in French loans during periods of bitter fighting.

Two weeks after Wilson’s August 19 speech, armed with more leverage because of the war, Jack Morgan took it upon himself to approach Wilson about his domestic concerns. “This war . . . has thrown a tremendous and sudden strain on American money markets,” Morgan wrote. “It has increased the already pronounced tendency of European holders of American securities to sell them for whatever prices they could obtain for them, and the American investor has got to relieve the European investors of these securities by degrees and as he can.”
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Market tensions were exacerbated by the fact that European investors were selling securities to raise money. That was a problem whose only solution required the provision of more loans. But there was something else, with more lasting domestic repercussions echoing the trustbusting of the Morgan interest in US Steel.

Morgan argued that rather than encouraging investors to feel safe, the government’s Interstate Commerce Commission, formed to regulate national industry in 1887, was doing the opposite by restricting eastern railroad freight rates and investigating railroad companies. In Morgan’s mind, war was definitely not a time for enhanced regulations against business. And
if railroad securities fell in value relative to the loans secured by them, banks would not be able to lend enough to make up the difference. The whole credit system could freeze.

As Morgan further warned, “Great depreciation in the value of these securities” would “throw back to the bank loans secured by them” and lead to a “great tieing up of bank funds, which will interfere with the starting of the new Federal Reserve System, and produce panic conditions.” He concluded that the war “should be a tremendous opportunity for America,” but not “as long as the business of the country is under the impression of fear in which it now labors.”
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Levying such serious threats, Morgan became the first banker to reveal that credit, the Federal Reserve, the big banks, the US economy, and the war were inextricably linked. Wilson knew this too.