Independent Man: The Life of Senator James Couzens

• 39. THE INVESTIGATOR AGAIN
• Chapter
• Wayne State University Press
• pp. 262-267
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CHAPTER XXXIX

THE INVESTIGATOR AGAIN

The inquisition of the House of Morgan began May 23, 1933, in the marble-floored conference room of the Senate Committee on Banking and Currency. In certain quarters it would be labeled a “circus,” especially after the incident engineered by a press agent of having a midget suddenly plump himself on Mr. Morgan’s lap.

But in truth this inquisition was one of the most important ever conducted by a Congressional committee in terms of its revelations as to the inner workings of interlocked finance and politics.

It was a continuation of the investigation into stock-market practices that the same committee had been conducting off and on for more than a year. In a large sense, it was also an extension of the investigation by the Senate Finance Committee two years earlier into the processes by which Americans had lost so heavily on Cuban, Peruvian, and other foreign bond issues. Taken together, the two inquiries furnished an especially candid picture of both domestic and foreign financial practices in the era of “wonderful nonsense.”

Even before the House of Morgan was subjected to inquiry, the stock-market investigation, called off during the 1932 election campaign, already revealed enough to permit Charles and Mary Beard to summarize:

Page after page of sworn testimony showed that mighty men among the Lords of Creation had formed “pools” for particular stocks and bonds, run up the price of securities, poisoned the news of financial columns by the bribery of reporters, drawn unwary sheep into the pens of bulls and bears and sheared them as the bottom fell out of liquid claims to wealth.¹

While J. P. Morgan and Company had been mentioned now and then in some of these amazing transactions, and one of its prominent partners, Lamont, had been questioned by the earlier Senate Finance Committee inquiry into foreign loans, the impression had persisted that, on the whole, it had been above yielding to any challengeable practices. The House of Morgan, it was believed, was so strong and so circumspect that it had no need to adopt methods that could not stand senatorial scrutiny.

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Now, however, the House of Morgan was subjected to its first thorough investigation since the Pujo inquiry of two decades before. It was understood that Roosevelt urged this personally, on the theory that the more adverse attention obtained by J. P. Morgan & Company, the more amenable Congress and the nation would be to New Deal legislation. In the words of Ernest K. Lindley, “To put the House of Morgan on the defensive immediately was to the Administration’s advantage. To establish definitely and expose its position in the economic and political world was a necessity preliminary to reforms that would go far beyond the improvement of the banking system.”²

In this inquiry, Couzens, even though now a minority member of the Banking and Currency Committee, played a prominent role. He was “merciless in his judgments and caustic of tongue,” recalled Stokes.³ Indeed, even though the committee finally retained Ferdinand Pecora, a hard-hitting New York City prosecutor, as counsel, it is doubtful if the House of Morgan investigation would have been so incisive if not for Couzens’ participation.

A number of the other senators, including even the usually acid-tongued Senator Glass, seemed overawed by the prestige of this firm and especially of its head, J. P. Morgan himself. They reflected the attitude, reported on by Frank R. Kent in the Baltimore Sun, of “a number of people who talk about the ‘terrible outrage’ of a Senate committee dragging Mr. Morgan and his partners down here, cross-examining them like a lot of chicken thieves, and making it all a sort of Roman holiday.”⁴

There was a tendency to handle Morgan with soft gloves, to show deference to him that was denied other bankers. Couzens put a stop to that. He had no more reverence for Morgan than he had possessed for Mellon. He agreed wholeheartedly with Frank R. Kent. “There should be nothing sacrosanct about the House of Morgan.”⁵

At one point, Couzens engaged in a row with Senator Glass when the Virginian declared that Pecora should be more respectful and less barbed in his questioning of Morgan. “I insist that Mr. Morgan be treated like anyone else here!” snapped Couzens. He pounded the table. Glass backed down,⁶ and from then on, Pecora, with Couzens’ backing, went after Morgan without gloves.⁷

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The results were startling enough to shake even a man so suspicious of other wealthy men as Couzens. The inquiry disclosed that J. P. Morgan and Company not only had engaged in many, if not all, of the practices common to the other firms already investigated, but, in one respect, had gone even further. Thus, while other firms had seduced mere newspaper editors and reporters to help win their cooperation for unloading inflated stocks on the public, the House of Morgan, it was now revealed, had apparently succeeded, by the device of so-called “preferred lists” in winning the influence, favor, or silence, of many of the most outstanding public figures of the nation. This seemed at least a fair inference when it was revealed that persons on the House of Morgan “preferred lists”—men permitted to purchase stocks in advance of the public sale at prices considerably lower than the public paid—included such public dignitaries as:

Former President Coolidge; Newton D. Baker, President Wilson’s Secretary of War; Charles Francis Adams, Hoover’s Secretary of the Navy; Charles D. Hilles and J. R. Nutt, officials of the Republican National Committee; Silas H. Strawn, former president of the United States Chamber of Commerce and law partner of Garrard Winston, Mellon’s Undersecretary of the Treasury; Norman H. Davis, even then functioning as Roosevelt’s ambassador-at-large in Europe on the question of war debts; John J. Raskob, former chairman of the Democratic National Committee; John W. Davis, 1924 Democratic Party nominee for President; General of the Army John J. Pershing; William G. McAdoo, Secretary of the Treasury under President Wilson and then Democratic Senator from California; and—most interesting of all to Couzens—William H. Woodin.⁸

It seemed obvious from this list that, in the game that was being played, the leaders of both parties were on equally good terms with the House of Morgan.

Couzens was among the first to comment pointedly on this bipartisan financial policy of the nation’s great. “When it comes to money,” he told the press, “there are no Republicans or Democrats. Rich men never fight each other seriously. There is the finest coalition of all parties when it comes to control of the Treasury of the United States.”⁹

This is what he had contended all his public life, and now evidence demonstrating his position had been produced.

The Morgan partners insisted that in most cases they did not even know the political affiliation or standing of their “preferred” clients and that “influence” was the last thing the firm had counted upon in letting these individuals in on chances to make gigantic killings in the stock market.¹⁰ Probably some persons believed these disclaimers. Couzens was not among them.

Couzens questioned George Whitney, partner of J. P. Morgan and Company, also director in large corporations, on the motives behind the preferred lists. The banker protested, “perhaps too vehemently,” he later conceded under questioning by Couzens,¹¹ that the lists were for purely business purposes, not for getting favors from high-placed individuals in politics and government.

It had been brought out, as one example, that J. P. Morgan & Company had distributed to the individuals on its preferred list shares of Johns-Manville Corporation at 47½ in June 1927, whereas when the stock was offered to the public a few weeks later, the stock sold at 79, “representing a potential combined profit to the members of the selected lists of $12,037,500.¹²

SENATOR COUZENS: You said the only object was that these men you distributed the stock to would make money?

MR. WHITNEY: I did not say our only object. I said we hoped they would.

SENATOR COUZENS: That was not the only object you had?

MR. WHITNEY: No sir.

SENATOR COUZENS: You hoped they would reciprocate?

MR. WHITNEY: No, really.

SENATOR COUZENS: You did not give them this price so that they would reciprocate and keep on good terms?

MR. WHITNEY: No, really. That is, of course, the suggestion that has been carried in the testimony yesterday, and in the papers, but I can only tell you that is not so.

SENATOR COUZENS: I never heard of anybody quite so altruistic in my life!¹³

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Nor did the Senate committee as a whole believe that altruism was the explanation, for it finally summed up:

The preferred lists strikingly illuminate the methods employed by bankers to extend their influence and control over individuals in high places. The persons upon whom princely favors were bestowed in this manner were . . . persons prominent in all the financial, industrial and political walks of our national life. The granting of these preferential participations . . . augured well for their mutual welfare and ill for that of the public.¹⁴

Of special interest to Couzens was testimony about certain taxation practices of the House of Morgan. This part of the inquisition produced unexpected corroboration of the significance of his investigation of Mellon and the Bureau of Internal Revenue almost a decade earlier. He had charged then that the Bureau, under Mellon, had favored wealthy individuals and corporations. The House of Morgan was not then involved. Now it was.

Mr. Morgan himself was forced to give testimony showing that the Bureau of Internal Revenue, during the period that Mellon was Secretary of the Treasury, exercised exceptional discreetness in matters in which the House of Morgan was concerned.

The committee later said in its report:

Internal-revenue agents accepted without examination income-tax returns prepared by J. P. Morgan & Co. on the assumption that preparation by that firm ipso facto established the correctness of the returns. For example, the tax return of Mrs. Margaret Y. Newbold for the year 1928, prepared by J. P. Morgan & Co. bore the following legend:

“Returned without examination for the reason that the return was prepared in the office of J. P. Morgan & Co., and it has been our experience that any schedule made by that office is correct. The books of the taxpayer are located in Philadelphia, and if necessary schedule C may be verified in that city. This office, however, recommends that the return be accepted as filed. C. M. SHEPPARD, Internal Revenue Agent.”

Many other returns, particularly of partners in large banking houses, were likewise exempted from adequate scrutiny. When examinations were made, the time devoted to them was comparatively short, in view of the wealth of the taxpayers and the complex nature of their transactions. Thus, in 1930, according to the Bureau’s own records, 1 day was spent in checking the partnership return of J. P. Morgan & Co., and Drexel & Co.—the most powerful banking group in the world. This return was not subjected to any field examination, and apparently the agent’s explanation was sufficient to satisfy the Internal Revenue Bureau that none was necessary.¹⁵

The Senate committee reported: “For the year 1930, 17 Morgan partners, including J. P. Morgan, paid no tax and 5 paid aggregate taxes of about $56,000. For the year 1931, not a single Morgan partner paid any tax. For the year 1932, not a single Morgan partner paid any tax.”¹⁶

It was all dramatic vindication of Couzens’ crusade against Mellonism, which Senators Moses and Watson, as well as others, including Mellon himself, characterized as merely a “private feud,” or just a demonstration of Couzens’ “terrible temper” and nothing more.¹⁷

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There was still further personal vindication for Couzens in these hearings. He had been criticized back in the spring of 1932 for having opposed a loan of millions of dollars from the RFC to a railroad because, he charged, the loan actually would go to J. P. Morgan & Company, which did not need it. The inquiry brought out that it was the House of Morgan that had suggested that the railroad apply for the loan and press it, over disapproval by the Interstate Commerce Commission, and that $5,850,000 of the government money promptly found its way into the coffers of the banking firm.¹⁸

Supremely corroborative as they were of much of Couzens’ career in the Senate, such revelations did not, however, really please him as much as many persons supposed. Reporters and others took it for granted that the “Scab Millionaire,” who preferred needling rich men to anything else, as it often was said of him, would be ecstatic over the House of Morgan inquisition. Actually, he was not. Such revelations merely added now to his painful frame of mind.

Coming on top of the Detroit bank episode, the findings of the Senate committee left him more acutely depressed than ever. He was being eaten up inwardly by suppressed hostility toward men like Morgan, who, he felt, ought to have behaved differently than he feared they had. He was not at all anxious to have it proved that the whole American business system, as it seemed to him, had been corrupt to the very highest pinnacle.

The day-after-day testimony to greed, irresponsibility, chicanery, and corruption, not of politicians and gangsters, but of the most respected persons in society, left him appalled. Former Governor James M. Cox of Ohio later had some conversations with him which caused Cox to conclude: “The world he was living in . . . gave him great concern, and he worried too much about it.”¹⁹

This was all too true. He was more and more tense; more and more in need of a change of scene.