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

by Ron Chernow

  There are many stories of Pierpont’s brusque impatience and his economy of self-expression. He had a short attention span and sometimes worked only from eleven o’clock to three or four in the afternoon, pausing for a sandwich, pie, and coffee at his desk. After saving one merchant’s business, he interrupted the man’s grateful blubbering to say, “No, it is a busy day. There’s no time for that. Good morning.”53 Few were privy to his thoughts, and he often had his own unstated agenda. Journalist Clarence W. Barron tells the story of a young Boston financier, F. H. Prince, who went to Pierpont for investment advice. Prince confessed, “I shook Mr. Morgan’s hand and thanked him warmly for the great interest he was taking in me as a young man and said I should never forget his advice. I knew at this time that he was doing everything he could to ruin me.”54

  After Junius’s death, Pierpont needed to loosen his autocratic grip, as the sheer volume of work outgrew his need for domination. He had long bewailed his inability to delegate authority—“It is my nature and I cannot help it”—and held no formal meeting of his partners until after the 1907 panic.55 Despite the scope of his vision, Pierpont was extremely attentive to details and took pride in the knowledge that he could perform any job in the bank: “I can sit down at any clerk’s desk, take up his work where he left it and go on with it. . . . I don’t like being at any man’s mercy.”56 He never entirely renounced the founder’s itch to know the most minute details of the business. He examined the cash balance daily, boasted he could pay off all debts in two hours, had a deadeye for fake figures in scanning a ledger, and personally audited the books each New Year’s Day. When he found an error, the effect could be memorable for the responsible employee. “He was a perfectly huge man and he had a voice like a bull,” said Leonhard A. Keyes, then an office boy who wound the gold Tiffany clock on his desk.57

  Pierpont Morgan’s power flourished during the steep industrial recession that began in 1893. Over fifteen thousand commercial firms failed in a contraction that led to class warfare and quasi-revolutionary strife in many parts of the United States. The bloody rout of steel workers in the Homestead strike of 1892 gave way to the government’s merciless crushing of the 1894 Pullman strike. Over six hundred banks failed during this period, and cash grew so scarce as a result of hoarding that brokers traded it on Wall Street curbs. Every company that failed and was reorganized by a bank ended up the bank’s captive client. In 1892, General Electric had been formed through a consolidation of the Edison General Electric Company and Thomson-Houston Electric. When the new company failed the next year, Pierpont rescued it and thus insured GE’s future loyalty to the House of Morgan.

  Oppressed by debt and overbuilding, more than a third of the country’s railway trackage fell into receivership, and English investors exhorted Pierpont to bring order to the industry. Thwarted by gentleman’s agreements, Pierpont now tried another approach to forming railway cartels: he would reorganize bankrupt roads and transfer control to himself. Then he wouldn’t be at the whim of government or feuding railway chiefs. In reorganizing railways, he ascended to a new plateau of power, beyond what any other private businessman had yet achieved. The lengthy catalogue of railroads that fell under his control included the Erie, Chesapeake and Ohio, Philadelphia and Reading, Santa Fe, Northern Pacific, Great Northern, New York Central, Lehigh Valley, Jersey Central, and the Southern Railway. Virtually every bankrupt road east of the Mississippi eventually passed through such reorganization, or morganization, as it was called. Some thirty-three thousand miles of railroad—one-sixth of the country’s trackage—were morganized. The companies’ combined revenues approached an amount equal to half of the U.S. government’s annual receipts.

  It is hard to exaggerate the power that Pierpont accrued. Railroads then comprised 60 percent of all issues on the New York Stock Exchange. Utility and industrial stocks were rated as too speculative for insurance companies and savings institutions, putting railroads in a blue-chip category by themselves. Also, by issuing free passes to politicians, the railroads exercised a giant, corrupting influence on state legislatures. As his bank became a gigantic mill for bankrupt railroads, Pierpont routinely picked up $l-million fees.

  With morganization, fixed railway costs were slimmed, and creditors were forced to swap their bonds for ones with lower interest rates, enabling roads to resume debt service. Pierpont would also put a lien on the railroads’ vast land and mineral holdings, so that money couldn’t be diverted to other enterprises. A court case nearly a hundred years later would show how binding these arrangements were. In 1987, the Burlington Northern Railroad tried to free itself from covenants Pierpont had imposed on the bonds of its predecessor, the Northern Pacific, which fell into receivership in 1893. He had put a lien on 1.9 million acres of land and 2.4 million acres of mineral rights, stipulating that all proceeds should go to improving the road. Analysts estimated that coal, oil, gas, and other minerals on the affected lands were worth billions of dollars. From beyond the grave, Pierpont stood up foursquare for creditors.

  As a further guarantee that the roads would never again squander money, a majority of their stock was transferred to “voting trusts.” These were usually a euphemism for Pierpont and three or four of his cronies, who ran the railroads, typically for a five-year period. It was an extension of Pierpont’s old trick of trading money for power, and it usurped commercial power on a scale unprecedented in banking history. No longer would the banker just finance and advise his clients; now he would intervene directly in running the companies. The distinction between finance and industry was eroding dangerously.

  Why would tens of thousands of shareholders yield their shares to this Wall Street pope in exchange for so-called trust certificates? The answer lies in a peculiarity of nineteenth-century finance: when companies lost money, shareholders in bankrupted companies could be dunned for assessments. So investors rushed to give up their shares and avoid the threatened penalties. Pierpont was now an altogether new species of robber baron—not nakedly voracious, not a Rockefeller snuffing out troublesome competitors, but a gruff, well-tailored banker with a legal, if highly controversial, system.

  Within the bank, morganization was viewed benignly as the exercise of fiduciary responsibility to shareholders. Pierpont didn’t seem to operate by any grand scheme—he was too instinctive for that. A later Morgan partner, Tom Lamont, remarked that he “never knew of a man who addressed himself more exclusively than Mr. Morgan to the ad hoc situation and the ad hoc job that lay before him. All this talk about his devising or building up systems is perfect tosh.”58 Pierpont didn’t spin webs or plot paths to power. Rather, he had a messianic faith in his ability to reorder businesses. If he could tidy up America better than anyone else, so be it. He took the technique of the voting trust and endlessly multiplied his power. As Sereno S. Pratt, an editor of the Wall Street Journal, later said of him, “His power is not to be found in the number of his own millions, but in the billions of which he was the trustee.”59

  If there was nothing devious about the voting trusts, they created a frightening concentration of Wall Street power. Before the morganization period, more than two-thirds of American railroads had offices outside New York; afterward, most were headquartered there. By 1900, the nation’s railroads were consolidated into six huge systems controlled by Wall Street bankers, principally J. P. Morgan and Company and Kuhn, Loeb. In this perpetual-motion machine, Pierpont not only reorganized roads but locked up their future financing. By acting as their trustee or holding a large block of their stock, he ensured bondage to 23 Wall. The banker was strong because the railroads were weak, and however much Pierpont deplored railroad instability, he thrived on such chaos.

  Pierpont alone could never have carried out the exhausting work of morganization. Hence the importance, then and later, of Morgan partners. In history books, they are often portrayed as mice scurrying in the background. Yet many were towering figures in their own right, the shadow cabinet of the Morgan government. The railroad re
organizations were carried out by a staff of fewer than 150 employees. This was at a time when old-fashioned banks, such as the House of Morgan, frowned upon typewriters as newfangled. Visitors always marveled at the discrepancy between the bank’s power and its size. In 1905, Dr. Hjalmar Schacht, later Hitler’s finance minister, recorded this impression: “The entire office was contained in a single room on the ground floor in which were dozens of desks where the employees worked. . . . No question of visitors being formally announced, no waiting, or anterooms. Anyone who saw that a principal was disengaged could walk right up to his desk. Relations between heads and employees were very informal and free-and-easy without thereby lacking in respect.”60

  Pierpont selected partners not by wealth or to fortify the bank’s capital but based on brains and talent. If the Morgan style was royal, its hiring practices were meritocratic. The bank had many first-rate technicians. Pierpont’s transportation man, Samuel Spencer, was said to know better than anyone in America every detail of railroading “from the cost of a car brake to the estimate for a terminal.”61 Most impressive was Charles Coster, a pale man with neatly brushed hair, pensive eyes, and handlebar mustache. As a young man, Coster had published a history of stamps, and his compulsion to organize and classify never left him. He was the obscure wizard of morganization. Jack Morgan said of him, “His mastery of detail was complete, his grasp of a problem immediate and comprehensive and his power of work astonishing.”62 Wall Street caught fleeting glances of this sedentary genius: “Men saw him by day—a white-faced, nervous figure, hurrying from directors’ meeting to directors’ meeting; at evening carrying home his portfolio of corporate problems for the night.”63 Yet Coster was no downtrodden clerk: thanks to the wonders of voting trusts, he sat on the boards of fifty-nine corporations!

  The House of Morgan would have a contradictory reputation as both a gentleman’s club and a posh sweatshop. During the morganization period, lights burned at the bank long after the rest of Wall Street was dark. The partners shouldered unbearable tasks. One journalist remarked that “the House of Morgan was always known as a partner-killer,” and the body count mounted steadily. One day in 1894, while waiting for an elevated train after the business day, partner J. Hood Wright dropped dead at the age of fifty-eight. The most shocking death was Coster’s, in March 1900, at age forty-eight. He contracted flu or pneumonia and died within a week. Mixing sympathy with outrage, the New York Times charged that the tasks piled upon Coster had grown “far heavier than any one man ought to bear, or could bear with safety.” Naming Morgan partners who died from overwork by 1900, John Moody said they had “succumbed to the gigantic, nerve-racking business and pressure of the Morgan methods and the strain involved in the care of the railroad capital of America. ’Jupiter’ Morgan had alone come through that soul-crushing mill of business, retaining his health, vigor, and energy.”64

  In choosing partners, Pierpont wouldn’t tolerate a refusal. He was shameless enough to recruit Coster’s successor, railroad lawyer Charles Steele, at Coster’s funeral! As the cortege moved along, Pierpont presented a partnership to Steele as a fait accompli. “Charles,” he said, “it looks as if the Lord had taken charge of this question, and I am going ahead to make the partnership agreement.”65 The courtly Steele later accumulated thirty-six corporate directorships, including those of United States Steel and General Electric, and his wealth would rival Jack Morgan’s.

  Even as the exhausting pace of work created scandals, a Morgan partnership became the most coveted financial post. Judge Elbert H. Gary, a chairman of United States Steel, said of Pierpont’s partners, “He made them all wealthy beyond their dreams.”66 Indeed, in exchange for exquisite torture, a Morgan partner received a guarantee of riches and a seat on the high council of American finance.

  CHAPTER FIVE

  CORNER

  IN 1895, Pierpont Morgan engineered his most dazzling feat: he saved the gold standard and briefly managed to control the flow of gold into and out of the United States. The concept behind the gold standard was simple. Ever since January 1879, the government had pledged to redeem dollars for gold, thus insuring the value of the currency. To make this more than an empty boast and reassure worried investors, Washington had a policy of keeping on hand at least $100 million in gold coin and bullion.

  In the early 1890s, huge amounts of gold began to flow from New York to Europe. In the circuitous way of world finance, the trouble started in Argentina. In the 1880s, the City of London was swept by a craze for Argentinean securities, which attracted almost half of British money invested abroad. The principal conduit was Baring Brothers, which shared a good deal of Argentinean business with Junius Morgan. Then the Argentinean wheat crop failed and was followed by a coup in Buenos Aires. The prospect of default hurt the Morgan bank in London but nearly collapsed the august Barings, which lost heavily on its Argentinean bonds.

  To save Barings from bankruptcy in 1890, the Bank of England organized a rescue fund, to which J. S. Morgan and Company and other rivals contributed. The old Baring partnership was liquidated; the reorganized firm would never regain its former power, and a major Morgan rival was weakened. Before long, Barings shared supremacy in Argentina with the Morgans. Meanwhile, with a stigma attached to foreign holdings, British investors retrenched and drained gold from America. This exodus of metal was greatly accelerated by the 1893 panic, with its bank failures and railroad bankruptcies.

  Adding to European jitters were American attempts to tamper with the U.S. currency. Under the Sherman Silver Purchase Act of 1890, the U.S. Treasury had to buy 4.5 million ounces of silver monthly and issue certificates redeemable in gold or silver. This effectively put America on a bimetal basis—that is, money was backed by both gold and silver—expanding the money supply. For the hard-money men of Europe, this looked as if it were an effort by American debtors to debauch the currency and repay loans in cheaper dollars. These creditors venerated the gold standard as their safeguard against such backdoor default. So European bankers redeemed their dollars for gold and shipped the gold back to Europe. For Pierpont Morgan, this was an alarming throwback to the days when George Peabody had to prove that Americans honored their debt. The Silver Act was repealed in 1893 under pressure from Morgan and other bankers. But wary Europeans feared that Populist forces might yet wreck the gold standard and force them to accept unwanted silver for dollars.

  Among the indebted farmers of the South and West, the gold standard generated fanatic hatred. The United States was still an agrarian debtor nation, and poor, rural debtors far outnumbered big city bondholders. These farmers had many legitimate grievances, for they contended with the curse of steadily falling prices in the late nineteenth century. Deflation meant they had to repay debt in dearer money—a recipe for ruin. There was no central bank to expand credit during hard times. At the same time, because of tariffs and industrial trusts, the prices of finished goods didn’t fall as fast as the price of food. (Thanks to Pierpont and the railway barons, freight rates actually rose.) So farmers welcomed inflation—specifically, higher prices for their own produce—as the only way to remain equal in the contest against bankers and industrialists.

  This discontent made bankers the favorite bogeymen in rural political demonology. So venomous was the mood that several western states outlawed bankers, and Texas banned them altogether until 1904.1 This pervasive anger in the hinterlands crystallized around the House of Morgan, which was seen as a mouthpiece for European finance. A popular, grass-roots mythology claimed that the Bank of England and New York bankers had suborned Congress into enacting the gold standard. For decades, William Jennings Bryan rallied the Populist faithful by inveighing against America’s “financial servitude” to British capital.2 From this period dates the folklore of the House of Morgan as heartless moneymen, traitors in the pay of British gold, glorying in the ruin of American farmers.

  The nineteenth-century inflationary nostrums that make for tedious study today—greenbacks, free silver coinage, bimet
allism, and so on—were attempts by indebted farmers to lighten their debt load. As the 1893 panic worsened, agrarian populists asked the government to mint silver coins and create cheap money, a move supported by the new silver-producing states. Farming districts scoffed at the notion that any damage might be done by going off gold. The Atlanta Constitution remarked that “the people of this country, outside the hotbeds of gold-buggery and Shylockism, don’t care how soon gold payments are suspended.”3 For Pierpont, however, destruction of the gold standard would subvert European faith in American securities and destroy his life’s work. As he later said, his aim in 1895 was “to build up such relations of confidence between the United States and the money markets of Europe, that capital from there could be secured in large sums for our needs.”4

  During 1894, the U.S. gold reserve dipped below the $100-million floor. Bad money (silver) was driving good money (gold) out of circulation. By January 1895, gold was fleeing New York at a frightening pace. One could watch this “flight capital” in action as gold bullion was loaded onto ships in New York harbor, bound for Europe. At fashionable Manhattan restaurants, sporting men placed wagers as to when America would go bust and declare its inability to redeem dollars for gold.