by Ron Chernow
What was the theory behind the Glass-Steagall Act? Foremost, it was meant to restore a certain sobriety to American finance. In the 1920s, the banker had gone from a person of sober rectitude to a huckster who encouraged people to gamble on risky stocks and bonds. As Pecora noted, small investors identified commercial banks with security, so that National City stock salesmen “came to them clothed with all the authority and prestige of the magic name ’National City.’ ”87 It was also argued that the union of deposit and securities banking created potential conflicts of interest. Banks could take bad loans, repackage them as bonds, and fob them off on investors, as National City had done with Latin American loans. They could even lend investors the money to buy the bonds. A final problem with the banks’ brokerage affiliates was that they forced the Federal Reserve System to stand behind both depositors and speculators. If a securities affiliate failed, the Fed might need to rescue it to protect the parent bank. In other words, the government might have to protect speculators to save depositors.
Ultimately, Glass-Steagall was as much an attempt to punish the banking industry as it was a measure to reform it. It was Main Street striking back at Wall Street, rounding out the 1929 disaster. The bill also had supporters among small investment banks eager to exclude large commercial banks from their domain. Many economic historians have pointed out the tenuous links between the crash and the subsequent bank failures. Bank failures were concentrated among thousands of country banks across America, while big Wall Street banks with securities affiliates withstood the Depression relatively well. Yet Glass-Steagall and other New Deal reform acts were directed at Wall Street and insulated little crossroads banks from big-city competition. This made political, but not economic, sense. The speculative fever of the 1920s had infected all securities houses, whether or not they were subsidiaries of deposit banks. The Jazz Age on Wall Street might have been no less effervescent if a Glass-Steagall arrangement had already been in place.
The House of Morgan had trenchant arguments to make against the bill, but nobody listened. After the Pecora hearings, even well-reasoned arguments by the financial elite resembled self-serving blather. Lamont pointed out that the flagrant scandals of the 1920s had involved retail-investment affiliates. Why, then, couldn’t wholesale banks, such as J. P. Morgan, distribute securities not to individuals but to dealers and large institutions? The Morgan partners also argued that disclosure requirements in the new Securities Act of 1933 would force banks to identify any loans outstanding to countries or companies whose bonds they issued—safeguards for bond investors lacking in the 1920s.
Lamont contended that size wasn’t to blame for America’s fragile banking system so much as fragmentation. The country had over twenty thousand banking institutions, resulting in a financial history peculiarly checkered with panics, failures, and runs. England, France, and Canada, by contrast, had a small number of large national banks, and these had passed through the Depression in far better shape. Then why not bigger, better-capitalized banks? To free banks from reliance on a single industry—whether Texas oil or Kansas farming—Lamont favored interstate banking. Russell Leffingwell contended as well that removing big commercial banks from underwriting work would produce capital-short investment banks—a prophecy not fully appreciated until decades later.
In 1933, however, such a perspective was bootless. The public wanted to see the giants slain and didn’t care about the dusty little banks that had faltered from bad luck or mismanagement. America’s atomized banking system might have contributed to its stormy financial history, but the political response was always to segment it further. With the Glass-Steagall Act, America experienced the catharsis awaited since Black Thursday. As Leffingwell said, “There is so much hunger and distress that it is only too natural for the people to blame the bankers and to visit their wrath on the greatest name in American banking.”88 All the while, Morgan partners felt that they suffered for sins committed by others. George Whitney later remarked that “we never retailed while I was in our office, but that’s where the trouble started, and the New Deal was smart enough to realize that if they could cut the security business up in pieces, they would take this power away and they did.”89
CHAPTER NINETEEN
CRACK-UP
AFTER passage of the Glass-Steagall Act, there was a grace period, during which the House of Morgan had to choose between deposit and investment banking. The partners still hoped the measure would be repealed. But after its unrivaled political influence in the 1920s, the bank seemed paralyzed, unable to exercise influence. As Arthur Schlesinger, Jr., has noted, no group lost more in public esteem, or more keenly lamented its exclusion from Washington, than the bankers. They became a caste of untouchables right at the start of the New Deal. For the House of Morgan, there were moments when the rout by enemy troops seemed terrifyingly complete. Its old foes were entrenched in Washington. For the new securities-disclosure law, the White House had asked Samuel Untermyer, of Pujo fame, to prepare a draft. Untermyer lost standing with Roosevelt, however, when he bragged too much about his supposed intimacy with the president.
The intellectual mentor of much legislation was that scourge of the New Haven Railroad, Louis Brandeis, now a Supreme Court justice. In May 1933, the precepts he had expounded to Lamont at the University Club twenty years before became law in the Securities Act. This truth-in-securities law required the registration of new securities and full disclosure of information about companies and underwriters. Caveat vendor replaced caveat emptor as the regulatory philosophy. When FDR spoke in favor of the bill, he alluded to Brandeis’s book about the New Haven railroad, Other People’s Money; the law, said Roosevelt, would embody “the ancient truth that those who manage banks, corporations, and other agencies handling or using other people’s money are trustees acting for others.”1
For the House of Morgan, Louis Brandeis was more than just a critic; he was an adversary of almost mythical proportions. In early 1934, Leffingwell told Lamont he should read a new edition of Other People’s Money and blamed Brandeis for the Glass-Steagall provision pertaining to private banks: “I have little doubt that he inspired it, or even drafted it. The Jews do not forget. They are relentless. . . . The reason why I make so much of this is that I think you underestimate the forces we are antagonizing. . . . I believe that we are confronted with the profound politico-economic philosophy, matured in the wood for twenty years, of the finest brain and the most powerful personality in the Democratic party, who happens to be a Justice of the Supreme Court.”2 Despite the separation of powers, Brandeis advised Roosevelt through an emissary—his daughter, Elizabeth Raushenbush. Roosevelt referred to Brandeis by the code name Isaiah.
In 1934, the House of Morgan joined with New York Stock Exchange president Richard Whitney in a zealous lobbying effort to defeat the Securities Exchange Act. Operating from a Georgetown townhouse nicknamed the Wall Street Embassy, they warned that federal regulation would convert the Street into “a deserted village.”3 It was a campaign of such harrowing intensity that despite the anti-Wall Street mood, the bill’s authors were surprised by their victory. One of them, Thomas G. Corcoran, exulted, “Rayburn and I stood alone against all the batteries of lawyers sent by Morgan’s and the Stock Exchange—and we won out!”4 Another Morgan hobgoblin, Joseph Kennedy, snubbed by Jack before the crash, became the Securities and Exchange Commission’s first chairman. Ferdinand Pecora, who worked on the bill, was named a commissioner. The money changers had indeed been chased from the Temple, by the Irish, the Italians, and the Jews—the groups excluded from Wasp Wall Street in the 1920s.
The Morgan partners resorted to hyperbolic criticism when they should have been conciliatory. Jack Morgan inveighed against “absurd” federal deposit insurance and warned of dying capital markets if securities laws were enacted. Faced with the decline of the bank’s power, he emitted an air of subdued defeat. He complained to friends that he was a punching bag for every political propagandist. Like other partners, he felt muzz
led in contesting the New Deal—perhaps the reason why he didn’t join his friend and lawyer John Davis in forming the anti-New Deal Liberty League in 1934. “If anybody lifts his voice in protest . . . he is at once held up to public scorn as a totally selfish, grasping individual, wholly unresponsive to the new thought,”5 he declared. He was an easy butt for critics. He often antagonized reporters by curtly refusing interviews: “I do not think my opinion is worth a damn.” Other times, he would talk and denounce progressive income taxes or take other inflammatory stands. Either way, his popularity declined.
Teddy Roosevelt had been Pierpont’s tormenter, and now another Roosevelt served the same role for Jack. At moments, the Roosevelt family seemed one big throng of Morgan-hating harpies. When somebody mentioned TR, Jack spluttered: “God damn all Roosevelts!”6 He was fond of quoting Richard Hooker, the English Renaissance divine, that to live by one man’s will was every man’s misery. For Jack, that man was FDR, whom he saw as a frightening left-wing charlatan out to destroy his own class. In 1934, he said, “I am gradually coming to the opinion, which I did not have at first, that the United States will probably outlive even the attacks upon it by Franklin Roosevelt and I am particularly satisfied to see the rising tide of opposition to his fierce methods and his wholesale slaughter of reputations.”7 The Roosevelt hatred became obsessive. When Jack developed a heart condition, his grandchildren were instructed not to mention the president’s name in his presence. Other accounts tell of retainers snipping Roosevelt photos from Jack’s morning paper, in deference to the master’s high blood pressure.
Rather than bending with the time, Jack’s conservatism grew crustily defensive. The old swipes at Congress lapsed into ugly diatribes against democracy and universal suffrage. Congressmen were “wild men” who controlled his destiny, while the intelligent, propertied class were subjected to the whims of a fickle, emotional majority. He regarded the New Deal less as a set of economic reforms than as a direct, malicious assault on the social order, aimed at the “extinction of all wealth and earning power.”8 Notwithstanding a 25-percent jobless rate, he wanted balanced budgets and low taxes. “The more I see of the New Deal,” he said, “the more I realize that there is nothing new about it except its name.”9
As chief bank lobbyist, Lamont wasn’t reflexively antagonistic to the New Deal and applauded measures to combat deflation, such as open-market operations (the purchase and sale of government securities) by the Fed. At moments in the 1930s, Morgans supported easy-money policies while hidebound Wall Street fretted about inflation. But even Lamont never presented a reform program that would steal the bank critics’ thunder; Wall Street let its enemies write the new laws.
As was his wont, Lamont used different voices as he spoke to different people. At a private dinner in 1934, he told relief administrator Harry Hopkins, “Well, if the country was willing to spend thirty billion dollars in a year’s time to try to lick the Germans, I don’t see why people should complain about its spending five or six billion dollars to keep people from starving.”10 Here he sounded like a free-spending liberal. Yet in chatting with Chancellor of the Exchequer Neville Chamberlain that year, he praised Britain for overcoming the Depression through sound, old-fashioned policies, not deficit spending. He joked, “I suppose I mustn’t hold you personally responsible for having sent Keynes over and to have made our President spend another Vi billion dollars in public works.”11
The best weapon the Morgan bank had for changing New Deal policy was Russell Leffingwell. With his pure white hair and Pinocchio nose, he looked like a sage or an elder statesman. He was an omnivorous reader, a man of wide vision who could offer cogent opinions on any subject. Leffingwell had the most balanced view of the New Deal and often told friends Roosevelt had saved America from revolution in 1933. He wasn’t afraid to scandalize Wall Street by consorting with the president. Sometimes he used his friend Morris Ernst, a liberal lawyer, as an intermediary to the White House, so that Walter Winchell and other columnists wouldn’t get wind of his influence. Yet even Leffingwell couldn’t make the intellectual adjustment required by the economic emergency. When Roosevelt brought him to the White House in October 1934 to discuss a new public works program, Leffingwell rejected the plan with ritual assertions that it would cause inflation and crowd out private capital from financial markets. Yet deflation was the major problem, and far from being overcrowded, capital markets were empty. Leffingwell was a nineteenth-century liberal and found it hard to approve of many forms of government intervention in the economy.
In many ways, the House of Morgan was a muscle-bound giant, afraid its lobbying efforts would be twisted by opponents into proof of insidious power. By late 1933, the airwaves were filled with demagogic voices that ascribed the Depression to Wall Street-inspired monetary policy. Father Charles E. Coughlin, the radio priest, stoked the old prairie fires once lighted by William Jennings Bryan. From his Shrine of the Little Flower near Detroit, he incited his nationwide audience with tales of a bank that had enslaved America to the gold standard, had long colluded with the British crown, and had forced debt and deflation on farmers. That the same bank had hailed Britain and America’s departure from gold mattered not a whit. In a November 1933 broadcast entitled “Thus Goeth the Battle!” Coughlin dredged up old myths about the House of Morgan: “Who in God’s name ever accused the Morgans of having patriotism to this country? Who doesn’t know that they have been playing the British game for years; that they pay taxes to England and none to America?”
He then evoked a football team of politicians—Morgan stooges all—who had pushed America into the Depression:
And on the sidelines there sits J. Pierpont Morgan—the Knute Rockne of the grand old guard—the scout in the pay of England, the master mind of tax-dodging, the strategist of the financial huddle. . .
There are two powerful generations of Morgans—the elder who sold guns to the Civil War soldiers—guns that couldn’t shoot—and the younger who arranged money for more guns that shot to no avail in the last war. . . . Now where do you stand? Choose between Roosevelt and Morgans! Choose between these anointed racketeers of Wall Street . . . and the “new deal”!12
Father Coughlin would ask his listeners to mail in dollar bills. It later was revealed that he used some of the money to speculate in silver futures through a personal account at Paine Webber.
In these scurrilous attacks by Coughlin, the Hearst press, and other isolationist organs, a powerful theme emerged—that World War I and the Depression had been instigated by the same Wall Street bankers. The argument was that the bankers drew America into the war to safeguard their Allied loans and that the debts and reparations produced by the war led to the Depression, ergo, Morgans and other international bankers were to blame for American participation in the war and for the Depression. For Anglophobic populists, this was a convenient equation. They could exploit discontent with Wall Street to argue against closer ties with Britain, and they could tap isolationist sentiment to press for tougher bank controls. The House of Morgan was the natural target for this attack.
ROOSEVELT was as perplexed and annoyed with the Wall Street bankers as they were with him. He saw himself as saving the patient with radical surgery, not killing him. His talent for experimentation, for latching onto new ideas, was profoundly disturbing to bankers who had lived by sacred, immutable laws. To try to patch up relations, FDR invited Morgan loyalist George Harrison, Ben Strong’s successor at the New York Fed, for a weekend cruise aboard his yacht, the Sequoia. Commenting on the bankers’ mistrust, Roosevelt said ruefully, “They oppose everything I do, even though it is with the intention of helping them.”13
Eager to mediate, Harrison arranged for FDR to address a meeting of the American Bankers Association in Washington. Lamont and Parker Gilbert attended, the first time Morgan partners ever graced an ABA meeting. The effort at mediation only worsened matters. Jackson Reynolds of the First National Bank of New York delivered a keynote speech lauding FDR. But when it was disc
overed that Roosevelt himself had vetted the speech, the bankers felt cheated, and the New Deal-bankers truce was ended. Both sides retreated into a bitter standoff.
Perhaps the most sophisticated foray against the House of Morgan came from those who sought changes in the Federal Reserve System. A little-noticed provision of the Glass-Steagall Act forbade the New York Fed to conduct negotiations with foreign banks. This was Washington’s response to the elaborate connivance between Ben Strong and Monty Norman—a relationship so important for the House of Morgan. The seemingly innocuous measure was one of Washington’s canniest moves against the bank.
Then in 1934, a young Utah banker, Marriner Stoddard Eccles, advised the Roosevelt administration on revisions to the Federal Reserve Act. Eccles wanted to emasculate the New York Fed and shift power to the Federal Reserve Board in Washington so as to purge the influence of Wall Street bankers from the system. Leffingwell was especially incensed at this move because he blamed the 1929 crash on the Washington board’s interference with the New York Fed, which had wanted to raise interest rates and arrest speculation. George Harrison tried to marshal enough conservative senators to defeat the Banking Act of 1935, but his efforts were in vain. Under the Eccles legislation, the district banks lost much of their autonomy; power was now lodged in the seven-member Washington board. In two symbolic steps underscoring the Fed’s new independence, the Treasury secretary was removed from the board, and the Fed, which had operated from Treasury premises, got its own building.