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

by Ron Chernow

  The auction didn’t pacify the Wheeler investigators. Even Glass-Stea-gall and the creation of Morgan Stanley hadn’t modified Senator Wheeler’s belief that J. P. Morgan and Company controlled the railroad securities business. He asked one witness, “But generally in the Street is it not conceded that Morgan Stanley & Co. is the same thing, or is just as much dominated by Morgan, as before?”11

  For six months in 1936, Wheeler investigators pored over records at 23 Wall Street: once sacred, confidential documents were becoming increasingly smudged with the fingerprints of government investigators. Committee counsel Max Lowenthal became the new Morgan bogeyman, and George Whitney complained to Jack about the “Jewish lawyer element” behind the investigation.12 Whitney thought the Van Sweringens the real object of their investigation, with the bank serving as their proxy after they died. In 1937, Senator Wheeler, distracted by the battle over Supreme Court reform, appointed Truman as acting chairman of the railroad investigation. At this point, the committee turned to the Van Sweringen’s 1930 purchase of Missouri Pacific, bought with proceeds from the Alleghany underwriting of 1929, made notorious by the preferred list.

  A future president was now educated in the Wall Street plunder of the 1920s. As Margaret Truman recalled, “It was my father’s investigation of the Missouri Pacific that really enraged him and convinced him for all time that ’the wrecking crew,’ as he called Wall Street financiers, were a special interest group constantly ready to sacrifice the welfare of millions for the profits of a few.”13 Under Alleghany—and ultimately Morgan control—the Missouri Pacific had become an open scandal. The railroad was milked for dividends while management fired thousands of workers, abandoned improvements, and made no provision for an emergency fund. There were also malodorous political dealings with Missouri legislators, one state senator having received $1,000, which he itemized as “covering services in the Alleghany-Missouri Pacific matter.”14

  The feisty Truman dug in his heels against tremendous Wall Street pressure to desist from the investigation. He blamed the House of Morgan for his troubles. As he wrote his wife, Bess, “It is a mess and has created a terrible furor in New York. Guaranty Trust and J. P. Morgan have used every means available to make me quit. I’m going to finish the job or die in the attempt.”15 Truman saw himself as the upright country boy who wouldn’t be hoodwinked by smart-alecky New York types, and he had a cultural as well as a political aversion to the bank. Even as a young man, he had considered Pierpont a snob who consorted with decadent European royalty, and he was quick to pick up on George Whitney’s air of superiority, his disdain for little midwestern senators. “Mr. Whitney is very much inclined to feel his position,” he told Bess. “He came to my office at about a quarter to ten and told me what he was going to do. I simply asked him who the chairman of the committee happened to be and he immediately dismounted and went along like a gentleman.”16 Truman’s experience left him with an enduring view of Wall Street bankers as smart, greedy, and oblivious to the hazards of concentrated wealth. The ordinary government bureaucrat, he declared, was no more a match for Wall Street lawyers than a lamb for a butcher.

  The Wheeler hearings spawned a Morgan enemy who would plague both J. P. Morgan and Company and Morgan Stanley for twenty years. Robert Young was a self-styled Texas populist who had worked for General Motors in New York and made a fortune selling short in the 1929 crash. He left to form his own investment firm, buying for himself, GM president Alfred P. Sloan, Jr., and other auto company executives. After buying a major block of Alleghany stock in the early 1930s, he and his clients were rebuffed by Morgans and Guaranty Trust in securing a board seat. Young would never forget this insult.

  After the Van Sweringens died, Young and his associate, Allen Kirby, an heir to the Woolworth fortune, bought control of the bankrupt Alleghany empire, still heavily mortgaged to J. P. Morgan and Company and Guaranty Trust. But rather than being a pliant client, Young decided to use Alleghany as a springboard for an assault on the House of Morgan itself. While other businessmen bucked the New Deal, Young cleverly mouthed its slogans and cast himself as a plucky outsider, proclaiming his mission as “saving capitalism from the capitalists.” He said he wanted to diffuse the power of Morgans and its associates. Lamont was outraged by Young’s testimony before the Truman subcommittee and called him on the carpet at 23 Wall. It was a dressing down that stung for the rest of Young’s life. When he told Lamont that he intended to keep him informed about his Alleghany rehabilitation plans, Lamont replied, “You don’t understand me. I want not only to be informed, but I want to help guide you in your policies.”17

  For Young, all was revealed in a flash of light. He often repeated the story, the way sinners retell their moments of conversion. Lamont had made him feel “just like a country boy” and had “literally put me on the carpet, spanked me and raked me over the coals for having the temerity to be developing a . . . plan without discussing it with Morgan’s.”18

  Inflamed by Lamont’s high-handed manner and emboldened by the Wheeler hearings, Young led a revolt against Morgan hegemony in railroad finance. His main target was the exclusive relations that gentleman bankers demanded from clients. The House of Morgan had managed issues for the C&.O railroad, which was part of the Alleghany empire. Young and his banking associates, Harold Stuart of Halsey, Stuart in Chicago and Cyrus Eaton of Otis and Company in Cleveland, laid a trap for the Morgan interests in November 1938. Young traveled out to Cleveland in a private railroad car with Harold Stanley of Morgan Stanley and Elisha Walker of Kuhn, Loeb for a meeting of the C&O finance committee. The New York bankers expected to negotiate a new $30-million bond issue in private.

  Stanley and Walker must have known something was afoot, for they had been asked to submit sealed bids for the issue. It was unprecedented for a Morgan Stanley partner to travel to a board meeting in this way. In what he doubtless thought a great concession, Stanley told the meeting that he would allow Kuhn, Loeb’s name to appear alongside Morgan Stanley’s as co-manager. At this point, Young delivered his bombshell: “Mr. Stanley, we are not interested in the advertising, or whose name appears above whose. . . . What we are interested in is what C&O is to get for the bonds.”19 Young suddenly disclosed that he had brought a competitive bid from Otis and Halsey, Stuart that would net the C&O $3.5 million more than the terms proposed by Morgans and Kuhn, Loeb. Some old Van Sweringen loyalists on the board still wanted to accept the traditional Wall Street bankers. Young threw them into confusion by threatening to sue them if they rejected the lower bid. He pranced about the room singing, “Morgan will not get this business! Morgan will not get this business! ”20 The flustered directors recessed, conferred with lawyers, then came back and accepted the lower bid.

  Young’s palace coup inaugurated a brand-new era on Wall Street. Instead of having gentleman bankers privately negotiate issues with clients, more issues would be opened up to competitive bids. This typically meant smaller “spreads” between the price paid to the company and the price at which the issues were resold to the public. With smaller profit margins for the investment bankers, more money, in theory, would remain for the issuer.

  During the next two years, the troika of Young, Eaton, and Stuart got two other railroads to accept competitive bids. In 1941, the SEC promulgated Rule U-50, mandating competitive bidding for public utility holding company issues. In 1944, the Interstate Commerce Commission enacted a similar ruling for railroads. However notable these victories for anti-Wall Street forces, they didn’t touch the far more lucrative industrial issues outside of railroads and utilities. The major proponents of old-fashioned banking would be Harold Stanley and his firm. Stanley would argue against the “casual intermittent connections” between bankers and issuers produced by competitive bidding, warning that companies would receive poor advice and sell issues at improper prices. If the argument were transparently self-serving, industrial America would willingly submit to its logic. For another forty years, blue-chip America would agree to exclusi
ve relations with Morgan Stanley, an alliance unbroken until IBM rebelled in 1979.

  CLEARLY, if there were going to be a rapprochement between the House of Morgan and the New Deal, it wouldn’t come from Jack Morgan, whose implacable bitterness made him politically valueless. It also wouldn’t come from George Whitney, the very model of the patrician banker that the reformers abhorred. Any new approach to the White House would have to involve Tom Lamont, who yearned to return to the political game and chafed under his Washington exile.

  The turbulent year of 1937 presented a possible opening for the bank. After drifting from spring to late summer, the economy and the stock market nose-dived in September. So steep was the fall in stock and commodity markets that October 19 was dubbed Black Tuesday. Markets slumped almost halfway to their 1932 lows. Investment banks took such a severe beating on two issues—Bethlehem Steel bonds and Pure Oil preferred stock—that there was talk of closing the Stock Exchange. Assuming the Morgan role of Wall Street leadership, Harold Stanley called in the heads of several investment banks and took an informal survey of their condition. In return, he offered them a rare, confidential look at Morgan Stanley’s books. Glass-Steagall had left an investment banking field of small, poorly capitalized banks, and the inevitable shakeout now began. Suffering heavy underwriting losses, the firm of Edward B. Smith and Company—the successor to Guaranty Trust’s securities affiliate—merged with Charles D. Barney and Company to form Smith, Barney, a firm that fell into the Morgan group. The confidence of the New Deal was shaken by this sudden reversion to the unsettled financial markets of the early 1930s.

  The industrial sector was also in turmoil. In January and February of 1937, the fledgling United Auto Workers paralyzed General Motors with sit-down strikes. In Flint, Michigan, police fired on strikers armed only with slingshots. From 14 percent in 1937, unemployment would zoom to 19 percent the following year. These events not only created a sense that the New Deal had stalled, but they intensified conflicts between the two chief administration factions. One group—inspired by Louis Brandeis and identified with Felix Frankfurter, Thomas G. Corcoran, and Benjamin V. Cohen—blamed big business for America’s failure to shake off the Depression and advocated more competitive markets. Their ally, Robert H. Jackson, chief of the Justice Department’s antitrust division, argued that monopolists had “priced themselves out of the market, and priced themselves into a slump.”21 Echoing this theme, Interior Secretary Harold Ickes warned of the pernicious influence of America’s sixty ruling families. Roosevelt was fond of experimentation, and his political church had many pews. For the moment, he favored the antitrust faction and told brain truster Rexford G. Tugwell that it might “scare these people [i.e., business] into doing something.”22

  There was another wing of brain trusters who had been influential during the so-called First New Deal, from 1933 to 1935. They admired the technological efficiency of big business and regarded the Brandeis view of a small-scale, competitive economy as a fanciful wish for a bygone America. They accepted the inevitability of economic concentration and advocated public control of the large economic units rather than vainly trying to break them up. They denounced the Jackson-Ickes speeches as demagogic and counterproductive. By late 1937, they were emboldened to mount a counterattack when FDR told Tugwell that “perhaps a message addressed to him by a mixed group of labor and business leaders would be one way in which he could find means for retreat and a change of policy.”23

  In fashioning their group, these left-wing New Dealers found common cause with Morgans. This wasn’t as contradictory as it sounded. From Pierpont’s day, the House of Morgan had supported industrial planning, albeit under private control. What were the railway associations and U.S. Steel if not planned economic systems? (We recall the covert ideological link between the bank and the Progressives, epitomized by the friendship between Teddy Roosevelt and George Perkins.) At the same time, the partners were by no means hostile to all federal intervention to stop the Depression. If they hewed to the balanced-budget dogma and opposed higher taxes, Lamont, Leffingwell, and Parker Gilbert also advocated cheaper money to combat deflation. By contrast, the American Bankers Association attacked Roosevelt’s policy of low interest rates. The obscurantism of their fellow bankers sometimes bothered the Morgan men. “I sometimes wonder whether we ought to continue to give our silent sanction to the American Bankers Association by continuing our membership in it,” Leffingwell said, blaming tight Fed policy in 1936-37 for that year’s downturn.24 In modern parlance, the Morgan partners were sympathetic to macroeconomic management of the overall economy, even if they deplored microeconomic regulation of specific industries.

  Adolf A. Berle was an important theoretician of government planning, and in 1932, with economist Gardiner Means, he co-authored a classic text, The Modern Corporation and Private Property. Berle and Means insisted that the large corporation was an ineradicable fact of modern economic life and that government had to adjust to it. Disturbed by Robert Jackson’s speeches, Berle started to correspond with Lamont, who, of course, spoke kindly about big business, which he asserted had higher ethical standards than small business. He also stressed his allegiance to Roosevelt’s foreign policy and a good portion of his domestic policy as well. There was considerable poetic embellishment here. Not long before, Lamont had complained to his close friend Lady Astor about the “extravagance, waste, and loose administration” of Roosevelt’s White House.25 But whatever license he took, Lamont was at least willing to talk and bargain with the New Dealers—a vast improvement over the fruitless rage of Jack Morgan and the rest of diehard Wall Street. Lamont struck a deal with Berle: he would support relief payments and deficit spending in exchange for a repeal of the surplus profits and capital gains taxes. At the same time, political attacks against business, especially utilities, had to end. This was the sort of political horse-trading so conspicuously absent from previous Morgan efforts to affect the New Deal.

  On the afternoon of December 22, 1937, eight members of a new Advisory Group met at New York’s Century Club, with Berle as chairman. Lamont and Owen Young of General Electric represented big business; Rexford Tugwell and Charles Taussig spoke for the New Deal; and Philip Murray, president of the steelworkers’ union, John L. Lewis of the Congress of Industrial Organizations, and CIO counsel Lee Pressman were there for the labor movement. In a decade badly polarized by class conflict, it was a unique moment. The eight men jointly opposed the antitrust prosecutions of Robert Jackson and endorsed the broad outlines of an agreement that had already been worked out by Berle and Lamont. At the end, Tugwell promised to set up a meeting with Roosevelt to discuss the pact.

  As a creature of the shadows, Lamont imagined the meeting with Roosevelt on January 14, 1938, would be a private, discreet affair. Instead, the participants had to run a gauntlet of photographers and reporters. There were press gibes about “Mr. Berle’s economic zoo” and front-page coverage supplied by unsympathetic White House leaks.26 Nevertheless, it was a productive meeting, with the conferees approving expanded purchasing power through federal spending rather than the old deflationary shaving-wages approach to hard times. Despite Roosevelt’s desire for more meetings, the experiment was stillborn. Brandeis-influenced regulators in the administration—such as Thomas Corcoran and Ben Cohen, who drafted the securities law—opposed such overtures to business. And a far-left faction in the CIO was equally bent on spiking this nascent business-labor-government triumvirate.

  For his part, Lamont regretted that the White House meeting had degenerated into cheap political theater and that the cooperation offered by him and Owen Young “had been used to make third rate politics.”27 At a time of political invective, it was a missed opportunity that demonstrated the potential benefit of practical discussions between business and labor. For the House of Morgan, it was an especially irretrievable chance, because the White House meeting occurred on the eve of a Morgan scandal that would turn the clock back to the dark days of 1933, calling into questi
on the partners’ view of themselves as enlightened, public-spirited financiers.

  FOR the House of Morgan, the winter of 1937-38 turned into a time of debacle and mourning. In February 1938, worn by responsibility and the labors of a precocious early adulthood, forty-five-year-old S. Parker Gilbert died. The prodigy who ran the Mellon Treasury Department in his twenties had suffered from hypertension; his death was caused by heart and kidney problems, but many thought he had worked himself to death. The years of staying till two in the morning at the Treasury and the years in Weimar Berlin, where the Germans noted his unrelenting devotion to work, had taken their toll. Earlier, Gilbert and his bride, Louise, a Kentucky belle whose racy sayings were repeated around Wall Street, had postponed their honeymoon for five years. After joining the bank in 1931—Parker hadn’t asked for a set salary, waving it aside as a detail—the Morgan partners protected him, always urging him to vacation and conserve his strength. His prodigious work and dedication earned him decorations from France, Belgium, and Italy and honorary degrees from Harvard and Columbia. A year after he died, the pretty, round-faced Louise married Harold Stanley, whose first wife had died in 1934. This not only created a novel link between J. P. Morgan and Morgan Stanley but meant that Louise’s son, S. Parker Gilbert, Jr., Morgan Stanley chairman in the 1980s, would claim a unique Morgan lineage.

  Parker Gilbert’s death came two weeks before scandal broke. If the House of Morgan lost its investment banking business with Glass-Stea-gall, it perhaps lost its honor in the Richard Whitney case. Where Ferdinand Pecora had exposed questionable practices—things legitimate but of dubious wisdom—the Whitney scandal was for the House of Morgan a closer brush with the law. The case became a morality play of old versus new Wall Street, of private versus public trust. It would do more than just scotch Lamont’s attempt to ingratiate himself with the New Deal. It would also speed reforms of the New York Stock Exchange.