Morgan
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The long depression was coming to an end. Farm prices began to pick up in the middle of 1879, when disastrous weather in Europe created demand for American produce, but Wall Street had felt the recovery earlier. In February Pierpont reported to Jacob Rogers that since the first of the year business had been “such that I haven’t seen for many many years,” and “negotiations of great magnitude follow each other with great rapidity.”
He was involved in a negotiation of relatively small magnitude but enormous potential. On October 20, 1878, he had written to Walter Burns about having been “very much engaged for several days past on a matter which is likely to prove most important … to the world at large [and] to us in particular in a pecuniary point of view. Secrecy at the moment is so essential that I do not dare to put it on paper. Subject is Edison’s electric light.”
Thomas Edison was known by 1878 for his work on the telegraph, telephone, and phonograph. He had taken out his first patent, for a telegraphic stock ticker, in 1869, and over the next forty years registered 1,092 more, averaging a new license every two weeks. In 1876 he built a small laboratory for industrial research at Menlo Park, New Jersey, and a year later found a way to record and reproduce sound. He demonstrated the first “talking machine” to a skeptical assistant by shouting “Mary Had a Little Lamb” into a hand-cranked recorder that scratched sound waves onto a revolving cylinder covered with foil. Then he replaced the cutting stylus, turned the crank again—and later said he was “never so taken aback in all my life” as when the song came crackling out: “I was always afraid of things that worked the first time.” People flocked to Menlo Park to see the amazing machine, and Edison took it to Washington in April 1878 to show to the American Academy of Sciences, several congressmen, and President and Mrs. Hayes.
That fall he turned his attention to light. Gas lamps and candles lit most interiors at the time (society aesthetes preferred candles, complaining that gas made diamonds look dull), but city streets and big public spaces were illuminated by arc lighting—electrical arcs that sparked a brilliant discharge between two carbon electrodes. Arc lights were too intense for commercial and domestic use, however, and after Edison toured a Connecticut arc-light plant early in September, he set out to subdivide electrical energy into smaller units. A few weeks later he produced a brief incandescence by passing an electric current through a platinum-wire filament in a partially evacuated bulb. England’s Lord Kelvin, asked later why no one else had figured out how to do it, said, “The only answer I can think of is that no one else is Edison.” On September 16, the New York Sun ran a story about EDISON’S NEWEST MARVEL, SENDING CHEAP LIGHT, HEAT AND POWER BY ELECTRICITY. Edison crowed, “I have it now!” and promised to illuminate downtown Manhattan with a single five-hundred-horsepower engine. He also promised to have a complete system in a few weeks—and to make electricity cheaper than gas. The price of gas-company stocks promptly fell 25 to 50 percent.
Developing electric-light systems was going to require money, and Edison authorized his attorney, Grosvenor P. Lowrey, to organize financing for the project: “All I want at present,” he said on October 3, “is to be provided with funds to push the light rapidly.” Lowrey served as general counsel for Western Union, and had a long-standing friendship with Egisto Fabbri—his law office was on the third floor of the Drexel Building. On October 15, 1878, thirteen men incorporated an Edison Electric Light Company; among them were Edison, Lowrey, Fabbri, three of Lowrey’s partners, and several Western Union officials. Fabbri was appointed to the board, the five-man executive committee, and the position of company treasurer. In return for funding the development of incandescent lighting, the company would own, sell, and license the use of Edison’s electrical inventions. It issued 3,000 shares of stock at $100 each, for a nominal capitalization of $300,000. Edison retained half the shares. The other half was taken by a small syndicate of investors, among them Fabbri and two other Morgan partners, Tony Drexel and J. Hood Wright. The syndicate paid for 500 shares right away, to provide Edison with $50,000.
The thirty-one-year-old inventor, entirely self-taught and so preoccupied with his work that he rarely bothered to comb his hair, change his coat, or go home to sleep, was not the sort of man with whom the Morgans generally did business. Moreover, they did not ordinarily get in on the ground floor of new ventures, tending to wait until commercial value had been established. Pierpont once told a colleague that his strengths lay more in the consolidation of existing projects than in the promotion of new ones. Still, in October of 1878, he had instantly seen the value of Edison’s project “to the world at large [and] to us in particular in a pecuniary point of view,” and urged his London partners to join him in backing it: “I fear Father will think it all imaginary,” he told Burns, “but am sure he will change his mind.”
He had to move quickly. News of the invention brought inquiries from financiers all over the world. At the time of Pierpont’s top-secret letter to Burns, Lowrey was urging Edison to assign all his foreign business to Drexel, Morgan: the English patents would provide “enough money not only to set you up forever but to … really endow a working labratory [sic] such as the world needs and has never seen,” argued the lawyer; if the enterprise was to succeed, it must be represented by “sober business men of the highest commercial standing,” with “an amount of [financial] skill and power which neither you nor I possess.” The Morgan bank had the contacts and experience to organize the business all over the world, as well as the ability to raise the “hundreds of thousands of dollars” the Light Company was going to need. In sum, Lowrey told his client, “you are introduced to a new class of men,” with “all the means which may ever be required” to promote the development and management of “what we all think is to be a great property.”
On November 19, Pierpont cabled Burns—“extreme secrecy essential”—that the business was “assuming desirable shape[.] Have secured one third whole thing with complete control and management our idea is offer London joint account for Great Britain if satisfactory.”‖ Drexel, Morgan would serve as Edison’s banker on both sides of the Atlantic. The risk would be “nominal,” Pierpont promised his London partners, requiring little money until “success demonstrated by actual trial here.” On the side of potential reward, “impossible overestimate result if such success attained.”
Junius was evidently unimpressed. His skeptical response has not survived—perhaps he shared the views of the British trade journal Engineering, which sniffed that Edison’s scheme might prove “good enough for our Transatlantic friends” but was clearly “unworthy of the attention of [England’s] practical or scientific men.” Pierpont tried to answer the paternal objections by mail, writing and tearing up several letters about “the Edison business,” then gave up in frustration and decided to make his case in person when he went to London in the spring. “I cannot however allow another mail to go by,” he wrote at the end of 1878, “without saying to you from my heart that I appreciated the feelings which prompted your letter.…” Deeply troubled by his father’s doubts, he went on: “If there is one thing which is dear to me in life it is the interest which you take in me and mine, & consequently I should never think of questioning the spirit in which you might write even if I could not agree with your views on all points.…” He felt sure that “if you understood what was proposed [about the Edison matter] you would look at it with a different light.” He did not appear to notice his apt double entendre.
Without his father’s backing, Pierpont proceeded to finance the Edison project. (See Chapter 12.)
In the midterm elections that fall, a new Greenback-Labor Party won more than a million votes, sending fourteen representatives to Congress. New York’s residential Upper East Side—the wealthiest constituency in the country—elected the Morgans’ syndicate partner Levi Parsons Morton to the House.
Descended from New England Puritans, Morton was the son of a Vermont pastor. He had begun his career as a storekeeper in New Hampshire, worked with Junius at
J. M. Beebe, Morgan & Co. in Boston, and founded his New York bank in 1863. His London partnership had been headed by a former Canadian finance minister, Sir John Rose, ever since Walter Burns left for Paris. With fair hair, small appraising eyes, a florid complexion, and invariably elegant attire, Morton looked like a cross between a curate and a country squire. His first wife died in 1871; two years later he married the former Anna Livingston Reade Street, of Knickerbocker stock. The couple had five children and lived in a six-story brick mansion with tall arched windows at 85 Fifth Avenue, on the northeast corner of 42nd Street. Edith Newbold Jones, later Wharton, made her debut in their ballroom in 1879. The second Mrs. Morton disliked her husband’s Old Testament name and called him L.P. They named their only son Lewis Parsons Morton.
Junius sent Morton congratulations after the 1878 election, as did former Treasury Secretary Boutwell, current Secretary Sherman, Anthony Drexel, and Pierpont Morgan. In office, Morton remained intimately involved with the Treasury’s refinancing operations. No law prohibited him from serving as lawmaker in the federal government and as banker negotiating with that government, but critics in the public and press objected that his dual role gave unfair advantage to Wall Street. Congressman Morton, like his Morgan friends, acknowledged no distinction between Wall Street interests and the national interest: two months into his term he told the House that if the country maintained its “honor and good faith” by maintaining the gold standard, “in my opinion the day is not far distant when the City of New York will be the clearing-house for the commercial exchanges of the world.”
Before Pierpont turned his full attention to the “negotiations of great magnitude” that followed the economic recovery and return to the gold standard, he wanted to secure the last of the Civil War refunding loans. The struggles over these final bond issues marked a turning point in an awkward, halting transfer of power—from Old Guard to New, London to New York, Rothschilds to Morgans, Junius to Pierpont.
Junius still insisted on treating the house of Rothschild as sovereign—a deference Pierpont thought it no longer deserved. Counting on the prerogatives of their position, the Rothschilds took precedence on deals they did not initiate, withheld information from syndicate partners, and let Drexel, Morgan do much of the actual work. Early in 1879 Pierpont told Walter Burns that Baron Rothschild’s treatment of “all [our] party, from Father downwards is such as to my mind no one would stand.”a Moreover, he considered the Baron’s imprimatur no longer essential to the bond issues’ success. Every Treasury Secretary he worked with had urged him to “drop” Rothschilds, he reported, largely because of “strong antipathy” to Belmont.
In January 1879 the Morgan/Morton group outmaneuvered the Rothschilds, Seligmans, and a syndicate led by a new domestic competitor, the enormously successful First National Bank, for the right to sell a new 4 percent issue abroad. Congressman Morton was in Sherman’s office when he learned that the Secretary was about to give the loan to the First National: its vice president, Harris Fahnestock, was cabling his London associates for approval. Morton contracted for the entire issue on the spot. Just as he finished speaking, a messenger handed Sherman a wire from Fahnestock in New York agreeing to terms. Morton had cinched the deal by seconds.
Junius was furious at his associates—just as he had been in 1873—for committing themselves without consulting London, especially the Rothschilds. Pierpont, bristling, replied that if Morton hadn’t moved so quickly the business would have been lost, and “It seemed to me that JSM Co. ought to be more bound to us than to the Rothschilds.” Nonetheless, Junius granted Baron Rothschild management of the loan.
Four months later Pierpont took the initiative on another matter that made his father even angrier. Secretary Sherman, impatient to finish up the refundings, opened bids on April 4 for $40 million of 4 percent bonds to replace the last of the old 6 percents. Pierpont urged his London partners to enter a large bid, and when they called for only $1 million he persuaded the National Bank of Commerce, whose board he had sat on since 1875, to make an offer for the entire $40 million. Sherman awarded the Bank of Commerce the whole loan by mistake: thinking it had put in for $4 million rather than $40 million, he accepted the bid, then felt bound to honor his commitment.
Junius read his forty-two-year-old son the riot act in a cable Pierpont called the most “cutting and severe” he had ever received—which was saying a lot. Levi Morton’s New York partner, George Bliss, found the junior Morgan in such a state of “nervous excitement” that he could barely speak: “I have rarely been more sorry for any person than I was for Mr. Morgan.” Fabbri feared that Pierpont would have one of his “attacks.”
Instead, Pierpont cabled detailed explanations to London, secured J. S. Morgan & Co. a share in the Bank of Commerce contract, and received what amounted, from Junius, to an apology: “We accept your explanations which modify our views.… We accept with many thanks $1,500,000 in Bank of Commerce subscription”—and wanted $2,500,000 more.
Although Junius had seen that the economic future belonged to the western side of his transatlantic alliance, he was not ready to yield authority to his heir apparent, even as Pierpont began to emerge as a forceful presence on Wall Street, exercising sage instincts and reasonable caution. As the dust from the National Bank of Commerce fracas settled, Tony Drexel and Egisto Fabbri sent London warm praise of “our Mr. Morgan, to whose personal management and prompt action alone the Syndicate is entirely indebted.” Pointing out the healthy growth in America’s capital markets, Pierpont’s U.S. partners thought the source of recent misunderstandings had been the “extreme reluctance on your side of the water to believe that a large and legitimate demand existed here for this loan.” Only men with “direct, personal experience on the spot” could now gauge the markets and politics of the United States, concluded Drexel and Fabbri.
In May of 1879 both Morgan houses took part in one last refunding contract, for $150 million, led by the First National Bank—the first national bank chartered in New York City under the 1863 Banking Act. Combining the functions of a bank and brokerage house, First National took large accounts and small risks: it made traditional loans, worked with other national banks across the country, acted like a federal reserve in lending money at moments of crisis, and did a large business buying and selling bonds. Under its conservative president, George Fisher Baker, the First had secured participation in the government refunding loans; at the end of 1877, an awed bank examiner reported to Washington that First National had “turned over” $225.5 million in bonds that year, and earned $670,000. Baker’s bank proved such a staunch defender of sound currency during the years leading up to Resumption, and handled the Treasury’s final bond issues so well, that it came to be known on Wall Street as Fort Sherman.
The May 1879 syndicate signaled the end of the Morgans’ dependence on the house of Rothschild and the beginning of a long, close alliance between Pierpont and George Baker. Unlike Junius, the Rothschilds had not accurately gauged the American future, and their reliance on Belmont alone to keep them in touch with U.S. affairs led to their eventual eclipse as a financial power in the New World. They had no share in this final contract, and failed to gain participation after the negotiations had closed. George Bliss crowed to his London partners, “We have no doubt the Baron chafed a good deal under the loss of the business.” The Baron died a week later, at seventy-one.
By the end of the 1870s, the Treasury and the bankers had refinanced $1.4 billion of Civil War debt, saving the government $20 million a year in interest. The work done by the Morgans on these loans established their professional efficacy and earned them freedom to choose strategies and friends. In June of 1881, as Pierpont put together a syndicate for a new project, he told Burns that their group should be able to “undertake and control among selves sufficient good business without dividing as heretofore with others,” creating “a combination which would defy competition.”
The refunding loans also drew attention to Pierpont as a financial
adviser to the government—a mixed blessing in light of popular antipathy to Washington/Wall Street collusion. Answering a question from Fernando Wood of the House Ways and Means Committee at the end of 1880, Morgan urged Congress to “secure what is almost indispensable, looking to the future of our financial institutions, i.e. an elastic currency” that could expand and contract according to seasonal demand. Congress did not take that advice for thirty-three years.
In the meantime the syndicate system, under which groups of bankers shared selling, profits, and risks, came to serve as the prototype for underwritings of large securities issues. Looking back on the 1870s in 1910, the financial analyst John Moody wrote that through the “single monumental success” of the refundings, the Morgans had reopened the United States to capital investment. After 1879, noted Moody, the “aggregation of great sums of money was absolutely essential for the conduct of human affairs … and the head of the syndicate—the man with the resources and temperament capable of conducting them—was about to concentrate the greatest financial power in the history of the world.”