Financial History, Winter 2015

2015·5.9 MB·English

by  Museum of American Finance

Financial
history
The magazine of the Museum of American Finance
Debt and Democracy: Forging a More Perfect Union
Who Paid to Defeat Hitler?
America on the Bargain Counter
ISSUE 112 | WINTER 2015 | $4.00

Financial
IN THIS ISSUE FEATURES
history
The magazine of the
Museum of American Finance
in association with 13 America on the Bargain Counter
the Smithsonian Institution
As the nation rebounds from depression in 1921,
Issue 112 • Winter 2015
(ISSN 1520-4723) investors indulge in commandingly cheap stocks.
Kristin Aguilera By James Grant
Editor
EDITORIAL ADVISORY BOARD
Howard A. Baker, Esq.
16 Shavers, Sharks and Payday Lenders
Howard Baker Associates
Brian Grinder
Society’s changing perceptions about lenders, loans and usury.
Eastern Washington University
Gregory DL Morris By Robert E. Wright
Freelance Journalist
Arthur W. Samansky
The Samansky Group
20 Debt and Democracy: Forging a More Perfect Union
Bob Shabazian
American Stock Exchange (ret.)
The role debt played in replacing 13 sovereign states with
Myles Thompson
Columbia Business School Publishing one energetic national union in the late 1780s.
Robert E. Wright
By Edward J. Larson
Augustana College
Jason Zweig
The Wall Street Journal
24 Who Paid to Defeat Hitler?
EDITOR EMERITAE
Diana E. Herzog
How FDR persuaded America it could afford taking part in World War II.
ART DIRECTION
Alan Barnett Design By Nicholas Wapshott
MUSEUM STAFF
David J. Cowen, President/CEO
Kristin Aguilera, Deputy Director 28 Economic Titans Debate on Free Trade
Sarah Buonacore, Collections Manager
Versus Protectionism in 1869
Jeanne Driscoll, Director of Development
Maura Ferguson, Director of Exhibits Horace Greeley and Arthur Latham Perry square off
and Educational Programs
on the issue of foreign tariffs.
Arturo Gomez, Business Manager
Chris Meyers, Director of Education By Alan Lavine
Linda Rapacki, Managing Director
of Visitor Services and Operations
Mindy Ross, Director, External Relations
32 Genesis of the “Big Three” Credit Rating Agencies
Copyright 2015 by the
Museum of American Finance, publisher, The origins and growth of Moody’s, Standard and Poor’s, and Fitch.
48 Wall Street, New York, NY 10005. Telephone:
212-908-4110; fax: [phone]. All rights reserved. By Lesyk Voznyuk
Financial History is the official membership
magazine of the Museum of American Finance.
Annual individual membership is $55. Payment must
be made in dollars, by credit card or check payable 36 Belly of the Exchange
to the Museum of American Finance.
The history of the New York Stock Exchange Luncheon Club.
There is no implied endorsement
of any advertiser in this magazine.
By Bart Ward
www.MoAF.org
2 FINANCIAL HISTORY | Winter 2015 | www.MoAF.org
IN THIS ISSUE DEPARTMENTS
TRUSTEES
Richard Sylla, Ph.D., Chairman
4 The Ticker Robert Muccilo, Treasurer
Tim Geithner speaks at Museum on Treasury Department’s Alvi Abuaf
225th anniversary, and Museum premieres documentary
Gregory W. Bauer
on “Charging Bull” sculpture.
David J. Cowen, President
Sanford F. Crystal
4 Message to Members
Andrea de Cholnoky
By David Cowen, President and CEO
Randolph DelFranco
Charles M. Elson
8 Connecting to Collections:
Niall Ferguson
The Drexel Burnham Lambert Archives
Adam Goldstein
By Linda Eichler
Martha Clark Goss
Robert Hotz
10 Educators’ Perspective
Alfred F. Hurley, Jr.
“Big John” Rides the Rails
Myron Kandel
By Brian Grinder and Dan Cooper
Glenn Kaufman
Bradford Kopp
39 Trivia Quiz Kirkpatrick MacDonald
Consuelo Mack
Richard B. Payne, Jr.
Edward J. Rappa
Richard M. Schaeffer
Mark Shenkman
ON THE COVER Kevin Shine
David Shuler
“Washington Before Yorktown,”
by Rembrandt Peale, 1824–1825. Andrew D. Soussloff
The rider on the right is Alexander
Ewout Steenbergen
Hamilton. See related article,
page 20. Susan Stupin
Charles V. Wait
John E. Herzog,
Library of Congress Prints and Photographs Division,
Washington, DC. Gift of the Mount Vernon Ladies Association. Chairman and Trustee Emeritus
www.MoAF.org | Winter 2015 | FINANCIAL HISTORY 3
THE TICKER MUSEUM NEWS
Pulitzer Prize Winner, Nobel Laureate, Governor and
Recent Secretary of the Treasury Speak at the Museum
At our most recent Board meeting in We also hosted seven Lunch and Financial literacy is on the forefront of our
November, I presented an update to the Learn events in the fall, including Pulit- discussions, and we are proud to represent
Trustees about all of the programs and zer Prize-winning author Edward Larson, our country. The next meeting will take
projects that are currently underway at who has also contributed to this issue place this fall in China, where there are
the Museum. The reaction was complete of our magazine (see article, page 20). more than 20 different finance museums.
pride at not only the sheer volume, but Tony and Grammy Award-winning art- We have several exciting programs
also the quality of events and educational ist Lin-Manuel Miranda filmed at the planned for the spring, including a panel
Museum for a full day for his on bitcoin, as well as a presentation by
upcoming documentary on Nobel Prize-winning economist Joseph
Message to Members his new off Broadway show Stiglitz. On March 10, we will also launch
about Alexander Hamilton, our new book, Genealogy of American
David J. Cowen | President and CEO opening in January. And for Finance, which was co-authored by Dick
the fourth consecutive year, Sylla and Financial History editorial board
John Herzog ran the Wall member Robert Wright. The book will be
offerings. The fall session of the Museum Street Coin, Currency and Collectibles published by Columbia Business School
Finance Academy concluded in Novem- Show at the Museum. As we go to press, Publishing and has been generously
ber, with more than 85 high school stu- we look forward to welcoming renowned underwritten by Chuck Royce.
dents receiving certificates of completion. author, publisher and financial historian Lastly, I would like to welcome two new
We have also secured funding for a special Jim Grant to speak on his recent book (see Board members, Greg Bauer of Moody’s
Girls Academy for Financial Education article, page 13). and Kevin Shine of Shine Financial Ser-
starting in early 2015. Our P-Credit con- In October, our chairman, Dick Sylla, vices, LLC. Just as we continue to expand
tinuing education program for New York and I were in Turin, Italy for the sec- our programming, we also continue to
City teachers will resume in the spring. ond annual meeting of the International expand our Board, and we thank all of our
We also have workshops planned with Federation of Finance Museums (IFFM). Trustees for their service.
the New York City mentoring program
in January, following on the heels of the
Mathfest program held at the Museum in
2014 for 300 middle school students. And
we now offer 19 different classroom expe-
riences for groups of all ages.
Several high profile speakers came to the
Museum in the fall, each attracting large
audiences. Governor Cuomo was here in
October to receive an award for improve-
ments in New York’s corporate tax struc-
ture. Tim Geithner spoke to a capacity
crowd on the anniversary of the Crash of
’29, and the Museum premiered a docu- uiz
R
mentary film about the “Charging Bull” Elsa
sculpture at Bowling Green Park, featuring Left to right: Museum Founder John Herzog, Museum President David Cowen, former Secretary
remarks by artist Arturo Di Modica. of the Treasury Tim Geithner and Museum Trustee Charles Wait at the October 29 event.
The first 401(k) plan, designed by employee-benefits
JAN 1 The first federal income JAN 1
consultant Ted Benna to include pre-tax payroll deductions
tax imposes a 3% tax on
1862 1981 and company matching contributions, goes into effect for
all incomes over $800.
the 85 employees of the Johnson Cos. in Newtown, PA.
4 FINANCIAL HISTORY | Winter 2015 | www.MoAF.org
MUSEUM NEWS THE TICKER
Tim Geithner Speaks at Museum,
Opens Hamilton Exhibit
On October 29, more than 225 people was at the center of Fed policy as the crisis
attended a sold-out event at the Museum, unfolded, and he was a principal architect
as Tim Geithner spoke about his book, of the Obama Administration’s strategy to
Stress Test: Reflections on Financial Cri- avert economic collapse and to reform the
ses, in a conversation with Charles Wait, financial system.
former member of the Federal Reserve Prior to the program, Geithner attended
Bank of New York’s Board of Directors the formal opening of the “Alexander
and a Trustee of the Museum. The event, Hamilton: Indispensable Founder and
uiz sponsored by Voya Financial, was appro- Visionary” exhibit in the Museum’s Ham-
R
os: Elsa pthreia Gterlyea th eClrda sohn o tfh 1e9 2895.th anniversary of iblyto nM Rusoeoumm. ThFoeu nedxehri bJiot hwna sH ceorz-cougr aatnedd
ot
h
P As President and CEO of the Federal Mariana Oller of the Alexander Hamil-
Top: Representatives of the Alexander
Reserve Bank of New York between 2003 ton Awareness Society (AHA). On view
Hamilton Awareness Society (AHA) with
and 2009 and then Treasury Secretary for through January 2015, the exhibit com-
Tim Geithner at the ceremonial opening
the duration of President Barack Obama’s memorates the 225th anniversary of Ham-
of the “Alexander Hamilton: Indispensable
Founder and Visionary” exhibit. Bottom: Tim first term, Geithner shaped the American ilton’s appointment as the nation’s first
Geithner in conversation with Charles Wait. response to the global financial crisis. He Secretary of the Treasury.
Governor Cuomo Receives Tax Award at Museum
Governor Andrew Cuomo received
the Tax Foundation’s Outstanding
Achievement in State Tax Reform
Award at a press conference held at the
Museum on October 16. The Museum’s
exhibitions served as a backdrop for the
award ceremony, which coincided with
the governor’s announcement of the
state’s latest employment numbers.
Clockwise from top left: Members of the media
attend the October 16 press conference;
Governor Cuomo accepts a corporate tax
award for New York State; Governor Cuomo
meets the Museum’s chairman, Richard Sylla,
and president, David Cowen.
As the Internet bubble nears its peak, 17 “Tulipmania” hits its peak in the Netherlands, with the price
JAN 30 FEB 5
dot com companies each spend $73,000 per of the rare Witte Croonen tulip bulb reaching 1,345 guilders
2000 second for network television ads — a total of 1637 per half pound, up 2506% in 33 days. Over the next five
nearly $38 million — during Super Bowl XXXIV. years, they lose an annual average of 76% of their value.
www.MoAF.org | Winter 2015 | FINANCIAL HISTORY 5
THE TICKER MUSEUM NEWS
Volunteer Spotlight: Carolyn Krouse
It is the mission of Museum volunteer Carolyn said her favorite aspect of her
Carolyn Krouse to let people know that volunteer work is that she gets to meet a
New York doesn’t have to be an unfriendly variety of interesting people who come
city. And based on feedback from guests through the door, while working with an
and other members of the visitor services inclusive, friendly and accommodating
team, it is clear she is succeeding. visitor services staff.
A high school English teacher-turned- “During the normal course of a week,
author, Carolyn spent four years in Japan I don’t meet a lot of new people; but one
due to her husband’s corporate reloca- day a week, I say hello to the world,” she
tion, so she is familiar with the challenges said.
of being in a foreign land. The author of When Japanese and French tourists
several non-fiction books, Carolyn’s most visit the Museum, they are often pleas-
successful publication is A Guide to Food antly surprised to find an American at the
Buying in Japan, which helps English- front desk who speaks their language. And
speaking residents of Japan purchase gro- whenever she has the opportunity to talk
ceries in Japanese markets. This is a key to visitors, she asks where they are from.
reference for the target demographic, as Because she is an avid traveler, she can
the prices are considerably less expensive often tell them she has visited their coun-
in the Japanese markets than in the coun- However, many of the larger institutions try and can share a story or two.
try’s western markets. Still in print, the were less flexible in their scheduling than Carolyn and her husband take about
book has sold more than 15,000 copies she had hoped and did not seem to be a three long trips of at least four weeks per
since its original publication in 1986. good fit because of her love of travel. year. Among her favorite travel destina-
Upon moving from Japan to Mahwah, While taking a course at New York tions are Australia (where she recently
New Jersey, in 1986, Carolyn began work- University, she was introduced to the spent a month) and Prague (where she
ing with a local reference librarian, a posi- Museum of American Finance on a class travels every two years to see the Czech
tion that she greatly enjoyed and hoped to field trip. Struck by the beautiful building opera). She also enjoys opera in New York
continue when she moved to New York and having enjoyed the tour, she inquired City, and she visits as many museums as
City in 2010. Unable to find a suitable vol- about volunteer opportunities. In 2011, she she can, both in the United States and
unteer position at a library in the city, she began volunteering at the Museum’s front abroad.
expanded her search to include museums. desk on Tuesdays.
MUSEUM OF AMERICAN FINANCE BENEFACTORS (2013–2014)
The Museum is most grateful for Gold • Capco • Protiviti
the financial support of these • Bank of America Merrill Lynch • Consolidated Edison • R.W. Presspich
major donors to help advance • Andrea de Cholnoky • Crystal & Company • Sullivan & Cromwell
our commitment to preserving, • Sidney Mobell • Dalio Foundation • U.S. Bancorp
exhibiting and teaching the power • Richard Sylla • Houlihan Lokey • Wells Fargo
and value of American finance. • TCW Group, Inc. • ING • Voya Financial
• Tishman Speyer • Kopp Family Charitable Fund
Platinum
• Steve Wozniak • Lipper Advisory Services For information about the
• New York Stock Exchange
• Moody’s Museum’s benefactor program,
• John Herzog Silver
• Niederauer Family Fund please contact Mindy S. Ross at
• Royce & Associates • The Adirondack Trust Company
• Perella Weinberg Partners 646-833-2755 or [email protected].
• Shenkman Capital • American Express
• Philidor RX Services, LLC
The Vanguard Group of Robert Morris creates the North American Land
FEB 8 FEB 20
Investment Companies Company. Its prospectus guarantees it will pay
1977 eliminates all sales charges, 1795 dividends of at least 6% a year, but the stock
becoming a no-load fund family. crashes and lands Morris in debtors’ prison.
6 FINANCIAL HISTORY | Winter 2015 | www.MoAF.org
MUSEUM NEWS THE TICKER
UPCOMING EVENTS
Jan 29 Evening Lecture Series: “A Conversation with Albert Gallatin.” Program followed by Q&A and reception. 5:30 – 7:00 p.m.
Feb 11 Evening Lecture Series: “Bitcoin and the Future of Payments Technology” panel discussion, featuring a conversation with
Lawrence Summers and the launch of the book The Age of Cryptocurrency, by Paul Vigna and Michael Casey. Fireside chat
and panel discussion followed by book signing and reception. 5:00 – 7:00 p.m.
Feb 12 Lunch and Learn Series: Bruce Smart on “People on US Bank Notes, 1861–1928: The Famous, the Familiar, the Forgotten.”
Talk followed by Q&A. 12:30 – 1:30 p.m.
Feb 24 Lunch and Learn Series: Mary Pilon on The Monopolists. Talk followed by Q&A, book signing and reception. 12:30 – 1:30 p.m.
Mar 10 Book Launch: Talk and reception to celebrate the release of the Museum’s new book, Genealogy of American Finance, by
Robert E. Wright and Richard Sylla (Columbia Business School Publishing, 2015). 5:30 – 7:00 p.m.
Mar 18 Evening Lecture Series: Panel discussion on A Force for Good: How Enlightened Finance Can Restore Faith in Capitalism,
by John Taft, featuring financial luminaries. Panel followed by Q&A, book signing and reception. 5:30 – 7:00 p.m.
Apr 15 Exhibit Opening: Re-Launch of “Money: A History,” featuring the Mark Shenkman Collection.
Apr 21 Evening Lecture Series: Joseph Stiglitz on The Great Divide. Talk followed by Q&A, book signing and reception. 5:30 – 7:00 p.m.
All events are held at the Museum (48 Wall Street, NYC) unless otherwise noted.
For more information or to register online, visit www.moaf.org/events.
Museum Premieres “Charging Bull” Documentary
and Displays Replica Sculpture
On the evening of December 3, the documentary and the Museum’s founder,
Museum hosted the first showing of a new John Herzog, who is featured in the film.
documentary film, “Lucky Balls,” com- While “Charging Bull” has become well-
memorating the 25th year that the “Charg- known around the world, there are also
ing Bull” sculpture by Arturo Di Modica smaller editions of the beautiful sculpture.
has been at Bowling Green Park in New The Museum was fortunate in locating
York City. Over the years, the sculpture one of these, a 42" stainless steel model
has become one of the most popular cast under Di Modica’s direction. It is
attractions in Lower Manhattan and one now on view in the grand entrance foyer
of the most widely-recognized images of the Museum, graciously loaned by Gina
around the world. The documentary will Biancardi, the president of Casa Belvedere,
be entered in the Tribeca Film Festival a cultural organization on Staten Island.
next year, and eventually a wider distribu- With this loan, the Museum is the first in
tion is anticipated. the world to display Di Modica’s work.
The Museum’s founder, John Herzog, with Gina
The film screening drew some 200 peo- His other works are on outdoor display
Biancardi, president of Casa Belvedere.
ple from the Museum membership and in Poland, Russia, China and elsewhere.
invited guests. Di Modica spoke at the “Charging Bull” will be on view at the
event, as did the Polish producers of the Museum through March 2015.
America’s first great growth industry is J.P. Morgan announces he is organizing the world’s largest
FEB 28 MAR 3
born, as 24 business leaders incorporate the corporation by merging his Federal Steel conglomerate
1827 Baltimore and Ohio Railway Co. to connect the 1901 with Carnegie Co. The company is initially capitalized at
“western frontier” with the eastern seaboard. $1.4 billion — the first billion-dollar company.
www.MoAF.org | Winter 2015 | FINANCIAL HISTORY 7
THE TICKER CONNECTING TO COLLECTIONS
The Drexel Burnham Lambert Archives
By Linda Eichler higher than those of the blue chips. There- In April of 1990, Milken pleaded guilty
fore, a diversified bond portfolio made up to securities and reporting violations, but
Drexel Burnham Lambert was a promi- of these new higher-risk companies would not to racketeering or insider trading. He
nent and very successful Wall Street do well into the future. was sentenced to 10 years in prison and
investment bank which was forced into In the past these new low-credit com- was fined $600,000. He was also barred
bankruptcy in February of 1990. It began panies could only raise money by offer- from the securities industry. His sentence
as Burnham and Company, a small New ing their stock rather than their bonds, was reduced to two years, of which he
York City retail brokerage firm founded in but now DBL created a market for these served 22 months.
1935 by I. W. Burnham II, a 1931 graduate first issue high yield bonds. DBL’s share In 1992, the firm emerged from bank-
of the Wharton School of the University of this market peaked at 75% in 1983 and ruptcy as a small investment bank with
of Pennsylvania. Burnham began his firm 1984. In the mid-1980s, DBL was ranked just 20 employees. It was called New
with $100, 000, of which $96,000 was bor- among Wall Street’s top investment banks Street Capital. In 1994, New Street Capital
rowed from his grandfather, a founder of a with employees numbering over 10, 000. merged with Green Capital.
Kentucky distillery. In addition to high yield bonds financing The Museum of American Finance was
The firm branched out into investment new companies with low credit ratings, privileged to receive from John Z. Katz,
banking, and in 1973 it merged with Phil- DBL’s Mergers & Acquisitions Depart- a former Associate Director of Research
adelphia-based Drexel Firestone, an ailing ment used the bonds for financing lever- at DBL, a gift of detailed historical docu-
old line investment bank, which welcomed aged buyouts and hostile takeovers. ments of Drexel Burnham Lambert from its
the merger with Burnham to form Drexel The demise of Drexel Burnham Lambert early beginnings through its bankruptcy and
Burnham and Company. The name “Drexel began in 1986 with the government inves- eventual reorganization. The material spans
Burnham” rather than “Burnham Drexel” tigation of allegations that the firm had the years 1966 through 1996. It consists of
was chosen because Drexel Firestone was engaged in various illegal activities. DBL internal memoranda and correspondence;
known as a “major bracket” firm with the denied it had done anything wrong, but financial statements including consolidated
power to underwrite stocks and bonds, while suits by the US Securities & Exchange Com- income statements; confidential and pro-
Burnham and Co. was merely a “sub-major mission (SEC) and the threat of a RICO prietary correspondence and documents;
firm” with no such power. In 1976, Drexel indictment by the government took their information about profit sharing; settlement
Burnham merged with William D. Witter, toll. Eventually DBL pleaded guilty to six with the U.S. SEC; Chapter 11 bankruptcy
the American arm of the Belgian company, felony counts and agreed to pay $650 mil- material; DBL Liquidating Trust material;
Georges Bruxelles Lambert, and then incor- lion to settle with the SEC in April of 1989. research reports; company newsletters;
porated as Drexel Burnham Lambert (DBL). Later that month, DBL eliminated 5,000 promotional memorabilia; and journal and
Great success followed, largely driven jobs after closing three departments. The newspaper articles about the rise and fall of
by DBL’s dominance in the high yield firm’s securities business collapsed when Drexel Burnham Lambert, etc.
bond market. Before the late 1970s, blue the parent, Drexel Burnham Lambert, A finding aid for this collection is cur-
chip companies that had fallen on hard defaulted on $100 million in loans, and rently being prepared to make the materials
times had to issue high yield bonds (junk Wall Street firms then sharply cut their available to researchers by appointment.
bonds), which often did not fare well in the business dealings with the firm. DBL filed
future. But Michael R. Milken, a Wharton for protection from its creditors under Linda Eichler volunteers in the Museum’s
MBA who ran the California bond trading Chapter 11 of the Federal Bankruptcy Library and Archives Department. She also
desk of DBL, discovered that new entre- Code on February 13, 1990. Thousands gives an intro to using the Bloomberg ter-
preneurial companies with lower credit of DBL employees were looking for new minal in the “Financial Markets” exhibit.
ratings — rated BB or lower — were found jobs, as Wall Street was stunned by the Prior to joining the Museum, she had a
to have only a slightly higher rate of rapid decline of the company which had 30-year career as a business reference librar-
default than solid blue chip issues, but just recently announced it was seeking a ian at the Lippincott Library of the Whar-
interest rates on these new bonds were partner because of a cash crunch. ton School, University of Pennsylvania.
President Franklin D. Roosevelt orders The US Supreme Court rules that J.P. Morgan’s
MAR 3 MAR 14
a nationwide bank holiday, during Northern Securities Co. holding company is
1933 which banks must close to prevent a 1904 stifling free competition — marking an end to
“run” on their deposits. the robber baron era.
8 FINANCIAL HISTORY | Winter 2015 | www.MoAF.org