Lords of Finance

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 over-arching 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 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 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, the panic 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, 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 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.

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 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 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 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 Str

eet. “Wherever he sat 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, 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 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.7 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, $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 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, 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.

5. L’INSPECTEUR DES FINANCES

FRANCE: 1914