by Prins, Nomi
When the New York Times got wind of the meeting, it plastered the news across the front page with the words “Pro-Arab” next to “Pro Oil.” Public opinion turned against Chase and its “anti-Israel stance.” But the issue was just heating up. During the 1970s, the struggle for power among the political and financial elites would include the struggle for control of that most precious commodity: oil. The battle for the profits that oil brought and the international control that physical or financial access to it enabled would play out in the embassies of the Middle East, the boardrooms of Wall Street, and the Oval Office in Washington.
CHAPTER 13
THE EARLY TO MID-1970S: CORRUPTION, GOLD, OIL, AND BANKRUPTCIES
“I’m mad as hell and I’m not going to take this anymore.”
—Howard Beale, Network
PRESIDENT RICHARD NIXON MAY HAVE BECOME THE NATION’S CEO IN 1969, but during the 1970s, the US financial throne, along with the unelected leadership it provided, belonged to the two most powerful banking titans: Walter Wriston, chairman of First National City Bank, and David Rockefeller, chairman of the Chase Manhattan Bank.
Their inevitable rise was more than the culmination of ladder climbing at their respective firms. The retirement of the two bankers they replaced—First National City Bank’s George Moore and Chase’s George Champion—severed all remnants of ties to post-Depression-era prudency and postwar unity in the eastern banking community. In the early 1970s, the banking industry continued the noticeable shift that had begun in the 1960s, back to the 1920s-style pursuit of private gain without even the pretense of public service or attention to public good.
An undertone of defiance on the part of the bankers that would have been unacceptable, even vulgar, in the postwar days festered alongside a dogmatic attachment to free-market ideals. They saw more opportunity in international pursuits—even if it meant diverging from US foreign policy initiatives—and pressed Nixon to abandon the Bretton Woods agreements, which had pegged the dollar to gold. For bankers, such restrictions were no longer palatable.
The oil crisis made this divergence all the more apparent. During the years when domestic inflation soared and oil prices quadrupled, the population suffered mightily. But the bankers were able to use price spikes to book massive petrodollar profits, off- and onshore. During the period, both Wriston and Rockefeller turned down cabinet posts, unwilling to leave the firms through which they were more globally powerful.
Whereas the 1960s encompassed a loss of youth and innocence, the 1970s evoked shattered trust, heightened cynicism, and economic fracture. It became increasingly clear that though the United States was a superpower, it couldn’t control the oil prices upon which it was increasingly dependent, and so it wasn’t omnipotent. In 1973, Rockefeller established the Trilateral Commission, an elite organization that gave the influential private-sector men of North America, Asia, and Europe opportunities to discuss ways to retain their global power. It was minted as a means to establish their “communication and cooperation.” But it also served Rockefeller’s aspirations to spread “democratic capitalism,” as he put it—which in practice meant western financial control over international economies.
Its creation coincided with the growing fear among bankers that if US economic and political power became less dominant relative to Western Europe and Japan, then the unelected leaders of the private sector would lose their ability to dictate the path of global affairs. The organization was designed to ensure that if the goals of the bankers and the White House diverged on matters of importance, there would exist a body outside the elected political system to protect open trade and capital flows.
Nixon had a more distant relationship with Wall Street than his predecessor, one of the most probusiness Democrats in history. With his detached style and stiff persona, Nixon presided over an accelerated wave of multinational corporate expansions that drove bankers further away from the country’s needs as they scrambled to service these giant customers in an increasingly international arena.
Wall Street’s War
While the protests against the Vietnam War intensified in the first years of the Nixon administration, the financial elite was fighting its own war—over the future of banking and against Glass-Steagall regulations. Wriston was a steadfast warrior in related battles, as he fought with Rockefeller for supremacy over the US banker community and for dominance over global finance.
Rockefeller’s sights were set on a grander prize, one with worldwide implications: ending the financial cold war. He made his mark in that regard by opening the first US bank in Moscow since the 1920s, and the first in Beijing since the 1949 revolution.
Augmenting their domestic and international expansion plans, both men and their banks prospered from the emerging and extremely lucrative business of recycling petrodollars from the Middle East into third world countries. By acting as the middlemen—capturing oil revenues and transforming them into high-interest-rate loans, to Latin America in particular—bankers accentuated disparities in global wealth. They dumped loans into developing countries and made huge amounts of money in the process. By funneling profits into debts, they caused extreme pain in the debtor nations, especially when the oil-producing nations began to raise their prices. This raised the cost of energy and provoked a wave of inflation that further oppressed these third world nations, the US population, and other economies throughout the world.
Bank Holding Company Battles
When Eisenhower signed the 1956 Bank Holding Company Act banning interstate banking, he left a large loophole as a conciliatory gambit: a gray area as to what big banks could consider “financially-related business,” which fell under their jurisdiction. In practice, that meant that they could find ways to expand their breadth of services while they figured out ways to grow their domestic grab for depositors. On May 26, 1970, the “Big Three” bankers—Wriston and Rockefeller, along with Alden “Tom” Clausen, chairman of Bank America Corporation—appeared before the Senate Banking and Currency Committee to press their case for widening the loophole.
During the proceedings, Wriston led the charge on behalf of his brethren in the crusade. Tall, slim, elegantly dressed, and the most articulate of the three, he dramatically called on Congress to “throw off some of the shackles on banking which inhibit competition in the financial markets.”1
The global financial landscape was evolving. Ever since World War II, US bankers hadn’t worried too much about their supremacy being challenged by other international banks, which were still playing catch-up in terms of deposits, loans, and global customers. But by now the international banks had moved beyond postwar reconstructive pain and gained significant ground by trading with Cold War enemies of the United States. They were, in short, cutting into the global market that the US bankers had dominated by extending themselves into areas in which the US bankers were absent for US policy reasons. There was no such thing as “enough” of a market share in this game. As a result, US bankers had to take a longer, harder look at the “shackles” hampering their growth. To remain globally competitive, among other things, bankers sought to shatter post-Depression legislative barriers like Glass-Steagall.
They wielded fear coated in shades of nationalism as a weapon: if US bankers became less competitive, then by extension the United States would become less powerful. The competition argument would remain dominant on Wall Street and in Washington for nearly three decades, until the separation of speculative and commercial banking that had been invoked by the Glass-Steagall Act would be no more.
Wriston deftly equated the expansion of US banking with general US global progress and power. It wasn’t so much that this connection hadn’t occurred to presidents or bankers since World War II; indeed, that was how the political-financial alliances had been operating. But from that point on, the notion was formally and publicly verbalized, and placed on the congressional record. The idea that commercial banks served the country and perpetuated its global identity and strength, rather than th
e other way around, became a key argument for domestic deregulation—even if, in practice, it was the country that would serve the banks.
Penn Central Debacle
There was, however, a fly in the ointment. To increase their size, bankers wanted to be able to accumulate more services or branches beneath the holding company umbrella. But a crisis in another industry would give some legislators pause. The Penn Central meltdown, the first financial crisis of Nixon’s presidency, temporarily dampened the ardency of deregulation enthusiasts. The collapse of the largest, most diverse railroad holding company in America was blamed on overzealous bank lending to a plethora of nonrailroad-oriented entities under one holding company umbrella. The debacle renewed debate about a stricter bank holding company bill.2
Under Wriston’s guidance, National City had spearheaded a fifty-three-bank syndicate to lend $500 million in revolving credit to Penn Central, even when it showed obvious signs of imminent implosion.
Penn Central had been one of the leading US corporations in the 1960s. President Johnson had supported the merger that spawned the conglomerate on behalf of a friend, railroad merger specialist Stuart Saunders, who became chairman. He had done this over the warnings of the Justice Department and despite allegations of antitrust violations called by its competitors. With nary a regulator paying attention, Penn Central had morphed into more than a railroad holding company, encompassing real estate, hotels, pipelines, and theme parks. Meanwhile, highways, cars, and commercial airlines had chipped away at Penn Central’s dominant market position. To try to compensate, Penn Central had delved into a host of speculative expansions and deals.3 That strategy was failing fast. By May 1970, Penn Central was feverishly drawing on its credit lines just to scrounge up enough cash to keep going.
The conglomerate demonstrated that holding companies could be mere shell constructions under which other unrelated businesses could exist, much as the 1920s holding companies housed reckless financial ventures under utility firm banners.
Allegations circulated that Rockefeller had launched a five-day selling strategy of Penn Central stock, culminating with the dumping of 134,400 shares on the fifth day, based on insider information he received as one of the firm’s key lenders.4 He denied the charges.
In a joint effort with the bankers to hide the Penn Central debacle behind a shield of federal bailout loans, the Pentagon stepped in, claiming that assisting Penn Central was a matter of national defense.5 Under the auspices of national security, Washington utilized the Defense Production Act of 1950, a convenient bill passed at the start of the Korean War that enabled the president to force businesses to prioritize national security–related endeavors.
On June 21, 1970, Penn Central filed for bankruptcy, becoming the first major US corporation to go bust since the Depression.6 Its failure was not an isolated incident by any means. Instead, it was one of a number of major defaults that shook the commercial paper market to its core. (“Commercial paper” is a term for the short-term promissory notes sold by large corporations to raise quick money, backed only by their promise to pay the amount of the note at the end of its term, not by any collateral.) But the agile bankers knew how to capitalize on that turmoil. When companies stopped borrowing in the flailing commercial paper market, they had to turn to major banks like Chase for loans instead. As a result, the worldwide loans of Chase, First National City Bank, and Bank of America surged to $27.7 billion by the end of 1971, more than double the 1969 total of $13 billion.7
A year later, the largest US defense company, Lockheed, was facing bankruptcy, as well. Again bankers found a way to come out ahead on the people’s dime. Lockheed’s bankers at Bank of America and Bankers Trust led a syndicate that petitioned the Defense Department for a bailout on similar national security grounds. The CEO, Daniel Haughton, even agreed to step down if an appropriate government loan was provided.
In response, the Nixon administration offered $250 million in emergency loans to Lockheed—in effect, bailing out the banks and the corporation. To explain the bailout at a time when the general economy was struggling, Nixon introduced the Lockheed Emergency Loan Act by stating, “It will have a major impact on the economy of California, and will contribute greatly to the economic strength of the country as a whole.”8 After the bill was passed, not a single Lockheed executive stepped down.9
It would take several years of political-financial debate and more bailouts to sustain Penn Central. One 1975 article labeled the entire episode “The Penn-C Fairy Tale” and condemned the subsequent federal bailout: “While the country is in the worst recession since the depression and unemployment lines grow longer every day, Congress is dumping another third of a billion dollars of your tax payer dollars down the railroad rat hole.”10 (The incident was prologue: Congress would lavish hundreds of billions of dollars to sustain the biggest banks after the 2008 financial crisis, topped up by trillions of dollars from the Fed and the Treasury Department in the form of loans, bond purchases, and other subsidies.)
More Bank Holding Company Politics
Despite the Penn Central crisis, the revised Bank Holding Company Act decisively passed the Senate on September 16, 1970, by a bipartisan vote of seventy-seven to one. The final version was far more lenient than the one that Texas Democrat John William Wright Patman, chair of the House Committee on Banking and Currency, or even the Nixon administration had originally envisioned. The revised act allowed big banks to retain nonbank units acquired before June 1968. It also gave the Fed greater regulatory authority over bank holding companies, including the power to determine what constituted one.11 Language was added to enable banks to be considered one-bank holding companies if they, or any of their subsidiaries, held any deposits or extended any commercial loans, thus broadening their scope.12
President Nixon signed the bill into law without fanfare on New Year’s Eve 1970. In fact, his inner circle decided against making a splash about it. They didn’t think the public would understand or care. Plus, they realized that there was a prevailing attitude that the Nixon administration had favored the big banks, and though it had, this was not something they wanted to draw attention to.13
The End of the Gold Standard
The top six banks controlled 20 percent of the nation’s deposits through one-bank holding companies, but second place in that group wasn’t good enough for Wriston, who noted to the Nixon administration that his bank was really the “caretaker of the aspirations of millions of people” whose money it held.14 Wriston flooded the New York Fed with proposals for expansion. His applications “were said to represent as many as half of the total of all of the banks.” The Fed was so overwhelmed, it had to enlist First National City Bank to interpret the new law on its behalf.15
By mid-1971, the Fed had approved thirteen and rejected seven of Wriston’s applications. His biggest disappointment was the insurance underwriting rejection. The possibility of converting depositors for insurance business had been tantalizing. It would continue to be a hard-fought, ultimately successful battle.
Around the same time, New York governor Nelson Rockefeller (David Rockefeller’s brother) approved legislation permitting banks to set up subsidiaries in each of the state’s nine banking districts. This was a gift for Wriston and David Rockefeller, because it meant their banks could expand within the state. Each subsidiary could open branches through June 1976, when the districts would be eliminated and banks could merge and branch freely.
Several months later, First National City Bank was paying generous prices to purchase the tiniest upstate banks, from which it began extending loans to the riskiest companies and getting hosed in the process; a minor David vs. Goliath revenge of local banks against Wall Street muscle.
By that time, the stock market had turned bearish, and foreign countries were increasingly demanding their paper dollars be converted into gold as they shifted funds out of dollar reserves. Bankers, meanwhile, postured for a dollar devaluation, which would make their cost of funds cheaper and enable the
m to expand their lending businesses.
They knew that the fastest way to further devalue the dollar was to sever it from gold, and they made their opinions clear to Nixon, taking care to blame the devaluation on external foreign speculation, not their own movement of capital and lending abroad.
The strategy worked. On August 15, 1971, Nixon bashed the “international money speculators” in a televised speech, stating, “Because they thrive on crises they help to create them.”16 He noted that “in recent weeks the speculators have been waging an all-out war on the American dollar.”17 His words were true in essence, yet they were chosen to exclude the actions of the major US banks, which were also selling the dollar. Foreign central banks had access to US gold through the Bretton Woods rules, and they exercised this access. Exchanging dollars for gold had the effect of decreasing the value of the US dollar relative to that gold. Between January and August 1971, European banks (aided by US banks with European branches) catalyzed a $20 billion gold outflow.
As John Butler wrote in The Golden Revolution, “By July 1971, the US gold reserves had fallen sharply, to under $10 billion, and at the rate things were going, would be exhausted in weeks. [Treasury Secretary John] Connally was tasked with organizing an emergency weekend meeting of Nixon’s various economic and domestic policy advisers. At 2:30 P.M. on August 13, they gathered, in secret, at Camp David to decide how to respond to the incipient run on the dollar.”18
Nixon’s solution, pressed by the banking community, was to abandon the gold standard. In his speech the president informed Americans that he had directed Connally to “suspend temporarily the convertibility of the dollar into gold or other reserve assets.” He promised this would “defend the dollar against the speculators.” Because Bretton Woods didn’t allow for dollar devaluation, Nixon effectively ended the accord that had set international currency parameters since World War II, signaling the beginning of the end of the gold standard.
