by Jean Strouse
This kind of private negotiation was roughly what Perkins and Bacon had proposed to TR in October of 1901, and the Morgan associates found it infinitely preferable to protracted legal and political battles. Gary regarded federal supervision as “a strong safeguard … to the prevention of violent attacks on private rights in general that might otherwise come,” and, sounding not unlike his banker, reported that U.S. Steel “had been absolutely satisfied with the treatment it had received from the Bureau.” Perkins proudly told Morgan when the Justice Department brought suit against Standard Oil in 1906 that he and Gary had “anticipated a great many questions and situations that might have been unpleasant and that the [Steel] Corporation is looked upon in Washington with more favor than perhaps any other concern. There has been a great deal of a favorable nature in the papers during the last two or three weeks, comparing us with the Standard Oil and its companies.”
Early in 1907, on learning that the Bureau of Corporations was turning to International Harvester next, Perkins and Cyrus McCormick held a two-day conference with its commissioners at Judge Gary’s Waldorf suite in New York, to work out another nonaggression pact. Roosevelt asked Perkins in the course of this investigation whether Harvester would be “satisfied with whatever the [bureau’s] findings were[.]” Perkins said he expected the officers would “frankly come to us and point out any mistakes or technical violations of the law; then give us a chance to correct them, if we could or would, and that if we did, then we would expect the Attorney General not to bring proceedings.” As the bureau concluded its work, Deputy Commissioner Herbert Knox Smith told Roosevelt that he had found no “moral ground” for a Harvester prosecution, and warned that it would be politically foolish to attack the Morgan interests over a case in which no “substantial” wrong had been found—it would only make enemies of strong men who “up to this time have supported the advanced policy of the administration.”
When these agreements between the administration and the house of Morgan came to light, they provoked outrage reminiscent of the response to the Cleveland gold deal. Critics charged that the bankers and industrialists had used privileged information to avoid prosecution, and that the White House, ostensibly trying to eliminate corporate corruption and impose government regulation on the trusts, had given virtual carte blanche to giant monopolies affiliated with the reigning lord of Wall Street. The businessmen seemed at least consistent in their pursuit of self-interest. The President looked two-faced.
Roosevelt was in fact transforming the executive branch of government from a weak adjunct of Congress into a powerful force in national and international affairs. Working with men he trusted on Wall Street, he had begun, clumsily, to define a relationship between strong government and big business—to check egregious abuses of corporate power while preserving what he regarded as industrial progress, confident that he could discipline the “captains of industry” and protect the American public from rapacious trusts. To the cumbersome machinery of punitive lawsuits, he preferred prior government approval of “rational” corporate policy—as did the Morgan bank.
George Perkins was turning out to be a decidedly mixed blessing for the Morgan bank. While his political skills had helped secure useful agreements in Washington, his arrogant manner and divided professional loyalites—to which Morgan had objected from the outset—alienated many of his partners. Bob Bacon had agreed to head a Morgan-Baring New York office only if Perkins went back to New York Life. The problem of the dual affiliation assumed public proportions when a wealthy Boston stockbroker and speculator named Thomas W. Lawson published a series of articles in Everybody’s Magazine on the connections between Wall Street and the insurance industry. Lawson reported that the three big life insurance companies, called the “racers”—the Equitable, Mutual, and New York Life—had systematically bribed politicians and regulators, used “captive” trust companies to conduct illegal financial operations, and put policyholders’ money into risky ventures. The specter of Wall Street “money kings” gambling with the savings of widows and orphans, plus a bitter public fight over ownership of the Equitable, prompted the New York State legislature to investigate the insurance industry.
Traditionally, life insurance companies had put most of their portfolios into government bonds, but the yields on those securities had declined in the deflation of the nineties, and insurers had begun seeking higher returns for their enormous surplus capital just as investment bankers needed steady sources of domestic cash for industrial underwritings. As a result, the racers had supplied the great turn-of-the-century merger movement with cash. They each had $1 billion of insurance in force by 1899, and their total annual premium income came to more than 75 percent of the gross income of America’s nationally chartered banks.
When the Equitable’s founder, Henry Hyde, died in 1899, he left 51 percent of its stock in trust to his twenty-three-year-old son, James, a Harvard-educated Francophile who wore silk shirts, bow ties, yellow gloves, and violets in his buttonhole. (It was James Hazen Hyde who wrote the 1920 memo about Morgan’s making sure Bessie Marbury never got the Legion of Honor.) Uninterested in the technicalities of the insurance business, he had a shrewd eye for new investment opportunities, and put much of the society’s surplus capital into corporate securities, largely through Kuhn, Loeb. The Equitable had lent millions to Harriman and Schiff in their attempt to take over Northern Pacific in 1901, while New York Life furnished millions to Morgan.
James Hyde stood to assume majority control of the society in 1906. The Equitable’s conservative president, James W. Alexander, profited from Hyde’s policies but insisted that life insurance was a “sacred trust,” not “a monster money-making scheme,” and feared that Hyde would sell out once he turned thirty and inherited his shares. Potential buyers, alert to this internal power struggle, began circling overhead.
On January 31, 1905, Hyde gave a costume ball at Sherry’s restaurant. Oblivious to the public’s increasing distaste for the excesses of the rich, he hired Whitney Warren to turn Sherry’s grand ballroom into the Hall of Mirrors at Versailles, engaged the Metropolitan Opera orchestra and the French actress Gabrielle Réjane for entertainment, invited prominent friends from all over the world, and set up a special gallery for photographers and the press. Elsie de Wolfe came as a dancer from the court of Louis XV. When the press reported that the “orgy” had cost the Equitable $200,000 and that Hyde was having an affair with Mme. Réjane—neither of which was true—the battle for control of the company turned into front-page news.
Both Hyde and Alexander lost the confidence of the board, and in February the directors appointed a panel of lawyers headed by Elihu Root to mutualize the company, which would vest control in its policyholders. Root was preparing to argue the Morgan/Hill case against Harriman before the Supreme Court—defending the pro rata plan for the liquidation of Northern Securities—but decided that the insurance crisis required immediate attention, since a collapse of confidence in companies that had millions invested in the industrial economy could bring on a general panic. He asked the Court to delay its hearing of Northern Securities arguments, and the judges granted his request.
Root scotched the mutualization plan. Over the next few weeks a committee of Equitable board members found the company’s management guilty of “moral obliqueness” and financial misconduct. Those who wanted to buy the Equitable included E. H. Harriman, William Rockefeller, and George Gould, but Root arranged for one of his own clients, the financier and street-rail magnate Thomas Fortune Ryan, to acquire Hyde’s majority holdings—on condition that control of the society be turned over to a voting trust. New York State law required the Equitable to maintain the stock price and dividend rate set at its founding in 1859. As a result, in 1905, 51 percent of the shares in a company with over $400 million in assets—a combination of cash in hand, premium income, investments, and real estate—had a par value of $51,000, and paid a 7 percent dividend of $3,570. Mutual Life had reportedly offered to buy out Hyde in the earl
y 1900s for $10 million. Ryan paid him $2.5 million in 1905, which was a large premium over the par value of the stock but significantly less than the company’s apparent market value.‡
Ryan’s claim years later that he had bought the company in order to protect America’s financial stability did not find many subscribers. Wall Street suspected that Morgan had engineered the sale—he was abroad between March and July of 1905, but Root could easily have consulted him by cable. The banker surely shared Root’s fear that a major insurance-industry struggle could precipitate a panic; he would not have wanted Harriman to control the $400 million life insurance company; and he might well have insisted on a voting trust to keep Ryan from playing fast and loose with the Equitable assets. Harriman, once again snookered out of a deal, was enraged: “He shook the tree for months and months,” wrote the new chairman of the Equitable board, Navy Secretary Paul Morton, “and Ryan walked off with the plums.”
Secretary of State John Hay died in July of 1905, and Elihu Root accepted Roosevelt’s invitation to return to Washington as head of the State Department, with Bob Bacon as his assistant. The new Equitable board fired James Alexander at the end the year. James Hazen Hyde, not yet thirty, retired from business and moved to France. Elsie de Wolfe declared his infamous ball one of the last great parties of the Gay Nineties.
In the fall of 1905 an investigative committee headed by New York State senator William W. Armstrong and his chief counsel, a red-bearded reformer named Charles Evans Hughes, began to take evidence about the insurance scandals. The appearance before the committee of George Perkins (dubbed “Gabby George” by Finley Peter Dunne) riveted attention on the house of Morgan. Examining transactions in which Perkins had acted as both buyer and seller of securities—purchasing the bonds of railroads, U.S. Steel, and the IMM for New York Life from the Morgan bank—Armstrong asked him, “When, in your judgment, are you acting for the New York Life?”
Perkins: “All the time.”
Armstrong: “When are you acting for J. P. Morgan & Company?”
Perkins: “It depends on what the actual case is.”
Pressed on this point, he protested: “Mr. Chairman … I know when a transaction comes to me, whether it is in J. P. Morgan & Company, or the New York Life or the Steel Corporation, or whatever it may be, I take up that question and dispose of it as I see my duty.”
The public did not share Perkins’s confidence in his sterling sense of duty, especially after Hughes brought out the details of his “parking” $800,000 of IMM bonds with J. P. Morgan & Co. on December 31, 1903, and buying them back a few days later in order to hide the extent of New York Life’s loss for its annual report. The Chicago Tribune ran a cartoon of Perkins milking a cow labeled “New York Life” for Morgan while policyholders fed money into the animal’s mouth. Pulitzer’s World pictured a bloated, top-hatted Morgan as Dickens’s Bill Sykes, with a rolled-up paper labeled “Ship Building Trust” in his pocket, hoisting tiny “Oliver” Perkins through the window of New York Life to steal “policy holders dough.”
Hughes documented collusion between insurers, legislators, and banks, and offered specific recommendations for reform. Among the regulatory measures passed by the New York State legislature in April 1906 were laws barring life insurance companies from underwriting securities issues and from investing in corporate stock and bonds. As a result, investment bankers changed the structure of their financings after 1906. Morgan made larger allotments to other syndicate partners, but the reduced demand for securities following the “Armstrong laws” contributed to a general market decline. The investigation’s disclosures heightened public awareness of financial corruption and stepped up the demand for change: in the fall of 1906 Charles Evans Hughes, the Armstrong Committee’s highly effective counsel, was elected governor of New York with a mandate for economic reform.
A month after Gabby George testified about banking and insurance in 1905, Morgan sent him on a special mission to Russia. Officials in the government of Czar Nicholas II had been trying for years to enlist Morgan’s help in opening U.S. markets to Russian bonds. The director of the International Bank of Commerce in St. Petersburg had sent the U.S. financier an extravagant plea in 1898, calling him “the King of America” and insisting that no one else could “so successfully take in hand the Russian flag.” Russia’s Finance Minister, Sergei Witte, also tried to engage the American “King” on almost any terms, but Morgan had repeatedly declined: in the late nineties he did not think U.S. markets would take up the bonds of this unstable economy, and there was no one he trusted to look out for his interests halfway around the world. Still, he stayed in touch with Russia’s leading financiers.
George Perkins had been less cautious. Before joining the Morgan bank he had arranged for New York Life to set up branch offices in Russia, invested some of his company’s profits in Russian railroads, and handled the first large sale of Russian securities in the United States. Between 1885 and 1914 New York Life was the most successful American commercial venture in imperial Russia.
Although Russia’s internal turbulence and war with Japan in 1904–5 seemed to justify Morgan’s prudence, he began at this unlikely moment to change his mind. Political unrest under fiercely repressive local and national regimes had been building in Russia for years. When two hundred thousand St. Petersburg factory workers carrying religious icons and singing “God save the Czar” gathered in front of the Winter Palace with a petition for fair wages, reasonable hours, universal suffrage, and a democratically elected government one Sunday in January 1905, the Czar’s ministers called out troops who shot into the crowd, killing hundreds of people. “Bloody Sunday” led to strikes, assassinations, riots, attacks on property and the gentry, calls for armed insurrection, the formation of councils, or “soviets,” of workers in Moscow and St. Petersburg, and struggles over the leadership of all this revolutionary activity.
The war that broke out in 1904 between Russia and Japan was partly a czarist effort to shift popular attention abroad, and partly a Great Power conflict over spheres of influence in the Far East. France financed the Russian imperialists who wanted to secure control of Manchuria and protect their East Asian border, especially Korea and the remote Pacific port at Vladivostok (where Richard Greener was serving as American consul), from aggressive, newly westernized Japan. England had a military alliance with Japan, which saw Korea as essential to its national security, and also wanted to control raw materials and markets on the Asian mainland, deploy its modernized armed forces, and gain recognition from the West. The Barings quietly underwrote £35 million in Japanese war loans, but kept their name off the issues, since they had also been lending to Russia. They found an enthusiastic American partner in Jacob Schiff, who opposed Russia’s anti-Semitic pogroms and was urging the world’s influential Jewish bankers not to finance the Czar. J. P. Morgan & Co. took a $500,000 share in Kuhn, Loeb’s first $50 million Japanese loan.
The Warburgs and Rothschilds participated in this underwriting as well, but most of the world thought Japan was being financed by the United States. Barings concealed their role so well that Morgan knew nothing about it. In July 1905 he told Revelstoke that his own house could have handled the Japanese loan as well as Kuhn, Loeb, and guessed that it had come to Schiff through the British financier Sir Ernest Cassel. Revelstoke said nothing. One of his partners reflected: “It is curious that the Old Man should not be better posted.”
Like Barings, Morgan did business with both sides in this war. In March of 1905, after the Japanese won the largest land battle ever fought at the time, at Mukden, he sent a representative to Russia proposing to build battleships with money raised by an American bond syndicate, perhaps to generate business for the IMM’s Harland & Wolff. Two months later, in the “greatest sea battle since Trafalgar,” Japan destroyed an entire Russian squadron at Tsushima Strait, and with it all Russian hope of winning the war.
In July 1905, a few days after Roosevelt urged Morgan not to sell the Canton-Hankow Railroad b
ack to China, he hosted a peace conference between Russia and Japan in Portsmouth, New Hampshire. The President sympathized with Japan, but wanted to prevent a wider war and maintain a strategic balance of power in the region to safeguard U.S. commercial interests.§ The Czar’s chief negotiator at the Portsmouth Conference—which produced a peace treaty and won Roosevelt a Nobel Prize—was his former Finance Minister, Sergei Witte. As soon as the conference ended, Witte went to see Morgan in New York.
The banker took his guest up the Hudson on Corsair to West Point. Having lunched with Roosevelt at Oyster Bay and found the fare “almost indigestible,” Witte said he got the only decent meals of his entire American trip on Morgan’s yacht. He had come to ask for help in liquidating Russia’s war debt, but first he ventured to bring up a delicate personal subject—his host’s nose. Witte himself was no beauty: Robert Massie has described him as “a huge, burly man with massive shoulders, great height and a head the size of a pumpkin.”
Seizing a moment with Morgan alone, Witte said (he later recalled) that he had been treated for a skin disease by a celebrated Berlin professor named Lassar. He had seen patients in the doctor’s office with “morbid nose formations such as yours,” the Russian minister told the American banker: Dr. Lassar surgically removed the growths and restored his patients’ noses to normal.
Morgan said he knew all about the professor and his operations, but could not possibly undergo such an operation—if he did, he could never return to the United States.
Why not? Witte asked.
Because, replied Morgan, “if I come to New York with my nose cured, every street boy will point at me and split his sides laughing. Everybody knows my nose and it would be impossible for me to appear on the streets of New York without it.”
