The foreign exchange market approved of the Gold Pool and the New York City bailout, but the bankers had to make them work. Both plans relied on gathering the yellow metal from bank co ers to ransom America from the Europeans. No one really wanted to ship gold abroad. According to the New York Times, the bankers hoped that “the mere fact that this market stands ready to make these payments is expected to … make it possible to cover nearly all the amount in bills of exchange instead of in gold.”519 The bankers wanted to assemble a gold hoard and display it like a stack of chips at a high- stakes poker game.
The overlap between the two plans raised su cient concern to force
Benjamin Strong, representing the Gold Pool, and Morgan and Schi , representing the New York syndicate, to meet with the secretary of the Treasury and the Federal Reserve Board on Thursday morning, September 10, to coordinate the defense of America’s virtue. Strong sent McAdoo a telegram two days before, suggesting that Strong arrive early to brief him.520 McAdoo invited Strong to his home the day before Morgan and Schi were scheduled to arrive.
The meeting that took place between McAdoo and Strong on Wednesday evening, September 9, was the rst of their many conversations about gold.
McAdoo urged the banks to pay it out freely, while Strong emphasized the di culty of doing so.521 Their debates would continue after Strong became governor of the Federal Reserve Bank of New York. He would lock horns with McAdoo to foster a delay in opening the Federal Reserve Banks until they could accumulate su cient gold. For now they both wanted to use the precious metal to guarantee America’s credibility.
At the September 4 conference, Wiggin and Strong had suggested, as part of their Gold Pool plan, that the Federal Reserve Board use its in uence to mobilize gold reserves throughout the country. Reality set in after the September 10 meeting among Morgan, Schi , Strong, and the board. J. P.
Morgan and Jacob Schi described the negotiations they conducted to form the syndicate to meet New York City’s obligations. Members of the Federal Reserve Board wanted to do the same for the Gold Pool, but they had no troops to command. The board also knew that resentment toward New York would hamper any e ort at moral suasion. The Federal Reserve Board approved of the Gold Pool in principle but admitted that it “found it di cult to arrange the details for carrying it out.”522
The Federal Reserve Board stumbled publicly on September 11 by issuing the following statement: “In view of the announcement that New York City has completed arrangements for paying of her maturing obligations … the Board felt that it may not be necessary to create the proposed fund of
$150,000,000 in gold and decided to await further developments before giving the matter further consideration.”523 Three days later, a Wall Street Journal article placed the Gold Pool on the inactive list: “The Federal Reserve Board has for the time being abandoned the consideration of the bankers plan to form a Gold Pool. … This action is taken in view of the fact that the situation has been so materially relieved by the arrangements in New York City to meet its $82,000,000 foreign indebtedness.”524
The foreign exchange market dispelled any doubt about the relative importance of the New York City bailout versus the Gold Pool. Figure 7.1 shows that the dollar price of the pound remained virtually unchanged between September 10 and September 15. The market greeted the cancellation of the Gold Pool with a giant yawn.
What accounts for the success of the New York City rescue? J. P. Morgan
& Company and Kuhn, Loeb knew how to raise money for corporations and municipalities. Morgan’s list of satis ed companies included U.S. Steel, and Kuhn, Loeb’s began with the Pennsylvania Railroad. Before bringing a new bond issue to market, the two investment banks usually consulted with their customers—wealthy individuals, insurance companies, and trusts—to set the interest rate that would attract investors. They then organized a group of selling banks, the syndicate, to distribute the public o ering throughout the country. Members of the syndicate earned a commission—sometimes called an underwriter’s fee—for participating in a public o ering of newly issued securities.
Henry Davison, the J. P. Morgan partner in charge of organizing the syndicate, employed charm, personality, and the prospect of participating in future public o erings, to convince a total of 124 banks in New York to subscribe to the city’s bonds.525 The banks agreed to pay their obligation in gold or sterling on a schedule determined by syndicate managers, J. P.
Morgan & Company and Kuhn, Loeb. Davison allocated the bonds within the syndicate in proportion to each bank’s deposits. The largest institution, National City Bank, subscribed to $7,800,280 of the city’s bonds and the smallest, the Tottenville National Bank in Staten Island, committed to
$3,005.526 J. P. Morgan and Kuhn, Loeb each took $694,155 bonds. The syndicate raised a total of $100 million—a sum that would repay all of the city’s obligations maturing before the end of the year, including $82 million held in Britain and France.
Success in redeeming the city’s credit depended not only on raising the money but in delivering gold or sterling to British investors. The rst test came on September 15, 1914, when the syndicate managers demanded a total of $8,257,400 for obligations coming due through the end of the month. J. P.
Morgan & Company called for the gold to be delivered to 23 Wall Street before the end of the day. Bank messengers arrived at the House of Morgan starting at ten o’clock in the morning, usually with a police escort, carrying satchels and handbags that looked as though they had seen years of commuter service on the city’s subways.527 The bags contained packets of gold certi cates, along with a few gold coins, that summed to each bank’s required contribution. Tellers at the Morgan bank combined the gold certi cates from several messengers and then delivered them across the street to the subtreasury o ce, where they were redeemed for gold bars. The bars returned to the bank under guard and were sealed in kegs. Within an hour of closing on September 15, an express company loaded the cargo onto trucks and delivered it to the railway station for shipment to Ottawa. The Bank of England depository took possession of the precious metal twelve hours later.
The syndicate’s e ciency in raising and transferring the gold generated an optimism usually reserved for opening day of a new baseball season. A prominent banker sounded the appropriate note: “There is now a big rift in the clouds and I would not be surprised if conditions improved rapidly from
this time. … The big demand for the New York City notes was one of the most pleasant surprises which we have had recently.”528 J. P. Morgan wrote a note to McAdoo con rming the success of the city’s nancing: “The entire issue is oversubscribed. The net result is that the banks will be relieved of a very considerable amount of the loan which they are carrying and will only be left with that which they wish to hold.”529 Nothing pleases syndicate members more than buying securities from the issuer and reselling them to ultimate investors before the ink is dry on the prospectus. All that’s left in banker pockets are the profits.
The spillover from New York City’s success created a nancial frenzy. The Wall Street Journal reported on September 15: “Consummation of the plans to meet the $100 million of New York City’s maturing securities, $80 million of which are held in England and France, was the most constructive development that has taken place since the war started. … There has been evidence that England, the largest foreign holder of our securities, is not as anxious to liquidate as might be supposed. About 75% of the holders of the
£420,000 Lake Shore one-year notes elected to take new notes … in exchange for maturing securities. One of the bankers in charge of that nancing said:
‘When they know they can get their money, they are not so eager to have it.’
”530
The Lake Shore one-year notes were obligations of the Lake Shore &
Michigan Southern Railway. The re nancing of these securities attracted British investors for two reasons: America showed a willingness to pay its debts in gold and the interest rate jumped to attractive levels. The new Lake Shore notes carried an interest rate of 6.75 percent. They replaced maturing securities that had been issued at an interest rate of 4.5 percent in March 1913.531 The more than 2 percent jump in rates re ected the precautionary demand for cash since the war began.532 All borrowers felt the pinch. New York City had to pay an interest rate of 6 percent to its new investors, compared with 4 percent in the last city borrowing.533 The city comptroller—
and the mayor—had complained about the cost of the nancing to McAdoo.
They should not have taken it personally.