Now It Is Told

On a bright spring morning in 1913, the shades of the many windows of the third floor corner suite of the Grand Hotel, Rome, were pulled down. Passing tourists knew that behind the shades lay John Pierpont Morgan, dead.

Last week dozens of millions of newspaper-tourists were permitted to tramp freely through, over and around the House of Morgan. Most of them, as ignorant of finance as they are of art, knew little more when the trip was over than when it began. But many thousands--and especially those who were themselves minor financiers-- were able for the first time to put together a coherent and fairly complete account of what has been the greatest and most legendary private business of modern times.

The John Pierpont Morgan who died in Rome before the War was descended from a line of wealthy New England traders. His grandfather, Joseph Morgan, had kept an inn and had been a pioneer in the extremely lucrative insurance business of Hartford, Conn. John Pierpont Morgan went to New York as a private banker. In 1894 he took partners forming the present firm. In the following years, as everyone knows, he performed dazzling feats of finance on a scale unprecedented. These included the formation of U. S. Steel and many another of the greatest corporations which have made a large part of industrial history since. When he died, his son inherited most of a $68,000,000 estate and magnificent art treasures. But what made his inheritance unique and vastly more valuable than any other inheritance in American History was the right to succeed to his father's private banking business at No. 23 Wall Street. Banking being a business of reputation, John Pierpont Morgan II, then 45 and now 65. inherited the world's greatest banking reputation at almost the precise moment when the U. S. was destined to become the financial centre of the world. But the Elder Morgan had also left his son (who had shown sterling qualities of character, but no genius) a group of partners who were either the ablest U. S. bankers or were credited with being so.

The greatest of these was the late Henry P. Davison who, raised among Pennsylvania farmers, said he had spent more time milking cows than attending directors' meetings. Others: Thomas W. Lamont, 62 (who succeeded on Mr. Davi-son's death in 1922 to the greatest reputation in the firm); and three much older men: Charles Steele, a venerable lawyer of the early "trust" forming days; Philadelphia's Edward T. Stotesbury, a drummer boy in the Civil War whom the present generation recollects as a socialite yachtsman; and Horatio G. Lloyd who leads a homey life in recent years, has specialized as Welfare Commissioner of Philadelphia and treasurer of Quakerish Haverford at a salary of $1 a year.

These Morgan-chosen partners and the partners they have subsequently chosen have instinctively known that their chief business was to maintain and by their deeds live up to the tremendous name which they inherited.

That much about the Morgan business has always been known to the world. And like the first dazzling effect of a great pile like St. Peter's, that remains the essential fact. But details? Just what did the firm do every day? How did they do it? How much money did they make?

At No. 23 Wall Street (two blocks down from Trinity Church and Broadway) is a low classical building, overshadowed by skyscrapers. It might be the swankest bank in a small town. Few have ever mounted the little steps leading to its heavy glass doors without some sort of mental twitter.

Last week, however, the whole U. S. rushed in to rubber. The plainclothes man in a grey fedora hat who watches eternally in the vestibule could not stop it, for entry was being made not through the portal on Wall Street but through the Senate Office Building at Washington. Ferdinand Pecora, onetime Sicilian immigrant, now a grey-haired, swarthy Manhattan lawyer, was cicerone--paid $255 a month for the job. A handful of U. S. Senators were official sightseers. The world trooped in after them. After that visit, men could make out a fairly complete picture of the business of Morgan:

The Business of Morgan & Co. consists of three chief parts: 1) banking, 2) commissions on Stock Exchange transactions. 3) wholesaling securities. On the stand Mr. Morgan said, "I think the larger part of our business is ... the straight banking business."

Senator Couzens: Your underwritings are a minor part of your business?

Mr. Morgan: I would say the least profitable part. And in volume I should say the least, yes.

Senator Couzens: The lesser part?

Mr. Morgan: Yes.

"Straight Banking," This testimony was a surprise to those who supposed that Morgan Partners would not waste their time on the routine of straight banking when they had so unique a franchise to indulge in romantically profitable "deals."

"Straight banking" is to take in deposits at say 1% interest, and loan or invest the deposits with safety at a higher rate.

The amount deposited in Morgan's at the end of 1929 was $492,000,000. Against this the firm had $59,000,000 in cash, $79,000,000 in call loans, $165,000,000 in U. S. Government securities (not to mention 60-odd millions each in municipal bonds, stocks, time and demand loans). It was extremely liquid. It was even more liquid in 1932: Against $340,000,000 of deposits it had $34,000,000 in cash, $7,000,000 in call loans, $225,000,000 in Government bonds.

But the "straight banking" of Morgan & Co. is not the same as "ordinary banking." The deposits in Morgan & Co. differ from the deposits in most banks. They are fewer and bigger. Few are the deposits of individuals, many of great corporations and foreign governments, with balances of more than $1,000,000.

Even more greatly do the firm's loans differ from those of ordinary "straight banking." Morgan & Co. does not lend working capital to the cloak & suit industry or make the ordinary bank's small loans to businessmen. It is more apt to advance some millions to a foreign government or to capitalists or corporations who may use the money to swing deals. With this goes other business: in acceptances, in letters of credit, in buying and selling foreign exchange for clients, and such commissions as the $500,000 Morgan collected for "syndicating" among banks a line of $200,000,000 credit to Great Britain.

Brokerage. In connection with straight banking, most banks buy and sell stocks for their customers. Unlike ordinary bankers J. P. Morgan has a seat on the N. Y. Stock Exchange, his partners have seats on other stock exchanges. Though they execute no orders on the floor by having memberships they, as brokers, can collect commissions (paying part to other brokers who actually execute their orders). Such commissions helped to pay the overhead. Recent example: H. F. Loree had Morgan buy 500,000 shares of New York Central for the Delaware & Hudson. '

For a general "average" picture of Morgan's banking business in "normal times," this will serve: $400,000,000 in deposits, $100,000,000 in cash and call loans, $150,000,000 in U. S. bonds, $50,000,000 in municipals and other bonds, the rest in loans and stocks. From the profit in the difference between say 1% paid on deposits and say 3% earned, deduct clerical expenses and overhead (less than for most banks because there are few small transactions) and add brokerage commissions. There is Morgan & Co.'s "straight banking" and brokerage profit, probably $8,000,000 a year more or less, a safe and satisfactory business.sb

Deals. But after the partners have invested their depositors' money in safe and liquid securities, they have still their capital (net worth) which they can employ in deals. The capital of the House of Morgan amounts to less than $100,000,000 (it passed that mark in 1929, was $119,000,000 at the close of that year, stood at $53,000,000 at the close of 1932). Morgan deals are of two kinds:

1) Bonds. The firm as a wholesaler of securities floats bond issues through syndicates. Because of its prestige it gets the pick of the business, the securities which are easiest to sell, of foreign governments (of England and Germany, for example), of great corporations without number. The margin of profit is small but because it gets the cream of the securities, the turnover is sure and rapid. If an issue of tens of millions can be floated over night, what if the profit is only $100,000? That is enough for a night's work.

But for many firms such a profit is not enough over a period of years to pay for the much greater losses which are sure to come sometime when an issue goes sour. Morgan & Co.'s net profits on bonds are due to having fewer losses than most houses. In the last 14 years, Morgan & Co. has headed syndicates which distributed $6,000,000,000 worth of bonds. Of these $2,000,000,000 have already been repaid. Forty percent of all their foreign bonds have been repaid. Of the balance 30% were selling, last week, above the offering price. Only in railroad bonds, heavily supervised by the U. S. Government, was there a bad showing.

2) Stocks. Morgan & Co. does not float common stocks, seldom preferred stocks, but when it arranges the financing of companies there are often common stocks to be sold. In such cases it may buy a block of common shares, which it gets at wholesale price, may make a handsome profit, for as in the case of Standard Brands (see p. 58) when the wholesale price is $32 a share, and the opening market price is over $40 a share, there is a paper profit of $8 a share to begin with. Of the block of shares purchased part may be resold at cost (the wholesale or bargain price) to Morgan partners and to wealthy clients of the firm, who will pay cash in full and will not dump the shares on the market. But, unlike other firms, Morgan & Co. have never given an "inside" participation to anyone in any security which they have offered to the public.

Composite. But the success of Morgan & Co.'s business depends on all of its parts together. The composite is the source of Morgan's power, the basis of honest alarms about the too great concentration of financial and social power, and the reason why investigators have so much difficulty in putting their finger on what they complain of. The success of its loans may be insured by its intimacy with corporations for whom it has floated securities. Its ability to make large loans brings it security business. Its prestige brings it the cream of financial business. Having the cream, its prestige and influence increases, etc. and though it cannot control the capital market, it at least has the front or inside seat. The whole is greater than the sum of the parts, and the whole is responsible for Morgan & Co.'s profits.

Profits. What the profits and losses of the firm are can be inferred in a general way from the fluctuations in its net worth: up $20,000,000 in 1928, up $27,000,000 in 1929, down $27,000,000 in 1930. down $39,000,000 in 1931, up $200,000 in 1932. But fluctuations in net worth do not take account of profits distributed, or capital brought in or taken out due to partnership changes. Income taxes are normally a better measure of a concern's profits, hut Morgan & Co., not being a corporation, does not pay a uniform 13 3/4% tax on net profits. Taxes are paid individually by the partners on their shares in the profits and are graduated according to the individual income tax. The aggregate taxes paid by the partners amounted to $11,000,000 for 1929, $48,000 for 1930, $0.00 for 1931, $0.00 for 1932. Failure to pay taxes in the later years is due to the fact that in their regular business, the partners of J. P. Morgan severally and jointly lost more money than they made.

The Partnership, The firm of Morgan is 20 men. Five were picked by the Elder Morgan. Others now in their prime include such men as Russell C. Leffingwell, from the law, who succeeds in large part to the place vacated by the late Dwight Morrow, and George Whitney who handles much of the firm's stock exchange business. Recent acquisitions are Harold Stanley, public utility expert, obtained from Manhattan's Guaranty Co. when Morgan & Co. plunged into utility financing, and S. Parker Gilbert, first famed as a brilliant young Treasury aid to Secretary Mellon. At the age of 30 he went with his bride to Europe to manage reparations. Returning, an expert on public and international finance, he lounged on the beaches of Hawaii for a few months before sinking himself in the depression problems of a Morgan partnership.

Besides Junius Spencer Morgan Jr.sb eldest son of J. P. made a partner some years ago, three heirs were admitted in 1929--Henry S.,sb second son of J. P., T. S. Lamont,sb second son of Thomas W., and Henry P. Davison, son of the late Henry P.

By reason of the partners having tried to pick men on the principles laid down by the Elder Morgan (who preferred character to all other attributes), there are no showy figures in the firm, no dominant personalities such as the Elder Morgan was himself. Able though several partners are they have been noted more for their integrity and influence than their brilliance.

They work for no salaries. When they join the firm (or when a partner retires) the assets of the partnership are sold at their market value to the new group. New partners may or not bring in new capital--if they are self-made men such as S. Parker Gilbert they frequently have none to begin with--but they sign the articles of partnership which makes them individually liable for all the debts of the firm and they are assigned a fixed share in all future profits and losses. Last week John W. Davis, eminent counsel of the firm, admitted that not even he had seen the articles which say what share each partner has in the business./- As profits come in they are credited to the partners' accounts. They draw what they need, leave the rest to increase their stake in the firm. Losses are similarly shared. Six of the partners are in debt to the firm, several of the younger ones for their share of the losses sustained since they entered the firm. These debts will be repaid when profits are credited to them (if not before). Till then they work for nothing, although the firm will certainly lend them enough to live on.

The 15 partners stationed in Manhattan (five manage Drexel & Co. in Philadelphia) work together behind a long row of rolltop mahogany desks on the first floor of No. 23 Wall St., shut off by a glass partition from the banking floor and an area where clerks toil incessantly with calculating machines. By elevator they can go to the floor above where a long corridor decorated with large photographs of partners gives access to private offices where they can go to dictate to secretaries. (The Elder Morgan would tolerate no female stenographers but that day is long past.) Every morning the partners, including any visiting from Philadelphia, hold a meeting to discuss and plan their work. None of them is assigned permanently to any special department of work --each takes on whatever job offers, preferably one with which he is already familiar. Ordinarily the partners live fairly placid lives.

Not placid were their lives last week however. In Washington the partners with their staff, lawyers, trunks full of records, occupied three floors of the Carlton Hotel. Their private detectives patrolled the corridors. The hotel elevators were forbidden to stop at the Morgan floors except for passengers with credentials.

From this seclusion they went morning and afternoon as chief performers in a public spectacle. In the Senate Banking & Currency Committee room they faced the Committee before a battery of cameras (Kleig lights were installed in the elaborate chandeliers) under the surveillance of a battalion of newshawks, and completely surrounded by as many spectators as could jam into the room. In tribute to the drawing power of the late great Morgan, his namesake was kept on the stand as much as possible though he could give few details. To get an accurate account of transactions Partner Whitney had to bear the brunt of questioning. When the house had been sold out for three successive days, the show moved into the Senate Caucus Room, largest available. Said Senator Glass: "All that is lacking is peanuts and pink lemonade."

Very courteous were the Senators to their guests. Very affable Mr. Morgan, wholly unlike his dictatorial father who gave blunt answers to the Pujo Committee 20 years ago. Very earnest--every inch the prosecutor--was Mr. Pecora. Very courtly Morgan's learned counsel. Mr. Davis. Only flare-ups of anger were between testy Senator Glass and Mr. Pecora over the course which the inquiry was taking. Mr. Glass, long a severe critic of our bankers, grew impatient with the mass of curiosity-questions not pertinent to the banking questions. Senator most critical of Morgan was Mr. Couzens.

Chief subjects of critical inquiry and the gist of Morgan & Co.'s answers:

Directorships: Q. Of how many corporations are partners directors'? A. 167. Q. Have they used their banking power to force their way in and control industry? A. J. P. Morgan dislikes having his partners serve as directors; they do so only by earnest request of companies who want financial advisers. Q. Do partner-directors force companies to finance with Morgan? A. No. Sometimes such companies finance elsewhere but often finance with Morgan. Q. Do not the interest of the partners as bankers conflict with their duties as directors? A. No. Partners as directors have their chief interest in the success of companies which they serve.

Bank secrecy: Q. Should not private banks be examined and forced to publish statements of condition? A. Possibly--but hitherto publication of such statements would conflict with State law prohibiting private bankers from advertising for deposits. Q. What assurance has a depositor of the solvency of Morgan & Co.? A. Faith. Q, Are not depositors entitled to statements of Morgan & Co.'s condition? A. They can have them if they want them; no one has ever asked. Q. Has any public statement of this fact ever been made except when the Elder Morgan testified before the Pujo Committee 20 years ago? A. (by Mr. Morgan) "No. That is the only public statement we have ever made about anything."

Income Taxes. Q. Did Morgan use the admission of S. Parker Gilbert to partnership as a means of establishing a $21,000,000 loss to avoid paying income taxes in 1931, 1932 and 1933? A. For 20 years the firm has always taken profits or losses by sales of assets every time a new partner was admitted or old partners retired; actually the firm had other losses in 1931 and 1932 so that no taxes would have been paid even without establishment of the $21,000,000 loss.sb Q. Has not the firm used the capital gains and losses section as a means of avoiding taxes "within the law"--did not Morgan pay taxes in England for 1931 and 1932? A. Morgan paid such taxes in England but England has no capital gains and losses tax. If the U. S. had no such tax the Morgan partners would have paid a lot less than $11.000,000 taxes for 1929--the tax has worked both ways. Comment by Senator Glass: The fault is with the law./-

Bargain lists. Q. Did not the Morgan firm in effect make hand-outs of $8,000 each time it sold 1,000 shares of Standard Brands at $8 below the market price (and similar amounts with offerings of Alleghany Corp. and other shares)? A. No. The firm had no such intent, regarded the shares as speculative (not the type of securities it would offer to the public); therefore disposed of them to people who knew the risk and could afford to take it; probably would not have done so except at cost. Q. Was not the offer of such shares at wholesale prices a kind of bribe to get favors from public and corporate officials? A. No. The shares were only offered to clients and friends, including retired public men; it was not Morgan's fault if its clients and friends included a number (such as Charles Francis Adams. William Woodin, Norman H. Davis) who later held public office.

To the following Morgan "Friends" in public life (before or since) went Standard Brands stock at wholesale or bargain prices:

No. of Shares Calvin Coolidge......................3,000 Norman H. Davis.......................500 Charles D. Hilles ...................2,000 Col. Charles A. Lindbergh......500 Williamm Gibbs McAdoo.....1,000 Gen. John J. Pershing ............500 John J. Raskob .....................2,000 William H. Woodin ...............1,000 Arthur Woods ..........................500

Also favored were the following potent bankers and industrialists:

No. of Shares Bernard M. Baruch, financier..........4,000 Hernand Behn of I. T. & T........1,000 Sosthenes Belin. of I. T. & T............. 1,000 John J. Bernet, of C. & O. R. R ..............500 Cornelius N. Bliss ...............2,000 Claude K. Boettcher, Denver banker....... 1,000 Charles J. Bradley, of Erie R. R. ......... 500 Matthew Brush, financier ...........2,000 Edward G. Auckland, of N. Y., N. H. & H. R. R. ................500 Floyd L. Carlisle, of N. Y. Edison Co..............2,000 Leon R. Clausen, of J. I. Case ...........500 Charles A. Corliss, of Lament, Corliss & Co. .............. 1,000 Patrick E. Crowley, of N. Y. Central R. R. ................. 500 Arthur . Davis, of Aluminum Co. ................. 1,000 Frederick H. Ecker, of Metropolitan Life .................2,000 Marshall Field III.............2,000 Philip A. S. Franklin, of I. M. M. ............1,000 Artemus L. Gates, of N. Y. Trust Co.............5,000 Walter S. Gifford, of A. T. &. T .........1,000 George H. Howard, of United Corp............2,000 Arthur Curtiss James ............2,000 Percy H. Johnston, of Chemical Bank & Trust ........1,000 Cornelius F. Kelley, of Anaconda ..........2,000 Clarence H. Mackay ...........2,000 Jlenry C. McEldowney, Pittsburgh banker ........5,000 Charles E. Mitchell ................10,000 Frederick K. Morrow, of United Cigar. .............1,000 Thomas Nelson Perkins, of A. T. & T. .............500 Wm. C. Potter, of Guaranty Trust Co. .............10,000 Seward Prosser, of Bankers Trust Co. ..............10,000 Alfred P. Sloan Jr., of General Motors...............1,500 Matthew S. Sloan, of N. Y. Edison.........1,000 Walter C. Teagle, of Standard Oil of N. J. ...........2,000 O. P. Van Sweringen .............5,000 Albert H. Wiggin............. 8,500 Joseph Wilshire, president Standard Brands, Inc .........50,000 Daniel G. Wing, Boston banker ............2,000 Clarence M. Woolley. of American Radiator ......... 2,000

To much the same list of industrialists went similar allotments of bargain priced stock in Alleghany Corp. The public figures on the Alleghany list included, however, several not favored in the Standard Brands allotment:

Charles Francis Adams...........1,000 Newton D. Baker....... 2,000 Owen D. Young ........... 5,000

sbThe First National Bank of the late Morgan-friend George F. Baker made about $12,000,000 a year in the last decade.

sbThe Morgans and the Lamonts go to Harvard. But six Yalemen are in the firm.

/-A fair index for 1929 may be had from the proportions in which shares of Standard Brands and Alleghany Corp. were offered to the partners Corp.

Alleghany Corp. Standard Brands J. P. Morgan 40,000 28,750 Thomas W. Lament 18,000 20,000 Thomas Cochran 15,000 25,000 George Whitney 14,000 50,000 Charles Steele 14,000 5,000 P. C. Leffingwell 13,500 10,000 F. D. Bartow 11,500 11,000 A. M. Anderson 11,500 10,000 William Ewing 10,000 10,000 Harold Stanley 10,000 9,970 Junius S. Morgan Jr. 8,000 Edward Hopkinson Jr. 4,500 Henry S. Morgan 4,100 1,000 T. Newhall 4,000 F. T. Stotesbury 4,000 H. G. Lloyd 4,000 H. P. Davison 2,500 2,500 T. S. Lamont 2,500 2,000

sbIf there was any advantage in taking the date of Jan. 2 for the readjustment of the partnership, it was to carry on the tax credit on losses into 1933. But that advantage was eliminated by a new tax bill passed last year.

/- Borne out by the fact that the banking com munity in general and Secretary of the Treasury Mellon originally opposed the capital gains and losses section of the law.

This file is automatically generated by a robot program, so reader's discretion is required.