Relationship Banker: Eugene W. Stetson, Wall Street, and American Business, 1916-1959

Published by EH.NET (August 2010)

James L. Hunt, Relationship Banker: Eugene W. Stetson, Wall Street, and American Business, 1916-1959. Macon, GA: Mercer University Press, 2009.? xxv + 386 pp. $35 (hardback), ISBN: 978-0-86554-915-9.

Reviewed for EH.NET by J. Peter Ferderer, Department of Economics, Macalester College.

In August 1919, after months of cloak-and-dagger intrigue, the Coca-Cola Company was taken public in what was at that time the largest business transaction in the history of the South.? The deal was brokered by Eugene W. Stetson of Guaranty Trust Company of New York and involved the sale of $25 million of stock, much of which was purchased at bargain prices by a small group of bank insiders.? Importantly, none of the shares had voting rights.? Rather, control over Coca-Cola rested in a three-person voting trust composed of the company?s president, the owner of a small Atlanta bank which bought a large stake (Ernest Woodruff) and Eugene Stetson.? At the time of his death in 1959, Stetson was the company?s longest serving board member.???

James L. Hunt, Associate Professor of Law at the Eugene W. Stetson School of Business and Economics and Walter F. George School of Law at Mercer University, has written an excellent biography of Eugene Stetson, full of illuminating stories such as these.? The more ambitious objective of the book is to shed light on the practice of relationship banking during the first half of the twentieth century.? Hunt contends that scholars have not fully appreciated the role of the ?human element? in banking history and attempts to address this shortcoming by exploring Stetson?s career.

Hunt describes several features of relationship banking.? First, it involved repeated transactions between banks and their clients over many years.? Second, banks frequently sacrificed short-term gain for the opportunity to provide an array of profitable services to clients in the long-run (e.g., secured loans, underwriting, trust management, foreign exchange).? Third, the relationship banker relied on ?soft? information and had to understand his client?s business at a deep level across many dimensions (i.e., the political environment it operated in, its patents and trademarks, its suppliers and competitors, etc.)? Fourth, the relationship banker was a ?steward of the client?s business, on par with the client?s chief executive officer? (p. 97).? Finally, friendship frequently accompanied the business relationship because it helped build and maintain cooperation.?

One way to understand the economic function of relationship banking is to consider the theory of the firm put forth by Coase (1937) and Williamson (1985).? Given asymmetric information, economic actors have an incentive to construct coordination mechanisms that reduce the likelihood that they will be exploited when goods and services are traded.? In pure market exchange, transactions are one-shot and the trading parties are unable to punish each other for opportunistic behavior by refusing to trade a second time.? In hierarchies, opportunistic behavior is minimized through permanent command relationships between superiors and subordinates.? Between these two extremes lie long-term relationships: ?transactions among otherwise independent economic actors in which the parties voluntarily choose to continue dealing with each other for a significant amount of time? (Lamoreaux, Raff, and Temin, 2003, p. 407).? The desire to maintain the relationship ? and profit from the business opportunities it produces ? curbs the incentive to misrepresent and cheat.?????????

If there is a weakness of this book it is that Hunt does not firmly ground his analysis in the Coasean theory of the firm and say more about the historical circumstances that caused relationship banking to dominate during the first part of the twentieth century.? His basic argument is that the high level of economic instability during this period caused businesses to value greater interconnectedness with banks.? Banks, in turn, served the role of patient creditors and rainmakers in return for corporate control and semi-monopoly power in the pricing of their services.? Using this line of reasoning, one could conjecture that the originate-and-distribute model of banking which has become popular in the past few decades ? and implicated by many in the recent sub-prime financial crisis ? was the result of the Great Moderation.? While there may be some truth to this argument, it seems that a broader set of technological, institutional and ideological forces were at work.?

The real strength of Relationship Banker is Hunt?s biographical treatment of Eugene Stetson, an excellent choice of study for two reasons.? First, his Southern roots (born in Georgia to an officer in the Confederate Army, student at Mercer College in Macon, and successful small-town banker specializing in cotton financing) help illustrate how certain strategically located individuals facilitate the flow of capital across regions by bridging cultural divides.? Guaranty Trust of New York hired Stetson in 1916, not only because he was a good banker, but also because he enabled the bank to develop profitable business in the South.? For instance, his ties to Southern cotton helped Guaranty become the leading American financier of cotton exports during World War I.? Stetson also utilized his Southern connections in the Coca-Cola transaction and other deals.???

The move to New York was not only financially rewarding for Stetson, but it also provided him with the opportunity to promote his vision for the New South, one which emphasized manufacturing over agriculture and local control.? For example, the Coca-Cola transaction kept the company in Atlanta under the stewardship of the Woodruff family ? a move that paid huge dividends for the South in 1979 when the Woodruffs made Emory University one of the richest universities in America with a $105 million gift of Coca-Cola stock.?

The second reason why Stetson?s career is important to study is that he possessed several unique abilities that allowed him to rise from humble beginnings to become one of the most successful relationship bankers of his generation.? According to Hunt, Stetson gained the confidence of other men with his ?knowledge, personality, and willingness to be forceful or conciliatory as conditions demanded? (p. 354).? He is also credited with being one of the first financiers to recognize the value of a ?brand? (Stetson believed that the Coca-Cola brand was four times more valuable than the company?s hard assets).?

Indeed, there is considerable evidence that Stetson was an extremely talented relationship banker.? He rose steadily through the ranks of Guaranty Trust, from vice president in 1916, to member of the board in 1928, to president in 1941, and chairman of the board in 1944.? The list of business titans with whom he built multidimensional and long-lasting relationships included Averell Harriman, J. P. Morgan partner Thomas Lamont, Robert Woodruff, Thomas Watson Sr., and many others.? When Harriman entered politics in the 1930s, Stetson became one of his trusted lieutenants and managed several of his economic interests including W.A. Harriman Securities, Aviation Corporation, and the Illinois Central Railroad.? Finally, Stetson was appointed to a mind-boggling number of corporate boards, spanning a diverse set of industries including banking, insurance, manufacturing, petroleum, soft drinks, carbonation, sugar, textiles, machinery, automobiles, railroads, tobacco, drugs, baking, alcohol, and more.?

Stetson used his strategic position on corporate boards to arrange mergers, joint ventures and simpler deals.? For example, during the 1920s he sat on the boards of Coca-Cola, Air Reduction Company (which supplied carbonation to Coke), Cuban Sugar (a producer of one of Coke?s main ingredients), and Canada Dry Ginger Ale (Coke?s competitor).? Like a telephone switching station or the hub of a wheel, Stetson connected these firms for their mutual gain.?

It is widely acknowledged that transportation and communication networks played a fundamental role in American economic development by expanding the size of the market and allowing firms to exploit economies of scale.? Hunt?s analysis is important because it helps us understand how human networks complemented these physical ones.? While relationship banking could lead to cronyism, it also had considerable potential to reduce asymmetric information problems by leveraging reputation.? Eugene Stetson?s career makes this point clear.??????????

References:

Coase, Ronald. ?The Nature of the Firm,? Economica, Vol. 4, No. 16, (November 1937), pp. 386-405.

Lamoreaux, Naomi R., Daniel M. G. Raff, and Peter Temin, ?Beyond Markets and Hierarchies: Toward a New Synthesis of American Business History,? Vol. 108, No. 2, American Historical Review, (April 2003), pp. 404-32.

Williamson, Oliver. The Economic Institutions of Capitalism, New York: The Free Press, 1975.??

J. Peter Ferderer is Professor of Economics at Macalester College in St. Paul, Minnesota.? He is currently working on a book which examines the development of the over-the-counter securities markets over the past two centuries.

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