The House of Morgan: An American Banking Dynasty and the Rise of Modern Finance

by Ron Chernow

  British investors cursed America as a land of cheats, rascals, and ingrates. State defaults also tainted federal credit, and when Washington sent Treasury agents to Europe in 1842, James de Rothschild thundered, “Tell them you have seen the man who is at the head of the finances of Europe, and that he has told you that they cannot borrow a dollar. Not a dollar.”7 Clergyman Sydney Smith sneered at the American “mob” and said that whenever he met a Pennsylvanian at a London dinner, he felt “a disposition to seize and divide him. . . . How such a man can set himself down at an English table without feeling that he owes two or three pounds to every man in the company, I am at a loss to conceive; he has no more right to eat with honest men than a leper has to eat with clean men.”8 Even Charles Dickens couldn’t resist a jab, portraying a nightmare in which Scrooge’s solid British assets are transformed into “a mere United States’ security.”9

  When his beloved Maryland defaulted, Peabody’s own nightmare was complete. Whenever he met a British investor, he said, he felt shame. The British were especially incensed over Maryland and Pennsylvania because those states were settled by Anglo-Saxon stock and therefore should have known better. Having marketed about half of Maryland’s securities to individual investors in Europe, Peabody was victimized by his own success. The brouhaha had direct repercussions, and he became persona non grata around London. The London Times noted that while Peabody was an “American gentleman of the most unblemished character,” the Reform Club had blackballed him for being a citizen of a country that reneged on its debts.10 Gloomily he wrote a friend, “You and I will, I trust, see that happy day, when as formerly, we can own ourselves Americans in Europe, without a blush for the character of our Country.”11

  A hallmark of merchant bankers was that they vouched for the securities they sponsored. At first, Peabody merely sent letters to Baltimore friends, scolding them about the need for Maryland to resume interest payments. Then he tired of persuasion and rewarded reporters with small gratuities for favorable articles about the state. At last, in 1845 he conspired with Barings to push Maryland into resuming payment. They set up a political slush fund to spread propaganda for debt resumption and to elect sympathetic legislators; they even drafted the clergy into giving sermons on the sanctity of contracts. By means of a secret account, the two firms transferred £1,000 to Baltimore, 90 percent from Barings and 10 percent from Peabody—a strategy Barings duplicated in Pennsylvania. Most shocking of all, Barings bribed Daniel Webster, the orator and statesman, to make speeches for debt repayment. The bankers conducted this shabby campaign with a skulking sense of guilt; it wasn’t their preferred style. “Your payment to Mr. Webster would not appear very well if it should get out,” Joshua Bates, the senior Baring partner, warned Thomas Ward, American bagman for the operation.12 Bates, a sober, diligent Bostonian, cringed at what they were doing: “I have a sort of instinctive horror of doing one thing to effect another, or using any sort of subterfuge or reserve,” he confessed to Ward.13

  Whatever their scruples, the conspiracy thrived: pro-resumption Whigs were elected in both Maryland and Pennsylvania, and London bankers again received payments from both states.14 Peabody, never one to forget an injury, excluded the most persistent debtors, Florida and Mississippi, from his later philanthropies. Even altruism had its limits.

  When the depreciated state bonds Peabody had bought up in the early 1840s paid interest again, he reaped a fortune. Then, as revolution swept across the Continent in 1848, American securities seemed a safe haven in comparison with Europe. And as the California gold rush and Mexican War wiped away the last vestiges of depression by the late 1840s, Peabody took new pride in his native roots. Now he fancied himself the ambassador of American culture in London and dispensed barrels full of American apples, Boston crackers, and hominy grits.

  On July 4, 1851, he hosted the first of his Independence Day dinners, featuring the elderly duke of Wellington as guest of honor. Beneath a portrait of Queen Victoria and a Gilbert Stuart of George Washington, the British minister in Washington and the American minister in London drained an oak loving cup and toasted the start of the Great Exhibition in London’s new Crystal Palace. Because Congress wouldn’t finance American exhibitors, Peabody played the impresario, paying to display Cyrus McCormick’s reaper and Samuel Colt’s revolvers. But not all of Peabody’s July Fourth pageants of Anglo-American friendship followed the desired script. In 1854, when Peabody toasted Queen Victoria before President Pierce—an act Washington thought arch heresy—James Buchanan, the U.S. ambassador in London and later President, indignantly stormed from the room.

  As banker and cicerone for Americans in London—once, in a single week, he dined eighty visiting Americans and took thirty-five to the opera—Peabody was constantly exposed to the fierce snobbery of British aristocrats toward the American commercial class. This condescension was particularly flagrant during Commodore Vanderbilt’s trip to London in 1853. The Commodore—vulgar, profane, and lecherous—wanted to show London society the full splendor of America’s richest man. With his wife and twelve children, he had sailed to England aboard his ornate, two-thousand-ton North Star, equipped with caterer, doctor, and chaplain. Peabody squired the Vanderbilts about Hyde Park and installed them in his box at Covent Garden; meanwhile, the court ostracized the ostentatious Commodore.

  Peabody amassed a $20-million fortune in the 1850s as he financed everything from the silk trade with China to iron rail exports to America. Although he built a lyceum and library for his native Danvers in the early 1850s, he mostly hoarded his money in preparation for the next panic. His insecurities only worsened as he had more to lose. He told a friend in 1852, “My capital is . . . ample (certainly nearer 400,000 pounds than 300,000) . . . but I have passed too many money panics, unscathed, not to have seen how often large Capitals are swept away, and that even with my own I must use caution.”15

  Junius Morgan, who became Peabody’s partner in 1854, later told how he found him one morning at the countinghouse looking sickly and rheumatic. The miserly Peabody didn’t own a carriage but came to work by public horsecar. “Mr. Peabody, with that cold you ought not to stick here,” Morgan said. Taking hat and umbrella, Peabody agreed to go home. Twenty minutes later, on his way to the Royal Exchange, Morgan found Peabody standing in the rain. “Mr. Peabody, I thought you were going home,” the younger man said. “Well, I am, Morgan,” Peabody replied, “but there’s only been a twopenny bus come along as yet and I am waiting for a penny one.”16 By this time, Peabody’s bank account bulged with over £1 million.

  Enjoying the clerk’s revenge, Thomas Perman, Peabody’s assistant, handed down a trove of nasty stories that tarnish the halo Peabody acquired as a result of his benevolence. He told how his boss, who ate lunch at his desk each day from a small leather lunch box, would dispatch an office boy to buy him an apple. These apples cost one pence halfpenny, and Peabody would give the boy twopence; although the boy dreamed of keeping the halfpenny change as a tip, Peabody always demanded it back.

  By the early 1850s, Peabody was approaching sixty and plagued by gout and rheumatism. His annual savings were staggering: he spent only about $3,000 of a total annual income of $300,000.17 With such wealth and such stinjiness, he was ripe for spiritual conversion. As he later said, “When aches and pains came upon me, I realized I was not immortal . . . I found that there were men in life just as anxious to help the poor and destitute as I was to make money.”18

  Wanting to dedicate himself to philanthropy, Peabody had only one problem. As an autocratic banker, he had never shared authority and only reluctantly made his office manager, Charles C. Gooch, a junior partner in 1851, so that someone could act in his absence. Gooch was a sad-faced Bob Cratchit who addressed Peabody like a trembling clerk; in fact, he had started as head clerk. He started one letter to his boss by writing, “Dear Sir, I do not often trouble you with letters, for I know you do not like the trouble of reading them, & mine are on subjects not over agreeable.”19 Gooch was being groom
ed for a career of permanent subordination and forelock tugging.

  Ordinarily, Peabody would have chosen a son or nephew to take over the business. Most merchant banks were family partnerships with a few talented outsiders. But as a bachelor, Peabody was in the unusual position of having to shop for an heir and bequeath his empire to a stranger. He was, however, no stranger to the company of women. While he didn’t smoke or drink, he resorted to the shadowy world of illicit pleasures. The tale-bearing Perman regaled the Morgans with the story of Peabody’s mistress in Brighton, whom he liberally favored with advances of £2,000. He excluded this woman and her illegitimate daughter from his will, and for years after his death, Peabody’s daughter Mrs. Thomas would materialize and badger the Morgans for money. In the late 1890s, the Morgans received an appeal from her two sons—one training to be a barrister, the other at Oxford or Cambridge. The aging Perman was dispatched to verify their Peabody genes. When he returned, he breathed with amazement, “Both of them have the old man’s nose to a dot.”20

  We don’t know why Peabody relegated love to the dim corners of his life. In general, he specialized in what Dickens called telescopic philanthropy—bountiful love for abstract humanity combined with extreme stinginess toward the individuals he knew personally. He would enjoy a reputation for generosity throughout the Victorian world—everywhere, in fact, but among his unacknowledged family and employees.

  Peabody had definite requirements for his successor: he wanted a sociable American with a family and experience in foreign trade. His Boston associate, James Beebe, recommended his junior partner, funius Spencer Morgan. Junius had been with J. M. Beebe, Morgan for three years. In May 1853, he visited London with his family, bringing along his high-spirited but sickly son, John Pierpont, then recovering from rheumatic fever. Pierpont was boyishly thrilled with his first exposure to British culture. He visited Buckingham Palace and Westminster Abbey, excitedly handled a million pounds of bullion at the Bank of England, and listened to a Sunday sermon at Saint Paul’s. Meanwhile, his father talked business with Peabody, whom Pierpont found “pleasant but smoky.”21 In general, Pierpont found Peabody a queer, likable old buzzard.

  Junius Spencer Morgan was tall with sloping shoulders and the thickening midriff of a strong but sedentary man. He had a wide face, light blue eyes, a prominent nose, and a firm mouth. He was witty and genial, but a deep reserve and watchfulness lay behind the charm. Junius Morgan always had a gravely mature air. His skeptical eyes gave him a hooded gaze, a banker’s air of vigilance. Big and brooding, he was the sort of prematurely middle-aged young man old financiers found consoling. A contemporary writer called him grim-mouthed; indeed, it is hard to imagine him young or carefree. He was solemn and businesslike and always master of his emotions.

  Peabody asked Morgan to be his partner and receive his empire on a silver platter. Junius’s grandson, J. P. Morgan, Jr., later recounted their exchange:

  “You know,” said Peabody, “I shall not want to go on much longer but, if you will come as a partner for ten years, I shall retire at the end of them, and at that time shall be willing to leave my name, and, if you have not accumulated a reasonable amount of capital in the concern, some of my money also, and you can go ahead as the head of it.”

  “Well, Mr. Peabody,” replied Morgan, “that sounds like a very good offer, but there are many things to be considered, and I could not think of giving an answer until I have looked over the books of the firm and have some idea of the business and of the methods by which it is done.”22

  It is revealing that Morgan didn’t leap at the fortune but responded with cool self-control. Evidently he was mightily pleased by the books—capital of £450,000, a caliber of business only one rung below the houses of Baring and Rothschild. So in October 1854, he was admitted into partnership, and he settled into new walnut-paneled headquarters at 22 Old Broad Street. The partnership document stipulated that the firm would buy and sell stocks, engage in foreign exchange, extend banking credits, and broker railroad iron and other commodities. To entertain American visitors, Peabody gave Morgan an expense account of £2,500 per year. A fortune had been deeded over—or so it seemed at the time. A decade later, as Peabody was being canonized for his philanthropy, Junius Morgan would bitterly recall the promises Peabody had made to him. And he would join the ranks of those spurned during George Peabody’s ascent to sainthood.

  WHEN Morgan moved to London in 1854, it was a more auspicious time for an American banker than it had been when Peabody was flogging the hated Maryland bonds in the 1830s. American grain prices soared during the Crimean War, and western railroads that transported grain boomed as well, creating a mania for their shares. Railroads devoured vast amounts of capital, and in the decade before the Civil War, investors poured $1 billion into their development, triple any former commitment. As a leading London dealer of American railroad securities, George Peabody and Company was well placed to exploit this latest craze.

  Yet, as the decade passed, Junius Morgan must have doubted the wisdom of transplanting his family to England. Peabody was a trying partner, and no real warmth existed between the two, as shown by their correspondence when the junior partner visited America each year. Their letters are formal and correct but notably lacking even in pleasantries. Morgan would make obligatory inquiries about Peabody’s health—always apt to please his hypochondriacal partner—but addressed him as “Dear Sir” and signed each letter with frosty respect—“J. S. Morgan.” Morgan found Peabody petty and vindictive and told how his partner once spent half the afternoon hauling some poor cab driver down to the police station for overcharging him.

  Then, in 1857, it looked as if Morgan would be denied his promised fortune. Wheat prices tumbled with the end of the Crimean War, causing hardship for American banks and railroads. By October, New York banks stopped gold payments, preventing American correspondents from transferring funds to Peabody in London. He was suddenly overextended on his American bills. At the same time, London investors sold American securities, siphoning more funds from Peabody and provoking a serious cash squeeze. Rumors raced through London that George Peabody and Company was about to fail, a prospect heartily relished by rivals, who disliked the old American. Morgan had also earned the displeasure of Barings by aggressively cutting prices on American securities and trying to steal their accounts.

  Now the major London houses told Morgan they would bail out the firm—but only if Peabody shut down the bank within a year. When Morgan relayed this patent blackmail to Peabody, the older man reacted “like a wounded lion.”23 Defiant, he dared them to bring down his firm. George Peabody and Company was saved by an emergency credit line of £800,000 from the Bank of England, with Barings a guarantor of the loan. The vengeful Peabody, who felt Barings had mercilessly pressed him to pay outstanding bills, asked that the name of the firm be stricken from a published list of banks rescuing his firm. For Peabody, who had just made a resplendent return to America after a twenty-year absence, the incident confirmed his innate pessimism. “It is not yet three months since I parted from you, and left the country prosperous and the people happy,” he wrote his niece. “Now all is gloom and affliction.”24

  The 1857 panic made a deep impression on Morgan’s twenty-year-old son, Pierpont, who had just started on Wall Street as an unsalaried apprentice at Duncan, Sherman and Company, New York agent for Peabody. Tutored by partner Charles Dabney, an excellent accountant, Pierpont learned to evaluate ledgers and fathom the mysteries of the chaotic American banking system. Ever since Andrew Jackson killed the second Bank of the United States in 1832, the United States lacked a uniform currency. Each state had a separate banking system, and in many places debts could be settled in foreign currency. Pierpont, new to Wall Street, was vexed by rumors of his father’s pending default and heard about the Bank of England rescue while visiting Cyrus Field’s office. His later tolerance for the proposed Federal Reserve System has often been traced to this early Bank of England bailout of his father’s firm.


  It was a baptism by fire for the Morgan family. Shaken, the elder Morgan became a more cautious and skeptical banker. He now demanded to see statements from correspondent banks in America, even if it meant offending them. And he began to lecture his son, often at wearisome length, on the need for conservative business practice; the 1857 panic would be the text of many sermons. “You are commencing upon your business career at an eventful time,” he wrote. “Let what you now witness make an impression not to be eradicated . . . slow &, sure should be the motto of every young man.”25 Junius Morgan developed a lofty disdain for price competition and adopted the royal passivity of the Rothschilds and the Barings, who refused to offer cut-rate terms: “If we cannot keep the account on such a basis we must be content to let others outbid us.”26

  Another disaster soon followed. Like the French banques d’affaires or the universal German banks, London merchant banks took equity stakes in ventures. For instance, George Peabody and Company had helped to bankroll Sir John Franklin’s expedition in search of the Northwest Passage. But its most farsighted bet was a £100,000 investment in Cyrus Field’s transatlantic cable, which would unite Wall Street and the City. The scheme looked inspired on August 16, 1858, when Queen Victoria made the first cable call, to President James Buchanan. In a burst of national pride, New York City engaged in two weeks of fireworks and euphoric celebration. Peabody dizzily wrote to Field, “Your reflections must be like those of Columbus after the discovery of America.”27 He spoke too soon, however: in September, the cable snapped, the venture’s share prices plummeted, and Peabody and Junius Morgan absorbed steep losses. Eight years would pass before full service was restored.