All the Presidents' Bankers Read online

  Raised in a New York mansion, well traveled, and schooled at an Ivy League university like his would-be adversary (and later ally) J. P. Morgan, Roosevelt held the pedigree of a consummate businessman. But he also possessed a rugged edge and a rebellious streak: he had worked as a rancher in the North Dakota Badlands, and some people said he had the characteristics of a lion.

  Roosevelt’s use of presidential power to take on the trusts asserted the might of Washington in this new financier-dominated era. Roosevelt directed the Justice Department to pursue an antitrust suit charging the Northern Securities Company with violating the 1890 Sherman Antitrust Act, which prohibits trusts from becoming monopolies. Northern Securities, one of the nation’s largest railroad trusts, had been formed by Morgan, Harriman, and Hill in 1901. The president’s power play might have been avoided if Morgan had less of an ego. But when Morgan approached Roosevelt privately to settle the matter, Roosevelt decided, “Mr. Morgan could not help regarding me as a big rival operator who either intended to ruin all his interests or could be induced to come to an agreement to ruin none.”18 Morgan ended up just fine with his other interests, though, even after he was directed to break up his key trust.

  The Northern Securities case preceded more than forty such lawsuits. In the process, Roosevelt gained enough popular support to win the election of 1904 with 70 percent of the electoral vote. But by 1907, either because he believed he needed Morgan’s help to salvage an economic catastrophe or because he wasn’t so different philosophically from Morgan after all, Roosevelt wound up doing Morgan’s bidding.

  Muckrakers, Muck Senators, and Muck Bankers

  Congress was also flexing its muscles. Its members were increasingly taking bribes from the leaders of big business in return for favorable legislation. (Today that practice is called campaign financing.) In March 1906, Cosmopolitan magazine shed a light on the situation by running a hard-hitting investigative series, “The Treason of the Senate,” written by popular novelist David Graham Phillips. William Randolph Hearst, a US House member, had purchased the magazine in 1905 with the goal of enticing readers with juicy stories. Subscriptions doubled within two months of the articles’ appearance.

  Phillips exposed widespread corruption of the Senate, in particular, by the Standard Oil Company. He revealed that New York senator Chauncey Depew had received more than $50,000 from his “seventy-odd” directorships of companies that wanted him to do their bidding—particularly insurance and railroad companies. Such serious conflicts of interest, though legal, were distasteful to the public.19 (Many New York senators would finance campaigns on the back of Wall Street money, particularly in the last part of the century.)

  Though Roosevelt attacked Morgan’s railroad trust and spoke disparagingly of the “tyranny of wealth” and its influence over America, he was less pleased about this skeptical glare placed on Washington. He endorsed “benefactors” to wage attacks against evil with “merciless severity,” but he cautioned against “hysterical sensationalism.”20 Roosevelt coined the pejorative term “muckrakers” to describe the new breed of investigative journalists, including Phillips; Upton Sinclair, who exposed the literal rot of the meatpacking industry; and Ida Tarbell, who focused on Standard Oil.

  Most illuminating of America’s future political-financial path, Phillips’s article slammed Rhode Island millionaire businessman turned senator Nelson Aldrich for his connections with the elite. As Phillips wrote, “In 1901, his [Aldrich’s] daughter married the only son and destined successor of John D. Rockefeller. Thus, the chief exploiter of the American people is closely allied by marriage with the chief schemer in the service of the exploiters.”21 Aldrich would soon play a more significant role in America’s financial capitalism era than Phillips could have imagined. Though Roosevelt had purposefully steered clear of trying to change the nation’s currency or banking system, Aldrich would be intricately involved in transforming both.

  Muckrakers aside, the liberal and conservative press continued to seek out the bankers’ expertise. Though there remained widespread belief in Washington and in the press that after the Panic of 1893 and the subsequent depression, something had to be done to avoid a situation whereby Morgan was called in to save the country again, nothing happened for years in that regard. Roosevelt had no interest in rocking that boat, particularly before the 1904 election. As such, the elite bankers generally, and Morgan in particular, increased their control over the US economy. The results proved disastrous.

  The Panic of 1907

  By early 1907, the US economy had dipped back into a recession born of a sell-off in the railroad industry and pronounced outflow of gold to Europe. The situation was reminiscent of the brief 1903 market panic, which had been referred to as “the rich man’s panic,” but this one showed signs of getting much worse. In March 1907, cartoonist Louis Glackens crafted an illustration for Puck magazine captioned “He loves me.” In it, a woman dressed like Little Bo Peep and labeled “Wall Street” plucks paper petals labeled “Tight Money” and “Easy Money” from a paper flower. Among the petals strewn upon the ground is a medallion stating “In Cortelyou We Trust.” Roosevelt’s Treasury secretary, George Cortelyou, dressed as an Elizabethan suitor, stands behind the lass brandishing a diamond ring labeled “Treasury Aid.”22 It wasn’t too far off from what would transpire six months later, when that aid was funneled through Morgan’s banks.

  In the wake of what would be called “Roosevelt’s Panic,” the president left his trustbusting battles aside and approved side deals for Morgan because he believed that doing so would save the country from a “frightful and nationwide calamity.”23

  The financial panic that struck in October had been brewing throughout the year, but the climax was precipitated by the failed attempt by “copper king” F. Augustus Heinze and notorious speculator Charles Morse to make a killing by cornering the copper market.

  By Monday, October 14, 1907, the three Heinze brothers, Morse, and their associates had formed a copper pool to drive up the price of United Copper stock. They succeeded in dramatic fashion and ran the price up $25 in mere minutes. To capitalize on the pricing activity, they ordered all the area brokers to deliver any stock held for or owed to them. They assumed they could retrieve their stock certificates, push the price up even higher, and then sell their extra stock at an even greater profit.

  But the plan backfired. On Tuesday, brokers turned in so much stock that the Heinze brokerage ran out of cash to pay for it. Brokers dumped all the additional stock on the market on Wednesday, crushing the price from above $60 to below $15 per share.24

  It could have been an isolated incident, except for one thing. Heinze, Morse, and E. R. Thomas were also directors of the Mercantile National Bank. In fact, Heinze was its president. On Thursday and Friday, depositors started extracting their money. The bank appealed to the Clearing House Association for help. Heinze resigned. The New York Clearing House Association insisted the men immediately repay the loans they had received from their various bank interests. But they didn’t have the money. So they sold their other securities, causing the entire market to plummet.25 Fear and suspicion settled in. Depositors distrusted banks. Banks distrusted one another. The perfect ingredients for a crisis coalesced around those city streets.

  Moreover, as in all times of financial uncertainty, money ceased flowing. Scared investors dumped more stock into the declining market to muster up cash. In desperation, the president of the exchange appealed to Morgan, the one man who could halt the financial bloodshed. In response, Morgan formed a pool to supply the needed money. In less than half an hour, the national banks offered up $20 million to increase market liquidity. Stock prices recovered. Catastrophe was averted. The pool made another $50 million available for stock exchange purposes against 50 percent collateral—a steep amount, as stipulated by Morgan, but those strapped for cash had no other choice.26

  The world seemed momentarily at ease. But it was the calm before the storm. The collapse of confidence in He
inze’s banks had unleashed a cancer of general distress. For Morse and Heinze had amassed control of at least eight banks and two trust companies. Though the men were forced to resign from their official banking positions, rumors of unsoundness abounded. Depositors scrambled to withdraw money from all of their affiliated institutions.27

  The Knickerbocker Trust Company Collapse

  By Monday, October 21, depositors were drawing money from the Knickerbocker Trust Company, the city’s second-largest trust, with a vengeance. On Tuesday, its president, Charles Barney, was forced to resign due to his affiliations with Morse. But this time, despite assurances from more powerful bankers and another $10 million guarantee from Morgan, the run accelerated.

  The type of neighborhood dictated the nature of the run. At Knickerbocker’s main office on Fifth Avenue and Thirty-fourth Street, it was reported that “automobiles and carriages drove up to the great white marble building, and handsomely dressed women and prosperous looking men ran up the steps and besieged the payment tellers.”28 At other branches, hundreds of more shabby depositors waited in line to withdraw their money. Harry Hollins, a company director, assisted tellers at 66 Broadway as depositors stretched alongside its colored windows and spilled into the street.29 Shortly before noon the crowd outside the Harlem branch numbered nearly four hundred. Tellers stacked tall bunches of money on the counters to show strength, but to no avail. Shortly after noon on Tuesday, October 22, the Knickerbocker Trust Company closed the doors of its main office.30

  The big New York banks responded by protecting themselves and restricting funds for longer-term projects nationally. Banks like California Safe Deposits and Trust of San Francisco went bust. A bicoastal meltdown was developing. The situation degenerated quickly as panic engulfed other trusts. Barney was also a director in the Trust Company of America, whose deposits totaled $67 million. There, heavy withdrawals had already begun. The difference was that this firm had more substantive ties to the major bankers. It was too big to fail.

  The Hotel Manhattan Meeting

  During that tense day, Roosevelt and Cortelyou were “in hourly communication with New York.”31 At midnight, Morgan’s secretary dashed into the lobby of the Hotel Manhattan. Only after meeting with the Knickerbocker Trust Company at its Fifth Avenue office did Morgan summon Cortelyou to the hotel at 12:30 A.M.

  Minutes later, Morgan and Stillman entered the hotel. Reporters clamored for information as the two titans hurried to the elevator. Upstairs, Cortelyou waited. Morgan’s partner, George Perkins, hurried in. Reporters were anxiously awaiting word from the super-bankers when National City vice president Frank Vanderlip appeared. Vanderlip was a former assistant secretary of the Treasury under President McKinley, and he had been a financial journalist in Chicago before that—where he found success doubling as a public relations officer for the banks.32 Someone especially fit for the situation, he called the reporters together and delivered the verdict.

  On behalf of the committee, he stated that the trust companies of New York had united to stand behind the Trust Company of America, “whose assets,” he said, “had been examined and found good in every way.”33

  At 1 A.M., Cortelyou announced confidently to the press: “To pass safely through such a day as this one of most unnecessary excitement as it has been, is the best evidence of strength and support on the part of those who’ve undertaken the difficult task of reestablishing public confidence. . . . As evidence of the Treasury’s disposition, I have directed deposits in the city to the extent of twenty-five million dollars.”34 Cortelyou deposited $25 million of public money with the national banks, with the understanding that it would be largely redeposited with the Trust Company of America to stabilize the company.

  With renewed vigor, the president of the Trust Company of America declared it would open for business as usual Wednesday morning. Unlike the Knickerbocker Trust Company, which had not garnered similar banker support, the Trust Company of America had been blessed by the sponsorship of the Morgan team.

  Depositors remained on edge past midnight. In downtown Manhattan, lines stretched from the front door of the Colonial Branch of the Trust Company of America half a block toward Nassau Street. Some people huddled in doorways at Wall Street and Broadway. Throughout the night, depositors hovered in the rotunda of the main office of the Trust Company of America. More than a hundred crowded inside the building. Larger crowds teemed outside. “Coffee and frankfurters were the only edible things that could be bought, and messenger boys and millionaires alike chased them from the vendors who’ve reaped the harvest,” the New York Times reported.35

  Braving fatigue and chill winds into the early morning hours, a swirl of depositors clamored before the doors of the Dollar Savings Bank and even the closed Knickerbocker Trust Company. When the doors of the Dollar Savings Bank opened, about a thousand people were standing in a line that circled the block. Some depositors were admitted through a rear door at Willis Avenue; a small riot started, and police used nightsticks to restore order.36

  Many bankers and businessmen visited Morgan the following day, as he allocated some $4 million to the disposal of the Trust Company of America. Cortelyou, stationed at the subtreasury in New York, was kept informed of the happenings but was not present for the dispensations. Those, Morgan controlled.37

  By Friday, the atmosphere was significantly more subdued. The lines before the Trust Company of America and its Colonial Branch were much shorter than on Thursday and far less than on Wednesday.38 On Saturday morning, the New York Times blared, “The sagacious measures put into effect by the hearty cooperation of secretary Cortelyou and the foremost bankers of the city, headed by J.P. Morgan, brought sterling results again yesterday” and noted “the long stride to the return of public confidence in the city banking institutions.”39

  But Morgan was not finished. On Monday, October 28, he received a visit from the New York City mayor George McClellan Jr.40 The city needed $30 million for its own survival, having delayed a bond issue that would have raised money while still struggling to find buyers. Swiftly, Morgan, Baker, and Stillman agreed to provide the money, underwriting the bond issue and guaranteeing its sale with the other big banks.

  Then, on Tuesday night, a syndicate of bankers and trust presidents headed by Morgan agreed to assist the Trust Company of America, which was still ailing; the Lincoln Trust; and Moore & Schley, a brokerage house run by Baker’s brother-in-law that was $25 million in debt.41

  Morgan held court in the library of his Madison Avenue home to formulate the best course of action. He assembled an informal steering committee of himself, Stillman, and Baker. Benjamin Strong, the young head of the Morgan-owned Bankers Trust, acted as secretary to the committee.42 Also present was Thomas Lamont, a friend of Strong’s who would become the youngest Morgan partner in 1911; he would later rise to run the firm and have a substantive impact on foreign-financial policy during World War I and for decades afterward.

  According to Lamont, Morgan demanded that another $25 million loan be made “to save the Trust Company of America.”43 It would come from the healthier trusts, their presidents browbeaten by Morgan. He instructed his lawyers to create a “simple subscription blank” that he waved at the group, saying, “There you are, gentlemen.”44 They all signed. Such was his influence over the banking contingent.

  Part of the bailout included the purchase of a majority stake held by Moore & Schley in the Tennessee Coal and Iron Company by its main rival and Morgan creation US Steel. But the strategy would have to be cleared by President Roosevelt.

  And so on Sunday night, Morgan’s partners—US Steel magnates Henry Clay Frick and Judge Elbert Gary—boarded a train for Washington to meet with the chief trustbuster himself. Despite potential antitrust violations, Roosevelt acquiesced over breakfast, saying it was “no public duty of his to interpose any objections.”45 The market rallied at the news.

  Roosevelt later wrote that during the panic the “Morgan interests were the only interests which reta
ined a full hold on the confidence of the people of New York—not only the business people, but the immense mass of men and women who owned small investments or had small savings in the banks and trust companies.” It was on this basis that he approved the side deals on behalf of Morgan.

  As he stated, “The action was emphatically for the general good. . . . The panic was stopped. . . . The action itself, at the time when it was taken, was vitally necessary to the welfare of the people of the United States.”46 The lion might have taken on Morgan from a broader economic and rhetorical perspective, but he was in no mood to risk doing so when the stakes were so high—or when he needed Morgan to save his legacy a year before the next election.

  Panic Aftermath

  Within a few weeks the panic appeared to be over. A 1907 New York Times headline, echoing the widespread sentiment that Morgan and his crew had masterfully saved the economy, declared Morgan the “world’s central bank.” Morgan didn’t leave headlines like these to chance any more than he did the chess game of banks. He not only assisted other banks (for a price); in 1896, he had helped the Ochs family buy the New York Times.

  What the papers didn’t report at the time was that Morgan had not saved the day with his money or even with the sum of his compatriots’ money. He had parlayed the government’s money. As was later divulged in congressional testimony during the Pujo Committee investigation of the money trusts in 1912, the Treasury Department had deposited $39 million in the National Bank of New York at the beginning of the panic week.47

  That $39 million was deposited without the requirement that any interest be paid on it, and a large part of it was left in Morgan Banks, from where it was loaned to the less powerful banks at substantial rates of interest. Even though $10 million had been designated to directly aid the Trust Company of America, Morgan allocated just $4 million for that purpose. All the while, small businesses around the country were unable to get funds because the “governments’ resources were being used to relieve stock gamblers and to assist that Morgan Banks.”48