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HENRY GOLDMAN’S GROWING stature on Wall Street was such that his views were sought—along with those of J. P. Morgan himself—in January 1914 by the two cabinet members in the Wilson administration tasked with designing the architecture of the Federal Reserve System after the passage of the Federal Reserve Act in 1913. Here, at the inception of the government’s regulation of Wall Street, Goldman Sachs was already advising politicians how to do the job. In a hearing in New York on January 6, Henry Goldman told the secretary of the treasury, William G. McAdoo, and the secretary of agriculture, David F. Houston, that New York City needed to have the most powerful and well-capitalized Federal Reserve bank in the system. He thought the New York Federal Reserve Bank should be on a par with the Bank of England, given that New York was the credit capital of the country. He told the Reserve Bank Organization Committee that unless the New York Federal Reserve Bank was made supremely important, “it will do no more exchange business with New York than at present unless the New York bank is strong enough to handle it.” Morgan concurred with Goldman’s view—and, of course, the New York Federal Reserve Bank did become the most powerful reserve bank in the system, and Goldman Sachs remains to this day one of the bank’s most important affiliations. (The current president of the New York Fed, William Dudley, is a former Goldman partner.)
But Henry Goldman’s conversation with the two secretaries that day also revealed additional morsels about Goldman’s character and the DNA of the firm he had helped to create. First, he referred to himself—quite proudly—to the secretary of the treasury as a commercial banker, saying that commercial banking was his principal business and specifically, “commercial banking all over the world, issuing credits to commerce and industry in this country and abroad, to merchants in this country for use abroad.” He made no mention of his firm’s growing prowess in the underwriting of debt and equity securities. From a very early stage the firm wished to be seen as a solid pillar of capitalism, not as an engine of speculation.
Goldman also seemed acutely—and presciently—aware of the risks local banks faced from a confidence perspective if they turned to a reserve bank as a source of liquidity other than in the normal course of business. While it was true that the Federal Reserve System was being created, in part, to combat the causes of the Panic of 1907, Goldman seemed to have had an intuitive sense of the risks posed by actually turning to a reserve bank in an hour of need. “The word ‘aid’ should be banished from our minds,” he told the secretaries. “ ‘Get aid.’ That means alarm.… It ought to be perfectly normal for a bank to go to a Reserve Bank and take discount, not in the sense of it being ‘aid.’ ”
After discussing what exact cities Goldman thought should house the reserve banks, McAdoo and Goldman returned one final time to the subject of the Fed providing liquidity in a time of crisis. It is easy to imagine that instead of McAdoo and Goldman speaking in January 1914, it was Paulson and Blankfein speaking in September 2008. “The reserve power that [the reserve banks] have through their ability to secure or to convert their resources into money when required, that is into circulating notes, is a power of transcendent importance here,” McAdoo told Goldman.
Goldman agreed with the secretary that the power to provide that liquidity was essential, and then returned to the idea he mentioned before about the message that tapping a reserve bank for that liquidity would send to the market. “I do believe that in business there are psychic factors which are so old and so ingrained in the human mind that no system can set them aside, and one is [the] capital strength of an institution,” he said.
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NOTWITHSTANDING THESE CLEVER insights into the verities of a banking system built upon the confidence placed in it—is there any other kind?—by August 1914 and the outbreak of World War I, Henry Goldman’s views in support of Germany’s increasingly aggressive behavior were quickly becoming a problem for Goldman, Sachs & Co. For instance, when he had been vacationing in England before the start of the war, Sam Sachs—Henry’s brother-in-law—had reassured Goldman Sachs’s underwriter partners at Kleinwort that the firm “stood firmly behind Great Britain,” only to discover, upon his return to New York, that Henry had become increasingly outspoken in his pro-German commentary. “He quoted Nietzsche to anyone who would listen,” Birmingham wrote of Henry Goldman.
The long-simmering tensions between Sachs and Goldman—once limited to their differences about business strategy and risk—now burst onto the public stage. The catalyst for the rupture between the two Goldman partners was a $500 million bond issue that Wall Street’s bankers had pledged to raise for the Allied war effort (the United States, of course, did not enter the war until 1917). The original plan called for the Wall Street firm Kuhn, Loeb to head up the effort to underwrite the war bonds. But when its pro-German leader Jacob Schiff said the Allies would have their money only if the finance ministers in France and England gave him their personal assurance that “not one cent of the proceeds of the loan would be given to Russia,” all hell broke loose. Of course, neither France nor England could offer Schiff this guarantee in the time of war—especially since Russia was part of the Allied effort—and a Kuhn, Loeb partners’ meeting was quickly held to decide how to proceed. “I cannot stultify myself by aiding those who in bitter enmity have tortured my people and will continue to do so, whatever fine professions they may make in their hour of need,” Schiff said. “I cannot sacrifice my profoundest convictions. This is a matter between me and my conscience.”
While Schiff’s partners were sympathetic to his strongly held views about the Russian leadership that had persecuted so many Jews for so long, the American press was outraged. “Kuhn Loeb, German Bankers, Refuse to Aid Allies,” the headlines screamed. With Schiff’s decision, the responsibility for raising the $500 million fell to J. P. Morgan, and soon one Wall Street firm after another lined up to take part of the debt offering. At Goldman, Sachs, the partners had a rule that no underwriting could be undertaken or any amount of capital committed unless the partners were unanimous in their agreement that the deal should proceed. Given his outspoken views, it was no surprise that Henry Goldman nixed his firm’s participation in the bond deal. “An intense, high-strung and didactic man, when Henry’s partners and sisters begged him to modify, or at least conceal, his feelings, he refused,” Birmingham wrote, “and his public utterances became more frequent and startling.” Goldman, Sachs became lumped into the same category as Kuhn, Loeb—an advocate for an anti-Allied, pro-German stance on the growing conflict. “But my father walked over to J. P. Morgan and Company and put in a personal subscription for himself and personal subscription for my uncle Harry Sachs, so as to go on the record as to where we stood,” Walter Sachs observed. Nevertheless, the firm’s decision not to participate in the bond offering would not be good for business.
As the United States’ effort to aid the Allies ratcheted up in the ensuing years, the Goldman partners stepped up their own involvement. Howard Sachs, Henry Goldman’s nephew, was on active duty with the Twenty-sixth Division. Paul Sachs, Sam’s son, was a member of the Red Cross in France. “Other members of the joint families were selling Liberty Bonds, winding bandages, and appearing at rallies to ‘bury the Kaiser,’ ” Birmingham wrote. Henry Goldman did not relent. When finally the partners at Kleinwort, in London, cabled Goldman Sachs in New York with the news that Goldman was “in danger of being blacklisted,” Henry Goldman finally got the message. “Well, I guess I am out of step,” he said. “I guess I’d better retire.” He agreed to retire from Goldman Sachs on December 31, 1917, eight months after the United States entered the war. “I am not in sympathy with many trends which are now stirring the world and which are now shaping public opinion,” he wrote his partners on company letterhead, accompanied by the words “Save & Serve, Buy Liberty Bonds!” “I retire with the best of feeling towards the firm (and all of its members) with which I have been associated for thirty-five years and to which I have given all there is in me.”
In the midst of the war, Goldman Sachs paid out Henry Goldman’s capital contribution to the firm. At first, Goldman kept a desk at the office and agreed “to give his services to the firm in an advisory capacity.” But this soon proved untenable and he left the firm altogether and set himself up in an office in midtown Manhattan. Of course, Goldman took with him his sizable chunk of the firm’s capital, a not inconsiderable number of clients, plus his general prowess for bringing in new business. He made “two or three investments that stood him in enormous stead,” Walter Sachs wrote. Goldman had large, personal equity stakes in CIT Financial, a lender to small businesses, in May Department Stores, and in Sears, Roebuck. Concluded Sachs: “Over the years he probably died a richer man than if he’d stayed in the investment banking business, because those were very successful investments.”
Henry Goldman continued to support Germany after he retired from Goldman. He was made an honorary citizen in 1922, although later the Nazis would humiliate him. “Being a Jew, he was actually, I believe … subject to the indignity of being stripped and searched to see whether he was doing anything against Hitler’s Germany,” Walter Sachs wrote. “I would say that he died a disillusioned and unhappy man.”
Goldman’s retirement from the firm started by his father left a hole that would be difficult to fill. “Henry Goldman was an extraordinary personality, and there’s no question that he made the first great imaginative contribution to the growth of the firm—not that my father didn’t do his share,” Walter Sachs observed. “My father had the dream of making this small commercial paper business an international banking business, and it was he that formed in the early stages the relationships with these various banking houses in the various foreign money centers. It was Henry Goldman who did the first financing of concerns, set up the first financing of concerns like Sears, Roebuck and Woolworth and Continental Can. So you can see this was a great time.” But the families’ relationship would not outlast the political divisions between the partners.
The Goldmans never again had a role in the firm and never again would Henry Goldman speak to the Sachses. He never again spoke with his sister Louise, who was Samuel Sachs’s wife. The firm fell on hard times, relatively speaking, and would not begin to recover until after the war. The underwriting partnership with Lehman was an early casualty of the split, since it was so heavily driven by the friendship between Henry Goldman and Philip Lehman. “Lehman Brothers and Goldman, Sachs continued to try to collaborate on underwriting issues,” Birmingham wrote, “but the relationship between the two firms was not what it had been. There were frequent arguments. Why, the Lehmans demanded, did Goldman, Sachs take all the credit, with their name showily at the top of the ads, for ventures for which Lehmans had supplied the money? Goldman, Sachs in turn asked why the Lehmans expected half the profits on deals originated by Goldman, Sachs. The arguments frequently disintegrated into angry name-calling. ‘They were both too ambitious,’ one banker has said, ‘to stay married.’ ” A formal memorandum ended the relationship and at the same time divided their sixty clients between those where Goldman had the “prime relationship” and those where Lehman did. Not for the last time, Goldman got the better end of the deal: forty-one of the sixty companies went into Goldman’s column, including—of course—Sears.
Indeed, at first, Lehman may have been the better off of the two firms, what with the departure of Henry Goldman from Goldman, Sachs and the dissolution of the Lehman underwriting partnership. After Goldman’s retirement, left behind as partners were five members of the Sachs family: Sam, Harry, Arthur, Walter, and Howard, plus Sam’s brother-in-law Ludwig Dreyfus and Henry S. Bowers, who lived in Chicago and ran the firm’s office there. Bowers was the first partner from outside the family and the first non-Jewish partner when he joined the firm in January 1912.
Taking Goldman’s place in the partnership—and replenishing a portion of the capital Goldman took with him—was Waddill Catchings, a “suave and polished Southerner,” who was then president of the Sloss-Sheffield Steel & Iron Company and the chairman of the Committee on Co-operation with the Council of National Defense of the United States Chamber of Commerce. He was also increasingly well known, post World War I, for a series of books he co-wrote with names such as Money, Profits, and Road to Plenty that extolled the “increasingly rosy future” for America after the war. Catchings, a friend and Harvard classmate of Arthur Sachs, thus became the second partner from outside the families to join Goldman but the first one to be based in New York with real authority at the firm and a penchant for hucksterism. It would be a fateful decision.
CHAPTER 2
THE APOSTLE OF PROSPERITY
Waddill Catchings, born in Sewanee, Tennessee, was the son of Silas Fly Catchings and Nora Belle Waddill. He graduated from Harvard in 1901 and Harvard Law School in 1904. He has been described, by the New York Times, as a “tall, slender, unassuming man with a full head of thick, white hair and a trace of the South in his speech.” In 1907, for the princely sum of ten dollars a week, he joined Sullivan & Cromwell, the whitest of the white-shoe law firms on Wall Street. At Sullivan & Cromwell, Catchings rode the wave of bankruptcies that followed the Panic of 1907 and proved himself adept at restructuring these forlorn companies and getting himself named the receiver—and getting well paid for his efforts—under the auspices of the bankruptcy court.
In June 1907, soon after Catchings arrived at Sullivan & Cromwell, Milliken Brothers, one of the country’s largest steel-construction contractors, filed for bankruptcy protection with $6.5 million in liabilities, including a $3 million bond issued the year before. Milliken, based in New York City, had used the proceeds of the bond issue to build a steel foundry on Staten Island—the only steel mill in New York City—in an effort to become less dependent on the major steel companies in and around Pittsburgh, Pennsylvania. Unfortunately for Milliken, the Staten Island plant ended up costing the firm $1.35 million more than planned. For a generation the Milliken name had been “as good as gold” in the credit markets, and the new leaders at Milliken had decided that the company would finance the extra cost of the Staten Island plant itself, figuring the firm’s long-standing reputation would allow it to replenish the funds as needed. That turned out to be a bad bet as the credit markets deteriorated in the spring of 1907, and the venerable company was forced into bankruptcy.
One of the receivers—August Heckscher, an industrialist from Long Island—was a friend of Catchings and eventually asked him to become involved in the Milliken matter, where he was described as one of the “active managers” of the proceedings. In 1909, Heckscher and Catchings successfully proposed a restructuring plan for Milliken, reorganizing the company’s debts and allowing it to emerge from bankruptcy.
In February 1910, one of the companies in Heckscher’s sprawling empire—the Central Foundry Company—filed for bankruptcy due, Heckscher allowed, to a “lack of adequate banking facilities and working capital. The result is an embarrassment we believe to be temporary.” Catchings was named as the receiver for the Central Foundry bankruptcy and promptly assured the markets that the company would continue operating as normally as possible. “Although there is little cash on hand, the accounts receivable are substantial and the collections should, to a great extent, supply the necessary funds for the continued operation of the business.” Catchings eventually became president of Central Foundry and a director of many of the companies that he guided through the bankruptcy process.
During the First World War, Catchings worked for Edward Stettinius, a partner at J. P. Morgan & Co., in the effort to supply the Allies with everything needed to wage a world war. “For the next three years Mr. Stettinius conducted the most magnificent shopping campaign in the world’s history,” Time magazine observed. “He put food, clothes, guns, explosives where the Allies put soldiers. He put them there good enough, cheap enough, soon enough, to win the War.” In March 1917, Catchings became the president of the Sloss-Sheffield Steel & Iron Company, based in Bi
rmingham, Alabama. In July 1917, Catchings—in his role as the chairman of a committee of the Chamber of Commerce—urged the federal government to create a Board of National Defense with the authority to negotiate contracts with American businesses to procure the supplies needed to fight the war.
Catchings became increasingly outspoken about the economic cycles and the prospects for American prosperity. Part of his philosophy of business was forged soon after he graduated from Harvard and discovered the harsh realities faced by companies such as Milliken Brothers and Central Foundry. His Harvard professors, he lamented, “had casually explained that their theories would hold true in the long run. But what people are interested in is the short, not the long, run. So I made up my mind that as soon as I had enough money I would set about reconciling these two phases of business—theory and practice.” Together with his Harvard classmate William Trufant Foster he created the Pollak Foundation for Economic Research and then set about publishing a number of books that espoused the idea that the future was rosy as long as businesses focused on “money and profit” and kept production humming at all costs. “If business is to continue zooming,” he once wrote, “production must be kept at high speed, whatever the circumstances.… Production would bring about consumption. Consumers would find work and spend money which would eventually accrue to the producers.” In a phrase that would echo throughout the American economy at the end of the twentieth century, Catchings declared that the “business cycle was dead.”
Money and Power Page 6