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

by Ron Chernow

  The bank lovingly tended its image, the glamorous 23 on its door. Its phone number was Hanover 5-2323, the license plate on its black company Cadillac G-2323. As banker to old money and high society, it obeyed strict etiquette. When calling, young bankers wore hats, and in the office risked irreparable career damage if they removed their jackets en route to the men’s room. In this prudish place, the ladies’ room of the Trust Department was left unmarked because red-faced bankers couldn’t agree on the sign’s proper wording. The preferred style was low profile. Clients were never mentioned to outsiders, annual reports contained no pictures, and advertising was strictly forbidden. When one new arrival asked the publicist his job, he was told, “I’m the guy paid to keep the bank out of the press.”25 With client relations still close and raiding the business of competitors taboo, there was no particular need for self-promotion.

  Even as the Morgan bank exploited its mystique, a lot of bluffing was going on. “The reputation of doing business only with the biggest of the big, the image of aloofness, could be off-putting to a new generation of entrepreneurs and corporate executives,” remarked Jim Brugger, the bank’s publicist. “Without enunciating it in so many words, the bank in this period worked to shed some elements of the mythology that clung to it.”26 The Gentleman Banker’s Code dictated that clients come to bankers. Yet Morgans could no longer afford such imperial passivity, and Whitney dispatched young “bird dogs” across the country to scout up business. He wanted greater geographic breadth in the client base. Without putting too fine a point on it, the mighty Morgans was begging for new clients, which offended some old-timers. As Longstreet Hinton of the Trust Department later wrote, “A few people within the organization believed that potential customers should take the initiative to do business with the bank and some even had the strange notion that no existing clients would ever even dream of taking their business elsewhere.”27

  An enduring Morgan myth was that the bank required a $1-million balance for personal checking accounts. These rare Morgan checks were cashed on sight anywhere in the world and were good for cultivating executives. At a Bond Club spoof in the 1950s, a vaudeville team satirized the Morgan approach, singing “Our tellers have a million-dollar smile. They only smile at people with a million dollars.”28 This exclusivity could be self-defeating. At one annual meeting, George Whitney created a sensation by denying the $l-million minimum. “WHITNEY EXPLODES ‘MORGAN MYTH’” ran the the incredulous New York Times headline; “LESS THAN MILLION DEPOSIT TAKEN.”29 But further down in the article, Whitney seemed to waver, saying the bank wasn’t “geared physically” to small accounts. He finally left the impression that perhaps there was a $l-million minimum for personal deposits after all.

  THIS posturing hid problems at the House of Morgan that would intensify through the decade. They stemmed from the way Wall Street banks financed their operations—especially a practice called compensating balances. In exchange for a loan, companies would leave up to 20 percent of the money behind in interest-free deposits. By paying such tribute, the borrowers preserved the banking relationship and received free services, such as the right to consult the bank economist or have a merger arranged. Compensating balances also guaranteed credit during times of scarcity, an assurance that reflected historic corporate anxiety about maintaining a constant flow of capital. This setup bound Wall Street banks to their customers in an intimate relationship and gave banks free cash to lend at high spreads. It was a wonderful racket. In these fading days of relationship banking, profits seemed almost guaranteed, producing a pleasant but stolid generation of bankers.

  In retrospect, it may seem peculiar that companies should have left so much idle money with their banks. But while inflation and interest rates were low, they really sacrificed little. Leffingwell was in the forefront of those arguing for free-market interest rates. The bank knew that the easy days of compensating balances were numbered. Nevertheless, it got a jolt in September 1949, when it found itself the unexpected victim of a sensational crime—a tabloid story that didn’t make the financial pages but had a profound impact at the bank.

  A French-Canadian jeweler known as J. Albert Guay had an illicit passion for a nineteen-year-old waitress named Marie-Ange. Determined to get rid of his interfering wife, Guay tucked a bomb into her suitcase just before she boarded a Quebec Airways flight. He wanted not only to indulge his illicit ardor but to collect his wife’s $10,000 in life insurance as well. Fifty miles northeast of Quebec, the plane exploded, incinerating Quay’s wife and twenty-two other passengers. The scheming jeweler collected neither cash nor mistress, but ended up condemned to death by hanging.

  Such melodrama seemed worlds away from the sedate J. P. Morgan and Company. Yet the plane victims included E. Tappan Stannard, head of Kennecott Copper. Stannard belonged to Kennecott back when Dwight Morrow helped the Guggenheims to organize it during World War I. In 1942, soon after Morgan’s incorporation, he became the first “outside” director on the bank’s board. Now Stannard’s mystified successor asked his chief financial officer about a $60-million deposit the copper company kept at Morgans. The flustered CFO said the company always kept big balances there. Not schooled in such absurdities, the new president asked, why not leave $10 million and invest the other $50 million? This bright idea shocked 23 Wall: Kennecott was withdrawing 10 percent of the bank, despite the fact that George Whitney was a Kennecott director. (According to other versions of the story, Morgans actually encouraged Kennecott to spread its deposits among several banks for reasons of safety.) The move foreshadowed a central feature of the Casino Age—the death of relationship banking, which had been characterized by exclusive ties that bound major companies to the House of Morgan and other Wall Street banks.

  Morgans needed these big cash balances to survive. Under legal lending limits, it couldn’t commit more than 10 percent of its working capital to a single customer. (Bank capital was actually smaller than deposits—essentially, what would remain after the bank had paid off all its debts.) This meant it could provide only a piddling $5 million or $6 million to a General Motors, a U.S. Steel, or a General Electric. With directors on these companies’ boards, Morgan still had an inside edge, but its shortage of capital threatened to rob it of major business. As Leonard McCollom of Continental Oil (afterward Conoco) told George S. Moore of National City, “J.P. Morgan’s not big enough to be an oil bank, but you are, and you should gear up for it.”30 Continental, it may be noted, was formed by a Morgan-arranged merger back in the 1920s, and McCollom was even a J. P. Morgan director. If they had to, companies would bolt traditional bankers and no longer feared antagonizing Wall Street. Their options in the Casino Age were far more diversified than they had been in the old days of captivity.

  The House of Morgan wrestled with the unpleasant fact that it was too small to survive as a major financial institution and that only a merger could restore its former power. In 1953, John J. McCloy, the former World Bank president who was now chairman of the Chase Bank, made a merger overture to Whitney. Chase was now a colossus beside Morgans; its vast assets put it third in size nationwide. Yet the House of Morgan believed unquestioningly in its special destiny. When Whitney explored the possible merger with McCloy, he bargained as if J. P. Morgan were the bigger bank. Whitney inquired who would control the merged bank and extracted a surprise concession from McCloy: “I am quite prepared to step aside if, as a result of. . . analysis, it would seem that others should conduct the affairs of this bank.”31 When Whitney pursued this extraordinarily generous offer with his colleagues, he found no jubilation. Rather, he faced intransigent opposition from two sons of famous partners—Henry P. Davison and Tommy S. Lamont—who refused to merge with anyone, let alone Chase. They didn’t want to adulterate the purebred Morgan culture. By decade’s end, this clan-nishness would belatedly force the Morgan bank into a lifesaving merger. McCloy, meanwhile, resumed talks with the Bank of the Manhattan and consummated a merger that turned Chase from a wholesale bank into the leading
retail bank, Chase Manhattan.

  DURING the Truman years, the Morgan bank was still subject to political attacks that echoed the New Deal. It was now accused of the old political crimes without having actually enjoyed committing them. Yet reformers couldn’t believe the House of Morgan had been emasculated. In 1950, Representative Emmanuel Celler of New York showed that J. P. Morgan directors sat on the boards of companies whose assets totaled over $25 billion, which he called a “breath-taking figure.” Similarly, during a brief brouhaha about Morgan power, U.S. Steel chairman Irving S. Olds reassured an annual meeting with these words: “It happens that a member of J.P. Morgan &. Co. is on this board. I say that J. P. Morgan & Co. or no other financial interest or group controls U.S. Steel.”32 The imagery suggested here, borrowed from Money Trust days, now seemed anachronistic. The giant American corporations, multinational in scope, were no longer beholden to a single Wall Street bank.

  By the early 1950s, the anti-Wall Street vendetta that had raged for twenty years was petering out, and Morgan executives could again function as political allies. Yet the political involvement was of a different nature. George Whitney and others felt the bank had gotten burned by fooling around in politics. Gun-shy, they shrank from the power-broker role that Tom Lamont had played in the Republican party. Although a lifelong Republican, Whitney had no stomach for public fights and associated politics with public exposure, scandal, and demeaning interrogation. His influence would be more personal than institutional in nature and so discreet as to be invisible to the general public.

  Whitney had a close relationship with Dwight D. Eisenhower, which came about almost by chance. Whitney’s son Robert had served on Eisenhower’s staff during the war and worked in his presidential campaign; he introduced his father to Ike, who lunched with the Whitneys in Old Westbury when he was president of Columbia. In 1951, George Whitney helped bankroll the volunteer group Citizens for Eisenhower, which encouraged Ike Clubs to sprout across America.

  When Eisenhower went to Paris in 1951 as the military commander of SHAPE (Supreme Headquarters Allied Powers Europe), he invited Whitney to draft weekly or monthly letters outlining his views on topical issues at home. Whitney obliged with long, opinionated letters that were acerbic in their judgments of most politicians, labor leaders, and businessmen but deferential and affectionate toward Eisenhower. Ike felt at sea on economic and financial issues and welcomed these lectures. “Your letters are one of the brightest things in my office life,” he told Whitney.33

  Whitney’s letters reflect a frustration with the contemporary economy that says much about the fallen state of bankers in the new age. By his own admission, his favorite bugbear was organized labor, yet he was no less reluctant to chastise management for caving in to labor’s demands. Although he had sat on the General Motors board for twenty-seven years, he took more pot shots at GM president Charles E. Wilson than anybody else. He was especially irate that Wilson had negotiated a cost-of-living allowance with the United Auto Workers, which he thought would foster inflation, even if it might benefit the company. At one point, Whitney mockingly sent Ike a Wilson speech about stopping inflation, pointing out the incongruity between author and subject. The days when the House of Morgan dictated to its industrial clients were over.

  Whitney loathed the Truman administration, which he saw as perpetuating the worst New Deal tendencies—a welfare-state mentality that encouraged people to expect support from government, imposition of federal controls over business, and a bias toward fighting unemployment rather than inflation. He thought Truman scapegoated the rich and exploited class divisions. Yet he was no less fearful of the Republican candidacy of Senator Robert Taft of Ohio, whom Lamont had rejected in favor of Wendell Willkie a decade earlier. In late 1951, Ike was still evading any commitment to run for president, citing the nonpartisan requirements of his position at SHAPE. But when Whitney heard that Taft had announced his candidacy in October 1951, he went beyond gentle prodding and made a strong plea for Eisenhower to get into the race: “It is quite clear that the work you are now carrying on would be put in jeopardy if Taft’s candidacy succeeded because his strongest backers represent the strongest isolationist movement in this country. . . . I see little comfort in a Republican Administration headed by Taft.”34 Ike’s election confirmed the ascendancy of the internationalists in the postwar Republican party.

  Only a month after Eisenhower’s election, Whitney’s pleasure in the victory was cut short. His thirty-six-year-old son, Robert, an assistant VP at the bank in charge of Southwest business and a ruggedly handsome, athletic man, was hit by a car one evening in late December 1952 and was killed instantly. Robert Whitney left behind a wife and four children.

  For a man whose early life had suggested easy prosperity, George had led a life full of trouble. Dwight and Mamie Eisenhower sent a handwritten note of condolence: “We can find no words to express the shock and grief we suffer from the news we have just received of Bobby’s tragic accident.”35

  In Eisenhower, the Morgan bank had a nearly perfect ally—conservative on economic issues yet opposed to economic nationalism and political isolationism. Not since Hoover had the bank enjoyed such a neat fit. Calling Whitney his Wall Street “listening post,” Eisenhower invited him to his White House “stag dinners” for business friends—occasions that produced charges of Ike’s being corrupted by rich friends. The president clearly heeded Whitney’s advice. In the early 1950s, there was a movement to unfix the price of gold. Some wanted higher, other lower, gold prices. Whitney and Leffingwell convinced Eisenhower to keep the gold price at $35 an ounce, where it had stood since 1934. Ike thought Leffingwell’s memo on the gold question the best he had read.

  The early Eisenhower years certified that the long-standing Morgan preference for international economic cooperation was firmly entrenched in Washington. The historic split that had so bedeviled Morgans—between rural isolationists, who favored inflation, and eastern-seaboard bankers, who favored hard money and had financial ties to Europe—had become a thing of the past, a topic for history students. American companies were going abroad, farmers were cultivating export markets, and Washington was operating military bases around the world. America no longer seemed so distant from the rest of the world and was explicitly tied to Europe through the Atlantic alliance. The House of Morgan had ceased to be an alien presence in America’s political culture.

  CHAPTER TWENTY-SIX

  MAVERICKS

  IF the Wall Street of the 1950s was a closed, privileged club, the trend-setting firm and social arbiter was Morgan Stanley. It was a remarkably small place, with fewer than twenty partners, a hundred staffers, and a paltry $3 million in capital. Nonetheless, it was the paragon of investment banking and exerted enormous influence. Its one office at 2 Wall Street, with green carpets and white walls, overlooked Trinity Church. In an elevated area called the platform—analogous to the partners’ room at Morgan Grenfell—stood a double row of mahogany rolltop desks, exact replicas of those at 23 Wall. Like a twin separated at birth, it showed common ancestry with J. P. Morgan and Company down the block.

  Morgan Stanley boasted a matchless list of Fortune 500 clients and had tight handcuffs on many old House of Morgan stalwarts, including General Motors, U.S. Steel, Du Pont, General Electric, and Standard Oil of New Jersey. In the late 1940s, it added Mobil, Shell Oil, Standard Oil of Indiana, Bendix, H. J. Heinz, and numerous others. It represented six of the seven-sister oil companies and pumped out more bonds than any other firm. As confidants of the mighty, Morgan Stanley partners dealt mostly with chief executives and were privy to their secret long-range plans. They monopolized the stock and bond issues of client companies. Nobody tried to steal Morgan Stanley clients, which was considered bad form and fruitless to boot.

  A palpable warmth still existed among the Morgan firms, many senior people having worked together at J. P. Morgan and Company or Guaranty Trust in the 1920s and 1930s. They might be divided by the Glass-Steagall wall, but they sent a thi
ck trail of vines snaking over the top. J. P. Morgan and Morgan Stanley encouraged their employees to fraternize and referred business to each other. Each year, they hosted an honorary dinner, assigning ten promising young people in each firm to attend; like doting parents, they pushed the children together. Morgan Stanley shared a cafeteria with J. P. Morgan and Company at 120 Wall Street. Morgan Stanley partners had personal accounts at 23 Wall and were among the few mortals to possess J. P. Morgan home mortgages.

  Wherever possible, the two Morgan firms cooperated on business. J. P. Morgan managed Morgan Stanley’s pension fund and profit-sharing plan, while Morgan Stanley sponsored J. P. Morgan securities issues. If Morgan Stanley floated a bond, J.P. Morgan paid out the dividends. They were wedded by a special bookkeeping arrangement that dated from the Depression, when Morgan Stanley feared cyclical fluctuations in securities work and wanted to keep overhead low. Morgan Stanley had no clerical or back-office staff, and the “closing” on bond issues—the physical exchange of checks and securities—still took place at 23 Wall. At this point, however, the fraternal Morgan relationship was highly unequal. Morgan Stanley was now the uncontested leader in investment banking, while J. P. Morgan was a shabby genteel aristocrat in commercial banking, backed by a great deal of tradition, but without comparable contemporary power. As partners in their firm, Morgan Stanley people made far more money than their 23 Wall counterparts. During these community-of-interest days, Morgan Grenfell people also apprenticed at both J. P. Morgan and Morgan Stanley. Despite Glass-Steagall, it was still a happy Morgan family.

  Far more than J. P. Morgan and Company, Morgan Stanley shrank from political involvement and never displayed an equivalent sense of either public service or noblesse oblige. Harold Stanley was all business, and Harry Morgan shared his father’s distaste for politicians. As mostly an issuer of blue-chip bonds, Morgan Stanley seldom dealt with the SEC and had little need to lobby Washington on industry issues. At one point in the 1950s, Eugene Rotberg (later World Bank treasurer) and Fred Moss of the SEC visited Morgan Stanley to study “hot issues”—new stock offerings that soared and gyrated wildly after issue. The SEC visit was unprecedented, even an occasion for mirth at 2 Wall Street. The two SEC men were greeted by a man in livery—a red jacket with white bands across the chest—who escorted them to the platform. At a desk in the middle stood Perry Hall, the funny, fiery managing partner, who introduced himself by saying “My name is Perry Hall—partner, Morgan Stanley, Princeton.” Fred Moss retorted, “My name is Fred Moss—SEC, Brooklyn College. Before my name was Moss it was Moscowitz. And before that it was Morgan, but I changed it in 1933.”1 Following an old House of Morgan custom, Morgan Stanley didn’t sell, trade, or distribute securities but allocated them to other firms, its partners worked far from the vulgar din of the Stock Exchange and wouldn’t stoop to sponsor new companies. It turned out that Morgan Stanley partners didn’t know what “hot issues” were.