The House of Morgan: An American Banking Dynasty and the Rise of Modern Finance

by Ron Chernow

  Corsair III was an even more megalomaniacal affair, a modern phar-oah’s tomb. Like a lover mourning his dead mistress, Pierpont had reproduced, at fantastic expense, the carpeting and other details of Corsair II. Measuring over three hundred feet at the waterline and requiring a crew of seventy, this black-hulled oceangoing ship was built on an altogether new and more garish scale. Among its many details was a special humidor to freshen Pierpont’s black eight-inch Meridiana Kohinoor cigars. He reveled in nautical spectacle. When he returned by liner from Europe, the Corsair would steam out to greet him as he waved his handkerchief from the larger ship’s deck. By transferring to the Corsair, he could slip through quarantine without having to mingle with the liner’s steerage passengers.

  Pierpont often slept aboard his yacht and took clients for sunset cruises. Sometimes, after entertaining friends at Cragston for the weekend, they would all steam back to Manhattan on a Sunday evening, sleep on board, and then awake to a plentiful breakfast before disembarking. The Corsair was a therapeutic, if expensive, toy for Pierpont. He continued to slip into depressions that he couldn’t shake, and his triumphs seemed only to deepen his gloom. The sea alone would lighten his mood. As Jack told his mother of one 1898 ocean voyage, “JPM has been so worried and bothered by the number of things on his mind and this annoyance of war rumor that it will be a great thing for him to have this voyage. Then if things calm down . . . he will come back for his Aix cure and get 2 more voyages. Those are the only things which really seem to do him any good.”26 Though this may have been partly a cover story—Jack’s way of shielding his mother from his father’s growing number of affairs—it was also true that for Pierpont Morgan the sea was always his sovereign remedy.

  THE dawning of the new century was accompanied by the first great wave of mergers in American history. Spurred by the telephone and telegraph and better transportation, local markets were newly interlaced in regional and national markets. And with American victory in the Spanish-American War, the attention of business also shifted from internal expansion to a global quest for markets. Driven by such changes in the economy, the number of mergers jumped from a modest sixty-nine in 1897 to over twelve hundred by 1899.

  So long as markets were local, industry seldom required large-scale financing, and there was a Wall Street and City bias against manufacturers as small-time businessmen. The Morgans had been mostly associated with railroad securities. (As late as 1911, the second Baron Revelstoke of Barings could snobbishly protest, “I confess that personally I have a horror of all industrial companies.”27) Now, as the great merger wave gathered pace, the focus of elite Wall Street banks shifted from railroads to industrial trusts. In a trust, stockholders would trade their shares in constituent companies for the “trust certificates” of a super holding company. After enacting a law that permitted one company to own another, New Jersey became the preferred state for trust incorporation. By 1901, these new corporate leviathans dominated a long list of industries—sugar, lead, whiskey, plate glass, wire nails, smelting, and coal.

  Wall Street bankers effected many of these industrial transformations, and their power swelled in tandem with their creations. Often, trusts were cobbled together from family-owned or closely held firms that had a visceral contempt for competitors’ joining the same trust; the bankers were the honest brokers who arbitrated the disputes among them. Since the bankers appraised the value of participating companies, they had to be fair; since this appraisal was seldom accepted by everyone, they had to be stern. Most of all, they had to be trusted. The populace might dread the power of Pierpont Morgan, but he paid his bills promptly, always stuck by his word, and was almost universally respected among businessmen. He also saw competition as a destructive, inefficient force and instinctively favored large-scale combination as the cure. Once, when the manager of the Moet and Chandon wine company complained about industry problems, Pierpont blithely suggested he buy up the entire champagne country.28

  In William McKinley, the business community had a Republican president who approved of consolidation and didn’t interpose any bothersome antitrust obstacles. The genesis of United States Steel in 1901 was inseparable from this permissive regulatory mood, which followed the 1900 GOP landslide. With the defeat of William Jennings Bryan and his anti-imperialist, trust-busting supporters, the business community felt emboldened to try bigger things. A few weeks after the GOP’s massive victory, Vice-President Theodore Roosevelt invited Elihu Root, the secretary of war, to attend a dinner in honor of Pierpont Morgan. “I hope you can come to my dinner to J. Pierpont Morgan,” he wrote. “You see, it represents an effort on my part to become a conservative man in touch with the influential classes and I think I deserve encouragement.”29

  This dinner preceded by a week the first discussions about U.S. Steel and must have reassured Pierpont that the McKinley administration would be supine in its attitude toward trusts. The inception of the steel trust is still debated. The more colorful versions attribute the idea to steelman John W. “Bet-a-Million” Gates, who allegedly came up with it while shooting pool at the Waldorf-Astoria Hotel, then on Fifth Avenue at Thirty-fourth Street. A former barbed-wire salesman and stock market plunger, Gates was a stout, raffish-looking character, with a derby always tipped back on his head and a big cigar stuck in the corner of his mouth. He used to bet on the speed of raindrops running down a train window and won his nickname from an enormous wager he once made on an English thoroughbred. Not content with an American steel trust, Gates wanted to include German manufacturers and attempt a global cartel.

  The more sober versions of U.S. Steel trace the trust to a looming collision between Andrew Carnegie’s steel company and two of Pier-pont’s steel creations, Federal Steel and National Tube. As the top manufacturer of crude steel, Carnegie decided in July 1900 to branch out into finished products, such as pipe and wire. As head of the second largest steel group, Pierpont feared a replication of the railroad chaos, with overbuilding and price wars. He growled that Carnegie would “demoralize” the entire industry through competition. Bracing for a grim battle, he had his makers of finished products prepare to meet Carnegie head-on in crude steel.

  On December 12, 1900, a week after he was feted by Teddy Roosevelt, Pierpont attended a famous dinner held for Charles M. Schwab at the University Club in Manhattan. A handsome young man with a long, smooth face, dark hair, and clear brow, Schwab was a faithful lieutenant of Andrew Carnegie’s. Morgan sat at Schwab’s right and stared at his plate as the young man delivered his after-dinner address. A mellifluous orator and self-dramatizing individual, he evoked for Morgan and the eighty other financiers present a vision of a steel trust which would handle all phases of the business, from mining ore to marketing steel products; the Carnegie and Morgan steel enterprises would be the trust’s obvious nucleus. The steel trust was to be a superior sort of conspiracy. Through economies of scale, it would attempt to lower prices and compete in burgeoning world markets. It was a form of national industrial policy, albeit conducted by businessmen for private gain.

  After the dinner, Morgan, intrigued, conferred with Schwab for half an hour. As Morgan partner Robert Bacon later said, “It was apparent that [Morgan] had seen a new light.”30 It has never been clear whether Schwab acted at Carnegie’s behest or whether he planned to recruit Pierpont first, then take the proposal to Carnegie. In any event, within three weeks, Morgan, Bacon, Gates, and Schwab worked out a proposal in an all-night session at Morgan’s “black library.” The proposed trust would control more than half the steel business. Besides Carnegie Steel and Morgan’s Federal Steel, it would include American Tin Plate, American Steel Hoop, American Sheet Steel, American Bridge, American Steel and Wire, National Tube, National Steel, Shelby Steel Tube, and Lake Superior Consolidated Mines.

  In forging U.S. Steel, Pierpont had to deal with two industrialists who represented very different aspects of American business—Andrew Carnegie and John D. Rockefeller. Both were hard-bitten individualists, scornful of b
ankers, who preferred to finance their operations from retained earnings. Rockefeller entered the deal through his ownership of ore mines and shipping companies on Lake Superior. Pierpont considered both men too crude for his stuffily refined tastes; they saw him as pompous and overbearing. The prudish Carnegie also disapproved of Pierpont’s adulterous escapades. “Carnegie frowned on anything savoring of the flesh and the devil,” Schwab said.31

  After the meeting in the “black library,” Schwab sounded out Carnegie on his willingness to sell his steel company to the trust. After a game of golf at Saint Andrews Golf Club in Westchester, Carnegie ruminated, then penciled his selling price, $480 million, on a scrap of paper. He wanted payment in bonds, not watered stock. When Schwab delivered the slip of paper to Morgan, the banker stared at it and said promptly, “I accept this price.”32 In the hurly-burly, Pierpont didn’t formalize the deal with a signature and weeks later had to send a lawyer uptown with a contract. Despite his veneration of Junius Morgan, Carnegie enjoyed petty jousting with Pierpont. When Pierpont invited him to 23 Wall Street, Carnegie insisted that Morgan come to his own Fifty-first Street office instead. After a cool fifteen-minute chat, Morgan said in parting, “Mr. Carnegie, I want to congratulate you on being the richest man in the world.”33

  Thin-skinned and vindictive, Carnegie gloated over the deal: “Pierpont feels that he can do anything because he has always got the best of the Jews in Wall Street. . . . It takes a Yankee to beat a Jew, and it takes a Scot to beat a Yankee.”34 Carnegie celebrated too quickly. He later admitted to Morgan that he had sold out too cheap, by $100 million. Not about to spare the industrialist’s feelings, Morgan replied, “Very likely, Andrew.”35

  In trying to coax recalcitrant companies into the steel trust, Pierpont showed his ringmaster’s flair for cracking the whip. He was irate with those who tried to extract undue advantage. During negotiations at 23 Wall, one major holdout was Bet-a-Million Gates and his American Steel and Wire. To break a deadlock, Pierpont materialized like the wrath of God and thumped a desk. “Gentlemen, I am going to leave this building in 10 minutes. If by that time you have not accepted our offer, the matter will be closed. We will build our own wire plant.”36 His bluff called, Gates capitulated and sold out. Pierpont then went home, boyishly elated.

  The House of Morgan generally didn’t sponsor new companies and abhorred stock speculation. Junius Morgan had long ago advised his son, “I would recommend your forming a resolution never to buy any stock on speculation.”37 So Pierpont’s promotion of U.S. Steel in early 1901 lent “old money” cachet to the rage for trusts. The year 1901 was not unlike 1929 or 1987: the stock market was on everybody’s lips. Daily share volume tripled. Wall Street seers babbled of a new age, and news-papers recounted tales of hotel waiters, business clerks, doormen, and dressmakers who made fortunes on Wall Street.38

  U.S. Steel stoked the bonfire of speculation. At a time when million-dollar issues were considered large, the new corporation was capitalized at a whopping $1.4 billion ($23 billion in 1989 dollars)—the first billion-dollar corporation in history. At the time, all U.S. manufacturing combined had only $9 billion in capitalization. To manage the flood of bonds and stock that financed the deal, Pierpont mustered a monster syndicate of three hundred underwriters. He appointed ace stock manipulator James R. Keene—a sharp-faced man with a pointed beard, known as the Silver Fox of Wall Street—to make a market in the shares. By simultaneously buying and selling shares, Keene created steadily rising prices and the illusion of tremendous volume. Despite predictions that so much stock would saturate the market, the issue’s success confirmed the boast of Morgan partner George W. Perkins that a Morgan issue “from the desert of Sahara” would find buyers.39 For its services, the syndicate took in $57.5 million in stock (nearly $1 billion in 1989 dollars). The U.S. Steel promotion made explicit the marriage of finance and industry that marked the Baronial Age; when four Morgan partners joined the new trust’s board, the marriage was consummated.

  For many observers, the sheer size of U.S. Steel seemed sinister and unnatural. Even the Wall Street Journal admitted to “uneasiness over the magnitude of the affair.”40 Among others, Yale president Arthur Hadley, a noted economist, saw a new need for federal control of large corporations. Ray Stannard Baker, later Woodrow Wilson’s biographer, pointed out that the new corporation would have revenues and expenses exceeding the budgets of all but a few world governments.41 Yet Wall Street was heedless of the critics and celebrated with a record volume of trading. In January 1901, the Big Board traded a record two million shares in one day; after the launching of U.S. Steel that spring, volume reached three million shares. Wall Street was so awash in shares that the Stock Exchange declared a special holiday just to catch up on paperwork.

  An unending controversy would surround U.S. Steel: was it Pier-pont’s greatest deal, as he believed, or a giant scam? The share flotation made multi-millionaires of dozens of steelmen, and the spectacle of so much sudden wealth appalled the public. In 1905, Charles Schwab, U.S. Steel’s first president, built a seventy-five-room mansion on Manhattan’s Riverside Drive, complete with a pipe organ, art gallery, bowling alley, private chapel, and sixty-foot swimming pool. Gaudy mansions went up all over Pittsburgh with the new steel money, symbolizing a new class of nouveaux riches industrialists.

  Later the U.S. Bureau of Corporations, a federal agency set up by Teddy Roosevelt, would value U.S. Steel at only half its $1.4-billion selling price, suggesting that investors had purchased an enormous bag of hope, at least half of it hot air. From Vanderbilt, Morgan had learned the trick of basing value not on current assets but on projected earnings. U.S. Steel’s subsequent history provided evidence for both detractors and admirers. From an opening price of 38, its stock zoomed to 55, only to skid to less than 9 during the “rich man’s panic” of 1903. By January 1904, U.S. Steel couldn’t even cover its dividends. Yet it is fair to say that in time the enterprise expanded to the contours of Morgan’s vision, becoming America’s foremost steel company. It amply rewarded its investors—at least, the patient ones.

  BEHIND the growing pomp of Pierpont Morgan lay an ever-present vulnerability. If tragedy, as Aristotle said, has the power to arouse fear and pity, then Pierpont wore a tragic mask. In 1903, Pierpont sat for two minutes as Edward Steichen snapped the famous photograph of him: from deep shadow and gripping the blade-like chair, Pierpont stares out, a tense crease between his brows, his collar stiff, his eyes pitiless points of lights, the gaze legendary in its terror. Steichen tried to make him turn, but Pierpont, self-conscious about his nose, stared straight ahead. The photographer snapped him bristling with anger. Pierpont hated the photo and tore up the first prints. Yet there was sadness as well as fire in the eyes—volcanic energy and despair. The photograph captured the man whole. When Pierpont later relented and offered to pay a stratospheric $5,000 for the photo, the wounded Steichen took two years to deliver copies.

  The blazing eyes were linked to the grotesque nose. As the years went by, the acne rosacea made Pierpont’s nose monstrous in size and hideous in shape. The nose was invariably touched up in official photographs, perhaps adding to the shock of those who saw him in person. Of his initial encounter with Wall Street’s Cyrano, art dealer Joseph Duveen wrote, “No nose in caricature ever assumed such gigantic proportions or presented such appalling excrescences. If I did not gasp, I might have changed color. Morgan noticed this, and his small, piercing eyes transfixed me with a malicious stare.”42 Many anecdotes link Morgan’s nose with his short temper—an old story of the vanity of the mighty. He would furiously avenge taunts, and one writer said he never recovered from the phrase “a ruby-visaged magnate.”43 When Bet-a-Million Gates dubbed him Livernose, the jest proved costly: Pierpont blackballed Gates from the Union League and New York Yacht clubs. About his nose, Pierpont could be more sensitive than he was about his trusts. After the newspapers of clubmate Joseph Pulitzer attacked his business dealings, Pierpont complained to the newspaperman not about
the allegations, but about the prominence of his nose in the papers’ cartoons, which he thought very unfair.

  Everybody came to terms with the nose differently. Lady Victoria Sackville-West, probably Pierpont’s last mistress, recorded in her diary in 1912, “I have never met anyone so attractive. One forgets his nose entirely after a few minutes.”44 Perhaps intimates did, but not rival businessmen. And children found it scarily hypnotic. When a later partner, Dwight Morrow, brought Pierpont to his home, his wife Betty—having warned the children not to mention the nose—asked the tycoon, “Do you like nose in your tea, Mr. Morgan?”45

  Pierpont tried everything to cure it, including an electrical remedy recommended by England’s Queen Alexandra. But it persisted, like nature’s revenge, reminding him of his humanity. In philosophic moments, he converted it into a mark of pride. When the Russian minister of finance, Count Witte, suggested surgery, he replied, “Everybody knows my nose. It would be impossible for me to appear on the streets of New York without it.”46 Still more grandly, he said his nose “was part of the American business structure.”47

  It was probably the nose that made Pierpont eager to hire handsome young men, and he often sent pedigreed collie puppies as a sign of impending partnerships. Over time, the early reputation of Morgan partners as harried technicians caught in the grinding machinery of railroad reorganizations gave way to another equally pronounced tradition: the Morgan partner as elegant fashion plate, suave member of the Social Register catering to rich clients. “A homely man had no chance of being selected a Morgan partner,” wrote an early Pierpont biographer. The same could be said, with a few exceptions, of the bank under his son, Jack.48

  The prototype was Robert Bacon, taken on as partner in 1894 after J. Hood Wright died suddenly. As soon as Bacon was hired, his former boss, Major Henry Lee Higginson, warned him, “Don’t overwork like Coster just because you can and like to do it. He is wonderful—and unwise—to do so.”49 Trim and athletic with a strong, wide face and debonair mustache, Bacon was called the Greek God on Wall Street. As a Harvard undergraduate (and classmate of Teddy Roosevelt’s), he boxed, ran the hundred-yard dash, captained the football team, was president of the Glee Club, and was number seven on the university crew team and Model Man of his class; his presence at the Corner of Broad and Wall inaugurated a new image for the Morgan partners. With Bacon in mind, a novelist wrote, “When the angels of God took unto themselves wives among the daughters of men, the result was the Morgan partners.”50 Pierpont doted on Bacon and wanted him constantly by his side. It was said Morgan had “fallen in love” with Bacon and “rejoiced in his presence.”51