THE
MAN BEHIND THE CURTAIN
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.
©
2002 Copyright Forbes Inc.
