Sunday, January 23, 2011

The House of Morgan, by Ron Chernow -- a review

In The House of Morgan, Ron Chernow provides a readable and thorough history of the Morgan bank and its successors from its founding by George Peabody and, shortly thereafter, Junius Morgan up until 1990, which was the time of the book's writing. Mr. Chernow used the most powerful of the great, historic Wall Street and global banks as a microcosm of the world of American finance over a period of more than a century.

Chernow divides the history of the House of Morgan into three periods. The "baronial age" extended from the 1830's until the death of J. Pierpont Morgan in 1913. During the latter part of this era, in which the United States did not have a national bank, the House of Morgan had far more financial power than the relatively small federal government. Indeed, attempts to respond to financial panics in the latter 19th and early 20th centuries were led by the Morgan bank, which alone had the resources to provide such leadership. Such power engendered considerable popular hostility toward the banks.

That relative power began to shift with the beginning of the "diplomatic age," which extended until 1948. Woodrow Wilson's progressive policies, including the creation of the Federal Reserve, extended federal power, and the policies of Franklin Roosevelt, including the passage of the Glass Steagall Act and the creation of the SEC, further eroded the power of private banks. Indeed, Glass Steagall forced the breakup of the House of Morgan into separate entities. While the power of private banks was reduced, they continued to play a central role, particularly during the 1920's, when cooperation between the federal government and the banks played a key role in U.S. diplomatic efforts. During this era, Jack Morgan was the key family figure at the bank, though others such as Tom Lamont played a more critical role in the direction of the bank.

The "casino age" extended from 1948 to 1989. As federal regulation continued to make it increasingly difficult for banks to make profits, financial institutions have engaged in ever increasing risk taking in order to maintain revenue streams and profitability. In the process, they have turned the idea of genteel relationships between gentlemen bankers and their clients into an anachronism.

Mr. Chernow relied heavily on the private papers of key figures in the history of the House of Morgan, and he conducted extensive interviews of many of those still living in putting together this thoroughly researched tome. He effectively captures the personalities and eccentricities of many of these key figures. Some interesting themes emerge. There is considerable discussion of the anti-semitism that reigned in the world of finance through World War II, which resulted in a separation of financial institutions along ethnic lines. Mr. Chernow also shows some surprise in the ease with which "conservative" financial institutions accepted much of government's increased role (though, of course, not the Roosevelt reforms). This perhaps is the result of the author's failure to appreciate the differences between small government conservatism and the type of conservatism that serves to protect large, existing institutions. The discussion of how global financial concerns caused many Morgan leaders, including those with liberal views such as Tom Lamont, to cozy up to dictators such as Mussolini is also of interest.

Most interesting however, is the long term effects of regulation on the banking industry, a theme that permeates the book. To say that increased regulation has engendered greater risk taking does not delegitimize all such regulation, though it should be a consideration in evaluating it. In addition, one might note that even up until this day, leaders in finance demand a considerable amount of deference to their expertise and independence on financial issues. A reading of this book might cause one to question if, given the history of questionable, even reckless, decision making, such deference has been earned.

In discussing the problems faced by banking institutions in the latter years covered by the book, Mr. Chernow gives little attention to the role of U.S. inflationary policy during the late 1960's and early 70's, and this seems to this reviewer to be a significant oversight. In addition, it is unfortunate that the book was written prior to a number of key financial events -- the merger between Morgan and Chase banks, the full repeal of Glass Steagall by the Gramm Leach Bliley Act in 1999, and, of course, the Great Recession of 2008-2009. While the current edition contains a brief new forward written in 2010, it has not been otherwise updated. While one recognizes that such updating would be a major project in itself, it would be warranted.

I strongly recommend this book.

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