The Chairman

by Kai Bird

  McCloy didn’t think much of the Dewey, Ballantine brief, and believed the lawyers had inappropriately applied the Dartmouth-case analogy merely to provide Baker with an excuse to stop the merger.26 Yet, now that the charter problem had been raised, some Bank of Manhattan shareholder was bound to tie up any renewed merger attempt in lengthy litigation. In pondering the problem, McCloy suddenly saw a simple solution: “I made up my mind that if the merger was worth doing, it was worth putting it around the other way. Instead of having the Bank of Manhattan merge into Chase, have Chase merge into the smaller Manhattan.”27 As one magazine later described the transaction, “Jonah swallowed the whale.”28 Such a maneuver precluded any question of having to obtain unanimous consent from Bank of Manhattan’s shareholders, since they would only be voting to acquire Chase’s assets, not dispose of their own. The maneuver would, however, require Chase to abandon its own charter, which meant the bank would leave the National Banking System and operate under the Bank of Manhattan’s New York State charter. The national comptroller of the currency, among others, was horrified when he learned of McCloy’s intention, but to McCloy it mattered little whether Chase operated technically under state or national regulations. In fact, though there was some prestige attached to having a national charter, New York State banking regulations were more lax than national regulations. Thus, under a state charter, Chase could make larger loans than the Bank of America could operating under a national charter.29

  To keep the negotiations secret as long as possible, McCloy broached the idea to Stewart Baker in the banker’s Park Avenue apartment. Two years older than McCloy, Baker looked and played the part of a patrician New York banker. His family had been involved with the Bank of Manhattan since 1799, and his father had headed the bank before he became chairman in 1932. Baker and McCloy ran in slightly different circles; Baker was a Princeton man and a golfer, and belonged to a different set of clubs from those McCloy frequented. Still, the two men had a passing acquaintance, and much of Baker’s reticence melted away when McCloy suggested that a merger could be achieved by retaining Manhattan’s old charter. Baker had realized all along that the two banks complimented each other. But, as with the Morgan partners, family history and sentiment had made him reluctant to preside over his bank’s disappearance. McCloy promised that if the merger went through the new bank would be called the Chase Manhattan Bank, thus assuring the survival of the older bank’s name. In addition, while McCloy would become chairman of the new bank, Baker would be named president and chairman of an executive committee of the board.

  All that remained was for McCloy to convince his own shareholders—and the government—that the merger would benefit both the bank and the larger public interest. Critics pointed out that the record-breaking merger would make Chase Manhattan the second-largest bank in the country, with total resources of $7.6 billion. Only the San Francisco-based Bank of America, with resources of $8.3 billion, would be larger. Congressman Emmanuel Celler, a Brooklyn Democrat and chairman of the House Judiciary Committee, told the press, “This is too big a merger. . . . It would give an all powerful oligarchy a stranglehold on New York banking.”30

  McCloy denied that the merger would produce “anything resembling a banking monopoly,” and pointed out, “There are some 14,000 commercial banks in the nation and it is really hard to conceive of any industry in the country where competition is keener.” Chase’s major competition in terms of retail banking, he argued, already had comparable numbers of local branch offices. National City Bank had seventy-four offices, Manufacturer’s Trust had 112, and the Chemical Corn Exchange Bank had ninety-eight branch offices. The merged Chase Manhattan Bank would only have eighty-seven offices out of a total of some 560 banking offices operated by fifty-seven different banks throughout the metropolitan area. “It should be apparent at a glance,” McCloy said, “that this merger would result in an intensification of competition in the city rather than a lessening of competition.”31

  He was right on one level to suggest that the merger would allow Chase to compete more effectively than before in the same retail banking services provided by such competitors as National City Bank. But Justice Department studies at the time demonstrated that bank deposits in New York City were increasingly concentrated in a few institutions, a trend being duplicated throughout the country. In each of sixteen major financial centers across the nation, two leading banks invariably owned more than 40 percent of all commercial banking assets, and in nine of these sixteen cities, the two leading banks owned more than 60 percent of all bank assets.32 Small banks were being pushed out of business.

  Critics were also unhappy about the appearance of further encroachments by Rockefeller interests upon the city’s banking system. The New York State superintendent of banking wrote McCloy to question whether the merger would raise a conflict-of-interest problem. He pointed out that the Bank of Manhattan owned a minority share in the largest bank in Westchester, New York, the County Trust Co. Since the Rockefeller brothers held a substantial interest in both a competing bank, the National Bank of Westchester, and Chase Bank, the superintendent questioned whether such interlocking ownership by “Rockefeller interests” created a potential conflict of interest.

  McCloy hotly denied the obvious, that the Rockefeller family together did indeed have a controlling interest in Chase. This denial mirrored the family’s long-standing policy of keeping as much public distance as possible between itself and its large stock holdings. As John D. Rockefeller, Jr., explained in a letter to his sons, “This policy protects us both from the embarrassment of investigating personal grievances, answering personal requests, and from the danger of taking any position which suggested control in the slightest degree of the activities in which a large stock interest might imply a more direct connection. It has proven such a wise policy that I urge all you boys to adopt it for the protection of the family.”33 In fact, the family’s stock in Chase during this period and for several decades afterward always represented more than 5 or 6 percent of all voting stock. Such percentages are commonly regarded as signifying de facto control. In the case of the National Bank of Westchester, the Rockefeller brothers together owned 19 percent of that bank’s shares, while the Bank of Manhattan owned 6.6 percent of its competitor, the County Trust Co. The conflict of interest was clear, and in recognition of this fact, McCloy, while continuing to deny Rockefeller control of Chase, nevertheless promised the banking superintendent that, if the merger was allowed to go through, Chase Manhattan would not vote its County Trust stock without the approval of the superintendent.34 Based on this pledge, the superintendent withdrew his objections.

  One more hurdle remained: approval from Chase’s own constituents at a special shareholders’ meeting. This turned into what McCloy called “a regular Donnybrook Fair.” In describing the scene for Justice Frankfurter later that day, he wrote, “A man named Gilbert really tried to tear things apart. He made such a to-do that at one time I did not know whether we would get through the meeting or not. . . . It was one of the most remarkable exhibitions of hysteria I have ever seen.” In the end, the troublemaker wore out everyone’s patience, and 86 percent of the bank’s shares were voted in favor of the merger.35

  McCloy’s victory touched off a virtual explosion in bank mergers around the country. Chase’s own major competitor, the National City Bank, quickly engineered a similar merger with the much smaller First National Bank, giving the renamed First National City Bank assets of $7.2 billion.36 The trend toward larger banks eventually precipitated two pieces of banking legislation unfavorable to Chase interests. Three months after the Chase merger, Congressman Celler introduced a bill that would specifically subject banks to the Clayton Antitrust Act. McCloy came down to Washington to testify against Celler’s bill on numerous occasions until finally, in 1960, Congress passed the Bank Merger Act. This bill subjected mergers of all federally insured banks to government approval. Critics of the merger also managed to have Congress pass the Bank Holding Compan
y Act of 1956, which for the first time brought bank holding companies under the direct regulation of the Federal Reserve. The government would now have the right to decide, on the basis of size alone, whether particular bank mergers or acquisitions were not in the public interest. A senior vice-president of Chase later concluded that both measures proved to be a “severe handicap to the bank’s strategy for expansion.”37

  There were other unforeseen dividends. Though McCloy promised Baker that he had no intention of ever abandoning the old Manhattan charter, certain of its provisions proved to be so antiquated that in 1965 McCloy’s successors brought Chase back into the national banking system. In addition, according to the author of a history of the bank, the merger “fueled a contest between the banks in which size became an end in itself. Eventually this contributed to actions by Chase that produced heavy losses. . . .”38 Still, for the remainder of McCloy’s tenure, Chase reaped many concrete benefits from the merger. The retail banking side of the business grew from Manhattan’s solid base. Profits and dividends paid out throughout the rest of the 1950s were more than respectable. Many years later, McCloy’s associates would look back on his tenure as chairman and realize that under his stewardship the bank had reached its zenith.

  CHAPTER 21

  McCloy, McCarthyism, and the Early Eisenhower Presidency

  “Oh, they’re not burning books,” said Eisenhower. “I’m afraid they are, Mr. President,” McCloy replied. “I have the evidence.”

  DARTMOUTH, 1953

  Throughout his first few years at Chase, McCloy was never exclusively a banker. He regularly attended meetings of the Council on Foreign Relations and continued to serve as a special adviser on international projects to the Ford Foundation. Germany was an obsession, and he kept in touch with developments there by talking on the phone—often on a weekly basis—with his old friend Eric Warburg and Hermann Abs, the Deutsche Bank chairman who was one of Adenauer’s closest financial advisers. Just before leaving for his new job as high commissioner, James Conant dropped in at 18 Pine Street to lunch with McCloy and Shep Stone. Conant’s Senate confirmation had been far from certain. There had even been talk of Eisenhower’s withdrawing the nomination in the face of opposition to the Harvard president from the right wing of the Republican Party, including Senator Joe McCarthy. Fortunately for Conant, McCloy had sent an early private message to Adenauer requesting that Bonn cable its approval of the nomination. Adenauer had quickly complied, so for the White House now to withdraw the nomination would cause the chancellor embarrassment. McCloy and Adenauer both felt that any further delay in Conant’s confirmation would adversely affect the Bundestag’s ratification of the Allied-German peace treaties. The German chancellor bluntly told the press that in the period since McCloy’s departure from Germany seven months earlier, the United States had been “disastrously unhelpful.” Such comments from across the Atlantic helped to keep the pressure on the Eisenhower administration to stand fast on Conant’s confirmation, and McCloy’s personal lobbying of the chairman of the Senate Foreign Relations Committee, Senator Alexander Wiley of Wisconsin, proved decisive. Yet McCloy was troubled that the confirmation of a man of Conant’s stature had aroused such partisan fireworks.1

  Conant’s confirmation battle underscored for him how far the country had slipped away from the ideal of a bipartisan foreign policy. Senator McCarthy was apparently going to make life as difficult for the new Republican administration as he had for the Democrats. His investigations of the State Department and the Voice of America were unrelenting. He was now focusing on the State Department’s overseas libraries, which he claimed carried books with “tainted ideas” on their shelves. Included in McCarthy’s list were books by Dashiell Hammett, former Communist Party leader Earl Browder, and Sol Auerbach. The State Department under Foster Dulles had quickly announced that its book policy had changed: henceforth such authors would no longer be carried in its libraries.

  McCloy was unhappy with this intimidation of State Department officials. On the other hand, in his opinion liberals too had abused the power of congressional investigation. So, on April 2, 1953, he gave a speech to the New York State Chamber of Commerce in which he reiterated some of the criticisms of congressional investigations he had made three months earlier at Harvard. He complained that too many civil servants were being “knocked about” these days. “We are beginning to suspect too many of our Government servants—too many of our neighbors—and we are inclined to follow some of the methods of the totalitarians in doing so.” Again without mentioning McCarthy by name, he complained about the use of innuendo and one-sided presentation of facts. But in an effort to place himself in the political center, he then suggested that such tactics had been pioneered by early New Deal investigations. “If the liberals had been more expressive when the so-called Congressional investigations of the 1930s were studiously violating personal rights and when business was the target there would have been less likelihood of excesses in this day and age.” He noted with irony that Alger Hiss, who served as a counsel to one such 1930s congressional investigation of the munitions industry, had recently been sent to prison for perjury.2

  McCloy had personal reasons to resent the 1930s congressional investigations, which had sullied the names of not a few of his friends, including Paul Cravath, Jean Monnet, Benjamin Buttenwieser, and Hoyt A. Moore. But the comparison was unjust. In the New Deal’s investigations of big business, individuals were singled out for business practices—such as insider trading—that even the business community acknowledged to be wrong by any ethical standard. In contrast, the McCarthy investigations engendered an atmosphere of pervasive fear, whereby government officials and private citizens who had nothing at all to hide nevertheless felt intimidated. Many of McCarthy’s victims, once subpoenaed to appear before his committee, found it impossible to obtain legal counsel. This certainly was not the case during the New Deal, when the targets of congressional investigations were vigorously defended by batteries of lawyers from the most prestigious Wall Street firms. Back in the 1930s, McCloy’s colleagues felt outrage, not fear, at Congress’s prying into their business practices. But if, as Telford Taylor complained at the time, the analogy wasn’t apt, McCloy and many of his peers found it a useful stance from which to criticize McCarthy’s charges.3 The New York Times applauded his speech in an editorial condemning the current abuses of Congress’s investigatory powers but also suggested that this “arrogance of committees did not originate yesterday.” The Times too chose not to name McCarthy as the chief culprit.4

  McCloy and The New York Times were not the only ones reluctant to condemn McCarthy by name. Walter Lippmann, still an occasional tennis partner of McCloy’s during the 1950s, personally sympathized with McCarthy’s victims, but rarely ventured to write about the issue.5 Few, if any, nationally recognized Republicans had spoken out against McCarthy up to this time. The president himself, to the frustration of certain of his aides, was unwilling to speak out. “I really believe,” Ike wrote in his diary that April, “that nothing will be so effective in combating this particular kind of trouble-making as to ignore him. This he cannot stand.”6

  But by the spring of 1953, Eisenhower and McCloy were about to learn that if they waited for McCarthy to overreach himself many of their policies could be destroyed in the meantime. Only a few days after McCloy’s Chamber of Commerce speech, McCarthy dispatched two of his investigators on a fact-finding mission to Europe. Roy Cohn and G. David Schine spent two weeks looking for politically suspect books lying on the shelves of U.S. Embassy libraries, and for the suspect officials who tolerated such books.

  Almost as soon as they had arrived in Bonn, Cohn announced that McCarthy’s Committee on Government Operations wanted Theodore Kaghan, the deputy chief of public relations for HICOG, to return to Washington for questioning about his political activities in the 1930s. Kaghan had met with Cohn and Schine in High Commissioner Conant’s office (Conant was back in the United States) and had initially refused to ans
wer their questions. But then Cohn revealed that Kaghan had written a play in 1939 defending the right of the workingman to go on strike and that he may have sympathized with the left-wing Republican government during the Spanish Civil War. Kaghan defiantly called Cohn and Schine “junketeering gumshoes” and said he was perfectly willing to testify under oath as to his anticommunist credentials. “I have spent more time superintending anti-Soviet broadcasts, pamphlets, newspapers and news agencies than Senator McCarthy’s two travelling spies have spent in school.”7 For such boldness, Kaghan received no support from the State Department, and was brought back to Washington for questioning by McCarthy.

  With Kaghan’s fate in doubt, HICOG announced only two days later that 137 Americans and more than seven hundred Germans were being stricken from the U.S. government’s payroll as of July 1. This force reduction had already been in the cards, but in a seeming effort to placate McCarthy’s investigators, HICOG had taken the opportunity to fire two high-ranking officials known to be on McCarthy’s list of suspects. From McCloy’s perspective, the most distressing of these two cases involved the firing of Joseph M. Frankenstein, editor of “America Dienst,” a German-language news service sponsored with HICOG funds. Frankenstein’s job was to place news features with American themes in German newspapers. He ran a sophisticated operation; his features were not mere propagandists tracts, and most Amerika Dienst stories were picked up almost exclusively by the opposition Social Democratic newspapers. McCloy had sanctioned the operation as high commissioner and believed it to be one of the most successful means of exposing left-of-center Germans to American views. He was therefore understandably distressed to hear in early April that Frankenstein had been fired. Cohn evidently precipitated the firing after learning that Frankenstein was married to Kay Boyle, a short-story writer and liberal-magazine contributor, who in years past had made small donations to various groups that now appeared on the attorney general’s list of subversive organizations.8