All the Presidents' Bankers (11 page)

Morgan was especially concerned about the Clayton Antitrust Act, which Congress was considering to strengthen the restrictions against monopolies and anticompetitive practices laid out in the 1890 Sherman Antitrust Act. Having passed the Senate, the bill was headed to a conference committee. Should it pass in its current form, libertarian Morgan believed, it would demonstrate that “the United States Government does not propose to allow enterprises to conduct normal business without interference.”
¹¹

Wilson took Morgan’s concerns seriously. He knew the last thing the United States needed was a credit meltdown. To avoid such a crisis and placate the bankers, he was already rewriting the Clayton Antitrust Act, but he didn’t admit it to Morgan. Wilson calculated that there had to remain some areas of negotiation to better one’s hand.
¹²
Though the two argued over interpretation of the bill, a white flag flew between Wall Street and Washington for the time being. Such periods of strife called for allied, not adversarial, relationships between the president and the bankers, and friendly relations would also promote the global power positioning of both parties.

In general, the war meant that the goodwill extended to bankers and business from the president continued, lending protocols included. An October 15, 1914, news report proclaimed, “American Bankers May Make Loans to War Nations.”
¹³
It was a government decision pushed by the banking contingent that would reverberate throughout the war and afterward, drawing clearer lines of competition among the various Wall Street powerhouses. Though the pro-Allies Morgan Bank sought cooperation with the British, for instance, National City Bank set up international branches around Europe and Russia to compete for future financial power, causing a rift between two of the three biggest New York banks that financed the war.
¹⁴
Partly, that rift had to do with the change of leadership at these firms.

Jack Morgan’s friend James Stillman, head of National City Bank, had ideas about the war that closely reflected Morgan’s own: though the war presented numerous expansion opportunities, old ties to the British and French banks had to be respected in the process, their countries supported unequivocally. Stillman’s number-two man—midwestern-born Frank Vanderlip, who harbored a grudge against the eastern banking establishment and Wilson for cold-shouldering him during his presidential campaign—didn’t share the same loyalties. He was less concerned than his upper-crust boss and the Morgan partners about the war’s outcome and openly opposed American intervention until 1916, by which point German-American relations were more obviously battered. Nor did he support British demands that National City Bank terminate dealings with German banks, to which Stillman had responded that in victory the British would remember the banks that helped them.

Thus, at the end of 1914, it was National City Bank that opened a $5 million credit line for Russia in return for the designation of Russian purchasing agent for war supplies in the United States. The Morgan Bank remained true to its pro-Allies position and chose not to be involved in such dealings, while Vanderlip was more detached and sought to strengthen National City’s position for whatever the postwar world would bring.

Stillman was less interested in war-related financing than Vanderlip, who believed it would augment the bank’s position as well as America’s global status. To him, it was important to forge ahead in Latin America and other underdeveloped countries while the European financial powers were busy with their war. That Stillman took some of this advice to heart enabled National City Bank to cover much ground postwar, not just relative to the European banks but also to the Morgan Bank. As Vanderlip wrote Stillman in December 1915, “We are really becoming a world bank in a very broad sense, and I am perfectly confident that the way is open to us to become the most powerful, the most far-reaching world financial institution that there has ever been.”
¹⁵
Vanderlip’s views ruffled Stillman’s feathers because of Stillman’s past collaboration agreements with the Morgan Bank. But they also ruffled the feathers of Morgan and Lamont in a way that would have huge repercussion for postwar peace.

War Thickens

The situation in Europe was deteriorating quickly. On May 7, 1915, a German U-20 torpedoed the starboard side of the British luxury liner
Lusitania
off the Irish coast. Nearly 1,200 people, including 124 US citizens, were killed.
Though the Germans expressed regret for the loss of American lives, it was a reticent regret. Wilson opened secret talks with the German ambassador Count Johann von Bernstorff to mitigate the targeting of Americans.
¹⁶
But publicly, Wilson issued a harsh note to the German government on May 14, 1915. In response, Morgan conveyed to Wilson his “intense satisfaction of both the substance and the manner of the note to the German Government.”
¹⁷

Morgan’s renowned support for the Allies led to an assassination attempt at his Glen Cove, Long Island, home on July 3, 1915. Shot twice in the groin, he returned to work a few weeks later, renewed in his vigor to defend the Allies.
¹⁸
The shooter—a German nationalist who bombed the US Senate reception room the day before—was sent to a local jail, where he committed suicide before being questioned. The incident left Morgan even more paranoid and reclusive than lore about him suggested he was.
¹⁹

By late summer, the brutality had escalated. On August 19, a German submarine sank another British passenger ship, the
Arabic,
without warning and with more loss of American lives. In response, Wilson negotiated the Arabic pledge of September 1, in which the German government promised not to torpedo passenger lines without warning.

More money would be needed for the Allies to combat their enemies. On September 25, the Morgan partners formed a syndicate to underwrite a $500 million bond issue for the British and French governments. They agreed to forgo their usual managing fee to support the war effort.
²⁰

Wilson remained hesitant about taking the country to war. In early January 1916, he sent Colonel Edward House as foreign policy adviser to London on his third peace mission.
²¹
While there, House met with British foreign secretary Sir Edward Grey to assess the situation. He returned to the United States in early March with the intent to cooperate in an Anglo-American peace plan agreement.

But German-American relations reached a new crisis when a submarine torpedoed an unarmed Channel packet,
Sussex,
on March 24, 1916. Three weeks later, Wilson presented Berlin with an ultimatum: he would break all relations unless Germany abandoned its unrestricted submarine campaign. Though Germany agreed, the peace was tentative.
²²

Still, as a result of Wilson’s attempt to maintain a better relationship with Germany, America’s relations with the Allies, particularly with Britain, deteriorated. Stateside, Wilson focused on his upcoming presidential campaign. Before the election, he reappointed Paul Warburg, a man considered sympathetic to his birth country, Germany, as vice president at the Federal Reserve.
²³

Whereas the last election hinged on policies toward bankers, this one was a referendum on the war. Republican presidential candidate Charles Evans Hughes, along with Theodore Roosevelt and other Republicans, criticized Wilson and his administration for alleged inefficiency and spinelessness toward Germany and Mexico, which was in the midst of a revolution. Wilson accused the Republicans of wanting to take the country into an unnecessary war.

On September 30, 1916, Wilson campaigned before a gathering of the Young Men’s League of Democratic Clubs, with many Tammany men among them, at Wilson’s grand summer residence, Shadow Lawn mansion (now Woodrow Wilson Hall), in West Long Branch, New Jersey.
²⁴
He stressed his domestic achievements, most notably the establishment of the Federal Reserve System, “the great banking system by which the credits of this country, hitherto locked up, the credits of the average man, have been released and put into action.” Contextualizing the establishment of the Federal Reserve System as a marquee Democrat accomplishment, Wilson played up the ineffectiveness of the original plan put forth by Republican Senator Nelson Aldrich.

“The heart of the Aldrich plan was a single central bank,” Wilson told the audience of hopeful politicians, “which was susceptible of being controlled by the very men who have always dictated the financial policy of the Republican Party, whereas the heart of our system is not a great central bank, but a body appointed by and responsible to the government and, by the same token, responsible to the people of the United States.”
²⁵

But control of financial policy was not as partisan as Wilson claimed. In fact, the bankers were largely unconcerned with the party in power, as long as they could influence it. The larger truth that Wilson hid from his prospective voters was that without Wall Street’s help, war financing would have been impossible. The war could not be fully funded publicly; it needed the support of private bankers. Still, Wilson’s general appeals for greater economic and social justice garnered widespread support from organized labor, Socialists, female voters in suffrage states, and farmers in plains states. Despite early returns indicating a victory for Supreme Court Justice Charles Evans Hughes, California handed the Electoral College majority to Wilson in a narrow victory.
²⁶

In the afterglow of his 1916 reelection, Wilson attempted to flex his power in a way he thought could help end the war. He persuaded the Federal Reserve Board to warn American bankers of the dangers to peace posed by continuing to purchase renewable short-term Allied notes and extending the
Allies credit in return—he thought if he could cut off the money supply for the warring nations, he could coax them into peace. The British had virtually exhausted their dollar reserves, and Wilson believed he could force the British and French to the peace table more quickly if he cut off their supply of private bank loans. This was no small request of the bankers, and they did not agree to it. There was too much money to be made from their international clients and too much financial ground to corner while their competitors were getting crippled in the war.

In addition to lending money, American banks were stockpiling foreign securities as a result of the war. Foreign countries decided it was safer to keep their wealth in America than risk losing funds because of military activities.

Before the outbreak of the war, the total amount of foreign securities held by national banks was $15.6 million. By May 1, 1916, it had increased tenfold to $158.5 million. And between May 1 and September 12, 1916, the national banks increased foreign securities holdings so that the total amount of foreign government and other foreign securities was nearly $240 million.
²⁷
This influx of capital greatly enhanced Wall Street’s position as the preeminent global lender and enhanced its ability to reloan funds to other countries and to war-related manufacturers domestically.

Marching Toward War

After another year of bitter trench warfare, Wilson was still convinced that the Allied war effort depended upon supplies from the United States, and he still believed he could use that leverage to force the British and French governments to negotiate peace. The Germans continued with their U-boat campaign, the consequences of which manifested throughout the United States. American ship owners began refusing to send their vessels into the war zone. As goods for Europe piled high on wharves in the United States, growing cries for war rippled across America. It was one thing to remain neutral for moral reasons, but quite another when the war began to hamper the US economy.

Wilson remained skeptical. Still, in his second inaugural address, he declared that the United States would adopt an armed neutrality to protect American commerce without resorting to full-fledged war.
²⁸

Morgan remained the key player in funding the war and handling all government matters of loans and bonds for the Allies. Congress had authorized the Federal Reserve Board and the comptroller of the currency to encourage
the national banks to participate in a $250 million issue of British Exchequer bonds, the proceeds of which would be used to finance the export of materials to Britain. In addition, on March 25, 1917, Colonel House informed Wilson and McAdoo that efforts “will probably be made” to put the Morgan Bank at the “fore in the event [that] any large international financing is to be done in conjunction with this country.”
²⁹

Raising money and waging war continued in lockstep as conditions worsened. A week after Morgan became the government’s de facto wartime bank, German U-boats sank the
Algonquin
and four other US merchant ships.
³⁰
It was the final straw for Wilson. On April 2, 1917, speaking before a joint session of Congress at 8:32
P.M.
, Wilson presented his decision to declare war. The Senate approved the war resolution on April 4, and the House followed on April 6. At 12:14 on Good Friday, the United States was at war on European soil for the first time in its history.
³¹

The outpouring of approval from around the country was immense. Thousands of letters and telegrams offering services and support poured into the White House. They hit Wilson’s desk mixed with hundreds of other papers awaiting his review and signature.
³²
Wilson’s private secretary, Thomas Brahany, singled out just one for the president’s immediate attention: a handwritten note from Morgan dated April 4. It read: