All the Presidents' Bankers

by Prins, Nomi

  FDR’s banking-oriented ideas were tinged with Wilsonian sentiment. But rather than rely on the Federal Reserve to decentralize control of the banks, he harnessed the power of Congress and the president, and gained support from the people and even most of the bankers, to foster a more stable banking system.

  Lamont’s Landlord

  FDR was a quintessential “Eastern Establishment” man, a Harvard graduate with solid blue-blood family connections, two townhouses in New York, and a mansion overlooking the magnificent Hudson River. He was able to speak the language of the bankers, and he had their respect—even if some of them occasionally criticized him and his party in public.

  What mattered, though, was what happened behind closed doors, in letters, in meetings, on boats. Roosevelt socialized with the bankers. He yachted with them. His presidency broke the chain of leaders from the Midwest and New England who did not grow up in the same social circles as the nation’s most powerful financiers. Even if FDR rebelled against his heritage at times—and though he and his wife, Eleanor, were instrumental in advancing major progressive causes, and he would be called a traitor to his class—his roots were inalterable.

  The presidency had returned to the hands of a New Yorker: a Democrat, yes, but a man more like most financiers than the former three presidents. There would be differences of opinion, but they would come from an origin of similar upbringing. And as such, they would be negotiated to satisfy everyone’s desire to retain their own piece of power.

  FDR’s father, James Roosevelt, had been a successful banker who traveled in the circles of J. P. Morgan and his ilk. The Roosevelts owned a home on the majestic banks of the Hudson River, in Hyde Park, New York, near where many elite industrialist-financiers spent their autumns amid the colorful foliage. The Morgans, Rockefellers, Astors, and Vanderbilts were all friends or neighbors of FDR.

  Then there was Thomas Lamont. His relationship with Roosevelt went back years. In 1915, Lamont had rented the Roosevelts’ New York City home. Lamont and Roosevelt participated in Harvard alumni events together (along with Jack Morgan).51 They had both been editors of the Harvard Crimson: Roosevelt in the early 1900s, Lamont a decade or so earlier. And they had both served and admired Wilson during World War I.

  Once FDR was in the White House, Lamont wasted no time in contacting him about his concerns, writing, “I believe in all seriousness that the emergency could not be greater.”52 He offered a five-page memorandum of initiatives including the Federal Reserve banks’ unlimited purchasing of government securities, which could be used as reserves against Fed loans instead of gold. The more government securities the Fed could take, the more banks could borrow against those securities. Lamont also suggested authorizing the Reconstruction Finance Corporation to deposit money in state and national banks without requiring additional security, and recommended that the government raise $1 billion to fund “urgent necessities.”53 His proposals were all about increasing liquidity to the banks.

  FDR’s Republican Treasury Secretary and Morgan’s Favors

  Roosevelt cleverly harnessed the public’s anger at the bankers, stoked by the unfolding congressional investigations, to promote a progressive agenda. But many of his reforms were designed to help most of the bankers as well as the population.

  FDR appointed Republican William Woodin, president of the American Car and Foundry Company, a leading maker of railway wheels and cars, as his first Treasury secretary.54 Woodin was FDR’s point man for the seven-day national bank holiday that began on March 5, 1933, the day after his inauguration.55 During that time banks were closed for examination by regulators while replenishing their reserves and stabilizing their conditions.

  The appointment presented problems when the Pecora Commission discovered that Woodin’s name was on the Morgan Bank’s “preferred customer list.” The exclusive list represented clients to whom shares of “hot” issues—the most desirable stocks, whose prices would escalate once they hit the public market—were allocated first.56 These high fliers got an early chance to acquire new stock at a cheaper price and with the certainty of a greater profit relative to the public. Charles Mitchell and Al Wiggin were also on the list.57

  In itself, there was nothing illegal about the list, but the disclosure stoked the public’s wrath. Woodin resigned in December 1933, citing poor health.

  FDR’s Secret Meeting with Banker James Perkins

  Just two days after FDR’s inauguration, Roosevelt invited National City Bank chairman James Perkins to the White House for a secret meeting. In a slick preemptive move that history has long overlooked, the men put into action a plan that would lead to the Glass-Steagall Act of 1933.

  FDR reasoned that the population would support any bill that looked like bank regulation, especially if it protected their deposits, and the Democratic Congress would support the president when it came time for a vote. But first Roosevelt secured Perkins’s backing. Perkins was convinced it was better to focus on deposit taking and lending than speculative trading or securities creation. He and FDR were on the same page regarding separating the banks. Both men would win if such legislation was passed: Perkins would retain the support of FDR (or “Frank,” as he called him) and control of the stronger arm of his bank, and FDR would receive policy approval from the nation’s largest holder of customer deposits.

  It was fortuitous for FDR that Perkins had nabbed the helm of National City Bank after Mitchell brought such scandal to the firm. The management shift represented turning over a new leaf, something FDR could exploit by blaming a few bad apples for the overzealous speculation and reckless moves that precipitated the Crash. Perkins, one of the good apples, would support the Glass-Steagall Act as it weaved through Congress.

  The next day, under Perkins’s direction and in anticipation of the bill’s passage, the National City Bank board passed a resolution to split the trading and deposit-taking elements of the bank. The split was publicly announced the following day. Afterward, FDR thanked Perkins for his actions, adding, “It was fine to see you the other day.”58

  The Second Alliance: FDR and Chase’s Winthrop Aldrich

  For FDR, Perkins was just the appetizer. The main course was another Harvard alum and friend, Chase chairman Winthrop Aldrich, who would be a major power player in the political-financial sphere for the next two decades.59

  Following the 1930 merger of Chase National, Equitable Trust Company, and the Interstate Trust Company to create the largest bank in the world, Aldrich ascended to president of the new entity, Chase National, while Wiggin retained his title of chairman.60 But when Wiggin resigned as chairman on January 11, 1933, the board of directors selected forty-seven-year-old Aldrich to take over.61 Aldrich was far more practical, conservative, and globally savvy than Wiggin, who in addition to his personal shenanigans had built a web of bad speculative debt through Chase’s trading subsidiary, racking up losses Aldrich wanted to reduce.

  Aldrich was a man of high class and pedigree: he was John D. Rockefeller’s brother-in-law and the son of Fed architect Nelson Aldrich.62 He was also an avid sailor and a member of the exclusive Seawanhaka Corinthian Yacht Club, which held its monthly meetings at the J. P. Morgan and James A. Roosevelt–founded Metropolitan Club in Manhattan.63

  Aldrich’s ascent at Chase was as much about family connections as it was about his financial and legal acumen. In 1929 he became president of Equitable Trust, which had grown through the 1920s via a series of strategic mergers to become one of the largest firms in America. Winthrop persuaded Wiggin to merge Chase with Equitable at the suggestion of Rockefeller, Equitable’s main shareholder. As president of the conglomerate, Aldrich eventually ousted Wiggin as chairman and took over the helm. (Wiggin’s suspiciously high pension of $100,000 per year would be attacked during the Pecora hearings.)

  Aldrich’s rise had broad ramifications for the banking industry and political relationships; up to that point, it had been the Morgan Bank whose partners had the closest ties to the presidents. Now a wider arr
ay of president-banker alliances was forming that included the heads of Chase and National City. Even the West Coast–based Bank of America would soon be involved.

  As New Deal scholar Thomas Ferguson noted in his much lauded paper “From Normalcy to the New Deal,” “With workers, farmers, and many industrialists up in arms against finance in general and its most famous symbol, the House of Morgan, in particular, virtually all the major non-Morgan investment banks in America lined up behind Roosevelt.”64

  This was not to say that Roosevelt didn’t have support among the Morgan bankers. Indeed, many of them were men he had known for decades. But banking reform presented particular opportunities for Chase and National City, especially, to rise above the Morgan Bank in terms of political-financial power and to raise their banks’ status domestically and globally.

  To achieve this goal, Aldrich and Perkins joined forces to support the Glass-Steagall bill, which they thought would diminish the strength of the Morgan Bank. The bill would force banks to decide between keeping deposits and lending, and maintaining the issuance of new securities. The latter was the means by which Morgan, in particular, had raised money for domestic and foreign lending, which was how it had become so influential. The Morgan Bank had never tried to gather deposits from ordinary investors to back its lending practices to the extent that Chase and National City had.

  Three days after Roosevelt called Perkins to the White House, Aldrich’s views on splitting up banks hit the front page of the New York Times. Vying for the position of the most powerful banker in the country, he vehemently backed the proposed Glass-Steagall Act of 1933, which would force a separation of commercial and investment banking activities. (The idea had been batted around Congress for more than a year; Wiggin had strongly opposed it because he was more interested in the trading side of the bank, where he had made most of his money.)

  In conjunction, Aldrich announced that Chase National Bank and Chase Securities Corporation would become separate entities, effectively enforcing the bill within his own company even before it became law, as Perkins had done. This wasn’t a simple restructuring—the Chase Securities Corporation was the biggest of its kind in the world.65 From an initial financial seedling of $2.5 million in May 1917 it had grown to $37 million in capital by the end of 1932, with $18 million in surplus and profits.66 The securities arm was so powerful that in July 1929 it bought 98 percent of the American Express Company.

  Nor were Aldrich’s moves altruistic. He forced a restructuring of the banking landscape knowing it would be comparatively beneficial for his bank. It would also help restore consumer confidence, which was a critical requirement for raising capital and expansion. As Ferguson later noted, “By separating investment from commercial banking, [Glass-Steagall] destroyed the unity of the two functions whose combination had been the basis of Morgan hegemony in American finance.”67 Aldrich deftly went one step further than even Glass had envisioned. By pushing for the separation of commercial and securities activities for private banks (the original bill had considered merely public ones), Aldrich would make life very difficult for the Morgan Bank.

  The banking community went up in arms over Aldrich’s actions, taking sides depending on allegiance to Morgan or Aldrich. William Potter of the Guaranty Trust Company, which closely collaborated with the Morgan Bank, called Aldrich’s ideas “quite the most disastrous . . . ever heard from a member of the financial community.”68

  Roosevelt was delighted. Not only did he want this split but his foot soldiers, the bankers, were making his job easier. He wrote Perkins and Aldrich letters of effusive appreciation for their preemptive moves.69 Aldrich replied somewhat adoringly: “I find myself lost in admiration of the courage and wisdom you have shown in dealing with the problems created by the immediate banking crisis.”70

  It was useful to FDR that Wiggin and Mitchell, with their speculative natures and thirst for power relative to the presidency, were out of his way. He wasn’t really close to them anyway. The bankers who were left knew how to gain power: by supporting his.

  Fireside Chat on Banking

  On March 12, 1933, eight days after he took office, FDR gave his first “fireside chat” radio address to the nation. The topic was the banking crisis. Millions of nervous Americans—a quarter of whom were unemployed—gathered around their radios to hear his address. These listeners, many of whom had seen their savings go with the closure of their banks, had a faint hope that there was light at the end of the tunnel.71

  FDR truly understood banking. He explained to his listeners that when people deposit money, banks invest it “in many different forms of credit—bonds, commercial paper, mortgages, and many other kinds of loans,” and that the “total amount of all the currency in the country is only a small fraction of the total deposits in all of the banks.” In other words, banks don’t keep a lot of peoples’ deposits in storage for stability.

  At the end of February and beginning of March, he explained, “there was a general rush . . . to turn bank deposits into currency or gold . . . so great that the soundest banks could not get enough currency to meet the demand.” By the afternoon of March 3, many state and local banks had to close to protect themselves, which is why a “nationwide bank holiday” was required: the banks needed time to breathe.

  FDR took care not to blame all the bankers for the country’s economic and credit problems. He knew it was important for Americans to regain trust in the bankers. Instead he said, “Some of our bankers had shown themselves either incompetent or dishonest in their handling of the people’s funds. They had used the money entrusted to them in speculations and unwise loans. This was, of course, not true in the vast majority of our banks.”72

  A skilled tactician, FDR would strengthen the banking system with the help of his friends, the “good” bankers. For he understood something very important: his power and influence would be greater if he had the bankers on his side and solved the banking crisis for the population. The bankers, in turn, realized that collaborating with FDR would help elevate their own financial power later.

  On March 16, Bank of America head A. P. Giannini, who had recently visited with FDR in New York, enthused, “The President is certainly doing great work and I don’t think that even Teddy, in his palmiest days, gripped the imagination of the people as has he in the past few days.”73

  Teddy Roosevelt had taken on the nonfinancial trusts in his day, but he had supported the “money trusts” during the Panic of 1907. Woodrow Wilson had bashed the money trusts in public (never by name), but established a Federal Reserve from which they could be assured support during emergencies. Hoover had tried unsuccessfully to work with the money trusts and secure the financial system at the same time. FDR had figured out how to effect real structural change with support from both parties: key commercial bankers and citizens.

  The Pecora Hearings, Part II

  The Pecora hearings were more probing and public than the Pujo hearings had been, but they became more of a show than a political necessity once FDR got the significant bankers’ endorsement for reforms on the legislative agenda—though they did serve to vanquish, if not jail, the tainted leaders.

  A few weeks after Charles Mitchell testified that he sold his stock “frankly, for tax purposes,” FDR was informed that the former head of National City Bank had been indicted for tax evasion.74 Mitchell was arrested at his Fifth Avenue home on March 21, 1933. As the Pecora hearings continued in the background, the New York papers splashed sensational headlines about his tax evasion trial in May and June 1933.

  On June 22, after twenty-five hours of jury deliberation, Mitchell was acquitted of all charges. The jury agreed with Mitchell’s defense attorney, who claimed that Mitchell’s “intent” was to “abide by the law” and that, technically, he had done that.75 Mitchell wept when the verdict was read. The press had readied bulletin copy announcing Mitchell’s conviction. The atmosphere was supercharged, as crowds milled in the corridors of the federal building.

  (The go
vernment entered a civil claim for the taxes and an adjustment of $1.1 million in back taxes and penalties. Mitchell appealed that case up to the Supreme Court and lost, rendering a final settlement on December 27, 1938.76 Roosevelt wrote the lead prosecutor in the case to congratulate him, saying “the amounts involved are not important. The Government’s successful challenge of the practices to which Mr. Mitchell resorted in this case has served largely to end those practices.”77)

  With that bad apple out of the way, FDR and Aldrich began a series of private conversations and meetings at the White House about the pending banking legislation. Washington insiders knew what was going on, and Aldrich’s political position elevated quickly in the eyes of Congress.

  As Aldrich wrote FDR on March 23, 1933, “Since writing you on March 20th two Senators, members of the Banking and Currency Committee of the Senate, have approached me indicating that they would like to talk with me about . . . banking reform. . . . I have felt myself that it might be more useful to you if I talked with you fully with regard to this matter before talking to anyone else.” Four days later, FDR invited Aldrich to the White House to discuss the matter.78

  Aldrich didn’t just call for the divorce of commercial and speculative banking, a tactical blow for the Morgan Bank. He also demanded reforms regarding interlocking directorships, which were at the heart of Morgan’s business policies. “No officer or director nor any member of any partnership dealing in securities should be permitted to be an officer or director of any commercial bank or bank taking deposits, and no officer or director of any commercial bank or bank taking deposits should be permitted to be an officer or director of any corporation, or a partner in any partnership, engaged in the business of dealing in securities,” he wrote.79

  FDR decided to include Aldrich in his conversation with Senators Carter Glass and Robert Bulkley.80 FDR’s aides concluded that Aldrich should be sent to convince Glass of the necessity for incorporating his view in the Glass legislation.81