Thursday, August 03, 2023


Phew! I just finished reading Ron Chernow's first book, the massive tome The House of Morgan. I checked it out from the library at the same time as two more reasonably-long books, and was amused to see that while the others were due on July 8th, HoM was automatically checked out until September 19 - I think it's cool that they would automatically give extra time for getting through it!



It's a fascinating book, and very well-written, so engrossing that I once completely missed my bus stop and had to loop all the way back around. It covers the history of the J. P. Morgan bank in its various manifestations, from a small American outpost in the City of London established early in the 1800s through its titanic presence at the turn of the century through its involvement in the scandals and malfeasance that came to characterize Wall Street in the 1980s. Chernow published this book in 1990 and it continues right up to that point, through the 1987 stock market crash and the presidency of George Bush. It has some aspects of a biography, but it's more of a biography of a dynasty than of an individual person. It's also a fantastic walk through history, especially compelling because it tells a coherent narrative story instead of needing to broadly cover everything that happened over those momentous 150 years.

I picked this up for a couple of reasons: I've highly enjoyed all of Chernow's other books I've read (biographies of Hamilton, Washington and Grant), and the financial thrust of this book seemed likely to align with my recent fascination / obsession with topics of wealth and inequality. To my surprise, for once I read a book and was not constantly cross-referencing it with ideas from Thomas Piketty. Instead, the book that most often came to mind was Matt Stoller's Goliath. Both books focus on roughly similar eras, from the start of industrialization through the present (although the "present" was three decades earlier for Chernow). It is really cool to see the same history through different perspectives. Chernow's book is a lot longer page-wise but its focus is narrower: primarily on the Morgan bank, and by extension the companies it did business with, which includes a lot of other competitive banks and railroads, but not many of the industrial and retail firms that Stoller pays attention to. Some of the people who towered in Stoller's book are barely mentioned here; one of the biggest examples is Andrew Mellon, who is a huge villain in Goliath but here is only fleetingly referenced as Hoover's secretary of the treasury. But they both have a lot to write about Louis Brandeis, and the creation of the Federal Reserve, and the various Congressional hearings of the first half of the 20th century, and how National City / Citibank is and always has been absolutely awful, and how Walter Wriston in particular is terrible, and so on.

The first 2/3 or so of the book reads like an anthology of biographies, covering the strong-willed men who started the Morgan empire and describing the world in which they operated; Chernow also does a great job at giving layman-level introductions to some key financial concepts, while keeping the focus resolutely on the human beings who execute those transactions and are affected by them. The story begins, oddly, not with a Morgan but with a Peabody: George Peabody, an American who relocated to London and became the de-facto representative for Americans seeking to raise money from the British. One of the biggest themes in this book is the shift in the flow of capital over this period of time. In the 1800s, the British were the world's richest empire and the biggest creditors, investing in projects around the world; the Americans were vibrant and developing upstarts, frequently in debt as they sought funds to build out their railroads, factories and other infrastructure. After the two World Wars, this orientation had shifted, with Wall Street the financial capital of the world and the place everyone went to raise capital, and Britain now playing a financially subservient role.

The genesis of this bank was having a foothold on both sides of the Atlantic, being able to vouch for the credit-worthiness of virtuous American projects, and acting as a clearinghouse for both lenders and borrowers. In particular this was what was known as a "merchant bank". Unlike a retail bank, which took deposits from individuals and small businesses (checking and savings accounts) and made loans (mortgages and small business loans), merchant banks only operated at the wholesale level, working with large companies and nations to raise large sums of money. They started off as financing mercantile operations such as long ship voyages, and evolved over time to exclusive providers for capital-intensive projects.

Peabody seems like a copy of Ebeneezer Scrooge. He was very miserly, and there are some great anecdotes about how this fabulously wealthy man would wait twenty minutes for a cheaper carriage to come by. Near the end of his life, he turned into a very generous philanthropist, giving away most of his fortune to care for the poor and other worthy causes.

Peabody never married (though he was very fond of prostitutes). He didn't want his bank to just vanish after he died, so he asked his American associates to recommend a partner to him, and they sent over Junius Morgan, a bright, serious and hard-working banker. Junius carefully analyzed the operation and agreed to join as a partner. Junius felt some bitter disappointment when Peabody gave away most of his capital rather than keep it in the bank, but carried on after his death, rebranding as J. S. Morgan. He opened another office on Wall Street and thus carried on bank business on both sides of the Atlantic axis, eventually bringing up his son Pierpoint Morgan to manage affairs in one hemisphere while he managed the other.

Chernow dips a lot into the psychology of the people in this story, which makes for very compelling reading, although I did find myself feeling curious about how confidently we can say what these individuals were thinking and feeling. In some ways, this weighty tome is a story of intergenerational neglect and trauma, a series of damaged men rising to powerful positions while carrying unrequited feelings. Junius seems to have had good intentions in raising his son, but, perhaps to compensate for their physical distance, was extremely controlling and micromanaging, constantly giving advice and orders on how much to chew his food, how to spend his day, how to talk to people and make friends, and so on. Perhaps in response to this, Pierpont became a very driven and cold individual, and seems like he would have been extremely unpleasant to meet: when he was done with a meeting, he would simply stare silently at his visitor until they got nervous and left. Pierpont was a fantastically skilled banker, but unlike his father, didn't get any joy or pleasure from banking; it seems like it was just an obligation to him (albeit an extremely lucrative one). Pierpont's biggest passions were the Church, collecting fine art, and having lots of mistresses.

Pierpont's relationship to his son Jack was almost the opposite of Junius's relationship to Pierpoint: Pierpont mostly ignored his boy and rarely shared his own feelings or acknowledged Jack's. Chernow sees this resulting in a vulnerability and sadness in Jack; he lacked his father's rough edges, as well as his confidence. Jack also wasn't especially passionate about banking: his own passion was for sailing. It's interesting to see how Junius's strong will carried on for many generations of Morgan men, even in the absence of true feelings for their profession.

The dramatic human elements are a strong part of the book and a big part of what kept me reading, but personally I was just as fascinated with the economic-historical parts. In the first half or so of the book, railroads loom over most of the activity: raising investments for railroads was by far the biggest focus of Peabody, Junius and Pierpont's careers. Railroads have also come up a lot in other books I've recently read about the 1800s, including histories of labor. I was a little surprised when Chernow confidently asserts that, due to the high fixed costs associated with railroads, they should have been funded as public utilities, and were only created as private enterprises because there were insufficient public resources. Chernow doesn't really back that up or explain why; that idea does sort of make sense to me but I don't think I've encountered it elsewhere.

A big theme of the Pierpont era has to do with efficiencies. As Chernow explains (and I've read elsewhere), lots of people were starting up railroads, which often traveled redundant routes and competed against one another. This lead to price wars and bankruptcies. Pierpont and his ilk hated inefficiencies, and their drive to consolidate seems as much of an aesthetic and philosophical objection as out of a desire for profit. It's wasteful to spent millions of dollars laying track that doesn't provide any advantage over the existing track, so Pierpont wanted the major players to join into cartels and work out their differences behind closed doors instead of competing in the market.

I don't remember Stoller spending a whole lot of time on the railroads in Goliath; he's much more interested in heavy industry, which the Morgans mostly eschewed until well into the 20th century. (Industries were very new at the time, used significantly less capital than railroads, and were much riskier.) I'd be curious to hear Stoller's thoughts on railroads, since he invariably values competition over consolidation, even publicly-owned consolidation. I've mulled over it a bit, and I think Stoller might still have preferred the wasteful status quo of the early Pierpont era: slashing rates was terrible for the owners of the railroads, and the banks and wealthy individuals who invested in the railroads, but those same low rates were a huge boon for users of the railroads, mostly small merchants and farmers. "Creative destruction" may have led to investors taking haircuts and lower ongoing prices. (The pains of consolidation are described by both Chernow and Stoller in the debacle of consolidated railroads slashing costs and safety measures, leading to widespread crashes and deaths and triggering nationwide recessions in their wake.)

Glass-Steagall has been on my mind lately, especially with this year's failure of Silicon Valley Bank, First Republic and Signature Bank. Glass-Steagall is a big presence in this book from the introduction. I kind of knowingly chucked in the first few pages when Chernow lays out his thesis: basically, banks used to be hugely powerful and influential in the 19th century when they controlled the flow of capital, heading empires that ruled over weak corporations. In the 20th century, though, Glass-Steagall neutered banks and corporations became the new goliaths, capable of funding their own expansion through retained earnings, and so today banks are once more serving at the whims of their customers rather than ruling them as their masters. "Ah," I chortled, "Little did Chernow know that by the end of the decade, Clinton would undo Glass-Steagall and banks would rise to once again become powerful and destructive forces in the economy!"

As I headed deep into the third section ("Casino"), though, I came to realize that Chernow and Stoller actually pretty much share the same thesis: that Glass-Steagall was neutered in spirit decades before it formally ended, and its repeal was more of a burial than a murder. Thanks to decisions made in the 1960s to relax rules around acquiring deposits (which Stoller calls "hot money" and Chernow calls "bought money"), banks regained their muscular power and their ability to reach far beyond traditional loading operations, into increasingly arcane and risky financial speculation.

And honestly, I think the last couple of chapters of the book sort of belie the claims made in the introduction. We see a world where Glass-Steagall is still technically the law of the land, but completely eviscerated: a few very narrow technical things still can't be done, but there are a dozen ways to do equivalent things, and everyone assumes a formal repeal is around the corner. I was really struck by how similar the lending crises of the 1980s are to the things that happened in 2000, 2008, 2023, etc. I've been conditioned to blame these crises on the repeal of Glass-Steagall, but this stuff was already happening decades earlier. Motivated by greed, and not feeling sufficient caution, banks plummet into disaster again and again.

Chernow points out a significant change from the pre-Glass-Steagall era to the modern one: governments are now larger, more muscular and effective than the banks, so unlike previous times they are capable of taking direct action and don't need to defer to the banks. But we also start seeing government bailouts, rescues from the risky decisions made by the banks. This feels like another form of co-opting, similar to the creation of the Federal Reserve, which both Chernow and Stoller convincingly portray as a Progressive initiative that was captured by the banks for their own uses. I think of 2008's financial crisis as being a watershed moment, the final nail in the New Deal's coffin: but it was exactly the same as the bailouts from Latin American defaults and other earlier activities, where banks threatened to bring down the economy unless they were rescued. Going back to Stoller, refusing to allow businesses to fail keeps them from acting well. We've created a world where they're strongly incentivized towards the riskiest possible legal strategies: if they profit, they'll reap enormous rewards, and if they fail, they won't suffer meaningful consequences. They get bailed out by threatening economic calamity if they go under, and the solution to that is to keep any institution from getting too big to fail, too powerful to say "No" to.

Chernow does have the marked advantage of not coming across as racist like Stoller does, though. Throughout the book he carefully notes the prejudices and blind spots of the generations of Morgans and later people who headed the bank; in some cases their antisemitism was perfunctory and clubby, other times it was deeply felt and vicious. Chernow recounts how the Morgans' anti-Catholic prejudice led them to spar with Koe Kennedy, and how antiquated their attitudes towards women were. Unlike Stoller, Chernow doesn't seem at all nostalgic for the days when mediocre WASP men ran the banks.

Like I mentioned before, I was kind of expecting more "Aha!" moments with Piketty's works than with Stoller's, since these days I seem to read everything through a Piketty lens. I think the difference might be because Piketty operates mostly at the micro level (what's happening with individuals) and the macro (entire countries), while House of Morgan and Goliath are both more focused on the middle level (companies and sectors). But where HoM does overlap with Piketty they seem to reinforce one another. In particular, the transformation from the 1800s to the 1900s is revealing. Previously, central governments had small tax bases and limited power in the economy, and later on they acquired money and power that shifted previously private functions into the public sphere. Piketty persuasively shows at the level of national accounts where, when and how this has happened, while Chernow gives some vivid, on-the-ground examples of this change, most especially in how economic crises have been handled.

Throughout the book, Chernow does a fantastic job at structuring the narrative. This could have been an unreadable slog, but he thematically groups stories into his major sections: he'll lay out the theme up front, tell the story, tie events back to the theme, and then move on. Things generally progress forward in time, but he'll follow one set of characters or a development through a period to its conclusion, then rewind a few years to tell another subplot. This occasionally feels slightly odd when jumping back in time across a major political event: you'll read one page discussing reconstruction after a World War, and then a few pages later you're back to events that occurred during that war. But it all reads well and is much better than the alternative of a rigid progression through time while simultaneously tracking a dozen actors. This gets even more true in the second half of the book: during Jack's time the bank evolves from the manifestation of one man's will into a collegial team of bright, talented, interesting men; eventually the singular bank shatters into several separate organizations, who first cooperate with one another but eventually turn into vicious competitors. Along the way the hereditary Morgans are nudged out, first as wealthy playboys who are merely token partners and eventually gone altogether. We're left with a revolving door of top executive leadership, and again, it's a huge testament to Chernow's writing skill that the story remains comprehensible at this point. He has a knack for quickly and vividly drawing a few characteristics for a new player, so we can make sense of the brief part of the story they're occupying.

Why are we reading a book about J. P. Morgan & Co in 1990 (or 2023)? I imagine a big reason people pull this book from the shelf is due to the centuries-long mystique of the Morgans as all-powerful manipulators of finance and politics. Particularly during the Progressive era, the Morgans in particular were often depicted as the shadowy power behind the throne, manipulating nations into profitable wars and inflicting misery to pad their profits. Chernow takes this reputation seriously, pulling back the curtain and exploring in what ways their reputation was accurate and in what way it wasn't. Much of this reputation was a natural consequence of Morgan secrecy, which in turn was a natural outcome of the nature of their business. Merchant banking inherently feels secretive since regular people can't interact with those banks: you couldn't walk in to a Morgan branch office with a paystub and open an account. Merchant banks only deal with companies, nations, and a handful of the wealthiest individuals in the world. Even within the elite world of merchant banking, Morgan always had a very outsized influence relative to the amount of capital it directly controlled. The reasons for this outsized influence (which I and nobody else call the "Morgan Bump") varied over time. Early on, Morgan was lucky to have footholds in both the City of London and on Wall Street, benefiting from connecting the two major sources of capital in the world. Later on its power came from strong personal connections between the bank's leaders and and government officials, central bankers, and the heads of major corporations: a Morgan could get the Secretary of the Treasury on the phone at a moment's notice, and could summon the heads of all the major banks and industries into his office, not because he had bribed these people but because he personally knew and worked with all of them.

Chernow shows how Morgan often used this unique power for good, stepping in to prevent or limit recessions that were caused by less cautious banks. There's a strong sense of noblesse oblige that colors the first 120 years or so of the bank: they make good money, and feel a social responsibility to keep the economic machine and the nation it resides within humming along as smoothly as possible. As the bank continued through the generations, its reputation grew and became its own source of power. Pierpont seems like an unlikeable and deeply unpleasant man, but he also always kept his word and dealt fairly and straightly with people. Almost nobody liked him, but everybody trusted him, and could count on how he would respond in a given situation. I was surprised to learn that Pierpont never negotiated: he would make or receive a single offer, it would be accepted or declined, and that would be the end of it. I tend to think of business leaders as being cunning negotiators and hagglers, but Pierpont was the ultimate take-it-or-leave-it guy, and in the end, that did more for his reputation and power than he would have won as a skilled haggler. He was feared but trusted.

A major concept that's introduced at the very beginning and continues through the end is the idea of the Gentleman Banker's Code. This is a certain unwritten but iron-clad code of conduct by which the merchant bankers in the City of London and Manhattan operated. The key principles were basically:

  • Your word is your bond. If you say you'll do something, you'll do it, whether there's a formal contract or not.
  • You serve your clients. Advise them fairly and act in their interest. Avoid any conflicts of interest, even if it means forgoing potential income.
  • The relationship between a banker and a client is seen as sacred. Banks won't poach other banks' clients, any more than they would pursue another man's wife. If an existing client wishes to move to a new bank, the new bank will seek the first bank's approval before accepting.

Chernow repeatedly uses the phrase "golden handcuffs" to describe the relationship between a bank and its client. For much of history, this was seen as a symbiotic relationship: the company could share its deepest secrets with the bank, without fear that the bank would exploit it. The client could count on the bank to raise the capital it needed. In return, that client provided a lot of money to the bank, often in the form of keeping large deposits in the bank that bore no interest.

Between banks, there was a sort of high-level maneuvering, but competition tended to be very abstract and obscure. A gentleman banker would never dream of "stealing" another bank's client by offering lower fees or better interest rates. Banks as a whole were definitely a cartel, quietly colluding to keep fees high and their clients content. There was definitely competition between banks, but it had more to do with actions they took in the real economy, what sectors and regions they invested in, what new business they sought out and nurtured, as opposed to directly opposing one another. Again, you can see why this spawned so many conspiracy theories about banks, many of which were quite reasonable.

It's an interesting thought experiment to imagine whether we'd be better off today if the Gentleman Banker's Code was still around. Ending it diminished the power of banks (probably good) and cut into their profit margins (also good), but led them to take increasingly reckless risks that could bring down the economy (very very bad). Individual clients as a whole are getting a much better deal today, keeping more of their money working for them and having more options as a result of the competition for business; but it feels like the economy as a whole is shakier now that everything is transactional rather than reputational.

I'm reminded of a comment that the Federal Reserve made to Morgan in the 1960s, essentially "It's OK if you do this, but not if other banks do, so we can't let you do it." Morgan was, to its credit, a conservative bank up until the 1970s or so. Banking used to be managed by norms and culture. "We do first-class business in a first-class way" is not just a catchy slogan, but how generations of Morgan men defined their purpose and existence, and that North star kept their banks on a generally reliable course.

Norms and culture mostly worked, but definitely had problems: less scrupulous institutions could flout the unwritten rules and create major damage, and sometimes even the major banks would turn a blind eye towards bad or risky behavior. After the Progressive and New Deal eras, banking was increasingly managed by laws instead of by customs. That worked really well while the law was actively enforced, with both banks and society as a whole on a smooth, profitable, nicely boring trajectory. Once enforcement of the law eroded, though, the old norms were no longer in place to provide guard rails. My feeling is that bank behavior in 2023 is much worse than it was in 1864, unconstrained by either vigilant government nor a moral sense of obligation.

Speaking of rules, though, it is interesting to see how strongly different rules in the path impacted investor behavior. Several times we read about how Junius and Pierpont would re-organize a flailing company, which would often include getting bondholders to agree to exchange their higher-interest bonds for lower-interest ones. I wondered why they would agree to this, but it turns out that at the time, people who had a financial interest in a company and stood to profit from it could be held individually liable for other unpaid debts and obligations held by that company. These reorganizations were a little like a private-sector form of bankruptcy, where creditors would receive some amount of payment, bondholders would swallow lower interest rates, owners would put up more capital (often borrowed), and management could be replaced or continue working under less-extreme financial pressure. Anyways, it's interesting to see that just two centuries ago there was a system where investors were incentivized to act for the good of the whole rather than their own narrow best interests. I'd be curious to hear more about how that system worked, when and how it changed: it sounds like reviving a similar system could go a long way towards restoring a more humane and less cut-throat world of business. (As I'm writing this, I'm reminded that Pistor's Code of Capital writes quite a bit about the history of prioritizing creditors versus prioritizing debtors, which seems to dovetail with this topic.)

As I reached the last several chapters of the book, it was cool to start seeing familiar contemporary names popping up as characters in the narrative: Robert Reich, Paul Volcker, Alan Greenspan, Rudolph Giuliani, Ed Markey, and others enter the story. In the end, that's one of the great achievements of this style of book: presenting history as a single contiguous narrative that seamlessly brings us to the present. The world we live in now is the outcome of decisions people in the past made, and it provides an implicit reminder that the choices we make, individually and as a society, will shape the lived experiences of people yet to come. With the financial system in particular, we seem incredibly short-sighted; it's depressing to see how banking crises causing depressions and recessions used to recur every 20 years like clockwork, then were held at bay for much of the 20th century, and now are with us once again. House of Morgan gives a really valuable and compelling behind-the-scenes look at just how banks work, how they cause and respond to those crises, and hopefully we can remember the hard-won lessons of the past. We don't need to keep doing this!

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