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

by Ron Chernow

  As president of the Exchange from 1930 to 1935, Richard Whitney had been the most arrogant Wall Street foe of federal securities regulation. For New Dealers, he personified the smug insolence of the ancien régime on Wall Street. When he testified about securities reform before the Senate Banking and Currency Committee in 1932, he lectured the senators on the need for a senatorial pay cut. Opposing creation of the SEC, he told Pecora’s investigators, “You gentlemen are making a great mistake. The Exchange is a perfect institution,” and he wouldn’t let brokers answer the Pecora questionnaires.28 In 1937, he met his match in SEC chairman William O. Douglas, who succeeded Joe Kennedy that year. Douglas had engaged in talks with Stock Exchange president Charles R. Gay about Exchange reform, and Whitney led a board faction opposed to such efforts. In the autumn of 1937, Douglas gave the Stock Exchange leaders a stern tongue-lashing: “The job of regulation’s got to be done. It isn’t being done now, and, damn it, you’re going to do it or we are.”29 Resigned to the need for change, Gay appointed a committee under Carle C. Conway of Continental Can to study reforms. In January 1938 it recommended a complete revamping of the Exchange, including a full-time paid president, a professional staff, and nonmember governors. It was amid such rancorous skirmishing that the Richard Whitney scandal would unfold.

  George and Richard Whitney were both tall, impressive, and patrician. Sons of a bank president, they had a Boston Brahmin upbringing and had attended Groton and Harvard. People would notice the gold watch chain with the Porcellian pig that Richard wore from his Harvard days. Morgan partner George had developed a dislike of his Groton classmate Franklin Roosevelt that he never shed. “My brother and I went to college, and we were always comfortable,” he said. “There was no poor-boy stuff about this.”30 George came to Morgans via Kidder, Peabody, becoming a partner in 1919.

  With a ruggedly handsome face, solid jaw, and elegant hauteur, George was emblematic of the Morgan bank in those years. A British visitor later commented, “George Whitney—tall, slim, iron gray head, very goodlooking and altogether charming—Miss Macey regards him as dangerous both to men and women!”31 He perpetuated the Morgan tradition of fashion-plate partners. By a splendid coincidence, he had married Martha Bacon, daughter of Robert, the Greek God of Wall Street who had so entranced Pierpont.

  By the late 1930s, George Whitney ran the Morgan bank and was a director of Kennecott Copper, Texas Gulf Sulphur, Johns-Manville, and Guaranty Trust. As the head of domestic underwriting, he suffered more than other Morgan partners from Glass-Steagall and watched his business pass into Harold Stanley’s hands. He was greatly respected on Wall Street and, despite his reserve, very popular in the bank. Of the Morgan partners who trooped to Washington to answer questions, George Whitney often seemed the most snobbishly indignant, as if unwilling to concede the legitimacy of the proceedings. Just when it looked as if New Deal attacks might relent, the scandal that broke meant more government inquisitors trying to penetrate his polished defenses.

  George grew up in the shadow of his older brother, Richard, the star of the family. Richard’s early career on Wall Street seemed to live up to his family’s high expectations. On Black Thursday in 1929, as vice-president of the Stock Exchange, he had taken the fabled stroll, placing the bid for U.S. Steel and other stocks; the following spring he was elevated to president of the Exchange, the youngest person in history to hold the position. He became popularly known as the man who halted the panic of 1929 and emerged as something of a folk hero.32 Cold and pompous, he was Mr. Wall Street, presiding in a black cutaway in his palatial suite on the Exchange’s top floor. In the private-club atmosphere, he represented the reactionary elements, the floor traders and specialists who resisted federal regulation, against the relatively more liberal retail brokers.

  Richard’s association with J. P. Morgan went beyond his brother. His firm, Richard Whitney and Company, was the major broker handling gilt-edged bonds for the bank. Even if nobody at Morgans had been involved in the scandal, it would have reflected on the bank. As journalist John Brooks has said, “When the gods of 23 Wall materialized on the earthly market across the street, the bodily form they took was that of Dick Whitney.”33 The bank generally stayed aloof, not involving itself in disputes at the Exchange, and was dismayed by the popular impression that Richard Whitney represented its views. By the time the scandal broke, it was too late to correct that impression.

  Richard Whitney led a double life in the 1930s. As he defended pools, short sales, and other speculation from Washington attacks, he was struggling with an addiction to gambling. He was a sucker for fast-buck artists. He bought stock in a Florida fertilizer company right before that state’s economy collapsed and invested in a bootleg applejack called Jersey Lightning. All the while, he lived like a country squire. Married to the heiress daughter of a former president of the Union League Club, he bred thoroughbreds at a five-hundred-acre New Jersey estate, presided over the Essex Fox Hounds, owned a Fifth Avenue townhouse, and swaggered about like a tycoon.

  Chronically indebted, Richard was always borrowing and enlisting people in joint investment schemes. In 1929, he tried to lure his distant cousin, Jock Whitney, into an investment partnership. But by then Richard’s reputation was already sufficiently murky that lawyer Lewis Cass Ledyard talked Jock out of it. (Later, with his friend David O. Selznick, Jock would buy the movie rights to The Story of Richard Whitney.) The remarkably faithful George kept Richard solvent and indulged his fantasies of financial glory. Before the crash, George lent Richard $500,000 to buy a Stock Exchange seat. After that, the loans grew more frequent, and Richard ran up a staggering $3-million debt to his brother. These loans permitted others; as Richard panhandled on Wall Street, people assumed George stood behind him. The fear and respect accorded the House of Morgan was such that throughout Richard’s protracted financial crisis, nobody ever demanded repayment.

  In 1931, the Morgan bank made a $500,000 loan to Richard that had to be continually renewed. The partners professed to like Richard’s roguish style, but with deep, unspoken reservations. At one point, they tried to get a veteran Stock Exchange governor to merge his firm with Richard’s in order to curb the latter’s excesses. Several times, Lamont warned George that Richard’s shrilly condescending attacks against securities reform were counterproductive. George himself knew Richard was being reckless. And when Morgans underwent its first inspection by state bank examiners in 1934, George had to supply his own securities as collateral for Richard’s loan.

  By the mid-1930s, in a sure sign of desperation, Richard was approaching Jewish Exchange members for loans, even though he had blackballed them from the Exchange’s upper echelons. In 1936, George asked partner Henry P. Davison, Jr., Harry’s son, to inspect Richard’s finances. While quizzing Richard in a polite, offhand manner, Davison noticed that his loans lacked sufficient collateral. Worse, Richard was using borrowed securities as collateral for more loans—the broad and open highway to financial ruin so memorably paved by William Crapo Durant a generation before.

  At this point, Richard graduated from poor judgment to outright crime and began to loot two blue-blooded institutions. The Stock Exchange had a $2.5-million Gratuity Fund, which provided death benefits to members’ families; Richard helped himself to $1 million of its securities as collateral for loans to himself and his firm. As treasurer of the New York Yacht Club, he misappropriated $150,000 in securities. The scandal was uncovered when Richard Whitney skipped a meeting of the Gratuity Fund trustees and a meek clerk divulged the missing securities. Suddenly Richard had to replace the “borrowed” shares. Among others, he tapped Averell Harriman for $50,000 but needed bigger money. On November 23, 1937, he went to George for a $ 1-million emergency loan. The bank’s formal culpability began here, because Richard admitted his criminal acts to his brother. It must have been a nightmare for George, who had spent years in Washington hotly defending the House of Morgan against insinuations of impropriety. As Richard said of George, “He was terribly distu
rbed and aghast that it could have been done and asked me many, many times why I had done it, and just couldn’t understand it—thunderstruck, as he had reason to be.”34

  Lacking ready cash, George went to Lamont and told him Richard was in a “very serious jam.” (“Jam” would be the all-purpose euphemism of the scandal.) He admitted the misappropriation of Stock Exchange securities and said they had to be replaced the next day. Cool but sympathetic, Lamont said, “Well, that is a devil of a note, George. Why, Dick Whitney is all right; how could he mishandle securities even for a moment, no matter what the jam?”35 The next day, in an extraordinary act of fear or friendship, Lamont sat down and wrote out a personal check for $1 million; George then made it over to Richard. Two weeks later, after repaying Lamont, George asked Jack Morgan if he could withdraw money from his partnership capital, vaguely referring to Richard’s being in an “awful jam.” Jack didn’t inquire as to the reason. He later said he assumed the money was for a business matter.

  Because Lamont and George didn’t report Richard’s crime, they were guilty of misprision of a felony. For three months, they knew Richard was a crook but told nobody at the Stock Exchange and handled the embezzlement as a matter best settled privately among gentlemen. They faced an excruciating dilemma. The Morgan partners never paid bribes and prided themselves on their integrity, but now there were strong temptations to hush up the scandal. George was naturally reluctant to expose his brother’s crimes. And the bank knew the New Dealers would gladly exploit a scandal to impose further reforms on Wall Street. They didn’t want to throw Richard to the liberal Democratic wolves, especially to William O. Douglas, who was ready to pounce on the House of Morgan and the Stock Exchange.

  A zealous regulator with a bottomless hatred of Wall Street, Douglas was a certified Morgan-hater. He had labeled the “Morgan influence . . . the most pernicious one in industry and finance today.”36 He loathed the “goddamn bankers” and castigated the “financial termites” driven by a thirst for immediate profit. He continually plied Roosevelt with memos about the need for new regional industrial banks to “displace the Morgan influence in the various regions [with] a new and enlightened leadership in the business.”37 Douglas was also conducting his crusade against the New York Stock Exchange, which he regarded as an archaic private club. In fact, he threatened to take over the Exchange the same month Richard went to George for his emergency loan.

  It is apt at this point, before examining the final act of the Whitney scandal, to relate a small anecdote that deserves a place in the Morgan annals. In February 1938, Richard took a $100,000 loan from a Walter T. Rosen. Evidently Rosen was well versed in Morgan lore, for in agreeing to the loan, he told Richard, “I have always been much impressed by the attitude of the elder Mr. Morgan who held the view that the personal integrity of the borrower was of far greater value than his collateral.” With a straight face, Richard replied, “Mr. Morgan was entirely right.”38 By this point, Richard had racked up $27 million in loans.

  On March 5, 1938, while George was recuperating from an illness in Florida, Richard suddenly appeared at the Links Club. He interrupted Morgan partner Frank Bartow at a bridge game. “I am in a jam,” he blurted out and asked Bartow for a loan. He admitted that he had embezzled shares from the New York Yacht Club. Bartow said, “This is serious.” Richard replied, “This is criminal.”39 Richard was about to appear before a Stock Exchange investigative committee and desperately needed money. Bartow refused to make a move before consulting a lawyer. The next day, he and Jack Morgan met with John Davis, who warned that any attempt to lend money to Richard could ruin the House of Morgan.40 Their refusal to help sealed Richard’s fate. When they telephoned George in Florida and told him of his brother’s impending downfall, George simply gasped, “My God!”41

  On March 7, 1938, the board of governors of the Stock Exchange voted misconduct charges against Richard Whitney. The next morning, an Exchange representative sounded the gong on the trading floor and announced the suspension of Richard Whitney and Company for insolvency. Pandemonium followed, and share prices plunged. Soon afterward, New York County district attorney Thomas E. Dewey indicted Whitney for grand larceny and securities theft, including a $100,000 theft from his wife. It came as a great shock to America’s aristocracy, including President Roosevelt. With old class loyalty surfacing, the president sat teary-eyed when William O. Douglas brought him the news as he breakfasted in bed. “Not Dick Whitney!” the president cried; “Dick Whitney—Dick Whitney. I can’t believe it!”42 For a moment, the economic royalists seemed as unconscionable as New Deal slogans claimed.

  The House of Morgan was outraged by the hastily arranged SEC investigation into the Whitney scandal. The crowded New York hearings took place at 120 Broadway, right near the Corner. Dean Acheson of Covington, Burling represented the Stock Exchange, while a young SEC lawyer named Gerhard A. Gesell led the questioning. When Ge-sell asked Jack Morgan whether he thought he had responsibilities to the Exchange in the matter, Jack replied, “No, none at all.”43 When Gesell asked why Morgans had lent money to Richard, Jack replied that he had never inquired as to the reason. “Well, you didn’t think it was wine and women and horses, did you?” Gesell asked. When Jack said no, the sum was too large for that, everybody laughed.44 Tired and defeated, Jack sat with eyes shut through much of the testimony, as if it were a bad dream from which he would soon thankfully awake. Gesell later praised him as a “perfectly delightful old gentleman . . . mellow and always truthful.”45

  Lamont’s usual sangfroid deserted him. At the hearings, he admitted that it hadn’t occurred to him that Richard was a thief, that he lent the money to George, and that he assumed Stock Exchange officials knew of the share dealings. He indignantly asked, “Would you expect me, Mr. Gesell, to say to Mr. George Whitney, ’Yes, George, I will help you out to cure this default, which you believe is a perfectly isolated thing, but I must trot down to the district attorney’s office and denounce your brother forthwith?”46 Lamont said he had done what any friend would do. Similarly, George Whitney said he had done what any brother would do.

  Lamont’s papers confirm his sense of bafflement. Even to his friend Lady Astor, he felt obliged to plead his innocence:

  It is all a bit like Alice in Wonderland to me. Ought we all to forget the principles on which we were trained to help one another, to try to forgive and to try to give the fellow another chance? . . .

  Of course, as the evidence proved, Dick was a thoroughgoing crook. He lied to George up to the last moment, he falsified his books, he deceived his wife and children, etc. etc. But all this was unknown to George last November at the time that he tried to help Dick undo the wrong that he had done.47

  Although Richard Whitney pleaded guilty to grand larceny, George and Lamont escaped punishment. Prosecutor Dewey perhaps thought the rich had suffered enough. But the SEC report harshly criticized the pair and said they had known of Richard’s criminal conduct and financial difficulties. (Even before seeing the report, Jack told Lamont and George it would be another “poisonous” SEC document.48) Hard and relentless, William O. Douglas wanted Morgan blood. During the hearings, he summoned Gesell to his office and said, “The press tells me you’re being soft on George Whitney.” Gesell shot back, “Bill, that’s beneath you. I’ve been bringing out the facts, but I’m not going to rub George Whitney’s face in the dirt simply because he helped his brother. And I’m not being soft on him.”49 Whitney respected Gesell and later encouraged Covington, Burling to hire him. “But you’d better get rid of this fellow Acheson,” he told Harry Covington. “He’s no good.”50

  Douglas asked the Justice Department to review George Whitney’s and Lamont’s conduct for possible misprision of a felony. When Justice Department attorney Brien McMahon refused to prosecute them, Douglas saw a malign conspiracy at work. He later said McMahon would “cast our reports into the dustbin. . . . Somewhere in the background was a powerful figure with money and political connections.”51 When he tried to
get the Exchange to pursue the Morgan partners, only University of Chicago president Robert Hutchins voted for censure.

  Douglas capitalized on the scandal to push through a new constitution and reform slate at the Exchange. The embezzlement demonstrated the need for greater openness at the Stock Exchange. By mid-May, the reforms recommended by the Conway committee were enacted. The board of governors was broadened to include public members, and the thirty-four-year-old secretary of the Conway committee, William McChesney Martin of Saint Louis, was elected the first salaried president of the Exchange. Douglas thus converted the Exchange from a private club into a body responsive to SEC dictates. He also pushed another reform agenda—competitive bidding for securities issues. In December 1938, he won a partial victory when the SEC ruled that investment banks couldn’t collect underwriting fees from public utilities unless they engaged in arm’s-length bargaining. Other financial crusaders also took heart from Whitney’s disgrace. Railroadman Robert Young later said he had the courage to persist against Lamont’s opposition after reading about Whitney’s arrest, which he saw as proof of decaying Morgan power.

  And what happened to Richard Whitney? After his arrest he behaved like a French nobleman being dragged off to the guillotine. Determined to face down his executioners, he berated Gerhard Gesell for being five minutes late to one interrogation. He objected to being described as insolvent, saying in a huff, “I still can borrow money from my friends.”52 Meanwhile wealthy sympathizers stacked up floral wreaths in front of his East Seventy-third Street townhouse. After he was convicted of grand larceny, a circus atmosphere attended his departure for a five- to ten-year prison term at Sing Sing. Five thousand spectators at Grand Central Terminal saw a tall bowler-hatted man being led to the train by police. He was shackled to two other prisoners—an extortionist and a man convicted of assault. Unlike these two criminals, the impassive Whitney made no attempt to hide his face from photographers. He became inmate number 94835 at Sing Sing, and the first Stock Exchange president ever to serve time there.