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

by Ron Chernow

  Such wholesale development of Alaska became a test case of the government’s attitude toward wilderness areas. It pitted Gifford Pin-chot, director of the U.S. Forest Service and a Teddy Roosevelt holdover, against Secretary of the Interior Richard Ballinger, a Taft appointee. Pinchot wanted to preserve the Alaskan wilderness for posterity, while Ballinger thought only the Guggenheim-Morgan combination could finance development in such a remote, costly spot. After public feuding between Pinchot and Ballinger, Taft dismissed Pinchot. When Teddy Roosevelt, on an African safari, heard about this, it fed his sense of having been betrayed by Taft.

  Toward the end of his second term, Roosevelt had decided not to file an antitrust suit against the Morgan farm-equipment trust, International Harvester. In 1911, Taft not only filed such a suit, but later released papers purportedly showing that George W. Perkins had blocked an antitrust suit against Harvester back in 1907 by lobbying the head of the U.S. Bureau of Corporations, who warned Roosevelt not to antagonize the Morgan interests without any proof of major wrongdoing.

  In October 1911, the Taft administration lodged a suit against U.S. Steel in a further rebuff to the Morgans. “Am horrified at character of bill which beyond everything I thought possible,” Harry Davison wrote to the London partners.26 To the Paris partners, he denounced the “cheap political methods of Taft and his associates.”27 What made this especially galling to both Morgan and Roosevelt was the stress on U.S. Steel’s acquisition of Tennessee Coal and Iron during the 1907 panic. This was the deal that Judge Gary and Henry Frick had gotten TR to approve during his breakfast. The former president was hypersensitive to allegations of having been hoodwinked. Defending his actions, Roosevelt said that the suit against U.S. Steel “has brought vividly before our people the need for reducing to order our chaotic Government policy as regards business.”28 The combination of the Pinchot firing and the U.S. Steel and International Harvester suit helped convince Roosevelt to bolt from the Republicans in 1912 and run as presidential candidate of the Progressive, or Bull Moose, party.

  The issue of Morgan influence still dogged Roosevelt because of the prominence in his campaign of ex-Morgan partner George W. Perkins. Perkins was furious about Taft’s trust-busting. He urged Roosevelt to run, covered many of his preconvention expenses, stage-managed the convention, and chaired the new party’s executive committee. It was said he traveled so often to Oyster Bay to see Roosevelt that his chauffeur “knew every pebble in the road, even in the dark.”29 Among Roosevelt’s Progressive followers, there lurked residual fear that Pierpont had planted Perkins in the campaign. But Perkins had left the bank on bad terms, and this seems unlikely. The 1912 split between Taft and Roosevelt brought to power the man who had lectured Pierpont on his moral duty: Woodrow Wilson. Meanwhile, the U.S. Steel suit miscarried, and International Harvester had to divest only three small subsidiaries.

  The intellectual and political leap most damaging to the House of Morgan was a spreading notion that a Wall Street trust had created the industrial trusts and governed their subsequent destiny. Minnesota congressman Charles A. Lindbergh, Sr., father of the future aviator, coined the title Money Trust, describing it as the most sinister trust of all. Senator George Norris later said of Lindbergh’s attack on the Money Trust that “the gentleman from Minnesota is entitled to more credit than any other member.”30 The Wall Street Journal correctly noted that the Money Trust was just a code name for Morgan. Legions of young muckraking reporters fanned out across Wall Street and rooted out insidious banking connections. Aided by his young assistant, Walter Lippmann, Lincoln Steffens exposed a web of links among ostensibly competitive New York banks. His exposes in Everybody’s magazine termed Pierpont “the boss of the United States.”

  During the summer of 1912, swollen Wall Street power was a hot issue at the Democratic National Convention. In a hell-raising speech, William Jennings Bryan introduced a resolution stating opposition “to the nomination of any candidate for president who is the representative or under obligation to J. Pierpont Morgan, Thomas F. Ryan, August Belmont, or any other member of the privilege-hunting and favor-seeking class.”31 Wilson was more circumspect. While refusing contributions from Morgan, Belmont, and Ryan, he made exceptions for such financial notables as Jacob Schiff and Bernard Baruch. In accepting the nomination, Wilson said, “A concentration of the control of credit . . . may at any time become infinitely dangerous to free enterprise.”32 That summer, he was tutored in economics by lawyer Louis Brandeis, who had combated Morgan control of the New Haven Railroad for several years. Financial reform would form a major part of Wilson’s campaign.

  Congressman Lindbergh introduced a resolution in the House calling for a congressional probe into the concentration of power on Wall Street. The resulting 1912 hearings of the House Banking and Currency Committee were commonly known by the name of subcommittee chairman Arsene Pujo, a Louisiana Democrat, and they got into high gear after Wilson’s victory in November 1912. Pierpont Morgan and his friends, colleagues, and partners were to be the star witnesses.

  The Pujo hearings are always portrayed as Pierpont’s martyrdom, the public confrontation that led to his death. Of equal relevance to our story is their haunting effect on Jack Morgan. He had coped with the fear of his overpowering father by resorting to awe-struck worship. As Pierpont returned the affection in later years, Jack’s gratitude contained an extra element of relief, and he deeply resented the blistering political attacks against his father. A new bitterness, a darker shading, crept into his letters: “As to attacks on the Senior,” he wrote Vivian Smith, “. . . owing to a laborious and prolonged press attack . . . in the public mind J.P.M. is no longer a benefactor, or a citizen who would be a credit to any country, but is an ogre lying in the background, and always ready to devour.”33 “The politicians that run our two countries appear to have been seized with a madness,” he told Grenfell. “Our country is full of hatred and bitterness and talk.”34

  At first, Jack regarded the Pujo investigation as a “nuisance.” He took heart from the opinion of Morgan lawyer, Francis Stetson, that as a private bank they could withhold their books and refuse testimony. Jack even fancied Pierpont might lay out some constructive measures for Pujo’s consideration. But in late April 1912, the committee chose as its counsel Samuel Untermyer, a rich, shrewd New York trial lawyer whose pedigree collies had once beaten Pierpont’s in competition. Untermyer had already railed against the Money Trust, and Jack was aghast: “Investigation will probably proceed now on as unpleasant lines as can be arranged,” he cabled his father.35 The hearings would sharpen Jack’s hostility toward Jews, reporters, Democrats, reformers—all those troublemakers who stirred up the populace. Scarred by the experience, he would grow disenchanted with democracy and what he referred to as America’s “amateur Government.”36

  The hearings occurred in December 1912, just as Pierpont hoped to wash his hands of worldly cares. The money kept rolling in—he was making about $5 million a year—and the bank under Jack and Davison almost ran itself. Pierpont was probably more au courant on Egyptian excavations than on Wall Street underwritings. At first, he brusquely said he would testify alone in Washington. But on this cusp of the Diplomatic Age, a new accountability was expected, and bankers had to tend their images more prudently. The new team at 23 Wall adopted an aggressive attitude toward public relations dramatically at odds with historical reticence.

  Silence was Wall Street’s golden rule of conduct. Its leading exemplar was Pierpont’s pal George F. Baker of the First National Bank, whose mutton-chop whiskers and gold watch chain across his paunch made him a prototypical Victorian banker. His bank was as mysterious as 23 Wall itself. Known as the Sphinx of Wall Street, Baker was director of more than forty companies. He gave his first newspaper interview in 1863 and not another until 1923, when a young woman said she was promised a job if she gained access to the reclusive Baker. Breaking his silence, he said, “Businessmen of America should reduce their talk two-thirds. Everyone should reduce his
talk. There is rarely ever a reason enough for anybody to talk.”37 By then, Baker’s fortune was estimated at between $100 and $300 million. He would richly endow the Harvard Business School, in part through the intercession of Tom Lamont.

  As a private merchant, Pierpont felt no obligation to inform the public and never hired a publicist. Now a new generation of Morgan partners took charge of a public relations offensive. Not only was Pierpont coached for the hearings by Davison and Lamont, but the bank hired its first publicist. It was the ideal moment for that quintessential banker of the new age, round-faced smiling Tom Lamont. He laid out a secret plan, approved by Pierpont, that would govern Morgan public relations for a generation. To improve the bank’s image, Morgan partners would meet with selected reporters, stay in touch with publishers, monitor newspapers, contribute articles, and privately protest critical articles to editors.

  Lamont’s publicity operation for the Pujo hearings went beyond the lone publicist usually mentioned. An associate of his named Brainerd bought the big Maclures Newspaper Syndicate, which sold material to newspapers across America; this would be their vehicle for countering Pujo. “Our idea is for Brainerd to continue this strictly sub rosa,” Lamont cabled Davison, who replied, “Much pleased learn of Brainerd’s purchase. Find Senior and others here much impressed with the importance of doing something promptly. We all agreed it is most important have publicity man put to work sub rosa at once on money trust investigation.”38 This flowered into a full-blown scheme for entering publishing. Along with Wall Street friends, the Morgan partners planned to buy papers in major cities—Washington, Chicago, and New York—and purchase two newspaper groups that sold inserts to papers around the country. This part of the campaign apparently lapsed, as did negotiations to buy the Washington Post. But the moves reflected a new wish to shape opinion and emerge from the old Morgan cocoon of secrecy.

  Instead of going alone to Washington, as he first hoped, Pierpont headed a sixteen-person entourage. The morning of the hearings, he emerged from a big, high-topped limousine and marched up the steps of the Capitol in striped pants, a velvet-collared coat, and silk top hat, grasping a cane. An immense crowd ringed the block: Pierpont was the most famous banker on earth. He was flanked by his daughter Louisa, her hands stuffed deep in a fur muff and her mouth tight with prim disapproval, and Jack, who wore a derby hat, his black mustache flecked with gray. As Pierpont sat in the hearing room, he wore the tragic mask of an old clown, his head mostly hairless, his nose bulbous and grotesquely gnarled, his posture erect and stubbornly proud.

  The Pujo hearings are celebrated for Pierpont’s triumphant retorts and spirited defense of his business honor; in a moment, we shall hear the well-worn phrases. But let us first note the awesome Morgan power that was revealed, lest the Money Trust theorists seem malcontents. Some 78 major corporations, including many of the country’s most powerful holding companies, banked at Morgans. Pierpont and his partners, in turn, held 72 directorships in 112 corporations, spanning the worlds of finance, railroads, transportation, and public utilities. In this era of relationship banking, board seats often meant a monopoly on a company’s business. During the previous decade, the House of Morgan had floated almost $2 billion in securities—an astronomical figure for the time.

  The Money Trust hysteria stemmed from a wave of bank mergers; Wall Street was snowballing into one big, Morgan-dominated institution. In December 1909, Pierpont had bought a majority stake in the Equitable Life Assurance Society from Thomas Fortune Ryan. This gave him strong influence over America’s three biggest insurance companies—Mutual Life, Equitable, and New York Life. Although he subsequently “mutualized” the Equitable and sold it to policyholders, the potential for abuse seemed terrifying.

  Pierpont also controlled several New York City trusts through that old trick from railroad days, the voting trust. His Bankers Trust had taken over three other banks. In 1909, he had gained control of Guaranty Trust, which through a series of mergers he converted into America’s largest trust; it had two Morgan partners on its voting trust. As a director of both Bankers Trust and Guaranty Trust, Harry Davison blithely claimed that Morgans had no more control over the two banks than over the Pujo Committee itself. But Morgan records reveal a distinctly proprietary tone toward the banks. When Davison vacationed, for instance, Lamont dashed off such memos as “Banking matters—everything running along smoothly and successfully at the Bankers. . . . At the Guaranty Trust things are in good shape.”39 Besides these Morgan-controlled trust companies, the core Money Trust group included J. P. Morgan and Company, First National Bank, and National City Bank. Over the National Bank of Commerce, America’s second biggest, Pierpont had such influence that it was styled “J. Pierpont Morgan’s bank.”40

  Wall Street bankers incestuously swapped seats on each other’s boards. Some banks had so many overlapping directors it was hard to separate them. Five of nine Chase directors were also First National directors, giving George F. Baker control over Chase. The banks also shared large equity stakes in each other. Pierpont was the biggest outside shareholder in Baker’s First National Bank. After the 1907 panic, Pierpont also took a large block of National City stock and put Jack on its board. The public could be forgiven for suspecting that these “Morgan banks” avoided competition and exercised veto power over new entrants to the capital markets.

  In part, the new financial giants resulted from the stupendous scale of industrial financing. Business gravitated to New York as companies became national in scope. For instance, in 1906 J. P. Morgan and Company captured American Telephone and Telegraph’s business from Boston’s Kidder, Peabody, which had marketed AT&T bonds in New England but couldn’t handle its new need for national financing. Banks had to grow with their customers, and the industrial trusts created a Money Trust as much as the other way around. Similarly, with large-scale foreign financing in China, Latin America, and elsewhere, Washington had forged Wall Street banks into an instrument of statecraft but was then dismayed when they cooperated at home.

  Why didn’t banks just merge instead of carrying out the charade of swapping shares and board members? Most were private partnerships or closely held banks and could have done so. The answer harked back to traditional American antipathy against concentrated financial power. The Morgan-First National-National City trio feared public retribution if it openly declared its allegiance. In 1911, the group thought of merging the Bank of Commerce and Chase National Bank, but the move was vetoed by National City president James Stillman. As Jack had cabled Pierpont, “His objection arises from his feeling that it is better at present not to call attention to the great power of trio, which might increase public sentiment against that power throughout United States. . .. None of the trio wishes further large investment in bank stocks for long period.”41

  At the Pujo hearings, Pierpont faced a crafty adversary. Short, sharp-nosed, and mustachioed, Samuel Untermyer was no scruffy radical but an affluent lawyer who sported fresh orchids in his lapel. A close student of trusts—he had investigated Equitable Life Assurance and Standard Oil—he had a suave, insinuating style. Pierpont, by contrast, was rough and uncouth in public. At this moment of supreme crisis, he reverted to those precepts that Junius had pounded into his head—the Gentlemen Banker’s Code of the City. The famous exchange went as follows:

  Untermyer: Is not commercial credit based primarily upon money or property?

  Morgan: No, sir, the first thing is character.

  Untermyer: Before money or property?

  Morgan: Before money or anything else. Money cannot buy it. . . . Because a man I do not trust could not get money from me on all the bonds in Christendom.42

  Spectators applauded, and businessmen across America stood rapt by this eloquence. The usually taciturn Pierpont had ennobled banking in an unexpected way. On Wall Street, banker Henry Seligman said, stock prices leapt 5 to 10 points on the strength of this testimony.43 Pierpont phrased the point more colorfully: “I have known a man to come into my
office, and I have given him a check for a million dollars when I knew that they had not a cent in the world.”44

  However much financiers might cheer such sentiments, to outsiders the statements sounded like cant preached to dupes. Yet, as we have seen, early merchant bankers used character and class as crude forms of credit screening; ever since the Medicis and Fuggers, it was a practical way for private bankers to protect their precious capital base. Pierpont’s statement was neither as cynical as critics thought nor as noble as friends imagined. It was a workable business strategy.

  In the history books, Pierpont’s epigrammatic sayings stand out. In the transcript of the Pujo hearings, however, they appear against an arid backdrop of denials and monosyllabic grunts, as if he wouldn’t concede the hearing’s legitimacy. Stamping his cane, Pierpont grew bullheaded and snorted like some angry god held hostage by heathens. Grudging in his explanations, he was led by Untermyer into some absurd statements. For instance, Untermyer got Pierpont to state his rationale for the one-man control of the railroads he sponsored:

  Untermyer: But what I mean is that the banking house assumes no legal responsibility for the value of the bonds, does it?

  Morgan: No, sir, but it assumes something else that is still more important, and that is the moral responsibility which has to be defended so long as you live.45

  This was Pierpont in a nutshell: he represented the bondholders and expressed their wrath against irresponsible management. But Untermyer saw more than passive surveillance at stake in the directorships and voting trusts. Besides representing bondholders, the House of Morgan represented itself to ensure a steady flow of business. It could intervene to protect its own interests. Because Pierpont wouldn’t admit this, he spouted gibberish: