All the Presidents' Bankers (27 page)

Much of Aldrich’s concern centered on the industry’s confusion over its liability. Though he conceded that a temporary guarantee was useful, he said, “My suggestion is that if it is necessary to have a permanent form of deposit guarantee system, the temporary system in the Banking Act of 1933, with its limited guarantee and limited contributions, should be adopted. But I earnestly believe we should seek by every practical means to make any kind of permanent deposit guarantee unnecessary.”
⁹³

His point was both valid
and
self-serving. On the one hand, banks that knew they had an implicit government guarantee and could use that assurance to explore new methods of taking risk would be bad for the system. On the other hand, banks that thought they were “better” at risk management than others didn’t want to be held liable for others’ foibles. Aldrich was in the latter camp.

Aldrich shrewdly saw the direction of the political winds and positioned his company accordingly. Beyond sticking it to a rival, he believed the future of banking resided on the commercial side of the business, and that Chase would be best positioned to capitalize on it after the Banking Act passed. Indeed, without Aldrich and Perkins’s support for FDR and vice versa, it’s possible that the act never would have passed. The powerful bankers’ backing pushed it through in an even stricter form than Glass had envisioned. The Banking Act of 1933 was approved by the House on May 23, as the Pecora hearings were ongoing.
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Morgan joined the chorus of bankers and politicians blaming the Fed for the financial chaos of the past few years. In his final statement to the Pecora Commission on June 9, 1933, he characterized the crash as “the great inflation”:

It is true that the failure of the then Federal Reserve Board to take the necessary measures to control the inflation in time encouraged the speculative frenzy, which carried the market quotation out of bounds. . . . The great inflation. The cheap money policy of the last half of 1927, the indecisive policy of 1928, and the Board’s veto of a dear money policy in the first half of 1929—these are the cause of the great super inflation of that period and of all the disastrous consequences.

By the time those words entered the public record, Morgan was yesterday’s news. Aldrich and Perkins had outmaneuvered him. Morgan’s political
power on the national stage, along with the praise and criticism it attracted, would become subordinate to these rising bank titans and the new regulations they promoted.

A week after the Morgan testimony was completed, on June 16, 1933, FDR signed the second Glass-Steagall Act. He was surrounded by a group of men that included Senator Glass, Representative Steagall, Senator McAdoo, and others. The bankers were not present in body, but Aldrich and Perkins were there in spirit that day, as was their alliance on the matter with FDR.

The deposit guarantee aspect of the act, the creation of the Federal Deposit Insurance Corporation, went into effect on January 1, 1934.

The Glass-Steagall Act and the New Deal

With the force of a man who would lift the power of the presidency to a new level, FDR signed fifteen major bills into law within his first hundred days in office, including the Banking Act, and created a slew of new agencies. Tens of thousands of people returned to work. FDR pledged billions to save homes and farms from foreclosure, provide relief for the unemployed, guarantee savings, and support the banks.

Though the substance of the first part of FDR’s New Deal centered around fortifying the banking system (the cornerstone of financial capitalism) and US financial power (through the Glass-Steagall—or Banking—Act and the Truth in Securities Act of 1933, which required better disclosure from the financial community), FDR moved quickly to other initiatives.

He backed the Agricultural Adjustment Act of 1933, a sweeping farm-relief bill designed to subsidize farmers for the sharp drops in prices of their crops; for the first time, the government paid farmers not to plant, so supply could be capped until demand and prices increased.

FDR also established the Federal Emergency Relief Administration in May 1933, which ran until December 1935. The $3.3 billion public works program provided unemployed people with various government jobs. In 1935, the plan divided into the Works Progress and Social Security administrations.

Toward the end of his first hundred days, FDR signed the National Industrial Recovery Act, which created the National Recovery Administration to regulate industry pricing, hours, and wages, and to stimulate the economy. The act also included a provision for collective bargaining by unions.

Many critics, at the time and more recently, fixed on the notion that the government should not bear so much responsibility for the public welfare. But in the context of the power play between the president and the bankers, it
can be viewed another way: FDR sought to preserve presidential power, and hence the country’s preeminence relative to other nations, by taking more control over the economy. He did not get rid of the market, capitalism, or banking; he merely rearranged it, or regulated aspects of it, in a way that empowered the federal government.

FDR’s legacy would lead Democratic and Republican presidents alike to invoke the power of the federal government to preserve economic stability in ways they deemed necessary for the overall population, though few presidents would be able to do so while balancing such a tight alliance with the nation’s key financiers.

FDR restored public confidence in banking. He propped up capitalism and saved the bankers from themselves, with their blessings. In addition, his actions instigated a changing of the guard in the banking industry, which saw a new generation of less risk-taking, more public-minded (though still exceptionally powerful) internationalist bankers take their positions at the top of the American and global banking hierarchy.

There were no hard feelings levied at FDR from the Morgan contingent, but there were remaining issues to iron out. On October 2, 1933, Leffingwell wrote FDR: “I want to congratulate you upon what you have accomplished in the seven months since you took office. The country today is scarcely recognizable as the country it was on March 4th, when all the banks were closed.”

Leffingwell had a number of qualms regarding FDR’s bank reforms, but it was a regulation (referred to as Regulation Q in the Banking Act) prohibiting interest payments on demand deposits that he claimed as “being reductive to bank deposits and therefore deflationary.” By restricting bankers from raising interest rates to entice customers to provide them with their deposits, especially in times when inflation might cause rates to rise, Regulation Q was restricting their access to capital, their lifeblood. Of all the stipulations of the Banking Act, it was Regulation Q that evoked the greatest condemnation from the bankers, and it would be the first part of the act to be obliterated several decades later.

Jack Morgan kept in touch with FDR on a friendly basis, but he decided to let Leffingwell do the legal arguing. The two bankers remained, Leffingwell said, at the service of FDR and Treasury Secretary Henry Morgenthau, and would publicly support their monetary policy objectives.
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As a pivotal year in the rising power of the presidency and the next generation of commercial bankers came to a close, Aldrich was summoned by FDR for a private wrap-up meeting at the White House.
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The two men had forged an important political-financial alliance. The Big Three retained enough liquidity and funds to summarily outperform their weakened competitors, who didn’t have the same access to capital. The public felt safer. And though Aldrich would disagree with some banking legislation to come, he and FDR were satisfied that a year that had begun in the malaise of a panic-stricken nation and credit-frozen financial system had worked out quite well for them both.

Decades later, Aldrich’s and Morgan’s banks combined to become JPMorgan Chase, regaining all the commercial and investment banking abilities that Aldrich had separated, after the Clinton administration repealed the Glass-Steagall Act in 1999.

CHAPTER 7

T
HE
M
ID
-
TO
L
ATE
1930
S
: P
OLICING
W
ALL
S
TREET
, W
ORLD
W
AR
II

“We cannot afford to accumulate a deficit in the books of human fortitude.”

—Franklin Delano Roosevelt, June 27, 1936
¹

B
Y 1934, THE COUNTRY APPEARED TO BE SLOWLY EMERGING FROM THE
G
REAT
Depression. Though unemployment was still near 22 percent, the national mood was lifting thanks to confidence in FDR’s New Deal programs coupled with the rising trust in the banking system that the president had carefully engineered.

A. P. Giannini, head of San Francisco–based Bank of America, was a veteran banker yet new to the game of political and financial alliance. He saw the Banking Act of 1933 as a way to broaden his bank’s geographical and influence reach, and he was as delighted as his New York counterparts that some power would be diffused from the Morgan Bank. In addition, deposit
insurance was a godsend for Giannini; it was hard enough to engender trust for a West Coast bank nationally, but the addition of insurance helped level the playing field. Even Regulation Q, which prohibited banks from paying interest on demand deposits (i.e., checking accounts) and capped the interest rates they could pay on savings accounts, helped him comparatively.
²

During the mid-1930s, the financiers who were focused on commercial banking pushed the FDR administration forward with additional regulations, while the private bankers remained sidelined. This internal power struggle in the industry coincided with a recession that shook up some of FDR’s banker alliances, as financiers began to think that it was time to reduce government intervention in the economy. All those domestic fights would fade, however, as it became increasingly clear that the country was headed to war, much to the chagrin of the isolationists in Congress. During that progression, FDR would find himself returning to all of his banker friends for support. As they had during World War I, the bankers would rally behind their “chief” regardless of their personal grievances, though this time they would be insistent about their requirements for a less constrained policy on the flow of capital. The Morgan bankers were well equipped to navigate wartime economics, and they knew the value of aligning with the president. Other bankers, like Aldrich and Perkins, would quickly find their way.

Policing Wall Street

The very structure of the US banking system had been dramatically altered under the Glass-Steagall Act of 1933. But there remained a need for a federal body to enforce the laws that would ostensibly keep the stock and bond markets from being manipulated by the financiers. To deal with this matter, the Fletcher-Rayburn bill, which would become known as the Securities Exchange Act, was introduced on February 10, 1934. It met with an intense and immediate opposition campaign chiefly engineered by Morgan confidant Richard Whitney, now president of the New York Stock Exchange. Many grievances remained in the Morgan realm over the Glass-Steagall Act, but establishing an entity to police the stock exchange was adding fuel to the fire. Plus, Whitney wasn’t exactly the cleanest of operators, as 1938 indictments and time in Sing Sing would reveal.

The bill was proposed to deal with the kind of securities fraud and violations that had been amply demonstrated in the Pecora hearings. It was designed to give the Federal Trade Commission power to regulate all aspects of organized exchanges, and to outlaw an array of shady market practices
including excessive margin buying, wash sales (fake sales initiated by banks solely to lure the public with the illusion of true demand), and pool operations (where prices could be rigged by the larger financial firms that gathered together to push prices up and then sell their shares before the public knew what was happening).
³

Whitney was having none of it. As a stunt, he invited members of the House Committee on Interstate Commerce, who were deliberating over the bill, and the press to visit the floor of the New York Stock Exchange on February 23. “We have nothing to hide, gentlemen,” Whitney said.
⁴

Senator Duncan Fletcher, the chairman of the Senate Banking and Currency Committee and sponsor of the bill, called Whitney’s efforts “countrywide propaganda.”
⁵
Whitney’s antics riled FDR. In a letter to Congress he noted that this kind of public opposition bore “all the earmarks of origin at some common source” and demanded that Congress pass legislation “with teeth in it.”
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