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

by Ron Chernow

  During the 1920s, the House of Morgan also helped Sosthenes Behn to launch his worldwide empire of International Telephone and Telegraph. Again the bank’s role wasn’t raiding but arbitrating. A historic truce was hatched at 23 Wall, whereby AT&T ceded overseas markets to Behn, who promised, in turn, that ITT wouldn’t build telephone plants in the United States. The deal, amazingly, lasted sixty years. This cartel arrangement showed that the Morgan bank still preferred collusion among big industrialists to the competitive economy laissez-faire ideologues.

  With his taste for political intrigue, Behn and the House of Morgan were a natural match. Through Morgan partner Herman Harjes in Paris, Behn took over the Spanish telephone system, which became the crown jewel in his international empire. In the mid-1920s, J. P. Morgan and Company helped Behn to take over telephone systems in Brazil, Argentina, Chile, and Uruguay, ousting the British from their former preeminence. The bank championed Behn’s cause in numberless ways. When it learned during Austrian loan negotiations that the government planned to buy telephone equipment from Siemens, it mentioned that ITT was eager to tender bids. Lamont sometimes functioned as Behn’s secret plenipotentiary. In 1930, he had an audience with Mussolini solely to advance Behn’s desire to build a factory in Italy. Deal making in this era was always a discreet, behind-the-scenes operation and had none of the flamboyance associated with the stock market raiders of a later day.

  IN early 1929, a sure sign of impending disaster occurred when the House of Morgan cast aside its traditional aversion and joined the flurry of stock promotion. Wall Street was being swept by new forms of leveraging. Borrowing a British concept, many brokerage houses, including Goldman, Sachs, introduced leveraged mutual funds, called “investment trusts.” A second favorite device was the holding company. Holding companies would take over many small operating companies and use their dividends to pay off their own bondholders, who had financed the takeovers in the first place. This permitted an infinite chain of acquisitions.

  Adopting the vogue for utility holding companies, the House of Morgan in 1929 sponsored the United Corporation, which took over Mohawk-Hudson, the Public Service Corporation of New Jersey, Columbia Gas and Electric, and other companies that controlled more than a third of the electric power production in twelve eastern states. It was a throwback to the days when Pierpont promoted trusts, kept a large block of stock for himself, and appointed the directors. The United Corporation’s books were kept at 23 Wall, and its board was filled with Morgan friends and partners. The bank also sponsored Standard Brands, an amalgam of food-product companies that included Fleischmann, Royal Baking Powder, Chase and Sanborn, and E. W. Gillette.

  The master boondoggle of 1929 was the Morgan-sponsored Alleghany Corporation, a holding company for the railroad and real estate empire of Cleveland’s Van Sweringen brothers. Oris P. and Mantis J. Van Sweringen were a queer, taciturn pair who lacked much formal education. Short, dumpy, and round-faced, they seemed as inseparable as Siamese twins. Living at Daisy Hill, their seven-hundred-acre Swiss chalet farm outside Cleveland, the bachelor brothers ate together, shared a bedroom, seldom socialized, avoided alcohol and tobacco, and dispensed with chauffeurs, valets, and other trappings of wealth. On the eve of the crash, they were worth over $100 million.

  Beginning with their development of suburban Shaker Heights, the brothers had learned the art of using other people’s money. They got into railroads when they built a line from downtown Cleveland to the development. They whirled into the Morgan orbit in 1916 when the Justice Department pressured the New York Central into divesting the “Nickel Plate” railroad, which ran into Cleveland; the Van Sweringens arose as the friendly party who would take the road off New York Central’s hands for a mere $500,000 cash. Alfred Smith, president of the New York Central, took the boys into 23 Wall, threw his arms around them, and told Lamont, “I have had many experiences with these two boys. They are very capable. . . . I want you to cooperate with them in any way you legitimately can.”12 Lamont complied.

  The House of Morgan and Guaranty Trust orchestrated financing for the brothers’ railroad and real estate takeovers. As masters of leverage, the Van Sweringens used each new purchase as collateral for the next. Their holding companies took control of other holding companies in an endless hall of mirrors, all supported by little cash but powerful Morgan connections. By 1929, the Van Sweringen railroads ruled America’s fifth largest railroad system from atop a forty-story Cleveland tower and controlled trackage equal in length to all of Britain’s railroads.

  Issued by J. P. Morgan and Company in January 1929, the stock of the Alleghany Corporation was meant to be a summary achievement for the brothers—the super holding company atop their pyramid of debt. In the words of the New York Times, it was “the holding-company device pushed to its uttermost limits.”13 The association with the Van Sweringen brothers showed how the recklessness of the 1920s had at last infected the citadel of respectability itself—the Morgan bank. Even the mystical Morgan name couldn’t hold together a pyramid built of nothing but faith. It would be four years before the public finally knew the questionable circumstances under which the Alleghany shares had been floated. In early 1929, however, the issue looked like the best buy in town.

  FOR much of 1929, Jack Morgan and Tom Lamont were distracted from the coming storm by the thorny problem of Germany’s reparations. They had continually warned against excess German borrowing only to find themselves subsequently making the loans. In this twilight of the businessman-diplomat, an admiring America still looked to Morgan bankers for guidance. GE chairman Owen Young and Jack Morgan were chosen as American delegates to a Paris conference that was supposed to devise an ultimate solution to the reparations issue; Tom Lamont and Boston lawyer Thomas W. Perkins were alternates. The group was technically unofficial although again in close touch with Washington. In February, they set sail on the Aquitania. Upon landing at Cherbourg, they were greeted by French officials, who quickly transferred them to a private railroad car for the trip to Paris.

  Chaired by Owen Young, the conference took place at the plush new Hotel George V. Once again the sticking point was Germany’s capacity to make reparations. As usual, the French, represented by Emile Moreau of the Banque de France, were obstinate in their opposition to lower reparations. And the U.S. refused to lower war debts. Believing reparations financially insupportable, the Reichsbank president, Dr. Schacht, disrupted the conference several times, flying into a rage and storming from the room. One of the British delegates, Lord Revelstoke, noted that with “his hatchet, Teuton face and burly neck and badly fitting collar . . . he reminds me of a sealion at the Zoo.”14

  At this conference, Jack Morgan had difficulty hiding his intense dislike of the Germans. Dr. Schacht made the mistake of buttonholing him about the House of Morgan’s financing of Germany’s railways. Jack was scornful. “From what I see of the Germans they are 2nd-rate people,” he cabled New York, “and I would rather have their business done for them by somebody else.”15 He grumbled about how the conference was ruining his plans for a Corsair cruise on the Mediterranean, not to mention those for shooting in Scotland; Dr. Schacht noted Morgan was the first to slip away. This was a rare occasion when Jack let his feelings surface in public, and Lord Revelstoke compared him to “a wild bison in a shop that sells Dresden china.”16

  In Paris, Dr. Schacht hoped to win substantial decreases in reparations and was irate at French intransigence. He shocked the Allies, in turn, by proposing that Germany get back the Polish corridor and take overseas colonies in exchange for the high cost of reparations. To help break a diplomatic logjam, Owen Young responded to a suggestion by his young assistant, David Sarnoff, shortly to be president of RCA, that he attempt informal negotiations with Schacht. Lamont told Sarnoff, “Good luck. If anyone can do this job, you can.”17 On May 1, the Russian-Jewish immigrant and the German Hjalmar Schacht had their first dinner at Schacht’s room at the Hôtel Royal Monceau. There was instant rapport. Schacht had onc
e studied Hebrew, a language Sarnoff learned while studying for the rabbinate, and they ended up talking about everything from German opera to the Old Testament. They also discussed reparations, and the first dinner turned into a marathon, eighteen-hour negotiating session. Sarnoff later took credit for selling a “safeguard clause” to Schacht that related reparations to German economic performance. This idea reconciled Schacht, however briefly, to the plan.18

  Jack was so delighted by Sarnoff’s initiative that he brought him a big bunch of ripe French strawberries. He also told Sarnoff, “David, if you actually bring back a signed agreement, you can have anything you ask for that is within my gift.”19 After another lengthy bargaining session in late May, Sarnoff brought an agreement back to the Ritz Hotel. Jack, amazed, tipped his black homburg to Sarnoff. “I doff my hat to you,” he said with a bow. “And I propose to stick to my promise. Ask for anything you want, and it will be yours.”20 Sarnoff asked for a meerschaum pipe of the sort Jack smoked. It was made by an elderly London pipemaker, who first made Pierpont’s. Jack chartered a plane so someone could fly to London and fetch the pipe for Sarnoff.

  The Young Plan reduced the schedule of reparations payments from that designated by the earlier Dawes Plan, stretching them over a fiftynine-year period. It also attempted to depoliticize German debt by converting it into tradable bonds. Instead of paying the Allies directly, Germany would pay bondholders through a new Bank for International Settlements. This would free Germany from political interference and lift the yoke of the hated agent general’s office. The boyish Parker Gilbert left Berlin to become a J. P. Morgan partner, a move that didn’t surprise the Germans. When Gilbert warned the Germans against seeking any foreign loan beyond the Young loan, Karl von Schubert of the German Foreign Office spied an ulterior motive. J. P. Morgan was about to float a big loan for France, and a German loan “would be seen [by Gilbert] as a disagreeable competitor for the project of the House of Morgan, to which he is known to be close,” said von Schubert.21

  Set up in a hotel off the main square of Basel, Switzerland, the new Bank for International Settlements fulfilled Montagu Norman’s dream of a place where central bankers could forge international monetary policy without political interference. Norman lovingly called it a confessional. A provincial U.S. Congress didn’t like the word international and refused to let the Federal Reserve join, although several private American banks bought shares in it. The BIS would outlast the Young Plan and develop into a central bank for central bankers, just as Monty Norman had envisioned.

  In June 1929, the German debt settlement was announced. Newspapers showed Dr. Schacht leaning across Owen Young to shake hands with Emile Moreau of France’s central bank. No sooner were the documents signed than a window curtain caught fire and burst into flames—a lurid omen suggesting the Young Plan’s fate in Germany, where it would prove no more popular than the Dawes plan. Dr. Schacht signed the document with strongly felt ambivalence, insisting that the German Cabinet take responsibility. Before long, he would denounce it and become a Nazi favorite. The $100-million portion of the Young loan, sponsored by the House of Morgan in June 1930, would be its second and final effort for Germany. Unlike the robust reception given to the Dawes loan, the Young loan aroused scant enthusiasm. Nevertheless, in 1929 the Paris conference gave a sense of closure to the era’s most intractable problem and helped spur the final upward rise of the stock market in New York City. Owen Young was even mentioned as a possible presidential candidate.

  WHILE Jack stayed behind for the grouse season, Lamont returned to New York. As a rule, Morgan partners didn’t belong to the select group of financiers who could later point out their apocalyptic warnings about the stock market. (Joe Kennedy later said he sold stocks after hearing his bootblack touting them.) Lamont was an exponent of the new economic era and thought only a business downturn could derail stocks. George Whitney thought the Federal Reserve Board a “set of damn fools” for tightening credit in 1929. The only Morgan seer was Russell Leffingwell, the former assistant Treasury secretary who had come to the Corner in 1923 from the law firm of Cravath, Henderson, Leffingwell, and de Gersdorff. An entertaining and courtly man, Leffingwell had a long pointed nose and a shock of premature white hair that gave him an air of wisdom. He was a liberal and sometime Democrat. In his combative, curmudgeonly intellectual style, he pilloried ideologues of both the left and the right. A perpetual worrier, he was withering in his view of the optimistic Andrew Mellon: “Meanwhile, the greatest Secretary of the Treasury since Alexander Hamilton grows richer on paper and thinks that all is for the best possible in the best of possible worlds.”22

  Leffingwell subscribed to the cheap-money theory of the crash; that is, he blamed excessively low interest rates for the speculation in stock. In 1927, Monty Norman had visited New York and asked Ben Strong for lower interest rates to take pressure off the pound. Strong obliged by lowering his discount rate. Leffingwell believed this had triggered the stock market boom. In early March 1929, when Leffingwell heard reports that Monty was getting “panicky” about the frothy conditions on Wall Street, he impatiently told Lamont, “Monty and Ben sowed the wind. I expect we shall all have to reap the whirlwind. . . . I think we are going to have a world credit crisis.”23 Later he held the two directly responsible for the Depression. It may be recalled that Jack Morgan and others at 23 Wall had favored England’s return to gold in 1925, but only with the proviso that Monty raise rates, not that Ben lower them.

  Benjamin Strong didn’t live to see the crash. He went through a hellish series of illnesses—tuberculosis, influenza, pneumonia, and shingles—and was shot full of morphine when he died, at age fifty-five, in October 1928; Montagu Norman, disconsolate, mourned Strong’s death for years. During the spring and summer of 1929, Strong’s hand-picked successor, George Harrison, pleaded with the Federal Reserve Board in Washington to increase interest rates. Instead, the board vetoed rate hikes in New York. Russell Leffingwell saw a Greek tragedy unfolding. He feared that Harrison had inherited the antagonism left by Strong and that “the immense resistance offered by the Washington Board may be partly the result of ten years of bottled up bitterness against poor Ben’s domination.”24 At the worst possible moment, the system was undercut by bureaucratic feuding. When the discount rate was belatedly raised in August 1929 from 5 to 6 percent, it was too late to cool off the boom.

  On September 5, 1929, the tragedy of that Black Thursday was foreshadowed when an obscure economist named Babson repeated a warning he had been making for years: “Sooner or later a crash is coming, and it may be terrific.”25 In ordinary times, the remark would have been ignored. Instead, circulated on news wires, it briefly cracked the stock market. Professor Irving Fisher of Yale, high priest of academic hope, rallied the faithful: “Stock prices have reached what looks like a permanently high plateau.”26 But the American economy had peaked in August and was falling even as Fisher spoke.

  By mid-October, the stock market gyrations so worried Hoover that he sent an emissary, Harry Robinson, to consult Lamont, his chief adviser on Wall Street. Hoover, the first president with a telephone on his desk, frequently rang Lamont before breakfast. Despite Hoover’s closeness to the House of Morgan, many partners secretly ridiculed him as cold, pompous, and pigheaded. Parker Gilbert once called him “Secretary of Commerce and Under-Secretary of all the other departments.”27 During the 1928 campaign, the Democrats had released a memo written by Leffingwell in his Treasury days that said, “Hoover knows nothing about finance, nothing about exchange and nothing about economics.”28 Hoover was petulant because the bank hadn’t done more to aid his reelection. Before the primary, he sent a threatening note to Lamont, accusing him of working for Charles Dawes.

  To his credit, however, the president wasn’t heedless of the Wall Street peril. In early 1928, while commerce secretary, he was flabbergasted by Coolidge’s cavalier lack of concern about the stock market. And in March 1929, as president, he summoned to the White House Richard Whitney, v
ice-president of the New York Stock Exchange and brother of Morgan partner George Whitney. Hoover wanted the Exchange to curb speculation—a plea that was ignored. Hoover also blamed the Fed for low interest rates and providing banks with ample reserves, which were then used to finance buying on margin.

  Now Hoover’s messenger, Harry Robinson, wished to know the answers to two questions: Were the increasing number of stock mergers grounds for concern? And should the federal government take action to stop speculation on Wall Street? Five days before Black Thursday, Lamont wrote Hoover a memo in which he whitewashed the practices of an era. He blandly waved away Hoover’s well-founded worries: “First we must remember that there is a great deal of exaggeration in current gossip about speculation. . . .” He paid tribute to the self-correcting forces of the marketplace. Citing industries that had lagged in the rally—automobiles, lumber, oil, paper, sugar, and cement—he declared that the market hadn’t overheated. With a nod to United Corporation and Alleghany, he praised the new holding companies that now dominated railroads and public utilities. His rousing peroration set all fears to rest: “Since the war the country has embarked on a remarkable period of healthy prosperity. . . . The future appears brilliant.”29 The only fault he found was with the Federal Reserve Board in Washington—for blocking higher interest rates at the regional reserve banks.

  Martin Egan brought the memo to the White House. The president was so eager to hear Lamont’s report that he held up a parade for ten or fifteen minutes in order to talk to Egan, who found him generally confident about his presidency, if edgy about Wall Street. The satisfaction didn’t last long. On October 22, the president sent a frantic messenger to Lamont expressing concern about the “speculative situation which seemed to him to be running very wild,” as Lamont relayed the message to Jack.30 Hoover was correct—if a little late. The next day, panic selling hit selected blue chips, with Westinghouse dropping 35 points and General Electric 20. The balloon was about to burst.