All the Presidents' Bankers (29 page)

Meanwhile, another front in the battle of the bankers was emerging. On June 28, Aldrich was forced to release a statement in response to claims (probably, but not conclusively, made on the Morgan side to discredit him) that he was getting “inside information” on the Senate subcommittee’s deliberations.
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Aldrich denied the charges but admitted that he had phoned Senators Carter Glass and John Townsend to discuss rumored changes to a part of the bill that had received little attention: Title III. He was vehemently opposed to those changes, which went against provisions he had persuaded Glass to include in the 1933 bill.

The next day, the
New York Times
published the details of a leaked version of the bill (again, probably but not conclusively engineered by the Morgan bankers) with the headline “New Bill Will Let Banks Underwrite Securities
Again.”
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Glass was furious about the leak but quickly moved on to defend his version of the bill.
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Indeed, an amendment in Title III would restore the underwriting privileges to deposit-taking banks that had been taken away under the Glass-Steagall Act of 1933. In the opinion of the commercial bankers who sided with Aldrich, the proposed amendment to the Banking Act of 1935 marked “an almost complete reversal of the underlying philosophy of the Banking Act of 1933.”

This represented a deeply personal blow to Aldrich’s ego and tactical skills; the proposed measure would demolish the banking reform he had most ardently pushed for and allow the Morgan contingent the practice they sought most to regain.
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FDR largely sat this one out, letting Aldrich and the Morgan bankers fight among themselves. Opponents of the proposed change were so blindsided by the Morgan move that it took them some time to regroup, particularly because the politician championing the change was Senator Glass himself (who had never intended the original act to apply to private banks like Morgan, anyway). Aldrich mistakenly believed that the matter had been settled, and that Glass would not relaunch a counterattack on his own act alongside the Morgan Bank, but that was exactly the situation unfolding.

When asked by the press if his proposed amendment meant that J. P. Morgan & Company could again underwrite securities, Glass’s response was, “Well, why not?”
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Aldrich, livid, went straight to the administration. In a July 11 conversation with McIntyre, he pressed and augmented his case to encompass all the activities that Morgan could possibly want resurrected. McIntyre recorded the following conversation:

       
A
LDRICH
: [We] are absolutely against this amendment in its present form. What we did say six months ago was that we would be willing to have commercial banks agree to
purchase
[emphasis added] securities, but that is not origination, and we don’t want them to originate and we don’t want interlocking directors.

       
M
C
I
NTYRE
: Are you active or just passive?

       
A
LDRICH
: We are actively opposed to the power to originate.

       
M
C
I
NTYRE
: I appreciate that.

       
A
LDRICH
: I am actively opposed to interlocking directorates between two banks. I haven’t changed my views at all at any time.

       
M
C
I
NTYRE
: Are you actively supporting that latter phase?

       
A
LDRICH
: We would be in favor of permitting a commercial bank to agree to
purchase
[emphasis added] securities from investing bankers—not originating them.

       
M
C
I
NTYRE
: You would be agreeable to it but not forcing the issue?

       
A
LDRICH
: We are agreeable to it but not forcing the issue. I am awfully anxious for the President to know that I haven’t changed my views.
⁴⁵

Roosevelt now supported Aldrich. He wanted to keep underwriting and deposit-taking activities separate to contain the risk of one infecting the other. He had, however, wanted to see the debate between the bankers play out—and during the past two years, the Morgan bankers, having adopted a strategy of friendliness mixed with lobbying, had given FDR some pause. Around the time Aldrich was meeting with McIntyre, and perhaps as a result of it, FDR wrote Senator Glass concerning the amendment, “I have seen more rotten practices among banks in New York City than you have. Regulations and penalties will not stop them if they want to resume speculation.”
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The chief had spoken.

The Banking Act of 1935

In August 1935, the deregulatory amendment was withdrawn, and the Banking Act of 1935 was finally passed. When he signed, Roosevelt asked jokingly if anyone had even read the bill, perhaps referencing the leak a little over a month earlier. Glass responded that he was the only one who had.
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The chess game was over. FDR and Aldrich had won, Morgan and Glass had lost. The defeated group succumbed to the inevitability of the law, and to the more influential political and financial leaders.

Two weeks later, J. P. Morgan & Company invited the business press to 23 Wall Street to give an official statement. The bankers were dignified in their defeat, though they had a workaround that would enable them to retain much of their way of doing business. Thomas Lamont, standing beside George Whitney and Harold Stanley, announced the resignation of five partners. Upon leaving the Morgan Bank, they would assume the job of setting up Morgan Stanley and Company—a separate securities underwriting entity that would be run by men with long-term blood and professional ties to the Morgan Bank.
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“We believe that the members of the new organization will be able, with the ample experience which they have heretofore had, to serve usefully the investment interests of the community,” Lamont said.

On September 16, 1935, the new investment bank opened its doors on the nineteenth floor of 2 Wall Street, overlooking Trinity Church at the head position on Wall Street. Jack Morgan’s son, Henry, one of the firm’s founding partners, was aboard a transatlantic liner returning home. In a sign of changing times, the firm’s president, Harold Stanley, chose to advertise its opening rather than issue an official press release.
⁴⁹

The Morgan Bank had won a small battle in the war for Wall Street supremacy by creating a securities firm populated by Morgan partners and progeny that would act in concert with its parent firm. But Aldrich had won the war.

The New Deal: Phase II

Though the first phase of the New Deal had improved economic conditions somewhat, the country hadn’t returned to prosperity. In fact, it was faltering. Broad despair turned to anger. Violent protests and strikes swept the country. This was the era of militant industrial unionism, sit-down strikes, factory occupations, and the rise of the Congress of Industrial Organizations. Industrial businesses were barely hiring, or not paying enough when they were. The far left called for greater reforms than Roosevelt had passed. The right attacked government and regulatory bodies and agencies as being too large and intrusive. People demanded a living wage and nationalization of the banks, if only to make ends meet and have better access to credit.

In the second phase of the New Deal, FDR introduced a safety net for retirees and the disabled through the Social Security Act, which also created the unemployment insurance program as a partnership between the federal government and the states.

In addition, FDR instituted aggressive tax hikes on the wealthy. Under Hoover’s Revenue Act of 1932, the marginal tax rate for the top bracket had jumped by one of the highest amounts in US history, from 25 percent to 63 percent. But tax rates across the board had risen as well, as Hoover attempted to thwart the effects of the Great Depression on the government’s budget without being seen as disproportionately taking from the upper class. His attempt failed. The widespread economic devastation didn’t allow for even the marginal contributions of the wealthiest Americas to properly fund the ailing country’s budget, and the wealthy were consuming less because their investments had soured. The middle and poorer classes suffered because of a more acute lack of jobs and income.

FDR raised this top bracket rate to 75 percent in the Revenue Act of 1935. The more progressive tax initiative was dubbed the “wealth tax” or “class tax,”
and passed in August after bitter congressional battles. (The Revenue Act of 1942 would raise this tax rate on income above $200,000 to 82 percent and increase the top rate of corporate taxes from 31 percent to 40 percent to help fund the war. The Individual Income Tax Act of 1944 went further, raising the top-bracket tax rate to 94 percent.)

It wasn’t so much the income tax elements of the Revenue Act of 1935 that riled bankers; it was the higher undistributed profits tax rates from the second phase of the New Deal that served to convert friends of FDR to enemies. By late 1935, FDR’s popularity among even his business class advocates was fading. Businessmen accused him of interfering with free enterprise. With the 1936 election in the wings, anti–New Deal groups sprouted up everywhere. The people FDR had grown up with, and who had supported him in his last election against Hoover, and for the most part in his quest to stabilize the banking system and US capitalism, were now accusing him of going too far, of being too radical, of being—now that his policies no longer suited their needs for banking stability—a “traitor to his class.”

The Mid-1930s Economy: 1934–1936

The jobs crisis was one of the most dire and deeply entrenched problems of the Great Depression. The unemployment rate leapt to 15.9 percent in 1931 and to 23.6 percent in 1932. Despite the New Deal’s efforts, it averaged approximately 20 percent between 1934 and 1936. Average family income in the mid-1930s stood virtually unchanged from the World War I period. Though wages for trade, finance, and services had risen around 30 percent, as had wages for government jobs (with public utility wages up 41 percent due to FDR’s programs), these were false signals that the economy was on the mend. It was finding steam thanks to a combination of more speculative activities and federal stimulus for federal jobs. This contributed to higher growth rates but not necessarily higher living standards or much of a budge in broader unemployment at first. Helping the population somewhat was low inflation. Food prices in the mid-1930s were approximately 30 percent lower than they were during World War I, and thus inflation policy was important to FDR and the bankers, who would disagree on how best to handle it.

But banks were still sitting on their money, and their reluctance to lend inhibited smaller businesses from hiring, let alone thriving. Beginning in 1934 the financiers used the more stable banking system that had been engineered by the New Deal as a platform upon which to drive up the volume of stock speculation, and with it stock prices. The confidence this exuded and
the media attention paid to it combined with New Deal stimulus to make the country appear to be exiting the Depression. This rise proved unsustainable, and the market and the overall economy would dip again in 1937 and 1938, until it became more substantively elevated by war financing efforts and related employment opportunities for those not in combat overseas.
⁵⁰

Still, by early 1936, the second part of FDR’s New Deal (particularly his jobs programs) seemed to be working to some extent, as the unemployment rate dropped to 16.9 percent. Even though that was still high, six million people had returned to work, corporate profits were rising again, and Detroit was rolling out almost as many cars as it had done before the Crash. A bulge in government jobs and the rising number of women in service jobs, combined with lower goods prices, appeared to be helping the economy for the time being.

Hitler Storms Through Europe

Since the end of World War I, public sentiment had staunchly favored an isolationist stance on foreign policy, not only because of the massive economic problems at home but also because of a growing perception that the war had been waged for profit. This was thanks in large part to North Dakota Republican senator Gerald Nye’s work as head of the Special Committee on Investigation of the Munitions Industry, established in April 1934.

In January 1936 Lamont, George Whitney, and J. P. Morgan Jr. were hauled up to hearings of the committee. Politically motivated by isolationists to thwart FDR (and what was construed as the bankers’ thirst for another war), the hearings ended up putting to rest the charge that adopting an internationalist policy toward financing the Allies had dragged the United States into World War I.

Nye’s committee examined the relationships between firms like the Morgan Bank and King George V of England to determine whether their financial agreements had created World War I.
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But when Nye claimed that President Wilson had lied to the Senate Foreign Relations Committee about secret Allied treaties during the war, the old guard in the Senate rallied to protect the former president’s good name. Funding to Nye’s investigation was cut off.
⁵²

Despite ninety-three hearings and more than two hundred witnesses, including Jack Morgan and Pierre du Pont, chairman of chemical company giant DuPont, the committee failed to nail down any hard evidence of a widespread conspiracy to enter World War I in order to profit off munitions sales.
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Still, Nye’s penchant for eyeball-grabbing headlines did its job. His
antics helped sway public opinion against support for US involvement in another major conflict.