Submitted by Mark Esposito, Guest Blogger
Author’s note: Another in a series of obscure American history viginettes.
Bush’s multi-trillion dollar bailout was nothing new in American history; the money just flowed in a different direction. In America, where the banking monarchy has long memories and keeps ledger books going back centuries, it was just repayment of a debt incurred before the turn of the last century to a new generation of our financial princes.
Things were getting desperate for President Grover Cleveland in the early months of 1895. The U.S. economy was collapsing under the burden of falling prices and rising unemployment that began with the Panic of 1893. Now eighteen months later, millions were unemployed. Without a central banking system and a currency backed by gold, the Treasury’s reserves were dropping too. Normally, the Treasury held gold reserves comfortably above the statutory floor of $100 million. By January 24, 1895, the Treasury has only $68 million. Scarcely a week later was it down $45 million.
Nervous investors began to demand gold for their dollars and a run on the Treasury was inevitable. The proposed plan to subsidize the gold standard with silver reserves only made creditors more anxious and the run accelerated. For his part, Cleveland tried to avert the disaster. With his Treasury Secretary, John Carlisle, Cleveland had proposed a plan to sell government bonds to the public to raise $60 million. The rapid run on the Treasury made than tedious process unworkable. The concern at the White House grew when Carlisle confidentially advised the President that the Treasury had gold reserves of $9 million, and that one single investor held a draft ostensibly worth $10 million. Insolvency o f the government was inevitable unless a source of funding could be found – indeed a bailout of the U.S. government was the only hope.
Enter Wall Street financial baron John Pierpont Morgan. Son and grandson of Wall Street bankers, Morgan may have been the most repulsive man on the Street. Suffering from a visage marked by chronic rosacea, Morgan avoided the public eye which only added to his reputation as a secretive, voracious gobbler of railroads and other businesses. Morgan was the original Wall Street shark, swooping in to grab an unsuspecting company and then retreating into the murky waters of finance leaving only the remnants of his presence. Using his financial power to extract concessions from major U.S. companies, he insinuated himself onto scores of managing boards by exchanging forgiveness of debt for seats. He used the knowledge derived therefrom to grow his steel trust into America’s first billion dollar business.
Morgan was keenly aware of the Government’s plight, and like all captains of industry saw both danger and opportunity. His financial empire founded on commercial railroad service needed a stable and growing economy. An imploding government was contrary to those needs, and Morgan understood that what was good for the U.S. Treasury was also good for business — his business.
Grover Cleveland well-knew Morgan’s reputation, and avoided his offers of help as long as he could. Finding no alternate, Cleveland reluctantly agreed to see him only when reports of Morgan’s trip to Washington eased the run on the Treasury. Perhaps Cleveland could use the banker’s prestige but avoid using his money to save the Country. No such luck.
Sitting before an anxious President, his Treasury Secretary, and Attorney General Richard Olney, Morgan was once again presiding over a meeting of another board of directors. To Morgan, the issues were the same – how to save a failing business and avoid disaster for the investors. The President protested that a private bailout wasn’t truly necessary and that he expected an upturn in the economy would save the day. Morgan drolly replied. “If that $10 million draft is presented, [and] you can’t meet it, it will be all over before three o’clock.” Shocked that someone other than the President’s inner circle knew the truth, Cleveland listened. Morgan proposed an immediate private sale of government bonds to Morgan and his syndicate. In exchange, Morgan would give the Treasury the gold it needed ($100 million) to meet its current and anticipated obligations. The President asked if it was legal, and Morgan nonchalantly replied, it was by virtue of a Civil War statute, “four thousand and something.” Olney checked and it was all quite legal – but politically dangerous for the President. The public was none too fond of Wall Street types and Morgan the biggest “type” of them all. Still things were desperate and Morgan assured the President that gold would not be shipped abroad until the goal of the plan was reached. Cleveland said that $60 million would be fine, trying to save some dignity from the situation.
Morgan was as good as his word and the bonds were sold and gold filled the Treasury. The run stopped and, as Cleveland predicted, the economy stabilized. Morgan had co-signed for the U.S. debt and like a happy teen with a new car, the economy took off. Morgan now stood to make millions more than he paid.
The political price Cleveland anticipated had to be paid. Many on the left contended the President “sold” the government to Wall Street. When Morgan refused to reveal his profits on the deal, the party grew more enraged. At the Democratic Convention the party rallied to William Jennings Bryan who delivered the famous line that mankind was being crucified on a “cross of gold.” He would lose the next three elections.
Morgan would go on to bailout both the New York City Stock Exchange and the City of New York in the coming decades, but neither would win him public approval. Indeed, President Teddy Roosevelt centered his “trust busting” canpaign on the insidious network of interlocking boards of directors that created the monopolies which Morgan epitomized. Still, there is no denying that Morgan saved the nation when no one else stepped forward. Whether he did so out of patriotism, profit , or some combination is debatable, but the fact that he did is not.
Source: HistoryNet.com (adapted from H.W. Brands, Upside Down Bailout)
~Mark Esposito, Guest Blogger