The Case Against the Fed

It was not only through Benjamin Strong that the Morgans totally dominated American politics and finance during the 1920s. President Calvin Coolidge, who succeeded Rockefeller ally President Harding when he died in office, was a close personal friend of J. P. Morgan, Jr., and a political protege of Coolidge’s Amherst College classmate, Morgan partner Dwight Morrow, as well as of fellow Morgan partner Thomas Cochran. And throughout the Republican administrations of the 1920s, the Secretary of the Treasury was multimillionaire Pittsburgh tycoon Andrew W. Mellon, whose Mellon interests were long-time allies of the Morgans. And while President Herbert Hoover was not nearly as intimately connected to the Morgans as Coolidge, he had long been close to the Morgan interests. Ogden Mills, who replaced Mellon as Treasury Secretary in 1931 and was close to Hoover, was the son of a leader in such Morgan railroads as New York Central; in the meanwhile, Hoover chose as Secretary of State Henry L. Stimson, a prominent disciple and law partner of Morgan’s one-time personal attorney, Elihu Root. More tellingly, two unofficial but powerful Hoover advisers during his administration were Morgan partners Thomas W. Lamont (the successor to Davison as Morgan Empire CEO) and Dwight Morrow, whom Hoover regularly consulted three time a week.

A crucial aspect of the first term of the Roosevelt New Deal, however, has been sadly neglected by conventional historians: The New Deal constituted a concerted Bringing Down and displacement of Morgan dominance, a coalition of opposition financial out-groups combined in the New Deal to topple it from power. This coalition was an alliance of the Rockefellers; a newly-burgeoning Harriman power in the Democratic Party; newer and brasher Wall Street Jewish investment banks such as Lehman Brothers and Goldman Sachs pushing Kuhn, Loeb into the shade; and such ethnic out-groups as Irish Catholic buccaneer Joseph P. Kennedy, Italian-Americans such as the Giannini family of California’s Bank of America, and Mormons such as Marriner Eccles, head of a vast Utah banking-holding company-construction conglomerate, and allied to the California-based Bechtel Corporation in construction and to the Rockefeller’s Standard Oil of California.

The main harbinger of this financial revolution was the Rockefeller’s successful takeover of the Morgan’s flagship commercial bank, the mighty Chase National Bank of New York. After the 1929 crash, Winthrop W. Aldrich, son of Senator Nelson Aldrich and brother-in-law ofJohn D. Rockefeller, Jr., engineered a merger of his Rockefeller-controlled Equitable Trust Company into Chase Bank. From that point on, Aldrich engaged in a titanic struggle within Chase, by 1932 managing to oust the Morgan’s Chase CEO Albert Wiggin and to replace him by Aldrich himself. Ever since, Chase has been the virtual general headquarters of the Rockefeller financial Empire.

The new coalition cunningly drove through the New Deal’s Banking Acts of 1933 and 1935, which transformed the face of the Fed, and permanently shifted the crucial power in the Fed from Wall Street, Morgan, and the New York Fed, to the politicos in Washington, D.C. The result of these two Banking Acts was to strip the New York Fed of power to conduct open-market operations, and to place it squarely in the hands of the Federal Open Market Committee, dominated by the Board in Washington, but with regional private bankers playing a subsidiary partnership role.40

The other major monetary change accomplished by the New Deal, of course, and done under cover of a depression “emergency” in the fractional reserve banking system, was to go off the gold standard. After 1933, Federal Reserve Notes and deposits were no longer redeemable in gold coins to Americans; and after 1971, the dollar was no longer redeemable in gold bullion to foreign governments and central banks. The gold of Americans was confiscated and exchanged for Federal Reserve Notes, which became legal tender; and Americans were stuck in a regime of fiat paper issued by the government and the Federal Reserve. Over the years, all early restraints on Fed activities or its issuing of credit have been lifted; indeed, since 1980, the Federal Reserve has enjoyed the absolute power to do literally anything it wants: to buy not only U.S. government securities but any asset whatever, and to buy as many assets and to inflate credit as much as it pleases. There are no restraints left on the Federal Reserve. The Fed is the master of all it surveys.

In surveying the changes wrought by the New Deal, however, we should refrain from crying for the Morgans. While permanently dethroned by the first term of the New Deal and never returned to power, the Morgans were able to take their place, though chastened, in the ruling New Deal coalition by the end of the 1930s. There, they played an important role in the drive by the power elite to enter World War II, particularly the war in Europe, once again on the side of Britain and France. During World War II, furthermore, the Morgans played a decisive behind-the-scenes role in hammering out the Bretton Woods Agreement with Keynes and the British, an agreement which the U.S. government presented as a fait accompli to the assembled “free world” at Bretton Woods by the end of the war.41

Since World War II, indeed, the various financial interests have entered into a permanent realignment: the Morgans and the other financial groups have taken their place as compliant junior partners in a powerful “Eastern Establishment,” led unchallenged by the Rockefellers. Since then, these groups, working in tandem, have contributed rulers to the Federal Reserve System. Thus, the present Fed Chairman, Alan Greenspan, was, before his accession to the throne a member of the executive committee of the Morgans’ flagship commercial bank, Morgan Guaranty Trust Company. His widely revered predecessor as Fed Chairman, the charismatic Paul Volcker, was a long-time prominent servitor of the Rockefeller Empire, having been an economist for the Rockefellers’ Exxon Corporation, and for their headquarters institution, the Chase Manhattan Bank. (In a symbolically important merger, Chase had absorbed Kuhn, Loeb’s flagship commercial bank, the Bank of Manhattan.) It was indeed a New World, if not a particularly brave one; while there were still to be many challenges to Eastern Establishment financial and political power by brash newcomers and takeover buccaneers from Texas and California, the old-line Northeastern interests had themselves become harmoniously solidified under Rockefeller rule.

• 40See, in particular, Thomas Ferguson, “Industrial Conflict and the Coming of the New Deal: the Triumph of Multinational Liberalism in America,” in The Rise and Fall of the New Deal Order, 1930–1980, Steve Fraser and Gary Gerstle, eds. (Princeton: Princeton University Press, 1989), pp. 3–31. Also see the longer article by Ferguson, “From Normalcy to New Deal: Industrial Structure, Party Competition, and American Public Policy in the Great Depression,” Industrial Organization 38, no. 1 (Winter 1984).
• 41See G. William Domhoff, The Power Elite and the State: How Policy is Made in America (New York: Aldine de Gruyter, 1990), pp. 113–41; 159–81.