The House of Morgan

by Ron Chernow

  An important part of Pierpont’s duties in New York was supplying his father with political and financial intelligence. Merchant banks required news about government financings or the credit of client companies and placed a premium on such information. The Rothschilds had a celebrated covey of carrier pigeons and courier boats at Folkestone. In a famous lament, Talleyrand sighed, “The English ministry is always informed of everything by Rothschilds ten to twelve hours before Lord Stuart’s dispatches arrive.”10

  Pierpont began drafting lengthy letters to his father, outlining political and economic conditions in America and posting them on Nassau Street. He reserved Tuesday and Friday evenings for these reports. For thirty-three years, Junius not only digested them but bound them, like sacred relics, and set them on his shelf. Whether less sentimental than Junius—or else aghast at their contents—Pierpont burned the collection in 1911, twenty-one years after his father’s death.

  For these thirty-three years, Junius and Pierpont had an intense relationship, despite the geographical distance. They managed to spend an enormous amount of time together: in the fall of each year, Junius made an annual trip to the United States of up to three months, and in the spring Pierpont made his ritual London pilgrimage. But their separation at other times of the year only heightened Junius’s anxiety that he couldn’t tame his son’s wayward nature. He pumped the poor boy full of endless advice and was full of maxims. No aspect of Pierpont’s life was too trivial to be overlooked. “You are altogether too rapid in disposing of your meals,” he told him. “You can have no health if you go on in this way.”11

  During the Civil War, Pierpont confirmed his father’s fears concerning his rashness. Amid a mad rush of Wall Street profiteering, Pierpont financed a deal in 1861 that, if not unscrupulous, showed a decided lack of judgment. One Arthur M. Eastman purchased five thousand obsolete Hall carbines, then stored at a government armory in New York, for $3.50 apiece. Pierpont loaned $20,000 to a Simon Stevens, who bought them for $11.50 each. By “rifling” these smooth-bore weapons, Stevens increased their range and accuracy. He resold them to Major General John C. Fremont, then commander of the Union forces in Missouri, for $22 each. Within a three-month period, the government had bought back its own, now altered, rifles at six times their original price. And it was all financed by). Pierpont Morgan.

  The extent of Pierpont’s culpability in the Hall carbine affair has been endlessly debated. The unarguable point is that he saw the Civil War as an occasion for profit, not service—though he had an alternative role model in his grandfather, the Reverend Pierpont, who served as a chaplain for the Union army when it was camped on the Potomac. Like other well-to-do young men, Pierpont paid a stand-in $300 to take his place when he was drafted after Gettysburg—a common, if inequitable, practice that contributed to draft riots in July 1863. (A future president, Grover Cleveland, also hired a stand-in, although he had a widowed mother to support.) In later years, Pierpont would humorously refer to his proxy as “the other Pierpont Morgan,” and he subsidized the man. During the war, he also leapt into wild speculation in the infamous “gold room” at the corner of William Street and Exchange Place. Prices would gyrate with each new victory or defeat for the Union army. Pierpont and an associate tried to rig the market by shipping out a large amount of gold on a steamer and earned $160,000 in the process.

  If Pierpont seemed corrupted by rowdy wartime Wall Street, he could also be unexpectedly tenderhearted. In 1861, the year of the Hall Carbine Affair, Pierpont, then twenty-four years old, had a quixotic love affair with Amelia Sturges, a frail girl with oval face and hair parted down the middle whom Pierpont had known for two years. Her father was a patron of the Hudson River school of artists, and her mother was an excellent pianist. When Pierpont wed Mimi in the parlor of her family’s East Fourteenth Street townhouse, she already had a terminal case of tuberculosis. Pierpont had to carry Mimi downstairs and prop her up during the ceremony. Guests watched this vignette from a distance, through an open door. After the ceremony, Pierpont carried his bride to a waiting carriage.

  They had a touching if bizarre honeymoon, Pierpont toting Mimi around the warm Mediterranean ports and hoping to restore her health. When she died in Nice four months later, Pierpont was inconsolable, and his pious adoration for her never ceased. When he afterwards bought his first painting, it was of a young fey woman, and he hung it in an honored place over his mantle. The experience with Mimi may have taught Pierpont the wrong lessons—a fear of his best impulses, a need to stifle his deep-seated romanticism. Beneath their straitlaced exteriors, the Morgans would always be a sentimental clan, their public reserve often warring with powerful private emotions. Over fifty years later, Pierpont in his will bequeathed $100,000 to endow a rest home for consumptives, called the Amelia Sturges Morgan Memorial. Even his son, Jack, would regard the memory of Mimi as sacred and to be discussed only in hushed tones.

  Observing his son’s reckless dealings and startling choice of a wife, Junius decided to take Pierpont’s life in hand. Between Pierpont and Junius Morgan, there would be total loyalty but also a fierce contest of wills. In 1864, Junius orchestrated an alliance between Pierpont, then twenty-seven, and Charles H. Dabney, thirty years his elder, to form the new firm of Dabney, Morgan and Company. Bolstered by capital from Junius, it would serve as his New York agent. He would retain final control over the credits it issued and the clients it selected. Dabney was expected to exert a steadying influence on Pierpont, and for the next twenty-six years Junius kept a moderating father figure near his son.

  In his private life, too, Pierpont fell into line. In May 1865, he married Frances Louisa Tracy—Fanny, as she was known—daughter of a successful lawyer, Charles Tracy, who later performed legal work for Pierpont. She was tall and pretty, with a rosebud mouth. She had a taste for elegant gloves and earrings and seemed thoroughly safe and respectable. If Mimi was a temporary madness, Frances was a return to sanity. Yet it was Mimi whose memory Pierpont would cherish, while the “practical” marriage to Fanny would prove the fiasco, causing terrible pain to them both. Pierpont’s unrequited romantic longings would only grow over the years until they later found other—and notoriously varied—outlets.

  THE father-son team of Junius and Pierpont Morgan came on the world banking scene at a time of phenomenal expansion of banking power. We shall call it the Baronial Age. It coincided with the rise of railroads and heavy industry, new businesses requiring capital far beyond the resources of even the wealthiest individuals or families. Yet, despite these tremendous needs for capital, financial markets were provincial and limited in scope. The banker allocated the economy’s scarce credit. His imprimatur alone reassured investors that unknown companies were sound—there were no government agencies to regulate securities issues or prospectuses—and he became integral to their operation. Companies would come to be associated with their bankers. The New York Central Railroad, for instance, would later be called a Morgan road.

  In this phase of the Industrial Revolution, companies were dynamic but extremely unstable. In an atmosphere of feverish growth, many businesses fell into the hands of unscrupulous promoters, charlatans, and stock manipulators. Even visionary entrepreneurs often lacked the managerial skills necessary to convert their inspirations into national industries, and no cadre of professional managers yet existed. Bankers had to vouch for securities and often ended up running companies if they defaulted. As the Baronial Age progressed, the line between finance and commerce would blur until much of industry passed under the control of the bankers.

  With such leverage over companies, the leading bankers developed a superior style, behaving like barons to whom clients paid tribute. They operated according to a set of customs that we will call the Gentleman Banker’s Code. The House of Morgan would not only transplant this code from London to New York but would honor it until well into the twentieth century. Under this code, banks did not try to scout out business or seek new clients but waited for clients to arrive with pr
oper introductions. They didn’t open branch offices and refused to take on new companies unless the move was first cleared with their former banker. The idea was not to compete, at least not too openly. This meant no advertising, no price competition, and no raiding of other firms’ clients. Such an arrangement worked to the advantage of established banks and kept clients in an abject, dependent position. But it was a stylized competition—a world of sheathed rapiers—not a cartel, as it often seemed. The elegance of the surface often blinded critics to the vicious underlying relations among the banks.

  No less than to industry, bankers dictated terms to sovereign states, and countries, like companies, had their “traditional bankers.” Benjamin Disraeli wrote of “the mighty loan-mongers on whose fiat the fate of kings and empires sometimes depended.”12 Byron’s witty couplet claimed their “every loan . . . seats a Nation or upsets a Throne.”13 The bankers acquired such power because many governments in wartime lacked the sophisticated tax machinery to sustain the fighting. Merchant banks functioned as their ersatz treasury departments or central banks before economic management was established as a government responsibility. The London banks didn’t lend their own funds but would organize large-scale bond issues. Through conspiring closely with governments, they acquired a quasi-official aura. Joseph Wechsberg has referred to merchant banks operating “in the twilight zone between politics and economics.”14 This was turf the Morgans would later claim as their own. It was also very lucrative turf, for bankers to sovereign states might also handle their foreign-exchange transactions and pay out dividends on their bonds.

  Every London house could unfurl a scroll of illustrious state loans. From their Saint Swithin’s Lane townhouse, the Rothschilds financed Wellington’s peninsular campaign and the Crimean War. A familiar adage said that the wealth of the Rothschilds consisted of the bankruptcy of nations. In 1875, Lionel Rothschild would arrange the £4-million financing that permitted Britain to wrest control of the Suez Canal from France. Disraeli laughingly confided to Queen Victoria, “I am of the opinion, Madame, that there never can be too many Rothschilds.”15

  Besides bankrolling the Louisiana Purchase, Barings financed the French indemnity payment after Waterloo, prompting a lapidary tribute from the due de Richelieu: “There are six great powers in Europe: England, France, Prussia, Austria, Russia, and Baring Brothers.”16 After the failure of Ireland’s potato crop in 1845, the Peel government used Barings to buy American corn and Indian meal to relieve the famine—so-called Peel’s brimstone. By the time of the Civil War, Barings was the agent bank for Russia, Norway, Austria, Chile, Argentina, Canada, Australia, and the United States. For their trouble, the grandees at 8 Bishops-gate were awarded with four peerages by the close of the nineteenth century—Ashburton, Northbrook, Revelstoke, and Cromer.

  Why this perfect mesh between merchant banks and statecraft? As private partnerships, these small banks were free of prying depositors or shareholders and could indulge their political biases. They didn’t have to submit to outside examination, and their naturally discreet style made them ideal channels for diplomacy. Because they financed overseas trade, they were far more internationalist in outlook than the High Street bankers who financed British industry and dealt largely with shopkeepers.

  The rarefied world of the Rothschilds and the Barings was the one Junius Morgan aspired to—a world hitherto barred to Americans. After Peabody’s death, he needed some dazzling derring-do with which to leap into the top ranks of Victorian finance. Only so much glory could be gained from trading Chinese tea or Peruvian guano or selling iron rails to Commodore Vanderbilt. Now in his late fifties, Junius had grown stout with wealth. He was an imposing six-foot figure, with high forehead, beetling brow, and watchful eyes. As an early American patron of Savile Row’s “bespoke” tailors, he dressed in suits conservatively tailored by Poole’s.

  With Peabody gone, he urgently needed to replenish his capital base, which was still meager compared to the Rothschilds and the Barings. Yet he was extremely selective about the business he did and had learned the need for caution. As he lectured Pierpont, “Never under any circumstances do an action which could be called in question if known to the world.”17

  Junius’s big chance for a state financing came in 1870, when the Prussians crushed French troops at Sedan in September, seized the emperor, Napoleon III, and laid siege to Paris. After a republic was proclaimed, French officials retreated to Tours and set up a provisional government. Otto von Bismarck, the Prussian chancellor, tried to isolate the French diplomatically. When they approached London for financing, he conducted a propaganda campaign, blustering that a victorious Germany would make France repudiate its debt.

  A rare opportunity opened up for an enterprising banker. This was one of the few times in the century that financially self-sufficient France needed to raise money abroad. Barings had floated Prussian loans and didn’t wish to upset delicate relations by dealing with France; the Rothschilds dismissed the French cause as hopeless. The City had lately been rocked by defaults in Mexico and Venezuela, and nobody was in a particularly venturesome mood for foreign loans. Enter Junius, who decided to float a syndicated issue for France of £10 million, or $50 million. The French hoped that by using an American banker, they might also be better positioned to purchase American arms.

  The French loan showed that he hid a riverboat gambler’s flair behind the steely air. This would be Junius’s signature deal, complete with that obligatory Rothschild touch—carrier pigeons. In backing France, he had to contend with Bismarck, who was privy to his moves. It later turned out that the private secretary of the French finance minister was a German spy and was feeding Bismarck daily reports on their dealings. Because Junius couldn’t speak French and wouldn’t take anything on faith, he brought over from France his son-in-law and later partner Walter Hayes Burns to act as translator. Junius insisted that every French document be accompanied by a certified translation.

  An innovation in European finance was then enhancing the bankers’ power—the syndicate, elite groups of banks that practiced what the French called haute banque. Instead of floating bond issues alone, the banks pooled their capital to share the risk of underwriting. Reflecting the extraordinary risks of the French loan, a Morgan-led syndicate offered the bonds at 85. This was 15 points below par—the value at which the bonds could later be redeemed. This sharp discount was designed to coax a skittish public into buying. The French felt blackmailed by these degrading terms, which they thought suitable for a Peru or Turkey. Yet Junius hadn’t exaggerated the risks. After Paris fell in January 1871, followed by the Paris Commune, the bonds dropped from 80 to 55, and Junius desperately bought them to prop up the price, nearly wiping himself out. This was all very strange for a man who had urged caution on Pierpont: he was betting the future of his firm on one roll of the dice.

  Whatever the risks, it must have been a heady experience for an American to be swaggering like a Rothschild and playing with gigantic sums. The loan had its full complement of theatrics. A brief Morgan Guaranty history still pulsates with the excitement of the episode: “Some communications between Paris and London were implemented by the use of a fleet of carrier pigeons. Several of them, bearing capsules filled with text on tissue paper, actually completed their journeys. One particularly bulky package of documents was sent from Paris to London by balloon! ”18 Some pigeons were apparently shot down and gobbled up by starving Parisians. This left French politicians in the dark during critical moments in the bargaining.

  When the war ended, the defeated French didn’t renege on the loan, as Bismarck predicted. Instead, they prepaid the bonds in 1873, bringing them up to par, or 100. As with Peabody and his Maryland bonds, Junius pocketed a fortune from this sudden windfall. The loan netted him a whopping £1.5 million. This vastly augmented his firm’s capital and propelled him into the upper ranks of government financing. Now the name J. S. Morgan and Company would appear frequently in “tombstone ads” (apparently so called becau
se of their rectangular shape and placement on newspaper obituary pages) announcing underwriting syndicates.

  George Smalley said that with the 1870 French loan, his friend Junius went from being a successful man to a power in the City. His impressions of Junius at this moment are telling. On the one hand, he was modest and breezily dismissive about his triumph. He said he had researched the history of twelve French governments since 1789, and “not one of these governments had ever repudiated or questioned the validity of any financial obligation contracted by any other. The continuing financial solidarity of France was unbroken.” But Smalley wasn’t fooled by such nonchalance. He noted “a fire in his eyes as he spoke which showed he was not insensible to the triumph he had won. Why should he be? It was considered, and has ever since been considered, an event in the history of English finance.”19

  As Junius developed into the wealthiest American banker in London, he acquired the trappings of magnificence. He lived in a Knightsbridge mansion, 13 Princes Gate, a five-story building of neoclassic design facing the south side of Hyde Park. The Morgan household was very dignified. Attended by butlers, the family dressed formally for dinner, which concluded with claret and Havana cigars. It was also a pious place, with Junius lining up the servants each morning for prayers. Following merchant-banking tradition, Junius dabbled in art collecting and often visited galleries with Pierpont when his son was in town. Junius’s friends said his home resembled a museum, with sixteenth-century Spanish embroidery on the walls, silver-filled vaults, and an excellent collection of paintings by Reynolds, Romney, and Gainsborough.

  Seven miles away, in the London suburb of Roehampton, Junius purchased Dover House, a ninety-two-acre estate with rolling lawns that swept down to the Thames. It was a miniature kingdom. Its dairy flowed with fresh milk and cream, its hothouses yielded blooms, gardeners tended strawberry beds, and children played on playground swings. Dover House was rustic in a formal way, with well-spaced trees and trimmed lawns. In a photograph from 1876, Junius is playing tennis dressed in bowler hat and a three-piece suit and is clutching his racket like a club; he looks incongruous in a recreational setting. Periodically he performed his patrician duty and shot pheasants on a moor.