Morgan Finale

Last week swart Inquisitor Ferdinand Pecora of the Senate Banking & Currency Committee wound up his efforts to pin scandal on J. P. Morgan & Co. by trying to prove that its partners had been evading income taxes (see p. 13). Not content to let the inquiry end upon this note, the House of Morgan countered by making two statements. First was a memorandum submitted by John P. Morgan answering Mr. Pccora's criticisms:

1) That he and his partners had paid $51,000,000 in income taxes from 1917 to 1929 -- $11,000,000 in the latter year -- a substantial part of the total due to capital gains. Since 1930 their profits have all been wiped out by losses. ". . . Income taxes are, after all, payable upon income and not upon deficits."

2) That their common stock sales at cost amounted to less than of their securitv business. In most cases the sale price was fixed before there was any market for the stocks. "Every successful issuer, from the Government of the U. S. down, has had the experience of seeing its issues quoted above the issue price while the offering is still open. ... It is not the practice of responsible bankers and dealers in pricing a new equity issue to charge all the traffic will bear--it would be inexcusable to do so in an inflation market such as prevailed in 1929. . . ."

3) That their private customers were selected because of long business and personal relations, not for political influence. "It seems extraordinary that we should be taken to task . . . simply because chance has brought some of them into high office and mischance has impaired the fortunes of others."

4) That they have habitually made statements of condition to the Federal Reserve Bank and "are ready to be examined by the Federal Reserve bank at any time and as often as may be desired."

Second statement came from Morgan Partner Russell Cornell Leffingwell. The Senate investigators were supposed to be engaged not in a scandal hunt but in an effort to find out how the financial system of the U. S. can be improved. Mr. Leffingwell's statement was aimed at this obscured point. Coming at any less exciting time, it would undoubtedly have been front-page news. His points:

P:In 1927 to counteract the beginnings of world deflation the Federal Reserve Bank lowered its discount rate which produced stockmarket speculation without having much effect on business.

P:The Federal Reserve instead of raising its rate to stop wild speculation shilly-shallied all through 1928, till August 1929.

P:Raising the discount rale in August 1929, and the Hatry crisis in London, precipitated the debacle which was spurred on in 1930 when the Hawley-Smoot tariff threw a monkey wrench into world commerce, in 1931 by the failure of the Creditanstalt in Austria, the German moratorium and England's abandoning gold. The Glass-Steagall bill produced improvement last summer which was promptly undone by President Hoover's Des Moines speech ("could not hold to gold . . . but two weeks longer"), controversy over War Debts and publication of R. F. C. loans which caused runs on banks.

His conclusions and recommendations: "President Roosevelt's abandonment of the gold standard and steps to expand credit were absolutely necessary. The plans to which our Government is now committed, for arresting the deflation and bringing about some rise in prices, and for lowering trade barriers, are sound and wise and go to the root of the matter."

P: No banking legislation or supervision could stop the bad effects of such a deflation as we have had.

P:Power in the Federal Reserve Bank should, however, be more centralized so that it can take prompt action to tighten up credit as soon as inflation sets in, to free credit when deflation starts. At present with twelve scattered Reserve Banks and a central board "composed of men of diverse opinions," prompt and effective action is difficult.

P: Our system of having many small independent banks has advantages but we pay a heavy price for it in times of depression.

P:Reform in issuing securities is advisable but new laws should take care not to destroy the means by which industry obtains long-term capital. If the machinery for floating capital issues is destroyed industry will not be able to repay its temporary loans, more bank failures will follow.

P:If it seems advisable to make banks divorce their securities affiliates, banks should still be allowed a limited privilege of buying, selling, owning, underwriting and lending on bonds, or the machinery for obtaining long-term capital will be seriously injured.

P:If the great commercial banks which for 20 years have floated many if not most capital issues, are forced to give up this business private bankers, issuing houses and dealers must be encouraged to take it up unless economic welfare is to suffer.

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