J.P. Morgan on Regulatory Environment

In late November 1910, Senator Nelson W. Aldrich, joined by Assistant Secretary of the Treasury A. Piatt Andrew, brought five leading financiers to a private meeting at the Jekyll Island Club, off the Georgia coast, to draft recommendations for a central banking system able to answer panics like that of 1907, the island's Wikipedia history records. The invited group comprised Frank Vanderlip, Henry P. Davison, Arthur Shelton, Benjamin Strong, and Paul Warburg. Davison was the senior partner of J. P. Morgan and Company; Strong, who represented the Morgan-influenced Bankers Trust, would become the first head of the Federal Reserve Bank of New York. Their plan called for fifteen self-governing branches spread across the country under a national commission that would coordinate policy. Aldrich put the proposal before the National Monetary Commission without acknowledging where it came from, and the Federal Reserve Act carried a similar federated structure. Disclosure waited until 1930, when Carter Glass claimed credit for the Federal Reserve's design and drew rebuttals from Warburg and other banking experts.

The Pujo Committee was a United States congressional subcommittee in 1912 and 1913 convened to probe the so-called money trust, the community of Wall Street bankers and financiers whose grip on the nation's finances had become the era's political obsession, its Wikipedia article records. After Congressman Charles August Lindbergh Sr. asserted in July 1911 that a banking trust existed and should be investigated, the Democratic Money Trust Caucus passed House Resolution 405 on February 7, 1912, and Arsene Pujo of Louisiana, chairman of the House Banking and Currency Committee, submitted a resolution that passed by a vote of 268 to 8. The lawyer Samuel Untermyer, who as early as December 1911 had advocated the investigation and encouraged Lindbergh to keep fighting for it, became the committee's counsel. The inquiry examined clearing houses, the New York Stock Exchange, and the concentration of wealth, though its scope was hampered when the Comptroller of the Currency furnished only a fraction of the requested loan data. Witnesses were first examined on May 16, 1912.

The National Monetary Commission was created by the Aldrich-Vreeland Act of 1908 after the Panic of 1907 and chaired by Senator Nelson Aldrich, a Republican Senate leader, its Wikipedia article records. Aldrich personally led a team of experts to the major European capitals, where they were stunned by how much more efficient the European financial system appeared and how much more important than the dollar the pound, franc, and mark were in international trade. The commission issued thirty reports between 1909 and 1912, a detailed and authoritative survey of the era's banking systems published by the Government Printing Office. Its plan provided for local associations of banks grouped into regional associations and a national reserve association headquartered in Washington, holding the country's bank reserves, issuing an elastic currency based on commercial assets, and rediscounting commercial paper. The plan failed to win strong public support because of its resemblance to a central bank and popular suspicion of Aldrich, but many of its features were incorporated in the Federal Reserve Act, enacted December 23, 1913.

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.

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.

Although Pujo left Congress in 1913, the committee's findings inspired public support for ratification of the Sixteenth Amendment authorizing a federal income tax, for passage of the Federal Reserve Act that same year, and for the Clayton Antitrust Act of 1914, the article records. The findings were also widely publicized in Louis Brandeis's book Other People's Money and How the Bankers Use It, which gave the money trust diagnosis its permanent literary form. Morgan himself, though suffering ill health, testified before the committee in December 1912 and faced several days of questioning from Untermyer; the exchange between the two men on the fundamentally psychological nature of banking, an industry built on trust rather than on money or property, is often quoted in business articles to this day. Morgan's associates laid his continuing physical decline at the hearings' door: he fell ill in February 1913 and died on March 31, with the Federal Reserve still nine months from officially displacing the money trust as lender of last resort.

On Saturday, November 2, with the brokerage Moore and Schley near collapse under loans collateralized by Tennessee Coal and Iron stock, Morgan called an emergency conference at his library, proposing that U.S. Steel acquire TCI, the article records. That evening, with runs still threatening the Trust Company of America and the Lincoln Trust, forty to fifty bankers gathered, the clearing-house presidents in the East room and the trust executives in the West room. Around midnight Morgan informed a leader of the trust presidents that saving Moore and Schley would require twenty-five million dollars he would not commit unless the trusts also rescued their weakest members. As discussion stalled, the bankers realized Morgan had locked them in and pocketed the key. At three in the morning about one hundred twenty officials assembled for a full report, and by 4:45 a.m. Morgan had persuaded the trusts' leader to sign, the rest following. Next day Elbert Gary and Henry Clay Frick won Roosevelt's assent to the TCI purchase less than an hour before the exchange opened, and the final crisis was averted.

The Northern Pacific Railway went bankrupt in the Panic of 1893, a bankruptcy that wiped out bondholders and left the property free of debt, and a complex financial battle for its control followed, Morgan's biography records. In 1901 Morgan, the New York financier E. H. Harriman, and Minnesota railroad builder James J. Hill reached a compromise. They formed the Northern Securities Company to combine three of the Midwest's most important railways under one holding company: the Northern Pacific, the Great Northern, and the Chicago, Burlington and Quincy. Unexpected opposition came from President Theodore Roosevelt, who judged the combination harmful to consumers and a breach of the seldom-enforced Sherman Antitrust Act of 1890; in 1902 he directed Attorney General Philander Knox to sue for its breakup. The Supreme Court dissolved the Northern Securities Company in 1904. Morgan did not lose money in the episode, but his all-powerful political reputation suffered.

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.

The panic's real effects were severe, the Federal Reserve History essay notes: industrial output fell seventeen percent in 1908 and real gross national product twelve percent, a contraction surpassed only by the Great Depression, though the real sector recovered rapidly, in little over a year. The Knickerbocker Trust itself reopened in March 1908 after an infusion of 2.4 million dollars in new capital, having suspended rather than failed. The essay emphasizes that the panic occurred before the Federal Reserve, deposit insurance, or securities regulation existed, when only the National Banking Acts and the private New York Clearing House structured crisis response. It records the argument of Moen and Tallman that the experience changed how Clearing House bankers judged the value of a central bank, since the panic's grip fell mainly on trust companies outside their membership. The 2008 rescue of Bear Stearns, bought by JPMorgan Chase with a Federal Reserve loan, is compared to the Clearing House support for the Mercantile National in 1907, and the Knickerbocker suspension is set beside the failure of Lehman Brothers.