All the Presidents' Bankers (33 page)

The Neutrality Act forbade US manufacturers from selling war munitions to any belligerent country in any war, and an amendment in 1937 prohibited loans to warring nations. But after World War II began, Congress began to ease up on the restrictions, which allowed munitions be sold to countries being attacked by Nazi Germany. On November 13, 1941, after the US destroyer
Reuben James
was sunk by a German sub, remaining restrictions were lifted. Merchant ships would be allowed to arm themselves in self-defense and could enter European waters with the appropriate financings and munitions in place.

The Japanese bombed Pearl Harbor on December 7, “a date which will live in infamy,” said FDR famously, as he signed the official declaration of US war on Japan the following day. Four days later, Germany and Italy declared
war on the United States, and the United States responded by declaring war on them. The European and Southeast Asian wars had become a global conflict. The United States was officially in World War II.

Postwar Finance Before the War Ends

Just after the United States entered the war, two simultaneous initiatives unfolded that would dictate elements of financing after the war, through the joint initiatives of foreign policy measures and private banking whims. Plans were already being formulated to navigate the postwar peace, especially its international power implications for finance and politics, in the background. American political leaders and scholars began considering the concept of “one world” from an economic perspective, void of divisions and imbalances. Or so the theory went.

The original plans to create a set of multinational entities that would finance one-world reconstruction and development (and ostensibly balance the world’s various economies) were conceived by two academics: John Maynard Keynes, an adviser for the British Treasury, and Harry Dexter White, an economist in the Division of Monetary Research of the US Treasury under Treasury Secretary Henry Morgenthau.

By the spring of 1942, White had drafted plans for a “stabilization fund” and a “Bank for Reconstruction and Development.” His concept for the fund became the seed for the International Monetary Fund. The other idea became the World Bank.
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But before those entities would come to life through the Bretton Woods conferences, many arguments about their makeup would take place, and millions of lives would be lost.

Taxes, Inflation, and Recovery

Inflation became a central concern to bankers, the population, and the FDR administration as the European battles intensified. With the stimulation of war effort requirements domestically and European war-related demand, the United States was truly recovering from the Great Depression. Adopting Aldrich’s view, tax policy would play a dual role in continued recovery, as FDR saw it, by raising money to fund the war and containing consumer purchasing power to curb inflation of nonmilitary goods.
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In that regard, the Revenue Act of 1942 called for tax revenues to be raised by $18 billion, and brought millions of new middle-class taxpayers into the income tax system. It also included an added “victory tax” of 5 percent on
all income over $624 until the war’s end, which was lowered to 3 percent in a subsequent act.

As the war effort gained momentum, the federal budget and the need for funds escalated. In 1942 FDR had presented the country with a budget that included a $30 billion increase over the previous year; it was nearly six times as large as the budget had been at its peak during World War I. “Victory,” said FDR in his budget message to Congress for the fiscal year beginning July 1, 1943, “cannot be bought with any amount of money however large; victory is achieved with the blood of soldiers, the sweat of working men and women and the sacrifice of all people.” By this point the budget exceeded $100 billion.

Though blood, sweat, and sacrifice would be the horrific ingredients of victory, money still had to be found to fund the war in as many ways as possible. The White House used the bankers to enhance the process. In mid-November 1942, FDR was informed by his staff that plans were growing in cities across the country to centralize and convert the “war drives” into “war chests.” The best man they could think of to run the effort properly was Winthrop Aldrich.
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The leaders of Chase and National City Bank rose to the occasion. The December 1942 Victory Bond Drive was a huge success; $13 billion in bonds were sold, exceeding a goal of $9 billon. Money that wasn’t raised via the population was minted by the government, and on both accounts bankers would play a pivotal role. The average US bank bought and held government securities equal to
nearly half
of its total deposits to support the prices of that Treasury debt on behalf of the US government. But more was needed.

Despite their support, the bankers had mixed views about the increase in debt and the potential for inflation that could result from it. Some of them believed it was better for the country (and for their business) to target the public as investors in war bonds than to raise money by issuing more Treasury bonds. FDR couldn’t afford to neglect the bankers’ inflation concerns; he needed their private fundraising avenues as much as he needed to raise money through public channels, including through tax increases.

Aldrich Seeks Alternatives to National Debt Increases

In a speech on January 21, 1943, at a Connecticut Bankers Association dinner, Aldrich wielded his influence on domestic policy, suggesting Treasury debt be augmented by taxes during the war, so as to limit national debt increases. He urged an at-the-source income tax and adoption of a federal retail sales
tax “to check the increases of public debt,” even though “they are not a good form of taxation . . . in times of peace.”

With federal debt at $143 billion, and set to hit $180 billion that year, he was concerned that the United States had relied “too little upon taxation and too much upon borrowings” as the war progressed. In 1941, about 50 percent of total federal expenditures were covered by taxes (the figure dropped to 31 percent in 1942). Aldrich believed that “investors had purchased too little and commercial bankers too large” a portion of debt, which had caused “an inflationary expansion of bank deposits” and “carries with it serious implications for the banking system.” He had rising concerns as to whether banks should bear as much of the costs of war debt as they were, and about inflation in general.

In 1942, commercial banks bought $19 billion of government securities (38 percent of the increase in total debt). Through 1943, he estimated, commercial banks might have to absorb $40 billion (60 percent of the estimated increase in federal debt). Though commercial banks stood ready to do their part in the war effort, they didn’t want to shoulder all the debt burden; it would be less profitable than using their capital to fund war supplies during the war and reparations afterward.

Aldrich praised the “notable success” of the Victory Fund Committees in placing 60 percent of the related securities sold with noncommercial buyers. He believed this would prevent the need for another such large offering until April, concluding “the wider the ownership distribution of the debt, the greater is the amount of debt that a nation can stand.”
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After the German Sixth Army admitted its first defeat at the Battle of Stalingrad, the Treasury Department announced plans for another $13 billion fund drive.

FDR summoned Aldrich to the White House in April 1943 to offer him the position of chairman of the National War Fund, which would coordinate local fund drives throughout the country. Aldrich was honored to accept the post. As he had written FDR beforehand, the National War Fund was “more important than the unification of the raising of money nationally [by] the private war relief agencies.”
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The fund centralized the bankers’ roles in the war effort and elevated their ability to control the flow of funds relative to the private relief agencies they would circumvent.

On May 21, FDR endorsed Aldrich and the fund publicly: “As Commander in Chief, I ask all our people to remember this—that a share in the National War Fund is a share in winning the war.” Two weeks later, Aldrich set the goal of the National War Fund drive at $250 million. He and Treasury
Secretary Morgenthau planned to start their coordinated drive in late September to avoid interfering with the Red Cross drive the following spring.
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Aldrich’s compatriot National City Bank chairman Gordon Rentschler was selected to be treasurer of the National War Fund. As the next wave of the drive swung into high gear in the fall of 1943 all the individual checks started flowing to him—such as a $5 check from Mac Grossman, a member of the US Army who tried to send it to his field officer and was told there’d be no organized drive in the field. Over the next year, other personal gestures of financial support flowed through Rentschler, such as $724.68—one day’s salary for the employees of A. Steinam Company—and $1 from Mrs. Grace Fox of Philadelphia.
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Burgess and Inflation

In keeping with his ideas about placing more of the financing burden on the citizenry, W. Randolph Burgess campaigned for the second bond drive to reach more individuals. “Coverage must be broader if inflation price advances are to be checked,” he wrote Federal Reserve chairman Eccles.
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Burgess was motivated by more than a lifelong concern about inflation; the broader the national coverage of bond buyers, the more customers would be performing their financial activities through the banks selling those bonds. It was a customer drive as much as a war bond drive. Patriotism could be linked to opening an account at National City Bank. Amassing savings in that account was akin to providing the public service of frugality in the face of mounting international bloodshed and the military operations that would be needed to fight Hitler.

By extension, National City Bank was opening new branches around the world, in countries with governments sympathetic to America and its allies. The growth was spun as a patriotic deed. The bank’s ads depicted international locales where battles were being fought and new branches were opening. After victories, National City Bank would be on hand to facilitate funds for reconstructing those countries on behalf of America and itself. From that local vantage point, the bank’s power over future development would be acute.

In addition, with national income expected to reach new levels as the nation entered high-production and full-employment mode, Burgess believed people should save their money voluntarily or make bond purchases to contain inflation. The bankers were thus abetting the process to align the people with the government. “With the inspiring achievements of the Armed Forces,
with miracles and production by American industry,” he wrote Eccles, “the bankers of the country can be counted on to do their share.”

On April 8, 1943, FDR had frozen prices, wages, and salaries in further efforts to stem inflation. The Current Tax Payment Act took effect on June 9. The act allowed the government to raise money in advance of the end of the tax year by collecting people’s income taxes the year the money was earned, not the following year. At the time, most bankers recognized the need to raise money through taxes. The Revenue Act of 1943 also provided for the distribution of the payment of taxes through the population. It carried a small concession to the wealthy, alleviating some of the elite’s negative feelings around the idea that prior incarnations were simply “class taxes.”
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It also increased excise taxes and raised the excess profits tax to 95 percent from 90 percent. Though FDR vetoed the act, claiming it was too business-friendly, the House overrode the veto to pass the Individual Income Tax Act of 1944.

With respect to the bond drives, everything went full steam ahead. On September 27, 1943, Burgess, who had been conferring regularly with Morgenthau on the matter, informed the Treasury secretary that “New York City went over the top today and I think the State will be tomorrow night. We are driving ahead on individual subscriptions.”
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While Aldrich and Rentschler focused on bond drives, which also fit into the framework of their banks’ strategies for opening accounts, Lamont concentrated on his area of political expertise: lobbying for passage of one of FDR’s major foreign policy initiatives, which dovetailed with his internationalist stance on trade matters. The Republicans had opposed the first incarnation of the measure, the Reciprocal Tariff Act of 1934, through which FDR extended the power of the presidency to establish foreign trade agreements with other countries (particularly with Latin America) and reduce tariffs (which the Republicans preferred to keep higher) to spur greater global trade liberalization. The bill had passed despite their opposition.

FDR expressed his gratitude to Lamont for his efforts in convincing the Republican opposition to pass the Reciprocal Trade Agreements Act of 1943, an expansion of the president’s tariff and trade negotiation powers. John Franklin Carter of the National Press Club informed FDR that “Lamont went to great personal trouble” to do so, fighting against a number of “recalcitrant Republican Senators and Congressmen.” It was a repeat of 1919, when Lamont wrestled the more isolationist components of his party on behalf of the president and a global banking and trade framework. Carter told FDR, off the record, that “word went out from the House of Morgan to support renewal of the Trade Agreements Act.”
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Both the Morgan Bank and FDR emerged victorious.

The Postwar Power Play During the War

There was more to the notion of war funding than ending the war; capital considerations became a battle for political and economic supremacy. Both America and the British wanted to control the postwar financial system. Britain had conceded ground to the United States and its bankers after World War I. This was a second chance, perhaps. But the United States didn’t want to forfeit the spot it had won as a new superpower.