The House of Morgan

by Ron Chernow

  When Dwight Morrow, George Whitney, and Tom Cochran went to Durant’s Fifty-seventh Street offices, they found a scene out of a melodrama. His debts had bulged to an extraordinary $38 million, and his anteroom was crowded with creditors demanding repayment. The Morgan partners saw a possible repeat of the 1907 panic, with Durant defaults shutting down a string of brokers. In a frenetic, all-night rescue session, the Morgan men bought up Durant’s shares at $9.50 per share—a steep discount from the closing price. The du Ponts put up $7 million, and the House of Morgan raised another $20 million to save Durant from margin calls. By dawn, a new company had been formed to buy Durant’s stock. Durant’s share of the new company was only 40 percent, while the du Ponts held 40 percent, and the Morgan-led bankers took 20 percent as their commission. Pierre du Pont was ready to deal leniently with Durant, but the pitiless Morgan partners insisted that he resign from GM. Overnight, the du Ponts and J. P. Morgan and Company had kidnapped an industrial empire. Two weeks later, Pierre du Pont emerged from retirement to become president of General Motors, a position he held until Alfred P. Sloan, Jr., replaced him three years later.

  It was a double coup in Morgan history, for it confirmed the bank’s relationship with General Motors and won the loyalty of the du Ponts. As Pierre du Pont wrote to his brother, Irenee, “Throughout the whole transaction the Morgan partners have appeared to the greatest advantage. They threw themselves into the situation wholeheartedly, stating at the start that they asked no compensation. They have acted with remarkable speed and success, the whole deal involving $60 million or more, having planned and practically completed it in less than 4 days.”43

  What about William Crapo Durant? An unreconstructed plunger, he lost half his net worth in the 1929 crash. In later years, he ran a bowling alley in Flint, Michigan. Poor and almost forgotten, he died in New York in 1947.

  DURING the 1920s, a cash-rich America embarked on a binge of buying foreign bonds, a new experience for a country that had long relied on European capital markets to finance its own development. The investing fad had begun when the Treasury sold Liberty and Victory bonds in denominations as small as $50, enticing a public new to buying bonds. After the war, the habit of investing persisted. If Americans traditionally put their money into savings banks, insurance policies, and old mattresses, now they bought bonds en masse. Brokerage houses encouraged Americans to think of themselves as potential tycoons, global benefactors, embryonic J. P. Morgans.

  The big New York City banks scrambled for the new business. National banks were barred from underwriting and distributing securities, but they could bypass such restrictions by creating separate securities subsidiaries. Chase, National City, and Guaranty Trust opened such affiliates. They sent out thousands of agents across the country, plying investors with a dizzying array of foreign bonds from Brazil and Peru, Cuba and Chile. At the same time, many American banks invaded overseas markets. Before the 1913 Federal Reserve Act, only state-chartered banks could have overseas branches—one reason why J. P. Morgan and Company had an enormous head start with foreign clients. Now nationally chartered banks could do the same. The glad-handing, fast-talking American banker became a figure of folklore around the world.

  In a burst of activity, National City went into Russia (where its branches were confiscated by the Bolsheviks), set up a thriving business in China, and established branches in Buenos Aires and Rio de Janeiro. Where Barings had long been dominant in Argentinean business, it was overtaken in the postwar years by National City, J. P. Morgan and Company, and Kuhn, Loeb. At the same time, the City was paralyzed by the Treasury embargo on foreign loans and lost many long-standing sovereign clients. When Argentina invited Barings to share management of a $40-million loan with J. P. Morgan in 1925, the Treasury embargo forced Barings to pass on the large financing.

  Washington watched the investing craze with growing fascination and wondered how to exploit it politically. Even after a Republican president, Ohio newspaper publisher Warren Harding, captured the White House in 1920, his laissez-faire ideology didn’t stop his administration from trying to mobilize the new Wall Street power. The paradox of the Roaring Twenties was that three free-market Republican administrations would confer new, semiofficial status on foreign lending, assuming the right to veto loans—something no Democratic administration would have dared to do, lest it be accused of socialist tendencies.

  The driving force behind the new loan policy was Secretary of Commerce Herbert Hoover. Hoover saw a precedent in Wilson administration policy toward Russian and Chinese lending, where the government had maintained a close eye on the bankers. At a White House conference on May 25, 1921, President Harding told Tom Lamont and other Wall Street bankers that henceforth all foreign loans had to be certified by the State, Treasury, and Commerce departments as being in the national interest. The secretaries in question—Charles Evans Hughes, Andrew Mellon, and Hoover—were there to back him up. Morgans had to notify other banks about the arrangement. Afterward, as spokesman for the influential private banks and trust companies, Jack Morgan pledged to Harding that the bankers would “keep the State Department fully informed of any and all negotiations for loans to foreign governments which may be undertaken by them.”44 For a pro-business administration, it was an astounding extension of governmental power. Carter Glass, now a Virginia senator, denounced the violation of bankers’ rights.

  During the Republican-dominated 1920s, bankers probably attained their peak of influence in American history. It would be the heyday of Morgan power. Yet the bank’s relations with the White House were never smooth, however much collusion and back scratching the radical pamphleteers might have discerned. From the outset, Morgan partners thought Harding a simpleton, inadequate to the challenge of postwar reconstruction. Upon Harding, Tom Lamont would later deliver a scathing judgment, seeing him as a “pathetic figure . . . the last man in the world to lead 120 million people from the darkness and confusion of World War I out into the light.”45 Even Jack, who was relieved by the Democratic rout and rushed to offer his services to the president, sniped at Harding as a “wishy-washy” chauvinist who lacked vision.

  The disdain for Harding was more than personal, for the White House and the House of Morgan represented quite different factions of the Republican party. By instinct and self-interest, the Morgan bank was liberal and internationalist on global financial issues. It advocated U.S. leadership, close consultation with the Allies, and vigorous lending abroad. On foreign policy issues it felt some kinship with Wilsonian Democrats. With England handicapped in its resumption of foreign lending, J. P. Morgan and Company wanted the United States to inherit British leadership and initiate the rebuilding of Europe. The Harding brand of Republicanism, by contrast, was provincial, protectionist, and wearily contemptuous of European conflicts. These Republicans regarded foreign loans as ways to manipulate foreigners or as wasted welfare payments better spent inside America. Throughout Morgan history, the bank would be strongly drawn to internationalist leaders, not necessarily Republican.

  Early in the new administration, the House of Morgan feuded with Harding over some $10 billion that the Allies owed to Washington from wartime loans. (These were the loans extended after the United States entered the war, not those sponsored by J. P. Morgan on Wall Street.) The pro-English House of Morgan argued strenuously to cancel this debt. Jack Morgan said the Allies had sent soldiers against Germany while America was still sending only dollars; decency demanded that the war debt be regarded as a subsidy and not as a loan. For the Harding administration, it was a question of whether Yankees would again be snookered by corrupt, wily Europeans. Collecting war debts was also a way to keep U.S. taxes low. When Lamont went to talk about getting the debt canceled, he found Harding floating in a sea of papers. “Lamont, this job is too much for me,” the president said. “Whatever shall I do with all that pile? Well, I suppose I might as well try to learn something about these debts.”46

  Lamont’s subsequent meetings weren’t any more
encouraging. Charles Evans Hughes, the secretary of state, had unsuccessfuly campaigned for U.S. membership in the League of Nations and felt uncomfortable with the insular debt policy. But he cited the lack of a popular mandate to cancel the debt—the same refrain the House of Morgan would hear for a dozen years to come. Lamont loftily suggested to Hughes that the United States take British Honduras in a swap for a piece of the debt—this was thrown out casually! Lamont found the other cabinet members overjoyed at the prospect of squeezing the debtor nations.

  The administration adopted a policy of barring Wall Street loans to any foreign government that had not settled its war debts with the United States. After a sobering encounter with Treasury Secretary Andrew Mellon, Lamont reported in horror to Jack: “He is the watchdog of the Treasury and naturally considers it his duty to see that the Treasury gets every penny out of its debtors . . . he seems to think, too, that if we keep alive all these notes owing to us from dinky little countries all over Europe the fact that we are holding the notes will give us a sort of strangle hold politically.”47

  This was an extraordinarily shortsighted attitude that would weigh on world finance for a generation. The mountain of debt would retard world trade, undermine political leadership, and poison relations among the Western nations. Faced with Washington’s obstinacy, the House of Morgan and Ben Strong reluctantly advised their British friends to settle the debt with Washington. After meetings between Mellon and Stanley Baldwin, the chancellor of the Exchequer, the British agreed to make payments stretching over sixty-two years. But they didn’t accept the bullying cheerfully. When Prime Minister Bonar Law heard the terms from Stanley Baldwin, he fairly howled with rage. The issue would fester throughout the interwar period, placing Morgans in the cross fire between Washington and Whitehall. At the same time, the failure to cancel Allied debt meant that the House of Morgan had to take a tough line toward German reparations. For if the Germans didn’t pay reparations to the Allies, how would the Allies pay Washington? This created a destructive merry-go-round of debt that would spin ever faster until the whole system would break down in the 1930s.

  If Washington at first demanded control over foreign lending out of concern for the Allied war debt, it soon grew accustomed to exercising its new power. The arrangement took on an unexpected longevity; the procedure became so entrenched that J. P. Morgan and Company would brief the incoming Coolidge and Hoover administrations on how it worked. Later, in remarkable testimony to government-banker ties in the Diplomatic Age, Tom Lamont would state categorically that no sizable loan of the 1920s was made without Washington’s tacit approval. The line between politics and finance blurred, then disappeared. The cognoscenti who interpreted Morgan actions as a mirror of official policy were seldom far off the mark.

  If this arrangement later collapsed in recriminations, it started in a spirit of mutual convenience. Hiding behind Wall Street banks, the government could disclaim responsibility when countries were approved or rejected for loans. The banks, in turn, saw it as a security treaty, committing the government to protecting loans made under its aegis. It also provided the banks with government intelligence about debtor states. As the United States became a creditor nation, Wall Street confronted that ageless problem of how to enforce payment from sovereign states. Washington seemed to be the answer.

  With the Harding review process came a notion—never explicitly stated, but always there—that a government safety net was in place, which would catch investors who fell off the high wire. As Lamont said, the government’s stamp of approval “led many American investors into big foreign issues under the impression, whether so stated or not, that the Government had approved the issue or it could not have been made.”48 The arrangement encouraged a lot of wishful thinking and spared bankers unpleasant thoughts about what might happen in the case of default. There was an unspoken invitation to dispense with close examination of debtor nations. In the 1920s, Wall Street operated under an assumption of government protection, a notion that would prove illusory. But while it lasted, it created a mood of intoxication such as the Street had never known before and helped to trigger a decade of dreams that ended in the 1929 crash.

  CHAPTER TWELVE

  ODYSSEY

  NOTHING better symbolized the House of Morgan’s postwar supremacy or its fusion with American policy in the Diplomatic Age than its new prominence in the Far East. At first, the bank had entered Asia at the government’s behest, reluctantly joining the China consortium. Then William Jennings Bryan had condemned such foreign “meddling,” and the group was disbanded. But the world war, by strengthening America and weakening Europe in the Pacific, tempted Secretary of State Robert Lansing with new regions. In 1919, rebuffed by his own Treasury Department, he resurrected the China group of private bankers instead. Jack Morgan remarked, “But Mr. Lansing, Mr. Bryan asked us to desist.” Lansing, shamefaced, conceded the striking policy reversal.1

  For this second China consortium, Tom Lamont played the exasperating chairman’s role that previously had fallen to Harry Davison. In December 1919, Lamont visited the White House for his marching orders and found his idol, Woodrow Wilson, confined to a wheelchair. In a moving farewell, the president was rolled into the sunshine of a wide bay window. Calm and pensive, even joking about his disability, he hoped Lamont could reconcile differences between the two rival governments struggling to control China. Ever since the 1911 revolution, power had been divided between an official government in Peking and a nationalist one in Canton, with warlords ruling over Manchuria. From a banker’s standpoint, this divided China was no less risky than the Manchu dynasty, for there still existed no ultimate guarantor of debt, no government bedrock on which to base loans.

  In 1920, Lamont went on a mission to the Far East to see whether the time was ripe for Chinese loans. Coolly watchful, he moved through a China convulsed by strikes and student riots prompted by aggressive Japanese moves in Manchuria. The students were outraged by the Treaty of Versailles, which seemed to ratify Japan’s seizure of German possessions in China during the war. Lamont was caught up in the Sino-Japanese rivalry. With diplomatic tact and evenhandedness, he included a side trip to Tokyo on his itinerary. During this 1920 trip, Lamont moved about with royal pomp and a touch of splendor, borrowing a leaf from Pierpont’s book. Each morning in Peking, he received local merchants, who brought to his hotel camel caravans laden with costly wares—furs, rugs, silk, jade, and porcelain.

  Lamont was pursued by more than just vendors. The Japanese set spies on his trail—such shameless eavesdroppers that they booked rooms on both sides of his hotel room. The insouciant Lamont kept a single item at his side—the code book for deciphering Morgan cables. His secretary lacked such sang froid. Lamont later wrote, “Although I thought it unnecessary precaution, my secretary always took [the code book] to bed with him and insisted upon sleeping with a loaded revolver under his pillow.”2 Afterward, reading a cable on a train, Lamont found a Japanese spy craning to steal a peek over his shoulder. He put the man out of his misery by offhandedly handing him the message.

  News reports of Lamont’s visit stirred nationalist fears that foreign bankers would try to impose a new financial protectorate over China. His arrival was protested by student demonstrations, which he thought were instigated by the Japanese. He liked to tell of how he had pacified a mob of students in Shanghai. If perhaps slightly embellished, the story testifies to Lamont’s belief in reason and refinement as all-purpose weapons:

  One mid-afternoon in Shanghai I was told that a group of a couple of hundred of the Chinese student body were waiting in front of my hotel in order to show their disapproval of the Consortium by stoning me. I sent out word suggesting that the leaders come in for a cup of tea, and talk it all over. A dozen of them turned up at first in rather an ugly mood. But the tea was soothing and as soon as I was able to explain the facts about the Consortium, that it was designed to free China from the worst of her financial difficulties and help put some of her state enterpri
ses on their feet, they readily understood and agreed to cooperate.3

  Did Lamont believe tea-time chatter had changed the students’ minds? Probably not. Yet the story suggests his constant advantage in confrontations. He always sounded so friendly and reasonable that he disarmed his most vocal critics. Nobody could bait him, shake his poise, or make him surrender that casual but impenetrable self-control.

  Lamont never warmed to the Chinese and often spoke of them disparagingly. Contrary to his usual reticence in such matters, he retailed stories of Chinese corruption and intolerance. In Shanghai, he wanted to see Dr. Sun Yat-sen, head of the nationalist government in southern China. Because the Chinese leader feared a terrorist attack if he went to Lamont’s hotel, Lamont visited him, under a heavy police escort. He saw nothing venerable about Dr. Sun, who had once attended school in Hawaii and had once been an omnivorous reader at the British Museum Library. Repeating Wilson’s question of whether peace could be achieved between the two Chinas, Lamont was shocked by the reply. “Peace between the South and North?” Sun echoed. “Why, yes. Just you give me $25 million, Mr. Lamont, and I’ll equip a couple of army corps. Then we’ll have peace in short order.”4 Lamont was equally disenchanted by his contacts with the Peking government. Over tea, President Hsu suggested that if a government loan fell through, he might be in the market for a $5-million loan for himself.