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

by Ron Chernow

  The Japanese army would continue to annex parts of northern China, a campaign that in 1937 would culminate in the Sino-Japanese War and the butchering of tens of thousands of Chinese civilians in the rape of Nanking. It was a dismal, ironic denouement to Morgan involvement in China, which began with Willard Straight’s dream of America acting as a buffer against Japanese encroachment in Manchuria and ended with a senior Morgan partner serving as apologist for that very action.

  CHAPTER EIGHTEEN

  MIDGET

  THE Wall Street of 1932 was a dismal ghost town. Securities firms declared “apple days”—unpaid vacation days each month that enabled destitute brokers to go out and supplement their income by selling apples on the sidewalk. Apple vendors appeared at the Corner. Downtown real estate was so depressed that building companies defaulted; astute investors who bought their bonds became the future owners of Wall Street. The misery extended everywhere. Riverside Park was lined with Hoovervilles, and sylvan retreats in Central Park looked like ragged hillbilly hollows. On Park Avenue, ten-room apartments that had been occupied by financiers of the twenties now lacked tenants. The new, half-occupied Empire State Building was mocked as the “Empty State Building.”

  For aristocrats in private clubs, it was a time of often macabre mirth. The Union League Club had a room wallpapered with stock certificates that were rendered worthless by the crash. (They were peeled off by itchy fingers when the market recovered.) After falling for over two straight years, the stock market hit bottom on July 8, 1932. By that point, two thousand investment houses had failed, and new underwritings stood at 10 percent of their 1929 peak volume. On the Stock Exchange floor, listless traders invented games to kill time. Big Board seats that fetched $550,000 before the crash now sold for as little as $68,000. The major financial work was refunding old bonds at lower interest rates.

  In 1932, almost thirteen million of America’s 125 million people were unemployed. Two million roamed America searching for work, boarding boxcars and sleeping in hobo camps. Hoover refused to renounce economic orthodoxy and mount a vigorous attack on the Depression. Sometimes he flirted with fanciful solutions to America’s despondency. At various times, he thought America needed a good laugh, a good poem, a good song. He even approached Will Rogers about writing a good joke to end panic hoarding. Hoover himself wore a funereal expression. Of a White House meeting with him, Secretary of State Henry Stimson said, “It was like sitting in a bath of ink.” And sculptor Gutzon Borglum remarked, “If you put a rose in Hoover’s hand it would wilt.”1 Hoover had a way of minimizing the nation’s suffering. In 1932, he insisted, “Nobody is actually starving. The hoboes, for example, are better fed than they have ever been. One hobo in New York got ten meals in one day.”2

  That spring, Jack Morgan was briefly roused to a rare act of public activism. A believer in self-reliance, he cited as his favorite biblical text Ezekiel 2:1: “And he said unto me, Son of man, stand upon thy feet, and I will speak it unto thee.”3 Jack construed this as God clucking his tongue at the welfare state. He preached the old-time religion, telling the marquess of Linlithgow that honesty, integrity, and economy were “the real solution of our troubles, most of which, in my opinion, come from greed. ”4 He rallied to Hoover’s plea for private benevolence instead of government intervention. In March 1932, he participated in a fundraiser for the Block Community Organization of New York. Dressed in dinner jacket at his Murray Hill mansion—with butler Henry Physick and other servants listening at a rear-hall receiver—he broadcast a radio appeal for help. “We must all do our bit,” he said, endorsing a plan by which workers contributed small weekly sums to a fund for the jobless. A shy man who dreaded public appearances, Jack’s cooperation reflected a fearful mood among the rich. Lamont, meanwhile, helped the Red Cross raise money for farmers victimized by the Midwest drought.

  An outdated allegiance to classical economics tipped a postcrash recession into seemingly insoluble depression. In late 1931, Federal Reserve Banks hiked up their discount rate by 2 percentage points in two weeks. To balance the budget, the Federal Revenue Act of 1932 almost doubled tax rates—again, the perfect medicine to kill the patient. Not everyone at Morgans automatically resisted experimentation. Throughout 1932, Russell Leffingwell, the resident Democratic iconoclast and self-styled curmudgeon, laughed at those who feared inflationary spending as “people who in an Arctic winter worry about the heat of the tropics.”5 Yet Leffingwell’s own views spun like a weathervane in a high gust, and at moments he reverted to budget-balancing orthodoxy. He told Walter Lippmann that a public works program would only prolong the Depression, and he doggedly maintained the need for the gold standard.

  The major Hoover policy initiative of 1932, the Reconstruction Finance Corporation, was a major boon to Morgan interests. It was set up to make loans to banks, railroads, and other hard-pressed businesses. The previous year, Lamont had told Hoover that the plight of America’s railroads was “the principle impediment to domestic recovery.” The railroads were burdened with debt from the twenties and couldn’t service their bonds. When the Van Sweringens defaulted on their secret rescue loan in 1931, Morgans and Guaranty Trust invited the brothers in for a frank chat, telling them that “we are, in effect, the owners of all of their properties.”6 So the bank dropped its usual objections to government bailouts when it came to railroads. Oris Van Sweringen said that he and Mantis were “on the doorstep waiting for them [the RFC] to open.”7 The Van Sweringens borrowed $75 million from the RFC, strengthening the case of those who saw it as a welfare agency for the rich.

  Hard times didn’t touch the splendor of top-drawer Morgan partners. If their drawing rights from the bank—that is, their annual percentage take as partners—were halved, they still had wealth left from the twenties. The main problem was enjoying it free of guilt. What would Jack do with his new Corsair, big enough to house a small village of hoboes? He decided, for decency’s sake, to mothball it for a while, telling Cosmo Lang, the archbishop of Canterbury, “It seems very unwise to let the ’Corsair’ come out this summer. There are so many suffering from lack of work, and even from actual hunger, that it is both wiser and kinder not to flaunt such luxurious amusement in the face of the public.”8 He offered to charter the boat to John D. Rockefeller, Jr.

  With over $20 million in his partnership account, Tom Lamont had time to catch up on travel. Where Jack liked to sail with bishops and surgeons, Lamont preferred the company of writers, intellectuals, and socialites. In the spring of 1931, he and Florence went on a leisurely Aegean cruise with Walter Lippmann and his wife, and classics scholar Gilbert Murray. They were joined in Athens by the John Masefields. There are photos of this Depression party aboard the Saturnia. One shows Lamont in a double-breasted suit with pocket handkerchief and a jaunty striped vest. His shrewd eyes crease into crow’s-feet as he gazes into the camera. Small and balding, he has appraising eyes, sympathetic but vigilant, that seem to take in everything. In another photograph, taken at the captain’s table, the group is elegantly erect. Walter Lippmann looks dashing, while Lamont peers attentively down the table. Dining in this wood-paneled interior, with its fresh table linen, the group has a glitter that is remote from the American dreariness of the moment.

  The Lamonts arrived at Patras with forty-two pieces of luggage. The Greeks treated them as visiting foreign dignitaries and followed protocol carefully. The provincial governor carried Florence’s hatbox ashore while a Greek cabinet representative (probably wondering to what depths he had sunk) inspected every toilet on their hotel floor. Tom and Florence Lamont liked to affect a bohemian innocence. During this idyllic trip, Florence reported, “We almost always have a picnic luncheon because the hotels are most of them so bad. We sit in the sun and read poems about Greece after luncheon.”9

  If the Morgan world seemed to survive the Depression intact, the surface was deceptive. Between 1929 and 1932, the bank saw its net worth—its basic capital cushion—drop with frightening speed, from $118 million to half
that before Hoover left office. Total assets plunged from $704 million to $425 million. Even for the House of Morgan, these were staggering blows. The real casualties were junior partners, who shared in the losses without having reaped the spectacular bull market profits. The bank still recruited based on talent. As an official Morgan history says, “The alternative of seeking additional capital by recruiting new partners with more money than talent, thereby diluting the quality of the firm, was deemed unacceptable.”10

  The House of Morgan retained Pierpont’s paternalism. When salaries were slashed by as much as 20 percent, the staff was told these cuts would be restored before partners resumed full drawing rights from their capital accounts. When the bank closed its employee dining room, it distributed cash allowances for lunch. Staff families also got two free weeks each year at a rustic Morgan camp in Maine. For the Morgan Grenfell staff, the Depression ennui was partly lifted by Jack’s gift of a sports ground in Beckenham, with a cricket pitch, hard tennis courts, trimmed lawns, and a tea pavilion. These touches inspired fierce loyalty and a cultlike intimacy among employees. Their Depression suffering, if real, was extremely modest compared with the unspeakable suffering beyond the marble walls.

  LET us consider 1932 politics, for the events that led to the Glass-Steagall Act—the Banking Act of 1933—and the division of the House of Morgan were rooted in that year. It was Herbert Hoover who first waged war on Wall Street and prompted hearings that led to new banking legislation. There had always been a slightly paranoid edge to Hoover’s dealings with his Morgan friends. After staying at the White House in the summer of 1931, Dwight Morrow told Lamont that Hoover was blue and felt “he had been trying to carry out the views of the banks here in New York and yet had got rather cold comfort from them.”11 Lamont sent Hoover a note to cheer him up, yet there was an undercurrent of uneasiness in his relations with the president.

  Hoover’s relationship with the House of Morgan dated back to his days as a mining engineer. In 1917, he acted as intermediary between Sir Ernest Oppenheimer, who wanted to take public his Johannesburg gold-mining group, and Morgans. To consolidate his new Wall Street tie, Oppenheimer insisted on the word American appearing in the new company’s name. Thus was born the Anglo-American Corporation, afterward Africa’s richest company. Evidently Lamont thought this would inaugurate a series of mining ventures tapping Hoover’s talents. As he told Morgan Grenfell, the Anglo-American deal was “part of a comprehensive plan involving association with Mr. Hoover in mining ventures generally.”12 But Hoover reneged on the deal, and Lamont later applauded Oppenheimer for ousting Hoover and engineer William Honnold. “We never shall have any quarrel with [Oppenheimer] in regard to his feeling about Honnold and/or Hoover,” Lamont informed London.13

  Beyond this history, Morgans and Hoover were doomed to have policy quarrels. Hoover felt straitjacketed by a Congress that cared little for Europe’s troubles, favored buy-America campaigns, and lacked interest in inheriting economic leadership from Britain. The House of Morgan, in turn, had European clients to protect, and its internationalism was no less problematic for Hoover than for his Republican predecessors. There were also clashing personal styles: Hoover was brusque and humorless, while Morgan partners were silky aristocrats.

  In July of 1932, it looked as if the world economy might finally cast off the twin burdens of German reparations and Allied war debt. At Lausanne, European leaders reached a gentleman’s agreement that effectively ended the debt charade; if they could stop paying off war debts, they would stop asking for reparations. Lamont was jubilant, seeing this as an end to the economic warfare that had been waged since Versailles. He dispatched Martin Egan to the White House, not to advise Hoover to cancel the war debts outright but simply to reexamine them.

  Returning from Washington, Egan said he had never seen the president so emotional about an issue. He had made a speech full of anger, self-pity, and impotent frustration. “Lamont has this matter all wrong,” Hoover had insisted, echoing widespread public sentiment. “If there is one thing the American people do not like and will not stand for it is a combination of this kind against them. . . . Lamont cannot appreciate the rising tide of resentment that is sweeping over the country. . . . They are trying to ’gang’ us. . . . Maybe they have settled German reparations but they did it the worst damned way they could.”14 He wouldn’t extend his one-year debt moratorium and rejected French and British proposals for deferring upcoming payments; he forced France to default. So on the eve of Hitler’s advent, the Allies were squabbling over moldy financial issues that had bedeviled them for years.

  The Morgan-Hoover feud over debt was mild compared with their debate over short selling on Wall Street. Moody and isolated, taciturn and stony-faced, Hoover now shared the average American’s view of Wall Street as a giant casino rigged by professionals. He saw the stock market as a report card on his performance, and it showed consistently failing grades. He came to believe in a Democratic conspiracy to drive down stocks by selling them short—that is, by selling borrowed shares in the hope of buying them back later at a cheaper price.

  The “bear raiders” first achieved notoriety in the 1930 suicide market. The master was Bernard E. “Sell-’Em Ben” Smith, a twenties pool speculator who was trounced by rising prices in 1929. That October, he suddenly came into his own and whooped it up on the day of the crash, shouting “Sell ’em all! They’re not worth anything.”15 Such tales convinced Hoover of malevolent forces at work in the market. He began to compile lists of people in the bear cabal and even claimed to know they met every Sunday afternoon to plot the week’s destruction!16 Hoover’s obsession was fed by confidants. Senator Frederick Walcott of Connecticut told Hoover that Bernard Baruch, John J. Raskob, and other Wall Street Democrats were planning bear raids to defeat his reelection.

  Hoover thought Stock Exchange officials should openly denounce the culprits. In January 1932, he called Stock Exchange president Richard Whitney to the White House for a verbal drubbing. He said short sellers were preventing an economic rebound and warned that unless Whitney curbed them, he would ask Congress to investigate the Exchange and possibly impose Federal regulation. Whitney refused to admit any danger in short selling. Privately Morgan partners mocked Hoover’s obsession as absurd and fantastic, but they couldn’t dissuade him from his vendetta.

  Although fearing that public hearings would dredge up “discouraging filth” and sabotage recovery efforts, in 1932 Hoover asked the Senate Banking and Currency Committee to start an inquiry into short selling. Wall Street bankers were so upset that Lamont lunched at the White House with Hoover and Secretary of State Stimson, trying to spike the inquiry. Hoover said destructive short sellers had offset his beneficial measures, a remark that led to a heated exchange about the hearings. “I tried to make clear to the President that if such an enquiry was encouraged to run riot it would create nothing but uneasiness throughout the country and would help to defeat the very constructive ends to which he was leading us,” Lamont said.17

  In April, the first witness was Richard Whitney, who called Hoover’s charges “purely ridiculous.” Even as the hearings commenced, Hoover and Lamont were secretly trading barbed remarks about short selling. Hoover blamed the bears for everything—low public confidence, business stagnation, and falling prices. Lamont’s reply was candid to the point of comic cruelty. Responding to Hoover’s contention that “real values” were being destroyed by bear raids, he asked, “But what can be called ’real value’ if a security has no earnings and pays no dividends?”18 He blamed 99 percent of the market’s decline on poor business.

  The press had a dandy time ridiculing the Senate bear hunt, which never unearthed a Democratic conspiracy. Nevertheless, at the end of April, a subcommittee broadened the hearings to include pools and market manipulations of the 1920s. The machinations of the RCA pool were unfolded before the public. Walter E. Sachs of Goldman, Sachs had to explain the losses of Eddie Cantor and forty thousand other investors in the Goldman Sachs
Trading Corporation. Something curious now happened: as the hearings shifted from present to past, memories of the crash grew in the public mind. At first, Main Street smirked at the crash as a Calvinist thunderbolt hurled at big-city sinners. Only now, when the crash was seen as a forerunner of depression, did public rage against the bankers crystallize.

  Amid the controversy, Hoover had to deal with a serious slump in the bond market—where short selling was prohibited. Corporate America couldn’t cope with the debt accumulated in the 1920s, much of it to finance takeovers. Many bonds defaulted and in extreme cases dropped 10, 20, or 30 points between sales, threatening the banking system. If savings banks couldn’t cash in bonds, they might have no money to pay off depositors, possibly causing runs and failures. The upshot was a Morgan-led operation to halt the bond market slide. Thirty-five banks pledged $100 million to buy high-quality bonds in a pool nicknamed the Stars and Stripes Forever. It was chaired by Lamont, who sported more titles than the mikado during this period. The bank touted the patriotic nature of the venture, but it was again that Morgan specialty—public service for profit. The bank considered bonds seriously undervalued and had excess cash on hand during the Depression. “If the organization of the Corporation . . . should have any degree of reassuring effect upon the public so much the better,” J.P. Morgan and Company told the Paris partners.19

  Lamont kept Hoover posted on the pool. In the bond market operation, some cynics spied a move to improve Republican prospects in the fall election—as if Hoover would field his own hard-charging bulls against the bears. If so, the strategy almost backfired on Hoover. Lamont used the pool as a bargaining chip and threatened to disband it unless the short-selling hearings were canceled. In the end, the pool went ahead and made a tidy profit. The hearings would drag on and eventually assume dimensions unforeseen in early 1932. They would finally take their name from a new subcommittee counsel, Ferdinand Pecora, appointed in January 1933. The Pecora hearings would lead straight to Glass-Steagall and the dismemberment of the House of Morgan.