SOME OF THE WELL KNOWN COMPANIES TODAY STARTED AS TRUSTS AND J P. MORGAN FINANCED THEM
By Melvin J. Howard
Some of the well-known trusts of the period included the telephone monopoly named the American Telephone and Telegraph Company (AT&T) after 1889. The communications leviathan is normally associated with Alexander Graham Bell, the founder of the company, although it was run by Gardiner Greene Hubbard and later by Theodore Vail. The Edison Illuminating Company, founded by Thomas Edison but managed by several staff members including Samuel Insull, eventually became the General Electric Company. Tobacco came under a virtual monopoly when James Buchanan Duke integrated tobacco farming, processing, and distribution under the aegis of the American Tobacco Company. The ingenuity displayed by these entrepreneurs lay in their abilities to understand the structure and potential markets of their businesses. In the process of consolidation, much of their competition was either absorbed or driven out of business. In this respect, American business had not changed markedly since the period prior to the Civil War, but the stakes had become larger as the American market grew. But one important factor distinguished some of these enterprises. Some were more capital-intensive than others and needed more investment funds to support expansion, and when they did they attracted Wall Street financiers. That attraction would be central to American development in the late nineteenth century, there were no better examples than the General Electric Company and AT&T. Both Edison and Bell had quickly become American legends for their discoveries, but neither was particularly good at managing or expanding his business.
From the very beginning, both relied heavily on professional managers and outside financing. Neither man would become as wealthy as those who assisted them and put the deals together. Bell/AT&T entered an alliance syndicate of bankers headed by J. P. Morgan to provide fresh funding Bell himself was by then out of the picture. By 1881 he was divorced from Bell companies except for a small shareholding. Thomas Edison was a more active participant in his own course. For a short time he was a partner in Pope, Edison Company, an engineering firm that pursued patents and products such electric ticker tape, which helped revolutionize stock exchange reports. When the firm was bought out in 1870, Edison used his share of the its to open a laboratory in Menlo Park, New Jersey, so he could purchased inventions. Edison was helped big time by J. P. Morgan, who provided funds for an experimental power station located at Pearl Street, adjacent to the Wall Street district.
Morgan continued to support Edison and would be instrumental in forging the General Electric Company out of Edison’s original company. During this period of entrepreneurship and invention, modern investment projects requiring capital that investment bankers could pick and choose which ones they would support. But investment banking was still limited by the amounts of capital it could provide for new and established companies. Even the large banks such as Morgan, Kidder, Peabody, or Kuhn Loeb could not afford to provide all the capital their clients needed so they began to use syndicates more and more. New issues of stocks and bonds were now regularly being sold to groups of banks, which would then sell them to the public. The banker who constructed the deal in the first instance was known as the lead underwriter and became the manager of the deal. Whichever bank assumed this position was able to dictate to the company needing funds, as well as to the rest of Wall Street. For the fifty-year period between 1880 and 1930, that position indisputably belonged to Morgan and Company he headed until 1913 by Pierpont Morgan.
His Influence Spreads
The last two decades of the nineteenth century also were Wall Street’s first golden age. The number of listings on the stock exchange increased by leaps and bounds it just had its first million-share day in 1885. The investment banking syndicates became fixtures on Wall Street through which bankers would purchase large blocks of new securities from companies then sell them to investors. The power and influence of the investment bankers continued to grow. The influential houses such as Morgan, Kidder, Lehman Brothers gained in stature, and many became better known than their client companies. The well-known bankers became the thread holding together many of the various parts of American industry. But many were not content with being just intermediaries. They became active in trust creation and consolidating power in their own right. The dependence upon foreign capital was still very evident in the nineteenth century. The United States was still a debtor nation, more to foreigners than it earned from them. By the beginning 1890s, this dependence became particularly clear when foreign investors began to panic over the gold-silver debates that had been waged in the United States since the Special Resumption Act of 1879. In 1890 the Sherman legislation was passed, as the Sherman Silver Act of which required the Treasury to buy a specific amount of silver in each deal in order to maintain its price. This was Congress’s bowing to the western mining states. Silver was used mostly for coins and for backing silver certificates. However, many people saw little use for it, and much of it returned to Treasury vaults shortly after being placed in circulation. Politically, maintaining a silver policy smacked in the face to many of trying to please two masters backing two metals currency rather than one. The clear preference was for gold, but politics intervened on behalf of silver.
Unsure of the Americans’ devotion to gold as the single standard, which was the base for the dollar; foreign investors began to sell American securites en masse. They had read of the fiery, eloquent speeches of Y Jennings Bryan in favor of silver. Such populism only added to their insecurity, which in turn caused an outflow of gold from the country. With in a short time the panic of 1893 began, underscoring the Americans’ continued reliance upon foreign investors. But the usually reliable banks investors had become more wary of foreign investment. In 1890 the venerable Baring Brothers failed and had to be bailed out by other banks. The bank’s chairman had overextended the family-run firm buying an excessive amount of Argentinean and Uruguayan securities when both of these markets collapsed, Baring followed soon after.
Panic bode well for American securities in the long run but made British investors nervous about foreign investments in general. The gold reserve of the United States had fallen to low levels before revenue losses created by protective tariffs and increased bonus to war veterans. When the reserves fell below $100 million, previously considered an acceptable level, investors became uneasy and began selling securities. In February 1893 the NYSE witnessed its busiest day ever 1.5 million shares were traded and over $6 million worth of bond s sold. By April only about one-quarter of the money in circulation was backed by gold reserves. In May the NYSE index dropped to an all time low behind massive selling of securities, wiping out many traders in the process. Railroad stocks were particularly hard hit. As a result, President Cleveland asked Congress to repeal the Sherman Silver Act of 1893 in an attempt to shore up reserves and restore order in the financial system. Morgan's position in finance was central to the heart of corporate America.
Advising corporations had been good business for investment bankers since the early days of the railroads. But Morgan's influence spread to include trusts and holding companies. In this respect his bank had no peers, and his ability to be at the center of the financial universe earned him begrudging respect during his tenure at the helm of his bank, but he was more feared than considered a colleague by other financiers. His personal yachts, all somewhat arrogantly dubbed the Corsair, suggested to some critics that investment banking and brigandage were one and the same activity. His haughtiness and authoritarian nature became legendary, but he did win the confidence of the U.S. Treasury, a relationship that was to endure for decade’s and is still evident today. But in terms of stock trading, he always kept on the banking side of the street rather than the speculative side. He preferred to use brokers when necessary and did not consider himself one of their members. Morgan's influence on the creation of corporate America was as strong as that of many inventors and entrepreneurs that owned their own businesses. In the nineteenth and early twentieth centuries, he had a dominant position in railroads, life insurance, steel, and electricity, in addition to banking. Of all of his activities, his role in the formation of the U.S. Steel Corporation and the General Electric Company were perhaps the largest feathers in his hat. In both cases, as in many others, all he brought to the table was financial advice. Thomas Edison and Andrew Carnegie had already laid the groundwork for these two companies. Edison's early enterprises had relied upon loans from Morgan since the time of the experimental power stations on Pearl Street. Morgan and his partners were also minority shareholders in Edison General Electric. The company remained relatively small until the 1880s, with sales remaining below a million dollars per year.
The light bulb was not to be the future of the electric industry. How it would be powered and where electrical power would originate were the more important issues that would turn the industry into a battleground. Electricity production was about to become a important issue in American politics that would last for the next fifty years. In the early 1880s, one of Edison's avid supporters was an erstwhile railroad baron. After the debacle in which he was forced into personal bankruptcy, he returned to his native Germany for six years before reemerging in New York in 1886. When he returned, he had financial support of several large German banks and was intent on forging a worldwide electrical cartel. One of his first targets was the Edison Company. But in order to capture it, he would need the blessing of Morgan. Edison himself was no longer interested in the business, he returned to tinkering and inventing. Villard and Morgan formed an alliance that effectively bought out Edison and the principals of Edison Electric, for several million dollars. Edison himself got $1.75 million, while the others received $1 million between them. One of those receiving a small amount was Edison's chief lieutenant, Samuel Insull, a young Briton, which helped the inventor organize the company. Insull went on to become a president and member of the board of the new company along with his son, while Villard became president. The money offered by Morgan and Villard was too much to resist, especially for the inventor. "Mr. Insul and Edison were afraid they might get into trouble for lack of money. . . . therefore they concluded it was better to be sure than to be sorry," Edison wrote.
Explains his reasons for accepting the offer. But Villard's fortunes were not to remain on the rise for long. The Edison General Electric Company prospered under Insul by cutting costs; he was able to trim the operation while increasing profits from year to year. It became the most profitable of the three major electrics companies, the others being the Westinghouse Company under General Westinghouse and the Thompson-Houston Electric Company. Westinghouse was the smaller of the two competitors, possessing an alternative product (alternating current rather than the direct current of Edison what proved to be a nasty battle between Edison and Westinghouse. The companies set out to prove that its respective product was the safer for electrical voltage. One of the products of that campaign was the introduction of the electric chair as a means of execution, adding a macabre sub-plot.
Explains his reasons for accepting the offer. But Villard's fortunes were not to remain on the rise for long. The Edison General Electric Company prospered under Insul by cutting costs; he was able to trim the operation while increasing profits from year to year. It became the most profitable of the three major electrics companies, the others being the Westinghouse Company under General Westinghouse and the Thompson-Houston Electric Company. Westinghouse was the smaller of the two competitors, possessing an alternative product (alternating current rather than the direct current of Edison what proved to be a nasty battle between Edison and Westinghouse. The companies set out to prove that its respective product was the safer for electrical voltage. One of the products of that campaign was the introduction of the electric chair as a means of execution, adding a macabre sub-plot.
A corporate battle between two innovative companies. However, Westinghouse had better engineering skills than Edison Electric, and a merger would be out of the question. So Villard arranged a merger whereby Edison would take over the larger Thompson-Houston. Morgan had ideas of his own, however. Arranging a counter deal v. the executives of Thompson-Houston, Morgan turned Villard's deal on its head. There is no doubt that Morgan was at the center of America’s early industrial expansion. So it is today that JP. Morgan has been the go to guy for the US Government for a very long time. Will that relationship last in today's climate I don't know. He did bail out the Government with little or no profit coming to him. But I don't think he was doing it out of the goodness of his heart it was in his best interest because if one industry went down it could take all the rest with it including his. Hey does that sound familiar did history repeat itself it most certainly did.
