All the Presidents' Bankers

by Prins, Nomi

  Commercial banks sold and redeemed war bonds for their customers directly through deposit accounts. Bankers proposed ways to structure the bonds so that they would be most appealing to American citizens. The government subsidized the banks in the process, paying banks’ servicing fees on the bonds at an average of twelve to thirteen cents on the dollar.2

  As a result of National City Bank’s dual capacity of distributing bonds and retaining deposits for domestic and foreign clients, its new chairman, Gordon Rentschler, had a sense of financial maneuvers that could portend military ones in Europe before even the Fed or the White House did.

  Rentschler succeeded James Perkins at the helm of National City Bank in July 1940 after Perkins died of a heart attack following dinner with US Steel magnate Arthur Anderson. Perkins had run the bank during the Depression in the wake of the scandals of his predecessor, Charles Mitchell. He had been instrumental in helping FDR push through sweeping banking reforms.3

  Another Eastern Establishment fixture, Rentschler was a Princeton graduate who used the escalating war to steer his bank toward the epicenter of America’s money-raising effort, coordinating his efforts with Morgenthau. Like his contemporaries, he served as a director at multiple companies that benefited from the reorientation of the war economy, including Union Pacific, Anaconda Copper, National Cash Register, and Consolidated Edison.4 (His brother, Fred, was the head of United Aircraft, which made planes for the French and British.)

  Another National City man would insert himself into the war bond and postwar financial reconstruction efforts with even more vigor. Two years before he died, Perkins enlisted his close friend Warren Randolph Burgess to become a vice chairman at National City Bank.5 The fiscally conservative Burgess, former vice president of the Federal Reserve Bank of New York and head of the American Bankers Association, did much to tailor the symbiotic relationship between the government and big private banks during the war effort. Burgess’s position as one of the top three men at National City Bank provided him access to private capital as well as a public role in overseeing domestic policies and foreign practices.6

  When Burgess started at National City Bank, Treasury Secretary Morgenthau, an old friend, opened an account there with a $5,000 deposit as a vote of confidence. In July 1940, Burgess approached Morgenthau to discuss the government securities market, which was behaving quite well under the circumstances but which he feared could falter if the government raised too much debt too quickly. He told Morgenthau he’d been giving “a good deal of thought to what may occur if we get worse news from abroad and what might be done about it.” He was especially concerned about repealing the president’s power to devalue the dollar through raising more debt, though he realized that Morgenthau’s allegiance would be with FDR on that score. Still, he suggested that “if the authorization to raise the debt limit were accompanied by a proposal to limit other expenditures,” then the government security market would fare better.7

  Lamont, Leffingwell, FDR, and War

  After FDR won the presidency for the third time on November 5, 1940 (though with a lower popular and electoral percentage than the prior election), Morgan partner Russell Leffingwell was quick to congratulate him. But like many bankers, he had not supported Roosevelt during this election. “I was not for a third term,” he wrote FDR in the spirit of directness that underscored their relationship. Pushing his candor, he added, “I know that no man can really want to carry the burden another four years in these hard times.” But as a matter of civic duty, he promised to do anything he could to help FDR.8

  A wise FDR saw beyond the less tactful elements of Leffingwell’s intentions. Knowing that Leffingwell and his bank’s help would be crucial in the coming years, he replied, “I appreciate the spirit of helpfulness in which you write.”

  Augmenting his colleague’s positive sentiments, Lamont got down to the business of offering FDR unequivocal support. On December 18, 1940, he phoned FDR to say he was “immensely pleased with the president’s’ approach to helping the British, and getting away from the dollar mark.”9 The tensions that had accompanied the banking reforms were over for now. Just before Christmas, Lamont visited FDR and confirmed, “Whatever differences there may have been about domestic affairs, I and my colleagues are heart and soul with you for unlimited material aid to Britain and for national defense.”

  The old articulate diplomat in Lamont, who had advised Wilson on how to garner the public’s backing for the League of Nations two decades earlier, suggested similar tactics to FDR before the president’s December 29 radio address. Speaking on behalf of his British compatriots, who he believed could stop the contagion of the war with enough support from the United States, Lamont said Americans needed to be told “that you will not go to war, but you cannot promise that Hitler will not make war upon us . . . that the first step in national defense is to give unlimited material aid to England.”10 The Morgan bankers’ and FDR’s strategies were identical.

  National City and War Bond Bucks

  For this war, the Morgan Bank would not be operating alone, controlling other banks’ involvement from atop the American banking hierarchy. FDR had changed that game. When the National City Bank and Chase backed the Glass-Steagall Act in 1933, they also severed themselves from the old Morgan “inner group” mentality, which had prevailed for the first third of the century. All the major firms would unite behind FDR and on behalf of America’s position in the war, but they would also be competing more aggressively for war-related business behind the scenes. They would choose different paths; the Morgan Bank would pursue the old path of leveraging government relationships to secure financing. The commercial banks would favor working through deposits and war bond distribution. Both types of banks would retain government securities equal to one-third of their overall assets by the war’s end.

  At noon on January 17, 1941, Rentschler addressed an august gathering at National City Bank’s 129th annual stockholders meeting. There, he proclaimed to a roomful of pensive, silk-suited men that the bank was actively participating in the financing of the national defense program—not just by distributing war bonds but also through enhanced lending to private industry.11

  As he told the crowd, the war’s “implications for this country have become our primary national concern.” He too was committed to support his president and his country. His bank had two major roles: “to safeguard the funds entrusted to us” and “to give our utmost aid to the national defense program.” Gone was the recklessness and heady talk of prosperity linked to the stock market that had characterized 1920s banking; the 1940s were about prudency and patriotism.

  Nevertheless, expansion remained a key strategy for National City Bank. The bank was now operating branches in Spain, the Far East, Belgium, France, and England. And as Rentschler stressed, “in no case have we as yet incurred any losses of consequence.” He informed the group that his bank had cooperated with the government to design a new form of bankable contract for emergency plant facilities, and that the bank was among the first to make loans on such contracts. Those contracts made it possible for private banks to finance a greater portion of the defense effort.12

  The war was already proving a boon to National City’s global business. The bank’s deposits had risen 25 percent to $2.9 billion in 1940, representing nearly half a million domestic accounts, as people rushed to open new accounts through which to purchase war bonds as a means to support the war without spilling American blood. National City had also extended $1 billion of new loans in the past year, partly for war-related manufacturing plants.

  The firm’s South American branches were showing a substantive increase in activity, too. This was largely, Rentschler explained, “due to diversion of business from Europe.” This war-related shift made way for a new core strategy; for decades to come, the bank would continue to press for “more extensive economic relations between the two continents.”13 Rentschler’s promise on that accord came to fruition; National City became the most active US ba
nk in the region during and after the war.14 In the wake of the war, it extended its global presence more quickly than any other American bank.

  Three days after his colleague addressed the shareholders, on FDR’s third inauguration day, W. Randolph Burgess introduced Allan Sproul as the new president of the Federal Reserve Bank of New York at the midwinter dinner of the New York Bankers Association in the Hotel Astor. It was a solemn occasion, given the circumstances. He said, “On one major objective the people of the nation are united as seldom before. It is the defense of our democracy. In that task the president can count upon the loyal support and cooperation of the bankers of this state.” At the same dinner, Sir Louis Beal of the British Purchasing Commission warned, “The longer the war . . . the more will Britain be in need of reconstruction. . . . How much we shall then be able to buy from you . . . [depends] on the extent we retain our position as creditor nation.”15

  Wartime financing provided banks a boost in less obvious ways. First, the Federal Reserve made bank reserves readily available to banks at low rates, which enabled them to increase their assets by as much as 50 percent throughout the war. Additionally, holding a mix of securities heavily weighted in Treasury bonds (with 35 percent of US government debt issued remaining on their books) gave them the appearance of better health.

  With such strong federal backing, investors and banks could borrow against their Treasury securities holdings to purchase new issues or more Treasuries. The Federal Reserve encouraged the practice because it helped bolster the price of government securities. Both the government and the banks benefited. As John Wilson wrote in The Chase, this “pyramiding of security purchases produced the major increase in Chase’s loans, as it did with loans of all major banks.”16

  The ability to hold and use extra Treasury bonds as collateral upon which to extend lending more brought America and its major banks back to life. Bankers stood ready to resume their international expansionary goals, picking up the slack that would be created as European banks succumbed to chaotic war conditions.

  Infamy

  Bankers like Lamont, Morgan, and Aldrich continued to back FDR as he considered whether to join the war, while the American population and press waffled between isolationism and horror at the Nazi atrocities.

  On October 2, 1941, Aldrich found a way to put his weight, and that of the Chase bank, behind US intervention. Speaking as head of the British War Relief Society in America, he requested and received immediate approval from the White House for his organization and similar ones to receive the same status as the Red Cross, “which is not hindered from giving aid to any organization of the country affected.”17 The provision would allow private banks like Chase to profit from extending aid.

  By late October 1941, as talk of a British invasion of the continent escalated, Lamont was pressing foreign policy ideas on FDR. “I can’t help wondering,” mused Lamont, “whether Mr. Churchill might not welcome a letter from you which he could make public, to the general effect that American industry was rushing ahead in the Defense Program and was turning out in large quantities munitions, tanks, airplanes etc . . . especially allocated for British defense purposes all over the world (and for Russia and China).”18

  The Neutrality Act forbade US manufacturers from selling war munitions to any belligerent country in any war, and an amendment in 1937 prohibited loans to warring nations. But after World War II began, Congress began to ease up on the restrictions, which allowed munitions be sold to countries being attacked by Nazi Germany. On November 13, 1941, after the US destroyer Reuben James was sunk by a German sub, remaining restrictions were lifted. Merchant ships would be allowed to arm themselves in self-defense and could enter European waters with the appropriate financings and munitions in place.

  The Japanese bombed Pearl Harbor on December 7, “a date which will live in infamy,” said FDR famously, as he signed the official declaration of US war on Japan the following day. Four days later, Germany and Italy declared war on the United States, and the United States responded by declaring war on them. The European and Southeast Asian wars had become a global conflict. The United States was officially in World War II.

  Postwar Finance Before the War Ends

  Just after the United States entered the war, two simultaneous initiatives unfolded that would dictate elements of financing after the war, through the joint initiatives of foreign policy measures and private banking whims. Plans were already being formulated to navigate the postwar peace, especially its international power implications for finance and politics, in the background. American political leaders and scholars began considering the concept of “one world” from an economic perspective, void of divisions and imbalances. Or so the theory went.

  The original plans to create a set of multinational entities that would finance one-world reconstruction and development (and ostensibly balance the world’s various economies) were conceived by two academics: John Maynard Keynes, an adviser for the British Treasury, and Harry Dexter White, an economist in the Division of Monetary Research of the US Treasury under Treasury Secretary Henry Morgenthau.

  By the spring of 1942, White had drafted plans for a “stabilization fund” and a “Bank for Reconstruction and Development.” His concept for the fund became the seed for the International Monetary Fund. The other idea became the World Bank.19 But before those entities would come to life through the Bretton Woods conferences, many arguments about their makeup would take place, and millions of lives would be lost.

  Taxes, Inflation, and Recovery

  Inflation became a central concern to bankers, the population, and the FDR administration as the European battles intensified. With the stimulation of war effort requirements domestically and European war-related demand, the United States was truly recovering from the Great Depression. Adopting Aldrich’s view, tax policy would play a dual role in continued recovery, as FDR saw it, by raising money to fund the war and containing consumer purchasing power to curb inflation of nonmilitary goods.20

  In that regard, the Revenue Act of 1942 called for tax revenues to be raised by $18 billion, and brought millions of new middle-class taxpayers into the income tax system. It also included an added “victory tax” of 5 percent on all income over $624 until the war’s end, which was lowered to 3 percent in a subsequent act.

  As the war effort gained momentum, the federal budget and the need for funds escalated. In 1942 FDR had presented the country with a budget that included a $30 billion increase over the previous year; it was nearly six times as large as the budget had been at its peak during World War I. “Victory,” said FDR in his budget message to Congress for the fiscal year beginning July 1, 1943, “cannot be bought with any amount of money however large; victory is achieved with the blood of soldiers, the sweat of working men and women and the sacrifice of all people.” By this point the budget exceeded $100 billion.

  Though blood, sweat, and sacrifice would be the horrific ingredients of victory, money still had to be found to fund the war in as many ways as possible. The White House used the bankers to enhance the process. In mid-November 1942, FDR was informed by his staff that plans were growing in cities across the country to centralize and convert the “war drives” into “war chests.” The best man they could think of to run the effort properly was Winthrop Aldrich.21

  The leaders of Chase and National City Bank rose to the occasion. The December 1942 Victory Bond Drive was a huge success; $13 billion in bonds were sold, exceeding a goal of $9 billon. Money that wasn’t raised via the population was minted by the government, and on both accounts bankers would play a pivotal role. The average US bank bought and held government securities equal to nearly half of its total deposits to support the prices of that Treasury debt on behalf of the US government. But more was needed.

  Despite their support, the bankers had mixed views about the increase in debt and the potential for inflation that could result from it. Some of them believed it was better for the country (and for their business) to target
the public as investors in war bonds than to raise money by issuing more Treasury bonds. FDR couldn’t afford to neglect the bankers’ inflation concerns; he needed their private fundraising avenues as much as he needed to raise money through public channels, including through tax increases.

  Aldrich Seeks Alternatives to National Debt Increases

  In a speech on January 21, 1943, at a Connecticut Bankers Association dinner, Aldrich wielded his influence on domestic policy, suggesting Treasury debt be augmented by taxes during the war, so as to limit national debt increases. He urged an at-the-source income tax and adoption of a federal retail sales tax “to check the increases of public debt,” even though “they are not a good form of taxation . . . in times of peace.”

  With federal debt at $143 billion, and set to hit $180 billion that year, he was concerned that the United States had relied “too little upon taxation and too much upon borrowings” as the war progressed. In 1941, about 50 percent of total federal expenditures were covered by taxes (the figure dropped to 31 percent in 1942). Aldrich believed that “investors had purchased too little and commercial bankers too large” a portion of debt, which had caused “an inflationary expansion of bank deposits” and “carries with it serious implications for the banking system.” He had rising concerns as to whether banks should bear as much of the costs of war debt as they were, and about inflation in general.

  In 1942, commercial banks bought $19 billion of government securities (38 percent of the increase in total debt). Through 1943, he estimated, commercial banks might have to absorb $40 billion (60 percent of the estimated increase in federal debt). Though commercial banks stood ready to do their part in the war effort, they didn’t want to shoulder all the debt burden; it would be less profitable than using their capital to fund war supplies during the war and reparations afterward.