Morgan

by Jean Strouse

  Lincoln Steffens, a young reporter for Villard’s Evening Post, did a stint on Wall Street in the early nineties, and years later recalled asking the president of another bank to put a question to Morgan.

  “Not on your life,” said the banker.

  “Why not?” asked Steffens.

  “You try it yourself and see.”

  Steffens went down to 23 Wall Street, walked into the famous glass-walled office, and stopped before the large, neat desk where Morgan was examining a sheet of figures. “I stood for two or three long minutes,” he wrote in his autobiography, “while the whole bank seemed to stop work to watch me, and he did not look up; he was absorbed, he was sunk, in those figures. He was so alone with himself and his mind that when he did glance up he did not see me; his eyes were looking inward.…” Soon, without registering the presence of his visitor, Morgan dropped his eyes back to the page, and Steffens edged out.

  As he left the bank one of the partners asked him what had happened. “Nothing,” replied Steffens. “He didn’t even see me.”

  “You’re lucky,” volunteered the partner with a laugh. “You have to call him to wake him up. If you had said, ‘Mr. Morgan,’ he would have come to. And then—“

  “What would have happened?”

  “Oh, then you would have seen—an explosion.”

  On another occasion, Steffens did interrupt the Morgan trance. The bank had sent the Post a statement about a recent bond issue that the city editor found incomprehensible. He assigned Steffens to find out what it meant.

  The reporter headed back to the bank in high trepidation. His account of this event years later resembles many of the stories told about Morgan, in which a brave young Daniel marches into the lion’s den, faces him down, and triumphs. That so many people felt called upon to report standing up to him this way was a measure of Morgan’s stature. Meeting him, certain men were inclined to measure their prowess, as it were, against his, when his was universally acknowledged to be gigantic. Intellectuals in particular tended to belittle him, especially in retrospect—to be at best baffled by and at worst contemptuous of a sensibility so alien to their own.

  Steffens, according to Steffens, once again walked into the glass-walled office and across to the immaculate desk, and this time the banker looked up. “He threw himself back in his chair so hard,” recalled Steffens, “that I thought he would tip over.”

  “ ‘Mr. Morgan,’ I said as brave as I was afraid, ‘what does this statement mean?’ and I threw the paper down before him.

  “ ‘Mean!’ he exclaimed. His eyes glared, his great red nose seemed to me to flash and darken, flash and darken. Then he roared. ‘Mean! It means what it says. I wrote it myself, and it says what I mean.’

  “ ‘It doesn’t say anything—straight,’ I blazed.

  “He sat back there, flashing and rumbling; then he clutched the arms of his chair, and I thought he was going to leap at me. I was so scared that I defied him.

  “ ‘Oh, come now, Mr. Morgan,’ I said, ‘you may know a lot about figures and finance, but I’m a reporter, and I know as much as you do about English. And that statement isn’t English.’

  “That was the way to treat him, I was told afterward. And it was in that case. He glared at me a moment more, the fire went out of his face, and he leaned forward over the bit of paper and said very meekly, ‘What’s the matter with it?’

  “I said I thought it would be clearer in two sentences instead of one and I read it aloud so, with a few other verbal changes.

  “ ‘Yes,’ he agreed, ‘that is better. You fix it.’

  “I fixed it under his eyes, he nodded, and I, whisking it away, hurried back to the office. They told me in the bank afterward that ‘J.P.’ sat watching me go out of the office, then rapped for [one of his partners] and asked what my name was, where I came from, and said, ‘Knows what he wants, and—and—gets it.’ ”

  Steffens’s artful story amounts to a lesson in how to treat an intimidating tycoon as well as a tribute to the author’s own skill and courage, since he reduces the “great man” to meek respect. (Never mind that the bank’s partners never called their senior “J.P.”—always “Mr. Morgan.”) The portrait also captures several things it does not highlight. For all his imperious force, Morgan was surprisingly flexible, especially in relation to people who had competence he lacked. Much of the time, as in this sketch, he was inept with language—the instrument of Steffens’s expertise. Of more consequence than Morgan’s acceptance of journalistic help is how little his power had to do with words: his authority—in his office, over railroads, in the world’s capital markets—came not from what he said but from what he did.

  When Junius Morgan noted in 1887 that the United States had the best market in the world for its own “high-priced securities,” patterns of American investment were shifting. For most of Junius’s career, people with money to invest in the United States had bought real estate, New England textile stocks, and railroad bonds. By the end of the eighties, however, the railroads’ huge demand for capital had declined, and investors were looking to other kinds of enterprises for profitable returns. There was as yet no financial market for “industrial” securities—the term did not come into use until 1889, to describe the stocks and bonds of companies involved in manufacturing, distribution, extraction, and processing.

  There were relatively few industrial concerns worth more than $10 million by 1889, while the ten largest railroads had a net worth of over $100 million each (led by the giant Pennsylvania, at over $200 million). Still, almost as much capital had been invested in industry as in railroads: the 1890 census estimated the fixed and current assets in manufacturing alone—leaving out distribution, extraction, and processing—at $6.5 billion; for railroads, the figure was $10 billion. Most of the industrial firms were privately held, and investors considered them risky. With relatively little demand, “industrial” shares sold at about three times earnings, while reputable railroad stocks sold for seven to ten times earnings. Railroad securities had been trading on organized public exchanges for decades; they brought higher prices because of the greater liquidity and lower risk involved.

  Although spectacularly successful industry leaders such as Standard Oil and Carnegie Steel generated so much income that they never had to turn to capital markets the way railroad builders did, less dominant firms had trouble raising money for expansion in the absence of an industrial securities exchange. Some borrowed short-term from commercial banks, hoping to repay the loans out of profits—which worked when the economy was booming, but not when it turned down. In the capital-intensive electrical industry, among others, trusts had evolved partly in response to this shortage of funds, as managers tried to secure steady supplies of income through consolidation.

  In 1884 the Dow Jones Company, a financial news agency founded two years earlier, began to publish the average closing price of several actively traded stocks considered representative of the broader market. This first average, which appeared in a two-page Customer’s Afternoon Letter, precursor to The Wall Street Journal, was made up of nine railroads, plus Western Union and Pacific Mail Steamship (it had been Pierpont’s purchase of Pacific Mail shares in 1858 that elicited a paternal tirade against speculation). Conservative investors were not ready to venture out of railroads into industrial securities; first, they wanted assurances about quality and safety, as well as the liquidity afforded by public exchanges. At the end of the decade, Morgan would provide warranties and other mechanisms to open up this new investment field, but in the early nineties he remained preoccupied with railroads, and moved into the industrial marketplace with extreme, Junius-like caution.

  He was first drawn in this direction through his connection with the Edison business. By the late eighties, Edison had two hundred central power stations and fifteen hundred isolated plants in operation across the United States. Morgan no longer needed a private generator behind his house in New York: electrical power for 219 came from the circuits of the I
lluminating Company. Edison’s was not the only entry in the electrical-industry sweepstakes, however. Like all the promising enterprises of the Gilded Age, this one stimulated fierce competition.

  Some of Edison’s rivals devised systems of their own, others adapted or copied his ideas. The wizard of Menlo Park spent years in court fighting over who invented what when, and once complained that taking out a patent was simply “an invitation to a lawsuit.” He also maintained that his electrical inventions had brought him no profits—only forty years of litigation. In fact they made him a millionaire several times over, but he never managed to hold on to his gains.

  His low-voltage, direct-current system worked well in densely populated cities, where the high costs of copper conductors could be spread out among hundreds of customers, but it proved prohibitively expensive for long-distance use. When a transformer patented in England in 1883 made it possible for high-voltage, alternating current carried over long-distance lines to be safely “stepped down” for ordinary household use, Edison’s competitors responded. George Westinghouse bought the American rights to the AC transformer, and used alternating current for incandescence, industrial motors, and street trolleys. The Thomson-Houston Electric Company in Lynn, Massachusetts, expanded to produce and sell both kinds of current and a wide range of products—arc lights, motors, trolley systems, generators, and transformers. Run by a brilliant manager named Charles A. Coffin, Thomson-Houston secured financing for this expansion through the Boston bankers Lee, Higginson, & Co.

  Edison dismissed alternating current as inefficient (it lost power in transformation), expensive, and dangerous: he electrocuted stray dogs and cats to demonstrate AC’s lethal power, and coined a verb for the electrical execution of criminals—“to Westinghouse.” Convinced that his lower-cost DC system would prevail on its own merits, he turned his attention to new projects.

  Henry Villard, an early Edison backer, had returned from Germany in the fall of 1886 eager to build an international electrical-industry cartel. He had made a careful study of Germany’s leading electrical firms, the vertically integrated Siemens & Halske and Allgemeine Elektrizitäts Gesellschaft, and advised Edison in the winter of 1888 to consolidate his companies on the German model. The inventor wavered, torn between his desire for autonomy and his need for outside capital. His colleague E. H. Johnson promised that the merger would be good for their interests and bad for the competition: “We shall speedily have the biggest Edison organization in the world with abundant capital when goodbye Westinghouse et al.”

  In May of 1889, with the help of Charles Coster and the backing of the Deutsche Bank, Villard combined the original Edison Electric Light Company and several manufacturing concerns into Edison General Electric, incorporated in New Jersey and capitalized at $12 million. New Jersey had just passed a law that allowed corporations to own controlling interests in the corporations of other states. Drexel, Morgan managed the initial $3.63 million stock offering.§ The Deutsche Bank took the largest share—62.2 percent, or $2,259,000. Morgan’s firm kept $600,000, gave $400,000 to Kuhn, Loeb, and divided the rest among people connected to the Edison business; none of the stock was offered to the general public. Villard, with the blessings of the Deutsche Bank, appointed himself president of Edison General Electric, put Edison’s personal secretary, Samuel Insull, in charge of daily business, and began to centralize operations with headquarters in Schenectady, New York.

  Edison did not have much to do with the new concern. He was preoccupied with his phonograph and an electromagnetic machine that would separate iron from low-grade ore. Thomson-Houston, meanwhile, had continued to expand: it built twice as many central power stations as Edison General, earned twice the profit, dominated the street railway business, and hired the best sales force in the industry.

  At the end of 1890, Villard proposed to end the industry’s “ruinous” competition through price- and output-agreements. Westinghouse flatly turned him down. Coffin at Thomson-Houston made a counterproposal—to consolidate Edison General and Thomson-Houston into a single corporate unit, since building integrated facilities to take advantage of central distribution networks, economies of scale, and strategic, long-range planning required such enormous amounts of money that it was wasteful for similar properties to compete. In this kind of capital-intensive industry, consolidation could eliminate duplication as well as price- and patent-wars; it could also concentrate major product lines in the best-equipped plants, combine sales forces and distribution systems, and secure a steady stream of income for research, development, and expansion.

  Morgan, busy trying to control railroad competition for exactly these reasons—greater efficiency and stability, an end to price wars, adequate profits—did not at first see the advantage of consolidating the electrical firms. When Coffin’s banker Henry Lee Higginson suggested a merger early in 1891, Morgan wrote back: “The Edison system affords us all the use of time and capital that I think desirable to use in one channel. If, as would seem to be the case, you have the control of the Thomson-Houston, we will see which will make the best result. I do not see myself how the two things can be brought together.”

  A year later he had changed his mind—perhaps because Thomson-Houston was winning the marketplace war. Coffin bragged that he was “knocking the stuffing out of them all along the line.” Morgan wrote to Higginson’s associate T. Jefferson Coolidge in March of 1892: “I entirely agree with you that it is desirable to bring about closer management between the two companies.”

  Edison hated the idea of cooperating with his enemies, and began selling his holdings in Edison General Electric as the Boston and New York bankers worked out terms for consolidation. He and Villard expected EGE to take over Thomson-Houston, but the architects of the merger decided on just the opposite plan: Thomson-Houston, clearly the stronger, better-managed company, had earned 50 percent more per share than EGE in 1891. Villard resigned, and later said he disapproved of the whole thing.

  Morgan told Coolidge in March that Villard’s resignation would take effect on April 1, and urged that Coffin “be then elected President of the Edison General Company.” When the new firm was chartered in New York on April 15, 1892, however, with Coffin as president, it was called not Edison General but General Electric.

  Each Edison share was converted into one share in the new company, while three Thomson-Houston shares brought five in GE. The bankers capitalized the consolidation at $50 million: $15 million went to the Edison stockholders, $18 million to Thomson-Houston’s, and $17 million (in stock) into the GE treasury. Drexel, Morgan underwrote the company’s first security offering—$4 million of 5 percent convertible bonds, sold entirely to the stockholders. Morgan and Coster took seats on the GE board, as did Higginson, Coolidge, and Edison. Furious at the removal of his name and the subordination of his interests to those of his rival, Edison attended one board meeting, then gave up in disgust to pursue other interests. Still, he continued to use the services of the Morgan Bank.‖

  The pioneers in the electrical industry had had to turn to financiers for funding, just as capital-intensive railroads did. As a result, bankers played a central role in shaping the financial structure of the business. Morgan had no overarching design for the Edison enterprises, and did not initiate their consolidation: making his way through uncharted territory, he was following what seemed to work. With even less intimate knowledge of this industry than he had of railroads, he relied for information on Coster, and on experts such as Edison, E. H. Johnson, and Charles Coffin.

  As long as individual managers did well, he left them alone. “I always make it a rule,” he told a colleague in the early nineties, “unless something is radically wrong, to follow the wishes of those who are in the management of the properties in which I am interested, and refrain from pushing my views unduly.” When things did go wrong, however—when the stock market was “demoralized,” or the Union Pacific about to go bankrupt, or the Edison companies losing competitive ground—he felt called on to step i
n.

  Finding the right specialist to run a given property was crucial to its long-term success, and fourteen years after Edison invented the lightbulb, it seemed clear that he was not the man to lead the electrical industry into the twentieth century. Coffin was. As president of General Electric, Coffin proceeded to rationalize its constituent companies into a model of integrated modern corporate enterprise. GE stock did not pay dividends during the long depression of the nineties—its bankers organized a syndicate to supply it with cash by buying $4 million worth of company assets, at a price far above the market value, and holding them in trust until the contraction eased. Coffin used the downturn to cut costs, diversify operations, develop new products, and build a pioneering research lab. Earnings rose again at the end of the decade, and GE and Westinghouse shared a global oligopoly with Germany’s leading electrical firms until after World War II.

  All kinds of businesses tried to put together industry-dominating combinations at the end of the nineteenth century—in sugar, flour, leather, glue, cottonseed oil, linseed oil, whiskey, thread, hay, tobacco, meatpacking, lumber, salt, ice, lead, steel—and national anxiety about “monster” trusts obscured the fact that more of them failed than succeeded. A century later, General Electric, the Standard Oil spinoffs, and U.S. Steel (as USX) remain, but National Cordage, U.S. Leather, Laclede Gas, and American Ice have long since disappeared. The process of building efficient, powerful, industry-dominating firms worked well in certain kinds of business and not in others, but the differences are clear only in retrospect.a

  Neither a succession of pro-business Presidents nor the courts did much to enforce the Sherman Act in the 1890s. The federal government lost seven of eight cases against corporations between 1890 and 1893. In 1895 the Attorney General charged that the “Sugar Trust”—H. O. Havemeyer’s American Sugar Refining Company, which had acquired the stock of four Philadelphia refineries—constituted a monopoly of production in restraint of trade. The Supreme Court dismissed the case, called U.S. v. E. C. Knight, ruling that the states, not the federal government, had jurisdiction over production, and that since the sugar industry mergers concerned manufacture, they did not fall under the Sherman law’s strictures against restraint of interstate commerce.