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NOTE 42. The Early Fed, 1914-1928: The Morgan Years

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The Early Fed, 1914-1928, The Morgan Years

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In their joining together to draft, and then to lobby for, the new Federal Reserve system, the House of Morgan was clearly very much the senior partner in the enterprise.

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The secret meeting of a handful of top bankers at the Jekyll Island Club in November 1910,

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One that framed the prototype for the Federal Reserve Act was held at a resort facility

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provided by J.P. Morgan himself.

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The Federal Reserve, in its first two decades, contained two loci of power.

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The main one was the head, then called the governor, of the Federal Reserve Bank of New

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York.

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Of lesser importance was the Federal Reserve Board in Washington.

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The governor of the New York Fed, from the beginning until his death in 1928, was Benjamin

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Morgan Strong, who had spent his entire working life in the Morgan Ambit.

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He was a vice president of the Bankers Trust Company, established by the Morgans to engage

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in the new and lucrative trust business.

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And his best friends in the world were his mentor and neighbor, the powerful Morgan partner

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Henry P. Davison, as well as two other Morgan partners, Dwight Morrow and Thomas W. Lamont.

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So highly trusted was Strong in the Morgan circle that he was brought in to be the personal

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The Morgans were not nearly as dominant in the then lesser institution of the Federal

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Reserve Board in Washington.

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On the original board, there were seven members, of whom two, the Secretary of the Treasury

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and the Comptroller of the Currency, were ex officio.

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The Morgan block on the original board was led by Secretary of the Treasury William Gibbs

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Micadou, son-in-law of President Wilson, whose Hudson and Manhattan Railroad Company in New

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York had been bailed out personally by J.P. Morgan, who then proceeded to staff the officers

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and board of Hudson in Manhattan with his closest business associates.

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From that point on, McAdoo was surrounded by a Morgan ambiance.

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Comptroller of the currency was John Skelton Williams, a protege of McAdoo's who had also

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been a director of the Hudson and Manhattan Railroad.

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Another board member was McAdoo protege Charles S. Hamlin, who came to the board from the

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post of Assistant Secretary of the Treasury.

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In addition to being a wealthy Boston lawyer, from a Boston financial group long affiliated

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Associated with the Morgan interests, Hamlin had married into the wealthy Pruan family

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of Albany, which had been associated with the Morgan-dominated New York Central Railroad.

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If these three were solid Morgan men, the other four reserve board members were not

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nearly as reliable.

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Paul M. Warburg was partner and brother-in-law of Jacob Schiff of the investment banking

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house of Coonleb.

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Frederick A. Delano, uncle of Franklin D. Roosevelt, was president of the Rockefeller-controlled

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Wabash Railway. William P.G. Harding was an Alabama banker whose father-in-law's iron

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manufacturing company had prominent Morgan as well as rival Rockefeller men on its board.

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And Adolph C. Miller was an academic economist at Berkeley who had married into the wealthy

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Morgan-connected Sprague family of Chicago. Thus, of the seven members of the original

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board, three were Morgan men, but of whom two were ex officio. One was Kuhn Leb, one

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One Rockefeller, one an independent banker with both Morgan and Rockefeller connections,

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and one was an economist with vague family ties to the Morgans.

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Hardly complete Morgan control of the board.

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But the Morgans not only had by far the most powerful Federal Reserve banker, Benjamin

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Strong, in their corner, they also had the Republican administrations of the 1920s.

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Although there were various groups around President Warren G.

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Harvey Harding, as an Ohio Republican, he was closest to the Rockefellers, and his secretary

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of state, Charles Evans Hughes, was a mentor of John D. Rockefeller Jr.'s New York Bible

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class, a leading Standard Oil attorney, and a trustee of the Rockefeller Foundation.

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Harding's sudden death in August 1923, however, unexpectedly elevated Vice President Calvin

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Coolidge to the presidency.

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Coolidge had been misleadingly described as a colorless, small-town Massachusetts attorney.

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Actually, the new president was a member of a prominent Boston financial family who were

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board members of leading Boston banks.

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One T. Jefferson Coolidge became prominent in the Morgan-affiliated United Fruit Company

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of Boston.

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Throughout his political career, moreover, Calvin Coolidge had two important mentors,

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both neglected by historians.

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One was Massachusetts Republican Party Chairman W. Murray Crane, who served as a director

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of three powerful Morgan-dominated institutions, the New Haven and Hartford Railroad, the Guarantee

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Trust Company of New York, and AT&T, on which he was also a member of the board's executive

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committee.

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The other was Amherst classmate and prominent Morgan partner, Dwight Morrow.

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Morrow began to agitate for Coolidge for president as early as 1919 and continued his pressure

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At the Chicago Republican Convention of 1920, Dwight Morrow and fellow Morgan partner Thomas

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Cochran lobbied strenuously for Coolidge at Chicago.

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Cochran, who was not an Amherst graduate, did not have the Amherst excuse for working for Coolidge,

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and so he kept in the background.

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Cochran and Morrow were happy, as prominent Morgan men, to confine their work to the background

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and to push forward as the frontman for Coolidge, the large,

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Doddy Boston merchant, Frank Stearns, who did have the virtue of being an Amherst graduate.

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Secretary of the Treasury throughout all three Republican administrations of the 1920s was the

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powerful multi-millionaire tycoon, Andrew Mellon, head of the Mellon Interests, whose empire spread

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from the Mellon National Bank of Pittsburgh to encompass Golf Oil, Copper's Company and Aluminum

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Corporation of America. Mellon was generally allied to the Morgan Interests. Furthermore,

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When Charles Evans Hughes returned to private law practice in the spring of 1925, Coolidge offered

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his crucial State Department post to long-time Wall Street attorney and former Secretary of State

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and of War Elihu Root, who might be called the veteran head of the quote, Morgan Barr.

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At one critical time in Morgan's affairs, Root had served as Morgan's personal attorney.

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After Root refused the State Department post, Coolidge was forced to settle for a lesser Morgan

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Undersecretary to Kellogg was Joseph C. Grew, who had family connections with the Morgans.

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J.P. Morgan Jr. had married a Grew, while, in 1927, two highly-placed Morgan men were

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asked to take over relations with troubled Mexico and Nicaragua.

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The year 1924 indeed saw the House of Morgan at the pinnacle of political power in the

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United States.

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And Calvin Coolidge, friend and protege of Morgan partner Dwight Morrow, was deeply admired

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by JP, quote, Jack Morgan Jr.

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Jack Morgan saw the president, perhaps uniquely, as a rare blend of deep thinker and moralist.

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Morgan wrote a friend, quote, I have never seen any president who gives me just the feeling

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of confidence in the country and its institutions, and the working out of our problems that Mr.

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Coolidge does, end quote.

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On the other hand, the House of Morgan faced the happy dilemma in the 1924 presidential

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election that the Democratic candidate was none other than John W. Davis, senior partner

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of the Wall Street firm of Davis, Polk and Wardwell, and chief attorney for J.P. Morgan

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& Company.

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Davis, a protege of the legendary Morgan partner Henry Davison, was also a personal friend

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and a backgammon and cribbage partner of Jack Morgan's.

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It was an embarrassment of riches.

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Whoever won the 1924 election, the Morgans could not lose, although they decided to opt

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for Coolidge.

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However, 1928 saw inevitable changes in Morgan domination of monetary policy.

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Benjamin Strong, sickly all year, died in October and was replaced by George L. Harrison,

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his handpicked successor.

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While Harrison was a devoted quote, Morgan loyalist, he did not quite carry the clout

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of Benjamin Strong.

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The Coolidge administration, too, was coming to an end.

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The Morgans, again facing an embarrassment of riches, were torn three ways.

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Their prime goal was to induce their beloved president to break precedent and run for a

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third term.

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Not being able to persuade Coolidge, the Morgans next turned to Vice President Charles G. Dawes,

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who had been connected with various Morgan railroads in Chicago.

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When Dawes dropped out of the race, the Morgans turned at last to Herbert Clark Hoover, who

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had been a powerful Secretary of Commerce during the two Republican administrations of the 1920s.

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While Hoover had not been as intimately connected with the Morgans as had Calvin Coolidge, he

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had long been close to the Morgan interests.

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Particularly influential over Hoover during his administration were two unofficial but

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of Powerful Advisors, both Morgan partners, Thomas W. Lamont and Dwight Morrow, whom Hoover

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consulted regularly three times a week.

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Herbert Hoover's cabinet was also loaded with Morgan people.

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As Secretary of State, Hoover chose the longtime Morgan lawyer and disciple and partner of

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Elihu Root, Henry L. Stimson.

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Andrew Mellon continued as Treasury Secretary and his undersecretary, who was to replace

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In 1931, and was close to Hoover, was Ogden L. Mills, a former congressman and New York corporate lawyer whose father, Ogden L. Mills Sr., had been a leader of such Morgan railroads as New York Central.

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Hoover's secretary of the Navy was Charles Francis Adams III from the famous Boston Brahmin family, long associated with the Morgans.

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This particular Adams' daughter had been fortunate enough to marry Jack Morgan.

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Benjamin Strong's monetary policy throughout his reign was essentially a Morgan policy.

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The Morgans, through their subsidiary Morgan-Grenfell in London, had long been intimately associated

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with the British government and with the Bank of England.

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Before World War I, the House of Morgan had been named a fiscal agent of the British Treasury

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and of the Bank of England.

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After the war began, the Morgans became the sole purchaser of all goods and supplies for

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The Morgan's played a substantial role in bringing the United States into the war on

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Britain's side and, as head of the Fed, Benjamin Strong obligingly doubled the money

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supply to finance America's role in the war effort.

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After the end of the war, Strong's monetary policy was deliberately guided by the prime

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The time objective of helping Great Britain establish and impose upon Europe a new and

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disastrous gold exchange standard.

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The idea was to restore, quote, England, which really meant the Morgan's English associates

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and allies, to her old position of financial dominance by helping her establish a phony

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gold standard.

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Ostensibly, this was a return to the pre-war, quote, classical gold standard, but the return

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in the spring of 1925, was at the pre-war par, a rate that hopelessly overvalued the

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pound sterling, which Britain had inflated and appreciated during the fiat money era

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after 1914.

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Britain insisted on returning to gold at an overvalued par, a policy guaranteed to hobble

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British exports, and yet was determined to indulge in continued cheap money and inflation

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instead of contracting its money supply to make the pre-war par viable.

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To help Britain get away with this peculiar and contradictory policy, the United States

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helped to pretend that the post-1925 standard in Europe, this gold bullion pound standard,

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was really a genuine gold coin standard.

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The United States inflated its money and credit in order to prevent inflationary Britain from

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losing gold to the United States, a loss which would endanger the new, Jerry-built, quote,

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gold standard structure.

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The result, however, was eventual collapse of money and credit in the US and abroad and

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a worldwide depression.

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Benjamin Strong was the Morgan's architect of a disastrous policy of inflationary boom

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that led, inevitably, to bust.