Last Updated on May 5, 2015, by eNotes Editorial. Word Count: 2130
Ron Chernow in The House of Morgan has written an epic study of the Morgan banking empire, from its origins in the nineteenth century through its diversification into three financial giants in the late twentieth century. Chernow’s book is a model of institutional history. He has mastered the vagaries of a multiheaded banking firm over the course of more than a century, without losing the thread of an engrossing story. Chernow brilliantly brings to life the men who made and staffed the Morgan empire. His work, which received the 1990 National Book Award for nonfiction, effectively becomes the collective biography of such powerful and fascinating characters as the two John Pierpont Morgans, father and son, and Thomas Lamont, who followed in their footsteps as ruler of the House of Morgan. The history Chernow relates with such skill is important because, as he says, the story of the Morgan banks is the story of American finance. Chernow traces the change in Wall Street from a slow- paced, gentlemanly world, in which personal reputation counted as much at times as ready assets, to the informal and hectic world of high-stakes leveraged buyouts and corporate takeovers. In the course of this task, Chernow not only tells of the transformation of Wall Street but also reveals profound changes in American culture. Far from being an arcane study of a mysterious subject, Chernow’s book speaks to the opportunities and challenges facing modern-day Americans.
The bank which would form the nucleus of the House of Morgan was founded in London in 1837, by a Massachusetts entrepreneur named George Peabody. The United States in the nineteenth century was a creditor nation, heavily dependent on foreign investment for its industrial development. London served as an international market for American bonds. Hence, any American firm hoping to play a major role in this lucrative business had to base itself in the British capital. Over the years, Peabody built a thriving and respected bank. In 1854, growing older and wanting time to devote to philanthropy, Peabody took Junius Morgan as a partner.
Junius Morgan had been born in Connecticut into a family of prosperous Yankee traders. He was a partner in a Boston merchant house when summoned by Peabody.
Junius Morgan would become the paterfamilias of the House of Morgan, giving the firm his name when Peabody died, and establishing his son John Pierpont Morgan, Sr., in an outpost of the firm on Wall Street. Junius Morgan embodied what Chernow calls the Gentleman Banker’s Code. According to this code, bankers did not seek out business, and dealt only with clients who arrived with introductions. They operated no branch offices and would only accept a new company as a client if the client’s previous banker did not object. Gentlemen bankers did not advertise their services, usually not even placing the firm’s name above the door, and refused to enter price competitions. Gentlemen bankers also played a quasi-official role in international finance, often numbering governments among their clients and organizing international bond issues. The gentleman banker had to be both upright and discreet. Junius Morgan was both, and became the wealthiest American banker in London, winning for his bank an international reputation.
It would be John Pierpont Morgan, Sr., however, who would make both himself and the House of Morgan legendary. Entrusted with the American side of the family business, Pierpont Morgan’s stature reflected the growing importance of American financial power, as well as his own business acumen. Reviled as a “robber baron,” Pierpont Morgan played a crucial role in the development of a host of American industries.
Morgan was personally offended by the chaotic conditions of American industrialization. Speculation and competitive rate wars in the railroad industry led to bankruptcies and insecurity in the railroad bonds he issued. In order to stabilize the market in his securities, Morgan began playing a role in the business decisions of railroads indebted to him, and arranged some mergers. Morgan was so satisfied with the results of his work that he became the great enemy of laissez-faire business competition in the United States. Before the end of his career, he would be the impresario of some of the most spectacular industrial mergers in American history, including the formation of General Electric and United States Steel, which was capitalized in 1901 at the then spectacular figure of 1.4 billion dollars. Morgan wielded this power because, in the late nineteenth century, bankers provided the services later provided by trade groups, government commissions, and the courts. A gentleman banker could intervene in a competitive war between companies and play the role of honest broker, arbitrating a settlement, and perhaps a merger, which would lead to higher profits for all. A banker with the resources of Pierpont Morgan could be all the more persuasive a peacemaker. While his critics saw him as the architect of industrial monopoly, Morgan believed that he was engaged in a moral endeavor. He saw himself as the champion of shareholders who might otherwise be ruined by the cutthroat competition of the day.
By the turn of the century, Pierpont Morgan was one of the most influential men in the country. His power was such that in 1895, when the gold reserves of the United States Treasury were dwindling away, President Grover Cleveland turned to him for help. Morgan organized a banking syndicate which briefly controlled the flow of gold in and out of the country, thereby saving the gold standard in the United States. In 1907, Morgan accomplished what the Federal Government had to do in the 1970’s and saved New York City’s finances. Pierpont Morgan came to symbolize the emergent power of Wall Street and American business.
By the time of Pierpont Morgan’s death in 1913, a new era in banking was beginning. Pierpont’s son John Pierpont Morgan, Jr., would probably wield even more influence than his father. Chernow terms this period the “Diplomatic Age” of international banking. Increasingly the Morgan banks in the United States and Great Britain would cooperate with their respective governments, until their interests became indistinguishable from certain Anglo-American policies. The American government hoped to use the Morgan financial power to persuade foreign governments to open their markets to American goods. The Morgan Bank, in turn, needed the American government as a policeman to force debt repayments in distant places.
The most dramatic episode in the House of Morgan’s new relationship with government came during World War I. Though Jack Morgan regarded Great Britain as a second home, he at first believed that the United States should remain neutral when war broke out in Europe. But eventually the pull of the House of Morgan’s London bank, and its traditional Anglophile leanings, led the American partners of the firm to espouse the Allied cause. With the blessing of President Woodrow Wilson, the House of Morgan became the purchasing agent and banker for Great Britain and France in the United States. The Morgan bank quickly became the greatest individual consumer in the world, buying $10 million worth of goods every day. Each month, the bank made purchases equivalent to the world’s gross national product a generation before. As a consequence, the House of Morgan spurred the growth of American war production, promoting the building of new factories and fostering what would be the world’s largest armaments industry by the end of the war. The Morgan partner in charge of this operation took to sleeping on a yacht in New York Harbor for security reasons. The House of Morgan even engaged in espionage for the Allies, keeping track of German attempts to invest in the United States. In gratitude, the British exempted the Morgan banks from mail censorship in and out of Great Britain, allowing Morgan partners to communicate with one another in secrecy, using their own cable code. When the United States entered the war in 1917, the House of Morgan continued to play a key role in Allied finances.
The 1920’s saw the apogee of the House of Morgan’s power. The growing intimacy of the Morgan banks and their respective governments led some to see them as shadow instruments of official policy. In fact, the House of Morgan was always scrupulous in aligning itself with the prevailing governmental line. As a result, the House of Morgan would play a useful and important role in the international financial diplomacy of the postwar years. More ominously, the House of Morgan came to believe that its loyal execution of official initiatives meant that the American government would somehow guarantee the risks taken by its investors. The House of Morgan helped resolve the dangerous Mexican debt crisis, and assisted in engineering the American economic resuscitation of Germany through the Dawes Plan. Thomas Lamont, increasingly the dominant partner in the House of Morgan, developed intimate banking relationships with Benito Mussolini’s regime in Italy and with Imperial Japan.
The Wall Street Crash of 1929 brought an end to the halcyon days of the House of Morgan, as well as the free-wheeling American economy of the 1920’s. More serious for the Morgan banks than stiff financial losses was the political backlash against Wall Street which developed as the United States spiraled into the Great Depression. Relations between the House of Morgan and the White House deteriorated. A congressional committee investigated the House of Morgan’s banking practices. Finally, in an attempt to correct the financial abuses which had led to the Crash, Congress passed the Glass-Steagall Act of 1933, which separated the deposit and securities businesses of banks, compelling firms to choose between them. The House of Morgan had pioneered in the fusing of these two banking functions. In response to the Glass-Steagall Act, the Morgan empire split, with the firm of Morgan Stanley being created to enter the securities market. The House of Morgan suffered other blows in the 1930’s. The financial diplomacy of the 1920’s collapsed, leaving the Morgan banks to foot much of the bill. Thomas Lamont’s close ties to the Italians and Japanese led to embarrassment as those countries embarked on careers of aggression.
World War II brought more change to I P. Morgan and Company. In 1940, the venerable Morgan bank ceased to be an old-fashioned partnership and was reorganized as a corporation. In 1942, it joined the Federal Reserve System, and in that same year, for the first time Morgan shares were offered to the public. Though the war improved relations between the House of Morgan and the American government, the bank did not play the heroic role it had in World War I. Times had changed, and private banks no longer enjoyed the influence they had once wielded. The “Diplomatic Age” of banking had passed.
Chernow writes that banking entered a “Casino Age” in the years following World War II. In this period a number of public and private institutions competed with the great banking houses, taking over many of the services they had provided in earlier years. The World Bank and International Monetary Fund formed the backbone of a new international monetary order. The central banks of the Western powers would collaborate as never before. In addition, multinational corporations disposing of huge amounts of capital went into the business of investment for themselves. Insurance companies, mutual funds, and pension funds offered alternative sources of capital and investment expertise. Compelled by their new institutional weakness, the banks scrambled for new clients and services, in the process abandoning their courtly traditions.
The pressures of the “Casino Age” steadily undermined the Morgan empire. Increasingly the American and British Morgan banks, as well as Morgan Stanley, became competitors rather than allies. In 1973, the Morgan houses held a meeting in Bermuda to try to recreate the old House of Morgan as an international institution. The meeting failed because the banks had grown too far apart. Separately, the Morgan banks continued to be leading financial institutions—Morgan Stanley, in particular, became a pioneer in the questionable practices of hostile takeovers and leveraged buyouts—yet, as Chernow concludes, there will never be another House of Morgan. The sources of financial power are too widely dispersed to allow any one institution the influence the Morgan empire once wielded. In some ways, modern money markets are more accessible and egalitarian, but something, too, has been lost by the demise of the gentlemanly style of banking once epitomized by the House of Morgan.
Sources for Further Study
America. CLXIII, September 29, 1990, p.191.
The Atlantic. CCLXV, April, 1990, p.103.
Barron’s. LXX, March 12, 1990, p.56.
Business Week. April 30, 1990, p.12.
The Economist. CCCXV, May 26, 1990, p.97.
Los Angeles Times Book Review. April 22, 1990, p.2.
The New York Times Book Review. XCV, March 18, 1990, p.9.
Publishers Weekly CCXXXVII, January 26, 1990, p.408.
The Spectator. CCLXIV, February 17, 1990, p.27.
The Times Literary Supplement. August 10, 1990, p.846.
The Wall Street Journal. May 4, 1990, p. A9.
The Washington Post Book World. XX, March 18, 1990, p.4.
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