J.P. Morgan on Corporate Governance

Elbert Henry Gary, a lawyer and former DuPage County judge addressed as Judge Gary ever after, numbered among the founders of U.S. Steel in 1901, together with J. P. Morgan, William H. Moore, Henry Clay Frick, and Charles M. Schwab, his Wikipedia biography records. He first became interested in steel while hearing a case as a judge, took the presidency of the Federal Steel Corporation in Chicago in 1898, and retired from his law practice to lead the merged company as chairman of the board and the finance committee from its founding until his death in 1927, moving its headquarters to New York in 1900. When President Theodore Roosevelt said Gary was head of the steel trust, Gary considered it a compliment, and the two men communicated in a nonconfrontational way unlike Roosevelt's dealings with the leaders of other trusts. The steel town of Gary, Indiana, founded in 1906, was named for him. Supported by Morgan, Gary consolidated control of the board, which consisted primarily of bankers and lawyers, over the traditional competitive steelmakers dominated by Carnegie's men.

The Erie Railroad, which emerged from its 1893 bankruptcy reorganization in 1895, began obtaining financial support from J. P. Morgan in that era, the railroad's Wikipedia history records. In 1898 the Erie obtained the New York, Susquehanna and Western as a subsidiary after Morgan purchased the majority of its shares on the Erie's behalf, gaining access to anthracite coal mines south of Scranton to compete with the Delaware, Lackawanna and Western's coal operations. The Morgan partner George W. Perkins brought Frederick D. Underwood into the Erie in 1910 to run it. During the eastern railroad strike of 1913, when Erie employees demanded a twenty percent wage increase that management resisted, the union leader W. G. Lee asserted that the only way to deal with the Erie was through J. P. Morgan and Company, or the banks; Underwood retorted from his home in Wisconsin that he, not George W. Perkins, not J. P. Morgan, nor anybody else, was running the Erie Railroad. The exchange shows how completely the Morgan firm was understood to stand behind the properties it reorganized.

A government suit was looming in November 1904 when Gary took a proposal to President Roosevelt, his biography records: cooperation traded for preferential treatment. The company would lay open its books to the Bureau of Corporations, and where the Bureau turned up evidence of wrongdoing, U.S. Steel would receive private warning and an opportunity to set matters right. Roosevelt accepted what became known as a gentlemen's agreement because it accommodated his interest in the modern industrial order while preserving his public image as slayer of the trusts. Gary then pursued stability through what historians describe as price leadership and orderly practices of competition: publicly announced fixed prices, wage stability, an unusual amount of information for stockholders in annual reports, and conservative technological progress. Starting in 1906 he built the world's largest fully integrated steel plant on the shore of Lake Michigan, in the area duly named Gary, Indiana, on which the company had expended seventy-eight million dollars by 1911. The posture reflected the thesis that industrial stability protected both profits and the public peace.

The Pujo Committee's report, concluded in 1913, found that a community of influential financial leaders had gained control of the major manufacturing, transportation, mining, telecommunications, and financial markets of the United States, the article records. The investigators documented that 180 individuals holding 341 directorships in 112 corporations possessed 22.245 billion dollars in aggregate resources, that the twenty largest banks held 42.9 percent of America's total banking resources, and that a cartel headed by J. P. Morgan, George F. Baker, and James Stillman controlled at least eighteen major financial corporations, commanding an estimated 2.1 billion dollars through seven banks and trust companies. The report further found that interlocking directorates and a system known counterintuitively as banking ethics restricted competition among banks and firms, and that a handful of men held manipulative control of the New York Stock Exchange. It also singled out individual bankers including Paul Warburg, Jacob Schiff, Felix Warburg, and Benjamin Strong.

In August 1861 Morgan loaned twenty thousand dollars to Simon Stevens, a well-connected New York attorney, who used it to buy five thousand Hall carbines at 11.50 dollars each from an arms dealer and immediately resell them to General John Fremont at 22 dollars. The rifles had earlier been sold off by the government for 3.50 dollars each; after the Union defeat at Bull Run placed a premium on arms, the resale became a scandal. Morgan held title to the carbines during the thirty-eight-day loan, having their barrels replaced with rifled ones before shipment, and received fifty-five thousand dollars from the Army in September, deducting the loan's face value plus expenses and interest. An 1863 report by a House select committee examining government contracts branded the profiteers worse than traitors in arms. The debate over Morgan's knowledge persisted for decades: Gustavus Myers accused him in 1910, public-relations chief R. Gordon Wasson found no evidence he knew, and historian Vincent Carosso concluded that Stevens had used Morgan's name to cover his own greed.

Morgan's ascent to power ran through America's largest business enterprises, the railroads, his biography records. He led the syndicate that broke Jay Cooke's government-financing privileges, raised large sums in Europe through the American rails section of the London Stock Exchange, and developed a national railroad empire through reorganization and consolidation. Instead of acting only as a financier, he took an active hand in managing and reorganizing the railroads themselves, raising efficiency in a practice labeled Morganization and described by his biography as pioneering private equity investing. The year 1883 saw him successfully place a large block of William H. Vanderbilt's New York Central stock with investors. In 1885 he reorganized the New York, West Shore and Buffalo line and leased it to the New York Central. After the Interstate Commerce Act of 1887, he convened unprecedented conferences of railroad presidents in 1889 and 1890, bringing together competitors to write agreements for the maintenance of public, reasonable, uniform, and stable rates, creating a community of interest among rival lines.

In December 1912, though his health was failing, Morgan appeared before the Pujo Committee, the House Banking and Currency subcommittee, his biography records. Its final conclusion was that a few financial leaders wielded considerable control over many industries. Aggregate resources of 22.245 billion dollars stood under the control of the J.P. Morgan partners together with First National and National City directors, a sum Louis Brandeis likened to all the property in the twenty-two states west of the Mississippi. The statistic became the emblem of the money trust era. Conservatives had hailed Morgan for civic responsibility after the 1907 rescue, but critics attacked the terms of his 1895 gold loan to the Treasury, and writers including Upton Sinclair attacked his handling of the Panic of 1907 itself. The hearings coincided with, and by his associates' account accelerated, Morgan's final physical decline.