Lords of Finance: 1929, the Great Depression, and the Bankers Who Broke the World (9 page)

Nelson Aldrich may have been the most knowledgeable member of the Senate about finance, but the cause of central banking in the United States could not have found a worse champion. In a Senate full of very rich men—it was becoming known as the “millionaires’ club”—he was one of the richest, having supposedly sold his stake in the United Traction and Electric Company of Rhode Island for $10 million; he boasted a grand estate in Newport, Rhode Island, and his daughter Abby had married John D. Rockefeller Jr. He was a fervent supporter of big business, a bitter enemy of regulation, an advocate of high tariffs; rumors abounded, furthermore, that he traded political favors for financial contributions. In short, he was the living embodiment of everything that opponents of a central bank most feared.

Over the next few months, much to Strong’s dismay, Progressives and midwestern Republicans joined forces to kill the plan; but in early 1913, the Democrats in Congress, led by Senator Carter Glass, salvaged the idea by modifying it. Rather than creating a single central bank, which would involve too great a concentration of power, the Glass Plan called for a number of autonomous regional institutions: Federal Reserve Banks, as they were to be named. While these individual entities were to be controlled and run by local bankers, a capstone—the Federal Reserve Board, a public agency whose members were to be appointed by the president—was placed in an oversight role over the whole structure.

Although Glass’s bill copied many of the essentials of the Aldrich Plan, Strong actively campaigned against it, predicting that its decentralized structure would simply perpetuate the fragmentation and diffusion of authority that had so bedeviled American banking and would only lead to conflict and confusion. Eventually New York bankers—pragmatic as ever and recognizing that the Glass Plan at least offered something better than the status quo—came around and it was signed into law as the Federal Reserve Act by Woodrow Wilson on December 23, 1913.

DURING THE FIRST
few days of August 1914, Strong was caught up in a flurry of meetings. On the morning of Saturday, August 1, he conferred with the other bankers of the Clearing Association at the Metropolitan Club of New York. That evening he was at the Vanderbilt Hotel for a large meeting of New York bankers with Treasury Secretary William McAdoo, who announced the issue of $100 million of emergency currency to meet the panic demand for cash. The following Monday he left for Washington.

Strong’s most immediate concern was the problem of American tourists stuck in Europe. Banks and hotels, alarmed by the sharp fall in the dollar, and afraid that paper currency might lose its value, were refusing to cash travelers’ checks or bank drafts. Thousands of Americans, most of them well off, found themselves marooned on the Continent without usable cash. Reports were rife
⁶²
of some being turned out of hotels and forced to sleep at railway stations, or walking the streets of Paris at night. Those who succeeded in cashing their checks were often able to do so only at the equivalent of 75 cents on the dollar.

Bankers Trust was then the main issuer of travelers’ checks to Americans going to Europe. Luckily for Strong, Fred Kent, the man in charge of the bank’s foreign exchange business, just happened to be on holiday in London. He immediately organized
⁶³
a two-thousand-strong mass meeting at the Waldorf Hotel on Aldwich, where he arranged to provide temporary funds to his stranded countrymen.

In the final outcome, should the Europeans not accept dollars, Americans always had the option of paying in gold. But how to get the gold into a Continent now at war? Insurance rates on private shipping had skyrocketed to prohibitive levels overnight. Strong persuaded
⁶⁴
the government to ship private gold over on a warship, and on August 6, the cruiser
Tennessee
left the Brooklyn Navy Yard with $7.5 million in gold aboard.

This was what Strong was good at: taking charge to address immediate and practical problems, even if it meant stepping on a few toes. Leadership came naturally to him. While he may not have had quite the polished, cosmopolitan grace of some Morgan partners, people liked him and responded well to his dominant personality; he was well known and admired on Wall Street. “Wherever he sat
⁶⁵
was the head of the table,” said a contemporary. Few people, though, could claim to know him intimately, and signs of a darker side sometimes manifested themselves from behind that gregarious and sociable veneer. He was a “Jekyll and Hyde personality
⁶⁶
, usually polite but flying at times into terrible rages” remembered one colleague. Those flashes of intense and startling anger provided brief glimpses into the pain and sorrow that he otherwise kept well hidden.

It was during that August of commuting between New York and Washington that Strong was first approached about becoming governor of the newly created Federal Reserve Bank of New York. If the Aldrich Plan of a single central bank
⁶⁷
had gone through, leaders of the New York banking community, such as Davison and Vanderlip, had long singled out Strong as the potential head. Now, under the Federal Reserve System, with multiple reserve banks and a Board in Washington, they came to the conclusion that he would be most effective and useful to them as the head of the Federal Reserve Bank of New York. Of the twelve regional reserve banks created by the new act, that of New York would be the largest.
^fn3
They correctly foresaw that the New York Fed—their reserve bank—would, by virtue of its size and its expertise, very likely come to dominate the system.

He was the perfect choice. His career as a banker had been distinguished; he had undergone his baptism by fire during the panic of 1907; after being party to the conception of an American central bank on that Georgia island, he had become one of the experts in the field; and finally, he was well known to the partners at J. P. Morgan. Lacking perhaps the flair of a Davison or the urbane savoir faire of Thomas Lamont, his was undoubtedly a safe pair of hands.

The offer put Strong in a real dilemma and initially he refused it. Although like other New York bankers he had reconciled himself to the new system, he still thought it fundamentally flawed, and had campaigned actively to block it. He insisted that personal financial considerations did not sway him, but it is hard to believe that they were not a factor. He had no inherited wealth; he had only just been made president of Bankers Trust at the comparatively young age of forty-one, and had not yet had the opportunity to accumulate a fortune of his own. In taking the job, he would have to resign every directorship he held. The salary he would receive
⁶⁸
, $30,000 per year, while very attractive, was a fraction of what he could make as the president of a large New York bank. His father-in-law was especially strongly opposed to his taking the job, saying, “Ben is not going to live
⁶⁹
on my money”—Converse was reputed to be worth over $20 million and Katharine stood to inherit a considerable fortune. The Strongs’ current lifestyle would however be impossible to sustain on his diminished income. Only the year before
⁷⁰
, the family—husband, wife, his three children from his first marriage, and his two daughters from his second—had moved into a luxurious eight-thousand-square-foot apartment in one of the city’s most prestigious buildings, 903 Park Avenue, where apartments covered a full floor and rented for $15,000 a year.

In early October, Strong was invited by Davison and Warburg for a weekend in the country. They both made the case to him that it was his
duty to accept a post in which he could do more for the public good than anywhere else. Davison was a hard man to argue with, especially when Strong owed him so much. On October 5, 1914, the Federal Reserve Bank of New York formally announced that Benjamin Strong had been elected its first governor.

^fn1
On September 22, 1914, Captain von Romberg was killed in action, one of the first German officers to die in the war. See “Baron Von Romberg Killed,”
New York Times,
September 30, 1914.

^fn2
Pierpont Morgan died in 1913 without ever occupying the apartment. It was until very recently a restaurant.

^fn3
By the mid-1920s, the New York Fed was two and a half times as large as its nearest rival, Chicago, and some ten times greater than the smallest Federal Reserve bank, that of Minneapolis.

There isn’t a bourgeois alive
⁷¹
who in the ferment of his youth, if only for a day or for a minute, hasn’t thought himself capable of . . . noble exploits . . . in a corner of every notary’s heart lie the moldy remains of a poet.

—G
USTAVE
F
LAUBERT,
Madame Bovary

IN PARIS THAT
summer, Aimé Hilaire Émile Moreau, director general of the Banque d’Algérie et Tunisie, the central bank for the French colonies of Algeria and Tunisia, was absorbed like everyone else in France in L’Affaire Caillaux. It was the latest in a long chain
⁷²
of scandals that had done so much to embellish the politics of the Third Republic and provide such a wonderful source of entertainment for the French public. In early 1914,
Le Figaro,
a conservative newspaper, had launched a campaign against the introduction of an income tax by Joseph Caillaux, finance minister and leader of the Radical Party. On its front page, it ran some youthful love letters from Caillaux to a former mistress, the already married Berthe Gueydan, who had eventually divorced her husband, a high civil servant, to become the first Mme. Caillaux. Much had happened since this correspondence. After Caillaux had married Berthe, he started an affair with
yet another married woman, the tall ash-blonde Henriette Claretie, divorced Berthe, and married his new mistress.

In March 1914, the second Mme. Caillaux, outraged that her husband’s affairs, even those prior to her arrival in his life, should be so scandalously publicized—and perhaps fearing that some of their own adulterous correspondence might also find its way into the press—took matters into her own hands. At 3:00 p.m. on March 16, she left her home, dressed in the most elegant clothes for a reception at the Italian embassy that evening. On the way she stopped off at Gastinne Renette, the elite gun shop on the Right Bank, bought a Browning automatic, proceeded to the offices of
Le Figaro
, waited an hour for Gaston Calmette, the editor, and confronting him, declared, “You know why I have come,” and calmly pumped six shots into him at point-blank range from the pistol that was hidden in her expensive fur muffs, killing him instantly.

The scandal split France and even provoked riots in Paris between supporters of Caillaux and right-wing agitators protesting the declining standards of the country’s ruling classes. The trial began on July 20, and the daily court proceedings dominated the headlines in every newspaper and captivated the city. Parisians, it seemed, were much more interested in the melodramatic mixture of adultery and moral corruption in high political circles, of Joseph Caillaux’s extensive network of mistresses, of his seduction of the heretofore simple, shy, and retiring Henriette Caillaux, than in distant rumblings from the Balkans.

For Moreau, the trial carried especial significance. He had been a student of Caillaux’s at the École Libre des Sciences Politiques
⁷³
in the early 1890s, when Caillaux had been an up-and-coming glamorous young man, rich, flamboyant, and as
inspecteur des finances,
a member of the elite administrative corps founded by Napoléon to conduct audits over the financial affairs of the state. The École Libre des Sciences Politiques—Sciences Po as it was and still is known—was an expensive private graduate school, established in 1872 after the Franco-Prussian War. Its founder had sought to create an up-to-date training ground for the new governing elite of France, capable of resisting the “democratic excesses” of the early years of
the republic. The faculty was not composed of academics but was drawn from highly placed politicians, civil servants, and businessmen. In its short life, Sciences Po had become the primary recruiting ground for the upper reaches of the civil service.

While Moreau was at Sciences Po, all France, including the school, was split by the Dreyfus affair. In 1894 a young Jewish artillery officer, Captain Alfred Dreyfus, was wrongly convicted of treason when French intelligence officials conspired to fabricate evidence that he had worked as a spy for Germany. The ensuing scandal pitted an old France—insular, royalist, and Catholic—against a new France seeking to modernize itself, a France that was more cosmopolitan, liberal, and outward looking. The head of Sciences Po was a committed Dreyfusard and several anti-Dreyfusard professors eventually resigned in protest.

Unlike most his fellow students at Sciences Po, with their well-to-do, sophisticated Parisian backgrounds, Moreau was a provincial who had only arrived in Paris in 1893, at the age of twenty-five, to enroll at the school. Born in Poitiers, the son of a local magistrate, Moreau had attended the lycée there and then obtained a license in law from its university. His family, minor gentry
⁷⁴
from Poitou, the ancient countryside around Poitiers, had roots there that went far back into history. One of his ancestors, Dutron de Bornier, had represented the area in the provincial assembly during the eighteenth century. His great-grandfather, Joseph Marie-François Moreau, had been a representative of the Third Estate when the Estates-General gathered at Versailles in 1789 to launch what was to be the Revolution; he later sat in the convention that did so much to press the Revolution home. He had subsequently become an important figure in the local administration—even after the restoration of the monarchy—as
receveur général de finance
, responsible for collecting the taxes of the newly established department of Vienne.