Morgan, J. P.
J. P. Morgan
Born April 17, 1837 (Hartford, Connecticut)
Died March 31, 1913 (Rome, Italy)
"Morgan had some grounds for thinking that the country ought to leave its financial affairs to him. Over the past half century, his bank had helped transform the United States … into the strongest industrial power in the modern world."
By 1900 John Pierpont (J. P.) Morgan had amassed one of the largest fortunes in the United States, and over the next decade his financial empire grew to rival the economies of large nations. His finance company was so well funded it was able to back new industries, buy railroads, and arrange mergers between giant corporations. The majority of the American public believed that Morgan's money and skill were advancing the rapid growth of American industry, but many nonetheless viewed the powerful Wall Street banker as a robber baron, a term sometimes used to refer to the ruthless and greedy industrialists of the latter half of the nineteenth century. In several ways Morgan had more influence over the American economy than the federal government, and some Americans were alarmed that one private citizen had obtained such power in a democratic nation. Morgan, however, believed he was working for the advancement of the United States. Throughout his career he organized industries in an attempt to eliminate competition among them and to stabilize the nation's economy. Morgan also directly helped the government avoid financial crises on three occasions. At a time when the nation's banking system was barely functioning, Morgan's company served as the chief financial institution of the country, playing a huge, if somewhat secretive, role in the shaping of the industrialized United States.
The education of a future banker
Morgan was born on April 17, 1837, in Hartford, Connecticut, to a wealthy family whose roots in the United States dated back to 1636. J. P. was the oldest of five children and the only son of Junius Spenser Morgan and Juliet Pierpont Morgan. Junius ran a successful dry goods wholesale business that had been purchased for him by his own wealthy father. He taught J. P. about business and sent him to expensive schools in the United States and Europe. While always a good student, Morgan was particularly gifted in math. When he was fourteen his family moved to Boston, Massachusetts, and Morgan graduated from the city's well-respected English High School three years later. Even as a child Morgan traveled extensively. By the age of fifteen he had visited most of the famous cities of Europe. During his travels he developed a lifelong passion for fine art, beginning a collection while still in his teens.
After Morgan's high school graduation, his father became a partner in a thriving London, England, firm, George Peabody & Company, which handled financial transactions for trade between Europe and the United States. J. P. spent several years traveling, first to fight a lingering illness, and later to study in Europe. He graduated from the University of Göttingen in Germany at the age of twenty, and then went to work at his father's London office. He returned to New York City in 1857.
In early 1860 Morgan married Amelia Sturges. Sturges was suffering from tuberculosis, a disease that affected the lungs, so for their honeymoon the pair sailed to North Africa in the hopes the climate there would improve her health. It did not, and she died within a couple of months. Morgan fell into a deep depression and turned to work to escape from his sorrow. In 1865 he wed Frances Tracy. Together they had four children: one son, J. P. Morgan Jr., and daughters Louisa, Juliet, and Anne. The couple separated around 1875.
Entering the world of finance
In New York Morgan was hired at the banking firm Duncan, Sherman & Company. He spent much of his first months as a copyist. The company had no typewriters and every business document had to be written in longhand and then copied in the same manner. Soon Morgan advanced to more interesting work, researching possible investments around the country. On his own time he began to do what seemed to come naturally to him: engineering money deals. One of his early ventures was to purchase a shipload of coffee in New Orleans and then sell it to merchants in New York at a profit.
In 1861 the twenty-four-year-old Morgan founded his own firm to act as the American agent for his father's London firm. That same year the American Civil War (1861–65; a war between the Union [the North], who were opposed to slavery, and the Confederacy [the South], who were in favor of slavery) began, and Morgan, like thousands of other men who could afford to do so, hired someone to take his place in the Union Army. During the war he drew criticism for his role in financing what came to be known as the Hall Carbine Affair, in which Morgan loaned money to a person who used it to buy obsolete (no longer useful) firearms from the U.S. government and then sold them back to the government at a profit. At the same time Morgan was taking part in gold speculation (engagement in a risky business transaction with the hope of making quick or large profits), purchasing gold in the United States and then selling half of it overseas. The overseas sales drove up the price of gold in the United States, and he could then sell the other half at a profit. When his father heard about these dealings, he convinced J. P. to bring an older and wiser partner into his firm in 1864. In 1871 Junius Morgan arranged a merger of his son's company with the New York branch of a Philadelphia bank, and the firm became Drexel, Morgan and Company.
Entering the railroad business
After the war the U.S. government was deeply in debt, and Morgan's company became one of its major refinancing agents, an institution that loaned money so that the borrower could merge several loans into one that could be paid off at a more reasonable pace and rate of interest. Morgan had already built up a large supply of capital (accumulated wealth or goods devoted to the production of other goods), and he could also get funding from his father's London connections. He began to purchase companies that had fallen into financial trouble during the war. He would buy out several businesses within one area and reorganize them so they had no competition and could operate profitably.
One of the businesses Morgan began financing was the railroad industry. Competition among railroad builders had resulted in unstable rates and wasted profits in the industry. From the 1860s through the 1880s, new railroad construction had occurred at an extremely rapid pace. Many powerful businessmen were only concerned with personal gain and did not care how long or well their companies operated. A result of this competition was that the railroad network became overbuilt. Competing companies were racing to put down track in order to lay claim to the best sites, regardless of whether those areas even needed rail service. Often two lines operated by competing companies would run side by side. In order to keep their customers, each railroad line would be forced to continually lower its rates, which often led them to operate without profit or even at a loss. Hundreds of railroads collapsed in the last three decades of the nineteenth century. Morgan quickly saw that the future of American railroads lay in building large systems in which a single corporation controlled all lines and operated without competition in its area. He resolved to correct the mistakes that had been made by the greedy railroad businessmen and stabilize the industry—at great profit to himself.
Morgan began buying up shares in the New York railroads. In 1869 he gained control of the Albany and Susquehanna Railroad from financial backers Jay Gould (1836–1892) and James Fisk (1834–1872). Then in 1879 the state began looking into charges that William Vanderbilt (1821–1885), the owner of the New York Central Railroad, was controlling his railroad rates in a discriminatory fashion, in a way that may have conflicted with New York state law. Rather than face investigation, he turned over 250,000 shares of the railroad to Morgan to quietly sell in Europe. The $25 million deal Morgan arranged greatly enriched his company and made him famous for the excellent monetary return he obtained for Vanderbilt. Morgan was even granted a seat on New York Central's board of directors. He went on to finance many failing railroads, successfully reorganizing them to eliminate the disorderly conditions caused by competition between them.
By 1885 Morgan had become a driving force behind America's railroads. He held private meetings at his home with other railroad leaders, a group that called itself the Interstate Commerce Railway Association, to discuss how to eliminate potential competition on profitable routes. He initially tried to create railroad pools, or agreements among rival companies to share their profits or divide up territories to avoid destructive competition and maintain higher prices, but many of them failed so he went on to forge mergers, in which one of the stronger railroad companies in an area bought up its competitors. His strategy became known as Morganization. He acquired bankrupted lines (those that could not pay their debts), gave them enough new capital to survive, made strict cost cuts, and oversaw agreements with rival lines to reduce unnecessary competition. He placed many of the largest systems under the control of boards of directors, or of voting trusts, that he and his associates closely controlled. Voting trusts are agreements in which people with voting powers who owned stock transferred their voting rights to directors while still retaining ownership. By 1900 he had gained financial control over the largest railroad empire in the country. He had made a great fortune, but he had also stabilized the troubled industry, bringing the rocky era of warring railroad companies to a close.
A financial statesman?
In 1893 the United States experienced a major financial panic due to a shortage of gold in the country. Bank failures (the collapse of banks that were unable to meet their credit obligations) began in April and spread rapidly. Some six hundred occurred in the first months of the panic, especially in the South and West, and four thousand banks had failed by the end of the year. An estimated fourteen thousand businesses collapsed during the same period, and the economy suffered a severe four-year depression. The United States had no central banking system at the time, and Morgan and the other bankers knew the nation's monetary system was in danger of failing. Morgan created a business group to provide the government with $65 million in gold, half of it borrowed from other nations. This action likely saved the American commercial banking system from collapse, averting years of painful financial decline, but the nation as a whole was not grateful. Morgan had profited enormously from the deal and the press was critical of his actions. Congress launched an inquiry, but Morgan refused to reveal how much profit he had actually made in the transaction.
The supreme capitalist
Junius Morgan died in 1890, leaving his son J. P. a great deal of money. By then the younger Morgan was head of his own firm, J. P. Morgan & Company. He was such a powerful force on Wall Street that businesses from all around the country moved to New York to be near his company's financial services. The city had become the hub of business activity for the nation and was home to its wealthiest people. Morgan was at the center of it all, a position in which he was quite comfortable due to his privileged upbringing.
After his success with the railroads, Morgan expanded the range of his financial activities. During the 1870s he had become interested in the work of inventor Thomas Edison (1847–1931; see entry), finding merit in Edison's experiments with electricity when no other businessmen did. Morgan and a couple of associates supported Edison's work for nearly two decades, which eventually led to the foundation of the Edison General Electric Company. In 1892 Morgan acquired the lighting company Thomson-Houston Electrical and merged it with the Edison Company to form General Electric (GE), which quickly became the country's main electrical equipment manufacturing company.
In the 1890s Morgan began to buy small steel-producing companies. Soon he owned a major share of the steel industry, which brought him into competition with Andrew Carnegie (1835–1919; see entry) and his huge and successful Carnegie Steel Company. In 1901 Morgan bought Carnegie Steel for $480 million. He then merged it with his ten other steel companies, creating U.S. Steel. U.S. Steel became the first billion-dollar company in the world and produced 67 percent of the country's steel. Within months Morgan began purchasing businesses that provided products or services his company used to manufacture and transport the steel, such as the Shelby Steel Tube Company and the Bessemer Steamship Company. U.S. Steel controlled massive iron deposits and coal reserves. The company also owned the largest shipping line on the Great Lakes, eighty blast furnaces (furnaces in which blasts of air were pumped into the fire to speed up the process of removing the iron from the iron ore), and 149 steel plants and mills. U.S. Steel continued to expand, acquiring seven more companies between 1902 and 1908 and constructing the world's largest steel mill at Gary, Indiana.
By the turn of the century U.S. Steel operated with expenses and revenues greater than all but a few of the world's governments. It had eliminated most of its competition and controlled every step in the steelmaking process from mining coal and ore to the making of nails and steel beams, so it did not have to pay high prices to other companies for their products or services. It was one of the world's biggest monopolies, companies that had the exclusive right to produce or sell a product. Morgan had succeeded in making a fortune for his company while at the same time making the steel industry more efficient so it could thrive in the following decades.
By the time Morgan formed U.S. Steel, the American public had become distrustful of monopolies and trusts. Trusts were formed when companies within an industry combined in order to eliminate competition. Complaints had pressured Congress into passing the Sherman Antitrust Act in 1890, which barred any "contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade" and made it a federal crime "to monopolize or attempt to monopolize, or combine or conspire … to monopolize any part of the trade or commerce among the several states." The 1890 act was rarely enforced in its early years, however. Morgan did not think it applied to him, since he felt his work as the nation's banker and financial backer was too beneficial to the country to be challenged. He was proved wrong in 1901.
That year James J. Hill (1838–1916), the head of the Great Northern Railroad and a friend of Morgan, and Edward H. Harriman (1848–1909), the head of the Union Pacific Railroad, engaged in a competition with each other to purchase controlling stock in the Northern Pacific Railroad, which did not have the power and money to stop these powerful and wealthy men from buying up controlling amounts of its stock. Hill sought Morgan's help, so Morgan sent word to his staff to purchase all the Northern Pacific stock they could. Such vast amounts of money and stock changed hands that the business dealings of these financial giants affected the nation's economy. Stock prices soared and fears about railroad failures caused a financial panic that ruined many businesses. Realizing that neither side could win, Morgan, Hill, and Harriman decided to form a $400 million holding company (a company formed to own stocks and bonds in other companies, usually for the purpose of controlling them) called the Northern Securities Trust Company. They hoped to bring order and efficiency to the northwestern railroad market by bringing their combined interests—the Great Northern Railroad, the Northern Pacific Railroad (over which Hill had finally gained control), and the Chicago, Burlington & Quincy Railroad—under the control of one board of directors. The merger resulted in one of the largest holding companies formed up to that point.
In March 1902 President Theodore Roosevelt (1858–1919; served 1901–9) instructed the U.S. attorney general (the chief lawyer of the federal government) to file a lawsuit against the Northern Securities Trust Company. By order of the federal court in a ruling upheld by the U.S. Supreme Court, in 1904 the company was dissolved, or broken down into its separate companies, to conform to the regulations in the Sherman Antitrust Act. Roosevelt stunned the business world when he finally applied the eleven-year-old act, and he soon became known as the "trust-buster." No one was more surprised by the government's actions than Morgan.
The friend and enemy of the government
On October 23, 1907, a major financial panic began with a few business failures that frightened the public. This caused a ripple effect through the nation's economy, starting with the New York banks, when hordes of panicky customers suddenly began to withdraw their money at the same time, causing the banks to run out of cash. The bank failures led to more business failures and a general downturn in the economy. As they had in the past, antigovernment officials and leading business executives looked to Morgan to make things better, and he went right to work. Morgan set up a syndicate (group) of the most powerful banks in New York. For three weeks this syndicate acted like the nation's central banking system, providing ready cash to financial institutions in need. Morgan obtained pledges to provide financial assistance from the Bank of England, oil industrialist John D. Rockefeller (1839–1937; see entry), and several other major financial backers. He recruited the best analysts available to investigate the resources of the various New York banks and trust companies to determine which were capable of being saved and then acted to do so. He even resorted to locking leading New York trust company presidents in his library overnight in his efforts to negotiate deals that would support the country's financial institutions. When the crisis calmed down in mid-November, the financial community credited Morgan with saving the nation. However, the incident had revealed to the public the immense power wielded by Morgan, a private citizen. More and more Americans began to demand reforms of the financial system.
The Federal Reserve Act of 1913
During the eighteenth and nineteenth centuries, the United States had a banking system that was significantly inferior to those of other industrial nations. Americans had opposed any type of central bank since the founding of the country, when the largely agrarian (farming) population favored local and state government control over any form of federal government activity, which they distrusted. Even when two national banks were founded, one in 1791 and the other in 1816, both were soon eliminated due to fears that the federal government was taking over powers that belonged to the states. As the nation expanded, hundreds of state banks were established under a wide assortment of state laws. Each state bank operated using its own methods; they issued their own paper money in amounts that suited their needs or tightened up their money supplies without any central coordination. The policies often conflicted with one another from state to state, and bank failures were widespread.
To correct some of these problems, Congress passed the National Bank Acts of 1863 and 1864, which combined to create a national bank system. National banks could issue banknotes—a fairly stable paper currency—and by 1865 state banks stopped issuing paper money. The nation's banking system, now made up of both state and national banks, continued to be inefficient, however. All banks faced the problem that the country's supply of currency was rigidly fixed to the nation's gold reserves. Additionally, no one had the authority to raise or lower the existing money supply to meet the changing needs of the nation.
By the turn of the twentieth century, the United States had become a rich and powerful industrial nation, but its economy was still hindered by the disorganization of its banking system. Major financial panics (periods when people feared that the economy was shaky and many withdrew their money from the banks, leading to bank failures, the closing of companies, and widespread unemployment) hit the United States in 1873, 1893, and 1907, with smaller panics occurring in the years between. After the panic of 1907, Congress began to look into the possibility of forming a central bank that could stabilize the economy.
In December 1913 the Federal Reserve Act was passed. The act is generally regarded as the most far-reaching piece of legislation covering banking and currency in the nation's history. It established a Federal Reserve system to set the nation's monetary policies, regulate banks, stabilize the economy, and provide banking services for the federal government and other public and financial institutions. It was the only institution authorized to issue the nation's currency. Unlike any previous American banking systems, Federal Reserve banks had the power to increase or decrease the amount of currency in circulation according to the needs of the economy. Generally, if the prices of goods fell too low, the Federal Reserve could increase the currency supply. When people had more money, they were willing to spend more on products, and businesses could raise their prices. If, however, there was a larger amount of ready money than goods and services on the market, which was called inflation, prices would rise, and a decrease in the money supply could help lower prices.
The Federal Reserve Act provided for the establishment of no more than twelve Federal Reserve Banks. These twelve so-called "bankers' banks" were not available to individuals and provided services only to member banks. The twelve banks were controlled by a seven-member Board of Governors appointed by the president and overseen by the secretary of the treasury. All national banks were required to belong to the Federal Reserve.
The Pujo Money Trust investigation
By 1912 the reform movement led to an important government investigation into the state of the nation's money. The Pujo Money Trust Investigation Committee was formed to explore whether money trusts or large combinations of financial institutions existed and were creating a concentration of the nation's wealth in the hands of a few powerful bankers and industrialists. Representatives from the largest U.S. financial institutions were called to testify, including key executives from J. P. Morgan & Company. The Pujo committee hearings uncovered astonishing facts about American financial institutions. Most impressive was the discovery that 341 directors of corporations with a net worth of more than $25 billion were controlled by Morgan and a few others. A United Press article on December 12, 1912, reported the details:
Domination of $25,325,000,000 of the nation's wealth by 18 leading financial firms was the stupendous evidence, purporting [intending] to show actual existence of a money trust, presented to the Pujo investigating committee today. Five firms, the J. P. Morgan, the Guaranty and the Bankers trusts companies, the First National and the National City bank, are said to have 341 directors in 112 corporations, with aggregate [total] resources of $22,245,000,000. The firm of J. P. Morgan & Co. was held up as the "heart" of the alleged combination.
Seventy-five-year-old Morgan was called to testify before the committee and complained about the government's desire to look into his financial affairs. He refused to discuss his business and his worth during the questioning, holding to his belief that business could not be carried out in "glass pockets"—in other words, that a businessman must be able to make his deals in private. He declared that in all of his dealings he had acted in the interest of the nation, a claim most historians agreed with. The public, however, believed that no one individual should ever again be allowed to have such tremendous power over the economy with no regulation. Within a year Congress passed the Federal Reserve Act, creating a central banking system that would greatly improve the government's ability to handle financial crises and provide funds for major national enterprises.
The Pujo investigation badly affected Morgan's health. In March 1913, a few months after he testified, he died at the Grand Hotel in Rome, leaving behind a fortune estimated at $68 million. Prior to his death, the state of New Jersey had begun an antitrust suit against U.S. Steel. Two years after his death, in 1915, the case was dismissed, with the court ruling that there was no acceptable evidence of unfair pricing or monopolization by U.S. Steel in the steel market. The U.S. Supreme Court upheld the ruling in 1920, finding U.S. Steel to be an acceptable form of combining business for efficient production. The Court explained that U.S. Steel had not been formed with the intent to monopolize or restrain trade or to restrict competition, and that despite its gigantic size, the corporation did not abuse its market powers to fix prices or to increase profits by reducing the wages of its employees or lowering product quality or output. Rather, according to the Court, the formation of the steel trust was a natural result of the existing industrial technology, which made mass production efficient. Morgan had spent most of his life working by this principle.
Morgan had been generous with his fortune throughout his life, donating large amounts to social and cultural institutions such as churches, hospitals, schools, and above all, the arts. He owned an extensive collection of fine art, most of which he bequeathed to New York's Metropolitan Museum of Art, of which he had served as president. He was also the owner of a superb rare book and manuscript collection that included several historically significant pieces, such as the first Bible ever printed in North America. His rare books and manuscripts, at first housed at his mansion at Madison Avenue and 36th Street in New York, were moved to the Pierpont Morgan Library.
Morgan played a significant role in the history of U.S. industrialization. He served as an important link between those who had funds and those who needed them. As a result of having so much money and power, he was frequently seen as either a force of good or the source of evil in the business world. In either case, he paved the way for large, efficient, and powerful corporations in industrial America.
For More Information
Chernow, Ron. The House of Morgan: An American Banking Dynasty and the Rise of Modern Finance. New York: Atlantic Monthly Press, 1990.
Strouse, Jean. Morgan: American Financier. New York: Random House, 1999.
"Investigation Shows Morgan, 17 Firms Control $25.3 Billion." UPI's 20th Century Top Stories (December 18, 1912).
"John Pierpont Morgan, 1837–1913." Obits.com. http://www.obituary.com/morganjp.html (accessed on July 7, 2005).
"John Pierpont (J. P.) Morgan." People of Connecticut. http://www.netstate.com/states/peop/people/ct_jpm.htm (accessed on July 7, 2005).