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

by Ron Chernow

  At first, the House of Morgan snickered at the Pecora hearings, seeing them as a circus. Lamont thought they were a political ploy “designed to acquaint a curiosity-loving public with the nature and extent of our own banking institutions.”44 With its fetish for secrecy, the bank tried to limit the inquiry’s scope. On March 22, 1933, Lamont and counsel John W. Davis—the 1924 Democratic presidential candidate, dubbed the Morgan prosecuting attorney—visited Pecora at his shabby, temporary offices at 285 Madison Avenue. Davis had assiduously protected the House of Morgan’s rights as a private bank and had written a New York State statute that exempted private banks from state inspection. Pecora was striking at an ancient privilege of gentleman bankers—keeping their capital position secret. On Davis’s advice, Lamont refused to give a statement of Morgan capital, opposed examination of the bank’s records, and insisted on the confidentiality of client accounts. As a close friend and near-neighbor of Jack Morgan’s and a fellow vestryman of Saint John’s of Lattingtown, Davis was in high dudgeon at any insinuation of Morgan dishonesty. He quickly elevated the affair into a matter of honor and constitutional rights. Two days later, he told Pecora he was “very chilly” to his request for five years of J. P. Morgan and Company balance sheets.

  Along with Parker Gilbert, Lamont visited George Harrison of the New York Fed and tried to enlist his influence for withholding the annual statements. Not only did Harrison refuse, but in his diary he registered shock at the request. Pecora interpreted the Morgan refusal to answer his questions as barefaced defiance and waged war against the bank in the press and on Capitol Hill. He got the Senate to pass a resolution enabling the committee to investigate private banking—a timely reminder to Morgans that it remained unregulated only at government sufferance. Pecora had won. For over six weeks, his sleuths worked in a room at 23 Wall, sifting through records no outsider had ever before seen. In the sole concession to Morgan eminence, investigators stopped at six each evening, while their colleagues worked until midnight elsewhere on the Street.

  As bank image maker, Lamont tried to soften any impression that he was obstructing the investigation. On April 11, he wrote a clever letter to Roosevelt vowing cooperation; the bank would make political hay by yielding to the inevitable: “So far as this particular item is concerned, we haven’t the slightest hesitation at any time in showing our balance sheet to members of the Committee, and I may add that I think you would regard it as a highly satisfactory one.”45 This last remark alluded to shared values, as if Lamont were reminding Roosevelt of his patrician background.

  Jack Morgan was especially enraged by Pecora. He believed implicitly in Morgan integrity and interpreted any investigation, by definition, as a vendetta. He unpacked a colorful array of ethnic epithets; at age sixty-six, he wasn’t about to learn tolerance. Pecora was degraded to a “dirty little wop,” “a sharp little criminal lawyer,” and “a 2nd-rate criminal lawyer.”46 It never occurred to Jack that Pecora might uncover anything amiss; he, too, thought the hearings were cooked up to pander to public voyeurism. He told the marquess of Linlithgow: “The risk of finding anything crooked in our affairs, honestly looked at, is nil; but it is taking a large part of the time of all the partners, and one whole firm of lawyers, to go through all the bank history and get ready to answer [the committee’s questions].”47 Lamont told his friend Lady Astor that he deplored the “Spanish Inquisition” in Washington and the conduct of the “young native Sicilian counsel, Ferdinand Pecora.”48 With such an inflated sense of virtue, the Morgan partners marched blindly into the hearings.

  As the partners prepared for their May appearance, the hearings took on a new urgency. Sponsored by Senator Carter Glass of Virginia and Representative Henry Steagall of Alabama, a bill was working its way through Congress to separate commercial and investment banking. This would force large commercial banks to give up their securities affiliates; deposit-and-loan business would be severed from securities work. The political movement to punish Wall Street was becoming a juggernaut. Nobody had expected securities reform to dominate the early New Deal. But Pecora’s sensational findings pressured the Roosevelt administration to take action against Wall Street.

  Amid an upsurge of populist feeling in 1933, demagogues of the left and right found the House of Morgan a convenient idol to smash. Responding to the Pecora inquiry, Louisiana’s Huey P. Long gave a speech entitled “Our Constant Rulers.” In it, he argued, against all evidence, that Roosevelt had stacked the Treasury Department with Morgan men. Roosevelt, claimed Long, was no less beholden to 23 Wall than Hoover: “Parker Gilbert from Morgan & Company, Leffingwell . . . what is the use of hemming and hawing? We know who is running the thing.”49

  Threats to the bank went far beyond redneck demagogues or professors in Roosevelt’s brain trust: they came from the banking community itself. In 1930, the Chase bank had merged with the Equitable Trust to form the world’s largest bank of its time. Winthrop W. Aldrich, a brother-in-law of John D. Rockefeller, Jr., had succeeded the disgraced Albert Wiggin as Chase president in early 1933 and wanted to refurbish the bank’s image. To this end, he got behind the push to divide commercial and investment banking. In March 1933, he took steps to spin off the Chase securities affiliate, Chase Harris Forbes. Similarly, James Perkins, who succeeded Charles Mitchell at National City, believed that its reckless stock affiliate had nearly ruined the bank, and he, too, favored a sequestration of financial functions. The bankers’ unity of the 1920s was breaking down into furious backbiting and jockeying for advantage. According to Arthur Schlesinger, Jr., “Aldrich’s action was interpreted as a Rockefeller assault on the House of Morgan; and for a time he achieved almost the dignity of a traitor to his class.” The counterattack came from William Potter of Guaranty Trust, who criticized Aldrich’s proposals as “quite the most disastrous . . . ever heard from a member of the financial community.”50 This division within the realm of banking sped the passage of the Glass-Steagall Act.

  The House of Morgan was the first private bank investigated by Pecora. After three months of nonstop preparation, the Morgan entourage swept into a $2,000-a-day suite of rooms at the Carlton Hotel attended by a small army of Davis, Polk lawyers. Jack was to be the first witness. The night before, John Davis rehearsed him with biting questions. Believing that Pierpont’s arrogance before the Pujo Committee had harmed the House of Morgan, Davis advised the men not to be coy, argumentative, or defensive. “I lined up the partners and held school every day,” he later recalled.51 As star witness, Jack was awaited with feverish anticipation. That morning, crowds ringed Capitol Hill to get seats in a sweltering, overflowing Senate Caucus Room. On the way, Jack confided to his chauffeur that he was afraid he would lose his temper. Charles Robertson sniffed, “Oh, you would not lose your temper with the likes of them.”52 Restored to his senses, Jack decided not to stoop to their level. No, he would conduct himself with honor. He entered the Capitol accompanied by several tough-looking bodyguards.

  Shortly before ten o’clock on Tuesday morning, May 23, guards cleared the way for Jack Morgan to enter the hearing room; he was flanked by Tom Lamont and John Davis. Flashbulbs exploded and spectators buzzed as the world’s most famous private banker stepped beneath the chandeliers and Corinthian pilasters. Despite his legendary name, Jack, age sixty-six, was a mystery man to most Americans, ghostly and insubstantial. He didn’t look fearsome. Over six feet two with broad shoulders and an egg-shaped head, he was a balding, white-haired old man with dark eyebrows. Within himself he might feel sheepish, but he had a kindly smile and radiated a well-tailored poise in his three-piece suit and gold watch chain. He and Pecora typified contrasting images—the imperturbable Bourbon and the assertive immigrant.

  Nobody was less eager than Jack to be dragged from his semiretire-ment. At this moment of crisis, he reverted to the tradition upheld by three generations of Morgans, the Gentleman Banker’s Code, first pounded into Pierpont’s head by Junius sixty years before. Jack’s opening statement harked back to Pierpont�
��s statement at the Pujo hearings, that character was the basis of credit:

  The private banker is a member of a profession which has been practiced since the middle ages. In the process of time there has grown up a code of professional ethics and customs, on the observance of which depend his reputation, his force and his usefulness to the community in which he works . . . if, in the exercise of his profession, the private banker disregards this code, which could never be expressed in any legislation, but has a force far greater than any law, he will sacrifice his credit. This credit is his most valuable possession; it is the result of years of faith and honorable dealing and, while it may be quickly lost, once lost cannot be restored for a long time, if ever.

  If I may be permitted to speak of the firm, of which I have the honour to be the senior partner, I should state that at all times the idea of doing only first class business, and that in a first class way, has been before our minds.53

  This was as clear a statement of principles as Jack could muster: this was his birthright, what it meant to be a Morgan banker. Yet his attempt at candor sounded strangely anachronistic to American ears. Jack was an old-school banker, as out of place as an alchemist in the atomic age. Historian William E. Leuchtenburg has said, “On the witness stand, Morgan appeared to have been resurrected from some Dickensian countinghouse.”54 This was literally true, for Jack was trained in late Victorian London and never abandoned its banking folkways.

  His black hair swept up in a pompadour, his chin jutting, Pecora jabbed the air and posed aggressive questions; sometimes he even pointed his cigar at Jack. Abiding by Davis’s advice, Jack didn’t joust with the attorney. He smiled nervously, called Pecora “Sir,” and hardly seemed a world-devouring tycoon. He breathed no fire, hurled no thunderbolts. The public saw the figure well-known to friends and associates but seldom, if ever, seen in public—the bluff, genial, but shy and vulnerable banker. “I should like it if the stuttering part were cut out of my answer to that question,” Jack asked at one point. “I am not used to this form of examination, Mr. Pecora, and I do not get my words quite straight always.”55

  Like Samuel Untermyer at the Pujo hearings, Ferdinand Pecora focused on the House of Morgan’s standing as the banker’s bank. Jack saw nothing wrong with Morgan partners sitting on the boards of Guaranty Trust and Bankers Trust. Nor was he ashamed of the Morgan bank making loans to sixty officers and directors of other banks, including Charles Mitchell of National City, Seward Prosser of Bankers Trust, and William Potter of Guaranty Trust. Denying that this afforded any special advantages, Jack said, “They are friends of ours, and we know that they are good, sound, straight fellows.”56 Far from regretting the Morgan role as the Wall Street clubhouse, Jack boasted that a private bank offered neutral territory, where incorporated banks might “meet and discuss the general problems without rivalry or competition.”57

  Jack’s testimony exposed Depression America to a form of wholesale, private banking that it had never known existed. When Pecora asked for the firm’s partnership agreement, John Davis protested such public revelation. So in executive session, Pecora unrolled the agreement: a magnificently hand-lettered scroll that even some Morgan partners had never seen. It disclosed Jack’s absolute powers to arbitrate disputes, allocate undivided profits, and even dissolve the bank. Jack was proud of the bank’s secrecy. “Our relations with our clients are much more confidential, in my opinion, than the relations with an incorporated bank can be,” he said.58

  In a culture that worshiped the hard sell, the reticent J. P. Morgan and Company was a puzzling curiosity. As a private New York bank, it couldn’t advertise, solicit deposits from the general public, or pay interest on deposits of less than $7,500. Apparently, getting a Morgan account was like being accepted at an exclusive country club. Even Senator Duncan U. Fletcher of Florida, the Chairman of the Senate Banking and Currency Committee, was perplexed by this:

  Fletcher: But you are serving the public?

  Morgan: Yes; but we are serving only our own clients who are our clients by our own choice.

  Fletcher: But you do not turn a man down, you do not select your clients; you do not give them tickets and pass on them?

  Morgan: Yes, we do.

  Fletcher: You do?

  Morgan: Yes, indeed; we do.

  Fletcher: I suppose if I went there, even though I had never [seen] any member of the firm, and had $100,000 I wanted to leave with the bank, you would take it, wouldn’t you?

  Morgan: No, we should not do it.

  Fletcher: You would not?

  Morgan: No.

  Fletcher: I’m quite sure then you would not . . .

  Morgan: Not unless you came in with some introduction, Senator.59

  Then who banked at this place? Pecora outlined a list of companies that kept million-dollar balances at Morgans—AT&T, Celanese, Du Pont, General Electric, General Mills, Ingersoll-Rand, ITT, Johns-Man-ville, Kennecott Copper, Montgomery Ward, New York Central, Northern Pacific, Standard Brands, Standard Oil of New Jersey, Texas Gulf Sulphur, and U.S. Steel. Their executives often chose J. P. Morgan for their personal bank accounts as well. Pecora had charts showing that Morgan partners held 126 directorships in 89 corporations with $20 billion in assets. He later called this “incomparably the greatest reach of power in private hands in our entire history.”60 He seemed incredulous when Jack said partners went on boards only at the “earnest request” of a company.

  If Jack entered the hearings with serene confidence, he was soon engulfed in an issue that would shadow him throughout the New Deal—income taxes. Pecora revealed that Jack had paid no income tax for 1930, 1931, and 1932, and all twenty Morgan partners paid nothing for 1931 and 1932. (Jack had paid taxes in England for these years.) Pecora also showed that by making Parker Gilbert a partner on January 2, 1931—instead of December 31, 1930, as would have been customary—the firm claimed a $31-million capital loss for 1931. Bumbling and flustered, Jack couldn’t recall the details of his tax picture; such vagueness was plausible to his associates, suspicious to the public. Although Jack and most of the partners hadn’t violated the law and had simply taken sizable write-offs from stock losses, their failure to pay taxes was politically explosive in the Depression. Tax shelters had not yet become a favorite American pastime, and the government desperately needed money. The next day, headlines trumpeted the Morgan partners’ “tax evasion.”

  There were further embarrassing disclosures. Lamont’s son Tommy, now a Morgan partner, had created a $114,000 capital loss by selling depressed shares to his wife, then buying them back three months later—a practice known as a wash sale. The young Lamont had to pay $3,949 in back taxes to remedy the problem. It turned out that the Internal Revenue Service had been curiously lax in examining Morgan tax returns; so sterling was the bank’s reputation—or so feared was its power—that agents never closely inspected tax returns prepared there. As Pecora later said: “The Bible tells us that a good name is rather to be chosen than great riches. But it was vouchsafed to the members of J. P. Morgan and Company to enjoy both.”61

  As Jack’s testimony took on a carnival atmosphere, Kentucky senator Alben W. Barkley told the doorkeeper to shut the rear door and asked photographers to stop setting off the blinding flashbulbs. The cacophony from voices and chairs scraping in the gallery sometimes drowned out Jack’s soft voice. The pugnacious Carter Glass—who considered it a waste of time to interrogate upstanding Morgan partners—experienced mounting indignation. A small man with a shock of disheveled hair and a spare face, he thought the hearings a “Roman holiday” that were distracting attention from his banking bill. He sniped at Pecora for his treatment of the Morgan partners. “I do not intend to see any injustice done to the House of Morgan,” he said, reddening with anger. “That is my attitude.”62 Fed up with the commotion over Jack’s appearance at the hearings, he blurted out, “We are having a circus, and the only things lacking now are peanuts and colored lemonade.”63

  This gibe would change Jack Mo
rgan’s life. Overnight it echoed in the mind of Charles Leef, a Ringling Brothers press agent. The next morning, he brought to Capitol Hill a thirty-two-year-old midget named Lya Graf. She wore a blue satin dress and red straw hat. Only twenty-seven inches tall, she had a Kewpie-doll face with bright eyes and round cheeks. To enliven a delayed start to the hearings, Ray Tucker, a Scripps-Howard newsman, went out into the corridor and shepherded Leef and Lya into the Senate Caucus Room to meet the celebrated banker. “Mr. Morgan, this is Miss Graf,” Tucker said. “She works for the circus.” Graf blanched, but Jack stood and shook her hand with instinctive ceremony. When he sat down, Leef, emboldened, plunked Graf on his lap, to the horror of Morgan partners and lawyers. Jack apparently thought at first she was a child.

  “I have a grandson bigger than you,” Jack said in the sudden glow of dozens of flashbulbs.

  “But I’m older.”

  “How old are you?”

  “Thirty-two,” interjected Leef.

  “I’m not,” Graf protested. “Only twenty.”

  “Well, you certainly don’t look it,” Jack replied. “Where do you live?”

  “In a tent, sir.”

  “Lya,” said Leef, “take off your hat.”

  “No, no,” she said.

  “Don’t take it off,” Jack said. “It’s pretty.”64

  The most powerful men on Wall Street—Tom Lamont, John Davis, Richard Whitney—bitterly watched what they saw as a vulgar stunt, even a cruel attempt to embarrass Jack. When the senators filed in, they were outraged by what had happened and appealed to the press not to print the pictures, a request honored only by the New York Times. The next day, pictures of Jack and Lya Graf appeared on front pages across America. They would rank as some of the best-known of all Depression photographs.