1929: Inside the Greatest Crash in Wall Street History--and How It Shattered a Nation - 40

On the morning of March 8, when Carter Glass opened the newspaper, his crusade for banking reform took a turn that he could never have imagined. National City Company, “which has placed more securities with investors than any other banking institution in Wall Street history,” according to The New York Times , announced it would divorce itself from National City Bank. In other words, without any prompting from the government, the banking behemoth had decided to separate its commercial bank from its investment bank. The Charles Mitchell era was officially over.

The bank’s decision to split in two made Glass’s bill somewhat moot, at least insofar as his favorite target was concerned. Glass’s banking bill only stipulated the separation of securities trading operations for nationally chartered banks like Mitchell’s National City. The fine print of Glass’s bill, unnoticed by most, left private firms like J.P. Morgan untouched.

The next day, Glass was hit with a bigger surprise: Winthrop Aldrich, who had just taken over Chase, the nation’s largest bank, waded into the fray with a declaration that all banks, public and private, be forced to do what National City had just done and stop trading securities. He committed that Chase would end the practice, too. And then he went one step further: He said that investment bank executives should also be barred from serving as directors of commercial banks, a move clearly aimed at J.P. Morgan’s business model, which relied on its partners’ intimate relationships with big commercial lenders.

“ I do not think,” Aldrich declared, “that the Glass bill goes sufficiently far in separating the business of commercial banking from that of dealing in securities. To separate commercial banks from their security affiliates is only half the problem.”

Aldrich was the brother-in-law of John D. Rockefeller Jr. He was a mix of old-money conservatism and Machiavellian instincts. The forty-seven-year-old son of late Rhode Island senator Nelson Aldrich, who had worked alongside Glass to shape the Federal Reserve, Aldrich was a yachtsman, society figure, and painter of watercolors. Among his many smart career moves had been leveraging his sister’s marriage into the Rockefeller family—who had been his father’s benefactor—into a stepping stone for his own rise.

Aldrich had been the president of Equitable Trust, of which the Rockefellers owned the largest stake. He had helped orchestrate the merger of Equitable Trust with Chase, making the Rockefellers Chase’s largest shareholder. Demonstrating a talent for aggressive power plays, Aldrich promptly ousted Chase’s longtime chief executive, Albert Wiggin, and took the role for himself.

Now, with the burgeoning momentum behind bank reform in Washington, Aldrich seized the chance to upend his rival J.P. Morgan by expanding the separation of commercial banking and securities trading to include all firms, not just the big publicly traded lenders.

Rather than build support quietly behind the scenes, he went right to the newspapers for maximum impact.

“ A clashing of the Rockefeller interests with the House of Morgan and other financial groups was seen in the announcement of Winthrop W. Aldrich,” The Buffalo News splashed in its front-page article.

Whether or not Aldrich genuinely believed his proposals constituted sound public policy, Aldrich’s shrewd maneuvering marked the dawn of a new era on Wall Street. For as long as anyone could remember, the nation’s bankers had agreed on one thing: Interference from Washington benefited none of them. Now, as the inevitability of major reforms sank in, Aldrich and the Rockefellers showed them all the necessity of jockeying for whatever regulatory advantage they could get. This is how the game would be played.

Glass was blindsided. Though he dearly wanted to separate lending and trading, Glass, a believer in private enterprise, just wanted to rein in the biggest publicly traded institutions. In particular, he had no interest in harming J.P. Morgan, which was a private partnership. For all his down-home Virginia roots, Glass had bought into the Morgan mystique. Morgan partner Russell Cornell Leffingwell, who had served as his deputy at Treasury in the Wilson administration, was practically family. Glass would have been more than comfortable letting the firm continue its business as usual.

As the bill was coming together, Glass and Leffingwell corresponded constantly, with Leffingwell offering suggestions and Glass providing updates. Had the public ever discovered just how close the two men were, Glass’s reputation as an independent politician might have been shattered. But he tried to keep it a closely guarded secret.

Aldrich, whose Rockefeller bona fides gave him practically limitless access to the upper reaches of power, immediately began courting Roosevelt and making the rounds in Washington. Though he only had three years of experience in banking—he’d been the Rockefellers’ lawyer before then—he felt very much in his element. After all, this was more politics than business.

“Two Senators, members of the Banking and Currency Committee of the Senate, have approached me indicating that they would like to talk with me,” Aldrich wrote to Roosevelt. He then asked for a personal meeting: “I have felt myself that it might be more useful to you if I talked with you fully with regard to this matter before talking to anyone else.”

Roosevelt invited Aldrich to the White House four days later at noon. Sitting in the Oval Office, Aldrich made his case for including all financial institutions in the bill. Roosevelt quickly signed on. The meeting could hardly have gone better. The president’s special counsel, Samuel Huston Thompson, told Roosevelt that he “ believes that Mr. Aldrich would be able to convince Senator Glass of the necessity for incorporating his views in the Glass legislation.”

Glass, who had no desire to collaborate with an unelected interloper on his bill, was deeply frustrated. And as much as he privately hoped to protect Morgan, Glass knew that he couldn’t very well stand up on the floor of the Senate and openly challenge the new president on behalf of one of Wall Street’s best-known institutions. As a fellow Democrat, Glass had duly supported Roosevelt— what choice did he have, really? —but he found dealing with the man was a frustrating experience. You never knew where he stood. Everything was political. Glass wasn’t even sure he could convince Roosevelt to support his bill. But he knew he had to try.

“ More and more, I am completely satisfied with having declined to go to the Treasury,” he wrote to a friend, complaining about the new president. “I am sure I would have found it absolutely necessary to resign in a short while had I gone there.”

On March 11, a fight nearly broke out on the floor of the Senate.

While Glass had been building support for his bill, Senator Huey Long of Louisiana, a volatile Democratic populist known as “the Kingfish,” was trying every tactic he could think of to block it.

Long had arrived in the Senate in 1932 after nearly being thrown out as governor for bribery and misappropriating state funds. He was a known charlatan, though far from the only one holding elective office in Washington. Glass privately described him as “the creature who seems to have bought and stolen his way into the United States Senate.” Long had his own sights set on taking the White House as the champion of the common man, and if that meant bucking his own party, he was perfectly happy to do so. “ All I care is what the boys at the forks of the creek think of me,” he proclaimed.

Soon after the Senate passed an emergency banking bill and the session adjourned, Long discovered that an amendment he thought he had added to the bill—to allow small state banks to receive the same benefits as members of the Federal Reserve without having to meet its stringent regulations—had been stealthily removed by Glass. He flew into a rage.

“A fitting climax to this glorious accomplishment,” Long called out, mocking Glass’s creation of the Federal Reserve.

Glass did not take insults lightly. Wagging his finger at Long, a tall, imposing figure thirty-five years his junior, he said, “ I am tired of this man making a personal issue of the matter,” and followed it with “You damn ___,” using an epithet that newspapers refused to print in accounts published the following day.

Long screamed back, “ Now you listen here!”

Glass challenged Long to meet him in the cloakroom for a literal fight and started toward the doors. Augustine Lonergan, a Democrat from Connecticut, tried to quell the tension.

“Right or wrong, Huey has a pretty popular proposition on the state bank matter,” someone managed to point out amid the scrum.

That set off Glass again. “Oh, ‘popular’—‘popular!’ ” he exclaimed. “What do you want to do, run the banks by mass meeting? Any qualified bank can join the Federal Reserve system now ,” he said, and then left the building.

After the skirmish, Long recounted his version of the fracas. “I said, ‘I couldn’t hit you, you are too old a man,’ ” Long told the press. “Then I walked away. I knew he couldn’t hurt me. But I thought he might hit me in the back of the head. He went off cussing me…He said I was a scoundrel and a few other things like that, which I don’t mind.”

Beneath all the vituperation lay substantive differences.

Glass’s bill stipulated that members of the Federal Reserve relinquish their security affiliates within five years and prohibited them from making depositors’ cash available in the call-money market. He was not fundamentally opposed to big banks, as his bill also proposed that member banks be allowed to open branch offices outside their home states, which was currently forbidden but which he believed would stabilize the system. In his view the thousands of tiny, undercapitalized lenders that dotted the American landscape undermined the stability of the entire banking system. Their markets were too small and interdependent. A rural bank that lent to local farmers could be easily wiped out by a bad crop. But if these banks were part of a larger network, they’d have other customers to fall back on.

It was Glass’s preference for large institutions over little scattered ones that triggered Long. To Long’s way of thinking, little banks were the backbone of America, a hedge against the evil forces of centralized power. If banks were allowed to open branches everywhere, New York would effectively be running the entire country. More than anything, that was what Long feared, and he intended to do everything in his power to prevent that from happening.

Latching on to Glass’s branch-banking provision as a big-city incursion against small-town America, Long had staged a grueling ten-day filibuster, a disrespectful tactic rarely employed against a fellow party member. When the filibuster was finally broken, Glass got his bill through the Senate by a resounding 54–9 margin, but Long had killed its momentum. “ Now that you take this carcass out of the Senate, you won’t need to follow it to the House,” he taunted Glass. “It has no more chance to become law this session than I have to become Pope of Rome—and I’m a Baptist. It’s dead as a hammer.”

Long was right; the bill died in the House. It was an embarrassing defeat for Glass, but it paid off in one respect. The Virginia senator was catapulted back onto the national stage. His distinctive tuft of hair and beak-like nose graced the cover of Time , accompanied by a long and laudatory profile that praised him for “keep[ing] his temper and his tongue when abused by windy petti-foggers for whose intelligence he had only scorn and contempt. A man of smaller calibre might have given up the struggle.”

On the evening of March 12, the night after Glass’s fight with Long, Roosevelt addressed sixty million Americans on the radio, his first “fireside chat,” assuring them that banks would shortly reopen. “ It is safer to keep your money in a reopened bank than under the mattress,” he told listeners. “We had a bad banking situation. Some of our bankers had shown themselves either incompetent or dishonest in their handling of the people’s funds. They had used the money entrusted to them in speculations and unwise loans…I do not promise you that every bank will be reopened or that individual losses will not be suffered, but there will be no losses that possibly could be avoided.”