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Wall StreetA History$

Charles R. Geisst

Print publication date: 1999

Print ISBN-13: 9780195130867

Published to Oxford Scholarship Online: November 2003

DOI: 10.1093/0195130863.001.0001

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The Money Trust (1890–1920)

The Money Trust (1890–1920)

(p.124) Chapter Five The Money Trust (1890–1920)
Wall Street

Charles R. Geisst (Contributor Webpage)

Oxford University Press

Abstract and Keywords

The money trust and the development of the Federal Reserve. The central role of Wall Street power brokers in the country and the increasing sophistication of the exchanges. The Pecora hearings in Congress, revealing the inner workings of the money trust, the death of Pierpont Morgan, World War I financing, Liberty Bonds, and the role of bankers again as central figures in the power structure of the country.

Keywords:   Anglo‐French loan, British investments, Congress, exchanges, Federal Reserve, First World War, Liberty bonds, Louis Brandeis, money trust, Pecora hearings

It's Morgan's, it's Morgan's

The great financial Gorgon's.


beer hall tune

Before the outbreak of World War I, American business entered a consolidation phase. Great trusts like those of the latter part of the nineteenth century continued to be formed as financiers aided and contributed to the consolidation of many smaller, innovative companies by merging them into industrial giants. From the outside, it appeared that American industry was flexing its muscle in aggregate. Bankers were central to the process, but more controversy was building concerning their roles in capital raising and restructuring. As the war approached, bankers were considered by their critics to be plunderers, having done little, if anything, to help develop the economy in a meaningful way. Others considered them patriots, helping to finance the Allies and America's eventual entry into the conflict by raising billions of dollars. During the 1930s, however, interpretations became much more one‐sided. Bankers would be referred to as “financial termites,” tearing the financial system apart from the inside. Never particularly loved at any time during that twenty‐year period, especially by Democrats, bankers became the most maligned professional group in the country during the Great Depression. But curiously, it was not their wealth that their detractors held against them. Instead, it was the combination of wealth and concentrated economic and political power that eventually made them such a vilified group. Wall Street was about to come under a cloud as Congress clamored for a new central bank. A natural question would quickly arise. In the absence of a central bank for over seventy years, how had the bankers managed to control the reins of credit in the country?

(p.125) Although never popular in many parts of the country other than the East Coast, bankers underwent a transformation between the two world wars. The institutions they led became more powerful than ever, dominating American life as never before. They plunged into new areas of business with a fervor that helped revolutionize American society by steering it onto the course of consumerism that has dominated it ever since. The United States became a country where the economy was dominated by spending. Beginning in the 1920s, about two‐thirds of the country's total gross national product was attributed to consumer spending, a percentage that has remained stable over the years. In order to finance that spending, bankers needed to supply credit, thereby making them central to the idea of American prosperity. Thorstein Veblen's idea of “conspicuous consumption,” first outlined in his Theory of the Leisure Class (1899), was rapidly becoming reality. With a characteristic tongue‐in‐cheek description, Veblen likened modern man's desire to consume as conspicuously as possible to primitive man's desire to accumulate food or women by force. As American consumer society became more mature, consumption became a goal worth achieving for the middle class as well as the wealthy. The 1920s would witness its virtual explosion.

Events prior to World War I led to a burst of economic activity in the 1920s. It has been customary to think of the 1920s as a period unique unto itself. But the increased spending fueled by the banks (accomplished by granting of credit to companies and individuals alike), the mass production of automobiles and radios, as well as the continuing concentration of financial power all had their origins in the earlier part of the century when the modern foundations of corporate and industrial power were laid. Despite attempts to regulate the power of financial institutions, the 1920s were remarkably similar to the prewar years.

One of the unique aspects of American industrial and corporate development was the role of banking in the nineteenth and early twentieth centuries. The financial system operated without the benefits of a central bank, relying instead upon the large money center banks in New York and Chicago. The banks were shackled by a variety of federal and state laws dictating what lines of business they could engage in and where they could do so—sometimes limited to their own states. But despite their limitations, the banks were able to accumulate large amounts of deposits and influence, and, for the most part, they resisted any sort of change that disturbed the status quo. Having a central bank, once the focus of the states' rights arguments, now was resisted as being “too European,” suggesting control of credit and money that bankers often painted as antithetical to the American ideal.

Immediately after the turn of the century, commercial banks were mainly wholesale institutions, deriving most of their revenues from businesses (p.126) and wealthy individuals. During World War I, they strengthened their grip on corporate America by venturing into the investment banking business. There they provided competition for the older investment banks, which were still properly known as private banks. That expansion helped them penetrate another market that was just coming of age—retail banking. Emerging American industrial dominance was creating a new class of wealthy individuals, and the large banks had set their sights firmly on them.

The regulatory environment surrounding the banks in the early 1920s was extremely friendly. The only real constraint was geography. Banks were not able to cross state lines and, in many states such as New York, were not able to cross city and country lines. As a result, the most successful of them were concentrated in New York City and, to a lesser extent, Chicago. Their power derived from the connections they had forged over the years with businesses and corporations. The corporate bankers loaned money to businesses, while the private banks underwrote securities for them; in some cases select institutions performed both functions. Most of the extremely powerful dated from the middle of the nineteenth century.

Bankers' Influence

Within the seventy‐odd years that the powerful had already existed at the outbreak of World War I, descriptions that would appear out of proportion to their relatively short histories quickly appeared. The adjective “great” was applied to the several top New York banks, and the families that sometimes headed them were referred to as “dynasties.” These banks' domination over certain parts of the economy was so complete that only a wink or a nod by an investment banker was necessary to make or break a deal. Many of the private bankers still did not publish financial statements, so their customers did not actually know of their financial condition; they had complete faith in the banks based solely upon reputation and word of mouth. Because of this halo effect, many bankers likened themselves to the great banking families of Europe: the Medici in sixteenth‐century Florence or the Rothschilds in nineteenth‐century Britain.

The dynastic names were normally associated with the private banks and investment banking houses—J. P. Morgan, Kidder, Peabody, Kuhn Loeb, Lehman Brothers, Seligman, Brown Brothers, and Harriman Brothers. The larger commercial banks, notably the National City Bank and the First National, both located in New York City, were also headed by chief executives whose names dominated banking—in some cases more so than the private bankers who often preferred to remain relatively anonymous. George Baker of First National, James Stillman and (later in the 1920s) Charles Mitchell of the National City Bank were among the best known.

(p.127) But these individuals were more than famous names in the banking business. They were also members of the money trust, a group that controlled the reins of credit in the country on an almost exclusive basis. The term was coined by Congressman Charles A. Lindbergh Sr. of Minnesota and became a household word in the years before World War I. They supplied credit to companies, raised bond and stock offerings for them, and had extensive holdings on corporate boards of directors that ensured a tight grip on American industrial policies. Without the bankers' access to money, industry would not have been able to expand as rapidly as it did in the late nineteenth and early twentieth centuries. But, as detractors would note, the money did little to develop business and new ideas. It simply helped the bankers accumulate concentrated economic power at the expense of those who founded and ran the businesses they financed. Memories of Jay Cooke had long since disappeared.

In the early part of this century, bankers were responsible for putting together deals that led to the rapid centralization of many businesses. Acting as both principal and agent in many deals, they helped rationalize industry into large holding companies, many with vast connections and power. The public utility industry, railroads, the rapidly developing telephone system, and the insurance industry were but a few examples. Using holding companies that acted as the parent company, many larger companies began to swallow up smaller ones with funds provided by their bankers. They also issued securities to finance those deals, and in many cases their bankers also invested in the deals as well as underwriting them. Often, many of the holding companies were related to each other although not officially on paper since they shared directors and bankers.

Holding companies appeared first in Ohio. Rockefeller founded Standard Oil there but moved to New Jersey when the state allowed corporations to hold each other's stock. Prior to that time, state laws had limited share ownership to individuals as a method of controlling monopolies. This principle began a revolution in American industrial and financial organization, which was widely used to avoid the Sherman Anti‐Trust Act after it was passed in 1890. By hiding under the umbrella of a holding company, many companies were able to buy each other's stock, thereby disguising true ownership. Companies were able to acquire others in the same business without raising too many watchful eyebrows. Prosecutions under the Sherman Act would be difficult because it would be time‐consuming to determine which company owned another.

The same form of organization was widely used in the securities business to avoid visible concentrations of financial power. Banks, forbidden to hold equity in other companies, organized themselves into holding companies to allow their newly founded securities subsidiaries to engage in the securities business. The best known of all securities subsidiaries prior to World War I was the National City Company, owned by the National City (p.128) Bank of New York. J. P. Morgan and Company's Drexel subsidiary was located outside New York in Philadelphia. Originally organized to venture into previously forbidden territory, after 1916 the subsidiaries were suspected of being used to avoid paying income tax. The same shroud of mystery that masked true corporate ownership could also be used to hide tax liabilities of individuals.

Few would argue with the positive economic effects of these mergers; they made American industry more efficient in many respects, and the country began to emerge as the dominant international economic power by World War I. But many objections began to be raised about the manner in which these deals were done and the soundness of the banking practices that financed them. Many of the most poignant criticisms came not from economists but from social activists who saw the great disparities the merger trend was creating in American society. In classic Marxist terms, the rich were getting substantially richer while the working class actually was losing earning power. This stood in stark contrast to the popular notion that the period from before the war to the end of 1920s was one of good times and prosperity for all.

Other criticisms over the extent of the amalgamation of industrial power could be heard from diverse quarters, from investors' groups to Woodrow Wilson. Investors were concerned that the concentration of power in holding companies was stifling new investment. As Wilson noted, “No country can afford to have its prosperity originated by a small controlling class. . . . Every country is renewed out of the ranks of the unknown, not out of the ranks of the already famous and powerful in control.” Once having acquired power, the large companies were no longer interested in innovation or new products; they were simply happy to sit back and collect their existing revenues. Wilson concluded by noting, “I am not saying that all invention has been stopped by the growth of trusts but I think it is perfectly clear that invention in many fields has been discouraged.”1 American industry was going through one of its first consolidation phases, and the trend clearly had many worried. Critics claimed that growth had been stymied in favor of paper transactions designed to make bankers and financiers richer.

The industrial trusts, or holding companies, had vast holdings that could clearly be challenged as violations of the Sherman Anti‐Trust Act. The United States Steel Corporation was an amalgam of 228 smaller companies scattered over more than a dozen states. The General Electric Company controlled directly or indirectly a wide range of water companies around the country. By controlling water, the company also effectively controlled much electrical power production and all the ancillary revenues that accompanied it. Before World War I, the U.S. Commissioner of Corporations feared that all water utilities in the country could (p.129) actually fall into single ownership. The implications of such an event were even more shattering considering that these vast industrial holdings were either controlled directly by, or provided banking services by, the money trust, notably J. P. Morgan & Company.

The power of industrialists and bankers was the subject of heated discussion and scrutiny in the late nineteenth century, culminating in the passage of the Sherman Anti‐Trust Act in 1890. Attempting to prohibit cartels and monopolies that constrained trade and competition, the Sherman Act still could not come to grips with some of the more subtle devices used to dominate certain industries. One was the central position that bankers had assumed on the American industrial scene. This was accomplished by sitting on the boards of many companies—some in the same sorts of industries—or on the boards of client companies. One of the bankers' main functions was to sit on as many boards as possible, ensuring an influence out of all proportion to the actual importance of the banks themselves.

It has long been assumed that American business and industry developed more quickly and exercised more power than the federal government, at least until the Great Depression. This is borne out by an examination of the banking industry in general. Subject to the regulation of their home states, most banks that carried the title “national” were not well regulated by the federal government. Until 1913 the country did not have a central bank, and the larger commercial banks in New York were accustomed to having things much their own way in the absence of a central banking authority responsible for money and credit creation. Their relationship to the industrial trusts extended indirectly to Wall Street itself. When many of these new, vast corporations had been formed, they certainly needed to sell stock in themselves to help finance new business and acquisitions. The banking houses stood ready to do business with them, having been steered the business by one of their own partners who sat on the board of the company. In such a manner, the banks dominated the money markets and the market for credit in general. When the proposal to establish the Federal Reserve gained momentum, the problem of bankers' power quickly emerged as a contentious issue. This concern led to a congressional hearing that became one of the most popular and revealing events in prewar America—the 1912 Pujo committee hearings.

Pierpont in Public

The committee hearings, called by Congressman Charles Lindbergh of Minnesota and named after Arsene Pujo, Democrat of Louisiana, were noteworthy because of the appearance of J. P. Morgan (Pierpont), among others, who was called to testify about the money trust. Although certainly (p.130) not known at the time, it would become one of two well‐publicized testimonies given by a Morgan in the twentieth century, both equally famous for revealing the amount of corporate power that bankers exercised. Morgan's chief inquisitor at the hearings was the chief counsel for the committee, Samuel Untermyer, a New York lawyer. Under close examination by Untermyer, who had little use for bankers as a group, Morgan maintained the traditional line about the extraordinary number of directorships he, his partners, and other bankers such as George Baker managed to hold, especially in those industries vital to the national well‐being. Hauling coal, in which many utility companies had an interest as both user and producer, on railroads owned by the same trust was but one of dozens of examples brought out by the committee.

Morgan emphatically denied that he and other major bankers ever controlled, or desired to control, sectors of the American economy. He stated this matter‐of‐factly, although it was well documented that he personally controlled as much as fifty thousand miles of rail lines in the years immediately preceding the hearings, as clearly revealed in a portion of the badinage between Morgan and Untermyer.2 Questioning Morgan about his railroad holdings and the business the railroads conducted, especially with the coal industry, Untermyer began:

  • MR. UNTERMYER: You and Mr. Baker control the anthracite coalroad situation, do you not, together?
  • MR. MORGAN: No; we do not.
  • MR. UNTERMYER: Do you not?
  • MR. MORGAN: I do not think we do. At least, if we do, I do not know it.
  • MR. UNTERMYER: Your power in any direction is entirely unconscious to you, is it not?
  • MR. MORGAN: It is sir, if that is the case.3
Other witnesses called before the hearings professed to be equally puzzled by what had become dubbed the money trust. George F. Baker, chairman of the board of the First National Bank of New York, denied that such a group had ever existed. When asked by Untermyer to describe what he understood to be a money trust, Baker simply replied: “I give it up. I do not know.”4 In fact, he and Morgan claimed that the banking system was built upon honor and character more than money. Banking was a matter of trust, and in such matters social background was an important factor. A banker could expect honorable behavior from others of his own ilk or those he subjectively trusted. Given this orientation, it was natural that bankers should hold many directorships as well as owning a share of many other banks.

In addition to his own bank, Morgan had extensive interests in many (p.131) others, including the Banker's Trust Company, the Guaranty Trust Company of New York, and the National Bank of Commerce. He and his dozen partners held over 72 directorships in 47 major corporations of different types. Similarly, the First National Bank's officers held directorships in 89 other companies, 36 of which had at least one Morgan partner on the board as well. The Pujo committee found that in aggregate the officers of Morgan, National City, and First National between them held 118 directorships in 34 banks and trust companies with assets totaling $2.6 billion and deposits of $1.9 billion. In addition, they held directorships in 10 insurance companies with total assets of almost $3 billion. Outside the financial sector, they held 105 directorships in 32 transportation systems with total capitalization of some $11 billion. The sum of their activities was staggering for the time: in total they held 341 directorships in 112 corporations with resources of $22 billion.5 When these connections were held up against their protests, the case for the money trust was well made. The bankers appeared to be claiming ignorance of something in which they had been actively engaging for years.

Despite the bankers' protestations, the Pujo committee went on to name the members of the money trust but admitted that it could not actually prove such a trust existed other than offer the overwhelming coincidence of interlocking directorships. The banking houses named were Morgan; First National Bank of New York; National City Bank of New York; Lee, Higginson and Company; Kidder, Peabody and Company; and Kuhn Loeb and Company. All were involved in deposit taking and securities underwriting to some extent, although Kidder, Peabody, Kuhn Loeb, and Lee Higginson were primarily securities underwriters. Almost as an afterthought to its report, the committee added that the money trust exercised two types of control over the credit process—controlling the supply of money and the way in which it was allocated.

In this latter respect, the testimony of George Reynolds, president of the Continental and Commercial National Bank of Chicago, was revealing. Untermyer confronted him with a copy of a speech given the previous year in which he categorically stated that six or nine banks controlled the processes by which loans were made throughout the country. Reynolds admitted having made the statement but went on to deny that such a thing as a money trust existed. He also stated that supplying funds and credit, especially in the absence of a central bank, was a natural function of the money center banks. In this respect his assertion was correct. The commercial banks between them had inordinate power over the supply of funds in the country because the federal government had given them that power de facto by never establishing a central bank. The lacunae in financial power had invested banks with authority they exercised as well as they could given the lack of governmental direction.

(p.132) The hearings did not produce any tangible evidence of a money trust. Most of Wall Street and a large portion of the press thought they only helped shed a favorable light on financiers in general. The New York Sun commented, “The Pujo sub‐committee is indebted to Mr. Samuel Untermyer for exhibiting to it, in the person of Mr. George F. Baker, that type of financial ability and integrity which is highly desirable that the legislative mind should study and comprehend.”6 Baker, one of J. P. Morgan's closest friends and confidants in the banking business, had shown remarkable restraint and ingenuousness when responding to Untermyer's questions, as had Morgan himself. While many began to believe that Lindbergh's characterization of the banks was nothing more than fantasy, the move toward a central bank had picked up momentum that could no longer be stopped.

Paul Warburg, a member of the German‐American banking house and a member of one of New York's prominent Jewish banking families, was one of the architects of the principles creating the Federal Reserve System. He later recalled the opposition that some bankers raised to the central banking concept before it was passed and at various times afterward as well. Warburg was one of a small group of Wall Street bankers who met clandestinely on Jekyll Island, Georgia, in 1910 at the behest of Nelson Aldrich, Republican senator from Georgia. The meeting was intended as a forum for framing a Republican alternative to banking reforms making their way through Congress, which was then Democratically controlled for the first time in twenty years. The Aldrich Plan outlined what would become the blueprint for the newly created Federal Reserve three years later. Warburg was eventually offered the job as chairman of the Fed but turned it down in his characteristically self‐effacing manner. He did, however, serve as a director until 1918. Although not passed by Congress in its original form, it was nevertheless the model upon which compromise would be centered.

As a partner of Kuhn Loeb and Company, Warburg was advised by its senior partner, Jacob Schiff, to keep his ideas concerning European‐style central banking to himself in order to preserve his own reputation in the New York banking community. He always thought American banking was somewhat primitive compared with European models, many of which had support from both the local banks and their respective governments.7 He also was fairly outspoken about the booming market in the middle and late 1920s. When confronted in his office one day by James Stillman, then chairman of the National City Bank of New York, he was asked why he wanted to propose such a radical change in American banking. “Warburg,” Stillman asked, “don't you think the City Bank has done pretty well? . . . Why not leave things alone?” His answer came quickly, without much hesitation: “Your bank is so big and so powerful, Mr Stillman, that when the (p.133) next panic comes, you will wish your responsibilities were smaller.”8 Such remarks did not sit well with the prophets whose major task was to keep a positive view of America's prospects. Bernard Baruch was later to remark, in typical New York fashion, “I cannot understand why people speak in such admiration of Paul Warburg. He's not so very rich.”9

Although the Pujo committee had revealed a good deal about the close relationships in corporate America, its impact was less than might have been expected. For the most part, it was overtaken by events. The Pujo hearings were also the last public appearance for J. P. Morgan, who died a year later in 1913. Although his son and successor, J. P. Morgan Jr. (Jack), took over the reins of the bank, it would be some time before he established himself as a legendary figure in American banking in his own right. And perhaps most important, the Federal Reserve was established as the nation's central bank in 1913. One of its major functions was to oversee the supply of money in the banking system and see that it was allocated evenly among the nation's twelve Federal Reserve districts. Nevertheless, the Morgan partners recognized the potential threat to their dominance and withdrew from the directorships of almost thirty companies as a conciliatory gesture. They did admit that the seats on those boards were expendable. The combination of these factors helped push the money trust into the background, where it would remain active but mostly away from the public eye for the next twenty years. The bankers had had their day in the sun and now were retreating from the public view because most of the money trusters had a distaste for publicity and the accountability that accompanied it. But there were some dedicated to reform who did not believe the publicity generated by the hearings would be enough in itself to tame the bankers' control of American economic life.

Shortly after the money trust hearings, the U.S. Senate turned its attention to the New York Stock Exchange and its practices. The sentiment prevailing in Washington was still cynical. Now that the Fed had been established, the stock exchange bore closer scrutiny. The first witness called by the Senate was Samuel Untermyer. The former counsel of the House Banking Committee testified about the inside information that many corporate leaders had concerning their own companies but failed to make public. Usually, they used the information to trade in their own stock or the stock of companies in which they were outside directors. The committee was investigating the usefulness of stock exchange internal rules, which had prescribed more corporate reporting and uniformity in corporate accounts. The exchange had made some progress in uniform rules of reporting but was still woefully inadequate on others. Corporate leaders felt that uniform rules encroached upon their ability to run their companies and were essentially not the business of outsiders, even shareholders. Untermyer made something of a prophetic statement before the committee: (p.134) “It will not be long before corporate officers will be prevented from withholding information and speculating on advance knowledge. . . . the time will come when those [members of the NYSE] who are bitterly assailing and slandering the champions of this legislation will find that it has marked the dawn of a new era of usefulness for them and the exchange.”10 Untermyer was perfectly correct, but the day was still twenty years away. The stock market crash and the Great Depression would occur before any serious legislation could be passed to prevent insider trading abuses and the lack of uniform reporting.

A “Constructive Adventure”

The Pujo hearings were one of the later factors behind the passage of the Federal Reserve Act of 1913. The creation of a central bank after a seventy‐year hiatus was the most controversial topic to hit Wall Street since the Civil War. Probing bankers' power and influence was just one of the topics the hearings examined. In an instant, all of the previous controversies came to the fore—the Treasury bailout of 1894, the panic of 1907, and circumlocutions of the Sherman Anti‐Trust Act. The Wall Street community was in an uproar that would not be quelled for years until the Federal Reserve had established itself.

Wall Street divided along traditional lines when the idea of a central bank was first proposed. The Jewish houses and those with strong European connections were mostly in favor of a central bank. Jacob Schiff was in the forefront of those in favor, who were accustomed to dealing with clients who themselves appreciated the benefits of a central authority overseeing credit and money. They realized that economic growth in the United States was always in danger of sharp downturns and depressions as long as the dollar was inelastic. Since the National Banking Act was passed during the Civil War, the supply of money had been backed by Treasury securities. Unfortunately, this made the supply of money unresponsive to the economy at times. There was no body that could adjust credit and money supply under different economic climates. The traditional Wall Street crowd did not favor a central bank because it would invariably get in the way of the Street's ability to create credit and possibly even interfere with market speculation.

Despite its lack of universal popularity, the creation of the Federal Reserve was inevitable. The two Morgan operations in the 1890s and in 1907 were still fresh in many minds, and it was now clear that what was quickly emerging as the world's largest economy was still being run by private bankers. Less obvious but still important was the strong role agriculture played in the economy. And the agrarian West did not like Wall Street. Ever since the days of the “western blizzard,” those in the West had blamed eastern financiers for their problems, while Wall Street (p.135) looked upon western agrarian interests as excessively populist and based upon loose money policies. Generally, it was felt that western social ideas were based on unsound financial premises. They represented opposite spectrums of American business practice. But in the case of the Fed, Wall Street did not have many allies in opposing the central banking concept.

The new Fed was vested with certain powers that were sure to make Wall Street uneasy. Those in political power also helped seal the fate of the opposition but not without a titanic battle. After Woodrow Wilson was elected in 1912, he held meetings at his home in Princeton on the bill that would shape the Federal Reserve before he was sworn into office. His soon‐to‐be‐appointed secretary of the Treasury was William Jennings Bryan. Neither man had any particular fondness for Wall Street bankers. Wilson was one of those who firmly believed in the existence of a money trust, which he considered analogous to the great industrial trusts except that it did not operate on a day‐to‐day basis. In December 1912, before his inauguration, he began informal talks with Senator Carter Glass of Virginia, among others, on the composition of the new institution. Although Glass characterized him initially as a “schoolteacher” despite the fact that Wilson was governor of New Jersey and a former president of Princeton, it soon became evident that the president‐elect would put his own stamp on the new central bank.

The powers to be vested in the new central bank were extremely contentious. The major bone of contention in the formative stages was the composition of the Fed itself. It would be governed by a board, resident in Washington, but its actual composition was not decided despite the Aldrich proposals made at Jekyll Island. The original Aldrich blueprint, submitted to Congress in January 1911, was not given much chance to survive a full congressional vote. It would have given the large New York banks a significant role in the new Federal Reserve Board. Many Wall Street bankers wanted to be represented on the board, but Wilson was firmly opposed from the very beginning. In his view, there was little point in allowing the fox into the henhouse before the roof was completed. In a meeting at the White House with key lawmakers framing the legislation, Wilson firmly rejected the notion of bankers sitting on the Fed's board. Countering their arguments, Wilson inquired, “Will one of you gentlemen tell me in what civilized country of the earth there are important government boards of control on which private interests are represented?” Senator Carter Glass, present at the meeting, recalled the silence that followed as the longest single moment he ever experienced before Wilson again inquired, “Which of you gentlemen thinks the railroads should select members of the Interstate Commerce Commission?”11 Recalling the robber barons and the railroad bankruptcies apparently did the trick. From that moment, the issue died and bankers were excluded from the (p.136) Federal Reserve Board. They would find representation on the boards of the local Federal Reserve banks, however.

The new Federal Reserve became reality when the Federal Reserve Act was passed in 1913. The system was composed of twelve district banks spread throughout the country, each with a separate management board. Local bankers from the districts were allowed a limited number of seats. The actual capital of the local district banks was purchased by the commercial banks in their area, which became stockholders. The board in Washington, composed of five paid directors, made policy for the entire system. The new regulatory body was charged with maintaining watch over credit conditions in the country, requiring reserves of those banks over which it had authority, and was given powers to intervene in the market to influence conditions if necessary. But the most contentious issue of all was the Fed's ability to issue notes.

The elastic currency was the most prominent issue facing Congress when it passed the legislation. The dollar had to be freed from the Treasury securities that underpinned it if it was to become responsive to changing credit conditions. The new act allowed the Fed to issue Federal Reserve notes backed not directly by Treasury securities but by the full faith and credit of the U.S. government. If the economy slowed down and needed a stimulant, the new Fed could provide it without asking the Treasury to issue more bonds, which it would not need in times of a slump in business conditions. The commercial banks also needed the ability to convert bank deposits into cash if required. That would appease the public, which might be worried about their bank's ability to redeem funds. Both measures would go a long way in establishing more faith in the American banking system. Unfortunately, some would also think the measures would prevent future panics and runs on banks. Gold still was the standard for the dollar, but this matter would quickly become academic because war was about to break out in Europe. As a result, the Fed got off to a quiet start.

Despite the slow beginning, the role of the New York Federal Reserve Bank would be central to the entire system. Other cities had been chosen because of intense political lobbying. There was little sound reason for Federal Reserve banks to be located in Richmond and Cleveland except for reasons of political expediency. But New York reigned supreme among the twelve. Once the 1920s began, it became clear that the focus of financial power was still in New York rather than in Washington, where outside interests would have preferred it to reside.

Challenging the Trust

The creation of the Federal Reserve banks in 1913 did not necessarily mean that the money trust had been replaced by a higher authority. While (p.137) the Fed developed its new powers, its relationship with Wall Street was still strong. Benjamin Strong, the first president of the Federal Reserve Bank of New York, had close connections to Morgan; as a result, Morgan's bank had the closest ties of any major New York bank to the new central bank. Some of the directors of the Federal Reserve Bank of New York mostly moonlighted in the position, keeping their lucrative private‐sector jobs in the banking business as their main occupation. This arrangement, a product of the compromise that created the Federal Reserve System, was widely criticized by many, including Louis Brandeis, who immediately saw a conflict of interest. But as a result of the presence of the bankers, banks continued to do business as they had previously without much concern. In fact, their pursuit of profit, especially before the income tax amendment was introduced, kept the freewheeling spirit of the nineteenth century alive. This was so despite the fact that the Pujo committee hearings gave the impression that the bankers would be curbed because of the hearing's findings about the concentration of financial and industrial power. The unaccustomed spotlight caused the investment bankers to organize into the first trade group in their history. In 1912, meeting at the Waldorf Astoria in New York, they banded together to form the Investment Bankers Association, the body that would become their official sounding board. The new group had 350 original members, including Wall Street firms of all sizes.

In the year before the outbreak of World War I, the print media had fewer financial matters to report. American preoccupations turned toward things more mundane. Banking itself was not mundane because it did not have a human side. Other than the cult of personality that surrounded the Morgans and Baker, banking made for boring reading. The great muckraking novels and social commentaries of Frank Norris and Upton Sinclair concerned themselves with the human side of the trusts and industrial combines that ruled the corporate world, not the organizational or financial sides. Novels about banking were just not part of the popular literary world or the popular press. Ironically, that would change when the Great Depression began and Matthew Josephson's revealing historical book entitled The Robber Barons became extremely popular in 1934, created by a set of circumstances unforeseen at the dawn of the Prohibition era only fifteen years before.

When the banking community converged to make loans to France, China, and Germany during and after the war, the news was dutifully reported, but terms and conditions were hardly the stuff of which popular novels were made. The popular imagination was captured by the growing class tensions brought about by the clash of organized labor and management. Frank Cowperwood, the protagonist of Theodore Dreiser's 1914 novel The Titan, is portrayed as a man driven to achieve fabulous wealth (p.138) simply by blind ambition. Ten years later, in An American Tragedy, Dreiser's characterization of the social‐climbing Clyde Griffiths as one willing to kill in order to achieve some social distinction is a disturbing view of an unsuccessful attempt to arise above one's lot in life. The most popular author of the entire period, Horatio Alger, constantly emphasized the role of good fortune and hard work in his benign pulp novels about lost boys fighting their way up the economic ladder. In almost all cases, the emphasis was on the human side. Hidden from view were the machinations of the financial community and the trust makers who were striving to consolidate American corporate life even further.

Ironically, some of the more cogent comments about American social and economic life came from those most opposed to capitalism and consumption. The dominion of the money center banks was also recognized by V. I. Lenin, who understood their hold over what he called “financial capital.” Citing Morgan and the Rockefellers in the United States and Deutsche Bank's control of the German economy, Lenin recognized that financial capital led to financial oligarchy and, ultimately, financial control. At the time, Lenin and his intellectual predecessor, Englishman J. A. Hobson, understood the close connection between money and power as a function of imperialism, not coincidentally the title of both of their respective books. But it was not this connection that would prove the most powerful in criticizing American economic life.

Only when Louis Brandeis began writing his articles about the trusts before the war was the mold broken. Finally, someone known as an interpreter and molder of public policy was speaking out against the unseen side of American life. During the first decade of the century, the money trust and Morgan in particular had developed an enemy in Brandeis. The son of Jewish immigrants, Brandeis graduated first in his class from the Harvard Law School in 1877. After practicing law in St. Louis, he returned to Boston, where he began to champion public causes. Because of his public advocacy, he quickly earned the nickname the “people's attorney,” mostly for supporting workers' causes. His first official introduction to the concentration of financial power came in 1906 when he led an inquiry into the Equitable Life Assurance Society, a major New York insurance company controlled by Morgan. The study led to an idea that savings banks should offer low‐cost life insurance for workingmen. The high premiums charged by commercial insurance companies were out of reach for many workers, who as a result had no insurance coverage. For the next ten years, Brandeis led investigations into other monopoly‐dominated industries, among them the railroad industry. In 1907 he led a famous inquiry into the management of the New Haven Railroad, another company controlled by Morgan. He quickly became a nemesis to bankers and industrialists. His method of analyzing federal legislation from a socioeconomic (p.139)

                   The Money Trust (1890–1920)

“Brandeis's Dream Of Empire,” Truth, 1913.

angle became known as the “Brandeis brief.” One of his more famous briefs was to have far‐reaching effects, extending into the future administration of Franklin Roosevelt.

Brandeis became interested in the activities of the Morgan‐controlled New Haven Railroad in 1907. The company had been accumulating the stock of the Boston and Maine Railroad while producing some dubious financial reports in the process. It was illegal for a company to hold another company's stock in Massachusetts, where the Boston and Maine had its headquarters. The extension of Morgan's tentacles into New England caused the advocacy lawyer to begin questioning the finances and management of the New Haven. That, in turn, sparked a battle that was to last seven years, evoking unpleasant responses from Morgan and the railroad's management, aimed at Brandeis personally. After originally surfacing, the issue remained volatile but receded from public view. But Brandeis forged an alliance with Senator La Follette in 1910, who reopened the New Haven issue on the Senate floor. The battle continued, with salvos being fired by both sides for two more years when the Boston Journal ran an entire page on the skirmishes between the two factions, which neatly summarized Brandeis's positions with respect to the New Haven. It recounted him as saying, “A business may be too big to be efficient without being a monopoly; and it may be a monopoly and yet may well be within the limits of efficiency. Unfortunately, the so‐called New Haven system suffers from both excessive bigness and from monopoly.”12

This characterization and others like it evoked an equally blunt response (p.140) from Morgan and the New Haven's president. In a press release issued in December 1912, they stated that “every one of these attacks defaming New England and its railroad system, so far as I have learned, traces back to Brandeis.” Not leaving the matter there, a magazine called Truth appeared, presumably financed by the railroads to attack Brandeis. It sought to forge a link between Brandeis and Jacob Schiff of Kuhn Loeb in a blatantly bigoted manner that invoked memories of anti‐Semitic statements of the past. It stated that

Mr. Schiff is the head of the great private banking house of Kuhn, Loeb and Company, which represents the Rothschild system on this side of the Atlantic. . . . Brandeis, because of his great ability as a lawyer and for other reasons. . . . was selected by Schiff as the instrument through which Schiff hoped to achieve his ambitions in New England. . . . the New England fight is simply part of a world movement. It is the age‐long struggle for supremacy between Jew and Gentile. Schiff is known to his people as “a prince in Israel.”13

The struggle lasted several more years before the New Haven finally cut its dividend and some of its fraudulent expenses were made public. The divestiture from the Boston and Maine took place, and the New Haven went into decline. But on the banking side, the troubles were attributed to Brandeis's crusade, not to any malfeasance at the railroad itself.

In 1916 Woodrow Wilson acknowledged Brandeis's contribution to social causes and the growing regulatory movement by naming him to the Supreme Court, the first Jew ever so named. At the same time, Wilson was paying off a debt because Brandeis was his unofficial economics tutor prior to his election in 1912. The nomination was supported by many in the liberal community, although the hearings occupied many months before confirmation. The young Walter Lippmann strongly supported Brandeis, although his own writings until that time showed some signs of elitism. In Drift and Mastery, published in 1914, Lippmann acknowledged that the new managerial class had been extremely effective in keeping the vast economic power of the new corporations away from the hands of meddling, unsophisticated shareholders. The managerial class had been successful in matters that socialism could not cope with, namely, managing large economic locomotives of growth. But his support of Brandeis was unequivocal, although he did admit in a 1917 letter to Oliver Wendell Holmes that he did not personally understand French philosopher Henri Bergson or Brandeis, two of his favorite authors, very well: “They don't seem able to believe in one side without insisting that the cosmos justifies them.”14 It was just this forceful combination of economics and law that made Brandeis a dreaded name in many quarters.

Writing in a series of magazine articles in Harper's, Brandeis became (p.141) so widely read that the essays were turned into a book. Writing after the Pujo hearings, Brandeis claimed that only when the money trust had been broken would what he called the “New Freedom” in American society emerge. Citing the financial oligarchy as potentially dangerous to the future of American liberty, he stated that the development of financial oligarchy followed lines with which “the history of political despotism has familiarized us: usurpation, proceeding by gradual encroachment rather than violent acts; subtle and often long‐concealed concentration of distinct functions, and dangerous only when combined in the same persons. It was the process by which Caesar Augustus became master of Rome.”15

This was a fairly strong statement considering that the bankers and industrialists had been consistently denying that any form of collusion had ever existed in the marketplace. Brandeis had already proved to be a thorn in their collective side and would remain as such for most of his life. His first, and most famous, target was J. P. Morgan and his control of the New Haven Railroad. That particular concentration of economic power inspired the series of magazine articles and later the book Other People's Money (1914), which outlined his criticisms and remedies for the American economy.

Brandeis's criticism of bankers in general and Morgan in particular gave a functional definition to the term money trust. His criticism was not of investment bankers on one side or commercial bankers on the other; only when the two crossed did the threat to the public became clear. Bankers looked upon deposit taking as a source of easy money, which could be loaned to brokers so they in turn could make loans to stock market speculators or use the funds to finance the deals they were underwriting. Many of those deals involved the restructuring of American industry by corporate America and its investment bankers. Once the restructuring was complete, bankers often took a piece of the deal in the form of stock for themselves, thus inviting themselves into the corporate boardrooms of their clients. In such a manner, Morgan, Baker, and others had assumed a vast amount of power without actually having added value to any of the products or industries they controlled. This was what was meant by using other people's money. Using deposits as a power base from which to dominate American economic life was a form of tax that bankers were not competent to charge, especially since they were using them only to further their own wealth and influence.

Twenty years later, in the aftermath of the stock market crash, new legislation would be framed to separate investment and commercial banking. It has traditionally been assumed that the reason they were separated was to protect depositors from having their funds loaned to speculators who, if they failed to pay back the loans, would default to the banks, putting the (p.142) entire financial system at risk. What was never assumed afterward was that the “wall of separation” dictated by the first major banking act of the century, which would be passed in 1933 (the Glass‐Steagall Act), was also a method of curbing the power of the money trust, which was still very active. The 1933 separation of banking was one of the first, but certainly not the last, restatements of Brandeisian principles that would be made during and after the depression.

Brandeis showed how the money trust extended its tentacles into all aspects of banking. All of the large New York money center banks had securities affiliates through which they underwrote securities (mostly bonds) and operated in the secondary stock markets. National City and First National had subsidiary companies bearing almost identical names. Charles Mitchell, eventually the chief executive officer of National City Bank, began his rise through that bank's hierarchy by first successfully running the National City Company, the securities subsidiary. Morgan controlled the Philadelphia brokerage of Drexel and Company, while other major banks also had securities affiliates. But the web of interlocking directorships helped the money trust extend its grasp far beyond New York. The banks in and around Boston were connected by directorships so that about 80 percent were joined at the hip in some fashion. Many of them could then be traced back to the New York banks through the series of correspondent relationships whereby the larger banks would provide short‐term loans to the smaller regional organizations.

Their influence was also felt in the stock market, where the money they loaned to investors had a great influence on the prices of securities. In the absence of a central bank, bankers could force up the price of stocks by creating additional liquidity in the marketplace by loaning money on easy terms. Conversely, the market could retreat when they made margin money less available. And the range in which they operated could be quite wide. At times, margin rates could be 50 percent or higher, while at others they could be very low. The bankers' total control of stock market liquidity was well known, but little could be done about it until the Federal Reserve System was established. They could aid their own underwritings greatly by supplying funds to the market when they had new securities to sell, giving the illusion of a hot market. Before the founding of the Federal Reserve, they had the market for stocks, bonds, and credit mostly to themselves through these interrelated activities.

Investment bankers' forays into related financial services could also be understood in this context. Prior to World War I, the insurance industry fell into the web of interlocking directorships, for good reason. As the Pujo committee had shown, three New York life insurance companies—New York Life, Mutual of New York, and the Equitable—had an annual cash flow of close to $70 million that had to be invested. A Morgan partner, (p.143) George W. Perkins, was a vice president of New York Life and regularly sold the Company investment securities. It was this connection that brought him to Morgan's attention in the first place. Equitable Life had Morgan himself as one of its major shareholders. The three major insurance companies had an aggregate investment of over $1 billion in bonds, the major underwriting emphasis of J. P. Morgan and Company and the other money center banks at the time.

Brandeis's comments are on the opposite side of the spectrum from the public statements of Morgan, Baker, and Reynolds. Despite the bankers' protests of innocence, Brandeis showed an intriguing web of relationships and back‐scratching that seemed to describe many European corporatist states of the 1920s and 1930s, not the country supposedly built on hard work and individual freedom that was the cornerstone of American popular thought. One documented bit of pettiness provided more of a damning condemnation than any illustration of interlocking directorships at banks. About the time of the Pujo hearings, a New York City bond issue was sold but a listing was denied on the NYSE because the actual bonds were not engraved and printed by the American Bank Note Company. Listings were important because far‐flung investors would buy such issues while sometimes eschewing nonlisted ones. American Bank Note bid $55,800 for the job, losing because of its high price. The contract instead had been given to the New York Bank Note Company, which bid $10,000 less. New York City had followed proper procedure in granting the contract to the best bid, but the American Bank Note Company had been granted an exclusive monopoly to do such work for the exchange. Upon further examination, it came to light that the more expensive bidder had some very well‐known financial personalities as investors. The best known was its largest shareholder, J. P. Morgan.16

Before the war, Morgan's estimated annual income was reputed to be about $5 million, so his individual portion of a single contract was not really at issue. What the small deal typified was the extensive hold of the money trust over all manner of things financial, from arranging syndicates for corporate securities offerings to printing securities for the deals. This Morgan influence was not diminished by the Pujo revelations but actually grew stronger over the next twenty years. During World War I, Morgan would concentrate on many public financings for the U.S. Treasury as well as several foreign countries that would only solidify the decades‐old tie the bank had forged with the U.S. government and others.

The Pujo revelations and Brandeis's popular crusade against concentrated economic power did not go unnoticed but helped contribute to the Clayton Act, passed in 1916. That legislation prohibited interlocking directorships but only when they could be shown to restrict trade. Brandeis's position on directorships was somewhat more pointed and went to what (p.144) he considered the root of the problem. Going so far as to state that interlocking directorships must be restrained, even if it could be shown that they provided economic benefits to their shareholders, he maintained, “Interlocking directorates must be prohibited, because it is impossible to break the Money Trust without putting an end to the practice in the larger corporations.”17 The origin of the American prohibition against these arrangements, however stated in later years, was the desire to put an end to the core power of the money trust. This Brandeisian origin of a point of American legislation would be seen several more times by the time the New Deal became a reality twenty years later.

Despite this fear, a fine line could be drawn between shared directorships that helped restrain competition and those that actually helped make a company more competitive in its own right. In most cases, corporate America continued on the path that had been plotted earlier in the century without much fear of reproach because collusion and restraint of trade or competition, if practiced subtly, were difficult if not impossible to prove. Only egregious violations of the Sherman or Clayton Acts were apt to be pursued as the war ended. The money trust continued as it had in the past, reaping large profits on deals arranged and controlling the flow of credit funds to the markets. But at the same time it was also planting the seeds for the near collapse of the economy. Both Democrats and Republicans realized the nature of the problem, but the robust economy of the 1920s would make it politically hazardous to intervene. Will Rogers summed up the economic climate by saying that the country had grown “too damn big” to need anything. Such thinking was quickly to lead to economic and social convulsions.

Banking Fees Increase

One idea that appeared in Brandeis's writings won him no friends in the banking community: his opinion that banks performed a public service and, as such, should be considered as operating in the public trust, treated as public utilities. Electric power companies and water companies had a virtual monopoly and consequently were limited in their activities since they held that concentrated power as a matter of public trust. The same should be true of banks. Using other people's money was a matter of trust, not a license to print money at their expense.

While Brandeis expounded notions that sought to redefine banking, the banks themselves were on the road to internationalizing their activities in search of greater profits. Much of this occurred during the administration of Woodrow Wilson, no admirer of banking practices by any means. Two loans made to foreign governments became the best examples of the new outward‐looking reach and also helped exemplify the international (p.145) outlook of Republicans, who were quickly becoming associated with banking and the new internationalism of the United States.

In 1911 an international banking syndicate attempted to put together a deal for the government of China. At that time, bonds were called loans, especially if they were made to foreign governments, emphasizing the generosity of the banking community. In contrast, when the American railways were financed in the late nineteenth century by foreign investors, mainly British, the loans were called by their more proper name, bonds. The banking community was developing a public relations program of its own that it used quite successfully in defending itself against detractors.

What would have caused critics to take notice were the terms and conditions of the loan itself. The amount, $50 million, was huge by contemporary standards, and the 9 percent interest rate was also very high, with a total fee structure amounting to 10 percent of the total issue. The under‐writing fees were as high as those that had prevailed in the past, the Pujo committee revelations notwithstanding. When Woodrow Wilson was elected, he rejected the notion that the United States might be willing to send troops to China if the loan terms were abrogated by the new Chinese government after the Boxer rebellion. This attitude effectively quashed the loan, and the bankers eventually withdrew their support, writing off China as if it had been a bad deal from the start. The terms were detrimental to China and would only have led to greater international friction when the Chinese found themselves with their backs to the wall while attempting to make the ruinous interest payments. But it was Wilson's rejection of sending in the gunboats to make a recalcitrant China pay that effectively killed the deal.

Another example was a loan (bond) made to the governments of France and Britain during World War I in 1915, dubbed the Anglo‐French loan. The purpose was to provide the Allies with credit so they could prop up their currencies and buy necessary war matériel from the United States. The $500‐million loan, lead managed by Morgan, was the largest bond of its type ever floated until that time. The syndicate formed to underwrite and sell it was also the largest ever assembled, and the fees attached again were generous to the underwriters. The success of the loan would pave the way for a similar sort of bond floated for Germany after the war, intended to help it maintain its reparations payments to the Allies. Unknown at the time was the fact that the syndicate employed in assembling the loan would be cited over thirty years later as proof of a conspiracy to monopolize the investment banking business by the major New York underwriting houses.

The matter of the fees that bankers charged their customers was a contentious issue at the time of the Pujo hearings and remained as such until the early 1930s. As seen earlier, it was not unusual for bankers to charge as (p.146) much as 10 percent of the amounts raised to underwrite a bond issue. Critics, including Brandeis, maintained that such fees were inordinately high for simply underwriting and selling a bond. In contemporary terms, they were more than twice the amount charged for a junk bond in the 1980s. But more important, they clearly showed why banks were so fond of the bond business, especially during the war. During the 1920s, many banks actively courted bond business from foreign governments and corporations with these sorts of fees in mind. In the absence of any meaningful regulatory authorities, the combination of high fees and foreign borrowers would prove to be a recipe for disaster after the crash.

The Anglo‐French and Chinese loans provided good examples of why the banks were so quick to seize upon international lending opportunities. The same scrutiny that had been applied to the banks' domestic activities was not present on the international side, especially in a country that was not decidedly in support of American intervention in World War I. The legacy of Brandeis, by this time a Supreme Court justice (Wilson appointed him to the Court in 1916), had been passed down well, although he was not out of the public eye but certainly more restrained on non‐Court issues than in times past. Although the idea of banks as public utilities did not take hold, it did live on in the memory of many and was raised again over the next seventy years, especially during times of banking crises and failures.

The private bankers recognized this attitude as a turning point in their dynastic histories. The Morgan bank especially took it as a personal attack from the past by Louis Brandeis, by 1933 a Supreme Court justice for almost seventeen years. Thomas Lamont, a Morgan partner, stated before the Senate committee investigating the stock exchange and investment banking in 1933 that Brandeis and Other People's Money were behind the specific provision in the act. He remarked to a Senate investigator, “I had a long talk with Justice Brandeis at the time he was bringing out that book. We spent an afternoon together on it and I entirely failed to convince him and he entirely failed to convince me.”18 Jack Morgan's personal dislike of Jews also had influenced some of his partners. But the antagonism was felt less on Wall Street itself, where several of the leading Jewish investment banking houses, notably Kuhn Loeb, the Seligmans, Lehman Brothers, and Goldman Sachs, had carved out lucrative businesses for themselves since their foundings around the Civil War. Morgan's sentiments never prevented business from being done between them.

The war caused severe shocks in the financial markets. The NYSE dived sharply when the Russian czar mobilized his army. Wall Street acted as if it had been caught napping, not anticipating conflict in Europe. Foreign investors also took the occasion to sell stocks en masse. The fall in stock prices gave testimony to the fact that the United States was still dependent (p.147) to a great degree on foreign capital. In 1915, foreign investors liquidated almost a billion dollars in railroad securities, some at sizable discounts. Americans bought back almost $2 billion during the first three years of the war, and all of that liquidity put a serious dent in the stock market for several years to come. But the bond market prospered. Many European and Canadian governments and companies raised almost $2 billion during the war and met a favorable reception from American investors. The British inadvertently came to the aid of the markets despite all the selling. Large stocks of British gold were stored in American vaults, allowing American interest rates to remain low while war raged in Europe. This was to signal a major change in the country's international status after the war was over. The United States was finally on the verge of becoming a creditor rather than a debtor nation for the first time in its history.

Reparations or Extortion?

Despite the clear‐cut distinctions between the reforming Democrats and the banking community, the two intertwined in everyday life. Several Morgan partners regularly advised Democratic as well as Republican administrations on financial and diplomatic affairs. Bankers and financiers were among the best emissaries of their day, possessing some of the finest diplomatic skills in the country. Bernard Baruch, Charles Dawes, Dwight Morrow, and Thomas Lamont were all affiliated with both finance and government service and were particularly adept administrators and diplomats, often to the dismay of their colleagues who preferred keeping a distance from the fray.

Bernard Baruch, a Democrat, was appointed by Wilson to the advisory commission of the Council of National Defense in 1916 and two years later served as chairman of the War Industries Board. His appointment surprised, even angered, many because he had spent most of his business life as a stock speculator. Immediately after the war he served as an adviser to Wilson at the Versailles peace conference and later went on to serve every president until his death in 1965. Dwight Morrow, a Morgan partner until appointed ambassador to Mexico by Calvin Coolidge, resigned his banking partnership to help smooth over relations between the United States and its southern neighbor, which were not particularly amicable in the 1920s. When his daughter later married the aviator Charles Lindbergh Jr. in 1929, it was considered further treason by the Morgan partners since it was his father, Charles Lindbergh Sr., who had called the Pujo committee in 1912 and coined the term money trust almost twenty years before.

Russell Leffingwell, another Morgan partner, originally served in the Treasury during World War I. Charles G. Dawes, a Chicago banker and (p.148) probably the most influential banker outside of New York, perhaps had the most distinguished public career of any financier at the time. Originally serving under John Pershing as a member of the American Expeditionary Forces in Europe during World War I, he later served as director of the budget under Warren Harding, and vice president under Coolidge, and was the chief architect (under Morgan's guidance) of the massive loan made to Germany in 1924. His efforts helped persuade France and Belgium to withdraw from the Ruhr. That part of the Dawes plan earned him a share of the Nobel Peace Prize in 1925.19 He later served as first director of the Reconstruction Finance Corporation (RFC) in 1932 under Herbert Hoover, a post that led him into further financial controversy involving charges of political favoritism and cronyism over the nature of the loans the RFC actually made in its early days.

But on aggregate it was the Morgan partners who reigned supreme over the political banking world. Morgan himself was too gruff and straightforward to be much of a diplomat, but his colleagues proved much more adept. Thomas Lamont, who became involved in international affairs during the last year of the war, became Wilson's most trusted adviser during the Versailles peace conference that began in 1919. The eventual reparations bill put to the Germans, $33 billion, was studiously analyzed by Lamont, among others. Wilson valued his counsel more than that of the other Morgan men who were plentiful at the conference. Bernard Baruch jealously remarked that there were so many Morgan men at the conference that it was apparent they were indeed running the show.20 This was the beginning of a long relationship that Morgan partners would have with the government and later with the Federal Reserve as well.

Wilson's reliance upon bankers opened a new era in banking‐government relations. Once openly critical of the money trust and the concentration of economic power it fostered, he came to rely, albeit somewhat late, upon its long list of connections with foreign heads of governments and foreign bankers. In many ways the war years were the heyday of the Democrats. Besides emerging victorious from the war itself, the Federal Reserve had been founded and the Clayton Act passed, both being the products of Democratic‐inspired legislation. The Farm Credit Banks were organized and operating, giving great heart to the long‐suffering agricultural sector. In the interim, the banking community had survived it all intact, with greater power than ever before. When Warren Harding became president, succeeding Wilson, the Republican decade would begin, bringing with it a friendlier attitude toward banking, credit, market speculation, and all of the values that characterized Republicans of the period. It also brought with it one of the more simplified economic theories of the century, which would lead to ideological sides being drawn within the next ten years.

(p.149) The size of the German war reparations was considered extreme by many, although the amount was certainly less than the French and the Belgians had requested. However, within two years Germany was unable to meet its payments and the French and Belgians occupied the Ruhr, threatening further action if payments were not forthcoming. This would put the bankers in a difficult position, for direct military action was certain to follow if an amicable agreement was not reached. The answer was the Dawes loan, negotiated and signed in 1924 at a great cost to Germany and a healthy profit for the banking consortium that floated it. The loan, or bond, again followed traditional Wall Street practice by charging the Germans 10 percent of its face value for underwriting costs.

Helping underwrite bonds for foreigners offset some traditional revenues lost during the war. Most bankers adhered to the Republican party line that international affairs, and international business, were intrinsically good for the country, aiding the balance of payments. This mentality was the direct result of the United States having been a net debtor nation for many years since the Civil War. During World War I, much international business was lost as the traditional northern European investors, mainly the British, divested themselves of their American investments, both port‐folio and direct, to concentrate on the war effort. Lending them money for the same purpose was another way of recapturing some of that business at a time when commission business was becoming difficult to generate.

On the domestic side, bankers made inroads into new areas that would certainly help transform American life. As the general population grew and became better off economically, bankers recognized the possibilities of serving retail customers who had done well in the economy. About the same time as the Federal Reserve was founded, many of the large commercial banks began their forays into the securities markets, at the time confined almost exclusively to the bond market. The savings ratios of Americans had been increasing and a new middle class was emerging, especially on the East Coast, which bankers recognized as a potential source of profit. Many of the commercial banks began to acquire existing securities dealers if they had not done so already. The National City Company, the subsidiary of National City Bank, acquired broker N. W. Halsey and Company in 1916 in order to sell bonds to this rising middle class. This was a clever bit of marketing because until that time bonds had been the preeminent investment in the country among the wealthy. During and after the war, they would become even more popular when the government financed the war effort by selling, and then redeeming, war bonds.

The popularity of war bonds indirectly aided bankers' marketing efforts after the war, making it much easier to sell corporate bonds, among others. The Liberty loans, first authorized by Congress in 1917, were the largest bond issues of their time, with more than $21 billion sold to the (p.150)

                   The Money Trust (1890–1920)

World War I Liberty Bond Poster.

public by 1919. At first, many investment bankers and the public alike were skeptical about the size of the issues despite the fact that they were tax‐free. The bonds were denominated in small amounts—one hundred dollars each—and sold by investment bankers and securities dealers. They were sold without any selling commissions, and most Wall Street houses joined the effort despite the absence of any tangible profits. Inadvertently, the Treasury's marketing effort was bringing in millions of customers who were assumed not to have existed before.

Part of Wall Street's largesse could be attributed to the phenomenal response the bond issues evoked. In 1917 the bankers had estimated the bond market to consist of about 350,000 individuals. By 1919 over 11 million had subscribed to the war loans. These war bonds provided many Americans with their first experience in owning intangible property, and they soon learned that money could be made by the simple process of holding paper securities until they went up in value. The Treasury characterized the 1919 sale of Liberty bonds as the “greatest financial achievement (p.151) in all history and a wonderful manifestation of the strength and purpose of the American people.”21 Inadvertently, the war effort had given the vast majority of small investors a taste for securities that would only grow stronger in the 1920s. Memories of Jay Cooke were evoked, but this time the public would channel funds from maturing Treasury bonds into the stock market.

While the public and the government alike were often cynical of bankers' motives prior to the war, the tension subsided and the bankers again began to tighten their grip on the credit system, despite the presence of the Federal Reserve. Prosperity in the 1920s brought with it a tolerance of bankers' actions that had not been witnessed before. In the 1920s, prosperity was evident (if not in all quarters), and the general sense of well‐being and friendly Republican administrations helped cast a blind eye on finance in general, as long as it appeared to be producing profits for all. By the time the recession of 1920–22 ended (called depressions at the time), the money trust was a name that was more than ten years old and receding from the collective memory. Bankers and corporate America had learned to adopt a different tack. As journalist Matthew Josephson pointed out, “what the giant Trusts learned from the era of ‘muck‐raking’ and the brandishings of the Big Stick was to move with a superior cunning and discretion about their tasks. . . . [They] sought nowadays to propitiate public opinion, hiring ‘public relations counselors’ who disseminated propaganda of great art, by which a mellower picture of themselves was presented.”22 But once the industrialists and the bankers had been under attack, they would try to keep their own internecine battles to themselves and put up more of a united front than would have been the case in the past. The money trust had receded from the public eye but, as the next ten years would prove, it was far from moribund. The 1920s were still to come.


(1.) Quoted in Louis D. Brandeis, Other People's Money and How the Bankers Use It (New York: Frederick A. Stokes, 1914), p. 223.

(2.) Myers, History of the Great American Fortunes, p. 594.

(3.) Quoted in Krooss, Documentary History of Banking and Currency in the United States, vol. 3, p. 2112.

(4.) Ibid., p. 2123.

(5.) Brandeis, Other People's Money, pp. 32–33.

(6.) New York Sun, January 11, 1913.

(7.) Birmingham, “Our Crowd,” p. 354.

(8.) Paul Warburg, The Federal Reserve System (New York: Macmillan, 1930), pp. 16–19. See also William Greider, Secrets of the Temple: How the Federal Reserve Runs the Country (New York: Simon and Schuster, 1987), p. 286ff., for an account of the Jekyll Island meeting and the conspiracy theories that surrounded it.

(9.) [Clinton Gilbert], Mirrors of Wall Street (New York: Putnam, 1933), p. 262.

(10.) Quoted in J. A. Livingston, The American Stockholder (New York: Lippincott, 1958), p. 190.

(11.) Carter Glass, An Adventure in Constructive Finance (Garden City, N.Y.: Doubleday, Page, 1927), p. 116.

(12.) Alpheus Thomas Mason, Brandeis: A Free Man's Life (New York: Viking, 1946), p. 202.

(13.) Ibid., pp. 203–4. Pamphlets and special‐purpose magazines and books would become a favorite method used by industrialists and Wall Street bankers in later decades to attack political opponents. This would be true especially in the 1920s and early 1930s. See Chapters 6 and 7.

(14.) John Morton Blum, ed. Public Philosopher: Selected Letters of Walter Lippmann (New York: Ticknor and Fields, 1985), p. 63.

(15.) Brandeis, Other People's Money, p. 7.

(16.) Ibid., pp. 82–83.

(17.) Ibid., p. 62.

(18.) Ferdinand Pecora, Wall Street Under Oath: The Story of Our Modern Money‐changers (New York: Simon and Schuster, 1939), p. 39.

(19.) Austin Chamberlain of Britain shared the prize with Dawes for his work in helping form the Locarno Pact.

(20.) Chernow, House of Morgan, p. 207.

(21.) Carosso, Investment Banking in America, p. 226.

(22.) Josephson, Robber Barons, p. 452.