by Prins, Nomi
Two weeks later, J. P. Morgan & Company invited the business press to 23 Wall Street to give an official statement. The bankers were dignified in their defeat, though they had a workaround that would enable them to retain much of their way of doing business. Thomas Lamont, standing beside George Whitney and Harold Stanley, announced the resignation of five partners. Upon leaving the Morgan Bank, they would assume the job of setting up Morgan Stanley and Company—a separate securities underwriting entity that would be run by men with long-term blood and professional ties to the Morgan Bank.48 “We believe that the members of the new organization will be able, with the ample experience which they have heretofore had, to serve usefully the investment interests of the community,” Lamont said.
On September 16, 1935, the new investment bank opened its doors on the nineteenth floor of 2 Wall Street, overlooking Trinity Church at the head position on Wall Street. Jack Morgan’s son, Henry, one of the firm’s founding partners, was aboard a transatlantic liner returning home. In a sign of changing times, the firm’s president, Harold Stanley, chose to advertise its opening rather than issue an official press release.49
The Morgan Bank had won a small battle in the war for Wall Street supremacy by creating a securities firm populated by Morgan partners and progeny that would act in concert with its parent firm. But Aldrich had won the war.
The New Deal: Phase II
Though the first phase of the New Deal had improved economic conditions somewhat, the country hadn’t returned to prosperity. In fact, it was faltering. Broad despair turned to anger. Violent protests and strikes swept the country. This was the era of militant industrial unionism, sit-down strikes, factory occupations, and the rise of the Congress of Industrial Organizations. Industrial businesses were barely hiring, or not paying enough when they were. The far left called for greater reforms than Roosevelt had passed. The right attacked government and regulatory bodies and agencies as being too large and intrusive. People demanded a living wage and nationalization of the banks, if only to make ends meet and have better access to credit.
In the second phase of the New Deal, FDR introduced a safety net for retirees and the disabled through the Social Security Act, which also created the unemployment insurance program as a partnership between the federal government and the states.
In addition, FDR instituted aggressive tax hikes on the wealthy. Under Hoover’s Revenue Act of 1932, the marginal tax rate for the top bracket had jumped by one of the highest amounts in US history, from 25 percent to 63 percent. But tax rates across the board had risen as well, as Hoover attempted to thwart the effects of the Great Depression on the government’s budget without being seen as disproportionately taking from the upper class. His attempt failed. The widespread economic devastation didn’t allow for even the marginal contributions of the wealthiest Americas to properly fund the ailing country’s budget, and the wealthy were consuming less because their investments had soured. The middle and poorer classes suffered because of a more acute lack of jobs and income.
FDR raised this top bracket rate to 75 percent in the Revenue Act of 1935. The more progressive tax initiative was dubbed the “wealth tax” or “class tax,” and passed in August after bitter congressional battles. (The Revenue Act of 1942 would raise this tax rate on income above $200,000 to 82 percent and increase the top rate of corporate taxes from 31 percent to 40 percent to help fund the war. The Individual Income Tax Act of 1944 went further, raising the top-bracket tax rate to 94 percent.)
It wasn’t so much the income tax elements of the Revenue Act of 1935 that riled bankers; it was the higher undistributed profits tax rates from the second phase of the New Deal that served to convert friends of FDR to enemies. By late 1935, FDR’s popularity among even his business class advocates was fading. Businessmen accused him of interfering with free enterprise. With the 1936 election in the wings, anti–New Deal groups sprouted up everywhere. The people FDR had grown up with, and who had supported him in his last election against Hoover, and for the most part in his quest to stabilize the banking system and US capitalism, were now accusing him of going too far, of being too radical, of being—now that his policies no longer suited their needs for banking stability—a “traitor to his class.”
The Mid-1930s Economy: 1934–1936
The jobs crisis was one of the most dire and deeply entrenched problems of the Great Depression. The unemployment rate leapt to 15.9 percent in 1931 and to 23.6 percent in 1932. Despite the New Deal’s efforts, it averaged approximately 20 percent between 1934 and 1936. Average family income in the mid-1930s stood virtually unchanged from the World War I period. Though wages for trade, finance, and services had risen around 30 percent, as had wages for government jobs (with public utility wages up 41 percent due to FDR’s programs), these were false signals that the economy was on the mend. It was finding steam thanks to a combination of more speculative activities and federal stimulus for federal jobs. This contributed to higher growth rates but not necessarily higher living standards or much of a budge in broader unemployment at first. Helping the population somewhat was low inflation. Food prices in the mid-1930s were approximately 30 percent lower than they were during World War I, and thus inflation policy was important to FDR and the bankers, who would disagree on how best to handle it.
But banks were still sitting on their money, and their reluctance to lend inhibited smaller businesses from hiring, let alone thriving. Beginning in 1934 the financiers used the more stable banking system that had been engineered by the New Deal as a platform upon which to drive up the volume of stock speculation, and with it stock prices. The confidence this exuded and the media attention paid to it combined with New Deal stimulus to make the country appear to be exiting the Depression. This rise proved unsustainable, and the market and the overall economy would dip again in 1937 and 1938, until it became more substantively elevated by war financing efforts and related employment opportunities for those not in combat overseas.50
Still, by early 1936, the second part of FDR’s New Deal (particularly his jobs programs) seemed to be working to some extent, as the unemployment rate dropped to 16.9 percent. Even though that was still high, six million people had returned to work, corporate profits were rising again, and Detroit was rolling out almost as many cars as it had done before the Crash. A bulge in government jobs and the rising number of women in service jobs, combined with lower goods prices, appeared to be helping the economy for the time being.
Hitler Storms Through Europe
Since the end of World War I, public sentiment had staunchly favored an isolationist stance on foreign policy, not only because of the massive economic problems at home but also because of a growing perception that the war had been waged for profit. This was thanks in large part to North Dakota Republican senator Gerald Nye’s work as head of the Special Committee on Investigation of the Munitions Industry, established in April 1934.
In January 1936 Lamont, George Whitney, and J. P. Morgan Jr. were hauled up to hearings of the committee. Politically motivated by isolationists to thwart FDR (and what was construed as the bankers’ thirst for another war), the hearings ended up putting to rest the charge that adopting an internationalist policy toward financing the Allies had dragged the United States into World War I.
Nye’s committee examined the relationships between firms like the Morgan Bank and King George V of England to determine whether their financial agreements had created World War I.51 But when Nye claimed that President Wilson had lied to the Senate Foreign Relations Committee about secret Allied treaties during the war, the old guard in the Senate rallied to protect the former president’s good name. Funding to Nye’s investigation was cut off.52
Despite ninety-three hearings and more than two hundred witnesses, including Jack Morgan and Pierre du Pont, chairman of chemical company giant DuPont, the committee failed to nail down any hard evidence of a widespread conspiracy to enter World War I in order to profit off munitions sales.53 Still, Nye’s penchant for ey
eball-grabbing headlines did its job. His antics helped sway public opinion against support for US involvement in another major conflict.
Across the ocean, Fascist armies were marching across Europe and Africa. On March 7, 1936, Hitler’s Germany seized the Rhineland in violation of the Treaty of Versailles and the Locarno agreements. Benito Mussolini’s Italy annexed Ethiopia on May 9, 1936.
FDR saw the signs for exactly what they were. On March 16, 1936, he wrote his German ambassador, William Dodd, “Everything seems to have broken loose again in your part of the world. All the experts here, there and the other place say ‘There will be no war’ . . . but as President I have to be ready.”54
The Americans who still remembered World War I reverted to an even sharper isolationist stance regarding another war. Congress quickly passed neutrality laws to prohibit FDR from taking sides from a foreign policy or economic perspective. Wilson’s initial reaction had been to declare neutrality without a congressional law, and shortly thereafter bankers and businesses got involved as they saw fit. The same thing would eventually happen with FDR, but it would take more time and maneuvering.
As the presidential election loomed, fresh aid for FDR’s campaign came from A. P. Giannini, who continued to lavish public support on FDR. This time, FDR responded personally. On May 7, 1936, he wrote, “In the midst of so much misunderstanding and misinterpretation it was decidedly reassuring to hear your radio address.”55
In late June 1936, Giannini’s endorsements traversed the West Coast newspapers. The San Francisco News ran a glowing headline, “A. P. Giannini Gives Support to Roosevelt.” The Herald Express of Los Angeles wrote, “A. P. Giannini favors Roosevelt Re-election.” An editorial in the Los Angeles Illustrated Daily News noted, “Although Mr. Giannini has long been one of the few big bankers in the Roosevelt New Deal camp, this evidence that he intends to stay there despite pressure is considered of high political importance.”
Giannini’s alliance proved crucial to FDR, who needed the California vote. Something about the way that Giannini had grown his bank to be more citizen-oriented than the New York banks, combined with his support for the New Deal, gave his words weight and helped improve his stature as the people’s banker. By late 1936, the Bank of America’s profits were up 38 percent, showing that support for FDR could be lucrative as well.56
FDR’s opponents remained focused on the negatives and labeled the pre-election economy a “Roosevelt recession” (it would become a full recession in 1937–1938). Leffingwell wrote Roosevelt to persuade him to reduce his antibanker rhetoric and interventionist policies. In a September 8 letter to FDR, Leffingwell, a libertarian Democrat (back then they were called “liberal”), wrote, “It was natural at the moment of the crisis in 1933 for the people to demand scapegoats. . . . It hurts our feeling to have you go on calling us money changers and economic royalists. . . . What such liberal democrats as I would like to hear from you is that you do regard some of the measures of the last three years as transitional and emergency measures; and that you do mean to use your second term to strengthen by your own example the prestige—now sadly lowered through the world—of government by democratic methods.”
Some bankers, including Aldrich, had acquiesced to the marginal tax rate hike on the wealthy as preferable to increasing the nation’s debt to sustain the economy. But Leffingwell felt that “tax policies which are punitive or directed to some ulterior social objective rather than to revenue-producing should be avoided.”57
FDR’s Timely Victory
Despite Leffingwell’s overtures FDR deployed the same strategy he used to win his first election: speaking out against big business and the elitist money types. “Government by organized money is just as dangerous as Government by organized mob,” he said.58 His political acumen proved impeccable. He won reelection by the biggest electoral margin victory since James Monroe ran unopposed in 1820, capturing 98.49 percent, or 523 electoral votes, the largest number of electoral votes ever recorded, and 60.8 percent of the popular vote. (Johnson would supplant this record in the 1964 election.)
Despite the victory and public support for the New Deal, FDR did lose some major fights with the Supreme Court about certain programs. The Court declared much of the National Industrial Recovery Act unconstitutional in May 1935, a month before the program was set to expire. Seven months later, it declared the Agricultural Adjustment Act unconstitutional through a narrow interpretation of the constitutional clause empowering Congress to regulate commerce.59
When the Supreme Court ruled against a New York law providing a minimum wage for women and children in June 1936, FDR retaliated by trying to pass a bill that would ostensibly force justices to retire at age seventy. After that point, and following FDR’s landslide victory, Supreme Court Justice Owen Roberts began siding with the president, and the “court-packing” bill was dropped.60
FDR’s win was well timed, for the end of 1936 gave way to a recession that would last through the next couple of years. The stock market dove considerably, the number of business failures and bankruptcies rose, and two million more people lost their jobs. As a result of the downturn, FDR’s plans and policies would come under attack by the bankers for strangling the economy and by liberals for not going far enough.
FDR had an ally at the Morgan Bank with respect to the war, if not his domestic policies. An eager Thomas Lamont was thrust back into his dual role as international banker and diplomat. There was no way to deal with a potential war situation from a stance of isolationism, he believed. He took matters in his own hands, keeping FDR informed along the way.
Lamont traveled to Rome on April 17, 1937, as a step in his joint peace-keeping and client-keeping diplomacy. During this trip, he sought a private meeting with Mussolini to persuade him to stay on the side of Britain, France, and the United States. Mussolini saw Lamont the following week for a private “courtesy” meeting.61 But the results of that rendezvous would transpire in manners far from what Lamont hoped.
The US Economy Wobbles
At home, news of an impending European war unleashed a bout of capital speculation. On November 10, 1936, the stock market hit a high of 144.44 before receding somewhat by the end of the year. Early in 1937, global rearmament programs and related private bank financings and reinvigorated speculation pushed up prices. Prices for steel and other metals commodities rose, as did shares of industrial companies on the stock market.
The bull market that lasted from 1932 to 1937 was the longest in US history at the time, belying a job-challenged, wage-challenged economy. Banks began to loosen their lending purses for corporations in 1936. The war would eventually boost employment, but there would be bumps along the way to recovery.
Soon after the stock market reached a high of 142.93 on March 8, 1937, FDR and Treasury Secretary Henry Morgenthau became worried about inflation. The word from Washington was that such a market boom was unwelcome. As the Federal Reserve increased bank reserve requirements in an attempt to tighten monetary policy, FDR issued a statement against speculators he believed were pushing up metals prices, indicating that the government might cease purchases from the capital goods industry unless prices were contained.62 To him, the issue was less about interest rate policy, which the bankers wanted loosened, and more about the dangers to funding a possible war effort and to the population of speculators driving prices up.
Prices remained stable until August 1937, when Charles Gay, who had replaced Richard Whitney as head of the New York Stock Exchange, publicly denounced “over-regulation in the securities markets” and spoke against the federal government surtax on undistributed profits. His speech set in motion a major sell-off. By November 24 the market had dropped 43 percent for the year, falling to 82.07 (it had been climbing each year since hitting the Great Depression low of 33.98 on July 8, 1932).
By the winter of 1937, US bankers and businesses were struggling again, and the US economy was faltering. In his January 1938 address, National City Bank chairman James Perkins apol
ogized to his shareholders for the weakening economic conditions. He said, “It is a disappointment to everyone to find that we come to the end of the year with our business activity as low as it was at the end of 1934.” He blamed this on the fact that the government had stopped what he referred to as “pump priming,” or stimulus, even though private industry wasn’t able to take up the slack because the Fed was restricting funds to the banks.63
During the early Depression years, GDP had decreased significantly: by 8.5 percent in 1930, 6.4 percent in 1931, and 12.9 percent in 1932. The bottoming-out period ended in 1933, with GDP decreasing just 1.3. GDP rebounded over the middle part of the decade, showing a 10.8 percent increase in 1934, an 8.9 percent increase in 1935, and a 12.9 percent increase in 1936.64 But by 1938, unemployment shot up again to 19 percent, not too far below the 1934 level of 21.7 percent.65 GDP fell by 3.3 percent from 1937 to 1938.
Capital “Lockout”
As the recession set in, bankers found themselves back in the spotlight for restricting capital. On January 27, 1938, at an address at the University of Pennsylvania’s bicentennial campaign, Lamont spoke out for his kind. He denied that capital had “gone on strike,” thereby causing the current recession. Instead, he characterized it as being “locked out.”
He might have been traveling to Europe on business-tinged diplomacy missions, but now Lamont publicly turned against FDR’s domestic policies. He was one of a half-dozen leaders representing banking, industry, and labor who had met with FDR that week to discuss the matter. He had concluded that much of the recession resulted from five years of a “general attitude of distrust toward business” and “extreme legislation, which, in aiming to cure evils, had placed obstacles in the path of progress” and “crippled the natural interplay of economic forces.” He called for a spirit of “good will” between government and business.
