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

by Ron Chernow

  In 1920, after counterrevolutionaries murdered Carranza, General Álvaro Obregón rose to power. To win recognition from Washington, he embarked on a conciliatory strategy, courting American businessmen, hiring a Washington lobbyist, and distributing favorable literature in the United States. In 1921, when William Randolph Hearst went to tour his vast Mexican properties—which his father had gotten cheaply from the former dictator, Porflrio Díaz—he found Obregón a pleasant surprise. Afterward, he said his properties had been “in continual trouble and turmoil during the several preceding administrations, but have been in complete peace and security during the administration of President Obregón.”13

  Eager to please American bankers and reestablish Mexican credit, Obregón plied Lamont with invitations to visit Mexico. But Secretary of State Hughes wanted a treaty of friendship and commerce from Obregón and insisted that Lamont stall to increase the pressure. When the bank received alarming reports of rebel troop movements against the president, Lamont told Hughes that if he went to Mexico, it might bolster Obregón’s standing. Hughes relented. In October 1921, Lamont boarded the bank’s private railroad car, Peacock Point, and headed south.

  Obregón, a chick-pea farmer from Sonora, was a crafty politician who knew how to temper reforms with authoritarian toughness. To gain peasant support, he would praise revolutionary ideals while scaling back Carranza’s reforms. Lamont found the one-armed general a charming host, friendly, expansive, and not without humor. With Prohibition in the United States, Obregón greeted Lamont and gave a brisk summons for some liquor. “At last, Mr. Lamont, you see you are in a free country,” he said. One detail of the visit riveted Lamont’s attention. Obregón had placed his desk in the middle of a hardwood floor, so he would be able to hear the squeak of an assassin’s footsteps.

  During his talks with the Mexican president, Lamont confronted the dilemma that accompanies every global debt crisis: the victim threatens to default unless he receives more money. What leverage do bankers ultimately have over a defaulting country if not the prospect of new loans? As Lamont later reported to Secretary of State Hughes, Obregón “could not see the advantage of the government’s attempting to live up to its obligations, even in greatly diminished measure, unless, at the same time, it were assured fresh loans upon a large scale.”15 Lamont was saved from this course by a structural obstacle: the debt was in the form of bonded debt, and capital markets wouldn’t swallow more Mexican bonds; so the lending had built-in limits. Lamont told Obregón that no new loans would be granted until the old ones were at least partly honored. The Mexican replied that their debt should be proportionate to their ability to pay—an argument that will sound drearily familiar to bankers of a later day—and wanted a 50-percent reduction in principal.

  Lamont began to sense that Obregón had a secret agenda. By holding back customs revenues pledged to the defaulted bonds, Mexico drove down the bonds’ market price. This was convenient, since the government could then use those revenues to buy back depreciated bonds in the marketplace. Lamont thought this a betrayal of bondholders’ trust. At this point, he still insisted that the bonds be redeemed at par. He tried to scare Mexico with arguments that default would make it a pariah in the international marketplace, that it would be unable to secure future loans.

  When Lamont left Mexico two days ahead of schedule, he had armed guards posted on the rear platform of his train. It turned out he narrowly escaped harm: when he reached San Antonio, Texas, he learned that his originally scheduled train was attacked by bandits, who planned to kidnap him and demand a half million gold pesos in ransom.16 Back at 23 Wall Street, Lamont received a wire from Jack Morgan expressing disgust with Mexico. Jack thought it a point of family honor to make sure Mexico repaid his father’s 1899 loan: “I did not think any Government of modern times would so frankly proclaim its complete dishonesty or its abandonment of all decent finance or morals. Hope you did not have too trying a time, and congratulate you in getting out before they stole your pocketbook or watch.”17 Again Jack personalized bank policy abroad, while Lamont assumed a diplomat’s disinterested professionalism and was thus better attuned to the Diplomatic Age.

  There is a tendency to portray Wall Street bankers of the period as reactionary ogres. In Latin America, they certainly had a bias toward strong, authoritarian regimes. But the weakness wasn’t for totalitarian or laissez-faire regimes so much as for stability, whatever its form. Bankers probably had a higher ethical standard than industrialists of the period, as became evident from the contrasting attitudes taken by the House of Morgan and the oil companies in dealing with Mexico.

  Throughout the twenties, American oilmen tried to persuade bankers to protest the hated 1917 Mexican constitution. They also bristled at higher Mexican export taxes and a government requirement that they obtain concessions on land they thought they owned. Both J. P. Morgan and Company and Morgan Grenfell had performed underwriting for Standard Oil of New Jersey, and Lamont was badgered by Standard, the Texas Company, and Sinclair Oil to join their campaign against Mexico. By 1921, Mexico was already the world’s biggest oil exporter and a high-priority area for American oilmen.

  Lamont didn’t want to jeopardize his debt negotiations by entering the murky, often violent strife between the oilmen and Mexico. He performed some perfunctory lobbying for them but generally kept his distance. The oilmen weren’t squeamish about their tactics and didn’t hesitate to trample governments that defied them. After Lamont returned from Mexico in 1921, Walter Teagle, head of Standard Oil, passed along a memo to him from an unnamed Mexican. In a covering note, Teagle said blithely that it “might be of interest to you in a general way.”18

  Preserved in Lamont’s files, the memo is shocking, nothing less than a blueprint for bribing the entire Mexican government. It starts out with a nasty portrayal of the Mexican national character: “The Mexican, and particularly the traditional professional politician of Mexico, after four hundred years of training, is actuated by two dominant motives; one, the fear of force—physical force; the other is the incentive of personal gain. . . . An appeal to patriotism or to idealism is not understood.”

  The nameless author goes on to say that the use of force would be too costly, leaving only pecuniary gain as a motivating force in Mexico. He contended that Obregón was an unwilling captive to party radicals and could not satisfy the needs of his greedily ambitious lieutenants. How to free him from their influence? “This force can only be removed from and returned to the President himself by putting him in such a financial position as to give him dominance. Money will change his cabinet, make over his congress, give him domination over his governors and allow him to abrogate or modify present unsatisfactory laws.”

  To provide Obregón with the necessary funds-—and this is where the House of Morgan came in—the writer of the memo suggested setting up a Mexican bank that would masquerade as a bank for agricultural development, but would exist to place money at Obregón’s personal disposal. The writer concluded that the money, liberally distributed, would achieve miraculous results: “The undesirable elements in his cabinet would be given a certain sum of money and sent to desirable foreign posts. The obstructive radical elements in his congress could be removed. It would soon be seen that the radical diputado would become a staid conservative the moment he came into possession of property. . . . Such a bank might well dominate the financial and economic life of Mexico and the American directors of such an institution might well keep in close touch with Washington.”19

  Lamont’s file shows no reply or follow-up. Perhaps he responded orally. In all likelihood, he was shocked. He may have regarded silence as the most eloquent expression of scorn, or at least the best way to avoid antagonizing an important client. Lamont was no choirboy in politics, but the House of Morgan shied away from blatant skulduggery. The bank had a strict policy against paying so-called fees or commissions and usually reacted to such requests with frigid New England reserve. The Standard Oil memo provides a benchmark for judg
ing the Morgan bank against the dismal standard of American business conduct in Latin America during the 1920s.

  The ensuing Mexican debt talks of the early 1920s can be quickly summarized. There were a few fleeting triumphs, always followed by fresh defaults and despair. Lamont’s ingenuity could never win more than a short reprieve. In 1922, he negotiated an agreement with the Mexican finance minister, de la Huerta, that won Obregón the U.S. recognition he had craved. The agreement called for steep concessions by Lamont, including lower interest payments spread over forty-five years. The deal was suspended by early 1924. Among other factors, Mexico was suffering from declining oil production as oil companies vengefully switched to the politically more pliant Venezuela. Another debt agreement was reached in 1925—the initial payment this time was down to a paltry $10.7 million—but it, too, was soon dead. The bankers who had once boldly insisted on full payment had to settle for ever-smaller fractions of the original loans. When final disposition was made of this Mexican debt later in the decade, Lamont would find himself negotiating not with the Mexicans, but with an unexpectedly resourceful adversary: his own former partner, Dwight W. Morrow, recently appointed ambassador to Mexico.

  THE Republican evasion of world responsibility presented new opportunities for the House of Morgan. Glorifying entrepreneurs and scorning politicians, the Harding, Coolidge, and Hoover administrations drafted financiers to represent them at economic conferences. This move reflected a 1920s cult in which businessmen were revered as far-sighted problem solvers who could succeed where politicians failed. The new mood suited Morgan partners Tom Lamont, Dwight Morrow, and Russell Leffingwell, who fancied themselves financial diplomats and sometimes joked about their technical ineptitude in more prosaic forms of banking. During the 1920s, Morgan partners spent enormous time at overseas conferences, serving as a legitimate cover for Republican administrations more global-minded than they cared to admit; thus the bank profited from the isolationism it deplored. This was the same use of private proxies that Washington had employed since the days of the first China consortium.

  If private bankers enjoyed new stature, they shared it with central bankers, who assumed new power and autonomy. Beneath the euphoria, the Jazz Age was a despairing time. The populace grew disenchanted with politicians who had led them into war and then squabbled over reparations and postwar security. A clique of western central bankers hoped to transcend this political opportunism and forge a banking elite dedicated to sound economic principles. They espoused free trade and an unrestricted flow of capital, balanced budgets and strong currencies. They saw it as their function to maintain financial standards and prod politicians into painful, necessary reforms.

  The American representative of this trend was Benjamin Strong of the New York Federal Reserve Bank. When the Harding and Coolidge administrations disclaimed leadership in postwar European reconstruction, the role devolved upon Strong, who was the Fed’s contact with the central banks of Europe. Strong was solidly in the Morgan mold—a descendant of seventeenth-century Puritans, counting theologians and bank presidents among his ancestors, and the son of a New York Central superintendent. Like his Morgan friends, Strong matched conservative domestic views with a cosmopolitan receptivity to European thought—so much so that Hoover later chided him as a “mental annex of Europe.” Hobbled by a regulation that he couldn’t lend directly to foreign governments, Strong needed a private bank as his funding vehicle. He turned to the House of Morgan, which benefited incalculably from his patronage. In fact, the Morgan-Strong friendship would mock any notion of the new Federal Reserve System as a curb on private banking power. In the 1920s, real power in the system resided at the New York Fed’s new Florentine palazzo on Liberty Street.

  Strong was capable of great warmth and sudden anger. Unlike the smooth Morgan partners, he was a moody and troubled man. He was divorced by his second wife and in 1916 contracted tuberculosis, which would keep him from the bank for several months each year. Perhaps in reaction to his personal disappointments, he became passionately devoted to the Fed. He tried to endow it with the Bank of England’s austere, unassailable dignity. A giant presence in American finance, Strong tutored the still green Federal Reserve governors in the art of central banking.

  Ben Strong participated in postwar European reconstruction and currency stabilization with his British counterpart, Montagu Norman, governor of the Bank of England after 1920. In Monty, he found a dear friend and alter ego. The divorced Strong and the bachelor Norman plunged into a relationship of such secret intimacy and convoluted intrigue as to arouse fears in both their governments. Taking long vacations together in Bar Harbor, Maine, and southern France, they fortified each other’s distrust of politicians. They shared faith in the gold standard and hoped to create autonomous central banks that could conduct global monetary policy free of political tampering. To their two-man cabal, Strong brought the unmatched financial power of Wall Street, while Norman lent British knowledge and professionalism ripened over many generations. The postwar pound was simply too weak for Norman to conduct unilateral financial diplomacy. After the Treasury embargoed foreign loans to shore up the pound, diverting foreign borrowers to New York, Norman desperately needed a Wall Street link to offset the City’s weakness. He found it in Ben Strong and the House of Morgan.

  For twenty-four years, Monty Norman reigned mysteriously in his mahogany office at the Bank of England. He had been perfectly bred for the job. One of his grandfathers was a long-time bank director, and the other was a governor of the bank. He himself came to the bank via the Anglo-American merchant bank of Brown Shipley and Company (Brown Brothers in New York). Many labels have been applied to Norman—madman, genius, hypochondriac, megalomaniac, conspirator, eccentric, visionary—all of which were true. One banker said he resembled “a painting by Van Dyck—tall, pointed goatee, great hat, like a courtier of the Stuarts.”20 He had a wizard’s face—sharp and chiseled, with pointed nose and beard. Despite—or perhaps to counter—rumors of Sephardic Jewish blood, he was viciously anti-Semitic. As he moved about in funereal black beneath a wide-brimmed hat, he retained a touch of Oriental splendor in the emerald that adorned his tie. Sensitive and high-strung, he often suffered breakdowns or lumbago attacks during currency crises. A suppressed hysteric, he would erupt in tantrums that terrified bank employees and made his rule absolute. His thin smile rarely opened into laughter, as if that might shatter his mystique. A proud prima donna, he would say he felt “faint” for “want of food” if he didn’t eat every two hours.

  One of Norman’s biographers describes him as giving “the appearance . . . of being engaged in a perpetual conspiracy.”21 This conformed to his sense of central banking, which he approached as a priestly mystery, a rite best conducted in deep shadows. “The Bank of England is my sole mistress,” he said; “I think only of her, and I’ve dedicated my life to her.”22 For Norman, the central banker was answerable only to higher principles, not to any elected representatives. When challenged, he often cited a favorite Arab proverb: “The dogs may bark, but the caravan moves on.”23 He received visitors alone, as if his office were a confessional, and he was privy to the inner thoughts of powerful men. Years later, Franklin Roosevelt unnerved him and stripped him of his wizard’s magic by insisting that others be present at their White House meeting. It was Norman who incarnated Washington fears that British financiers were a sophisticated and treacherous lot who gulled innocent Americans.

  Monty Norman was a natural denizen of the secretive Morgan world. Among old friends, he counted his former classmate Teddy Grenfell and Vivian Hugh Smith of Morgan Grenfell. Brooding and melancholy, he liked Grenfell’s prankish wit, while he was dedicated to Smith for having helped him to overcome doubts about becoming a director of the Bank of England in 1907. Bucking him up, Smith had written, “Of course you will accept and, when you are on the Court, remember that you are as good as they are.”24 As a solitary bachelor, Norman created a mysterious circle of married female confidantes, includin
g Smith’s wife, Lady Sibyl, the beautiful society suffragette. A follower of theosophy and faith healing, she appealed to Norman’s kooky side. “Through her influence,” says a Norman biographer, “he widened his interest in the esoteric and the occult; for Sybil was emphatic about the crucial importance of religion to a spirit as easily bruised as his.”25 Lady Sybil would disappear for long, platonic weekends with Monty, who became a godfather to the Smith children. Thus, by happenstance, Morgan Grenfell was extremely close to the most influential central banker of the interwar years.

  The House of Morgan formed an indispensable part of Norman’s strategy for reordering European economies. America had the means to accomplish the task but was still ambivalent about exercising power in Europe. Even among Morgan partners, there was a reservoir of doubt. Russell Leffingwell, a former Treasury official who became a Morgan partner in 1923, told Basil Blackett of the British Treasury, “We feel that we got you out of a pretty pickle [during the war] but we rather think that it is time you were looking out for yourselves. We have never had any taste for world finance and our brief experience has not developed it. We like you and want to see you prosperous and happy and peaceful but we don’t like the game you play nor the way you play it and don’t want to be forced to sit in it.”26 Norman loved the game. Imperial to the core, he wanted to preserve London as a financial center and the bank as arbiter of the world monetary system. Aided by the House of Morgan, he would manage to exercise a power in the 1920s that far outstripped the meager capital at his disposal.

  Norman thought in large, geopolitical terms. He saw the rehabilitation of central Europe as a precondition for restoring prosperity and political order and exempted reconstruction loans from the foreign loan embargo. Through his leadership, Morgans first became involved in Austria. In late 1921, the British sounded out Jack about an Austrian loan, saying its government would furnish Gobelin tapestries as collateral. The next year, Austria’s finance minister, Dr. Kienbock, pleaded with Dean Jay of Morgan, Harjes in Paris (now in plush headquarters on the place Vendôme) for a loan. Kienbock cited famine, misery, and a worthless Austrian schilling. He again asked for a loan backed by tapestries and other objets d’art.27 At first, the House of Morgan frowned on this unorthodox request, afraid it would create a “pawn-broking impression”28—even beggars had to come suitably attired to Morgans. Lamont—now known as the Morgan empire’s secretary of state—wondered whether another bank should undertake the loan. He feared that as former banker to the Allies and fiscal agent for England and France, J. P. Morgan and Company was a poor choice and might even engender hostility in Austria.