When John Pierpont Morgan arrived on Wall Street, it was a disorganized jumble of competing interests and one of the many financial centers in a country still struggling with the remnants of colonialism. When he left Wall Street, it was a tightly knit group of big businesses that were leading one of the fastest growing economies in the world. Much of the progress that Wall Street experienced at the close of the twentieth century and the beginning of the twenty-first was due to the influence of J.P. Morgan and the skill with which he wielded it.
During his life, Morgan played many roles: banker, financier, robber baron and hero. In this article we'll take a look at the life of Wall Street's most famous banker.
The Family Business
When J.P. Morgan was born on April 17, 1837, in Hartford, Conn., there was very little doubt that his future lay in banking. His father, Junius Spencer Morgan, was a partner in a bank run by another American, George Peabody.
Morgan was brought up knowing he would take his father's place, shuttling from the U.S. to Britain, peddling U.S. bonds to London investors. Most of these bonds were state and federal offerings and, at this period in history, a much higher risk than government bonds from European nations. (To learn more about European and American investments, see American Options Investors: Should You Go Euro?)
Upon his retirement, George Peabody left the bank completely in the hands of Junius, even removing his name from it. In 1864, J.S. Morgan & Co., the first Morgan bank, made its debut. By this time, J.P. Morgan had finished his European education and was learning his future trade as his father's New York agent while his father tended the more important London end of the business.
Taking the Helm
Morgan began to take over his father's responsibilities following the Drexel-Morgan merger. The Drexel-Morgan merger extended the scope of business, strengthened international ties, and added to the capital that the bank was able to loan.
As his father faded to the background, Morgan took an increasing role in underwriting companies for public offerings. He took a great interest in the railroad, holding shares, handling offerings, financing, and even placing Morgan employees on the company boards. With the importance of the railroad growing throughout the continent, Morgan picked an excellent time to expand both his bank's wealth and his personal power. (Keep reading about this in How The Wild West Markets Were Tamed.)
At the cusp of the twentieth century Morgan, Wall Street and the U.S. government were becoming increasingly worried over the U.S.'s status as a debtor nation. Wall Street had a firm belief that a stable currency was needed before the U.S. could crawl out of the hole. It was Morgan that Wall Street sent to the White House to discuss matters with the president. This led the American people to believe that Morgan was the kingpin of Wall Street, and also gave a focus for their wrath over the adoption of the gold standard - seen as a death knell for farmers in a largely agrarian nation. He was the robber king among the robber barons. (To learn more about debtor nations, read What Is The Balance Of Payments?)
The Great Reorganizing
Morgan, Cornelius Vanderbilt, John D. Rockefeller and all the other robber barons shared two beliefs: cutthroat competition was ruinous, and combination and size could reduce competition while increasing efficiency. Morgan used his personal power and reputation to encourage the formation of trusts and mergers within industries where he saw ruinous competition.
Although he will always be remembered for trying to create a steel monopoly in the form of U.S. Steel, many of the other large players Morgan helped to create were beneficial to the economy. General Electric (NYSE:GE) and International Harvester (now Navistar International) (NYSE:NAV) helped the U.S. advance technologically and helped the agricultural sector that Morgan was often accused of strangling through his rail trusts. (Keep reading about these barons in The 5 Most Feared Figures In Finance and Monopolies: Corporate Triumph And Treachery.)
J.P. Morgan's perceived power was much greater than the actual wealth he controlled. The Morgan bank simply didn't have the size to underwrite public offerings or handle bond issues without help from the growing financial sector. Morgan's reputation, however, meant that any time his bank was part of a syndicate, it was reported as if Morgan was personally steering the offering. Morgan's growing prestige helped him in an age when the offering bank's reputation mattered more than the stock fundamentals. This cemented the public's perception of Morgan as a figurehead for all of Wall Street.
When things were bad, Morgan was accused of suppressing the economy. When things were good, Morgan was thought to be lining his pockets. Morgan's personal power came at a very high public price.
J.P. Morgan was hated and respected in almost equal measure at the beginning of the 1900s. In 1907, however, he tipped his hand and gave the government and the general public a reason to fear. On March 25, 1907, the NYSE began to plummet on an unprecedented streak of panic-selling. This odd event soon corrected itself, but it signaled to the financial community that all was not right on the stock exchange. Morgan was 70, semi-retired, and on vacation while the irregularities increased through the summer and into the fall. By October 1907, a crisis was clearly brewing. On October 19, Morgan traveled to New York to try to avert the financial disaster.
Morgan used his considerable connections to gather everyone involved in the U.S. economy. Even the U.S. Treasury threw $25 million behind Morgan's efforts to increase liquidity and keep the market afloat. (Find out more about this in A Nightmare On Wall Street.)
From his office, Morgan sent messengers to exchanges and banks, making certain that no till closed, but that the rate at which cash could be drained from the system was slowed. Money counters were instructed to double-count at a slow pace, religious leaders were called on to preach calm in their sermons, and company presidents and bankers were all locked in Morgan's library. In the locked room, Morgan was able to force all involved to agree to a plan. Basically, they would create liquidity to shore up the financial world much like the federal government does now in similar situations. This plan then received presidential approval, and the panic subsided.
Recognizing that only an aging banker sat between the U.S. and financial disaster, the government quickly moved to reform the banking industry and built up the Federal Reserve System to avert crises in the future.
The Panic of 1907 was Morgan's finest moment. In the aftermath, he was praised as well as getting his usual helping of blame. His obvious manipulation of the economy only worsened the general public's opinion of him as the "Robber King" of Wall Street. Rather than being left to his retirement, Morgan was called to the Pujo Committee, a government investigation into money trusts. In the course of his testimony, John Pierpont Morgan gave voice to what was then an unspoken banker's code. Among other things, he reinforced the Old World concepts of character and moral responsibility being a banker's guiding principles. Whether this was a noble principal, it became clear that a gentleman's arrangement between the big banks on Wall Street was controlling a vast amount of the nation's credit.
Following the hearings, Morgan's health began to fail. He was an old man and his many ailments had as much to do with his declining health as any stress put on him by the committee. With his decline, however, the age of gentleman's business, or baronial rule as seen by his detractors, was over on Wall Street. On March 31, 1913, the hero of the Panic of 1907 and the alleged kingpin of Wall Street died in a hotel room in Rome. Today, we speak of entities, corporations and multinationals dominating Wall Street. Never again will one man, neither the chairman of the Fed nor the leader of a nation, wield so much power over the financial world. This, like Morgan himself, has its good and bad points.