All the Presidents' Bankers (25 page)

For FDR, the challenge was just beginning. During his inaugural address, he famously pronounced, “The only thing we have to fear is fear itself.” There were fourteen million people out of work; nine million had lost their savings. Fear didn’t begin to describe the hopelessness. Yet FDR spoke with the confidence of a man who would figure it out. To the millions of unemployed Americans he vowed, “Our greatest primary task is to put people to work.” And speaking to the growing antibanker sentiment, he promised, “The money changers have fled from their high seats in the temple of our civilization. We may now restore that temple to the ancient truths.”

Toward the end of his speech Roosevelt vowed to install “two safeguards against a return of the evils of the old order.” The first would be “a strict supervision of all banking and credits and investments” in order to end speculation with other people’s money. The second would be “an adequate but sound currency.” FDR was no isolationist; like the bankers, he realized that a strong dollar would promote American power in the world and help fix problems at home.

It had been a rough few years. In 1930, 1,350 banks had failed, followed by 2,293 in 1931 and 1,453 in 1932. The smaller banks fared the worst. Even the great Morgan Bank had seen its assets decline from $118.7 million in 1929 to $53.2 million by 1933, though in general the big New York banks did much better than others. Things got worse as 1933 opened, with 273 banks closing in January alone, bringing about another rush of citizens extracting whatever deposits they had left, fearing the worst. On February 14, the state of Michigan declared a bank holiday to stop the drainage; another twenty-one states had followed suit by March. By the time FDR took office, the situation had reached its lowest point.

FDR’s banking-oriented ideas were tinged with Wilsonian sentiment. But rather than rely on the Federal Reserve to decentralize control of the banks, he harnessed the power of Congress and the president, and gained support from the people and even most of the bankers, to foster a more stable banking system.

Lamont’s Landlord

FDR was a quintessential “Eastern Establishment” man, a Harvard graduate with solid blue-blood family connections, two townhouses in New York, and a mansion overlooking the magnificent Hudson River. He was able to speak the language of the bankers, and he had their respect—even if some of them occasionally criticized him and his party in public.

What mattered, though, was what happened behind closed doors, in letters, in meetings, on boats. Roosevelt socialized with the bankers. He yachted with them. His presidency broke the chain of leaders from the Midwest and New England who did not grow up in the same social circles as the nation’s most powerful financiers. Even if FDR rebelled against his heritage at times—and though he and his wife, Eleanor, were instrumental in advancing major progressive causes, and he would be called a traitor to his class—his roots were inalterable.

The presidency had returned to the hands of a New Yorker: a Democrat, yes, but a man more like most financiers than the former three presidents. There would be differences of opinion, but they would come from an origin of similar upbringing. And as such, they would be negotiated to satisfy everyone’s desire to retain their own piece of power.

FDR’s father, James Roosevelt, had been a successful banker who traveled in the circles of J. P. Morgan and his ilk. The Roosevelts owned a home on the majestic banks of the Hudson River, in Hyde Park, New York, near where many elite industrialist-financiers spent their autumns amid the colorful foliage. The Morgans, Rockefellers, Astors, and Vanderbilts were all friends or neighbors of FDR.

Then there was Thomas Lamont. His relationship with Roosevelt went back years. In 1915, Lamont had rented the Roosevelts’ New York City home. Lamont and Roosevelt participated in Harvard alumni events together (along with Jack Morgan).
⁵¹
They had both been editors of the
Harvard Crimson
: Roosevelt in the early 1900s, Lamont a decade or so earlier. And they had both served and admired Wilson during World War I.

Once FDR was in the White House, Lamont wasted no time in contacting him about his concerns, writing, “I believe in all seriousness that the emergency could not be greater.”
⁵²
He offered a five-page memorandum of initiatives including the Federal Reserve banks’ unlimited purchasing of government securities, which could be used as reserves against Fed loans instead of gold. The more government securities the Fed could take, the more banks could borrow against those securities. Lamont also suggested authorizing the
Reconstruction Finance Corporation to deposit money in state and national banks without requiring additional security, and recommended that the government raise $1 billion to fund “urgent necessities.”
⁵³
His proposals were all about increasing liquidity to the banks.

FDR’s Republican Treasury Secretary and Morgan’s Favors

Roosevelt cleverly harnessed the public’s anger at the bankers, stoked by the unfolding congressional investigations, to promote a progressive agenda. But many of his reforms were designed to help most of the bankers as well as the population.

FDR appointed Republican William Woodin, president of the American Car and Foundry Company, a leading maker of railway wheels and cars, as his first Treasury secretary.
⁵⁴
Woodin was FDR’s point man for the seven-day national bank holiday that began on March 5, 1933, the day after his inauguration.
⁵⁵
During that time banks were closed for examination by regulators while replenishing their reserves and stabilizing their conditions.

The appointment presented problems when the Pecora Commission discovered that Woodin’s name was on the Morgan Bank’s “preferred customer list.” The exclusive list represented clients to whom shares of “hot” issues—the most desirable stocks, whose prices would escalate once they hit the public market—were allocated first.
⁵⁶
These high fliers got an early chance to acquire new stock at a cheaper price and with the certainty of a greater profit relative to the public. Charles Mitchell and Al Wiggin were also on the list.
⁵⁷

In itself, there was nothing illegal about the list, but the disclosure stoked the public’s wrath. Woodin resigned in December 1933, citing poor health.

FDR’s Secret Meeting with Banker James Perkins

Just two days after FDR’s inauguration, Roosevelt invited National City Bank chairman James Perkins to the White House for a secret meeting. In a slick preemptive move that history has long overlooked, the men put into action a plan that would lead to the Glass-Steagall Act of 1933.

FDR reasoned that the population would support any bill that looked like bank regulation, especially if it protected their deposits, and the Democratic Congress would support the president when it came time for a vote. But first Roosevelt secured Perkins’s backing. Perkins was convinced it was better to
focus on deposit taking and lending than speculative trading or securities creation. He and FDR were on the same page regarding separating the banks. Both men would win if such legislation was passed: Perkins would retain the support of FDR (or “Frank,” as he called him) and control of the stronger arm of his bank, and FDR would receive policy approval from the nation’s largest holder of customer deposits.

It was fortuitous for FDR that Perkins had nabbed the helm of National City Bank after Mitchell brought such scandal to the firm. The management shift represented turning over a new leaf, something FDR could exploit by blaming a few bad apples for the overzealous speculation and reckless moves that precipitated the Crash. Perkins, one of the good apples, would support the Glass-Steagall Act as it weaved through Congress.

The next day, under Perkins’s direction and in anticipation of the bill’s passage, the National City Bank board passed a resolution to split the trading and deposit-taking elements of the bank. The split was publicly announced the following day. Afterward, FDR thanked Perkins for his actions, adding, “It was fine to see you the other day.”
⁵⁸

The Second Alliance: FDR and Chase’s Winthrop Aldrich

For FDR, Perkins was just the appetizer. The main course was another Harvard alum and friend, Chase chairman Winthrop Aldrich, who would be a major power player in the political-financial sphere for the next two decades.
⁵⁹

Following the 1930 merger of Chase National, Equitable Trust Company, and the Interstate Trust Company to create the largest bank in the world, Aldrich ascended to president of the new entity, Chase National, while Wiggin retained his title of chairman.
⁶⁰
But when Wiggin resigned as chairman on January 11, 1933, the board of directors selected forty-seven-year-old Aldrich to take over.
⁶¹
Aldrich was far more practical, conservative, and globally savvy than Wiggin, who in addition to his personal shenanigans had built a web of bad speculative debt through Chase’s trading subsidiary, racking up losses Aldrich wanted to reduce.

Aldrich was a man of high class and pedigree: he was John D. Rockefeller’s brother-in-law and the son of Fed architect Nelson Aldrich.
⁶²
He was also an avid sailor and a member of the exclusive Seawanhaka Corinthian Yacht Club, which held its monthly meetings at the J. P. Morgan and James A. Roosevelt–founded Metropolitan Club in Manhattan.
⁶³

Aldrich’s ascent at Chase was as much about family connections as it was about his financial and legal acumen. In 1929 he became president of Equitable Trust, which had grown through the 1920s via a series of strategic mergers to become one of the largest firms in America. Winthrop persuaded Wiggin to merge Chase with Equitable at the suggestion of Rockefeller, Equitable’s main shareholder. As president of the conglomerate, Aldrich eventually ousted Wiggin as chairman and took over the helm. (Wiggin’s suspiciously high pension of $100,000 per year would be attacked during the Pecora hearings.)

Aldrich’s rise had broad ramifications for the banking industry and political relationships; up to that point, it had been the Morgan Bank whose partners had the closest ties to the presidents. Now a wider array of president-banker alliances was forming that included the heads of Chase and National City. Even the West Coast–based Bank of America would soon be involved.

As New Deal scholar Thomas Ferguson noted in his much lauded paper “From Normalcy to the New Deal,” “With workers, farmers, and many industrialists up in arms against finance in general and its most famous symbol, the House of Morgan, in particular, virtually all the major non-Morgan investment banks in America lined up behind Roosevelt.”
⁶⁴

This was not to say that Roosevelt didn’t have support among the Morgan bankers. Indeed, many of them were men he had known for decades. But banking reform presented particular opportunities for Chase and National City, especially, to rise above the Morgan Bank in terms of political-financial power and to raise their banks’ status domestically and globally.

To achieve this goal, Aldrich and Perkins joined forces to support the Glass-Steagall bill, which they thought would diminish the strength of the Morgan Bank. The bill would force banks to decide between keeping deposits and lending, and maintaining the issuance of new securities. The latter was the means by which Morgan, in particular, had raised money for domestic and foreign lending, which was how it had become so influential. The Morgan Bank had never tried to gather deposits from ordinary investors to back its lending practices to the extent that Chase and National City had.

Three days after Roosevelt called Perkins to the White House, Aldrich’s views on splitting up banks hit the front page of the
New York Times.
Vying for the position of the most powerful banker in the country, he vehemently backed the proposed Glass-Steagall Act of 1933, which would force a separation of commercial and investment banking activities. (The idea had been
batted around Congress for more than a year; Wiggin had strongly opposed it because he was more interested in the trading side of the bank, where he had made most of his money.)

In conjunction, Aldrich announced that Chase National Bank and Chase Securities Corporation would become separate entities, effectively enforcing the bill within his own company even before it became law, as Perkins had done. This wasn’t a simple restructuring—the Chase Securities Corporation was the biggest of its kind in the world.
⁶⁵
From an initial financial seedling of $2.5 million in May 1917 it had grown to $37 million in capital by the end of 1932, with $18 million in surplus and profits.
⁶⁶
The securities arm was so powerful that in July 1929 it bought 98 percent of the American Express Company.

Nor were Aldrich’s moves altruistic. He forced a restructuring of the banking landscape knowing it would be comparatively beneficial for his bank. It would also help restore consumer confidence, which was a critical requirement for raising capital and expansion. As Ferguson later noted, “By separating investment from commercial banking, [Glass-Steagall] destroyed the unity of the two functions whose combination had been the basis of Morgan hegemony in American finance.”
⁶⁷
Aldrich deftly went one step further than even Glass had envisioned. By pushing for the separation of commercial and securities activities for private banks (the original bill had considered merely public ones), Aldrich would make life very difficult for the Morgan Bank.

The banking community went up in arms over Aldrich’s actions, taking sides depending on allegiance to Morgan or Aldrich. William Potter of the Guaranty Trust Company, which closely collaborated with the Morgan Bank, called Aldrich’s ideas “quite the most disastrous . . . ever heard from a member of the financial community.”
⁶⁸