Ye Cannot Serve Both God and Morgan
Ron Chernow depicts the American financier’s apotheosis and his decline. These days, our economy serves markets, neither God nor Morgan.
Review by Will Bryant
Last year I graduated college and started a job, which means I also started saving for retirement. It turns out these savings don’t sit under a mattress somewhere. My employer has hired a financial services company to invest them on my behalf. So there is an asset manager out there somewhere, unknown to me, who controls some of my money. I wonder: who is this person? Who is in charge of my money?
To get some answers, I picked up Ron Chernow’s 1992 history of the J.P. Morgan banking dynasty, The House of Morgan. Thirty-five audiobook hours later, I arrived at the frustrating conclusion: no one really is in charge, not anymore, not an asset manager nor anyone else. Tycoons like John Pierpont once ruled, but in the past century they lost power to expanding financial markets. Along the way, Chernow entertains with surgical archival work, accessible economic history, and the amount of biographical detail I deserved, not the amount I needed.
J.P. Morgan began as the venture of an American expat living in London named George Peabody, a “homely” man who died without an heir. In order to secure his bank’s future, Peabody brought on the well-heeled Junius Spencer Morgan as a partner in 1854. After securing early profits from Union war bonds during the Civil War, Junius passed the bank to his son John Pierpont upon his death in 1890.
The following two decades saw the zenith of Morgan’s power. Railroad technology had matured and industrialists were hungry for the capital necessary to build across America. The house of Morgan offered a crucial service to these industrialists by connecting them to investors who could provide capital. For railroads, this was usually accomplished by issuing securities; that is, tradeable financial assets like stocks and bonds. Morgan would issue stock for a new railroad company, which allowed many small investors to own a share of the company’s future profits, in exchange for the upfront cash that capitalized the railroad. (In today’s lingo this is called an initial public offering or “IPO.”) The bank would set the initial price of the stock, circulate it on the New York Stock Exchange, and take a fee from the rail company for their services. In this era, they also received a hefty portion of shares at a discounted price to keep for the bank. As the industry ballooned and stock prices rose, the strategy became very profitable.
Morgan’s power came from their total control of the relationship between investor and company. Partners at the bank acted on behalf of companies to attract investment and set stock prices, and they acted on behalf of investors by sitting on corporate boards and disciplining company management to ensure that investors received their return. It was in these capacities that Pierpont earned his reputation as a taxing negotiator and his bank earned its reputation for patrician refinement. To attract wealth, the banking business lived on the social mores of the transatlantic American elite, and in this respect the house of Morgan excelled. Competition of the kind imagined in Econ 101 was strictly forbidden. Banks courted clients with the graces of a suitor, and once a client was won, loyalty (read: monopoly) was the rule. It was a serious faux-pas to abandon one’s bank for another offering more competitive financing terms. The house of Morgan earned its power in the Gilded Age because it arbitraged the market entrance of new technologies (most notably rail, but also steel, shipping, electric power, and other heavy industries), and it defended its right to police this lucrative border of the capital markets on the basis of its sterling reputation.
A house so divided could not stand against the rising financial stars of the 20th century.
After Pierpont’s flying heights in the Gilded Age, the house of Morgan never recovered the same power. Arbitrage opportunities disappeared as capital markets matured, and the bank lost its shine. The 1933 Glass-Steagall Act mandated that commercial banks, which hold deposits and issue loans, separate from investment banks, which issue securities. Morgan had both functions and elected to remain a commercial banker, spinning off its investment banking division as Morgan Stanley.
A house so divided could not stand against the rising financial stars of the 20th century. After the second world war, company balance sheets ballooned and executives realized they needn’t pay bankers for financing they could provide in-house. Morgan’s blue-chip reputation slowly lost ground to cutthroat competition between banks. There were now many investment banks, and comparatively few companies in need of IPOs or other financings.
Chernow casts “the traders” as the upstart foes of his patrician Morgans. As capital markets matured in the digital era, computers replaced bankers as the go-between for investors and companies. The market discipline once meted personally by Pierpont to rail operators was now provided by nameless thousands of stock traders sitting at their Bloomberg terminals. Pension funds, endowments, and other institutional investors no longer desired the cachet that came with a bank like Morgan’s. Instead, they sought competitive returns in volatile digital markets.
This transition meant that power shifted away from individuals. Today’s money managers cannot bully their way to profitability with cigar in hand, as Pierpont and other tycoons once did. They are subject to the behavior of financial markets. They are price-takers, not price-makers.
Since the Great Recession, some investors have turned their backs on public markets in an effort to reassert an industrialist’s control. These so-called “alternative investments” include a variety of private equity strategies and, more recently and mysteriously, private credit. By avoiding scrutiny from the traders who set securities prices, investors can take greater risks, manage their portfolio companies more aggressively, and—in theory—earn a greater return than in the oversaturated public markets.
But as their names suggest, these are private investments and therefore inaccessible to my newborn retirement account. (Only pension plans, insurers, sovereign wealth funds, and other institutional investors can take advantage of alternative strategies.) So, none of these developments are particularly encouraging for my own retirement prospects. The turn towards private capital suggests that the same institutions that once allowed me—and the broader investing public—to make a competitive return now prevent industrialists from exercising the kind of managerial power that can generate such a return. Regulated exchanges and quarterly reporting, for all their aspirations towards democracy and the wisdom of crowds, may in fact hamstring investment. Knowledge in society, as Hayek put it, may not be so useful after all.
Who, then, is in charge of my money? Chernow answers: no one, not anymore, not in the public markets. Cooler (and better-capitalized) heads have reallocated to private strategies, whose returns are higher and the extent of whose risks are unknown. Wall Street continues to innovate, hopefully not, this time around, at the expense of Main Street and their retirement accounts.
Will Bryant lives in Washington, DC, and works in clean energy policy. He graduated from Dartmouth College, where he studied Religion and Quantitative Social Science, in 2024.
The House of Morgan was published by Grove Press in 1990. You can purchase your own copy here.
