Old Money

We could use a little human interest around here, a few good stories…dare we say, a little “juice.” So let us turn to a discussion of banking and the history of capital markets.

If our objective seems conflicted, it at least has met its match in today’s volume, The House of Morgan by Ron Chernow. In his Foreword, Chernow tells us he set out to write the history of banking but found the topic too dull for the average reader (harrumph!); further, he decided, such an approach would do “small justice to the turbulent pageant of heroes and scoundrels” therein contained. (We’re just in the Foreword and already we got pageants?) He decides, therefore, to trace the history of one bank, the House of Morgan, as a proxy for the banking industry. The result is an entertaining volume the general size and weight of a doorstop: the text runs over 700 pages, with uncounted backmatter. At that length it competes with some of Dickens’ longer novels, and Dickensian, too, is the cavalcade of characters Chernow presents us. Whether that approach is successful is another matter.

For those whose parents did not belong to a yacht club (poor devils), the House of Morgan was a bank catering to governments, “the right sort” of large companies, and very wealthy individuals. For most of the company’s history, it fit into a single office at the intersection of Broad and Wall Streets in New York City…as in, directly across the street from the New York Stock Exchange. (The House of Morgan was actually comprised of four separate entities: J.P. Morgan in New York, Morgan Grenfell in London, Morgan et Cie in Paris, and Drexel, Lambert in Philadelphia; New York was the largest office. Even at that the company ran with very few staff in total.) WASP, preferably Episcopalian, to the core…to steal a phrase from Bette Midler, these are the sort who make the rest of us look Third World. But in their defense, within that demographic — which at the time represented a great deal of American finance — the House of Morgan was a meritocracy: if you were smart and driven you could advance, social standing was not important.

Let us consider their world by focusing on the firm’s first three Chairmen.

The first head of the House of Morgan wasn’t even a Morgan. George Peabody was an American whom we find storming around London in the mid-1830s. He was trying to refinance state bonds, mainly on behalf of Maryland. Many states had speculatively invested in railroads by issuing bonds, Maryland included; many of those projects went bust and the states in question defaulted on their bonds, Maryland included. Peabody had been sent to sell new bonds to the British to replace the old, defaulted instruments. A tough sell that didn’t work, nor did cajoling Maryland just to resume paying on the old issues. Not to be gainsaid, Peabody then decided to fix an election. Whigs in Maryland were generally in favor of resuming payments, so in conjunction with the British bank, Barings, Peabody set up a slush fund (90% Peabody, 10% Barings) to finance Whig candidates. Miracle of miracles, it worked. It also set several patterns of operation, notably Peabody (later the Morgans) taking an intimate hand in government, and close coordination with the British on matters both financial and political.

Peabody was, you will agree, a truly great Salesman.

Sadly, the one thing he neglected to sell was himself. Peabody was gregarious in business, but in his private life was a miser. Misers seldom get the girl, Peabody had no heir, and his firm was privately held. He decided, therefore, to bring in Junius Spencer Morgan (he was recommended by a friend) as his junior partner and ultimate replacement. Junius was the first Morgan of the House of Morgan.

Junius took control of what was then George Peabody and Company in 1857. The banking world of the time was very unlike that of today. Chernow highlights two major differences: first, the United States had no central bank. When the Second Bank of the United States lost its charter in 1836, Andrew Jackson vetoed a replacement for it…Jackson was from the West, where bankers were unpopular figures. As a result, for much of the nineteenth century and into the twentieth, the government had to turn to private bankers if it needed a loan or wanted to issue bonds to raise funds. The second, less obvious, difference had to do with corporate governance. Before the railroads and the telegraph it was difficult to do business much beyond the local or regional level. Certainly import/export has been around as long as people have, but both communication and shipping remained costly and slow. These factors imposed a size limit on most businesses. As a result, they tended to have comparatively little cash on hand and equally little appetite for internal financial managers. This situation meant that business owners, too, were dependent on their bankers when they needed cash. Moreover, if the borrower was distressed, the bank might offer a loan in exchange for one or more seats on the company’s board of directors. Doing so increased the bank’s power, of course, but in return the bankers generally took an ongoing interest in the health of their clients.

Against that background, Junius established J.S. Morgan and Company as successor to the Peabody bank in 1864. His business exploits were many and notable. Railroads were an enormous part of the investment market during the nineteenth century, and Morgan invested in (and took seats on the boards of) rail companies so heavily that some were known as “Morgan lines.” Junius’s chief rival at the time was Jay Cooke, also a railroad man; when Cooke’s fortune collapsed in the Panic of 1873, Morgan and his bank emerged triumphant. The banking empire that had begun trying to refinance defaulted bonds was, late in the century, the rival of famous banks like Barings and Rothschild.

In short, Junius made a lot of money, just like Peabody. Unlike Peabody, however, Junius Morgan spent a lot of money.

Much of it on art. Junius maintained a London townhouse and a manor in the English countryside, amusingly named Wall Hall. With real estate to fill, Junius became a collector of art, with a concentration in Reynolds and Gainsborough. His son, John Pierpont Morgan, continued his father’s collecting tradition, amassing one of the great private collections of art and (significantly) literary manuscripts in history: when he died, half of his $50 million fortune was tied up in his curation. When Pierpont’s son, Jack, inherited the collection, he brought it to New York (for tax reasons, most of the pieces had been resident in England), displayed it once in its entirety, and then sold off all the art to pay estate taxes, keeping only the manuscripts.

Thus began today’s Morgan Library.

Junius was the last of the unregulated bankers. His son, the aforementioned J. Pierpont Morgan, had an equally stellar career. He assumed control and renamed the company J. P. Morgan & Company in 1895; his was the flotation of U.S. Steel, International Harvester, and General Electric, among other large corporations. He survived the economic Crash of 1907, making the famous walk across Wall Street, “when Morgan took a hand” to stabilize the market. However, it was that financial downturn which prodded Congress to pass the Federal Reserve Act, creating a central bank for the country (the Federal Reserve and the regional Reserve banks) in 1913. Private corporations, too, were changing: improved transportation (rail) and communication (telegraph, then telephone) greatly facilitated national markets and corporate growth. As companies grew larger, they retained more cash, hired more professional management, and had a correspondingly reduced need for banking help and bankers’ oversight.

The low point for banking came during the Depression and Roosevelt’s New Deal. The Crash of 1929 and the worldwide depression that followed it were frightening events, and the country’s financial leaders — both the people and the institutions — became villains in the public eye. Enter the Glass-Stegall Act of 1933. This act forced banks to choose between accepting deposits from individuals (commercial banking) or issuing bonds and new stock offerings for corporations (investment banking). Morgan had a huge presence in the issuance of bonds, but also took deposits from the very wealthy…in a day when the average worker earned $2000 per year (the 1920s), Morgan refused initial deposits of less than one million dollars. The expectation was that under Glass-Stegall, Morgan would choose investment banking, given the number of new issues they floated every year. Instead they chose commercial banking: their logic was that law changes over time, but access to very wealthy individuals is always useful. Morgan proved right about the law, although Glass-Stegall was not repealed until 1999.

Much history and much Morgan history occurs after the Second World War, but the bank's power was enormously diluted by both Glass-Stegall and the expansion of the Federal government during the war. Morgan corporate history devolves into what strikes the reader as mere money-grubbing: profitable, but lacking the style of earlier generations. Part of the reviewer’s reaction is personal...having lived through the 1980s, the Curmudgeon was already aware that cocaine and leveraged buyouts go hand in glove.

Michaelangelo was asked how he sculpted his magnificent David. His reputed response was, “I chipped away everything that didn’t look like David.” Hijacking that analogy, Chernow’s book is one that could have used a little more chipping. We do benefit from the dross: we find that Pierpont’s daughter was lesbian and living in a menage a trois. We find Ben Strong, the widowed Fed governor and former Morgan partner, and Montague Norman, the perpetually unmarried British Minister of Finance, who were inordinately close friends; between them, they were also the architects of the gold standard for the British and American currencies. We even find that Pierpont’s first in command, Tom Lamont, mixed a perfect 3:1 Martini…during Prohibition his cellars held 330 bottles of gin and 110 bottles of vermouth. Amusing to ponder, but both the intellectual and the literary thrust of the work suffer from the digressions. A chainsaw edit might have yielded a slimmer volume with more focus.

Although focus may not be the point: the Morgans at their finest were rich, powerful, and unafraid of their own somewhat-messy edges. That faint odor you detect is the aphrodisiac perfume of Old Money.