by Ron Chernow
The new Bretton Woods bodies were shaped by the interwar lending disaster. The memories of the 1920s were fresh, with over a third of foreign government securities still in default. The World Bank’s decision to finance only meticulously conceived projects was a reaction to this loose sovereign lending. Even so scrupulous a lender as Morgans smarted from a flood of outstanding defaulted bonds—$197 million in Japanese debt, $20 million from Austria, $151 million from Germany. No banker was foolish enough to assert that countries never went bust or that government loans were less risky than commerical loans. Since the World Bank had to tap U.S. capital markets—only the United States had spare cash—it needed to please Wall Street and erase the stigma of foreign lending.
The World Bank’s second president, John J. McCloy, had to safeguard the new institution’s credit and consulted Leffingwell about Morgan’s interwar experience. With his usual style of passionate urgency, Leffingwell told McCloy about the bank’s sense of betrayal over foreign loans that had enjoyed phantom government guarantees—most notably the German loans. McCloy concurred in Leffingwell’s critique of 1920s lending—that politics had gotten confused with finance, encouraging debtors to regard loans as disguised foreign aid. This destroyed discipline and invited excessive borrowing, followed by default.
Considering the defaults on Latin American loans, McCloy asked whether the bank should lend to the region. Leffingwell shot back, “Except for the Argentine, I do not think of any Central or South American country that hasn’t got a contemptible, discreditable record of default to American investors.”4 (Argentina was always a special case: when Juan Perón came to power in 1946, the country boasted a large supply of gold amassed from food exports to wartime Europe; Peron even favored paying off foreign debt to avert bondage to foreign bankers.) If the World Bank made Latin American loans, Leffingwell warned McCloy, it might tarnish the World Bank’s own bonds with American investors. McCloy had greater sympathy for the Latin Americans than Leffingwell did, arguing that bankers had tempted the region into over-borrowing. “The competition that went on in Europe and in Latin America for loans was something to see,” he told Leffingwell. “I know because I was a part of it.”5 Although the World Bank made Latin American loans, it insisted that Peru and other nations first settle outstanding debt with private bondholders. This shored up creditors and prevented Latin American debt from contaminating the bank’s own credit.
Leffingwell thought private lending to Europe couldn’t resume until political turmoil in the area ended. In 1946, Churchill sounded the alarm with his “Iron Curtain” speech in Fulton, Missouri. His fears of European disintegration were spookily analogous to those following World War I, especially with food shortages and poor crops in early 1947. As Under Secretary of State Robert Lovett had warned Lamont, “At no time in my recollection have I seen a world situation which was so rapidly moving toward real trouble.”6 Leffingwell feared a stingy, punitive approach to rebuilding Europe, reminiscent of Versailles. He, in turn, warned Lovett, his friend and Locust Valley neighbor: “Western Europe is drifting toward catastrophe. Penny-wise and pound-foolish, we dribble out little loans and grants, too little and too late, meeting a crisis here or there . . . while we neglect to deal constructively on a great scale with the problem of the reconstruction of western Europe”7 He stressed aid to Britain and France, without strings: “The British and French are not infants nor aborigines to be dictated to by the nouveaux riches Americans.”8
With U.S. investors still skittish about foreign bonds, the World Bank couldn’t cope with the Western European crisis. In December 1947, Truman presented Congress with plans for the multibillion-dollar Marshall Plan to raise Europe from wartime rubble behind a NATO defense shield. “What took place after World War I was the forerunner of the Marshall Plan,” noted McCloy, who had worked on the Dawes loan in the 1920s. “But back then the rehabilitation of Europe was done in a private capacity.”9 The scope of the Marshall Plan—$5 billion for the first year alone—far exceeded Wall Street’s meager resources, still depleted by the Depression, war, and Glass-Steagall.
The internationalism that had always ostracized the House of Morgan in the hinterlands was now irrevocably established in Washington. The war, television, and foreign travel all acted to reduce American parochialism. As the Republicans shed their traditional isolationism, the bank had a party in which it could place implicit faith. No longer would Morgans rise as an alien institution, conspiratorially aligned with foreign powers. If this increased the bank’s political comfort, it also reduced its influence. Foreign governments with better entree in Washington had less need of a Wall Street agent to conduct their diplomacy.
During the early summer of 1947, the Truman administration was in a quandary over whether to include the Soviets in the Marshall Plan. George F. Kennan wanted to invite the Soviets to participate because he assumed they would spurn the offer and get blamed for partitioning Europe. Lovett wasn’t convinced and received permission from Truman to sound out Leffingwell at 23 Wall. According to his son-in-law, after pondering whether to invite the Soviets, Leffingwell told Lovett, “Bob, the answer is very simple. If you don’t ask Soviet Russia, there will be hell to pay. If you do ask them, they’ll tell you to go to hell.”10 Leffingwell managed to convince Lovett where Kennan had failed. As Kennan and Leffingwell predicted, the Soviets later rebuffed the overture.
In the late 1940s, it looked as if Morgan political influence would be limited to such sophisticated advisory roles. As an investment bank before Glass-Steagall, it had floated many government bond issues. As a commercial bank lending its own money, it strained just to eke out postwar loans to England and France. When J. P. Morgan and Company and Chase co-managed two French loans totalling $225 million in 1950, they nearly exhausted Morgan resources. Leffingwell wanted to aid France despite his rather harsh view of de Gaulle: “There is no place in modern France for the general on horseback. De Gaulle can be and is I think a disturbing influence. . . . He has never shown statesmanship, judgment or common sense. In a way it was the very lack of these qualities which made him a great war leader of the resistance.”11
The capital-short House of Morgan had to neglect many former foreign clients and was powerless to help devastated Japan. Clinging to a dated view of England and America as coequal partners, Leffingwell couldn’t fathom Britain’s demotion to a second-class power. In 1947, he wrote his friend T. J. Carlyle Gifford of the British Treasury, “However bungling we may think the governments of the West, it is plain that there can be no hope for democracy and a world of free men except that England be restored and aided to take her place again in the world.”12 To his friend Lady Layton he said, “Nothing matters as much as the British empire and the United States of America and their collaboration.”13 Britain’s diminished place in world affairs would lessen the value of Morgan ties to the British Treasury and the Bank of England. Unlike the 1920s, after World War II the United States no longer deferred to Britain’s financial leadership. When John Maynard Keynes proposed that the World Bank and the International Monetary Fund be based in London or New York, the United States, in a symbolic act, placed its Bretton Woods wards a short walk from the White House.
For Leffingwell, the touchstone of any policy was how it would affect both America and Britain. Like others at Morgans, he was violently anti-Zionist, imagining that agitation for a Jewish homeland would stir up the Moslem world against the British Empire. J. P. Morgan and Company was still a Wasp, homogeneous bank, drawing a large fraction of its people from Ivy League schools and prominent families. Leffingwell championed minority rights but was impatient with minorities who asserted those rights too aggressively. In 1946, his close friend Morris Ernst, a Jewish lawyer active in civil liberties causes, chided Morgans for having no Jewish directors. Leffingwell fairly breathed fire in defense: “Why not be just citizens and Americans and drop all this talk about the rights of Jews. . . . So long as some Jews regard themselves as a racial and religious minority in othe
r people’s countries, and agitate for their rights, I fear they will be disliked.”14 After delivering this churlish judgment, Leffingwell ended with a tribute to Ernst’s own brilliance. Ernst, in turn, urged Truman to consult Leffingwell as an adviser, assuring the president he wasn’t a publicity monger like Tom Lamont.15
If there was a bilious quality to Leffingwell’s thoughts in later years, it probably came from too many political disappointments. Known around Wall Street as the resident Morgan liberal, he was less of a dreamer than a hard, practical man. And he loved the cut and thrust of debate. He thought the League of Nations was a sad mistake, a cover for taking territory from Germany and Austria. He once told Lamont, “The truth of the matter is that this is a predatory world in which some if not all nations go out to take what they want sooner or later by force.”16 In the early 1950s, he believed the Soviets were hellbent on world domination and cited Berlin, the Balkans, Iran, Yugoslavia, and Korea as examples.17 He had little use for disarmament and talked unapologetically about the United States serving as the world’s policeman. He had seen too many dictators.
While deploring McCarthyism, Leffingwell wanted to root out subversives and argued that schools and governments should have a free hand to fire such persons. Later appointed by Truman to an internal security commission headed by Admiral Chester W. Nimitz, he thought civil liberties should yield priority to national security: “I think employee tenure and civil rights generally have to be subordinated to the rights of the nation to defend itself against Russia, which is the enemy of all civil rights and all the freedoms.”18
At the start of the Korean War, during the summer of 1950, George Whitney wrote to Truman pledging the bank’s support. While the two had had a testy exchange during the Wheeler railroad hearings years before, Truman now recognized the need for national harmony. The president told Whitney rather shamelessly that his letter had “brought back pleasant memories of our meeting so many years ago.”19
Despite their support for the Korean War, the Morgan officials grew alarmed in the fall of 1950 when South Korean troops reached the Chinese border and General Douglas MacArthur seemed to yearn for a showdown with the Chinese Communists. This brought out an old Morgan bias against China as well as a fear that the United States would save Asia at the expense of Western Europe. Leffingwell warned Truman that the country shouldn’t go to war “with those miserable 400 million Chinamen. They have been the victims of their own war lords, and of their own misgovernment, and of their Japanese conquerors, and now of their Communist conquerors. We have no mission to kill Chinamen; and to get involved with them will leave us defenseless at home and in Europe.”20 Truman agreed. In April 1951, he relieved MacArthur of his duties after the latter urged the United States to emphasize Asia instead of Europe and take the war to the Chinese mainland.
The House of Morgan shared Truman’s cold war liberalism yet differed with him on economics, where the president reverted to his earlier cynicism about Wall Street. This became clear when Leffingwell met with Truman at the White House in early 1951 to make a plea for market-based interest rates. Since early in the Second World War, the Federal Reserve had pegged long-term rates at 2.5 percent, a policy prolonged after the war with Truman’s blessing. In the early 1920s, Truman had been dumbfounded when his government bond dropped in price after Ben Strong raised interest rates. He didn’t see this as bad luck but as a sinister betrayal of the bondholder, and it made him disposed to fix interest rates. The Fed was now spending billions of dollars to keep prices high and yields low on Treasury bonds. Along with Allen Sproul of the New York Fed, Leffingwell thought this a waste of money and wanted to return to free market interest rates.
Treasury Secretary John Snyder spied in Sproul and Wall Street a cabal intent on returning to the good old days, when the New York Fed and Morgans dictated monetary policy. Truman was eager to stifle inflation jitters during the Korean War and was irritated by what he saw as the bankers’ patent selfishness. He gave Leffingwell a tongue-lashing reminiscent of the earlier New Deal diatribes:
I appreciate your interest in this matter but it seems to me that an emergency is a very poor time for bankers to try to upset the financial apple cart of the nation. The stability and confidence of the nation are entirely wrapped up in the two hundred and fifty-seven billion dollar debt that is now outstanding. . . . For my part I can’t understand why the bankers would want to upset the credit of the nation in the midst of a terrible emergency. It seems to be what they want to do and if I can prevent it they are not going to do it.21
There was something strained in Truman’s cordiality toward the House of Morgan, and at moments his real but usually carefully guarded feelings would flare up again.
WHEN George Whitney became Morgan chairman in 1950—leaving Russell Leffingwell to hover as a wise man during the decade, firing off position papers—J. P. Morgan and Company was a hothouse bank surpassed in size by ten other New York banks alone. It was compactly squeezed into 23 Wall, with Whitney seated at a rolltop desk at the end of the glass-enclosed room along Broad Street, his white hair well-brushed, his elegance unbending, and his tailoring faultless. As publicity man fames Brugger recalled, he was “patrician, reserved, terse in speech and blunt in comment, [his] countenance cool but capable of crinkling with a mischievous grin.”22 The elegance was sometimes belied by a booming voice and a gruff manner.
Whitney was always haunted by his brother’s embezzlement scandal and vowed to pay back every penny, even though doing so markedly thinned his own fortune and that of his heirs. “It was emotionally debilitating to him,” said his grandson George Whitney Rowe. “The reputational disaster was even harder than the money. It cost him a tremendous amount of money near the end of his earning power, but he made every penny good.”23 He was forced to sign away easy, pretax money of the 1920s. Worried about his grandchildren, he asked John M. Meyer, Jr., a later chairman, to watch out for their interests. In the Morgan tradition of nepotism, several Whitney heirs ended up working at the bank. The Whitneys tried not to treat Richard like a pariah, but the subject was so touchy and explosive that family members came to blows over it. Barred from finance, Richard performed odd jobs—he imported Florida oranges at one point—but was mostly supported by his heiress wife, Gertrude.
Perhaps as a result of his brother’s crimes, George Whitney made a fetish of honesty. In 1955, J. P. Morgan and Company and Morgan Stanley teamed up on a General Motors “rights issue”—new shares offered at a discount to existing shareholders. The company wanted to raise $325 million for retooling in order to produce cars with power steering, power brakes, and V-8 engines. Morgan Stanley handled the financial end and J. P. Morgan the clerical end—the typical arrangement of the day. In a massive team effort, Whitney pitched in to deal with crowds. A New Yorker reporter recorded a telling vignette of J. P. Morgan’s Boston Brahmin as recounted by a broker:
While [Whitney] was on duty, a lady stockholder came in to exercise her rights for two shares and handed him a stack of bills that supposedly totalled a hundred and fifty dollars. Whitney, it seems, was too polite to count them in her presence, so he just took them, smiled, shook her hand, and gave her a receipt. Well, after she had left, he counted the money and was flabbergasted to find that it came to a hundred and seventy dollars. Everybody was in a terrible tizzy until it was discovered that the papers hadn’t yet disappeared into the files, so they knew who the stockholder was and could send the overpayment back to her, along with her stock.24
The 1950s would expose the extreme damage done to the House of Morgan by Glass-Steagall in a way not clear during the Depression, when nobody needed loans anyway. As an investment bank, J. P. Morgan and Company had towered over its rivals, while as a commercial bank it couldn’t match the more plebeian banks that courted retail deposits. Nationally it fluctuated in size somewhere between twentieth and thirtieth. It was hard to believe that this small, genteel, somewhat stuffy bank had been the glowering red-eyed dragon of American finance.
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Even in its reduced state, the House of Morgan still fancied itself Wall Street nobility. Employing seven hundred people, it retained the gentlemanly mood of an old Wall Street partnership. It was so tiny that to celebrate staff members who were returning from the service in 1947, the entire staff was able to fit into a dinner dance at the Waldorf-Astoria. George Whitney did the hiring himself, mostly bringing in men with prep-school and Ivy League backgrounds; everybody started in the mail room and rotated upward. Once a year, Whitney would stroll over to Davis, Polk, ask for the year’s legal bill, go back to his desk, and write out a check. Morgan style was simple, British and informal. The bank of the fifties would have still been recognizable to partners of the twenties. At 10:30 A.M., the top twenty officers met around a large table to comment on world affairs and swap news, an exchange that continued over free lunches.
The paternalistic Morgans pampered its people. Employees lived in a warm cocoon and received better pay and longer vacations than anyone else on Wall Street. The bank had a plantation atmosphere. Its dining room was staffed by white-gloved black waiters who ladled out soup from beautiful metal tureens. One newcomer nearly protested when a waiter seemed to drop dirty ice cubes into his iced tea. Then he realized that the cubes were made from tea, so that they wouldn’t dilute the drink. It was that kind of place.