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

by Ron Chernow

  Morrow was exhausted and dispirited. He suffered from insomnia and headaches and ran a lackluster campaign. Nicolson suggests he had a serious drinking problem. Coincidentally, Prohibition became a central topic in the campaign. Not ducking the issue, Morrow became the first federal official to favor outright repeal of the Eighteenth Amendment.

  Again, he seemed driven by his ambition, and the Senate campaign produced more anxiety. Betty recorded in her diary that “Dwight is so tired; so discouraged; so wild that he has been trapped into this Senatorial campaign. He is exhausted, does not want it, would be glad to lose.”37 Fate, devising new ways to punish him, produced a landslide victory in November.

  As senator, Morrow seemed worn from the immense burdens he had carried over the years. He immediately disappointed liberal admirers. Despite the Depression, he voted against food relief, the soldiers’ bonus bill, and tougher utility regulation. This prompted one journalist to declare that in three months he had wiped away the liberal reputation of a lifetime.38 Such remarks stung Morrow. He approached problems in his thorough, dogged way but got mired in their complexity. He passed sleepless nights reading tomes on unemployment, and Betty warned him that he was getting too little sleep. “That’s nonsense,” he replied. “Most people have exaggerated ideas about sleep. If I can get two solid hours I’m all right.”39 At the family Fourth of July celebration in 1931, Morrow stared sadly at the lawn of his Englewood home and said to his son-in-law, “Charles, never let yourself worry. It is bad for the mind.”40

  In September, Morrow had a minor stroke while he and Betty lunched with newspaper publisher Roy Howard on a yacht in Maine. Yet he couldn’t stop his compulsive activity or moderate his exhausting pace. On October 2, 1931, after spending a sleepless night on a train from Washington to New York, he told a passenger, “I kept waking up thinking what a hell of a mess the world is in.”41 That day he attended a political reception at his Englewood home. He shook hands with four thousand people; his right hand became blistered, and he had to use his left. Three days later, then in his late fifties, Dwight Morrow died in his sleep of a cerebral hemorrhage. The man once unsettled by his dream of great wealth left a million dollars in charitable bequests alone.

  And Harold Nicolson left an appropriately ambiguous epitaph: “There was about him a touch of madness or epilepsy, or something unhuman and abnormal. . . . He had the mind of a super-criminal and the character of a saint. There is no doubt at all that he was a very great man.”42 Yet Nicolson tempered this judgment with a far less generous one: “Morrow was a shrewd and selfish little arriviste who drank himself to death.”43

  In one respect, fate proved merciful to Dwight Morrow. Five months after Morrow died, his grandson, Charles Lindbergh, Jr., was kidnapped from his family’s home near Hopewell, New Jersey. The House of Morgan tried to help solve the famous case. Jack Morgan sounded out an underworld contact, and the bank fielded tips from several sources, including a palmist. It also bundled and numbered the ransom money that Lindbergh’s associate, Dr. John F. Condon, passed across a dark cemetery wall to the kidnapper. When the baby’s body was discovered in a wood two months later, Anne and Charles moved to Next Day Hill, the Morrow house in Englewood. Haunted by the press and bad memories, they left the United States for England in 1935. There they lived at Long Barn, a thatched Kentish house owned by Harold Nicolson, Anne’s father’s biographer.

  The Lindbergh kidnapping also spread fear through the House of Morgan. Afterward, an army of 250 bodyguards protected the families of Morgan partners, and many of their grandchildren would remember growing up surrounded by opulence and armed guards.

  CHAPTER SIXTEEN

  CRASH

  WE picture the bull market of the twenties as spanning the entire decade, when in fact it was compressed into the second half. It was largely a Wall Street phenomenon, not matched by other stock markets around the world. Germany’s market had peaked in 1927, Britain’s in 1928, and France’s in early 1929. Why the enormous burst of Wall Street optimism? It was partly a reaction to the unsettled postwar years, with their inflation and labor strife, their bitter Red-baiting and anarchist turmoil. Financial history teaches us that the desire for oblivion is the necessary precondition for mayhem.

  The euphoria was also generated by a liquidity boom of historic proportions. Cash was everywhere. In 1920, Ben Strong sharply raised interest rates to cool off an inflationary commodity boom. This created not only a recession but disinflationary conditions that lasted for several years. Money fled hard assets. As commodity bubbles burst—ranging from Texas oil to Florida land—the money poured into financial markets. Stocks and bonds floated up on a tremendous wave.

  With Europe devastated by war, America’s economy outpaced competitors and created a large trade surplus. The economic boom was lopsided. Commentators spoke of “sick sectors” in farming, oil, and textiles. With half of America still living in rural areas, the Wall Street rally seemed unreal and irrelevant to farmers. Nor did all banks prosper. Weakened by farming and oil loans, small-town banks failed at the rate of two a day, a fact not noticed in urban areas, where finance and real estate thrived together. For instance, in late 1928, John J. Raskob, Democratic national chairman, started plans to build the Empire State Building as a monument to “the American way of life that allowed a poor boy to make his fortune on Wall Street.”1

  Raskob and other prophets of the age espoused an ideology of endless prosperity and talked of a new economic era. Their shibboleths were readily believed by the large number of young, inexperienced people recruited by Wall Street. As the Wall Street Journal said after October 1929’s Black Thursday, “There are people trading in Wall Street and many over the country who have never seen a real bear market.”2 If many on Wall Street were determined to forget past panics, most were too young to have ever known about them.

  For many pundits, the sheer abundance of cash precluded any crash. A big worry of the late 1920s was that America might run short of stocks. The day before the 1929 crash, the Wall Street Journal reported, “There is a vast amount of money awaiting investment. Thousands of traders and investors have been waiting for an opportunity to buy stocks on just such a break as has occurred over the last several weeks.”3 The excess cash was viewed as a sign of wealth, not as an omen of dwindling opportunities for productive investment.

  Riding this cash boom, the American financial services industry grew explosively. Before the war, there were 250 securities dealers; by 1929, an astounding 6,500. A critical shift in the popular attitude toward stocks occurred. Bonds had always dwarfed stocks in importance on the New York Stock Exchange. Before the war, banks and insurance companies might trade stocks, but not small investors. We recall Pierpont Morgan’s steady disdain for stocks. When asked why the market went down, he would say dismissively, “Stocks will fluctuate,” or “There were more sellers than buyers,” as if the subject weren’t worthy of analysis.4

  In the 1920s, small investors leapt giddily into the stock market in large numbers. They frequently bought on a 10-percent margin, putting only $1,000 down to buy $10,000 worth of stock. Of a total American population of 120 million, only 1.5 to 3 million played the stock market, but their slick, easy winnings captured the national spotlight. The 1929 market disaster would be heavily concentrated among the 600,000 margin accounts.

  With active securities markets, it was cheaper for big corporations to raise money by issuing securities than it was for them to raise money by paying for short-term bank credit. Many companies also financed expansion from retained earnings, continuing to wean themselves away from the banker dominance of the Baronial Age. In fact, some businesses had so much surplus cash that they engaged in stock speculation and margin lending—much as Japanese companies in the 1980s would use spare cash for zai-tech investment—so that the Federal Reserve’s pressure on banks to stop margin lending was offset by unregulated industrial lenders.

  In this pre-Glass-Steagall era, corporate preference for securities issues p
osed no threat to Wall Street. The big New York banks profited through their new securities affiliates, which could also bypass limits on interstate banking. Guaranty Trust opened offices in Saint Louis, Chicago, Philadelphia, Boston, and even Montreal. The securities unit of the Chase National Bank not only operated coast-to-coast but set up offices in Paris and Rome. The world of integrated global markets was thus already foreshadowed by the 1929 crash. In 1927, Guaranty Trust invented American depositary receipts (ADRs), enabling Americans to buy overseas stocks without currency problems. This would be an extremely lucrative business for J. P. Morgan and Company when it later took over Guaranty Trust.

  There were now two securities worlds on Wall Street. One was retail-oriented and pedestrian and was typified by the National City Company, the affiliate of the bank. National City chairman Charles Mitchell lent a carnival tone to securities marketing. He would organize contests and pep talks for his nearly two thousand brokers, spurring them on to higher sales. Bankers took on the image of garrulous hucksters. Among these men, there was a fad for foreign bonds, especially from Latin America, with small investors assured of their safety. The pitfalls were not exposed until later on, when it became known that Wall Street banks had taken their bad Latin American debt and packaged it in bonds that were sold through their securities affiliates. This would be a major motivating factor behind the Glass-Steagall Act’s separation of the banking and securities businesses.

  By the 1929 crash, large deposit banks had vanquished many old partnerships in the securities business and originated a startling 45 percent of all new issues. The National City Bank Company sponsored more securities than J. P. Morgan and Kuhn, Loeb combined. Nevertheless, elite Wall Street survived, typified by the august House of Morgan. The bulk of prime securities business remained with the prestigious, old-line, wholesale houses. J. P. Morgan had no distribution network but originated issues distributed by as many as twelve hundred retail houses; still distant from markets, the bank allocated shares to “selling groups.” It co-managed issues with its Money Trust allies—National City, First National, and Guaranty Trust—while Morgan Grenfell worked with the Houses of Baring, Rothschild, Hambro, and Lazard.

  As in the days of the Pujo hearings, big bond issues were still conducted according to fixed rituals. AT&T provides an excellent example. At the Morgan Library in 1920, Jack Morgan, Harry Davison, and Robert Winsor of Kidder, Peabody worked out a secret deal to divide American Telephone and Telegraph issues. They kept identical participations throughout the decade: Kidder, Peabody, 30 percent; J. P. Morgan, 20 percent; First National Bank, 10 percent; National City Bank, 10 percent; and so on. The Gentleman Banker’s Code prohibited the raiding of customers. It was thought not only bad form, but dangerous. J. P. Morgan and Kuhn, Loeb feared that if they competed for each other’s clients, they would destroy each other in bloody, internecine battles.

  On its marble pedestal, the wholesale House of Morgan didn’t need to twist the arms of small investors. As The New Yorker said in 1929, “It is doubtful whether any private banker ever enjoyed the individual prestige of Morgan senior, but the firm now is vastly more powerful than it was in his day.”5 By decade’s end, it would have less to repent than many other banks. Some of this was the result of tradition, as the bank profited from its Victorian disdain for the stock market—as Pier-pont once told Bernard Baruch, “I never gamble.”6 Jack Morgan had held a Stock Exchange seat since 1894 but never conducted a transaction. Only once, during a Liberty Bond rally, did he appear on the Exchange floor. He kept the seat only to reduce commissions from the thirty-odd brokers the bank used. In addition, common stock issues accounted for a mere 3 percent of Morgan-sponsored securities. Since the chief damage of the 1920s would be done by stock manipulation, the House of Morgan was spared involvement in some of the worst excesses.

  J. P. Morgan and Company engaged almost solely in a wholesale bond and banking business. With glaring exceptions, it refused to water down standards. It recommended conservative investments, such as railroad bonds, but shied away from the tipster’s art of plugging stocks. On the notable occasion when this Morgan policy was violated, the bank was deeply embarrassed. In July 1926, Morgan partner Thomas Cochran, setting sail for Europe, entertained a reporter aboard the liner Olympic. (In the Roaring Twenties, even luxury liners had brokerage offices.) When Cochran was at sea, the Dow Jones ticker quoted him as saying that General Motors would eventually sell at 100 points higher than its current price. Aware of the Morgan-Du Pont interest in the company, traders drove up GM stock by 25 points in two days. Aghast at this proof of its power, the bank made sure such incidents didn’t recur.

  Although the Morgan bank, as an institution, was distant from the stock market, its partners weren’t averse to speculation. They were in an excellent position to take advantage of insider trading, which was a common vice of the 1920s, and not illegal. Not only did Jazz Age Wall Street echo with rumors, but being in a position to plant false reports was considered a mark of financial maturity. Lax Stock Exchange rules and meager corporate reports made inside information more valuable, and investors milked their Wall Street friends for news. Inside tips didn’t guarantee success—many investors perished on Black Thursday clutching them—yet they were profitable enough to be considered a major perk of Wall Street employment.

  In the 1930s, Morgan partners joined those favoring an end to insider trading. Lamont would say flatly, “This is a simple and unanswerable proposition in business ethics.”7 Some had had the courage to take this stand earlier. Judge Elbert Gary, chairman of U.S. Steel, used to hold board meetings each day after the stock market closed; following these meetings, he would brief the press, denying directors an exclusive opportunity to benefit from his news. By and large, however, Morgan partners, like others on Wall Street, did benefit from insider trading, not so much on pending deals as on routine corporate information.

  Edward Stettinius was a loquacious director of both General Motors and General Electric. In 1922, Harry Davison asked whether he should buy GM preferred stock for his wife. Stettinius replied: “I hesitate . . . about buying any common stock until after the statement has been published showing the results of last year’s operations. This statement, which is now in the course of preparation, will probably show a total debit against Surplus Account of about $58 million as indicated in the memo attached hereto. I think it possible that this statement may have a depressing effect on the stock and would not favor purchases of the stock until after the statement shall have been published.”8 Stettinius handled GM purchases for both Jack Morgan’s and Tom Lamont’s personal accounts.9 We might call this the shooting-fish-in-a-barrel school of finance.

  In passing tips, Stettinius displayed a vague sense of the impropriety of doing so. In 1923, Morgan partner Herman Harjes in Paris asked about buying General Electric shares. Note how Stettinius hesitates before spilling the news:

  I would much prefer to buy than to sell the stock of the General Electric Co. at present prices, say 196. I do not feel that I can properly tell you what information has come to me as a member of the Executive Committee and Board of Directors of the Co., but I do think that I can say to you (to be treated confidentially) that it is my guess that some action will be taken within the next 6 months to still further enhance the value of the company’s shares. I shall be surprised if the shares do not sell on a basis of 225 or 230 per share, within the next six or nine months. The Co. is doing a wonderful business—and this again in confidence—profits for 11 months of 1923 show an increase of 50$$$ over the profits for the corresponding period of 1922.10

  If Stettinius displayed scruples, it was less about revealing corporate information than in having it leak out to those beyond the inner circle of J. P. Morgan partners.

  The House of Morgan was involved in another period phenomenon that belied its well-advertised repugnance toward common stock. Between 1927 and 1931, the bank participated in more than fifty stock pools, which weren’t outlawed until the New Deal
. They were regarded as racy and glamorous, attracting cocktail party sophisticates, and their progress was reported in the press. These syndicates blatantly manipulated stock prices. Some would hire publicity agents or even bribe reporters to “talk up” a stock. Pools made Joe Kennedy’s reputation after he was enlisted in 1924 to defend John D. Hertz’s Yellow Cab Company against a bear raid; afterward, Hertz suspected Kennedy of carrying out such a raid against the stock himself. By October 1929, over one hundred stocks were being openly rigged by market operators. So while Morgan partners claimed they preferred sound long-term investments, they were far from immune to the speculative atmosphere.

  The 1920s were also a time of manic deal making. As Otto Kahn recalled, there was “a perfect mania of everybody trying to buy everybody else’s property. . . . New organizations sprang up. Money was so easy to get. The public was so eager to buy equities and pieces of paper, that money was . . . pressed upon domestic corporations as upon foreign governments.”11 Although J. P. Morgan had no formal merger department, it informally spun many webs. It specialized in deals of strategic import, requiring sensitive contacts abroad or covert government support. Many of its deals were directed against British interests; first and foremost, 23 Wall operated as an arm of Washington.

  Consider telecommunications. After the war, the United States feared the British military monopoly of undersea cable communications, which had yielded invaluable wartime intelligence. The U.S. Navy favored the use of a new private corporation, supported by Washington, to battle Britain in the emerging field of radio technology. Privately, President Wilson notified General Electric that he wanted to counter Britain’s cable monopoly with an American radio monopoly. Morgan money helped GE to buy out British interests in American Marconi, which became the core of Radio Corporation of America. Washington stayed on RCA’s board as a nonvoting observer.