After this meeting, Chicago banker James B. Forgan, president of the Rockefeller-dominated First National Bank of Chicago, emerged as the most effective banker spokesman for the central bank movement. Not only was his presentation of the Aldrich Plan before the executive council of the ABA in May considered particularly impressive, it was especially effective coming from someone who had been a leading critic (if on relatively minor grounds) of the plan. As a result, the top bankers managed to get the ABA to violate its own bylaws and make Forgan chairman of its executive council.
At the Atlantic City conference, James Forgan had succinctly explained the purpose of the Aldrich Plan and of the conference itself. As Kolko sums up:
the real purpose of the conference was to discuss winning the banking community over to government control directly by the bankers for their own ends.... It was generally appreciated that the [Aldrich Plan] would increase the power of the big national banks to compete with the rapidly growing state banks, help bring the state banks under control, and strengthen the position of the national banks in foreign banking activities.74
By November 1911, it was easy pickings to have the full American Bankers Association endorse the Aldrich Plan. The nation’s banking community was now solidly lined up behind the drive for a central bank.
However, 1912 and 1913 were years of some confusion and backing and filling, as the Republican Party split between its insurgents and regulars, and the Democrats won increasing control over the federal government, culminating in Woodrow Wilson’s gaining the presidency in the November 1912 elections. The Aldrich Plan, introduced into the Senate by Theodore Burton in January 1912, died a quick death, but the reformers saw that what they had to do was to drop the fiercely Republican partisan name of Aldrich from the bill, and with a few minor adjustments, rebaptize it as a Democratic measure. Fortunately for the reformers, this process of transformation was eased greatly in early 1912, when H. Parker Willis was appointed administrative assistant to Carter Glass, the Democrat from Virginia who now headed the House Banking and Currency Committee. In an accident of history, Willis had taught economics to the two sons of Carter Glass at Washington and Lee University, and they recommended him to their father when the Democrats assumed control of the House.
The minutiae of the splits and maneuvers in the banking reform camp during 1912 and 1913, which have long fascinated historians, are fundamentally trivial to the basic story. They largely revolved around the successful efforts by Laughlin, Willis, and the Democrats to jettison the name Aldrich. Moreover, while the bankers had preferred the Federal Reserve Board to be appointed by the bankers themselves, it was clear to most of the reformers that this was politically unpalatable. They realized that the same result of a government-coordinated cartel could be achieved by having the president and Congress appoint the board, balanced by the bankers electing most of the officials of the regional Federal Reserve Banks, and electing an advisory council to the Fed. However, much would depend on whom the president would appoint to the board. The reformers did not have to wait long. Control was promptly handed to Morgan men, led by Benjamin Strong of Bankers Trust as all-powerful head of the Federal Reserve Bank of New York. The reformers had gotten the point by the end of congressional wrangling over the Glass bill, and by the time the Federal Reserve Act was passed in December 1913, the bill enjoyed overwhelming support from the banking community. As A. Barton Hepburn of the Chase National Bank persuasively told the American Bankers Association at its annual meeting of August 1913: “The measure recognizes and adopts the principles of a central bank. Indeed... it will make all incorporated banks together joint owners of a central dominating power.”75 In fact, there was very little substantive difference between the Aldrich and Glass bills: the goal of the bank reformers had been triumphantly achieved.76, 77
CONCLUSION
The financial elites of this country, notably the Morgan, Rockefeller, and Kuhn, Loeb interests, were responsible for putting through the Federal Reserve System, as a governmentally created and sanctioned cartel device to enable the nation’s banks to inflate the money supply in a coordinated fashion, without suffering quick retribution from depositors or noteholders demanding cash. Recent researchers, however, have also highlighted the vital supporting role of the growing number of technocratic experts and academics, who were happy to lend the patina of their allegedly scientific expertise to the elites’ drive for a central bank. To achieve a regime of big government and government control, power elites cannot achieve their goal of privilege through statism without the vital legitimizing support of the supposedly disinterested experts and the professoriat. To achieve the Leviathan state, interests seeking special privilege, and intellectuals offering scholarship and ideology, must work hand in hand.
Part 3
FROM HOOVER TO ROOSEVELT: THE FEDERAL RESERVE AND THE FINANCIAL ELITES
FROM HOOVER TO ROOSEVELT: THE FEDERAL RESERVE AND THE FINANCIAL ELITES
This chapter is grounded on the insight that American politics, from the turn of the twentieth century until World War II, can far better be comprehended by studying the interrelationship of major financial groupings than by studying the superficial and often sham struggles between Democrats and Republicans. In particular, American politics in this period was marked by a fierce struggle between two major financial-industrial groupings: the interests clustered around the House of Morgan on the one hand, and an alliance of Rockefeller (oil), Harriman (railroad), and Kuhn, Loeb (investment banking) interests on the other. The Morgans began in investment banking, and moved out into railroads, commercial banking, and then manufacturing; the Rockefeller–Harriman–Kuhn, Loeb alliance began in their three respective original spheres, and moved into commercial banking. In most instances, the two mighty combines clashed: for example, in whether or not Theodore Roosevelt (always closely allied to the Morgans) should use the antitrust weapon to smash Standard Oil, or whether, in his turn, President Taft (allied with the Ohio-based Rockefellers) should try to break up Morgan trusts such as International Harvester or United States Steel. In other areas, the interests of the two mammoths coincided and they were allies: thus, both groups were heavily represented in the drive for measures cartelizing industry that were sought and lobbied for by the National Civic Federation during the Progressive Era; and both groups joined to push through the Federal Reserve System.1
THE EARLY FED, 1914–1928: THE MORGAN YEARS
In their joining together to draft, and then to lobby for, the new Federal Reserve System, the House of Morgan was clearly very much the senior partner in the enterprise. The secret meeting of a handful of top bankers at the Jekyll Island Club in November 1910 that framed the prototype of the Federal Reserve Act was held at a resort facility provided by J.P. Morgan himself. The Federal Reserve, in its first two decades, contained two loci of power: the main one was the head, then called the governor, of the Federal Reserve Bank of New York; of lesser importance was the Federal Reserve Board in Washington. The governor of the New York Fed from the beginning until his death in 1928, was Benjamin Strong, who had spent his entire working life in the Morgan ambit. He was a vice president of the Bankers Trust Company, established by the Morgans to engage in the new and lucrative trust business; and his best friends in the world were his mentor and neighbor, the powerful Morgan partner Henry P. Davison, as well as two other Morgan partners, Dwight Morrow and Thomas W. Lamont. So highly trusted was Strong in the Morgan circle that he was brought in to be the personal auditor of J. Pierpont Morgan, Sr., during the panic of 1907. When he was offered the post of governor of the New York Fed in the new Federal Reserve System, the reluctant Strong was convinced by Davison that he could operate the Fed as a “real central bank... run from New York.”2
The Morgans were not nearly as dominant in the then-lesser institution of the Federal Reserve Board in Washington. On the original board, there were seven members, of whom two, the secretary of the Treasury and the comptroller of the currency, were ex officio. The Morgan
bloc on the original board was led by Secretary of the Treasury William Gibbs McAdoo, son-in-law of President Wilson, whose Hudson and Manhattan Railroad Company in New York had been bailed out personally by J.P. Morgan, who then proceeded to staff the officers and board of Hudson and Manhattan with his closest business associates. From that point on, McAdoo was surrounded by a Morgan ambience.3 Comptroller of the currency was John Skelton Williams, a protégé of McAdoo’s who had also been a director of the Hudson and Manhattan Railroad. Another board member was McAdoo protégé Charles S. Hamlin, who came to the board from the post of assistant secretary of the Treasury. In addition to being a wealthy Boston lawyer—from a Boston financial group long affiliated with the Morgan interests— Hamlin had married into the wealthy Pruyn family of Albany, which had been associated with the Morgan-dominated New York Central Railroad.
If these three were solid Morgan men, the other four Reserve Board members were not nearly as reliable: Paul M. Warburg was partner and brother-in-law of Jacob Schiff of the investment banking house of Kuhn, Loeb; Frederic A. Delano, uncle of Franklin D. Roosevelt, was president of the Rockefeller-controlled Wabash Railway; William P.G. Harding was an Alabama banker whose father-in-law’s iron manufacturing company had prominent Morgan as well as rival Rockefeller men on its board; and Adolph C. Miller was an academic economist at Berkeley who had married into the wealthy Morgan-connected Sprague family of Chicago. Thus, of the seven members of the original board, three were Morgan men (but of whom two were ex officio); one was Kuhn, Loeb; one Rockefeller; one an independent banker with both Morgan and Rockefeller connections; and one was an economist with vague family ties to the Morgans. Hardly complete Morgan control of the board!
But the Morgans not only had by far the most powerful Federal Reserve banker, Benjamin Strong, in their corner, they also had the Republican administrations of the 1920s. Although there were various groups around President Warren G. Harding, as an Ohio Republican he was closest to the Rockefellers, and his secretary of state, Charles Evans Hughes, was a mentor of John D. Rockefeller, Jr.’s, New York Bible class, a leading Standard Oil attorney, and a trustee of the Rockefeller Foundation.4 Harding’s sudden death in August 1923, however, unexpectedly elevated Vice President Calvin Coolidge to the presidency.
Coolidge has been misleadingly described as a colorless small-town Massachusetts attorney. Actually, the new president was a member of a prominent Boston financial family, who were board members of leading Boston banks. One, T. Jefferson Coolidge, became prominent in the Morgan-affiliated United Fruit Company of Boston. Throughout his political career, moreover, Calvin Coolidge had two important mentors, both neglected by historians. One was Massachusetts Republican Party Chairman W. Murray Crane, who served as a director of three powerful Morgan-dominated institutions: the New Haven and Hartford Railroad, the Guaranty Trust Company of New York, and AT&T, on which he was also a member of the board’s executive committee. The other was Amherst classmate and prominent Morgan partner Dwight Morrow. Morrow began to agitate for Coolidge for president as early as 1919, and continued his pressure at the Chicago Republican convention of 1920. Dwight Morrow and fellow Morgan partner Thomas Cochran lobbied strenuously for Coolidge at Chicago. Cochran, who was not an Amherst graduate, did not have the Amherst excuse for working for Coolidge, and so he kept in the background. Cochran and Morrow were happy, as prominent Morgan men, to confine their work to the background and to push forward as their front man for Coolidge the large, doughty Boston merchant Frank Stearns, who did have the virtue of being an Amherst graduate.5
Secretary of the Treasury throughout all three Republican administrations of the 1920s was the powerful multimillionaire tycoon Andrew Mellon, head of the Mellon interests, whose empire spread from the Mellon National Bank of Pittsburgh to encompass Gulf Oil, Koppers Company, and Aluminum Corporation of America. Mellon was generally allied to the Morgan interests. Furthermore, when Charles Evans Hughes returned to private law practice in the spring of 1925, Coolidge offered his crucial State Department post to longtime Wall Street attorney and former secretary of state and of war, Elihu Root, who might be called the veteran head of the “Morgan bar.” At one critical time in Morgan’s affairs, Root had served as Morgan’s personal attorney. After Root refused the State Department post, Coolidge was forced to settle for a lesser Morgan light, Minnesota attorney Frank B. Kellogg. Undersecretary to Kellogg was Joseph C. Grew, who had family connections with the Morgans (J.P. Morgan, Jr., had married a Grew), while, in 1927, two highly placed Morgan men were asked to take over relations with troubled Mexico and Nicaragua.6
The year 1924 indeed saw the House of Morgan at the pinnacle of political power in the United States. President Calvin Coolidge, friend and protégé of Morgan partner Dwight Morrow, was deeply admired by J.P. “Jack” Morgan, Jr. Jack Morgan saw the president, perhaps uniquely, as a rare blend of deep thinker and moralist. Morgan wrote a friend: “I have never seen any president who gives me just the feeling of confidence in the country and its institutions, and the working out of our problems, that Mr. Coolidge does.”
On the other hand, the House of Morgan faced the happy dilemma in the 1924 presidential election that the Democratic candidate was none other than John W. Davis, senior partner of the Wall Street firm of Davis, Polk and Wardwell, and chief attorney for J.P. Morgan and Company. Davis, a protégé of the legendary Morgan partner Harry Davison, was also a personal friend and a backgammon and cribbage partner of Jack Morgan’s. It was an embarrassment of riches. Whoever won the 1924 election, the Morgans could not lose, although they decided to opt for Coolidge.7
However, 1928, saw inevitable changes in Morgan domination of monetary policy. Benjamin Strong, sickly all year, died in October, and was replaced by George L. Harrison, his hand-picked successor. While Harrison was a devoted “Morgan loyalist,” he did not quite carry the clout of Benjamin Strong.8
The Coolidge administration, too, was coming to an end. The Morgans, again facing an embarrassment of riches, were torn three ways. Their prime goal was to induce their beloved president to break precedent and run for a third term. Not being able to persuade Coolidge, the Morgans next turned to Vice President Charles G. Dawes, who had been connected with various Morgan railroads in Chicago. When Dawes dropped out of the race, the Morgans turned at last to Herbert Clark Hoover, who had been a powerful secretary of commerce during the two Republican administrations of the 1920s. While Hoover had not been as intimately connected with the Morgans as had Calvin Coolidge, he had long been close to the Morgan interests. Particularly influential over Hoover during his administration were two unofficial but powerful advisers—both Morgan partners: Thomas W. Lamont, and Dwight Morrow, whom Hoover consulted regularly three times a week.9
Herbert Hoover’s Cabinet was also loaded with Morgan people. As secretary of state, Hoover chose the longtime Morgan lawyer, and disciple and partner of Elihu Root, Henry L. Stimson. Andrew Mellon continued as Treasury secretary, and his undersecretary, who was to replace Mellon in 1931 and was close to Hoover, was Ogden L. Mills, a former congressman and New York corporate lawyer whose father, Ogden L. Mills, Sr., had been a leader of such Morgan railroads as New York Central.10 Hoover’s secretary of the Navy was Charles Francis Adams, III, from the famous Boston Brahmin family long associated with the Morgans. This particular Adams daughter had been fortunate enough to marry Jack Morgan.
Benjamin Strong’s monetary policy, throughout his reign, was essentially a Morgan policy. The Morgans, through their subsidiary, Morgan, Grenfell in London, had long been intimately associated with the British government and with the Bank of England. Before World War I, the House of Morgan had been named a fiscal agent of the British Treasury and of the Bank of England. After the war began, the Morgans became the sole purchaser of all goods and supplies for the British and French war effort in the United States, as well as the monopoly underwriter in the United States of all British and French bonds. The Morgans played a substantial role in bringing the United S
tates into the war on Britain’s side, and, as head of the Fed, Benjamin Strong obligingly doubled the money supply to finance America’s role in the war effort.11
After the end of the war, Strong’s monetary policy was deliberately guided by the prime objective of helping Great Britain establish, and impose upon Europe, a new and disastrous gold-exchange standard. The idea was to restore “England”—which really meant the Morgans’ English associates and allies—to her old position of financial dominance by helping her establish a phony gold standard. Ostensibly this was a return to the prewar “classical” gold standard. But the return, in the spring of 1925, was at the prewar par, a rate that hopelessly overvalued the pound sterling, which Britain had inflated and depreciated during the fiat money era after 1914. Britain insisted on returning to gold at an overvalued par, a policy guaranteed to hobble British exports, and yet was determined to indulge in continued cheap money and inflation, instead of contracting its money supply to make the prewar par viable. To help Britain get away with this peculiar and contradictory policy, the United States helped to pretend that the post-1925 standard in Europe—this gold bullion-pound standard—was really a genuine gold-coin standard. The United States inflated its money and credit in order to prevent inflationary Britain from losing gold to the United States, a loss which would endanger the new, jerry-built “gold standard” structure. The result, however, was eventual collapse of money and credit in the U.S. and abroad, and a worldwide depression. Benjamin Strong was the Morgans’ architect of a disastrous policy of inflationary boom that led inevitably to bust.
THE HOOVER FED: HARRISON AND YOUNG
A History of Money and Banking in the United States: The Colonial Era to World War II Page 23
