Morgan

by Jean Strouse

  In trying to create a community of interest on the Atlantic, Morgan and his partners failed to take into account not only the national self-interest of foreign states but also the economics of the seasonal, cyclical shipping trade—which one contemporary analyst called about “as shifting and unstable as the sea”—and their timing could not have been worse. The IMM bought its expensive components just as maritime transport headed into a decline that ended only with World War I. Leyland’s managers, probably gauging the excess capacity and foreseeing a downturn, had sold out at the top of the market for $11 million cash. The expansion-minded managers of the other lines, gaining access to the bankers’ deep pockets, leaped at the chance to order new tonnage.

  Having based the combine’s financial structure “largely on conjecture” since they could not get accurate accountings from White Star, the Morgan partners immediately found themselves saddled with huge “unforeseen commitments.” Dawkins complained to Steele early in 1903 that “what threatens to swamp us is this monstrous indebtedness for shipbuilding, and I don’t feel satisfied that we are not putting more big ships into the Atlantic than it can bear.” Pirrie, whose yard got the commissions, had “dilated a great deal on the earning capacity of these new boats,” but Dawkins was inclined to agree with those who had dubbed IMM “the Pirrie Relief-Bill.”

  The drop in shipping revenues that coincided with the organization of the IMM persuaded its backers not to apply for listing on the Stock Exchange. Brokers traded some of the stock off the Exchange, at prices far lower than those factored into the deal: in December 1902 the preferred opened at 55, the common at 15. And the increased earnings Morgan had expected from consolidation never materialized. White Star alone showed a profit in the IMM’s first year of operation; steep losses on all the other lines forced the trust to forgo dividends on both classes of its stock.

  Severe stringency in the U.S. money markets made the situation worse. In 1902 Treasury Secretary Leslie Shaw pumped $57 million into circulation, but his central-bank-style intervention failed to avert a contraction. The end of the year saw heavy liquidation in the stock market as banks called in loans. Morgan remained bullish in public, assuring The New York Times in March 1903 that the lack of confidence was “not justified by the facts” but had to do with a surfeit of “undigested securities.” In private, he arranged with George Baker and James Stillman to set up a $50 million reserve fund in case of a crisis.

  In April the U.S. Circuit Court sitting in St. Paul declared Northern Securities an illegal combination in restraint of trade; the company’s lawyers immediately appealed to the Supreme Court.b Morgan’s assurances did not halt the dumping of stocks, and the market crashed that fall in what came to be known as the “Rich Man’s panic.” Banks and businesses failed; railroads cut back on orders for iron and steel; U.S. Steel common fell to $10 a share (its high for the year had been $39⅞) and stopped paying dividends.

  Roosevelt, coming up for reelection in 1904 and probably eager to burnish his antibusiness reputation, blamed the market unease on “the speculative watering of stocks on a giant scale in which Pierpont Morgan and so many of his kind have indulged during the last few years.” The banker/publisher Henry Clews agreed, citing “revelations of fraud, chicanery, and excessive capitalization,” but pointed out that the bankers’ aggressive mergers had launched the country on “an unprecedented industrial boom.” The Commercial & Financial Chronicle attributed the crash to the recent Northern Securities decision, which threatened “the prosperity of by far the greatest industry in the land.” As usual, no one really knew what caused the panic, and everyone assigned reasons of his own. The contraction hit bottom in August 1904, after which the economy embarked on a new expansion.c

  The IMM syndicate had put up 25 percent of its $50 million cash commitment at the end of April 1902, and the calls continued all year, amounting to 100 percent by July 1903. There was no market for the bonds. Morgan kept extending the syndicate’s life, but when he finally closed the account in July 1906, its members held almost 80 percent of the $50 million in bonds. His firm tried to dull their pain by calling for IMM payments right after disbursals of Steel syndicate earnings, since many subscribers belonged to both groups. To people who thought Morgan operations involved easy profit and no real risk, the IMM—like the failed Steel bond-conversion plan—was vivid evidence to the contrary.

  The Morgan bank had set the IMM syndicate fee at 25,000 shares of preferred and 250,000 shares of common stock, and its own management fee at one fifth of that—5,000 preferred, 50,000 common. In the markets of May 1902, with the stock expected to trade at 85 and 35, the fees were theoretically worth about $11 million; when the stock opened later that year at 55 and 15, the earnings had fallen to $5 million, and no one was buying shares. By the end of 1903, the preferred was quoted at 18, the common at 5. When Morgan closed the syndicate account in 1906, his firm made up a $17,000 deficit.

  J. P. Morgan & Co. had earned nearly $23.3 million in 1902, largely from launching U.S. Steel; that figure remained the record during Pierpont’s lifetime. In the contraction of 1903, the firm posted a loss of over $3.5 million, with the IMM accounting for nearly two thirds ($2.3 million) of the deficit. There is no record of the bank’s IMM losses over the long term. A rough guess would be that, net of fees, it lost under $3 million—not an inconsiderable sum, but not, for Morgan, nearly as damaging as the injury to his reputation.

  George Perkins’s New York Life Insurance Company had taken a $4 million share in the IMM syndicate. At the end of 1903, the investment was worth only about $3 million, and Perkins was not eager to have the decline appear on the company’s books; he also did not want to sell the bonds at a loss. He therefore “sold” $800,000 of New York Life’s IMM bonds to J. P. Morgan & Co. at his purchase price on December 31; a few days later, safely into 1904, he bought them back for the same price. As a result, New York Life’s 1903 annual report showed only $3.2 million in IMM bonds and an $800,000 increase in cash. This sleight of hand was not lost on Charles Evans Hughes, the lawyer for a New York State committee that investigated the insurance business in 1905.

  The IMM never gained control of shipping. It owned 20 percent of the scheduled North Atlantic tonnage, and its German allies owned another 47 percent—about the same share of the market U.S. Steel had. In shipping, however, 67 percent did not restrain price wars or dominate the market. The large investment required to build a fleet of ships created a barrier to entry but not an insuperable one, largely because there were no rights of way or tracks to confer control, and other lines were already servicing the Atlantic trade. The British government twice handicapped the trust—by prohibiting the use of preferential rates on U.S. cargo, and by subsidizing Cunard, which forced the IMM to spend vast sums it was not earning to build competitive ships. And finally, the IMM was set up as a loose holding company that never managed to cut costs by integrating its constituent parts or rationalizing operations.

  Dawkins had been urging such economies for months, and at the end of 1902 he angrily pointed out how little was being done to make the new enterprise work. “Apparently none of us can arrive at being credited with the understanding that the mere fact of the IMMCo. being organized does not provide an inexhaustible source of revenue,” he protested to his New York partners, and struck the note Morgan himself had sounded often before: “If we cannot grasp the urgency of economy it is perhaps easier to understand [that we have a] certain moral responsibility for the success of the business owing to the fact that we are in many ways connected with it.” The managers of the companies were “not disposed to go well in harness,” and someone—clearly Griscom was not doing the job—had to take charge.

  Stepping up his sarcasm, Dawkins went on: “It is comforting to find that there is no need to trouble about the theory of the business, all that is sufficient being to realize that ‘the IMMCo. is a great and good institution.’ Such simple medicine is, however, not good enough for all children, including the unintellige
nt Government here which wants to know, as does [the firm’s solicitor] Mr. Crisp, exactly where things stand.” And he concluded: “I have no doubt we shall be able to fix matters up, but I fear it would be difficult to ask the Government merely to fold its hands and rest content, as I have much pleasure in doing, with an apostolic assurance that the ‘IMMCo. is a great and good institution.’ ”

  Perhaps something more than apostolic assurance could have been applied to the problem if Morgan had been attentively minding the store. By 1902 he was more interested in Raphaels than in balance sheets, and he believed so firmly in the efficacy of combination and the power of abundant capital that he failed to come to terms with recalcitrant facts.

  In June of 1903, Dawkins wrote to Gerald Balfour about the wording of the IMM agreement. Their “New York friends” had taken alarm at its “phraseology” in light of that spring’s Northern Securities decision: “To put it plainly,” said Dawkins, “the blessed word ‘combination’ is what frightens them, as to use the word … in America causes as much disturbance now as the singing of the Marseillaise did under the Third Empire.” Morgan shared this apprehension, but was “quite certain that the Government would never wish to cause him any difficulty by insisting on a mere matter of phraseology if the substance can be as well expressed in another manner.”

  Morgan’s certainty that Washington would not cause him trouble over wording may have come from high sources, but the government in this case was not the problem. By the end of 1903 the international financial world recognized the shipping trust as a disaster. Jack reported to his father from London that the air was “thick with rumors about your retirement,” and early in 1904 Henry Adams wrote, “Pierpont Morgan’s collapse is greatly to be regretted—says Oliver Payne—because he is the last Christian banker in exchanges.” Dawkins told Steele that “if the [IMM] cannot come right … we may as well put up our shutters.” He thought it would come right in the end, but signed himself, “Yours truly & of a desperate courage.”

  Early in 1904 Morgan tried what had worked for other troubled corporations—hiring better management. He asked Albert Ballin, who he surely knew was Jewish, to take over as president of the trust; the Hamburg-Amerika director declined the offer “chiefly on account of my relations with the Kaiser,” while noting that Morgan was finding it “impossible to get the right men to take their places.” Morgan finally replaced the ineffectual Griscom with the difficult White Star chairman J. Bruce Ismay, saying that he “did not mind losing money, but he did object to doing so owing to poor organisation.” Shouldering “moral responsibility” for the floundering combine, he promised Ismay that if the company did not earn enough to pay its fixed charges, he would make up the deficiency for the next three years.

  With Griscom out, Morgan moved the company headquarters from Philadelphia to New York. He did make up the deficits, but neither his subsidy nor Ismay’s presidency saved the IMM.

  Ironically, the existence of the American-dominated trust stimulated foreign competition, and for the next ten years the ships of rival nations—not only Cunard, but the scheduled freight lines and tramp steamers of other countries as well—vied with the IMM for traffic in the North Atlantic lanes. The Wall Street Journal concluded: “The ocean was too big for the old man.”

  The old man refused to believe that the IMM would not “come right.” Three months before he died, he objected to a description of the shipping trust as “ill-fated.” “It’s not ill-fated,” he told his librarian. “They say that because they can’t see beyond their noses or the daily ticker. America’s future is international and the Mercantile Marine is part of that future.… Speaking of the ticker, some day you’ll see this stock at par. Maybe I will too, but you watch.”

  America’s future was international, but the Mercantile Marine never became part of it. The company defaulted on its bonds in 1914, and went into receivership a year later. Saved temporarily by World War I, it eventually sold off its foreign holdings, reorganized as the United States Lines, ceased to exist as an operating company in 1937, and went bankrupt again in 1986.

  * The privately held White Star had no market price in 1901: $32 million amounted to ten times its record 1900 earnings. Ten times earnings was not an unusual price for a transportation company at the turn of the century, but the basis itself (earnings of $3.2 million) was extremely high—almost a third larger than White Star’s average earnings for the previous five years, which included no recessionary time. The Americans had expected to pay $24 million, wisely basing their estimates on average rather than peak earnings.

  † With popular hostility to Wall Street running high, Senate positions on the subsidy divided sharply along East/West lines. Of the four senior conservative Republicans who usually acted as a unit—Nelson Aldrich of Rhode Island, Orville Platt of Connecticut, William Allison of Iowa, and John Spooner of Wisconsin—the easterners voted for the bill, the westerners against.

  ‡ At the end of 1903, the independent auditors Price, Waterhouse, & Co. estimated the actual depreciated value of the constituent companies to be about $65 million, not including Leyland. Thomas Navin and Marian Sears, whose 1954 analysis of the shipping merger remains the best existing account, noted that the $65 million figure also did not include roughly $10 million for “other physical assets and net working capital,” and they concluded that a “conservative valuation” of the properties in the merger as of December 1902 was about $75 million—again, not including Leyland: “This figure should be compared not with $170,000,000 but with $83,700,000, the cost in cash plus the anticipated opening market value of the securities issued in payment. Although higher by 10 per cent than the $75,000,000 valuation, the price paid for the component properties … was not unreasonably out of line with the depreciated cost.”

  A second way to appraise the value of the merger was the method the bankers used—earning power. The companies going into the combination, including Leyland, had earned an average of $6.5 million a year before depreciation for the previous five years. After subtracting for depreciation, the earnings came to about $4 million, a figure the bankers expected to increase through consolidation—they thought net income from new ships alone would amount to roughly $3 million a year. The merger was committed to pay fixed charges of about $3 million a year on its $50 million issue of bonds. Navin and Sears thought that even if the level of earnings did not increase, “interest would be ‘covered’ about twice by earnings before depreciation. Earnings anticipated on the increased tonnage would have covered interest about three times. The Morgan partners must have considered this coverage sufficient, though it was hardly enough for a high-grade bond.”

  § Mary was Chamberlain’s third wife. His six children included a future Prime Minister, Neville, and a future Foreign Secretary, Austen; both his previous wives had died in childbirth. Mary’s father, William Crowninshield Endicott, had been a justice of the Massachusetts Supreme Court and Secretary of War in the first Cleveland administration; her mother, Ellen, was a cousin of Junius’s former partner, S. Endicott Peabody. When the Endicotts visited London in the early 1880s, they called on the Morgans at Dover House and Princes Gate.

  ‖ The traumatic birth that had damaged his arm had probably also deprived his brain of oxygen for several crucial minutes, which medical experts suggest may have caused his “hyperactivity and emotional lability.”

  a The agreement stipulated that British ships in the combine would continue to sail under British flags and carry British crews; that half of all new IMM tonnage would be built in Britain by Pirrie’s Harland & Wolff; that no British ships, including new ones built by the combine, would be transferred to foreign registry without the consent of the president of the Board of Trade; and that the Admiralty could draft IMM ships on thirty hours’ notice. The Americans agreed not to grant preferential rates to the U.S. rail freight carried on IMM ships. In exchange for all this, the government agreed to give the British lines in the combine the same mail and freight privileges it granted
to other British carriers.

  b In September the judge in the Minnesota lawsuit held that the company violated no state laws. That decision, too, was appealed to the Supreme Court.

  c In early October 1903, two months after he denounced Morgan’s speculative stock-watering, Roosevelt sent a note to “My dear Mr. Morgan,” asking him to stop in at the White House when he next came to Washington, as “I should very much like to see you to talk over certain financial matters.” Morgan replied from New York that “I should like extremely to have an interview with you,” but in “the serious condition of affairs in this City”—the crash and its immediate consequences—“it is absolutely impossible for me to leave.” Roosevelt said there was no hurry—“I wished to speak to you about certain matters of financial legislation,” but it could wait.

  PART IV

  PATRON

  [Morgan’s] urge for collecting came naturally to him and had nothing to do with a concern to improve his social standing, as was the case with Frick, since Morgan already belonged to the elite. He was really interested in all kinds of art … especially those not readily accessible to the general public, such as early manuscripts, medieval jewelry, enamels, Chinese porcelains, etc. Paintings, usually the most obvious field for a collector, interested him least, although in his library he was surrounded by masterpieces of the early Renaissance.

  Reminiscences of William R. Valentiner