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FINANCIAL HISTORY of the UNITED STATES a FINANCIAL HISTORY of the UNITED STATES

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FINANCIAL HISTORY of the UNITED STATES a FINANCIAL HISTORY of the UNITED STATES A FINANCIAL HISTORY of the UNITED STATES A FINANCIAL HISTORY of the UNITED STATES Volume II From J.P. Morgan to the Institutional Investor (1900 -1970) Jerry W. Markham M.E.Sharpe Armonk, New York London, England Copyright © 2002 by M. E. Sharpe, Inc. All rights reserved. No part of this book may be reproduced in any form without written permission from the publisher, M. E. Sharpe, Inc., 80 Business Park Drive, Armonk, New York 10504. Library of Congress Cataloging-in-Publication Data Markham, Jerry W. A financial history of the United States / Jerry W. Markham. p. cm. Includes bibliographical references and index. Contents: v. 1. From Christopher Columbus to the Robber Barons (1492–1900) — v. 2. From J.P. Morgan to the institutional investor (1900–1970) — v. 3. From the age of derivatives into the new millennium (1970–2001) ISBN 0-7656-0730-1 (alk. paper) 1. Finance—United States—History. I. Title. HG181.M297 2001 332’.0973—dc21 00-054917 Printed in the United States of America The paper used in this publication meets the minimum requirements of American National Standard for Information Sciences Permanence of Paper for Printed Library Materials, ANSI Z 39.48-1984. ~ BM (c)10987654321 For my parents, John and Marie Markham In every generation concern has arisen, sometimes to the boiling point. Fear has emerged that the United States might one day discover that a relatively small group of individuals, especially through banking institutions they headed, might become virtual masters of the economic destiny of the United States. —Adolf A. Berle, February 1969 Contents List of Illustrations xiii Preface xv Acknowledgments xvii Introduction xix Chapter 1. A New Century 1. The Twentieth Century Begins 3 The NYSE 3 • The Consolidated Stock Exchange 5 • The Curb Market 6 • Brokerage Firms 7 • The West Coast 9 • Speculators 10 • The Securities Business 10 • Mergers 12 • The Great Northern Battle 13 2. Insurance, Banking, and Underwriting 17 Insurance 17 • The Armstrong Investigation 18 • New Directions 20 • New Entrants Into the Banking Business 21 • Money Markets 21 • Consumer Credit 22 • The Big Banks 23 • Investment Banking 25 • Economic Consolidation 26 • Securities Disclosures 27 3. The Panic of 1907 29 J.P. Morgan to the Rescue 31 • Effects of the Panic 34 • The Hughes Committee 35 • Currency Issues 38 • Trading Continues 39 • Taxes 40 4. The Federal Reserve and the Money Trust 42 The Duck Hunters 43 • The Federal Reserve Is Created 45 • State Banks 46 • The Hunt for the Money Trust 47 • The Pujo Committee Attacks the NYSE 50 • The Pujo Committee Recommendations 53 5. Banking and Securities Before the War 55 Changing of the Guard 55 • Financial Institutions 56 • Bank Affiliates 57 • Blue-Sky Laws 58 • Financial Markets 60 • William Durant 63 • Automobile Finance 64 • International Finance 65 ix x CONTENTS Chapter 2. America Enters the War 1. World War I 69 Prewar Finance 69 • International Payments 70 • American Financial Leadership 73 •America Enters the War 75 • The Liberty Loans 76 • War Finance 78 2. War and the Stock Market80 The Money Committee 80 • The Capital Issues Committee 82 • Securities Trading 85 • Financial Changes 88 • Pension Plans 90 • Disturbances 90 • Accounting 91 3. The Futures Markets 93 Regulatory Issues 94 • The Cotton Futures Act 95 • Wartime Trading 96 • Postwar Problems 99 • The FTC Study 100 • Legislation 101 • Abuses Remain 102 • Additional Exchanges 104 • Clearinghouses and Other Issues 105 4. Banking in the Twenties 107 Consumer Finance 107 • Money Markets and the Fed 108 • Banking Operations 111 • Branch Banking 113 • International Banking 115 • Bank Securities Affiliates 115 • J.P. Morgan & Co. 118 • Government Finance 118 Chapter 3. The Crash 1. The Stock Market Expands 123 The NYSE 124 • Other Markets 126 • Information 128 • Investments 129 • Merrill Lynch and Other Giants 130 • Syndicate Operations 131 • William Durant 132 • More Automobiles 133 • Financial Troubles 134 2. The Market Surge and Investment Trusts 137 Investment Trusts 137 • The Big Investment Trusts 140 • Investment Trust Abuses 142 • Other Abuses 143 • Preferred Lists 145 • Real Estate 146 3. The Stock Market Crash of 1929 148 Speculative Orgies 148 • Manipulations 149 • Margin Concerns 150 • The Crash 153 • Aftermath 156 4. The Banking Crisis 160 Bank Failures 160 • The Reconstruction Finance Corporation 161 • Government Programs 163 • Bank Runs 164 • The New Deal 165 • The Investment Bankers Split 168 • Further Reforms 171 5. Congress Investigates the Stock Market 173 The Crisis Deepens 173 • Congressional Investigations 177 • Insider Trading 180 • Margin Trading 182 • Securities Legislation 184 CONTENTS xi Chapter 4. Regulating Finance 1. Monetary Policy and the Depression 189 Monetary Policy and International Finance 190 • The Gold Standard Is Abandoned 191 • The Silverites Return 194 • Fort Knox 195 • Government Intervention 195 • The Bonus Army 197 • NIRA 198 • More Relief Agencies 199 • Social Security 200 • Taxes 201 2. The Federal Securities Laws 202 Joseph Kennedy 202 • SEC Regulations 202 • Holding Companies 205 • The Whitney Scandal 206 • NYSE Reforms 207 • SEC Efforts 208 • The NASD 210 • Accounting 211 • Trust Indenture Act 212 3. Commodity Market Reforms 214 Speculation 214 • Farm Relief 214 • Trading Concerns 215 • President Hoover Becomes Alarmed 216 • Commodity Prices Continue Their Plunge 217 • Government Intervention 218 • Congress Investigates 220 • The Commodity Exchange Act 222 • Margin 223 • Commodity Markets 224 4. The Market Suffers 226 Trading Continues 226 • Government Securities 228 • Financing Business 230 • New Leaders 232 • Market Ups and Downs 233 • The Crisis Continues 235 5. Investment Companies and Insurance Regulation 237 Abuses 238 • Legislation 239 • Market Activity 241 • Government Investigations 244 • TNEC and a New Money Trust 245 • Insurance Industry Investigation 245 • Industry Composition 246 • Insurance Industry Investments 249 • Industry Abuses 250 Chapter 5. War and the Rebuilding of Finance 1. World War II and Finance 255 War Preparation 255 • Effects of the War in Europe 257 • Lend-Lease 258 • Commodity Trading 259 • Financial Effects of the War 260 • Government Finance 261 • War Loans 263 • Wartime Taxes 263 • Securities Markets 265 • Banking Activity 266 • Insurance Business 267 2. After the War 269 Demobilization 269 • Postwar Boom 270 • Speculation Resumes 270 • Truman’s Attacks on Speculators 272 • Expanded Trading 274 • The IMF 275 • GATT 277 • The Marshall Plan 277 • Banking Operations 278 • Credit Cards 279 • Insurance Companies 280 • Financing Resumes 281 • Government and Finance 283 • Securities Trading and Information 284 xii CONTENTS 3. Korea and the War on the Investment Bankers 286 Speculation 286 • Insurance Programs 288 • A New Money Trust Hunt 288 • Underwritings 290 • Stock Trading 292 • New Issues 293 • Securities Fraud 295 • Boiler Rooms 296 • Financial Changes 297 4. The Fed and the 1950s 299 The Treasury–Federal Reserve Accord 299 • Fixed Income Securities 301 • Small Businesses 303 • Commercial Banks and Thrifts 303 • Consumer Finance 305 • Credit Card Growth 306 • Banking Operations 307 • Bank Holding Company Legislation 307 • Banking Challenges 308 • International Finance 309 • Financial Concerns 310 Chapter 6. A New Era Begins 1. Institutional Investors 315 Investment Standards 315 • Insurance Business 316 • Annuities 317 • Pension Funds 318 • Mutual Funds 320 • Corporate Finance 320 • Securities Markets 321 • Financial Abuses 323 • Commodity Markets 323 • Increased Wealth 324 2. Banking, Gold, and Trading 326 Gold Problems 326 • Euro Dollars 328 • Problems on the AMEX 329 • Securities Trading 330 • Salad Oil Swindle 331 • Special Study of the Securities Markets 333 • Insider Trading and Other Concerns 334 • Government Finance 334 • Banking Consolidation and Regulation 335 • Crossing Regulatory Boundaries 336 • Banking Finance 339 • Government Securities 340 • Commodity Markets 341 3. The Securities Markets 342 Merrill Lynch 342 • Underwriting 343 • Stock Exchanges 344 • Exchange Competition 346 • Securities Information 346 • Mergers and Acquisitions 347 • Conglomerates 348 • Securities Markets and Mutual Funds 351 • IOS 353 4. Institutions and Paperwork 356 Insurance Companies 356 • Pension Plans and Other Institutional Investors 357 • Hedge Funds 358 • Institutional Membership 359 • Block Trades 360 • REITs 360 • Securities Trading 361 • Paperwork Crisis 362 • Legislation 364 • Stock Certificates 366 Conclusion 369 Notes 373 Selected Bibliography 383 Name Index 395 Subject Index 401 List of Illustrations James R. Keene 11 J.P. Morgan 32 Nelson Aldrich 35 William C. Durant 63 Benjamin Strong 151 Carter Glass 153 Jesse Jones 162 Joseph P. Kennedy 203 Charles Merrill 243 William McChesney Martin 301 xiii Preface This is the second of three volumes in a history of finance in America. The first volume covered the period from the “discovery” of America to the end of the nineteenth century. This volume starts with the investment bankers who dominated finance at the beginning of the twentieth century. It then describes the Panic of 1907 and the resulting creation of the Federal Reserve Board (the “Fed”). The volume then traces finance through World War I, and it examines the events that led to the stock market crash of 1929 and the Great Depres- sion. From there, it reviews the rebirth of finance after World War II and the growth of the institutional investor. The third and final volume of this history will focus on the growth of de- rivatives, the
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