Part 3 FROM HOOVERTO ROOSEVELT: THE FEDERAL RESERVE AND THE FINANCIAL ELITES FROM HOOVERTO ROOSEVELT: THE FEDERAL RESERVEANDTHE FINANCIAL ELITES

This chapter is grounded on the insight that American politics, from the turn of the twentieth century until World War II, can far better be comprehended by studying the interrelationship of major financial groupings than by studying the superficial and often sham struggles between Democrats and Republicans. In particular, American politics in this period was marked by a fierce struggle between two major financial-industrial groupings: the interests clustered around the House of Morgan on the one hand, and an alliance of Rockefeller (oil), Harriman (railroad), and Kuhn, Loeb (investment banking) interests on the other. The Morgans began in investment banking, and moved out into railroads, commercial banking, and then manufacturing; the Rockefeller–Harriman–Kuhn, Loeb alliance began in their three respective original spheres, and moved into commercial banking. In most instances, the two mighty combines clashed: for example, in whether or not Theodore Roosevelt (always closely allied to the Morgans) should use the antitrust weapon to smash Standard Oil, or whether, in his turn, President Taft (allied with the Ohio-based Rockefellers) should try to break up Morgan trusts such as International Harvester or United States Steel. In other areas, the interests of the two mammoths coincided and they were allies: thus, both groups were heavily represented in the drive for measures cartelizing industry that were sought and lobbied for by the National Civic Federation during the Progressive Era; and both groups joined to push through the Federal Reserve System.¹

THE EARLY FED, 1914–1928: THE MORGAN YEARS

In their joining together to draft, and then to lobby for, the new Federal Reserve System, the House of Morgan was clearly very much the senior partner in the enterprise. The secret meeting of a handful of top bankers at the Jekyll Island Club in November 1910 that framed the prototype of the Federal Reserve Act was held at a resort facility provided by J.P. Morgan himself. The Federal Reserve, in its first two decades, contained two loci of power: the main one was the head, then called the governor, of the Federal Reserve Bank of New York; of lesser importance was the Federal Reserve Board in Washington. The governor of the New York Fed from the beginning until his death in 1928, was Benjamin Strong, who had spent his entire working life in the Morgan ambit. He was a vice president of the Bankers Trust Company, established by the Morgans to engage in the new and lucrative trust business; and his best friends in the world were his mentor and neighbor, the powerful Morgan partner Henry P. Davison, as well as two other Morgan partners, Dwight Morrow and Thomas W. Lamont. So highly trusted was Strong in the Morgan circle that he was brought in to be the personal auditor of J. Pierpont Morgan, Sr., during the panic of 1907. When he was offered the post of governor of the New York Fed in the new Federal Reserve System, the reluctant Strong was convinced by Davison that he could operate the Fed as a “real central bank... run from New York.”²

The Morgans were not nearly as dominant in the then-lesser institution of the Federal Reserve Board in Washington. On the original board, there were seven members, of whom two, the secretary of the Treasury and the comptroller of the currency, were ex officio. The Morgan bloc on the original board was led by Secretary of the Treasury William Gibbs McAdoo, son-in-law of President Wilson, whose Hudson and Manhattan Railroad Company in New York had been bailed out personally by J.P. Morgan, who then proceeded to staff the officers and board of Hudson and Manhattan with his closest business associates. From that point on, McAdoo was surrounded by a Morgan ambience.³ Comptroller of the currency was John Skelton Williams, a protégé of McAdoo’s who had also been a director of the Hudson and Manhattan Railroad. Another board member was McAdoo protégé Charles S. Hamlin, who came to the board from the post of assistant secretary of the Treasury. In addition to being a wealthy Boston lawyer—from a Boston financial group long affiliated with the Morgan interests— Hamlin had married into the wealthy Pruyn family of Albany, which had been associated with the Morgan-dominated New York Central Railroad.

If these three were solid Morgan men, the other four Reserve Board members were not nearly as reliable: Paul M. Warburg was partner and brother-in-law of Jacob Schiff of the investment banking house of Kuhn, Loeb; Frederic A. Delano, uncle of Franklin D. Roosevelt, was president of the Rockefeller-controlled Wabash Railway; William P.G. Harding was an Alabama banker whose father-in-law’s iron manufacturing company had prominent Morgan as well as rival Rockefeller men on its board; and Adolph C. Miller was an academic economist at Berkeley who had married into the wealthy Morgan-connected Sprague family of Chicago. Thus, of the seven members of the original board, three were Morgan men (but of whom two were ex officio); one was Kuhn, Loeb; one Rockefeller; one an independent banker with both Morgan and Rockefeller connections; and one was an economist with vague family ties to the Morgans. Hardly complete Morgan control of the board!

But the Morgans not only had by far the most powerful Federal Reserve banker, Benjamin Strong, in their corner, they also had the Republican administrations of the 1920s. Although there were various groups around President Warren G. Harding, as an Ohio Republican he was closest to the Rockefellers, and his secretary of state, Charles Evans Hughes, was a mentor of John D. Rockefeller, Jr.’s, New York Bible class, a leading Standard Oil attorney, and a trustee of the Rockefeller Foundation.⁴ Harding’s sudden death in August 1923, however, unexpectedly elevated Vice President Calvin Coolidge to the presidency.

Coolidge has been misleadingly described as a colorless small-town Massachusetts attorney. Actually, the new president was a member of a prominent Boston financial family, who were board members of leading Boston banks. One, T. Jefferson Coolidge, became prominent in the Morgan-affiliated United Fruit Company of Boston. Throughout his political career, moreover, Calvin Coolidge had two important mentors, both neglected by historians. One was Massachusetts Republican Party Chairman W. Murray Crane, who served as a director of three powerful Morgan-dominated institutions: the New Haven and Hartford Railroad, the Guaranty Trust Company of New York, and AT&T, on which he was also a member of the board’s executive committee. The other was Amherst classmate and prominent Morgan partner Dwight Morrow. Morrow began to agitate for Coolidge for president as early as 1919, and continued his pressure at the Chicago Republican convention of 1920. Dwight Morrow and fellow Morgan partner Thomas Cochran lobbied strenuously for Coolidge at Chicago. Cochran, who was not an Amherst graduate, did not have the Amherst excuse for working for Coolidge, and so he kept in the background. Cochran and Morrow were happy, as prominent Morgan men, to confine their work to the background and to push forward as their front man for Coolidge the large, doughty Boston merchant Frank Stearns, who did have the virtue of being an Amherst graduate.⁵

Secretary of the Treasury throughout all three Republican administrations of the 1920s was the powerful multimillionaire tycoon Andrew Mellon, head of the Mellon interests, whose empire spread from the Mellon National Bank of Pittsburgh to encompass Gulf Oil, Koppers Company, and Aluminum Corporation of America. Mellon was generally allied to the Morgan interests. Furthermore, when Charles Evans Hughes returned to private law practice in the spring of 1925, Coolidge offered his crucial State Department post to longtime Wall Street attorney and former secretary of state and of war, Elihu Root, who might be called the veteran head of the “Morgan bar.” At one critical time in Morgan’s affairs, Root had served as Morgan’s personal attorney. After Root refused the State Department post, Coolidge was forced to settle for a lesser Morgan light, Minnesota attorney Frank B. Kellogg. Undersecretary to Kellogg was Joseph C. Grew, who had family connections with the Morgans (J.P. Morgan, Jr., had married a Grew), while, in 1927, two highly placed Morgan men were asked to take over relations with troubled Mexico and Nicaragua.⁶

The year 1924 indeed saw the House of Morgan at the pinnacle of political power in the United States. President Calvin Coolidge, friend and protégé of Morgan partner Dwight Morrow, was deeply admired by J.P. “Jack” Morgan, Jr. Jack Morgan saw the president, perhaps uniquely, as a rare blend of deep thinker and moralist. Morgan wrote a friend: “I have never seen any president who gives me just the feeling of confidence in the country and its institutions, and the working out of our problems, that Mr. Coolidge does.”

On the other hand, the House of Morgan faced the happy dilemma in the 1924 presidential election that the Democratic candidate was none other than John W. Davis, senior partner of the Wall Street firm of Davis, Polk and Wardwell, and chief attorney for J.P. Morgan and Company. Davis, a protégé of the legendary Morgan partner Harry Davison, was also a personal friend and a backgammon and cribbage partner of Jack Morgan’s. It was an embarrassment of riches. Whoever won the 1924 election, the Morgans could not lose, although they decided to opt for Coolidge.⁷

However, 1928, saw inevitable changes in Morgan domination of monetary policy. Benjamin Strong, sickly all year, died in October, and was replaced by George L. Harrison, his hand-picked successor. While Harrison was a devoted “Morgan loyalist,” he did not quite carry the clout of Benjamin Strong.⁸

The Coolidge administration, too, was coming to an end. The Morgans, again facing an embarrassment of riches, were torn three ways. Their prime goal was to induce their beloved president to break precedent and run for a third term. Not being able to persuade Coolidge, the Morgans next turned to Vice President Charles G. Dawes, who had been connected with various Morgan railroads in Chicago. When Dawes dropped out of the race, the Morgans turned at last to Herbert Clark Hoover, who had been a powerful secretary of commerce during the two Republican administrations of the 1920s. While Hoover had not been as intimately connected with the Morgans as had Calvin Coolidge, he had long been close to the Morgan interests. Particularly influential over Hoover during his administration were two unofficial but powerful advisers—both Morgan partners: Thomas W. Lamont, and Dwight Morrow, whom Hoover consulted regularly three times a week.⁹

Herbert Hoover’s Cabinet was also loaded with Morgan people. As secretary of state, Hoover chose the longtime Morgan lawyer, and disciple and partner of Elihu Root, Henry L. Stimson. Andrew Mellon continued as Treasury secretary, and his undersecretary, who was to replace Mellon in 1931 and was close to Hoover, was Ogden L. Mills, a former congressman and New York corporate lawyer whose father, Ogden L. Mills, Sr., had been a leader of such Morgan railroads as New York Central.¹⁰ Hoover’s secretary of the Navy was Charles Francis Adams, III, from the famous Boston Brahmin family long associated with the Morgans. This particular Adams daughter had been fortunate enough to marry Jack Morgan.

Benjamin Strong’s monetary policy, throughout his reign, was essentially a Morgan policy. The Morgans, through their subsidiary, Morgan, Grenfell in London, had long been intimately associated with the British government and with the Bank of England. Before World War I, the House of Morgan had been named a fiscal agent of the British Treasury and of the Bank of England. After the war began, the Morgans became the sole purchaser of all goods and supplies for the British and French war effort in the United States, as well as the monopoly underwriter in the United States of all British and French bonds. The Morgans played a substantial role in bringing the United States into the war on Britain’s side, and, as head of the Fed, Benjamin Strong obligingly doubled the money supply to finance America’s role in the war effort.¹¹

After the end of the war, Strong’s monetary policy was deliberately guided by the prime objective of helping Great Britain establish, and impose upon Europe, a new and disastrous gold-exchange standard. The idea was to restore “England”—which really meant the Morgans’ English associates and allies—to her old position of financial dominance by helping her establish a phony gold standard. Ostensibly this was a return to the prewar “classical” gold standard. But the return, in the spring of 1925, was at the prewar par, a rate that hopelessly overvalued the pound sterling, which Britain had inflated and depreciated during the fiat money era after 1914. Britain insisted on returning to gold at an overvalued par, a policy guaranteed to hobble British exports, and yet was determined to indulge in continued cheap money and inflation, instead of contracting its money supply to make the prewar par viable. To help Britain get away with this peculiar and contradictory policy, the United States helped to pretend that the post-1925 standard in Europe—this gold bullion-pound standard—was really a genuine gold-coin standard. The United States inflated its money and credit in order to prevent inflationary Britain from losing gold to the United States, a loss which would endanger the new, jerry-built “gold standard” structure. The result, however, was eventual collapse of money and credit in the U.S. and abroad, and a worldwide depression. Benjamin Strong was the Morgans’ architect of a disastrous policy of inflationary boom that led inevitably to bust.

THE HOOVER FED: HARRISON AND YOUNG

While secretary of commerce, Herbert Hoover had been a severe critic of Strong’s inflationary policies. Unfortunately, however, Hoover was in favor of a different form of easy money and cheap credit. When he became president, he tried, like King Canute, to hold back the tides by continuing to generate cheap bank credit, and then using “moral suasion” to exhort banks and other lenders not to lend money for the purchase of stock. Hoover suffered from the fallacious view that industrial credit was productive and “legitimate” while financial, stock market credit was “unproductive.” Moreover, he believed that valuable capital funds somehow got lost, or “absorbed,” in the stock market and therefore became lost to productive credit. Hoover employed methods of intimidation of business that had been honed when he was food czar in World War I and then secretary of commerce, now trying to get banks to restrain stock market loans and to induce the New York Stock Exchange to curb speculation. Roy Young, Hoover’s new appointee as governor of the Federal Reserve Board, suffered from the same fallacious view. Partly responsible for the Hoover administration’s adopting this policy was the wily manipulator Montagu Norman, head of the Bank of England, and close friend of the late Benjamin Strong, who had persuaded Strong to inflate credit in order to help England’s disastrous gold-exchange policy. Norman, it might be added, was very close to the Morgan, Grenfell bank.

By June 1929, it was clear that the absurd policy of moral suasion had failed. Seeing the handwriting on the wall, Norman switched, and persuaded the Fed to resume its old policy of inflating reserves through subsidizing the acceptance market by purchasing all acceptances offered at a subsidized rate—a policy the Fed had abandoned in the spring of 1928.¹³

Despite this attempt to keep the boom going, however, the money supply in the United States leveled off by the end of 1928, and remained more or less constant from then on. This ending of the massive credit expansion boom made a recession inevitable, and sure enough, the American economy began to turn down in July 1929. Feverish attempts to keep the stock market boom going, however, managed to boost stock prices while the economic fundamentals were turning sour, leading to the famous stock market crash of October 24.

This crash was an event for which Herbert Hoover was ready. For a decade, Herbert Hoover had urged that the United States break its age-old policy of not intervening in cyclical recessions. During the postwar 1920–1921 recession, Hoover, as secretary of commerce, had unsuccessfully urged President Harding to intervene massively in the recession, to “do something” to cure the depression, in particular to expand credit and to engage in a massive public-works program. Although the United States got out of the recession on its own, without massive intervention, Hoover vowed that next time it would be different. In late 1928, after he was elected president, Hoover presented a public works scheme, the “Hoover Plan” for “permanent prosperity,” for a pact to “outlaw depression,” to the Conference of Governors. Hoover had adopted the scheme of the well-known inflationists Foster and Catchings, for a mammoth $3 billion public-works plan to “stabilize” business cycles. William T. Foster was the theoretician and Waddill Catchings the financier of the duo; Foster was installed as head of the Pollak Foundation for Economic Research by Catchings, iron and steel magnate and investment banker at the powerful Wall Street firm of Goldman, Sachs.¹⁴

When the stock market crash came in October 1929, therefore, President Hoover was ready for massive intervention to attempt to raise wage rates, expand credit, and embark on public works. Hoover himself recalls that he was the very first president to consider himself responsible for economic prosperity: “therefore, we had to pioneer a new field.” Hoover’s admiring biographers correctly state that “President Hoover was the first president in our history to offer federal leadership in mobilizing the economic resources of the people.” Hoover recalls it was a “program unparalleled in the history of depressions.”¹⁵ The major opponent of this new statist dogma was Secretary of the Treasury Mellon, who, though one of the leaders in pushing the boom, now at least saw the importance of liquidating the mal-investments, inflated costs, prices, and wage rates of the inflationary boom. Mellon, indeed, correctly cited the successful application of such a laissez-faire policy in previous recessions and crises. But Hoover overrode Mellon, with the support of Treasury Undersecretary Ogden Mills.

If Hoover stood ready to impose an expansionist and interventionist New Deal, Morgan man George L. Harrison, head of the New York Fed and major power in the Federal Reserve, was all the more ready to inflate. During the week of the crash, the last week of October, the Fed doubled its holdings of government securities, adding $150 million to bank reserves, as well as discounting $200 million more for member banks. The idea was to prevent liquidation of the bloated stock market, and to permit the New York City banks to take over the loans to stockbrokers that the nonbank lenders were liquidating. As a result, member banks of the Federal Reserve expanded their deposits by $1.8 billion—a phenomenal monetary expansion of nearly 10 percent in one week! Of this increase, $1.6 billion were increased deposits of the New York City banks. In addition, Harrison drove down interest rates, lowering its discount rates to banks from 6 percent to 4.5 percent in a few weeks.

Harrison conducted these actions with a will, overriding the objections of Federal Reserve Board Governor Roy Young, proclaiming that “the Stock Exchange should stay open at all costs,” and announcing, “Gentlemen, I am ready to provide all the reserve funds that may be needed.”¹⁶

By mid-November, the great stock break was over, and the market, artificially buoyed and stimulated by expanding credit, began to move upward again. With the stock market emergency seemingly over, bank reserves were allowed to decline, by the end of November, by about $275 million, to just about the level before the crash. By the end of the year, total bank reserves at $2.35 billion were almost exactly the same as they had been the day before the crash, or at the end of November, with total bank deposits increasing slightly during this period. But while the aggregates of factors determining reserves were the same, their distribution was very different. Fed ownership of government securities had increased by $375 million during these two months, from the level of $136 million before the crash, but the expansion had been offset by lower bank loans from the Fed, by greater money in circulation, and by people drawing $100 million of gold out of the banking system. In short, the Fed tried its best to inflate a great deal more, but its expansionary policy was partially thwarted by increasing caution and by withdrawal of money from the banking system by the general public.

Here we see, at the very beginning of the Hoover era, the spuriousness of the monetarist legend that the Federal Reserve was responsible for the great contraction of money from 1929 to 1933. On the contrary, the Fed and the administration tried their best to inflate, efforts foiled by the good sense, and by the increasing distrust of the banking system, of the American people.

At any rate, even though the Fed had not managed to inflate the money supply further, President Hoover was proud of his experiment in cheap money, and of the Fed’s massive open market purchases. In a speech to a conference of industrial leaders he had called together in Washington on December 5, the president hailed the nation’s good fortune in possessing the splendid Federal Reserve System, which had succeeded in saving shaky banks, restoring confidence, and making capital more abundant by lowering interest rates. Hoover had personally done his part by urging banks to discount more at the Fed, while Secretary Mellon reverted to his old Pollyanna mode in assuring one and all that there was “plenty of credit available.” Hoover admirer William Green, head of the American Federation of Labor, proclaimed that the “Federal Reserve System is operating, serving as a barrier against financial demoralization. Within a few months industrial conditions will become normal, confidence and stabilization in industry and finance will be restored.”¹⁷

By the end of 1929, Roy Young and other Fed officials favored pursuing a laissez-faire policy “to let the money market ‘sweat it out’ and reach monetary ease by the wholesome process of liquidation.”¹⁸ Once again, however, Harrison and the New York Fed overruled Washington, and instituted a massive easy-money program. Discount rates of the New York Fed fell from 4.5 percent in February to 2 percent at the end of 1930. Other short-term interest rates fell similarly. Once again, the New York Fed led the inflationist parade by purchasing $218 million of government securities during the year; the resulting increase of $116 million in bank reserves, however, was offset by bank failures in the latter part of the year, and by enforced contraction on the part of the shaky banks remaining in business. As a result, total money supply remained constant throughout 1930. Expansion was also cut short by the fact that the stock market boomlet early in the year had collapsed by the spring.

During the year, however, Montagu Norman was able to achieve part of his long-standing wish for formal collaboration between the world’s major central banks. Norman pushed through a new central bankers’ bank, the Bank for International Settlements (BIS), to meet regularly at Basle, and to provide regular facilities for cooperation. While the suspicious Congress forbade the Fed from joining the BIS formally, the New York Fed and its allied Morgan interests were able to work closely with the new bank. The BIS, indeed, treated the New York Fed as if it were the central bank of the United States. Gates W. McGarrah resigned as chairman of the board of the New York Fed in February to assume the position of president of the BIS, while Jackson E. Reynolds, a director of the New York Fed particularly close to the Morgan interests, became chairman of the BIS’s organizing committee.¹⁹ Unsurprisingly, J.P. Morgan and Company supplied much of the capital for the new BIS. And even though there was no legislative sanction for U.S. participation in the bank, New York Fed Governor George Harrison made a “regular business trip” abroad in the fall to confer with the other central bankers, and the New York Fed extended loans to the BIS during 1931.²⁰

Late 1930 was perhaps the last stand of the laissez-faire, sound-money liquidationists. Professor H. Parker Willis, a tireless critic of the Fed’s inflationism and credit expansion, attacked the current easy money policy of the Fed in an editorial in the New York Journal of Commerce.²¹ Willis pointed out that the Fed’s easy-money policy was actually bringing about the rash of bank failures, because of the banks’ “inability to liquidate” their unsound loans and assets. Willis noted that the country was suffering from frozen wasteful malinvestments in plants, buildings, and other capital, and maintained that the depression could only be cured when these unsound credit positions were allowed to liquidate. Similarly, Albert Wiggin, head of Chase National Bank, clearly reflecting the courageous and uncompromising views of the Chase bank’s chief economist, Dr. Benjamin M. Anderson, denounced the Hoover policy of propping up wage rates and prices in depressions, and of pursuing inflationary cheap money, saying, “Our depression has been prolonged and not alleviated by delay in making necessary readjustments.”²²

On the other hand, Business Week, then as now a spokesman for “enlightened” business opinion, thundered in late October 1930 that the “deflationists” were “in the saddle.”²³

In August 1930, however, President Hoover took another decisive step in favor of inflationism by replacing Roy Young as chairman of the Federal Reserve Board by the veteran speculator and government official Eugene Meyer, Jr.

THE ADVENT OF EUGENE MEYER, JR.

Eugene Meyer, Jr., differed from Strong and Harrison in not being totally in the Morgan camp. Meyer’s father, an immigrant from France, had spent all his life in the employ of the French international banking house of Lazard Frères, finally rising to the post of partner of Lazard’s New York branch. Eugene, Jr., early broke out from Lazard on his on and became a successful speculator, investor and financier, an associate of the Morgans, and even more closely an associate of Bernard Baruch and Baruch’s patrons, the powerful Guggenheim family, in virtual control of the American copper industry. It is true, however, that Meyer’s brother-in-law, George Blumenthal, had left this post at Lazard to be a high official in J.P. Morgan and Company, and that Meyer himself had once acted as a liaison between the Morgans and the French government.²⁴ By the 1920s, Meyer’s major financial base was his control of the mighty integrated chemical firm, Allied Chemical and Dye Corporation.²⁵

Before World War I, Meyer’s major financial involvement had been with the Guggenheims and the copper industry. By 1910, he was so prominent in the copper industry that he was able to arrange a cartel agreement between his old patrons, the Guggenheims, and Anaconda Copper, each agreeing to cut its production by 7.5 percent. In the same year, Meyer discovered in London a highly productive and profitable new process for mining copper, and was quickly able to become its franchiser in the United States.²⁶

It should not be surprising, then, that, under the regime of World War I collectivism, Meyer began, first, in early 1917, as head of the nonferrous metals unit of Bernard Baruch’s Raw Materials Committee under the Advisory Commission of the Council of National Defense. The nonferrous metals unit included copper, lead, zinc, antimony, aluminum, nickel, and silver. When the War Industries Board took over the task of collectivist planning of industry in August 1917, Meyer assumed the same task there—and was also to become the virtual “czar” of the copper industry.²⁷

More important for his eventual role in the Hoover administration was Meyer’s crucial part in the War Finance Corporation (WFC). The WFC had been set up by Secretary of the Treasury McAdoo in May 1918, ostensibly to finance industries essential to the war effort. Meyer was named the WFC’s managing director. The WFC massively subsidized American industry. During the war, it had two basic functions. One was acting as agent of the Treasury to prop up the market for U.S. government bonds. During the last six months of the war, Meyer spent $378 million to keep government bonds from falling by more than one-quarter point a day, and later resold the bonds to the Treasury at the cost of purchase.

The second and dominant function of the WFC was to subsidize and bail out firms and industries in trouble, allegedly “essential” to the war effort. The WFC began with an authorized capital of $500 million supplied by the Treasury, and with the power to borrow up to $3 billion through the issue of bonds. Its major focus was on utilities, railroads, and the banks that had financed them. Banks were also under strain because many of their savings deposits had been drawn down to help finance the federal deficit. All in all, during the war, the WFC made loans of $71 million, in addition to its bond-price operations.

It was clear that the essential mission of the WFC acted as a camouflage for a government subsidy operation. As Meyer’s approving biographer writes: “The WFC had been created as a rescue mission for essential war-disrupted industries, and Meyer had shaped it into a powerful instrument of public policy.”²⁸

If the WFC, and for that matter the rest of the apparatus of war collectivism, had been strictly war-related, they all would have been dropped swiftly as soon as the Armistice was signed on November 11, 1918. But on the contrary, Baruch, Meyer, the War Industries Board, and most business leaders were anxious to continue the benefits of collectivism indefinitely after the war was over. The goals were twofold: price controls to keep prices up during the expected postwar recession; and a permanent peacetime cartelization of American industry enforced by the federal government. Permanent cartelization was endorsed by the U.S. Chamber of Commerce and by the National Association of Manufacturers. President Wilson, however, prompted by Secretary of War Newton D. Baker, insisted on scuttling the WIB by the end of 1918. Other aspects of wartime government interventionism continued on, however, not the least of which was the War Finance Corporation.²⁹

The War Finance Corporation was a striking example of a wartime government agency that refused to die. After the war, the investment bankers were worried that Europeans, shorn of American aid, would no longer be able to keep up the bountiful wartime level of American exports. Hence, the Morgans urged their friends in the Treasury Department to use the WFC to provide credits to finance American exports, specifically to pay American exporters and then collect the money from foreign importers. While the Wilson administration did not want a permanent government loan program, it persuaded Congress to extend the WFC in March 1919 and to authorize it to lend up to $1 billion over five years to American exporters and to American banks that made export loans.³⁰ Particularly ardent in pressuring Congress was WFC head Eugene Meyer, who had been gravely disappointed when the Wilson administration scuttled the War Industries Board.³¹

Meyer happily plunged into making and encouraging export loans and, while in Europe for the peace conference, he tried unsuccessfully to pressure British banks into issuing $600 million in loans to finance British imports, and to keep the overvalued pound from falling to its market levels. To counter the dangerously inflationary postwar boom, President Wilson shifted David F. Houston from the post of agriculture secretary to Treasury secretary, and Houston boldly set about shifting America to a more laissez-faire and deflationary course. Meyer worked feverishly to keep the inflationary boom going, the WFC approving loans totaling $150 million to finance the exports of cotton, tobacco, copper, coal, and steel. But Treasury Secretary Houston refused to give Meyer his required approval. Houston declared, in fact, that he was proposing ending the WFC, in order to complete the government’s withdrawal from all its wartime activities of government intervention in the economy. Houston pointed out that exports had already attained an unprecedented volume in 1919, and that it was important to bring down inflation. Meyer tried every device to persuade Houston, but he couldn’t go over his head to the president because of Wilson’s illness. Finally, Meyer threw in the towel and resigned his post in May 1920.³²

Unfortunately, however, Eugene Meyer was soon back in the saddle. Recession always follows an inflationary boom. A recession hit in the fall of 1921, and the newly burgeoning farm bloc began its long-term drive to get the government to bring the farmer back to the unprecedented good times he had enjoyed from the artificial export boom created by World War I. During the presidential campaign of 1920, Secretary of Treasury Houston bravely resisted the farm bloc, maintaining that the federal government should do nothing to interfere with the inevitable postwar recession. Eugene Meyer, working for the Harding ticket, put himself at the head of the interventionist forces battling his old laissez-faire enemy. When Houston addressed the annual meeting of the American Bankers Association (ABA) in Washington, he refused to speak if the ABA succumbed to pressure by a group of Memphis bankers and businessmen to have Meyer address the group at the same meeting. When Houston’s ploy was successful, the Memphis group of inflationist and interventionist bankers organized a rump meeting nearby featuring the address by Meyer, who led a fervent campaign for restoration of the WFC, this time stressing government financing of agricultural exports.

The defeat of the Democrats in November was a referendum on World War I, its aftermath, and the inflation and rationing of wartime, rather than against Houston, but Meyer used the victory to step up attacks on Secretary Houston. Organizing a nationwide campaign of demagogy, stressing especially the plight of the cotton farmer, Meyer personalized his assault on Houston’s stalwart laissez-faire views. Combining hyperbole with alliteration, Meyer roasted Houston before the Joint Agricultural Committee of Congress. Meyer thundered,

History records no precedent... for the wholesale sacrifices imposed upon the civilized world by the Secretary’s [Houston’s] present policies for the purpose of maintaining the petty platitudes of the outworn political economy which he professes.³³

Congress duly passed the measure to revive the export lending of the WFC. When Wilson followed Houston’s advice to veto the measure, asking Houston himself to write the veto message in December, Congress easily overrode the veto.

During the interregnum, Meyer and his friends angled for top jobs for him with the new Harding administration, but with Treasury and commerce closed off, Meyer turned down the post of assistant secretary of commerce under Herbert Hoover, correctly expecting Congress to re-enact the WFC. The new president duly reappointed Meyer to be head of the revived WFC, refurbished as an agricultural export aid bureau. In fact, exports were largely forgotten as the WFC was transformed into a simple agricultural relief agency. Under Meyer’s aegis, and supported by Harding, Congress passed the Agricultural Credits Act of 1921, which increased the maximum authorized credits by the War Finance Corporation to $1 billion, and permitted it to lend directly to farmers’ cooperatives and foreign importers, as well as exporters.

Meyer plunged in with a will, heavily financing farm coops, enabling them to buy and store crops, thereby raising farm prices, and presaging the more directly governmental farm price support policies of the Hoover and Roosevelt administrations. The WFC’s first loan was to Aaron Sapiro’s Staple Cotton Cooperative Association. Sapiro was a high-priced young attorney for several California farm co-ops who concocted grandiose plans for voluntary price-raising cartels in cotton, wheat, tobacco, and other crops, all of which turned out to be failures.³⁴ By the summer of 1923, the WFC had loaned $172 million to farm co-ops and another $182 million to rural banks, which in turn loaned money to farmers. The WFC, working closely with farm bloc leaders, appointed a Corn Belt Advisory Committee of farm leaders to pressure Midwestern rural bankers into lending more heavily to farmers in that region.

With banks providing a steady flow of short-term farm loans, and a vast Federal Farm Loan system, established in July 1916, supplying plentiful mortgage loans, the farm bloc still felt a gap in unsubsidized intermediate-term credit. Meyer and the co-op interests duly introduced a bill into Congress calling for a system of privately capitalized agricultural credit corporations, with the Federal Reserve empowered to extend credits and support these corporations. But the farm bloc, supported by Secretary of Commerce Hoover and Secretary of Agriculture Henry C. Wallace, went further, backing a competing bill establishing a large governmentally capitalized system of Federal Intermediate Credit Banks, patterned after the Federal Reserve System and governed by the Federal Farm Loan Board (FFLB), which had already been established to run the Farm Loan System. Congress passed both bills in one Agricultural Credits Act of 1923 in the summer of that year, but the Meyer system was in effect a dead letter; how could a privately financed albeit subsidized credit system compete with one financed by the U.S. Treasury?

With WFC duties now assumed by the new Federal Intermediate Credit system, Eugene Meyer allowed the War Finance Corporation’s authority to make loans expire at the end of 1924. The WFC lingered on with no duties for five years, until Congress finally liquidated it in 1929. Meyer was cheerful about its demise, however, because he was able to use the virtually defunct post to meddle in, and eventually take over, the now-powerful Federal Farm Loan Board (FFLB). Meyer assumed control of the FFLB in March 1927, and continued to run it until the advent of the Hoover administration two years later.³⁵ His lengthy record in charge of inflationary government lending, in addition to his service in helping swing the New York Republican delegation to Hoover at the Republican convention of 1928, made Eugene Meyer eminently qualified to be Hoover’s new governor of the Federal Reserve Board in the autumn of 1930.

MEYER IN THE HOOVER ADMINISTRATION

In the midst of a German and the American bank crises, and a growing depression, Eugene Meyer battled the totally Morgan-run New York Fed for dominance over the Federal Reserve System. The Morgans were even more interested than Meyer in bailing out the European banking systems. In late June 1931, the New York Fed agreed to participate with the Bank of England, the Bank of France, and the Bank for International Settlements in a $100 million loan to try to bail out the German Reichsbank. Soon the Germans were asking for $500 million more to save their banking system. While Harrison was sympathetic, Meyer and the other bankers felt this was too much of a long-term commitment. The German government then asked the Fed, not only for the extra loan, but also for a reassuring statement—clearly mendacious—hailing the “fundamental soundness” of the German economy. Happening to be in New York in the midst of this German crisis on the weekend of July 12, Meyer found out by accident of a secret meeting at the New York Fed on the crisis with the top Morgan people in the administration, including Morgan partners Russell Leffingwell and S. Parker Gilbert; Albert Wiggin, head of the Morgan-run Chase National Bank; Acting Treasury Secretary Ogden Mills; Owen D. Young, chairman of the Morgan-run General Electric, and from the New York Fed, Governor George Harrison and Deputy Governor W. Randolph Burgess. The meeting had already persuaded President Hoover to issue a statement of sympathy for the German situation. Meyer, at this point, went ballistic, insisting that the president’s statement, backed by a meeting of top banking worthies, would be taken by the Germans as well as everyone else as a “moral commitment to help the Germans,” which would either lead to a disastrous blank-check support for German finance, or would make matters worse when that support was repudiated. Meyer also insisted that only the Federal Reserve Board in Washington could legally commit the Fed to such action. By his last-minute intervention, Meyer was fortunately able to block the Morgan cabal from getting Hoover to make the public endorsement. The following week, Hoover, aided by veteran Morgan-oriented lawyer and Secretary of State Henry L. Stimson, agitated again for direct loans to Germany, but Meyer was able to confine Hoover to engineering a Meyer-approved big power “standstill agreement” by which banks throughout the major countries of the world would continue to hold German and other Central European short-term debts without trying to get out of German marks and other shaky currencies of that region.

Generally, Meyer was able to overrule Harrison. Thus, when gold flowed out of U.S. banks after Britain’s disastrous abandonment of the gold standard in late September, Meyer was able to force Harrison—wedded to cheap money—to raise the New York Fed’s discount rate from 1.5 percent to 3.5 percent in October, thereby reversing the gold drain by raising market confidence in the dollar.³⁶

By early September 1931, even before Britain’s abandonment of the gold standard, President Hoover, Eugene Meyer, and the nation’s financial establishment all agreed that America required a massive infusion of more money and credit, under the direction of the federal government. There was one difference: whereas Meyer and the bankers wanted a revival of the War Finance Corporation for government to pour in the new money directly, Hoover first wanted to try a dab of his characteristic government-business partnership to encourage private bankers to contribute the necessary hundreds of millions of dollars to a federal agency. Hoover set up his National Credit Corporation (NCC) to attract $500 million from the banks in order to shore up shaky individual banks. But when the National Credit Corporation was only able to raise $150 million, Hoover quickly and cheerfully threw in the towel, and by the end of November, agreed to introduce a bill into Congress to revive the old WFC and expand it for peacetime uses into a new Reconstruction Finance Corporation (RFC).³⁷

The RFC bill, which sailed through Congress by late January 1932, provided for the Treasury to pour $500 million of capital into the Reconstruction Finance Corporation, which was empowered to issue securities up to an additional $1.5 billion. The RFC could make loans to banks and financial institutions of all types. The theory was that, ensured of freedom from failing, the timid banks would be emboldened to lend massively to business and industry, the money supply would dramatically rise, and prosperity would return. This was the doctrine trumpeted by President Hoover, Meyer, Mills, and Undersecretary of the Treasury Arthur A. Ballantine, a partner of the law firm headed by longtime Morgan attorney Elihu Root. Unsurprisingly, the representatives of groups expecting a massive infusion of federal money—commercial banks, savings banks, life insurance companies, and building and loan (in later years, savings and loan) associations—testifying before Congress “all praised the [RFC] bill in glowing terms, claiming that it was essential to the survival of the money market.” In addition, the RFC was empowered to lend money to railroads, in order to relieve their indebtedness and revivify the railroad bond market. The railroad representatives were also delighted with the bill.

Hoover’s original bill was even more sweeping, also allowing the RFC to make business loans to “bona fide institutions,” but the Senate Democrats, suspicious of excessive executive power over business, killed this proposal. The Senate Democrats also reportedly extracted a promise from Hoover to make the beloved Eugene Meyer chairman of the new RFC. Meyer, doing double duty as governor of the Federal Reserve Board and head of the RFC, was now the most powerful single economic and financial force in the federal government.

The RFC, at the Democrats’ insistence, was to have a board of directors consisting of four Republicans and three Democrats. Three of the Republicans were the ex officio heads of the Federal Reserve Board (Chairman Meyer), the secretary of the Treasury (Ogden Mills, who had replaced Mellon in January), and of the Federal Farm Loan Board (Paul Bestor, Meyer’s protégé and successor). The fourth Republican appointee was former Vice President Charles G. Dawes, a Chicago railroad man in the Morgan ambit.

The RFC was not only patterned after the old War Finance Corporation in philosophy, but also aped its organizational structure and took over many of the WFC’s actual personnel. The general counsel, and the three top examiners, of the WFC happily took up their old posts, while the first secretary of the RFC was George Cooksey, a former director of the WFC who had been a member of that outfit’s remarkably leisurely liquidation committee from 1929 until he assumed his new position in the RFC. Like the War Finance Corporation, the RFC established eight divisions, as well as 33 local loan agencies.

Each of these loan agencies established an advisory committee consisting of the leading local bankers to scrutinize and pass on loan applications. This arrangement placed tremendous political and financial power into the hands of local bankers armed with federal power. Moreover, the Reconstruction Finance Corporation was not required to reveal the names of borrowers or the amounts of its loans to Congress or to the public. A tremendous political and economic power was thus placed in the RFC and bankers associated with it. Even progressive Senator George Norris of Nebraska lamented that he had never envisioned “putting the government into business as far as this bill would put it.”

Hoover and his associates rationalized this power as being a temporary necessity to handle an emergency, supposedly much like World War I, when the prototype of the RFC had been established. Thus, Hoover repeatedly spoke of fighting the depression as the equivalent of fighting a war:

We are engaged in a fight upon a hundred fronts just as positive, just as definite, and requiring just as greatly the moral courage, the organized action, the unity of strength, and the sense of devotion in every community as in war.

Eugene Meyer spoke repeatedly in military metaphors, and Secretary Mills spoke of the “great war against depression... being fought on many fronts,” especially the “long battle... to carry our financial structure through the worldwide collapse.”

And so too did business and financial leaders rationalize their hasty embrace of collectivism in the Reconstruction Finance Corporation. An illuminating article in the Magazine of Wall Street, summarizing the congressional debate over the RFC bill, noted that big business, “always complaining of public intervention in economic matters,” was now beating the drums for intervention, the RFC being supported by big bankers, industrialists, and railroad presidents. The article added:

The answer made by representatives of business to the charge of socialism is that in all great emergencies, war for example, governments have always thrown themselves into the breach, because only they can organize and mobilize the whole strength of the nation. In war every country becomes practically a dictatorship and every man’s resources are at its command; the country is now in an equally great emergency.³⁸

The RFC certainly paid off for these favored business groups. The excuse for the secrecy was that public confidence would be weakened if the identity of the shaky business or bank receiving RFC loans became widely known. But of course these institutions, precisely because they were in weak and unsound shape, deserved to lose public confidence, and the sooner the better both for the public and for the health of the economy, which required the rapid liquidation of unsound investments and institutions. During the first five months of operation, from February to June 1932, the RFC made $1 billion of loans, of which 60 percent went to banks and 25 percent to railroads. The theory was that railroad bonds must be protected, since many of these securities were held by savings banks and insurance companies, alleged agents of the small investor. In practice, the bulk of these RFC railroad loans went to repaying debt. About a third of these loans went to repaying railroad debts to banks. Thus, one of the first RFC loans was $5.75 million to the Missouri Pacific Railroad to repay its debt to J.P. Morgan and Company, and an $8 million loan to the B and O Railroad to repay its debt to Kuhn, Loeb and Company. One of the main enthusiasts for this policy was Eugene Meyer, who touted it as “promoting recovery” by “putting more money into the banks.” It certainly did the latter, at the expense of the taxpayers and of propping up inefficient banks and businesses. The loan to Missouri Pacific was a particularly egregious case, for as soon as Missouri Pacific performed its task of repaying its debt to Morgan, it was gently allowed to go into bankruptcy.

Another consequence of RFC bailout loans to railroads was to accelerate the socialization of the railroad industry, since the RFC, as a large-scale creditor, was able to place government directors on the board of the railroads reorganized after bank-ruptcy.³⁹

While the Democrats in Congress had their way after August in forcing the RFC to report to Congress on its loans, President Hoover had his way in finally persuading Congress to transform the RFC into a bold, “positive” agency empowered to make new loans, to engage in capital loans, to finance sales of agriculture at home and abroad, and to make loans to states and cities, instead of being merely an agency defending indebted banks and railroads. This amendment to the RFC Act, the Emergency Relief and Construction Act of 1932, passed Congress at the end of July, and increased the RFC’s authorized capital to $3.4 billion. Eugene Meyer, suffering from exhaustion, persuaded Hoover to include, in the amended bill, the separation of the ex officio members from the RFC. But Meyer’s double-duty work was greatly appreciated by Felix Frankfurter, soon to be one of the major gurus of the Roosevelt New Deal. Frankfurter telegraphed Meyer’s wife that “Gene... has been the only brave and effective leader in [the Hoover] administration in dealing with depression.”⁴⁰

Free-market financial writer John T. Flynn had a very different assessment of the year of the Hoover-Meyer Reconstruction Finance Corporation. Flynn pointed out that RFC loans only prolonged the depression by maintaining the level of debt. Income “must be freed for purchasing by the extinguishment of excessive debts.... Any attempt to... save the weaker debtors necessarily prolongs the depression.” Railroads should not be hampered from going into the “inevitable curative process” of bankruptcy.⁴¹

In the meantime, Eugene Meyer was promoting more inflationary damage as governor of the Federal Reserve. Meyer managed to persuade both Hoover and Virginia conservative Carter Glass, leading Democrat on the Senate Banking Committee, to push through the Glass-Steagall Act at the end of February, which allowed the Fed to use U.S. government securities in addition to gold as collateral for Federal Reserve notes, which were of course still redeemable in gold.⁴² This act enabled the Federal Reserve to greatly expand credit and to lower interest rates. The Fed promptly went into an enormous binge of buying government securities, unprecedented at the time. The Fed purchased $1.1 billion of government securities from the end of February to the end of July, raising its holdings to $1.8 billion. Part of the reason for these vast open market operations was to help finance the then-huge federal deficit of $3 billion during fiscal year 1932.

Thus, we see the grave error of the familiar Milton Friedman-monetarist myth that the Federal Reserve either deliberately contracted the money supply after 1931 or at least passively allowed such contraction. The Fed, under Meyer, did its mightiest to inflate the money supply—yet despite its efforts, total bank reserves only rose by $212 million, while the total money supply fell by $3 billion. How could this be?

The answer to the mystery is that the inflationary policies of Hoover and Meyer proved to be counterproductive. American citizens lost confidence in the banks and demanded cash—Federal Reserve notes—for their deposits (currency in circulation rising by $122 million by the end of July), while foreigners lost confidence in the dollar and demanded gold (the gold stock in the United States falling by $380 million in this period). In addition, the banks, for the first time, did not fully lend out their new reserves, and accumulated excess reserves—these excess reserves rising to 10 percent of total reserves by mid-year. A common explanation claims that business, during a depression, lowered its demand for loans, so that pumping new reserves into the banks was only “pushing on a string.” But this popular view overlooks the fact that banks can always use their excess reserves to buy existing securities; they don’t have to wait for new loan requests. Why didn’t they do so? Because the banks were whipsawed between two forces. On the one hand, bank failures had increased dramatically during the depression. Whereas during the 1920s, in a typical year 700 banks failed, with deposits totaling $170 million, since the depression struck, 17,000 banks had been failing per year, with a total of $1.08 billion in deposits. This increase in bank failures could give any bank pause, especially since all the banks knew in their hearts that, as fractional reserve banks, none of them could withstand determined and massive runs upon them by their depositors. Second, just at a time when bank loans were becoming risky, the cheap-money policy of the Fed had driven down interest returns from bank loans, thus weakening banks’ incentive to bear risk. Hence the piling up of excess reserves. The more that Hoover and the Fed tried to inflate, the more worried the market and the public became about the dollar, the more gold flowed out of the banks, and the more deposits were redeemed for cash.

Professor Seymour Harris, writing at the time and years before he became one of America’s leading Keynesians, concluded perceptively that the hard-money critics of the Hoover administration might have been right, and that it might be that the Fed’s heavy open market purchases of government securities from 1930 to 1932 “retarded the process of liquidation and reduction of costs, and therefore have accentuated the depression.”⁴³

Herbert Hoover, of course, reacted quite differently to the abject failure of his inflationist program. Instead of blaming himself, he blamed the banks and the public. The banks were to blame by piling up excess reserves instead of making dangerous loans. By late May, Hoover was “disturbed at the apparent lack of cooperation of the commercial banks of the country in the credit expansion drive.” Eugene Meyer’s successor at the RFC, former Ohio Democratic Senator Atlee Pomerene, denounced the laggard banks bitterly: “I measure my words, the bank that is 75 percent liquid or more and refuses to make loans when proper security is offered, under present circumstances, is a parasite on the community.” Hoover also went to the length of getting Treasury Secretary Ogden Mills to organize bankers and businessmen to lend or borrow the surplus credit piled up in the banks. Mills established a committee in New York City on May 19 headed by Owen D. Young, chairman of the board of Morgan’s General Electric Corporation, and the Young Committee tried to organize a cartel to support bond prices, but the committee, despite its distinguished personnel, failed dismally to form a cartel that could defeat market forces.⁴⁴ The idea died quickly.

Not content with denouncing the banks, President Hoover also railed against the public for cashing in bank deposits for cash or gold. Stung by the public’s redeeming $800 million of bank deposits for cash during 1931, Hoover organized a hue and cry against “traitorous hoarding.” On February 3, 1932, Hoover established a new Citizens’ Reconstruction Organization (CRO) headed by Colonel Frank Knox of Chicago. The cry went up from the CRO that the hoarder is unpatriotic because he restricts and destroys credit. (That is, by trying to redeem their own property and by trying to get the banks to redeem their false and misleading promises, the hoarders were exposing the unsound nature of the bank credit system.) On February 6, top-level antihoarding patriots met to coordinate the drive; they included General Charles Dawes, Eugene Meyer, Secretary of Commerce Robert P. Lamont, and Treasury Secretary Ogden Mills. A month later, Hoover delivered a public address on the evils of hoarding: “the battle front today is against the hoarding of currency,” which prevents money from going into active circulation and thereby lifting us out of the depression.

President Hoover later took credit for this propaganda drive putting a check on hoarding, and it is true that cash in circulation reached a peak of $5.44 billion in July 1932, not rising above that until the culminating bank crisis in February 1933. But if true, so much the worse, for that means that bank liquidation was postponed for a year until the final banking crisis of 1933.

THE NEW DEAL: GOING OFF GOLD

The international monetary system that the House of Morgan helped Great Britain cobble together in 1925 lay in ruins when Britain hastily abandoned the gold-exchange standard in late September 1931. The Morgans tried desperately to keep Britain on gold in 1931, and afterward tried to get their bearings in the newly chaotic monetary arena. By the time of Roosevelt’s accession to power in the spring of 1933, the Morgans had thrown in the towel on the American gold-coin standard; indeed, the Morgan-oriented leadership at the Treasury, Mills and Ballantine, had been agitating for going off gold considerably earlier.⁴⁵ But the overriding Morgan concern was always their associates and colleagues in England, and they hoped for a rapid return to some kind of fixed-exchange-rate relation to Britain, and perhaps, by extension, to the other major European currencies as well. The Morgans wanted to reconstruct a regime of monetary internationalism as soon as possible.

But for the first time since the turn of the century, the Morgans were no longer dominant over the monetary thinking of American financial and business elites. In the midst of the cauldron of depression, a new economic and monetary nationalism, a desire for domestic inflation untrammelled by international monetary responsibilities, began to take hold. Backed by proto-monetarist and proto-Keynesian economists eager to spur inflationist federal policies to cure the depression, the shift of business groups toward inflation centered in farm and agribusiness groups, which had been agitating for higher farm prices since the early 1920s, and in industrialists making products for the retail market, who wanted government to pour new money into consumption spending. Thus, in January 1933, powerful business groups formed The Committee for the Nation (more formally, The Committee for the Nation to Rebuild Prices and Purchasing Power), dedicated to getting the government to “reflate” prices back up to 1929 levels, and to get off the gold standard so that the government could issue fiat paper money for that purpose. The co-defenders of The Committee for the Nation were Vincent Bendix, head of Bendix Aviation, and General Robert E. Wood, head of the mighty retail combine of Sears, Roebuck. Others who soon joined them were Frank A. Vanderlip, former president of the National City Bank of New York—the flagship bank in the Rockefeller orbit; James H. Rand, Jr., president of Remington Rand Company, manufacturer of typewriters and other retail products; Lessing Rosenwald, major owner of Sears, Roebuck; Samuel S. Fels, producer of Fels Naptha; Philip K. Wrigley, head of William J. Wrigley Company; E.L. Cord of the Cord automobile company; William J. McAvenny, president of Hudson Motor Company; R.F. Wurlitzer, producer of Wurlitzer musical instruments; Frederic H. Frazier, chairman of the board of the General Baking Company; and a galaxy of farm leaders: Fred H. Sexauer, president of the Dairymen’s League Cooperative Association; Edward A. O’Neal, head of the American Farm Bureau Federation; and Louis J. Taber, head of the National Grange. It should also be noted that Rockefeller’s petroleum products were of course goods largely sold at retail.⁴⁶

Another emboldened inflationist group was the silver mining interest, centered in the Mountain states, which seemingly had lost out permanently to the McKinley and Republican gold forces in the 1890s. Mountain-state senators led the silver bloc in Congress, and Senator Burton K. Wheeler (D-Mont.) introduced a bimetallic bill to reinstitute the silver-gold standard at the old nineteenth-century ratio of 16-to-1. Leading theoretician and lobbyist for the silver bloc was New York banker Rene Leon, who got himself appointed as adviser to the House Ways and Means Committee in unsuccessfully pressing for an international conference to raise silver prices.

More generally, the Rockefeller and Harriman forces had been allied against the Morgans since the turn of the century, and now they and other rising financial groups banded together avidly to overthrow and dethrone the financial and political dominance achieved by the House of Morgan during the Republican decade of the 1920s. Again influential in the new Democratic regime was the veteran speculator and political manipulator Bernard Baruch, who had been czar of the collectivized economy as head of the War Industries Board in World War I, and who yearned to re-establish a similar, collectivist cartelized regime in peacetime, using the depression as the means for achieving this goal. Baruch, since childhood, had been a protégé of the powerful Guggenheim family, who controlled the American copper industry, but who liked to keep a low political profile and operate through Baruch and his network of operatives.

Newer Jewish Wall Street investment banking houses, more anti-Morgan than Kuhn, Loeb, were also rising to help challenge Morgan: notably, Goldman, Sachs and Lehman Brothers, the Lehman family contributing New Deal governor of New York Herbert H. Lehman to the American political scene. Furthermore, Jewish retail interests, led by the Boston Filene brothers, were in favor of more inflation and consumer spending; and longtime Filene and retailer attorney Louis D. Brandeis had become powerful in the Democratic Party, and was helping run the New Deal surreptitiously from his seat on the U.S. Supreme Court. Brandeis was a longtime enemy of the Morgans, as attorney for opposing corporate interests, and a dedicated supporter of retail cartels supported by the government.

Moreover, all these financial and industrial groups were swinging notably leftward, not simply in monetary matters, but also in advocating far more government intervention, including promotion of labor unions, than the Morgans were willing to accept. Thus, these anti-Morgan groups, now gathered in the Democratic Party, were happy to form a coalition with left-wing intellectuals, technocrats, economists, and social workers who wished to staff the planning agencies, all to advance their common New Deal and ultra-statist agenda.

Particularly powerful in the New Deal and in the Democratic Party was the underrated W. Averell Harriman, scion of the great Harriman interests and longtime enemy of the Morgans. Harriman dominated a highly influential new agency set up in the New Deal, the Business Advisory Council (BAC) of the Department of Commerce, which transmitted the influence of the pro-New Deal wing of industry and finance. Also dominant in the BAC was Sidney J. Weinberg of Goldman, Sachs. The Franklin Roosevelt–Hyde Park–Democrat wing of the Roosevelt family had always been close to their Hudson Valley neighbors, the Astors and the Harrimans,⁴⁷ whereas the Oyster Bay–Theodore Roosevelt–Republican wing of the family had always been close to the Morgans.⁴⁸

To return to monetary policy: Eugene Meyer, who, after all, had three years to go in a ten-year term as governor of the Federal Reserve Board, refused President Hoover’s request to resign immediately upon the inauguration of President Roosevelt. But Meyer found out quickly that he could not agree to going off the gold standard and an inflationary higher gold price, and he tendered his resignation as Fed chief in early May 1933.

President Roosevelt’s early monetary appointments sent an important signal of his new orientation and policies. To succeed Meyer, Roosevelt appointed his friend, the young Georgia banker Eugene R. Black, who had been governor of the Federal Reserve Bank of Atlanta. Black’s orientation may be gauged by the fact that, when he left the Fed a year later, he was to spend 16 years climbing up the executive ladder at the powerful Chase National Bank, which by this time had shifted firmly from the Morgan to the Rockefeller camp (see “Banking and Financial Legislation: 1933–1935,” p. 308). Indeed, for the rest of his working life, Eugene Black was to serve at Chase as protégé of none other than the eminent Winthrop W. Aldrich, chairman of the board at Chase and a close kinsman of the Rockefeller family.⁴⁹

Roosevelt’s first secretary of the Treasury was William H. Woodin, who received the appointment after it was turned down by Melvin Traylor, president of the First National Bank of Chicago, one of the main commercial banks in the Rockefeller orbit. Woodin had spent most of his career as a high official of the American Car and Foundry Company in New York, and was now chairman of the board of the American Locomotive Company. Woodin was also a director of such important enterprises as the Harriman-controlled American Ship and Commerce Corporation, as well as the Rockefeller-dominated Remington Arms Company. He had also been a founding director of the County Trust Company of New York, along with the influential Vincent Astor and Herbert H. Lehman. Woodin’s financial associations in New York were therefore in the Harriman-Astor-Lehman-Rockefeller ambit rather than in the Morgan network.

Ill health forced Woodin to resign in December 1933, however, and his place was taken by Henry Morgenthau, Jr., who was to be an important and controversial Treasury secretary for the remainder of Roosevelt’s reign in office. Morgenthau, who rose from undersecretary, was a longtime friend and neighbor of Roosevelt’s, and a gentleman-farmer interested in agriculture. He was backed by his wealthy father, who had been ambassador to Turkey under Wilson, but more important was Henry Jr.’s close links to the powerful investment banking family of Lehman Brothers. Indeed, Henry Jr. was married to a Lehman (her mother was a sister of Herbert H. and Arthur Lehman), and Henry’s nephew Jules Ehrich had married a sister of Philip Lehman. Moreover, Henry Sr. had long been a major stockholder of the Underwood Typewriter Company, and several of his fellow board members were Philip Lehman; Philip’s cousin Arthur Lehman; Maurice Wertheim, who had married Henry Jr.’s sister, Alma; and Waddill Catchings, a top official of Goldman, Sachs.⁵⁰

Two fateful monetary steps were taken in 1933 by the incoming Roosevelt administration. The first and most revolutionary deed, accomplished in April, was to go off the gold standard, to confiscate almost all the gold of American citizens and place it under the ownership of the Federal Reserve, to embargo the export of gold and to devalue the dollar to $35 a gold ounce. This swift policy carried out almost completely the program of The Committee for the Nation. But in March and April even the Morgans had been convinced by the banking crisis to go off gold. Democratic Morgan partner Russell Leffingwell was influential in urging Roosevelt to go off gold and devalue the dollar, and Jack Morgan himself applauded Roosevelt’s decision to inflate and go off gold.

The major theoretician of the inflationists, who had liquidated the assets of his own prior Stable Money Association into The Committee for the Nation, was Yale Professor Irving Fisher, the intellectual forerunner of Milton Friedman (who has hailed Fisher as “the greatest economist of the twentieth century”) and who mechanistically had believed that since the price level was not rising in the 1920s, there was no inflation to worry about and no coming crash. Fisher strongly urged the inflationist devaluation and fiat standard upon Roosevelt, who had asked him for advice. When Roosevelt cast the die against gold, Fisher exulted to his wife, “Now I am sure—as far as we ever can be sure of anything—that we are going to snap out of this depression fast. I am now one of the happiest men in the world.”

Fisher had a personal as well as an ideological stake in rapid inflation. Sure of a permanent prosperity and stock boom in the late 1920s, he had invested all of his wife’s and most of his sister-in-law’s substantial Hazard family fortune in the stock market, and he was desperately anxious for Roosevelt to reflate and to drive up stock prices. As Fisher added in the same letter to his wife: “I mean that if F.D.R. had followed Glass [who had urged him to stay on gold] we would have been pretty surely ruined.” As it happened, the fiat money policy did not restore the stock market and Fisher’s and his wife’s and sister-in-law’s fortune was ruined by his unwise speculations—a mute testimony to the unsoundness of Fisherine monetarism in explaining or counteracting business cycles.⁵¹

On the other side of the gold-standard decision were the bulk of the nation’s economists, who signed a mass petition urging immediate return to gold. They were led by two doughty hard-money men: Dr. H. Parker Willis, who had staunchly opposed the Strong-Morgan inflationism of the 1920s and urged rapid liquidation of unsound assets to promote recovery; and Dr. Benjamin M. Anderson, longtime hard-money economist of Chase National Bank, who had influenced Chase President Albert Wiggin in favor of hard-money and laissez-faire policies. In the executive branch, the major opponent of the new fiat regime was Lewis W. Douglas, Arizona scion of the Phelps Dodge copper mining interests, and Roosevelt’s head of the Bureau of Budget. The fiscally conservative Douglas had, in early 1933, persuaded Roosevelt to make severe cuts in the proposed appropriations of the executive agencies.

Even though monetary nationalism had triumphed, the Morgan interests and the other monetary internationalists were anxious to re-establish fixed exchange rates with Britain, and to rebuild the special relationship with Morgan allies in Britain and western Europe. The ultra-inflationists, led by The Committee for the Nation, were strongly opposed to fixed exchange rates with Britain and wanted to press ahead with monetary or dollar nationalism, higher gold prices, and continued inflation.

Tensions within the administration, and within the industrial and financial communities, centered around the World Economic Conference set for London in June 1933, which had been prepared for a year by the British-dominated League of Nations, in a desperate attempt to restore some sort of fixed-exchange-rate, stabilized international monetary system. The World Economic Conference, with delegates from 64 nations, met on June 12. The gold bloc at the conference, led by the French, urged an immediate restoration of the full, classical gold standard; the British wanted fixed exchange rates, tied to gold or not, but emphasizing that the pound must be cheaper at $4.00, so as not to lose the export advantage Britain had built up in the past two years. The United States, on the other had, wanted to place prime emphasis on continued domestic inflation; currency stabilization, which should not put the pound below $4.25, could wait until some future date after domestic prices had risen.

From the beginning, however, there was great tension between the bulk of the American delegation to London and the Roosevelt administration in Washington. Chief economic adviser to the American delegation was James P. Warburg of Kuhn, Loeb, who took the Morgan line of favoring a new international gold standard at new and more realistic exchange rates. Morgan-oriented George L. Harrison of the New York Fed, and Professor O.M.W. Sprague, were sent by FDR to work on an agreement for temporary stabilization of exchange rates for the duration of the conference. When, however, Sprague and Harrison concluded an agreement on June 16 with the British and French for temporary stabilization of the three currencies, setting the dollar-sterling rate at $4.00 a pound, and pledging the United States not to inflate the currency in the meanwhile, Roosevelt angrily rejected the agreement. Roosevelt gave two reasons to the chagrined Sprague and Harrison: the pound must be no cheaper than $4.25, and Roosevelt could accept no restraint on his freedom to inflate to raise domestic prices. Harrison quit in disgust and returned home—a harbinger of the fate of the Morgans in the years to come.

The World Economic Conference proceeded with lengthy discussions, both the Americans and British talking about an eventual “gold standard” which would enjoy no domestic gold coin or bullion circulation, with gold to be used only as a medium for settling international balances of payments—a foretaste of the eventual Bretton Woods system after World War II. The stubbornness of the United States finally forced the assembled delegates to agree on an innocuous final declaration at the end of June that committed the United States to very little more than its own resolution for eventual return to a sadly denatured gold standard, coupled with a vague agreement to cooperate in limiting exchange-rate speculation.

This declaration, weak as it was, seemed to offer hope of eventual stabilization, and so it was strongly supported by Sprague, Warburg, and by chief brain truster Raymond Moley, assistant secretary of state, who was head of the American delegation to London. Within the administration, the agreement was strongly supported by Douglas, Baruch, and by Undersecretary of the Treasury Dean G. Acheson. Acheson was a disciple of Morgan-oriented lawyer Henry L. Stimson, and one of his Washington law partners, J. Harry Covington, was a director of the Guggenheim-controlled Kennecott Copper Corporation. Sending the proposed declaration to Roosevelt on June 30, Moley pointed out that dollar depreciation during June had brought the pound-dollar rate up to $4.40, well above the $4.25 that Roosevelt had insisted on.

On July 1, however, FDR stunned Moley, the delegates, and the American supporters of the agreement by flatly rejecting the declaration, stating that the United States should be allowed the time “to permit... a demonstration of the value of price-lifting efforts which we have well in hand.” But, adding insult to injury, Roosevelt followed up this rejection on July 3 with an arrogant and contemptuous message to the London conference, which became known as his famous “bombshell message.” Here, Roosevelt denounced any idea of currency stabilization as a “specious fallacy.” In particular, he thundered, “old fetishes of so-called international bankers are being replaced by efforts to plan national currencies” in order to obtain a fixed price level. In short, Roosevelt was now totally and publicly committed to the entire nationalist Fisher–Committee for the Nation program for fiat paper money, currency inflation, and a very steep “reflation” of prices. The idea of stable exchange rates or an international monetary order would fade away for the remainder of the 1930s, and monetary nationalism, currency blocs, and economic warfare would be the order of the day for the remainder of the decade.⁵²

The chagrined supporters of the aborted London monetary agreement soon found it necessary to leave the Roosevelt administration. This included Acheson; Warburg, who had been offered the job of undersecretary of the Treasury before Acheson and who was close to his ancient Kuhn, Loeb allies, the Harriman interests; Lewis W. Douglas, who was soon to write a bitter book attacking the New Deal;⁵³ and Moley, who returned to the academy and who helped run Today and Newsweek with his friends the Astors and Harrimans.

The Committee for the Nation has long been known as the prime mover behind the fiat money and inflationist policy of the early New Deal; what has not been known until recently was the powerful behind-the-scenes role in the committee played by the Rockefeller empire, in conjunction with their longtime international rival, the British Royal Dutch Shell Oil, financed by the Rothschild interests. Thus, a top financier of The Committee for the Nation was James A. Moffett, a longtime director and high official of the Rockefeller flagship company, the Standard Oil Company of New Jersey. Moffett, friend and early supporter of Roosevelt, coordinated his behind-the-scenes agitation for inflation and against the London Economic Conference with New York banker and leading silver-bloc agitator Rene Leon, who functioned as an agent for the powerful Sir Henri Deterding, head of Royal Dutch Shell, who was heading the international agitation for a worldwide cartelized increase in the price of silver. Deterding pressured Roosevelt for inflation, not so much in his capacity as an oil leader, as in a financier of silver production. It turns out that Moffett and Leon, working in tandem, were most influential in successfully pressuring Roosevelt to torpedo the London Economic Conference. Here was a startlingly clear case of Rockefeller (and Royal Dutch Shell) against Morgan.⁵⁴

BANKING AND FINANCIAL LEGISLATION: 1933–1935

The Rockefellers’ and other financiers’ war with the Morgans in 1933 had been building for several years. By the late 1920s, the Rockefellers, along with newly rising financial groups, increasingly resented the Morgan grip over both the Federal Reserve, especially the New York Fed, as well as the administration. Bankers enraged at Benjamin Strong and the New York Fed’s low-interest policy on behalf of Britain in the 1920s, were led by Melvin A. Traylor, head of the Rockefeller-controlled First National Bank of Chicago. The Rockefellers had never been England-oriented. Traylor led the Chicago bankers in going to the Democratic convention in 1928 and supporting Al Smith, the Democratic nominee. Averell Harriman, of Brown Brothers, Harriman, solidified his support of the Democratic Party during the same year and for similar reasons. Also, brash new ethnic groups rose to challenge Morgan hegemony and were fiercely fought by the Morgans and their controlled New York Fed: these included the Bank of America, a huge new Italian-American-run commercial bank chain in the West; and the rising Irish-American buccaneer Joseph P. Kennedy of Boston, both of whom were Democrats and emphatically outside the WASP-Morgan-Republican structure.

The crucial event occurred within the Morgans’ showcase New York institution, the Chase National Bank, a commercial bank with an investment banking arm, Chase Securities. As a result of the 1929 crash, the Rockefeller-controlled Equitable Trust Company was in vulnerable shape, and its new head, Winthrop W. Aldrich, engineered a merger into Chase in March 1930, making Chase the world’s largest bank. Aldrich was the brother-in-law of John D. Rockefeller, and was destined to be for decades the key Rockefeller man in banking as well as in the manipulation of politicians.

A titanic three-year struggle immediately ensued for control of Chase between the Rockefeller and the Morgan forces, who had previously been in charge. The CEO of Chase had been Morgan man Albert H. Wiggin, with Wiggin ally Charles McCain as chairman of the board. The Rockefeller forces quickly mobilized to make Winthrop Aldrich president of the bank, a move fought desperately but unsuccessfully by Morgan partner Thomas W. Lamont. Aldrich was now president and subordinate to Wiggin and McCain, but the nose of the camel was now in the tent, as Aldrich strove to oust Wiggin and McCain and take over the bank. Supporting Aldrich in this struggle were board members Thomas M. Debevoise, fraternity brother and top counsel to John D. Rockefeller, Jr.;⁵⁵ Vincent Astor, of the famed Astor family and friend and cousin of Franklin Roosevelt; and Gordon Auchincloss, close friend of Winthrop Aldrich. As the conflict came to a climax in late 1932, Lamont found to his horror that several high Chase officials in the Aldrich camp were supporting Roosevelt. Cementing the closeness of Rockefeller and Chase National to Franklin D. Roosevelt was the crucial role of the shadowy, dominant adviser to President Woodrow Wilson, “Colonel” Edward Mandell House. House, a Democratic politician from Texas, had inherited railroads and other properties in Texas, and, during Wilson’s day, was very close to the Morgans. Now, however, House, a key behind-the-scenes adviser to Roosevelt, had shifted to the Rockefeller orbit, impelled by the fact that his daughter was married to Gordon Auchincloss.⁵⁶

At the end of 1932, Aldrich managed to oust Wiggin as chairman of the board of Chase; and he immediately began to use his perch as president to launch a multipronged and savage attack on the Morgan empire. In the first place, he collaborated fully and enthusiastically with the bitter and raucous Pecora–U.S. Senate Banking and Currency Committee assaults on Wall Street and particularly on the Morgan empire. Aldrich happily fed the Pecora committee data blackening the Wiggin-McCain regime at Chase, and Pecora was able to use such material to vilify demagogically the Morgan and other bankers for activities that were legal and legitimate. Thereby, Pecora could appeal both to the ignorance and to the envy of the bedazzled public. Thus, Pecora was able to hector the Morgan bankers for 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

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 persecution 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 dissatisfied 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, “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 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

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 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

The Morgans fought back bitterly, William Potter of the Morgan-dominated Guaranty Trust calling Aldrich’s proposal “quite the most disastrous... ever heard from a member of the financial community.” The opposition was to no avail, however, with President Roosevelt personally urging Senator Glass to retain Section 21. As Chernow writes, “This was the coup de grâce for the House of Morgan.”⁶⁷ J.P. Morgan and Company delayed their final divestment decision, hoping for the passage of Carter Glass’s amendment to the Banking Act of 1935, allowing some securities powers to deposit banks, but Roosevelt delivered the final blow to the Morgans by personally interceding in the House-Senate conference committee to kill the amendment. Upon this defeat, J.P. Morgan and Company made the fateful decision to keep its deposit business and to divest itself of its power center, the investment banking business. The Morgans set up a new Morgan, Stanley and Company to engage in investment banking.⁶⁸

It is a tragic irony that Carter Glass and his theoretician H. Parker Willis were lured into this alliance with the Rockefellers and the New Dealers to clobber the Morgans by coercively divorcing commercial and investment banking. Willis, as noted above, was a trenchant critic of the Strong-Morgan credit inflation of the 1920s. Unfortunately, Willis’s “real bills” approach, which led him to oppose the bank credit expansion, also led him to oppose it for the wrong reason. Contrary to Willis, the problem was not that the banks were buying corporate securities or lending money to the stock market; the problem was that the banks were inflating credit, period. But Willis and Glass, starting with the wrong reasoning, came to the wrong solution: to compel the commercial banks to stop purchasing or issuing securities, as a partial means of reaching the ultimate goal—forcing the banks and the Fed to return to the original concept of confining their credit to short-term self-liquidating “real” bills. Hence, the luring of the reluctant Glass and Willis into uncongenial schemes of socializing and cartelizing Wall Street and helping the Rockefellers destroy the Morgans.

Professor Benston points out that all the provisions of the Banking Act of 1933 helped develop a coherent structure for government cartelization of the banking industry. In the first place, the separation sections, which we have been discussing, helped the commercial bankers get rid of unprofitable securities, and to eliminate the powerful competition of investment bankers for customers’ deposits. As for investment bankers, one-third of them, including J.P. Morgan and Company, hived off that business to stick to deposit banking, leaving the remainder free of their competition. In particular, as we have seen, the Rockefellers rid the commercial banks of unwelcome investment banking competition.

Other Banking Act provisions reinforced the cartelization. Thus, federal deposit insurance guaranteed all bank deposits, thereby cartelizing the industry and supposedly guaranteeing every bank’s success. The prohibition of bank payment of interest on demand deposits was a particularly cartelizing device, since it “forced” the banks collectively to keep payment of interest to their depositors at zero, policing any competing bank that would have liked to break the cartel by bidding for depositors’ accounts.⁶⁹

In addition to all this, the Banking Act of 1933 began the crucial process of stripping away the dominant power of the Federal Reserve Bank of New York (and hence of the Morgans) over the operations of the Federal Reserve System, and of transferring that power to political appointees in Washington. Previously, for example, each Federal Reserve Bank—and therefore the private bankers in that district—had total power over its own open-market operations—and therefore over the movement of bank reserves. In practice, this meant the New York Fed, since open market operations were in U.S. government securities, and the bond market is located in New York. The Banking Act of 1933 began a transfer of power by creating a statutory Federal Open Market Committee (FOMC). The FOMC, however, continued to be in private banker hands, since it consisted of one member from each Federal Reserve District, selected by the board of directors of each Federal Reserve Bank. In practice, these were the governors of each Federal Reserve Bank.

The new law required that every Federal Reserve bank’s open market operation conform to Federal Reserve Board regulations, but each Federal Reserve bank retained the right to refuse to participate in the FOMC’s recommended open market policies. The result of this hybrid system was that the Federal Reserve Board was ultimately responsible for Fed policy, but it could not initiate open market operations. The Federal Reserve Board could ratify or veto FOMC policies, but those policies had to be initiated by the FOMC. The Federal Open Market Committee, for its part, could initiate open market policies, but it could not execute them; execution remained in the hands of the New York Fed and the Federal Reserve banks. The Federal Reserve banks, for their part, could not initiate open market policies, but could obstruct them by failing to execute them.

All in all, the Federal Reserve Bank of New York, while losing much of its power over open market operations in the 1933 act, was able to live with the new arrangement. It was more annoyed over a neglected provision of the act, that forbade the New York Fed (or any other Federal Reserve bank) from conducting negotiations with foreign banks—a direct slap at the crucial New York Fed–Morgan role during the 1920s in making arrangements with the Bank of England and other European banks.⁷⁰

The demagogic eruption of the Pecora hearings also led to another New Deal 100 Days measure that both revolutionized and cartelized the securities industry and delivered another body blow to the House of Morgan. This was the Securities Act of 1933, passed in May, followed the next year by its more powerful successor, the Securities Exchange Act of June 1934. The first act imposed rigorous and expensive laws and procedures for any new securities issues, allegedly to protect the investing public. Its actual effect was to cartelize the sources of new capital, channeling the supply of savings into firms big enough to bear the substantial costs and freezing out smaller and more risky new capital ventures. Even more directly, the Securities Act cartelized the investment banking industry, keeping out any newer and smaller investment banks that might challenge the established giants. While many investment bankers were unhappy with specific provisions and urged amendments, they were on the whole delighted with the basic thrust of the regulation. Thus, testifying on the bill before the House Commerce Committee, George W. Bovenizer, partner in Kuhn, Loeb and Company, and a venerable Morgan enemy, declared that his firm was

wholeheartedly in favor of the type of legislation... suggested by the President. We have stood by now for the past 12 years, or more, and have looked on with apprehension as the good name of investment banker has been put into jeopardy... by the actions of some people who should never have been in the business.... I believe that every honest banker today will look with great favor upon the principle of this legislation as the dawn of a new era.⁷¹

The enforcement of the Securities Act was put into the hands of the Federal Trade Commission, since the accession of Roosevelt in left-wing hands, but a new Securities and Exchange Commission created for this purpose was to take over the enforcement powers in July 1934. By that time, however, Congress had passed the Securities Exchange Act of June 1934, greatly expanding the powers of the Securities and Exchange Commission from compulsory registration of new issues to control over the practices of the exchange as well as to compulsory disclosure for existing securities.⁷²

The securities legislation constituted a body blow to the Morgan empire because the Morgans dominated the New York Stock Exchange, especially through the exchange’s president, Richard Whitney. Whitney, a scion of the prominent Morgan-oriented financial family, was the head of Richard Whitney and Company, the major bond broker for J.P. Morgan and Company. In addition, Richard’s brother George was a senior partner at the House of Morgan, and was Morgan’s man on such important boards as that of General Motors and of the giant Morgan-controlled public utility holding company, the United Corporation. Since Richard Whitney was the leader of fierce opposition to any government regulation of securities and in behalf of laissez-faire, his defeat by the New Dealers, and in particular his later disgrace, tended to discredit his free-market views.⁷³

It had always been assumed that since the Stock Exchange was a New York institution, it could only be constitutionally regulated by the state of New York, rather than by the federal government. The New Dealers, however, considered states’ rights an absurd obstacle in the path of centralizing the economy, and they treated it accordingly. Moreover, by imposing federal regulation and enforcement, they could at one and the same time dominate and cartelize the securities and investment banking industries, while delivering another body blow to the House of Morgan.

The two securities acts were written by New Dealers, many of them young and all eager to radicalize and transform American finance. Substantial roles were played by Federal Trade Commission Chairman Huston Thompson, a Washington State populist, and by the venerable New York trial lawyer Samuel Untermyer, scourge of the House of Morgan as chief counsel of the U.S. Senate’s Pujo Committee in 1912, which had then helped to drive J.P. Morgan, Sr., to his grave. But the most important role in drafting and pushing through the securities acts was played by powerful left-liberal theorist, agitator, and shadowy manipulator Felix Frankfurter, a professor at Harvard Law School. An old friend and adviser to Franklin Roosevelt, Frankfurter specialized in seeding his former students and assistants, his “happy hot dogs,” into powerful positions in the federal government. In particular, Frankfurter folded into the New Deal, and into drafting the securities acts, his disciples James M. Landis, Benjamin Cohen, and Thomas “Tommy the Cork” Corcoran. And standing behind Frankfurter, pulling the strings from his Supreme Court bench, was the even more shadowy master manipulator Louis D. Brandeis, Frankfurter’s mentor from Harvard Law School. Brandeis was able to violate judicial ethics systematically while on the Court, by putting Frankfurter on permanent retainer on his secret payroll, and using Frankfurter as his agent in the political realm. Brandeis, who had been powerful in the Wilson administration, had been fiercely anti-Morgan for decades, and was a longtime legal representative for retail users of Morgan railroads and utilities, particularly for the Filine interests of Boston.^{74, 75}

While the New Deal Left originally wanted security regulation in the hands of the left-dominated Federal Trade Commission (FTC), they were perfectly happy to “compromise” by setting up a specialized Securities and Exchange Commission (SEC). Indeed, Roosevelt cunningly threw a sop to conservatives and moderates by naming his old friend, the Irish-American stock speculator and buccaneer Joseph P. Kennedy, to be chairman of the five-man SEC, while the other commissioners were leftist ideologues from the FTC, including the leading New Dealer writing the legislation, James McCauley Landis. Rounding out the SEC was none other than that scourge of the Morgans and the Wall Street Republicans, Ferdinand Pecora. Landis was to succeed Kennedy when the latter left the SEC chairmanship in 1935.

While Joseph Kennedy was a bit more conservative than his colleagues, especially on the New Deal assault on public utility holding companies, his life as a speculator successfully bamboozled many moderates who did not realize the extent of Kennedy’s 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 pleasantly 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 Yearbook of the Encyclopedia Britannica:

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.

In other words, the scholar, D.R. Scott, was noting the wondrous 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 standardized 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 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 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, 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 Chicago-based utility empire, which collapsed with Insull fleeing to Europe in mid-1932; the other two were Morgan-oriented combines: J.P. Morgan’s directly controlled United Corporation, and General Electric’s Bond and Share Company, General Electric being from its inception in the Morgan ambit. For seven years until 1935, the Federal Trade Commission engaged in massive assaults on the utility holding companies, and Pecora did his snarling best with a retrospective series of blasts against Insull. Finally, Roosevelt set up a National Power Policy Committee in the summer of 1934 to draft legislation abolishing utility holding companies. Arch New Dealer, Interior Secretary Harold Ickes, was chairman of this committee, and general counsel was Benjamin V. Cohen, who drafted the fateful Public Utility Holding Act (PUHA), a measure so radical that Joseph Kennedy felt he had to resign as chairman of the SEC.

The public utility holding companies, led by the Morgans, waged a long ferocious political and constitutional battle against the PUHA. It was led by the Edison Electric Institute, the lobbying organization for the public utilities, and by its general counsel, longtime Morgan attorney and personal friend of Morgan’s, John W. Davis. Also assisting the opposition effort was Wendell L. Willkie, head of the Commonwealth and Southern Corporation, a subsidiary of Morgan’s United Corporation. Davis thundered that the act was “vicious... the last word in federal tyranny... the gravest threat to the liberties of the American citizen that has emanated from the halls of Congress in my lifetime.” But all to no avail, as in 1938 the Supreme Court, tamed and denatured by the New Deal, upheld the constitutionality of the Public Utilities Holding Company.⁸⁶

MARRINER S. ECCLES AND THE BANKING ACT OF 1935

The saga of Marriner Stoddard Eccles has been told many times, not only by his adoring biographer,⁸⁷ but also by numerous historians of the New Deal. How Marriner Eccles, young multimillionaire head of a Western banking and construction empire, had been led by the depression and by his reading of Foster and Catchings, to rethink his previous laissez-faire views, and to arrive, virtually on his own and therefore almost miraculously, at proto-Keynesian conclusions. How he came to impress the New Dealers, and was called first to the Treasury and then soon became the radical New Deal head of the Federal Reserve Board and of the entire Federal Reserve System, to remain chairman of the board until after World War II.

In truth, rediscovering ancient economic fallacies hardly qualifies as a notable achievement. Eccles read Foster and Catchings in early 1931, and adopted wholesale their view of underconsumption as cause of depression, and government deficit spending and stimulation of consumption as the way to recovery. Any intellectual acumen on Eccles’s part would, on the contrary, have led him to realize that Foster and Catchings were writing during the boom of the 1920s, and would have led him to wonder what accounted for the sudden change from boom to depression—a change that can scarcely be explained by an alleged state of permanent underconsumption. Under the influence and assistance of proto-monetarist and radical New Dealer Lauchlin Currie, Eccles soon added governmental monetary inflation to his armamentarium, to make him a comprehensive inflationist and macro–New Dealer. Given such influences, it was easy to become a “Keynesian” slightly before Keynes’s time.

Moreover, it is doubtful that Marriner Eccles’s conversion to statism was purely intellectual. Marriner was the son of David Eccles, who, as a penniless lad and Morman convert, had emigrated from Glasgow to Utah, there to build up one of the largest fortunes in the West. Most of David’s fortune was in banking and sugar manufacturing. When David died in 1912, Marriner, at age 22, managed to elbow aside competing Mormon families of David’s, and assume control of his father’s empire. By the early 1930s, Marriner had expanded the business empire greatly, a business empire centered in a network of bank holding companies throughout the West, and also including milk production and construction as well as sugar. Marriner Eccles’s empire was centered in his bank holding company, the First Security Corporation, and indeed Marriner had pioneered in forming such holding companies in banking.⁸⁸ Eccles’s conversion away from free markets was, indeed, micro as well as macro: as head of the important Amalgamated Sugar Company, Eccles led a vigorous effort to cartelize the sugar industry, and to unite all sugar producers, foreign and domestic, in an allotment plan to form rigorous maximum production quotas for each firm. Furthermore, as a large banker in a shaky banking environment, Eccles was understandably eager to push for federal guarantees of bank deposits, legislation that redounded to his direct benefit.

From the failure of the voluntary sugar cartel, it was an easy step for Eccles to advocate a compulsory cartel plan for all of agriculture: essentially the Agricultural Adjustment Administration’s domestic allotment plan for the federal government to compel restriction of agricultural production in order to raise farm prices. It was also an easy step for Eccles to weave together his banking and sugar interests, to advocate the federal government’s subsidy of farm mortgages, mortgages which of course had been and would continue to be purchased by Eccles’s savings banks.⁸⁹

There was another personal economic reason for Eccles to suddenly look benignly on massive federal public works spending. In 1930, President Hoover decided to build the mammoth Boulder Dam, which became one of the major public works projects of the early depression years. One of the major construction companies in the consortium that built the dam was Utah Construction, with Eccles putting up much of the capital and personally present at the San Francisco meeting where the consortium was formed.⁹⁰

By the time of his appearance at the Senate Finance Committee hearings at the end of February 1933, in testimony that would win him great notoriety, Eccles had worked out a complete collectivist program: not only for macro deficits, public works, and unemployment relief, not only for guaranteed bank deposits, and not only for taxing the rich and subsidizing the poor, but also a plea for agricultural cartels, for federal agencies which would have to approve all new capital issues, and all “means of transportation and all means of communication to ensure their operation in the public interest”; and, as a topper, “a national planning board to coordinate public and private economic activities.”⁹¹

What was unusual about Eccles was not that he was a big businessman who had opted for collectivism—he was only one of many in this era—but that he was willing and eager to move to Washington to carry out these programs personally. Eccles had another personal economic and intellectual interest in serving in Washington in money and banking. Like the Bank of America’s A.P. Giannini, Eccles was a Western outsider to the Morgan-dominated Federal Reserve System of the 1920s, and he had conceived a bitter hatred of the Morgan empire, as well as a crusading desire to transform American banking by shifting power in the Fed, once and for all, from the Morgan- and Wall Street–dominated New York Federal Reserve Board to a non-Morgan politically appointed Federal Reserve Board in Washington.

Two channels have been charted for the way that Eccles’s views became known to the New Dealers. Robert Hinckley, an old friend of Eccles’s and nephew of Senator William King (D-Utah), and another young man, Dean Brimhall, a brother-in-law of Eccles’s, had formed a bimonthly discussion club in Utah called the Freidenkers. On hearing of Eccles’s new views, the Freidenkers became Eccles’s disciples, and Hinckley used Senator King’s influence to get Eccles a hearing at the Senate Finance Committee. Also Marriner was a regent of the University of Utah, and when radical New Dealer Stuart Chase spoke at the Chautauqua lecture series at the university, he was impressed with Eccles’s views. Another, overlooked influence on the New Dealers is the fact that George Dern, Roosevelt’s secretary of war and former governor of Utah, was a financial subaltern of Eccles’s, being a director of two Salt Lake City banks, both part of Eccles’s First Security Corporation holding company.

After a year, in February 1934, Eccles came to Washington as special assistant on monetary and credit matters to Secretary of the Treasury Henry Morgenthau. Eccles found himself frustrated at Treasury, however, since Morgenthau had old-fashioned pro-balanced-budget views. Morgenthau was heavily under the influence of Lewis W. Douglas, still in the administration as head of the Bureau of Budget (then in the Treasury Department), and of Undersecretary of the Treasury T. Jefferson Coolidge, of the Morgan-allied financial family in Boston, who had been placed in his spot on the urging of George Harrison. But Eccles did not waste his months at the Treasury, finding support and enthusiastic agreement in two young aides, former Fed economist Winfield W. Riefler and Lauchlin Currie, a young Ph.D. from Harvard. Currie, whose important monetarist work was in the process of being published by Harvard University Press, converted Eccles to the goal of total political control over the money supply, and of the alleged necessity for recovery to concentrate on open market operations for rapid inflation of the money supply.⁹²

In early September 1934, Eccles was asked by administration aides to accept an appointment as governor of the Federal Reserve Board in Washington, Eugene Black having resigned to return to Georgia and later to move to the Chase National Bank. Eccles boldly replied that he would only accept the post if at the same time there was a fundamental structural change at the Fed, and power was shifted from the New York Fed to the Federal Reserve Board in Washington. Following up on this determined stance, Eccles submitted a memorandum to the White House on November 4, written in collaboration with Eccles’s aide and theoretician, Lauchlin Currie. The memo stressed that the Federal Reserve Board must take full power from the New York Fed: that it must obtain “complete control over the timing, character and volume of open market purchases and sales of bills and securities by the Reserve banks.” Until this point, wrote Eccles/Currie, private banker “interest, as represented by individual Reserve bank governors, has prevailed over the public interest, as represented at the [Federal Reserve] Board.” From now on, the “public interest” must prevail. In particular, the Federal Reserve Board must gain complete control over the Open Market Committee, now composed of the 12 governors of the private Federal Reserve banks. Such changes were necessary, the memo concluded, in order for the Fed to become a genuine “central bank”; although, secure in such new powers, there would be no need to arouse intense political opposition by calling such a setup a “central bank.”⁹³

On November 10, FDR, impressed by the memo and emboldened by his smashing victory over the Republicans in the November 1934 congressional elections, announced the appointment of Marriner Eccles as governor of the Federal Reserve Board, and he was sworn in a week later. At the same time as his appointment was announced and submitted for confirmation to the Senate, the radical Banking Act of 1935, embodying the Eccles/Currie program, was scheduled to be submitted to Congress. Lined up against Eccles and the new banking act were powerful Senator Carter Glass, chairman of the Senate Finance Committee and of the crucial subcommittee of the Senate Banking and Currency Committee, as well as Glass’s theoretician Professor H. Parker Willis, who denounced the banking act as the “worst and most dangerous measure that has made its appearance for a long time.” In this particular battle, the opposition was a coalition of former enemies, the Willis-Glass hard-money qualitativists; and the Morgan empire, spearheaded by George L. Harrison, whose New York Fed stood to lose its dominating power over the banking system. In contrast, founding monetarist and veteran inflationist Irving Fisher of Yale, spiritual mentor to Milton Friedman, claimed that the banking bill “will represent a great step forward, probably the greatest in the president’s administration.”

With the fight now under way, Eccles moved quickly to establish his own total control over dissident institutions within the Federal Reserve. He met with the Federal Advisory Council (FAC), a powerful voice of private bankers within the Federal Reserve. The FAC consisted of one private banker from each of the 12 Federal Reserve districts; almost always, they were representatives from large metropolitan banks in each district. The occasional publications of the FAC were often presented to the public as if they were the official views of the Federal Reserve Board. Thus, in September, strategically timed for the election, the FAC had publicly called for a balanced federal budget, incensing Eccles and the New Dealers. Eccles now cracked down, ordering the FAC to confine itself to an advisory role, and to issue no public statements without first submitting the recommendations to the Federal Reserve Board and notifying it in advance of any public pronouncement. The Federal Advisory Council promptly knuckled under.

Eccles then moved to completely control any legislative recommendations to emerge from the Federal Reserve System. He abolished the Fed’s Committee on Legislative Programs, which had been headed by Harrison, and had consisted only of private or regional Fed bankers with the exception of one representative from the Federal Reserve Board. Eccles then created a new legislative committee, consisting solely of his own appointed professional staff. In addition to Eccles himself, members were Chester Morrill, Federal Reserve Board secretary; Walter Wyatt, the board’s general counsel; Emanuel Gold-enweiser, director of the Fed’s Division of Research and Statistics; and Lauchlin Currie, the division’s new assistant director. The committee was charged with drafting a new banking act. The committee draft would then go to a subcommittee on banking legislation of the administration’s Interdepartmental Loan Committee, chaired by Secretary Morgenthau, and consisting of the heads Federal Advisory Council and Federal Deposit Insurance Corporation (FDIC), and the comptroller of the currency, as well as several representatives of the Treasury.

To gain support from the Treasury and other administration figures as well as from Congress and the nation’s bankers, FDR devised a cunning strategy: he would present Eccles’s radical reform as Title II of the new banking act, sandwiched in between two reforms the bankers desperately wanted: Title I, liberalizing assessment on banks for deposit insurance, a pet reform of FDIC head Leo T. Crowley; and Title III, which granted bankers a grace period beyond the statutory July 1, 1935, imposed by the Banking Act of 1933, before they had to repay loans granted to them by their own banks. Title III was a favorite project of Comptroller of the Currency J.R.T. O’Conner. It was no accident that both Crowley and O’Connor were members of the decisive Interdepartmental Loan subcommittee. While both Crowley and O’Connor fought to present their own bills separately from Eccles’s, Morgenthau went along with Roosevelt’s strategy and with Eccles’s reforms, the banking act being hammered through the committee quickly and submitted to Congress on February 5.⁹⁴

In Congress, Eccles’s nomination sailed through, with struggles concentrated on the banking act. In the hearings, particularly interesting in opposition was James P. Warburg of Kuhn, Loeb, and chairman of the board of the Kuhn, Loeb–run Bank of Manhattan. Warburg, who as an old-line banker had been allied with the Morgans at the London Economic Conference, denounced the banking bill as “Curried Keynes.”⁹⁵ In the course of the controversy, the highly influential New York Times and the Washington Post (owned and directed by Eugene Meyer) changed their initial opposition to support for the bill. Essentially, Eccles won almost all of his points: the shift of banking control from Morgan’s New York Fed to the non-Morgan Washington politicians had been completed. In the Senate, Eccles only had to make one important concession to Glass: instead of the Federal Open Market Committee consisting solely of the governors of the Federal Reserve Board, it would be instead comprised of the seven members of the Federal Reserve Board plus five rotating representatives of the Federal Reserve banks (in practice, their presidents) and hence of private bankers.

But despite this compromise, the decisive act had taken place: open market policy would be initiated in, dominated by, and enforced by the Federal Reserve Board in Washington. Actual open market operations would be carried out, most conveniently, in New York, but strictly under the orders of the Federal Reserve Board–dominated FOMC. Individual Federal Reserve banks (in practice, the New York Fed) were prohibited from buying or selling government securities for their own account, except under the direction, or with the explicit permission, of the FOMC. To further reduce the power of the Federal Reserve banks, it was explicitly provided that the bank-elected members of the FOMC were not to serve in any way as agents of the banks that elected them; indeed, the banks were not to know what was going to happen but only to have a chance to be heard through an advisory committee. Indeed, the bank presidents serving on the FOMC were not even allowed to divulge actions taken at FOMC meetings to their own board of directors! Harrison fought unsuccessfully against this provision; and in a last-ditch and finally failing battle in 1937, Harrison tried to get the FOMC to allow Reserve banks to conduct open market operations on their own in case of individual bank emergencies.

In addition, the Federal Reserve Board was given veto power over the election of the president and first vice president of each district Federal Reserve bank. And, in a symbolic gesture, all district Fed “governors,” the hoary name for heads of the central banks, were demoted to “presidents,” whereas the old “members” of the Federal Reserve Board in Washington were upgraded to “governors,” while the previous “governor” of the Federal Reserve Board now became the board’s august “chairman of the board of governors.” Furthermore, cementing Chairman Eccles’s power within Washington, the Treasury secretary and the comptroller of the currency were both removed as ex officio members of the Federal Reserve Board.

Finally, the last shred of qualitativist restraint upon the Fed’s expansion of credit was removed, as bank assets deemed eligible for Fed rediscounting were broadened totally to include any paper whatever deemed “satisfactory” by the Fed—that is, any assets the Fed wished to declare eligible.⁹⁶

The Banking Act of 1935 was important for being the final settled piece of New Deal banking legislation that consolidated all the revolutionary changes from the beginning of the Roosevelt administration. The Morgans tried desperately, for example, to alter the 1933 Glass-Steagall provision, compelling the separation of commercial and investment banking, but this reversion was successfully blocked by Winthrop Aldrich. Specifically, Senator Glass’s amendment to the Banking Act of 1935, restoring limited securities power to deposit banks, was able to reach the congressional conference committee; for a while, it looked like this Morgan maneuver would succeed, but presumably at the behest of Aldrich, however, FDR personally interceded with the committee to kill the Glass amendment.⁹⁷

For his part, Aldrich, as a Wall Street banker himself, was not very happy about the permanent shift of power from Wall Street to Washington, but he was content to go along with the overall result, as part of the anti-Morgan coalition with Western banking.

The centralization of power over the banking system in Washington was now complete. It is no wonder that the irrepressible H. Parker Willis, writing the following year, lamented the centralized monetary and banking tyranny that the Federal Reserve had become. Willis wisely perceived that the course of inflationary centralization to have begun in the 1920s as Morgan control in the hands of the New York Fed, and now, with the New Deal, was immeasurably accelerated and shifted to Washington:

The Eccles group which advocated the Act of 1935 sought to obtain for themselves those powers which the more ambitious of the banking clique in New York and elsewhere had already arrogated to the Federal Reserve Bank of New York and to the small group by which the institution was practically directed [the House of Morgan]. There was no change in the conception or notion of centralization, but only in the agency or personnel through which such centralization should be put into effect.⁹⁸

The New Deal, Willis went on, had passed various allegedly temporary and emergency measures in its first three years, which were now permanently consolidated into the Banking Act of 1935, and thus “was built up perhaps the most highly centralized and irresponsible financial and banking machine of which the modern world holds record.”

The result, Willis pointed out, was that the years of “tremendous deficit” from 1931 on were marked by a process of “gradually diverting the funds and savings of the community to the support of governmentally directed enterprises.” It was “an extraordinary development—an extreme application of central banking which brought the system of the United States to a condition of even higher concentration” than in other countries. Willis ominously and prophetically concluded,

Today, the United States thus stands out as a nation of despotically controlled central banking; one in which, as all now admit, moreover, business paper of every kind is gradually taking the form of government paper which is then financed through a governmentally controlled central banking organization.⁹⁹

EPILOGUE: RETURN OF THE MORGANS

It is well not to cry for the Morgans. Though permanently dethroned by the New Deal, they were able to make a comeback by the late 1930s. The great thrust for economic nationalism had subsided, and the Morgans were able to begin to work again for stabilization of exchange rates. In the fall of 1936, the United States entered into a tripartite agreement with Great Britain and France, the three countries agreeing—not exactly on fixed exchange rates—but on maneuvering to support each other’s exchanges at least within any given 24-hour period. Soon, the agreement, which was to last until World War II, was expanded to include Belgium, Holland, and Switzerland.

As the nations moved toward World War II, the Morgans, who had long been closely connected with Britain and France, rose in importance in American foreign policy, while the Rockefellers, who had little connection with Britain and France and had patent agreements with I.G. Farben in Germany, fell in relative strength. Secretary of State Cordell Hull, a close longtime friend of FDR’s roving ambassador and Morgan man Norman H. Davis, took the lead in exerting pressure against Germany for its bilateral rather than multilateral trade agreements and for its exchange controls, all put in place to defend a chronically overvalued mark.^{100, 101}

As the United States prepared to enter World War II, it made its economic war aims brutally simple: the ending of the economic and monetary nationalism of the 1930s, and their replacement by a new international economic order based upon the dollar instead of the pound. In the trade area, this meant vigorous U.S. promotion of exports and the reduction of tariffs and quotas against American products (the so-called “open door” for American commerce and investments), and in the monetary sphere, it meant the breakup of national currency blocs, and the restoration of multilateral exchanges with fixed parities based upon the dollar. Even as the United States prepared to enter the war to save Britain, its continuing conflict with the British proclivity for exchange controls and an Imperial Preference bloc remained unresolved.¹⁰²

The resolution of the problem came after lengthy negotiations throughout World War II, culminating in the Bretton Woods Agreement in July 1944. Basically, the agreement was a compromise in which the United States won the main point: a new multilateral world of fixed exchange rates of currencies based on the dollar, while the Americans accepted the British Keynesian insistence on jointly promoting permanent inflationary policies to ensure “full employment.” The United States had achieved the objective expressed by Secretary Morgenthau: “to move the financial center of the world from London to the United States Treasury.”¹⁰³ It is no wonder that, in January 1945, Lamar Fleming, Jr., president of Anderson, Clayton and Company, world’s largest cotton export brokers, could write to his longtime colleague and boss William L. Clayton that the “British empire and British international influence is a myth already.” The United States would soon become the protector of Britain against the emerging Russian landmass, prophesied Fleming, and this would mean “the absorption into the American empire of the parts of the British empire which we will be willing to accept.”¹⁰⁴

The dominant role in the critical wartime negotiations leading up to Bretton Woods was played not by the State Department, but secretly by the Council of Foreign Relations (CFR), a highly influential organization of businessmen and experts set up by the Morgans after World War I to promote an internationalist foreign political and economic policy. Private study groups set up by the CFR intermeshed and virtually dictated to parallel study groups established by the sometimes reluctant Department of State. President of the CFR from 1936 until 1944 and director of this effort was none other than Norman Davis, longtime Morgan affiliate and disciple of Morgan partner Henry P. Davison. The Morgans, indeed, were back.¹⁰⁵ During the war, many Morgan-oriented men who had strongly opposed the economic nationalism of the early New Deal happily came back to help run the World War II and postwar version of the new era: Lewis W. Douglas; Dean Acheson, who had left the New Deal because of its radical monetary measures, was back as assistant secretary of state for monetary affairs; Acheson’s mentor, Henry L. Stimson, was secretary of war; and Stimson’s other disciple, John J. McCloy, in effect ran the war effort as his deputy secretary. And when the ailing Cordell Hull retired in late 1944, he was replaced as secretary of state by Edward Stettinius, son of a Morgan partner and himself former president of Morgan-dominated United States Steel.¹⁰⁶

After World War II, the Morgans were content to slide into a new role as junior partner to the Rockefellers. The new prominence of oil made the Rockefellers the dominant force in the political and financial Eastern Establishment. The Rockefellers assumed control of the Council of Foreign Relations, the entire shift being neatly symbolized by the new postwar role of John J. McCloy, who was to serve as chairman of the Council of Foreign Relations, of the Rockefeller Foundation, and of the Rockefeller flagship bank, the Chase National Bank.¹⁰⁷ The old verities and financial group conflicts of the pre–World War II era had disappeared, and had been transformed into a new world.