1929: Inside the Greatest Crash in Wall Street History--and How It Shattered a Nation - 44

On May 23, 1933, Thomas Lamont stepped into the Senate Caucus Room just behind Jack Morgan and his bodyguards, exuding the kind of self-assurance that had once been common among Wall Street titans—but had all but vanished amid the intense scrutiny of the Pecora hearings. J.P. Morgan had brought so many people to Washington that they filled five floors of the Carlton Hotel, spending a total of $2,000 a night.

The hearings had been ongoing for more than a year, and Pecora was finally training his sights on the House of Morgan. The hearing room was packed with reporters, and as flashbulbs popped, spectators competed to get a better look at the sixty-six-year-old Morgan, who was rarely seen in public. Unlike his famous father, with his wild eyebrows, disfigured nose, and intense scowl, Jack presented a benign affect: tall and robust, white mustache, benevolent smile, and quiet confidence.

Lamont, too, looked healthy and vigorous. If anything, his reputation had been enhanced by the events of October 1929. In 1932, syndicated columnist Drew Pearson called Lamont one of the “super lobbyists” of Washington, among the few for whom “the door of the White House, of every Cabinet office, always is open. They advise and they are listened to.” But this was not entirely meant as praise. Pearson added, “But it is exactly this that makes their influence so powerful, their position so dangerous.”

Prior to the hearing, Pecora had met privately with Lamont, outlining the documents he required from the Morgan bank. It did not go well. Lamont asked him to submit questions in writing; he sent them twenty-three questions; they answered fifteen. He received a “chilly” response when he asked to examine the bank’s internal records for the last five years.

In Morgan’s magnetic presence, the diminutive Pecora suddenly appeared as David facing Goliath. That did not bother Pecora. As The New Yorker ’s John Brooks would later describe him, Pecora was “ three-quarters righteous tribune of the people, one-quarter demagogic inquisitor.”

One thing that Pecora had mastered during his years in the courtroom was a knack for seizing on certain details that made his targets look utterly guilty and disreputable, even if they turned out to be perfectly legal under closer examination. A private investment bank like the House of Morgan, with all its intricate layers of distinguished clients, partners, directorships, and political allies, was an especially inviting target. If Pecora could reveal even a few of the secrets inside this closed society, the American public was sure to be appalled, even if none of it was against the law.

Pecora watched the Morgan men enter the room. It was a surreal moment for him: As a young law clerk working in an office catty-corner to the Morgan bank, he would sometimes catch a glimpse of the legendary J. Pierpont. Now he was the firm’s avowed adversary. Pecora had spent months preparing, closely studying the transcripts of the elder Morgan’s testimony in the 1912 Pujo hearings.

Jack Morgan, who maintained that he was semiretired, had also been prepped. Just as Lamont had coached his father two decades earlier before the Pujo hearings, Morgan’s lawyer John Davis had spent three months coaching all of the firm’s executives who had been subpoenaed. Davis read the Pujo testimony as well and counseled the Morgan men to avoid the impression of arrogance that Jack’s father had left in the public mind.

“ I lined up the partners and held school every day,” Davis explained. A more private person than his father, Jack Morgan had little patience for Pecora, privately referring to him as a “dirty little wop.” As a man who had been educated and trained in Victorian England, and who had worked for a time in London at Morgan, Grenfell & Co., J.P. Morgan’s British subsidiary, Morgan seemed almost an antiquated figure—dignified but stuffy. He genuinely believed the House of Morgan was above reproach, confiding to a friend: “ The risk of finding anything crooked in our affairs, honestly looked at, is nil; but it is taking a large part of the time of all the partners, and one whole firm of lawyers, to go through all the bank history and get ready to answer” what he referred to as the “Spanish Inquisition.”

Lamont, who saw the hearings as a cynical ploy “designed to acquaint a curiosity-loving public with the nature and extent of our own banking institutions,” was worried about how his son Tom, who had also been subpoenaed, would be treated by Pecora.

Though still spectacularly rich by any standard—Lamont alone had $20 million in his partnership account—the men of Morgan no longer felt immune from the hardship that had afflicted most of the country. Paychecks of junior partners were drastically cut, and the firm’s lavish dining room for employees was closed.

Partners felt compelled to curtail their own lifestyles less because they couldn’t afford it than because of how it appeared. Morgan reluctantly kept his new yacht, the Corsair IV , in dry dock. Still, certain habits were hard to break. When the Lamonts took a vacation on an Aegean cruise with old friends, including Walter Lippmann and his wife, they arrived in Greece with forty-two pieces of luggage.

On his first day before the Senate committee, Jack Morgan made an opening statement that summarized what might be called the “Morgan Ethos.”

“The private banker is a member of a profession which has been practiced since the Middle Ages. In the process of time there has grown up a code of professional ethics and customs, on the observance of which depend his reputation, his force and his usefulness to the community in which he works…if in the exercise of his profession, the private banker disregards this code, which could never be expressed in any legislation, but has a force far greater than any law, he will sacrifice his credit. This credit is his most valuable possession; it is the result of years of faith and honorable dealing and while it may be quickly lost, once lost cannot be restored for a long time, if ever.”

As Morgan spoke, Pecora gently twirled a pencil between his fingers.

Then Pecora began his questioning of Morgan, who responded a bit nervously at first to his inquisitor, even calling him “Sir.” At one point, Morgan stopped mid-sentence: “I should like it if the stuttering part were cut out of my answer to that question. I am not used to this form of examination, Mr. Pecora, and I do not get my words quite straight always.”

Pecora pressed him on the various boards of directors Morgan employees sat on and how it decided to whom the firm lent money. Morgan insisted he saw nothing wrong with the firm’s partners having seats on the boards of various banks or corporations, or with making loans to insiders such as Mitchell.

“ They are friends of ours, and we know that they are good, sound, straight fellows,” Morgan said.

Pecora requested a copy of the bank’s partnership agreement, hoping to read it aloud. He knew Morgan would vehemently protest—and he did. So did Davis. That was entirely too private, they insisted—and to what purpose could it be put for the investigation? Pecora won the argument, but spectators were asked to clear the room.

In the closed session, Pecora made a show of unrolling a parchment scroll that had been kept secret; many of the firm’s longtime partners had never laid eyes on it. “It was like asking Morgan & Co. to bare its soul,” Pecora later said.

The elaborately hand-lettered document granted almost godlike powers to Jack Morgan as the bank’s president and chairman of the board. He and he alone determined disbursements from the partnership pool. He arbitrated disputes and if he deemed necessary could actually dissolve the firm. And then there were the rules about how the House of Morgan was to interact with the public: The bank was not allowed to advertise its services, nor solicit deposits from customers, and it would only pay interest to clients with accounts that held more than $7,500. It had no board of directors or shareholders. New partners were not required to deposit money for the privilege of joining the firm, as was the case at most other private partnerships on Wall Street. There was to be no sign on its outer door indicating that it was a bank, but only the name “J.P. Morgan” on its inner door.

To Morgan, disclosing this information was beneath him, and under his breath he described Pecora as having “ the manners of a prosecuting attorney who is trying to convict a horse thief.” He had an even less flattering view of the senators—he told his lawyer that they reminded him of “ sex-suppressed old maids who think everybody is trying to seduce them.”

Senator Duncan Fletcher, a Florida Democrat who had replaced Norbeck as chairman of the committee, quizzed Morgan on his insistence that the firm was different from other banks because its clients were carefully selected for their integrity based on long-standing relationships—and not simply wealthy customers whose money J.P. Morgan wanted to invest.

“ I suppose if I went there, even though I had never seen any member of the firm, and had one hundred thousand dollars I wanted to leave with the bank, you would take it in, wouldn’t you?” Fletcher asked.

Morgan: “No, we should not do it.”

Fletcher: “You would not?”

Morgan: “No.”

“Not unless you came in with some introduction, Senator,” Morgan told him. “That has been the rule for many, many years.”

Those with introductions and assets were indeed graciously welcomed. Pecora listed the clients that maintained $1 million balances at the House of Morgan, including AT&T, Celanese, DuPont, General Electric, General Mills, ITT, Montgomery Ward, Standard Oil of New Jersey, Texas Gulf Sulphur, and U.S. Steel.

Despite his desire for secrecy, Morgan testified that the deposit accounts of J.P. Morgan on December 31, 1932, totaled $340 million, while the firm’s capital or net worth stood at “$53,194,000 and odd.”

As Morgan’s testimony continued, it was revealed that J.P. Morgan was exempt from examination by the New York banking authorities.

Morgan explained that his firm was exempt because it was not a traditional bank.

“Well, we do not like the little deposit accounts, with many drawings and that sort of thing, because they are simply an expense without any return. We discourage them all we can,” he said.

But all the discussion about the way the House of Morgan worked was a subplot once Pecora dropped a bombshell: Jack Morgan had paid no U.S. income taxes in 1931 and 1932. As Pecora revealed that Morgan had erased his entire tax liability, Morgan shifted in his chair, sweat trickling down his face and chin. And it wasn’t just Morgan who took sizable write-offs for stock losses: Of the twenty Morgan partners, not one had paid income taxes in 1931 and 1932. The strategy had been cleared by their lawyers and accountants, of course, but in response to a question from Glass, it was disclosed that the Internal Revenue Service had not closely examined their returns, perhaps in deference, perhaps in fear.

“ I might point out that they also examined Mr. Charles Mitchell’s income tax return,” Couzens sniped back at Glass.

Responding to the stunning tax testimony, reporters, photographers, and spectators jostled to get a better view, while senators strained to hear the soft-spoken Morgan. For his part, Morgan tried to stay relaxed, joking with the security guards about whether they carried guns to protect themselves from the senators.

Lamont’s son Tom found himself under fire, too, coming in for condemnation when it was shown that, like Mitchell, he had participated in a “wash sale,” selling underwater stocks to his wife and taking a tax write-off of $114,000, only to buy the shares back three months later.

But the real fireworks came from Senator Glass, after several days of hearings. Bitter that the hearings were becoming a spectacle that could distract from his banking bill, Glass reproached Pecora, whom he criticized for keeping the committee in the dark about his plan to take on J.P. Morgan. He said the entire hearing had become a “Roman holiday.”

A furious Pecora practically threatened to quit. “I want to assure Senator Glass that the compensation of $255 which I am receiving for these services certainly is no incentive to me to render these services or to continue to render them.”

Glass interjected.

“Oh yes. That is what it is all about. I do not intend to see any injustice done to the House of Morgan,” he said. “We are having a circus, and the only things lacking now are peanuts and colored lemonade.”

The hearing was turning into a disaster for the House of Morgan—and it wasn’t helping Carter Glass’s reputation, either. The senator who prided himself on holding Wall Street’s feet to the fire was starting to sound suspiciously like its apologist.

“ Senator Glass almost wrecked the investigation,” observed the syndicated columnist Heywood Broun. “I am afraid that his obstructionist tactics were based on almost the worst possible motives. I will readily grant that the veteran senator from Virginia is not a partisan or a beneficiary of the House of Morgan. But he is an arch and passionate preserver of the ego of Carter Glass. To put it bluntly, he was jealous of Ferdinand Pecora.”

Rumors had swirled for months that Glass had been subtly protecting J.P. Morgan. Now the hearing was confirming the gossip. Under pressure from Roosevelt, Glass had allowed Aldrich’s unequivocal bank-breakup language—which was aimed right at the House of Morgan—to be included in his bill. But he still couldn’t stomach the idea that the one firm he thought was honest was now being impugned. Pecora, in his view, was driven by a lust for headlines, which played right into the hands of the Rockefellers.

When a voter in Virginia criticized Glass about his seeming defense of Morgan, he wrote back: “Dear Sir—I am wasting a three-cent stamp to say I always disregard the insults of a blackguard, particularly when they come from a distance.”

From that point forward, though, Glass kept relatively quiet for the remainder of the hearings. After all, the bill he’d spent years championing and that bore his name was finally within reach, and he couldn’t risk jeopardizing it by speaking his mind. For once, the senior senator from Virginia held his tongue.

When the hearings resumed on a Thursday morning, Morgan and his entourage returned to the Senate Caucus Room, amid swirling headlines that characterized the House of Morgan as a haven for tax scofflaws. As he entered the hearing room, Morgan was approached by a reporter named Ray Tucker, who wanted to introduce him to someone.

“ Mr. Morgan, this is Miss Graf,” Tucker said. “She works for the circus.”

A bit taken aback, Morgan leaned down from his height of six feet, two inches and with his usual dignity shook the hand of Lya Graf, a woman who stood only a little over two feet tall. As flashbulbs fired, Charles Leef, the PR man for the circus who had the clever idea to bring her to the hearings after Glass’s “circus” comment, scooped up Miss Graf. He placed her in Morgan’s lap just as he took his seat. “The smallest lady in the world wants to meet the richest man in the world,” Leef announced.

“I have a grandson bigger than you,” Jack said, thinking at first that she was a child.

“But I’m older,” Graf replied, in a high-pitched voice.

“How old are you?” he asked in a friendly, even tender tone.

“Thirty-two,” the press agent interrupted.

“I’m not,” Miss Graf said. “Only twenty.”

“Well, you certainly don’t look it,” Jack said.

Lamont looked on in annoyance as Richard Whitney waved the circus duo away. As the senators filed in, everyone agreed that it had been a crass stunt. The committee’s chairman, Senator Duncan Fletcher, pleaded with the press not to print the pictures. The New York Times was one of the few newspapers to comply. The Baltimore Sun ran a cartoon with a tiny Uncle Sam sitting in Jack Morgan’s lap, over the caption “ A Midget Gets a Thrill.”

With the Morgan men back at the witness table, Ferdinand Pecora turned his questioning to the letters that Lamont, George Whitney, and other Morgan partners had sent to some of the most prominent individuals in the nation in the days and hours before Lamont left on the Aquitania for Europe to begin the reparations negotiations in February of 1929. As he spoke, Pecora held a cigar that he sometimes waved around to punctuate his points. To the senators, the letters, offering stock in Alleghany Corporation and Standard Brands at prices far below the market, were nothing more than bribes.

Several committee members alleged that the House of Morgan played politics by offering discounted stock to people like John Raskob, the former Democratic National Committee chairman. Raskob’s letter to Morgan partner George Whitney seemed to confirm he understood the nature of the gift and the possibility of a quid pro quo. “ Many thanks for your trouble and for so kindly remembering me. My check for $40,000 is enclosed herewith in payment for the Alleghany stock…I appreciate deeply the many courtesies shown me by you and your partners, and I sincerely hope the future holds opportunities for me to reciprocate.”

Pecora asked Whitney what Raskob meant about “opportunities for me to reciprocate.”

“I thought it was just a nice, polite letter,” Whitney responded, pointing out that he and Raskob had been fellow directors at GM. Jack Morgan calmly watched Whitney’s testimony, at times even napping; Whitney smoked a cigarette as he spoke.

Lamont, however, was outraged at the suggestion that the House of Morgan would ever attempt to buy favor.

Pecora countered with another damning document, a memo written by Lamont himself in February 1929 to partner Arthur Anderson.

“ It occurred to me this morning to make inquiry from you whether in our distribution of Alleghany common we had allotted anything to Frederick Strauss. He was so exceedingly helpful and at considerable sacrifice to himself in going over to Washington to testify in the matter of the stock issues, that I am not at all sure that we ought not try to do something for him even at a date as late as this.”

Most of Morgan’s favored group sold the Alleghany shares quickly—or wished they had. By 1933 it was trading at a dollar or two a share.

Pecora introduced a copy of Whitney’s tax return for 1929, which showed that he had purchased 8,145 shares of Alleghany stock at a cost of $162,900, which he later sold for $392,311.32, for a profit of $229,411.32. Whitney professed to have no memory of the transaction.

Whitney, typically as poised as Lamont, became flustered under questioning.

“I don’t know, Senator Couzens,” he said in response to a question. “It is hard to say why we did things. It is even harder to say why we didn’t.”

Just as he had done with Mitchell, Pecora skillfully flipped the public perception of Morgan by doing little more than exposing their standard business practices.

The New York Times took note of the gambling and influence peddling on Wall Street and pinned it on the mighty men of Morgan: “ Here was a firm of bankers, perhaps the most famous and powerful in the whole world, which was certainly under no necessity of practicing the small arts of petty traders. Yet it failed under a test of its pride and prestige.”

Distressed by the criticism, Lamont pleaded with Adolph Ochs, publisher of The New York Times , to understand the firm’s fundamentally good intentions. “ We naturally turned in part to individuals who had ample means and who understand the nature of common stock—men who are prepared to take a chance with their money,” he wrote in a private letter to Ochs.

Lamont’s close friend Walter Lippmann felt as if he’d been fooled and blasted Morgan for its “monopoly” powers, effectively ending his relationship with Lamont, who was stung by the criticism.

“ What undoubtedly upset me most,” Lamont wrote in an internal memo, “was the thought that one of my most intimate friends would readily undertake public criticism before even the so-called evidence was half in, and without making the slightest attempt to clear up points with us that seemed puzzling or open to question.”

Lamont appeared again before the committee seven days later to be questioned about how Morgan wielded its influence through the many corporate boards its partners served on, as well as those of banks—the “interlocking” theory of power first enunciated by lawyer Samuel Untermyer in the Pujo hearings.

“I feel that there is a very strong popular delusion which has been nourished…by people insincerely,” argued Lamont, who himself sat on ten corporate boards. “It just isn’t so…We are credited with having what is known as power or influence; and we admit and are glad to admit that we hope that our counsels are of some avail in certain directions in sound finance. What is that derived from? Is it derived from money? Has the Morgan fortune ever been known as one of the great fortunes of this country? No. With all due respect to Mr. Morgan and his father, it has not been so known.” He insisted that directors were invited to serve on boards “to serve the community.”

Just as Pecora was completing the hearings, Jack Morgan requested that he make a final “brief statement upon certain points we believe are not yet fully clear, and then I will turn this in and enter it on the record.” It was a three-page essay contending that separating securities underwriting from traditional banking would cause irreparable harm to the financial sector and eliminate jobs. But there was little vigor or defiance in his voice. He sounded as if he had already accepted defeat. The House of Morgan knew that the game was over.