The House of Morgan

by Ron Chernow

  The next day, call money soared again to extortionate rates. Eight banks and trust companies had already failed during the week. Pierpont went to the New York Clearing House, the banker’s trade group for clearing checks, and got it to issue scrip as a temporary emergency currency to relieve the serious cash shortage. Herbert L. Satterlee has left a wonderful vignette of his father-in-law returning to 23 Wall. It shows why contemporaries saw Morgan as the incarnation of pure will:

  Anyone who saw Mr. Morgan going from the Clearing House back to his office that day will never forget the picture. With his coat unbuttoned and flying open, a piece of white paper clutched tightly in his right hand, he walked fast down Nassau Street. His flat-topped black derby hat was set firmly down on his head. Between his teeth he held the paper cigar holder in which was one of his long cigars, half smoked. His eyes were fixed straight ahead. He swung his arms as he walked and took no notice of anyone. He did not seem to see the throngs in the street, so intent was his mind on the thing that he was doing. Everyone knew him, and people made way for him, except some who were equally intent on their own affairs; and these he brushed aside. The thing that made his progress different from that of all the other people on the street was that he did not dodge, or walk in and out, or halt or slacken his pace. He simply barged along, as if he had been the only man going down Nassau Street hill past the Subtreasury. He was the embodiment of power and purpose.11

  That Friday night, Pierpont called in city religious leaders and asked them to preach calm in their Sunday sermons. Archbishop Farley held a special Sunday mass for businessmen. Grappling with a bad cold that had dogged him for days, Pierpont went up to Cragston for the weekend. On Monday, October 28, New York City mayor George B. McClellan came to the Morgan Library with another serious brush fire to extinguish. Alarmed by events on Wall Street, European investors were withdrawing money from America, and the city couldn’t place its warrants abroad. The city needed $30 million to cover its obligations, McClellan said. Morgan, Baker, and Stillman agreed to provide the needed money—the first of four Morgan-led rescues of New York City in this century. In a bravura performance, the seventy-year-old Pierpont extemporaneously drafted a letter-perfect contract on Morgan Library stationery. He also demanded a bankers’ committee to monitor the city’s bookkeeping practices, a feature of later New York City crises as well.

  For a seventy-year-old man with a bad cold, Pierpont handled the 1907 panic like a virtuoso. He sucked lozenges and worked nineteen-hour days. He said that he missed Jack. At moments, his physician, Dr. Markoe, plied his throat with sprays and gargles, as if the banker were an aging boxing champ being resuscitated between rounds. The doctor also extracted a pledge that Pierpont would cut down his cigar consumption to only twenty a day! When he dozed during an emergency meeting, nobody dared disturb the royal snooze. One banker “reached forward and lifted from the relaxed fingers, as one might take a rattle from a baby, the big cigar that was scorching the varnish on the table.”12 For a half hour, he was fast asleep as bankers discussed a $10-million loan.

  During the 1907 panic, Pierpont proved that American finance could aspire to high drama. In an elaborate finale on Saturday night, November 2, he devised a rescue for the still-shaky Trust Company of America, for Lincoln Trust, and for Moore and Schley, a speculative brokerage house that was $25 million in debt. This last company held a gigantic majority stake in the Tennessee Coal and Iron Company as collateral against loans. If it had to liquidate that stake, it might collapse the stock market. If Moore and Schley, in turn, collapsed, it might topple other houses as well.

  Like an impresario creating his theatrical masterpiece, Pierpont gathered the city’s bankers at his library. He settled commercial bankers in the East Room, beneath signs of the zodiac and a tapestry of the seven deadly sins, while in the West Room trust-company presidents sank into deep red couches and armchairs beneath the gaze of saints and Madonnas. In between, like lupiter above the fray, Pierpont played solitaire in Belle Greene’s office.

  One spectator was Tom Lamont, now a vice-president of Bankers Trust. Then only an “experienced errand boy,” as he said, he was entranced by the pageantry. Of Pierpont’s successors, only Lamont would possess the flair to stage such events. He recalled: “A more incongruous meeting place for anxious bankers could hardly be imagined. In one room were lofty, magnificent tapestries hanging on the walls, rare Bibles and illuminated manuscripts of the Middle Ages filling the cases; in another, that collection of the Early Renaissance masters—Castagno, Ghirlandaio, Perugino, to mention only a few—the huge open fire, the door just ajar to the holy of holies where the original manuscripts were guarded.”13

  To save Moore and Schley, Pierpont wanted some payoff for himself. With his usual sense of martyrdom, he felt it was his due. With his peculiar bifocal vision, he saw the panic as a time for both statesmanship and personal gain. At this point, he told friends that he had done enough and wanted some quid pro quo. He now took an appropriately big fee.

  Pierpont hatched a scheme that would save Moore & Schley, avert its need to sell the Tennessee Coal and Iron block in the open market, and benefit his favorite creation, U.S. Steel. He knew U.S. Steel could profit from Tennessee Coal’s huge iron ore and coal holdings in Tennessee, Alabama, and Georgia. For antitrust reasons, it was a prize unattainable under ordinary circumstances. So he struck a deal: U.S. Steel would buy Tennessee Coal stock from Moore and Schley if the hesitant trust-company presidents assembled a $25-million pool to protect the weaker trusts. What a characteristic mix of high and low motives!

  Ben Strong noticed that Pierpont had locked the enormous bronze doors and pocketed the key. He was up to his old tricks—confinement of adversaries, a deadline, the abrupt appearance of the menacing host after long hours of bargaining. At a quarter to five in the morning, Pierpont pushed a gold pen into the hand of Edward King, leader of the trust presidents. “Here’s the place, King. And here’s the pen.”14 Beaten down by all-night bargaining, King and the other trust company presidents agreed to contribute to the $25-million pool.

  On Sunday night, Henry Clay Frick and Judge Elbert Gary of U.S. Steel sped down to Washington on a midnight train. They traveled in a single Pullman car specially hitched up to a locomotive. They had to secure Roosevelt’s approval for U.S. Steel’s takeover of Tennessee Coal and Iron before the stock market opened on Monday morning. They ended up interrupting Roosevelt in the middle of his breakfast; mindful of the panic, TR said it was “no public duty of his to interpose any objections.”15 In other words, the Sherman Antitrust Act wouldn’t be used against U.S. Steel. Five minutes before the stock market opened at 10:00 A.M., Gary called 23 Wall Street from the White House and told George Perkins that the president had agreed to the plan. The stock market rallied on the news.

  Immediately, there were charges that Pierpont had duped Roosevelt into scuttling his antitrust policy and sanctioning, under duress, an anticompetitive steel merger. Wisconsin senator Robert La Follette even said the bankers had rigged up the panic for their own profit. Certainly the $45-million distress sale price of Tennessee Coal and Iron was a steal. Financial analyst John Moody later said that the company’s property had a potential value of about $1 billion. Grant B. Schley, head of Moore and Schley, also admitted later that his firm could have been rescued by an outright cash infusion rather than the purchase of the Tennessee Coal stock. So there was far more than altruism at work in the famous all-night rescue of the firm.

  Despite this controversy, Pierpont reached the zenith of his influence with the 1907 panic. As his biographer Frederick Lewis Allen wrote, “Where there had been many principalities, there was now one kingdom, and it was Morgan’s.”16 Pierpont was suddenly not a pirate but a sage. Woodrow Wilson, then president of Princeton University, said the nation should be advised on its future by a panel of intellectuals, and he recommended Pierpont Morgan as its chairman.17 The tributes, nonetheless, coincided with new concern about America’s financial system. U.S. financia
l panics recurred with worrisome regularity, every ten years. The 1907 panic exposed many systemic defects. As people hoarded money and banks called in loans, there was no central bank to instill confidence or offset the sudden credit contraction. Sharp drops in the money supply then led to severe recessions. The country needed an elastic currency and a permanent lender of last resort.

  From the ashes of 1907 arose the Federal Reserve System: everybody saw that thrilling rescues by corpulent old tycoons were a tenuous prop for the banking system. Senator Nelson W. Aldrich declared, “Something has got to be done. We may not always have Pierpont Morgan with us to meet a banking crisis.”18 By confirming his storied powers, Pierpont also inadvertently fostered talk of an omnipotent Wall Street money trust. President Roosevelt now recommended federal regulation of the stock exchanges, while New York governor Charles Evans Hughes wanted margin requirements raised from 10 to 20 percent. If these suggestions had been enacted, the country might have been spared some of the lurid excesses of the 1929 crash.

  The one direct consequence of the 1907 panic was a universal clamor for banking reform. In 1908, Congress passed the Aldrich-Vreeland Currency Act, which created the National Monetary Commission to study changes in the banking system. The commission was chaired by Senator Aldrich of Rhode Island, and the House of Morgan quickly moved to exert influence on it. Perkins cabled Pierpont in London that he and George F. Baker, the walrus-mustached head of the First National Bank, had stayed away from Washington, lest the new legislation be seen as a Wall Street plot. At the same time, Perkins sent a coded cable saying that Harry Davison, Baker’s young protégé, would be Aldrich’s adviser: “It is understood that Davison is to represent our views and will be particularly close to Senator Aldrich.”19 Davison had been Pierpont’s cool lieutenant during the 1907 panic and had greatly impressed him. When the Aldrich commission was about to depart for a tour of Europe’s central banks, Davison went ahead to confer with Pierpont, who wanted a private central bank on the Bank of England model. Davison would be the only banker to accompany the senators and congressmen on their mission.

  A central bank was by no means supported by all Democrats. William Jennings Bryan and the Populists feared that a central bank would be dominated by the same hard-money men who ran Wall Street. They saw it as an institution that would slay the silverites. In many ways, the concept was associated more with conservative, hard-money men. Pierpont was amenable to central banks so long as they were private and had boards composed of bankers. As Pierpont’s man on the commission, Davison reflected his mentor’s uncompromising preference for banker rather than politician control of a central bank. He also expected such a bank to introduce a “level playing field” and end the competitive advantage of the trusts.

  In November 1910, in what was billed to the press as a “duck-shooting holiday,” Davison (now a Morgan partner) and other Wall Street bankers met secretly at the Jekyll Island Club, a palm-shaded seaside compound of turreted buildings off the Georgia coast and a favorite Morgan hideaway. Known as the resort of the one hundred millionaires, Jekyll Island claimed among its organizers Pierpont’s chum George F. Baker. Pierpont kept an apartment in its San Souci building. The Jekyll Island meeting would be the fountain of a thousand conspiracy theories. Here Wall Street bankers worked out their plan for a central bank under private aegis, a system of regional reserve banks topped by a governing board of commercial bankers. Davison, an architect of the meeting, not only got a suspicious stationmaster in Brunswick, Georgia, to keep quiet about his suspicions, but often led the discussion. As Paul M. Warburg of Kuhn, Loeb, one of the key theoreticians at the meeting, later said, “Davison had an uncanny gift in sensing the proper moment for changing the topic, for giving the discussion a timely new turn, thus avoiding a clash or deadlock.”20

  When Senator Aldrich presented his bill for a central bank to Congress in 1910, the Democrats blocked it. In 1913, Congressman Carter Glass, a Virginia Democrat, used it as the basis for the Federal Reserve Act, although making extensive modifications. President Wilson successfully demanded that the system of twelve private regional reserve banks be placed under a central political authority, a Washington board that would include the Treasury secretary and presidential appointees. Progressives hoped the Federal Reserve would reduce the House of Morgan’s unique power. As we shall see, the truth was far more complex, for the bank would skillfully harness the Fed and use it to amplify its powers. In an ironic outcome unforeseen by reformers, it would become the private bank of choice for central banks throughout the world, giving it an incalculable new advantage.

  WHEN the Republican president William Howard Taft took office in 1909, the wily George Perkins flattered himself, thinking that he had already wormed his way into its inner council. Taft sent him a confidential draft of his inaugural address, which was “in all respects conciliatory and harmonizing in tone,” Perkins reported to Pierpont.21 He felt convinced Taft would water down the troublesome Sherman Antitrust Act. In coded cables to Morgan, who was vacationing in Egypt, Perkins made it sound as if he alone had picked the new cabinet. “Acting on suggestion made solely by me 2 weeks ago Franklin Mac-Veagh Chicago has been selected for Secretary of Treasury. Wicker-sham will be Attorney General and other places are filled to our entire satisfaction.”22

  Yet the one-term Taft administration would be deeply ambivalent toward the House of Morgan. On the surface, it would seem even more hostile than Roosevelt’s and surprisingly aggressive in battling the trusts. It filed antitrust suits against two cherished Morgan progeny—U.S. Steel and International Harvester. The Taft years also saw the dismemberment of John D. Rockefeller’s Standard Oil trust and James B. Duke’s American Tobacco trust. For all his windy attacks on the trusts, Teddy Roosevelt had been far more circumspect about translating his words into tough action.

  Yet there was more to the Taft-Morgan relationship than a progressive crusade against a Wall Street cabal. If trust-busting made good political theater, the deeper story was one of foreign collaboration. Even as Washington chastised the banks at home, it was forging them into foreign-loan syndicates in a new age of dollar diplomacy. With the U.S. defeat of Spain and the colonization of the Philippines and Puerto Rico, the country had acquired a new taste for imperialist adventure, and the House of Morgan would be one of its main instruments.

  Henceforth, much of the Morgan saga revolves around incestuous dealings between the Morgan banks in New York and London and their respective governments, intrigue that would drape them in mysterious new raiment. The Baronial Age was one of unbridled laissez-faire, marked by often unqualified hostility on the part of bankers toward government. But in the dawning Diplomatic Age, there would be an explicit fusion of financial and government power. In time, it would become hard to disentangle the House of Morgan from various aspects of Anglo-American policy. Yet there would also be spectacular instances in which Morgan policy would take on a clandestine life of its own, diverging from official dictates.

  The new alliance was mutually advantageous. Washington wanted to harness the new financial power to coerce foreign governments into opening their markets to American goods or adopting pro-American policies. The banks, in turn, needed levers to force debt repayment and welcomed the government’s police powers in distant places. The threat of military intervention was an excellent means by which to speed loan repayment. When Kuhn, Loeb considered a loan to the Dominican Republic, backed by customs receipts, Jacob Schiff inquired of his London associate Sir Ernest Cassel, “If they do not pay, who will collect these customs duties?” Cassel replied, “Your marines and ours.”23

  During its first year, the Taft administration recruited the House of Morgan in a scheme to create a financial protectorate over Honduras and bail out British bondholders at the same time. As part of a debt settlement, the bank would buy up old Honduran bonds, which were selling at a steep discount in London. Secretary of State Philander Knox would then impose an American lien on Honduran custom-house receipts and se
ll new Honduran bonds through a Morgan syndicate. The scheme would be backed up by American military might. Although Senator William Alden Smith, for one, was irate that the State Department supported the Morgan scheme, the bank had actually been dragooned by the government. Serving only prime government clients, the House of Morgan had a supercilious attitude toward small, backward countries. As Jack said in a cable to the London office, “Negotiations only undertaken because U.S. Government anxious get Honduras settled.”24 He and Harry Davison refused to proceed without a treaty that provided ironclad guarantees for the bonds. After enraged mobs besieged the Honduran assembly, protesting threats to their sovereignty, the U.S. Senate vetoed the deal, and the operation was scrapped.

  The new era was most vividly adumbrated in China. As with Honduras, the House of Morgan had no great relish for such a foreign operation. Backward and sprawling, lacking a central army and modern budgeting, fin-de-siècle China had proved exasperating for foreign bankers. Its officials excelled in playing off one group of foreign creditors against another. (The bankers were accused of exploiting the same strategy with Chinese officials.) This not only bred resentment among bankers but fostered a decided Wall Street prejudice in favor of China’s ancient enemy, Japan.

  The French, Germans, and British were already well entrenched in China, controlling their own spheres of influence. The European bankers had entered the picture in the late nineteenth century, when provincial Chinese merchants lacked the necessary capital to build railroads. In 1899, Secretary of State John Hay had declared an “open door” policy toward China that was supposed to guarantee unrestricted foreign access. Under Taft, however, the open door was converted into a blunt U.S. demand for inclusion in China on an equal basis with the European powers.