“There were stories about Stillman—his eccentricities, his domineering ways, his tremendous power,” recalled Frank Vanderlip, an assistant Treasury secretary who got the chance to observe Stillman up close. Vanderlip was invited to dine at Stillman’s New York home, a brownstone on Fortieth Street just off Fifth Avenue. The year was 1900, and more than three decades later Vanderlip would call it “the most trying dinner I ever lived through.”
How did Vanderlip end up spending such an uncomfortable evening in Manhattan? His boss, Secretary of the Treasury Lyman Gage, had recently visited Stillman in New York. City Bank’s president mentioned Vanderlip and then pointed toward a corner of his office and said, “When you are through with that young man I want him to sit over there.” Vanderlip would not only sit at the bank; one day he would run it.
But first Vanderlip had to sit at Stillman’s dinner table, along with Stillman’s daughter Elsie, who would later marry a Rockefeller, plus “a lady companion” and the great man himself. “Throughout the meal Mr. Stillman hardly spoke and I was obliged in spite of my distaste for small talk to carry on a conversation with the ladies, smothering as best I could my discomfort in the knowledge that Mr. Stillman was sitting there sizing me up.”1
Stillman must have been satisfied with what he observed, because after dinner he had one of his lawyers come in to chat with Vanderlip about events in Washington. Then Stillman and his man withdrew for a private discussion, “leaving me to fuss with my tie, smooth my big brush of a black mustache, and to perspire deep into my mind,” according to Vanderlip.2 Stillman returned, spoke at length about New York banking, and then said to Vanderlip, “When you are through with the Treasury, and I understand Mr. Gage wants you to stay there for another year, we want you to come into the City Bank as vice-president.”
Vanderlip said he needed time to consider it, but was secretly stunned and ecstatic. He had planned to accept even if Stillman had only offered him a job as a private secretary. “Upon my return to Washington and after a decent interval during which I was several times congratulated by my jubilant friend Mr. Gage, I wrote to Mr. Stillman accepting his offer.”3 Vanderlip continued at the Treasury before going to work for City in 1901.
It was a different time. Today, a top Treasury official probably wouldn’t get away with remaining on the job for a year after accepting a job at a giant bank. The potential conflicts of interest would be too numerous to count. Even then, Vanderlip’s plan relied on avoiding public disclosure. He admitted in his memoir, “None but Mr. Gage knew of the arrangement I had made to go to the City Bank; it would have been fatal to the arrangement if anyone had known about it.”4
Perhaps things haven’t changed all that much in the years since Vanderlip monetized his federal experience. In 2009, future Treasury secretary Jack Lew was paid by Citigroup for taking a job with the Obama administration. He was contractually due a bonus if he left Citi for a “high level position with the United States government or regulatory body.”5 Coming or going, it seems the bank has always found ways to compensate senior Washington officials.
Vanderlip certainly enjoyed being a Washington official. A farm boy from the Midwest, he was drawn at a young age to political power and prestige. Rural life had been difficult. While Vanderlip was a teenager, his father and brother died and the family farm was sold. Along with his mother and sister, Vanderlip moved in with a grandmother and two aunts and began working at a machine shop in Aurora, Illinois.
Vanderlip decided in 1881 to travel to Cleveland to witness the burial of President James Garfield. Garfield had finally died in September after being shot twice by an assassin in July. Vanderlip wrote in his memoir that he expected “it was going to be a thrilling and a dignifying adventure to travel on railroad trains from Aurora all the way to Cleveland to see the pageant of the Garfield obsequies.”6 Vanderlip, already a staunch Republican, was not disappointed. “The canopied and heavily draped catafalque in which the coffin was hauled through the streets was as large a platform and as carefully arranged as a Mardi Gras float; but not even the gloom of its blackness could spoil for me so rich a show.” He added, “I saw former President Rutherford B. Hayes. I saw Arthur, the successor of the president who was in his coffin. I saw Blaine and Windom and the other members of the cabinet. These men were as deities to me.”7
Vanderlip sought to be a person of influence in his own community. He saw an opportunity when he read in the Aurora Evening Post that the newspaper’s city editor was leaving for another job in another city. Vanderlip asked the publisher for the job and was promptly hired. “Six dollars a week was the pay and quite often I had to go out and collect the amount from delinquent subscribers or advertisers, for rarely was there that much money in the till. The paper was housed in a one-story wooden building of two rooms, and which was the most gummy with a deposit of chewing tobacco it would be hard for me to say with accuracy,” wrote Vanderlip. “The year was 1885 and I was twenty-one, but my soul was inches taller because I was now a personage.”8
The future Treasury official and bank president enjoyed his new role in the affairs of the town. “I went to the police-station, I went to the city hall, and to the other sources of routine news and although the expression was not then in use I was, in Aurora, a big shot.”9 But he wanted a bigger town, and soon made his way to Chicago, where, after a few undistinguished years working in finance, Frank Vanderlip became a reporter for the Chicago Tribune.
More than a century before fake news involving Russia became a story in the 2016 presidential election, Vanderlip knew all about it. According to his memoirs, “a tradition of the time” held that it was “always open season for faking on the hotel beat.” Chicago’s newsmen would regale readers with invented tales of exotic characters allegedly staying in the Windy City’s most luxurious hotels. A friend at a rival paper would sometimes share with Vanderlip the particulars of a fabricated story about an intriguing foreign visitor so that Vanderlip wouldn’t get scooped on the made-up story. This also must have provided some protection to the inventor of the story because it would appear that the bogus account had been corroborated. It seems that the various reporters on the beat weren’t the only ones in on the scam. Vanderlip wrote that if a curious or skeptical reader came to the hotel where, for example, a mysterious Russian guest was reported to be staying, the clerk at the front desk could be counted on to say, “Mr. Sonofagunsky has just left town.”10
If Vanderlip was not a brilliant investor, he was certainly a tenacious one. Investing money that his father had left to his mother, he made an initially disastrous bet on the shares of a company called Central Market, which went into bankruptcy. This was not just a serious setback for his family’s finances but also a professional embarrassment, since Vanderlip was by this time the financial editor at the Tribune. But all was not lost for the Vanderlip clan. The newsman dug into the issue and found what he believed to be a legal flaw in the process by which the company had distributed its shares. He showed up to press his case at a meeting of the company’s creditors, which was presided over by First National Bank president Lyman Gage, who would become Vanderlip’s boss at the Treasury.11 Stubbornly confronting the lawyers representing creditors, Vanderlip demanded that he be made whole and succeeded in recovering “my mother’s money and my self-respect.”12
Whatever the legal merits, perhaps the creditors were inclined to resolve a dispute with the Tribune’s financial editor. In our own time, such an episode would certainly raise questions about conflicts of interest and journalistic ethics. But Vanderlip doesn’t appear to have been burdened by such concerns. In his memoirs he wrote admiringly of a colleague who cut telegraph wires in order to prevent competing reporters from filing their stories.13
Instead of aiming for high professional standards, Vanderlip was focused on becoming “almost a daily stroke of apoplexy to a masterful financier of the city,” Charles T. Yerkes, whom Vanderlip believed was “recklessly daring in his ambitions.”14 Vanderlip seems to have been bothered by Yerkes’s control of various Chicago businesses. The future Treasury official was convinced that many companies of the day did not adequately disclose financial information to their investors. Vanderlip also admitted that he “resorted to some obnoxious methods” in uncovering the “scandal” that some railroads of the time gave discounts to large shippers that were not offered to retail customers.15
However “obnoxious” Vanderlip’s methods were, they certainly helped him to obtain a rising profile among Chicago’s movers and shakers. He joined the Union League after being proposed by “a banker friend” and became president of the Press Club.16 He became a magazine editor, and it was around this time that there was “an alteration” in Vanderlip’s “relations with financiers in Chicago.”17
One night in 1896 he “was called out of bed to the telephone and asked to come to the house of P.D. Armour,” the meat-packing baron. “I got there just before midnight and found the presidents of most of the banks and the governors of the stock exchange. There had been a financial collapse; Moore Brothers had failed. They were a couple of lawyers who had been running a big operation in Diamond Match Company stock. When it was discovered they would be unable to pay back their borrowings, a very dangerous situation was seen to exist. One of the bankers put the matter before me,” wrote Vanderlip.18
The financier told Vanderlip they wanted him “to handle this story so as to minimize its effect. We have decided not to open the stock exchange tomorrow but unless the news is handled with discretion we will have runs on all the banks and savings institutions.”
“I’ll do it,” said Vanderlip, “on one condition. Every man here must pledge himself not to see reporters or answer any questions tonight.”19 After gaining their ascent, Vanderlip then offered his exclusive to all the newspapers of the city on the condition that they would print the story exactly as he wrote it and allow him to inspect their headlines. All but one paper agreed, and Vanderlip managed to break the story while downplaying its significance, just as the bankers had hoped he would. “The end of my story was a curious sort of afterthought, a kind of—‘by the way, The Stock Exchange will not open today.’”20 Did Vanderlip bury the lede out of a public-spirited desire to prevent a financial panic—or because he managed in one stroke to gain a valuable exclusive while also ingratiating himself to Chicago’s leading financiers and industrialists?
All we can say for sure is that Vanderlip’s future lay in politics and finance, not journalism. A year later he went to work at the Treasury for Lyman Gage. While some might look back and question Gage’s decision to hire Vanderlip—or his decision to let Vanderlip continue working at the Treasury even after he was committed to City Bank—it’s hard to fault Gage for his management of the US dollar, which was his primary responsibility. Gage led the McKinley administration campaign to reestablish a currency backed solely by gold, an effort that culminated with the enactment of the Gold Standard Act of 1900.
Vanderlip for his part was planning his move to City Bank but decided that it would appear unseemly to go straight to the bank from his Treasury post. So he left the government in March of 1901 and spent four months traveling in Europe. Apparently, he was less concerned about appearances while overseas. With letters of introduction from City Bank, he met various leading bankers and finance ministers on the Continent. “It was the manner in which I was received in places of great power abroad which began to give me some glimmering of the new force with which I had become associated,” he recalled.21
When he returned to the US, Vanderlip joined City as a vice president without portfolio—and without a clue. “I sat there on the busy platform on the first floor and I did not have the faintest idea what to do,”22 he later recalled. Vanderlip knew little about banking, which, when combined with his experience as a Treasury official, allowed him to achieve remarkable success.
At the dawn of the twentieth century, banking was not a marketing culture. Bankers, especially those who worked at a giant New York institution like City, did not make cold calls. They did little in the way of advertising and were reluctant to solicit business even from people they knew well. The custom was to develop relationships and then respond when someone asked to become a client. Vanderlip hadn’t grown up in this culture and didn’t understand why the old-school bankers weren’t asking people to open accounts. He also didn’t understand the process of making loans or the intricacies of various financial instruments.
But as he sat there idle at an empty desk, largely ignorant of the work his busy colleagues were conducting right next to him, Vanderlip realized that he did possess some very special assets. “I knew a great number of bankers; the influential ones all over the country. As Assistant Secretary of the Treasury I had had charge of all the relationships between the Treasury and the National Banks.” So he began writing these contacts and urging them to open accounts with City. This was called correspondent banking—serving as a bank for other banks. And beyond the contacts Vanderlip had developed while at the Treasury, there was another way in which the government helped him to develop this business. By restricting branch banking, regulators all but forced smaller banks to develop correspondent relationships with other banks, especially in New York, and regulators also passed judgment on which firms could serve as reserve banks and therefore appropriate depositories for the cash from rural banks outside of harvest season. The combination of Washington-created advantages and his own innovative marketing helped Vanderlip to grow City’s deposits. By 1905, the bank’s US correspondents had doubled.
Vanderlip also pushed the old-fashioned commercial bank into a significant role in Treasury bond trading and investment activities, for which taxpayers may have a difficult time forgiving him. Since he had overseen bond issuance while at the Treasury, he possessed unique insights into this market—and a well-placed source. “As Mr. Gage was still Secretary of the Treasury and my friend, I was easily able to keep myself well informed concerning changes of Government policy with respect to bond issues and retirements,” noted Vanderlip. Lucky him. In an era when Washington was running a budget surplus, it must have been useful to know which bonds were going to be retired, as well as the course of future issuance. Vanderlip would later help arrange for Mr. Gage to leave the Treasury to become president of United States Trust Company, so things seem to have worked out well for both men.
Drawing on his newspaper experience in Chicago, Vanderlip also published articles on the Treasury market and on issues of global finance and economics. This, too, had not been customary at City, but Stillman supported the effort and had copies printed for distribution to clients and potential clients. Vanderlip seems to have been revolutionizing the marketing of financial services, and City continued to thrive. Stillman for his part still wasn’t talking much—except apparently to Vanderlip. City’s president would frequently invite his younger colleague to dinner or for a Sunday drive, at which time the boss would offer all sorts of advice about the character of men with whom Vanderlip would have to deal, and about the operations of City. “Indeed, sometimes it seemed almost as if he were fearful that there would not be enough time to impart to me all that he felt I should know,” recalled Vanderlip.23
“Caution was the thing he was trying to impress upon my character in all our talks and dealings,” continued Vanderlip. “These were his earnest precepts, that a man is never so rich he can afford to have an enemy; enemies must be placated; competition must never become so keen as to wound the dignity of a rival man or institution; and, above all, I was to avoid having too many banking eggs in one basket.”24
Yet despite preaching caution, Stillman seems to have appreciated Vanderlip’s ambition and the growth in City’s role as the go-to bank for other banks.
Vanderlip soon had his own office upstairs at the bank, as well as an expanding staff. He favored expensive cravats—often gifts from Stillman obtained on trips to Europe. Vanderlip developed a cigar habit, became a member of New York’s Metropolitan Club, and eventually presided over a country estate.
While his fortunes were on the rise, the nation’s financial system was headed toward a reckoning. As usual, Stillman was well prepared. According to one of his employees at the time, Stillman saw signs that the economy was “working toward a crash and indeed that he expected it as early as 1906.”25 His guess was a year early, but City was ready to play its now-familiar role as an island of stability in a financial storm.
As was often the case in the era when government prevented branch banking, the Panic of 1907 occurred in the fall, when country banks were pulling cash out of city banks so that rural customers could make withdrawals and then pay people to bring in the harvest. On top of the normal government-created annual autumn stress, in 1907 there were also the particular problems of a plunge in copper prices, which bankrupted some leveraged commodity speculators, and a general economic downturn. Railroads began to report losses, and United States Steel Company experienced a weakening of demand. Money grew tight.
One troubled institution, Mercantile National Bank of New York, which held deposits of about $11 million, applied to the New York Clearing House Association for assistance.26 The clearinghouse provided illiquid member banks a loan certificate to settle accounts with other banks. This was borrowing backed by collateral that freed up precious cash for the bank.27
Mercantile received assistance, but in examining the bank’s troubles the clearinghouse found links to another, much larger institution. Knickerbocker Trust Company had $35 million of deposits,28 but, like other trust companies, held very little cash. Trust banks, chartered by states, accepted deposits from trust funds, wealthy individuals, and institutions and often made short-term loans to Wall Street brokerages wagering on stocks. The trust banks were allowed to operate with far less cash and riskier assets than the national banks, which had stringent capital and liquidity requirements.
But the leaders of even the strongest national banks figured that a panic among depositors at the trust banks could spread to other institutions. So they joined forces to see if they could save institutions that could be saved—in other words, firms that held quality assets but had a temporary need to borrow cash. Always prepared for a rainy day, Stillman’s City Bank had the strength to play a leading role in the rescue effort led by J. Pierpont Morgan, who proposed to create a pool of funds to lend to struggling institutions. Also part of the rescue team were other leading bankers George Baker, president of the First National Bank of New York; George Perkins, a partner with J. P. Morgan; Henry P. Davison, vice president of the First National Bank; and Benjamin Strong, secretary of the Bankers Trust Company. The team determined which trust institutions were financially strong enough to support. Knickerbocker Trust was the initial institution experiencing liquidity difficulties. However, Knickerbocker closed its doors before even a cursory diagnostic review could be undertaken by Davison and Strong. Morgan was not overly disturbed by the failure or those who criticized his lack of will to intervene: “I can’t go on being everybody’s goat, I’ve got to stop somewhere.”29 Unable to receive assistance, Knickerbocker’s president committed suicide.
Shortly after Knickerbocker’s failure, a two a.m. phone call roused Strong at his home in Greenwich, Connecticut. He raced into New York City to help assess the next institution that was faltering—Trust Company of America. The team determined that the firm was solvent and had sufficient collateral to support a lending facility. The team members agreed to support it with $13 million, the first installment of which was $3 million extended entirely by Stillman’s City Bank.30
Strong described how he personally delivered the collateral and the first installment of cash with the assistance of one of City’s vice presidents. He first “dashed down to Morgan’s,” where he found Perkins and another banker “waiting anxiously for my report.” After hearing his summary of the situation, they ordered the opening of the Morgan vault and gave Strong “bags of securities which had been left there the day before by the Trust Company of America.” Then a Morgan banker “called up Vice President Whitson of the National City Bank and told him that we had to have some cash at once.” Strong was out the door again and racing to prevent a panic:
We ran down Wall Street to the National City Bank with some millions of securities, the street being thronged with sightseers and a long line of waiting depositors also extending down William Street from the Trust Company of America and into Exchange Place. A very hasty examination of the collateral was made at the National City Bank, and I remember giving Mr. Whitson a pencil receipt for a bundle of gold certificates—I cannot now recall whether it was $600,000 or $1,000,000—but I put them in my pocket, ran down Wall Street, and at almost exactly ten o’clock found Mr. Thorne [president of Trust Company of America] walking up and down the gallery overlooking the banking room in the utmost anxiety lest he be disappointed in the loan. The minute he saw me he said that the trust companies had failed him, the money was not forthcoming, and that he expected to close the institution promptly at ten. The look of relief on his face when I handed him the first earnest money I shall never forget.31
Thorne wasn’t the only one looking relieved as the crisis began to subside. But as fearful as many bankers and investors had been as the trust banks began to falter, the Panic of 1907 ended up causing little damage to other financial institutions. Very few commercial banks failed during the panic, as the level did not reach anywhere near the thousands per year that collapsed at the height of the Depression (a peak of four thousand failures in 1933) or the hundreds that went bust during the 1920s. Failures also did not reach the level witnessed during the Panic of 1893 when about five hundred banks failed in a single year. In contrast, only six national banks, eighteen state-chartered banks and seventeen state-chartered trusts failed during the Panic of 1907.32 So at least based on the benchmark of bank failures, commonly used to judge the severity of a financial crisis, the Panic of 1907 was a relatively mild event. (See Figure 1 in chapter 5.)
But a precedent was set that would prove to be very costly indeed. The Panic of 1907 is commonly remembered as a crisis managed and resolved by a private citizen, J. Pierpont Morgan. In the years that followed, some urged a larger role for government on the theory that the resolution of such financial crises should not rest on the leadership of one wealthy banker—that it was too much power for one man to hold. This view may strike some modern readers as odd. Today, taxpayers can only dream that private individuals, rather than government, would be responsible for coming to Wall Street’s rescue in a crisis.
In any case, the truth is that while Morgan certainly led the management of the crisis and put Morgan money into the solution—and even helped rescue not only the New York Stock Exchange but New York City itself—this was not a strictly private undertaking. In one of the earliest historical examples of a federal effort to support individual financial institutions, Treasury Secretary Cortelyou pledged $25 million on behalf of the US government, with the funds deposited in City ($8 million), First National Bank ($4 million), and National Bank of Commerce ($2.5 million) among other New York banks. The idea was that these strong commercial banks would then have more to lend to the firms that were struggling.
The funding made available by the Treasury was extended in large part to support borrowers like Trust Company of America. But this new and larger role for Washington would ultimately affect all Americans. In the wake of the crisis, public policy discussion focused on the possibility of the government creating a central bank to serve as a lender of last resort in times of market stress. Readers can probably guess who among New York bankers was an enthusiastic backer of the idea. Frank Vanderlip believed that Washington needed to organize and centralize financial power—and he would work very hard to make sure that the interests of City were well represented in the new world of American banking.