All the Presidents' Bankers (12 page)

We are most heartily in accord with you as to the necessity of the United States assisting the allies in the matter of the supplies of materials and of credits. To those matters we have been devoting our whole time and thought for the past two years. I write to assure you again that the knowledge we have gained in those two years of close association with the allies in these matters are entirely at the disposal of the United States Government at any time or in any way you may wish to use it.
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The Allies had already disbursed more than $2 billion in the United States since the war began. The amount comprised 75 percent of the total amount of the Allies’ purchase of munitions and raw materials in America.
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The Morgan Bank, which was guiding these purchases, controlled war financing to an unprecedented extent.

There was no doubt about the necessity of the president-banker alliance. Each needed the other in this time of uncertainty and to secure their rise in the hierarchy of global power during and after the war. Wilson answered Morgan personally, “I am sure I can count upon you and your associations in this emergency.”
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Three days later, the House Ways and Means Committee met to consider the bond bill.
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The administration had asked Congress for authority to issue $5 billion of government bonds to fund the war with Germany. The request included $2 billion to finance part of the organization and operation of the Army and Navy and the conduct of the war generally, and $3 billion to supply credit to Allied governments, which would help them secure supplies in the United States.

In addition, McAdoo sought assistance from the Federal Reserve banks, national banks, state banks, savings banks, insurance companies, private bankers, and investment bankers to help raise money directly from the population.
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The leaders of the financial community extended the use of their services to place government bonds with the public free of charge; they would find other profitable ways to make use of the new customers who streamed through their doors later.

The United States wound up selling nearly $17 billion in Liberty bonds.
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McAdoo wanted to reach the broadest population of bond buyers possible—from small farmers to businessmen to workers. By doing so, he inadvertently created a new generation of American investors who would later participate in the 1920s stock bubble. McAdoo appointed Wall Street lawyer Russell Leffingwell, his old neighbor in Yonkers, New York, as counsel on the effort—and later made him assistant Treasury secretary in charge of the Liberty bond drives.
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Leffingwell went on to become head of the Morgan Bank in the 1940s during World War II.

In addition to Liberty bonds, big banks went into overdrive to lend money to the Allies. By July 13, 1917, there were fifty-one private banks providing Britain with another batch of loans totaling $234 million. Morgan led the pack with nearly $70 million. Other top lenders included Chase National Bank with $12.5 million, First National Bank with $45 million, Guaranty Trust Bank with $20 million, and the National City Bank with $30 million.
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National City Bank’s Charles Mitchell and
Forbes Magazine

The war had another distinctly financial dimension that helped the bankers. It served to push memories of the Panic of 1907 and the Pujo hearings into a receding spot in the national consciousness. Citizens began to view the bankers not as crooks but as patriots in the war effort. Thanks to this sentiment of unity, a space opened up for the rise of a new generation of
independent bankers with few ties to the panics and trials of the past, who could use their real or alleged commitment to the cause as a way to bolster their reputations. Men who were not connected by blood to the Morgans or Rockefellers, and who were not members of the Jekyll Island Club or predisposed to side with any particular country, began to vie for spots at the country’s major firms. These men would bring with them a fresh stance on the role of finance that was based more on opportunism than on prior relationships. The result would propagate two types of Wall Street bankers: the ones who worked on the basis of personal alliances and the ones who worked on the basis of profit alone.

One journalist was especially fascinated with documenting these shifts. In September 1917, Bertie Charles Forbes launched
Forbes Magazine
from offices at 120 Broadway, near Wall Street. With the war escalating, American financial titans stood to become definitive global leaders, and Forbes sought to lead the press in capturing their ascent.

The first issue paid homage to a rising financier from outside the usual family names or connections: Charles Mitchell, who later turned National City Bank into America’s first supermarket financial services firm.

Forbes characterized Mitchell as a “human financial dynamo” and quoted Mitchell as saying of his early career as an investment banker, “I had more nerve than capital.” Mitchell’s first major deal with his firm Mitchell and Company had been selling a block of $300,000 of equipment notes secured by New York harbor scows. Mitchell, an exceedingly persuasive salesman, had the note presold to eager inside investors before it was officially available for sale in the market (not unlike the way shares of Facebook were sold to inside investors before others could buy them publicly in the stock market a century later).

“It was the big game that fascinated him,” wrote Forbes. Fortunately for Mitchell’s ego, National City asked him to join the firm in March 1916. There, he could play that game in a bigger arena. “This was exactly in line with my ambition,” Mitchell said. “There was virtually no limit to what might be accomplished in the way of constructive financing.”

As soon as Mitchell became vice president of National City Bank, he began to fashion the firm into something resembling a private investment bank. This was similar to what Morgan had done, but with a significant twist—unlike his elitist rival, who depended on large corporate clients, Mitchell sought to broaden the firm’s capital base by also appealing to “the Everyman,” as he called individual depositors.
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Mitchell’s decision to open the doors to average citizens, many of whom were still banking at smaller local banks, ushered in the modern age of national banking. World War I helped secure these new customers because in addition to providing them with banking services, National City Bank also pushed the notion that opening an account was a way to support the war effort, peppering its advertising campaign with this notion.

Mitchell’s brash philosophy propelled the firm to success in this new era, as it would grow to become the first bank in the United States to reach $1 billion in assets. Mitchell would become the bank’s president and preside over its extensive postwar international speculation on the back of those new deposits. He would also be at the helm when the market crashed in 1929. In fact, Carter Glass would later say, Mitchell, more than any other banker, was responsible for the Crash. But all of this was years away. For now, Mitchell brought his new ideas to bear to make his bank into an international powerhouse, using the war as a means to that end.

Economic Entanglements of War

In the wake of the Austro-Hungarian and German attack in Northern Italy on October 24, 1917, President Wilson sent Colonel House for another round of negotiations with the British and French allies.
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There, he would discuss matters of critical economic and financial importance. Wilson also sent Morgan partner Thomas Lamont, who was intimately involved in organizing Liberty and foreign loans, to serve unofficially as a private adviser. Lamont had been working closely with McAdoo and Leffingwell, and he would broker meetings between US Lieutenant Colonel William Boyce-Thomson, stationed in Petrograd, and British officials on the situation in Russia.
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The war would continue for more than a year, and a treaty would take nearly two years to gain acceptance by most of the countries involved, but Wilson’s negotiating team already had a key representative from America’s most powerful bank on it.

Serving in a dual capacity (helping the president while protecting the Morgan Bank’s postwar position), Lamont spent the next ten days working with his colleagues at Morgan, Grenfell & Company in London and meeting with members of the House mission. Not to leave money on the table, he also negotiated Morgan’s 0.125 percent compensation from the British treasury for acting as its paying agent for all the British government’s US purchases now being handled by the US government. The sum offset all the
expenses Morgan had agreed to forgo as the British government’s purchasing agent.
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By December 7, 1917, the United States was also at war with Austria-Hungary. A week later, just as Morgan had predicted, the financial markets quickly sank into disarray. The upheaval and the anxiety surrounding the drop threatened the very survival of the war effort, and thus America’s ability to navigate the war from a solid economic stance. But the main problem the markets had wasn’t a military one; it was a regulatory concern.

Responding to the bankers’ pressure to do something about railroad industry regulation, a nervous McAdoo informed Wilson that New York security markets were “demoralized.” He said there were rumors swirling around Wall Street that “if the Government took over the railroads, the rights of bondholders and stockholders would not be protected.” The exaggeration linked the government’s domestic policy to its foreign war policy. Fears that undue regulations would strain credit and subdue the markets, which Morgan had warned about since the war’s start, were being realized at the worst time for the nation.

At the bankers’ insistence, McAdoo warned Wilson that declines “might reach a point where a panic would set in, grave injury would result and the financial operations of the Government would be seriously imperiled.”
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He encouraged Wilson to issue a soothing statement to the public. Instead, Wilson exercised his presidential authority to effectively nationalize the railroads for war purposes. Rather than dampen the markets, this news sent them rallying into the year’s end. Investors saw the government’s financial support as a positive, even if bankers considered it overly intrusive.

Wilson was more concerned about solidifying public support for the war and congressional support for his strategy to end it. The peace he sought would increase US power in a world in which European power was diminishing, a strategy the bankers were happy to support. On January 8, 1918, Wilson delivered his “Fourteen Points” address to Congress. Among other things, he proposed freedom of the seas, a reduction of armaments to establish a route to a more equitable peace, and an end to secret diplomacy and economic trade barriers among nations. The latter comforted Germany, which feared financial repercussions, and delighted international bankers.

The final point paved the way for the League of Nations, a world parliament containing members from all nations, with a central council controlled by the greater powers, including the United States. From a diplomatic perspective, the idea seemed to have everything one could want. From a banker’s
standpoint, a united set of trading partners, with a central US influence, was full of opportunity.

National City Bank Transitions

By early spring 1918, a prominent change occurred at the nation’s largest commercial bank that would have important ramifications for its postwar position as an international superbank. On March 15, after battling illness for a month, National City Bank chairman James Stillman died in his home. Stillman had handled all the bank’s business ever since president Frank Vanderlip took a leave of absence in September 1917 to chair the national War Savings Committee. A few weeks before he died, Stillman called Vanderlip back to New York because the bank’s Russian positions, engineered by Vanderlip, were a disaster. They had already cost $10 million, but the losses stood poised to rise to $33 million, or 40 percent of the bank’s capital. The meeting never came to pass because of Stillman’s death, but internal rumors had Vanderlip on his way out the door.

While the Morgan Bank focused on war efforts mostly on behalf of Allied European countries, Stillman (following an agreement with Vanderlip) had concentrated on extending National City Bank’s international influence—particularly in South America, where it was challenging British banks for market share. Shortly after the war began, Stillman established branches in Buenos Aires and Rio de Janeiro, and later expanded to all the major cities in South America and Cuba, as well as in Europe.

Following Stillman’s death, Vanderlip met with National City’s attorney John Sterling before returning to Washington.
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Vanderlip had become obsessed with a grand plan to expand National City’s international presence by infusing the European recovery (not just that of the Allies) with US capital. This tested the patience of the Morgan Bank, which was supporting only the Allies. Stillman had been caught between Vanderlip’s urging and the alliances he had forged at the turn of the century with the Morgan Bank and J. P. Morgan.

National City directors appointed Stillman’s son, James A. Stillman, as chairman. The younger Stillman was at odds with Vanderlip personally and regarding the Allies.
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That slight propelled Vanderlip, still eager to make his mark on the bank, to undertake a three-month, seven-country tour of Europe while his banker rival Tom Lamont and former friend President Wilson were there involved in treaty negotiations. Perhaps eager to retain his corner of influence after being passed over for the chairman position, Vanderlip
made a speech following his trip that fueled the fire regarding a congressional rejection of Wilson’s treaty and League of Nations proposal. This was his last major move before he faded into obscurity.