Although Chase had only a modest network of nine branches scattered across Europe, the Caribbean, and the Far East, Winthrop saw real opportunities for Chase overseas. Indeed, it was one of the things that he had talked to me about during our meeting in Paris in 1945. His enthusiasm for international business was one of the principal reasons I decided to join Chase.
My first assignment in the Foreign Department was the development of “new business” from the affiliates of American corporations for our branches in London and Paris. Although I was still quite innocent of the intricacies of banking, sales was something that I understood. My time with Mayor La Guardia had taught me a few things, and I found that I enjoyed meeting people, talking business with them, and closing the deal.
I worked on the project for about six months with an experienced younger banker named James Watts. We developed a rather impressive list of more than five hundred firms and identified ways to approach them. I then set off for Europe by steamer in July 1947 to put our plan into operation. (In those days you went by boat because air travel had not yet been perfected.) I could have saved the cost of the voyage.
Much of London had been destroyed by the wartime bombing. The British government still found it necessary to ration food and fuel, factories and offices remained closed, and whole neighborhoods had been obliterated by the blitz and “V” bombs. The face of London had changed markedly, but the Chase London branch remained mired in the past. While the country cried out for credit to rebuild, Chase did not pursue corporate lending for fear of offending its British bank clients. Instead, it continued to provide financial market information as a courtesy to visiting executives of American corporations, to engage in routine foreign exchange, and to provide traveler’s letters of credit. We continued to serve our customers tea and crumpets while cashing their checks, but our major American competitors actively exploited the new business opportunities, including making loans to the subsidiaries of our principal domestic customers.
The Scotsman who ran the bank’s operations viewed my “new business” efforts to get major American companies to open accounts with “his” branch with great skepticism. While I had some modest success in attracting business, the branch manager found my methods unseemly; I drove a rented car to make calls on prospective customers in their offices. In his view, clients always called on a banker in his office if they had business to discuss.
The situation in Paris was worse. Chase had little contact with either U.S. subsidiaries or French corporations. In essence, we were no more than a post office for our American clients. They used our offices at 41, rue Cambon, across the street from the Ritz Bar, as a convenient mailing address. We changed money for them and handled their traveler’s letters of credit. The manager, an American who had headed the branch for twenty-five years, never learned to speak French; anyone who needed to see him had to speak English!
With only two European branches, managed by bankers with little imagination and no marketing savvy, Chase’s operations clearly required a more aggressive strategy.
LATIN AMERICA: UNTAPPED MARKETS
By the end of 1947 I had become frustrated with the difficulties of trying to coax clients to bank with our London and Paris branches, and asked to be transferred to the Latin American section of the Foreign Department.
Latin America had become a more important area for Chase, just as my own interest in its business, culture, and art had grown. During a second honeymoon right after returning from the war, Peggy and I had traveled through much of Mexico and became fascinated by that country’s impressive pre-Conquest culture, turbulent colonial period, and vibrant contemporary spirit.
Nelson’s visionary plans to assist Latin America’s economic development had also stirred my imagination. After resigning from the State Department in August 1945, Nelson set up two organizations—the not-for-profit American International Association for Economic and Social Development (AIA) and the for-profit International Basic Economy Corporation (IBEC)—to provide technical assistance and financial capital for the economic development and diversification of Venezuela and Brazil.
I was so taken by his plans that I asked my Trust Committee for an invasion of principal so that I could invest a million dollars in IBEC. For many years IBEC was one of my largest personal investments.
In 1948, accompanied by Peggy, I made my first business trip to my new territory. We toured the Chase branches in Puerto Rico, Cuba, and Panama, as well as the bank’s trade finance operations in Venezuela and Mexico. I discovered that Chase’s position and prospects varied a great deal from country to country. We dominated the market in both Panama and the Canal Zone; in Cuba we were major financiers of the sugar crop but did little else; in Puerto Rico our position was insignificant. I returned from this initial tour convinced that Chase could greatly increase the scope of its business. I reported my reactions in a memorandum to Winthrop Aldrich in March 1948. In referring to the Caribbean branches, I wrote:
My general impression of all three branches is that they have been run in accordance with conservative commercial banking policy, but there has been little overall thinking or philosophy as to what their role should be in the communities where they are situated. . . . It is my impression that there may be ways, if we were to look for them, in which Chase could be constructive positively in helping these countries formulate and carry out programs to raise their standard of living through improved agriculture, more efficient distribution and increased industrialization.
Reading these words more than a half-century after I wrote them, I am amazed at my temerity in criticizing the operations of the bank to its chairman. But there was no doubt about the need to change the way we did business. I noted in the same memo:
Unquestionably the trend towards nationalism and all that it connotes is on the increase in Latin America. The day has passed when our Latin neighbors will tolerate American institutions on their soil unless those institutions are willing to take an interest in the local economy. I believe it is to our own interest, therefore, as well as others, that Chase should rethink its policies with respect to Latin America in general and our southern branches in particular.
Much to my surprise, my superiors allowed me to experiment with the variety of services we offered and to expand our Latin American operations.
CATTLE AS COLLATERAL IN PANAMA
Panama seemed an excellent place to begin the process of change. Chase had operated in Panama and the Canal Zone for twenty-five years and held 50 percent of all the bank deposits in the combined areas. We financed shipping tolls through the canal, the export of the sugar and banana crops, and the business of local merchants in Panama City and Colon. However, our deposits far exceeded our loans, and the Panama manager and I agreed that Chase should use a larger share of our local deposits to promote economic growth in Panama.
To begin with, we opened a branch in the isolated western province of Chiriqui in a small town called, coincidentally, David, to provide loans to cattle ranchers. With little access to credit, these ranchers found it impossible to develop their operations, so we initiated the practice of securing our loans with their animals as collateral. I went to David in 1951 for the opening of the branch and took a hand in branding some of our collateral cows with the Chase logo!
By making credit available we enabled the ranchers to expand their businesses, generating some large revenues for the bank and earning Chase a reputation as a foreign bank committed to the well-being of the Panamanian people. As nationalistic passions over the ownership and operation of the canal grew stronger, Chase’s willingness to assist in the development of the local economy became important in maintaining our favorable position.
SUGARCANE AND REVOLUTION IN CUBA
Cuba, the “Pearl of the Antilles,” presented equally alluring opportunities but some very significant dangers in terms of political stability. Since the Spanish-American War, the United States had developed a dominant position in the Cuban economy, which had become heavily
dependent on the production of sugarcane and its export to the U.S. market.
While Chase was the lead American bank in financing the sugar crop, sugar exports represented only about 20 percent of the island’s commercial business. We had little or no role in the other sectors of the economy—tobacco, mining, or tourism. I believed that Chase should become more broadly based and needed to do it quickly. I came up with a novel proposal, at least for that time. I suggested that we buy into a local Cuban bank with an existing branch system. With head office approval I entered into conversations with the president of the Trust Company of Cuba, the largest and best run of the Cuban banks. Largely for reasons of Cuban national pride, nothing came of our proposal, so as an alternative we opened two more branches in Havana.
It was just as well that we didn’t succeed in buying a bank. On January 1, 1959, Fidel Castro overthrew the authoritarian Batista government. Although The New York Times described Castro as a “democratic and anti-Communist reformer,” things didn’t quite work out that way.
Within months Castro had established the first Marxist, pro-Soviet government in the Western Hemisphere. In 1960 he seized $2 billion worth of U.S. property, including all of Chase’s branches. Fortunately for us he overlooked the fact that we had an outstanding loan of $10 million to the Cuban government secured by $17 million in U.S. government bonds. In response to the seizure of our branches we sold the collateral and quickly made good our losses. Reportedly, when Castro learned what had happened, he had the president of the central bank summarily executed for his negligence.
“OPERATION BOOTSTRAP” IN PUERTO RICO
In my 1948 memo I described Chase’s position in Puerto Rico as “lamentable.” Winthrop Aldrich had personally authorized the creation of the branch in 1934, but almost nothing had been done in the intervening years to develop its potential.
Ironically, nationalism—a threat to the bank’s operations in most other parts of the world—in this case provided us with a unique opportunity. In 1948, Governor Luis Muñoz Marín, who had led the effort to secure “commonwealth” status for the island, began to implement “Operation Bootstrap,” his plan to develop and diversify the island’s resources. I viewed this as a ready-made opportunity for Chase to expand its business.
I got to know Muñoz Marín and his able secretary of economic development, Tedoro Moscoso, quite well. Since credit was the key to their development efforts, we introduced a program of lending to private purchasers of government-owned enterprises. For instance, we lent the Ferre brothers a million dollars to acquire a steel plant.
Chase eventually became one of the island’s leading “offshore” banks, and after being rebuffed in our effort to acquire Banco Popular, we increased the number of Chase branches on the island and built a handsome building designed by Skidmore Owings and Merrill in Hato Rey as our headquarters.
By the end of 1949 the changes we had introduced in the “southern” branches had begun to show strong results. Our traditional correspondent business grew steadily, but so did our new business. In contrast with my experience in Europe, the staff in our Caribbean branches seemed eager to embrace new ideas. One such idea was to hire and promote citizens of the countries in which we operated, which sent an important message to the local community about our intention to be a constructive partner. Hiring qualified local personnel was a policy that Chase would begin to pursue as we expanded aggressively around the world in later decades.
By the early 1950s our branch system in the Caribbean had emerged as the most dynamic part of our overseas operations. I was eager to use our Caribbean strategy—branching, buying into local banks, and expanding into new lending activities—as a model for expansion into other parts of the world, most immediately into the big countries of South America.
EXPANDING IN SOUTH AMERICA
Two years after joining the Latin American section and helping to improve our Caribbean results, I was promoted to vice president and took over responsibility for all our activities in Latin America. As quickly as I could, I embarked on an extensive six-week trip to the major countries of South America to assess the potential that might exist for business expansion.
In those days there was no jet service, so we endured long hours on four-engine Constellations cruising slowly over the endless Amazonian rain forest and picking our way carefully through the treacherous peaks of the Andean cordillera.
The 1950 trip was in many ways a watershed event in my life. I saw that banking could be a truly creative enterprise—creative in the sense that my old professor Joseph Schumpeter defined the term—and that Latin America was a place where economic development might take hold with spectacular results. Before that trip I had kept Anna Rosenberg’s admonition firmly in mind; afterward I found myself fully committed to a career at the Chase. My traveling companion and guide on that trip, Otto Kreuzer, was an old Chase hand who had spent a good part of his professional life in Latin America. Otto chain-smoked cheap cigars. He lit his first one while he was reading the paper in bed in the morning and continued puffing on them all day long and well into the evening. The smoke was so noxious that I would hang out the window of our car for fresh air as we traveled between meetings. My coughing and hacking and obvious discomfort made no impression on him. Otto simply lit up another cigar.
But Otto knew our operations intimately, and he gave me a thorough introduction to every aspect of our business. In those days each of the South American countries depended on the export of a few major commodities for the preponderance of their foreign exchange earnings. Peru exported cotton, sugar, and copper; Chile, copper and nitrates; Argentina, vast amounts of wheat and beef; Venezuela, petroleum products; Brazil and Colombia, coffee, billions of beans every year.
Chase financed a good portion of this trade by extending short-term letters of credit, usually no longer than three months’ duration, to the exporters, who were also clients of our local correspondent banks. While the business was profitable, when demand for these commodities fell and prices dropped, as they did on a regular basis, the bank lost business and revenue. Also, as these economies expanded and relied less heavily on commodities, the bank’s income became vulnerable. We needed to expand our product offerings.
Loans to governments emerged as one of a number of new opportunities. Over the years Chase had maintained good relations with the central banks in the countries where we operated, and I thought we could build on those relationships. I recall one instance when I agreed on the spot to the Brazilian finance minister’s request for a $30 million short-term loan against the country’s coffee crop.
In a more important departure from prior bank practice, I persuaded Chase to participate, along with the U.S. Treasury and the International Monetary Fund, in a $30 million loan to Peru at the request of my old friend Pedro Beltrán, then the president of the Peruvian central bank, to stabilize its currency in the foreign exchange markets. The Peruvians provided no collateral for the loan, but they agreed to adopt a program of fiscal reform laid out by the IMF. This was the first time that a private bank in the United States had cooperated with the IMF in such an arrangement.
While loans to governments could be risky if they were not carefully crafted and well secured, I was convinced that they could provide us with profitable business and open doors to a broader range of private business lending as well. It was no secret that senior officers on the domestic side of the bank viscerally distrusted lending to foreign governments, especially in the lesser developed world. They felt the return was too small and the risk too great. My disagreement with George Champion, then the head of the United States department and a rising power in the bank, on this issue was the beginning of a schism that would widen considerably over time.
AN ATTEMPT TO DEVELOP CAPITAL MARKETS
I learned after only a brief acquaintance with Latin America that economic growth was lagging due to the lack of medium- and long-term credit for equity financing. While there were a few financieras that channeled private funds
into new enterprises, merchant or investment banks, such as those found in profusion in Europe and the United States, simply did not exist. Except in the field of government bonds, capital markets capable of underwriting security issues were completely absent.
North American and European commercial banks compounded the problem because they rarely extended credit for more than three months, and then only for trade-related activities. It was an area of real frustration for Latin American entrepreneurs who wanted to expand and diversify their businesses but lacked the capital resources to do so. Here was a glittering opportunity for Chase, but we had to find our way around a legal obstacle before we could proceed.
The Glass-Steagall Act of 1933 prohibited U.S. commercial banks from participating in domestic investment banking. They could do so overseas through the provisions of the Edge Act of 1919. Chase had an Edge Act corporation, but we had used it solely as a real estate holding company for our branches in Paris and the Far East. We amended the charter to permit investment banking and created a new subsidiary called Interamericana de Financiamiento e Investimentos, S.A. as a joint venture with IBEC to underwrite and distribute securities within Brazil. I recruited fourteen of our Brazilian correspondent banks to join us as shareholders, and we launched the new company in early 1952.
Interamericana made money during its first two years of operation, but then hit a stagnant period when the Brazilian economy fell into recession. We never recovered our momentum. Pressure built within the home office to cut our losses, and despite my pleas to correct the problems and wait for better days, I lost the fight. In 1956, Chase sold its share of Interamericana to IBEC.
In retrospect I have no doubt that the concept underlying Interamericana was sound, and our Brazilian partners were among the strongest banks in the country. Unfortunately, few at Chase had any interest in or sympathy for the idea. We needed first-rate investment bankers to run it and enough time to prove the idea could work. Even though several bright junior officers were assigned to the project, we never found an experienced senior investment banker to head the operation.
Memoirs Page 17