by David M. Kennedy
THE HOUSE OF MORGAN: An American Banking Dynasty and the Rise of Modern Finance
Atlantic Monthly Press, $29.95.
THERE WERE TWO J. P. Morgans. Literally. Though obscurely conflated in popular memory into what Ron Chernow calls a single “composite beast,”one was a man of the nineteenth century, the other largely a man of the twentieth. John Pierpont Morgan, Sr., was born in 1837 and died in 1913. His son, John Pierpont Morgan, Jr., lived from 1867 to 1943. Their enduring achievement was the fabled House of Morgan. It sprang from a merchant-banking partnership between the first J. P.’s father, Junius Spencer Morgan, and George Peabody, in London in 1854. Over the next century Junius and the two J. P. Morgans erected on that foundation a financial empire that included the banking and investment firms of Morgan Grenfell, in London; Morgan et Compagnie, in Paris; Drexel, Morgan, in Philadelphia; and Morgan Guaranty Trust and Morgan Stanley, in New York.
There have also been two images of the House of Morgan figuratively inscribed in the history books. The first is the familiar financial Gorgon of populist mythology. Matthew Josephson did much to popularize this portrait with The Robber Barons, which found a receptive audience among Depressionplagued Americans when it was published, in 1934. Josephson described the Morgans, and indeed all investment bankers, as men with “glittering eyes of greed" who ran with the “swine, jackals, and wolves,”and he borrowed from Balzac to depict them as “lynx-natured, thin-lipped, keeneyed, hard-favored.” Josephson rendered the elder J. P. Morgan as an “ugly, lowering figure" of “tremendous arrogance and cynicism,”a “crafty . . . pugnacious” man who was “‘imperiously proud,’ rude, and lonely, intensely undemocratic,” and who petulantly flung food at his delinquent servants. Even his philanthropic benefactions Josephson considered “barbaric extravagance.” Lewis Corey, another Depression-era writer, painted the senior J. P. Morgan as a “truculent and domineering character, animated by an overwhelming urge to power,” “the uncrowned American money king,” “arrogant, arbitrary, massive.” This unlovely image of the Morgans and all they represented is by now a commonplace; it has entered into the vernacular of American political culture.
A second and vividly contrasting image of the Morgans and their house emerges from the pages of Ron Chernow’s book. His Morgans are not the taloned vultures of predatory capitalism but the cooing doves of industrial peace and the unblinking owls of far-visioned statecraft. They are not heartless bankers but literary aesthetes, closet romantics, even voluptuaries. Josephson’s J. P. Morgan, Sr., ruthlessly trampled his hapless foes; Chernow’s J. P. Morgan, Jr., tenderly reads Dickens’s Christmas Carol to his children (from Dickens’s original manuscript). Here is a capitalist with a human face.
Chernow’s tone is always sympathetic and at times almost reverential. “Much of our story,” he writes,
revolves around this chiseled marble building [at 23 Wall Street] and the presidents and prime ministers, moguls and millionaires who marched up its steps. With the records now available, we can follow them inside the world’s most secretive bank.
Thus parting the veil on the sanctum sanctorum of finance capitalism, Chernow takes the reader on a 700-page junket from Charles Dickens’s London to Tom Wolfe’s New York, with extended side trips to Germany, France, Italy, Japan, Mexico, and Brazil. He displays not only a clutch of Morgans but also a full wallet of other imposing personalities. They include Dwight Morrow, who was “Morgan’s philosopher-king,” the father-in-law of Charles Lindbergh, and an ambassador to Mexico; Thomas Lamont, “the Morgan empire’s secretary of state,” hobnobbing with Mussolini and Herbert Hoover and Walter Lippmann; the silky and cerebral Russell C. Leffingwell, perhaps the brainiest of all the Morgan partners and, whether incidentally or not, one of the few Democrats to dwell in the House of Morgan.
Having an imperial-scale subject, Chernow has written an imperial-sized book, a tome of paperweight heft and full-vacation’s-reading length. Yet it is never dull. Chernow, a seasoned financial reporter and a former economic researcher at the Twentieth Century Fund, is a gifted guide on this fascinating historical journey. He deftly mixes biography with economics and explicates arcane matters of high finance with sparkling clarity.
Chernow does not ignore the controversies that have haunted the House of Morgan, from Arsène Pujo’s investigation of the “Money Trust” in 1912— 1913 to Ferdinand Pecora’s revelations of Wall Street malfeasance in 1933 — 1934, to the years-long trial of Morgan Stanley before Judge Harold Medina in the 1950s. But, at least until the gogo 1970s and 1980s, his Morgans and their minions consistently appear as the avuncular pacifiers of raw, adolescent capitalism, lonely and selfless patrician seers who struggle to calm the heaving seas of modern history. Indeed, Chernow often seems so impressed with the centrality of his subject that the reader may wonder whether he considers the history of the modern world as context for or footnote to the Morgan saga.
TO BE SURE, the Morgans stood at or near the center of a lot of history. In the nineteenth century, when governments lacked the sophisticated tax machinery necessary to finance costly wars, the great banking houses functioned as de facto treasuries or central banks, organizing gigantic bond issues whose success or failure could make or break states. Junius Morgan ascended into the select company of the City of London’s premier financial powers when he syndicated a $50 million loan to France to wage the FrancoPrussian War, in 1870. A quarter century later J. P. Morgan, Sr., rescued the Cleveland Administration from bankruptcy by organizing a $62 million bond issue, half of it to be taken in Europe, that kept the United States on the gold standard. This notorious deal evoked outraged condemnation from Populists, who considered the national government beholden to the bankers, and the bankers, in turn, beholden to alien, aristocratic Europe. There was, in fact, much truth in both those accusations. The scanty government over which Grover Cleveland presided was sadly inadequate to cope with a big financial crisis on its own. And Morgan’s rescue of the gold standard in 1895 underlined the disagreeable fact, Chernow writes, “that America was still financially dependent on Europe.” Nearly two decades earlier Junius Spencer Morgan had been lauded at a testimonial dinner at Delmonico’s in New York for “upholding unsullied the honor of America in the tabernacle of the Old World.” This was the voice not only of cultural deference but of cold pecuniary calculus.
Within a few years of Morgan’s gold rescue—certainly by the end of the First World War—the center of global financial power had migrated from London to New York. Holding positions at both ends of the trans-Atlantic axis, the House of Morgan profited first as the conduit for European investment in America and then as the organizer of U.S. investment in Europe. But though the Morgans had helped to bring this shift about, it did not make them any more popular on Main Street. As advocates of internationalism, opposed to high protective tariffs and in favor of canceling Allied war debts to the U.S. Treasury, they collided head-on with the tightfisted, provincial isolationism of America in the 1920s.
The Morgans also aroused popular wrath for the practice of “Morganizing” American businesses, especially railroads, in the Depression of the 1890s. Overbuilding and the ruinous rate wars that ensued—so-called cutthroat competition — bankrupted countless companies and jeopardized investors’ money. Morgan’s remedies for this destructive chaos varied in their technical details—mergers, voting trusts, and holding companies were frequently employed devices — but had always the common objective of dampening competition and making the business environment more stable and predictable.
Morganization was most spectacularly applied to the steel industry in 1901. The House of Morgan patched together America’s first billion-dollar corporation, United States Steel, out of several steelmaking companies that were threatening to encroach on one another’s markets. The new corporation, with Morgan partners strategically seated on its board of directors, would see to it that they did not.
The formation of U.S. Steel was criticized then and later as owing less to the logic of economic efficiency than to “promoters’ profits”—the fat commissions (some $57 million) that the Morgan syndicate received for underwriting the issue of U.S. Steel stock. Chernow disagrees. In that age of scarce investment capital, he argues, the losses that attended unbridled competition did not merely punish investors but also exacted heavy social costs. By cutting the wasteful costs of competition, Morganization amounted to “a form of national industrial policy"—another social function, like central banking, that Morgan and his colleagues graciously performed “before economic management was established as a government responsibility.”
AS THE TWENTIETH Century opened, some politicians—notably Theodore Roosevelt—were beginning to consider “industrial policy” a government prerogative, not a private one. Roosevelt and Morgan clashed, most conspicuously in the Northern Securities case, when TR brought a successful antitrust suit against the recently Morganized Northern Pacific Railroad. When Roosevelt some years later departed for an African safari, allegedly Morgan growled that he hoped some lion would do its duty.
Chernow makes clear, however, that Roosevelt and Morgan were “secret blood brothers.” They both scorned the pell-mell, profligate individualism of the nineteenth-century economy and sought the key to orderly, riskless growth by big, efficiently integrated enterprises. The truly mortal enemy of the Morgans was not Theodore Roosevelt but Louis Brandeis. Chernow rightly calls him “the most cunning and resourceful foe the House of Morgan would ever face.” Brandeis was no rustic Populist, sputtering with resentment at plutocratic opulence. He was a shrewd and worldly lawyer who was to serve for more than two decades on the Supreme Court. For him, the issue was not wealth but power. “Vast fortunes like those of the Astors are no doubt regrettable,” Brandeis wrote in his celebrated tract of 1914, Other Peoples Money and How the Bankers Use It.
But the wealth of the Astors does not endanger political or industrial liberty. . . . The Astor wealth is static. The wealth of the Morgan associates is dynamic. . . .
Though properly but middle-men, these bankers bestride as masters America’s business world. . . . The key to their power is Combination—concentration intensive and comprehensive.
Unlike TR, Brandeis decried the “curse of bigness.”
Brandeis especially objected to the web of interlocking directorates that Morganization had created. “He argued,”Chernow writes,
for an arms-length distance between bankers and companies. For Brandeis, bankers who sat on corporate boards were in a conflict-of-interest situation. Far from being neutral confidants of companies, they were tempted to load up clients with unneeded bonds or charge them inflated commissions. . . . The Brandeis critique was predicated not on government regulation of monopolies but on breaking them up and reverting to a small-scale competitive economy. Over time, this view would prove far more threatening to the House of Morgan than the trustbusting of Teddy Roosevelt and other supporters of large-scale industry.
“For the House of Morgan,” Chernow writes, “Louis Brandeis was more than just a critic; he was an adversary of almost mythical proportions.” He was also a Jew. Through the fabric of Chernow’s account the theme of antiSemitism runs like a scarlet thread. It helps explain the division of labor between the self-consciously WASPish investment firms like Morgan’s, which dealt in blue-chip government and railroad securities, and those like Goldman, Sachs and Kuhn, Loeb, which had to content themselves with underwriting shares for lowly textile manufacturers and retailers. Anti-Semitism probably contributed to Morgan’s refusal in 1930 to rescue rhe failing Bank of the United States—described by Russell C. Leffingwell as a bank with “a large clientele among our Jewish population of small merchants, and persons of small means and small education, from whom all its management was drawn.” Morgan Grenfell in the 1970s adopted a policy of not hiring Jews, so as to avoid irritating its petrorich Arab clients.
When Congress passed the landmark Glass-Steagall Act of 1933, a law that would shatter the historic House of Morgan, Leffingwell saw Brandeis’s perfidious hand at work. “The Jews do not forget,” he advised Thomas Lamont,
“I have little doubt that [Brandeis] inspired it, or even drafted it. . . . I think you underestimate the forces we are antagonizing. . . . I believe that we are confronted with the profound politico-economic philosophy, matured in the wood for twenty years, of the finest brain and the most powerful personality in the Democratic party, who happens to be a Justice of the Supreme Court.
In the last analysis it was not Brandeis’s religion but his “politico-economic philosophy” that menaced the House of Morgan. The Glass-Steagall Act enshrined in law the fundamentally Brandeisian precept that commercial banking and investment banking should be utterly separate from each other. Separation was meant to ensure that deposit banks would not be tempted to invest in the dubious offerings of their securities affiliates, and that investment banks, no longer able to draw on their own demand and time deposits for funds, would have to scrutinize new securities issues more carefully, and hustle in the marketplace for the monies with which to underwrite them.
J. P. Morgan and Company, the heart of the intercontinental House of Morgan, had embraced both deposit banking and investment banking until the passage of the Glass-Steagall Act. Now, like other such firms, it had to choose which branch of the business it would retain. Unlike most other firms, it chose commercial banking, and spun off an independent investment bank called Morgan Stanley.
Here Chernow’s book, like the financial world it chronicles, loses majesty even as it picks up speed. He dutifully records the merger of J. P. Morgan with Guaranty Trust in 1959, and the dizzying financial pirouettes of Morgan Stanley in the 1970s and 1980s. But there are few heroes here to match the titans who pace his early pages. The old J. P. Morgan and Company had resided in sovereign calm at The Corner, that stately edifice at 23 Wall Street furnished with leather armchairs and rolltop desks. There discreetly attired partners moiled in dignity amid the serene ambience of a British gentlemen’s club. In 1973 Morgan Stanley moved to the Exxon Building in the raucous agora of midtown Manhattan; the head of its mergers-and-acquisitions department sported suspenders decorated with dollar bills.
This was a world utterly different from that of the pre-New Deal era, before Glass-Steagall. Yet, as Chernow perceptively argues, its newness owed less to the specific reform policies of the New Deal than to the evolving nature of the international political system in general, and especially of the financial marketplace itself. In an earlier time governments had been weak and capital had been scarce. Now both national governments and new quasigovernmental transnational bodies like the International Monetary Fund and the World Bank performed many of the functions, such as guaranteeing the liquidity of the banking system and stabilizing exchange rates, that had once been undertaken by private bankers.
BUT THE “REAL threat to the House of Morgan,” Chernow writes, “would come, not from Washington, but from new financial powers beyond the control of the old eastern elite.” The world’s money markets by the 1970s were awash with capital and with new forms of financial instruments and arrangements virtually unimagined a generation earlier. Corporations, cash-rich, confident, and colossal, severed their traditional relationships with banks and plunged directly into the money markets on their own. “Our principal competition is our clients,” a Morgan partner noted in 1978, in a statement that would have floored the first J. P. Morgan, who regarded his clients as supplicants or wards. The old-fashioned deposit-andloan style of banking in which J. P. Morgan and Company had chosen to remain, in the wake of Glass-Steagall, appeared to be almost a dying business. “Liability management,”with its frenetic daily trading in certificates of deposit, federal funds, T-bills, and Eurodollars, began to displace deposits as the principal source of funds with which to finance banking operations. And in the realm of investment banking even greater changes—and dangers— appeared.
In what Chernow calls the “Baronial Age,” which he dates from the mid1800s until the First World War, vigilant bankers behaved with a fitting parsimony. They conserved the scarce resource of capital by allotting it frugally and personally guarding its subsequent employment. In the succeeding “Diplomatic Age,” which Chernow dates from 1913 to 1948, the men of Morgan tried, often in vain, to expand those practices to the international arena.
The modern period Chernow aptly dubs the “Casino Age,”and he accuses the investment bankers of being its most reckless plungers. The distinguishing mark of the Casino Age is an abundance of capital and the consequent relaxation of discipline concerning its dispensation. In the Casino Age, he writes, “far from standing guard over scarce resources, bankers would evolve into glad-handing salesmen, almost pushing the bountiful stuff on customers.” Apparently—and somewhat mystifyingly, in what remains a genuinely needful world—Investment bankers have deemed it most appropriate to push the stuff on customers who wish to buy other customers, especially ones with “clean balance sheets, little debt, and lots of cash.” By the mid-1980s Morgan Stanley was annually involved in more than $50 billion worth of mergers and acquisitions. No longer content to be a mere agent for these behemoth transactions, it began to take equity positions itself in the mergers and buy-outs it sponsored—a practice known as “merchant banking.” In a crowning irony, Morgan Stanley made a public offering of its own stock in 1986 to raise more money for these ventures; “it went public,” Chernow says, “so it could take other companies private.”
In January of this year one merchant-banking transaction went spectacularly sour—the $400 million in “bridge loans” that First Boston and other investment banks advanced to the Campeau Corporation to buy Federated Department Stores. Freighted with this enormous debt, Campeau was driven to bankruptcy. The Campeau disaster confirms what Chernow perhaps too modestly calls the “underiying fragility” of the modern financial world, and marks the distance that bankers have traveled from the baronial serenity and measured prudence of the Morgans’ heyday. By the late 1980s nonfinancial corporate debt stood near the $2 trillion mark, and some companies were compelled to pay out half of all earnings on debt service. This was a dangerous place for businessmen to be, and the bankers had helped them get there. In “the faithless, rootless world of modern finance,” Chernow ominously concludes, “it was hard to see how corporate America could weather a severe recession without unspeakable destruction.”