APB Excerpt: Woodrow Wilson & Jack Morgan July 2, 1913 Secret WWI Prep

This excerpt from ALL THE PRESIDENTS’ BANKERS: The Hidden Alliances that Drive American Power originally appeared on Zerohedge. Reprinted with permission from Nation Books. It discusses Woodrow Wilson and Jack Morgan’s collaboration to finance the Allies in the early days of World War I, illuminating one of the strongest examples of the intimate cooperation between the presidency and the highest levels of private banking.

The Mid-1910s: Bankers Go to War

“The war should be a tremendous opportunity for America.”

—Jack Morgan, personal letter to President Woodrow Wilson, September 4, 1914

On June 28, 1914, a Slavic nationalist in Sarajevo murdered Archduke Franz Ferdinand, heir to the Austrian throne. The battle lines were drawn. Austria positioned itself against Serbia. Russia announced support of Serbia against Austria, Germany backed Austria, and France backed Russia. Military mobilization orders traversed Europe. The national and private finances that had helped build up shipping and weapons arsenals in the last years of the nineteenth century and the early years of the twentieth would spill into deadly battle.

Wilson knew exactly whose help he needed. He invited Jack Morgan to a luncheon at the White House. The media erupted with rumors about the encounter. Was this a sign of tighter ties to the money trust titans? Was Wilson closer to the bankers than he had appeared? With whispers of such queries hanging in the hot summer air, at 12:30 in the afternoon of July 2, 1914, Morgan emerged from the meeting to face a flock of buzzing reporters. Genetically predisposed to shun attention, he merely explained that the meeting was “cordial” and suggested that further questions be directed to the president.

At the follow-up press conference, Wilson was equally coy. “I have known Mr. Morgan for a good many years; and his visit was lengthened out chiefly by my provocation, I imagine. Just a general talk about things that were transpiring.”Though Wilson explained this did not signify the start of a series of talks with “men high in the world of finance,” rumors of a closer alliance between the president and Wall Street financiers persisted.

Wilson’s needs and Morgan’s intentions would soon become clear. For on July 28, Austria formally declared war against Serbia. The Central Powers (Germany, the Austro-Hungarian Empire, the Ottoman Empire, and Bulgaria) were at war with the Triple Entente (France, Britain, and Russia). While Wilson tried to juggle conveying America’s position of neutrality with the tragic death of his wife, domestic and foreign exchange markets were gripped by fear and paralysis. Another panic seemed a distinct possibility so soon after the Federal Reserve was established to prevent such outcomes in the midst of Wilson’s first term. The president had to assuage the markets and prepare the country’s finances for any outcome of the European battles.

Not wanting to leave war financing to chance, Wilson and Morgan kicked their power alliance into gear. At the request of high-ranking State Department officials, Morgan immediately immersed himself in war financing issues. On August 10, 1914, Secretary of State William Jennings Bryan wrote Wilson that Morgan had asked whether there would be any objection if his bank made loans to the French government and the Rothschilds’ Bank (also intended for the French government). Bryan was concerned that approving such an extension of capital might detract from the neutrality position that Wilson had adopted and, worse, invite other requests for loans from nations less allied with the United States than France, such as Germany or Austria. The Morgan Bank was only interested in assisting the Allies.

Bryan was due to speak with Morgan senior partner Henry Davison later that day. Though Morgan had made it clear that any money his firm lent would be spent in the United States, Bryan worried that “if foreign loans absorb our loanable money it might affect our getting government loans if we need.” Thus, private banks’ lending decisions could affect not just the course of international governments’ participation in the war but also that of the US government’s financial health during the war. Not much had changed since the turn of the century, when government functions depended on the availability of private bank loans.

Wilson wasn’t going to deny Morgan’s request. He approved the $100 million loan to finance the French Republic’s war needs. The decision reflected the past, but it also had implications for the future of political-financial alliances and their applications to wars. During the Franco-German war of 1870, Jack’s grandfather, J. S. Morgan, had raised $50 million of French bonds through his London office after the French government failed to sell its securities to London bankers to raise funds. Not only was the transaction profitable; it also endeared Morgan and his firm to the French government.

Private banking notwithstanding, on August 19, 1914, President Wilson urged Americans to remain neutral regarding the combat. But Morgan and his partners never embraced the policy of impartiality. As Morgan partner Thomas Lamont wrote later, “From the very start, we did everything we could to contribute to the cause of the Allies.”

Aside from Jack Morgan’s personal views against Germany and the legacy of his grandfather’s decisions, the Morgan Bank enjoyed close relations with the British and French governments by virtue of its sister firms—Morgan, Grenfell & Company, the prestigious merchant bank in London; and Morgan, Harjes & Company in Paris. The bank, like a country, followed the war along the lines of its past financial alliances, even to the point of antagonizing firms that desired to participate in French loans during periods of bitter fighting.

Two weeks after Wilson’s August 19 speech, armed with more leverage because of the war, Jack Morgan took it upon himself to approach Wilson about his domestic concerns. “This war . . . has thrown a tremendous and sudden strain on American money markets,” Morgan wrote. “It has increased the already pronounced tendency of European holders of American securities to sell them for whatever prices they could obtain for them, and the American investor has got to relieve the European investors of these securities by degrees and as he can.” Market tensions were exacerbated by the fact that European investors were selling securities to raise money. That was a problem whose only solution required the provision of more loans. But there was something else, with more lasting domestic repercussions echoing the trustbusting of the Morgan interest in US Steel.

Morgan argued that rather than encouraging investors to feel safe, the government’s Interstate Commerce Commission, formed to regulate national industry in 1887, was doing the opposite by restricting eastern railroad freight rates and investigating railroad companies. In Morgan’s mind, war was definitely not a time for enhanced regulations against business. And if railroad securities fell in value relative to the loans secured by them, banks would not be able to lend enough to make up the difference. The whole credit system could freeze.

As Morgan further warned, “Great depreciation in the value of these securities” would “throw back to the bank loans secured by them” and lead to a “great tieing up of bank funds, which will interfere with the starting of the new Federal Reserve System, and produce panic conditions.” He concluded that the war “should be a tremendous opportunity for America,” but not “as long as the business of the country is under the impression of fear in which it now labors.” Levying such serious threats, Morgan became the first banker to reveal that credit, the Federal Reserve, the big banks, the US economy, and the war were inextricably linked. Wilson knew this too.

Morgan was especially concerned about the Clayton Antitrust Act, which Congress was considering to strengthen the restrictions against monopolies and anticompetitive practices laid out in the 1890 Sherman Antitrust Act. Having passed the Senate, the bill was headed to a conference committee. Should it pass in its current form, libertarian Morgan believed, it would demonstrate that “the United States Government does not propose to allow enterprises to conduct normal business without interference.”

Wilson took Morgan’s concerns seriously. He knew the last thing the United States needed was a credit meltdown. To avoid such a crisis and placate the bankers, he was already rewriting the Clayton Antitrust Act, but he didn’t admit it to Morgan. Wilson calculated that there had to remain some areas of negotiation to better one’s hand. Though the two argued over interpretation of the bill, a white flag flew between Wall Street and Washington for the time being. Such periods of strife called for allied, not adversarial, relationships between the president and the bankers, and friendly relations would also promote the global power positioning of both parties.

In general, the war meant that the goodwill extended to bankers and business from the president continued, lending protocols included. An October 15, 1914, news report proclaimed, “American Bankers May Make Loans to War Nations.” It was a government decision pushed by the banking contingent that would reverberate throughout the war and afterward, drawing clearer lines of competition among the various Wall Street powerhouses. Though the pro-Allies Morgan Bank sought cooperation with the British, for instance, National City Bank set up international branches around Europe and Russia to compete for future financial power, causing a rift between two of the three biggest New York banks that financed the war. Partly, that rift had to do with the change of leadership at these firms.

Jack Morgan’s friend James Stillman, head of National City Bank, had ideas about the war that closely reflected Morgan’s own: though the war presented numerous expansion opportunities, old ties to the British and French banks had to be respected in the process, their countries supported unequivocally. Stillman’s number-two man—midwestern-born Frank Vanderlip, who harbored a grudge against the eastern banking establishment and Wilson for cold-shouldering him during his presidential campaign—didn’t share the same loyalties. He was less concerned than his upper-crust boss and the Morgan partners about the war’s outcome and openly opposed American intervention until 1916, by which point German-American relations were more obviously battered. Nor did he support British demands that National City Bank terminate dealings with German banks, to which Stillman had responded that in victory the British would remember the banks that helped them.

Thus, at the end of 1914, it was National City Bank that opened a $5 million credit line for Russia in return for the designation of Russian purchasing agent for war supplies in the United States. The Morgan Bank remained true to its pro-Allies position and chose not to be involved in such dealings, while Vanderlip was more detached and sought to strengthen National City’s position for whatever the postwar world would bring.

Stillman was less interested in war-related financing than Vanderlip, who believed it would augment the bank’s position as well as America’s global status. To him, it was important to forge ahead in Latin America and other underdeveloped countries while the European financial powers were busy with their war. That Stillman took some of this advice to heart enabled National City Bank to cover much ground postwar, not just relative to the European banks but also to the Morgan Bank. As Vanderlip wrote Stillman in December 1915, “We are really becoming a world bank in a very broad sense, and I am perfectly confident that the way is open to us to become the most powerful, the most far-reaching world financial institution that there has ever been.” Vanderlip’s views ruffled Stillman’s feathers because of Stillman’s past collaboration agreements with the Morgan Bank. But they also ruffled the feathers of Morgan and Lamont in a way that would have huge repercussion for postwar peace.

Another Excerpt: All the Presidents' Bankers: Nixon's War/Wall Street's War

(This excerpt first appeared on Zerohedge, with permission from Nation Books. All rights reserved.)

Wall Street’s War

While the protests against the Vietnam War intensified in the first years of the Nixon administration, the financial elite was fighting its own war—over the future of banking and against Glass-Steagall regulations. National City Bank chairman Walter Wriston was a steadfast warrior in related battles, as he fought with Chase chairman David Rockefeller for supremacy over the US banker community and for dominance over global finance.

Rockefeller’s sights were set on a grander prize, one with worldwide implications: ending the financial cold war. He made his mark in that regard by opening the first US bank in Moscow since the 1920s, and the first in Beijing since the 1949 revolution.

Augmenting their domestic and international expansion plans, both men and their banks prospered from the emerging and extremely lucrative business of recycling petrodollars from the Middle East into third world countries. By acting as the middlemen—capturing oil revenues and transforming them into high-interest-rate loans, to Latin America in particular—bankers accentuated disparities in global wealth. They dumped loans into developing countries and made huge amounts of money in the process. By funneling profits into debts, they caused extreme pain in the debtor nations, especially when the oil-producing nations began to raise their prices. This raised the cost of energy and provoked a wave of inflation that further oppressed these third world nations, the US population, and other economies throughout the world.

Bank Holding Company Battles

When Eisenhower signed the 1956 Bank Holding Company Act banning interstate banking, he left a large loophole as a conciliatory gambit: a gray area as to what big banks could consider “financially-related business,” which fell under their jurisdiction. In practice, that meant that they could find ways to expand their breadth of services while they figured out ways to grow their domestic grab for depositors. On May 26, 1970, the “Big Three” bankers— Wriston and Rockefeller, along with Alden “Tom” Clausen, chairman of Bank America Corporation—appeared before the Senate Banking and Currency Committee to press their case for widening the loophole.

During the proceedings, Wriston led the charge on behalf of his brethren in the crusade. Tall, slim, elegantly dressed, and the most articulate of the three, he dramatically called on Congress to “throw off some of the shackles on banking which inhibit competition in the financial markets.”

The global financial landscape was evolving. Ever since World War II, US bankers hadn’t worried too much about their supremacy being challenged by other international banks, which were still playing catch-up in terms of deposits, loans, and global customers. But by now the international banks had moved beyond postwar reconstructive pain and gained significant ground by trading with Cold War enemies of the United States. They were, in short, cutting into the global market that the US bankers had dominated by extending themselves into areas in which the US bankers were absent for US policy reasons. There was no such thing as “enough” of a market share in this game. As a result, US bankers had to take a longer, harder look at the “shackles” hampering their growth. To remain globally competitive, among other things, bankers sought to shatter post-Depression legislative barriers like Glass-Steagall.

They wielded fear coated in shades of nationalism as a weapon: if US bankers became less competitive, then by extension the United States would become less powerful. The competition argument would remain dominant on Wall Street and in Washington for nearly three decades, until the separation of speculative and commercial banking that had been invoked by the Glass-Steagall Act would be no more.

Wriston deftly equated the expansion of US banking with general US global progress and power. It wasn’t so much that this connection hadn’t occurred to presidents or bankers since World War II; indeed, that was how the political-financial alliances had been operating. But from that point on, the notion was formally and publicly verbalized, and placed on the congressional record. The idea that commercial banks served the country and perpetuated its global identity and strength, rather than the other way around, became a key argument for domestic deregulation—even if, in practice, it was the country that would serve the banks.

The Penn Central Debacle

There was, however, a fly in the ointment. To increase their size, bankers wanted to be able to accumulate more services or branches beneath the holding company umbrella. But a crisis in another industry would give some legislators pause. The Penn Central meltdown, the first financial crisis of Nixon’s presidency, temporarily dampened the ardency of deregulation enthusiasts. The collapse of the largest, most diverse railroad holding company in America was blamed on overzealous bank lending to a plethora of non-railroad-oriented entities under one holding company umbrella. The debacle renewed debate about a stricter bank holding company bill.

Under Wriston’s guidance, National City had spearheaded a fifty-three-bank syndicate to lend $500 million in revolving credit to Penn Central, even when it showed obvious signs of imminent implosion.

Penn Central had been one of the leading US corporations in the 1960s. President Johnson had supported the merger that spawned the conglomerate on behalf of a friend, railroad merger specialist Stuart Saunders, who became chairman. He had done this over the warnings of the Justice Department and despite allegations of antitrust violations called by its competitors. With nary a regulator paying attention, Penn Central had morphed into more than a railroad holding company, encompassing real estate, hotels, pipelines, and theme parks. Meanwhile, highways, cars, and commercial airlines had chipped away at Penn Central’s dominant market position. To try to compensate,
Penn Central had delved into a host of speculative expansions and deals. That strategy was failing fast. By May 1970, Penn Central was feverishly drawing on its credit lines just to scrounge up enough cash to keep going.

The conglomerate demonstrated that holding companies could be mere shell constructions under which other unrelated businesses could exist, much as the 1920s holding companies housed reckless financial ventures under utility firm banners.

Allegations circulated that Rockefeller had launched a five-day selling strategy of Penn Central stock, culminating with the dumping of 134,400 shares on the fifth day, based on insider information he received as one of the firm’s key lenders. He denied the charges.

In a joint effort with the bankers to hide the Penn Central debacle behind a shield of federal bailout loans, the Pentagon stepped in, claiming that assisting Penn Central was a matter of national defense.5 Under the auspices of national security, Washington utilized the Defense Production Act of 1950, a convenient bill passed at the start of the Korean War that enabled the president to force businesses to prioritize national security–related endeavors.

On June 21, 1970, Penn Central filed for bankruptcy, becoming the first major US corporation to go bust since the Depression. Its failure was not an isolated incident by any means. Instead, it was one of a number of major defaults that shook the commercial paper market to its core. (“Commercial paper” is a term for the short-term promissory notes sold by large corporations to raise quick money, backed only by their promise to pay the amount of the note at the end of its term, not by any collateral.) But the agile bankers knew how to capitalize on that turmoil. When companies stopped borrowing in the flailing commercial paper market, they had to turn to major banks like Chase for loans instead. As a result, the worldwide loans of Chase, First National City Bank, and Bank of America surged to $27.7 billion by the end of 1971, more than double the 1969 total of $13 billion.

A year later, the largest US defense company, Lockheed, was facing bankruptcy, as well. Again bankers found a way to come out ahead on the people’s dime. Lockheed’s bankers at Bank of America and Bankers Trust led a syndicate that petitioned the Defense Department for a bailout on similar national security grounds. The CEO, Daniel Haughton, even agreed to step down if an appropriate government loan was provided.

In response, the Nixon administration offered $250 million in emergency loans to Lockheed—in effect, bailing out the banks and the corporation. To explain the bailout at a time when the general economy was struggling, Nixon introduced the Lockheed Emergency Loan Act by stating, “It will have a major impact on the economy of California, and will contribute greatly to the economic strength of the country as a whole.” After the bill was passed, not a single Lockheed executive stepped down.

It would take several years of political-financial debate and more bailouts to sustain Penn Central. One 1975 article labeled the entire episode “The Penn-C Fairy Tale” and condemned the subsequent federal bailout: “While the country is in the worst recession since the depression and unemployment lines grow longer every day, Congress is dumping another third of a billion dollars of your tax payer dollars down the railroad rat hole.” (The incident was prologue: Congress would lavish hundreds of billions of dollars to sustain the biggest banks after the 2008 financial crisis, topped up by trillions of dollars from the Fed and the Treasury Department in the form of loans, bond purchases, and other subsidies.)

More Bank Holding Company Politics

Despite the Penn Central crisis, the revised Bank Holding Company Act decisively passed the Senate on September 16, 1970, by a bipartisan vote of seventy-seven to one. The final version was far more lenient than the one that Texas Democrat John William Wright Patman, chair of the House Committee on Banking and Currency, or even the Nixon administration had originally envisioned. The revised act allowed big banks to retain nonbank units acquired before June 1968. It also gave the Fed greater regulatory authority over bank holding companies, including the power to determine what constituted one. Language was added to enable banks to be considered one-bank holding companies if they, or any of their subsidiaries, held any deposits or extended any commercial loans, thus broadening their scope.

President Nixon signed the bill into law without fanfare on New Year’s Eve 1970. In fact, his inner circle decided against making a splash about it. They didn’t think the public would understand or care. Plus, they realized that there was a prevailing attitude that the Nixon administration had favored the big banks, and though it had, this was not something they wanted to draw attention to.

The End of the Gold Standard

The top six banks controlled 20 percent of the nation’s deposits through one-bank holding companies, but second place in that group wasn’t good enough for Wriston, who noted to the Nixon administration that his bank was really the “caretaker of the aspirations of millions of people” whose money it held. Wriston flooded the New York Fed with proposals for expansion. His applications “were said to represent as many as half of the total of all of the banks.” The Fed was so overwhelmed, it had to enlist First National City Bank to interpret the new law on its behalf.

By mid-1971, the Fed had approved thirteen and rejected seven of Wriston’s applications. His biggest disappointment was the insurance underwriting rejection. The possibility of converting depositors for insurance business had been tantalizing. It would continue to be a hard-fought, ultimately successful battle.

Around the same time, New York governor Nelson Rockefeller (David Rockefeller’s brother) approved legislation permitting banks to set up subsidiaries in each of the state’s nine banking districts. This was a gift for Wriston and David Rockefeller, because it meant their banks could expand within the state. Each subsidiary could open branches through June 1976, when the districts would be eliminated and banks could merge and branch freely.

Several months later, First National City Bank was paying generous prices to purchase the tiniest upstate banks, from which it began extending loans to the riskiest companies and getting hosed in the process; a minor David vs. Goliath revenge of local banks against Wall Street muscle.

By that time, the stock market had turned bearish, and foreign countries were increasingly demanding their paper dollars be converted into gold as they shifted funds out of dollar reserves. Bankers, meanwhile, postured for a dollar devaluation, which would make their cost of funds cheaper and enable them to expand their lending businesses.

They knew that the fastest way to further devalue the dollar was to sever it from gold, and they made their opinions clear to Nixon, taking care to blame the devaluation on external foreign speculation, not their own movement of capital and lending abroad.

The strategy worked. On August 15, 1971, Nixon bashed the “international money speculators” in a televised speech, stating, “Because they thrive on crises they help to create them.”16 He noted that “in recent weeks the speculators have been waging an all-out war on the American dollar.” His words were true in essence, yet they were chosen to exclude the actions of the major US banks, which were also selling the dollar. Foreign central banks had access to US gold through the Bretton Woods rules, and they exercised this access. Exchanging dollars for gold had the effect of decreasing the value of the US dollar relative to that gold. Between January and August 1971, European banks (aided by US banks with European branches) catalyzed a $20 billion gold outflow.

As John Butler wrote in The Golden Revolution, “By July 1971, the US gold reserves had fallen sharply, to under $10 billion, and at the rate things were going, would be exhausted in weeks. [Treasury Secretary John] Connally was tasked with organizing an emergency weekend meeting of Nixon’s various economic and domestic policy advisers. At 2:30 p.m. on August 13, they gathered, in secret, at Camp David to decide how to respond to the incipient run on the dollar.”

Nixon’s solution, pressed by the banking community, was to abandon the gold standard. In his speech the president informed Americans that he had directed Connally to “suspend temporarily the convertibility of the dollar into gold or other reserve assets.” He promised this would “defend the dollar against the speculators.” Because Bretton Woods didn’t allow for dollar devaluation, Nixon effectively ended the accord that had set international currency parameters since World War II, signaling the beginning of the end of the gold standard.

Once the dollar was no longer backed by gold, questions surfaced as to what truly backed it (besides the US military). According to Butler, “The Bretton Woods regime was doomed to fail as it was not compatible with domestic US economic policy objectives which, from the mid-1960s onwards, were increasingly inflationary.”

It wasn’t simply policy that was inflationary. The expansion of debt via the joint efforts of the Treasury Department and the Federal Reserve was greatly augmented by the bankers’ drive to loan more funds against their capital base. That established a debt inflation policy, which took off after the dissolution of Bretton Woods. Without the constraint of keeping gold in reserve to back the dollar, bankers could increase their leverage and speculate more freely, while getting money more easily from the Federal Reserve’s discount window. Abandoning the gold standard and “floating” the dollar was like navigating the waters of global finance without an anchor to slow down the dispersion of money and loans. For the bankers, this made expansion much easier.

Indeed, on September 24, 1971, Chase board director and former Treasury Secretary C. Douglas Dillon (chairman of the Brookings Institution and, from 1972 to 1975, the Rockefeller Foundation) told Connally that “under no circumstances should we ever go back to assuming limited convertibility into gold.” Chase Board chairman David Rockefeller wrote National Security Adviser (and later Secretary of State) Henry Kissinger to recommend “a reevaluation of foreign currencies, a devaluation of the dollar, removal of the U.S. import surcharge and ‘buy America’ credits, and a new international monetary system with greater flexibility . . . and less reliance on gold.”

With the dollar devalued, investors poured money into stocks, fueling a rally from November 1971 led by the “Nifty Fifty,” a group of “respectable” big-cap growth stocks. These were being bought “like greyhounds chasing a mechanical rabbit” by pension funds, insurance companies, and trust funds. The Chicago Board of Trade began trading options on individual stocks in 1973 to increase the avenues for betting; speculators could soon thereafter trade futures on currencies and bonds.

The National Association of Securities Dealers rendered all this trading easier on February 8, 1971, when it launched the NASDAQ. The first computerized quote system enabled market makers to post and transact over-the-counter prices quickly. With the stock market booming again, NASDAQ became a more convenient avenue for Wall Street firms to raise money. Many abandoned their former partnership models whereby the firm’s partners risked their own capital for the firm, in favor of raising capital by selling the public shares. That way, the upside—and the growing risk—would also be diffused and transferred to shareholders. Merrill Lynch was one of the first major investment bank partnerships to go “public” in 1971. Other classic industry leaders quickly followed suit.

Meanwhile, corporations were finding prevailing lower interest rates more attractive. Instead of getting loans from banks, they could fund themselves more cheaply by issuing bonds in the capital markets. This took business away from commercial banks, which were restricted by domestic regulation from acting as issuing agents. But bankers had positioned themselves on both sides of the Atlantic to get around this problem, so they were covered by the shift in their major customers’ financing preferences. While their ability to service corporate demand was dampened at home, overseas it roared. Currency market turmoil also led many countries to the Eurodollar market for credit, where US banks were waiting. Thus, the credit extended through international branches of major US banks tripled to $4.5 billion from 1969 to 1972.

The market rally, cheered on by the media, was enough to bolster Nixon’s fortunes. In the fall of 1972, Nixon was reelected in a landslide on promises to end the Vietnam War with “peace and honor.” Wall Street reaped the benefits of a bull market, and more citizens and companies were sucked into new debt products. The Dow hit a 1970s peak of 1,052 points in January 1973, as Nixon began his second term.