The following is an excellent excerpt from the book “ALL THE PRESIDENTS’ BANKERS: The Hidden Alliances That Drive American Power” by Nomi Prins from Chapter 7 titled “The Mid-to Late 1930s: Policing Wall Street, World War II” on page 135 and I quote: “We cannot afford to accumulate a deficit in the books of human fortitude.” –Franklin Delano Roosevelt, June 27, 1936
“By 1934, the country appeared to be slowly emerging from the Great Depression. Though unemployment was still near 22 percent, the national mood was lifting thanks to confidence in FDR’s New Deal programs coupled with the rising trust in the banking system that the president had carefully engineered.
A. P. Giannini, head of San Francisco-based Bank of America, was a veteran banker yet new to the game of political and financial alliance. He saw the Banking Act of 1933 as a way to broaden his bank’s geographical and influence reach, and he was delighted as his New York counterparts that some power would be diffused from the Morgan Bank. In addition, deposit insurance was a godsend for Giannini; it was hard enough to engender trust for a West Coast bank nationally, but the addition of insurance helped level the playing field. Even Regulation Q, which prohibited banks from paying interest on demand deposits (i.e., checking accounts) and capped the interest rates they could pay on savings accounts, helped him comparatively.
During the mid-1930s, the financiers who were focused on commercial banking pushed the FDR administration forward with additional regulation, while the private bankers remained sidelined. This internal power struggle in the industry coincided with a recession that shook up some of FDR’s banker alliances, as financiers began to think that it was time to reduce government intervention in the economy. All those domestic fights would fade, however, as it became increasingly clear that the country was headed to war, much to the chagrin of the isolationists in Congress. During that progression, FDR would find himself returning to all of his banker friends for support. As they had during World War I, the bankers would rally behind their “chief” regardless of their personal grievances, though this time they would be insistent about their requirements for a less constrained policy on the flow of capital. The Morgan bankers were well equipped to navigate wartime economics, and they knew the value of aligning with the president. Other bankers, like Aldrich and Perkins, would quickly find their way.
Policing Wall Street – The very structure of the US banking system had been dramatically altered under the Glass-Steagall Act of 1933. But there remained a need for a federal body to enforce the laws that would ostensibly keep the stock and bond markets from being manipulated by the financiers. To deal with this matter, the Fletcher-Rayburn bill, which would become known as the Securities Exchange Act, was introduced on February 10, 1934. It met with an intense and immediate opposition campaign chiefly engineered by Morgan confidant Richard Whitney, now president of the New York Stock Exchange. Many grievances remained in the Morgan realm over the Glass-Steagall Act, but establishing an entity to police the stock exchange was adding fuel to the fire. Plus, Whitney wasn’t exactly the cleanest of operators, as 1938 indictments and time in Sing Sing would reveal.
The bill was proposed to deal with the kind of securities fraud and violations that had been amply demonstrated in the Pecora hearings. It was designed to give the Federal Trade Commission power to regulate all aspects of organized exchanges, and to outlaw an array of shady market practices including excessive margin buying, wash sales (fake sales initiated by banks solely to lure the public with the illusion of true demand), and pool operations (where prices could be rigged by the larger financial firms that gathered together to push prices up and then sell their shares before the public knew what was happening).
Whitney was having none of it. As a stunt, he invited members of the House Committee on Interstate Commerce, who were deliberating over the bill, and the press to visit the floor of the New York Stock Exchange on February 23. “We have nothing to hide, gentlemen,” Whitney said.
Senator Duncan Fletcher, the chairman of the Senate Banking and Currency Committee and sponsor of the bill, called Whitney’s efforts “country-wide propaganda.” Whitney’s antics riled FDR. In a letter to Congress he noted that this kind of public opposition bore “all the earmarks of origin at some common source” and demanded that congress pass legislation “with teeth in it.”
Whitney advocated creating a commission with representation from the exchange, so as to exercise control over its decision-making. Instead, Senator Carter Glass passed an amendment establishing the Securities and Exchange Commission and prohibiting its administrators from having any personal business with the exchange.
Russell Leffingwell’s Plea for Deposits – At the start of 1934 Morgan partner Russell Leffingwell was enjoying a Caribbean cruise. The prior year had been a tough one, and he was regrouping under the warmth of the equatorial sun. But that didn’t mean he wasn’t considering how to undo the damage to the firm that his old friend FDR and his competitors had inflicted. The matter weighed on his mind. On January 4, he wrote to ask FDR if he would “be so kind as to let me come down and see you after I get back?”
Along with his request Leffingwell sent his concerns about the Banking Act of 1933. He argued that the ban on taking deposits would push legitimate incorporated banks and private bankers out of the business. He implored FDR to permit national banks to underwrite securities under whatever regulations were deemed necessary. That would allow a loophole through which private bankers could engage in the securities business as national banks could
While FDR deferred his reply, Leffingwell persisted. On February 20, he took another tack, asking FDR, “What would you think of extending for a year the time limit on securities dealings by banks and bankers [to] June 1935 instead of June 1934?” He reiterated, “I do think it is a vital necessity of your administration to find some way to keep the banks and private bankers in the underwriting business.”
FDR stuck to his guns. He held more power over the industry than any other president before him had. Plus he had the people’s support, as well as that of Congress and some key bankers. So he postponed the meeting with Leffingwell, citing the fact that there was “too much press” around, and instead replied on February 24 that “a very large proportion of the bankers themselves do not want the present law changed.” (He was referring, of course, to Aldrich and Perkins, but keeping all of his banker friends close at the same time was part of his brilliant divide-and-conquer strategy, while using them against each other as necessary.) “Secondly,” wrote FDR, “Senators and Members of Congress are very loath even to consider amendments which would restore commercial banks to the investment business, even in a remote degree.”
In truth, the day Leffingwell sent this second letter, FDR met with Aldrich at the White House to discuss the Securities Exchange Act. Still, FDR wanted to keep Leffingwell in his corner, so he rescheduled to have a “quiet” talk over dinner on March 5. The day before their dinner, Leffingwell made clear that he wouldn’t let the desires of private bankers go. In a letter to FDR, he wrote, “I accept your decision against letting the banks underwrite—partly because I must! And partly because you have been so amazingly right in your political and economic judgments. But—forgive me one question in which I have a special interest—what about the private bankers? The Banking Act of 1933 put them too out of the underwriting business on June 16th. Who is to underwrite new issues then?” It was a question Leffingwell would never relinquish, and the dinner between the two men didn’t resolve it.
FDR continued his plans for reforming the financial system with the help of his banker allies. On April 19, when it looked like the proposed legislation was weakening, he called another private meeting with Aldrich and Perkins. Fletcher was considering a new bill to postpone the time that bank affiliates, or securities arms, would have before being cut off from their banks—the Morgan partners had gotten to him. Making matters worse, the new measure would allow private bankers to take deposits for one year longer. Aldrich was irate about the extension when the bill was introduced officially. On April 30, he informed Roosevelt’s assistant Secretary, M. H. McIntyre, he was coming to Washington the next day to see Fletcher and talk to FDR about it. The extension that the Morgan bankers had sought was denied.
On May 10, Aldrich announced that the official separation of Chase’s securities unit, Chase Harris Forbes Corporation, would be completed by June 14, in accordance with the Banking Act. The unit would merge with the similar offspring of the First National Bank of Boston, the First of Boston Corporation, and would drop the Chase name for clarity.
Perkins followed suit less than a month later and announced to shareholders that National City Bank’s securities affiliate, the City Company of New York, would go into liquidation. The fait accompli that began when the two men announced that their securities arms would split from their commercial banking business was official. The separated units were now completely different companies. Solidifying the New Deal banking regulation initiative, the Securities Exchange Act was finally passed on June 6, creating a federal regulator to police the securities industry.
For his part, Jack Morgan had chosen to stay above the fray of legislation, letting his more able legal mind, Leffingwell, deal with the lobbying effort. Yet Morgan would maintain the social relationship with FDR he had enjoyed for decades. On June 8, upon discovering that FDR was attending the sailing races in new London, Connecticut, and that his son was rowing on the freshman crew, Morgan said he looked forward to the “privilege of entertaining [FDR’s son] along with the rest of the squad” on his yacht, the Corsair. He invited FDR to join them for lunch, but the president declined. “Unfortunately, I must go back on board the little “Sequoia” after the morning races,” he said. “Perhaps I shall see you on the Referee’s boat—I hope so.” Both men wanted to resurrect their friendship.
The Kennedy Connection – Three weeks later, to the dismay of New Dealers and big business alike, FDR selected the first man who would run the Securities and Exchange Commission. He did not choose just any old banker but a notorious one, Joseph Patrick Kennedy, to lead the new unit. It was a good time to be a Harvard graduate; they now ran the six spots with the most control over the financial industry; the presidency, the New York Stock Exchange, the three largest banks, and the body that watched over them.
Ironically, while the battle over the Fletcher-Rayburn bill was raging, Ferdinand Pecora was grilling banker Henry Mason Day over his role in creating a pool to speculate in the stock of the Libbey-Owens Ford Glass Company, in which Kennedy was included and from which he profited $68,800. Thus, Pecora had implicated Kennedy in the same shady practices he would be tasked with policing.
But Roosevelt had a more personal reason for installing Kennedy into the prime national regulator’s slot: he owed him one. They were old friends who had first encountered each other when Roosevelt was assistant secretary of the Navy and Kennedy was running the Bethlehem Shipbuilding Company.
Kennedy had been instrumental behind the scenes during Roosevelt’s 1932 presidential campaign. Not unlike Sidney Weinberg, he had donated $25,000 directly and raised another $100,000 from others. At the time, Kennedy was in California—beginning a highly lucrative foray into the film industry and serving as one of Roosevelt’s “silent six,” traveling ahead of the candidate during his West Coast tour and acting as a financial adviser. Kennedy convinced William Randolph Hearst to support Roosevelt in California, and as a result Roosevelt captured the nomination after the state swung his way. Once in office, as part of his expression of gratitude, FDR invited Kennedy to come over to his place for a weekend and sail on the Sequoia.
Kennedy took measures early on to reassure the banking community that he’d be working for them. At the National Press Club in early August 1934, he proclaimed that his job was to give bankers the opportunity “to live, make profits, and grow.” He added, “We of the SEC do not regard ourselves as coroners sitting on the corpse of financial enterprise. . . . [We] are not working on the theory that all men and all women connected with finance . . . are to be regarded as guilty of some undefined crime.”
Bankers, initially skeptical, were elated. In response to his speech, the New York Times reported, “Nowhere on Wall Street was any disapproval or unfriendly criticism of the speech heard.” Even Richard Whitney commented approvingly, “I think Mr. Kennedy has shown that he is approaching his job carefully and from a sane and sound point of view.”
On September 2, not wishing to be outgunned by the big New York commercial bankers, Bank of America head Giannini informed the White House, “I am one hundred percent with the president and his New Deal and I hope he will not let any one block him in his efforts to put it over.”
On October 1, Thomas Lamont decided it was time to resurrect the most congenial aspects of his relationship with FDR. So he sent FDR his notes from an intimate mid-September business dinner he had attended given by Perkins, who had initiated the gathering to ensure ongoing support for FDR.
Not to be shafted by Perkins, who had boasted about all of his “talks” with FDR at the dinner, Lamont wanted to regain the ear—and the confidence—of the president. He conveyed his approval for the New Deal stimulus objectives and reminded FDR of his international experience and progressive leanings: “When people complain to me of the amount of money that the Government has been borrowing, I always answer it by saying: “Well, if that county was willing to spend thirty billion dollars in a year’s time to try to lick the Germans, I don’t see why people should complain about its spending five or six billion dollars to keep people from starving.”
As to the “general attitude of the banking community,” wrote Lamont, retaking ownership for their combined thinking, “the attitude is generally the same as it is in this [the Morgan Bank] office, namely one of backing up the Administration to the limit.” This support, he believed, was exemplified by the vast amount of US government bonds the New York banks were holding. In closing, he informed Roosevelt, “I may be a republican but you can bear witness from my association with President Wilson that I do want to be loyal to any Democratic President with whom I happen to be working, especially one who is a friend and of many years’ standing as F.D.R. is.” Somewhat upended by Glass-Steagall and related issues, Lamont was ready to join the president’s side. In return, he hoped to maintain his position as the dominant domestic and global banker.
Under Kennedy’s leadership, the SEC implemented some major reforms but took no further actions against the big banks. What most concerned Kennedy, as it did the bankers, was the restoration of the capital markets to supply the nation’s corporations with credit. Before February 1935, issues of new debt securities had nearly stopped. New Dealers called this “a strike of capital,” with big business holding the economy hostage while demanding less stringent oversight.
The Morgan bankers attributed the credit crisis to the Glass-Steagall Act’s separation of securities issuance from deposit-taking businesses. At any rate, all that changed when Swift and Company negotiated a $43 million bond issue with the SEC; soon afterward, the capital markets come roaring back. This loosening of credit played a role in resurrecting the business economy.
Kennedy was appointed chairman of the SEC for one year, but he stayed nearly sixteen months. He remained a strong supporter of Roosevelt, though, lending his name to the book I’m for Roosevelt!, published during the election year of 1936. Roosevelt enthusiastically responded in a personal note, “I’M FOR KENNEDY!” As a campaign surrogate, Kennedy strongly defended Roosevelt’s record in front of hostile audiences. After 1938, Kennedy and his family traveled to London, where he took up his FDR-appointed post as US ambassador to the Court of St. James’s.”
(WITH FIERCE OPPOSITION FROM MORGAN CONFIDANT, RICHARD WHITNEY, PRESIDENT ROOSEVELT STILL PASSED THE SECURITIES EXCHANGE ACT ON JUNE 6, WITH HELP FROM MR. ALDRICH and MR. PERKINS. PRESIDENT ROOSEVELT PASSED THE SECURITY ACT TO REGULATE THE STOCK MARKET WITH SOME REAL REGULATIONS. THE ONLY THING LEFT TO DO, WAS WHO TO APPOINT TO RUN THE NEW SECURITIES & EXCHANGE COMMISSION and HE APPOINTED JOSEPH PATRICK KENNEDY, EVEN THOUGH HE HAD SOME PROBLEMS, HE SAID HE WOULDN’T LET THE PRESIDENT DOWN. THE 1933 GLASS-STEAGALL ACT WAS IN FORCE, SEPARATING THE COMMERCIAL BANKS FROM THE INVESTMENT BANKS. BOTH THE COMMERCIAL BANKS AND THE STOCK MARKET RUNNING SEPARATELY WORKED FOR MANY YEARS UNTIL THE BIG BANKING LOBBYISTS SUCCESSFULLY GOT RID OF IT IN 1999, WHICH EVENTUALLY LED TO MUCH BIGGER PROBLEMS THAN THE GOVERNMENT BAILOUT BY THE GEORGE W BUSH ADMINISTRATION IN 2008 AND EVEN MORE SERIOUS PROBLEMS COMING DOWN THE ROAD, WHICH HAS NOW AFFECTED THE IMF AND WORLD BANK, WHICH NOMI PRINS MENTIONED IN HER BOOK BUT SHE SHOULD WRITE ANOTHER BOOK, MENTIONING SOME OF THE PROBLEMS THAT BOTH OF THESE GROUPS RAN INTO TRYING TO RUN THE WORLD.
LaVern Isely, Overtaxed Independent Middle Class Taxpayer and Public Citizen and AARP Members