The Jews in America Trilogy (54 page)

The work of the Joint was based on a simple assumption: that Jews had a right either to live where they were or to emigrate; the Joint was devised to facilitate either of these alternatives. As Oscar Handlin has said, “The historic program of the Joint offered all Jews a basis for unity of action. Its American insistence on ‘giving to all an equal opportunity for survival and creative life' was enriched by ‘the Biblical concept of social obligation and mercy.' It could therefore rise above all factional divisions.” Stefan Zweig said of the Joint, “Later, at some future date, we shall again gladly and passionately discuss whether Jews should be Zionists, revisionists, territorialists or assimilationists; we shall discuss the hair-splitting point of whether we are a nation, a religion, a people or a race. All of these time-consuming, theoretical discussions can wait. Now there is but one thing for us to do—to give help.”

For the next fifty years, the Joint would continue to exert its unifying force upon the disputatious, splintered Jewry of America. While young Otto Kahn was stylishly aiding the war effort, Jacob Schiff in his twilight years was, in his quiet way, adding even more glory to his name.

The scope of what had been called Schiff's “complex Oriental nature” was becoming clear. Long before it was fashionable for American millionaires to have humanitarian instincts, he had spoken out for the Negro, for free public education, for the Child Labor Amendment, and for the rights of trade unions. He had an abiding, idealistic faith in the Fatherhood of God and the brotherhood of man. No wonder he always thought, right up to the time of his death, that the Joint was strictly a temporary organization. He always expected—and, in fact, anticipated—the day when the injustices the Joint was designed to solve would disappear, when the need for the Joint would vanish, and it could be disbanded.

42

THE RISE OF A HOUSE OF ISSUE

In 1900 Lehman Brothers, though it had been successful, was still considered essentially a commodity brokerage house. In prestige and importance it was ranked so far below Kuhn, Loeb that it was not even considered in the same business. The Lehmans had nothing of the social power of the Seligmans, and nothing approaching the wealth of the Schiffs, Warburgs, or Otto Kahn.

The Lehmans, however, were far from being needy. From cotton brokerage they had branched into commodities underground—particularly petroleum—and Mayer and Emanuel were mentioned in every list of the city's richest men. One of the most spectacular young men in the class of 1899 at Williams College was Herbert H. Lehman. Among the companies his father and uncle had bought into, along with P. A. B. Widener and John Jacob Astor, was the Electric Vehicle Company, an early automobile manufacturer, and the Rubber Tire Wheel Company of Springfield, Ohio, the first American maker of pneumatic tires. Young Herbert arrived on the Williams campus with not only his own car—in itself a rarity—but his own chauffeur. Periodically, Herbert's driver painted the car's license plate with oil, causing dust from the road to obscure the numbers on the plate, thereby making the young dandy difficult to identify by police as he sped about
the landscape. It was hard to believe that this high-living fellow would later become one of New York's most meticulous governors, so concerned with maintaining his personal dignity that, for years during his stay in Albany, he refused to dine at his favorite restaurant, Keeler's, for fear it would not “look right to have the Governor seen eating in a public restaurant,” and who, at a Democratic function in New York, walked out when he felt he had not been seated properly at the banquet table.

On Wall Street the Age of the Trusts seemed about to pass the Lehmans by. Between 1898 and 1904 alone, over four billion dollars' worth of new securities in industrial combinations had been sold—through bankers—to investors. In 1893 there had been twelve large trusts with an aggregate capital of less than 2 billion dollars. By 1904 there were 318 such trusts, one of which was capitalized at almost a billion and a half. The trust system, which had been a brain child of John D. Rockefeller's lawyers, was to put the voting power of a group of companies into the hands of a group of trustees. Technically, the individual companies would remain independent, as far as their operations were concerned, and therefore they would not be liable to antitrust action. But central control of voting meant that no company could step very far out of line. (Jacob Schiff never approved of voting trusts and the kind of control they gave over company operations, but he sold their securities cheerfully enough.) The theory of the trust was that eliminating competition among the consolidated units would bring about immediate economies and therefore increased profits. It worked—sometimes.

The Age of Trusts was the age of the investment banker. Money needed to launch new enterprises and to put their securities on the market made bankers' contributions essential. Banking houses had had experience selling government and railroad bonds in Europe, and this stood them in good stead. Now they could sell the new corporate stocks—whose values might or might not be watered. As the twentieth century advanced, the European market for American securities became less important; there was a well-heeled investing public in America to consider.

There were companies who figured they could do without investment bankers. In 1902 the Pennsylvania Railroad came up with a plan to bring their line directly into New York City, through tunnels under the Hudson River, which would make the Pennsylvania competitive with the New York Central. There were powerful interests in both New York and New Jersey opposing the plan, but Jacob Schiff,
who had been the Pennsylvania's banker for over twenty years, went actively to work rallying support for it, writing a letter to his friend Isidor Straus of Macy's, pointing out the advantages to the city and its businesses and asking for his help.

The bond issue put out to finance the construction of the tunnels was reasonably priced and was considered a bargain, and so the railroad decided, to save the underwriter's fees, to bring the issue out itself. Schiff advised against this, and the Pennsylvania seems to have been in a rather ungrateful frame of mind, considering all Schiff's hard work. But Schiff accepted the decision in good grace. Soon, however, without the market support and stamp of approval provided by an investment banking house, the tunnel bonds were in trouble, and the price fell so disastrously that Kuhn, Loeb had to step in and perform a last-minute rescue operation. It was a dramatic example to industry of the importance of a banking house and its abilities to find and “sell” a market. It was also the last time a company would ever attempt to offer securities to the public without the backing of a “house of issue.”

The investment banks sold securities to the public in any one of, or in any combination of, three basic ways. They might
underwrite—
or, simply speaking, guarantee the success of an issue which they would actually sell. In return for the greater risk the underwriter took, he was given the say on the price the issue could be sold at, to whom it should be sold, where, and by what means. Or a banker might sell securities on the market under a
negotiated
system—selling a company's stocks on a commission basis while, at the same time, lending the company money for its operating, development, or expansion expenses. Ideally, the banker makes money in two ways in such an operation. (This was Joseph Seligman's favorite banking technique with railroads; he, of course, often lost.) The third method was
contracting
, where an investment house bought up an entire issue outright, and then either parceled it out to other houses or sold it exclusively. This was Kuhn, Loeb's favorite way of operating, and to the outsider it might seem to involve the greatest risk. Actually, contracting was seldom done unless an issue was considered a sure bet.

Little of this lucrative business had been done by the house of Lehman Brothers by the turn of the century. In fact, in the first fifty years of its existence, the Lehmans underwrote only one issue—in 1899, for something called the International Steam Pump Company, a pump trust consisting of five pump manufacturers. The combine did not work out well and, to conform with antitrust laws, it was reorganized as the
Worthington Pump & Machinery Corporation. Once bitten, the Lehmans dropped out of underwriting for several years. They continued with commodities—cotton, coffee, and petroleum futures—and, for their own portfolios, bought issues of the day.
*

But when Emanuel Lehman died, control of the firm was fully in the hands of the second generation—a group of restless, eager, ambitious boys: Philip, Sigmund, Arthur, Meyer H., and Herbert. Particularly ingenious when it came to banking was Philip, Emanuel's son, and it is Philip Lehman's wizardry—along with the strength of his will and the assertiveness of his personality (“At anything he did, Philip
had
to win,” says a member of the family)—that has established the Emanuel Lehman branch of the family as the dominant one in the firm's affairs.
†
In an era when no self-respecting private banker would deign to back retail stores, textile manufacturers, clothing or cigarette makers—to say nothing of the indignity of mail-order houses and five-and-ten operations—Philip Lehman led his cousins directly into such businesses with quickly profitable results. Very early, Lehman Brothers helped finance and develop the American Potash and Chemical Corporation—and continued to back it until it was sold, for a nice figure indeed, to the Standard Oil Company of New Jersey.

It was Philip Lehman's generation that first married into the elite of New York's German Jewry. He and his cousins married, variously, Strauses, Altschuls, Lewisohns, Lauers, Limburgs, Fatmans, Goodharts, and—in the case of his cousin Sigmund—first-cousin Lehmans, thereby aligning the Lehmans with other fortunes and banking houses. The marriage of Arthur Lehman to Adolph Lewisohn's daughter was of prime importance, for it brought the Lewisohn mining enterprises under the Lehman wing.

It was at Philip Lehman's insistence that the firm first began to venture into underwriting, the step that would lead Lehman Brothers into investment banking. He had often discussed it with his best friend, Henry Goldman.

Henry's father, Marcus Goldman, had died a few years before Philip's, and the proceeds of the business old Marcus had carried in the lining of his hat had left his heirs more than comfortably off. Henry,
too, was ambitious and eager to move into something beyond commercial paper sales—in which Goldman, Sachs had become the leading dealers in New York. Business mergers were not so fashionable in those days as they have become, and so the two friends did not consider this. But they did toy with the idea of forming an underwriting firm of their own, Goldman & Lehman. But the pressures, both practical and sentimental, not to abandon their respective family firms were strong, and so at last they decided to collaborate in underwriting as a side line. Each house would continue with its specialty—Lehman with commodities, Goldman, Sachs with commercial paper—and the two friends would go in as partners in underwriting ventures, splitting the profits fifty-fifty.

Goldman, Sachs, like Lehman Brothers, was a firm tied together with tight matrimonial knots. Two of Henry Goldman's sisters were married to two Sachs brothers. In 1906 Henry Goldman's brother-in-law's sister, Emelia, married a man named Samuel Hammerslough.
*
Hammerslough's older sister, Augusta, was married to a man named Samuel Rosenwald, and their son, Julius Rosenwald, who nobody thought would amount to anything, had gone to Chicago at a tender age and bought up a mail-order house called Sears, Roebuck & Company. The relationship may have been tenuous, but when Julius Rosenwald wanted money he approached his “cousin,” Henry Goldman. Julius wanted to expand Sears, Roebuck, and he asked Goldman for a loan of five million dollars.

Goldman introduced Rosenwald to Philip Lehman, and the two bankers offered Rosenwald a better suggestion. Why not make a public offering of Sears stock—and make ten million dollars? It was a fairly daring notion, because there had never before been a mail-order security on the market. There was no way of telling how the stock-buying public would react to Sears. Rosenwald agreed, and the foundation of a gigantic mail-order house was laid. Few Sears, Roebuck shareholders today regret Philip Lehman's and Henry Goldman's idea.

Lehman and Goldman went on to cooperate in other issues, nearly all of them for Goldman, Sachs clients. They became specialists in helping privately owned companies “go public,” an operation that has always been heavy with risk. In 1910 they underwrote an issue for the Underwood Corporation; in 1911 they introduced Studebaker. A year later the friends put the first shares of a variety chain store on the
market; it was the F. W. Woolworth Company. The following year they presented the Continental Can Company. In all, the two men collaborated in fourteen major securities issues, and were considered Wall Street's hottest young underwriting team, when the guns of August were fired in 1914.

Henry Goldman's brother-in-law, Sam Sachs, had returned from a trip to England just after the war's outbreak. While there, he had assured Goldman, Sachs's correspondent firm in London, Kleinwort, that Goldman, Sachs stood firmly behind Great Britain. In New York, however, to his dismay, he learned that Henry Goldman had already made several pro-German speeches.

When the Anglo-French loan had been turned down by Kuhn, Loeb, it had gone to J. P. Morgan, and most leading Wall Street firms were asking Morgan for participations. However, Henry Goldman, one of Goldman, Sachs's most important partners, had announced that he wanted nothing to do with the loan, and for outspokenly pro-German reasons. There was, furthermore, a rule at Goldman, Sachs that the firm could sponsor no issue unless all partners agreed unanimously. An intense, high-strung, didactic man, when Henry's partners and sisters begged him to modify, or at least conceal, his feelings, he refused and his public utterances became more frequent and startling. The Prussianism that Otto Kahn deplored, Henry Goldman admired. He quoted Nietzsche to anyone who would listen. Sam and Harry Sachs, meanwhile, went directly to Morgan as Otto Kahn and Morti Schiff had done, to take personal subscriptions in the loan in an attempt to save the day. But Goldman's damage had been done, and Goldman, Sachs was another German firm to fall under a heavy pall.