Sunday, April 13, 2014

Morgan – the uncrowned king of the world? – A look at J.P. Morgan in the 1930s

Today, J.P. Morgan holds total assets of 2.4 trillion USD. That is about half the cumulated net worth of the 500 richest people in the world or 32 times the net worth of the richest man in the world (currently Bill Gates). Roughly 260,000 employees work for the bank. That is 3 % of London’s total population or 65 % of Zürich’s total population.
How can a bank become that big?

In 1932, Fritz Schwartz provided some answers in his book “Morgan – der ungekrönte König der Welt”. Clearly, Fritz Schwartz doesn’t like the Morgan family and the business practices of its two main representatives of that time, John Pierpont Senior and John Pierpont Junior. If you read German, I encourage you to have a look at this short book. Whether you believe in all the stories or agree with the author is not relevant here. The book is simply funny to read.

„Morgen ist Herr über die Geldmenge!“

“Morgan is the master of money supply“

The Morgan family
The Morgan family stems from the Normandy region in France. It migrated to the United States in the early 19th century where Josef Morgan made a fortune in the agriculture and stage coach businesses and Junius Spencer Morgan became, as Peabody Bank’s shareholder, the financial representative of the United States of England during the American civil war.

„In der Familie Morgan war die Jagd nach dem Dollar eine beliebte Beschäftigung.“

“In the Morgan family, chasing the dollar was a popular activity.”

John Pierpont Morgan Senior (1837 – 1913)

Fritz Schwarz offers a surprising theory for J.P. Morgan’s business acumen: When studying mathematics in Germany, he fell, at the age of 22, in love with Miss Amelia Sturges. Unfortunately, a few months after the marriage, she died prematurely. According to the author, this triggered a rancorousness which made J.P. Morgan focus relentlessly on his business activities. This is somewhat contradictory to his second marriage and the birth of his son in 1867

J.P. Morgan Senior

Let’s have a look at some of the transactions Fritz Schwartz describes in his book:

Carbine trade
Through undercover agents, Morgan bought 5,000 carbines from the American army. They were seen as defective and dangerous and, thus, sold for USD 3.50 per piece. A few months later, Morgan declared the same carbines as new and faultless and sold them back to the U.S. army for 22 USD per piece. Even though the army contested, it lost in court.

Contraction of money supply between 1873 and 1893
Before 1873, the money supply was dependent on gold and silver reserves. On February 12, 1873, silver was abolished as support metal. As gold reserves were rare at that time, money supply contracted and, as a result, aggregate demand and prices dropped. Morgan benefited from this situation by buying cheap stocks of railway companies. When gold reserves recovered later on, Morgan resold the stock at higher prices, thus making a huge profit.

„Morgan galt als der mächtigste amerikanische Eisenbahnmagnat, ohne dass er selber jemals eine Eisenbahn gebaut hätte, woraus wieder klar hervorgeht, dass der Geldmann dem Unternehmer überlegen ist.“

"Morgan was considered the most powerful American railroad magnate, although he himself had never built a railroad. This shows once again clearly that the financier is superior to the entrepreneur."

Proprietary trading
As you can read in Fritz Schwartz’ book, proprietary trading was already an issue back in the 1930s. He blames J.P. Morgan for speculating with deposits of the middle class instead of using these funds to give credits to start-up companies.

„Selbst wenn sich der Mittelstand vorsichtig von den Gefahren des Geldmarktes fern hält, so wird sein Geld doch von den Banken benutzt, wie wenn es ihr Eigentum wäre. […] Die Börsenherren beherrschen die Banken; diese ihrerseits spekulieren mit dem Geld der kleinen Sparer, wobei ihnen die Verluste aufgehalst werden, während die Gewinne den Großen zufallen, die besser unterrichtet sind als die kleinen Banken.“

“Even if the middle class keeps away from the dangers of the money market, its money is still used by the banks, as if it were their property. […] The stock market masters dominate the banks that speculate with the money of small savers saddling them with the losses, while distributing the profits to the big banks which are better informed than the small banks.”

1907/08 world economic crisis
The author accuses J.P. Morgan of having triggered the world economic crisis in 1907/08 to earn a profit of 3 BUSD. In this context, he cites President Roosevelt as follows:

„Die Majestät des Staates und der Gesetze wurde in den Kot gestampft unter dem goldgepanzerten Fuß eines meineidigen Zuchthäuslers [J.P. Morgan].“

"The majesty of the state and the law was rammed into the mire under the gold-plated foot of a perjured convict [J.P. Morgan] committing perjury."

Death of John Pierpont Morgan Senior

Morgan dies in 1973. Fritz Schwarz describes the scene:

„Er, der einen Magen gehabt hatte, der Nägel vertragen konnte, der stets für zwei aß und trank und dreißig bis vierzig schwere Havannas täglich rauchte, konnte plötzlich nichts mehr verdauen. Schwach und immer schwächer werdend, wollte er in Karnak [in Ägypten] noch im Wagen durch die Säulenreihen des Ammon-Tempels fahren. Man gestattete es ihm nicht, wollte aber die Fahrt in einem Krankenwagen erlauben. Das aber wollte wiederum Morgan nicht, «denn», bemerkte er bitter, „wenn Wall Street erfährt, dass sich Morgan nicht mehr auf den Beinen halten kann, so werden die Kurse fallen und ich wünsche jetzt keine Baisse.“ Mit seiner Jacht «Corsair» fuhr er nach Rom; er wollte nicht unter Mohammedanern sterben. In der ewigen Stadt erlöste der Tod den sechsundsiebzigjährigen, nun ganz abgezehrten Mann nach einem mehrtägigen Todeskampf, am 31. März 1913.“

“He, who had had a stomach that could digest nails, always ate and drank for two and smoked thirty to forty heavy Havana cigars daily, suddenly couldn’t digest anything. Weak, and becoming weaker and weaker, he still wanted to drive, in his car, through the colonnades of the temple of Amun in Karnak, [Egypt]. The doctors only wanted to allow the ride in an ambulance. Morgan, however, did not want this, because he remarked bitterly, "if Wall Street learns that Morgan cannot stay on his feet, prices will fall and I wish now no bear market for now." With his yacht, the "Corsair", he went to Rome, as he did not want to die under Mohammedans. In the eternal city of Rome, the death redeemed the 76 year old, now very emaciated man after several days of agony, on March 31, 1913.”

Temple of Amon - Karnak

John Pierpont Morgan Junior (1867 – 1943)

Fritz Schwartz starts off criticizing the appearance of the Morgan family but noting a positive evolution over generations: While he pinpoints to the “deformed and swollen nose of J.P. Morgan Senior” and the excess weight of J.P. Morgan Junior, he welcomes Junius Morgan’s look, as he is “tall, svelte, and blond”.

J.P. Morgan Junior

„Er [J.P. Morgan Junior] ist heute einer der einsamsten Menschen und sein Bekanntenkreis ist selbst unter Geschäftsfreunden nicht groß. Jeder spricht über Morgan, aber niemand kennt ihn; er ist zu einem Mythos geworden.“

"Today, he [J.P. Morgan Junior] is one of the loneliest men and even in business his circle of acquaintances is not large. Everyone is talking about Morgan, but no one knows him, and he has become a myth.”

JP Morgan’s office life in the 1930s
Morgan shared his office with 12 collaborators. According to Fritz Schwartz, the group was called “Christ and the 12 apostles”. He writes that the office resembled a school class, as the desks were arranged in rows, with J.P. Morgan sitting in the last row. I am, however, wondering where Fritz Schwartz got all this detailed knowledge from…

Financing the First World War
The author describes how J.P. Morgan benefited from the First World War. As a matter of fact, his bank arranged and placed bonds issued by the Allied forces. At this stage, Fritz Schwarz’ book becomes a bit preposterous as he writes, “to earn these sums and to save funds invested in Europe, American soldiers have been sent to the European theater of war”.

J.P. Morgan’s fight for the gold standard

„Der Kampf gegen die Goldwährung ist der Freiheitskampf des 20 Jahrhunderts.“

"The fight against the gold standard is the struggle for freedom of the 20th century.”

Until 1976, the value of the U.S. dollar was pegged to the value of gold. This gold standard had already been debated in the U.S. in the 1930s. Fritz Schwarz was not a great believer in the gold standard. In his view, it only allowed banks like J.P. Morgan to speculate. Hence, they defended the gold standard ferociously. The writer describes two main stories:

In 1924, J.P. Morgan Junior fought successfully against the U.S. presidential candidate Robert La Follette, who wanted to abolish the gold standard. Fritz Schwartz writes that J.P. Morgan threatened voters to stop lending to their employers if La Follette became president.

In 1930, the Bank for International Settlements (BIS) was founded to recover and settle reparation payments imposed on Germany after the First World War. Where is the link to the gold standard? It’s the choice of Basel as seat of the BIS, records Fritz Schwartz: Switzerland is said having promised to stick to the gold standard in exchange for locating the BIS in the country. This is obviously not the story that BIS tells about its foundation: “The choice of Switzerland for the seat of the BIS was a compromise by those countries that established the BIS: Belgium, France, Germany, Italy, Japan, the United Kingdom and the United States. When consensus could not be reached on locating the Bank in London, Brussels or Amsterdam, the choice fell on Switzerland. An independent, neutral country, Switzerland offered the BIS less exposure to undue influence from any of the major powers.”

Tax fraud?

Let’s finish with a quote from J.P. Morgan Junior, as reported by Fritz Schwartz. Accused of tax fraud, he allegedly said in court:

„Ich unterstehe keinen Gesetzen, sondern einem ungeschriebenen Ehrenkodex. Mein Kredit ist mein wertvollster Besitz.“

"I am not governed by laws but only by an unwritten code of honor. My credit is my most prized possession."

Again, I actually don’t know which stories in Schwartz’ book are right and which are wrong. But that’s not my point. I have read the book simply because it’s a piece of history which gives a sense of how people thought about the finance industry at that time.