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

by Ron Chernow

  Reporting back to the American group, Lamont recommended that no Chinese loans be made until north and south were unified, with a parliament that could take responsibility for a loan. It was the same problem faced by the first bankers’ consortium—an unstable polity. China never met the group’s conditions. By 1922, Lamont was asking Secretary of State Hughes whether the China consortium should be disbanded. An ersatz diplomat, Lamont wished to persevere less for reasons of profit than for reasons of state. But the question was moot: the China group had been stillborn. This didn’t upset the House of Morgan, for Japan would be its most profitable customer in the Far East and China only an annoying factor in that relationship. Before long, Morgan involvement in Japan would be so deep as to deprive Tom Lamont of any incentive to renew his Chinese initiatives.

  IN contrast with his tumultuous journey through China, the Japanese leg of his 1920 journey was far more congenial, the start of a lasting friendship. Japan was already known as the England of Asia—the highest possible recommendation for a Morgan partner—and with Japan and America ascendant in the Pacific, the time had come for closer financial relations. Like the United States, Japan had prospered during the war by selling ships and supplies to the Allies. Its gold reserves had grown a hundredfold—a war chest likely to impress any banker. And where the United States was already Japan’s best customer, Japan was now the fourth best market for U.S. exports.

  The political context, too, was auspicious: the Japan that Lamont encountered contained liberal elements eager to cultivate Western bankers and open the country to new influences. For the moment, enlightened aristocrats held the upper hand over militarists, and the cultural mood favored tolerance, openness, even a touch of bohemianism. The Japanese economy was dominated by zaibatsu—combination trading houses and industrial conglomerates formed around core banks—and they were fast expanding overseas. So as Britain weakened its long-standing alliance with Japan, Washington moved to fill the vacuum.

  Tom Lamont and his wife, Florence, were greeted by Japan’s elite: the merchant emperors of the houses of Mitsui and Mitsubishi. Cultured and patrician, these families possessed a natural appeal for someone as ceremonious and attentive to style as Lamont. A friend later remarked that Tom “simply outsmiled the Japanese.”5 Eager to meet Wall Street’s newest ambassador, the Japanese business leaders entertained him as a visiting monarch. He marveled at how they produced No dancers at a moment’s notice or “bevies of graceful, dancing geisha girls.”6 Florence was taken on a private tour of the twenty-five-acre central Tokyo estate of Baron and Baroness Iwasaki, a maze of lakes, gardens, and secluded courtyards. The Iwasakis were probably Japan’s richest family and the founders of the Mitsubishi conglomerate, which owned Japan’s largest steamship line.

  The power of the House of Morgan in the 1920s owed much to its intimacy with the world’s major central bankers, its ability to provide private channels of communication among them. Lamont conferred about the China consortium with Junnosuke Inouye, governor of the Bank of Japan, a gravely erect man with round, black-rimmed glasses and a solemn mien. The towering figure of his generation in Japanese finance, Inouye had served as president of the Yokohama Specie Bank, whose Wall Street office was fiscal agent for the Japanese government. He would twice be governor of the Bank of Japan and three times minister of finance. Like Ben Strong in America, Montagu Norman in England, and, later, Hjalmar Schact in Germany, Inouye made his nation’s cental bank a strong, independent voice in the country’s affairs. Like so many Lamont meetings, this one was providential. For Wall Streeters eager to believe that justice and decency would prevail over militarism in Japan, Inouye was heaven-sent. He was an apostle of sound currencies and balanced budgets and remained a steadfast, courageous opponent of the militarists.

  Lamont established another fateful friendship, with the head of the Mitsui conglomerate, Baron Takuma Dan, a slight, fragile man, with a gentle manner and distinguished gray hair and mustache. His nickname was the Morgan of Japan. Fluent in English, with a mining degree from MIT, he was no less international and cosmopolitan than Tom Lamont. As managing director of the Mitsui conglomerate and chairman of the Mitsui bank, he controlled an empire that extended into every branch of the Japanese economy. It controlled a third of Japanese overseas trade—25 percent of the silk trade, 40 percent of coal exports—and managed a shipping fleet the size of the French merchant marine.

  The Mitsui group made the Morgans seem like yesterday’s upstarts. For nine consecutive generations, its bank had faced the sacred mountain, Fujisan. The House of Mitsui had become financial agents of the shogunate in the seventeenth century and bankers to the imperial house by 1867. It provided a convenient overseas network for the Japanese government, having more agencies abroad than the government had embassies. At the Mitsui compound in central Tokyo—a fortresslike structure with a huge gate and stone wall bristling with bamboo spikes—Baron Dan entertained Lamont with the same magnificence he later displayed to the Prince of Wales. He showed his guest Gobelin tapestries in his grand salon. Then they strolled by lotus ponds and under pine trees festooned with thousands of paper lanterns. The following year, to promote closer American ties, Dan led a Japanese delegation to Wall Street and dined with the Lamonts at their East Seventieth Street townhouse.

  Lamont’s success on his 1920 trip bore fruit with amazing speed. On September 1, 1923, an earthquake erupted in the Tokyo-Yokohama vicinity. It was a hot, windy day, and fires fanned over both cities, causing unspeakable damage. It was the century’s worst earthquake, and over a hundred thousand people died. More than half of Tokyo and Yokohama was reduced to ashes. The property damage alone wiped out 2 percent of Japan’s wealth.

  When the news was learned at 23 Wall, Morgan publicity chief Martin Egan paid a condolence call at the Wall Street office of the Yokohama Specie Bank. Dwight Morrow became chairman of the Red Cross Japan Fund, and the Corner was converted into the New York headquarters for relief work. Rumors circulated that Japan planned to float its first bond issue in America since the Russo-Japanese War. Lamont wrote to Inouye, who was now the finance minister, and advised against such an issue. Lamont realized that candor more than greed would pay off in this situation. In his cable he said, “People who are contributing millions of dollars out of pocket for suffering and disaster are a little chary at the same moment of buying bonds for the people whom they are trying to assist.”7

  By late 1923, the Japanese, with their exceptional resilience, had restored Tokyo’s electric lights, gas service, and water supply. The Tokyo Stock Exchange was back in service in under three months. The mass destruction had one beneficial side effect: it forced Japan to scrap many old factories and modernize its industrial plants. By declaring a bank holiday that saved many financial institutions, Inouye attained heroic stature in Japan. And when the House of Mitsui rebuilt its bank, the building’s white marble facade was designed by Trowbridge and Livingston, the architects of 23 Wall Street. Some saw the House of Mitsui paying tacit homage to the House of Morgan and honoring their new ties.

  Once the calamitous mood disappeared, Lamont set about to win the Japanese government as an exclusive Morgan client. The Japanese had found Pierpont rather rough and abrasive—he had offended them by demanding collateral on loans—and preferred doing business with Jacob Schiff of Kuhn, Loeb. For aid provided during the Russo-Japanese War, Schiff was decorated by the mikado with the Order of the Sacred Treasure. On Wall Street in the 1920s, it was a delicate affair to steal away valued business while adhering to the Gentleman Banker’s Code. So with guile and subtlety, Lamont had to coach Inouye’s emissary, Tat-sumi, on Wall Street etiquette. Slyly, he put words in his mouth, tutoring him in the preferred style for an amicable breach. Afterward, Lamont explained how he primed his target:

  However as to the handling of any loan we have told Tatsumi frankly that it appeared to us there were only 2 courses for him to adopt. First to go to Kuhn, Loeb & Co. and state to them that because of the relations existing
during the loan operation of the Russian War 20 years ago they desire them now to undertake the projected operation; or second as a complete alternative to go to them and say that because of the national crisis confronting their country; because of the grave necessity they felt themselves under for securing co-operation throughout the entire American investment public; because too of the importance for careful co-operation between the New York and London markets they had determined to invite us to make the lead in the projected operation and expected their friends Kuhn, Loeb & Co. to tell them this course was the wise one.8

  Kuhn, Loeb was now too small to handle the projected $150-million earthquake loan, which would be the largest long-term foreign loan ever placed in the American market. The firm was also still suffering from the damage done to its standing on account of its supposed German sympathies in the war. When the issue appeared in February 1924, J. P. Morgan and Company brought in its old allies, National City and First National, as syndicate managers. To soothe ruffled feelings, they included Kuhn, Loeb. Whatever the private gloating at Morgans, the firm outwardly respected propriety. There was a twin loan of £25 million in London, and Barings, Schroders, and Rothschilds now had to include Morgan Grenfell in their Japanese financing.

  The American loan had a concealed agenda. On two occasions, Lamont had talked with Secretary of State Hughes, who said he would be gratified “to have the Japanese people have clear evidence of the friendly feeling on the part of the two great English speaking nations toward Japan and the Japanese.”9 Once again, Wall Street financing was the visible face of a shift in government policy.

  One problem inherent in employing bankers as de facto ambassadors was that they might transfer their allegiance to foreign powers. After all, private bankers were schooled in a tradition of absolute loyalty to their clients. A Tom Lamont would feel no less responsible to Japanese bondholders than a Pierpont Morgan would to railroad bondholders. So the House of Morgan believed it had a stake in Japanese success and prosperity and felt obliged to perform political favors for its important new client. Even as the Morgan bank sponsored the big earthquake loan, partners were embroiled in a political controversy on behalf of the Japanese. They protested the Japanese Exclusion Act, which was designed to check Japanese immigration and had a racist tinge. And they complained to the White House about American fleet maneuvers around Hawaii, which were troubling the Japanese. Tokyo and 23 Wall now played a game of mutual adulation. By 1927, the emperor of Japan would invest Jack Morgan with the Order of the Sacred Treasure and Lamont with the Order of the Rising Sun; in 1931, Russell Leffingwell would receive the Second Class Order of the Sacred Treasure. These were rare honors for American bankers.

  The tendency to switch loyalties to foreign clients and acquire a strong interest in their survival would have profound consequences for the House of Morgan. For by the mid-1920s, Lamont had recruited three new clients—Japan, Germany, and Italy—whose course would sharply clash with America’s. It was strictly by chance that the bank became involved with three future enemies. But over time, these business conquests would create an extraordinary situation in which the true-blue banker of the Allies ended up in the precarious position of banker to the future Axis powers.

  IN the new vogue for foreign securities, the major area of attention was Latin America. Bond peddlers from Wall Street banks badgered small investors into buying bonds issued in places they could scarcely pronounce. Few knew the checkered history of Latin American lending or that as early as 1825 nearly every borrower in Latin America had defaulted on interest payments. In the nineteenth century, South America was already known for wild borrowing sprees, followed by waves of default. Now too many bankers again chased too few good deals, and credit standards eroded accordingly. In describing the 1920s, Otto Kahn later said, “A dozen American bankers sat in a half a dozen South and Central American States . . . one outbidding the other foolishly, recklessly, to the detriment of the public.”10 The default of Latin debt in the 1930s would profoundly shake America’s faith in Wall Street.

  Latin American loans had always been risky because of the region’s dependence on fluctuating commodity prices. A dip in copper prices instantly hurt Chile, while lower tin prices could cripple Bolivia. When the price of sugar collapsed in 1920-21, the Cuban economy plunged with it. Faced with many business failures, National City Bank—which held 90 percent of Cuba’s deposits and served as the country’s national bank—foreclosed on properties and ended up owning a fifth of the island’s sugar mills. The Guaranty Trust was also heavily invested in Cuban sugar and had to be rescued by a Morgan-led group of bankers in May 1921. William C. Potter, a manager of the Guggenheims’ smelting trust, was brought in as a caretaker executive and loan liquidator for the bank; George Whitney and other Morgan partners went on its board. Devastated by the experience, Guaranty Trust would deteriorate into such a sleepy, stodgy, risk-fearing institution that by 1959 it would be ripe for merger with the far smaller J. P. Morgan and Company.

  As the prestige bank of Wall Street, the House of Morgan didn’t need to coerce Main Street investors into buying Latin American bonds. It preferred European industrial states, Commonwealth countries (Canada and Australia), and developed states on the periphery (Japan and South Africa) although it had long shared business in Argentina with Barings. This was the privilege of success: the bank could choose the soundest foreign borrowers, lending its imprimatur only to those countries that probably didn’t need it. The only poor country the bank dealt with was Mexico, which had gone from the model Latin American debtor in Pierpont’s day to the bête noire of global bankers. During the prolonged turmoil of the Mexican Revolution, it had repudiated over $500 million in government and railway debt, an unusual loss of principal on Morgan-sponsored foreign bonds. Adding to the bank’s indignation was the fact that the defaulted debt included Pierpont’s sacred loan of 1899—the first foreign issue ever floated in London by an American banking house.

  Before examining the Mexican debt morass, it is important to note some differences between Latin American debt then and now. During the interwar years, the debt was package’d as bonds and sold to small investors; in our own day, the debt would take the form of bank credits, meaning that the public is not directly at risk. During the 1920s, banks negotiated with Latin American debtors, not on their own account, but as “moral trustees” for small bondholders. Such was the nature of Morgan involvement in Mexico, with Tom Lamont serving as chairman of the International Committee of Bankers on Mexico—the splendidly initialed ICBM. Formed in 1918 with the approval of the State Department and the British Foreign Office, the ICBM negotiated for two hundred thousand small bondholders. In the nineteenth century, Mexican debt talks had been handled by Barings. But citing the Monroe Doctrine, the State Department demanded that the United States have the controlling hand on the committee. With over $1 billion invested in Mexico, the United States behaved like a jealous landlord. Mexico was a resource-rich country that always held out a seductive promise of prosperity, which it never quite fulfilled. And it had a weak political system, always making debt repayment problematic.

  Lamont spent so much time wrestling with Mexican debt that a slightly paternal tone crept into his comments, as if Mexico were the backward child of the Morgan brood. Writing a birthday greeting to his son, Corliss, in 1923, he grew mawkish: “Much of my life for 2 years past has been devoted to help poor Mexico to her feet. . . . The accomplishment of that task is one of my daily prayers.”11 Lamont claimed that Mexico was the first thing to occupy him each morning, and he often talked about the widows and orphans who had waited years without receiving interest on their bonds. The Mexican debt crisis demanded saintly patience and something of a romantic’s penchant for lost causes. Lamont was ideally suited for the task.

  In working with Japan, Lamont had some room in which to maneuver. This wasn’t the case with Mexico, where he had close State Department supervision. When it came to Third World countries, Washington more openly exploit
ed American financial power. Secretary of State Hughes opposed diplomatic recognition of Mexico, which had continually threatened powerful U.S. interests there. In 1917, under leftist president Venustiano Carranza, Mexico had enacted a radical constitution, which asserted Mexican ownership of subsoil minerals—a measure denounced as nationalization by American oilmen, who wanted to send in gunboats to repeal it. After Pancho Villa’s troops looted his huge cattle ranch in Mexico, William Randolph Hearst began to editorialize in favor of a Mexican invasion in 1916. Hughes was also bothered by Mexico’s default on foreign debt and its confiscation of American-owned lands. Until these demands were met, Hughes demanded a credit quarantine around Mexico. The House of Morgan was his main instrument for enforcing it.

  Like the China consortium meetings, the ICBM meetings were held at 23 Wall Street. It was the same act of ventriloquism: the State Department talked, and Tom Lamont moved his lips. The Mexicans preferred this charade, for it enabled them to bargain with Washington while being spared the public stigma of negotiating with a gringo government. Private banks such as Morgans were perfect channels for frank exchanges between Washington and foreign governments.

  But while Lamont was rapturously fascinated by Japan, he knew virtually nothing of Mexico, which was thought too wild for tourism. Hence, Lamont acted as proxy for two hundred thousand bondholders whom he never saw, negotiating with a country he never visited. He became a familiar figure in the Mexican press, the personification of American finance. Interviewing him in 1921, a Mexico City correspondent wrote: “He is not the man behind the throne, he is the man on the throne. He is the most clever, the most listened to, the most powerful of the partners of Morgan.”12