Lords of Finance: 1929, the Great Depression, and the Bankers Who Broke the World (8 page)

But then Henry Davison had a remarkable nose for opportunity. He was a self-made man. In this, he was not unusual. In fact, the only one of the eight barons of Wall Street meeting that day to have inherited his wealth was Jack Morgan. A. Barton Hepburn had been a professor of mathematics before entering the world of finance. Several had not even gone to college. Frank Vanderlip had grown up on a farm in Illinois and started his career as a journalist. Charles Sabin had begun as a flour salesman, going into banking only when an Albany firm hired him because it
needed a pitcher for its baseball team. Davison himself had grown up in the hardscrabble hills of north central Pennsylvania, the son of an itinerant plow salesman.

While Benjamin Strong, the youngest of the eight men at the Morgan meeting, had neither been born to wealth nor had attended college, he had most of the other advantages that a ruling-class background could provide. Tall and slim, good-looking but for a prematurely receding hairline and a large nose that spoke of ruthlessness, he exuded the confidence of the Ivy League athletic star. Born of good Yankee stock and able to trace his roots back to a Puritan family that had landed in Massachusetts from Taunton, England, in 1630, he came from a line of merchants and bankers. Benjamin’s great-grandfather, also named Benjamin, had been Alexander Hamilton’s clerk at the U.S. Treasury and one of the founders of the Seaman’s Bank. Members of the family, all extremely conscious of their social obligations, were very active in church affairs. The first Benjamin Strong was on the Executive Committee of the American Bible Association and his son Oliver became president of the Society for the Reformation of Delinquents. Strong’s mother’s family had similar roots—her father was a minister and sat on the Presbyterian Board of Publications.

Benjamin was born in a small Hudson Valley town in 1872, the fourth child of five, and grew up in the New Jersey suburbs. When he graduated from Montclair High School in 1891, he had intended to follow his elder brother to Princeton, but his father, who helped manage the private finances and philanthropies of the railroad millionaire Morris K. Jesup, was going through a period of financial difficulty; so Benjamin had to skip college and instead joined a Wall Street brokerage firm, which he quit in 1900 to join a bank.

In 1895, Strong married Margaret Leboutillier; in 1898, the young couple moved to Englewood, New Jersey, and over the next few years had two boys and two girls, and established themselves as an up-and-coming young couple among the socially prominent of the town. Strong played golf and bridge, was a member of the Englewood tennis team, and became treasurer of the Englewood Hospital. It was there he met Davison.

In later years
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, when Davison had become one of the great figures in banking, it was part of the folk wisdom of the Street that the path to fame and fortune lay on the 8:22 a.m. train from Englewood that Harry Davison took into the city every morning. If you happened to strike up an acquaintance with him and he liked you, it was said, then you were made. As with all myths, there was some truth to this. Two of Davison’s future partners, Thomas Lamont and Dwight Morrow, had been discovered and launched on their Wall Street careers because they were neighbors to Davison; and in 1904, Davison offered Strong a job as secretary of the Bankers Trust Company, which he had helped found the year before.

Strong owed Davison more than his career. In May 1905
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, while he was away at work, his wife, Margaret, apparently in the grip of postpartum depression after the birth of their fourth child, and recently released from a sanatorium in Atlantic City, chanced upon a revolver that the Strongs had just bought after a burglary scare in the neighborhood and shot herself. The next year Strong’s eldest daughter died of scarlet fever. The Davisons immediately took Strong’s three surviving children—Benjamin Jr., Philip, and Katherine—into their home.

In 1907, after less than two years of widowhood, Strong remarried—some thought with undue haste. His new wife, Katharine, a shy girl of eighteen, seventeen years his junior, was the daughter of Edmund Converse, the extremely rich president of Bankers Trust and a longtime associate of Pierpont Morgan. Henry Davison served as best man, and the new couple moved from Englewood to a house on the Converse estate in Greenwich, Connecticut, where Katharine could be close to her family.

A few months later, in October 1907, the United States was rocked by a severe financial crisis. The panic began, like so many before it, with the failure of a large speculative venture, this time an attempt by a couple of unscrupulous characters to corner the market in the stock of a copper company. When they failed and one of them, the president of a Brooklyn-based bank, was rumored to have lost $50 million, most of it borrowed, a run on his bank set in. By the end of October, the fear had infected the whole city and there were runs on a variety of banks across
New York, including the Knickerbocker Trust Company, the third largest in the city.

The United States was then the only major economic power without a central bank. Throughout its history, the country had displayed an unusually ambivalent attitude to the whole institution of central banking. While East Coast financiers, who were lenders of money, kept pressing the case for placing authority over the country’s monetary system in a single overarching bank, there was much support for the argument, particularly from farmers, who typically borrowed money, that putting so much power in the hands of one institution was somehow un-American and undemocratic. Because of this fundamental disagreement, banking policy in the United States had careened from one extreme to another.

In 1791, Alexander Hamilton, the secretary of the treasury, had created the country’s first central bank, the First Bank of the United States, although its domain was not very grand because there were only four other banks in the whole country at the time. In 1811, the First Bank’s charter was allowed to expire. In 1816, the country tried again, setting up what came to be known as the Second Bank of the United States. In 1836, the republic had second thoughts once again and under President Andrew Jackson, the Second Bank’s charter was also not renewed. For the next seventy-plus years, the United States survived and even prospered without a central bank, albeit at the price of having a primitive, fragmented, and unstable banking system especially prone to periodic panics and crises.

In 1907, as one New York bank after another fell victim to a run, the financial community, without any central bank to look to, turned to J. Pierpont Morgan, the preeminent financier of his generation. He had lived through more panics than had any other banker, in 1895 actually bailing out the United States government itself when it was within days of running out of gold and defaulting on its debts to Europe. Though J. P. Morgan & Co. was by no means the country’s biggest bank, Pierpont Morgan himself had acquired an extraordinary aura of authority that gave him the right, indeed the obligation, to take command during financial crises. It
helped that he was believed to be not simply rich, but extremely rich—like the Rockefellers or the Vanderbilts or Andrew Carnegie—and that with his fierce glowering stare and terrible temper, he intimidated most people, including his own partners. It would turn out that the first of these attributes was exaggerated, for he was not nearly as wealthy as most people thought—when he died in 1913, leaving an estate then valued at $80 million, John D. Rockefeller, who himself was worth $1 billion, is said to have shaken his head and said, “And to think
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that he wasn’t even a rich man.”

Morgan swiftly assembled the very best financiers to assist him with the rescue effort, drafting Davison and Strong to act as his principal lieutenants—they were exactly the type of young men
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with which he liked to surround himself: athletic, good-looking, decisive, and confident. The task force had two assignments. The first, on which Davison and Strong concentrated, was to decide which banks caught in the upheavals were to be bailed out and which left to go under. The second, which Morgan led, was to raise the money for the rescue effort. By early November, despite having injected $3 million of his own cash, raised over $8 million from the other banks collectively, secured a commitment from the secretary of the treasury to provide $25 million in deposits, and even managed to extract $10 million from John D. Rockefeller Sr., Morgan had been unable to check the panic. Depositors continued to withdraw their money and one of the largest trust companies in the country, with over $100 million in deposits, tottered on the edge of collapse.

Finally, on the night of Sunday, November 3, Morgan summoned the presidents of the major New York banks to his new library, at the corner of Madison Avenue and Thirty-sixth Street, an Italian Renaissance–style palace he had built next door to his house to showcase his collection of rare books, manuscripts, and other artwork. Its marble floors, frescoed ceilings, walls lined with tapestries and triple-tiered bookcases of Circassian walnut, crammed full of rare Bibles and illuminated medieval manuscripts, made it an incongruous setting for a meeting of the banking establishment. Once the moneymen had gathered, Morgan had the great
ornamented bronze doors to the library locked and refused to let anyone leave until all had collectively agreed to commit a further $25 million to the rescue fund.

The 1907 panic exposed how fragile and vulnerable was the country’s banking system. Though the panic had finally been contained by decisive action on Morgan’s part, it became clear that the United States could not afford to keep relying on one man to guarantee its stability, especially since that man was now seventy years old, semiretired, and focused primarily on amassing an unsurpassed art collection and yachting to more congenial climes with his bevy of middle-aged mistresses.

Shaken by the crisis, the U.S. Congress decided to act. In 1908, it created the National Monetary Commission, consisting of nine senators and nine representatives, and chaired by Senator Nelson Aldrich, to undertake a comprehensive study of the banking system and to make recommendations for its reform. Over the next few years, the commission produced a voluminous set of studies on central banking in Europe but not much else. Memories of how close the system had come to imploding progressively dimmed and the momentum for reform stalled.

In 1912, Davison, now a Morgan partner, frustrated by the lack of progress and fearing that without changes the next panic would be even more catastrophic, set out to convene a meeting of experts to develop a formal plan to establish an American central bank—the third in the nation’s history. Only five men were invited. Besides Davison himself
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, there was Senator Aldrich; Frank Vanderlip, the forty-eight-year-old president of the National City Bank, the largest in the country; Paul Warburg, of the well-known Hamburg banking family, a forty-two-year-old partner at Kuhn Loeb who, although he had only just moved to New York, was probably the greatest expert on central banking in the United States; A. Piatt Andrew Jr., the thirty-nine-year-old assistant secretary of the treasury, who had been a professor at Harvard and accompanied the original commission on its European study tour; and Benjamin Strong, then thirty-nine years old.

Davison was worried, and for good reason, that any plan put together
by a group from Wall Street would immediately be suspect as the misbegotten product of a bankers’ cabal. He therefore chose to hold the meeting in secret on a small private island off the coast of Georgia—in effect creating the very bankers’ cabal that would have aroused so much public suspicion. The preparations were elaborate. Each guest was told to go to Hoboken Station in New Jersey on November 22 and board Senator Aldrich’s private railroad car, which they would find hitched with its blinds drawn to the Florida train. They were not to dine together, nor to meet up beforehand, but to come aboard singly and as unobtrusively as possible, all under cover of going duck hunting. As an added precaution, they were to use only their first names. Strong was to be Mr. Benjamin, Warburg Mr. Paul. Davison and Vanderlip went a step further and adopted the ringingly obvious pseudonyms Wilbur and Orville. Later in life, the group used to refer to themselves as the “First Name Club.”

Disembarking at Brunswick, Georgia, they were taken by boat to Jekyll Island, one of the small barrier islands off the Georgia coast, owned by the private Jekyll Island Club, which had opened in 1888 as a hunting and winter retreat for wealthy northerners. Described by one magazine as “the richest, the most exclusive and most inaccessible club in the world,” it numbered only some fifty members, including J. P. Morgan, William Vanderbilt, William Rockefeller, Joseph Pulitzer, and various Astors and Goulds. Membership was now closed and had become hereditary.

For the next ten days, the little party had the club with its skeleton staff to themselves—it had been closed for the summer and would not be open to other members for several weeks. They worked every day from early morning to midnight, convening in the luxurious rambling clubhouse with its turret, fifteen-foot ceilings, and numerous verandas and bay windows overlooking the Atlantic Ocean. Davison and Strong rose at daybreak to go riding or swimming, before settling down to work after breakfast. They ate copiously—pans of fresh oysters, country hams, wild turkey—and celebrated Thanksgiving together. Vanderlip would later write that it had been “the highest pitch of intellectual awareness
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that I have ever experienced.” The group dispersed under an oath of secrecy, a pledge that all
faithfully kept. Although the fact of the meeting came to light in a magazine some four years later, none of the participants would publicly admit to having been there for another twenty years.

The plan they developed over those ten days, the final details of which were drafted by Vanderlip and Strong, was unveiled to the public on January 16, 1911. Known as the Aldrich Plan, it had at its center a single institution—the National Reserve Association—a central bank in everything but name that would have branches all over the country, with authority to issue currency and to lend to commercial banks. While the government was to be represented on the association’s board, the association itself was to be owned and controlled by banks, a sort of bankers’ cooperative.