All the Presidents' Bankers (30 page)

Across the ocean, Fascist armies were marching across Europe and Africa. On March 7, 1936, Hitler’s Germany seized the Rhineland in violation of the Treaty of Versailles and the Locarno agreements. Benito Mussolini’s Italy annexed Ethiopia on May 9, 1936.

FDR saw the signs for exactly what they were. On March 16, 1936, he wrote his German ambassador, William Dodd, “Everything seems to have broken loose again in your part of the world. All the experts here, there and the other place say ‘There will be no war’ . . . but as President I have to be ready.”
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The Americans who still remembered World War I reverted to an even sharper isolationist stance regarding another war. Congress quickly passed neutrality laws to prohibit FDR from taking sides from a foreign policy or economic perspective. Wilson’s initial reaction had been to declare neutrality without a congressional law, and shortly thereafter bankers and businesses got involved as they saw fit. The same thing would eventually happen with FDR, but it would take more time and maneuvering.

As the presidential election loomed, fresh aid for FDR’s campaign came from A. P. Giannini, who continued to lavish public support on FDR. This time, FDR responded personally. On May 7, 1936, he wrote, “In the midst of so much misunderstanding and misinterpretation it was decidedly reassuring to hear your radio address.”
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In late June 1936, Giannini’s endorsements traversed the West Coast newspapers. The
San Francisco News
ran a glowing headline, “A. P. Giannini Gives Support to Roosevelt.” The
Herald Express
of Los Angeles wrote, “A. P. Giannini favors Roosevelt Re-election.” An editorial in the
Los Angeles Illustrated Daily News
noted, “Although Mr. Giannini has long been one of the few big bankers in the Roosevelt New Deal camp, this evidence that he intends to stay there despite pressure is considered of high political importance.”

Giannini’s alliance proved crucial to FDR, who needed the California vote. Something about the way that Giannini had grown his bank to be more citizen-oriented than the New York banks, combined with his support for the New Deal, gave his words weight and helped improve his stature as the people’s banker. By late 1936, the Bank of America’s profits were up 38 percent, showing that support for FDR could be lucrative as well.
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FDR’s opponents remained focused on the negatives and labeled the pre-election economy a “Roosevelt recession” (it would become a full recession in 1937–1938). Leffingwell wrote Roosevelt to persuade him to reduce his antibanker rhetoric and interventionist policies. In a September 8 letter to
FDR, Leffingwell, a libertarian Democrat (back then they were called “liberal”), wrote, “It was natural at the moment of the crisis in 1933 for the people to demand scapegoats. . . . It hurts our feeling to have you go on calling us money changers and economic royalists. . . . What such liberal democrats as I would like to hear from you is that you do regard some of the measures of the last three years as transitional and emergency measures; and that you do mean to use your second term to strengthen by your own example the prestige—now sadly lowered through the world—of government by democratic methods.”

Some bankers, including Aldrich, had acquiesced to the marginal tax rate hike on the wealthy as preferable to increasing the nation’s debt to sustain the economy. But Leffingwell felt that “tax policies which are punitive or directed to some ulterior social objective rather than to revenue-producing should be avoided.”
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FDR’s Timely Victory

Despite Leffingwell’s overtures FDR deployed the same strategy he used to win his first election: speaking out against big business and the elitist money types. “Government by organized money is just as dangerous as Government by organized mob,” he said.
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His political acumen proved impeccable. He won reelection by the biggest electoral margin victory since James Monroe ran unopposed in 1820, capturing 98.49 percent, or 523 electoral votes, the largest number of electoral votes ever recorded, and 60.8 percent of the popular vote. (Johnson would supplant this record in the 1964 election.)

Despite the victory and public support for the New Deal, FDR did lose some major fights with the Supreme Court about certain programs. The Court declared much of the National Industrial Recovery Act unconstitutional in May 1935, a month before the program was set to expire. Seven months later, it declared the Agricultural Adjustment Act unconstitutional through a narrow interpretation of the constitutional clause empowering Congress to regulate commerce.
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When the Supreme Court ruled against a New York law providing a minimum wage for women and children in June 1936, FDR retaliated by trying to pass a bill that would ostensibly force justices to retire at age seventy. After that point, and following FDR’s landslide victory, Supreme Court Justice Owen Roberts began siding with the president, and the “court-packing” bill was dropped.
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FDR’s win was well timed, for the end of 1936 gave way to a recession that would last through the next couple of years. The stock market dove considerably, the number of business failures and bankruptcies rose, and two million more people lost their jobs. As a result of the downturn, FDR’s plans and policies would come under attack by the bankers for strangling the economy and by liberals for not going far enough.

FDR had an ally at the Morgan Bank with respect to the war, if not his domestic policies. An eager Thomas Lamont was thrust back into his dual role as international banker and diplomat. There was no way to deal with a potential war situation from a stance of isolationism, he believed. He took matters in his own hands, keeping FDR informed along the way.

Lamont traveled to Rome on April 17, 1937, as a step in his joint peace-keeping and client-keeping diplomacy. During this trip, he sought a private meeting with Mussolini to persuade him to stay on the side of Britain, France, and the United States. Mussolini saw Lamont the following week for a private “courtesy” meeting.
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But the results of that rendezvous would transpire in manners far from what Lamont hoped.

The US Economy Wobbles

At home, news of an impending European war unleashed a bout of capital speculation. On November 10, 1936, the stock market hit a high of 144.44 before receding somewhat by the end of the year. Early in 1937, global rearmament programs and related private bank financings and reinvigorated speculation pushed up prices. Prices for steel and other metals commodities rose, as did shares of industrial companies on the stock market.

The bull market that lasted from 1932 to 1937 was the longest in US history at the time, belying a job-challenged, wage-challenged economy. Banks began to loosen their lending purses for corporations in 1936. The war would eventually boost employment, but there would be bumps along the way to recovery.

Soon after the stock market reached a high of 142.93 on March 8, 1937, FDR and Treasury Secretary Henry Morgenthau became worried about inflation. The word from Washington was that such a market boom was unwelcome. As the Federal Reserve increased bank reserve requirements in an attempt to tighten monetary policy, FDR issued a statement against speculators he believed were pushing up metals prices, indicating that the government might cease purchases from the capital goods industry unless prices were contained.
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To him, the issue was less about interest rate policy, which
the bankers wanted loosened, and more about the dangers to funding a possible war effort and to the population of speculators driving prices up.

Prices remained stable until August 1937, when Charles Gay, who had replaced Richard Whitney as head of the New York Stock Exchange, publicly denounced “over-regulation in the securities markets” and spoke against the federal government surtax on undistributed profits. His speech set in motion a major sell-off. By November 24 the market had dropped 43 percent for the year, falling to 82.07 (it had been climbing each year since hitting the Great Depression low of 33.98 on July 8, 1932).

By the winter of 1937, US bankers and businesses were struggling again, and the US economy was faltering. In his January 1938 address, National City Bank chairman James Perkins apologized to his shareholders for the weakening economic conditions. He said, “It is a disappointment to everyone to find that we come to the end of the year with our business activity as low as it was at the end of 1934.” He blamed this on the fact that the government had stopped what he referred to as “pump priming,” or stimulus, even though private industry wasn’t able to take up the slack because the Fed was restricting funds to the banks.
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During the early Depression years, GDP had decreased significantly: by 8.5 percent in 1930, 6.4 percent in 1931, and 12.9 percent in 1932. The bottoming-out period ended in 1933, with GDP decreasing just 1.3. GDP rebounded over the middle part of the decade, showing a 10.8 percent increase in 1934, an 8.9 percent increase in 1935, and a 12.9 percent increase in 1936.
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But by 1938, unemployment shot up again to 19 percent, not too far below the 1934 level of 21.7 percent.
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GDP fell by 3.3 percent from 1937 to 1938.

Capital “Lockout”

As the recession set in, bankers found themselves back in the spotlight for restricting capital. On January 27, 1938, at an address at the University of Pennsylvania’s bicentennial campaign, Lamont spoke out for his kind. He denied that capital had “gone on strike,” thereby causing the current recession. Instead, he characterized it as being “locked out.”

He might have been traveling to Europe on business-tinged diplomacy missions, but now Lamont publicly turned against FDR’s domestic policies. He was one of a half-dozen leaders representing banking, industry, and labor who had met with FDR that week to discuss the matter. He had concluded that much of the recession resulted from five years of a “general attitude of distrust toward business” and “extreme legislation, which, in aiming to cure
evils, had placed obstacles in the path of progress” and “crippled the natural interplay of economic forces.” He called for a spirit of “good will” between government and business.

Lamont further blamed the capital “lockout” on the surplus profits tax and excessive government. “In America,” he said, “we are all agreed that no individual must be allowed to go hungry,” but “we must beware too much pampering, and of rendering potentially useful citizens useless, by allowing them to assume that it is government’s function not only to meet pressing temporary emergency, but to look after all their needs.”

In a thinly veiled threat disguised as a suggestion to reduce regulation and loosen credit, he said, “The entire business community has . . . made the most . . . determined effort to maintain the improvements that marked 1936 and early 1937 . . . but . . . if enterprise is to continue to advance, fresh capital must be made constantly available for it.”
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On February 14, 1938, Lamont again met with FDR at the White House to discuss credit policies, capital markets, and public utilities. In a follow-up letter, he pressed the urgency of his ideas, noting that “my contacts with you date back twenty-five years: so I allow myself some latitude.”
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He lambasted, in his own courteous way, Federal Reserve chief Marriner Eccles for tightening monetary policy. He urged FDR to persuade Eccles to reverse his “deflationary policies,” particularly because, as Lamont knew more than the public realized, FDR would have to get involved in a war for “the preservation of the European peace” and he would need capital and bankers to finance it.

Lamont was concerned that the economy was dipping again, and that a “long-continued depression here is bound to have similar effects abroad,” which could devolve into a long, drawn-out war. An “early arrest of the depression” in the United States was critical, and a loose monetary policy would achieve that. Without such a policy, unemployment, which was already creeping up again, would skyrocket. Lamont stressed that the improvement of the past two years had a high degree of artificiality because “so much of it was based on Government spending which has recently been wisely curtailed. Any suggestion that the remedy should be the resumption of government spending, or another round of “pump-priming,” seemed “almost incredible” to him.
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Lamont wanted money to flow cheaply, but from the Fed to the banks, not from the government to industry or the population directly.

Lamont’s instincts on war were sound. In March 1938, German troops swept in to occupy their former ally Austria without a single shot being fired. Czechoslovakia fell next. By the fall of that year, European war was imminent. In a September 28 note to FDR, Lamont—who had been following
the movements in Europe and traveling back and forth quite a bit—wrote ominously, “I just finished talking over the phone with one of my London partners who says that whereas yesterday Noon there the chances seemed 1000 to 1 for war, now they feel they are about 10 to 1 against there being war.”
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Two days later, Britain, France, Italy, and Germany signed the Munich Agreement recognizing Hitler’s annexation of the Sudetenland in western Czechoslovakia.

The United States could only avoid involvement for so long. In his December 5 speech to the University of North Carolina student forum, FDR reminded his audience that his policies hadn’t changed. “Actually, I’m an exceedingly mild-mannered person, a practitioner of peace both domestic and foreign, a believer in the capitalist system and for my breakfast a devotee of scrambled eggs.”
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FDR wanted to cater to the pacifists and the isolationists’ desires to avoid war, but he still wanted the United States to play a lead role in international politics, particularly if the global landscape would change as a result of war. The United States had come a long way, and he wanted to retain its hegemony.