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Zeus of Wall Street

In the early years of corporate America, J.P. Morgan was the undisputed king of U.S. Finance.
Thomas F. Gillen
From the Print Edition:
J.P. Morgan, Mar/Apr 00

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But he grew impatient when the refitting took longer than anticipated, and he may have gotten wind of a possible congressional investigation into fraudulent war contracts, so he demanded and received his money back. Later, Congress did indeed investigate the contract; it became known as the Hall Carbine Affair. Morgan's name never surfaced in connection with the scandal. Prior to the war, Morgan's attention was on more than just business. He was in love with the daughter of a vestryman at St. George's Episcopal Church, which Morgan attended. Two years his senior, Amelia Sturges's sparkling personality helped ease Morgan's shyness. He was enraptured with this attractive, vivacious brunette, who was known to everyone as Mimi; but their happiness was short-lived. In 1861, Mimi was diagnosed with tuberculosis. As her health rapidly declined, Morgan pleaded with her to marry him, believing a Mediterranean honeymoon cruise would help her. She finally consented, and they were married in her parents' home in Manhattan. The couple set sail immediately for Europe, but Mimi died four months later in Nice, France. A widower at 24, Morgan was devastated. Mimi's memory would haunt him for the rest of his life.

Every year he would visit her grave, either on their anniversary or on her birthday. Once again, Junius took control of his depressed son's life. He quickly reorganized Morgan's company, bringing in Charles H. Dabney, who had tutored J. P. at Duncan, Sherman, as a partner. It was a stabilizing move that Morgan came to appreciate, and Dabney, Morgan and Co. lasted for seven years. Morgan, however, was to continue to feel the weight of his father's hand until Junius's death in 1890. Morgan's personal life underwent changes as well. In 1865, he married Frances Louisa Tracy. Over the next eight years, they would have four children: Louisa, John "Jack" Pierpont Jr., Juliet and Anne. While the marriage to Frances brought Morgan social respectability, it was one of convenience. Morgan engaged in numerous affairs throughout their marriage. There were clearly two sides to Morgan. In business, he was very tough but scrupulously fair, and always insisted on a high level of integrity. He was moralistic in his attitudes, a vestryman at his church, and a supporter of the Society for the Suppression of Vice. In public, he never discussed business with women, and no women were allowed to work at the bank. In his private life, however, another side of Morgan manifested itself. He conducted many adulterous adventures: on his yachts, on private railroad cars and on his frequent European vacations. Morgan's most notable relationships were with actress Lillian Russell and Maxine Elliott, the first woman to build a Broadway theater. As his business grew, Morgan the businessman became more defined.

He cultivated an image of a somewhat snobbish aristocrat, snappish with a fiery temper. He detested long meetings and was known for making fast assessments of business dealings and giving quick answers, earning the nickname "Yes-or-No Morgan." His judgment of people was just as concise, shown by his belief that "a man always has two reasons for the things he does--a good one and the real one." What his observers misunderstood, however, was that he based his decisions on extensive and careful research. He had learned his lesson with the Hall Carbine Affair and intended not to repeat it. It was the job of his staff to dig up the facts so that Morgan knew more about a prospective client's business than the client did. Banking in those times had a different set of rules than today. Lending money to a company usually meant also taking a board seat so that the investor could protect his interests. This was necessary then, for Wall Street was full of unscrupulous manipulators who regularly fleeced investors (many would suggest the same holds true today). It was a time when the rule was that there were no rules.

The conclusion of the Civil War brought a burst of economic activity. By 1870, Dabney, Morgan & Co. was thriving; Morgan was earning the fabulous sum of $75,000 a year. He moved to a brownstone at 6 East 40th Street, and in 1872 purchased a country estate near the Hudson River close to West Point called Cragston. From April to October he would cross the Hudson from Cragston on his launch, Louisa, the first of a series of subsequently larger yachts, and then board the train to Manhattan. In 1871, when Dabney had announced his retirement, Junius arranged for Morgan to form a new partnership with a prestigious banking firm in Philadelphia known as Drexel and Co. Anthony Drexel had made his fortune trading government bonds during the Civil War and was looking to tap into European money sources. Junius could provide that link. The new firm was named Drexel, Morgan and Co., with the Drexel family contributing $7 million in capital and Junius adding $5 million. Morgan, however, was uncertain of the arrangement and threatened to retire. He reluctantly agreed to the partnership on the condition that he would join the firm after a 15-month hiatus, during which he would travel in Europe. When Morgan returned to work in 1873, a financial panic was brewing, centered around corruption in the building of the Northern Pacific railroads.

The well-known Philadelphia firm of Jay Cooke, the underwriter and distributor of the railroad bonds that had financed the project, was at the center of the scandal. The firm failed on Black Thursday, September 18, 1873, causing such an investor panic that the New York Stock Exchange had to close its doors for 10 days, the first such closing since its formation in 1792. European investors eventually lost $600 million in railroad stocks from the panic, and America plunged into a recession. Not only did Drexel, Morgan survive unscathed, but Morgan boasted that he made a million dollars in the panic. With Jay Cooke gone, Drexel, Morgan became America's leading investment banking firm. Morgan was optimistic about America in the 1870s and always alert for promising new industries. In a bold move, he agreed to finance a young inventor named Thomas Edison and his experiments with an electric lightbulb, an early example of venture capitalism. Eventually the success of the experiments would lead Morgan to form the General Electric Co. In 1882, Edison wired a section of New York City for electric power, including the Drexel, Morgan building where Edison threw the switch that lit lower Manhattan. By 1882, Morgan's income had escalated to a half million dollars a year. He moved his family to a new home on Madison Avenue at 36th Street.

Eight years later, he would commission architect Charles F. McKim to construct the now famous Pierpont Morgan Library adjacent to his house. Today, the building is a museum that commands attention. Designed in a Greco-Roman style, the library cost $1.2 million to construct and was completed in 1906. One of the primary functions of the library was to store the vast art collection that Morgan was accumulating. One of the largest private collections of its day, it included Napoléon's watch, Leonardo da Vinci's notebooks and 225 works of ivory, as well as tapestries, rare books and manuscripts. In the early 1880s, Morgan commissioned the first of his yachts, Corsair. The black-hulled ship was 165 feet long. In 1890 he commissioned the 240-foot Corsair II and, after the turn of the century, the Corsair III, a vessel more than 300 feet long requiring a crew of 70. The yachts were second homes to Morgan, lifting his spirits during his bouts of depression. He conducted business and pleasure on board and created the "Corsair Club," a group of friends he used as a cover to bring women to parties held on the yachts. During the 1880s, Morgan's firm continued to expand. By the mid-1890s, his reputation would be so intimidating that when he walked down the street, crowds would separate to let him pass. America slipped into a steep industrial decline in 1893. More than 15,000 businesses and 600 banks failed, and bloody clashes were commonplace between owners' forces and workers. Railroads were particularly hard hit, since they were burdened with heavy debt loads that had been sold to European investors. Before long, one railroad after another collapsed into bankruptcy. English investors, suffering large losses, appealed to Morgan to rescue them. His solution was a corporate structure known as the voting trust.

Up to this point, almost all stock ownership meant that shareholders of a bankrupt company could be assessed for any lost money. Through his reorganization plan, or morganizing, Morgan offered relief to the shareholders of a bankrupt company if they would transfer their shares to the voting trust in exchange for nonvoting trust certificates. To escape the potential liability, thousands of shareholders made the exchange. Morgan would then engineer a restructuring of the company's finances, becoming not only the trustee for the voting trust but the banker for the entire company. By the end of his career, Morgan had morganized approximately 33,000 miles of railroad track--about one-sixth of all the tracks in the nation. Such railroads as the Erie, Chesapeake & Ohio, Philadelphia & Reading, Sante Fe, Northern Pacific, Great Northern and New York Central, just to name a few, came under his control. The extent of Morgan's power can be better appreciated by the fact that nearly 60 percent of the companies traded at the time on the New York Stock Exchange were railroads. The most impressive feature of morganization was Morgan's ability to reorganize all of these railroads with a staff of fewer than 150 people. Morgan prided himself on knowing every aspect of his company's operations. He personally audited his bank's books every New Year's Day.

Any employee who made a mistake had hell to pay. By 1895, Morgan was in total control of his firm. The Drexel family retired from the company and Morgan reorganized the bank, renaming it J. P. Morgan and Co., the firm that survives today. That year, in perhaps his most spectacular feat, he rescued the U.S. government from bankruptcy. With the recession that began in 1893, demand for farm goods waned and prices fell. At the time, U.S. currency was backed by gold (known as the gold standard), and the government had a gold reserve of $100 million to exchange for dollars. To increase the money supply and, hopefully, create demand for farm goods, the government began issuing dollars convertible into silver, a less desirable exchange, particularly to European investors. These investors feared the new money would cheapen the value of the dollars they held.

As a result, they rushed to convert large quantities of dollars into gold, shipping the metal to Europe. The drain turned critical in 1895 as the reserves neared exhaustion. If the gold ran out, the government would default on any outstanding dollars presented for exchange. Knowing that default would make it impossible to sell U.S. securities in Europe, Morgan boarded a train for Washington to see President Grover Cleveland. For political reasons, Cleveland, though friendly with Wall Street, had to avoid appearing sympathetic to supporters of the gold standard. American farmers were a large voting bloc, and politicians such as Williams Jennings Bryan were blaming Wall Street bankers for nailing farmers to a "cross of gold." Fearful of the political ramifications, Cleveland initially refused to see Morgan. Undaunted, Morgan announced he was not leaving Washington until he saw the president. That night he calmed himself by playing hours of solitaire in his hotel room as he puffed on cigars. The next morning he returned to the White House. During the meeting with Cleveland, Morgan sat in quiet frustration, crushing an unlit cigar in his hands while the president and others debated what to do. The meeting was interrupted when a message arrived stating that the Treasury was down to $9 million in gold. Morgan seized the opportunity to tell the president of a $10 million draft that he claimed was going to be submitted. Cornered, Cleveland asked the financier for his solution.

Morgan told the president that he could arrange for the delivery of 3.5 million ounces of gold in exchange for $65 million worth of 30-year gold bonds. The government would float the bond issue, which Morgan would sell, under a statute enacted in 1862 granting the president emergency powers to buy gold. (Cleveland's Congress had refused to vote a bond issue to replace the gold.) Reluctantly, Cleveland conceded, saving the government from default. Turning to Morgan, however, would eventually be political suicide for Cleveland, and public resentment for Wall Street bankers would fester for decades, with Morgan as its focal point. Recognizing the benefits from increasing market share through mergers, other corporations followed Morgan's morganization techniques with business-friendly states such as New Jersey offering liberal rules for forming trusts. Such changes enabled Morgan to further consolidate his power. One such case was the steel industry. Morgan already controlled the nation's second largest steel operation; Andrew Carnegie owned the largest. After a chance meeting in 1900 with Carnegie's chief assistant, Charles M. Schwab, Morgan learned of Carnegie's possible interest in selling Carnegie Steel. Neither man cared much for the other. Morgan, however, suggested that Carnegie put a price on his holdings. After considering the matter during a round of golf, Carnegie penciled a figure of $480 million on a scrap of paper. When the price was presented to Morgan, he accepted it without hesitation. Later realizing that he could have held out for $100 million more, Carnegie mentioned the thought to Morgan.

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