All the Presidents' Bankers

by Prins, Nomi

  As chairman of the nation’s largest bank, Aldrich reminded Truman that he was already doing his part in financing postwar development, perhaps more quickly than the government was. Chase, Aldrich noted, had been approached by France, Italy, and the Netherlands, “all desirous of discussing with us elaborate operations looking toward the reestablishment of their national credit.” He was going to continue European financial discussions during his trip abroad.46

  Though Truman was unable to clear a meeting time before Aldrich’s trip, he invited Aldrich to discuss the results after his return. To further solidify his alliance with Truman, and in the spirit of public-oriented service, Aldrich used his role as president of the National War Fund to bestow Truman with a citation for his service, stating in an October 30 letter that “his personal assistance and efforts have meant much toward the success of the final appeal of this important part of our war effort.”47

  Bretton Woods Agreement Approved

  Congress approved the Bretton Woods agreement on July 20, 1945. Twenty-seven other countries joined as well. The Soviet Union did not. It was a portent of how rapidly the world was falling into the Cold War and how rapidly the United States was forging its own foreign alliances in the postwar economy.

  By the time the Bretton Woods delegates reconvened to settle the final details of the agreement at Savannah, Georgia, in March 1946, Churchill had already coined the term “the Iron Curtain” to describe the line between Communist Soviet Union and the West in his famous “Sinews of Peace” speech at Westminster College.48

  In addition to the growing Cold War mentality, or perhaps because of it, expectations that White would lead the IMF were squashed when the FBI alerted Truman that White and other senior civil servants had passed secret intelligence to the Soviet Union. It’s doubtful that Truman believed the allegations; though he took White out of the bidding for the head position, White remained an executive director.

  The incident served as a precedent for how the top positions at the World Bank and the IMF would be allocated along political-geographical lines. The post was offered instead to Belgian economist Camille Gutt, establishing the protocol whereby the IMF would be headed by a Western European and the World Bank by an American.

  But while politics dictated the initial leadership choices, private bankers’ behavior would soon overshadow the functions of both bodies. Despite their “international” monikers, the World Bank and the IMF disproportionately served the interests of the Western European nations that were most important to the United States from the get-go. The bankers could exert their influence over both entities to expand their own enterprises.

  Later, another element that reinforced this dynamic was added. Thanks to a minor technicality introduced by Truman’s Treasury secretary, John Snyder, “aid monies” to “friendly” (or large and friendly) countries would be considered “grants,” which would not show up as national debt, thereby providing the illusion of better economic health.49 Money granted for military operations for the friendly countries would not show up as debt either. This presented a foreign business opportunity whereby banks could provide loans at better terms to larger countries and make more money off higher interest loans to developing ones because of the disparity in their perceived debt loads.

  In addition, as Martin Mayer observed in his classic book The Bankers, “the growing and unregulated Eurodollar market would become a cauldron of out-of-control debt and heady profits for US banks.”50 Through this market, many of the major midcentury postwar loans would be made.

  The End of the War

  The war in Europe had drawn to a close in April 1945, with the American sweep to the Elbe and the Russian drive into Berlin, followed by the announcement of Adolf Hitler’s death on May 1. The first surrender agreement of World War II was signed at Reims, France, on May 7, and then countersigned in Berlin on May 8, requiring hostilities to end at midnight on May 9, when Nazi Germany surrendered to the Soviet Union.

  According to Foreign Affairs writer William Hyland, “Two tremendous factors operated to bring about Germany’s defeat: British courage in adversity . . . and Russian manpower and the vastness of Russian distances. But the cornerstone of victory was the American machine. The mass industrial output of America provided the sinews of conflict for all the Allies.”51

  On June 18, Truman canvassed his senior advisers for their view on invading Japan. Just before the meeting adjourned, Truman said, “We haven’t heard from you, McCloy.” Assistant Secretary of War John McCloy replied, “We ought to have our heads examined if we do not seek a political end to the war before an invasion.” He suggested assuring the Japanese they could retain their emperor and warning them of the existence of the atomic bomb. Truman assigned McCloy and Secretary of War Henry Stimson to fashion a plan along those lines.52

  Yet on August 6, Truman dropped a massive atomic bomb on Hiroshima, Japan, and followed a few days later with another one on Nagasaki. About seventy thousand people died immediately in the Hiroshima explosion, with seventy thousand more from radiation over the next five years.

  Debate over why Truman decided to drop the bomb continues to this day: some argue that he felt he had something to prove stepping into FDR’s shoes; others claim he believed it was necessary to secure US hegemony. In response to a February 12, 1965, letter from Alan Weiner, an American history major at Long Island University who wrote, “I . . . would appreciate it very much if you would take the time to write me a brief letter stating your basic reasons for dropping The Bomb,” Truman said, “It was dropped to stop a war—and it did.”53

  US Political, Financial, and Military Dominance

  The United States dominated the global economy in the late 1940s. With 7 percent of the global population, America controlled 42 percent of the world’s income and half its manufacturing output. It produced 57 percent of the world’s steel, 43 percent of its electricity, and 62 percent of its oil.

  After the war, controlling global banking became easier for the US banks, because their competitors were mired in expensive reconstruction efforts (which the US bankers and government helped fund, as they had done after World War I). In addition, the American-influenced global agencies favored their largest trading partners with grants upon which US banks could lend more. US banks quickly opened a succession of overseas branches to accommodate the flow of money.

  The domestic economy wasn’t being as cooperative. After World War I, a mini recession had broken out; in 1946, the threat of inflation emerged as a critical issue for the Truman administration. War costs that had been financed through taxes and the sale of government bonds were now being replaced with bank credit, which fueled consumer appetites. A large volume of pent-up demand met by a new gush of bank loans had pushed prices up and stirred inflation.

  The bankers remained concerned about inflation despite their role in exacerbating it. On April 24, 1946, the Philadelphia, New York, and San Francisco Federal Reserve Banks voted to roll back the discount rate of 0.5 percent for member banks using government securities as collateral, which had prevailed during the war years, in their own bid to curb inflation and speculation.54 The preferential rate was designed to encourage banks to borrow to purchase additional government securities, or lend at low rates to others to buy them, to finance war efforts. In an address at the Annual Convention Dinner of the Illinois Bankers Association on May 2, 1946, Aldrich agreed with the new Fed strategy, and outlined his views on how to further combat this inflation threat. “To the extent that wars can be financed through taxes and the sale of bonds to non-commercial bank investors, postwar financial and economic distortions are diminished,” Aldrich reasoned. “Only if we follow the course of action outlined, can we maintain the private enterprise system, which, in the economic field, is the counterpart of democratic action in the political field.”

  Aldrich’s statement embodied the core assumption of the bankers regarding postwar governance: the pursuit of capitalism was akin to the pursuit of democracy. His reco
mmendations included refinancing short-term debt with longer-term debt, stimulating production, and relieving the Federal Reserve of the need to maintain an artificial level of interest rates. In other words, it was time to let free markets dictate interest rates and bond prices, even if he conceded that certain federal stimulation was also needed.

  But Aldrich had no wish to re-create the environment that led to the Great Depression. “As bankers,” he concluded, “we, too, have a distinct responsibility. We must make sure that bank credit is extended on a sound basis . . . to facilitate production and not speculation. We must encourage our depositors to retain rather than to spend their savings.”55 This notion ran counter to the idea that spending would stimulate the economy, but it made sense in the framework of banking at the time. The more money depositors kept with banks, the more money banks would have to advance their postwar global lending and investment strategy.

  On that accord, Aldrich remained very active. On June 24, 1946, he informed the French Ministry of Finance that the Morgan Bank and National City Bank were assisting the Dutch government in selling or liquidating American securities to raise money, and that Chase would happily do the same for them. US banks would provide credit for two to three years at low interest rates guaranteed by French-held American securities so that the French could obtain cash and not have to sell all those securities at once. This would keep the prices of American securities lifted and allow banks to increase their lending to this key US ally and borrower.

  In the distance, the task of reconstructing Western Europe and the Far East loomed as an opportunity for the US government to exert massive political influence, and for private US banks to do so from a financial perspective. One man’s war was another man’s war loan.

  Meanwhile, the American public resumed its isolationist stance. Just as the US population had turned insular after World War I, so it did again after World War II. A 1946 Bureau of the Budget report noted that foreign concerns were no longer at the forefront of Americans’ minds. Concerns about domestic economic policies, such as the high cost of living and jobs, were the consuming issue.56

  To make their mark on international trade while the domestic mentality turned inward, the bankers realized they had to get more involved in the postwar loan efforts, just as they had after World War I. Having spent so much time in Europe during and after the war, Aldrich concluded he was the best man to address these matters. Truman agreed and appointed him as chair of the Committee for Financing Foreign Trade, a group of twelve bankers and industrialists tasked with coordinating postwar US trade policy and private company endeavors. In that capacity, Aldrich would have Truman’s ear, and he would facilitate communication from the rest of the committee regarding the role of American business and finance in foreign trade policy.

  From the end of the war onward, the bankers would be in a position to drive federal monies, as well as dictate the rules of the supranational entities created at Bretton Woods. They would do so amid a remarkable shift in public perception. Having been held in utter contempt by the American population after the Crash and during the Great Depression, they had erased their aura of undue power through engagement in the war effort coupled with speeches of their own responsibilities to the country. And yet they stood to gain more global influence than ever before.

  CHAPTER 9

  THE LATE 1940S: WORLD RECONSTRUCTION AND PRIVATE BANKERS

  “We must unite to win the peace with the same assurance and in the same businesslike manner as we organized to win the war.”1

  —Chase chairman Winthrop Aldrich, September 30, 1947

  WORLD WAR II HAD NOT JUST REVITALIZED THE AMERICAN ECONOMY; IT HAD resuscitated the reputation of the banker as a public servant, a partner of the president, a defender of America. The bankers, through more unifying speeches and less ostentatious styles, had demonstrated their desire to support the war—and the peace—effort beyond simple financing. The result of this shift was their ability to influence global finance in a much broader way than their predecessors had, with less scrutiny.

  On July 2, 1946, Truman told Chase chairman Winthrop Aldrich that he looked to him as chairman of the Committee for Financing Foreign Trade to organize the work of its members.2 It was a critical component of the White House agenda. Truman had written each member personally to say that “the conduct and financing of foreign trade should be handled by private industry with the cooperation and such assistance as is necessary from the proper Government agencies.”

  Truman had positioned himself as playing backup to private industry and the bankers as far as foreign economic policy was concerned. This was exactly what Aldrich had wanted; a supportive government that gave private bankers latitude. But Truman didn’t leave matters fully up to Aldrich. Instead, he asked each committee member to draft a report on problems concerning foreign trade and to provide recommendations for handling them to the National Advisory Council, which would prepare a definite plan of procedure.3

  Two and a half months later, the twelve-man committee (which included Bank of America head A. P. Giannini and National City Bank chairman Gordon Rentschler) gathered in Washington for their first official meeting with the president.4 These would become frequent occurrences as America’s global role was mapped out.

  Truman grew to trust Aldrich, much as Wilson had grown to trust Morgan’s Thomas Lamont after World War I. For his part, Aldrich became a leading figure in organizing financial relief to Europe during and after World War II, with great influence over the direction of the IMF. As Lamont had been extremely vocal about the need for Wilson’s League of Nations, Aldrich was the banker most publicly supportive of the Marshall Plan, which spelled out how the United States would aid foreign nations. As it would turn out, he added ideas of his own to benefit private industry and banking.

  During the postwar phase of the late 1940s, Aldrich traveled the world in a triple capacity: as chairman of the Chase bank, president of the International Chamber of Commerce, and chairman of the Committee for Financing Foreign Trade. The impact on the bank’s bottom line was substantial. In 1946, Chase reported, “The volume of business handled in all divisions of the foreign department increased enormously.”5 Chase commercial loans in London doubled that year. Aldrich’s dual work as public servant and private banker was reaping rewards for his firm, and for his status as a diplomat. His partnership with Truman assured him of both.

  Truman’s Treasury Secretary and Postwar Savings Bonds

  Another aspect of the banking-government alliance was the makeup of public debt, which had quintupled during the war and totaled $270 billion on June 30, 1946. Between war defense and finance programs, government obligations represented 60 percent of all outstanding debts, public and private, compared to less than 25 percent in 1939. Commercial banks held $84.5 billion, or about one-third of the US debt securities, representing 71 percent of their total assets.6 War financing replenished the banking system’s assets and offered it a foundation of securities upon which to expand.

  Though he was not of the eastern bankers’ ilk, Truman’s Treasury secretary, John Snyder, was still quite familiar with the world of banking. He had served as vice president at First National Bank of St. Louis, Missouri, for a couple of years before joining the Truman administration.7 Snyder would take a lead role as the communication point between Truman and the bankers through the late 1940s.

  As “one of Truman’s closest advisors on not only financial matters, but also general domestic and foreign policy issues,” according to the Treasury Department and Federal Reserve, Snyder was “often the last person to whom Truman spoke before he made final decisions.”8

  Snyder was a banker’s perfect Treasury secretary, comfortable on both sides of the political aisle. As he later said, “I like many of the Democratic aims and objectives. I was brought up a Democrat. Of course, my private business associations have been largely with Republicans. The officers in the banks that I’ve associated with have been largely Republicans.”9

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sp; Bankers eagerly advised Snyder on issues of postwar debt management, “selecting the right kind of securities to offer to the public,” and various tax matters. But Snyder tended to rely more on bankers hailing from outside the New York area. Among his most trusted confidants in the banking industry were A. P. Giannini and his son, Mario.10

  When it came time to reconsider the postwar savings bond program, Snyder enlisted the Gianninis’ advice. He needed a new way to entice the population to buy bonds and realized that an appeal based on a patriotic act would no longer do. This was potentially a big problem: the government still had its own debt to pay down, and turning to citizens for financing needs had proven quite useful during the war. Snyder now needed the bankers to collaborate with him to “sell the idea that savings was good for the individual to prepare him to buy the things that he might otherwise miss buying: an education for his children, a new house, maybe an automobile in the future . . . an economic purpose, a standard of living purpose.”11 The more people saved, went his reasoning, the more they would consider investing in things like bonds.

  Thus, Snyder played a key role in fashioning the acceptability of debt to fund the pent-up needs and desires of postwar America. The bankers did their share to provide the credit to support that way of life, appealing to the public to both save and borrow. The Federal Reserve played its part, too. The Fed had accommodated the war by maintaining the low interest rates that fueled private banks’ ability to lend to manufacturing companies.12 From 1937 to 1947, the Fed kept its “rediscount rate,” enjoyed by commercial banks borrowing cash against Treasuries, at 1 percent.

  During the war, there was widespread bipartisan support for rising deficits and taking on additional debt to fund the war. But afterward, the Truman administration continued to favor lower interest rates as a means of economic stimulus, while the Fed wanted to raise them to fight inflation.