by Prins, Nomi
Fortified by Lamont’s support, Wilson muscled up the strength to travel to Columbus, Ohio, where on September 4 he made his first stop on a national tour to rally public opinion.39 But his failing health inhibited his oratorical skills. Wilson’s talent for memorizing and delivering speeches was faltering. His sentences came out incomplete, disconnected, and rambling.
Still, Lamont remained tireless. This had become his and Wilson’s cause, and for a moment that cause loomed larger than what either had to gain separately. On September 10, he tried to bolster Wilson’s confidence over the impact of his statement, noting that “The New York Tribune . . . is beginning to hedge very strongly in its support of the Lodge types.” In other words, the press was beginning to lean away from Wilson’s detractors. Lamont praised Wilson on his recent speeches and told him that “they must have their effect upon the country & thus upon the Senate.”40
The shifting sentiment in the press appeared to be doing the trick, for critics in Washington looked like they might budge. Lodge and the mild reservationists finally agreed to the critical Article X, on the condition that Congress would approve any use of US forces.
But it was not to be. Wilson declared the compromise “a rejection of the Covenant.” Three days later, as his train reached Colorado, he suffered such a severe stroke warning that Dr. Grayson canceled the rest of his tour. In wavering health and frustrated with the Republicans’ suggestions, which he believed would gut the entire point of the treaty and the League of Nations, Wilson returned to Washington on September 28. At about 8:30 A.M. on October 2, a major stroke paralyzed the left side of his body.41 The next day, the White House issued a statement that Wilson had been working on, saying that the coming election will be a “genuine national referendum” on the issue of American membership in the League of Nations.
Toward the 1920 Election
Lamont defended and advised Wilson during the campaign period through the following year. But Wilson’s ideals and Lamont’s push would go unappreciated. On Election Day, November 2, 1920, voters rejected Wilson and his League, as represented by Democratic presidential candidate James A. Cox and vice presidential candidate Franklin Delano Roosevelt (FDR). Republican Party presidential candidate Warren Harding and vice presidential candidate Calvin Coolidge, catering to an increasingly isolationist citizenry, won in a landslide victory.42
Two and a half weeks later, on November 19, 1920, the Senate rejected a peace treaty for the first time in history, by a vote of thirty-nine to fifty-five. A group of Democrats helped Lodge’s mild reservationists and the irreconcilables defeat the proposal. The United States never ratified the Treaty of Versailles, nor did it join the League of Nations.43
On March 1, 1921, Wilson said farewell to his cabinet at their last meeting. A few minutes later, “leaning on his cane and limping slightly,” he “passed slowly out of the executive offices.”44 The Progressive Era was officially over.45
In the coming decade, the bankers would extend their power by expanding their franchises globally and by consolidating the deposits of the more insular-focused US population. The result would be extreme speculation within and beyond America’s borders that would bring about great highs and subsequent economic collapse. The presidency would be weakened in the process. And the absence of America’s presence in the League of Nations, coupled with the overcompromised, tension-laden Treaty of Versailles, would set the stage for a deadlier second world war.
To be sure, America was destined to become a financial, military, and political superpower. But it would do so by way of the conservative Republicans (with support from a war-weary public), who believed that global power would be amassed by focusing on domestic fortification rather than by helping other countries. Adopting a stance of nationalistic elitism, they weren’t willing to risk contamination by socialistic doctrines or accept the labor rights Wilson supported through the League (which more liberal Democrats wanted strengthened). Even though the bankers constantly sought ways to rise above isolationism in the direction of financial and trade internationalism, the victorious politicians wanted a more self-centered, laissez-faire style of government, and that in turn fueled a more mercenary breed of financial capitalism. The prevailing stance would have an economic impact worldwide and helped pave the way to a war that would claim millions of lives.
CHAPTER 4
THE 1920S: POLITICAL ISOLATIONISM, FINANCIAL INTERNATIONALISM
“Human nature cannot be changed by an act of the legislature. It is too much assumed that because an abuse exists it is the business of the national government to remedy it.”1
—President Calvin Coolidge, 1926
THE NOTION OF AMERICAN ISOLATIONISM AFFECTED THE WAY THE 1920S PRESIDENTS conceived of the role of chief executive domestically as well. They didn’t attempt to shape their authority or that of the White House relative to the bankers in the way that Teddy Roosevelt and Woodrow Wilson had. As such, financiers stepped in to enhance their power, primarily by expanding on the influence they already had but also by doing what they wanted to do without any Washington-imposed restrictions.
President Warren G. Harding was an uninspiring politician who saw his job as calming a nation, balancing a postwar budget, and leaving bankers and businessmen alone. President Calvin Coolidge represented more of the same, though with an even more reticent personal style. Coolidge even kept most of Harding’s cabinet, including Treasury Secretary Andrew Mellon and Secretary of Commerce Herbert Hoover. Given his international experience under Wilson, Hoover might have done more to mold the power of the presidency and adopt a more internationalist doctrine when he assumed the presidency. But his time as president was marred by an epic financial disaster and all that the bankers had done to instigate it.
For the most part, the philosophy of these three Republican presidents was simple. They believed the role of government should be to facilitate, rather than regulate, the growth of business and finance, and that such an approach would strengthen America. They embodied the “laissez-faire” (in English, “Let them do”) doctrine, and they were determined not to leave a distinctive mark on the post of the presidency. Isolationism became a form of denial, leaving room for the bankers to expand their control over the country’s economy—and to take greater financial risks domestically and globally.
Harding shunned Wilson’s foreign policy ambitions during his campaign, reflecting the country’s disenchantment with internationalism, peace treaties, and debate over whether America should join the League of Nations. The population and politicians became increasingly disengaged from the preceding Progressive Era and cultivated a strident sense of individualism, particularly as it pertained to personal economics. Relegated to the back pages of newspapers were strikes, riots, and the growing vilification of immigrant “radicals.” Promising a “return to normalcy,” of which this insularity was indicative, Harding grabbed the presidency by a landslide (404 to 127 electoral votes).
Political isolationism was fine for some bankers, as long as it did not interfere with their global expansion goals. Charles Mitchell, president of National City Bank—as mentioned earlier, it was the largest bank in terms of assets in the United States, with the most extensive network of overseas branches—solidified his position by standing outside the fray of postwar financial diplomacy as much as possible, even as he dumped loans into countries that couldn’t pay for them and sold the related shabby and fraudulent bonds to the American public.
Meanwhile, the Morgan Bank, under the daily direction of Thomas Lamont (with oversight from Jack Morgan), continued to influence foreign policy by collaborating with the New York Federal Reserve Bank to assist in the European recovery through more targeted loan extensions, particularly to the Bank of England. The firm maintained its role of indispensability to the presidents regarding war debt and reparations discussions. However, unstable economic conditions in Europe—and, to a lesser extent, in Latin America—contributed significantly to the more subtle power plays between the White Hou
se and major bankers. Lamont believed that a stronger Europe would catapult American dominance forward faster, expanding the Morgan Bank’s footprint in the process. But he and the presidents had differing opinions on the degree and nature of US participation in European reconstruction and debt forgiveness.
The chess game between the main financiers for supremacy on Wall Street intensified significantly during the 1920s. The isolationist foreign policy position spurred fractious relationships among the key bankers, who had once been bound by side agreements similar to those that the European powers had made with each other before the war. (The Morgan Bank, National City Bank, and the First National Bank, for example, shared whatever business each upended at the turn of the century.) Relationships among the former heads of these banks were born of decades of intimate collaboration and Jekyll Island–type gatherings. Now it was becoming every man for himself—until the next crisis.
It was as if the war had provided a damper on the latent whims of the hungriest financiers; the fighting had invoked a spirit of cooperating on behalf of the combined good of the country, the world, and their firms. That was gone now. The fact that the government itself deployed a hands-off policy relative to the bankers meant that aggressive speculative ventures and big bank mergers would forge ahead unhindered. A war for sovereignty, of sorts, had moved into the financial realm.
As for President Harding, the reserved yet calculated method with which he came to power was indicative of his relaxed governing approach, particularly as it applied to big business and Wall Street. Hailing from Ohio, Harding had little opportunity to cultivate relationships with New York bankers in his earlier years, but he still aligned with them during his presidency.
Copying his Democratic predecessor, Harding turned to Lamont in that regard, though the two would never develop the same close relationship. Lamont’s concentration still revolved around European debt repayments. The Treaty of Versailles didn’t help the countries struggling from debt overhang (to the US government and its banks). The United States had become the world’s biggest creditor, while its private bankers relentlessly scoured the world in search of more borrowers. The postwar recession that engulfed the globe in the early 1920s made war debt repayment, and thus the ability of banks to extend even more credit, extremely difficult.
Britain, the former power center of European and global business and finance, was staggering under its huge war debt and the costs of maintaining its overseas empire. Once fighting came to an end, it abandoned the gold standard and stopped inflating its currency to help finance the war. As a result, the US dollar began to surpass the British pound in international transactions and emerged as the global reserve currency.2
After the war, the Morgan Bank solidified its status as the leading world bank by organizing huge loans to foreign governments for reconstruction and development. Precious little financing activity during the war or afterward hadn’t somehow passed through Morgan’s doors. The firm wanted to keep this position.
Like most bankers, Lamont saw the world as a potential client base; the wake of the war provided—if not intentionally, then coincidentally—a means to an end. Thus, he remained a staunch supporter of the League of Nations throughout the 1920s. It would behoove American bankers, he believed, to have open trade and financial ties with the rest of the globe, particularly with Europe, in order to enhance their international presence and growth opportunities abroad.
Lamont Presses Harding for League
On August 23, 1920, at the height of campaign season, Lamont urged Senator Harding to support the League of Nations. “As a life-long Republican I am bound to tell you that you are making it exceedingly difficult for papers like the Evening Post and for hundreds of thousands of loyal Republicans to come strongly to your support. There is only one way out . . . the ratification of the Treaty and League with proper reservations.”3
When Harding refused to change his stance, Lamont broke from his party and his banking friends. In a letter in the New York Evening Post, he endorsed the Democratic ticket of Cox and Roosevelt. His reasoning was simple. “Cox is for the League of Nations and Harding is against it . . . this is why I vote for Cox.”4 Lamont’s support for the ticket was based on the issue of internationalism: he knew many foreign problems lingered, and he was wary about Harding’s ability or desire to deal with them properly.
Before leaving office, Wilson had attempted to alleviate the growing European debt problems by submitting a proposal to the Senate to substitute German government war reparation bonds for the Belgium war debt owed to England, France, and the United States. Harding was “shocked” at Wilson’s motion and what he deemed its secrecy. His pointed reaction would have driven a wedge between the incoming probusiness president and the Morgan Bank executive if Lamont had not traveled to Florida to meet with Harding and deny reports that a mysterious agreement to cancel Germany’s war debt had been made.5
The Telegraph reported that particular press attention was paid to Lamont’s dramatic trip because of Lamont’s “intimate knowledge of the Versailles negotiations and because his firm is the principal fiscal agent in this country for the debtor powers.” The paper further surmised, “Mr. Harding is understood to have discussed with him his own proposal for converting the debts into negotiable paper, but neither could comment afterward on that feature of the discussion.”6
The next day, at an end-of-term luncheon at the White House with President Wilson and the First Lady, Lamont saw that Harding’s victory had squashed Wilson’s spirit and lingering hopes for renewed political support for the League.7 The Senate had also rejected Wilson’s debt-swapping proposal, meaning the subject of war debt and reparations agreements would linger on. That financial problem had the potential to turn the postwar peace into another war.
Harding may not have understood all these ramifications, but he knew he needed someone on his side who could assess the issues and work with him on a solution that reflected his political doctrine yet helped avert a disaster. That someone was Lamont.
Thus, in April 1921, a month after Harding took office, Lamont set sail on the Adriatic for a six-week trip to England, France, Holland, and Belgium. Though it was described in the papers as a “pleasure” trip, Lamont had a bevy of credit matters to attend to on behalf of Morgan, Harding, and the US government.8
He wanted to meet his London and Paris partners in person, to determine the true loan propensity of the countries in which they operated. J. P. Morgan & Company had propelled itself to the center of postwar financing to foreign governments. The advance of postwar American bank loans to Europe began with a $250 million convertible gold bond issue to Britain constructed by J. P. Morgan & Company in October 1919, followed by a $100 million loan to the French government in September 1920.9
As a result of his trip, in May 1921, Lamont secured another $100 million French government issue. He worked out the details with his French colleagues while his wife, Florence, shopped for furnishing for their new home.10 A tipping point was brewing: private banks wanted to extend more loans to Europe, though Europe was staggering under the weight of current debt. Lamont knew very well how unstable these postwar economies were, but his inner banker drove him to find ways to postpone their pain—or inevitably inflict more pain with more loans, depending on how one looked at it.
Harding’s Real Legacy
Harding’s brief presidency would be forever tainted with a scandal perpetrated by his inner circle: the infamous Teapot Dome incident, in which Secretary of the Interior Albert Fall leased petroleum reserves owned by the Navy in Wyoming and California without competitive bidding to two private oil companies, and received millions of dollars in kickbacks. The scandal shadowed Harding’s administration from 1921 to 1923. In his 1928 report on the incident, North Dakota Republican senator Gerald Prentice Nye wrote, “The investigation has uncovered the slimiest of slimy trails beaten by privilege.”11
Harding’s two enduring contributions to the course of American political-financi
al history were choosing Herbert Hoover as secretary of commerce (and putting him in play to become president) and appointing Andrew Mellon as Treasury secretary.12 Mellon was a Pittsburgh industrialist-financier, head of the Mellon National Bank. He had founded the Aluminum Company of America (Alcoa) and the Gulf Oil Company. With Henry Clay Frick, he founded the Union Steel Company, which he later sold to J. P. Morgan’s consortium for an obscene price, reflecting a short-term speculative gambit that was very bold for its time.13 Mellon was an “operator.” He owned numerous trusts, insurance, railroad and utility companies, and the Pittsburgh Coal Company, the largest of its kind in the world.
In 1911, Munsey’s Magazine described Mellon as the “J.P. Morgan of the Steel City.”14 On issues of economics and foreign trade, Mellon was more conservative than Harding. He also believed in low taxes. Harding promoted Mellon’s efforts to extend huge tax cuts for the rich and corporations. (By 1926, a person making $1 million a year paid less than a third of the taxes paid in 1920.) To further remove the Roosevelt-era legacy of government intrusion into business, Harding encouraged the Federal Trade Commission, the Justice Department, and the International Commerce Commission to cooperate, rather than regulate or engage in antimonopoly actions against business.15
One of Mellon’s initial acts as Treasury secretary was to push through the 1921 Budget and Accounting Act.16 The act was the first to require the president to draft an annual budget.17 It also created the General Accounting Office (renamed the Government Accountability Office in 2004) to get a better handle on the debt and increasingly complex federal financial transactions that followed World War I.
Harding gave his secretary of state, Charles Evans Hughes, free rein over foreign affairs.18 Hughes collaborated with Hoover and Mellon on foreign policy, which philosophically supported American bankers’ drive to replace the British ones at the top of the pile of global financiers as a way to enhance American power. Hoover and Hughes also encouraged seven US oil companies to form a consortium led by Rockefeller’s Standard Oil and seek participation in Iraqi oil concessions, initiating the “open door” policy in the Middle East—and the tight relationship of Chase (“the Rockefeller bank”) to the region, which will be explored later in this book.19