During the time the U.S. grew economically after the Civil War ended, a class of ultra rich entrepreneurs rose to the top of many of America’s industries. Those that were the most successful had the backing of crafty financiers to provide large sums of capital when needed and to solve financial problems that blocked or threatened their success. One of the best of these financiers was John Pierpont Mogan.
Early Years: John Pierpont Morgan was born in 1837 in Hartford, Connecticut, into a wealthy and influential banking family. When he was ten years old, his grandfather died leaving the family a large fortune. At the time, his father was a partner in the largest dry goods wholesaler in Hartford. Morgan preferred to be called “Pierpont” as opposed to “John.” He attended private and public schools in New England, but a bout of rheumatic fever impacted his studies to the extent that his father sent him to the Azores for a year to recuperate before returning to graduate. Afterward he attended schools in Switzerland and Germany to become proficient in both French and German languages. At age twenty, he went to London to work for his father who had become a partner at George Peabody and Company, a banking firm that supported commerce with loans. Shortly thereafter he became an apprentice with a New York banking firm, Duncan, Sherman & Company. Later he ran his own company for three years before merging with Charles Dabney to form Dabney, Morgan and Company. All during his apprenticeship, he acted as his father’s American representative, opening numerous doors for him. He worked hard and learned the profession well, and became a sought-after commodity on Wall Street.
Reorganizing and Consolidating American Railroads: While a clerk with Duncan, Sherman and Company he participated in the reorganization and consolidation of a number of railroads. Morgan typically handled negotiation and execution of the loans personally doing much of the legwork in collecting interest and dividend payments. He also conducted credit checks with the mercantile houses that did business with George Peabody and Company. Peabody was dealing with issues with their American banking partners after the Panic of 1857, when many financial firms in the U.S. became overextended owing to their support of the rapidly expanding economy. The Panic of 1857 was the first financial crisis that originated in American but spread throughout the world. Being the point man in America for Peabody’s business, Morgan grew in wisdom and business acumen. While servicing the railroad’s financial difficulties, Morgan gained control of large blocks of railroad common stock giving him an estimated control of as much as 17% of the railroad industry.
J. Pierpont Morgan and Company: Morgan opened his own company during the first months of the Civil war in 1861. In the beginning his company was managing many of the same clients that his father had him working on when he was with Duncan, Sherman and Company. The war shifted some of the business away from the cotton industry and also railroads as iron rails were hard to come by owing to the war’s demands on iron and steel. But Morgan shifted gears into trading Union bonds, particularly after the Union victory in the Battle of Antietam in 1862. This led to a major pickup in trading European Securities due in no small part to a large deposit by banker W. W. Corcoran, who became wealthy by trading government securities during the Mexican War. Corcoran retired 1854 and liquidated his holdings, preferring to spend his time with philanthropic pursuits. Morgan received a huge boost when his father succeeded George Peabody as the firm’s managing partner of the London office renaming it J.S. Morgan & Company. At that point the senior Morgan transferred the remaining commercial accounts business from Duncan Sherman to J. Pierpont Morgan and Company, making it one of the strongest private financial institutions in the U.S. A year later Pierpont Morgan sent large sums of gold to Britain creating a spike in the price upon which he capitalized when he sold the holdings. He further became embroiled in a scandal involving the sale of rifles to the military. Morgan loaned the principal of the scandal, Simon Stevens, a large sum of money to buy carbine rifles for resale to General John C. Fremont. The government purchased the arms and resold them to an arms dealer in June, 1861, before the Union’s defeat in the first battle of Bull Run placed a premium on arms. Stevens used the Morgan loan to buy the arms from the dealer and sell them to General Fremont for nearly twice as much. As Morgan held the merchandise during the life of the loan, he collected the payment from the Army, deducting the loan proceeds along with interest and expenses before sending the balance to Stevens. The scandal referred to as the “Hall Carbine Affair” was a brouhaha for the military and a black eye for Stevens, but very little difference to Morgan who simply wanted to exit the deal after finding out what had happened.
Dabney, Morgan and Company; Drexel Morgan and Company: In 1864, George Peabody retired completely from J.S. Morgan and Company, but left his holdings in the firm as an investment. The senior Morgan brought Charles Dabney, a partner from Duncan, Sherman and Company, into his firm as a senior partner, and brought J. P. Morgan in as well to manage the acquisition of new business opportunities. Dabney, Morgan and Company centered their business around commodities and commercial banking, but found new opportunities in the trading of such commodities as Philippine tobacco, Brazilian coffee, and Peruvian guano, along with iron rails and American cotton. In 1871, Philadelphia financier Anthony Drexel became J. P. Morgan’s mentor, and at the behest of the senior Morgan, they dissolved Dabney, Morgan and Company and formed the Partnership of Drexel Morgan and Company. Drexel Morgan became a leading agent for investing European capital in post Civil War U.S., funneling major amounts of capital that reached the far corners of the U.S. economy and not just railroads. But the railroads continued to grow after the war, particularly in the American West, and much in the way of consolidation and reorganization among the various rail lines was needed. In 1887, Congress enacted the Interstate Commerce Act that provided the framework of sorting out the unnecessary competition between railroad companies that resulted in such problems as duplicate lines set up from one city to the next. This created much more in the way of railroad business for Drexel Morgan and Company, and J.P. Morgan in particular. Morgan’s efforts in this area extended beyond the furnishing of loans, and into active management and reorganization of the railroads into a major nationwide network. He was de facto the pioneer of a popular financing method used today known as private equity. This framework was effective in the transportation sector of the economy and set the stage for more consolidation to take place in the industry during the first half of the 20th century. After the death of Anthony Drexel, the company was rebranded again as J. Pierpont Morgan and Company. The business connections remained the same and the primary focus continued to be toward consolidations and reorganizations.
The Northern Securities Company: Morgan got a rare setback from the failure of the company he put together to consolidate three competing railroads in the wake of the bankruptcy of Northern Pacific Railway. The panic of 1893 forced Northern Pacific into bankruptcy wiping out the bond holders completely. To gain control of the situation, Morgan made deals with financier E. H. Harriman and railroad builder James J. Hill to merge two regional railroads with Northern Pacific Railway and thereby reduce the competition that forced the bankruptcy. The tool used to conduct the merger would be the newly created Northern Securities Company. However, the plan ran afoul of President Theodore Roosevelt who considered it a violation of the 1890 Sherman Antitrust Act, passed to prevent monopolies from proliferating. The merger then went to the court system and was finally struck down by the Supreme Court in 1904 who ordered the dissolution of the Northern Securities Company. Morgan did not lose money as a result, but his all-powerful reputation fell victim to Theodore Roosevelt’s muckraking campaign. He had a few more foibles late in his career including a failed attempt to build a London Underground rail line. Further, he financed an organization known as the International Mercantile Marine Co. (IMMC), a group of shipping companies in the North Atlantic trade corridor that sought to monopolize shipping between the U.S. and Europe. However, this effort also ran afoul of antitrust legislation in the U.S. It was a subsidiary of the IMMC, the White Star Line, that built and launched the Titanic for its fateful maiden voyage.
Panic of 1907 and Aftermath: The United States economy did not have the backup of a central bank when the Panic of 1907 caused a major banking and financial crisis. Some giant New York banks were on the brink of bankruptcy with no available means by the government of providing a rescue movement. The U.S. Treasury helped out by depositing about $35 million with the banks, but more importantly, Morgan brought the nation’s top financiers together to hammer out an agreement to face down the crisis. The plan was a system of organization of banking executives that redirected money around to the troubled banks, seeking additional lines of credit wherever possible, thus becoming a lender of last resort and stopping the freefall that could have taken place. One crucial side step involved arranging a merger between U.S. Steel and Tennessee Coal and Iron Company as the latter company had used its own stock to borrow heavily from some New York banks, and now was in a bad position and unable to pay the loans off. President Roosevelt stepped aside in this case fearing far worse could take place, and the panic ended when the merger was agreed to.
Criticism of His Financial Success: Morgan avoided serving in the U.S. Army during the Civil War by paying for a substitute to take his place. His huge gain by selling gold in Europe during the Civil War was criticized as taking advantage of a market bubble he helped create at the expense of the Union’s Treasury, however the trades did not impact the Union’s economy significantly. The Hall Carbine Affair was transacted by Morgan but maximized by other characters. Nonetheless since Morgan facilitated the transaction, he looked as if his hands were dirty. He was widely praised for his efforts to end the Panic of 1907. His power continued to grow throughout his lifetime, but towards the end, pressure mounted to disseminate this power for the sake of the nation’s economy. In 1912, he was called to testify before the Pujo congressional hearings that were investigating the existence of a “money trust” of a group of Wall Street financiers who may have been seeking to control the American Banking System and the entire investment sector of the economy. He was exonerated of any wrongdoing, but the committee moved forward with major nationwide financial reforms including the development of the Federal Reserve System and the passage of the 1914 Clayton Antitrust Act. A recent study unearthed proof that JPMorgan, through two of its consolidated subsidiaries, owned slaves in areas where slavery was legal. The slaves, up to 1,250 in number, were used as collateral for loans by different plantations in the cotton industry, and became bank property when some of the loans defaulted.
Conclusions: Morgan’s success as a financier was arguably unparalleled, but he was corralled by the changing times in the upper half of the 19th and early decades of the 20th centuries. The political trend was towards breaking up huge monopolies and limiting the financial power of America’s own oligarchs such as John D. Rockefeller, Andrew Carnegie, George Vanderbilt, James Buchanan Duke, and others. As the U.S. entered the 20th century, such financial reforms as Federal individual income tax and the Federal Reserve coupled with the removal of trade tariffs opened the door for the U.S. to become the major world power it is today.
Sources: History.com, J.P. Morgan, June 7, 2019.
Wikipedia, J.P. Morgan.
The Motley Fool, The Story of J.P. Morgan, the Most Powerful Bank in America, Alex Planes, June 30, 2013.
Picture: oil on canvas by Fedor Encke, 1903.