All the Presidents' Bankers (6 page)

At this, Wilson relented, but with reservations as to his ability to “come anywhere near” Vanderlip’s expectations.
⁶³
Though he would distance himself in platform, he concluded that some banker support could be helpful.

The 1907 panic had revealed the weakness in the Morgan-dominated banking system, in that it relied too heavily on the maneuvers and money of an elite group of men who wielded increasing control over the country. For their part, the bankers knew that too many emergencies could put them in danger of losing their preeminent position over US finance. But they needed backing in times of panics, as well.

As it turned out, the office of the president stepped in to take a more active role in the economy. But in doing so, it found itself not more separate in power but more connected with the nation’s bankers. The collaboration of bankers and politicians would define the early 1910s. Morgan and his professional and genetic progeny and other titans of finance would remain in their prominent positions for decades, outlasting and influencing presidential administrations regardless of party affiliation.

The matter of creating a central banking mechanism that the two camps agreed upon, and that would support America’s rise to a position of global power, would assume center stage in political discourse. The related alliances between presidents and bankers would truly come to define not just America but its position in the world.

CHAPTER 1

T
HE
E
ARLY
1910
S
: P
OST
-P
ANIC
C
REATURE AND
P
ARTY
P
OSTURING

“We must break the Money Trust or the Money Trust will break us.”

—Louis B. Brandeis,
Other People’s Money and How the Bankers Use It

W
HEN
A
MERICA ENTERED THE 1910S, IT WAS NOT YET THE GLOBAL FINANCIAL
superpower that it would become by decade’s end. Two key elements would propel it to such a height. The first was the creation of the Federal Reserve System (the Fed), which provided bankers backup in case of financial emergencies and enabled the nation to produce a unified currency on par with the British pound or French franc. The second was the Great War, which reshaped the landscape of international business and political power.

The nation’s economic foundation was already transforming irrevocably in that direction. The baron industrialists and their sons had reinvented
themselves as financiers; making money would no longer occur in tandem with production but would be an end unto itself. The war would provide the perfect opportunity to expand the global influence of that excess capital.

Within the United States, there was a pronounced westward movement and sprouting of new banks to address finance demands on that coast. But despite this dispersion of capital, the New York bankers maintained their dominant position, largely through their closer ties to the White House. In Washington, the Republican Party remained in power. Roosevelt decided not to run for reelection in 1908, but he backed William Howard Taft, a man later described by Senator Nelson Aldrich’s great-grandson as a “well-fed patrician.”
¹
Like the Aldrich family, the Tafts had come to America from England in the late 1600s and settled in a small town in Massachusetts named after the English town of Uxbridge. As president, Taft would support Aldrich in fashioning a new currency system for the United States: the precursor to the Federal Reserve System, which would become law under Woodrow Wilson. Despite arguments from Democrats and populists that Aldrich’s plan gave bankers too much control, Taft endorsed the banker-friendly aspects from Aldrich’s earlier drafts.

The Morgan Bank would emerge unscathed from congressional investigations. Morgan associates and other key bankers would drive America to establish the Federal Reserve System. They would lead World War I–related financings, both for America’s armament efforts and for those of the Allied countries. New-generation financier Jack Morgan (son of J. P. Morgan) would dictate how credit was extended to battered nations during the war and through postwar peace. One Morgan partner in particular, Thomas Lamont, would become the unlikely and critical ally of President Wilson. The two men, both of whom had Ivy League educations and religious fathers, would combine efforts and whims to forge a postwar treaty that would fail because of domestic political power plays. Though that failure would crush Wilson and the Democrats, the bankers would find other ways to render Wall Street the global center of financial capitalism.

By the decade’s end, under the tutelage of a new generation of voracious bankers led by the brash and ambitious Charles Mitchell, National City Bank would become the first American bank to reach $1 billion in assets. Mitchell would establish the postwar model of short-term profit-seeking—not by leveraging relationships, the prevailing Wall Street model, but by accumulating customer deposits to finance global endeavors of sheer opportunism and speculation.

Jekyll Island, 1910

After the Panic of 1907, bankers and politicians alike sought a more stable banking system, though for different reasons. Despite J. P. Morgan’s ability to harness backing from the Treasury Department when he needed it (and vice versa), he desired a more permanent solution to financial emergencies. The rest of the big bankers concurred. But they wanted such a mechanism to be established on their terms.

In Washington, Republicans and Democrats both concluded that excessive reliance on bankers to stabilize the financial system in times of turbulence was too high a risk to their own influence over the country, and possibly damaging to America’s status in the world. The axiom that the group that controlled the money controlled the country remained true. But with the nation struggling economically, such a condition had political implications and had to be navigated accordingly.

Taft knew this when he campaigned on a vow to continue Roosevelt’s reform policies, including the trustbusting activities Roosevelt had set in motion. Though his own background was largely blue-blooded and warm toward the financiers, he knew the population blamed the bankers for their problems and that the Democrats would capitalize on those suspicions if he didn’t balance his support for business interests with empathy for the public. The tactic worked. In the presidential election of 1908 Taft won handily over populist Democrat William Jennings Bryan, even as the country was experiencing a post-Panic recession.

Despite rhetorical speeches about the undue influence of the bankers, especially Morgan, nearly five years passed before Congress launched an investigation into the money trusts’ influence. Meanwhile, to alleviate concerns of another panic (or simply to take advantage of the situation to press for an initiative whose time had come), Congress established the bipartisan National Monetary Commission to develop a banking reform proposal and study the problems underlying the panic and alternative foreign central banking systems, for analytical and competitive purposes.

The commission had no populist bent; it was headed by Aldrich and largely made up of men sympathetic to bankers and their lawyers. The Aldrich-Vreeland Act enabled an elite group of national banks to formulate a reserve association to create currency backed by their securities, or excess capital. In that way, the act gave the banks a way to alleviate their own credit concerns (and retain control) in times of emergency. It was the true precursor to the Federal Reserve System.

During the summer of 1908, Aldrich and some subcommittee members journeyed to Europe.
²
Their official mandate was to study the operations of European central banks for background information with which to fashion some sort of central bank for the United States. Unofficially, Aldrich and the bankers wanted to strengthen America’s economic position relative to its European counterparts—that would require establishing a means to further consolidate or centralize a method of creating currency in downturns, or for other purposes, as the European central banks could.

Aldrich was expected to provide a summary of his findings and draft a currency bill that fall. Yet when he and his men returned, they did not bring home a fully formed strategy for a US equivalent to the English and French central banks that would both create a stronger national currency and support the desires of the bankers. Also, constructing the first central bank in the United States required a fair bit of maneuvering; the idea did not yet have broad bipartisan or popular support. With elections looming, it was risky to push for a system that might be deemed unacceptable or too bank-centric by voters who didn’t understand that this was already the premise of the Aldrich-Vreeland Act. There was a recession going on, after all, and public opinion equated this matter as residue from the Panic of 1907.

Aldrich tapped his Wall Street friends to advise him further. The world stood at a financial crossroads: the most powerful and capital-rich US bankers could realistically consider the possibility of competing with European bankers for the first time, just as the United States itself could now consider competing with Europe. It would be advantageous for the US government and for Wall Street to establish a strong central bank that would strengthen the US currency to aid both factions in that quest for international power. The only question was: How would this central bank be fashioned? How would it be controlled, and who would have the most influence over it—actually or at least with respect to the public eye? The solution would require constructing an entity that worked for both the president and the bankers, politically and practically. Even before the panic, banker Jacob Schiff, head of Kuhn, Loeb & Company, had warned the New York Chamber of Commerce that “unless we have a central bank with adequate control of credit resources, this country is going to undergo the most severe and far reaching money panic in its history.” Schiff’s son-in-law’s brother, Hamburg-born banker Paul Warburg, would play a key role in fashioning that bank.
³
Warburg would fortify his relationship to Kuhn, Loeb by marrying Nina Loeb, daughter of Solomon Loeb.

In March 1910, Aldrich tested the popular waters among friends by intimating at an Economic Club gathering that he leaned toward having a central
bank. He hoped to see New York become the center of the financial world.
⁴
As he told the group of bankers to hearty applause, “It is a disgrace to this country, with its vast resources, that we are obliged to pay our bills in sterling drafts or in drafts drawn payable in marks or francs in London or Berlin or Paris. The time will come—and it ought to come soon, gentlemen—when the United States will take the place to which she is entitled as the leading financial power in the world.”
⁵

Through their travels, Aldrich and his fellow commissioners put together twenty-three volumes of analysis of foreign financial and central banking systems, hoping to provide enough information to assuage political critics who doubted that such a mechanism was needed while leaving room to adopt a system that would be more tightly connected to the main national banks than the European private banks were. The American system would accomplish three things: it would promote America’s overall power in the world, support bankers with an excess money source in their quest for domestic and international financial control, and enable presidents to enhance their global political stature in the process.

In the summer of 1910 Aldrich selected National City Bank president James Stillman to accompany him on yet another fact-finding mission to Europe.
⁶
Stillman had ties to two of the most powerful families in the United States. His daughter was married to William Rockefeller’s son, William Goodsell Rockefeller, and he worked in a banking alliance with both J. P. Morgan and William Rockefeller.

For Frank Vanderlip, a founding father of the original plan for the Federal Reserve System, who was serving as vice president of the National City Bank at the time, “the beginning of the adventure” came in the form of a letter from Stillman, his boss and mentor, while Stillman was traveling in Paris with Aldrich. Stillman said that he had “just had a long conference” with “Zivil” (their code name for Aldrich), who was “keen to get to work on banking and currency revision.” Zivil was upset that Vanderlip and Henry Davison (a senior partner at J. P. Morgan) had not been able to join him and Stillman in Europe that summer, where he felt the group would have had “plenty of time for our discussions and been free from interruptions.”
⁷
Stillman told Vanderlip to “make everything else subservient,” to give his “whole time and thought to a thorough consideration of the subject.”