A History of Money and Banking in the United States: The Colonial Era to World War II

by Murray N. Rothbard

  Tensions within the administration, and within the industrial and financial communities, centered around the World Economic Conference set for London in June 1933, which had been prepared for a year by the British-dominated League of Nations, in a desperate attempt to restore some sort of fixed-exchange-rate, stabilized international monetary system. The World Economic Conference, with delegates from 64 nations, met on June 12. The gold bloc at the conference, led by the French, urged an immediate restoration of the full, classical gold standard; the British wanted fixed exchange rates, tied to gold or not, but emphasizing that the pound must be cheaper at $4.00, so as not to lose the export advantage Britain had built up in the past two years. The United States, on the other had, wanted to place prime emphasis on continued domestic inflation; currency stabilization, which should not put the pound below $4.25, could wait until some future date after domestic prices had risen.

  From the beginning, however, there was great tension between the bulk of the American delegation to London and the Roosevelt administration in Washington. Chief economic adviser to the American delegation was James P. Warburg of Kuhn, Loeb, who took the Morgan line of favoring a new international gold standard at new and more realistic exchange rates. Morgan-oriented George L. Harrison of the New York Fed, and Professor O.M.W. Sprague, were sent by FDR to work on an agreement for temporary stabilization of exchange rates for the duration of the conference. When, however, Sprague and Harrison concluded an agreement on June 16 with the British and French for temporary stabilization of the three currencies, setting the dollar-sterling rate at $4.00 a pound, and pledging the United States not to inflate the currency in the meanwhile, Roosevelt angrily rejected the agreement. Roosevelt gave two reasons to the chagrined Sprague and Harrison: the pound must be no cheaper than $4.25, and Roosevelt could accept no restraint on his freedom to inflate to raise domestic prices. Harrison quit in disgust and returned home—a harbinger of the fate of the Morgans in the years to come.

  The World Economic Conference proceeded with lengthy discussions, both the Americans and British talking about an eventual “gold standard” which would enjoy no domestic gold coin or bullion circulation, with gold to be used only as a medium for settling international balances of payments—a foretaste of the eventual Bretton Woods system after World War II. The stubbornness of the United States finally forced the assembled delegates to agree on an innocuous final declaration at the end of June that committed the United States to very little more than its own resolution for eventual return to a sadly denatured gold standard, coupled with a vague agreement to cooperate in limiting exchange-rate speculation.

  This declaration, weak as it was, seemed to offer hope of eventual stabilization, and so it was strongly supported by Sprague, Warburg, and by chief brain truster Raymond Moley, assistant secretary of state, who was head of the American delegation to London. Within the administration, the agreement was strongly supported by Douglas, Baruch, and by Undersecretary of the Treasury Dean G. Acheson. Acheson was a disciple of Morgan-oriented lawyer Henry L. Stimson, and one of his Washington law partners, J. Harry Covington, was a director of the Guggenheim-controlled Kennecott Copper Corporation. Sending the proposed declaration to Roosevelt on June 30, Moley pointed out that dollar depreciation during June had brought the pound-dollar rate up to $4.40, well above the $4.25 that Roosevelt had insisted on.

  On July 1, however, FDR stunned Moley, the delegates, and the American supporters of the agreement by flatly rejecting the declaration, stating that the United States should be allowed the time “to permit... a demonstration of the value of price-lifting efforts which we have well in hand.” But, adding insult to injury, Roosevelt followed up this rejection on July 3 with an arrogant and contemptuous message to the London conference, which became known as his famous “bombshell message.” Here, Roosevelt denounced any idea of currency stabilization as a “specious fallacy.” In particular, he thundered, “old fetishes of so-called international bankers are being replaced by efforts to plan national currencies” in order to obtain a fixed price level. In short, Roosevelt was now totally and publicly committed to the entire nationalist Fisher–Committee for the Nation program for fiat paper money, currency inflation, and a very steep “reflation” of prices. The idea of stable exchange rates or an international monetary order would fade away for the remainder of the 1930s, and monetary nationalism, currency blocs, and economic warfare would be the order of the day for the remainder of the decade.52

  The chagrined supporters of the aborted London monetary agreement soon found it necessary to leave the Roosevelt administration. This included Acheson; Warburg, who had been offered the job of undersecretary of the Treasury before Acheson and who was close to his ancient Kuhn, Loeb allies, the Harriman interests; Lewis W. Douglas, who was soon to write a bitter book attacking the New Deal;53 and Moley, who returned to the academy and who helped run Today and Newsweek with his friends the Astors and Harrimans.

  The Committee for the Nation has long been known as the prime mover behind the fiat money and inflationist policy of the early New Deal; what has not been known until recently was the powerful behind-the-scenes role in the committee played by the Rockefeller empire, in conjunction with their longtime international rival, the British Royal Dutch Shell Oil, financed by the Rothschild interests. Thus, a top financier of The Committee for the Nation was James A. Moffett, a longtime director and high official of the Rockefeller flagship company, the Standard Oil Company of New Jersey. Moffett, friend and early supporter of Roosevelt, coordinated his behind-the-scenes agitation for inflation and against the London Economic Conference with New York banker and leading silver-bloc agitator Rene Leon, who functioned as an agent for the powerful Sir Henri Deterding, head of Royal Dutch Shell, who was heading the international agitation for a worldwide cartelized increase in the price of silver. Deterding pressured Roosevelt for inflation, not so much in his capacity as an oil leader, as in a financier of silver production. It turns out that Moffett and Leon, working in tandem, were most influential in successfully pressuring Roosevelt to torpedo the London Economic Conference. Here was a startlingly clear case of Rockefeller (and Royal Dutch Shell) against Morgan.54

  BANKING AND FINANCIAL LEGISLATION: 1933–1935

  The Rockefellers’ and other financiers’ war with the Morgans in 1933 had been building for several years. By the late 1920s, the Rockefellers, along with newly rising financial groups, increasingly resented the Morgan grip over both the Federal Reserve, especially the New York Fed, as well as the administration. Bankers enraged at Benjamin Strong and the New York Fed’s low-interest policy on behalf of Britain in the 1920s, were led by Melvin A. Traylor, head of the Rockefeller-controlled First National Bank of Chicago. The Rockefellers had never been England-oriented. Traylor led the Chicago bankers in going to the Democratic convention in 1928 and supporting Al Smith, the Democratic nominee. Averell Harriman, of Brown Brothers, Harriman, solidified his support of the Democratic Party during the same year and for similar reasons. Also, brash new ethnic groups rose to challenge Morgan hegemony and were fiercely fought by the Morgans and their controlled New York Fed: these included the Bank of America, a huge new Italian-American-run commercial bank chain in the West; and the rising Irish-American buccaneer Joseph P. Kennedy of Boston, both of whom were Democrats and emphatically outside the WASP-Morgan-Republican structure.

  The crucial event occurred within the Morgans’ showcase New York institution, the Chase National Bank, a commercial bank with an investment banking arm, Chase Securities. As a result of the 1929 crash, the Rockefeller-controlled Equitable Trust Company was in vulnerable shape, and its new head, Winthrop W. Aldrich, engineered a merger into Chase in March 1930, making Chase the world’s largest bank. Aldrich was the brother-in-law of John D. Rockefeller, and was destined to be for decades the key Rockefeller man in banking as well as in the manipulation of politicians.

  A titanic three-year struggle immediately ensued for control of Chase between the Ro
ckefeller and the Morgan forces, who had previously been in charge. The CEO of Chase had been Morgan man Albert H. Wiggin, with Wiggin ally Charles McCain as chairman of the board. The Rockefeller forces quickly mobilized to make Winthrop Aldrich president of the bank, a move fought desperately but unsuccessfully by Morgan partner Thomas W. Lamont. Aldrich was now president and subordinate to Wiggin and McCain, but the nose of the camel was now in the tent, as Aldrich strove to oust Wiggin and McCain and take over the bank. Supporting Aldrich in this struggle were board members Thomas M. Debevoise, fraternity brother and top counsel to John D. Rockefeller, Jr.;55 Vincent Astor, of the famed Astor family and friend and cousin of Franklin Roosevelt; and Gordon Auchincloss, close friend of Winthrop Aldrich. As the conflict came to a climax in late 1932, Lamont found to his horror that several high Chase officials in the Aldrich camp were supporting Roosevelt. Cementing the closeness of Rockefeller and Chase National to Franklin D. Roosevelt was the crucial role of the shadowy, dominant adviser to President Woodrow Wilson, “Colonel” Edward Mandell House. House, a Democratic politician from Texas, had inherited railroads and other properties in Texas, and, during Wilson’s day, was very close to the Morgans. Now, however, House, a key behind-the-scenes adviser to Roosevelt, had shifted to the Rockefeller orbit, impelled by the fact that his daughter was married to Gordon Auchincloss.56

  At the end of 1932, Aldrich managed to oust Wiggin as chairman of the board of Chase; and he immediately began to use his perch as president to launch a multipronged and savage attack on the Morgan empire. In the first place, he collaborated fully and enthusiastically with the bitter and raucous Pecora–U.S. Senate Banking and Currency Committee assaults on Wall Street and particularly on the Morgan empire. Aldrich happily fed the Pecora committee data blackening the Wiggin-McCain regime at Chase, and Pecora was able to use such material to vilify demagogically the Morgan and other bankers for activities that were legal and legitimate. Thereby, Pecora could appeal both to the ignorance and to the envy of the bedazzled public. Thus, Pecora was able to hector the Morgan bankers for not paying income taxes during the depression—the public not being willing to understand the legitimacy of deducting severe stock losses from one’s income. The Morgans were also pilloried for having a “preferred list” of financiers and politicians for purchasing new stock issues in advance of public sale. The list made juicy reading as a clear attempt to curry favor, and it was in vain that the Morgans remonstrated that this opportunity can only be profitable in a rising stock market.57

  Similarly, Pecora was able to put Wiggin in the dock for profitably short-selling Chase stock on a loan from Chase.58 He badgered and ridiculed J. P. Morgan himself, and drove McCain into resigning from the bank. Aldrich used this crisis to become the dominant force at Chase, and to assume the post of chairman of the board in January 1934.

  Ferdinand Pecora has received little but adulation from the media and historians. Ironically, his harassment and persecution of Wall Street originated with Herbert Hoover. As early as 1919, Hoover had called for government regulation of the stock market to eliminate “vicious speculation.” In 1928 and 1929, Hoover had pioneered in the view that the problem of bank credit was that too much of it was going to the stock market rather than that there was too much bank credit, period. After the crash, President Hoover naturally segued into charging that the collapse of stock prices was caused by the vicious action of short-sellers, forgetting that for every short-seller there must be a buyer. Under threat of regulation, Hoover forced Morgan man Richard Whitney, head of the New York Stock Exchange, to agree “voluntarily” to withhold loans of stock for purposes of short-selling.

  After forcing the stock exchange to restrict short-selling in the crisis of late 1931 and yet again in February 1932, but being dissatisfied with continuing declines in stock prices, President Hoover finally carried out his threat and pressured the U.S. Senate to investigate the New York Stock Exchange, even though he admitted that the federal government had no constitutional jurisdiction over the exchange, which was a New York institution. Hoover continually and hysterically denounced what he termed “sinister” and “systematic bear raids” on stocks, as well as “vicious pools... pounding down” security prices, “deliberately making a profit from the losses of other people”— which of course is what bulls and bears always do from each other. Angrily replying to the protest of New York bankers, Hoover used some crystal ball of his own to assert that current prices of securities did not represent “true values”; instead, he declared, the vicious “propaganda that values should be based on earnings at the bottom of a depression is an injury to the country and to the investing public.” Mr. Hoover’s preferred alternative criterion? The absurd one of the public being “willing to invest on the basis of the future of the United States.”59 Hoover, lacking any knowledge of the market, was foolishly convinced that all-powerful Democratic speculators, headed by John J. Raskob of DuPont and Bernard Baruch, were conducting bear raids to drive down the prices of stocks. It was in vain that Whitney and the Morgans tried to pooh-pooh these fantasies.

  Hoover kept pressing the Senate Banking and Currency Committee to conduct hearings on “short-selling in the stock exchange,” beginning his pressure in late February 1932. Sensing disaster from these bull-in-a-china-shop tactics, Thomas Lamont vainly pleaded with Hoover to suspend his campaign. Finally, the hearings got under way in April 1932, the first witness, Richard Whitney, terming Hoover’s charges “purely ridiculous.” When, in private, Hoover told Lamont that short-selling by bears was responsible for all economic ills, including business stagnation and falling prices, and that “real values” were being destroyed by bear raids, Lamont tartly replied: “But what can be called ‘real value’ if a security has no earnings and pays no dividends?”60

  In late April, a new subcommittee broadened the Senate inquiry from the fruitless attempt to discover a Democratic bear conspiracy, to include pools and stock market manipulations in general. The short-selling emphasis seemed ridiculous when the Morgans stepped in to try to revive a crash in the bond market—a market where short-selling had been prohibited.

  The Senate subcommittee hearings were suspended in late June, but they took on a very different, and fateful, aspect when they reopened in January 1933, with Ferdinand Pecora of New York as chief counsel. The aggressive Pecora, a former chief assistant district attorney in New York, proceeded to launch a savage and demagogic assault on Wall Street in general and on the Morgan interests in particular. Pecora had been born in Sicily, and emigrated as a child to New York. At first intending to enter the Episcopal ministry, Pecora instead became a lawyer and, at the age of 30, became a district leader of the Progressive Party in 1912, and soon became vice president of the New York State party. Joining the Wilson Democratic Party a few years later, Pecora rose in the district attorney’s office during the 1920s. Politically ambitious, Pecora ran unsuccessfully for district attorney on the Democratic ticket in 1930, and repeated his effort and failure while basking in the public limelight during the Pecora stock market practices hearings in 1933.

  Pecora cultivated a media image of feisty integrity, but more astute observers noted that his angry and glaring searchlight pilloried Republican bankers, but managed to overlook such leading Democratic and pro–New Deal investment bankers on Wall Street as Brown Brothers, Harriman and Lehman Brothers. We know now, too, that President Franklin D. Roosevelt, who, in his inaugural address had ranted against “unscrupulous money changers” and in his first fireside chat to the radio public had oddly blamed investment bankers for the commercial banking crisis, met secretly with Pecora and with Senate Banking Committee Chairman Duncan Fletcher to urge them to go after J.P. Morgan and Company. Ferdinand Pecora was only too happy to oblige.61

  It was the hysterical atmosphere deliberately generated by the Pecora hearings, particularly Pecora’s assaults on Albert Wiggin’s Chase National Bank and on the Morgans, that created the atmosphere that permitted the coalition of New Deal reformers and Win
throp W. Aldrich’s Rockefeller forces to drive through fateful banking and financial legislation during the “First 100 Days” of 1933, legislation that overturned and destroyed the economic power of the Morgan empire. In particular, the Roosevelt administration managed to pass the Banking Act (Glass-Steagall Act) of 1933 and the Securities Act of 1933. In a thorough and illuminating analysis of the Pecora hearings, Professor George Benston has demonstrated both the legitimacy and the economic soundness of the maligned practices of the investment bankers, as well as their complete irrelevance to the major anti-Morgan thrust of the Banking Act of 1933: the compulsory separation of investment and commercial banking.62 Benston shows that the charges were generally trumped-up, and the vaunted Pecora “findings” were usually only ad hoc speculation by individual senators.63

  The Banking Act of 1933 had three major provisions: (1) the compulsory separation of commercial and investment banking; (2) the provision of federal “insurance” to guarantee all bank deposits; and (3) prohibiting commercial banks from paying interest on their demand deposits. The compulsory separation clauses (a) severely restricted commercial banks from buying securities—except, cleverly, that government securities were exempt from this restriction; (b) prohibited commercial banks from issuing, underwriting, selling, or distributing any securities (again, government securities were exempt); and (c) prohibited any investment bank, that is, a bank that does underwrite corporate securities, from ever accepting any deposits.

  Provision (b), the divestment by commercial banks of underwriting, was a slap by Aldrich and the reformers against the security affiliates that large, commercial banks had developed for investment banking functions, in particular the two largest: Chase’s Chase Securities Corporation and National City Bank’s National City Company. These securities affiliates had been particularly active in the late 1920s, and it was therefore all too easy to blame them for the stock market crash.64 Aldrich had been happy to repudiate the Wiggin-Morgan regime’s Chase Securities Corporation, which was doing badly during the depression anyway, but his main thrust was provision (c), a direct death blow to J.P. Morgan and Company, a private investment bank which also accepted bank deposits. The Rockefeller commercial banks, not tied in much with investment banking anyway and content to use their allied investment banks, could happily strike at Morgan and its characteristic fusion of the two forms of banking.65