Money and Power (8 page)

While Schiff’s partners were sympathetic to his strongly held views about the Russian leadership that had persecuted so many Jews for so long, the American press was outraged. “Kuhn Loeb, German Bankers, Refuse to Aid Allies,” the headlines screamed. With Schiff’s decision, the responsibility for raising the $500 million fell to J. P. Morgan, and soon one Wall Street firm after another lined up to take part of the debt offering. At Goldman, Sachs, the partners had a rule that no underwriting could be undertaken or any amount of capital committed unless the partners were unanimous in their agreement that the deal should proceed. Given his outspoken views, it was no surprise that Henry Goldman nixed his firm’s participation in the bond deal. “An intense, high-strung and didactic man, when Henry’s partners and sisters begged him to modify, or at least conceal, his feelings, he refused,” Birmingham wrote, “and his public utterances became more frequent and startling.” Goldman, Sachs became lumped into the same category as Kuhn, Loeb—an advocate for an anti-Allied, pro-German stance on the growing conflict. “But my father walked over to J. P. Morgan and Company and put in a personal subscription for himself and personal subscription for my uncle
Harry Sachs, so as to go on the record as to where we stood,”
Walter Sachs observed. Nevertheless, the firm’s decision not to participate in the bond offering would not be good for business.

As the United States’ effort to aid the Allies ratcheted up in the ensuing years, the Goldman partners stepped up their own involvement.
Howard Sachs, Henry Goldman’s nephew, was on active duty with the Twenty-sixth Division.
Paul Sachs, Sam’s son, was a member of the Red Cross in France. “Other members of the joint families were selling
Liberty Bonds, winding bandages, and appearing at rallies to ‘bury the Kaiser,’ ” Birmingham wrote. Henry Goldman did not relent. When finally the partners at Kleinwort, in London, cabled Goldman Sachs in New York with the news that Goldman was “in danger of being blacklisted,” Henry Goldman finally got the message. “
Well, I guess I am out of step,” he said. “I guess I’d better retire.” He agreed to retire from Goldman Sachs on December 31, 1917, eight months after the United States entered the war. “
I am not in sympathy with many trends which are now stirring the world and which are now shaping public opinion,” he wrote his partners on company letterhead, accompanied by the words “Save &
Serve, Buy Liberty Bonds!” “I retire with the best of feeling towards the firm (and all of its members) with which I have been associated for thirty-five years and to which I have given all there is in me.”

In the midst of the war, Goldman Sachs paid out Henry Goldman’s capital contribution to the firm. At first, Goldman kept a desk at the office and agreed “
to give his services to the firm in an advisory capacity.” But this soon proved untenable and he left the firm altogether and set himself up in an office in midtown Manhattan. Of course, Goldman took with him his sizable chunk of the firm’s capital, a not inconsiderable number of clients, plus his general prowess for bringing in new business. He made “
two or three investments that stood him in enormous stead,”
Walter Sachs wrote. Goldman had large, personal equity stakes in
CIT Financial, a lender to small businesses, in
May Department Stores, and in
Sears, Roebuck. Concluded Sachs: “Over the years he probably died a richer man than if he’d stayed in the investment banking business, because those were very successful investments.”

Henry Goldman continued to support Germany after he retired from Goldman. He was made an honorary citizen in 1922, although later the
Nazis would humiliate him. “
Being a Jew, he was actually, I believe … subject to the indignity of being stripped and searched to see whether he was doing anything against Hitler’s Germany,” Walter Sachs wrote. “I would say that he died a disillusioned and unhappy man.”

Goldman’s retirement from the firm started by his father left a hole that would be difficult to fill. “
Henry Goldman was an extraordinary personality, and there’s no question that he made the first great imaginative contribution to the growth of the firm—not that my father didn’t do his share,” Walter Sachs observed. “My father had the dream of making this small commercial paper business an international banking business, and it was he that formed in the early stages the relationships with these various banking houses in the various foreign money centers. It was Henry Goldman who did the first financing of concerns, set up the first financing of concerns like Sears, Roebuck and
Woolworth and Continental Can. So you can see this was a great time.” But the families’ relationship would not outlast the political divisions between the partners.

The Goldmans never again had a role in the firm and never again would Henry Goldman speak to the Sachses. He never again spoke with his sister Louise, who was Samuel Sachs’s wife. The firm fell on hard times, relatively speaking, and would not begin to recover until after the war. The underwriting partnership with Lehman was an early casualty of the split, since it was so heavily driven by the friendship between Henry Goldman and
Philip Lehman. “Lehman Brothers and Goldman, Sachs
continued to try to collaborate on underwriting issues,” Birmingham wrote, “but the relationship between the two firms was not what it had been. There were frequent arguments. Why, the Lehmans demanded, did Goldman, Sachs take all the credit, with their name showily at the top of the ads, for ventures for which Lehmans had supplied the money? Goldman, Sachs in turn asked why the Lehmans expected half the profits on deals originated by Goldman, Sachs. The arguments frequently disintegrated into angry name-calling. ‘They were both too ambitious,’ one banker has said, ‘to stay married.’ ” A formal memorandum ended the relationship and at the same time divided their sixty clients between those where Goldman had the “prime relationship” and those where Lehman did. Not for the last time, Goldman got the better end of the deal: forty-one of the sixty companies went into Goldman’s column, including—of course—Sears.

Indeed, at first, Lehman may have been the better off of the two firms, what with the departure of Henry Goldman from Goldman, Sachs and the dissolution of the Lehman underwriting partnership. After Goldman’s retirement, left behind as partners were five members of the Sachs family: Sam, Harry, Arthur, Walter, and Howard, plus Sam’s brother-in-law
Ludwig Dreyfus and
Henry S. Bowers, who lived in Chicago and ran the firm’s office there. Bowers was the first partner from outside the family and the first non-Jewish partner when he joined the firm in January 1912.

Taking Goldman’s place in the partnership—and replenishing a portion of the capital Goldman took with him—was Waddill Catchings, a “
suave and polished Southerner,” who was then president of the
Sloss-Sheffield Steel & Iron Company and the chairman of the Committee on Co-operation with the Council of National Defense of the United States Chamber of Commerce. He was also increasingly well known, post World War I, for a series of books he co-wrote with names such as
Money, Profits,
and
Road to Plenty
that extolled the “increasingly rosy future” for America after the war. Catchings, a friend and Harvard classmate of
Arthur Sachs, thus became the second partner from outside the families to join Goldman but the first one to be based in New York with real authority at the firm and a penchant for hucksterism. It would be a fateful decision.

W
addill Catchings, born in Sewanee, Tennessee, was the son of
Silas Fly Catchings and Nora Belle Waddill. He graduated from Harvard in 1901 and Harvard Law School in 1904. He has been described, by the
New York Times,
as a “
tall, slender, unassuming man with a full head of thick, white hair and a trace of the South in his speech.” In 1907, for the princely sum of ten dollars a week, he joined
Sullivan & Cromwell, the whitest of the white-shoe law firms on Wall Street.
At Sullivan & Cromwell, Catchings rode the wave of bankruptcies that followed the
Panic of 1907 and proved himself adept at restructuring these forlorn companies and getting himself named the receiver—and getting well paid for his efforts—under the auspices of the bankruptcy court.

In June 1907, soon after Catchings arrived at Sullivan & Cromwell,
Milliken Brothers, one of the country’s largest
steel-construction contractors, filed for bankruptcy protection with $6.5 million in liabilities, including a $3 million bond issued the year before. Milliken, based in New York City, had used the proceeds of the bond issue to build a steel foundry on Staten Island—the only steel mill in New York City—in an effort to become less dependent on the major steel companies in and around Pittsburgh, Pennsylvania. Unfortunately for Milliken, the Staten Island plant ended up costing the firm $1.35 million more than planned. For a generation the Milliken name had been “as good as gold” in the credit markets, and the new leaders at Milliken had decided that the company would finance the extra cost of the Staten Island plant itself, figuring the firm’s long-standing reputation would allow it to replenish the funds as needed. That turned out to be a bad bet as the credit markets deteriorated in the spring of 1907, and the venerable company was forced into bankruptcy.

One of the receivers—August Heckscher, an industrialist from Long Island—was a friend of Catchings and eventually asked him to become involved in the Milliken matter, where he was described as one of the “active managers” of the proceedings. In 1909, Heckscher and Catchings successfully proposed a restructuring plan for Milliken, reorganizing the company’s debts and allowing it to emerge from bankruptcy.

In February 1910, one of the companies in Heckscher’s sprawling empire—the
Central Foundry Company—filed for bankruptcy due, Heckscher allowed, to a “
lack of adequate banking facilities and working capital. The result is an embarrassment we believe to be temporary.” Catchings was named as the receiver for the Central Foundry bankruptcy and promptly assured the markets that the company would continue operating as normally as possible. “Although there is little cash on hand, the accounts receivable are substantial and the collections should, to a great extent, supply the necessary funds for the continued operation of the business.” Catchings eventually became president of Central Foundry and a director of many of the companies that he guided through the bankruptcy process.

During the First World War, Catchings worked for Edward Stettinius, a partner at J. P. Morgan & Co., in the effort to supply the Allies with everything needed to wage a world war. “
For the next three years Mr. Stettinius conducted the most magnificent shopping campaign in the world’s history,”
Time
magazine observed. “He put food, clothes, guns, explosives where the Allies put soldiers. He put them there good enough, cheap enough, soon enough, to win the War.” In March 1917, Catchings became the president of the
Sloss-Sheffield Steel & Iron Company, based in Birmingham, Alabama. In July 1917, Catchings—in his role as the chairman of a committee of the Chamber of Commerce—urged the federal government to create a
Board of National Defense with the authority to negotiate contracts with American businesses to procure the supplies needed to fight the war.

Catchings became increasingly outspoken about the economic cycles and the prospects for American prosperity. Part of his philosophy of business was forged soon after he graduated from Harvard and discovered the harsh realities faced by companies such as Milliken Brothers and Central Foundry. His Harvard professors, he lamented, “
had casually explained that their theories would hold true in the long run. But what people are interested in is the short, not the long, run. So I made up my mind that as soon as I had enough money I would set about reconciling these two phases of business—theory and practice.” Together with
his Harvard classmate
William Trufant Foster he created the Pollak Foundation for Economic Research and then set about publishing a number of books that espoused the idea that the future was rosy as long as businesses focused on “money and profit” and kept production humming at all costs. “
If business is to continue zooming,” he once wrote, “production must be kept at high speed, whatever the circumstances.… Production would bring about consumption. Consumers would find work and spend money which would eventually accrue to the producers.” In a phrase that would echo throughout the American economy at the end of the twentieth century, Catchings declared that the “
business cycle was dead.”

This was the profile of the man the Sachses invited to join Goldman Sachs on January 1, 1918. “
Catchings was a brilliant person,”
Walter Sachs wrote of him years later, “but I’ve always used this term in regard to him: ‘Most men can stand adversity and very few men can stand success.’ In my estimation, he was the second genius in the firm,” after
Henry Goldman. The war had been tough on Goldman’s business. “Things came to a stop,” Sachs observed. “It was impossible to issue securities in the ordinary way. There was relatively little done. We carried on, but it was more or less just carrying on without moving forward.” Catchings’s arrival at the firm coincided with the end of the war and the resumption of the issuance of corporate securities. He “played an amazingly constructive part in that,” Walter Sachs said, but added that despite his brilliance “very often when men are your partners you don’t know everything about them. You only find out things after they cease to be your partners.”

——

W
ITH A SENSE
of renewed optimism in the possibilities that the banking business afforded in the postwar era, the Goldman Sachs partners decided to abandon their offices at 60 Wall Street in 1920 and purchased, for around $1.5 million, a twelve-story “fireproof” office building at 30–32 Pine Street, built on the site where
Marcus Goldman had first started his firm.

Business boomed at Goldman Sachs in the postwar years. Sachs credited Catchings with creating “
such great companies” as
National Dairy Products Corporation—a combination of
Hydrox in Chicago,
Sheffield Farms in New York, and
Rieck McJunkin Dairy Company in Pittsburgh—that later became
Kraft Foods. He also helped to create what became the
General Foods Corporation by combining the
Postum Cereal Company,
Maxwell House Coffee,
Jell-O, and many others.
These companies, and others that Catchings helped to create, remained clients of Goldman Sachs for generations, and Goldman partners took their turns, seriatim, on their boards of directors, further cementing the ongoing and close relationships.