THE LAST PARTNERSHIPS Inside the Great Wall Street Money Dynasties phần 6 pot

Morgan &Co.—began in Britain and gravitated toward the United States, bring-ing with it access to cash and connections sorely needed to helpdevelop the growing American economic infrastr

ONE OF THEtruisms of century banking was that investment capital needed to be importedfrom Europe The firms that were the most successful all had a Britishconnection or links to other Continental banking affiliates that ensured

nineteenth-a flow of investor funds into the United Stnineteenth-ates The most successfulbanking operation of the nineteenth century—that of J P Morgan &Co.—began in Britain and gravitated toward the United States, bring-ing with it access to cash and connections sorely needed to helpdevelop the growing American economic infrastructure

The story of the Morgans’ rise to financial power is less flamboyantthan that of August Belmont and is more calculated and opportunistic.After Junius Spencer Morgan inherited the banking operation ofPeabody in London, his son John Pierpont Morgan developed a parallelcareer in the United States Within twenty years, he was the most widelyrespected, and feared, banker in the country How such a remarkableaccession to power was accomplished in such a short time makes the rise

of the Seligmans or Goldman Sachs seem somewhat mundane by parison Needless to say, Pierpont had a head start on his eventual com-petition and did not exactly have to begin from scratch, but the actualpower he was able to attain, and pass to his son Jack, was still breathtak-ing Like all of his counterparts, Pierpont Morgan was opportunistic anddetail-oriented to a fault, but it was his political instincts that differenti-ated him from the rest The same political instincts would eventually failhis son Jack and his partners later in the twentieth century

com-CORNER OF BROAD AND

WALL: J P MORGAN AND MORGAN STANLEY

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The rise of the House of Morgan was quite different from that ofthe other prominent banking houses in the nineteenth century Thefounder of the dynasty, Junius Spencer Morgan, was neither an immi-grant nor penniless when he began his career Born in Massachusetts

in 1813 to Joseph Morgan and Sarah Spencer Morgan, Junius spentmost of his early life in and around Connecticut and western Massa-chusetts Joseph Morgan was a businessman with varied interests Heowned a tavern, coffeehouse, and hotel, and was one of the founders

of the Aetna Insurance Company in Hartford Junius did not attendcollege but was apprenticed to a Boston businessman when he wassixteen After a short stint in Boston, Joseph bought him a partnership

in a New York private bank that became known as Morgan Ketchum

& Co But Junius was not destined to become a banker early in hislife A year and a half later, he left the firm to return to Hartford toenter the dry goods business with a local firm Shortly thereafter, hemarried Juliet Pierpont and settled down to become a leader in thecity’s business community It appeared that his fate was to become afixture in the local business community and live out his days involved

in New England affairs

Junius remained in Hartford for the next fifteen years, becoming aprominent figure in local business His firm, Howe, Mather & Co.,was one of Hartford’s most prosperous, and Morgan earned a verycomfortable living During the Panic of 1837, the crucible for somany Wall Street firms, he was sent to the South to maintain relationswith merchants with whom his firm did business and to ensure that allmoney owed to Howe, Mather was paid in timely fashion He alsobegan to expand his own activities in Hartford, being invited to serve

as a director of the Hartford Fire Insurance Co and the New Havenand Hartford Railroad Company In both cases, he owed the oppor-tunities to his father, who was a major shareholder in each.1Very early

in Junius’s career, a precedent was established that would ize the business philosophy of the Morgans for years to come Oldrelationships would be remembered in business, and family memberswould be expected to carry the gauntlet of the business into thefuture Unlike some of the Jewish-American banking houses, how-ever, there were not that many family members in the Morgandynasty, so the son always carried the gauntlet

character-Joseph Morgan passed on all that he knew about business practices

to Junius While living in Hartford, Junius and his wife had five dren, the first of whom was born just before the Panic of 1837 Thatson, John Pierpont Morgan, would be the child to whom Junius wouldpass his business knowledge and connections Joseph died in thesummer of 1847, leaving a large estate valued at more than $1 million,most of which was inherited by his wife and son Junius continued to

chil-be extremely successful in business, and the firm for which he worked

in Hartford officially changed its name to Mather Morgan & Co Butstill hungry for more success, Junius kept his eyes open for a businesswith international connections as well In 1850, Morgan branched out

by going into partnership with James M Beebe, a Boston dry goodsmerchant Part of the partnership’s business was importing goodsfrom Europe, and Junius began to travel to London frequently onbusiness On one of the trips he met George Peabody, the expatriateAmerican whose banking house was one of the most prominent inLondon Peabody began business as a merchant but soon discoveredthat banking was more profitable He became so successful that,despite being an American, he was held up to English schoolboys asone of the country’s most successful businessmen, worth imitating Abiographer wrote that he developed banking almost as a sideline tobuying and selling goods but soon discovered that “he became abanker as well as a great merchant, and ultimately much more of abanker than a merchant.”2Never married, Peabody had no heirs andwas actively looking for an American partner with whom he couldshare his business After extensive meetings in London, Peabodyoffered Morgan a partnership in his bank The partnership agreementwas to take effect in 1854, allowing Morgan time to settle affairs inBoston and find a place to live in London That partnership agree-ment officially began the history of the House of Morgan

Morgan’s deal with Peabody was advantageous, for it allowed him ashare of potential profits that was far in excess of his own contribution

to the firm’s capital The mid-1850s proved difficult for business ingeneral because of war in Europe, the Sepoy Mutiny in India, and thePanic of 1857 in the United States All would test the abilities of inter-national traders like Peabody & Co to the fullest Panic in the Ameri-can securities markets would affect Peabody the most, since the firm’s

primary business was dealing in the securities of American railroadsand municipalities Peabody conducted most of the usual merchantbanking business—dealing in commodities, financing trade transac-tions, letters of credit, and foreign exchange—but it was most exposed

to the securities markets because it served as an outlet for Americansecurities to British investors Its American agent in New York, Dun-can Sherman & Co., was exposed to the same sorts of risks The Amer-ican house offered a clerkship to Junius’s oldest son, Pierpont, just asthe Panic of 1857 began, and the younger Morgan witnessed the finan-cial crisis firsthand from his vantage point in New York

The crisis put the capital of Peabody & Co under enormous sure, and it was quickly realized that the house needed a temporarytransfusion of cash if it was to survive Peabody and Morgan calculatedthat they needed a loan of £800,000 Some of their less-than-friendlycompetition in London could not be counted on to extend facilities, soPeabody sought aid from the Bank of England The “Old Lady” agreed

pres-to help if the actual cash would be provided by other British banks Arescue group was quickly arranged, and the bank was saved Theyoung Pierpont Morgan eventually saw the list of contributors andnoticed Brown, Shipley & Co on it—but for a subscription that heconsidered too small, given that Peabody had helped bail it out of dif-ficulties during the Panic of 1837 He wrote to Junius that “this showshow little gratitude there is in some men as well as their littleness.After Mr Peabody’s exertions on their behalf in ’37, it certainly seemsoutrageous that they show the spirit they have in this case.”3 Appar-ently, Morgan and Peabody expected greater help than they receivedfrom Brown And it was quite apparent that the young Pierpontalready was commenting on the firm’s affairs while only an apprentice

at Duncan Sherman, which itself almost sank during the troubles

By 1859, Junius Morgan had assumed full control of the firm fromPeabody Pierpont had struck out on his own in New York after serv-ing his apprenticeship at Duncan Sherman The younger Morganbecame familiar with his father’s and Peabody’s business by serving assecretary to Peabody for short periods of time and later by handlingtheir business at the New York firm Fluent in French and German,Pierpont had studied for a term at the University of Göttingen beforetraveling to New York By the time he was twenty-one, he had started

his own New York firm, J Pierpont Morgan & Co., and was handlingbusiness for Peabody & Co in New York, carefully passed to him byhis father But it was not long before controversy began to follow him,something the elder Morgan would find abhorrent

Much criticism of Morgan arose because of business dealingsoccurring before and during the first years of the Civil War GeorgePeabody became something of a philanthropist in his later years, giv-ing much money to American colleges in particular This promptedSocialist writer and muckraker Gustavus Myers to comment that “evi-dently, it was the sight of the large benefactions which Peabody wasthen giving that prompted the remarks upon the origin of his for-tune.”4After the war began, Peabody & Co was named as one of theUnited States’ financial agents in London Representing the Unionwas something of a conflict of interest for Peabody, because much ofits business was with Southern states, especially in the commoditiesfinancing business Several newspapers noticed that the fortunes ofthe firm began to increase substantially after the war began, givingrise to conflict-of-interest and profiteering charges

The criticisms were little more than thinly veiled accusations oftreason Peabody allegedly dumped Treasury securities sold at largediscounts in Europe to finance the war, helping to depress the marketand make future sales highly unlikely—a problem that Jay Cookefaced when he assumed command of the bond issues Adding insult toinjury, Peabody also floated funds in his own favor against the Trea-sury, letting its disbursements to Europeans go into arrears while hecollected interest on the cash This was the same sort of complaintleveled against Clark Dodge during the Mexican War The Spring-

field Republican commented that Peabody “participated to the full in

the common English distrust of our cause and our success, and talkedand acted for the South rather than for the nation [and] con-tributed so much to flooding our money markets with the evidences

of our debt in Europe, and breaking down their prices and weakeningfinancial confidence in our nationality than George Peabody & Co.,and none made more money, by the operation.”5

One of Peabody’s more profitable adventures—and one that drew

no criticism—was its financing of Cyrus Field’s Atlantic cable ning in 1854 The transatlantic cable made telegraph between North

begin-America and London possible, although early technical problems madethe initial investment look precarious The firm invested its own money

in the adventure Private capital was not particularly attracted to itbecause of the technical difficulties that surrounded laying cable fromNew York to Newfoundland to Ireland and then finally to London.Some of the young Pierpont Morgan’s ventures also came undercriticism Whereas Junius was the model of conservative banking,Pierpont, at least in his early years, appeared to be more willing to take on speculative ventures that would cast shadows over the familyreputation The first such adventure also involved accusations of warprofiteering during the Civil War Pierpont provided financing for abusinessman, Simon Stevens, to purchase rifles so that they could beresold to General John C Fremont The rifles were considered sur-plus because they were out of date and needed retooling Stevens paid

$11.50 apiece for them from an arms dealer named Arthur Eastman,who originally paid $3.50 for them from the Army itself Stevens thenoffered them to Fremont for $22 apiece The circuitous path earnedMorgan a few thousand dollars, but the entire affair became the sub-ject of a government investigation into the procurement of Army ord-nance Morgan was subjected to charges of profiteering, although heonly provided the finance for the operation and did not act as one ofthe principals in the transaction The carbine affair ended tamely,although the muckrakers used it as fodder for years to come

Another charge of profiteering at the government’s expense cameduring the gold operations in the early days of the war Pierpont’s firmbecame involved in purchasing gold for clients, which opened him tocharges of cornering the precious metal in the same way that JayGould would do later in the decade During the war, Pierpont wasacting as agent for several firms that purchased gold in the market touse as remittances for trade with firms in London In one notabledeal, Morgan purchased gold for Ketchum, Son & Co so that themetal could be shipped to England Ketchum was Morris Ketchum,with whom Junius had once been a partner briefly in MorganKetchum, and the son was Edward, with whom Pierpont also hadbusiness connections He purchased the gold, forcing up the price,and then sold some that he had purchased for his own account, net-

ting a profit of more than $100,000 The New York Times commented

on the deal but concluded that no real damage was done to the stockmarket and attributed the affair to “a young house in Exchange Place,respectably connected on the other side” of the Atlantic.6That under-stated the importance of the operation The gold trading was done atthe gold room, a trading room located around the corner from theNYSE Trading in the metal took precedence there above anythingelse When the Union was victorious on the battlefield, the traderssang “John Brown’s Body” in unison; when the South scored a victory,they switched to “Dixie.” The lack of conscience displayed by thespeculators infuriated many, including Abraham Lincoln, who asked acolleague, “What do you think of those fellows in Wall Street who aregambling in gold at such a time as this? For my part I wish every one

of them had his devilish head shot off.”7

Speculating in gold during the Civil War had more serious tions for the Union The bonds being sold by Jay Cooke and others tofinance the war relied on gold as their backing If the value of the cur-rency fluctuated, which it did during such operations, and was thenexported to Britain, which had officially declared its neutrality in theconflict, then it could be reasonably assumed that the war financingwas being undermined indirectly When word of the operation wasmade public, Morgan did no more speculative deals The operationfollowed the successful selling of the 6 percent bonds, known as the5-20s, by Jay Cooke in the spring of the same year, 1863 The friend-ship with the Ketchums was put under further strain when EdwardKetchum was arrested shortly thereafter, having stolen $3 million insecurities from his father’s bank and forged over $1 million in goldcertificates, some in Pierpont’s name The Morgans were horrified bythe incident, and Edward was sentenced to a term in Sing Sing.8

implica-The following year Junius’s partnership arrangement with Peabodyofficially came to an end The seventy-year-old Peabody decided toretire from the firm, taking his name with him, so the bank wasrenamed J S Morgan & Co The firm was known as one of the mostinfluential in London specializing in trade and securities with theUnited States, yet when Morgan struck out alone he employed onlyseveral clerks and had capital of only about £350,000 That wasapproximately £200,000 less than Brown Brothers’ capital and wasthe subject of much discussion in London.9This helped underscore

the peculiarity of nineteenth-century banking Many trade tions between countries were guaranteed or financed by small bankswith sparse capital, which traded on the strength of their word andprivate assurances that the deals they participated in would be suc-cessful Morgan was certainly in this category, although it was clearthat it was wartime again and small capital bases were vulnerable.Junius needed a stronger link with the United States than DuncanSherman could provide, and he continued to pass business to his son.Pierpont was quickly developing a reputation as a solid banker withextremely solid connections—tools necessary for success in interna-tional as well as domestic financing deals Gustavus Myers recognizedthis when he wrote that Morgan was unlike many of the Americanbankers who had come up the hard way: “Morgan was not one ofthose magnates coming wholly under the classification of being a self-made man.” He did not fit the nineteenth-century mold, but his success certainly became the model for all bankers, regardless oftheir beginnings.

transac-Forging Links

While the family firms were flourishing on both sides of the Atlantic,Junius Morgan decided to forge another link with an American bank-ing house He chose Drexel & Co of Philadelphia, a well-knownhouse since it had helped finance Mexican War bonds along withClark Dodge & Co J S Morgan & Co had successfully floated bondsfor several foreign governments, including Chile and France, but itscore business was still with the United States When Anthony Drexelpaid a courtesy call on Junius in London, the older Morgan broachedthe subject with him in much the same way Peabody had done withhim years before

Junius and Anthony Drexel, the senior partner of Drexel & Co.,agreed to a link that would include Pierpont as a partner in the firm

in 1871 It would name its Wall Street operation Drexel, Morgan &

Co The new firm would become one of the country’s most prominentprivate banks It provided the London bank with a stronger Americanally, adding the link that J S Morgan & Co had been seeking forsome time Although the two houses were separate, for all practical

purposes the House of Morgan was thought of as having two sides,the London parent in J S Morgan & Co and the American side inDrexel, Morgan & Co Their business was quite similar to that of theRothschilds and August Belmont, separate institutions thought of asone for practical purposes.

The newly forged alliance was not strong enough to assume thatbusiness would come to it automatically The alliance also recognizedthat it had serious competition for business in the United States.When the Treasury decided to refinance the 6 percent war bondswith new 5 percent bonds, all of the country’s major private banksentered into discussions to manage the deal When Jay Cooke wonthe deal, Junius Morgan was clearly irritated by his success Morgansaw Cooke as an outsider encroaching on his business, althoughCooke was the senior of the two and had been in American bankingsince his days with Clark Dodge before the Mexican War Morganrefused to join any Cooke-led syndicate He wrote to Drexel, “I hesi-tate about joining because I can see that Jay Cooke & Co have in viewsomething entirely beyond the mere profit They, if successful, willhope to make a reputation and put themselves in a more command-ing position here.”10Rarely did bankers make known so directly theirfeelings about others While Morgan, like the Rothschilds and Bar-ings, objected to the terms of the refinancing, an equal if not overrid-ing consideration was the desire not to make Jay Cooke look toosuccessful in the effort At this stage, it became clear that Juniuswould tolerate little opposition to his self-assumed role as banker tothe Treasury That would translate into little sympathy for Cooke just

a few years later

The major victim of the Panic of 1873 was Jay Cooke & Co Theplunge that Cooke took into the Northern Pacific Railroad provedunsuccessful, and his house suspended operations, ending his briefbut spectacular career as America’s first truly national bond distribu-tor Since the United States did not have a central bank at the time, nogovernmental institution could come to the aid of failing banks, evenone as prominent as Jay Cooke & Co The Morgans, on the contrary,did quite well in 1873 and reported a healthy financial condition onboth sides of the Atlantic and no serious repercussions from thepanic Although they did extend some short-term assistance to small

brokers with whom they did business, there was certainly no attempt

to extend a rescuing hand to Cooke Cooke’s banking operation fellquickly, especially after the New York operation technically failedwithout bothering to tell Cooke himself until it was too late Althoughcontroversy swirled around Morgan’s role in the failure, it would not

be the first time that a major rival hit the financial skids at a propitiousmoment in the developing story of the House of Morgan

Although still in the shadow of his father, Pierpont was developingtraits that would come to characterize him in later life His mannerwas already imperious, and he assumed the general aura of someonewho was larger than the industry that was making him famous Butthe imperious behavior provided a benefit nevertheless Business forDrexel Morgan was increasing in two areas—loans to governmentsand railroad financings In addition to helping finance later Treasuryrefundings, J S Morgan & Co participated in a bevy of loans toEuropean and Latin American governments This brought both Morgans into contact with numerous government officials who wereimpressed with the air of authority displayed by Pierpont And in rail-road financing, the assumed air was an even more invaluable asset.The railroad barons of the day were the strongest personalities imag-inable, and only someone of their own nature could deal with themeffectively This was especially true in Pierpont’s first major railroadfinancing coup

Pierpont made his name in railroads when he helped WilliamHenry Vanderbilt sell his large stake in the New York Central Railroad,founded by his father, Cornelius “Commodore” Vanderbilt Billy washis father’s heir and had inherited the operation after the Com-modore’s death Much criticism had followed him even after his noto-rious father died, and he had decided to sell his holdings New Yorklegislators were becoming much more strict toward railroads, espe-cially those owned by one family, and Vanderbilt decided that it wastime to divest But the amount of stock he held was too large to sim-ply sell on the market, so he arranged with Pierpont to sell it in anorderly fashion to private subscribers

Pierpont contracted with Vanderbilt to buy 150,000 shares at $120per share, with an option for an additional 100,000 if the initial saleproved successful The shares were offered to the public in January

1880 at $131 Unfortunately, they came under heavy selling pressure

on the NYSE and the price fell But Morgan apparently was not turbed “We did not expect a quick turn when we commenced,” hetold Junius a couple of months later, “and we have no reason to be dis-appointed at the results so far.” The assessment proved correct Bothhouses made about $12 per share on their allocations, netting J S.Morgan more than $500,000.11Vanderbilt made almost $20 million onthe first part of the sale

dis-In the Morgan saga, money was not the only ingredient that provedalluring As a result of the reorganization of the railroad, the number

of seats on the board of directors was increased and Pierpont wasgiven one as a condition of the sale Two other seats were given toclose allies of Jay Gould, who had to be placated so that the deal couldproceed Gould and Commodore Vanderbilt had been locked in mor-tal combat over control of the Erie Railroad, and any reorganization

of the New York Central would have to pass Gould’s approval to keephim from interfering in the deal by pursuing his own interests Whenthe reorganization was completed it was hailed as a major boon forthe future of railways in the country, but internecine warfare betweenrailroad barons broke out again shortly afterward Pierpont had hisseat on the board, however, beginning what critics would contend was

a stage in his career endowed with other people’s money He hadeffectively dealt himself into the game by helping underwrite Van-derbilt’s shares Once in, he would prove difficult to dislodge, and thelesson would be carried over into other industries as well

Morgan was the best-known private banker to negotiate his wayonto corporate boards of directors, but certainly not the only one.Most other private investment bankers also served on boards of clientcompanies, but Morgan was the most visible and later would be able

to forge an empire out of such relationships Since competitionamong bankers was virtually unknown during the latter nineteenthcentury, the board seat was recognition that the banker served as thecompany’s main investment banker Once established, the link wasdifficult, if not impossible, to break Competition among investmentbankers for a client’s account was virtually unheard of until thepost–World War II years, when Wall Street underwent a major transformation in the way it did business The full extent of Morgan’s

influence would not be fully revealed until the Pujo Committee ings a year before his death In the thirty years that followed, theMorgan partners assumed a staggering array of seats on most of thecountry’s major corporate boards.

hear-Striking Out Alone

Railroad financing became the most significant part of Morgan’sdomestic business in the 1880s Many of the major railroads were in

an organizational mess at the time and needed financing The NewYork Central deal made Morgan the most famous railroad financier,and his services were in much demand While Junius was alive, therelationship between the New York and London houses was muchlike that between the Rothschilds and Belmont Deals that originated

in New York often used London to place securities with overseasinvestors, and the London connection became invaluable for DrexelMorgan since investors rightly assumed that the vast reservoir of for-eign funds was at the disposal of the elder Morgan, who by the 1880sranked high on the totem pole of international bankers

The Northern Pacific Railroad became another of Pierpont’s majorcoups of the 1880s and proved to be the first of his two victories overHenry Villard The railroad had recovered from the days of JayCooke’s initial investment, but by 1880 it needed a capital transfusion

in order to survive After years of delays and periodic financings, theline was still not finished, and its management approached DrexelMorgan about a bond issue that would allow completion of the linebetween Lake Superior and Puget Sound If the money could guar-antee completion of the line, the entire Pacific Northwest would betransformed quickly Morgan agreed to raise a $40 million bond issuealong with August Belmont & Co., but he soon encountered stiffopposition from a local entrepreneur in the area

Born Heinrich Hilgard in Germany, Villard anglicized his namebefore arriving in the United States in 1853 He moved to Colorado,seeking his fame and fortune in the West Originally, he bought asteamship company, and by an adroit watering of its stock, he raisedenough funds to branch out into other endeavors By 1880, he was themost prominent businessman in the entire region, but the Northern

Pacific posed a threat to his interests by opening the area to otherinvestment Villard decided to buy the company rather than competewith it, and he proceeded to mount some spectacular raids on itsstock on the stock exchange Emerging victorious, he was the soleowner of the railroad and appeared to have maintained his grip on theregion But he was undone by his own success and by the enemies hehad made in the process

Villard became the president of the railroad Other financings weresubsequently arranged at his behest Junius Morgan joined the board

of the railroad in 1883 in what was becoming a standard move forbankers closely involved in large bond financings and stock financings.Naturally, Villard began to influence the banking groups that pro-vided financing for the railroad, providing competition for Morgan.Apparently, this new turn of events did not sit well with Drexel, Mor-gan & Co Shortly thereafter, the stock of the Northern Pacific cameunder attack on the NYSE by Charles Woerishoffer, a professionalshort seller, or “plunger,” in the mold of Jay Gould and CommodoreVanderbilt He and Villard became enemies because he was part ofthe original group that helped corner the stock for Villard but waslater denounced as having been less effective than others He took tothe raid on Northern Pacific with a vengeance, betting most of his for-tune and reputation on the outcome When the stock collapsed, Vil-lard was ruined He had to sell many of his personal possessions, and

he suffered a nervous breakdown in the process Woerishoffer added

to his reputation considerably, although it was generally edged that he was in the employ of Morgan forces and was deter-mined to drive Villard out of the Northern Pacific Although Morganengineered the operation, Villard was charged with executing it Mor-gan then persuaded Villard to resign and liquidated many of his hold-ings for him, expressing his sorrow for what had befallen the railroad’spresident The two would do battle again some years later in anotherproject close to both their hearts, but the outcome, unfortunately forVillard, would be much the same

acknowl-During the 1880s, Pierpont’s activities brought him squarely intothe developing world of monopoly concentrations Many of the coun-try’s industries were consolidating at a rapid rate, and financing wasneeded to achieve the mergers and takeovers that dotted the indus-

trial landscape This meant opportunity for many of the bankers whohelped firms merge: They were often able to negotiate board seats onmany of the new, enlarged companies But Morgan took the trendone step further for a banker by becoming part of it himself, both as afinancier and as a principal player in the saga His first step would be

an attempt to consolidate the railroads and the warring railroadbarons, who had not become any friendlier since the New York Cen-tral deal with William H Vanderbilt

Pierpont Morgan’s attempt to bring the warring railroad barons into

an alliance in 1889 was an outgrowth of his successful financing for thePacific Northern and the New York Central Although he had wit-nessed the sort of conflict that the railroad barons engaged in when hehelped finance the Albany & Susquehanna Railroad against a takeover

by Jay Gould and Jim Fisk in 1869, he also recognized the structuralproblems that the fiercely independent railroads faced As a result, hewas more than willing to try to unite them before the Interstate Com-merce Commission, created by Congress in 1887 specifically to dealwith the railroad problem, could make its presence felt on railroad ratesand organization Certain that price competition would lead to the ruin

of the railroads, Morgan proposed setting up a rate structure that wouldreduce their internecine warfare while ensuring them a steady stream

of revenue The problem with the idea was that it smacked of collusionfrom the start and would clearly have led the railroads into a cartel.Although the idea failed shortly thereafter, Morgan realized that theidea had merit in a different industry Too many critics of the railroadswere constantly at war with the carriers to make any serious headwaywith them The idea needed to be applied somewhere else

The first successful large company forged by Morgan was the General Electric Company in 1892 It was the culmination of a longassociation between Morgan and Thomas Edison Edison’s firstpower-generating plant on Pearl Street in lower Manhattan wasfunded primarily by Morgan, and the two developed a working rela-tionship over the years But it was not until Henry Villard reappeared

on the scene after spending time in Europe in the wake of the ern Pacific deal that Morgan jumped into action and formed GE Villard returned to the United States bent upon forging a monopoly

North-in the new electric power generation busNorth-iness and eyed Edison’s

com-pany as the perfect place on which to build his empire Edison tric was initially bought out by a combination of Villard and Morganforces Edison was distanced from the business he founded, and Villard became president of the new company Villard quickly becameacquisitions-minded and proposed that his company buy the largerThompson-Houston Electric Co., one of the largest in the country.His mistake was approaching Morgan for financing Morgan insteadarranged with Thompson-Houston to take over Edison Electric.Once the deal was sealed, the new General Electric was the largestsupplier of electric power in the country Morgan then forced Villardout of the company, scoring his second coup over the German-bornfinancier in a decade.

Elec-Pierpont already was considered the country’s top banker whenJunius died in 1890 While on a prolonged holiday in Italy, a carriage

in which he was riding had an accident when the horse bolted Theelder Morgan suffered severe head injuries, and he died several dayslater He was buried in Hartford The funeral attracted hundreds ofbankers and politicians, and he was hailed as the American equivalent

of the Medicis and the Rothschilds Pierpont now was fully in charge

of both firms and was immediately elevated to an even higher pedestalthan he had occupied before His position as the country’s greatest liv-ing banker was firmly entrenched The London house had capital ofsome $10 million, which represented more than 80 percent of Junius’sestate Estimates at the time put the figure much higher.12But the cap-ital alone did not adequately explain the Morgan influence The househad advised many of Europe’s prime ministers and kings and providedfinances for many Latin American companies Deals by Pierpont hadbrought him into contact with most American industrialists Takentogether, these successes made Morgan the equal of the Rothschildsand the Barings, both of whose influence was slowly starting to wane

in Europe The United States was a rising world power, and Morganwas its high-profile banker—a position he would exploit effectivelyover the next twenty years Ironically, in 1890, at the time of his father’sdeath, Pierpont appeared to be on the verge of retirement His fameuntil that time was mostly in banking circles, and he seemed to be tir-ing of the game His reputation was solid, but his role as financial sav-ior of the great democracy of the West had not yet been made

Saving the Country, Part 1

Morgan needed to add partners to his New York and Philadelphiaoperations in the 1870s and 1880s in response to the growing businessbeing acquired by the Morgan and Drexel firms Among them were

J Hood Wright, Egisto Fabbri, Charles Godfrey, James W Paul,George C Thomas, and Edward Stotesbury They were followedsome years later by George Bowdoin and Charles Coster Costercame in for high praise on Wall Street as being the genius behindmost of Morgan’s reorganization plans until 1900, when he died JohnMoody called him “Morgan’s right arm a notable example of a manwho worked himself to death.”13 Offers of a partnership in the NewYork and Philadelphia operations were few and far between; Morganand Tony Drexel were known to be very discriminating when choos-ing future colleagues And partners were not chosen for their ability

to bring personal wealth with them Almost all partners admitted inthe latter part of the nineteenth century were experienced bankerswho at one time in their careers had been merchants Despite the factthat being associated with Morgan was the highest position a banker

on Wall Street could hope for, the bank had a reputation as a difficultplace to work, with long hours and little support staff

Nevertheless, the prestige of the position and the high incomeaccompanying it convinced most that it was worth the work Onceadmitted, they were expected to leave a portion of their annual earn-ings with the firm.14 This was a key element in Morgan’s continuedsuccess The Morgan family connection provided only the chief exec-utive of their operations The partners were chosen for their abilitiesand future prospects As a result, the Morgan banks did not have toseek merger partners or temporary infusions of cash And dynasticmarriages did not play a part in their game plan, although one mar-riage to a Belmont did occur in the 1890s

During the period of the panic in the early 1890s, the Morganbanks underwent a reorganization that ultimately produced whatwould be the premier name in American banking for the next cen-tury J P Morgan & Co was founded in late 1894 when Pierpontannounced changes after Anthony Drexel’s death in 1893 The firmkept its Philadelphia and New York houses intact, although the Drex-

els themselves were no longer active in the firm The old partnersretained their positions and Pierpont was the senior partner at eachhouse, including London Otherwise, London remained a separateentity The new bank had capital of $7.1 million, with Morgan per-sonally responsible for $4.6 million The figure was not particularlyhigh, considering the central role that Morgan played in Americanfinance But Pierpont was now at the helm of the country’s most influ-ential bank, and his influence in the face of that relatively small capi-tal base was soon to be tested.

Almost at the same time that J P Morgan & Co was officiallyformed, Pierpont faced the first crisis that would cast him as the one ofthe most powerful men in the country His influence was beginning totake on larger-than-life connotations Since the demise of the secondBank of the United States, the country had been without a centralbank Most bankers had grown accustomed to the fact, even if theywere not completely comfortable with it Anytime a bank required atransfusion of funds, its only recourse was to approach other banks for

a bailout That made friendly relations with other bankers essential butalso put the stronger banks in an enviable position Other bankerscould not afford to upset the powerful bankers and usually toed theofficial line when Morgan made his wishes known What becameupsetting to many was that Washington also found itself in the sameposition since the country was still dependent to a large extent on theimport of foreign capital Anyone having access to those funds was inthe driver’s seat with the U.S Treasury

After the Panic of 1893–94, the dependence of the United States

on foreign investors became painfully obvious While the debate athome continued about using silver to support the dollar in addition togold, foreign investors began to lose confidence in their investments.Gold was viewed as the only acceptable standard, and they began

to sell their holdings of stocks and bonds The gold reserve began

to diminish as a result, falling to $50 million, one half of the reserve considered acceptable Then it began to slip even more, and drasticaction was needed so that the Treasury did not become bankrupt

A major obstacle to remedying the situation was congressionalreluctance to authorize a bond issue designed to attract gold A couple

of small issues had served only to harden congressional authorization,

because domestic investors were not paying for the bonds they didpurchase with actual gold but only swapping one issue for another, col-lecting interest on the bonds without actually relinquishing gold Pres-ident Grover Cleveland desperately needed a solution to the problembefore his government ran out of money, and it became obvious thatforeign investors would somehow have to be courted if the Treasurywas to avoid a default on its obligations.

Pierpont’s first major foray into gold, during the Civil War, hadbeen met with criticism, but his solution the second time around wasadroit Cleveland had called some prominent bankers to Washingtonfor consultation, including Morgan and August Belmont, who main-tained excellent relationships with members of the administration.Morgan offered an ingenious technical solution to the problem.Given that Congress would not sanction a new borrowing to shore upthe reserves, he proposed that the borrowing be disguised to look like

a purchase of gold coins using Treasury bonds, a tactic that had beenused by Salmon Chase during the Civil War Most important, the lawdid not require official sanction by Congress and could be accom-plished by the men gathered in the room with little outside assistance.The deal was quickly arranged A syndicate led by Morgan and Bel-mont sold the government gold coins worth $65 million in return for30-year bonds paying 4 percent interest Shortly thereafter, the bondswere offered to the public at a large markup of 8 percent and they soldout quickly.15The European sale was conducted by J S Morgan & Co.and the Rothschilds The deal saved the Treasury the embarrassment

of a default and put the credit of the United States on a sounder ing It satisfied all sides because it was done quietly and effectivelywithout involving Congress, and it pleased the Cleveland administra-tion because the gold was coming from abroad rather than fromdomestic sources The importance of gold over silver was also under-lined: almost no one except those in the western states favored silver

foot-as backing for the dollar The Sherman Silver Act, which designatedsilver as official backing for the dollar along with gold, was repealed in

1893 But all was not well on the political front, because the deal setoff howls of protest from silver advocates and the muckraking press.Critics of the deal pointed to the two favorite bogeys periodi-cally accused of skulduggery against the United States—Jews and the