Lords of Creation

by Frederick Lewis Allen

  By 1927 Mitchell’s men were selling not merely bonds and preferred stock but common stock also, thus definitely encouraging the speculative bull market. As the market boomed, the National City Company would accumulate stock by buying it on the market and would sell it all over the country through its salesmen. In 1929 it sold over a million shares of Anaconda Copper—a speculative common stock. It even sold over a million shares of the stock of the National City Bank itself, not only distributing them through its sales force, but trading in them on the market more heavily than any other firm or individual. (Banks were forbidden by law to deal in their own stock—but of course it was not the National City Bank which was doing the trading, but its affiliate.)

  I know of no evidence that the lending or investment of the money deposited in the National City Bank itself was unfavorably affected by the aggressive selling campaigns carried on under Mitchell’s inspiration by the Bank’s alter ego. Yet the fact that the legal device of a technically separate investment affiliate enabled Mitchell and his associates to serve two masters bore interesting results.

  For example, depositors in the National City Bank who wished the advice of the bank on investments would be referred to the City Company. Listen now to a bit of testimony in the Senate investigation:

  MR. PECORA: And if that depositor or customer then followed up that suggestion by calling upon the National City Company for advice as to his investments, it was not an unusual thing for the National City Company to suggest investment in securities that the Company was sponsoring, was it?

  MR. HUGH BAKER (President of the National City Company): That is right.

  Again, when a salesman from the National City Company called upon a small-town banker or investor, it can hardly be denied that he carried with him the prestige which grew out of the size and importance and sound financial reputation of the National City Bank itself. No wonder the small-town banker bought; anything which was good enough for the biggest bank in the country was good enough for him.

  And one must also consider the effect of this double interest upon the officers of the Bank in their relation to the general economic situation. Early in 1929 Mitchell’s bank lent millions of dollars in the call market to stockbrokers in defiance of the wishes of the Federal Reserve Board, which was trying to check the epidemic of speculation. Was his judgment in so doing completely unaffected by the fact that within the preceding four months he had been one of the managers of a joint-account operation in copper stocks; that his National City Company was selling common stocks, and had on hand at that time a large block of shares of Anaconda Copper common; and that his own financial fortunes were bound up with those of the National City Company through the existence of a “management fund,” based on the profits of the Company, from which Mitchell had been given three-quarters of a million dollars as his share of the profits for 1928? Again, as the stock market began to collapse, in the latter months of 1929, Mitchell was one of the most vociferous of all defenders of the existing price-level. Was he motivated solely by his calm banking judgment as the head of a great institution sensible of its responsibility to depositors, to business, and to the country as a whole for the maintenance of economic stability?

  Salesmanship in banking was having its inevitable effect.

  2

  From Mitchell’s National City Bank in Wall Street, New York, we now journey all the way across the continent to San Francisco. For the next tendency in American banking which calls for our consideration is the tendency toward concentration into a few hands of power over commercial banks, and the most picturesque and remarkable example of this was contributed by a San Franciscan: Amadeo Peter Giannini.

  Giannini was a pyramid-builder. There were many striking parallels between his career and those of other pyramid-builders like Insull and the Van Sweringens. Like Insull, he was of foreign origin: though he was born in California, his father was an Italian immigrant. Like Oris Van Sweringen, he was aided throughout his career by a brother with a name as unusual as his: the younger Giannini was named Attilio. Like both Insull and the Van Sweringens, Amadeo Giannini was not born to wealth and his formal schooling was limited.

  At the age of twelve this Italian boy was living on an incredible schedule: going to school by day, and getting up at one or two o’clock each morning to work in his step-father’s produce firm until his school hours began. At the age of nineteen he became a member of the firm. At the age of thirty-one he retired from the produce business, having made enough money to bring him in an income of five thousand a year. But such energy could not long remain quiet: soon he was operating in real estate and serving on the board of directors of a bank, and in 1904—when he was only thirty-four years old—he established a bank of his own. It was in the Italian district of San Francisco, it was designed for the Italian-speaking population, and he called it the Bank of Italy.

  Almost at the outset of his banking career Giannini showed his resourcefulness. In 1906 the city of San Francisco was rocked by earthquake and swept by fire. As the flames approached the little Bank of Italy, the young banker piled his cash and securities into a horse-drawn wagon and with a guard of two soldiers took them to his home at San Mateo, twenty miles from San Francisco, where he buried them in the garden; and then while the ruins of the city were still smoking he set up a desk in the open air down by the waterfront, put up a sign over the desk which read BANK OF ITALY, and began doing business again—the first San Francisco bank to resume.

  His institution prospered and began to open branch offices. Before he had reached his fiftieth birthday there were twenty-five of them, mostly outside San Francisco. Then came the nineteen-twenties and the new era of financial ambition, and Giannini’s banking system began to expand in earnest.

  There is no need to trace in detail the steps by which this Italian ex-produce merchant advanced, but something should be said of the background and method of his expansion program. There had long been a prejudice in America against branch banking—in other words, against the operation of local branch offices by big banks. One reason for this was doubtless the small-town man’s fierce distrust of the “city feller”; another was a very justifiable fear of reckless or unprincipled absentee ownership. It was good, thought the small-town merchant or the rancher or farmer of the neighboring countryside, to be able to call the president of the bank “Ed,” and to know that it was run for the benefit of the community and not for the benefit of some metropolitan capitalist who might loot it for his own distant and devious purposes. There were, to be sure, two sides to this argument: the appalling record of failures among small-town banks in the nineteen-twenties is sufficient evidence that “Ed” was sometimes a fine fellow but an incompetent banker. The popular objection to branch banking, however, had crystallized into many laws and regulations restricting its development. And when a banker began to buy up other banks to convert them into branches, naturally rival bankers would oppose him by fanning the popular prejudice and, if necessary, by calling for new laws and restrictions.

  In the early nineteen-twenties, this prejudice was slowly melting in the warm airs of financial confidence. Farm lands had not fallen in value so fast and so far in California as in other parts of the country, and thus the country banks in that state were mostly prospering well enough to appeal to an aggressive capitalist as investments. Giannini bought and bought—and presently the conservative bankers of the state realized that the little Bank of Italy, upon which they had hitherto looked with a condescending eye, had covered a good deal of the northern part of the state with branch offices and was becoming a menacing power in California finance.

  They rose in opposition. Giannini, hot with zeal for expansion, sought to acquire banks in Los Angeles to serve as branches, and found that there seemed to be none for sale—his rivals had seen to that. Angrily he declared that he would open new branch offices in competition with the existing banks; he was said to have threatened to pepper the southern end of the state with branches so thickly that it wo
uld look like a target fired upon at close range with a shotgun loaded with birdshot. The state banking department stood in his way; Giannini waged a political campaign against it and won. The authorities somewhat relaxed their regulations, and he went ahead faster than ever.

  Ironically, even when the regulations which safeguarded branch banking in California were strictest, they did not prevent Giannini from employing methods of expansion which in the wrong hands could have become very dangerous. The ingenuity of corporation lawyers is usually two or three steps ahead of that of legislators. His principal method was to form holding companies and use their funds to accumulate stock in local banks, which he would then form into branches of the Bank of Italy or of his big Los Angeles unit, the Bank of America. He raised the money to form the holding companies by selling stock to the public, through the security affiliates of his banks as well as through other investment concerns.

  As time went on, he maintained his grip on the growing system by piling one holding company on top of another, Insull-fashion. Like Insull, he paid high prices for what he bought: competition was sharp and he had no choice unless he were to cease his campaign of conquest. As his reputation grew, the price of the stocks of his holding companies shot up, offering a temptation to speculators. His principal holding company during most of this campaign was the Bancitaly Corporation. From the first his loyal fellow-Italians had been eager to purchase Bancitaly stock; presently thousands of other California investors and speculators were attracted to it; soon it was bought and sold in huge quantities on the New York Curb Market as well as on the San Francisco Stock Exchange, professional operators took it up, and little plungers all over the country who hardly knew what sort of business this Bancitaly was engaged in were staking their meager capital upon it. Giannini had become the center of a vast speculative boom, and there was grave danger that the nature of his operations would involve his banks and his whole corporate structure in sustaining this boom.

  Despite this danger, Giannini drove ahead. He seemed to be putting his investors’ money into the purchase of everything in sight. By 1929 the Giannini system included no less than 453 banking offices in California alone. His principal bank in San Francisco—no longer called the Bank of Italy, but naturalized, as it were, into the Bank of America National Trust and Savings Association—had become the fourth largest commercial banking institution in the country; it was bigger than any bank in Chicago, and only three of the giants of New York overshadowed it: Mitchell’s National City, Wiggin’s Chase National, and the Guaranty Trust Company.

  Nor was Giannini content to operate in California alone. He had invaded New York itself, securing control of the old Bank of America, which by 1930 had 32 branches of its own. As if to show that it was not enough to have a banking empire, Giannini and his associates controlled a fire insurance company, a life insurance company, mortgage companies, and public utilities. They controlled a bank in Milan, Italy. And they even owned shares—under the spell of what imperial dream, who knows?—in the Bank of England, the Bank of France, and the Reichsbank. An extraordinary collection of properties for a man who twenty years before had been the head of but a single small bank used chiefly by Italian immigrants!

  The endlessly changing pyramid of corporations through which Giannini ruled over this domain was topped, as you may have guessed, by a Delaware corporation: The Transamerica Corporation. Even a San Franciscan, when in the grip of financial ambition, would turn to that little state on the Atlantic seaboard for his instruments of conquest.

  A strange and wonderful thing was this pyramid. Was there no better way, one asks oneself, of achieving the very real advantages of branch banking—the advantages of an opportunity for skillful management of little banks, for healthy diversification of loans and investments, and above all for the imposition of some sort of order upon a banking anarchy—than by thus piling together under one dominating management a vast number of banks, affiliates, holding companies, stock-selling concerns, real-estate companies, and public utilities, with all the invitations to unbridled irresponsibility and speculative management—in short, to the service of two masters—which such a structure offered?

  Needless to say, when the speculative tide turned, thousands upon thousands of Giannini’s investors suffered grave losses. Parts of the edifice were seriously affected. Giannini almost lost his control of the whole system to his Blair allies in New York. As it was, he lost his New York bank, the Bank of America; it was absorbed by Mitchell’s National City. As the cream of earnings ran thin, the price of Transamerica stock slid from a 1929 high of 67⅜ down to a 1932 low of 2½. That the whole structure did not utterly go to pieces and that Giannini’s California banking system did not collapse—except insofar as the entire banking system of the United States collapsed—was probably due to the fact that Giannini himself had not become thoroughly imbued with the speculative spirit, and that personal greed had not entered into his program as into the programs of some other pyramiders.

  When the stock of his Bancitaly Corporation had gone far too high in 1928, Giannini had not hesitated to protest that it was not worth so much. When he had given a million and a half dollars to the University of California, it was reported that this sum constituted the greater part of his personal fortune. Not caring overmuch for money for its own sake, he was able to resist the invitations which his methods of conquest extended to him, and in large degree to prevent his associates from accepting them. With the aid of able assistants, including some former Canadian bankers, he saw to it that his bank’s management remained within bounds. What chiefly impelled Giannini was a sincere belief in branch banking, coupled with a fervid ambition: a royal lust like that of the Roman empire-builders—and of his compatriot Mussolini—for the glory of conquest. He loved power, loved victory; and the way to power and victory, for a modern Caesar of the financial world, lay in the use of the corporate devices of the time, and above all of the corporate pyramid.

  The impulse to combine banks into systems and groups and chains was not confined in the nineteen-twenties to Amadeo Giannini. It was widespread. By the autumn of 1929 there were 273 chains or groups in operation in the United States, involving 1,858 banks and over eighteen per cent of the banking resources of the country. The vicissitudes of some of these other chains and groups show all too well the dangers inherent in holding-company control of banks. In Detroit, for example, two big holding companies took charge of many of the leading banks. Some of these banks had invested too large a proportion of their depositors’ funds in real estate, or had otherwise succumbed to the lure of a bigger and better speculative future. At the onset of the depression in the nineteen-thirties, the profits of these banks naturally began to fall off, and the condition of many of their investments became progressively worse. Yet they were compelled to go on paying dividends to the two holding companies—the Guardian Detroit Union Group, Inc., and the Detroit Bankers Company—in order that these holding companies might in turn continue to pay dividends. Had the dividends been earned? No matter: they must be paid. What happened later, everybody knows. It was the downfall of these Detroit banks, early in 1933, which precipitated the collapse of the entire banking system of the United States.

  But during the seven fat years no such crises were putting the holding-company method of control—or any other method—to the test. Mergers or combinations of big banks were taking place not merely in California and in Michigan, but in Chicago and conspicuously in New York. The National City Bank took unto itself the Farmers Loan & Trust Company and thus became a two-billion dollar institution, to the accompaniment of enthusiastic applause. The Guaranty Trust Company took unto itself the Bank of Commerce, thus approaching the two-billion-dollar mark, if not quite reaching it. The Chase National absorbed the Equitable Trust Company, thrusting ahead of the others. The thrill of bigness had become as irresistible to banks as to the planners of twelve-hundred-foot skyscrapers. Bigness and power: they enthralled Mitchell of the National City and Wiggin of the Cha
se as they enthralled Amadeo Peter Giannini, the one-time produce-merchant’s boy from the Italian district of San Francisco.

  3

  As you approach almost any of our American cities by air, you see this city first as a large irregular brownish discoloration upon the landscape, overhung by a pall of smoke. But presently you notice at the center of the discoloration a protuberance: a jagged cluster of whitish pinnacles. That cluster of pinnacles—the towering office buildings, hotels, and apartment houses at the center of the city, where land is at a premium—is in large degree a surviving outward manifestation of one of the two great speculative manias of the nineteen-twenties. One of these manias, of course, was for speculation in stocks: a phenomenon to which we shall give due consideration shortly. The other was for real-estate speculation.

  Someone has said that the history of the United States is the story of a gigantic land boom. By the nineteen-twenties the frontier had long been closed, but habits are slow to die and the boom continued. First it passed like a ravaging disease through the farm lands of the country, leaving behind it, after 1921, a trail of debt, wrecked banks, and distress. In 1924 and 1925 it descended upon the State of Florida; here the characteristic symptom of the epidemic was a delusion that there was an unlimited supply of millionaires and other idlers prepared to live for months of the year in Venetian luxury, playing golf and polo and rushing about expensive lagoons in speedboats. By the time the Florida boom collapsed—with the inevitable result of ruined speculators and dying banks—it had given impetus to a whole series of summer-resort, winter-resort, and suburban boomlets in other parts of the country, similar to it in frenzy, absurdity, and after-effects. But meanwhile the fever of real-estate speculation had entered the phase in which it was to do the greatest damage to the larger banks of the country. It had attacked the centers of American cities.