by Jean Strouse
Morgan reported that a statute enacted in 1862 had authorized Civil War Treasury Secretary Salmon Chase to buy coin with U.S. bonds as an emergency measure in the public interest. If the loan he had in mind were considered a purchase of coin rather than a sale of bonds, it would not require congressional approval. Under the 1862 law, Carlisle ought to have the same power Chase had had to buy gold.
Cleveland sent Olney out to look up the statute, and the Attorney General returned a few minutes later to read aloud the Act to Authorize the Purchase of Coin of March 17, 1862, from Section 3700 of the Revised Statutes. It provided exactly the authority Morgan described, and it was still in force. Cleveland asked his chief law officer whether the act would allow the Treasury Secretary to buy gold in the present emergency and replenish the federal reserve. Olney thought it would.*
The tension that had held the room in its grip all morning suddenly broke. Cleveland, Carlisle, and Morgan immediately started to work out terms, although the President insisted that they keep the negotiations secret, since Congress was scheduled to vote two days later on the issue of public bonds. No one present expected the measure to pass, but given the politics of 1895, Cleveland had to avoid any appearance of collusion with what the silverites considered “goldbuggery and Shylockism.” The government could turn to Wall Street only after it had exhausted every other remedy.
The crucial feature of the negotiations concerned the continuing gold drain. Could Morgan guarantee that the new metal would not immediately be shipped abroad? the President asked.
He could, nodded the banker, without consulting London or even Belmont across the room. In the past, his father had excoriated him for making instantaneous, autocratic decisions. Now, Pierpont had only himself to answer to, and he promised to protect the Treasury from further withdrawals—in effect, to control the international markets for gold and foreign exchange during the life of the contract. It was an extraordinary warranty, and it substantially strengthened his hand.
The bankers and administration agreed that the government would buy 3.5 million ounces of gold coin from the syndicate at $17.80 per ounce, in exchange for $62 million worth of thirty-year bonds paying 4 percent interest—bonds that could ultimately be redeemed in gold or silver coin at the discretion of the government. Since the value of gold at the time was $18.60 per ounce, the bankers were selling the government $65.1 million in gold in exchange for $62.3 million in bonds; in effect, they paid a $3 million premium, buying each $100 bond for $104.5, at a yield of 3¾ percent.†
Morgan was able to get a lower purchase price (i.e., a higher yield) than he expected because he knew exactly how desperate the situation was, had access to the capital that offered a solution, and could promise, at least in theory, to make the solution work. The Treasury agreed to give the bankers a large spread—the difference between the price the syndicate paid and the price it could charge the public—in exchange for urgently needed gold and protection of the federal reserve. The syndicate would have six months to complete the contract, and would procure half the new gold abroad at a rate not exceeding 300,000 ounces a month.
The meeting ended at 2:00 P.M.—it had lasted four and a half hours—and when Morgan stood up, a fine brown powder drifted from his lap to the floor. He had all morning been grinding the unlit cigar in his hand into dust. Cleveland laughed and handed around a box of fresh cigars.
“Impossible convey any just idea of what I have been through today,” Morgan cabled Burns from the Arlington Hotel later that afternoon, “but we have carried our point & are more than satisfied.” The new plan “will we think inspire confidence & act as an indicator that the U.S. Govt will buy gold when & where needed to maintain its Credit.”
He took an evening train to New York, arriving late Tuesday night. Two days later, as expected, Congress defeated the bill to issue public bonds. Morgan returned to Washington on Thursday, February 7, in a heavy blizzard, to conclude the negotiations. He wired Burns on Friday: “Have just left Treasury Department, homeward bound. Could not have better document.” He and Belmont would have “absolute control sales U.S.” The Rothschilds and J. S. Morgan & Co. would have the same in London.‡
London and New York each took half of the $62 million issue, and applications for syndicate participation were overwhelming. In the United States, Morgan and Belmont allotted their own firms about $2.7 million each, and gave large shares to George Baker’s First National Bank, James Stillman’s National City Bank, the United States Trust Co., and Harvey Fisk & Sons. They allotted lesser amounts (under $1 million each) to Standard Oil, the Mutual and the Equitable life insurance companies, and private banks including Winslow, Lanier; Kuhn, Loeb; Lazard Frères; Kidder, Peabody; Brown Brothers; and Morton, Bliss. The life insurance companies and Standard Oil, the only industrial firm in the syndicate, had so much available capital that they acted like banks.
On February 20, twelve days after signing the contract with the government, J. P. Morgan & Co. offered the bonds for sale at 112¼—nearly eight points above the syndicate’s purchase price—and sold out the entire issue in twenty minutes. “Subscriptions something enormous,” Morgan cabled his London partners. The issue was heavily oversubscribed, with a total bid of almost $200 million. J. S. Morgan & Co. in London had the same experience, closing its books after two hours with bids amounting, not including Rothschild’s figures, to $100 million.
“We are quite overwhelmed by success of transaction,” continued Morgan to Burns the next day. “We send you our deepest heartfelt congratulations. You must appreciate the relief to everybody’s minds for the dangers were so great scarcely anyone dared whisper them.”
A week later the price of the bonds in New York climbed to 124, which suggested that the initial offering could have been priced higher. Yet as it was, the public objected to unconscionable Wall Street profits; the criticism would have been even louder had the opening price been higher.
Morgan’s messages to Burns recall Junius’s remark about duty being a word whose definition could be made to conform to almost anything one wants to do. Pierpont preferred to have railroad companies and national economic affairs run smoothly on their own, and when they didn’t—they often didn’t—he complained of the responsibilities thrust onto his shoulders by a troublesome world. He rarely acknowledged how much he enjoyed being the man to whom other people turned in an emergency. Some years after the gold crisis, discussing his various rescue operations with his librarian, he highlighted this view of himself as reluctant hero, observing: “Sometimes I had to take command but it was always because there was no one else to do it.”
“Perhaps there was no one else who could do it,” she obligingly suggested. He nodded: “Vous avez raison.”
With the 1895 bond issue placed, gold on its way to the Treasury, and congratulations exchanged, Morgan turned to the harder part of his job—protecting the new reserve from withdrawals. The day before the bonds went on sale he had cabled Burns: “Whole transaction promises large profit but what is much more essential now that profit secured is to show public that our promises made at the time of the negotiations will be fulfilled & that our influence is powerful enough to maintain so far as possible Treasury gold reserves.”
He could not reverse the trade deficit or stop the legitimate payment of gold for imported goods. He could and did, however, sustain the reserve by other means. At the outset he had set aside $3 million in bonds to sell as necessary to protect the exchange market, and a reserve of $10 million in gold to cover Treasury withdrawals. When people traded paper currency for gold, the syndicate replaced the gold, effectively providing the government with another $25 million—$15 million more than Morgan had anticipated with his $10 million reserve. The bankers took paper notes in exchange, but since the notes did not pay interest, the syndicate lost income on these substitutions. Morgan also set up a credit fund in Europe so that American traders buying foreign products could pay for them on credit rather than ship gold from New York.
; And he intervened in the foreign-exchange markets, borrowing pounds in London and selling them in New York to prop up the dollar. Having allotted syndicate participation to the major traders in foreign exchange on condition that they not sell gold below a set price, he managed temporarily to offset the law of supply and demand. It was a classic Morgan consortium, with each party having a vested interest in a common end—in this case, protecting the Treasury against further loss of gold.
Morgan was in his element with the foreign-exchange campaign. Ever since his first trip abroad at age fifteen, he had been fascinated with the prices of money in different markets. Clerks at his Wall Street office brought him hourly reports of currency quotations, and at home over breakfast he got the figures from London by wire or phone. He monitored exchange markets the way a doctor takes a pulse, gauging the pressure in the financial arteries of nations. Through this information he could predict roughly what was going to happen to various currencies, and, reported his son-in-law Herbert Satterlee, “personally conducted considerable operations in exchange”—arbitrage operations, buying money in one market and immediately selling it in another to profit from the discrepancy in price. He used these diagnostic skills in 1895 to keep other people from speculating in Treasury gold.
To the surprise of skeptics on both sides of the Atlantic, his strategy worked. The $32.5 million in gold pledged by the American syndicate was delivered within a few weeks. The dollar’s value held. Gold not only stopped leaching out of the Treasury—throughout the spring of 1895 it flowed steadily in. By the end of June the Treasury’s reserve stood at $107.5 million. And as Morgan had hoped, the loan’s success brought European capital back into U.S. markets.
It also amplified public perceptions of his power. The New York Sun attributed the restoration of foreign faith in America’s credit entirely to Morgan. When he returned from his annual spring trip abroad that June, he not only had sold millions in U.S. securities through his own firms, reported the Sun, but had “revived a confidence in the wealth and resources of this country that has made a market for issues of securities of corporations with which he has no connection.”
“I support Pierpont Morgan for President on a distinct gold monometallic platform,” announced Henry Adams that June. To this Cassandra of America’s economic politics, the country in 1895 consisted of two elements—borrowers and lenders of money—with the latter incontrovertibly in command. Adams, whose private income depended on the lenders, saw Morgan as the incarnation of capital, the gold standard, and America’s financial dependence on England—all of which he regarded with antic dismay: “As a man of sense,” he continued by mail to his brother Brooks, “I am a gold-bug and support a gold-bug government and a gold-bug society. As a man of the world, I like confusion, anarchy, and war.”
On the sidelines Adams kept switching sides, concluding one minute that “the gold-bugs are not likely to lose the fight. They can’t”—and the next that the syndicate would not be able to fulfill its obligations under the government contract, much less carry the country through the 1896 election.
With regard to the contract, Adams was partly right. The syndicate failed to provide the government with the full $32.5 million in gold it had pledged to deliver from Europe. During the six-month life of the contract, some of the foreign investors who had agreed to buy bonds reneged on their commitments—probably because of the depression, unresolved U.S. currency questions, and new corporate bankruptcies. When the bankers made their final gold delivery to the Treasury on June 24, they had imported just $15.75 million, less than half the amount promised. Secretary Carlisle allowed them to modify the contract and eliminate the import requirement. Syndicate members made up the difference from their own domestic reserves.
Morgan had insisted in February that public confidence could be restored only if half the coin came from abroad. As it happened, everyone thought the gold was coming from Europe, which in itself restored public equanimity. In financial markets, confidence can be as good as gold.
The sale of gold to the government involved significant risk. If the markets had not taken the bonds at or above the purchase price, syndicate members would have had to hold or sell them at a loss. Had the bankers failed to come up with $65 million in gold, had Morgan been unable to protect the reserve, had the trade deficit grown, a renegade currency trader broken ranks, or the country repudiated the gold standard, the whole operation could have gone off track.
To Morgan, those risks were worth taking because of the greater danger posed to the national economy by government default and the related threat of currency devaluation. All the foreign investment in the United States—much of it represented by the house of Morgan—depended on gold’s disciplinary “rule of law.” Morgan couldn’t afford not to take the action he did in 1895. As he had cabled Walter Burns at the outset, “We all have large interests dependent upon maintenance sound currency U.S.”
The people who suffered most under the economic stringency of the nineties were outraged by the bankers’ gold bond issue. Rumors put the syndicate profits at $5 million to $18 million. A Farmers’ Alliance publication denounced the “great bunco game” that had cheated the American people out of more than $8 million in bankers’ profits while adding another $62 million to the national debt, and called for a revolution against the vampires of the financial trust.
The Rothschilds’ participation provoked a display of the anti-Semitism that has animated xenophobic populism of the left and right throughout American history, reflexively linking issues of money and credit with Jews. William Jennings Bryan ordered the House clerk to read Shylock’s bond, then demanded “that the Treasury shall be administered on behalf of the American people and not on behalf of the Rothschilds and other foreign bankers.” Pulitzer’s World complained that a “Wall Street conspiracy” of foreign aliens and bloodsucking Jews had robbed the country of millions in twenty minutes. Mary E. Lease, a populist writer who advised farmers to “raise less corn and more hell,” denounced Cleveland as “the agent of Jewish bankers and British gold.”
With the archfiend Rothschild far away across the Atlantic, his accomplice in New York took the brunt of American wrath. “The abuse poor Morgan has received, is receiving, and is likely to receive,” wrote a Brown Brothers partner to his London office at the beginning of March, “is both outrageous and discouraging.” In mid-March, exhausted by the syndicate work and public attacks, Morgan reported himself to Walter Burns as “completely worn out hardly fit for business.”
No President for two decades forgot the intensity of public outrage at Washington’s deal with Wall Street. Cleveland published an account of the episode nine years later, using the language of his accusers with heavy irony: “Without shame and without repentance, I confess my share of the guilt” in the “crime charged,” he wrote, “and though Mr. Morgan and Mr. Belmont and scores of other bankers and financiers who were accessories in those transactions may be steeped in destructive propensities, and may be constantly busy in sinful schemes, I shall always recall with satisfaction and self-congratulation my collusion with them at a time when our country sorely needed their aid.”
Some of the press took a sympathetic line. Villard’s Evening Post said in February of 1895 that the bankers and the President had acted to allay an unprecedented “emergency in public finance,” while Congress stood by “like a lot of boys playing with dynamite.” The New York Times reported that “the admiration of the financial world is turned upon [Morgan’s] masterly management of the loan”: no other banking house “could have pledged the power now behind the contract, to keep the Treasury reserve intact, and investors large and small would not have trooped so willingly for possession of the bonds except for the safeguards thrown about them and about the gold reserve.” The syndicate had earned its profits, concluded the Times—no corporation could have “put the business of the country on its feet for $5,000,000.”
In fact, the syndicate earned far less than $5 million on the transaction. It h
ad pledged to deliver $65 million in gold in exchange for $62 million in bonds. The American group as a whole netted about $1.5 million—just under 5 percent of the $31 million U.S. half of the issue—plus roughly $500,000 in interest (not generally calculated as profit) on the securities. J. P. Morgan & Co.’s share of the American profits came to $131,932; the firm’s total earnings from the operation, including interest and half of the U.S. management fee, were $295,653.§
In view of the amounts these bankers regularly handled and the specter of federal default, the American syndicate’s $1.5 million earnings were relatively modest, yet even that figure would have been seen by their political opponents as robbery. When the Senate investigated the transaction the following year, Morgan refused to discuss his fees. He regarded a private banker’s earnings and losses as private. Testifying in June 1896, he was questioned first by the pro-business New York Republican boss (now Senator), Thomas Collier Platt, and then by an ardent silverite, George Vest of Missouri.
Platt, endorsing Morgan’s declaration that he had acted out of large, public motives, concluded: “And so your real purpose, as I understand you, in this transaction was not the idea that you could take this bond issue and make money out of it, but that you could prevent a panic and distress in the country.”
Morgan: “I will answer that question, though I do not think it necessary, in view of all that I have done. I will say that I had no object except to save the disaster that would result in case that foreign gold had not been obtained.”