The panic of 1907 had spectacularly displayed the weakness of what was known by courtesy as the American banking system: a collection of national banks (independent of one another except as they were locally organized into clearing-house groups) superimposed upon forty-eight collections of state banks. Not only were the standards of safety imposed by law varied and inadequate (and destined long to remain so) but the individual banks were so independent of one another that there was no way of mobilizing their scattered reserves to meet emergencies in one part of the country or another. Each bank had to sink or swim by itself, aided only by such relief measures as a local clearing house could contrive or as some local leader could impose upon the local banks (as Morgan had done in New York in 1907). The first great need was thus for a practicable device for shifting a part of the scattered reserves here and there in accordance with changing conditions. The second great need was for a more flexible currency: there was no way of providing for a suitable yet controlled expansion of it in times of expanding requirements. The AldrichVreeland Act of 1908, though it was to prove very useful when the war storm broke in 1914, was frankly a measure for panic use only—a stopgap measure to serve until a more elastic system of currency could be devised.
For years after 1907, Senator Aldrich of Rhode Island and various astute bankers such as Paul M. Warburg, impressed by this double need, had been working on plans for a central banking system which could mobilize and hold ready for use a part of the reserves of the individual banks and could also issue notes based on commercial paper (and thus provide a currency sensitive to the volume of going business). They had labored to convince the slow-moving bankers of the country that such an institution was necessary, and had made some headway. Senator Aldrich finally went so far as to introduce a bill in the Senate in 1912.
The character of the Aldrich Bill, however, may be suggested by the fact that it was written at a secret conclave held at the Jekyl Island Club on the Georgia coast—a favorite playtime haunt of the New York bankers—by a small group of men which included, along with Aldrich and Warburg, two representatives of the dominant financial powers: Harry Davison of the House of Morgan and Frank A. Vanderlip of the National City Bank. Genuine as the wish of these men undoubtedly was to provide a superbank which would truly serve the national need, and adroitly as their proposal was adapted to meeting the shortcomings of the national currency, one could hardly expect that any plan which they drew up would seriously disturb their influence. The plan evolved at Jekyl Island called for a central reserve bank with a board of directors in which the private bankers of the country would have an obvious majority.
At a time when the air was full of talk of a “money trust” such a scheme was obviously impossible. It would be opposed not merely by the adamant conservatism of the average private banker, who distrusted any device which would hamper his individual freedom of action, but also by the fear among Westerners and Southerners and men from the smaller cities generally that a central bank would turn out to be a bank under the control of the powers in Wall Street, and still more potently by the insistence of the reformers upon curbing the financial oligarchy. But when the Wilson Administration came into power in 1913 it made a surprising and very canny move. It took over the Aldrich-Warburg idea and altered it to make it a part of the reform program. The bill which Carter Glass sponsored in Congress and which Woodrow Wilson backed with his commanding influence provided indeed for a superbanking system, but a decentralized one (to meet the jealousy and suspicion of the small cities) which while operated by men chosen by the private bankers (to placate the banking community) would be supervised and regulated by a government board (to prevent Wall Street control). The bill, that is to say, provided for twelve separate regional reserve banks, the directors of which would be chosen by the bankers of these various regions; but also for a supervisory Federal Reserve Board consisting of the Secretary of the Treasury, the Comptroller of the Currency, and five other men to be appointed by the President.
This masterly compromise won the day. Despite much shaking of heads among the diehards of the financial world, the bill was passed at the end of 1913. The Federal Reserve System was ready to begin operations in November, 1914, only a few months after the outbreak of the war. By the time the war boom gathered headway, late in 1915, the value of the System was already apparent. It did not especially curb the power of Wall Street, but on the other hand it did not accentuate this power. It made such banks as flocked to join it safer, providing indeed as much safety as could be expected in view of the fact that membership was not compulsory and that the legal standards for commercial banking remained varied and lax. And it provided ample currency and credit to meet the growing needs of a nation which had suddenly found itself doing a roaring business.
3
When old Pierpont Morgan died, men had wondered whether the supremacy of the banking house which he had built would come to an end. If character were the secret of financial influence, as the old man had argued at the Pujo inquiry, perhaps the great days of the Morgan house were over; for J. P. Morgan the younger, who now at the age of forty-five became the senior partner, had given no evidence of any such colossal personal force as his father had radiated. He was an attractive young man, by reputation solid and reliable; he inherited his father’s patrician spirit and tastes, his father’s scorn of the common herd, and his father’s blinding temper; but his capacity for personal leadership had not been tested. He was surrounded by exceptionally able partners; Harry Davison in particular, a protegé of George F. Baker’s who had had a leading part in the organization of the Bankers Trust Company, was looked to as a rising power in the Street. But the question of the future influence of the firm remained open, and all the more so because the Clayton Act soon forced the members to resign as directors of the commercial banks on whose boards they sat, and in deference to public opinion they resigned also from thirty of the directorships which they held in business concerns. These resignations had but a slight effect upon their influence, for as already noted in the previous chapter of this book the number of directorships which a firm held was by no means a measure of its power; nevertheless the move added to the uncertainty with which the future of the House was surrounded. This uncertainty was not completely dispelled for two years.
The war boom of 1915 and 1916 dispelled it, however, and conclusively.
The House of Morgan had always been closely tied to England. Morgan the Elder had received his early training in his father’s American banking house in London. He had spent much time at his splendid house in Prince’s Gate. He had been accepted by the leading financiers of England as a kindred if somewhat overmastering spirit. Morgan the Younger was likewise sympathetic with the English. The House had a branch in Paris, too, and a long record of close association with French as well as British bankers. These facts, together with the enthusiasm of the partners for the Allied cause—“Our firm had never for one moment been neutral,” wrote Lamont later; “we didn’t know how to be”—and with the supreme position which the firm occupied in American finance, bore rich fruit in 1915.
As a result of the diplomatic suggestions of the ever-alert Davison, who spent weeks in conference with British officials in London, the British government made J. P. Morgan & Co. its purchasing agent in the United States. The French government also decided to coordinate its American purchases through the Morgan office. And both governments made the House of Morgan their fiscal agent in the United States, entrusting them at the outset with the staggering task of selling to American investors a half-billion issue of Anglo-French bonds, the largest issue of securities ever floated in the country.
The position which the firm came to occupy in the American economy as a result of its successful exercise of the double function of purchasing agent and money-raising agent was as extraordinary as it was unprecedented. The Allied purchases of munitions and war materials of all sorts were growing and soon became enormous: they were the chief stimulant of the new prosperity of
1915 and 1916. The only way in which trade between the United States on the one hand and England and France on the other hand could be balanced while such vast exports were going on was by a combination of three simultaneous processes: first, the importation into America of over a billion dollars’ worth of gold; second, the gradual sale to American investors, through the stock exchanges, of foreign-owned American securities to the extent of a billion and a half dollars (the selling of which, incidentally, was also entrusted to the Morgan firm); and third, the borrowing by England and France of over a billion dollars more. I say borrowing—but the money was all spent in the United States. It was taken in from American investors under the name of the Allied governments, and it was handed out to American manufacturers, also under the name of the Allied governments, in payment for munitions and supplies. And both the taking in and the handing out were managed by the House of Morgan!
To be more specific: J. P. Morgan & Co. organized the syndicates which borrowed the money for the Allies-huge syndicates, the first one of which, to distribute the Anglo-French bond issue of 1915, consisted of several hundred banks and investment houses, sixty of them in New York alone. And through a special department headed by Edward R. Stettinius (who soon became a Morgan partner) the firm also apportioned the British and French orders among steel mills and powder plants and tool works and the numerous other plants all over the country which darkened the sky with their smoke as they fed the slaughter in Europe. No such direct economic power had ever been exercised by a single group of men in all American history.
As to the effect of all this activity upon the neutral position of the United States, it might be mentioned here that on August 15, 1914, when the war was hardly a fortnight old, Secretary Bryan had written to the House of Morgan: “In the judgment of this Government, loans by American bankers to any foreign nation which is at war are inconsistent with the true spirit of neutrality”; but that this virtual prohibition was later permitted to lapse. The stimulating effect of war orders upon American business and the quickly rising sympathy of Americans—especially in the East—for the Allied cause, were too strong to permit it to stand. There is little question that the extent to which American economic fortunes were staked upon an Allied victory proved a strong factor in aligning the United States with the Allies.
As to the manner in which the men at the corner of Broad and Wall Streets exercised their power, Lamont’s figures in his life of Davison are illuminating: “The final record as to the British contracts showed that, of the hundreds of different concerns dealt with, there were only eleven in which the Morgan partners held any interest; and the largest interest they held in any one of those eleven did not exceed three per cent of the shares. In the case of the French, the percentage was even more trifling.” The British government, hearing rumors of favoritism in the letting of the contracts, sent over an investigator but could find no basis for criticism. The firm made a practice of notifying the British or French government, in advance, of their precise interest in any firm to which they considered giving an order. Some of the profits made by munition-makers were immense—but the House of Morgan believed in profits.
The prestige of the firm rose to new heights. Morgan the Senior was gone, but the institution that he had set up was now mightier than ever.
4
The twenty months or so between the beginning of the war boom in 1915 and the entry of America into the war in early 1917 were a time of furious activity—business booming, credit expanding; prices rising, wage increases being granted—or, if not granted, being demanded and struck for by workmen; profits leaping; the farmers enjoying the best times they had ever known; the stock market making fortunes in Wall Street. It was also a time of furious emotions. From the day that the Lusitania was sunk till the day that Wilson read his war message to Congress—all through the long months when the celebrated Wilson correspondence with Germany was indeterminately proceeding, and Roosevelt and the patriots of the National Security League and the Plattsburgers were shouting for preparedness, and Hughes was running against Wilson for the Presidency—the one great question which hung over the country was “Will America go to war?” and the answers given to it were hot with passion. As the months went by, gradually the war thrust other issues and other interests into the background; and when, on the last day of January, 1917, Germany announced her intention to engage in unrestricted submarine warfare, it became clear that America herself was to be sucked into the maelstrom and that the concentration of the country upon war-making activities was to become furious and transforming.
What happened during the succeeding twenty-one months need not be detailed here: the decision of an anxious and depressed Wilson to call for a declaration of war and for a policy of conscription; the raising of an army of over three and a half million men, two million of whom were sent to Europe; the lethal campaign of 1918, in which American troops fought in the blood and filth and anguish of the trenches and aided the French and British to turn back the German tide; the tumult and shouting at home, the tramp of soldiers’ feet on American pavements, the flags hung along the streets, the Hoover food-saving campaign, the frenzy of Liberty Loan campaigns and Red Cross campaigns and United War Work campaigns, the converging upon Washington of the dollar-a-year men; the fury and rapture of the war spirit, the unworldly idealism of the Wilson war messages; the long, long casualty lists, with all that they meant to broken families; and at last, the wild rejoicing of the first Armistice Day. For the purposes of this narrative, all that concerns us is the effect of this strange interlude upon the American economy. It was an effect multifold and significant.
In the first place, industrial production was still further expanded. It had to be expanded because Washington was calling insistently not only for men but for guns, shells, uniforms, cantonments, airplanes, trucks, rolling stock, ships, and other supplies in endless variety, to be delivered in quantity and at the earliest conceivable moment. This huge demand was superimposed upon a continuing demand for munitions and supplies for the Allies. In view of the shortage of men and of raw materials and transportation facilities, this inevitably meant cutting down on the production of things not needed for the winning of the war. It meant converting plants from peace-time uses to those of the emergency. In view of the utter derangement of supply and demand (for demand was imperative and almost unlimited), it meant regulating prices. Hence the creation of the War Industries Board, with its almost dictatorial power to decide to what uses the industrial machinery of the country might be applied; hence the Railroad Administration, which took over the roads and operated them as one huge system, giving priority to troops and to necessary supplies; hence the Food Administration and the Fuel Administration and other sources of inevitable interference with rugged American individualism.
During those twenty-one months the center of economic control moved definitely from New York to Washington. Wall Street became almost an outlying province. The House of Morgan was busy with many things, among them the difficult stabilization of British exchange; but it was shorn of its previous power. Morgan himself was not called upon by the Administration for any war service. Stettinius became an Assistant Secretary of War. Vanderlip of the National City Bank managed a war-savings campaign for the Treasury Department. Other bankers were drawn into the huge Liberty Loan organization. In every bank and corporation office there were now vacant places as men went off to the training camps, to France, to dollar-a-year service in Washington. In the drama of economic concentration through financial control, these months were an intermission, strange and exciting.
Wealth was not conscripted though life was, and in some cases wealth made a good thing out of the disaster. Despite the contempt with which the country regarded “profiteering” and despite the efforts of the government to set prices at fair levels, it must be admitted that the vast volume of war orders, the increasing efficiency of production, and the fallibility of governmental officials combined to permit some very high profits. The biggest c
oncerns which made war materials did not, on the average, fare quite as richly as during the boom of 1915 and 1916 when they had been making munitions at the behest of the House of Morgan, but this was partly because of drastic charges for depreciation and heavy excess-profits taxes—and it must be recalled that 1915 and 1916 had been altogether extraordinary years for such concerns. All things considered, they fared very well even after the United States went into the war.
For example: the net income of the duPont powder concern (after amortization but before interest on bonds) had been only a little over 5½ millions in the dire year 1914. In 1915 it had jumped to 57 millions, in 1916 to 82 millions. In 1917 and 1918, when the United States itself was calling for duPont explosives, it dropped back—but only to 49 and 43 millions respectively. Bethlehem Steel was another great munition-maker. Its earnings (after depreciation and fixed charges) had been a little over 5½ millions in 1914, had risen in 1915 to 17 millions and in 1916 to 43 millions, and fell back in 1917 and 1918 only to 27 millions and 15 millions respectively.
As for the United States Steel Corporation, its changing fortunes may be expressed in earnings per share on the common stock. In 1913 these earnings had been $11.02. In the bad year, 1914, they had dropped below zero (the corporation not quite earning its preferred dividend). In 1915 they had recovered to $9.96. In 1916 they had gone up to the remarkable figure of $48.46. In 1917 the decline was only to $39.15; and in 1918, to $22.09. An average war-time profit of somewhere in the neighborhood of thirty dollars a share on Steel Corporation common stock! (To see such a figure in its full perspective one must recall the origin of those common shares, as recounted in the first chapter of this book.)
It might be added that accountants reporting to the Director General of Railroads subsequently gave—rightly or wrongly—much larger figures for the Steel Corporation. Adding to the net earnings, as reported by the company, various items which, they claimed, were “improperly deducted in the corporation’s statements: Interest on bonds, etc., of subsidiary companies; inventory profits, intercompany; sinking funds on subsidiary bonds; and excess depreciation,” they arrived at “adjusted earnings” totaling over eleven hundred million dollars in two years (1917 and 1918). Amateur statisticians may be interested to figure how this two-year total would compare with the total pay of all the soldiers in the A.E.F.
Lords of Creation Page 20