by Jean Strouse
Morgan organized a syndicate to secure at least 51 percent of the stocks of the constituent companies (by exchanging them for shares of U.S. Steel), and also to underwrite $200 million of the new corporation’s securities to meet immediate cash needs.‡ He had done the same thing on a smaller scale for Federal Steel. U.S. Steel, too, would offer shares to the public, and whether or not it had to call for the full $200 million pledged by the syndicate would depend on how the public offering went. By March 21, the merger had acquired over 90 percent of its constituents’ stock, and four days later, J. P. Morgan & Co. asked the syndicate to raise $25 million in cash—12.5 percent of its $200 million commitment. Morgan hired Wall Street floor-operator James R. Keene to manage the offering on the Stock Exchange, and demand was huge. Keene reportedly made $1 million in commissions. The new shares sold so well that the remaining $175 million of syndicate cash never had to be called.
The Billion Dollar Trust raised with fresh urgency all the country’s objections to financial concentration and gave new force to a range of questions: Did corporate size per se threaten competition and individual freedom? Did consolidation in fact promote efficiency over the long run? Would Morganization stifle not only destructive conflict but also the creative energy that stimulates innovation and economic growth?
Some of the consolidation’s critics at the time argued that it was wildly reckless—composed of so much aqua pura that it would never pay dividends. Others condemned it as a monopolistic restraint of trade. Since it cannot have been both a foolhardy issue of worthless paper and an instrument of tight market control, these arguments suggest, again, that it was the size of the deal that elicited instinctive abhorrence.
The speed with which U.S. Steel had been put together left critical considerations about its structure and direction unresolved (see Chapter 22), but time proved Morgan right about the financing. The corporation created real value for its investors, earning $60 million in net profit between March and December 1901, and $90 million in 1902—enough to pay a 7 percent dividend on the preferred stock and 4 percent on the common, and still have a sizable surplus. Over the next quarter of a century, its stock performed better than that of all other American steel companies except Bethlehem. Morgan seemed to be turning everything he touched to gold.
Even more controversial than the size of the merger were the syndicate’s earnings—about $50 million, paid in shares of U.S. Steel preferred and common stock at then current market valuations. For the first year of the corporation’s existence the preferred shares traded at around 94, the common at 44. After reimbursing participants for the $25 million put up in cash and deducting $3 million incurred as expenses, the syndicate paid $40 million to its members and $10 million as management fee to J. P. Morgan & Co.
The Bureau of Corporations in 1911 called these charges “greatly in excess of a reasonable compensation,” and The Wall Street Journal looking back in 1988 concluded that they “represented a level of greed probably without contemporary parallel.” Fifty million 1901 dollars would be roughly equivalent to $750 million in the 1990s.
Entries in the U.S. Steel syndicate book indicate that the $40 million paid to the subscribers in four installments during 1902 was 5 percent of the $800 million worth of securities the syndicate underwrote—$200 million pledged in cash, plus about $600 million in new shares traded for stock of the constituent companies. The Morgan bank’s $10 million management fee brought the total to 6.3 percent—not “greatly in excess of a reasonable compensation” at a time when underwriting commissions ranged from 2.5 to 10 percent. (In the 1990s, neither a gross fee of 6 percent for an initial public offering nor a 20 percent management fee would be out of line.)
The syndicate’s defenders at the time pointed out that it had helped float the entire deal, providing well over 51 percent of the merging companies’ stocks; that it would have been liable for $200 million in cash had the launching not gone so well; and that the main reason it did go well was the credit furnished by its organizers, specifically by the house of Morgan. Investors knew that if anything went wrong, the bank would provide the necessary capital and “stand by its goods.”
U.S. Steel stock prices fluctuated for the first few years: during a contraction in 1903–4, the preferred traded below 50, the common as low as 8⅜, and the directors had to suspend dividends on the latter. If the syndicate’s $50 million profit had been calculated at these prices (it was based on market values), it would have amounted to slightly over $16 million.
Morgan was confident that the corporation would create value for its paper certificates over the long run, and it did. The stock performed so well, argued economist George Stigler years later, that the formation of U.S. Steel should be seen as “a master stroke of monopoly promotion,” and critics were “churlish” to complain at the syndicate’s earnings. The Morgan bank argued when the merger came under attack that the properties were fully worth the value of the securities, and that since the transaction was “unique” in character and scope, it could not be judged by the standards of “ordinary experience.” Virtually everyone not connected with the deal judged it monstrous.
In early March 1901, as Morgan was about to announce the formation of U.S. Steel, he hired a new partner. George Walbridge Perkins, first vice president at the New York Life Insurance Company, was a trim man with protruding ears, a thick brush of mustache, and a gift for making deals. Between 1892 and 1899 he had transformed New York Life from the smallest of the three big insurance companies (called “the racers”—the other two were the Equitable and Mutual Life) into the largest. Under his guidance New York Life had begun to function as an investment bank, using its immense financial resources to underwrite corporate securities and foreign government loans; by 1900 its assets seemed likely to exceed a billion dollars within a decade.
Competition among “the racers” was fierce, and though Perkins outperformed his rivals, he believed that the competitive struggle for power had more costs than benefits. “The entire path of our industrial progress is strewn with the white bones of … competition,” he declared, and the conflicts had become “too destructive to be tolerated. Co-operation must be the order of the day.” He tried to impose regulation and self-discipline on insurance-industry warfare. A moralistic, second-generation insurance agent who wanted to eliminate irresponsible practices and stabilize his sales force, he also took steps to improve New York Life’s relations with its workers: he set up pension plans, death benefits, and cash bonuses for workers. The bonuses were given not in relation to volume, which might have encouraged reckless expansion, but for steady performance, and Perkins was delighted with the results: he told a friend in 1897 of his pride at having linked the interests of managers and workers in “a corporation that is composed of nearly 300,000 members.”
Perkins was also an adroit politician, friendly with President McKinley, Vice President–elect Theodore Roosevelt, and Senators Beveridge and Hanna. Wall Street took note of Perkins’s skills, especially once he negotiated loans to the governments of Germany and Russia. In November 1900 James Stillman made him a director of the National City Bank, and commended him to Morgan. In December Morgan asked Bob Bacon, who also sat on the City Bank board, to bring the insurance man to 23 Wall Street.
Perkins welcomed the invitation. He was raising money to save the eroding cliffs on the western bank of the Hudson—he lived in Riverdale, just north of Manhattan, and Roosevelt as Governor of New York had made him chairman of a Palisades Interstate Park Commission; Perkins wanted Morgan to contribute. As soon as he took a seat in the famous glass-walled office, he started to explain his mission. Morgan cut him short.
“I know all about that,” he said. “You are chairman of the Commission. What is it you want?”
Perkins: “I want to raise $125,000.”
Morgan: “All right, put me down for $25,000. It is a good thing. Is that all?”
Somewhat flabbergasted, Perkins managed to ask who else might subscribe. Morgan suggested Jo
hn D. Rockefeller. Perkins thanked him and was rising to leave when Morgan said: “I will give you the whole $125,000 if you will do something for me.”
“Do something for you?” repeated Perkins. “What?”
“Take that desk over there,” said Morgan, pointing to the room in which his partners worked. He was offering a coveted position at his right hand to a man he had just met.
Perkins stalled: “I have a pretty good desk up at the New York Life.”
Morgan made it explicit: “No, I mean come into the firm.”
Like everyone who got these imperious invitations, Perkins asked for time to think it over. “Certainly,” said Morgan. “Let me know tomorrow if you can.” As Perkins was leaving, Morgan stipulated that of course he would give up his work at New York Life if he came to 23 Wall Street, since the big insurance companies had become large buyers of securities sold by the Morgan bank.
Perkins quickly canvassed his influential friends—Senator Beveridge warned him that Morgan was a partner killer; President McKinley advised him to stay at New York Life—and declined Morgan’s offer, although not without using it to raise his salary from $30,000 to $75,000 a year.
Two months later, at the end of February 1901, Morgan invited Perkins to breakfast. He explained that he was about to launch U.S. Steel, and would soon be organizing similar ventures in other industries. He knew that Perkins shared his views on excessive competition. He also knew that some of the hostility to his own work came from the “occult mechanisms” of high finance, and thought that if people understood what he was doing they would see it the way he did—as a national service. Probably he was aware as well of Perkins’s popular worker-benefit programs, at a time of escalating conflict between capital and labor. He said he wanted help with the social and political problems created by the trusts, and according to Perkins’s biographer, John A. Garraty, this appeal worked: Perkins believed that “size and business efficiency went hand in hand, and that the most challenging problems of the modern world were to be found in the relationships that were developing between the giant corporations and their workers, and between these corporations and the public.”
The terms of Morgan’s offer added incentive. Perkins would earn $250,000 a year, plus a share of the bank’s profits. As to the condition Morgan mentioned at the end of their first interview—resignation from New York Life—Perkins refused, since he wanted exactly what his new employer did not, a direct link between the buyers and sellers of securities. Morgan was concerned about what a later era would call conflicts of interest, and gave in to Perkins against his better judgment: “if you … believe you can carry out this dual position, which I do not believe you can,” he said, “I am willing to try it temporarily.”
“Temporarily” turned out to be ten years. That Perkins, age thirty-nine, got his way on this critical point indicates again that Morgan’s legendary power was not as absolute as people thought. In need of Perkins’s skills, he put prudent objections aside.
To James Stillman at the City Bank, Perkins said he hoped “when I find my place down the street I will not, in any way, disappoint you.” Stillman sent back “heartiest good wishes. You have the most splendid opportunity in being so closely associated with the greatest financier, in spite of his peculiarities, this or any other age has ever seen, and one which I am free to say I envy you.”
Perkins quickly became a one-man department of public relations at the Morgan bank, holding press conferences, publishing articles and pamphlets, and giving speeches on the advantages of industrial consolidation. Appointed to the Finance Committee and board of directors at U.S. Steel, he issued such rhapsodic statements that his friend Beveridge warned him to “Go slow … about Mr. Morgan’s philanthropic motives in Steel Trust or the public will think you protest too much.”
As Morgan and Gary had done at Federal Steel, Perkins lifted the veil of corporate secrecy: in the fall of 1901 he began to publish quarterly financial reports for U.S. Steel. The Commercial & Financial Chronicle praised this first accounting as “the fullest and frankest earnings statement ever submitted … by a great industrial concern,” and welcomed Big Steel’s recognition of the “public’s right to know.” From London, Jack described the report as well received in spite of skeptics who called its figures “impossibly good,” the product of “expert bookkeeping”: he hoped it would force other companies to follow suit, and help dispel the prejudice against industrial securities.
In March of 1902, Pulitzer’s New York World announced that “George W. Perkins now does all the talking … for the firm of J. P. Morgan and Co.… [He] has the facility of saying just enough and not too much on any subject.” Perkins acted so consistently as the bank’s ambassador to Washington over the next decade that he became known as Morgan’s Secretary of State.
At the beginning of April 1901, Morgan sailed for Europe on the White Star’s Teutonic—to avoid reporters, photographers, and curious crowds he had to duck up the second-class gangway. He would from now on find privacy only behind closed doors. For the first time in years, Louisa, four months pregnant, did not accompany him. He traveled with his sister Mary Burns instead.
He played solitaire and slept most of the way across the Atlantic. Henry Adams wrote to his friend Elizabeth Cameron: “Wall Street goes quite wild, while Lombard Street is dead broke.… London and Berlin are standing in perfectly abject terror, watching Pierpont Morgan’s nose flaming over the ocean waves, and approaching hourly nearer their bank-vaults.”
For the moment, Morgan had more interest in Europe’s art markets than its bank vaults. He did not see Fanny, who was touring Italy with Anne, for several weeks. Shortly after he arrived in London he bought the Duchess of Devonshire, the Gainsborough portrait that Junius had been about to acquire in 1876 when it was stolen from Agnew’s Bond Street gallery. The thief, Adam Worth, unable to unload his renowned white elephant all these years and now seriously ill, had finally handed it over to a Pinkerton agent and William Agnew’s son Morland at a Chicago hotel in March 1901, in exchange for an undisclosed sum and probably immunity from prosecution.
Although the canvas was dirty and cut, the Duchess’s face and voluptuous figure were intact. Agnew took the picture to London, where Morgan agreed to buy it sight unseen, asking the dealer to have it restored and to charge whatever he considered fair. London papers buzzed with the story, but never managed to learn the price. Morgan told a friend: “Nobody will ever know. If the truth came out, I might be considered a candidate for the lunatic asylum.”
He paid £30,000 (nearly $150,000) for the well-traveled Georgiana—five times what he paid for Rembrandt’s Nicolaes Ruts three years earlier. William Agnew, who had retired, congratulated him on “possessing the finest Gainsborough in the world,” which was a proprietary stretch. Another Agnew son, Lockett, said later that he thought the “réclame” [publicity] aspect of the acquisition probably appealed most to Morgan, since seven weeks elapsed between his purchase of the painting and the first time he saw it. Sentiment played a role as well: Junius had wanted the picture, and Pierpont carried out his father’s wishes without regard to content or cost.§
In Paris two weeks after he secured the Duchess, he made a far more significant purchase. By 1901 no painter was held in higher esteem in the United States than Raphael. Nineteenth-century American artists and connoisseurs traveled to Europe explicitly to study the High Renaissance master’s work. They especially admired his Madonnas—paintings that combined grandeur with tenderness, flawless execution with sensuous color and form. The Sturgeses owned a print of Raphael’s Sistine Madonna, and made a pilgrimage to see the original in Dresden on their European tour in 1859. As American collectors’ taste for Old Masters developed toward the end of the century, and as American artists and architects looked increasingly to Renaissance Rome for cultural models, Raphael came to represent the supreme moral and aesthetic ideal. According to David Alan Brown, the curator of an exhibition on Raphael and America at the National Gallery of Art
in 1983, Raphael was “the only artist whose prestige had endured all changes of taste and fashion up to the end of the nineteenth century,” and was “referred to by Berenson without exaggeration as the ‘most famous and most beloved name in modern art.’ Indeed, his name was synonymous with Art.”
There was not a single painting by Raphael in the United States in 1897, and the scarcity of the artist’s work in a rising market had driven its prices beyond the reach of most collectors. In 1898, at the urging of her adviser, Bernard Berenson, Isabella Stewart Gardner bought Raphael’s portrait of Tommaso Inghirami, a fat, wall-eyed Roman prelate in a red robe and cap, shown writing at his desk.‖ Two years later, also through Berenson, she purchased for £5,000 a Lamentation by Raphael, part of an altarpiece predella. These works did not satisfy her, however: like other major collectors at the time, she wanted the supreme trophy—“a heavenly Raphael Madonna”—and to Berenson’s dismay she refused for a time to buy anything else, insisting that “My remaining pennies must go to the greatest Raphael.… Nothing short of that. I have tasted blood you see.”
Mrs. Gardner never acquired a Raphael Madonna, but Morgan did. He crossed the English Channel at the end of April 1901, and on a quick visit to the Charles Sedelmeyer gallery in Paris bought an early Raphael altarpiece known as the Colonna Madonna, painted in 1504–5 for the convent of Sant’ Antonio of Padua in Perugia. Mrs. Gardner’s predella panel was originally part of it.
Vasari described the altarpiece as a “truly marvellous and devout” work, “much extolled by all painters.” It had a royal pedigree, having been owned by the Colonna princes in Rome and successive kings of Naples. Ruskin, who did not particularly admire Raphael, had urged Liverpool’s merchants to buy this painting in 1874, and French critics had commended it to the Louvre as a “work of the highest order, which every European Gallery should be eager to secure.” A brochure printed by Sedelmeyer quoted some of these assessments, traced the work’s provenance, called it the “richest and most important composition of all the various Madonna pictures of Raphael,” and compared it favorably with the Ansidei Madonna, which London’s National Gallery had bought from the Duke of Marlborough in 1885 for £70,000 ($350,000), then the highest price ever paid for a painting.