All the Presidents' Bankers (41 page)

In general, Eisenhower didn’t believe that America and Britain should be joined at the hip.
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He regarded this method of the “joint ultimatum” as
“self-defeating.”
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That prevailing attitude would lead to the Suez Canal crisis. It would also help catapult the United States above its former superpower ally, politically and from an international banking perspective.

John McCloy, the World’s Most Powerful Banker

As mentioned, when Eisenhower won the presidential election in 1952, ending twenty years of Democratic control of the White House, he sought advice from a panel of bankers who supported his domestic and foreign trade policies of tight budgets and open markets.

Nearly simultaneously, transitioning from his Truman-appointed post as US high commissioner to Germany, Aldrich chose John McCloy to succeed him as Chase chairman for $150,000 per year plus benefits ($1.3 million in today’s terms). McCloy remained chairman of the Board of Trustees at the Ford Foundation and became chairman of the highly influential Council on Foreign Relations concurrently. Coupled with his tight relationship with Eisenhower and connection to the World Bank through his former friend and colleague Eugene Black, McCloy became the most influential banker in the world.

Most of McCloy’s public service roles had been under Democratic presidents, though he considered himself a classic Republican. Generally, during Republican presidencies, he’d worked in the private sector. He modestly downplayed his influence on Eisenhower. As McCloy put it, “He had his own advisors.”
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But McCloy would not hesitate to get in touch with Eisenhower when he needed, or wanted, to.

When Eisenhower became president, he considered McCloy for the secretary of state position, but instead offered him the subordinate position of undersecretary of state under John Foster Dulles, a man McCloy held in low regard. Adding insult to ego, it was Dulles, not Eisenhower, who approached him about the role.

Describing the incident, McCloy later explained, “Eisenhower . . . indicated that there had been more to it than just the Under Secretaryship for State, that it was really the Secretary of State he had in mind . . . because Dulles wanted to be relieved of the job of Secretary of State. . . . [As] I understood the proposal, Mr. Dulles was to still be the general advisor on foreign affairs although no longer Secretary of State. If I was going to be Secretary of State I wanted to be responsible for foreign policy. At any rate I indicated to him that that wouldn’t have made any difference. . . . It was a flattering offer but it
did not appeal to me.”
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McCloy had no interest in subordinating his foreign policy views to Dulles, whatever the capacity.

David Rockefeller’s name was batted around the White House in consideration for assistant secretary for economic affairs, but Rockefeller decided to remain at Chase as senior vice president, where he focused on growing the firm’s Latin American businesses.
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His and McCloy’s public post rejections portended a major transition of power alliances: Wall Street was becoming an increasingly more appealing platform for influence than a public post in Washington.

It took McCloy five months after starting at Chase to call the White House for an “important” meeting with Eisenhower. On May 18, 1953, they met regarding word McCloy had received about pending testimony before the Senate. Later that day, Eisenhower wrote his thoughts on Senator Joe McCarthy to Harris Bullis of General Mills: “With respect to McCarthy, I continue to believe that the President of the United States cannot afford to name names in opposing procedures, practices, and methods in our government . . . but, whether a Presidential ‘crackdown’ would better, or would actually worsen the situation, is a moot question.”
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The topic would soon rear itself in a very public way. For in July 1953, McCloy was called before a Senate subcommittee investigating the Internal Security Act. The inquiry was based on a Jenner Committee report that accused the Army of being too tolerant of Communists during World War II, implying that McCloy was responsible. In February 1954, McCloy was subject to more direct attacks by Senator McCarthy regarding commissioning Communists to Army positions and having ordered the destruction of Army Intelligence files when he worked in the War Department. Eisenhower, who had at first stayed on the sidelines regarding McCarthy, became irate. As White House Press Secretary James Hagerty wrote in his diary on February 24, “Pres very mad and getting fed up . . . it’s his army and he doesn’t like McCarthy’s tactics at all.” McCarthy was operating too close to home for Eisenhower, who said, “This guy McCarthy is going to get into trouble over this. I’m not going to take this one lying down. He’s ambitious. He wants to be president. He’s the last guy in the world who’ll ever get there, if I have anything to say.”
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The charge was dropped two days later.
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These incidents might have rendered McCloy more inclined to focus on his private-sector responsibilities, but they didn’t serve to alienate him from his involvement with the Eisenhower administration. Thus, when Congress wanted to slash Eisenhower’s appropriation requests for the Mutual Security Program, McCloy came through and explained the necessity of the program
to Congress and the public. In June 1954, Eisenhower told Congress, “Our Mutual Security Program is based upon the sound premise that there can be no safety for any of us except in cooperative efforts to build and sustain the strength of all free peoples. Above all else communist strategy seeks to divide, to isolate, to weaken. . . . We have chosen to help develop and expand world markets, because we believe that this course will strengthen the economies of all free nations, including our own.”
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The bankers’ efforts were successful. As Ike wrote McCloy and the other bankers who supported him, “I am most grateful for your vigorous help. . . . Since you and others have taken steps to avoid a crippling appropriations cut, the action of the Subcommittee on Foreign Operations of the House Appropriations Committee has been twice postponed.”
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The bankers supported the Mutual Security Program largely because it was also a mutual government-banking alliance program. The better funded Eisenhower’s military program, the more financially successful it would prove for the bankers as they expanded into the related countries.

McCloy’s Foreign Banking Legacy

By mid-1954, following a brief and mild recession, US newspapers were singing Eisenhower’s praises for allowing his advisers to steer his domestic policy to one of deregulation with respect to businesses. “Their [businessmen’s] attitude and that of investors throughout the country,” wrote the
New York World Telegram,
“is best expressed by the action of the stock market, which is currently at the highest levels in a generation.”
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In addition, by the fall of 1954, the unemployment rate had dropped to 4.8 percent, from a postwar peak of 7.6 percent in February 1950.

By late 1954, Chase’s foreign loan department was booming. Despite being known for his fiscal prudence, McCloy had taken the opportunity to increase the bank’s risk by lowering the amount of cash reserves the bank held against the loans it extended. Combining this more speculative lending with his shaping of international private banking policy, McCloy led a precedent-setting deal. With the US Treasury and IMF as partners, Chase extended a $30 million loan to the Peruvian government. The twist was that there was no collateral from Peru; instead the deal forced Peru to adopt IMF-dictated austerity measures in return for loans.
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The Peru deal was the first of many instances since Bretton Woods where US banks, the US government, and the multinational agencies would cooperate to force developing countries into the American-dominated financial
system in return for their economic and political concessions, through the extension of public or private loans, or a combination of both. The loan further cemented the role that Chase and other private banks would play in the supposed spirit of helping developing countries.

While at the World Bank, McCloy had consummated an agreement by which all loan proposals would require approval of the core “management” team, the elite American directors that he was friends with, as opposed to that of the broader board. This meant that he could more easily influence World Bank loans while at Chase. A stark example of that would occur when McCloy’s friend and former colleague World Bank president Eugene Black enlisted McCloy’s financial and advisory help with respect to the Aswan Dam in Egypt. Ultimately the incident had dire consequences beyond the control of either man.

The Inter-American Community

In April 1955, Eisenhower submitted another request for increased appropriations for the Mutual Security Program, including economic aid to “the free nations of South and East Asia.” He considered US determination to fight Communism as “rooted in our own revolt against colonial status” and “exemplified by our encouragement of Cuba and the Philippines to assume full freedom and control of their own destiny as independent nations.” He reiterated that America’s foreign economic policy expresses the combined embrace of political, military, and economic security across all “free nations.”
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It was the conservative Republicans, in particular, who opposed the provision of foreign aid to other nations. Eisenhower’s request unleashed another avalanche of banker moves to support him.

Three months later, his foreign policy initiatives were underscored by the Council on Foreign Relations’s flagship journal,
Foreign Affairs.
In a July 1955 article, former assistant secretary of state Edward Miller Jr. wrote that “Latin America is changing with sensational rapidity.” “As one country after another has become aware of the great progress and great wealth that the United States enjoys,” he explained, “the people have come to demand for themselves, and for their countries as a whole, a greater share of the good things of life and a better place under the sun.”
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Miller continued, “The economic contribution which we have made to the development of Latin America during the ten years following the end of World War II has been far greater than our prewar aid.” But it was up to the United States to pick up the slack Britain, Germany, Italy, Japan, and France
had left after World War II in terms of their critical economic roles as “suppliers and consumers of goods and as suppliers of capital.”

The United States and Latin America had similar population sizes, yet the aggregate national income per year in the United States was “ten times as large as all 20 Latin American nations combined.” He regarded the wealth disparity as a reason to strengthen economic ties to the region, an action that would be paired with anti-Communist rhetoric and US military support. The bankers and the White House embraced the notion of Latin America as a region desirous and needy of US support. Piling on debt and creating expensive financial arrangements between Latin American producers and US refiners of products was seen as beneficial to the region.

During the mid-1950s, US bankers were opening branches as fast as they could throughout Latin America. National City Bank had the edge over Chase in the region (except in Venezuela). In the Middle East, though, Chase was outpacing National City Bank, as we shall see.

McCloy’s Merger Legacy

Domestically, the banking system was undergoing dramatic changes, having remained relatively static during the 1940s, when bankers put up a unified front to finance the war, and the 1930s, when speculative activity was restricted due to the Great Depression, the Glass-Steagall Act, and thousands of bank closures.

The growing trend of mergers and merger applications from the industry was not going unnoticed in Congress, where there was concern that the big banks (mostly in New York) would acquire smaller ones around the country for the sake of growing their deposit bases, which would hamper competition. According to a July 30, 1955, statement by North Dakota Republican senator Milton Young, the Federal Reserve reported that from 1953 to 1955, small and medium-sized locally owned banks were going out of existence through mergers and voluntary liquidations at an average rate of over two per week. At that rate, Young claimed, “50 [percent] of the 14,000 commercial banking corporations now in existence are doomed to disappear from the financial scene in the next two generations.”
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Young’s concerns were the antithesis of the conservative deregulatory doctrine that would prevail in later years. Rather than representing the free market at its best, he saw these mergers as a threat to smaller, more localized financial enterprises and regarded them as anticompetitive and monopolistic.

But it was McCloy’s vision that prevailed in 1955 and dictated the framework for how the US banking industry would be structured going forward. His contribution to keeping banks outside antitrust laws came in the form of a relatively brief, heavily legalistic thirty-six-page document titled “A Statement on Bank Mergers,” which he submitted to the antitrust subcommittee of the House Judiciary Committee on July 5 of that year.
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His submission was to oppose a bill introduced by Congressman Emanuel Celler, a Democrat from New York, to extend Section 7 of the Clayton Anti-Trust Act of 1914. Celler’s bill would make commercial banks subject to the antitrust law, and more specifically would prohibit bank mergers that would substantially reduce competition or create a monopoly.

McCloy stressed that banks “provide a steady flow of lifeblood into America’s growing economy, and it is essential to the well-being of the nation that they remain sound, vigorous, and strong.”
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He believed they should remain free to expand without the confines of antitrust entanglements. Big banks, he reasoned, weren’t stifling the competitive opportunities of other banks because all banks were already subject to more regulation than other businesses.
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His reasoning overlooked the fact that big banks, with more capital and larger deposit bases, could wage effective takeovers of smaller banks—not only thwarting competition but annihilating it. Big banks might be subject to regulations, but their unfair advantage was, and would continue to be, indicative of monopoly behavior. Of course, sitting on top of one of the biggest, most powerful banks in the world was a pretty comfortable spot from which to be spouting these views.