J. P. Morgan

I

INTRODUCTION

J. P. Morgan (1837-1913), American investment banker, art collector, and philanthropist, considered by many the greatest financier in the history of United States business. A private banker, Morgan raised millions of dollars in foreign investment to help build railroads in the United States and to help pay off the country’s enormous debt from the Civil War (1861-1865). His greatest accomplishment came in 1907 when he brought bankers together to stem a financial panic that threatened the U.S. banking system. Growing concern with Morgan’s control of investment banking, however, led the U.S. government to appoint a commission that recommended the creation of a central bank, now known as the Federal Reserve.

II

EARLY CAREER

John Pierpont Morgan was born in Hartford, Connecticut, the son of financier Junius Spencer Morgan. His father achieved great success and raised his son to follow in his footsteps. Junius Morgan sent Pierpont to private schools in the United States, Switzerland, and Germany, and then at the age of 20 to work for the brokerage house of Duncan, Sherman & Company in New York City. There, Pierpont worked without pay, learning investment banking from the ground up. In 1860 he became U.S. agent for George Peabody and Company and in 1864 a partner in Dabney, Morgan and Company. In 1871 he entered the firm of Drexel, Morgan & Company, which he reorganized in 1895 as J. P. Morgan & Company, with branches in Paris and London.

Despite the huge sums of money they handled, most investment banks of the time were small organizations. They brought together a handful of partners who contributed differing amounts of money to the firm and who drew profits based on their share of investment. To issue large amounts of stocks or bonds, several investment banking partnerships would join together, each guaranteeing to sell a portion of the bond or stock issue. Typically, investment bankers bought and sold foreign currency, invested in bonds and stocks on behalf of their clients, and financed commodity trades. Such activities required trust not only in partners but also in clients.

In the 1870s and 1880s, Morgan specialized in marketing American securities to Europe. The Civil War (1861-1865) had been enormously expensive, and the U.S. government sought to refinance its debt at the lowest possible rates of interest. Beginning in 1873 and continuing until 1879, Morgan’s company was a major player in refinancing the U.S. debt.

III

THE RAILROAD ERA

Soon after, Morgan began to promote American railroads to European investors. In one of his first major forays into railroads, he managed to sell a huge chunk of William Vanderbilt's holdings in the New York Central Railroad without driving down the price. When Morgan marketed railroad bonds and stocks, he frequently demanded that he or his partners have control of the railroad for a period of time. To protect his investors from bankruptcy, Morgan would often reorganize the railroad, reduce its debt to avoid bankruptcy in the near future, and place men loyal to him in control. This process, called Morganization, was applied to railroads as diverse as the Northern Pacific, the Erie, the Reading, and the Richmond Terminal.

Increasingly, Morgan sought to minimize competition among American firms because he believed it brought waste and losses. At first he tried to have railroads form pools (informal agreements to share traffic and maintain rates). As these pools failed in the face of withering competition, Morgan promoted self-contained systems, in which railroad corporations bought up competitors within a region. By 1900 most of the American railway system was owned by 30 corporations, and these corporations cooperated to avoid competing with each other. When competition threatened American manufacturing, Morgan became deeply involved in the great merger wave of the early 1900s, promoting the formation of General Electric, the International Merchant Marine, International Harvester, and most famously, the United States Steel Corporation. When Federal Steel, which Morgan had helped form, faced the prospect of stiff competition from Carnegie Steel, owned by Andrew Carnegie, Morgan bought out Carnegie to create U.S. Steel, the first billion-dollar corporation.

IV

BANKING PANIC OF 1907

Morgan is perhaps best known for helping prevent a banking panic in 1907. A banking panic occurs when a bank’s customers begin to doubt the safety of their deposits and start withdrawing money in panic, a process also known as a run on a bank. Morgan organized a group of bankers to put money into a pool to bail out banks facing runs and helped end the panic.

Morgan’s financial power did not go unchallenged, however. During the Progressive Era from 1900 to 1916, Americans worried about the enormous power wielded by private enterprise. To ease these concerns, the U.S. government charged two of Morgan’s greatest combinations, the Northern Securities Company and U.S. Steel, with antitrust violations. The government won the Northern Securities case but lost the U.S. Steel case. The government also investigated Morgan himself. He testified before the U.S. Senate and denied that there was a “money trust.” Nevertheless, because of his dominant position in the fields of both domestic and international finance, Morgan’s influence on money and stock markets was unequaled by any American of his time.

V

ART COLLECTOR AND PHILANTHROPIST

Morgan was also famous as an art collector and philanthropist. During his lifetime, he contributed generously to the New York Botanical Garden, the American Museum of Natural History, the Cathedral of Saint John the Divine, and, most famously, the Metropolitan Museum of Art, all in New York City. After his death the Metropolitan received a large part of Morgan’s collection, which is housed in the Pierpont Morgan wing. In 1924 the Pierpont Morgan Library, originally Morgan’s private library, was made into a public institution.