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
(continued from page 1)
October 24, 1907, Ransom H. Thomas, president of the New York Stock Exchange, rushed from his office to a building across the street. But instead of going to the U.S. Treasury offices on one corner, Thomas headed to 23 Wall Street, where the office of the most powerful banker in America was located.
The man was John Pierpont "J. P." Morgan, and Thomas had come to beg for his help. The United States was in the grip of a financial crisis. Investors were stampeding out of stocks, bringing trading to a virtual standstill. Banks were calling loans that borrowers could not pay since they were unable to sell their investments. The interest rate on margin money jumped to an astronomical 150 percent. People lined up at banks, demanding their money, which the banks could not recover from the loans, collateralized by the now depressed or even worthless stocks. Today, a similar situation would be called a liquidity crisis, and the Federal Reserve Bank would provide the cure. In 1907, however, the Federal Reserve system was still six years away. Numerous banks failed, increasing the panic.
As a result, Thomas faced the impending failure of 50 brokerage firms and even the exchange itself. He knew only one man could mend the crisis, and he now sat before him. One can imagine the 70-year-old Morgan sitting behind his desk, dressed in his standard dark gray suit, his intense stare grilling Thomas. In his customary manner, the stoic banker would listen expressionless, his bushy mustache twitching from time to time beneath his bulbous nose. He held an eight-inch-long maduro Havana cigar known as a Meridiana Kohinoor; the cigars were dubbed "Hercules's clubs" by his observers. Morgan listened for a few moments, puffing on his cigar, and then raised his hand as a signal for silence. Thomas wasn't telling him anything that he didn't already know. "What time does the exchange usually close?" Morgan snarled.
The banker disdained stock speculation, considering it beneath him, so he never paid attention to the exchange's hours of operation. He believed the only worthwhile investment was debt--a lien that had to be paid back lest the borrower be willing to suffer severe consequences, especially the kind he could inflict. "Three o'clock," a nervous Thomas replied. "It must not close one minute before that hour today!" Morgan commanded. At two that afternoon, Morgan held a meeting in his office with several of the city's most important bank presidents. He persuaded them to pledge $25 million for a line of credit to be made available to the market investors at 10 percent interest. At 2:16, an announcement of the available funds--better known as call money in broker parlance--resounded on the floor of the New York Stock Exchange. A cheer immediately erupted that Morgan could hear across the street.
The relieved traders were giving the mighty financier an ovation for rescuing them from near certain financial death. While he is among the legends of Wall Street, and he did accumulate vast wealth (although not to the extent of some of the industrialists of his day), the real story of J. P. Morgan is about the enormous amount of financial power he wielded. The process of his accumulation of that power became known as morganization, and the results are impressive. Not only did he save the stock exchange, but he rescued the U.S. government from bankruptcy 12 years earlier. He created the General Electric Co. and U.S. Steel, at the time the world's largest company. At one point he controlled more railroads than anyone in the United States. His investment banking firm, J. P. Morgan & Co., remains to this day one of the most influential firms of its kind in the world. His hands even touched the infamous Titanic; his International Mercantile Marine Co. constructed the doomed ship.
Morgan's era conjures images of the robber barons: corporate titans with their huge estates, opulent mansions and ostentatious lifestyles. Morgan shunned such displays. Although at one point he owned the largest yacht in the world, Morgan was not interested in the glamour or social functions of high society. He was an intensely private person with few close friends and a sharp temper, earning him the reputation of a stern and crusty tyrant. People feared him, and he knew it. The inner Morgan was a different man. His wanderlust led him to far-flung places, where he collected works of art and rare manuscripts. He was an avid student of religion. And he enjoyed few things more than his beloved cigars, smoking dozens of them a day. His life was one of contrasts. For all his enormous power (Jupiter and Zeus were two of his nicknames), Morgan was uncomfortable in the role of the grand master. He built a huge financial empire, yet he often considered quitting his business life altogether. His business success was often a burden, causing him physical problems, including fatigue, headaches, fainting spells, depression and skin eruptions.
He was a deeply religious man (he once told his associate that he believed every word of the Bible), yet he had a proclivity for licentious behavior and became notorious for his extramarital dalliances with women. Morgan's life reveals three major forces that affected his behavior. First, there was the influence of his domineering father, Junius. Second was the tragic death of his first wife, Mimi, perhaps the only woman he ever loved. Third, he was always self-conscious of his deformed nose, caused by a skin condition now recognized as rosacea, so much so that he had photographs of himself retouched to hide its true condition. John Pierpont Morgan was born on April 17, 1837, in Hartford, Connecticut, with a solid gold spoon in his mouth. His grandfather Joseph was an extremely successful businessman who left Junius more than $1 million when he died. J. P., or Pierpont, as he was known, was the oldest of five children: three sisters, Sarah, Mary and Juliet, and a brother, Junius Jr., who died at the age of 12 after an illness. A high-strung, yet shy child given to mood swings, young Pierpont suffered from rashes and fatigue.
Despite these lifelong ailments, he excelled in his studies and was competitive at sports. In 1854, Junius Morgan formed a partnership with prominent American banker George Peabody and moved to London, where George Peabody and Co. was located. At the time, London was the center of the financial world, and Peabody was involved with funding the financially thirsty ex-colonies across the ocean. The partnership would eventually establish Junius as one of Europe's prominent investment bankers. J. P. Morgan, meanwhile, had graduated from high school in Boston and had been sent off to the Institut Sillig on Lake Geneva, Switzerland, where he mastered German and French. He then attended the university at Gottingen, Germany, excelling in math. By then a trim young man 6 feet, 2 inches tall, Morgan wore well-tailored clothes with polka-dot vests, bright cravats and checked pants. Enjoying his life as a dandy, he spent long hours in the beer halls consuming large quantities of brew, singing songs, and cultivating his lifelong taste for cigars. Alarmed by his son's wayward behavior, Junius sent Morgan to work at Duncan, Sherman, a merchant banking firm in New York City. Junius wanted to pattern his own investment banking empire along the lines of the great European banking firms which, by tradition, were passed from one generation to the next. Pierpont was his only surviving son and Junius planned for him to become the next generation of Morgan bankers.
The placement of Morgan in a respectable firm was more than just a father's concern for an unruly son. Junius was raising capital for several U.S. state governments as well as for new industries such as the railroads. To protect his English investors, he had to have trustworthy information about political and business conditions in the States that might have an impact on those investments. Upon his return to New York in 1857, Morgan provided the crucial link for his father, dutifully writing to him at least twice a week about the country's economy and politics. The letters continued for more than 30 years, and his father saved every one, which he bound in volumes. (In 1911, two years before his death, the intensely private J.P. Morgan burned all the letters.) Morgan's apprenticeship at Duncan, Sherman lasted four years. He then persuaded his father to support him in the opening of his own firm, J. P. Morgan and Co. (This was not the prestigious investment banking firm that would later bear his name.)
Junius supported Morgan's request with the intention that the firm was to execute trades and represent Peabody and Co., at his father's direction, to Junius's influential American friends. Morgan, however, had other ideas. One of his first deals nearly ended in disaster. The Civil War was just beginning when Morgan was approached by a man named Simon Stevens, who asked him to finance the refitting of 5,000 rifles known as Hall carbines for the Union army. Stevens arranged to purchase the guns, which the army had already declared obsolete. Once they were refitted, they were to be sold for $22 per rifle, about twice Stevens's cost, to Union Maj. Gen. John C. Frémont for his troops. The deal was too good to turn down, and Morgan made the loan.
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.
Morgan showed no emotion as he immediately responded, "Very likely, Andrew." To finance the creation of the new company, Morgan organized a syndicate of more than 300 firms. The deal was unprecedented, valuing the company, to be called U.S. Steel, at a market capitalization of more than $1 billion in 1901 dollars, the first billion-dollar corporation in history. By comparison, the rest of corporate America had a combined market value of $9 billion. Shortly after creating U.S. Steel, Morgan attempted to form a maritime trust to monopolize transatlantic shipping. Immigrants were pouring into America via steamships, and cross-Atlantic luxury travel was increasing. Morgan formed a trust called the International Mercantile Marine, or IMM, with the Belfast, Ireland-based White Star shipping line as its jewel. The trust controlled 120 steamships, more than any other private company. Britain's Cunard line was IMM's main competition. With the aid of government subsidies, Cunard built two luxurious ocean liners, which it named the Mauretania and the Lusitania. The ships were big and fast. To counter, IMM, with the approval of Morgan, also commissioned two ships: the Olympic and the Titanic. Morgan attended the christening of the Titanic in Belfast in 1911. His personal suite was on B deck, with a private promenade and such amenities as cigar holders in the bathroom. Morgan was scheduled for that fateful maiden voyage in April 1912, but as luck would have it, he had to cancel.
The Titanic's sinking weighed heavily on Morgan and may have contributed to his death. His health had been failing since the turn of the century, and the stress of the 1907 panic had taken its toll. After he had organized financing for the New York Stock Exchange, the panic continued for several weeks, during which time Morgan acted as the country's central banker, cutting deals to reorganize banks and brokerage firms. During the ordeal, he had a terrible cold and was finally convinced by his doctor of the need to cut down on his cigar smoking. Reluctantly he agreed, promising to smoke no more than 20 cigars a day.
For all his efforts, Morgan, like all Wall Street bankers, faced a growing public cynicism that he never understood. People feared Morgan, particularly politicians in Washington, and legislation was proposed to break up the trusts. By 1912, the financial power of Wall Street became the stuff of Congressional hearings. The most famous of these were led by Congressman Arsène Pujo, a Louisiana Democrat. Morgan, who was his prime target, was summoned to appear before a Congressional committee for questioning. Morgan took such public scrutiny personally.
Having to testify about his business decisions was contemptible to him, and he fared poorly under the lawmakers' grillings. The stress from the hearings left Morgan depressed and in poor health. (His son, Jack, would blame the ordeal for his father's death.) Once again, he turned to his favorite remedy, travel, escaping to Europe to recuperate. But instead he grew weaker, dying in the Grand Hotel in Rome on April 1, 1913, a few weeks short of his 76th birthday. At his death, Morgan's art collection was valued at $50 million (about $840 million today). His estate, not including the collection, was worth approximately $69 million (more than $1.2 billion today). More important, the company he created would, under his son Jack, soon become the most powerful private bank in the world, brokering deals between nations and playing a key behind-the-scenes role in the history of the twentieth century.
Thomas F. Gillen is an investment manager who is working on a novel about Thomas Edison. The author acknowledges Ron Chernow's award-winning 1990 history, The House of Morgan, as the primary source of information for this article.
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