The House of Morgan

by Ron Chernow

  As a major sponsor of foreign loans, the House of Morgan was naturally dismayed. If debtors couldn’t export goods to the United States, how would they ever earn foreign exchange and pay off loans? “I almost went down on my knees to beg Herbert Hoover to veto the asinine Hawley-Smoot tariff,” Lamont declared.7 He soon referred to the world trading system as an insane asylum.8 Apprehensively, America’s most international bank watched the rise of a new economic nationalism. It would dismantle the structure of free trade and free flow of capital that the House of Morgan, along with Montagu Norman and Ben Strong, had struggled to create in the twenties. Within two years, two dozen countries would retaliate against the Hawley-Smoot tariff by raising their own tariffs and slashing U.S. imports. The age of “beggar thy neighbor” economics had begun.

  The second great mid-1930 blunder was made by the Federal Reserve Board in Washington: it ended the liberal provision of credit and shrank the money supply. This was part of an attempt to rein in the New York Fed and end its backdoor diplomacy with European ministries. Treasury Secretary Andrew Mellon wanted higher interest rates to stop the flow of gold to Europe. Many at the Fed saw austerity as a bitter but necessary medicine. “The consequences of such an economic debauch are inevitable,” said the Philadelphia Fed governor. “Can they be corrected and removed by cheap money? We do not believe that they can.”9 By the second half of 1930, the postcrash calm was gone. That fall, Hoover complained to Lamont about bear raids, short selling, and other unpatriotic assaults against national pride. The following year would be the worst in stock market history.

  While the Fed had assumed responsibility for the health of the entire financial system after the 1929 crash, the House of Morgan still played a part in specific, smaller crises. The Fed had no obligation to rescue individuals, banks, or companies; its concerns were more general. The crash’s aftermath revealed much about Morgan priorities. While claiming to represent the public interest, the firm actually represented its clients, cronies, and fellow bankers. Part of its power had always stemmed from its fidelity to Wall Street friends, its generosity in making loans to bankers and other financial houses. This was strikingly demonstrated after the crash.

  Take, for instance, the case of Charles E. Mitchell, chairman of the National City Bank. Right before the crash, Mitchell had put together a deal to merge with the Corn Exchange; if he had succeeded, he would have produced the world’s largest bank, surpassing even the Midland Bank in London. Since the deal was to be effected with National City shares, Mitchell needed to maintain their price at $450. During the crash, the price plunged through this floor, and even furious buying by the National City Company, the bank’s securities affiliate, couldn’t sustain it. On his way to work, Mitchell stopped by 23 Wall and walked out with a $ 12-million personal loan, secured by his own National City stock. When he later failed to meet payments, the House of Morgan temporarily became the second largest stockholder in National City. Later Mitchell said of Morgans, “That firm stood at the very peak as to ethics, understanding, and leadership.”10 Yet however laudable in terms of loyalty, it was a reckless loan from a financial standpoint.

  Loyalty to clients was always the vice of the House of Morgan. Sometimes it got in so deep it couldn’t get out. After the crash, the Van Sweringen brothers, those financial acrobats of the 1920s, suddenly lost their balance. Their overly indebted railroads were among the worst crash performers. Much like William C. Durant with General Motors in 1920, the Van Sweringens kept buying Alleghany stock on its way down. Using borrowed money, they only augmented their losses. They ignored polite warnings from Morgans to stop their rash purchase of more railroads, including the huge Missouri Pacific. Buying on credit had become a Van Sweringen habit.

  The Alleghany shares feverishly bid up in the frothy days of early 1929 now led the market down in the autumn of 1930. They fell from 56 to 10 in just two months. On the evening of October 23, 1930, Oris and Mantis Van Sweringen met at Tom Lamont’s East Seventieth Street townhouse along with representatives of Guaranty Trust. The short, moon-faced brothers were $40 million in hock to their broker. Having sponsored $200 million in securities in their behalf, Morgans and Guaranty felt bound to prop them up. Lamont was pessimistic about the prospects of railroads. He was already telling Hoover how two hundred affluent passengers were arriving daily by air in New York City. Yet he also feared a domino effect among Wall Street brokers who dealt with the brothers.

  The two banks led a syndicate that furnished a $40-million rescue loan for the Van Sweringens. The rescue was handled with a delicacy and secrecy that seldom accompanies personal bankruptcy. The Van Sweringens would remain as figureheads so that nobody would suspect their true plight. They were rewarded for their profligacy with a personal allowance of $ 100,000 a year. In the words of Matthew Josephson, “The Van Sweringens’ personal insolvency during 5 years was one of the best kept secrets in Wall Street.”11 The following year, when the brothers missed payments on their loans, Morgans and Guaranty Trust foreclosed on their Alleghany Railroad empire. Ultimately Alleghany stock would fall to 37½ cents per share.

  As a lender of last resort, the House of Morgan favored like-minded institutions of similar character and background. Kidder, Peabody was just such a firm. It didn’t hustle business or steal clients and always played by Morgan rules. In 1930, it was hit by multiple blows. The Italian government removed $8 million in deposits, and the new Bank for International Settlements instructed Kidder to switch big sums to a Swiss bank. This led to another rescue at Jack Morgan’s home, chaired by George Whitney, who had started his career as a Kidder clerk. The House of Morgan arranged a $10-million line of credit. Under Whitney’s tutelage, the old Kidder, Peabody was folded. Whitney brought in his friends Edwin Webster, Chandler Hovey, and Albert H. Gordon to take over the company’s name and goodwill. “Incidentally, we are slowly making the grade socially,” Gordon reported to the elder Webster. “Yesterday for the first time Morgan invited us to tea on our way out from the almost daily conference.”12

  Unstinting in serving its friends, the House of Morgan could be heart-less to those whose image didn’t fit the preferred profile. This became apparent with the failure of the Bank of United States on December 11, 1930. With 450,000 depositors, it was New York’s fourth largest deposit bank. In general, the crash and subsequent deflation had damaged the collateral behind bank loans. From a rate of 60 bank failures a month in early 1930, the figure snowballed to 254 in November and 344 in December of 1930. There were over a thousand bank failures for the year. The failure of the Bank of United States was the largest thus far and threatened more general ruin.

  But this bank wasn’t a high-class operation. Its Jewish owners had chosen its grand name in an effort to fool its Jewish immigrant customers into thinking it had government support. In the lobby hung a large oil portrait of the U.S. Capitol, reinforcing the misleading message. A proposed rescue plan for the Bank of United States got a cool reception on Wall Street, even after Lieutenant Governor Herbert H. Lehman, the state banking authorities, and the New York Fed all pleaded for it. The regulators wanted to merge the Bank of United States with three other banks, backed by a $30-million loan from the Wall Street banks.

  At an emotional meeting, Joseph A. Broderick, the state banking chief, warned that if the bankers rejected the rescue plan, it might drag down ten other banks. One in ten New York families using bank accounts would be stranded. As the Wall Street bankers sat stony-faced, Broderick reminded them how they had just rescued Kidder, Peabody and how they had banded together years before to save Guaranty Trust. But they refused to save the Jewish bank, pulling out of their $30-million commitment at the last minute. “I asked them if their decision to drop the plan was still final,” Broderick recalled. “They told me it was. Then I warned them they were making the most colossal mistake in the banking history of New York.”13 The biggest bank failure in American history, the Bank of United States bankruptcy fed a psychology of fear that already gripped deposit
ors across the country.

  The failure of the Bank of United States has been attributed to anti-Semitism among Wall Street bankers. At the time, there were few commercial banks owned by Jews, Manufacturers Trust being the only other important one in New York. It is impossible to verify whether anti-Semitism stopped the bankers from rescuing the Bank of United States. But Morgan records show that its clientele’s Judaism was very much in the partners’ minds. When informing Morgan Grenfell of events in New York, Lamont’s son Tommy noted that it was patronized largely by foreigners and Jews.14 Russell Leffingwell described it as “an uptown bank with many branches and a large clientele among our Jewish population of small merchants, and persons of small means and small education, from whom all its management was drawn.”15 Their attitude was shortsighted, for the bank’s failure shook confidence across America. It was a failure that could have been easily avoided by the proposed merger.

  Had it not been for the large number of depositors, the Bank of United States would not have deserved to survive. Its securities affiliate had sponsored shoddy stocks and issued misleading prospectuses, and had been manipulated by the bank’s own offices. Two of its owners were jailed for loose banking practices. One, bank president Bernard K. Marcus, was the uncle of Roy Cohn, who always blamed the bank’s failure on an anti-Semitic plot. Even banking superintendent Broderick was indicted for not having shut the bank sooner. (He was acquitted, after two trials.) To have to bail out such a bank undoubtedly grated on the patrician bankers. But with so many Morgan rescues occurring in those years, all backed up with high-flown rhetoric about saving the banking system, it’s hard to believe religion wasn’t a major factor behind Wall Street’s refusal to act. Hundreds of thousands of Jewish depositors were not worth one Charles Mitchell. Jews were always a blind spot in the Morgan vision, no less than in the days when Pierpont Morgan had vied with Jacob Schiff.

  THE City of London had reacted to the New York crash with alarm, but also with some quiet satisfaction and schadenfreude, After Black Thursday, the New York Times reported that the “selling left London’s ’City’ in a comfortable position saying ’I told you so.’ It had been expected for a long time. ”16 In many ways, London profited from the crash as investors switched funds from New York, easing the strain on British gold reserves. In 1930, there was even a brief spurt in foreign lending as London became a safe haven for investors. At the same time, the deeper prognosis for Britain remained grim. Its industry languished, its unemployment rose, and London’s port was vulnerable to spreading protectionism. Several Commonwealth countries dependent on agricultural exports—Australia, Canada, and India—were hit early by the Depression, and this hurt the City.

  England’s real crisis, however, originated in Central Europe, just as Montagu Norman had always suspected it would. Reparations continued to burden Germany’s economy and polarize its politics. In March 1930, Dr. Schacht submitted his resignation as Reichsbank president to protest additional German debt mandated by the Young Plan. Germany’s day of reckoning—so feared and so long predicted—was at hand. In the elections of September 1930, the National Socialists and the Communists scored sizable gains, and Chancellor Heinrich Brüning adopted an antireparations policy. The right wing capitalized on the reparations issue. On January 5, 1931, Dr. Schacht attended a dinner party thrown by Hermann Göring. For his tough stand on reparations, Schacht had become a great favorite of the National Socialists. At the dinner, he met Hitler and Joseph Goebbels and became a critical link between the Nazis and German big business. That spring, as political street fights broke out in Germany, pressure mounted to cast off the Versailles burden.

  Into this already volatile situation came the powerful jolt of a major bank failure. On May 11, 1931, the Credit Anstalt failed. It was not only Austria’s largest bank but probably the most important bank in Central Europe. A rescue plan announced by the Austrian National Bank and Rothschilds only served to alert the world to trouble and brought on a run. The disaster spread through Central Europe, collapsing Austrian and German banks. In June, Norman gave emergency credit to Austria’s central bank to prop up the schilling—his swan song as a global lender of last resort. Along with an emergency loan to Germany, it marked the end of British financial leadership in the 1930s.

  It was against this backdrop that Lamont telephoned Hoover on June 5, 1931, to propose a holiday on payment of war debts and reparations. Without it, he warned, there might be a European crash that could prolong America’s Depression. As Lamont’s files show, Hoover reacted in a grumpily defensive manner: “I will think about the matter, but politically it is quite impossible. Sitting in New York, as you do, you have no idea what the sentiment of the country at large is on these inter-governmental debts.” A banker of the Diplomatic Age, Lamont didn’t merely couch his argument in economic terms: he made an unashamedly political appeal. “These days you hear a lot of people whispering about sidetracking the Administration in the 1932 Convention,” Lamont told Hoover. “If you were to come out with such a plan as this, these whisperings would be silenced overnight.”17 In closing, Lamont said that if the plan ever reached fruition, the bank would hide its role and let Hoover take the credit: “This is your plan and nobody else’s.” What a cunning fellow Lamont was when he whispered in Hoover’s ear!

  Treasury Secretary Mellon tried to spike the idea and dismiss the debt as Europe’s mess, but Hoover had now had enough with myopic isolationism. On the evening of June 20, 1931, he telephoned Lamont at Torrey Cliff, his home on the Palisades, to say that he had just announced a one-year moratorium on war debt and reparations payments. He knew France would be indignant at the mercy shown toward Germany and asked whether Lamont could sell the plan to the French. Lamont expressed sympathy for the French position but also reminded Hoover that they were the world’s most difficult people to deal with—a recurring theme in his letters. Finally, though, he agreed to lobby the French government through the Banque de France. True to Hoover’s predictions, the French thought the moratorium an Anglo-American plot to let Germany escape reparations.

  The Hoover moratorium was a belated response to a crumbling world financial system. The Danat Bank, one of Germany’s largest, failed on July 13, 1931. A teary-eyed Chancellor Briining rejected a New York rescue out of fear that a bad loan to President Hindenburg’s son Oskar might surface in such an operation. After the Danat failure, Germany had to shut the Berlin bourse and the city’s banks. Around the world, creditors were calling in German loans. The Morgan-led bond issues for Germany and Austria, heralded with trumpet peals in the 1920s, plummeted with frightening speed. All the laborious work of that decade was coming apart.

  Now the crisis shifted to London, as investors traced financial ties between Germany and England. During the summer of 1931, investors dumped sterling in massive amounts. Even without Germany, the pound was already in a parlous state. In late July 1931, a committee of bankers and economists, the May Committee, had predicted that Britain’s budget deficit would widen to £120 million, with no end of red ink in sight. The committee recommended higher taxes and a 10-percent cut in the dole. A few days later, sterling cracked on world markets. The Bank of England told Philip Snowden, the chancellor of the Exchequer, that Britain had almost exhausted its foreign exchange. Despite the need for stringency, Ramsay MacDonald’s Labour government was stymied in coping with the problem. With 2.5 million unemployed, the unions wouldn’t surrender unemployment benefits.

  A few days before the May report was published, Monty Norman left the bank “feeling queer.” A year before, tired and wrung out, he had taken a two-month vacation in South America. Now haggard from overwork, the high-strung Norman was ordered to bed by doctors. When he was again ambulatory, it was recommended that he travel abroad to recover from his nervous collapse. Norman was temporarily replaced by his deputy governor, Sir Ernest Harvey. As a sterling crisis loomed, Jack Morgan and Teddy Grenfell decided to smuggle Norman out of England. Fearing he might break, the House of Morgan plott
ed with British authorities to place him in temporary exile. After clearing Norman’s removal with Edward Peacock, a Bank of England director, Grenfell reported to New York, “M.N. has not made any progress and it has been intimated to him that he should keep away and leave No. 2 to run the show.”18 It is unclear whether the doctors were part of this scheme or whether they were invoked as a cover for the operation.

  One marvels at both Morgan’s imperial hauteur and the tender solicitude for Norman. The bank wished to banish him with dignity. Jack telegrammed with a gesture of royal magnanimity: if he wished, Norman could take the Corsair IV anywhere in Europe, North Africa, or the Far East, attended by a doctor of his own choosing. “There are rooms for six beside himself,” Jack told Grenfell, “and for all the servants he could want.”19 Norman was steaming to Quebec when Jack’s message came by radio, and he declined the “glorious offer.” To scotch rumors of a bankers’ cabal, he wanted to avoid the United States altogether. He recuperated at the Chateau Frontenac, where he also conferred with George Harrison. In exile, Monty was spared the need to take the ax to his beloved gold standard, and Grenfell said afterward he wouldn’t have been able to withstand the strain.

  The House of Morgan had helped Britain back onto the gold standard in 1925 and now underwrote a last-ditch effort to save it. Prime Minister Ramsay MacDonald and Philip Snowden knew the pound couldn’t be defended without a foreign loan. New York and Paris owned most of the world’s gold, and George Harrison suggested a joint U.S.-French loan. It fell to 23 Wall to keep MacDonald informed of Wall Street opinion vis-à-vis British chances for a credit. The messenger was Teddy Grenfell, who had triple authority—as a Bank of England director, a Conservative member of Parliament from the City, and the senior Morgan Grenfell partner. Pitiless toward Labour politicians and staunchly opposed to their program of nationalizing industry, he had a scathing opinion of MacDonald, whom he found coarse and gutless. “The only white thing about him is his liver, and the only portion of him that is not red is his blood.”20 In early August, Grenfell warned MacDonald that halfway measures wouldn’t do and that a British loan from Wall Street would be dimly received unless he took courageous action and cut the budget deficit. Sensing a crisis in the offing, Grenfell tracked down the Conservative leader, Stanley Baldwin, then in France, and suggested he return to England at once.