Tags: Fed | Prins | bank | Morgan

Scholar Recounts Relationship Between Fed and Presidents

By    |   Thursday, 22 May 2014 08:11 AM

Nomi Prins, who worked for Goldman Sachs and Bear Stearns before turning to financial scholarship and is now a senior fellow at the liberal think tank Demos, recently appeared on C-SPAN's AfterWords to discuss her book All the Presidents' Bankers: The Hidden Alliances that Drive American Power with host Larry Doyle, who also wrote a book that was covered in an article in this series, In Bed with Wall Street.

Doyle pronounced Prins' book "an unparalleled written history" and asked Prins what her motive was for writing the book. She said the idea grew out of a novel she wrote for which she did not do as much research, in which she told the story of a meeting of bankers led by Thomas Lamont, head of Morgan Bank (now part of JPMorgan Chase), to figure out how to respond to the stock market crash of 1929.

Upon a closer look, she discovered a web of relationships — social, financial and political — between bankers and the presidents of their times, and she decided to examine papers of the presidents at their presidential libraries and to document these relationships and their influence on policy.

Prins found that LBJ had a close relationship with Sidney Weinberg, who was chairman of Goldman Sachs and had been a confidant of FDR. Contemplating the bank rescue of 1929 prompted Prins to look back at the original bank rescue when Teddy Roosevelt had asked JP Morgan, the actual person, not the bank, to rescue the banking system from the panic of 1907, focusing on the Knickerbocker Bank. Morgan summoned the leading bankers, and they decided which banks could be saved and which could not be. The Treasury chipped in $25 million, thus setting a precedent for future bailouts.

Morgan decided that he did not want to be the focal point of future crises, especially if he would have to contribute his own money, so he used his convening authority to assemble leaders of the industry on Jekyll Island, Ga., in November 1910, including Sen. Nelson Aldrich, chairman of the Senate Finance Committee. (Recall that the name of a later governor of New York would be Nelson Aldrich Rockefeller, a prime example of the intermarriage of leading families of banking and finance.)

The group put together the blueprint for what would become the Federal Reserve System, enacted in 1913, with operations beginning in 1914. The operations of the System were centered at the Federal Reserve Bank of New York, in the financial capital, but as part of a compromise, to counter charges that New York bankers would control the Fed, a Board of Governors was established in Washington and regional banks were located in 12 cities around the country, including a string of Midwestern cow towns.

Nevertheless, the events of 2007 and 2008, a century after the Panic of 1907, the New York banks may be more firmly in control than ever. One theme of the book is that the influence of a group of six banks runs through the entire century of the Fed.

Another theme is that the government and the banks have needed each other. At the time the Fed was created, the Wilson administration was trying to finance the U.S. involvement in The Great War. Later there would be a need for bankers to help in relief efforts.

Prins lamented that in recent years, the relationship between the government and the banks is still cozy, but the government supports bankers without asking anything in return. This writer would add that as the industry ran its leverage up to 50:1 and sometimes beyond, the bankers had little or no capital to contribute, but rather depended on government support as an entitlement.

(Archived video can be found here.)

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Robert-Feinberg
Nomi Prins, who worked for Goldman Sachs and Bear Stearns before turning to financial scholarship and is now a senior fellow at the liberal think tank Demos, recently appeared on C-SPAN's AfterWords to discuss her book All the Presidents' Bankers: The Hidden Alliances that Drive American Power.
Fed, Prins, bank, Morgan
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2014-11-22
Thursday, 22 May 2014 08:11 AM
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