The House of Morgan

by Ron Chernow

  Instead of explaining his decision, Jack sprang it unexpectedly on the public. Then he retreated into a touchy silence, heeding Pierpont’s dictum of never answering press attacks. This made him seem guilty and defensive. One can only speculate as to the reasons behind his self-defeating silence. As a private banker, he would have refrained from any statement suggesting a need to shore up the bank’s capital—no secret was more closely guarded by merchant bankers than their capital position. At this point, the House of Morgan had never been examined by regulators or revealed a balance sheet; Jack wasn’t about to discuss Morgan capital in public. It might have also been hard to explain the urgent need for money without indirectly criticizing his father’s prodigality. If blame was to be meted out, it probably should have been directed toward Pierpont, whose collection had outpaced any provision for its storage and display. It was Pierpont, not Jack, who failed to provide for both bank and art collection. Although he did it in boorish, public-be-damned style, Jack may only have been setting things’ aright.

  THE second crisis shadowing Jack’s first days at the helm involved the New York, New Haven and Hartford Railroad. Joseph Morgan—Pierpont’s grandfather—had sponsored one of its predecessors, giving it a special place in the family. Going on the road’s board after 1892, Pierpont came to rule it with a mixture of sentimentality, explosive rage, and willful blindness almost without equal in Morgan annals. In 1903, he had brought in Charles S. Mellen—called “the last of the railway czars”—to run the New Haven. Mellen had a smooth, domed head, white mustache, and a cold, sarcastic manner that made him the most hated man in Boston. The New Haven would be a folie a deux for Morgan and Mellen, bringing out the worst in both in their contempt for the public.

  The two planned to take over every form of transportation in New England and wantonly usurped steamship lines, interurban electric trolleys, rapid transit systems—anything that threatened their monopoly. The New Haven gobbled up every railroad in Rhode Island, Connecticut, and southern Massachusetts. The centerpiece of their plan was the purchase of the Boston and Maine Railroad in 1907. This was so controversial that Pierpont and Mellen met with President Roosevelt in order to forestall antitrust problems. Though the president offered his tacit consent, he later confessed that he had gone “beyond the verge of propriety in condoning offenses” committed by the New Haven.16

  The New Haven’s expansion was both unwise and unscrupulous. As it paid exorbitant prices to swallow up competitors, its debt load grew crushing. The railroad became a bloated monster of a holding company, with 125,000 employees in 336 subsidiaries. To hide its financial chicanery, it set up hundreds of dummy corporations, some headed by mystified clerks who were periodically called in and told to sign contracts. The House of Morgan made enormous profits from this corporate maze, booking nearly a million dollars in commissions from an incessant flow of stocks and bonds. Meanwhile, the New Haven’s real future competitor—the automobile—escaped the wide net that Pierpont had flung over New England transportation.

  Unbeknownst to the public, the House of Morgan itself was queasy about Mellen’s stewardship. In May 1908, George Perkins wrote to Pierpont, “I still feel, as I have for a couple of years, that Mr. Mellen is getting the New Haven road into considerable of a muddle by his financial methods, and this, I think, is becoming more or less the general opinion.”17 The bank began quietly to sell off its securities in the road.

  Unfortunately for Pierpont’s image, Mellen was a vocal admirer and later said he never undertook any initiative without first consulting Pierpont. “I wear the Morgan collar,” he boasted to reporters, “but I am proud of it. If Mr. Morgan were to order me tomorrow to China or Siberia in his interests, I would pack up and go.”18 He would leave an indelible portrait of Pierpont as an autocratic board member. “It was Mr. Morgan’s way, when he wished to cut opposition and discussion short, to fling his box of matches from him, bring his fist down, and say, ’Call a vote. Let’s see where these gentlemen stand.’ ”19 Other board members, Mellen said, cowered and submitted to him.

  The Morgan patronage had definite advantages for the railroad. The New Haven’s stock was considered the safest of blue-chip investments and sported a high dividend. And Charles Mellen had redeeming features as a railroad man. For the first time, he enabled passengers to travel from New York to Boston without switching lines. The problem was that Mellen was a thorough rascal. Here was William Allen White’s verdict: “Mellen, in the eyes of economic liberals, was the head devil of the plutocracy in Massachusetts and New England. . . . In politics, Mellen walked to his ends directly, justified by the conscience of a plutocrat, which held in contempt the scruples of democracy.”20

  Congressional investigators later revealed that Mellen handed out about a million dollars in bribes on one suburban line alone. Beyond shame, he even suborned a Harvard professor to deliver lectures favoring lenient regulatory treatment for trains and trolleys. So pervasive was New Haven power in New England that it was termed the “invisible government.”21 Mellen’s largesse extended right up to the Republican National Committee. When later granted immunity from prosecution, Mellen almost gloried in the vicious squalor, the total absence of business scruples. Testifying about the competition between the New Haven and a rival, he was asked what form it took. “Any form you can imagine—one man cutting the heart out of another, except they were two railroads.”22

  An open scandal, the New Haven attracted the attention of the most cunning and resourceful foe the House of Morgan would ever face—Louis D. Brandeis, now a “people’s lawyer” but later a Supreme Court justice. The son of eastern European immigrants, a Harvard Law graduate, Brandeis was already a millionaire lawyer in 1907 when he took on the New Haven as a public-interest cause. That year, he spearheaded the fight against the purchase of the Boston & Maine.

  Brandeis conducted a searching critique of the Gentleman Banker’s Code—those rituals that governed competition among elite banking houses. He sounded themes of excessive banker influence that would be amplified by the Pujo hearings and echoed in the New Deal, later shaping Securities and Exchange Commission policy. He argued for an arm’s-length distance between bankers and companies. For Brandeis, bankers who sat on corporate boards were in a conflict-of-interest situation. Far from being neutral confidants of companies, they were tempted to load up clients with unneeded bonds or charge them inflated commissions. The House of Morgan was his major object lesson; he said it symbolized “a monopolistic and predatory control over the financial and industrial resources of the country.”23 The Brandeis critique was predicated not on government regulation of monopolies but on breaking them up and reverting to a small-scale competitive economy. Over time, this view would prove far more threatening to the House of Morgan than the trust-busting of Teddy Roosevelt and other supporters of large-scale industry.

  The New Haven’s day of reckoning came in 1911, when its debt burden forced layoffs, pay cuts, and deferral of critical track maintenance. The road piled up a grisly record of train wrecks—four that year, seven the next—that caused dozens of deaths. As the train wrecks mounted in 1912, Brandeis found an ever-wider audience for his attacks on the New Haven, and the Interstate Commerce Commission began to hold hearings on the matter. That summer, Brandeis went to Sea Girt, New Jersey, to consult with Woodrow Wilson, the Democratic presidential nominee. Brandeis advised Wilson on economic matters, wrote speeches, and slipped the Money Trust into his rhetoric, getting Wilson to espouse an end to interlocking directorates between bankers and industrial companies. For Brandeis, the New Haven was an archetypal battle in the eternal war between “the people” and “the interests.”

  Threatened by Brandeis, Mellen fought back in inimitably dirty style. A Boston publication called Truth, subsidized by the New Haven, portrayed Brandeis as an agent of Jacob Schiff and described his campaign as part of the “age-long struggle between Jew and Gentile.”24 In December 1912, Mellen and Morgan issued a stinging press release, accusing Brandeis
of trying to destroy confidence in the New Haven. But Brandeis was winning converts, and Mellen was indicted by a federal grand jury on antitrust charges. He waived immunity, apparently hoping to spare Pierpont the strain of a subpoena during the Pujo investigation. The Pujo report further bolstered Brandeis’s case against Morgan and the New Haven. And that was where matters stood at Pierpont’s death.

  That Pierpont’s sins would be visited on Jack became evident on June 12, 1913, when a New Haven collision at the Stamford station killed seven passengers. Wilson’s new attorney general, James C. McReynolds, already had civil and criminal suits against the New Haven in the works, and the climate was ripe for trustbusters to intensify their campaign. On July 9, the Interstate Commerce Commission published a report criticizing the New Haven’s financial management and recommending that the New Haven be stripped of its trolley and steamship holdings. Here came a critical watershed in Morgan history. As a banker of the Baronial Age, Pierpont would have stood obstinately by Mellen, spewing rage. But Jack had replaced his father on the railroad board. Heeding the ICC warning, he ousted Mellen and overrode the rest of the board to do so. It wasn’t that Jack had any ideological sympathy with government regulation; he was as rabid on the subject as his father. But as a tactical matter, he was more conciliatory—more a banker of the Diplomatic Age. The New Haven board brought in Howard Elliott of the Northern Pacific to replace Mellen.

  The New Haven would always be a touchy subject with the Morgans, who considered themselves benefactors of New England. Pierpont had been the proud president of the New England Society. His grandson Harry Morgan later said that Pierpont “was so loyal to the region” that he had “a blind spot when it came to New England and the New Haven’s place in it.”25 Facing a chorus of criticism, Jack tried to defend his deceased father, claiming that in his last years he had spent half his time abroad and couldn’t possibly be held responsible for the railroad’s excesses. Yet Jack’s cables reveal that Pierpont stayed in touch on New Haven matters. He might have been gallivanting on the Riviera or cruising up the Nile, but he followed the railroad’s affairs. In 1910, Mellen had wanted to extend the New Haven’s territory to the newly completed Pennsylvania Station in Manhattan. Sensing a competitive threat to his other ward, the New York Central, Pierpont threatened to resign if Mellen persisted. All the way from Rome, he bellowed, “You can tell C. S. Mellen with my compliments that if he persists in proposed policy he will, in my opinion, make mistake of his life.”26 Pierpont was remote in body but not in spirit.

  Even after Howard Elliott’s appointment, horror stories still abounded at the New Haven. In September 1913, another wreck outside New Haven killed twenty-one passengers and trapped forty boys returning from summer camp. An ICC report blamed Morgan and Mellen. Then, in a final humiliation for the bank, the debt-riddled New Haven skipped its dividend in December for the first time in forty years. It was a classic widows-and-orphans stock, and thousands of small investors lost their income before Christmas. Whether from shame, anger, or a desire to avoid blame, both Jack Morgan and George F. Baker missed the meeting at which the historic vote was taken. Attorney General McReynolds still breathed down the necks of the New Haven board, which he thought was dominated by bankers. The Morgan men knew they were outflanked. “Whole situation disgusting,” Harry Davison cabled to Jack, “but must recognize that Brandeis et al have ear of President and Attorney General just now.”27 Jack told Davison that he would resign from the New Haven board, except that it might be seen as confirming Brandeis’s attacks on him and his father.

  During the New Haven controversy, there was an important sideshow that never came to light. During the fall of 1913, Brandeis published his influential series Other People’s Money—and How the Bankers Use It, in Harper’s Weekly. His critique of the Gentleman Banker’s Code argued that bankers on corporate boards introduced nepotism and double-dealing. As a result of these articles, Tom Lamont decided to put into effect his new public relations policy of meeting privately with bank critics. Through Norman Hapgood, editor of Harper’s Weekly, he arranged for a private chat with Brandeis in December 1913 at the University Club on Fifth Avenue. A verbatim transcript of the meeting survives.

  Let us picture the antagonists as they settled into their armchairs. Speaking with a Kentucky drawl, the young Brandeis had a wide face, large jug ears, powerful shoulders, and flaring eyes. Lamont was short and elegant, had a look of keen, watchful amusement, and was very tough beneath the charm. Confident of his persuasive powers, Lamont was as refined with strangers as Jack was awkward. In his meeting with Brandeis, we see him emerging as the principal image maker and ideologist of the House of Morgan.

  Lamont cast Pierpont’s faith in Charles Mellen as a virtue: “Mr. Morgan had that large nature which led him almost blindly to have faith in a man when once it was established.”28 He reiterated Morgan dogma that bankers were responsible to investors and had to be on boards to safeguard their interests. Brandeis retorted, “You could be kept precisely as fully in touch and informed off the board as you are on.”29 Lamont seemed caught off guard. Rather than having bankers negotiate private deals with clients, Brandeis espoused open, competitive bidding for securities offerings. Lamont said this worked fine in good times, when investors readily took new issues, but left companies adrift in bad times, when investors became apprehensive. These arguments would reverberate for forty years.

  Both Lamont and Brandeis tried to sound friendly, although Brandeis was more dogged, relishing a chance to confront his adversary face-to-face. After a time, it grew clear that both men circled around something unspoken—namely, mythical Morgan power, the belief on Wall Street that if the bank had a single director on a board, he would dictate to all the others. Lamont was exasperated by glancing references to this power and finally confronted it directly:

  Lamont: You are picturing our firm . . . as having this gigantic power over men and matters.

  Brandeis: But it has that power, Mr. Lamont. You may not realize it, but you are feared, and I believe the effect of your position is toward paralysis rather than expansion.

  Lamont: You astonish me beyond measure. How in the world did you arrive at the belief that people are afraid of us, or that we have this terrific power?

  Brandeis: From my own experience.30

  Brandeis told how he had foreseen the New Haven debacle, had gone to Boston bankers to complain about the railroad’s management, and was told the road was “Mr. Morgan’s particular pet” and that they feared being excluded from future Morgan bond syndicates if they offered any protest. This was probably true: any firm that refused to participate on one Morgan issue might be penalized on others.

  In the end, Brandeis scored more points in the debate—one senses Lamont was unprepared for the attorney’s fierce intelligence—but neither side budged in his position. Yet the conversation resonated in Lamont’s mind, particularly Brandeis’s charge that Wall Street lacked interest in small businesses. Years later, when advising Woodrow Wilson at Versailles, Lamont asked the president if he could cite a single instance of a deserving company being denied credit on Wall Street; according to Lamont, Wilson could not. The Brandeis encounter started a lifelong effort by Lamont to present a coherent case for Morgan power. He needed to make others believe in the bank’s virtue. Through him, Wall Street’s most reticent bank would acquire a refined voice and an explicit ideology.

  In the Diplomatic Age, companies remained tied to their Wall Street bankers, but the strings were already loosening. The Baronial Age was based on the immaturity of industry. Now large companies were accumulating cash reserves and financing expansion from retained earnings. When private bankers were better known than the companies they sponsored, exclusive relations with clients guaranteed their access to scarce capital. But such Morgan offspring as AT&T, U.S. Steel, and International Harvester were now becoming established companies on a national and even a global scale, outgrowing the need for banker protection.

  For Pierpont’s
generation of bankers, membership on the boards of client companies was an article of faith. But in January 1914, hoping to placate the Wilson administration, Morgan partners startled Wall Street by resigning as directors from thirty companies, including banks, railroads, and industrial firms. Jack resigned not only from the New Haven, but from the New York Central, the National City Bank, the First National Bank, and the National Bank of Commerce. (By lumping the New Haven with the others, he didn’t give Brandeis the satisfaction of a lone resignation.) He hoped this would stop legislation, supported by Wilson, outlawing bank-company interlocks. The Clayton Antitrust Act of 1914 forbade interlocking boards of competing companies but didn’t stop bankers from sitting on the boards of client companies.

  Changes in the government-business balance were now occurring with amazing speed. In 1913, the Sixteenth Amendment was ratified; the following year, income taxes soared, and the Federal Trade Commission was created. Jack accepted the changes bitterly. Like Pierpont, he would store up anger silently until it overwhelmed him. Now he stewed inwardly, indulging in jeremiads that prefigure his remorseless hostility toward the New Deal. He inveighed against “destructive elements” that had supposedly controlled the country since Teddy Roosevelt. He wrote a friend in June 1914: “A greater lot of perfectly incompetent and apparently thoroughly crooked people has never, as far as I know, run, or attempted to run, any first-class country. The Mexicans are far better off, because their various bosses only murder and rape, and our bosses run the country and make life intolerable for a much larger number of people.”31