A History of Money and Banking in the United States: The Colonial Era to World War II (46 page)

“quite the most disastrous . . . ever heard from a member of the financial community.” The opposition was to no avail, however, with President Roosevelt personally urging Senator Glass to retain Section 21. As Chernow writes, “This was the
coup de
grâce
for the House of Morgan.”67 J.P. Morgan and Company delayed their final divestment decision, hoping for the passage of Carter Glass’s amendment to the Banking Act of 1935, allowing some securities powers to deposit banks, but Roosevelt delivered the final blow to the Morgans by personally interced-ing in the House-Senate conference committee to kill the amendment. Upon this defeat, J.P. Morgan and Company made the fateful decision to keep its deposit business and to divest itself of its power center, the investment banking business. The Morgans set up a new Morgan, Stanley and Company to engage in investment banking.68

It is a tragic irony that Carter Glass and his theoretician H. Parker Willis were lured into this alliance with the Rockefellers and the New Dealers to clobber the Morgans by coercively divorcing commercial and investment banking. Willis, as noted above, was a trenchant critic of the Strong-Morgan credit inflation of the 1920s. Unfortunately, Willis’s “real bills” approach, which led him to oppose the bank credit expansion, also led him to oppose it for the wrong reason. Contrary to Willis, the problem was not that the banks were buying corporate securities or lending money to the stock market; the problem was that the banks were inflating credit, period. But Willis and Glass, starting with the wrong reasoning, came to the wrong solution: to compel the commercial banks to stop purchasing or issuing securities, as a partial means of reaching the ultimate goal—forcing the banks and the Fed to return to the original concept of confining their credit to short-term self-liquidating “real” bills. Hence, the luring of the reluctant Glass 67Chernow,
House of Morgan
, pp. 362–63, 375.

68Ibid., pp. 384ff.

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

and Willis into uncongenial schemes of socializing and cartelizing Wall Street and helping the Rockefellers destroy the Morgans.

Professor Benston points out that all the provisions of the Banking Act of 1933 helped develop a coherent structure for government cartelization of the banking industry. In the first place, the separation sections, which we have been discussing, helped the commercial bankers get rid of unprofitable securities, and to eliminate the powerful competition of investment bankers for customers’ deposits. As for investment bankers, one-third of them, including J.P. Morgan and Company, hived off that business to stick to deposit banking, leaving the remainder free of their competition. In particular, as we have seen, the Rockefellers rid the commercial banks of unwelcome investment banking competition.

Other Banking Act provisions reinforced the cartelization.

Thus, federal deposit insurance guaranteed all bank deposits, thereby cartelizing the industry and supposedly guaranteeing every bank’s success. The prohibition of bank payment of interest on demand deposits was a particularly cartelizing device, since it “forced” the banks collectively to keep payment of interest to their depositors at zero, policing any competing bank that would have liked to break the cartel by bidding for depositors’ accounts.69

In addition to all this, the Banking Act of 1933 began the crucial process of stripping away the dominant power of the Federal Reserve Bank of New York (and hence of the Morgans) over the operations of the Federal Reserve System, and of transfer-ring that power to political appointees in Washington. Previously, for example, each Federal Reserve Bank—and therefore the private bankers in that district—had total power over its own open-market operations—and therefore over the movement of bank reserves. In practice, this meant the New York 69Benston,
Separation of Commercial and Investment Banking
, pp. 136, 221–22.

From Hoover to Roosevelt:

319

The Federal Reserve and the Financial Elites
Fed, since open market operations were in U.S. government securities, and the bond market is located in New York. The Banking Act of 1933 began a transfer of power by creating a statutory Federal Open Market Committee (FOMC). The FOMC, however, continued to be in private banker hands, since it consisted of one member from each Federal Reserve District, selected by the board of directors of each Federal Reserve Bank.

In practice, these were the governors of each Federal Reserve Bank.

The new law required that every Federal Reserve bank’s open market operation conform to Federal Reserve Board regulations, but each Federal Reserve bank retained the right to refuse to participate in the FOMC’s recommended open market policies. The result of this hybrid system was that the Federal Reserve Board was ultimately responsible for Fed policy, but it could not initiate open market operations. The Federal Reserve Board could ratify or veto FOMC policies, but those policies had to be initiated by the FOMC. The Federal Open Market Committee, for its part, could initiate open market policies, but it could not execute them; execution remained in the hands of the New York Fed and the Federal Reserve banks. The Federal Reserve banks, for their part, could not initiate open market policies, but could obstruct them by failing to execute them.

All in all, the Federal Reserve Bank of New York, while losing much of its power over open market operations in the 1933 act, was able to live with the new arrangement. It was more annoyed over a neglected provision of the act, that forbade the New York Fed (or any other Federal Reserve bank) from conducting negotiations with foreign banks—a direct slap at the crucial New York Fed–Morgan role during the 1920s in making arrangements with the Bank of England and other European banks.70

70Sidney Hyman,
Marriner S. Eccles: Private Entrepreneur and Public
Servant
(Stanford, Calif.: Stanford University Graduate School of Business, 1976), pp. 156–57; Kennedy,
Banking Crisis
, p. 210; and Chernow,
House of Morgan
, p. 383.

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

The demagogic eruption of the Pecora hearings also led to another New Deal 100 Days measure that both revolutionized and cartelized the securities industry and delivered another body blow to the House of Morgan. This was the Securities Act of 1933, passed in May, followed the next year by its more powerful successor, the Securities Exchange Act of June 1934. The first act imposed rigorous and expensive laws and procedures for any new securities issues, allegedly to protect the investing public. Its actual effect was to cartelize the sources of new capital, channeling the supply of savings into firms big enough to bear the substantial costs and freezing out smaller and more risky new capital ventures. Even more directly, the Securities Act cartelized the investment banking industry, keeping out any newer and smaller investment banks that might challenge the established giants. While many investment bankers were unhappy with specific provisions and urged amendments, they were on the whole delighted with the basic thrust of the regulation. Thus, testifying on the bill before the House Commerce Committee, George W. Bovenizer, partner in Kuhn, Loeb and Company, and a venerable Morgan enemy, declared that his firm was

wholeheartedly in favor of the type of legislation . . . suggested by the President. We have stood by now for the past 12 years, or more, and have looked on with apprehension as the good name of investment banker has been put into jeopardy . . . by the actions of some people who should never have been in the business. . . . I believe that every honest banker today will look with great favor upon the principle of this legislation as the dawn of a new era.71

The enforcement of the Securities Act was put into the hands of the Federal Trade Commission, since the accession of Roosevelt in left-wing hands, but a new Securities and Exchange Commission created for this purpose was to take over the 71Vincent P. Carosso,
Investment Banking in America: A History
(Cambridge, Mass.: Harvard University Press, 1970), p. 357. See also Benston,
Separation of Commercial and Investment Banking
, pp. 136–37.

From Hoover to Roosevelt:

321

The Federal Reserve and the Financial Elites
enforcement powers in July 1934. By that time, however, Congress had passed the Securities Exchange Act of June 1934, greatly expanding the powers of the Securities and Exchange Commission from compulsory registration of new issues to control over the practices of the exchange as well as to compulsory disclosure for existing securities.72

The securities legislation constituted a body blow to the Morgan empire because the Morgans dominated the New York Stock Exchange, especially through the exchange’s president, Richard Whitney. Whitney, a scion of the prominent Morgan-oriented financial family, was the head of Richard Whitney and Company, the major bond broker for J.P. Morgan and Company.

In addition, Richard’s brother George was a senior partner at the House of Morgan, and was Morgan’s man on such important boards as that of General Motors and of the giant Morgan-controlled public utility holding company, the United Corporation. Since Richard Whitney was the leader of fierce opposition to any government regulation of securities and in behalf of laissez-faire, his defeat by the New Dealers, and in particular his later disgrace, tended to discredit his free-market views.73

It had always been assumed that since the Stock Exchange was a New York institution, it could only be constitutionally regulated by the state of New York, rather than by the federal government. The New Dealers, however, considered states’ rights an absurd obstacle in the path of centralizing the economy, and they treated it accordingly. Moreover, by imposing federal regulation 72Carosso,
Investment Banking
, pp. 356–68, 375–79.

73Chernow,
House of Morgan
, pp. 316, 421–29. The revelation, conviction, and imprisonment of Richard Whitney in 1938 for embezzlement of Stock Exchange funds to cover reckless personal debts was another horrific blow to Morgan power, especially since Morgan partners George Whitney and Thomas W. Lamont, by the end knew of (but did not condone) Whitney’s criminal activities, but failed to report them to the authorities. Radical New Dealer William O. Douglas, then chairman of the SEC and out for Morgan blood, was able to use the scandal to dominate, alter, and dictate Stock Exchange procedures from then on.

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The Colonial Era to World War II

and enforcement, they could at one and the same time dominate and cartelize the securities and investment banking industries, while delivering another body blow to the House of Morgan.

The two securities acts were written by New Dealers, many of them young and all eager to radicalize and transform American finance. Substantial roles were played by Federal Trade Commission Chairman Huston Thompson, a Washington State populist, and by the venerable New York trial lawyer Samuel Untermyer, scourge of the House of Morgan as chief counsel of the U.S. Senate’s Pujo Committee in 1912, which had then helped to drive J.P. Morgan, Sr., to his grave. But the most important role in drafting and pushing through the securities acts was played by powerful left-liberal theorist, agitator, and shadowy manipulator Felix Frankfurter, a professor at Harvard Law School. An old friend and adviser to Franklin Roosevelt, Frankfurter specialized in seeding his former students and assistants, his “happy hot dogs,” into powerful positions in the federal government. In particular, Frankfurter folded into the New Deal, and into drafting the securities acts, his disciples James M. Landis, Benjamin Cohen, and Thomas “Tommy the Cork” Corcoran. And standing behind Frankfurter, pulling the strings from his Supreme Court bench, was the even more shadowy master manipulator Louis D. Brandeis, Frankfurter’s mentor from Harvard Law School. Brandeis was able to violate judi-cial ethics systematically while on the Court, by putting Frankfurter on permanent retainer on his secret payroll, and using Frankfurter as his agent in the political realm. Brandeis, who had been powerful in the Wilson administration, had been fiercely anti-Morgan for decades, and was a longtime legal representative for retail users of Morgan railroads and utilities, particularly for the Filine interests of Boston.74, 75

74For Frankfurter’s role in the securities acts, see Seligman,
Transformation of Wall Street
, pp. 39–127. The sinister Brandeis-Frankfurter connection lasted for decades until 1937, when Frankfurter broke with his mentor and paymaster for opposing Roosevelt’s plan to pack the Supreme Court. It was a case of Frankfurter, for the first time trapped
From Hoover to Roosevelt:

323

The Federal Reserve and the Financial Elites
While the New Deal Left originally wanted security regulation in the hands of the left-dominated Federal Trade Commission (FTC), they were perfectly happy to “compromise” by setting up a specialized Securities and Exchange Commission (SEC). Indeed, Roosevelt cunningly threw a sop to conservatives and moderates by naming his old friend, the Irish-American stock speculator and buccaneer Joseph P. Kennedy, to be chairman of the five-man SEC, while the other commissioners were leftist ideologues from the FTC, including the leading New Dealer writing the legislation, James McCauley Landis.

Rounding out the SEC was none other than that scourge of the Morgans and the Wall Street Republicans, Ferdinand Pecora.

Landis was to succeed Kennedy when the latter left the SEC

chairmanship in 1935.

While Joseph Kennedy was a bit more conservative than his colleagues, especially on the New Deal assault on public utility holding companies, his life as a speculator successfully bamboo-zled many moderates who did not realize the extent of Kennedy’s between Brandeis and FDR, choosing to serve the more powerful friend.