by Prins, Nomi
Jack Morgan’s friend James Stillman, head of National City Bank, had ideas about the war that closely reflected Morgan’s own: though the war presented numerous expansion opportunities, old ties to the British and French banks had to be respected in the process, their countries supported unequivocally. Stillman’s number-two man—midwestern-born Frank Vanderlip, who harbored a grudge against the eastern banking establishment and Wilson for cold-shouldering him during his presidential campaign—didn’t share the same loyalties. He was less concerned than his upper-crust boss and the Morgan partners about the war’s outcome and openly opposed American intervention until 1916, by which point German-American relations were more obviously battered. Nor did he support British demands that National City Bank terminate dealings with German banks, to which Stillman had responded that in victory the British would remember the banks that helped them.
Thus, at the end of 1914, it was National City Bank that opened a $5 million credit line for Russia in return for the designation of Russian purchasing agent for war supplies in the United States. The Morgan Bank remained true to its pro-Allies position and chose not to be involved in such dealings, while Vanderlip was more detached and sought to strengthen National City’s position for whatever the postwar world would bring.
Stillman was less interested in war-related financing than Vanderlip, who believed it would augment the bank’s position as well as America’s global status. To him, it was important to forge ahead in Latin America and other underdeveloped countries while the European financial powers were busy with their war. That Stillman took some of this advice to heart enabled National City Bank to cover much ground postwar, not just relative to the European banks but also to the Morgan Bank. As Vanderlip wrote Stillman in December 1915, “We are really becoming a world bank in a very broad sense, and I am perfectly confident that the way is open to us to become the most powerful, the most far-reaching world financial institution that there has ever been.”15 Vanderlip’s views ruffled Stillman’s feathers because of Stillman’s past collaboration agreements with the Morgan Bank. But they also ruffled the feathers of Morgan and Lamont in a way that would have huge repercussion for postwar peace.
War Thickens
The situation in Europe was deteriorating quickly. On May 7, 1915, a German U-20 torpedoed the starboard side of the British luxury liner Lusitania off the Irish coast. Nearly 1,200 people, including 124 US citizens, were killed. Though the Germans expressed regret for the loss of American lives, it was a reticent regret. Wilson opened secret talks with the German ambassador Count Johann von Bernstorff to mitigate the targeting of Americans.16 But publicly, Wilson issued a harsh note to the German government on May 14, 1915. In response, Morgan conveyed to Wilson his “intense satisfaction of both the substance and the manner of the note to the German Government.”17
Morgan’s renowned support for the Allies led to an assassination attempt at his Glen Cove, Long Island, home on July 3, 1915. Shot twice in the groin, he returned to work a few weeks later, renewed in his vigor to defend the Allies.18 The shooter—a German nationalist who bombed the US Senate reception room the day before—was sent to a local jail, where he committed suicide before being questioned. The incident left Morgan even more paranoid and reclusive than lore about him suggested he was.19
By late summer, the brutality had escalated. On August 19, a German submarine sank another British passenger ship, the Arabic, without warning and with more loss of American lives. In response, Wilson negotiated the Arabic pledge of September 1, in which the German government promised not to torpedo passenger lines without warning.
More money would be needed for the Allies to combat their enemies. On September 25, the Morgan partners formed a syndicate to underwrite a $500 million bond issue for the British and French governments. They agreed to forgo their usual managing fee to support the war effort.20
Wilson remained hesitant about taking the country to war. In early January 1916, he sent Colonel Edward House as foreign policy adviser to London on his third peace mission.21 While there, House met with British foreign secretary Sir Edward Grey to assess the situation. He returned to the United States in early March with the intent to cooperate in an Anglo-American peace plan agreement.
But German-American relations reached a new crisis when a submarine torpedoed an unarmed Channel packet, Sussex, on March 24, 1916. Three weeks later, Wilson presented Berlin with an ultimatum: he would break all relations unless Germany abandoned its unrestricted submarine campaign. Though Germany agreed, the peace was tentative.22
Still, as a result of Wilson’s attempt to maintain a better relationship with Germany, America’s relations with the Allies, particularly with Britain, deteriorated. Stateside, Wilson focused on his upcoming presidential campaign. Before the election, he reappointed Paul Warburg, a man considered sympathetic to his birth country, Germany, as vice president at the Federal Reserve.23
Whereas the last election hinged on policies toward bankers, this one was a referendum on the war. Republican presidential candidate Charles Evans Hughes, along with Theodore Roosevelt and other Republicans, criticized Wilson and his administration for alleged inefficiency and spinelessness toward Germany and Mexico, which was in the midst of a revolution. Wilson accused the Republicans of wanting to take the country into an unnecessary war.
On September 30, 1916, Wilson campaigned before a gathering of the Young Men’s League of Democratic Clubs, with many Tammany men among them, at Wilson’s grand summer residence, Shadow Lawn mansion (now Woodrow Wilson Hall), in West Long Branch, New Jersey.24 He stressed his domestic achievements, most notably the establishment of the Federal Reserve System, “the great banking system by which the credits of this country, hitherto locked up, the credits of the average man, have been released and put into action.” Contextualizing the establishment of the Federal Reserve System as a marquee Democrat accomplishment, Wilson played up the ineffectiveness of the original plan put forth by Republican Senator Nelson Aldrich.
“The heart of the Aldrich plan was a single central bank,” Wilson told the audience of hopeful politicians, “which was susceptible of being controlled by the very men who have always dictated the financial policy of the Republican Party, whereas the heart of our system is not a great central bank, but a body appointed by and responsible to the government and, by the same token, responsible to the people of the United States.”25
But control of financial policy was not as partisan as Wilson claimed. In fact, the bankers were largely unconcerned with the party in power, as long as they could influence it. The larger truth that Wilson hid from his prospective voters was that without Wall Street’s help, war financing would have been impossible. The war could not be fully funded publicly; it needed the support of private bankers. Still, Wilson’s general appeals for greater economic and social justice garnered widespread support from organized labor, Socialists, female voters in suffrage states, and farmers in plains states. Despite early returns indicating a victory for Supreme Court Justice Charles Evans Hughes, California handed the Electoral College majority to Wilson in a narrow victory.26
In the afterglow of his 1916 reelection, Wilson attempted to flex his power in a way he thought could help end the war. He persuaded the Federal Reserve Board to warn American bankers of the dangers to peace posed by continuing to purchase renewable short-term Allied notes and extending the Allies credit in return—he thought if he could cut off the money supply for the warring nations, he could coax them into peace. The British had virtually exhausted their dollar reserves, and Wilson believed he could force the British and French to the peace table more quickly if he cut off their supply of private bank loans. This was no small request of the bankers, and they did not agree to it. There was too much money to be made from their international clients and too much financial ground to corner while their competitors were getting crippled in the war.
In addition to lending money, American banks were stockpiling foreign securities as a result of t
he war. Foreign countries decided it was safer to keep their wealth in America than risk losing funds because of military activities.
Before the outbreak of the war, the total amount of foreign securities held by national banks was $15.6 million. By May 1, 1916, it had increased tenfold to $158.5 million. And between May 1 and September 12, 1916, the national banks increased foreign securities holdings so that the total amount of foreign government and other foreign securities was nearly $240 million.27 This influx of capital greatly enhanced Wall Street’s position as the preeminent global lender and enhanced its ability to reloan funds to other countries and to war-related manufacturers domestically.
Marching Toward War
After another year of bitter trench warfare, Wilson was still convinced that the Allied war effort depended upon supplies from the United States, and he still believed he could use that leverage to force the British and French governments to negotiate peace. The Germans continued with their U-boat campaign, the consequences of which manifested throughout the United States. American ship owners began refusing to send their vessels into the war zone. As goods for Europe piled high on wharves in the United States, growing cries for war rippled across America. It was one thing to remain neutral for moral reasons, but quite another when the war began to hamper the US economy.
Wilson remained skeptical. Still, in his second inaugural address, he declared that the United States would adopt an armed neutrality to protect American commerce without resorting to full-fledged war.28
Morgan remained the key player in funding the war and handling all government matters of loans and bonds for the Allies. Congress had authorized the Federal Reserve Board and the comptroller of the currency to encourage the national banks to participate in a $250 million issue of British Exchequer bonds, the proceeds of which would be used to finance the export of materials to Britain. In addition, on March 25, 1917, Colonel House informed Wilson and McAdoo that efforts “will probably be made” to put the Morgan Bank at the “fore in the event [that] any large international financing is to be done in conjunction with this country.”29
Raising money and waging war continued in lockstep as conditions worsened. A week after Morgan became the government’s de facto wartime bank, German U-boats sank the Algonquin and four other US merchant ships.30 It was the final straw for Wilson. On April 2, 1917, speaking before a joint session of Congress at 8:32 P.M., Wilson presented his decision to declare war. The Senate approved the war resolution on April 4, and the House followed on April 6. At 12:14 on Good Friday, the United States was at war on European soil for the first time in its history.31
The outpouring of approval from around the country was immense. Thousands of letters and telegrams offering services and support poured into the White House. They hit Wilson’s desk mixed with hundreds of other papers awaiting his review and signature.32 Wilson’s private secretary, Thomas Brahany, singled out just one for the president’s immediate attention: a handwritten note from Morgan dated April 4. It read:
We are most heartily in accord with you as to the necessity of the United States assisting the allies in the matter of the supplies of materials and of credits. To those matters we have been devoting our whole time and thought for the past two years. I write to assure you again that the knowledge we have gained in those two years of close association with the allies in these matters are entirely at the disposal of the United States Government at any time or in any way you may wish to use it.33
The Allies had already disbursed more than $2 billion in the United States since the war began. The amount comprised 75 percent of the total amount of the Allies’ purchase of munitions and raw materials in America.34 The Morgan Bank, which was guiding these purchases, controlled war financing to an unprecedented extent.
There was no doubt about the necessity of the president-banker alliance. Each needed the other in this time of uncertainty and to secure their rise in the hierarchy of global power during and after the war. Wilson answered Morgan personally, “I am sure I can count upon you and your associations in this emergency.”35
Three days later, the House Ways and Means Committee met to consider the bond bill.36 The administration had asked Congress for authority to issue $5 billion of government bonds to fund the war with Germany. The request included $2 billion to finance part of the organization and operation of the Army and Navy and the conduct of the war generally, and $3 billion to supply credit to Allied governments, which would help them secure supplies in the United States.
In addition, McAdoo sought assistance from the Federal Reserve banks, national banks, state banks, savings banks, insurance companies, private bankers, and investment bankers to help raise money directly from the population.37 The leaders of the financial community extended the use of their services to place government bonds with the public free of charge; they would find other profitable ways to make use of the new customers who streamed through their doors later.
The United States wound up selling nearly $17 billion in Liberty bonds.38 McAdoo wanted to reach the broadest population of bond buyers possible—from small farmers to businessmen to workers. By doing so, he inadvertently created a new generation of American investors who would later participate in the 1920s stock bubble. McAdoo appointed Wall Street lawyer Russell Leffingwell, his old neighbor in Yonkers, New York, as counsel on the effort—and later made him assistant Treasury secretary in charge of the Liberty bond drives.39 Leffingwell went on to become head of the Morgan Bank in the 1940s during World War II.
In addition to Liberty bonds, big banks went into overdrive to lend money to the Allies. By July 13, 1917, there were fifty-one private banks providing Britain with another batch of loans totaling $234 million. Morgan led the pack with nearly $70 million. Other top lenders included Chase National Bank with $12.5 million, First National Bank with $45 million, Guaranty Trust Bank with $20 million, and the National City Bank with $30 million.40
National City Bank’s Charles Mitchell and Forbes Magazine
The war had another distinctly financial dimension that helped the bankers. It served to push memories of the Panic of 1907 and the Pujo hearings into a receding spot in the national consciousness. Citizens began to view the bankers not as crooks but as patriots in the war effort. Thanks to this sentiment of unity, a space opened up for the rise of a new generation of independent bankers with few ties to the panics and trials of the past, who could use their real or alleged commitment to the cause as a way to bolster their reputations. Men who were not connected by blood to the Morgans or Rockefellers, and who were not members of the Jekyll Island Club or predisposed to side with any particular country, began to vie for spots at the country’s major firms. These men would bring with them a fresh stance on the role of finance that was based more on opportunism than on prior relationships. The result would propagate two types of Wall Street bankers: the ones who worked on the basis of personal alliances and the ones who worked on the basis of profit alone.
One journalist was especially fascinated with documenting these shifts. In September 1917, Bertie Charles Forbes launched Forbes Magazine from offices at 120 Broadway, near Wall Street. With the war escalating, American financial titans stood to become definitive global leaders, and Forbes sought to lead the press in capturing their ascent.
The first issue paid homage to a rising financier from outside the usual family names or connections: Charles Mitchell, who later turned National City Bank into America’s first supermarket financial services firm.
Forbes characterized Mitchell as a “human financial dynamo” and quoted Mitchell as saying of his early career as an investment banker, “I had more nerve than capital.” Mitchell’s first major deal with his firm Mitchell and Company had been selling a block of $300,000 of equipment notes secured by New York harbor scows. Mitchell, an exceedingly persuasive salesman, had the note presold to eager inside investors before it was officially available for sale in the market (not unlike the way shares of Facebook were sold to inside investo
rs before others could buy them publicly in the stock market a century later).
“It was the big game that fascinated him,” wrote Forbes. Fortunately for Mitchell’s ego, National City asked him to join the firm in March 1916. There, he could play that game in a bigger arena. “This was exactly in line with my ambition,” Mitchell said. “There was virtually no limit to what might be accomplished in the way of constructive financing.”
As soon as Mitchell became vice president of National City Bank, he began to fashion the firm into something resembling a private investment bank. This was similar to what Morgan had done, but with a significant twist—unlike his elitist rival, who depended on large corporate clients, Mitchell sought to broaden the firm’s capital base by also appealing to “the Everyman,” as he called individual depositors.41
Mitchell’s decision to open the doors to average citizens, many of whom were still banking at smaller local banks, ushered in the modern age of national banking. World War I helped secure these new customers because in addition to providing them with banking services, National City Bank also pushed the notion that opening an account was a way to support the war effort, peppering its advertising campaign with this notion.
Mitchell’s brash philosophy propelled the firm to success in this new era, as it would grow to become the first bank in the United States to reach $1 billion in assets. Mitchell would become the bank’s president and preside over its extensive postwar international speculation on the back of those new deposits. He would also be at the helm when the market crashed in 1929. In fact, Carter Glass would later say, Mitchell, more than any other banker, was responsible for the Crash. But all of this was years away. For now, Mitchell brought his new ideas to bear to make his bank into an international powerhouse, using the war as a means to that end.
