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

by Ron Chernow

  The following morning, Winston Churchill stood in the visitors’ gallery of the New York Stock Exchange. Two weeks earlier, he had lunched with the Morgan partners who had helped him to restore England to the gold standard in 1925. Now he looked down on a scene that many would circuitously trace to that 1925 decision, with its need for lower U.S. interest rates. Within the first two hours of trading, almost $10 billion was lost on paper. The drops posted were so sharp and the resulting shrieks so fearful that the gallery was closed by late morning.

  As in 1907, desperate men stood on the steps of Federal Hall, hands in their pockets, their hats pulled low, staring grimly ahead. Their shocked silence is almost palpable in the photographs taken that day. They stood six deep outside the Stock Exchange. Having bought on margin, many investors were ruined outright. Newspapers noted a strange noise filtering through the canyons of the Street—a roar, a hum, a murmur. It was the cumulative sound of thousands of stunned people giving vent to their feelings. Violence was in the air. When a workman appeared atop a building, the crowd assumed he wanted to leap and was impatient with his hesitation. A dozen suicides were reported, some poetically apt. “Two men jumped hand-in-hand from a high window in the Ritz,” Galbraith noted. “They had a joint account.”31 Only the Stock Exchange pages, who lacked investments, savored the ruin of their bosses.

  Around noon, the master bankers of Wall Street marched briskly up the steps of 23 Wall. These were the men whose exploits had thrilled America—Charles Mitchell of National City, Albert Wiggin of Chase, Seward Prosser of Bankers Trust, William Potter of Guaranty Trust. They represented $6 billion in assets, perhaps the world’s greatest pool of wealth. For the last time, they enjoyed the heroic stature that the Jazz Age had conferred upon them. To Street veterans, it came as no surprise that the meeting was chaired by fifty-eight-year-old Tom Lamont. The Morgan role in rescues was now automatic. Whatever its flaws, it was the banker’s bank, the arbiter of disputes, the statesmanlike firm that offered confidentiality no other house could match. In the words of B. C. Forbes, “Thomas W. Lamont, foremost Morgan partner, stepped into a role on Thursday which the original J. P. Morgan used to take in past panics.”32

  Even in a crisis, Lamont was debonair, his sangfroid now legendary. He was Wall Street’s mystery man, and Black Thursday would be his celebrated moment. He was a strange candidate for the part. In his youth, he had lost a year’s salary by selling short and thereafter forswore stock speculation. He was also the banker who had advised a skittish Hoover to take a posture of benign indifference toward Wall Street.

  The bankers’ rescue on Black Thursday proved longer on symbolism than on substance. The men knew they couldn’t prop up a collapsing stock market, so they tried to introduce liquidity and engineer an orderly decline. There had been terrifying moments that morning when no buyers appeared. So they pledged $240 million to buy up assorted stocks and stabilize the market. (The Guggenheims joined this pool.) It was just a finger in the dike, but it was the best they could manage.

  Because the president of the Stock Exchange was in Honolulu, the acting president, Richard Whitney, was agent for the bankers’ rescue. He seemed an ideal choice because his brother was a Morgan partner and his own firm was a Morgan bond broker. Richard Whitney was also a great pretender, and his cool demeanor masked the fact that he and his wife, an heiress, were absorbing stock losses that would amount to $2 million.33 So when he took his jaunty stroll across the Exchange floor at 1:30 P.M., it was an extraordinary performance. He went to the trading booth for U.S. Steel and bid 205 for twenty thousand shares—topping the previous bid by several points. As news of his purchase spread, the market seemed to steady for a time.

  The choice of U.S. Steel, a Morgan ward, was no accident: as gentleman bankers, Lamont and the others felt they should support companies they had sponsored. It later turned out Whitney had bought only two hundred shares of Steel and pulled his order when others jumped in. At another fifteen or twenty trading posts, he repeated his bidding, placing almost $20 million in orders. By day’s end, only half the bankers’ money was actually spent. Yet their lingering magic was such that the market briefly rallied that afternoon. It was the last conjuring trick of the 1920s.

  At the end of the trading day, the bankers regrouped for a second meeting and designated Lamont their spokesman. He was mobbed by newsmen shouting questions. Dangling his pince-nez, he came up with the most memorable understatement in American financial history: “There has been a little distress selling on the Stock Exchange.”34 Although often mocked, the line was actually a reply to a sarcastic reporter who asked whether Lamont had noticed the selling on the Exchange that day. Lamont blandly blamed the decline on a “technical condition” and spoke of “air pockets” in the market. In a phrase of incomparable ambiguity, he said the market was “susceptible to betterment.”35 These hand-holding sessions with reporters continued for weeks and made Lamont a celebrity. He leapt to the cover of Time magazine.

  Almost at once, Wall Street began to issue bravely hopeful statements. The silver-lining specialists appeared in force. That night, the retail brokers met at the brokerage house of Hornblower and Weeks and pronounced the market “technically in better condition than it has been in months.”36 The headline in the Wall Street Journal the next morning featured not the crash but the rescue: “BANKERS HALT STOCK DEBACLE: 2-HOUR SELLING DELUGE STOPPED AFTER CONFERENCE AT MORGAN’S OFFICE: $1,000,000,000 FOR SUPPORT.’37 The bankers asked Hoover to plug stocks as a cheap buy. Instead, he disgorged his well-known platitude: “The fundamental business of the country, that is production and distribution of commodities, is on a sound and prosperous basis.”38 The market staggered through Friday and Saturday morning trading without a fresh crisis.

  The 1929 crash unfolded in two stages, with a weekend in between. On Sunday, the mood was grim as tourist buses made ghoulish swings through Wall Street to see where the crash had occurred. Those who pondered Hoover’s statement over the weekend apparently rushed to sell on Monday. American Telephone and Telegraph dropped 34 points, and General Electric 47 points. Both the market and public faith in bankers were collapsing.

  On Tragic Tuesday, October 29, investors looked back on Black Thursday as a halcyon time. On this worst day in market history, the ticker lagged two and a half hours behind. More than sixteen million shares changed hands—a record that would stand for forty years. By day’s end, the two-day damage had dragged share prices down by nearly 25 percent. Buying didn’t dry up this time: it simply disappeared. At the rally’s peak, White Sewing Machine sold for 48, then slumped to 11 on Monday. On Tuesday, when no buyers surfaced, an alert messenger bought shares at $1 apiece. When commuters entered Grand Central Terminal that evening, newsboys hawking papers shouted, “Read ’em and weep!”

  Unlike Black Thursday, Tragic Tuesday exposed the bankers’ frailty. They were little men standing before a tidal wave. The New York Times wrote, “Banking support, which would have been impressive and successful under ordinary circumstances, was swept violently aside, as block after block of stock, tremendous in proportions, deluged the market.”39 Where rumors on Black Thursday were hopeful—men winked and talked of the “organized support” taking control—Tragic Tuesday was marked by reports of bankers dumping stocks to save themselves.

  Lamont now faced a more hostile group of reporters. He had to deny reports that his group was sabotaging the market for profit. “The group has continued and will continue in a cooperative way to support the market and has not been a seller of stocks.”40 With his usual cunning phraseology, he said the situation “retained hopeful features.”41 In a vain effort to bolster confidence, U.S. Steel and American Can declared extra dividends.

  As if expressing a new bunker mentality, the Stock Exchange governors met on Tragic Tuesday in a basement room under the Exchange floor. When Lamont and George Whitney tried to slip in unnoticed, they were briefly detained by guards. The main topic was whether to shut the market. Richard Whitney thought a cl
osing would unsettle the public and create a black market on the curb, as happened at the outbreak of World War I. He also feared it would create chaos among banks with heavy call loans to brokers. At various points in 1929, Morgans had $100 million outstanding in such loans, with stocks pledged as collateral. How would Wall Street banks and brokers function with stock collateral frozen?

  As in 1987, the group decided to shorten Exchange hours instead. An excuse was at hand: overworked clerks were haggard from lack of sleep; shorter hours would let them catch up on paperwork. Instead of ringing at ten o’clock, the opening gong would sound at noon on Thursday, and the Exchange would be shut Friday and Saturday. Richard Whitney left a graphic impression of the basement meeting: “The office they met in was never designed for large meetings of this sort, with the result that most of the governors were compelled to stand or to sit on tables. As the meeting progressed, panic was raging overhead on the floor. . . . The feelings of those present were revealed by their habit of continually lighting cigarettes, taking a puff or two, putting them out and lighting new ones—a practice which soon made the narrow room blue with smoke.”42

  In the weeks after Tragic Tuesday, rumor mills produced tales of clandestine lunchtime meetings in the Stock Exchange basement. One version had Lamont and Richard Whitney spying on traders through a periscope. Whitney continued to walk about with a rakish air, exuding confidence, although he later spoke of the “war atmosphere” of those days. Before emerging into public, he would exhort his associates, “Now get your smiles on boys!”43 As it happens, the real remedial action that was taken came not from the old Wall Street club but by a force new to financial panics—the Federal Reserve.

  In late October, Jack, back from Europe, chaired a meeting at the Morgan Library with George Harrison, Ben Strong’s successor at the New York Fed. Son of an army officer, a graduate of Yale and Harvard Law School, Harrison was a handsome, pipe-smoking man who limped as a result of a boyhood accident. An activist in the Strong mold, Harrison lowered interest rates and pumped in billions of dollars in credit to buoy banks with heavy loans to brokers. “The Stock Exchange should stay open at all costs,” Harrison announced. “Gentlemen, I am ready to provide all the reserve funds that may be needed.”44 Rebuked by Fed governor Roy A. Young in Washington, Harrison courageously replied that the world was “on fire” and that his actions were “done and can’t be undone.” He bought up to $100 million in government bonds per day and made sure Wall Street banks had adequate reserves with which to deal with the emergency. In scale and sophistication, his postcrash actions made Pierpont’s in 1907 look antediluvian in comparison, for he could expand credit as needed. Harrison confirmed the principle of government responsibility in financial panics.

  The days after the crash were a great time for pep talks and false bravado. The redoubtable Irving Fisher found it consoling that weak investors were shaken from the market and that stocks now rested in stronger hands. He described the postcrash market as a bargain counter for shrewd investors.45 From the fastness of his Pocantico Hills estate, John D. Rockefeller issued an oracular statement: “Believing that fundamental conditions of the country are sound . . . my son and I have for some days been purchasing sound common stocks.”46 Rockefeller’s words were relayed to Eddie Cantor, then starring in Whoopee on Broadway and a victim of the collapse of the Goldman Sachs Trading Corporation. Cantor replied, “Sure, who else had any money left?”47

  Eddie Cantor later filed a $100-million suit against Goldman, Sachs. This was probably less damaging to the firm’s future than his new vaudeville routine. In it, a stooge walked out on stage violently wringing a lemon. “Who are you?” Cantor asked. “I’m the margin clerk for Goldman, Sachs,” the stooge replied. So many suits were filed against Goldman, Sachs that during listless Depression days brokers with a taste for black humor would call up the firm and ask for the Litigation Department. From now on, even humor would puncture Wall Street’s pretensions. The age had come to an abrupt, calamitous end. The crash was a blow to Wall Street’s pride and its profits. As Bernard Baruch later said, “The stereotype of bankers as conservative, careful, prudent individuals was shattered in 1929.”48

  CHAPTER SEVENTEEN

  DEPRESSION

  AFTER the crash, Herbert Hoover wasn’t quite as passive or impotent as legend suggests. He announced tax cuts and public works programs and asked utilities to embark on new construction. Bringing business leaders to the White House, he extracted pledges to maintain wages and thus avert an erosion of purchasing power. Henry Ford cut car prices and boosted workers’ wages to $7 a day. Meanwhile, the New York Fed orchestrated a swift series of interest-rate cuts that more than halved its discount rate, to 2½ percent, by June of 1930. Clearly, the principle of government action to ease economic misfortune was enshrined before the New Deal.

  Wall Street tried to face the crash with stoic fortitude and treat it as a stern but salutary lesson. Everybody sounded philosophical. In late 1929, Lamont described the crash as an unpleasant warning of no lasting harm: “I cannot but feel that it may after all be a valuable lesson and the experience gained may be turned to our future advantage. . . . There has never been a time when business as a whole was on a sounder basis.”1 This reasonable approach reflected a belief that the financial trouble had ended; in fact, it had just begun.

  Never entirely comfortable with the radical, tax-cutting Republicanism of the twenties, Morgan partners hoped the crash presaged a return to more conservative economics. They had been uneasy with the speculative debauch of the twenties and welcomed a return to thrift and hard work. Dwight Morrow, then a New Jersey senator, agreed that “there is something about too much prosperity that ruins the fiber of the people.”2 Russell Leffingwell viewed the slowdown as a “healthy purge” after a seven-year bacchanalia: “The remedy is for people to stop watching the ticker, listening to the radio, drinking bootleg gin, and dancing to jazz . . . and return to the old economics and prosperity based upon saving and working.”3 Such comments savored of puritans punishing the wicked. Treasury Secretary Andrew Mellon, who had ducked a leadership role after the crash, now said of the downturn, “It will purge the rottenness out of the system. People will work harder, live a more moral life.”4 Keynes, however warned that such austerity would only deepen the Depression.

  Many of the people who voiced these soothing statements were living off the riches of the 1920s. Although Morgan partners suffered huge losses, they still boasted wealth of embarrassing proportions. At Christmas 1928, each partner had received a bonus of $1 million. In 1929, Jack’s son Junius moved into Salutation, a forty-room stone mansion on an island beside his father’s island estate. Even as stock brokers jumped from building ledges in October, workmen in Bath, Maine, rushed to complete Corsair IV, a six-thousand-horsepower yacht, 343 feet long, with gross tonnage of 2,181. Reputed to be the biggest private yacht of all time, a floating palace with elevators, beamed ceilings, India teak paneling, mahogany armchairs, and fireplaces, it required a crew of over fifty and cost Jack an estimated $2.5 million. If the price tag was stupendous, it amounted to only about half the annual income that Jack took from the bank in the late 1920s.

  Jack Morgan spent the Christmas of 1929 with his fifteen grandchildren at Matinicock Point, and it was a warm, happy time. “It really resembled nothing so much as some of the families of pigs I have seen on the farm,” he said.5 In the new year, he looked forward to a cruise to Palestine with his friend Dr. Cosmo Lang, the archbishop of Canterbury.

  What made the postcrash lull tolerable on Wall Street was that a political backlash hadn’t yet gathered force. Nobody yet demanded radical overhauls of the system. That December, learning of proposed staff cuts at the American Museum of Natural History, Jack covered the budget shortfall; the munificence of rich men still meant something. Soon, though, the Depression would unleash a popular fury against bankers that would rage for years.

  Wall Street perhaps had better excuses for postcrash complacency in 1929 tha
n in 1987. America boasted a trade and budget surplus and was finishing the most triumphant economic decade in its history. In the world economy, it was the ascendant power and the leading creditor nation. J. P. Morgan and Company was so flush with cash that it was giving large gifts to its less fortunate London and Paris partners in the late 1920s. The age can be forgiven some of its hubris.

  The speculative mood didn’t immediately disappear. Those with money who rushed in to buy stocks were at first vindicated: by early 1930, the market had regained much lost ground. People chattered about a little bull market. Business investment rose, accompanied by an upturn in car and home sales. On March 7, 1930, President Hoover proclaimed: “All the evidence indicates that the worst effects of the Crash upon unemployment will have passed during the next sixty days.”6

  In April, however, the stock market began to slide, then dropped in May and June with each new Hoover expression of hope. Unlike the spectacular downward swoops of the previous October, the deterioration in prices was small and steady but unrelenting. In mid-1932, the market would bottom out at one-tenth of its September 1929 peak. So the yokels who sold in terror after the Crash fared better, in the long run, than the canny traders who scouted for bargains.

  We shall never know whether wise economic management might have averted the Great Depression. But two events led to a frightful, downward momentum. On June 17, 1930, ignoring the pleas of over a thousand American economists, President Hoover took up six gold pens and signed the Hawley-Smoot Tariff Act. Its heavy tariffs would account for more than half the price of some imports. The day before Hoover signed the bill, the stock market, in nervous anticipation, suffered its worst day since Tragic Tuesday.