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

by Ron Chernow

  Able to slough off divisive, prewar domestic issues, FDR and the Morgan partners became fast friends. After Lamont congratulated him for declaring war, Roosevelt wired back, “Generous words of approval from an old friend like you are heartening.”37 They swapped jokes, anecdotes, and amusing press clips, including one citing Communist leader Earl Browder’s accusation that Roosevelt had prevailed upon Lamont and Walter Lippmann to engineer Willkie’s nomination. In early 1942, Lamont spent almost an hour at the White House speculating as to how the U.S. might use Fort Knox gold in the postwar world to stabilize currencies. Roosevelt said America was trusted more in continental Europe than was Britain. This was the relationship Lamont had craved—full of secrets, confidences, and back scratching. Turning to the subject of Churchill, FDR confided to Lamont that Winston didn’t have the economic mind they had.38 (Yet in 1939, the British embassy in Washington filed this tart appraisal of Roosevelt: “His knowledge of certain subjects, particularly finance and economics, is superficial.”39) At Roosevelt’s request, Lamont appeared at a Madison Square Garden rally for Soviet-American friendship—the one time Tom appeared politically with his left-wing son, Corliss.

  What strengthened ties between Roosevelt and the House of Morgan was that both felt beleaguered by the same isolationist forces. In the spring of 1942, Leffingwell told the president that the war effort required more parades, brass bands, and flag-waving. Agreeing, Roosevelt added that “the real trouble is not in the people or the leaders, but in a gang which unfortunately survives—made up mostly of those who were isolationists before December seventh and who are actuated today by various motives in their effort to instill disunity in the country.”40 So the new concord between Roosevelt and Morgans corresponded to the old political axiom that the enemy of my enemy is my friend. War had finally made peace between the White House and the House of Morgan.

  CHAPTER TWENTY-FOUR

  PASSAGES

  THE early war years saw the final transformation of J. P. Morgan and Company from a private partnership to a corporation. This momentous step in Morgan history was taken only after extensive deliberations at the Pierpont Morgan Library. In announcing the transformation in February 1940, Jack made an unprecedented appearance at the press conference. He would be board chairman, George Whitney chief executive, and Lamont head of the executive committee. In dropping the partnership form, Jack had to sell the New York Stock Exchange seat bought by Pierpont in 1895. As a private bank, partners had been exposed to the full risk of loss. But they had gladly accepted this risk in order to keep their capital position secret and their books free from inspection. This tradition had contributed immeasurably to the firm’s mystery and power.

  Why, then, the change? The bank feared rapid capital depletion as the three richest partners aged: Tom Lamont, Charles Steele, and Jack Morgan. Steele had died in Westbury, New York, in mid-1939, after spending his last years watching his grandsons play polo. If either Jack Morgan or Lamont died soon, too, there could be a serious drain on capital. A combination of the Depression and inheritance and income taxes had whittled the bank’s assets down from $ 119 million in 1929 to only $39 million in 1940. By converting to share ownership, heirs could sell their stakes without disrupting the bank’s capital. There was also a wish to enter the trust business, which was closed to partnerships. In 1927, American Telephone and Telegraph had funded the first big corporate retirement plan, and Morgans wanted to capture similar huge pools of capital.

  There were other blows to Morgans’ traditional aloofness as well. In 1942, it joined the Federal Reserve System—having been the largest holdout—in a move related to its heavy purchase of government bonds, which was Wall Street’s principal wartime activity: the Corner witnessed Victory Loan rallies for which huge throngs turned out before a flag-draped Stock Exchange. Now for the first time, the House of Morgan’s nearly $700 million in deposits became subject to federal deposit insurance. Also in 1942, ownership of Morgan shares spread beyond the eighty or ninety people, mostly family and friends, who had controlled it before. A syndicate led by Smith, Barney offered 8 percent of Morgan shares to the public—the first time ordinary mortals could buy a piece of a Morgan bank. This both broadened ownership and assigned value to closely held shares. In a final affront to tradition, J. P. Morgan and Company disclosed its earnings in a prospectus.

  In this period of transition, the Morgan link with its Philadelphia affiliate, Drexel and Company, also ended. The Philadelphia firm had brought the Drexels, Biddies, Berwinds, and other Main Line families into the Morgan fold. As Pierpont had told Arsene Pujo, “It only has a different name, owing to my desire to keep Mr. Drexel’s name in Philadelphia.”1 In 1940, 23 Wall took over Drexel’s deposits, shut the Philadelphia office, and sold the name to some Philadelphia partners who were forming an investment bank. Later on, I. W. “Tubby” Burn-ham merged his Burnham and Company with the reincarnated Drexel, so that the famous name would later grace the junk-bond operation of Drexel Burnham Lambert.

  To qualify for Stock Exchange membership, Morgan Stanley became a partnership in 1941. It was now harried by the Brandeisian trustbusters who had pursued J. P. Morgan and Company and saw Morgan Stanley as simply a retooled version of the original company. Morgan Stanley’s instant success had aroused suspicion, for it had managed a quarter of all negotiated bond issues since Glass-Steagall. During the Temporary National Economic Committee hearings in 1939 and 1940, the committee’s chairman, Senator Joseph O’Mahoney of Wyoming, refused to believe J. P. Morgan had withdrawn from investment banking: “Now that the Banking Act has separated two functions that were formerly merged, Morgan Stanley in the investment field has succeeded to a similar dominant position that J.P. Morgan formerly held.”2 SEC counsel John Hauser advanced a conspiracy theory that dismissed Morgan Stanley as a “legal fiction” set up by J. P. Morgan partners to bypass Glass-Steagall. An exasperated Harold Stanley was repeatedly asked whether he took orders from 23 Wall after Glass-Steagall. “We were a separate, split-off organization,” he insisted. “We owned and ran the business. Our money had been risked in the common stock.”3 Notwithstanding his denials, the SEC charged that J. P. Morgan and Company had used its influence over Dayton Power to obtain business for Morgan Stanley.

  What weakened Morgan Stanley’s claim to autonomy was that most of its preferred stock was owned by J. P. Morgan and Company officers. The SEC asserted this created “an identity of pecuniary interest” between the two Morgan houses and an “emotional” and “psychological” affiliation.4 So Morgan Stanley began buying the preferred stock, and J. P. Morgan executives sold it to their wives, sons, grandchildren, and so forth—a transparent ruse that didn’t fool anybody. To retire the bogey of J. P. Morgan control once and for all, Morgan Stanley redeemed and canceled its preferred shares on December 5, 1941. This ended any formal link between the two firms, although a multitude of intangible links would weave them together for decades.

  At this point, the campaign against Wall Street shifted to a lower gear. The investment banking business was moribund during the war as the Treasury Department asked underwriters to desist from new bond issues so as not to compete with government war-bond drives. Therefore, the drive to reform investment banking was stalled until the Medina trial of the early postwar years. In the meantime, by switching to a partnership form, Morgan Stanley retreated into the world of “mystery and dignity,” as Judge Medina later labeled it, just as J. P. Morgan was emerging into the sunlight.

  AFTER initial grumbling, Jack Morgan settled amiably into his new role as board chairman. “What he had looked forward to with distaste he found not at all disagreeable,” said Russell Leffingwell.5 On January 31, 1943, Jack presided over the first public shareholders meeting of J. P. Morgan and Company, Inc. It was a pleasant, autumnal time for him: the war had silenced New Deal charges of villainy, and everybody was saying that Jack hadn’t seemed so happy since before Jessie’s death, eighteen years before. He enjoyed serving as nanny to his English war b
abies and went duck shooting nearly every weekend that fall. There were gentler pursuits as well, including the new hobby of taking color photographs of cherry blossoms and other flowers.

  The soft-shoe, avuncular Jack was much more in evidence. Every evening, he stopped to chat with the Pinkerton guards at Matinicock Point, thanking them as they opened the gates that guarded the estate. Playing backgammon with John Davis for a nickel a game, he had a winning streak and teased Davis’s butler that he was about to lose his wages. He observed life’s smaller details. Each morning, at the same bend in the road, he passed a young neighbor driving to work in the opposite direction; when the young man overslept one morning and they passed further down the road than usual, Jack wagged a satirical finger of rebuke.

  In late February, doctors gave Jack a clean bill of health before he left for a Florida holiday, a quiet fishing trip on the Gulf of Mexico. On the train to Boca Grande, he had heart trouble, however, followed by a cerebral stroke. His steadfast valet of twenty-eight years, Bernard Stewart, managed to get him to his rented cottage at the Gasparilla Inn, a winter resort on a barrier island, and his New York heart specialist, Dr. Henry S. Patterson, came down to look after him. Jack survived less than two weeks. He died in a coma on March 13, 1943, and his body was brought north in a special Pullman car attached to the Seaboard Line.

  Even in death, there were eerie parallels between Jack and Pierpont Morgan. Both died at the age of seventy-five, and again news of the death was withheld until after the stock market closed, so as not to disturb share prices. The voluminous obituaries that followed were of the full-page variety reserved for heads of state. The New York Times commented, “The private banking house of J.P. Morgan & Co. . . . gained a position of world-wide importance and a place in international financial affairs that not even the house of Rothschild attained in the period of its greatest power.”6 The paper called Jack the last financial titan—they had said the same thing of Pierpont—noting that for the first time since George Peabody’s retirement, the Morgan bank was not headed by a Morgan. Tom Lamont ascended to board chairman.

  Jack’s funeral service, too, was reminiscent of Pierpont’s. He lay in state at the Pierpont Morgan Library before a funeral at Saint George’s Church on Stuyvesant Square. The service featured the black baritone Harry Burleigh, who had sung at the 1913 funeral. Again flags flew at half-mast over the New York Stock Exchange and the Corner. One difference was subtly apparent to the twelve hundred mourners who arrived in a heavy downpour: they were solemnly escorted to their seats by the directors of two banking houses—J. P. Morgan and Company and Morgan Stanley. After cremation, Jack’s ashes were sent to Hartford for burial at Cedar Hill Cemetery, alongside the graves of Pierpont and Junius.

  In his will, Jack perpetuated Pierpont’s tradition of flamboyant generosity, including a $ 1-million trust fund for his elderly domestic employees. Henry Physick, Jack’s butler of thirty-four years and the man who was so resourceful during the 1915 assassination attempt, received $25; 000. His secretary of forty years, John Axten, hired as a boy of nineteen, got $50,000, as did Belle da Costa Greene. With a paternalistic flourish in the style of Pierpont, Jack gave six months’ wages to long-time bank employees and three months’ to those hired more recently.

  As they had been at his father’s death, everybody was surprised by the relative modesty of Jack’s estate—only $16 million before taxes and expenses, $4.6 million afterward. Following merchant-banking tradition, he left the bulk of his estate to his sons, Junius and Harry. His daughters’ families, the Nichols and the Pennoyers, would enjoy the prestige but less of the fortune associated with the Morgan name. During his lifetime, Jack gave away an estimated $35 million, including $ 15 million to the Pierpont Morgan Library and $9 million to the Metropolitan Museum of Art. His fortune wasn’t frittered away only by philanthropy. After Jessie’s death, he had maintained the fantastic indulgence of the colossal yachts and the regal estates.

  Opinion of Jack’s place in history was immediately divided. Clearly, his business career had been a personal triumph. When he took over the bank, Wall Street rumor mills had patronized him as a bungler. Yet under him, the House of Morgan had amassed power beyond that of the bank under Junius or even under Pierpont. It had taken on extraordinary international breadth, winning many governments, finance ministries, and central banks as clients and capitalizing on the merger of politics and finance in the Diplomatic Age. The building at 23 Wall now seemed less a smoky clubhouse of banking cronies than a gathering place for the world’s financial elite. With some glaring exceptions—such as the Van Sweringen escapade and the Richard Whitney scandal—Jack had preserved the bank’s reputation for fair, conservative dealings.

  He had also put in place a superlative team and allowed its members to employ the full scope of their energies. He was a good “successor” figure who knew how to delegate power and take disinterested pleasure in his partners’ feats. If the Morgan bank moved like a well-oiled machine and was free of internal warfare, it had something to do with Jack’s reputable stewardship. A more self-centered boss might have regretted his own absence during the 1929 crash, yet Jack took fatherly pride in his partners’ behavior: “I . . . was made very happy by the absolutely magnificent conduct of all my partners during the ’late unpleasantness’ in Wall Street. The Firm showed that it could behave just as well when I was not there, as it could have done had I been there.”7 Unlike his father, he was never a prisoner of his ego.

  Of Jack’s public role, a far less flattering judgment must be rendered. The New Republic acidly observed that Jack had “added nothing creative or humanizing to American life, and . . . his passing subtracts nothing.”8 In the Victorian age, he would have been a model banker, cherishing honor, integrity, and Christianity. Such values, however, were inadequate during the worldwide Depression, when many people went hungry while still abiding by them. It was a harsh Providence that dropped such a hidebound, frightened man into an age of radical upheaval and experimentation. He asked for privacy in an era that demanded accountability. Increasingly the Morgan bank operated as an adjunct of government. It couldn’t accept the benefits of public service without also accepting its burdens. Fleeing his political troubles, Jack kept aloof from his countrymen and never understood plain Americans the way he did English aristocrats. The New Yorker once said with justice, “One feels he could both teach and learn if he would cross the Mississippi frequently and meet the people that largely make up America.”9

  At a time that demanded fresh thinking, Jack could only reiterate ancient economic verities and brood over affronts to his dignity. Rather than giving new ideologies a fair hearing, he found them evil and insidious. For a man of such delicacy, who reported late to work so he could watch the tulips bloom, he could be heartless with his supposed enemies—Jews, Catholics, Germans, liberals, reformers, and intellectuals—whom he lumped together into a single nefarious plot. “The world knew him only as a somewhat mysterious colossus of finance,” said The New York Herald Tribune.10 If the world saw remarkably little of his compassion, he had himself to blame for it. He never gave of himself freely to the public. At bottom, he didn’t believe in common humanity and imagined his foes driven by motives unlike his own. Instead of accepting change as a fact of life, he raged against his moment in history and suffered in the process.

  That Jack Morgan was an anachronism could be seen by the fate of his possessions: only institutions could afford his boats and residences. Corsair IV was bought by Pacific Cruise Lines and converted into a cruise ship for eighty-five passengers. His Georgian brick mansion on Long Island was rented to the Soviet UN delegation in 1949. Soviet diplomats and their families played volleyball on a lawn that once had been owned by the czar’s banker; in the mansion, they installed seventy-one beds, sixty-seven canvas chairs, and eight big cafeteria tables. The town of Glen Cove objected to this use of the property, and the Russians had to depart. For many years afterward, the estate served as a convent for the Sisters of
Saint John the Baptist, who built a chapel in the courtyard between the main house and Jack’s sixteen-car garage. The mansion was later torn down, and one hundred suburban houses were put up on the old estate grounds. The fifteen-hundred-acre Camp Uncas in the Adirondacks was bought by the Boy Scouts, while the United Lutheran Church paid a scant $245,000 in 1949 for Jack’s forty-five-room Madison Avenue townhouse. In 1988, when the Lutherans decamped for Chicago, they sold it back to the Pierpont Morgan Library for $15 million. Wall Hall was acquired by the county council for a green belt around London. Princes Gate, once among the finest private homes in London, became headquarters of the Independent Television Authority in the 1950s (and in 1980 had as its neighbor just a few doors away the Iranian embassy, which in that year was the scene of a violent siege). The world of the grandees was over. In the post-World War II era the Wall Street and City banks would grow into vast, global institutions of a hitherto unimaginable size. But the bankers inhabiting them would, paradoxically, seem that much smaller.