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

by Ron Chernow

  Bacon’s elevation in the bank signaled a problem with the Morgan empire: Bacon, a charming lightweight, reflected Pierpont’s fear of hiring commanding figures. That Bacon was second in command spoke poorly of his boss’s managerial judgment. Art critic Roger Fry saw Morgan as a vain, insecure despot who “likes to be in a position of being surrounded by people he has in his power to make and unmake.”52 The most talented early partners—the apostles of Pierpontifex Maximus, or Jupiter’s Ganymedes, as they were called—might have been legal and financial wizards, but they were not leaders. Since they were few in number—New York had six partners in the 1890s; the Philadelphia office, four—they had to pull enormous weight.

  The danger of Pierpont’s despotism was glaringly exposed during the so-called Northern Pacific corner of 1901, perhaps the most controversial takeover fight in American history. After U.S. Steel was successfully launched, Pierpont had sailed to France, where he entertained a dark French countess on the Riviera, leaving the firm in Bacon’s hands. Since Coster’s death the year before, Bacon knew he was in over his head and reeled under the responsibility. “My life is simply engrossed in this maelstrom,” he told his wife.53 He was soon blindsided by the most powerful Wall Street combination outside that of the Morgan firms—an amalgam of Edward H. Harriman, William Rockefeller, the National City Bank, and Kuhn, Loeb. It was a ganging up of Pierpont’s most determined enemies.

  A battle had been brewing since 1895, when Pierpont decided not to reorganize the bankrupt Union Pacific, which he scoffed at as “two streaks of iron rust across the plains.”54 His willingness to write off America’s southwestern states provided an opening for outsiders. Edward Harriman took up the Union Pacific and merged it with the Southern Pacific. He and his bankers, the Jewish house of Kuhn, Loeb, dominated the southwestern roads as invincibly as Morgan did those of the East and the Northwest. The Northern Pacific corner was the thunderous, head-on crash of the railroad systems under the personal dominion of Harriman and Morgan.

  Harriman was a very different type from Pierpont. He was short and bandy-legged, had shifty eyes, and wore wire-rimmed spectacles, an unkempt mustache, and a peevish expression. Like many on Wall Street, he was the son of a poor clergyman and an unabashed social climber. A crack shot, he had a taste for blood sport and played tough on the stock exchange as well. Where Pierpont preferred back-room deals sealed with a handshake, Harriman was a market operator—more a raider than a deal maker. Where Pierpont usually served as proxy for bondholders, Harriman preferred to buy common stock and exert direct control. Finally, where Morgan was the establishment figure, Harriman was an embittered outsider who showed the damage that could be done by a bright man barred from Pierpont’s club. If bankers proved they could dominate companies through voting trusts and other devices, Harriman showed that the stock raider could dominate both the bankers and their companies.

  Harriman’s banker was the German-born Jacob Schiff, the unbending, white-bearded patriarch of Kuhn, Loeb who was second only to Pierpont as a financial railroad overlord. Schiff was such a grandee that one private Pullman car was seldom enough for him when he traveled.55 He was stiff and formal and as haughty as Pierpont Morgan himself.

  Like the London merchant bankers, the early Jewish bankers on Wall Street had started out as dry-goods merchants: the Lehmans began as Alabama cotton brokers; Goldman, as the owner of a Pennsylvania clothing store, Kuhn and Loeb, as Cincinnati clothiers; and Lazard, in a New Orleans dry-goods business. These firms were dynastic, with only blood or marriage securing partnerships. They worked in the interstices left by the big Christian houses and dealt more directly in markets than the Morgans did. Markets were considered coarse by fancy gentile bankers. So Goldman, Sachs specialized in commercial paper, Lehman in commodity trading. Around 1900, they began underwriting shares for companies that were spurned by the gentile firms as too lowly—retail stores and textile manufacturers, for instance. Among them was Sears, Roebuck, introduced by Goldman, Sachs and Lehman Brothers in 1906. Of such relatively small issues, the gentile firms would sniff, “Let the Jews have that one”—snobbery for which they paid dearly in the twentieth century.56

  Schiff didn’t want to settle for the scraps left to the Jews. Alone among the Jewish bankers he had the gumption to play the grand game and contest Morgan in government issues and railroad financing. He fun-neled German and French money into American shares no less expertly than Pierpont did with British money. Much of Kuhn, Loeb’s exceptional power derived from the fact that it voted stock shares in American railroads as proxy for legions of German investors.

  Morgan referred to Schiff dismissively as “that foreigner.”57 Schiff, in turn, professed to admire Morgan, but his compliments sometimes had a slightly hollow, envious ring. After Pierpont’s heroic role in the 1907 panic, Schiff said, “Probably no one could have got the banks to act together . . . as he did, in his autocratic way.”58

  Political, ethnic, and religious differences among bankers permeated Wall Street in the early 1900s. The Yankee-Jewish banking split was the most important fault line in American high finance. And since the two groups would come to dominate American investment banking, their feuds form a recurring theme in the Morgan banking saga. Pierpont’s anti-Semitism was well known. Said an early biographer: “He had a deep-seated anti-Semitic prejudice and on more than one occasion needlessly antagonized great Jewish banking firms.”59 His dislike of Jews may have been sharpened by dealings with the Rothschilds. The Jewish tycoon Joseph Seligman noted Pierpont’s “freeze-and-thaw attitude” toward him, which he attributed to his discomfort with Jews.60 During thaws, the two men collaborated on issues, and when Seligman was barred from a fashionable Saratoga hotel, the Morgan bank signed an advertisement protesting the exclusion. In addition, Kuhn, Loeb, in particular, managed many syndicates with the Morgans. The strain of anti-Semitism running through the Morgan story is fascinating precisely because it had to be so carefully suppressed.

  The group making common cause with Harriman and Schiff against Morgan in 1901 was the Rockefellers. In 1881, John D. Rockefeller had financed the Standard Oil trust from its huge cash reserves, staying free of Wall Street. As the 1880s progressed, Standard Oil was generating so much cash that the Rockefellers looked about for a financial repository. They chose the National City Bank—the forerunner of today’s Citibank—and pumped in so much money that by 1893 it ranked as New York’s largest bank. It was a significant development: at a time when bankers tightened their grip on industry, here was an industrial empire fastening its grip on banking. National City became known as the oil bank, much as J. P. Morgan and Company would be called the steel bank. National City Bank’s president, James Stillman, with his coldly alert and penetrating eyes, would oppose Pierpont in the Northern Pacific battle but become a close ally later on. Two of Stillman’s daughters married two of William Rockefeller’s sons, sealing the union of the Rockefellers with the National City Bank.

  The Northern Pacific quarrel began when northwestern railroad magnate James J. Hill decided to buy a midwestern road called the Chicago, Burlington, and Quincy. Hill was a garrulous man with a bushy, white untamed beard, shoulder-length hair, and a troll’s face. With Morgan’s help, he had consolidated the Great Northern and Northern Pacific into a railroad system that dominated transport in the northwestern United States. The purchase of the CB&Q, Harriman feared, would provide Hill with an entree into Chicago and a possible connection for a transatlantic line; it might even link up with Morgan’s New York Central.

  Schiff and Harriman pleaded with Hill and Morgan for a stake in the road but were rebuffed. Harriman said implacably, “Very well, it is a hostile act and you must take the consequences.”61 In a manner that anticipated mergers of the 1980s, Schiff and Harriman decided to swallow the railroad that had swallowed the CB&Q—the Northern Pacific. The Northern Pacific ran west from Wisconsin through North Dakota and Montana, terminating in Seattle, Washington. Schiff, torn between dreams of glory and dread of Morgan
, passed a sleepless night before acceding to Harriman’s plan. It was an extraordinary act lèse-majesté, because the House of Morgan had a substantial stake in the Northern Pacific and wouldn’t tolerate such an attack.

  The raiders went into the market secretly, buying up $78 million in Northern Pacific shares—at the time, the largest such market operation in history. As share prices rose in April 1901, Pierpont credited it to the bullish tone of stocks set by the launching of U.S. Steel. Schiff cunningly circulated rumors that the rise reflected Northern Pacific’s enhanced value after the CB&Q purchase. When a block of shares came into Robert Bacon’s hands, he gladly sold. Even the railroad’s board sold. It was a masterly con job by Harriman’s forces, camouflaged by the ebullient financial markets that followed McKinley’s reelection. The newspapers noted that many young men-about-town with newfound stock market fortunes were now calling themselves financiers. At the same time, many investors, apprehensive about the giddy market activity, predicted a general panic.

  Then, in May, Northern Pacific stock shot up so fast it seemed to levitate. Hill, who had been beguiled by Bacon’s beauty, was troubled by bad dreams. Asleep in his private railroad car in Seattle, he was visited by “a dark-complected angel” who warned of trouble in New York. Hill raced clear across America to Wall Street. On Saturday, May 4, he alerted Bacon to what he saw as a catastrophe in the making. They cabled Pierpont, now in Aix-les-Bains, and awaited instructions.

  At this point, the Harriman-Schiff forces were 40,000 shares short of majority control of the Northern Pacific. That Saturday morning, Harriman ordered Kuhn, Loeb to buy the needed stock, but Jacob Schiff was attending services at Temple Emanu-El, and the order never got executed. The lapse was fateful, for the next day Pierpont told Bacon to purchase 150,000 shares at any price. That Monday morning, Morgan brokers fanned out across the Exchange floor, and insane trading in Northern Pacific ensued.

  The jumps in the stock were staggering. On Tuesday, May 7, the stock closed at over 143—a gain of 70 points in three days. The next day, it shot up to 200. This was a corner, a bloody trap for speculators. Speculators kept “shorting” the stock—that is, selling borrowed shares in the belief that the bubble would pop and enable them to buy back the shares at a cheaper price. Instead, the Northern Pacific geyser kept rising, forcing them to liquidate shares of other companies to pay for their borrowed Northern Pacific shares. Hence, the problem was generalized to the entire stock market.

  By Wednesday, almost every stock on the Exchange was crashing, with money sucked from the rest of the list to feed the spectacularly surging Northern Pacific. Then came Thursday, May 9, and the biggest market crash in a century. Northern Pacific zoomed up as much as 200 or 300 points per trade, finally hitting 1,000. Then it dropped 400 points on a single trade. The Exchange was a scene of wild pandemonium as speculators found it impossible to locate certificates to cover short sales. The New York Times reported: “Brokers acted like insane men. . . . Big men lightly threw little men aside, and the little men, fairly crying with indignation, jumped anew into the fray, using hands and arms, elbows, feet—anything to gain their point. . . . To the spectators in the distant gallery of the Produce Exchange it was something incomprehensible, almost demonic—this struggle, this Babel of voices, these wild-eyed excited brokers, selling and buying, buying and selling.”62

  When brokers appeared with Northern Pacific certificates, they were clawed at by men who feared they would be ruined without them. One broker hired a train from Albany just to deliver one certificate of five hundred shares. Amid this free-for-all, Pierpont Morgan regained control of the Northern Pacific, but at the price of a full-blown panic. It was the madly destructive act of an egotist bent on winning at any cost. The carnage ended when a new Morgan partner, George Perkins, acting with Schiff and Harriman, announced that short sellers would be allowed to buy up shares at only $ 150 a share. Had the action not been taken, more than half the brokerage houses on Wall Street might have gone belly-up. It had been a pageant of extreme cupidity, one that sparked public apprehension about the omnipotent new financial magnates. The New York Herald banner headline of May 9, 1901, summed up the popular view: “GIANTS OF WALL STREET, IN FIERCE BATTLE FOR MASTERY, PRECIPITATE CRASH THAT BRINGS RUIN TO HORDE OF PYGMIES.”63

  The devil-angel nature of Pierpont Morgan was such that he alone started and stopped panics. He often appeared to be two different people of identical appearance but contrasting personalities. Comically, at the panic’s height, a New York Times reporter found a forlorn investor named Jefferson M. Levy at the Waldorf-Astoria; Levy sighed, “If Mr. Morgan had been here this never would have happened.”64

  Pierpont brooked no criticism of his role in the Northern Pacific. Appearing at the Morgan, Harjes offices in Paris, he said with baronial bluntness, “I owe the public nothing.”65 The closest he ever came to an explanation was a reiteration of the Gentleman Banker’s Code: “I feel bound in honor when I reorganize a property and am morally responsible for its management to protect it, and I generally do protect it.”66 Yet his power on Wall Street was now such that like a female elephant charging to protect her young, he couldn’t help but crush innocent bystanders. He was too large for the flimsy regulatory structures that encased him; he had outgrown his age. Coming after the U.S. Steel promotion, the Northern Pacific corner reinforced the view that the public was being held hostage by the stock manipulations of a few Wall Street moguls.

  For the most part, President McKinley was deaf to such outrage. Then, on September 6, 1901, he was shot by an anarchist named Leon Czolgosz as he stood in the Temple of Music at the Pan-American Exposition in Buffalo. We have graphic descriptions of Pierpont’s reaction to the news. He was about to leave 23 Wall Street for the evening and already had on his silk hat when a New York Times reporter rushed in with the report. “What?” said Pierpont, seizing the man’s arm. He stared into his eyes, overcome with amazement. Then he slumped into a desk chair, awaiting the confirmation that soon came by telephone. “This is sad, sad, very sad news,” he told the Times reporter.67 Other accounts describe him as red-faced and almost reeling with shock.

  McKinley’s assassination would be a turning point in Pierpont Morgan’s life, for it installed in the presidency forty-two-year-old Theodore Roosevelt, a man whose view of big business was far more ambivalent than his predecessor’s. Jack Morgan was mildly hopeful about the new president, although TR’s noisy chatter had grated on him after the March inauguration. “What I fear is that he may perhaps talk too much which would be very undesirable,” he said.68 In fact, the presidency of Teddy Roosevelt would mark the start of periodic warfare between the White House and the House of Morgan, warfare that would rage through three straight presidencies—those of Roosevelt, Taft, and Wilson.

  Two months after McKinley’s assassination, the feuding parties of the Northern Pacific corner made their peace. They set up a holding company, the Northern Securities Co., which merged the Northern Pacific, Great Northern, and CB&Q lines. Both Hill and Harriman were given seats on the board. If this brought peace between the two most important groups on Wall Street, it also heightened public alarm that a railroad monopoly had taken hold west of the Mississippi. “And it will be much easier for them to obtain the second half than it was the first,” said one newspaper editor, foreseeing a subsequent eastern rail monopoly. “One railroad after another will slide gently into their grasp until any passenger anywhere who objects to traveling on their lines can take a trolley car or walk.”69 The dreams of the architects of Northern Securities went beyond the most vivid Populist fear. After tying up transcontinental railroads, they planned to link them with steamship lines to Asia—a vision that later would culminate in Edward Harriman’s plans for an around-the-world transportation network. Pierpont, meanwhile, meditated on a rail-ship monopoly of the North Atlantic, extending his domain beyond the borders of the United States. Wall Street increasingly gazed abroad.

  Besides bankrupting thousands of investors, t
he Northern Pacific corner claimed a last casualty—Morgan partner Robert Bacon. Although he remained at 23 Wall for another year and a half, his nerves were shot by the strain. On doctor’s orders, he rode to hounds for two years—a very Morgan form of therapy. When he returned to the United States from his travel abroad, he occupied a series of positions—assistant secretary of state, secretary of state, and ambassador to France—of a far less taxing nature than being chief lieutenant to J. Pierpont Morgan.

  CHAPTER SIX

  TRUST

  ASSIGNED to J. S. Morgan and Company in London in 1898, Jack Morgan, now thirty-one, was a lonely prince in exile. Tall and broad-shouldered, he was a husky young man with a broad face, a direct gaze, a black mustache, and prominent nose that never assumed the gross proportions of his father’s. From afar, Jack watched the epochal events unfolding in New York—the formation of U.S. Steel and the cornering of Northern Pacific—with a vague yearning. He may have felt his date with destiny had been continually rescheduled. While conceding London’s pleasures, he complained to his mother, “when I think of home the time does seem a bit long.”1 He grumbled how “profoundest peace” reigned at 22 Old Broad Street, while everything was “jumping about” at 23 Wall Street.2 Worst of all, he had to watch Pierpont turn the spotlight of his favor on Robert Bacon.