All the Presidents' Bankers

by Prins, Nomi

  Once the dollar was no longer backed by gold, questions surfaced as to what truly backed it (besides the US military). According to Butler, “The Bretton Woods regime was doomed to fail as it was not compatible with domestic US economic policy objectives which, from the mid-1960s onwards, were increasingly inflationary.”19

  It wasn’t simply policy that was inflationary. The expansion of debt via the joint efforts of the Treasury Department and the Federal Reserve was greatly augmented by the bankers’ drive to loan more funds against their capital base. That established a debt inflation policy, which took off after the dissolution of Bretton Woods. Without the constraint of keeping gold in reserve to back the dollar, bankers could increase their leverage and speculate more freely, while getting money more easily from the Federal Reserve’s discount window. Abandoning the gold standard and “floating” the dollar was like navigating the waters of global finance without an anchor to slow down the dispersion of money and loans. For the bankers, this made expansion much easier.

  Indeed, on September 24, 1971, Chase board director and former Treasury Secretary C. Douglas Dillon (chairman of the Brookings Institution and, from 1972 to 1975, the Rockefeller Foundation) told Connally that “under no circumstances should we ever go back to assuming limited convertibility into gold.”20 Chase Board chairman David Rockefeller wrote National Security Adviser (and later Secretary of State) Henry Kissinger to recommend “a reevaluation of foreign currencies, a devaluation of the dollar, removal of the U.S. import surcharge and ‘buy America’ credits, and a new international monetary system with greater flexibility . . . and less reliance on gold.”21

  With the dollar devalued, investors poured money into stocks, fueling a rally from November 1971 led by the “Nifty Fifty,” a group of “respectable” big-cap growth stocks. These were being bought “like greyhounds chasing a mechanical rabbit” by pension funds, insurance companies, and trust funds.22 The Chicago Board of Trade began trading options on individual stocks in 1973 to increase the avenues for betting; speculators could soon thereafter trade futures on currencies and bonds.

  The National Association of Securities Dealers rendered all this trading easier on February 8, 1971, when it launched the NASDAQ. The first computerized quote system enabled market makers to post and transact over-the-counter prices quickly. With the stock market booming again, NASDAQ became a more convenient avenue for Wall Street firms to raise money. Many abandoned their former partnership models whereby the firm’s partners risked their own capital for the firm, in favor of raising capital by selling the public shares. That way, the upside—and the growing risk—would also be diffused and transferred to shareholders. Merrill Lynch was one of the first major investment bank partnerships to go “public” in 1971. Other classic industry leaders quickly followed suit.

  Meanwhile, corporations were finding prevailing lower interest rates more attractive. Instead of getting loans from banks, they could fund themselves more cheaply by issuing bonds in the capital markets. This took business away from commercial banks, which were restricted by domestic regulation from acting as issuing agents. But bankers had positioned themselves on both sides of the Atlantic to get around this problem, so they were covered by the shift in their major customers’ financing preferences. While their ability to service corporate demand was dampened at home, overseas it roared. Currency market turmoil also led many countries to the Eurodollar market for credit, where US banks were waiting. Thus, the credit extended through international branches of major US banks tripled to $4.5 billion from 1969 to 1972.

  The market rally, cheered on by the media, was enough to bolster Nixon’s fortunes. In the fall of 1972, Nixon was reelected in a landslide on promises to end the Vietnam War with “peace and honor.” Wall Street reaped the benefits of a bull market, and more citizens and companies were sucked into new debt products.23 The Dow hit a 1970s peak of 1,052 points in January 1973, as Nixon began his second term.24

  Nixon’s Personality and the Bankers

  For the most part, Nixon resented the East Coast money establishment. Yet he maintained a warm relationship with Gabriel Hauge, president of Manufacturers Hanover, whom he had known since the Eisenhower era, when Hauge worked as Ike’s economic adviser. Hauge began informing Nixon of his economic opinions, as he had with Eisenhower. But Nixon didn’t respond by seeking them out, as Eisenhower had done, and soon the opinions stopped coming.25

  The personal distance between Nixon and the Wall Street bankers cut both ways. For instance, Rockefeller had corresponded in some manner with Johnson every other week: through letters, meetings, notes, memos, invitations, and other event appearances. The two horse-traded their support for each other.

  But when he tried similar tactics with Nixon, he found himself spurned more often than not. Still, he remained proactive about dropping by the White House, as he did on September 13, 1971, when he visited to discuss international economic developments and their policy implications.26 Rockefeller had a tremendous stake in aligning his intentions with those of the president. But it was harder to get a direct audience with Nixon. Rather than being able to meet with Nixon, he was asked three weeks later to submit a formal proposal on the matter, including an outline of his recommendations.27 The idea that he would be denied these types of personal meetings did not sit well with him. On October 18, Rockefeller requested a face-to-face meeting with Nixon. Again he was denied.

  In general, comments to Nixon, including personal correspondence, were filtered through his aides. For instance, economic adviser Peter Flanigan sent Nixon a memo about Merrill Lynch chairman Don Regan for the dual purposes of policy discussion and providing money: “You will be interested to learn that Don Regan shares the concern for the lack of growth in the money supply and has taken action to make his concern forcefully known in the right places,” Flanigan wrote. “You will also be happy to learn that the Merrill Foundation, of which Don Regan is President, has granted $100,000 to redo the reception area on the second floor of the White House.”28

  Rockefeller’s Appointments and Wriston’s Ambitions

  Nixon’s relative insularity may explain the frosty relationships between the White House and Wall Street in the early 1970s. This didn’t imply there was no relationship, just a colder one.

  Both Wriston and Rockefeller received requests to become Nixon’s Treasury secretary, and both were insulted that the request didn’t come directly from Nixon. Though they cited conflicts of interest for turning down the post, it might have been conflicts of ego. Rockefeller, in fact, declined the offer twice—first in the fall of 1968 and then in January 1974, when he learned from General Alexander Haig that George Shultz was stepping down.

  Among other disagreements, Rockefeller opposed Nixon’s price and wage controls. “My own inclination,” he said, “was to allow the markets to have free rein.”29 Perhaps more to the point, a Washington post would have been constrictive for a power broker like Rockefeller. Besides, with economic problems mounting, he didn’t want to become Nixon’s scapegoat. It turned out to be a wise decision.

  Meanwhile, Wriston was determined to convince Wall Street that First National City Bank was better than any other bank. He had to find investors to raise more capital, and investors had to be persuaded that the returns were worth it. So Wriston made the bold move of promising a 15 percent return on equity throughout the 1970s. Considered gutsy at the time, Wriston’s promise held true. By 1972, First National City Bank shares had broken through a 20 percent return-on-equity barrier and were fast becoming one of the hottest plays on Wall Street. In the process, shorter-term stock market performance became more important than longer-term, more prudent behavior, and the rise of Wall Street analysts touting stocks to small investors soon followed.

  Free-Market Float

  As stocks prices rose, so did inflation. Democratic Congressman Wright Patman blamed the banks for inflaming this problem through rate manipulation. Wriston retorted that the federal government’s efforts were makin
g the banking industry “more volatile.”30 The Justice Department entered the fray when it launched an investigation into rate setting. When Wriston was interrogated, he explained that the practice of explicitly setting prime rates was obsolete anyway. Like many future bank leaders, he escaped unscathed from the allegations of rate manipulation.

  On October 20, 1971, at the prestigious Fairmont Hotel in downtown Los Angeles, Wriston and Edward Palmer, his executive committee chairman, decided to unleash market forces that would dictate the level of the prime rates banks charged as interest on loans to their most “credit-worthy” customers. In a public statement, Palmer announced that he was responsible for the changes, but he was deliberately vague as to what they would be in practice.31 The practice of floating rates was considered a bold move for banks at the time.

  Wriston remained obsessed with the idea of a “free-market float” in all of its forms. He disdained price and wage controls as fiercely as he did fixed currencies. While in Manila, Philippines, on October 28, 1971, Wriston initiated a public attack against Nixon’s wage and price controls that lasted until the controls were lifted in 1974.32

  To more privately press his ideas, in late November 1971, Wriston met with Nixon and Treasury Secretary Connally. Over ham and cheese sandwiches, he told Connally, “At the end of the day, the dollar is going to be floating” before suggesting devaluing it further. Wriston’s support for devaluation “meant a great deal to Connally.”33 On November 13, at an informal news conference following his seventeen-day trip to Asia, Connally told reporters that world monetary uncertainty could continue for “an almost indefinite period” given that most major currencies were “floating,” but he noted that the United States was well positioned regardless.34 Shortly thereafter, Connally announced another 10 percent devaluation of the dollar. Wriston had influenced the direction of the US currency to the benefit of its banks, for whom “cheaper” money meant a greater supply of it for their purposes.

  Four months after Nixon’s suspension of dollar convertibility into gold, the Group of Ten major countries agreed to appreciate their currencies relative to the US dollar. To facilitate the action, the Smithsonian Agreements (named for the Smithsonian Institution, where the group met) were passed on December 18, 1971. They allowed the IMF to adjust the relationships of currency rates.35 As a result of the agreements, the price of gold rose from $35 per ounce to $38.

  Nixon called it “the most significant monetary agreement in world history.”36 A year later, it became clear that it had failed. The banker-led movement toward an international, floating-rate multicurrency system proved too powerful a force against government or central bank desires to peg currencies. Within fifteen months, all the major currencies were floating against one another.

  By May 1972, free-marketer George Shultz had replaced Connally as Treasury secretary. A product of the Chicago School of Economics and a “close friend” of Chicago School icon Milton Friedman, he and Wriston were kindred spirits.37 Both believed the world financial system should be “free.” Through their relationship Wriston could exercise even greater influence on Washington. As Wriston’s biographer Phillip Zweig wrote, “When Wriston spoke, Shultz did more than listen; he acted.”38

  Wriston led bankers to embrace floating prime rates in the fall of 1972. First National City earned the distinction of being labeled a “floating bank” by the White House, a designation shared with Bankers Trust and Irving Trust. As such, Wriston also chose to raise rates without caring about the Fed’s posture on the matter. His main rivals were the “nonfloating banks” Chase, Morgan Guaranty, Bank of America, and Manufacturers Hanover. These were considered more politically aligned with the administration because they operated within the confines of federally dictated monetary policy and hadn’t yet pressed the floating rate boundary.

  In an internal memo to Treasury Secretary Shultz, Peter Flanigan, who would later be a managing director at Dillon, Read, proposed contacting these nonfloaters and asking them not to raise their rates no matter what the floaters were doing.39 This would maintain the illusion of Washington control over rates. But in reality, it was Wall Street that was king of domestic financial policy, and Wriston who wielded the control.

  Wriston elevated his attacks on Nixon’s policies at an April 1973 speech at the New York Bar Association titled “Freedom and Controls.” He said, “The freedom to win or lose, to succeed or fail, is basic to our way of life. When the marketplace is hobbled by regulation, the distortions created are eventually reflected across the country.”40 Wriston’s way would prevail.

  By the time of Wriston’s diatribe, First National City Bank had surpassed Bank of America as the nation’s most profitable bank. “Walt’s Bank,” also known as “Fat Citi,” was considered one of the best managed companies in America by the business press. The International Herald Tribune called Wriston the world’s “most influential banker.”41 He was a major force propelling multinational companies to further expand beyond the United States. As he said in a September 1973 speech titled “The World Corporation: New Weight in an Old Balance,” “The pressure to develop the economy of the world into a real community must come, in part, from an increasing number of multinational firms which see the world as a whole.” If theoretically the White House had a say in US economic policy, practically, it was Wriston who controlled its financial trajectory.

  Rockefeller, the Soviet Union, and the People’s Republic of China

  In March 1973, David Rockefeller infiltrated the Eastern Bloc with the skill of a Mission Impossible agent. Under his tutelage, Chase had become the first US bank since 1929 to open a fully operational office in the Soviet Union. Four months earlier, Chase had opened a representative branch at One Karl Marx Square, near the Kremlin.

  Rockefeller pushed Chase to provide the first loan by a US bank in the Soviet Union by the summer of 1973: $86 million to finance a truck foundry on the Kama River.42 Unlike Wriston, he was still partial to aligning himself more closely with Nixon. Linking his expansion desires to foreign military policy, he told the Joint Economic Committee that “the desire of the Soviets to use Western trade, credits, and technology to bolster their own economy hopefully could be accompanied by their giving lower priority to military programs.”43 Like his former boss, John McCloy, he believed international finance could replace competitive armament stockpiling. Later, instead of a Cold War lined with weapons, there would be bank wars based on economic competition.

  Wriston was less enthusiastic about the area. He refused to grant loans to the Soviet Union except on a floating-rate basis. Though First National City Bank had opened a Moscow office in the spring of 1974 (after which eleven of its New York City branches had their windows smashed), it wound up closing after six years and made no money in the interim.

  Rockefeller led Chase on another global expansion spree, adding forty foreign branches, representative offices, affiliates, subsidiaries, and joint ventures. In July 1973, after he returned from a business trip to Hong Kong, Rockefeller steered Chase to become the first US correspondent to the Bank of China since the 1949 Chinese Revolution.44

  His actions preempted Washington to some extent, or were at least nearly parallel in timing. In early 1973 the Nixon administration had established the National Council on US-China Trade, a “public-private group” whose goal was to increase trading opportunities with China. (The council would later become known as the United States Business Council.) Rockefeller was appointed its vice chairman, and he attended its first conference in Washington in May of that year.45

  With that political credential in the bag, he made his first visit to China, becoming the first American bank executive to enter since the 1949 revolution. Chase was subsequently invited to become the first US bank in China. Its branch office was established at the Peking Hotel, where many US corporations would be introduced to officials and business opportunities.

  On one hot, muggy night in late June 1973, Rockefeller, his wife, Peggy, and his entourage waited at
the Great Hall of the People in Beijing. “Zhou Enlai . . . stood at the top of the steps to greet us,” he later wrote. This was an unusual gesture; “he did not extend such a welcome to Nixon or Kissinger.”46 When they met, Rockefeller told Zhou that the weak US dollar had been caused by faulty US policies (that had emanated from Johnson through Nixon) rather than “fundamental economic ills.”

  Rockefeller considered this meeting critical for all future US-China relations. “I felt our new connection was supporting of broader American interests as well,” he wrote. “The diplomatic opening achieved by Nixon and Kissinger had enormous significance . . . [but] contact with the PRC at the private as well as at the government level would be necessary.”47 Soon after his visit, Chase made its first loan to China. Subsequently, the Chase World Information Corporation, a Chase subsidiary focused on Eastern Europe, the Soviet Union, the Middle East, and China, began introducing American businesses to investment opportunities in China. Rockefeller visited China five more times over the next fifteen years.48

  Rockefeller, McCloy, and the Middle East

  Even more significant to Chase, and to Wall Street as a whole, was the oil-rich Middle East. At the start of 1970, Chase had little representation there, except for an office branch in Beirut, a joint venture in Dubai, and a role as a major depository for the Saudi central bank, SAMA—which kept funds at its head office and in London. By 1971, Chase had established a branch in Bahrain. In the wake of this growing trend of US interest in the region, the US government and the newly formed government of Bahrain agreed to establish a permanent naval base on its shores.49 In concert with Rockefeller’s expansion, the entire Fifth Fleet of the US Navy found a new home.

  Rockefeller had been involved in Middle Eastern affairs for the better part of two decades. He was one of a handful of Americans with access to all the Arab leaders in the region.50 McCloy was equally keen about the area.