The Man Behind The Curtain

By Kevin Baker

There is nothing quite so pathetic as a wizard when he is starting to lose it. See The Wizard of Oz, when the title sorcerer thunders at Dorothy and friends to “Pay no attention to that man behind the curtain!”—i.e., himself.

In recent months, no less a personage than Alan Greenspan, Chairman of the Federal Reserve Board, has had to endure such Oz-ian (Ozymandian?) performances. Earlier this year, many observers criticized him for his partisan support of the Bush tax plan. Meanwhile, the investors and financial analysts who once hung on his every word have come to greet his announcements of new rate cuts with about as much excitement as the arrival of a commuter train.

It was not so long ago that this same Greenspan was featured on the cover of Time magazine above the caption, “The Committee to Save the World”; posing there with his loyal cohorts—Clinton Treasury Secretary Robert Rubin and Deputy Secretary Lawrence Summers—like some team of economic superheroes.

Can any one man really prop up our economy—or for that matter, the world’s economy—with a little help from his friends? The desire to believe it so hearkens back to an earlier, more romantic era of international finance, when a small, tightly knit group of bankers, answerable to no one but each other, really did seem to have the world on their purse string.

The apex of this era was achieved in October of 1907, when reckless speculation by some leading trust companies jeopardized the nation’s money supply. It was not uncommon for such shortages to plunge the country into harrowing depressions. Before long depositors were mobbing banks throughout New York City, pulling out their money and leaving them on the verge of collapse.

The man everyone turned to first was even more feared and trusted than Alan Greenspan is today. John Pierpont Morgan, Sr., had spent most of the previous twenty years creating U.S. Steel and consolidating America’s massive—and often bankrupt—rail system. By 1907, no one individual—indeed, no one in America’s history—wielded more power in the world of finance.
Now 70 years old, morose and semi-retired, Morgan nonetheless hurried back to Wall Street from a religious convention in Richmond.

“The thing that made his progress different from that of all the other people on the street was that he did not dodge, or walk in and out, or halt or slacken his pace,” remembered an eyewitness who watched the great man shove his way through the frightened hordes filling New York’s financial district. “He simply barged along, as if he had been the only man going down Nassau Street hill past the Subtreasury. He was the embodiment of power and purpose.”

For the better part of a week, Morgan worked 19-hour days, fueling himself on cigars and throat lozenges. He was able to gather up the few bankers and trust company executives necessary to save the day and literally lock them up behind the great bronze doors of his Morgan Library until they had agreed on a $25-million pool that might stop the panic and save the weakest trusts. When negotiations seemed stuck, Morgan appeared suddenly at five in the morning, and demanded the exhausted financiers sign onto the pool. There, beneath one of their host’s finest art acquisitions, a magnificent sixteenth-century tapestry entitled The Triumph of Avarice, they did just that.

It was, as Ron Chernow calls it in his award-winning history, The House of Morgan, “a bravura performance.” Morgan was widely hailed as a savior, and there was little doubt that he had saved not just the market, but also nation’s entire monetary system.

This was just what alarmed some people. Why was the world’s largest economy in the hands of a single, grumpy, septuagenarian banker, however able? Then there was the question of Morgan’s fee. In return for putting together the deal that saved the market, he had overawed Teddy Roosevelt’s Justice Department into waiving the anti-trust laws and allowing Morgan’s beloved U.S. Steel to acquire Tennessee Coal and Iron—a billion-dollar company—for a bargain $45 million.

A campaign to re-establish of some sort of central bank gained support on Capitol Hill. In 1913, Morgan himself was hauled up before the House’s Pujo Committee hearings, investigating the workings of Wall Street and “the Money Trust.” Morgan was incensed. Only a few months from his death, he seemed to lose control of himself, and responded with testimony that was frankly incredible—insisting that he did not run his own firm, possessed “Not the slightest” power in the country or on the Street, and extended commercial credit primarily on the basis of “character.”

“I have known a man to come into my office, and I have given him a check for a million dollars when I knew that they had not a cent in the world,” he maintained.
A skeptical Congress responded by creating the federal reserve system. This resembled the system as it exists today, with the nation was divided into 15 (later 12) regions, each with its own reserve banks, and a governing, Federal Reserve Board in Washington. It seemed like a bold reform but in fact it failed to provide the governing board with sufficient power to exert any real influence.

On several occasions, for instance, the national Fed tried to rein in the runaway bull market of the 1920s—only to be steamrolled by the regional, New York Fed, which was controlled by the nation’s leading banks and trust companies. Lacking the legal authority to regulate the stock market or, in that era of truly small government, the public securities to determine interest rates, the Fed quietly backed down. Morgan’s small clique of presumed gentlemen was still in command.

The limitations of character would become painfully clear with the Wall Street crash of 1929. On “Black Tuesday,” October 24, the air finally went out of the market, and stocks lost an estimated $9 billion in value. By eleven that morning the trading floor had already deteriorated into a wild melee, while “a weird roar” could be heard from the mob jamming the streets outside.

Just as they had in 1907, the desperate traders looked to “the Corner”—the House of Morgan’s famous citadel at 23 Wall. They were not disappointed. At high noon, the most powerful bankers and trust executives in the country marched up the steps, convened by Morgan partner Thomas Lamont. Quickly dubbed “the Big Six” by the press, they represented an estimated $6 billion in assets, and if they could not save things, no one could.

“Now, twenty-two years later, that drama was being re-enacted,” Galbraith writes. “The elder Morgan was dead. His son was in Europe. But equally determined men were moving in…The very news that they would act would release people from the fear to which they had surrendered.”

The bankers anted up some $240 million in organized support for the market. Another bold figure now pushed his way through the frightened mobs and into history. Richard Whitney, vice-president of the New York Stock Exchange, was the very embodiment of Wall Street confidence and superiority. A large, powerfully built man; scornful, aristocratic, and a thoroughgoing snob, Whitney was a leading broker and also the older brother of distinguished Morgan partner George Whitney. His background, and his arrogance, was such that he even cut his old Groton classmate, Franklin Roosevelt.

At 1:30 p.m., he strolled nonchalantly across the Exchange floor as the Olympian errand boy of the Big Six. He began with that old Morgan favorite, U.S. Steel, at Trading Post No. 2—casually buying some twenty thousand shares several points above their latest price. He went on to one trading post after another, purchasing $20 million worth of critical, sliding stocks.

It worked—for awhile. The market rallied gamely for another couple of days, but by the following Monday it had begun to collapse again. Then came “Black Tuesday,” October 29, when some 16.4 million shares changed hands—a record that would stand until 1968. Before the day was out, stocks had lost some $32 billion dollars of value.
Years of congressional inquiries tried to discover just what had happened, but the main problem was that the nation’s financial markets were simply too big to be saved by any small coterie of gentlemen. Not $20 million, nor $240 million, nor even the Big Six’s full $6 billion would have been enough to restore the bull market that fateful week in 1929. Certainly, the Street could have used a man like the senior J.P. Morgan, but what it really needed was what it got—a Fed with real power and the Securities Act, regulating the markets for the first time.

The men who had substituted for Morgan on Black Thursday were more or less aware of this. When they realized they could not stop the slide, it was later discovered, they quietly sold the stocks their pool had purchased, making a modest profit on the whole deal and leaving the market to its fate.

This did not go down well with a nation staggering through a decade of depression. Investigations and even indictments followed, and some stuck. Yet most of the Big Six had played within the rules of the time, and the crash had left them nearly as shaken and mortified—albeit, not nearly as broke—as their investors.

Then there was Richard Whitney. His peers, grateful for his valor, elected him president of the Exchange in 1930. Before Congress, he defended Wall Street’s traditional ways of doing business with such spirit that he was called “the most arrogant, supercillious witness in the history of congressional hearings.”

Unbeknownst to his admirers Whitney was also, in Galbraith’s phrase, “one of the most disastrous businessmen in modern history.” Having run up enormous losses investing in a peat humus company and a brand of hard cider known as “Jersey Lightning,” he borrowed still greater amounts from his brother and anyone else who would help him—continuing to speculate, and continuing to lose. Then he started to steal, embezzling millions—even from a fund for the widows and orphans of other brokers.

By 1938, Whitney was an amazing $27 million in debt, and had finally run out of pigeons. District attorney Thomas Dewey packed him off to Sing Sing for three years. There, William Manchester wrote sardonically, “other convicts took off their caps when he approached them, and in prison yard baseball games they always let him get a hit. People respected an important man in those days.”

This is not, of course, to suggest that Alan Greenspan will share anything like the same fate. As a government official, Greenspan is at least (occasionally) answerable to the country at large, and the market is supported, as it has been for many years, by the host of laws and regulations passed during the New Deal. Yet in these days of global markets, we should all the more chary about the idea that any one man is going to save the world.

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