by Ron Chernow
IN the autumn of 1932, Hoover presided over one last humiliation—a nationwide banking crisis. Three years of deflation had eroded the collateral behind many loans. As banks called them in, the business slump worsened and produced more bank runs and failures. Before 1932, the thousands of bank closings were mostly confined to small rural banks. Then, that October, Nevada’s governor shut the state’s banks. There followed a frightening crescendo of state bank closings—euphemistically called holidays—climaxed by an eight-day closing of Michigan banks in February. The contagion spread so fast that thirty-eight states had shut their banks by Roosevelt’s inauguration.
Between the November election and the March 1933 inauguration was a time of paralysis and glowering hostility between Hoover and Roosevelt. Irritated, beleaguered, and resentful, the president refused to undertake new initiatives without Roosevelt’s cooperation; Roosevelt, on the other hand, wanted to wait until he assumed full power. For the House of Morgan, it was a season of peril. Through three consecutive Republican terms, it had probably enjoyed better access to Washington than any other bankers in American history. Under Hoover, the president was a telephone call away. Sometimes Morgan power had seemed as awesome as crude left-wing propaganda would have it. Now the bank combated threats to its survival as the political wheel came full circle.
As early as 1929, Hoover advanced the idea of separating commercial and investment banking, a notion that now took hold. It appeared in a banking bill introduced by Senator Carter Glass as early as 1930 and formed part of the Democratic party platform in 1932. During the campaign, Roosevelt blamed Hoover for the speculative binge of 1929 and the spate of foreign loans that left a bloody trail of defaults. After Bolivia became the first Latin American debtor to default in 1931, nearly every Latin American government followed suit.
After Hoover’s “bear raid” crusade, the president’s departure wasn’t mourned at the Corner. Russell Leffingwell and Parker Gilbert formed a Morgan minority that voted for Roosevelt. “The truth is,” Leffingwell confessed to Walter Lippmann, “I can’t bring myself to vote for a desperate man who wishes to continue desperate remedies for a desperate situation.”20 Nor was it self-evident that FDR would emerge as an enemy. Genial and aristocratic, he chastised Hoover as a big spender and advocated balanced budgets; he looked more bland than bold. Leffingwell almost patronized Roosevelt, calling him “a pleasant, kindly, well-meaning chap with a pleasing smile.”21
Socially, FDR fit the Morgan mold far more than Hoover. Leffingwell—who knew Roosevelt from his own Treasury days, when Roosevelt was in the Navy Department—excitedly set down his pedigree for Vivian Smith of Morgan Grenfell. He noted Roosevelt’s Groton and Harvard education, his Hudson River upbringing and old New York Dutch ancestry, and his employment at the Wall Street firm of Carter, Ledyard, and Milburn, which defended corporate clients against antitrust actions. Leffingwell ended sarcastically, “All that is the background of the man who is a peril to American institutions according to Hoover the foreign mining engineer.”22 Lamont also knew Roosevelt, having rented his East Sixty-fifth Street house. Before the inauguration, he phoned him and busily dashed off “Dear Frank” letters.
If the winter interregnum suggested possible good relations, there were also warning signs. Late in the summer of 1932, Leffingwell and Roosevelt had an exchange that previewed, in miniature, the titanic feud to come. In August, Leffingwell sent “Frank” a note deriding the banking reforms being advanced by Carter Glass; in it, he tried to strike a note of camaraderie and shared values: “You and I know that we cannot cure the present deflation and depression by punishing the villains, real or imaginary, of the first post-war decade, and that when it comes down to the day of reckoning nobody gets very far with all this prohibition and regulation stuff.”23 Far from indulging Leffingwell, Roosevelt threw cold water in his face: “I wish we could get from the bankers themselves an admission that in the 1927 to 1929 period there were grave abuses and that the bankers themselves now support wholeheartedly methods to prevent recurrence thereof. Can’t bankers see their own advantage in such a course?”24 It would be the tragedy of the House of Morgan that it couldn’t see the advantage in such a course. The public demanded a mea culpa for 1929, which the bankers wouldn’t provide. As Leffingwell told Roosevelt, “The bankers were not in fact responsible for 1927-29 and the politicians were. Why then should the bankers make a false confession?”25 Yet such was Leffing-well’s disgust with Hoover’s tariffs, isolationism, and reparations policy that he gladly voted for FDR.
The bank campaigned to slip Leffingwell into a Treasury post, which became a litmus test of Roosevelt’s financial soundness. All aflutter, Monty Norman told Lamont, “I shall wait to hear that R.C.L. is established before I can rest happily.”26 When Senator Carter Glass was approached about taking the Treasury secretary job again, he said he would want to hire two Morgan men and former deputies: Leffingwell and Parker Gilbert.27 Walter Lippmann joined the bandwagon, but Roosevelt cringed: “We simply can’t tie up with 23.”28 The shorthand betrayed a knowingness that would work to the bank’s disadvantage. Despite his failure to get a Treasury post, Leffingwell would remain a trusted friend and adviser of Roosevelt’s and something of a black sheep on Wall Street for his partial support of the administration.
The person who probably shot down Leffingwell’s trial balloon was Ferdinand Pecora, the fifty-three-year-old former assistant district attorney from New York, who took over the Senate’s Wall Street probe in January 1933. Smoking a blunt cigar, his shirtsleeves rolled up, the hard-bitten Pecora captured the public’s attention. For six months, the hearings had been stalled. Republicans and Democrats, with fine impartiality, had feared fat cats of both parties might be named and united in a conspiracy of silence. With Pecora as counsel, the hearings acquired a new, irresistible momentum. They would afford a secret history of the crash, a sobering postmortem of the twenties that would blacken the name of bankers for a generation. From now on, they would be called banksters.
Even before Roosevelt’s inauguration, Pecora turned his investigative spotlight on the National City Bank, showing eminent bankers in sordid poses, particularly the bank’s head, Charles E. Mitchell, a member of the Black Thursday rescue squad. Through Pecora, the public got a view of bankers scheming while supposedly protecting the public. Pecora revealed that the $12-million Morgan loan to preserve National City’s merger with the Corn Exchange Bank had represented more than 5 percent of Morgans’ net worth, sticking the bank with a substantial loss. It was also disclosed that to buffer crash losses at National City, one hundred top officers had borrowed $2.4 million, interest free, from a special morale loan fund—loans never repaid.
Pecora also studied the operations of the National City Company, whose 1900 salesmen had unloaded risky Latin American bonds on the masses. It emerged that in touting bonds from Brazil, Peru, Chile, and Cuba to investors, the bank had hushed up internal reports on problems in these countries. After bank examiners criticized sugar loans made by the parent bank, the securities affiliate sold them as bonds to investors, an example of how commercial banks might palm off bad loans through securities affiliates. Pecora cited the case of an Edgar D. Brown of Pottsville, Pennsylvania, whose National City salesman had pushed him into “a bewildering array of Viennese, German, Peruvian, Chilean, Rhenish, Hungarian, and Irish government obligations.”29
Another supposed hero of Black Thursday was Albert H. Wiggin of Chase, a poker-playing clergyman’s son who sat on fifty-nine corporate boards. He was also exposed as being up to his ears in mischief. For six weeks in 1929, he had shorted shares of Chase stock and earned several million dollars; the speculation was backed by an $8-million loan from Chase itself. For good measure, Wiggin had set up a Canadian securities company to avoid federal taxes. The stories of Chase and National City showed the extent to which the traditional distinction between savings and speculation had disappeared in the 1920s—a distinction the Glass-Steagall Act would seek to restore.
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The Pecora findings created a tidal wave of anger against Wall Street, and against this backdrop Roosevelt vetoed the Leffingwell nomination. As people followed the hearings on their farms and in their offices, on soup lines and in Hoovervilles, they became convinced that they’d been conned in the 1920s. Yesterday’s gods were no more than greedy little devils. Even most of Wall Street was shocked by this phase of the hearings. Senator Burton Wheeler of Montana said, “The best way to restore confidence in the banks would be to take these crooked presidents out of the banks and treat them the same way we treated Al Capone when he failed to pay his income tax.” Even Carter Glass, a staunch Morgan friend, joked nastily, “One banker in my state attempted to marry a white woman and they lynched him.”30
When Roosevelt took office on March 4, 1933, he ran up a flag of independence from Wall Street. That morning, Governor Herbert Lehman shut New York’s banks, and Richard Whitney mounted the podium to close the Stock Exchange. The financial massacre was complete: of twenty-five thousand banks in 1929, some seven thousand had now failed. Amid this atmosphere of financial ruin, a grim Roosevelt delivered a stinging indictment of the bankers: “The money changers have fled from their high seats in the temple of our civilization. We may now restore that temple to the ancient truths.”31
To offer advice on the banking crisis, Lamont had telephoned Roosevelt and urged him to avoid drastic measures. This counsel reflected a faith not only in market mechanisms but in political expediency. As J. P. Morgan and Company cabled London: “There is great reluctance to contemplate any form of federal action which it might be difficult later on to get rid of”32 Roosevelt brushed aside Lamont’s tepid remedies and announced a sweeping week-long bank holiday; over five hundred banks never reopened. Along with an emergency bank bill, this tough action restored public confidence and revealed a new public receptivity to emergency measures. Throughout the New Deal, the House of Morgan would repeat the same political error: it would advocate marginal reforms, which would be dismissed as self-serving. Instead of devising its own alternative reform package, it settled for scare tactics.
Despite these early Roosevelt rebuffs, Hoover’s bleak record made even Morgan bankers ripe for experimentation. Jack Morgan was at first ecstatic about FDR. “Of course, it is quite possible that some of his cures may be wrong ones, but, on the whole, things were so bad that almost any cure may do some good. ”33 In correspondence from the Morgan files of March 1933, the partners sound remarkably like other frightened Americans: they, too, needed a savior. Hadn’t they seen their own prescriptions fail? After Roosevelt’s March 12 fireside chat and the reopening of the banks, 23 Wall reported with relief to Morgan Grenfell: “The whole country is filled with admiration for President Roosevelt’s actions. The record of his accomplishment in just one week seems incredible because we have never experienced anything like it before.”34 The Stock Exchange soared and posted a 54-percent gain for 1933.
The House of Morgan couldn’t see that, like a black speck on the horizon, the Pecora hearings were a hurricane heading in its direction. During this false honeymoon, the House of Morgan committed a famous act of apostasy: it applauded Roosevelt for taking America off the gold standard in April. It was hoped this would devalue the dollar, raise commodity prices, and reverse the lethal deflation. A radical measure in ordinary times, it was less controversial in 1933. Harking back to greenback currency (currency with no metal backing) and free-silver coinage, farmers and other debtors were reviving old inflationary nostrums from the days of William Jennings Bryan. Roosevelt was under pressure to choose some inflationary expedient. Gold was moving abroad in large quantities, and there was fear it would contract the monetary base, feeding deflation.
The House of Morgan provided intellectual support for leaving gold. Russell Leffingwell lunched with Walter Lippmann and advised him on a newspaper column favoring an end to a rigid gold standard. Leffingwell saw the need for higher commodity prices. He also felt the downward drift of European currencies had led to an overvalued dollar, hurting U.S. exports. After lunch, Leffingwell said, “Walter, you’ve got to explain to the people why we can no longer afford to chain ourselves to the gold standard. Then maybe Roosevelt, who I’m sure agrees, will be able to act.”35 Lippmann let Leffingwell vet the article and sharpen its fine points.
Leffingwell had great intellectual stature among the New Dealers. When Roosevelt later accused Treasury Secretary Henry Morgenthau, Jr., of sounding like Leffingwell, Morgenthau retorted, “I wish I had half his brains.”36 One of the more radical brain trusters, Columbia professor Rexford G. Tugwell, noted Leffingwell’s influence on Roosevelt in the gold decision. “Consulting widely among New York acquaintances he regarded as public-minded—Russell Leffingwell of the House of Morgan was perhaps the most trusted—he had concluded that gold must be sequestered entirely, hoarding forbidden, and shipment abroad prohibited.”37 The day after Walter Lippmann’s column appeared, Roosevelt publicly advocated an end to gold. Through a series of executive orders, he prohibited gold exports and hoarding. Congress in June abrogated the clause in bond issues that mandated compulsory payment in gold coin. Even Jack Morgan smilingly applauded the move. For those who remembered Pierpont’s 1895 rescue of the gold standard and Morgan efforts to put countries back on gold throughout the twenties, such statements were wondrous to behold, proof that the safe nineteenth-century world of neoclassic economics had been turned topsy-turvy.
Many financial experts were in a state of shock, as if the ship of state’s rudder had been violently torn off. Budget Director Lewis Douglas intoned, “This is the end of Western civilization.”38 Bernard Baruch felt a similar alarm at this sudden turn in financial policy: “It can’t be defended except as mob rule. Maybe the country doesn’t know it yet, but I think we may find that we’ve been in a revolution more drastic than the French Revolution.”39 The perplexity was greater in Europe, where bankers wondered why the United States had cheapened its currency despite a trade surplus and an adequate gold store. When informed that Monty Norman thought the move would plunge the world into bankruptcy, Roosevelt—who called him Old Pink Whiskers—just laughed. The gold embargo showed that both the United States and England had renounced world leadership in favor of domestic ends. The world was adrift in a full-blown war of economic nationalism, fought with competitive currency devaluations.
For people schooled in the old economic verities, it was a disorienting new world. Bernard S. Carter, a Morgan et Compagnie partner in Paris, told J. P. Morgan partners how a Romanian banker walked into Morgans’ place Vendôme office and launched into the following diatribe:
Here are the 3 great financial countries of the world, who have been preaching the sanctity of contracts to us ever since the war, and who have now all resorted to repudiation of one kind or another in their turn. First England goes off the gold standard, then France refuses to pay her debts to America, and now America goes off the gold standard. I guess we Roumanians are not such crooks after all!40
By summer, Roosevelt was chiding the gold standard and other “old fetishes of so-called international bankers” and praising the brave new world of managed national currencies.41 Although by background an internationalist and a strong supporter of the League of Nations, FDR pursued domestic recovery at the expense of global economic leadership. More cosmopolitan than Hoover, he had a vestigial fear of British finance. He ended British war-debt payments, as Leffingwell had advised, but couldn’t suppress a view of British bankers as a devious bunch out to trick the Yanks. “The trouble is that when you sit around the table with a Britisher he usually gets 80$$$ of the deal and you get what’s left,” Roosevelt explained.42
So the early New Deal threatened the House of Morgan in two ways: the Pecora hearings were exposing practices that could bring fresh regulation to Wall Street. And the White House attitude toward European finance augured an end to the House of Morgan’s special diplomatic role of the 1920s. After an incestuous relationship with Washington in the tw
enties, the bank would suffer the curse of eternal banishment.
THAT spring, FDR urged the Senate Banking Committee to adopt a broader, more amorphous mandate to investigate “all the ramifications of bad banking.” It was nothing less than a license for a comprehensive inquest into Wall Street. The committee turned to private bankers—whom Pecora defined as men “who make their own rules and are not subject to examination”—with J. P. Morgan and Company topping the list. It was too much to expect America’s richest bankers to get off scot-free. What retrospective of the twenties would be complete without the bank that epitomized the decade’s power? As a former Republican party chairman said, “Never before in the history of the world has there been such a powerful centralized control over finance, industrial production, credit, and wages as is at this time vested in the Morgan group.”43 It was time for Washington to storm the Bastille of Wall Street.
In Ferdinand Pecora, the committee’s $255-a-month counsel, history provided a perfect foil for Morgan bankers. A Sicilian-born, anti-Tammany Democrat, he had thick, wavy black hair mixed with gray, a jaunty grin, and an assertive chin. A devoted Bull Mooser in 1912, he had switched to Wilson’s progressive Democrats in 1916. As assistant district attorney in New York, he took on tough assignments—from bucket shops to crooked banks, the Police Department to bail bondsmen—posting an 80-percent conviction rate. Even when his prosecutorial manner was mild, he had a talent for taunts and withering asides. He was also fearless and incorruptible and had rejected several offers from Wall Street law firms. When he took over the Senate probe, he thought he would be through before Roosevelt took office. Instead, the investigation went on until May 1934, producing ten thousand pages of testimony that filled up eight fat tomes.
