Wall Street, Banks, and American Foreign Policy

by Murray N. Rothbard

This first appeared in World Market Perspective (1984) and later as a monograph published by the Center for libertarian Studies (1995). Afterword By Justin Raimondo.

Excerpts:

Businessmen or manufacturers can either be genuine free enterprisers or statists; they can either make their way on the free market or seek special government favors and privileges. They choose according to their individual preferences and values. But bankers are inherently inclined toward statism.

Commercial bankers, engaged as they are in unsound fractional reserve credit, are, in the free market, always teetering on the edge of bankruptcy. Hence they are always reaching for government aid and bailout.

Investment bankers do much of their business underwriting government bonds, in the United States and abroad. Therefore, they have a vested interest in promoting deficits and in forcing taxpayers to redeem government debt. Both sets of bankers, then, tend to be tied in with government policy, and try to influence and control government actions in domestic and foreign affairs.

In the early years of the 19th century, the organized capital market in the United States was largely confined to government bonds (then called “stocks”), along with canal companies and banks themselves. Whatever investment banking existed was therefore concentrated in government debt. From the Civil War until the 1890s, there were virtually no manufacturing corporations; manufacturing and other businesses were partnerships and had not yet reached the size where they needed to adopt the corporate form. The only exception was railroads, the biggest industry in the U.S. The first investment banks, therefore, were concentrated in railroad securities and government bonds.

The first major investment-banking house in the United States was a creature of government privilege. Jay Cooke, an Ohio-born business promoter living in Philadelphia, and his brother Henry, editor of the leading Republican newspaper in Ohio, were close friends of Ohio U.S. Senator Salmon P. Chase. When the new Lincoln Administration took over in 1861, the Cookes lobbied hard to secure Chase the appointment of Secretary of the Treasury. That lobbying, plus the then enormous sum of $100,000 that Jay Cooke poured into Chase’s political coffers, induced Chase to return the favor by granting Cooke, newly set up as an investment banker, an enormously lucrative monopoly in underwriting the entire federal debt…..

An Aggressive Asian Policy

The late 1890s also saw a new turn in the United States’ attitude toward the Far East. Expanding rapidly into the Pacific in pursuit of economic and financial gain, the U.S. government saw that Russia, Germany, and France had been carving up increasing territorial and economic concessions in the near corpse of the Chinese imperial dynasty. Coming late in the imperial game of Asia, and not willing to risk large-scale expenditure of troops, the U.S., led by Olney and continued by the Republicans, decided to link up with Great Britain. The two countries would then use the Japanese to provide the shock troops that would roll back Russia and Germany and parcel out imperial benefits to both of her faraway allies, in a division of spoils known euphemistically as the “Open Door.” With Britain leaving the field free to the U.S. in Latin America, the U.S. could afford to link arms in friendly fashion with Britain in the Far East.

A major impetus toward a more aggressive policy in Asia was provided by the lure of railroad concessions. Lobbying heavily for railroad concessions was the American China Development Company, organized in 1895, and consisting of a consortium of the top financial interests in the U.S., including James Stillman of the then Rockefeller-controlled National City Bank; Charles Coster, railroad expert of J.P. Morgan and Co.; Jacob Schiff, head of the New York investment bank of Kuhn, Loeb and Co.; and Edward H. Harriman, railroad magnate. Olney and the State Department pressed China hard for concessions to the ACDC for a Peking-Hankow Railway and for a railway across Manchuria, but in both cases the American syndicate was blocked. Russia pressured China successfully to grant that country the right to build a Manchurian railway; and a Belgian syndicate, backed by France and Russia, won the Peking-Hankow concession from China.

It was time for sterner measures. The attorney for the ACDC set up the Committee on American Interests in China, which soon transformed itself into the American Asiatic Association, dedicated to a more aggressive American policy on behalf of economic interests in China. After helping the European powers suppress the nationalist Boxer Rebellion in China in 1900, the U.S. also helped push Russian troops out of Manchuria. Finally, in 1904, President Theodore Roosevelt egged Japan on to attack Russia, and Japan succeeded in driving Russia out of Manchuria and ending Russia’s economic concessions. Roosevelt readily acceded to Japan’s resulting dominance in Korea and Manchuria, hoping that Japan would also protect American economic interests in the area.

Theodore Roosevelt had been a Morgan man from the beginning of his career. His father and uncle were both Wall Street bankers, both of them closely associated with various Morgan-dominated railroads. Roosevelt’s first cousin and major financial adviser, W. Emlen Roosevelt, was on the board of several New York banks, including the Astor National Bank, the president of which was George F. Baker, close friend and ally of J.P. Morgan and head of Morgan’s flagship commercial bank, the First National Bank of New York.’ At Harvard, furthermore, young Theodore married Alice Lee, daughter of George Cabot Lee, and related to the top Boston Brahmin families. Kinsman Henry Cabot Lodge soon became T.R.’s long-time political mentor….

The Fortuitous Fed

The massive U.S. loans to the Allies, and the subsequent American entry into the war, could not have been financed by the relatively hard-money, gold standard system that existed before 1914. Fortuitously, an institution was established at the end of 1913 that made the loans and war finance possible: the Federal Reserve System. By centralizing reserves, by providing a government-privileged lender of last resort to the banks, the Fed enabled the banking system to inflate money and credit, finance loans to the Allies, and float massive deficits once the U.S. entered the war. In addition, the seemingly odd Fed policy of creating an acceptance market out of thin air by standing ready to purchase acceptance at a subsidized rate, enabled the Fed to rediscount acceptance on munitions exports.

The Federal Reserve was the outgrowth of five years of planning, amending, and compromising among various politicians and concerned financial groups, led by the major financial interests, including the Morgans, the Rockefellers, and the Kuhn, Loebs, along with their assorted economists and technicians.

Particularly notable among the Rockefeller interests were Senator Nelson W. Aldrich (R.-R.I.), father-in-law of John D. Rockefeller, Jr., and Frank A. Vanderlip, vice president of Rockefeller’s National City Bank of New York. From the Kuhn, Loebs came the prominent Paul Moritz Warburg, of the German investment-banking firm of M.M. Warburg and Company. Warburg emigrated to the United States in 1902 to become a senior partner at Kuhn, Loeb & Co., after which he spent most of his time agitating for a central bank in the United States.

Also igniting the drive for a Federal Reserve System was Jacob H. Schiff, powerful head of Kuhn, Loeb to whom Warburg was related by marriage. Seconding and sponsoring Warburg in academia was the prominent Columbia University economist Edwin R.A. Seligman, of the investment-banking family of J. & W. Seligman and Company; Seligman was the brother of Warburg’s brother-in-law.

The Morgans were prominently represented in the planning and agitation for a Central Bank by Henry P. Davison, Morgan partner; Charles D. Norton, president of Morgan’s First National Bank of New York; A. Barton Hepburn, head of Morgan’s Chase National Bank; and Victor Morawetz, attorney and banker in the Morgan ranks and chairman of the executive committee of the Morgan-controlled Atchison, Topeka, and Santa Fe Railroad.

While the establishment of the Federal Reserve System in late 1913 was the result of a coalition of Morgan, Rockefeller, and Kuhn, Loeb interests, there is no question which financial group controlled the personnel and the policies of the Fed once it was established. (While influential in framing policies of the Fed, Federal Reserve Board member Warburg was disqualified from leadership because of his pro-German views.) The first Federal Reserve Board, appointed by President Wilson in 1914, included Warburg; one Rockefeller man, Frederic A. Delano, uncle of Franklin D. Roosevelt, and president of the Rockefeller-controlled Wabash Railway; and an Alabama banker, who had both Morgan and Rockefeller connections….

The Round Table

In England, Cecil Rhodes had launched a secret society in 1891 with the aim of maintaining and expanding the British Empire to re-incorporate the United States. After the turn of the 20th century, the direction, organization, and expansion of the society fell to Rhodes’s friend and executor, Alfred Lord Milner. The Milner Group dominated domestic planning in Britain during World War I, and particularly the planning for post-war foreign and colonial policy. The Milner Group staffed the British delegation of experts to Versailles. To promote the intellectual agitation for such a policy, the Milners had also set up the Round Table Groups in England and abroad in 1910….

The CFR

The American branch of the new group took a while to get going. Finally, the still inactive American Institute of International Affairs merged with a defunct outfit, begun in 1918, of New York businessmen concerned with the postwar world, and organized as a dinner club to listen to foreign visitors. This organization, the Council on Foreign Relations, had as its honorary chairman Morgan lawyer Elihu Root, while Alexander Hemphill, chairman of Morgan’s Guaranty Trust Company, was chairman of its finance committee. In August 1921, the two organizations merged into the new Council on Foreign Relations, Inc., a high-powered organization embracing bankers, lawyers, and intellectuals.

While varied financial interests were represented in the new organization, the CFR was Morgan-dominated, from top to bottom. Honorary president was Elihu Root. President was John W. Davis, Wilson’s Solicitor-General, and now chief counsel for J.P. Morgan & Co. Davis was to become Democratic Presidential candidate in 1924. Secretary-Treasurer of the new CFR was Harvard economic historian Edwin F. Gay, director of planning and statistics for the Shipping Board during the war, and now editor of the New York Evening Post, owned by his mentor, Morgan partner, Thomas W. Lamont.

It was Gay who had the idea of founding Foreign Affairs, the CFR’s quarterly journal, and who suggested both his Harvard colleague Archibald Coolidge as the first editor, and the New York Post reporter Hamilton Fish Armstrong as assistant editor and executive director of the CFR. Other prominent officials in the new CFR were: Frank L. Polk, former Under-Secretary of State and now lawyer for J.P. Morgan & Co; Paul M. Warburg of Kuhn, Loeb; Otto H. Kahn of Kuhn, Loeb; former Under-Secretary of State under Wilson, Norman H. Davis, a banking associate of the Morgans; and as vice-president, Paul D. Cravath, senior partner of the Rockefeller-oriented Wall Street law firm of Cravath, Swaine, and Moore.

After World War II, the Council on Foreign Relations became dominated by the Rockefeller rather than by the Morgan interests, a shift of power reflecting a general alteration in financial power in the world at large. After World War II, the rise of oil to prominence brought the Morgans and Rockefellers – once intense rivals – into an Eastern Establishment of which the Rockefellers were the senior, and the Morgans the junior, partners.

Rockefeller, Morgan, and War

During the 1930s, the Rockefellers pushed hard for war against Japan, which they saw as competing with them vigorously for oil and rubber resources in Southeast Asia and as endangering the Rockefellers’ cherished dreams of a mass “China market” for petroleum products. On the other hand, the Rockefellers took a non-interventionist position in Europe, where they had close financial ties with German firms such as I.G. Farben and Co., and very few close relations with Britain and France. The Morgans, in contrast, as usual deeply committed to their financial ties with Britain and France, once again plumped early for war with Germany, while their interest in the Far East had become minimal. Indeed, U.S. Ambassador to Japan, Joseph C. Grew, former Morgan partner, was one of the few officials in the Roosevelt Administration genuinely interested in peace with Japan.

World War II might therefore be considered, from one point of view, as a coalition war: the Morgans got their war in Europe, the Rockefellers theirs in Asia. Such disgruntled Morgan men as Lewis W. Douglas and Dean G. Acheson (a protégé of Henry Stimson), who had left the early Roosevelt Administration in disgust at its soft money policies and economic nationalism, came happily roaring back into government service with the advent of World War II. Nelson A. Rockefeller, for his part, became head of Latin American activities during World War II, and thereby acquired his taste for government service.

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