All the Presidents' Bankers

by Prins, Nomi

  Moreover, Coolidge and Mellon wanted to ensure the private domestic economy retained more of its profits. In 1924, Mellon published his collected writings on lowering federal income taxes in Taxation: The People’s Business. Organizations like the American Bankers Association rushed to promote his views by sending thousands of copies to members and clients. In the book, Mellon explained, “The Government is just a business, and can and should be run on business principles.”45 Coolidge agreed, famously quipping, “The chief business of the American people is business.”46 In that vein, reduced taxation was a means to generate revenue to run that business.47

  When Chase National Bank chairman Albert “Al” Wiggin received his advance copy of Taxation, he promptly praised Mellon: “We were so enthusiastic over [the book] we could not resist the impulse to distribute quite a large number of copies to customers and friends of the Chase National Bank.”48

  The Revenue Acts of 1924, 1926, and 1928 put Mellon’s ideas into motion. Though the basic income tax rate had remained low into the 1920s, the surtaxes imposed by Wilson during World War I on citizens with incomes greater than $6,000, in addition to the income tax, meant that the topmost incomes were taxed at 70 percent. The Coolidge-Mellon tax plans ultimately cut rates for the rich to 25 percent and raised the surtax threshold.

  Not to be left out of his own tax reduction policies, during his first four years in office, Mellon gave himself a tax refund of $404,000, the second biggest rebate after John D. Rockefeller’s refund of $457,000 (around $6 million today).49 Mellon also cut taxes for the middle class, exempting the first $4,000 of income for each citizen.50 By 1928, most Americans paid no federal income tax at all.51

  Americans were grateful, and a heady “buy now, pay later” consumer society emerged. Earnest Elmo Calkins, author of the 1928 bestseller Business, the Civilizer, credited a combination of business and advertising for this phenomenon: “We have seen the evolution of shaving creams, safety razors, and tooth pastes, as well as soap powders, laundry chips, washing machines, vegetable shortenings, self-rising flours, electric irons, vacuum cleaners, hot-water taps, aluminum cooking utensils, refrigerators, kitchen cabinets—everything, in short, that constitutes the difference between our mothers’ kitchens and our wives’.”52 All that desire and all those products upon which to spend money made the appeal of betting in the stock market that much more potent during the 1920s.

  The Diplomatic Era of Banking

  Lamont wasn’t the only banker in the mix of postwar debt negotiations. By early fall 1924, Charles Mitchell of National City Bank was working on a settlement of his own—for French debt.53 He chose to work more independently.

  Mitchell’s interest in acting as a debt-structuring ambassador was also stoked by the benefit it could have for his lending business. Otherwise, he said, it would have been “difficult to measure the credit status of France for private loans.”54 In this capacity he brokered loans between the governments of France, Germany, Belgium, Italy, Japan, and Austria to help reduce reliance on foreign government debt.55 It was in his interest to limit that debt, in order to extend the private bank loan business and to try to overtake the Morgan Bank as the top credit provider to Europe.

  His financial diplomacy spawned another foreign policy initiative: the 1925 Locarno agreements, which resolved territorial disputes outstanding since World War I and helped restructure war debt. That was the year Dawes shared the Nobel Peace Prize with British Foreign Secretary Austen Chamberlain for his plans. Dawes and Chamberlain had done more for the big banks than they had for Europe. Coolidge biographer David Greenberg described the financial mirage as “something absurd,” with “American funds going to Germany, through the allies, and back to the United States—which was contrived partly to satisfy each country’s sense of a more prosperous period.”56

  Mitchell had the instincts to hedge his exposure to Europe. He had been pushing National City to expand its Latin America presence, in part to offset potential losses in Europe but also to stake its own territory in the field of world finance. In late January 1922, after a ten-day tour of Cuba he took with Percy Rockefeller and a bevy of other bankers, culminating in a luncheon in Havana given in his honor by two hundred of Cuba’s top businessmen, he had proclaimed, “You businessmen must find a way to carry Cuba’s story before our country.”57 But his real intent was to soak Cuba in debt and get US investors to fund it through National City Bank–arranged bonds.

  Mitchell correctly predicted that the $5 million loan made to Cuba during that last week of January would be the “forerunner of a larger loan.” He told reporters that Cuba’s future lay in merging its companies. By “putting some of these properties together into one large company, whose shares could be taken by investors in all parts of the United States, some of the financial burden at least is lifted,” he said.58 As such, he laid the path for future investment banking business in the country. By the late 1920s, many of the loans to Cuba, including to sugar and other interests, were in default.

  Domestically, Mitchell remained the nation’s steadfast economic cheerleader throughout the mid-1920s. National City remained the country’s largest bank, if not the most prestigious, and he retained the status of a rising pillar of the Wall Street banking fraternity—not by birth but by sheer ambition (and, as he later admitted, a bit of luck).

  In January 1925, the New York Times reported that the prior year had been a “banner year for New York banks,” the most profitable in history.59 That summer, Mitchell issued a statement proclaiming, “The country is enjoying a prosperity at present. . . . There is every promise for better business than this country has had since 1920.” He added, “While there is more bank credit in use than ever before, bank resources are greater than ever before.”60 Those “resources” were largely the deposits National City was amassing from citizens.

  Coolidge’s Kid Gloves and Mitchell’s Pronouncement

  Early in his second term, on February 26, 1926, Coolidge signed the Mellon Bill, which further cut income taxes, deleted the gift tax, halved the estate tax, and reduced taxes on the wealthy to 25 percent.61 Solidifying his stance in the face of rising public criticism of favoritism to the elite throughout the year, Coolidge argued that “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.”62

  Coolidge’s belief that government should yield no overbearing presence in people’s lives coincided with Mellon’s plans to cut taxes and tighten budgets—a tactic that might have worked had it not left the financial world to its own devices in the process. But increasingly, prosperity was measured by bankers’ ability to inflate the values of paper representations (stocks and bonds) of production and goods, not the goods themselves. Money in people’s pockets, realized or illusory, needed an outlet. That was the stock market, which billowed on extensive domestic borrowing to fund investment.

  The overzealous international lending was not going unnoticed. Addressing the Pan-American Commercial Conference in 1927, an even more worried Hoover stated, “One essential principle dominates the character of these transactions. That is, that no nation as a government should borrow or no government lend and nations should discourage their citizens from borrowing or lending unless this money is to be devoted to productive enterprise.”63 It was increasingly unclear to him that this was the case.

  Still, Mitchell maintained his exuberance. On December 10, 1927, at a Detroit Athletic Club luncheon, he claimed that American prosperity was growing, largely on the back of automobile production, and predicted that “every country and community on the face of the globe would buy the Model A Ford and General Motors cars.”64

  “The year 1928 will be one of unparalleled prosperity,” Mitchell proclaimed. “The powerful influence of a sound credit situation, a return of Mr. Ford and other manufacturers to a normal output and continuance of large-scale buildings will swing business back into its stride.”65 His heady w
ords cascaded across the nation even as cracks were beginning to show in the armor of American prosperity.

  Earlier Signs of Impending Problems

  Even before the bubble of the mid-1920s, there existed signs of trouble brewing in the land of plentiful credit extensions. In November 1923, the Federal Reserve began increasing its holdings in government securities (such as Treasury bonds) by a factor of six, from $73 million to $477 million, in what could be considered the first instance of “quantitative easing.” This keeps rates low, not by setting them explicitly but by forcing the price of bonds up, which has the net effect of driving rates down.

  The Fed’s move made money cheaper for the banks to borrow at the beginning of the 1920s and paved the way for speculative excess. The prevailing mentality was that prices would rise forever—a classic bubble mentality. But by the mid-1920s, the amount of deposits backing loans or shaky investments declined significantly as leverage increased, such that any losses would reverberate more than during any prior crisis.

  By August 1924, Chase’s chief economist, Benjamin Anderson, expressed concern about a dangerous speculative bubble caused by: “the present glut in the money markets, with excessively cheap money and its attendant evils and dangers to the credit structure of the country. . . . Both incoming gold and Federal Reserve Bank investments are reflected almost entirely in an increase of member bank balances with immediate and even violent effect upon the money market. The situation is abnormal and dangerous.”66

  But the bankers weren’t thinking about these dangers. They remained focused on seemingly limitless expansion. On the evening of January 12, 1925, Mitchell and Mellon sat among six hundred of the banking elite at a tribute event for George Baker Sr., one of J. P. Morgan’s inner circle and founder of the First National Bank of New York (which later became part of Citigroup), in the glittering ballroom of the Waldorf Astoria hotel.

  It was a grand occasion, not least because it was where Jack Morgan, a notoriously private man, gave his first public speech—calling for a code of ethics for bankers. “There is, and must be, in every profession, a code of ethics, the result of years of experience,” he said. “Where I am required to state an ethical code for our profession, I think that I would say the first rule should be: never do something that you do not approve of in order to more quickly accomplish something that you do approve of.”

  At the event, Mitchell proposed a toast to President Coolidge, his fellow Amherst alum, after which his fellow bankers downed what the Prohibition-era press referred to as “pellucid ice water.”67

  Money poured just as freely. Mitchell and the other bankers collected it to lend for market speculation and related lending from two sources. First, as with all banks, money came from deposits—the bigger and more spread out the bank, the more channels for receiving new deposits. Mitchell saw opportunity in extending banking to “smaller individuals.” The Nation later called this an example of the “socialization of banking,” though the magazine concluded that this was not likely Mitchell’s intent.68 With extra deposits, Mitchell could increase his power to provide loans for speculative purposes using other people’s money.

  Second, funds came from the Fed, which kept rates relatively low on loans to banks during the speculative period and required little in the way of reserves, or collateral, to be set aside for stormy days.

  As a result of both methods, ordinary individuals weren’t really engaged in collective prosperity. They were, rather, engaged in collective debt creation, and would suffer most acutely in the aftermath of its destruction.

  For now, crisis was still far in the distance, and bankers raked in cash. In 1927, the Morgan Bank was the leading syndicate manager of bond issues, with just over $500 million. Postwar foreign bond issues comprised a third of the Morgan managed offerings. National City Bank and Kuhn, Loeb followed close behind.

  The rush to extend foreign loans and sell foreign bonds to American investors would prove disastrous. In a talk before the International Chamber of Commerce in Washington on May 2, 1927, Mitchell’s rival Lamont warned investors of what he saw as a potentially ugly situation, though he was probably also concerned that Morgan was losing its standing as the leading international bond house: “American bankers and firms [are] competing on an almost violent scale for the purpose of obtaining loans in various foreign money markets overseas. . . . That sort of competition tends to insecurity and unsound practice.”

  The bankers’ reckless underwriting of loans (without any useful regulation from Washington to curtail it) would implode at the public’s expense. Losses on the Latin American bonds sold to investors to raise money for loans would come from the pockets of investors and take a toll on the American economy, as would the stock market crash.

  Hoover’s Prep for President and Bankers’ Support

  Coolidge shocked the nation when he announced in early August 1927, while on summer break in South Dakota, that he would not seek reelection.69 As the country digested the news, Mellon snuck in one more round of tax cuts. The US economy stood on the precipice of a six-year run of stock market growth and record high Wall Street profits, which masked underlying problems: home prices had softened in 1926, car sales dropped in 1927, and construction would level off in 1928.70 Inequality had increased dramatically, threatening economic stability. The whole system was buckling.

  But such signs of weakness were not the stuff of great political rhetoric, so when Herbert Hoover won the 1928 presidential election, he declared, “We in America are today nearer to the final triumph over poverty than ever before in the history of any land.”71 Americans might have been somewhat skeptical, given their growing difficulties in finding jobs and small business loans, but the financial leaders were pleased at the vote of confidence. It buoyed the market, and all of their plans and fortunes along with it.

  Hoover proceeded to select a cabinet reflective of his status as the “first millionaire to reach the White House.” Other millionaires in his inner circle included Henry Stimson, Andrew Mellon, James Good, Charles Francis Adams III, Robert Patterson Lamont, and James Davis. They filled six of his top ten posts.72

  That Mellon, “one of the four richest men on this continent,” according to The Nation, remained in the Treasury secretary post showed the growing strength of those with money in Washington, despite obvious conflicts of interests. As The Nation wrote of Mellon, “During eight years he has so administered that office that $3.5 million in refunds, credits, and abatements of income taxes has gone to wealthy individuals and corporations.” The magazine further pointed out, “On the eve of the coming in of the new Administration, the Senate has voted an inquiry into his eligibility to hold his post—from which a person interested in commerce or trade or in the liquor industry, is barred. His own Aluminum Company of America has escaped the prosecution proposed for it by the Federal Trade Commission, and has received large refunds of taxes.”73 In his public post, Mellon took care of his own interests.

  The bankers were happy with Hoover. He offered a sense of continuity with the Harding and Coolidge policies, which had lined so many bankers’ and brokers’ pockets with so much cash. The stock market roared the first six months of Hoover’s term, from a slump in March 1929 to record highs that fall.

  Gathering Clouds

  As for the Morgan Bank, while foreign loans and financial diplomacy were near to de facto chief executive officer Lamont’s heart, domestic business, including industrial financing, was also a staple of income. As such, after his winter holiday in late 1928, Lamont began working on a new kind of domestic business: a large loan to the Van Sweringen brothers’ holding company.

  A decade earlier, the “unprepossessing, reclusive and hard-working bachelors” had begun building a major railway system through the acquisition of the New York, Chicago, and St. Louis lines. Using a pyramid structure of holding companies, they borrowed heavily from banks to speed up the process. They shared their forthcoming aggressive acquisition plans with the Morgan Bank, which believ
ed the secured loan of $25 million to them represented the first step in a growing and profitable relationship.

  Russell Leffingwell, a Morgan partner and former assistant Treasury secretary to President Wilson, and his Morgan partner associate George Whitney harbored strong reservations about the bubbling market. While traveling abroad in March 1928, Lamont received a cable from the Morgan offices: “the market is boiling.” Leffingwell was increasingly troubled, while Lamont remained an optimist.74 Perhaps it was all his time abroad that blinded him to the machinations of the domestic stock market, or the more shady practices of his competitors, but he decided to get more involved with the market nonetheless.

  For years, J. P. Morgan & Company had limited the underwriting of securities it offered the public (or for “public offering”) to high-grade, less risky bonds, for governments and large corporations. Its policy was not to underwrite what it perceived as riskier stock issues for public distribution. The company wasn’t interested in acting as a securities broker for little people.

  But the frenzied stock speculation and profits had affected Lamont and many of the other Morgan partners who became millionaires trading stocks for their own account. They decided to pursue a risky holding company strategy for clients: combining several companies into a single holding company against which they could then sell new securities—to the public, no matter what the condition of that web of firms.

  In January 1929, Lamont oversaw the planning of two large domestic financings based on this new strategy. One of them was a large package for the Van Sweringen brothers: a $35 million bond issue combined with $25 million in preferred stock and $25 million in common stock. Funds would be used to back the newly formed Alleghany Corporation. The Morgan Bank purchased $25 million in common stock at $20 a share, part of which it sold to the public at $24 a share. The Morgan name, which had been so profitable with loans and bonds, would now “bank” on the stock market, following on the heels of National City Bank, which had issued its first stocks in 1927. This thirst for Wall Street domination would provoke market collapse, as no firm wanted to be left out of the speculative festivities.