by Ron Chernow
One final episode in this last flowering of Progressive reform should be noted. On December 23, 1913, President Wilson signed the Federal Reserve Act. Wilson, of course, had insisted on a Federal Reserve Board in Washington under political, not banker, control. “There are only two choices,” he said. “Either to give the central control to the bankers or to give it to the government.”32 Earlier in the year, Jack had gone down to Washington with the Morgan plan for a central bank under private control. J. P. Morgan and Company had not only formulated a scheme but had had it beautifully printed up. When Wilson’s close adviser, Colonel House, saw what Jack had brought, he hastily told him to present it to Wilson typed on ordinary paper, lest Bryan and the Progressives think the House of Morgan was dropping off a prearranged plan.
The Federal Reserve System that went into operation in November 1914, was, in many ways, a Morgan godsend. It took some political heat off the bank. As Fed historian William Greider has written, “As an economic institution, the Fed inherited the noblesse-oblige role that the House of Morgan could no longer perform—and also some of the resentment.”33 The diminution of Morgan power was less than met the eye. In many ways, the Washington board, which oversaw the twelve regional banks, was toothless. The New York Fed, in contrast, emerged as the focal point for dealing with European central banks and the foreign exchange markets. So, real financial power remained where it had always resided—on Wall Street.
The critical position in the new system was the governor of the New York Federal Reserve Bank. Its first occupant, Benjamin Strong, had Morgan written all over his resume. He was a protege of Harry Davison, who had made him a secretary of Bankers Trust and brought him in as Pierpont’s personal auditor during the 1907 panic. There was an emotional bond between the two men. When Strong’s wife committed suicide after childbirth and a daughter died a year later, the Davisons took the three surviving Strong children into their home. Strong then married Katherine Converse, daughter of Bankers Trust’s president, and had become president himself by 1914.
That year, when the New York Fed job became available, Strong balked at taking it. Not only had he supported the bankers’ Aldrich plan, but he had even campaigned against the Federal Reserve Act. Only after spending a long country weekend with Harry Davison and Paul Warburg did he take the job. Strong wanted to endow the New York Fed with the dignity and prestige of the Bank of England. The House of Morgan directed him to Teddy Grenfell for tutorials on how that bank operated. Through Strong’s influence, the Federal Reserve System would prove far more of a boon than a threat to Morgans. The New York Fed and the bank would share a sense of purpose such that the House of Morgan would be known on Wall Street as the Fed bank. So, contrary to expectations, frustrated reformers only watched Morgan power grow after 1913.
CHAPTER TEN
WAR
EVEN as domestic troubles crowded in upon the House of Morgan, the bank was on the eve of its most spectacular foreign triumph, one that would make Pierpont Morgan look provincial in comparison. During the early summer of 1914, an industrial recession was accompanied by a bear market on Wall Street. Businessmen grumbled that Woodrow Wilson’s crusade against the “interests” had chilled the entrepreneurial spirit. In this gloomy frame of mind, American investors panicked when they learned of Austria-Hungary’s declaration of war against Serbia on July 28, 1914. Wall Street, which prided itself on its prescience, was once again caught napping by a historic event.
The House of Morgan had closely followed European events. Although later accused of World War I profiteering, it nearly engaged in clandestine diplomacy to stop fighting between the Balkan states and Turkey in 1912. The plan was to have the House of Morgan provide loans to both sides on condition that they submit to American mediation, and President Taft was to have acted as mediator. The scheme was apparently hatched by Herman Harjes, senior partner of Morgan, Harjes in Paris, and U.S. ambassador to France Myron Herrick. Jack Morgan finally vetoed the idea, fearing that the loan money would be used to further the war effort, which the House of Morgan wished to stop.1 He also refused to proceed without the full cooperation of the European powers.
The hysteria that seized Wall Street in late July 1914 stemmed from a misguided fear that transatlantic trade would collapse and worsen the recession. Americans thought they couldn’t survive without European capital and feared that gold would be withdrawn from New York and hoarded in London. After the czar mobilized over a million Russian troops on July 29, all the European markets shut down. As overseas investors rushed to liquidate securities through New York, the Stock Exchange took its steepest one-day dive since the 1907 panic.
By the morning of July 31, 1914, a staggering accumulation of overnight sell orders threatened a thunderous crash. Even though Pierpont Morgan was now dead, his star pupil, Harry Davison, had been well tutored in the 1907 panic. Bankers still instinctively resorted to 23 Wall Street in an emergency. The House of Morgan was more than a man; it had acquired an institutional continuity. Davison summoned Wall Street’s bankers to the old Mills Building at 15 Broad Street, the provisional Morgan home while the new headquarters was being readied. Before the start of trading, the Stock Exchange president rushed over for consultation.
Even though Jack was there, Davison presided. Also present was a new Morgan banker, Dwight W. Morrow, a distinguished tax and utility lawyer. Morrow recalled the frantic discussion: “The Stock Exchange authorities wanted to know whether to open or not, and nobody knew what to tell them. It got down to about five minutes of ten, and the President . . . called up the Exchange and told them to announce that the Exchange would be closed.” It was a hairbreadth reprieve: the man who rang the opening gong had already assumed his post, and traders shrugged with relief. “It was in my very early days in a banking firm,” Morrow added, “and I can remember that I was impressed with how little anybody knew what he was doing.”2 Curiously, Morgan accounts of this meeting omit a 9:30 A.M. phone call that Jack made to Treasury Secretary William G. McAdoo, who advised him, “If you really want my judgment, it is to close the Exchange.”3
The New York Stock Exchange didn’t resume restricted trading until December, and normal trading didn’t return until the following spring. A curious fugitive institution sprang up—the so-called gutter market of outlaw brokers, who loitered on the curbs trading stocks. According to Wall Street lore, it started out with “four boys and a dog,” but soon a hundred brokerage firms jumped into sidewalk trading on New Street—to the point where the Stock Exchange clamped down. As Alexander Dana Noyes noted, this ragtag band was probably “at the time the only actual stock market in the world.”4
The war was initially a bleak time for the House of Morgan. Like other banks, it made a great deal of money from broker call loans—loans made to buy stock on margin—and so started the war in low spirits. This despondent mood obscured a momentous shift in world finance: the United States was about to capture financial supremacy from England and emerge as the leading creditor nation. Although nobody quite realized it at first, the English era was over. After the war, world currency markets would shift from a sterling to a dollar standard.
The news of war was greeted with melodramatic foreboding by Jack Morgan, who foresaw “the most appalling destruction of values in securities which has ever been seen in this country.”5 Later reviled as a “merchant of death” by isolationists, his first reaction, in fact, was spotlessly humane. On July 31, he even issued a rare public appeal for peace: “If the delicate situation can be held in abeyance for a few weeks, I should expect a rising tide of protest from the people who are to pay for war with their blood and their property.”6 Far from rubbing his hands at the prospect of war profits, he scoffed at the notion that New York might supplant London as the world’s financial center.
The partner with the best antennae for the seismic shift was Harry Davison. The war would be his glory time. Almost at once, he sensed a Morgan bonanza and immediately dispatched telegrams to Lamont, then trout fishing and
horseback riding on a Montana ranch. These telegrams throb with excitement:
THE CREDIT OF ALL EUROPE HAS BROKEN DOWN ABSOLUTELY SPECIE PAYMENTS SUSPENDED AND MORATORIUM IN FORCE IN FRANCE AND PRACTICALLY IN ALL COUNTRIES THOUGH NOT OFFICIALLY IN ENGLAND. . . .
PROBABLY COULD DO LITTLE IF YOU WERE HERE THE ONLY POINT BEING THAT IS FILLED WITH EXTRA ORDINARY INTEREST AND OF COURSE GREAT POSSIBILITYS. . . . PERHAPS I MIGHT EXPRESS THE SITUATION BY STATING THAT IT IS AS IF WE HAD HAD AN EARTHQUAKE ARE AS YET SOMEWHAT STUNNED BUT WILL SOON GET TO RIGHTING THINGS.7
An immediate war casualty was that chronic Morgan stepchild, the city of New York, which had about $80 million in European obligations coming due. As the dollar plunged—making repayment more expensive—and the United States faced a possible standstill in transatlantic trade, sentiment was strong for suspending payment on the debt. Why not exploit the European chaos to save some money? Forming a syndicate to pay off the bonds, the House of Morgan and Kuhn, Loeb organized an impromptu rescue. Gold was shipped to the Bank of England and then credited to Morgan Grenfell, which paid off New York City notes as they matured. The operation was a mark of financial maturity, a signal to the world that New York as a financial center could offer safety comparable to that of London.
For many Americans, the war was at first a distant irrelevance; for isolationists, it provided yet another example of why America should steer clear of foreign imbroglios. Despite his sympathy for the Allies, President Wilson issued a proclamation of neutrality, entreating Americans to be “impartial in thought as well as action.” For Morgan partners, this was impossible. As Tom Lamont said, “we wanted the Allies to win, from the outset of the war. We were pro-Ally by inheritance, by instinct, by opinion.”8 As cosmopolitan bankers with London and Paris affiliates, the Morgan partners were deeply enmeshed in European life and had too abiding a faith in Anglo-Saxon civilization to stand on the sidelines. Yet it was also a cardinal rule of the Diplomatic Age not to defy government edicts, and the bank abided by Washington’s policy.
In early August, the French, who had appointed J. P. Morgan and Company as their financial agent, sounded out the bank on a possible $100-million loan. The Wilson administration did more than deny this request. The secretary of state, William Jennings Bryan—the toad in the garden of Morgan history—denounced loans to belligerents as “the worst of contrabands.”9 A few days later, he told the press that loans by American bankers to warring nations were “inconsistent with the true spirit of neutrality.”10
Within six weeks, Bryan’s policy on contraband financing was reversed as Wilson tilted—subtly but unmistakably—toward the Allies. Robert Lansing, the State Department counselor and acting secretary of state that fall, figured out a way to sidestep U.S. neutrality through legal legerdemain. He persuaded Wilson to adopt a serviceable distinction between forbidden “loans” made through foreign war bonds and permissible “credits” for Allied purchases of materiel. Why the sudden shift after only two months of war? American exports to Europe had lifted the United States from recession, and even parochial farmers worried that Allied purchases of grain, meat, and cotton might be curtailed for lack of credit. As Davison told Treasury Secretary McAdoo, “to maintain our prosperity we must finance it.”11 The House of Morgan offered a convenient cover for preserving the appearance, while denying the spirit, of neutrality.
With much industrial slack, the United States was an ideal arsenal for the war. But as the Allies bid against each other for American supplies, they drove prices sky-high; even separate departments of the British government ended up in bitter competition. To relieve such price pressure, Lloyd George, then the chancellor of the Exchequer, asked Teddy Grenfell if Morgans in New York could do anything about expanding American rifle production, and Jack Morgan made inquiries at the Remington and Winchester arms companies. But more than expanded production was needed to stop war profiteering. In October 1914, the British Treasury sent over Sir George Paish and Basil Blackett to look into the problem. The most mandarin of Whitehall bureaucracies, the British Treasury needed a Wall Street outpost and found it in their New York agent, the House of Morgan. When the Treasury men returned to London in late November, they had another passenger stowed away on board, Harry Davison. Because Willard Straight was restless, Davison took him and Dorothy along. The Straights’ new magazine, The New Republic, was already running a letter from Ray Stannard Baker warning American business not to exploit the war “to promote its own business and trade.”12
Davison had come up with an inspired idea, which Straight claimed was stolen from him. Davison wondered whether the House of Morgan could get rid of plundering middlemen by concentrating Allied purchases in a single agency that would negotiate from a position of strength. He knew the preferred Morgan style was never to grandstand and suggested that Jack Morgan take the boat with the Treasury men. Never one to steal glory, Jack replied, “You jump on the steamer yourself, this is your idea.”13 Jack’s friend Sir Cecil Arthur Spring-Rice, the British ambassador in Washington, had lobbied for a similar idea, telling the Foreign Office that it would require a firm of stature in both London and New York. The Anglo-American House of Morgan was the logical choice.
Once Davison was installed at Claridge’s, Teddy Grenfell led him on a tour of Bank of England and Whitehall officials. British officials liked the Davison plan, and not only because it would lower prices. Politically, it would convert the House of Morgan into a lightning rod for the inevitable charges of favoritism that go with wartime contracts. The firm’s liabilities were also apparent. Some officials feared that British radicals would have a field day with this Wall Street link, and others worried about the bank’s unpopularity among certain sectors of American society. The House of Morgan knew its own unpopularity west of the Mississippi. In April 1914, it had considered setting up a rare branch in Chicago to soften midwestern sentiment against it.
On December 16, 1914, Davison lunched with the prime minister, Herbert H. Asquith, and the chancellor, David Lloyd George. He brought along a contract for a proposed Morgan purchasing agency for the Allies. The prime minister reviewed it paragraph by paragraph and said he “approved every word.”14 On January 15, 1915, the House of Morgan signed the Commercial Agreement with the Army Council and the Admiralty. The first purchase was $12 million for horses—then an urgently needed item. In the spring, a similar arrangement was concluded with the French through the senior Morgan partner in Paris, Herman Harjes.
Nobody foresaw the magnitude of the proposed operation. Lord Kitchener, secretary of war, told Davison the purchases might amount to £10 million—and he stressed that he was guessing on the high side. In fact, the purchases came to an astronomical $3 billion—almost half of all American supplies sold to the Allies during the war. Skimming off a 1-percent commission, the House of Morgan booked an astounding $30 million in fees. It was probably the most important deal in its history, not only for the money but for the political and corporate contacts it produced. Jack Morgan had qualms about the bank going into such alien business but feared a political backlash against the United States in Britain if war profiteering continued. At the White House in late January 1915, Jack got Woodrow Wilson’s blessing, who said he wouldn’t interfere with any action in “furtherance of trade.”15
The old private banks of Wall Street and the City had a chameleon quality and could quickly adapt to opportunities. To head what became the Export Department, Tom Lamont recruited Edward R. Stettinius, Sr., president of the Diamond Match Company. A former speculator in the Chicago wheat pits, Stettinius had well-brushed silver hair, a mustache, and rimless spectacles. His neat exterior reflected a meticulous, almost obsessive, attention to detail. Later, Secretary of War Newton Baker would refer to his “almost terrifying sense of responsibility.”16 From 9:00 A.M. until midnight daily, he lashed a Morgan staff of 175 known as SOS—Slaves of Stettinius. He didn’t simply hire people: he conscripted them, squeezed them, drove them to exhaustion. One drone later said, “If any fell
ow quit at 9 o’clock at night he was usually congratulated by the others on being about to take a half-holiday.”17
The purchasing operation reflected the size and the complexity of modern warfare. World War I seemed both primitive and modern, an incongruous mixture of cavalry charges and zeppelin raids, cannon fire and mustard gas. There were endless salvos of deadly projectiles: at the Battle of the Marne alone, two hundred thousand shells were exploded in a day. So the logistical needs were immensely varied and of decisive importance in the war effort.
Stettinius became the single most important consumer on earth, rounding up $10 million in goods per day. He bought, shipped, and insured supplies on an unprecedented scale and stimulated methods of mass production. As word of his operation spread, 23 Wall Street was mobbed by brokers and manufacturers of every description; the bank had to post guards at every door and assign them to partners’ homes. Each month, Stettinius presided over purchases equivalent to the world’s gross national product a generation before. He bargained hard for corned beef and barbed wire, locomotives and artificial limbs.
The German general staff had never imagined that the United States could switch so quickly to war production. As the capacity of plants became strained, Stettinius promoted the building of new factories. The House of Morgan and Great Britain made loans to Winchester Repeating Arms for new gun capacity and advanced money to many other firms to fulfill their contracts. By war’s end, the United States had an arms-making capacity that eclipsed that of England and France combined. For his efforts, Stettinius would bear the unlovely tag of father of the military industrial complex. Even General Erich von Ludendorff was heard to say that Stettinius was worth an army corps to the Allies.18 He became a czar of American industry. Boris Bakhmeteff, head of a Russian Industrial Mission to the United States, recalled a meeting at which Stettinius assembled the heads of some of America’s largest companies and “gave them hell in words that I was ashamed of.”19