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How Did Kidder, Peabody & Co. Tackle Wartime Situation?

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August 1914, the month Europe went to War, was a difficult time for American business. The stock market reflected the general depression in trade-a marked increase in the number of business failures, dividend suspensions, and an equally pronounced decline in bank clearings and merchandise exports. Sales on the New York Stock Exchange, which had totaled 131.1 million shares in 1912, fell to slightly less than 83.5 million in 1913 and continued to fall through the first seven months of 1914. Contemporary business opinion blamed President Wood-row Wilson's "misguided attempts... to carry through a scheme of radical legislation intended to revolutionize business methods" for the fact that "business was lame and halt and enterprise and energy crippled and paralyzed, with confidence at a low ebb." Kidder, Peabody & Co., like so many other businesses, suffered from the downturn. "As you will see, the year has been a poor one," the firm wrote Baring Brothers early in 1914. It was not only the decline in profits that concerned the partners; what disturbed them just as much was the uncertainty created by the continuing decade-long mood of reform and the newly enacted state and federal laws and regulations affecting their own operations and business generally. The outbreak of World War I added new uncertainties and undermined confidence still further.

The first shock came on July 28, 1914, with the Austro-Hungarian declaration of war against Serbia, followed by another blow the next day when Tsar Nicholas II ordered general mobilization. Europe's stock exchanges, badly demoralized since the onset of the crisis, responded to these events by closing their doors. The New York Stock Exchange was one of the last major markets to continue operations. It had suffered a week of heavy liquidations at disastrously declining prices, with still more selling orders pouring in from all parts of the world. To avoid panic and protect the reserves of New York City's banks, badly depleted by earlier gold exports, stock market officials conferred with several prominent Wall Street bankers and early on the morning of July 31 decided not to open the exchange. It remained closed for more than three months, and even then it opened only on a limited basis. Full operations were not resumed until April 1915. Exchanges in other cities, following New York's lead, also closed their doors.

With no market for securities, investment banking came to a near halt. New issues, which had totaled some $1.9 billion during the first six months of 1914, fell to slightly less than $861.4 million during the last half of the year; trading in existing securities came to a near standstill. Unlisted securities continued to be traded, but even these transactions were limited and regulated by special committee. It was not until mid-autumn that orderly trading began to be restored, and a few new issues started to appear, mostly short-term notes.

Security markets were not the only ones to be disrupted by war. Foreign exchange operations were hit just as hard, causing immediate and widespread distress not only to business people but to American tourists stranded in Europe, unable to draw on their letters of credit or cash traveler's checks. Congress immediately appropriated an initial $250,000 (subsequently adding another $2.5 million) to relieve their distress, and several Atlantic Coast bankers, including Kidder, Peabody as well as American Express, contributed an additional $3 million. Early in August 1914, to ease the pressure on exchange rates, Kidder, Peabody helped arrange a shipment of gold to London aboard the battleship Tennessee.

As one of the country's leading international banking houses, with particularly strong ties in England, Kidder, Peabody was heavily involved in all kinds of foreign exchange transactions. It cooperated with the Treasury and other bankers in trying to restore the value of the dollar in foreign exchange and promote the recovery of American trade, which had been totally demoralized by the outbreak of war. William L. Benedict, the Kidder, Peabody partner who managed the firm's New York office, was among the bankers, business executives, shippers, and government officials called together by Treasury Secretary William G. McAdoo to devise a plan to help the country's hard-hit cotton growers, nearly all of whom faced disaster unless they could resume exports. It was this group, led by McAdoo, that in November 1914 established a $135 million loan fund to help cotton growers survive the crisis.

No sooner had these emergency activities been completed than investment bankers were called upon to satisfy the belligerents' pressing needs for credit and assistance in making war purchases in the United States. Kidder, Peabody played an important role in these operations. Almost six months before the Wilson administration officially approved private loans to belligerents, the Barings had queried Kidder, Peabody on the possibility of Britain borrowing in the United States. No loans to belligerents were possible, Kidder, Peabody replied, without the consent of the United States government.

Once the Wilson administration relaxed its original prohibitions against private credits and loans to the belligerents, American bankers proceeded immediately to finance the combatants.

Between October 30, 1914, when New York's National City Bank extended to France a $10 million credit to pay for its war purchases and April 6, 1917, when the United States declared war on Germany, the warring countries borrowed almost $2.7 billion through American bankers. Except for some $35 million that went to the Central Powers, the balance was loaned to the Allied governments, with the largest amounts going to Britain ($1.25 billion) and France ($640 million), followed by Russia ($107 million), Japan ($102 million), and Italy ($25 million). Kidder, Peabody helped underwrite and distribute many of these loans, particularly the great $500 million Anglo-French loan of October 1915. The firm co-managed a syndicate organized by J. P. Morgan & Co. in June 1916 to sell a $50 million loan for Russia, and it also participated in many other foreign offerings, among them the French cities and Paris loans of 1916 and a Canadian bond issue in 1917.

Kidder, Peabody's services to the Allies were not limited to selling their bonds. Equally important were its activities in assisting companies producing arms, munitions, and other war goods. The Winchester Repeating Arms Company of Connecticut was one of the companies that turned to Kidder, Peabody for capital to expand its production of guns and cartridges to meet greatly increased orders, particularly from Britain and France. The company had borrowed $8 million from the House of Morgan and an equal amount had been advanced to it by the British government. These sums proved inadequate, and in March of 1916 Kidder, Peabody managed a syndicate offering $16 million of Winchester's two-year notes. Slightly more than half of the money from this issue went to pay earlier loans made by Morgan & Co. Charles S. Sargent, a Kidder, Peabody partner, became a Winchester director, serving the company as its financial consultant.

Allied war purchases also increased the deposit liabilities of bankers arranging payments for these orders. Kidder, Peabody was no exception. Its deposit accounts grew appreciably during 1915 and 1916. The firm was fully aware of the risks and advantages resulting from these increases. Writing to the Barings at the end of January 1916, Kidder, Peabody attributed some of the firm's profits to the "temporary increase" in foreign deposits, and assured its London correspondent that the partners were using these funds cautiously, "keeping a large amount of cash in banks and [investing the balance in] the quickest kind of short time notes and quick securities."

With the exception of about a half-dozen corporate underwritings-the largest an $80 million bond issue for the American Telephone & Telegraph Company offered in December 1916-most of Kidder, Peabody's major transactions during the period of American neutrality involved assisting the Allied governments, selling their securities, and financing their suppliers in the United States. These and other war-related activities, such as distributing foreign-held American securities traded on the New York Stock Exchange before and after its closing, contributed significantly to transforming the United States from a debtor to a creditor nation and moving the financial capital of the world from London to New York.

Once the United States entered the war, the federal government called on investment firms to provide it with many of the same services they previously had performed for the Allies. One of the most important of these was to assist the Treasury in selling an unprecedented volume of war bonds. In less than two years-between June 1917 when the first Liberty Loan was launched and April 1919 when the Victory Loan was offered- the Treasury issued a total of $20.5 billion of bonds. Not since the Civil War had Americans been asked to respond to such enormous calls on their savings in so short a time. That the loans were successful was due in no small part to the assistance and cooperation of the nation's bankers.

Kidder, Peabody participated actively in all five of these loans, soliciting its clients by letter and circular. Several weeks before the first Liberty Loan was floated, the firm informed its clients that it had purchased $10 million of short-term Treasury notes. Kidder, Peabody recommended these to its clients, suggesting that later they exchange them for bonds. The notes, yielding 3 percent, were being sold at cost, the firm informed prospective buyers. A year later at the time of the third Liberty Loan, Kidder, Peabody advised women with "any means at all" to buy the government's new bonds, and in January 1918 announced it had made a specialty of buying and selling the Treasury's securities.

Investment houses also cooperated with the government's efforts to conserve capital and direct it into essential war industries. Early in January 1918, at the request of Treasury Secretary McAdoo and with the enthusiastic support of the Investment Bankers Association, the Federal Reserve Board established a Capital Issues Committee (CIC) on an informal basis. Four months later it was given statutory authority under Title II of the War Finance Corporation Act. The CIC's chief task, to review all new security offerings in excess of $100,000 and determine whether they contributed to the war effort, was accomplished through special subgroups organized in each Federal Reserve District. Only issues approved by the CIC as "compatible with the national interest" were allowed to be floated and then only at times when they did not compete with the Treasury's bond drives. Many of the circulars announcing the half-dozen offerings underwritten by Kidder, Peabody in 1918, such as the one for a $50 million note offering of the Bethlehem Steel Corporation, included the statement: "Passed by the Capital Issues Committee as not incompatible with the national interest, but without approval of legality, validity, worth, or security." The CIC's efforts to conserve capital proved effective. Between May and December 1914, the months its restrictions were in force, the CIC disallowed some $450 million of new issues, slightly less than 20 percent of those proposed. Total corporate offerings fell from nearly $2.2 billion in 1916 to $1.3 billion in 1918. During the same period, state and municipal bond issues declined by nearly 53 percent, from nearly $498 million to slightly less than $263 million.

Like all businesses, investment houses had to adjust to the loss of employees to the armed forces and other war-related activities. Kidder, Peabody endured a large turnover of clerks, some sixty-five leaving the firm and nearly twice as many being hired between 1914 and 1919. None of the partners took on full time government assignments, but many of them served on Liberty Loan committees and assisted the Treasury in other ways as well.

Unlike a few private banking houses, notably Morgan & Co., which added new partners to help meet expanded wartime operations, Kidder, Peabody admitted no new partners during the war either in Boston or New York. In January 1919 Albert S. West, who had started with the firm as a clerk in 1877, was admitted to the partnership following the death three months earlier of Frank E. Peabody, the last partner to bear the name of a founder.

World War I brought about important changes in the way investment bankers conducted their affairs and accelerated others already in the making before the onset of hostilities. The size and frequency of Allied war loans during the period of American neutrality led to the formation of larger underwriting syndicates, bringing new firms into an aspect of the securities business previously restricted to a relatively few Atlantic Coast firms. Underwriting and selling groups became nationwide. After the United States entered the war, the Treasury's huge bond drives sparked the organization of new firms, just as had occurred during the Civil War. Sales of Liberty bonds also revealed a new group of potential investors, one which many investment bankers came to consider essential to the successful flotation of large issues. Kidder, Peabody was one of the first major houses to appeal to middle-income investors. In April 1918 for the first time the firm called on women specifically to invest in Liberty bonds; less than a year later in January 1919 it advised anyone with $100 or any larger sum" to buy American Telephone & Telegraph Company seven-year convertible 6 per-cent bonds. These developments, together with the emergence of the United States as the world's leading creditor nation, altered the financial environment in which investment houses operated and provided new challenges and opportunities.
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