by Ron Chernow
They are actually lovely shots, bright with whimsy, and they probably accomplished more for Jack’s image than anything since the 1915 shooting. Between the portly businessman and the ringleted midget on his knee, there was an electric chemistry. While Graf steadied herself, Jack watched with fascinated amusement; he was tender with the midget and resembled a proud grandfather. For a generation of Americans, this would be their indelible image of Jack Morgan. The pictures were widely credited with starting a new age in financial public relations.
When his testimony was over, Jack dozed through the appearances of the other Morgan partners. At one point, he awoke abruptly to ask what year it was. In the sultry hearing room, a senator suggested they take off their coats. The old-fashioned Jack balked prudishly, then slipped off his light gray jacket, showing his white suspenders. He laughed and joked with guards and asked one if he needed his gun as protection against the senators. He showed reporters the famous bloodstone Pier-pont had worn. Yet he was not nearly as calm or relaxed as he appeared. When a newsman told him he hadn’t seen such hoopla since the Lindbergh kidnapping, Jack said privately that he “felt quite sick” at the comment.65 His seeming aplomb contrasted with his deep mortification at being held up to public scrutiny.
Jack could have used the episode with Lya Graf to capitalize on goodwill. Instead, he was embittered by the hearings and sulked over the incident. His New England pride wouldn’t let him admit what the photographs suggest—that he had enjoyed the impromptu encounter. He didn’t want to be made human in such a sordid way and said the incident had been “very unusual and somewhat unpleasant.”66 With the press, he tried to react to the episode with faint sarcasm. When asked why he hadn’t removed the woman from his lap, he replied, “Well, you see, I didn’t know but what she might be a member of the Brain Trust or one of the Cabinet.”67
Everyone noted the uncanny parallels between the Pujo and Pecora hearings. Newspaper commentary favorably contrasted Jack’s cooperation with Pierpont’s truculence and Will Rogers even forecast a brilliant career for Jack. In milder moments, Jack conceded that Pecora hadn’t been as taxing as Untermyer. But he was still unforgiving in his general appraisal. “Pecora has the manners of a prosecuting attorney who is trying to convict a horse thief. Some of these senators remind me of sex suppressed old maids who think everybody is trying to seduce them.”68 For someone as bashful as lack, a public grilling was a gruesome affair. He declared, “To have stood before a crowd of people and attempt by straight answers to crooked questions, to convince the world that one is honest, is a form of insult that I do not think would be possible in any civilized country.”69
Sometimes Jack could laugh about the experience. One day on the golf fairway, he was lining up a shot when his caddy, Frank Colby, said he should think of the ball as Pecora’s head. When Jack hit a splendid shot, they both laughed appreciatively.70 But most of the time, Jack brooded about the hearings, which ended up alienating him from the New Deal. Afterward, he got a visit from William Jay Schieffelin, son-in-law of Dr. Markoe, who was trying to win support for a scheme enabling poor people to buy life insurance from savings banks. Jack not only refused to help, but made a revealing comment: “I only wish I had the capacity you have, a capacity for indignation at outrages. I’ve been so outraged that it leaves me cold when I hear of somebody else being outraged.”71 This sense of his own victimization would close Jack’s mind toward the Roosevelt programs. More and more, he would feel a revulsion from America, a sense of being abandoned by his own country, and profound anger at the tarnishing of his bank’s reputation.
The story of Lya Graf ends sadly. As sensitive as Jack, she was traumatized by the endless jokes about the episode—so much so that in 1935 she decided to return to her native Germany, even though she was half Jewish: her real name was Lia Schwarz. Two years later, she was arrested by the Nazis as a “useless person” and sent to Auschwitz, where she died in the gas chambers. All this was learned only after the war when Nate Eagle, the Ringling Brothers manager who cared for the midgets, traced her history. Jack Morgan never knew what became of her, nor that her extreme distress over their brief encounter set in motion events that led, ultimately, to her death.
AS Pecora adroitly exposed their subterfuges, the other partners fared no better than Jack. When George Whitney read a statement favoring disclosure of commissions in security offerings, Pecora sarcastically noted that the legislation had just been passed. Returning in his questioning to 1929, Pecora lobbed another grenade over to the Morgan side. That year, the bank had joined the craze for creating new holding companies and had sponsored Alleghany Corporation as a vehicle for the railroad and real estate interests of the Van Sweringen brothers; United Corporation, an electric-utility holding company; and Standard Brands, a merger of four food and consumer-products companies.
Instead of placing shares only with dealers, Morgans borrowed a British precedent and placed shares with scores of friendly individuals. These shares came from a block of stock the bank kept as its underwriting fee. On Wall Street in the 1920s, it wasn’t uncommon to have company officers or well-heeled individuals serve as underwriters. By allocating shares of the three holding companies to rich investors, Morgans claimed, it had tried to strike a compromise with its usual policy of not enticing individuals into risky stock transactions. As George Whitney said, they chose only those customers whom they knew were “competent financially and mentally to undertake the risks, whatever the risk may be.”72
Such self-serving descriptions didn’t capture the reality of 1929. In the souped-up bull market, shares offered to Morgan intimates before the public issue were already selling on a when-issued basis at a steep premium. (When-issued sales occur before a public offering and anticipate the price that will prevail when trading begins.) Between the Morgan price for lucky friends and this provisional market price lay a wide gap, an instant windfall. For instance, the bank was giving Alleghany shares to friends at $20 apiece; these could soon be cashed in for $35; United shares at $75 would soon go for $99; and Standard Brands shares bought at $32 could be redeemed just sixty days later at $41. In the soaring 1929 market, there was no great risk in carrying these shares before public issue, and the potential rewards were colossal. The shares seemed almost to be outright gifts—the sort of royal bequest only the House of Morgan could bestow. In Alleghany stock alone, the bank had over $8 million in profits to distribute. The setup was dubbed the gravy train.
The revelation of the House of Morgan’s so-called preferred list of friends confirmed Main Street’s cynicism of Wall Street as a place of easy riches and loose morals. For Morgan critics, this was at last the smoking gun, the tangible proof of corruption. The stunning list of recipients encompassed the American business and political elite. It started at the very top. After leaving the White House, Calvin Coolidge had been advised on finances by Morgan partner Tom Cochran and received three thousand shares of Standard Brands; somewhat ashamed at this revelation, he told friends that it saddened him to appear on the preferred list while they were on the welfare list.73 Other Republican beneficiaries included Charles O. Hilles, chairman of the Republican National Committee, and Charles Francis Adams, Hoover’s secretary of the navy and the father-in-law of Jack’s younger son, Harry.
Hedging its bets, Morgans also cultivated Democrats. This side of the ledger was even more embarrassing to its recipients, among them William G. McAdoo, the former Treasury secretary, a mentor of Russell Leffingwell. What made McAdoo’s plight especially mortifying was that as a senator, he now sat on the Pecora committee. Also on the list was John J. Raskob, chairman of the Democratic National Committee. The list reached straight into the New Deal itself. When he was president of American Car and Foundry Company in 1929, William H. Woodin, now FDR’s Treasury secretary, had taken up Morgans on an offer.
Beyond politics, the preferred list exposed an astonishing range of Morgan corporate contacts. There were business chieftains—Owen Young of General Electric, Myron Tay
lor of U.S. Steel, Walter Teagle of Standard Oil of New Jersey, Walter Gifford of AT&T, and Sosthenes Behn of ITT; financiers—Albert Wiggin of Chase, George F. Baker of First National, Richard Whitney of the New York Stock Exchange, and Bernard Baruch; a war hero—General John Pershing; a national hero—Charles Lindbergh; distinguished lawyers—John W. Davis and Albert G. Milbank; and distinguished families—Guggenheims, Drexels, Biddies, and Berwinds.
The House of Morgan was shaken by the disclosures and the imputation of dishonesty. When hiring partners, both Pierpont and Jack had always made the same statement; they would say, “I want my business done up there”—holding their hands in the air—“and not down here”—pointing to the ground.74 Jack would tell people that at the first sign of unethical conduct, they should come straight to him. Now the bank had to face charges that it had unscrupulously curried favor with a broad spectrum of business and political leaders. How to defend the indefensible?
The task fell to George Whitney, whose Brahmin good looks and lacquered black hair made him the prototypically handsome Morgan partner of his generation. He had enjoyed Alleghany bounty himself, netting $229,000 on the sale of eight thousand shares. A tough, unyielding witness, Whitney stuck to the line that the bank was shielding small investors from risk. “They took a risk of profit,” Whitney said of the preferred customers; “they took a risk of loss.” Pecora later rejoined: “Many there were who would gladly have helped them share that appalling peril!”75 At moments, even the self-assured Whitney seemed confused, stammering at one point, “I don’t know, Senator Couzens. It is hard to say why we did things. It is even harder to say why we didn’t.”76
Even as Morgan partners denied that shares were distributed to influence people, Pecora released subpoenaed bank records that confirmed a less than angelic intent. In 1929, Morgan partner William Ewing had written to William Woodin coyly acknowledging the bonanza being offered:
I believe that the stock is selling in the market around $35 to $37 a share, which means very little, except that people wish to speculate. We are reserving for you 1,000 shares at $20 a share, if you would like to have it. There are no strings tied to this stock, and you can sell it whenever you wish. . . . We just want you to know that we were thinking of you in this connection and thought you might like to have a little of the stock at the same price we are paying for it.77
Other documents suggested that the operation was conducted secretly. Partner Arthur Anderson told lawyer Albert Milbank, “It probably is unnecessary for me to add that I hope you will not make any mention of this operation.”78 Some correspondence resorted to sly hints. Golfing in Palm Beach, John J. Raskob, a former Du Pont treasurer and General Motors director, thanked George Whitney for his shares with the sincere hope that “the future holds opportunities for me to reciprocate.”79
Lamont was indignant at charges of influence peddling. Yet his own files contain a February 1929 memo that may be the most damaging of all. In a postscript written to Arthur Anderson, it shows how the distributed shares were discussed internally: “It occurred to me this morning to make inquiry from you whether in our distribution of Al-leghany common we had allotted anything to Frederick Strauss. He was so exceedingly helpful and at considerable sacrifice to himself in going over to Washington to testify in the matter of the stock issues, that I am not at all sure that we ought not to try to do something for him even at a date as late as this.”80 Clearly, the preferred list had less to do with protecting small investors than with rewarding important friends.
The preferred list came at a particularly inopportune time both for the Roosevelt administration and the Morgan bank. High finance was on trial, and congressional hoppers bulged with securities-reform bills. The cabinet spent an hour deciding whether Woodin should remain in his post as Treasury secretary. Vice-President John Nance Garner favored his resignation to establish that the administration was free of Morgan influence, but Roosevelt feared abandoning a friend under fire. “The President took the position that many of us did things prior to 1929 that we wouldn’t think of doing now; that our code of ethics had radically changed,” Interior Secretary Harold Ickes wrote in his diary.81 Woodin remained in the cabinet until November 1933, when, gravely ill, he was replaced by Morgenthau. The cabinet was also disturbed by the appearance of Norman Davis, its roving ambassador, on the preferred list. Some feared that if the Roosevelt administration moved closer to the League of Nations or the British government, the public would impute the action to Morgan influence over Davis. Despite this, Davis represented Washington at several high-level European conferences in the 1930s.
The public reacted to the preferred list scandal with extreme disillusionment: the brightest angel on Wall Street had fallen. The bank had avoided the flagrant abuses of other banks—even Pecora called Morgans a “conservative” firm—but the preferred list cast it in the mud with other banks. A stunned Walter Lippmann told Morgan friends that no group of men should have such private power without public accountability. It was a bitter pill for Lippmann, who had often dined at Lamont’s table. His biographer, Ronald Steel, suggests that he and other journalists were lulled to sleep by Lamont, whose “charm and familiarity with the trade enabled him to persuade many journalists to look upon the activities of the Morgan firm no more critically than he did himself.”82
Lippmann wasn’t the only shocked journalist. As if some mighty public trust had been betrayed, the New York Times wrote an elegiac editorial: “Here was a firm of bankers, perhaps the most famous and powerful in the whole world, which was certainly under no necessity of practicing the small arts of petty traders. Yet it failed under a test of its pride and prestige. . . . They have given their warmest friends cause for feeling that somehow the whole community, along with numbers of men whom all had delighted to honor, has been involved in a sort of public misfortune.”83
Reading this, Lamont became distraught. Of the Morgan partners, he had the most personal need for admiration. He wrote his friend Adolph Ochs, publisher of the Times, trying to extenuate the scandal. He said Morgans hadn’t expected people on the list to serve in public office again. He cited the risks of owning common stock and made it sound as if the list were made up only of family and friends. The explanations sounded strained: “We naturally turned in part to individuals who had ample means and who understand the nature of common stock—men who are prepared to take a chance with their money.”84 All his arts couldn’t hide what had become a certifiable scandal, setting the stage for the bill that would dismember the House of Morgan.
THE Glass-Steagall Act was sponsored by a Virginia senator who felt more warmly toward 23 Wall than any of his Senate Banking Committee colleagues. Small and peppery, Carter Glass was a former Lynchburg newspaper editor with little formal education. As a congressman, he had helped to write the Federal Reserve Act and had espoused strong banker control. As Wilson’s Treasury secretary, he had been Russell Leffing-well’s boss. In early 1933, he was a mass of contradictions. After supporting Roosevelt’s election, he quickly emerged as an articulate critic of FDR. He rebuffed the president’s offer to become Treasury secretary and attacked New Deal activism from a Jeffersonian standpoint; he was the sole Democratic senator to oppose the gold devaluation. Glass sponsored his famous bill with no personal animus toward Wall Street. In fact, he and Leffingwell often exchanged nostalgic, syrupy notes about their years in the Treasury Department. Although Leffingwell described their friendship as one of his most cherished, he was frustrated in his efforts to capitalize on it that spring: when subcommittee members working on the bank-reform bill swore not to talk to outsiders about it, Glass had to abide by the decision.
Glass-Steagall evolved in a way that owed much to fate. Huey Long and other congressional populists wanted federal deposit insurance in the bill, as well as restrictions on interstate branching. Both features were anathema to Roosevelt, who favored a national banking system that would put small-town Republican bankers out of business, not prop them up. Like Hoover, he fea
red that deposit insurance would pull strong banks down with the weak and thought it “puts a premium on sloppy banking and penalizes good banking.”85
Roosevelt kept the press guessing whether he would support Glass-Steagall. The Pecora hearings certainly contributed to public support of the bill. But what sealed its fate was the flood of mail to Congress favoring deposit insurance. The inclusion of deposit insurance was also important because nobody wanted to insure the securities affiliates of banks; if they had federal insurance, they would be obliged to stick to conservative loan-and-deposit banking. Finally, the bill set ceilings on savings interest rates. The Glass-Steagall Act was signed on June 16, 1933, by a president who didn’t even think the public was particularly eager for banking reform. From now on, banks would either take deposits and make loans or merchandise securities—but not both.
A surprise last-minute insertion in the bill was a provision endorsed by Chase president Winthrop Aldrich that forced private banks to choose between deposit and securities businesses. This was the coup de grâce for the House of Morgan. Later Carter Glass told Leffingwell that Aldrich drafted this provision and that Roosevelt foisted it on him. Pecora’s disclosure about the Morgan partners’ avoidance of income taxes made it impossible to delete this provision, so strong was public wrath.86 Adding to the pressure was Chase’s decision to disband its securities affiliate, whose refugees joined with renegades from the First National Bank of Boston to form First Boston, the first modern American investment bank.
The Glass-Steagall Act took dead aim at the House of Morgan. After all, it was the bank that had most spectacularly fused the two forms of banking. It had, ironically, proved that the two types of services could be successfully combined; Kuhn, Loeb and Lehman Brothers did less deposit business, while National City and Chase had scandal-ridden securities affiliates. The House of Morgan was the active double threat, with its million-dollar corporate balances and blue-ribbon underwriting business.