When the US was hit with a financial crisis in 1907, there was no Federal Reserve to act as lender of last resort to stem the crisis. But while a central bank didn't exist as such, that doesn't mean it didn't have a central banker.
John Pierpont Morgan, the most powerful titan on Wall Street, orchestrated a banking consortium that guaranteed the deposits of its weaker members. JP Morgan didn't invite, but summoned lesser lights to his court on 23 Wall Street to sort them out. He even summoned the US Treasury secretary to come see him; such was JP Morgan's power and prestige.
The episode is remembered as "the momentous decisions of the modern Medici", according prominent banker Thomas Lamont. JP Morgan also bailed out the US Treasury in 1895 when he organised other Wall Street titans to back federal debt, according to Neil Irwin’s book “The Alchemists: Inside the secret world of central bankers.”
The bluest of blue-blooded banking dynasties started off in the New World in the early 19th century when JP Morgan's grandfather Joseph left farming to become a hotelier. He quickly expanded into steamboats, canal, railway and even the fire insurance business. When grandfather Joseph died in 1847, he left an estate of over $US1 million or about $US40m-$US50m of today’s money.
Joseph Morgan’s greatest legacy was not the money he left behind but his decision to put his son Junius Spencer into the trade with a firm called Howe and Mather, which was engaged in trading raw materials and dry goods. Junius Spencer could be regarded as the patriarch who founded the House of Morgan.
Junius started to get involved in banking activities such as endorsing and discounting commercial paper after the death of Joseph, his skills came to the attention of George Peabody, an American merchant banker based in London, who was looking for a partner and a successor. When Peabody died in 1864, Junius was left in charge of the firm that became known as J.S. Morgan and Company.
American economic historian David Landes says that Morgan was disappointed that he didn’t get to keep the name Peabody. But soon the name of Morgan would eclipse that of Peabody and become an international brand.
Like the Barings, Junius had his first big break after a major war. When the German 'iron chancellor' Otto von Bismarck defeated France in the first Franco-Prussian war, a defeated France could not get any credit from international financiers. Morgan stepped in and underwrote a loan based on the risk calculus that France never repudiated a debt despite numerous regime changes.
The loan was issued at a discount of 15 per cent below par and was discounted further when the country was hit with further political turmoil. Junius had to buy bonds frenetically to support prices. As luck would have it, a humiliated French government decided to redeem all the outstanding bonds at par.
The House of Morgan made a windfall of £1.5m, or $450m in today’s money. After the war, the Morgan family became an important player in international finance. Though Junius settled into a life of gentility in London, his son John Pierpont, the most famous and powerful of the Morgan dynasty, set out to conquer the US.
JP had an eye for new technologies and associated business opportunities. He bankrolled railway expansion, shipping and put together US Steel, a sprawling empire of 15 steel mills centred around Andrew Carnegie’s company. It was capitalised at $1.4 billion, then the largest company in the world.
He also formed General Electric in 1892 after taking over Thomas Edison’s company and many of his inventions. His power reached its zenith when he organised the rescue of the US financial system, but at the same time, his influence, wealth and power incited resentment and jealousy, as well as political concerns over the influence of the “money trust”.
JP Morgan became the subject of an inquiry by the American Congress and a series of laws and regulations were passed subsequently passed to curb the power of the Morgans. And the Federal Reserve System was established in 1913 as part of the reforms.
The most powerful banker in the world was burnt out and died in his sleep while travelling abroad. The House of Morgan faced its big succession challenge like many other great family businesses. According to Landes, JP’s son, John Jr, "was not in the same class as his father, and his sons were simply not cut out for business".
Unlike the Rothschilds, who insist that their bank be an exclusively family enterprise, the Morgans had to bring in outside partners and managers to run their bank. Perhaps most importantly, John Jr loved his life too much to let running a bank stand in his way. He was kept busy with his 250 acre estate on Long Island as well as a large country mansion in England, where he hunted pheasants with British monarchs.
The Morgan banking empire was split into two parts thanks to the Glass-Steagall Act, JP Morgan and Company (commercial banking) and Morgan Stanley (investment banking). Though Morgan banks were taken over by outside partners and managers, many of the family traditions remained.
"The symbols became terribly important: how one dressed, ate, spoke, Morgan’s prided themselves immensely on their cultivated spirit and genteel ambience," says Landes in his book, Dynasties, Fortunes and Misfortunes of the World’s Great Family Businesses.
Eventually, JP Morgan allowed itself to be bought by Chase Manhattan and the new entity became known as JP Morgan Chase. A century after the death of its legendary patriarch John Pierpont Morgan, the most powerful banker in the world at the time, the name Morgan still carries power and prestige.
The decline of the Morgan family dynasty is a classic tale of the founding family losing interest and control, paving the way for outsiders to take over. However, as a consolation prize, the Morgan name has survived and continues to serve a fountain of pride and prestige for the family.
This is the second instalment of Family Business’ series on great family businesses of the world. Read the first instalment: The rise and fall of the Barings banking dynasty, July 9.