During the first week of April 1927, Juan Leguia, the twenty-one year old son of President Augusto Leguia of Peru, slipped quietly into New York City on a highly confidential mission.
Although young Leguia was considered good newspaper copy because of his periodic mad escapades and international reputation as a polo player, no New York paper mentioned his presence in the city. The son of the Peruvian dictator was travelling incognito, and all other necessary precautions had been taken to avoid the publicity usually attending his movements.
Juan Leguia had come north to conclude a secret multi-million dollar deal with a small group of Wall Street financiers.
Shortly after he had established himself in a luxurious apartment at the Ritz Towers hotel, Leguia conferred privately with representatives of the banking firm of J. W. Seligman & Company. The subject under discussion was the size of a bribe Leguia was to receive for his “personal services” in facilitating a loan by an American banking syndicate to the Government of Peru.
According to the terms of the agreement reached between Leguia and the Seligman executives, Leguia was to get the major portion of all commissions on loans to Peru floated in the United States by Seligman and their associates. A special account in the name of Juan Leguia was opened on the books of Seligman& Company. It was mutually understood that the details of the “gentlemen’s agreement” were not to be publicized; and no record of them was made in writing.
During the following months, Seligman & Company deposited to Leguia’s account “commissions” totalling $415,000 . . .
According to a subsequent statement by Frederick J. Lisman, head of Lisman & Company, one of the firms in the banking syndicate arranging the Peruvian loan, the money turned over to Leguia was not a “bribe.” It was paid to him, said Lisman, for his “nuisance value.” Seligman representatives in Peru had reported that young Leguia made a practice of obstructing deals between his father and American financiers who failed to take his personal interests into consideration.
The confidential arrangement made with Juan Leguia was not the only significant item omitted from the circular prospectuses and other promotional material used by the members of the banking syndicate to stimulate the sale of Peruvian bonds in the United States. The Wall Street concerns also refrained from mentioning that the Leguia Government was in desperate financial straits, that Peru’s natural resources were being systematically drained from the country by absentee American owners, and that President Leguia was maintaining his rule over the impoverished Peruvian population by imprisoning, exiling or murdering political opponents, and by savage coercive measures against the people as a whole.
In the summer of 1930 the Leguian dictatorship was overthrown by a popular revolt; ex-President Leguia and his sons were imprisoned by a revolutionary tribunal; and the value of Peruvian bonds on the American market dropped from their original price of $91.00 to $4.00 apiece.
The directors of Seligman & Company were not greatly disturbed by these developments. The gross profit to their firm from the sale of Peruvian bonds had amounted to $5,475,000 . . .
When the banker, Frederick J. Lisman, was called before the Senate Committee on Finance in 1932, he was asked by Senator Hiram Johnson regarding the bribing of Juan Leguia: “Do you run across that sort of thing often in Latin American countries?”
“I had heard of it quite often, yes,” said Lisman. He added: “Bankers do not knowingly float bad loans. But the purpose is to do a good business at a profit.”
There were numerous instances among leading American banking houses of such “good business at a profit” during the Prosperity Years.
From 1926-1930 the Chase Securities Corporation, an affiliate of the Rockefeller-controlled Chase National Bank, sold $20,000,000 worth of Cuban “public works securities” and $40,000,000 worth of Cuban bonds to the American public. Most of the funds went directly into the private coffers of President Gerardo Machado, the murderous despot and former cattle-thief who had come to power in 1925 aided by a million-dollar campaign fund from American financial and industrial interests, and who then had smashed the Cuban trade union movement, used hired gunmen to assassinate his political enemies, and established a brutal military dictatorship.
Like Seligman & Company, the Chase National Bank found bribery useful in its Latin American ventures. President Machado’s son-in-law, José Emilio Obregon y Blanco was appointed “joint manager” of the bank’s Havana branch at a yearly salary of $19,000, and, in addition, given a “commission” of $500,000 when the Cuban bond issue was floated. “As we know, from any business standpoint he is perfectly useless,” James Bruce of the Chase National Bank wrote regarding Obregon y Blanco in a letter to another Chase official.
In promoting the sale of Cuban “securities” in the United States, the Chase National Bank refrained from mentioning the despotic nature of the Machado regime and the extremely precarious condition of Cuba’s economy.
When the seething discontent of the Cuban masses threatened to end Alachado’s dictatorship in the late twenties, U.S. State Department and War Department officials, who were in close friendly touch with the Chase National Bank, privately informed the Cuban tyrant that American armed intervention could be counted upon in the suppression of any revolt.
In August 1933, when Machado could no longer afford to pay the salaries of his gangsters and army officers, and the advent of the Roosevelt Administration had made unfeasible American armed intervention, the dictator was overthrown by a furious uprising of the Cuban people. Machado fled the country with a price on his head.
Following Machado’s downfall, the Cuban bonds which the Chase National Bank had sold in the United States at a profit to the bank of approximately one and a half million dollars were declared illegal by the new Cuban government and were de faulted.
During 1925-1929, Kuhn, Loeb & Company disposed of $90,000,000 worth of Chilean bonds on the American market. A military junto was ruling Chile at the time, but the Wall Street bankers were reluctant to mention the words “military council” in their Chilean bond prospectus. “Is it not correct,” they cabled their agent in Chile, “to refer to the council as government council which we prefer instead of military council?” The firm’s prospectus com- promised by defining the Chilean government as a “governing council.” By 1933, the Chilean bonds had been defaulted.
In a report issued in 1934, the Senate Committee on Banking and Currency had this to say about the practises pursued during the previous decade by American banking concerns in floating foreign securities in the United States:
The record of the activities of investment bankers in the flotation of foreign securities is one of the most scandalous chapters in the history of American investment banking. The sale of these foreign issues was characterized by practises and abuses that were violative of the most elementary principles of business ethics.
The predatory operations of American bankers during the 1920s were by no means limited to the flotation of foreign securities. Their greatest booty came from transactions in American stocks and bonds.
By unloading enormous amounts of wildly inflated or utterly worthless stocks on the market, by inducing tens of thousands of Americans to invest their savings in reckless speculation, by engineering market fluctuations, manipulating stock pools, misrepresenting the assets of enterprises they were promoting and employing an endless variety of other shady devices, American financiers plundered the public wealth with a thoroughness and on a scale which made the depredations of the Robber Barons of the nineteenth century seem petty in comparison.
Typical, according to subsequent findings by the Senate Committee on Banking and Currency, were the machinations of the National City Bank, the second largest commercial bank on the American continent. To circumvent legislation restricting the market activities of commercial banks and prohibiting them from trading in their own stock, the National City Bank operated through a securities affiliate called the National City Company. This affiliate company, which was actually nothing more than a giant brokerage firm with over 600 salesmen, engaged in the promotion of all manner of securities.
Among other securities sold by the National City Company to the American public were 1,950,000 shares of National City Bank stock at a total cost exceeding six hundred million dollars. In September the market price of National City Bank stock was $579 a share; its book value at the time was $70 a share.
Out of the fabulous profits accruing to the National City Bank, the officers of the bank and its securities affiliate, privately siphoned off immense bonuses for themselves through two special “Management Funds.” Between 1921-1929 the total sum distributed among the bank’s top executives from these Management Funds was $19,000,000. The personal share of Charles E. Mitchell, president of the National City Bank until 1929 and then chairman of the board of directors, amounted to $6,950,539.83.
“The industrial situation of the United States is absolutely sound and our credit situation is in no sense critical,” stated Mitchell in the fall of 1929. His income that year exceeded $4,000,000. Moreover, as he later explained before a Senate committee, he avoided paying income tax in 1929 through the expedient device of selling the multiple stocks he owned to his wife . . .
Another well-known banker engaging in curious financial transactions was Albert H. Wiggin, chairman of the board of directors of the Chase National Bank. To simplify his own trading in Chase National Bank stock, and with the incidental objective of avoiding v payment on income and inheritance taxes, Wiggin formed three family corporations called Clingston Company, Inc., Shermar Corporation, and Murlyn. The latter two were named after the banker’s daughters. “There was,” said Wiggin later, “a little sentiment about it.” During 1928-1932 Wiggin’s family corporations, whose value was not entirely sentimental, made a total profit of more than ten million dollars from trading in Chase National Bank stock.
In 1929 there were more than 400 stock-market pools foisting highly speculative securities upon the American public and juggling market prices so as to garner huge profits for the behind-the-scenes manipulators. A typical pool in Sinclair Consolidated Oil stock, organized by Harry F. Sinclair of Teapot Dome fame in collusion with the Chase Securities Corporation and other banking concerns, netted a profit of $12,200,109.41 for its operators, while causing losses of tens of millions of dollars to small investors.
Impressive newspaper advertisements, articles by “financial experts,” radio programs and every other form of promotional technique and high-pressure salesmanship were employed to persuade the public of the easy money to be made in “sound” stocks and to stimulate widespread speculation on the market.
Exemplifying the methods of press agents and public relations counsel hired by stockbrokers, bankers and pool operators to boost the sale of certain securities were the activities of one David M. Lion, whose clients included such well-known concerns as Hayden, Stone & Company; Eastman, Dillon & Company; and Sinclair Oil Company.
As part of his promotional efforts, Lion founded an organization impressively entitled the McMahon Institute of Financial Research. The “Institute” consisted wholly of one man, William J. McMahon, an employee of Lion’s who was featured on a weekly radio programme as “the distinguished economist and President of the McMahon Institute of Financial Research.” The “sound investments” recommended by McMahon to his radio audiences were, of course, stocks and bonds which Lion’s clients wished to sell…
Another public relations counsel, A. Newton Plummer by name, established an organization called the Institute of Economic Research, whose sole function was to place newspaper articles boosting securities for the brokerage firms that employed him. According to evidence later submitted to the Senate Committee on Banking and Currency by Representative Fiorello LaGuardia of New York, the recipients of checks from Plummer included financial writers on the Wall Street Journal, the New York Times, and the New York Herald-Tribune . . .
The Chicago brokerage firm of Halsey, Stuart & Company, which did a land-office business in the sale of stock in Samuel Insull’s utilities holding-companies, sponsored a weekly coast-to-coast radio program featuring the “Old Counsellor,” who offered homely advice to his listeners as to what stocks represented the “best investments” for their savings.
The “Old Counsellor” was a professor at Chicago University. “Of course, everything he delivered was written for him,” Harold L. Stuart of the firm of Halsey, Stuart & Company subsequently related. “He was simply the deliverer of it . . . It was written in our office.”
While the brokers and pool operators were hiring press agents to purchase newspaper writers and radio artists for the boosting of their wares,” writes M. R. Werner in his book, Privileged Characters, “the larger banking houses were employing more dignified means of gaining influence for their issues of securities and purchasing the goodwill of important personages. J. P. Morgan & Company had what the newspapers dubbed ‘preferred lists’.” The individuals on these “preferred lists” were offered stocks at special rates far below their market value. The lists, states Werner, included
the names of politicians, public officials, editors, lawyers, officers and directors of banks, trust companies, insurance companies, railroads and industrial corporations. There were rumours that King George of England, King Albert of Belgium, and Mussolini of Italy, were on the preferred list of the London and Paris house of Morgan for shares of the United Corporation, and also that leading politicians in France were allotted shares in that issue at the special bargain price at which J. P. Morgan had purchased them.
Among the influential personages whose names were on the preferred lists of large banking houses and who were thus enabled to buy stocks at special discounts were such individuals as Secretary of the Navy Charles F. Adams; former Secretary of War Newton D. Baker; John J. Rascob, chairman of the Democratic National Committee, and E. I. du Pont de Nemours and General Motors executive; Senator William G. McAdoo, former Secretary of the Treasury; William H. Woodin, later Secretary of the Treasury; Myron C. Taylor, chairman of the board of U.S. Steel; Bernard M. Baruch, market-speculator and financier; and Edgar Rickard, financial adviser to Herbert Hoover.1
Some concept of the prodigious sums mulcted from the American public and turned over as “bonuses” to persons on the preferred lists of leading banking concerns may be derived from these facts: when Standard Brands stock was put on the market, 722,600 shares released at $10 below the market price effected a bonus of $7,226,000 to the favoured recipients; 600,000 shares of United Corporations stocks, distributed among persons on the preferred lists at $24.00 below the market price, provided the privileged few with a bonus of $14,400,000 . . .
“Implicit in the bestowal of favours on this magnificent scale,” stated the 1934 report of the Senate’s banking investigation “is a persuasive assumption of power and privilege. Implicit in the acceptance is a recognition of that power and privilege. The ‘preferred lists’, with all their grave implications, cast a shadow over the entire financial scene.”
The unrestrained predatory operations of bankers and big businessmen during the Boom Years cost the American people, when the market collapse finally came, a sum estimated between twenty-five and thirty billion dollars. In addition to bringing financial ruin to millions of Americans, these operations helped to pave the way for the years of mass unemployment, destitution and ineffable suffering of the whole nation during the Great Depression.
Despite the voluminous evidence gathered by congressional committees which later investigated the machinations of American financiers during the Boom Years, none of the major culprits went to jail for these crimes committed at such a fearful cost to the country.
American courts of law, however, were not completely inactive at the time.
1) After his term in office was over, Calvin Coolidge’s name was placed on the preferred list of J. P. Morgan and Co.