The House of Morgan
is written by history and biographer Ron Chernow. Chernow is a phenomenal writer and researcher, and makes a topic that could be mundane even for someone as interested as me really come to life. It’s a very long book that will keep you busy for quite some time. One of Chernow’s earlier works, there is a part of his writing style that makes you feel like he is trying to impress you with unnecessarily obscure words one mechanism. But the research behind this book, it’s objectivity, and it’s ability to go beyond facts into insightful interpretation make it a truly engaging book.
There are some lessons that I take away from The House of Morgan
that are worth sharing.
1. Anti-Semitism drove major business strategy around the world.
It’s truly sad to see how far anti-Semitism inserted itself into the hearts and minds of smart and honorable people. These were deeply held beliefs and drove a tremendous amount of business strategy. When many banks would syndicate their loans, they would do whatever they could to ensure that the Jewish banks were not part of those syndications. This of course led to the Jewish banks sticking together and doing their own business with each other. The hiring of Jewish bankers in many of the larger historical banks took longer than it took for Jackie Robinson to break into Major League Baseball. As written about Jack Morgan:
Jack had a way of looking at the Yankee-Jewish rivalry on Wall Street and seeing it in conspiratorial and religious terms rather than in the more mundane terms of business.
This prejudice was both institutionalized by building syndicated loans that would shut out Jewish banks, but was also casual in its attitude:
Around 1900, they began underwriting shares for companies that were spurned by the gentile firms as too lowly—retail stores and textile manufacturers, for instance. Among them was Sears, Roebuck, introduced by Goldman, Sachs and Lehman Brothers in 1906. Of such relatively small issues, the gentile firms would sniff, “Let the Jews have that one”—snobbery for which they paid dearly in the twentieth century.
It’s hard fro me to imagine how people did business, or lived their lives this way. We certainly know that anti-Semitism isn’t dead, as many other forms of prejudice isn’t dead, but it’s amazing how open and accepted it used to be, by otherwise good men.
2. The lessons of banking regulation and deregulation are doomed to continued repeating
“Too big to fail” became the rallying cry of “how could we be so stupid?” during the most recent financial crisis, from which we will be extracting ourselves for a full generation. Yes, this is the same dialogue and lessons that happened in 1984 with major bank failures, and preceding the Great Depression, which led to Glass-Steagall Acti of 1933. This act lead to the separation of J.P. Morgan and Morgan Stanley:
This empire was shattered by the Glass-Steagall Act of 1933, which erected a high wall between commercial banking (making loans and accepting deposits) and investment banking (issuing stocks and bonds). In 1935, J. P. Morgan and Company chose to remain a commercial bank and spun off Morgan Stanley, an investment house. Seeded with J. P. Morgan capital and personnel, Morgan Stanley for decades clearly exhibited common ancestry with its Morgan brother down the block. They shared many clients and kept alive a family feeling no less potent for its informality.
The 1984 failure of Continental is perhaps even more disturbing, only because it was so recent. More from the book:
The stakes were tremendous: Continental was larger than all the banks that failed during the Depression combined. As a “hot money” bank, it was insured for only about 10 percent of its $40 billion in “deposits.” Could the world really cope with $36 billion in losses? Nobody wanted to find out. At a meeting on Tuesday morning, May 15, Volcker, Comptroller of the Currency Todd Conover, and William Isaac and Irving Sprague of the FDIC agreed that a Continental failure would be cataclysmal and decided on an FDIC capital infusion.
However, one of the reasons we are likely to repeat some of these mistakes is that through innovation and a global market, any effort to regulate our way around this problem has proven to be unsustainable. Current efforts to have past and not just future compensation at risk for bank failures may be the closest thing to a sustainable solution, as this more reflects the past cultural element that was in place when it was partners’ capital at risk and not just other people’s money.
3. Governments being more powerful than banks is a relatively new turn of events.
Going back centuries, governments had to find the money to enact their strategies. Tax systems and federal treasuries were not sophisticated enough to act on their own. This was especially true in war:
The bankers acquired such power because many governments in wartime lacked the sophisticated tax machinery to sustain the fighting. Merchant banks functioned as their treasury departments or central banks before economic management was established as a government responsibility.
As an example of this, the Nazi’s rise to power was certainly enabled by national treasuries and banks. One of the drivers of German inflation was the fact that France would not forgive German reparation payments from World War I. They couldn’t afford to, because the U.S. would not forgive war loans to France. Eventually, the only way for Germany to pay their due was to print money:
Meanwhile, German inflation worsened. The government was printing so much money that newspaper presses were commandeered. Thirty paper mills worked around the clock to satisfy the need for bank notes. Prices soared so fast that wives would meet their husbands at factory gates, collect their wages, and then rush off to shop before the next round of price increases. In January 1922, about two hundred marks equaled one dollar. By November 1923, it took over four billion marks to buy a dollar. A stamp on a letter to America cost a billion marks. At the end, in a final absurdity, prices doubled hourly.
This hyperinflation lead to an unsettled German population looking for answers, and this, in part, led to the Nazi party, and Hilter himself, gaining power.
This effectively placed Germany in international receivership. (And many reparation payments were funneled through the Morgan bank.) Germany was mortgaged to the Allies, with its railways and central bank subjected to foreign control, a situation that would provide a propaganda bonanza for the Nazis.
By no means is this the fault of the U.S., or any other country, but it is part of the backdrop of contributing factors. As things were resolved, it also helped Hilter build his war machine:
Unemployment plunged and Germany’s economic slide was reversed into a five-year upturn. This revival would provide Adolf Hitler with a splendid industrial machine and the money to finance massive rearmament. In the meantime, the world was trapped in a circular charade in which American money paid to Germany was handed over as reparations payments to the Allies, who sent it back to the United States as war debt.
The banks and government are highly intertwined when it comes to politics and war.
4. The culture of the founder must be maintained to prevent organizations from losing their way
The culture of the original Morgan men who lead the organization had vanished from the company. There was a strong sense of purpose, and integrity, and a focus on relationships that went by the wayside. This reflects some of how people felt about the 2nd Morgan leader:
The populace might dread the power of Pierpont Morgan, but he paid his bills promptly, always stuck by his word, and was almost universally respected among businessmen.
In Pierpont’s words, this is in part how he felt about clients:
“I feel bound in honor when I reorganize a property and am morally responsible for its management to protect it, and I generally do protect it.”
This client-first-even-above-profits mentality was respectable, but lost once the organizations became public companies, partners no longer had their own capital at risk, and profits came fast and at the expense of others in an increasingly zero-sum game.
Former elements of the House of Morgan would repeatly help one client with a hostile raid on another client. Loyalties disappeared. Use of confidential information became a sliding scale of ethics.
If Pierpont and Jack Morgan were alive and on the board today, things would be different for certain. Perhaps every organization needs to develop a cultural practice of asking “what would our founder do?”
I highly recommend reading The House of Morgan
for anyone in business today, anyone interested in history, or anyone that just enjoys as well written book.
