Politics in the Bonding Business1
In early 1921 Franklin D. Roosevelt became vice president of the Fidelity & Deposit Company of Maryland and resident director of the company's New York office at 120 Broadway. Fidelity & Deposit of Maryland was an established insurance company specializing in the bonding and surety policies required on government and corporate contracts and a range of individual employments ranging from secretary of a trade union to employees of stock brokerage houses. In fact, a potential for bonding business exists wherever a contractor or employee can violate a fiduciary trust or fail to complete a contract, as in construction projects. In brief, bonding is a specialized field of insurance covering the risk of noncompliance. In 1921 Fidelity & Deposit was the fourth largest such bonding house in the United States, but not to be confused with the Fidelity and Casualty Company of New York, another insurance company, which incidentally had W. Emlen Roosevelt, FDR's cousin, on its board of directors.
Why did Van-Lear Black, owner of The Baltimore Sun and board chairman of Fidelity & Deposit, hire insurance novice Franklin D. Roosevelt as vice president of the important New York office? Almost certainly he hired FDR because the bonding business is unusually dependent upon political influence. Reading through FDR's Fidelity & Deposit letter files from 1921 to 1928, we find that only rarely do price or service appear as competitive elements in bonding. The main competitive weapons are "Whom do you know?" and "What are your politics?" In other words, politics is a substitute for the market place. Politics was FDR's forte and Van-Lear Black knew his bonding world when he acquired FDR. It is important to note the political nature of the bonding business because FDR's biographers have, in some cases, suggested that FDR, a business novice, was relatively useless to VanLear Black. For example, Frank Freidel writes:
What then were the roles of politics and politicians in the bonding business in New York State in the 1920s?
POLITICIANS AS BOND WRITERS
The pervasive political nature of the bonding business is reflected in a contemporary, but anonymous, news clipping found in the FDR letter files and carefully marked by FDR himself. The clip refers to New York State government officials negotiating state contracts while at the same time acting as members of private bond-issuing firms selling security bonds to state contractors. The newspaper aptly headed the column "All Under One Roof" and reported that Daniel P. O'Connell, a member of the Albany bonding firm O'Connell Brothers & Corning and simultaneously in charge of the public affairs of the city and county of Albany, was endeavoring to exert a statewide influence over the issue of his bonds, to the dismay of competing bond writers:
Bond writer cum office holder O'Connell then wrote soliciting letters to all Albany city and county contractors to the effect that he was in the bonding business at the City Savings Bank Building, owned incidentally by Albany Mayor Hackett and which also happened to be the headquarters of the Albany county Democratic organization. O'Connell's letter to State contractors concluded with the appeal:
It is important to note this prevailing and apparently acceptable use of political office and influence to feather one's own nest. In the light of the evidence below, it suggests that FDR was merely following the contemporary mores of his environment. The use of politics to obtain bond business is reflected in the FDR letter files and essentially is the only way he obtained bonding business while vice president of Fidelity & Deposit Company. Of course, his letters soliciting business to the other Wall Street Roosevelts are entirely legitimate. We find for example, a letter to "Dear Cousin Emlen" (W. Emlen Roosevelt of Roosevelt & Son, 30 Pine Street) dated March 10, 1922 to inquire about obtaining the scheduled bond for the Buffalo, Rochester and Pittsburgh Railway Company, a bond then written by the competing National Surety Company. Emlen replied promptly on March 16 that he "was able to speak to the President about the matter." This must have stirred FDR's imagination because on March 16, 1922 he wrote to "Dear George" (George E. Roosevelt), also at Roosevelt & Son, inquiring about the blanket bond taken out by the firm itself for its own protection.
Trade unions were a special FDR target for business; as each union local secretary and treasurer is required to have a bond, this was a lucrative field. On December 13, 1921 general secretary treasurer E. C. Davison of the International Association of Machinists wrote FDR:
Then on January 26, 1922 Joseph F. Valentine, president of the International Molder's Union of North America, wrote to FDR that he was most appreciative of all FDR's efforts for the union while acting as Assistant Secretary of the Navy and
Union officials in Washington and elsewhere were prompt to request their locals to divert business to their old friend FDR and away from other bonding companies. In turn, local union officials were prompt to report on their diverting actions, information in turn promptly conveyed to FDR. For example, the president of the International Association of Boilermakers wrote to Secretary Berres of the Metal Trades Department, A. F. of L., in Washington, D.C.:
Naturally FDR exploited his old political friends to the utmost and with a commendable attention to detail. In a sales pitch dated March 2, 1922 addressed to Congressman J. A. Maher, FDR wrote two letters, not one. The first letter read in part:
FDR enclosed for Congressman Maher a more formal letter obviously to be shown around to Maher's friends stating precisely what it was he wanted: "fidelity and contracts bonds from the powers that be in Brooklyn:"
Later we shall see how successful this approach was for F & D.
POLITICAL INFLUENCE AND CONTRACT AWARDS
FDR's political contacts and influences were of course well known within Fidelity & Deposit, and he was repeatedly called upon by other members of the firm to use his political expertise and personal credit to generate bond business, even outside New York. This may be exemplified by a letter dated August 23, 1928 from F & D director F. A. Price, in charge of the Chicago office, about business from local Chicago politicians. Price wrote "Dear Franklin" with a message that, since the death of Chicago political leader George Brennan, several names had been proposed as leaders of the local Democratic Party machine. Brennan before his death requested that M. L. Igoe be his successor, Price writes FDR:
Price noted that recently when in Baltimore he had discussions with F & D company president Charles Miller about "the thought of making some deal with the new democratic leader in Illinois. It is with this view in mind that I wish the letter of introduction." As machine politics in Chicago has been notorious for its low ethical standards, it requires little imagination to visualize the kind of deal Price was suggesting and which FDR used his name and influence to further.
That personal friendship alone was insufficient to get bonding business and that some variety of sweetener was used is brought out in a letter on the New York political situation dated September 23, 1925 from John Griffin, in charge of the New York office contract division, to "My Dear Mr. Roosevelt." It discusses the complex interconnections between New York political offices and the bond brokerage business. In part the letter reads:
A meticulous reading of this internal company letter suggests that kickbacks were the usual way to get bond business from New York government agencies; note the paragraph, "Perhaps Murphy receives from the National Surety Company, or the Company to whom he gives business now, a larger commission than we might be willing to give for his direct business." The concluding sentence, ". . . mere personal friendship will not be sufficient" has an ominous ring.
Politicization of the surety business, so obvious in Chicago and New York, extended also to the Federal government contract arena in Washington D.C. On May 5, 1926 F & D second vice president F. A. Bach in Baltimore wrote FDR about a $11/4; million Veterans Bureau building projected for construction that spring:
Similarly, to a contact in a "firm holding Navy contracts" FDR wrote:
Louis Howe, FDR's right-hand man, also worked at F & D offices, also actively solicited bonds, and was not at all backward about canvassing business. Howe's letter to Homer Ferguson of the Newport News Shipbuilding Company in December 1921 noted that the company had entered bids on construction of the vessel Leviathan and thanked Ferguson for the bond:
These political methods of doing business are, of course, a long way from the competitive market place of the college textbooks. It would be naïve to think that political preference and personal friendship have no role, or only a minor role, in business relationships. In reviewing FDR's bond business, however, it is difficult to visualize another business in which politics plays such an all-encompassing role as it did in the bonding and surety business in the 1920s. The morality of kickbacks and of the use of political office to generate personal business is questionable, and the legality is definitely doubtful. Much less obvious is the consequent loss of economic efficiency and loss to society as a whole. If purchase and sale of such bonds is determined by price and past performance—and personal acquaintance can be a legitimate factor in judging past performance—then the market place will yield maximum economic benefits and efficiency for society. In a politicized business atmosphere these impartial competitive factors are eliminated, economic efficiency is foregone, and benefits are reduced. We have, in effect; a microcosm of a socialist economy in which all decisions are politicized to the detriment of society as a whole. In brief, FDR's bonding operations were to some degree antisocial.
Yet other letters in the Roosevelt files provide authentic glimpses into the back rooms of 1920 era politics, the wheeling and dealing that has so often degenerated into outright corruption. Witness an FDR letter dated July 11, 1928 to first vice president George L. Radcliffe in Baltimore relating to the manner in which John J. Raskob became Chairman of the Democratic National Committee. Raskob was vice president of Du Pont and of General Motors and consequently as much a member of the Wall Street establishment as could be found anywhere:
Later in this book we shall record the enormous funds poured into the Democratic Party by Raskob and the quid pro quo for big business: the New Deal and the National Recovery Administration (NRA).
On August 24, 1927 another letter to George Radcliffe outlined the manner in which the bonding industry could get together on behalf of James Beha, then Superintendent of Insurance in the State of New York. This quotation confirms the fact that "regulated" industries are no more than political devices to keep unwelcome competition at bay and that the regulators can be in the pockets and act on behalf of the supposedly regulated industry:
On the other hand, there were attempts in New York to eliminate abuses in the bonding business. One such effort was that by State Architect Sullivan W. Jones to eliminate a state requirement for bonds. Governor Al Smith was at first induced to extend his approval to the Jones plan. This brought a swift letter to FDR from R.H. Towner at 160 Broadway to the effect that the Jones Plan would be disastrous and (if) "Governor Smith (has gone) astray some of his friends ought to put him right." FDR's prompt reply to Towner was, "I hope to see the Governor in the next couple of weeks and will then talk to him like a Dutch uncle about Jones' plan." We read no more in the FDR files about abolishing compulsory surety bonds in the State of New York.
That F & D's office was hard nosed about its own interests is reflected even in relatively minor matters: for example, no New York business association was able to win F & D financial support. On August 5, 1926 a request from the Better Business Bureau of New York for a subscription evoked a cold response from F & D. FDR passed the letter to vice president Cullen to prepare a "suitable reply," and Cullen promptly turned down the Better Business Bureau. This turn-down was supported by president Charles R. Miller in Baltimore, "I am not so keen on making a contribution toward the Better Business Bureau at this time...." Then the Merchants Association of New York wrote FDR on May 23, 1925 about membership of F & D in their association. Again Cullen argued that "the Merchants Association is of absolutely no benefit to us." No law requires membership in better business associations, but these brush-offs make suspect do-gooder social appeals from these nonjoiners.
THE PAY-OFF FOR FIDELITY & DEPOSIT COMPANY
This brief review of Franklin D. Roosevelt's career from 1921 to 1928 as vice president of Fidelity & Deposit Company in New York suggests the philosophical road Roosevelt followed for the next two decades. The bonding business was pervasively political, and FDR in politics was like a duck in water. Political contacts made during his service as Assistant Secretary of the Navy were utilized to the full, new political contacts, encouraged by the Baltimore management of F & D, were made, and FDR had seven years to practice this art of politics in business. The results for F & D were exceptionally good. Business expanded, in some measure perhaps because almost all business expanded in the 1920s, but almost certainly to a major extent because of FDR's political activities. In the period January 1st, 1923 to January 1st, 1924 Fidelity & Deposit showed a gain of $3 million in the year and surged into third place among the bonding companies, a good jump ahead of U.S. Fidelity and Casualty Co., its displaced competitor. The figures read:
Surety Company Bonds in the State of New York
The Fidelity & Deposit office at 120 Broadway was FDR's base of operations in the 1920s, but the bonding business, successful as it was, was not FDR's only business activity. Other interesting endeavors will be explored in subsequent chapters. These seven years in a politically charged business atmosphere—a microcosm of a socialist society, because socialist societies are also politically run economies—were undoubtedly a determining influence in FDR's later approaches to solutions of national economic problems. This was FDR's first exposure to the business world. It was not an exposure to the competitive market elements of price and product quality; it was exposure to business on the basis of "Whom do you know?" and "What are your politics?"—ultimately the most inefficient and unprofitable bases possible for business enterprise.
1. This chapter is based on the FDR papers at Hyde Park, New York: specifically Group 14, file entitled "Fidelity & Deposit Co. of Maryland, Correspondence of FDR as Vice President, 1921-1928."
2. Freidel, The Ordeal, op. cit., p. 138. Freidel is unfair to Roosevelt. No evidence is given of Wall Street criticism of the appointment. Criticism is unlikely—given the political nature of the business, that politics was FDR's strength, and the long Roosevelt tradition on "the Street."
3. Cullen was Manager of the New York production office.