by Jean Strouse
As Pierpont worried his partners and tried to prevent speculators from gambling with his clients’ securities, Junius began to take some calculated risks. In March 1870 the elder Morgan met Andrew Carnegie, who had emigrated from Scotland to Allegheny, Pennsylvania, at age twelve, and worked his way up through the ranks of the Pennsylvania Railroad Company to become head of its Pittsburgh Division by the time he was twenty-four, in 1858. Ten years later, this son of a Scottish weaver owned $400,000 worth of securities and partnerships in railroads, banks, iron mills, and telegraph lines; he also owned a bridge-building company called Keystone.
Carnegie decided in 1869 to build a railroad bridge across the Mississippi River—something more substantial than the “fearful looking bridge resting on one or two islands” that Pierpont and Fanny crossed. With the help of his mentors at the Pennsylvania Railroad, Carnegie won the construction contract for a bridge at St. Louis, to be designed by former army engineer James B. Eads. The plans called for three metal arches resting on masonry piers sunk into rock ninety-three feet below the river’s surface. Skeptics predicted it would take $7 million to build the bridge—and seven million years.
Hoping to raise money (less than $7 million) in London, Carnegie presented his plans to Junius in the spring of 1870. He had been preceded by an enthusiastic letter of introduction from Pennsylvania Railroad president J. Edgar Thomson. At J. S. Morgan & Co., Carnegie described a span that would put U.S. technological ingenuity on display, generate lucrative iron sales, and serve as a “toll-gate on the continental highway.” Junius wondered at first how the public would view such a “novel” project—“a mortgage bond upon a Bridge”—but agreed to take $1 million of Illinois and St. Louis Bridge bonds at 85 percent of their face value, after making some changes in the wording to protect his firm from risk.
Accustomed to the work of managing iron foundries and railroads, Carnegie was enthralled by the lofty methods of Old Broad Street. Careful discussion, a few adjustments, a simple agreement—“that was all it took,” writes his biographer Joseph Wall, “to move into the market the necessary gold to heat the foundries in Pittsburgh and put iron beams across a muddy river 5000 miles away. Here was capitalism in its most powerful form, and Carnegie would never tire of watching its quiet, smooth operation.” The bonds for the bridge sold so well that when Dabney, Morgan asked for a share, Junius said no: his own firm’s allotment was “already smaller than what we want or ought to have.” Building the bridge did not take seven million years, but the Morgan banks had to keep advancing money as construction deadlines passed. Fifteen men died working underwater in pneumatic caissons filled with compressed air, and many more were crippled by a mysterious ailment not yet known as the bends. Eads wanted to use steel for parts of the structure; Carnegie still favored iron. By the time the bridge finally opened in July 1874 the United States was in the midst of a depression. Little rail traffic moved across the new “toll-gate on the continental highway,” and the company had to borrow again from its bankers to pay interest on its bonds.‡ Still, the St. Louis Bridge was a brilliant piece of engineering, and the Morgans did not hold Carnegie responsible for its problems. More accustomed to the vicissitudes of long-term projects than they had been with the Atlantic cable, they helped finance Carnegie’s other bridge and railway enterprises, and also a steel-rail rolling mill he began to build in 1873 several miles south of Pittsburgh on the Monongahela River. As soon as Carnegie was convinced that iron would be superseded by more versatile, durable steel, he moved quickly. He named his new mill the Edgar Thomson Steel Works, after the president of the Pennsylvania Railroad. The E.T. plant went into operation in September 1875. Its first order, for two thousand steel rails, came from the giant Pennsylvania.
Having made a close study of railroad economics, Carnegie realized there would also be scale economies in making steel. He built big, efficient, technologically up-to-date mills and ran them at full capacity, which kept his production volume high and his costs low. In the summer of 1876, he crowed to Junius: “we have made a wonderful success—every sanguine prediction I have made is more than verified & we are making … steel rails for less than $50 per ton.” With the lowest costs in the industry, he could “scoop” the market by underselling his rivals anytime he wanted. Although government tariffs protected this new industry, Carnegie told Junius proudly that “even if the tariff were off entirely, you couldn’t send steel rails west of us.”
Carnegie had access, partly through Junius, to the capital he needed for this propitious start, but unlike the railroads with their ongoing need for money, his steel operations soon proved so profitable that he no longer had to depend on bankers. In 1876 he built half the exhibition space for America’s hundredth birthday party, the Philadelphia Centennial Exposition; two years later he secured the contract for the Brooklyn Bridge; in 1885 he was producing most of the steel that built America’s tools, factories, tall buildings, ships, streetcars, and machines. With his tremendous economies of scale and the daunting amounts of money that would be required for anyone to build competing facilities, Carnegie had seized and consolidated his “first mover” advantage. He loved competition—he knew he could always win—and from 1875 to 1901 he reigned over American steel.
Junius also ventured in 1870 into a form of finance that had proved extremely successful for Europe’s haute banque firms, the funding of government loans. The Rothschilds had financed Wellington’s peninsular campaign, the first issue of Prussian bonds in 1818, and the Crimean War. Baring Brothers had underwritten the Louisiana Purchase and France’s indemnities after Waterloo. Serving as bankers to states brought these houses political influence as well as profits and prestige. “There are six great powers in Europe,” announced the Duc de Richelieu in 1818: “England, France, Prussia, Austria, Russia and Baring Brothers.”
The Morgans had tried without success to break Jay Cooke’s hold on the primary market for U.S. government securities in 1862. Over the next few years Junius had sponsored bond issues for the governments of Chile, Peru, and Spain, watching for larger opportunities to put his flourishing but not yet firstrank firm on a par with the world’s great banks. He found an opening in 1870. War between France and Prussia broke out that summer when the moribund Second Empire of Napoleon III took on Otto von Bismarck’s powerful North German Confederation. Junius thought the ambitious French Emperor (Bonaparte’s nephew) had “signed his own death warrant.” Four weeks later Napoleon III surrendered, but French republicans seized Paris and refused to give up.
As Prussian armies attacked Paris, officials of the fallen French government appealed to London for financial aid. Neither Rothschilds nor Barings would have anything to do with a loan under these circumstances. Lowering their sights to the next echelon of bankers, the French tried J. S. Morgan & Co. Junius made a quick survey of French financial history, he later told a reporter, found that no government since 1789 had failed to repay its debts, and contracted for a syndicated loan of £10 million ($50 million).
In retrospect, Junius claimed he had been sure of success, but in fact he took a large gamble at a moment of extreme political turbulence. Paris surrendered to the Iron Chancellor at the end of January 1871. When the French accepted Germany’s harsh terms for peace (including a punitive $1 billion war indemnity) and elected a National Assembly dominated by monarchists, the republicans set up a revolutionary Commune and launched a civil war. The value of the “Morgan” bonds plummeted. Junius held on to the certificates he had not sold, bought others back at a steep discount, and helped France raise money in England to pay Bismarck’s indemnity. In 1875 France redeemed the entire 1870 issue at par. J. S. Morgan & Co., having taken the bonds at 80 and bought back many more as the price fell, earned £1.5 million ($7 million) in commissions and redemptions on this loan—15 percent of its total value—as well as the respect of the international banking world.
Pierpont had not solved his problems with his partners, but in other respects he seemed to be thriving. In the
fall of 1869 he moved his family uptown to a large house with a high front stoop at 6 East 40th Street, next door to the Fifth Avenue mansion of William Henry Vanderbilt (the Commodore’s son) and diagonally across from the Croton Reservoir, whose Egyptian-styled walls rose fifty feet above the street. Herter Brothers furnished the new Morgan house in relatively modest style—they were doing far more elaborate work for the Vanderbilts and for Ulysses Grant’s White House. The following summer, Pierpont and Fanny again rented Stonihurst at Highland Falls. Their third child, another Juliet Morgan, was born there in July 1870.
As wealthy Americans eager to emulate Europe set out to build cultural institutions of their own, Pierpont began to play a prominent role in New York’s civic life. He helped found the American Museum of Natural History in 1869, along with Theodore Roosevelt (the father of the future president), Levi P. Morton, and several other friends. And when a group of prominent New Yorkers at the Union League Club announced plans to build an art museum in 1869, Morgan was among the first subscribers; he became a patron of the Metropolitan Museum of Art, with a contribution of $1,000, in 1871.
His professional situation was causing him such discomfort, however, that at thirty-three he decided to retire. When Charles Dabney announced at the beginning of 1871 that he would resign from the firm on July 1, Pierpont told George Morgan and Jim Goodwin in an awkward formal note that he wanted out as well—invoking familiar dictates of external necessity and health: “I feel it is my duty towards you to say to you thus early that I feel that I must reserve to myself the right to avail of this opportunity to withdraw from active business and liquidate.” Having been “strongly urged to adopt such a course & take a respite at least for a time from the responsibilities of business life,” he would comply, though “with great reluctance & not without grave doubts.”
Just who had “strongly urged” him to withdraw from business is not clear—his doctors? his family?—but he was acutely conflicted over how much and with whom he wanted to work. He did not have to work. Other sons of wealthy men in the Gilded Age spent their time (and their fathers’ money) hunting, sailing, traveling, drinking, racing horses and yachts. It was generally “new” men from more modest backgrounds who were building America’s corporate commonwealth and making large fortunes. Though Pierpont had too strong a work ethic for a life of conspicuous leisure, as well as too much urgent pressure from London, he did not seem able to harness himself to his job, and depression periodically took the struggle out of his hands. Nervous troubles released him from all responsibility and constraint.
Junius had no intention of letting his son quit. If the junior Morgan’s health required a leave of absence, the senior would grant it. But in establishing a position among the world’s leading international bankers, Junius was looking to expand his base in the crucial U.S. market, not contract it, and his prince regent in New York was an essential part of the plan. If he had to sacrifice the disappointing George and the loyal but ineffectual Jim, he would. The real problem was finding a replacement for Dabney. Much as Junius had disliked Jim’s report of Pierpont’s unpopularity on Wall Street, he knew he needed a competent senior counselor on the far side of the Atlantic.
By fortuitous circumstance, Junius’s requirements early in 1871 neatly coincided with those of the prominent Philadelphia banker Anthony J. Drexel, at Drexel & Co. Private financiers of Austrian Catholic descent, the three Drexel brothers were doing a large business in international trade through affiliated partnerships in New York (Drexel, Winthrop & Co.) and Paris (Drexel, Harjes & Cie.); they also had good connections in Germany. The brothers were worth approximately $7 million, and their American firms averaged $350,000 a year in profits.
At the end of 1870 forty-five-year-old Tony Drexel had won the account of the Pennsylvania Railroad away from his Philadelphia rival, Jay Cooke, and was looking for more dynamic leadership than he had in Paris or New York. Having done business with J. S. Morgan & Co., including transfers of funds for the 1870 French loan, he turned to Junius for advice. The senior Morgan at once suggested combining the houses of Drexel and Morgan. With their strong positions in Philadelphia and London, the two banks could “largely and profitably” increase their joint business in Paris. Junius’s son would supply the necessary force in New York.
On March 8, 1871, Pierpont called on Tony Drexel, twelve years his senior, at home in West Philadelphia, Pennsylvania. In the course of a long talk, the two men agreed (subject to Junius’s approval) that Pierpont would serve as senior partner in a New York firm called Drexel, Morgan & Co. This arrangement promised him more autonomy than he had under Dabney, with authority over Drexel’s younger brother, Joseph, and another banker named J. Norris Robinson. He would work closely with Tony Drexel and his elder brother, Francis, in Philadelphia, but still answer ultimately to Junius. First, however, he would take a year off.
When he returned to New York, he told Jim and George that he planned to retire and liquidate their firm. That was not the whole truth. Without mentioning his commitment to the Drexels, he reminded his partners of the “timely notice” he had given them two months earlier, and again justified his departure on grounds not of choice but of obligation. He had come “with the greatest reluctance” to the decision to withdraw—not for his own sake but for “those most near and dear to me and whose interests I feel bound to respect and protect.” Did he mean his father and their banking business? His wife and children? Tortured syntax underlined his discomfort: he needed rest “at the risk of any personal sacrifice (even if necessary to the extent of sacrificing a business and position to build up & create which my labor of the past ten years has been devoted together with your own).” His renunciation deserved praise, not blame: “Our career together has been a long and most successful one and it takes a great deal of courage to bring it to a close.” As he looked with “great anxiety” to the future, he doubted he would ever again be able to “give to business the close attention which I have done in the past.” In fact he had promised his closest attention to the business of Drexel, Morgan & Co. in a year’s time.
Junius approved of Pierpont and Tony Drexel’s plans. George Morgan took a job with the firm of Heinemann & Payson. Jim Goodwin, accepting his dismissal like a good soldier, agreed to manage the New York office while Pierpont took his year off. In the end it was Jim, not Pierpont, who retired from Wall Street; he married Sarah Lippincott of Philadelphia in 1873, then divided his time between Hartford and New York, serving on corporate boards at Pierpont’s invitation, and helping his brother, Frank, manage their Hartford real estate.
Drexel, Morgan & Co. opened for business on July 1, 1871, at 53 Exchange Place. A few days later, Pierpont set off with his family for a year abroad.
* Gould had gained control of the Erie in another competitive battle. Cornelius Vanderbilt, former steamboat magnate and principal owner of the New York Central Railroad, had in the early 1860s built a regional rail system up the Hudson River from New York City to Albany, and after the Civil War he had begun extending it west along the Great Lakes to Chicago. He decided to take over the Erie in 1867, when it threatened to steal some of the Central’s traffic. “Commodore” Vanderbilt was a tough old bird who played by his own rules and generally got what he wanted. In 1867, however, he underestimated Erie president Daniel Drew, a seasoned pirate who had made a fortune manipulating the road’s shares. “Uncle Daniel” called in Jay Gould and “Jubilee” Jim Fisk, another marauder whose ebullient spirits, street-fighter tactics, and flashy tastes masked a shrewd intelligence. This trio secured control of the Erie by bribing state officials and issuing millions of dollars in phony stock. Drew, thinking he had extracted all the profit he could, resigned from the presidency and left the Erie to Gould, who immediately added William M. “Boss” Tweed, leader of New York City’s corrupt Democratic machine, to the road’s board of directors.
A piece of fraud perpetuated by Drew may be the source of the term “watered stock.” As a young cattle drover bringing herds fro
m Putnam County to market in New York, he fed his cows salt just before they reached town, then let them drink as much as they could hold. The profitable difference between their real weight and their weight at the moment of sale was pure water.
† Immediately after the “Susquehanna War,” Gould cornered the gold market and brought on the crash that came to be known as “Jay Gould’s Black Friday.” Spending most of his time on his gold maneuver late that summer, he had left the A&S work primarily to Fisk.
‡ By 1878 the company was bankrupt, and the Morgans reorganized it to protect their bondholder-clients: they set up a new corporation to buy the bridge, refinance its debt, and issue new stock. In 1881 Pierpont leased the bridge to Jay Gould, whose Wabash and Missouri Pacific railroads were now its principal customers.
Chapter 9
ILL WINDS
Morgan’s entourage in 1871 consisted of his wife, three children, two nursemaids, and Fanny’s sister Mary. They stopped to see Junius and Juliet in England, then went on with a courier named Cesar through Germany, Austria, and Switzerland. At Vevey, Pierpont showed the children his old school. He had planned to spend the winter in Italy, but in Rome, feeling restless and “blue,” he decided to take everyone to Egypt.
They sailed from Brindisi to Alexandria in the middle of December 1871, crossing the immense cultural distance that separates West from East. Morgan did not record his first impressions of this ancient, mysterious land, but he would return to what he called “my beloved Egypt” for the rest of his life.
Foreign rulers had been conquering Egypt and commandeering its cultural treasure for thousands of years. Herodotus, writing in the fifth century B.C., supplied the standard occidental text on Egypt until Napoleon’s invasion in 1798 opened the country to modern European study and to further appropriation of artifacts and art. Between 1809 and 1828, the French produced an encyclopedic nineteen-volume Description de l’Égypte, and the English Orientalists John Gardner Wilkinson and Edward W. Lane followed with detailed studies of their own. (Morgan, engaged more by immediate experience than by scholarship, bought these books long after he began traveling to Egypt.) In the 1820s, Jean-François Champollion deciphered the hieroglyphics inscribed on the black basalt Rosetta Stone, which brought about a revolution in knowledge of ancient Egypt.
