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

by Ron Chernow

  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.

  Junius—tall, sociable, self-confident—and his wife, Juliet Pierpont Morgan, made an odd pair. She was a short, plain, buxom woman who grew increasingly sickly and hypochondriacal. Often homesick, she frequently sailed to New York to stay with Pierpont. While her husband blossomed into one of London’s magnificoes and was blessed with robust health, Juliet became more feeble and withdrawn. In her later years, she was an invalid, often closeted in an upstairs bedroom. She seems to have suffered some form of premature senility. This pattern of the sickly wife and the autocratic, headstrong husband would be repeated in the life of their son Pierpont. It also set a pattern of private grief and loneliness that would come to haunt the spectacularly successful Morgan family.

  CHAPTER THREE

  PRINCE

  AS Junius Morgan’s Wall Street agent for thirty years, Pierpont moved with the massed power of British capital behind him. A Wall Street jest said that his yacht, the Corsair, flew the Jolly Roger above the Stars and Stripes, and the Union lack above both. (Throughout his life, Pierpont would slyly hint at descent from the pirate Henry Morgan.) The young Morgan resembled a burly roughneck with a coat of British polish. Broad-shouldered and barrel-chested, he had dark hair and a pugilist’s hands. Over six feet tall, he was something of a dandy, now given to checkered vests. Where Junius had a hard and impenetrable stare, Pierpont’s hazel eyes were sad and cloudy. Where his father had unfailing composure, Pierpont was mercurial. In early pictures, he looks edgy, as if spoiling for a fight.

  There was plenty to fight about in the rough-and-tumble of the postwar railroad boom. Everybody had a sense of immense enterprise ahead. “We are going some day to show ourselves to be the richest country in the world in natural resources,” Pierpont predicted during the Civil War. The railroads would unlock the resources in the American wilderness. Perhaps no business has ever blossomed so spectacularly: within eight years of the war’s end, railroad trackage doubled to seventy thousand miles, a spree fed by tens of millions of acres in federal land grants. More than just isolated businesses, railroads were the scaffolding on which new worlds would be built. As Anthony Trollope noted during an American visit, railroads “were in fact companies combined for the purchase of land” whose value they hoped to increase by opening a road. Towns sprang up along the tracks, settled by European immigrants imported by the railroads.1

  As speculation in rail shares grew frenzied, European investors were stumbling about in the dark. Between Kansas and the Rocky Mountains, schoolboy maps showed a blank space dubbed the great American desert.2 Europeans relied on their American agents to guide them through this financial wilderness, and American bankers had to keep posted on developments. Soon after completion of the first transcontinental railroad, in May 1869, Pierpont and Fanny Morgan made an extended rail journey across the country, stopping to see Mormon leader Brigham Young in Utah. A competition was already underway on Wall Street between Jewish bankers, such as Joseph Seligman, who wooed German investors with railroad shares, and Yankee bankers, such as Pierpont Morgan, who drew on London money.

  From the outset, railways were in a chaotic state as they covered the country in a crazy-quilt expansion that frequently produced more roads than traffic. Because of their exorbitant fixed costs, they should have been public utilities. But this was impossible in an age of free-booting individualism. As a result, assorted hucksters and rogues threw up twice the trackage actually needed. What appeared to be solid investment one moment was revealed as so much watered stock the next. In Henry Adams’s judgment, “The generation between 1865 and 1895 was already mortgaged to the railways and no one knew it better than the generation itself.”3

  Such anarchy could easily fire a moralistic young banker like Pierpont Morgan. In his early years, he was exposed to many incorrigible Wall Street rascals, including Daniel Drew, the rustic sharpster who sold Erie stock short while sitting on the railroad’s own board (he was called the speculative director), and Jay Gould, the small, swarthy, full-bearded financier who prodigally bribed legislators as he vied for control of the Erie and other railroads.4 This was the infamous era of the Tweed Ring, Jay Gould’s 1869 attempt to corner the gold market, and other acts of larceny on a scale never before imagined. While Junius inhabited the white-glove world of the City, Pierpont had to deal with Wall Street squalor and found it alternately seductive and repellent. Confronted by corruption, he saw himself as a proxy for honorable European and American investors, a tool of transcendent purpose representing the sound men on Wall Street and in the City. But what he saw as a moral crusade others might regard simply as competing self-interest. In his early years, at least, he wasn’t always clearly distinguishable from the robber barons he was supposedly contesting.

  In 1869, Pierpont, aged thirty-two, was enlisted in a dispute over a small upstate New York railroad that would establish his reputation as a self-assured young banker, unafraid to dirty his hands. This corporate fight would dramatize the transition of the American banker from a passive figure issuing shares for companies to a strong, active force in managing their affairs. The line in question, the 143-mile Albany and Susquehanna, was small and inconsequential. It had only 17 locomotives and 214 cars and ran through the sparsely populated Catskill Mountains between Albany and Binghamton, New York. Yet it became a battleground for competing powers when Jay Gould decided it could advance the fortunes of his Erie Railroad, the so-called Scarlet Woman of Wall Street. Through this road, Gould hoped to sell Pennsylvania coal to New England and also vie with the New York Central for freight from the Great Lakes.

  To this end, Gould bought up a block of A&S stock, made an alliance with a dissident wing of directors, and had his pet judge, George C. Barnard, suspend the railroad’s founder, Joseph H. Ramsey, from the board. Ramsey countered by having several Gould partisans judicially suspended in turn. In these early days, corporate warfare was no mere euphemism, and the Ramsey and Gould forces sometimes slugged it out directly rather than filing suits and obtaining injunctions. In the Battle of the Susquehanna, Jim Fisk, a former circus roustabout and Gould’s chief lieutenant, and his Bowery boys—thugs scraped off New York’s streets and operating as Gould’s stooges—piled onto a train heading east from Binghamton, their army numbering about 800 men. The Ramsey forces loaded about 450 fighters onto a train heading west from Albany. In a cinematic finale, the two trains crashed head-on at the Long Tunnel near Binghamton. Their headlights were smashed, one locomotive was partly derailed, and eight or ten people were shot before the Gould forces fled. Governor Toots Hoffman summoned the state militia to stop the bloodshed.

  On September 7, 1869, momentarily putting down their weapons, the Gould and Ramsey forces converged on the annual board meeting of the A&S. Ramsey—“a little, grey-headed, sallow faced gentleman, weighing about 115 pounds, with a very bright eye”—had recruited the husky Pierpont, who had just returned from his western trip; Pierpont bought six hundred shares of stock in the road for Dabney, Morgan.5 Pierpont’s son-in-law Herbert L. Satterlee later claimed that at the September 7 meeting, Pierpont hurled chubby Jim Fisk down a flight of stairs. The story may be apocryphal. But the meeting was so tense that Ramsey, who had hidden the subscription books in an Albany cemetery, had the documents lowered into the room from a back window to keep them from the hands of the Gould forces. In the end, the meeting was stalemated by competing injunctions, with eac
h side again claiming control of the road based on two separate elections.

  Under Pierpont’s tutelage, the Ramsey forces found a friendly judge in the upstate town of Delhi, New York, who obligingly ousted the Erie slate. Pierpont then advised the Ramsey forces, now back in control, to merge their railroad with the friendly Delaware and Hudson line, which they accomplished in February 1870. In settling the dispute, Pierpont made a move that marked his subsequent financial maneuvers: he took payment, not simply in money, but in power, becoming a director of the newly merged railroad. This first board seat was a sign of things to come, starting an era in which bankers sat on corporate boards and gradually came to rule them. Board membership would become a warning flag to other bankers to stay away from a captive company. During the 1870s, Pierpont began to style himself as far more than a mere provider of money to companies: he wanted to be their lawyer, high priest, and confidant. This wedding of certain companies to certain banks—“relationship banking”—would be a cardinal feature of private banking for the next century. It came about not because bankers were strong but because companies were still weak.

  PIERPONT’S life was now prosperous and settled. He was making the gigantic salary of $75,000 a year. He and Fanny lived in a brownstone at 6 East Fortieth Street, just across Fifth Avenue from the Croton Reservoir, which arose like a vast Egyptian tomb on the site of today’s New York Public Library. The Morgan home was comfortable and cluttered, furnished with rugs, heavy mahogany furniture, and gilt-framed pictures crowding one on top of the other. In 1872, Pierpont bought Cragston, a country retreat on the Hudson River near West Point. A three-story white Victorian house with rambling porches, its grounds comprised several hundred acres of spectacular river scenery and was Pierpont’s answer to Junius’s Dover House. There were horse stables, a dairy, tennis courts, and kennels for breeding collies. (When the collies got boisterous, he switched to breeding blooded cattle.) From April to October, Pierpont commuted to Wall Street, crossing the river on his steam launch, the Louisa, which seated about eight people. Then he took the train into Manhattan. The Morgans now had three children, Louisa, born in 1866, John Pierpont, Jr., or Jack, born in 1867, and Juliet, born in 1870. Before long, they would add another daughter, Anne.

  Behind the aura of comfort and precocity, Pierpont was a troubled young man. He continued to be bedeviled by headaches, fainting spells, and skin flare-ups. In 1871, his partner, Charles Dabney, retired and their partnership was dissolved. Not for the last time, Pierpont contemplated retirement. As if unable to stop his own ambition, he would assume tremendous responsibility, then feel oppressed. He never seemed to take great pleasure in his accomplishments, and for the rest of his life, he craved a restful but elusive peace.

  With Dabney retiring, Junius needed to find a partner for Pierpont. He also wanted to broaden the House of Morgan beyond its New York-London axis and strengthen its international securities business. Although we think of global finance as a modern invention, Victorian merchant banks were already multinational in structure and cosmopolitan in orientation. Instead of branch offices, they set up interlocking partnerships in foreign capitals—precisely what Junius now decided to do. In January 1871, he was approached in London by Anthony J. Drexel regarding an affiliation between his Philadelphia bank and the Morgans. Among the Philadelphia banks, Drexel’s was second only to Jay Cooke’s in government finance. Junius was already Drexel’s London correspondent. As when George Peabody approached him, a financial fortune was being laid at Junius’s feet. He was not only the ablest American banker of his day; he was also the luckiest.

  Son of Francis M. Drexel, an itinerant Austrian portrait painter turned financier, Tony Drexel at forty-five was slim and refined with a smooth forehead, domed head, mild eyes, and handlebar mustache. At the time, Wall Street was shaping up as a provider as well as importer of capital as financial power gravitated from Philadelphia and Boston to New York. Sensing this seismic shift, the influential Drexel wished to fortify his New York operations. As before with Charles Dabney, Junius hoped to hedge the young Pierpont with safeguards and place him under the protective tutelage of an older man. So he suggested to Drexel that he take on Pierpont as his chief partner in New York.

  However prodigious Pierpont’s gifts, he was still clay modeled by his father’s hands. Junius urged him to respond to any invitation from Drexel. Hence in May he dutifully traveled to Philadelphia, dined with Drexel, and chatted with him after dinner. He returned to New York with a partnership agreement scribbled on an envelope. According to the deal, Pierpont would become a partner of Drexel and Company in Philadelphia and Drexel, Harjes in Paris. He would also manage a New York partnership called Drexel, Morgan and Company. The order of the names reflected the importance of the partners. Tony Drexel and his two brothers, Francis and Joseph, were worth about $7 million, while Pierpont had a puny $350,000. To even the score, however, Junius pumped in $5 million. Pierpont always acknowledged his debt to his father—he never pretended to be self-made—and later told New York governor Grover Cleveland, “If I have been able to succeed in the station of life in which I have been cast, I attribute it more than anything to the endorsement of my father’s friends.”6 The new Drexel, Morgan was the forerunner of J. P. Morgan and Company.

  Before signing the deal, Pierpont laid down a curious condition—that he delay working on the new partnership. Far from itching to start, he felt a need to recuperate from emotional and physical travail. Apparently he was on the edge of a nervous breakdown. Under doctor’s orders, he took a fifteen-month vacation, traveling to Vienna and Rome and sailing up the Nile. At work, Pierpont could never relax and developed a powerful urge for escape. He would vacation three months each year and joked that he could perform twelve months of work in just nine months. His son-in-law Herbert Satterlee later wrote, “He seemed to feel better when he was actually travelling than when they settled down anywhere.”7 In the late 1870s, when Pierpont tried to flee work by taking a vacation in Saratoga, New York, a blizzard of business letters and telegrams trailed after him. “There is only one way of getting real rest,” he told Junius, “and that is to get on board of a steamer.”8

  Two years after its debut, in 1873, Drexel, Morgan moved to the corner of Wall and Broad streets. It would be the most celebrated address in banking, the financial crossroads of America. Tony Drexel had bought a parcel of land across the street from the New York Stock Exchange for $349 a square foot, which stood as a record for the next thirty years. He built a heavily ribbed marble building with mansard roof, dormer windows, and ornate facade and allegorical figures above the doorway; the six-story building was one of the city’s first with an elevator. Splendidly symbolic, its unusual catercorner entrance simultaneously faced the Subtreasury Building on Nassau Street (the most important branch of the U.S. Treasury system) and the Stock Exchange on Wall Street. Appropriately, Drexel, Morgan would specialize in both railroad and government finance and occupy a pivotal place between Wall Street and Washington.

  From a personal standpoint, the Drexel-Morgan match wasn’t smooth. Pierpont was already gruff and difficult and insisted on having his own way. Joseph Seligman saw him as “a rough, uncouth fellow, continually quarreling with Drexel in the office.”9 But the merger worked just as Junius had planned in terms of tempering Pierpont’s xcesses. An early Dun and Company report said, “This young man is smart and is perhaps the most venturesome member of the firm but he is kept in check by the Drexels.”10

  The merger with the Drexels gave the Morgans new international breadth. In 1868, Drexel had sent John J. Harjes of Philadelphia to set up a Paris partnership, which performed with elan during the Paris Commune, switching operations to Switzerland to service American travelers and businessmen. (This wartime role would later be quintessentially Morgan’s.) As social butterflies who married into many prominent Philadelphia families, the Drexels also added a high-society image to the Morgan bank, and the Philadelphia house would always be a glamorous corner of the emerging
empire. Through their interlocking partnerships, the Morgans now had footholds in New York, Philadelphia, London, and Paris. These would remain the brightest stars of the Morgan constellation for a century.

  SOON after the Drexel-Morgan merger came an event that catapulted Pierpont Morgan, age thirty-six, into the empyrean of American finance. In 1873, Washington decided to refund, at lower interest rates, the $300 million in bonded debt remaining from the Civil War. Until then, Jay Cooke—Tony Drexel’s main Philadelphia rival—reigned as the white-bearded emperor of federal finance. The self-made Cooke had started out as a bank clerk with a quick eye for counterfeit money. At a time when government bonds were the exclusive province of rich men and European banks, he marketed them to the masses. During the Civil War, he pioneered in retail distribution, sending twenty-five hundred “minute-man” agents to peddle Union bonds across America and winning Lincoln’s gratitude. With his riches, Cooke built a fifty-two-room castle outside Philadelphia. In the early 1870s, the phrase “rich as Jay Cooke” had the same magic resonance as “rich as Rockefeller” would have in a later day.

  Cooke seemed invincible to competitors—at least until he financed the Northern Pacific Railroad in 1869. His promotion for $100 million in Northern Pacific bonds was liberally spiced with invention, fraudulence, and political bribery. To lure European settlers to towns serviced by the railroad, he created a tissue of brazenly surreal lies. Colorful ads depicted fruit groves flourishing along its Great Plains tracks—fantastic claims that won the railroad the nickname of Jay Cooke’s Banana Republic. Cow towns were puffed up into vast metropolises, and Duluth, Minnesota, was trumpeted to European immigrants as the “Zenith City of the Unsalted Seas.”11 When grain prices fell after the Franco-Prussian war, the fortunes of the Northern Pacific and other railroads fell along with them. Thus began Jay Cooke’s undoing. His vulnerability in relation to the Northern Pacific would provide an opening for Drexel, Morgan to usurp his exalted place in government finance.