All the Presidents' Bankers (16 page)

The chess game between the main financiers for supremacy on Wall Street intensified significantly during the 1920s. The isolationist foreign policy position spurred fractious relationships among the key bankers, who had once been bound by side agreements similar to those that the European powers had made with each other before the war. (The Morgan Bank, National City Bank, and the First National Bank, for example, shared whatever business each upended at the turn of the century.) Relationships among the former heads of these banks were born of decades of intimate collaboration and Jekyll Island–type gatherings. Now it was becoming every man for himself—until the next crisis.

It was as if the war had provided a damper on the latent whims of the hungriest financiers; the fighting had invoked a spirit of cooperating on behalf of the combined good of the country, the world, and their firms. That was gone now. The fact that the government itself deployed a hands-off policy relative to the bankers meant that aggressive speculative ventures and big bank mergers would forge ahead unhindered. A war for sovereignty, of sorts, had moved into the financial realm.

As for President Harding, the reserved yet calculated method with which he came to power was indicative of his relaxed governing approach, particularly as it applied to big business and Wall Street. Hailing from Ohio, Harding had little opportunity to cultivate relationships with New York bankers in his earlier years, but he still aligned with them during his presidency.

Copying his Democratic predecessor, Harding turned to Lamont in that regard, though the two would never develop the same close relationship. Lamont’s concentration still revolved around European debt repayments. The Treaty of Versailles didn’t help the countries struggling from debt overhang (to the US government and its banks). The United States had become the world’s biggest creditor, while its private bankers relentlessly scoured the world in search of more borrowers. The postwar recession that engulfed the globe in the early 1920s made war debt repayment, and thus the ability of banks to extend even more credit, extremely difficult.

Britain, the former power center of European and global business and finance, was staggering under its huge war debt and the costs of maintaining its overseas empire. Once fighting came to an end, it abandoned the gold standard and stopped inflating its currency to help finance the war. As a result, the US dollar began to surpass the British pound in international transactions and emerged as the global reserve currency.
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After the war, the Morgan Bank solidified its status as the leading world bank by organizing huge loans to foreign governments for reconstruction and development. Precious little financing activity during the war or afterward hadn’t somehow passed through Morgan’s doors. The firm wanted to keep this position.

Like most bankers, Lamont saw the world as a potential client base; the wake of the war provided—if not intentionally, then coincidentally—a means to an end. Thus, he remained a staunch supporter of the League of Nations throughout the 1920s. It would behoove American bankers, he believed, to have open trade and financial ties with the rest of the globe, particularly with Europe, in order to enhance their international presence and growth opportunities abroad.

Lamont Presses Harding for League

On August 23, 1920, at the height of campaign season, Lamont urged Senator Harding to support the League of Nations. “As a life-long Republican I am bound to tell you that you are making it exceedingly difficult for papers like the
Evening Post
and for hundreds of thousands of loyal Republicans to come strongly to your support. There is only one way out . . . the ratification of the Treaty and League with proper reservations.”
³

When Harding refused to change his stance, Lamont broke from his party and his banking friends. In a letter in the
New York Evening Post,
he endorsed the Democratic ticket of Cox and Roosevelt. His reasoning was simple. “Cox is for the League of Nations and Harding is against it . . . this is why I vote for Cox.”
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Lamont’s support for the ticket was based on the issue of internationalism: he knew many foreign problems lingered, and he was wary about Harding’s ability or desire to deal with them properly.

Before leaving office, Wilson had attempted to alleviate the growing European debt problems by submitting a proposal to the Senate to substitute German government war reparation bonds for the Belgium war debt owed to England, France, and the United States. Harding was “shocked” at Wilson’s motion and what he deemed its secrecy. His pointed reaction would have
driven a wedge between the incoming probusiness president and the Morgan Bank executive if Lamont had not traveled to Florida to meet with Harding and deny reports that a mysterious agreement to cancel Germany’s war debt had been made.
⁵

The
Telegraph
reported that particular press attention was paid to Lamont’s dramatic trip because of Lamont’s “intimate knowledge of the Versailles negotiations and because his firm is the principal fiscal agent in this country for the debtor powers.” The paper further surmised, “Mr. Harding is understood to have discussed with him his own proposal for converting the debts into negotiable paper, but neither could comment afterward on that feature of the discussion.”
⁶

The next day, at an end-of-term luncheon at the White House with President Wilson and the First Lady, Lamont saw that Harding’s victory had squashed Wilson’s spirit and lingering hopes for renewed political support for the League.
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The Senate had also rejected Wilson’s debt-swapping proposal, meaning the subject of war debt and reparations agreements would linger on. That financial problem had the potential to turn the postwar peace into another war.

Harding may not have understood all these ramifications, but he knew he needed someone on his side who could assess the issues and work with him on a solution that reflected his political doctrine yet helped avert a disaster. That someone was Lamont.

Thus, in April 1921, a month after Harding took office, Lamont set sail on the
Adriatic
for a six-week trip to England, France, Holland, and Belgium. Though it was described in the papers as a “pleasure” trip, Lamont had a bevy of credit matters to attend to on behalf of Morgan, Harding, and the US government.
⁸

He wanted to meet his London and Paris partners in person, to determine the true loan propensity of the countries in which they operated. J. P. Morgan & Company had propelled itself to the center of postwar financing to foreign governments. The advance of postwar American bank loans to Europe began with a $250 million convertible gold bond issue to Britain constructed by J. P. Morgan & Company in October 1919, followed by a $100 million loan to the French government in September 1920.
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As a result of his trip, in May 1921, Lamont secured another $100 million French government issue. He worked out the details with his French colleagues while his wife, Florence, shopped for furnishing for their new home.
¹⁰
A tipping point was brewing: private banks wanted to extend more loans to Europe, though Europe was staggering under the weight of current debt.
Lamont knew very well how unstable these postwar economies were, but his inner banker drove him to find ways to postpone their pain—or inevitably inflict more pain with more loans, depending on how one looked at it.

Harding’s Real Legacy

Harding’s brief presidency would be forever tainted with a scandal perpetrated by his inner circle: the infamous Teapot Dome incident, in which Secretary of the Interior Albert Fall leased petroleum reserves owned by the Navy in Wyoming and California without competitive bidding to two private oil companies, and received millions of dollars in kickbacks. The scandal shadowed Harding’s administration from 1921 to 1923. In his 1928 report on the incident, North Dakota Republican senator Gerald Prentice Nye wrote, “The investigation has uncovered the slimiest of slimy trails beaten by privilege.”
¹¹

Harding’s two enduring contributions to the course of American political-financial history were choosing Herbert Hoover as secretary of commerce (and putting him in play to become president) and appointing Andrew Mellon as Treasury secretary.
¹²
Mellon was a Pittsburgh industrialist-financier, head of the Mellon National Bank. He had founded the Aluminum Company of America (Alcoa) and the Gulf Oil Company. With Henry Clay Frick, he founded the Union Steel Company, which he later sold to J. P. Morgan’s consortium for an obscene price, reflecting a short-term speculative gambit that was very bold for its time.
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Mellon was an “operator.” He owned numerous trusts, insurance, railroad and utility companies, and the Pittsburgh Coal Company, the largest of its kind in the world.

In 1911,
Munsey’s Magazine
described Mellon as the “J.P. Morgan of the Steel City.”
¹⁴
On issues of economics and foreign trade, Mellon was more conservative than Harding. He also believed in low taxes. Harding promoted Mellon’s efforts to extend huge tax cuts for the rich and corporations. (By 1926, a person making $1 million a year paid less than a third of the taxes paid in 1920.) To further remove the Roosevelt-era legacy of government intrusion into business, Harding encouraged the Federal Trade Commission, the Justice Department, and the International Commerce Commission to cooperate, rather than regulate or engage in antimonopoly actions against business.
¹⁵

One of Mellon’s initial acts as Treasury secretary was to push through the 1921 Budget and Accounting Act.
¹⁶
The act was the first to require the president to draft an annual budget.
¹⁷
It also created the General Accounting Office
(renamed the Government Accountability Office in 2004) to get a better handle on the debt and increasingly complex federal financial transactions that followed World War I.

Harding gave his secretary of state, Charles Evans Hughes, free rein over foreign affairs.
¹⁸
Hughes collaborated with Hoover and Mellon on foreign policy, which philosophically supported American bankers’ drive to replace the British ones at the top of the pile of global financiers as a way to enhance American power. Hoover and Hughes also encouraged seven US oil companies to form a consortium led by Rockefeller’s Standard Oil and seek participation in Iraqi oil concessions, initiating the “open door” policy in the Middle East—and the tight relationship of Chase (“the Rockefeller bank”) to the region, which will be explored later in this book.
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Presidents and Bankers and Foreign Loans

As Hoover put it later, Harding “was not a man with either the experience or the intellectual quality that the position needed. But he was neither a ‘reactionary’ nor a ‘radical.’” Though his style of governing vis-à-vis the bankers was primarily “hands off,” Harding did briefly stand up to them by demanding government supervision of their foreign loans. But this was mostly to assert the power of his office rather than to assert his jurisdiction over their practices.
²⁰

For the most part, it was Hoover who kept a sharp eye on lending and the general finances of Europe. In February 1922, Harding appointed Hoover to the new World War Foreign Debt Commission, designed to settle the Allies’ debts based on “their capacity to pay.” The total debt owed the US government was about $11 billion, 40 percent of which had been lent after the armistice. Debt payments totaled only $250 million annually, whereas the interest the United States owed on the bonds issued to finance the debt was $450 million.
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Harding was not at all impressed with that disparity. Nor was Mellon.

Unable or unwilling to define the amount of reparations Germany would pay going into the Treaty of Versailles, the Allies and the United States had instead established a reparation commission to consider the amount later. In May 1921, the commission set Germany’s payment amount at $31.5 billion, plus interest, starting with annual payments of $500 million. But within a year Germany was in default.
²²

Lamont began to think that neither the Germans nor the Allies could
ever
make good on their debts. The situation required a drastic remedy. A year later, at the annual meeting of the American Bankers Association on
October 2, 1922, Lamont shocked the banking community and the president with his declaration that European debt should be canceled.

Echoing Wilson, he argued that America, the “greatest economic power in the world,” should assume a “more constructive and responsible role in world affairs.” The trouble, he claimed passionately, using but rejecting the words that ardent isolationist Borah had used on the Senate floor to help defeat the League of Nations, was that “we have been timid and fearful of petty entanglement.”
²³

Lamont did what he had urged Wilson to do in Paris in mid-1919. He strived to appeal to a latent sense of American altruism. He knew his speech would reach beyond the bankers and urged citizens to consider the Allies’ heavy burden of repaying war debt. Britain and France owed three-quarters of the debt. If France agreed to reduce its reparations demands on Germany, Lamont argued, it was only fair that the US government reduce its demands on France and other countries.

Though Congress had recently agreed to stretch loans up to twenty-five years and reduce interest rates, Lamont claimed the amount owed still greatly exceeded what Europe could pay. There was also the question of morality. Half the debt had been issued between April 4, 1917, when the United States declared war against Germany, and a year later, when large numbers of American soldiers first entered the French trenches. During that year, Britain and France gave up more blood and the United States more money. Lamont felt that this inequity deserved consideration relative to debt repayments. It was only just.