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

by Ron Chernow

  Depending on one’s viewpoint, Ramsay MacDonald’s story in 1931 is either that of a farsighted prime minister who nobly sacrificed ideology to the national good or that of a blackguard who betrayed his party and platform to satisfy the foreign bankers. (There are striking parallels between MacDonald’s actions and Grover Cleveland’s alienation from his Democratic followers during the 1895 gold crisis.) A fiery, opinionated socialist, MacDonald had taken office in 1929 promising to fight unemployment, and he enacted unemployment benefits that became sacred to the trade unions. For all his rabble-rousing, however, he had a true-blue Englishman’s faith in sterling as the medium of world finance. So his dilemma was stark in August 1931. Foreign bankers insisted that he close the budget gap as the precondition for a loan. But any such austerity talk brought outcries from Labour ministers, who saw it as a betrayal of their followers to appease rich bankers.

  Speaking for Wall Street, Grenfell talked bluntly to MacDonald. “We are all getting tired of promises,” he warned in mid-August.”21 Grenfell watched MacDonald warily, suspecting he would opt for expediency. As with Churchill in 1925, the Morgan partner took a rather mordant view of his target: “The P.M. is at last alarmed but he is so conceited and fluffy headed that it will be difficult to keep him up to the scratch.”22 He greatly underestimated MacDonald. When trade unions proved intransigent about cuts in unemployment benefits, MacDonald, angered by their obstinacy, was converted to Grenfell’s cause. Many of his own ministers dug in their heels and resisted cuts in the dole.

  The next steps in the crisis were intricate. The Bank of England sounded out the New York Fed on whether Chancellor Snowden’s compromise plan for budget cuts would guarantee a Wall Street loan. MacDonald was afraid his cabinet would be offended by the idea of consulting New York bankers and wanted to test opinion covertly. George Harrison of the New York Fed referred the Bank of England to Morgans.

  Throughout the crisis, J. P. Morgan and Morgan Grenfell had a secret back channel with the Bank of England. As Grenfell explained, “If the Prime Minister were to tell his Cabinet that he had already exposed his plan to foreign bankers and asked for a loan his Cabinet would be much incensed. . . . You must understand that neither Prime Minister nor his Cabinet have ever seen any of the cables between J.P. Morgan & Co. and Morgan Grenfell though many of them have been shown to Governor Norman and Deputy Governor.”23 On August 22, 1931, Harrison received a cable from the Bank of England outlining the new compromise budget that MacDonald would discuss with his cabinet on Sunday, August 23. The prime minister wished to know whether they could be sure of a New York loan if the cabinet adopted it. Harrison showed the cable to George Whitney and other Morgan partners, who had gathered at the Glen Cove home of partner Frank D. Bartow.

  This backdoor intrigue set the stage for a showdown between Mac-Donald and his cabinet. That Sunday evening, the cabinet ministers paced through a warm twilight in the garden of 10 Downing Street. They had awaited New York’s verdict since noon. Morgan partners pored over figures calling for £70 million in budget cuts—including a 10-percent dole cut—and an extra £60 million in taxes. Finally, at 8:45 P.M., Sir Ernest Harvey at the Bank of England called Downing Street to announce a telephone message from New York. He offered to carry it right over.

  For MacDonald, the suspense must have been excruciating: his political career hinged on the message. When Harvey arrived, MacDonald tore the cable from his hand and rushed back to the cabinet. This split-second action was fraught with historic consequence, for MacDonald didn’t stop to screen the contents of the message or even ascertain the sender’s identity. He introduced it as being from nameless New York bankers. The cabinet ministers assumed, wrongly, that the message came from the New York Fed. It actually came from George Whitney and was addressed to the Bank of England, not to the cabinet.

  Coming upon the cable in Morgan Grenfell’s files, it is disappointing to see the blandness of this government-toppling document. It briefly expresses sympathy for a British credit but stipulates no specific budget cuts. It’s a sterile document, as if the bankers who penned it were being extremely cautious. But the cabinet ministers were hot and tired, and their nerves were frayed from debate. They spied sinister meaning behind its final lines: “In the foregoing we have as always given you the precise trend of our thought. Let us know promptly as indicated above what the Government’s desires are and within 24 hours we shall be able to give you our final judgment. Are we right in assuming that the programme under consideration will have the sincere approval and support of the Bank of England and the City generally and thus go a long way toward restoring international confidence in Great Britain?”24

  When MacDonald read these words aloud, there was such a commotion in the cabinet room that Sir Ernest Harvey heard it outside, and he later recalled that “pandemonium had broken loose.”25 This last paragraph, clearly, was intended for the Bank of England alone. To those present, it awakened old fears of dark dealings between private banks in London and New York. The other stumbling block was MacDonald’s apparent mention of a 10-percent dole cut. This wasn’t mentioned by Morgans. Later, in reconstructing events, Grenfell told Lamont that “the Cabinet have gone on repeating . . . that the American Bankers insisted on a 10$$$ cut. . .. If he made mention of a 10$$$ cut as a condition MacDonald must have invented it as it does not appear in your cable.”26 The cable supports Grenfell.

  MacDonald felt that he lacked the cabinet mandate to proceed with the emergency budget cuts required to restore foreign confidence in sterling. The bickering grew so fierce that at 10:20 P.M. he arrived at Buckingham Palace and laid his resignation before King George V. Looking wild and distracted, he told the king that “all was up.”27 In insisting upon the budget cuts, MacDonald set himself against powerful segments of his own party, and he now knew he had crossed some personal Rubicon. The king asked him to return to Buckingham Palace the next morning along with the opposition leaders—Stanley Baldwin of the Conservatives and Sir Herbert Samuel of the Liberals. To spread political risks and ensure passage of the cut in unemployment benefits, the king invited the three to form a coalition government. MacDonald would remain prime minister of a government that was Tory at heart.

  The new government cut the budget deficit with higher taxes on gasoline, beer, tobacco, and income and lower salaries for civil servants. J. P. Morgan and Company provided a $200-million revolving line of credit, and another $200 million came from France. Unfortunately, it proved impossible to restore confidence in the pound. Many Labourites now regarded MacDonald as a traitor and were vitriolic in their criticism of him. In September, the Communists marched on Parliament and insisted that a cold-blooded bankers’ “ramp,” or conspiracy, had imposed unfair hardship on British workers. Unemployed workers rioted in Battersea and mounted police charged demonstrators on Oxford Street. It was widely believed that the New York Fed had brought down the government. London’s Daily Herald featured a photograph of George Harrison on the front page, charging that a New York-led conspiracy had plotted against the British welfare state. “The Daily Herald to-day discloses a startling and apparently successful attempt by US bankers to dictate the internal policy of Great Britain,” the headline read.28

  One can picture Grenfell’s sardonic smile as he followed this misunderstanding. To operate in the political shadows, to pass wraithlike through a crisis and exert an unseen influence on large events—for Grenfell, these were the perfections of his art. When he was pumped for information in Parliament, he played the “village idiot,” he said. He confided to Lamont, “I believe it is the opinion of the late Cabinet that George Whitney’s long telephone message. . . . was a message from the Federal Reserve Bank. For the present, therefore, the fall of Ramsay MacDonald will be put down to the domineering action of poor George Harrison, who will not I imagine lose his sleep in consequence.”29

  Did the House of Morgan bring down the Labour government? MacDonald himself exonerated the bankers and stressed the need to maintain the plac
e of sterling in world finance. Morgan records confirm that the bank refrained from recommending specific budget cuts. Yet it was no secret that Wall Street wanted the dole cuts. And the broad body of American bankers had a veto over any big British loan on Wall Street. There was no hidden Morgan agenda, only the usual bankers’ mentality of favoring austerity and cuts in spending. It was Britain’s choice to defend the gold standard, which placed it in the thrall of foreign investors. Morgans merely expressed the consensus among bankers.

  A few days after the Sunday cabinet meeting, Lamont spoke by phone with Hoover, who gave qualified approval to the British credit. Since the large credit would enlist 110 American banks, Hoover warned that Wall Street would be accused of funneling money to Britain at a time of American distress.30 Not for the first time, small-town America looked askance at Morgan assistance to Britain, even as Britain’s left accused American bankers of treacherous interference.

  The coup de grâce to Britain’s gold standard came in September 1931, when naval units at Invergordon, Scotland, struck against proposed pay cuts. This little mutiny terrified foreign investors, who saw it as proof that the British public would never accept an austerity budget. Sterling crashed again. Monty Norman was sailing home from Canada on September 21, 1931, when England went off gold. Hence, it would no longer redeem sterling for gold at a fixed rate: the old imperial fantasy was dead, and the pound fell a shocking 30 percent. Keynes exulted over gold’s demise: “There are few Englishmen who do not rejoice at the breaking of our gold fetters.”31 But Monty Norman, arriving at Liverpool, was stunned that the edifice he built was shattered. He took the train down to Euston Station and had a temper tantrum when he arrived at the bank. Yet his associates, Harvey and Peacock, believed that he would have done the same thing had he been in charge. Twenty-five countries followed Britain off gold in a rush of competitive devaluations.

  In an Associated Press interview from London, Jack Morgan applauded Britain’s departure from gold. When Lamont read this in New York, he was thunderstruck. Hadn’t they just enlisted over one hundred banks to save that gold standard? And wouldn’t those banks now feel betrayed? Lamont, who almost never got angry, was beside himself.

  Now came the moment that was destined to occur—when the power relationship at the bank was revealed and even Jack Morgan would feel the sting of Lamont’s pen. They had for some time a tacit deal: Jack would be semiretired figurehead, and Lamont would retain executive control. Now in his early sixties, Jack was an absentee boss who preferred golfing and yachting; he was aging and no longer traveled on the Corsair without a surgeon aboard. In most banking matters, control had slipped from his grasp.

  Lamont had never challenged Jack openly. Now, in his fury, he confronted him directly. So unprecedented was the accusatory letter he sent that he cosigned it with Charles Steele, the other major partner in terms of capital share and an old-timer from Pierpont’s days. Steele was a friend of Jack’s and was regarded around the bank as a pleasant, wise old man.

  It may be said that this letter of September 25, 1931, marks the moment when the House of Morgan ceased operating as a family bank. Lamont wrote: “The point that we must make to you—a point that we fear you little realize—is to have you know fully the uncomfortable position in which the New York firm has been placed before the whole American world and the public generally. What the banks here, without exception, fail to understand, is why this enormous credit operation should have been permitted to blow up in our faces over night so to speak.”

  Lamont reminded Jack of the solemn pledges to preserve the gold standard that were made to participating banks:

  It was upon that prophecy, made wreckage in just three weeks to the day, that we were able to complete the group for the credit. There was, as we told you at the time, great reluctance upon the part of many banks to join in the credit. . . . Now the outcome has manifestly and inevitably diminished our prestige, not only publicly but with the American banking community which has for years so largely supported us in our efforts for the preservation here of British credit. And this is a fact that every partner of the firm, which (under you and your Father before you) has built up its American reputation upon careful judgment and prudent dealing, must keep in the forefront of his mind for a long time to come. . . .

  Now, we have said our say about the situation over here, and will try not to allude to the subject again. But with you so far away, it has been we have thought, quite important to acquaint you with the unpleasant facts which have come to us all.32

  Ten years before, Lamont would never have dared this. He had always dealt with Jack gingerly so that he would never lose face. Now, however, Lamont’s money and position gave him incontestable power. Still, nobody confronted a Morgan without grave anxiety. At one point in the letter, Lamont gave Jack an out: he hinted that the AP quote must have come at the end of a long interview and he closed the letter “with much love from us all,” signing it “Faithfully.” Lamont knew the letter was uniquely candid and bare-knuckled. After posting it, he telephoned Jack to say no blame was intended and that he, Lamont, would have acted the same under the circumstances. Yet the letter showed that a palace revolution had taken place at the House of Morgan and that the Morgan family had surrendered its absolute power. From that time onward, the influence of the Morgan family would steadily diminish within the House of Morgan and then all but disappear.

  AS the political skies darkened in 1931, Tom Lamont seemed blind to the spread of political extremism and militarism around the world. This was partly a reflection of his innate optimism, his almost instinctive faith in the future. He kept thinking the Depression couldn’t get any worse, that the world would suddenly return to its senses, that the dictators would be held in check. The gregarious Lamont often found it hard to credit people’s malevolence and was reluctant to probe beneath their reassuring smiles.

  This blind spot was especially apparent with sovereign clients, where a banker’s self-interest bolstered his preference for looking on the bright side of things. Partisan in behalf of clients, he tried to keep their reputations as unblemished as that of the House of Morgan itself. Their good name was especially vital in the Depression’s volatile market for foreign bonds. Unfortunately, a concern with the financial standing of foreign states could slip over into questionable dealings with them. In extreme cases in the 1930s, the House of Morgan would function as an unfettered government in its own right, conducting a secret foreign policy at odds with that of Washington.

  As fiscal agent for the imperial Japanese government in the late 1920s, Lamont had devotedly served his client. For a Western banker, he had achieved remarkable, unheard-of triumphs. After the mammoth earthquake loan, he had floated loans for Tokyo, Yokohama, and Osaka, advised on a merger between Tokyo Electric Power and Tokyo Electric Light, mediated between the Bank of Japan and the New York Fed, and extended a $25-million credit that restored Japan to the gold standard in January 1930. On the eve of the crash, the House of Morgan was exploring a possible working link with the House of Mitsui, talks that enjoyed official Japanese patronage. When it came to Japanese business, Lamont took great pride in his accomplishments.

  His early faith in Japan was understandable. When he first visited in 1920, Japan stood on the brink of more than ten years of liberal, pro-Western party rule. He developed distinguished and cultured friends, especially Junnosuke Inouye, the commanding figure of Japanese finance, with whom he corresponded frequently. Inouye was finance minister for a third time after 1929. Humane and courageous, he was known for his conciliatory views on foreign affairs and was often at loggerheads with the army. He represented the enlightened antimilitarist forces in Japan. At Inouye’s request, Lamont would lobby the New York press and argue Japan’s case. In 1928, after meeting with editors of the New York Times, he told his friend, “I also told them of the patient and tolerant attitude of your people toward China and the Chinese. . . . It therefore is a matter of satisfaction to me to see how fair and sound the
Times has been.”33

  The House of Morgan attained peak involvement in Japan just as that nation’s experiment with liberal rule began to crumble. Following a wave of bank failures and the stock market closing in 1927, it slipped into a depression before most Western countries. That year, Japan was enraged by China’s boycott of its goods in protest of foreign encroachment—a slap at national pride that Japan would invoke during the Manchurian invasion. In 1930, the Morgan-assisted restoration of the gold standard, under Inouye’s aegis, proved a masterpiece of bad timing. It made exports expensive just as world trade contracted. When Depression-plagued America economized on luxury clothes, Japanese silk exports plunged. Silk was still a staple of Japan’s economy, with two of every five families drawing income from it. Poverty spread throughout the countryside, breeding a vicious new strain of rural nationalism. Rice prices also tumbled. The budding Japanese export boom was blighted by Western protectionism, feeding xenophobia. These economic setbacks enhanced the power of the militarists, who blamed foreign powers for Japan’s troubles. Militarism would be bloodily manifested in Manchuria.

  The Japanese had long coveted Manchuria, that resource-rich north-eastern corner of China. Whenever problems beset Japanese society—whether overpopulation, too great a reliance on foreign raw materials, or the need for new export markets—militarists saw China as the solution. They claimed Manchuria almost as a matter of divine right. China was still fragmented and chaotic, with warlords ruling parts of the country, and it appeared to be easy prey for aggressors. It was weakened by a civil war that had culminated in 1927 with Chiang Kai-shek’s defeat of the Communist rebels under Mao Tse-tung. By treaty with China, Japan controlled the South Manchuria Railway and even stationed a garrison in the region. This treaty gave the Japanese militarists a legitimate cover behind which to carry out their plunder. Japan’s Kwantung army plotted to use Manchuria as the base for military expansion in China.