The Magnitude of J. P. Morgan

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As Frederick Lewis Allen, Morgan’s best biographer, explained it, “In a real sense it was he and the other fabricators of giant industries, and the lawyers and the legislative draftsmen inventing new corporate devices, who were the radicals of the day, changing the face of America; it was those who objected to the results who were conservatives seeking to preserve the individual opportunities and the folkways of an earlier time. You might question the direction in which Morgan was moving; but that he was moving fast, and with a purpose which seemed to him to be to the country’s benefit, is certain. In this, the major sphere of his life, he was not a brake, he was an engine.”

To give just one instance of the new business environment that the bankers created, it was they, not government, who, in the last two decades of the century, required that publicly held corporations employ independent accountants to certify their books and issue annual and quarterly reports.

 

Among Morgan’s successful stock underwritings were General Electric, International Harvester, and, of course, U.S. Steel, launched in 1901. It was the largest corporate enterprise the world had ever seen. The companies being combined to create U.S. Steel controlled 60 percent of the American steel market. The new firm was capitalized at no less than $1.4 billion, while all the manufacturing capacity of the United States was capitalized at only $9 billion. Even The Wall Street Journal confessed to “uneasiness over the magnitude of the affair” and wondered if the new corporation would mark “the high tide of industrial capitalism.”

It did not, of course, but more and more people were becoming alarmed at the power of corporations that wielded such immense capital, and they were less and less willing to depend on the honor of men like Morgan to protect the interests of the country as a whole. Morgan, although he accepted the inevitable, never understood it.

In 1902 he was stunned when the government announced it was suing under the Sherman Antitrust Act—long thought a dead letter—to break up Morgan’s new Northern Securities Company. He hurried to Washington, wondering why Theodore Roosevelt, as one gentleman to another, had not informed him ahead of time so that a satisfactory agreement could be reached quietly.

“If we have done anything wrong,” Morgan told the President, encapsulating fully his idea of how the world should work, “send your man to my man and they can fix it up.”

“That can’t be done,” Roosevelt said.

“We don’t want to fix it up,” the Attorney General explained, “we want to stop it.” Both business and government had left the nineteenth century and entered the twentieth. In some ways Morgan never would.

Still, five years later, in 1907, when the financial crisis hit, Teddy Roosevelt was nowhere to be found. Instead, far beyond the reach of telegraph or telephone, he was happily slaughtering bears somewhere deep in the Louisiana canebrakes. Even if he had been available, there was, probably, little he could have done, for the United States government lacked the needed instrument to deal with the crisis: an effective central bank.

 

It is the business of a central bank to monitor commercial banks, regulate the money supply, and act in times of panic as the lender of last resort. A central bank, in other words, is supposed to prevent precisely the sort of liquidity crisis that Morgan and the other New York bankers were trying to deal with in late October of 1907.

Because banks mostly hold deposits that can be withdrawn on demand and lend these deposits out on term loans, they are all, in one sense, perpetually insolvent. If the depositors come to doubt the soundness of a bank and begin to withdraw their deposits, they can drain a bank of cash very quickly, and the bank will be forced to close. A central bank, taking a basically sound bank’s loan portfolio as security, can provide it with the cash needed to meet the demand, printing the money, if necessary.

In his last years he spent his time at his library, or abroad on collecting trips.

But Morgan and his allies could not print money, and that was exactly the problem. Because the United States lacked a central bank, its money supply was what economists call “inelastic” and could not be adjusted to meet varying demand. With depositors by the thousands withdrawing money from the banking system and hiding it in mattresses, the panic had caused a huge increase in the demand for money. Late on that Thursday night when this story began, as Morgan played solitaire, the bankers in the other room sought a way to provide it.

Since they could not print it, they developed a plan to do the next best thing. The major banks were members of the New York Clearing House, an institution founded in 1853 to facilitate transactions among New York banks. All checks written on member banks were brought to the Clearing House, allowing banks to settle accounts among themselves quickly and easily. To do this, they all maintained large balances at the Clearing House. The bankers now decided to allow the the settling of accounts to be made by Clearing House Notes, which were to pay 6 percent interest, rather than cash. This freed the banks to lend out their Clearing House balances.