All in a Life-time

by Henry Morgenthau; French Strother

Mr. Schwab became a member of our board, and I had never before met any one who equalled him in that extraordinary capacity of intelligently reading and conclusively analyzing a financial statement at a single glance that seemed hasty and superficial.

The foregoing incidents are samples of the minor tactics on the field of battle in the vast struggle which was waging for the financial control of America. I shall now outline the major strategy of that struggle as it impressed me from my slight contact with it.

The decade from 1896 to 1906 was the period of the most gigantic expansion of business in all American history, and, indeed, in all the history of the world. In that decade the slowly fertilized economic resources of the United States suddenly yielded a bewildering crop of industries. Vast railroad systems were projected and built into being with magic speed. The steel industry sprang with mushroom-like rapidity into a business employing half a million men, and yielding the profits of a Golconda. The Standard Oil Company spread its production and sales to the ends of the earth. In every field of manufacture, expanding companies were brought together into great trusts to unify their finances and to stimulate their production.

All these swift growths demanded money: money for new plants—money for expansion—money for working capital. The cry everywhere was for money—more money—and yet more money. Wall Street was besieged with a continual supplication for capital—that priceless fluid to water the bursting fields of pulsing prosperities. It is an old law that he who has what all men seek may make his own terms, and in that decade Wall Street controlled the money of America. No wonder, then, that the financiers of Wall Street leaped to a power greater for a time than the power of presidents and kings. No wonder that heads were turned, that power was abused, that tyranny developed, and that finally the nation, sensing a life-and-death struggle between capitalism and organized government itself, arose in fear and anger, and put shackles on the money power that made it again the servant, and no longer the master, of the people.

Let me trace briefly how this magic power was concentrated. Under the old banking system, before the passage of the Federal Reserve Act, the need for a common banking centre through which to “clear” inter-community and inter-state debits and credits, following upon the exchange of goods and the sale of crops, led the “country” banks all over the United States to maintain in some New York bank a considerable deposit of their funds, so that interbank transactions could be settled expeditiously and without cost by the simple device of drawing a draft against the New York account. The sum total of these country bank deposits in the metropolitan banks placed in the control of the New York bankers a vast reservoir of liquid capital. What should have been done with this money was to use it as the basis for financing the movement of crops in the fall and the exchange of commodities during the rest of the year. What frequently was done with it was to lend it to New York financiers for speculation in the price of crops and commodities, preventing the farmers and country merchants and small industrials from securing money at the times they needed it. Another use to which this reservoir of capital was put, was to lend it to the great industrial groups battling for supremacy in the fields of sugar, steel, textiles, railroads, and the like.

But there were other reservoirs of capital, and these, too, centred in New York. The great insurance companies were like pools at the bottom of a great valley: down the hillsides from all directions trickled the tiny streams of policy holders’ premiums—each in itself but a few drops of the precious fluid but all together, when gathered in the pool, a vast golden shining mass tempting the eyes of the speculative builders of industry. The insurance company presidents, therefore, became, like the bank presidents of New York, arbiters of financial destiny, because by their nod of favour, or disapproval, they could grant or withhold the golden stream of credit for which all men were begging.

Thus arose a natural struggle between the banks and the insurance companies for the control of the finances of the country. If the bankers could control the insurance companies, they would be masters of the situation. If the insurance companies could control the banks, then the insurance company presidents would be the great men. It may seem odd to suggest that the insurance companies might have controlled the banks, but I can easily demonstrate that this was quite within the realms of possibility. One man with enough shrewdness and enough force, and possessed of not more than $100,000,000, could at that time actually have controlled the banking system of America. On August 5, 1899, when I entered “Finance” with the organization of our company, the capitalization of all the banks in the Clearing House was only $58,000,000, and their total undivided profits were 77 millions—making their entire resources 135 millions; the selling price of their stocks was about 200 millions. One man with a private fortune of $100,000,000, or McCurdy or Hyde controlling an insurance company with assets greatly in excess of that amount, or the Standard Oil group might have been shrewd enough to have bought a majority interest in all the important banks in New York, and this majority interest would have placed in his control, by virtue of the system I have described above, practically the entire banking power of America. We should then have had a financial octopus in the person of one man, with even weirder potentialities of sinister control of American life than the only less dangerous small group which actually did dominate the country financially in the early years of the present century.

What actually happened was that the banking power, instead of being all in the hands of one man, was held jointly by a group of a few men who, although they fought incessantly and bitterly among themselves, nevertheless often united for common profit. It may interest the reader to be reminded of these groups and their leaders.

Towering above them all in the public mind, although in fact but little more powerful than several of the others, was the massive figure and threatening eye of J. Pierpont Morgan. Morgan ruled less by virtue of his wealth than by the overpowering force of his character. Men feared him, but they trusted him. Nearly every enterprise he financed turned to gold, and his leadership became the most impressive fact in American financial life. A close second to Morgan was James Stillman. Elected president of the National City Bank in July of 1901, Stillman, then forty-two years of age, heir to a profitable cotton brokerage business that made him financially independent, had partially retired from active business life, and was enjoying his cultivated tastes in semi-leisure. When Percy R. Pyne, president of the National City Bank, retired from office, and found that his two sons had no ambition to succeed him, he offered Stillman the presidency, and Stillman accepted. The policies which Stillman inaugurated at the National City Bank soon gave evidence of that genius which was shortly to place him at the very top of the financial world. Stillman previsioned the vast expansion of American business, and took steps at once to share in the control of it. He bought all the stock of his bank that came on the market, and then he made it a leader in the financing of industry by attracting to his Board of Directors the heads of the greatest enterprises in the country. These men brought to his bank not only money for deposit, but they brought what the subtle Stillman prized even more, and that was their knowledge and their brains. At his board meetings Stillman learned, at first hand, the inside facts about every business in the country, and this priceless information gave him the key to all the mysteries of financing that lay at the bottom of his success, and at these meetings Stillman had for the asking the advice and counsel of the shrewdest business men in the land. He once confided to me that by this simple device of putting these men on his directorate he had secured their services at the absurd price of about $400 a year apiece. As he expressed it: “These men attend a board meeting once a week, and receive $10 for their attendance, and for that price I am free to pick their brains.”

Stillman was allied with the Rockefeller family by the marriage of his two daughters to the two sons of William Rockefeller, and through this alliance gained all the direct and indirect advantages of a favoured position with the Standard Oil Company and its measures.