Warning: this is really long, but at the end you will find out who is behind the Federal Reserve system.
Last week on Methods of Prosperity, Andrew Carnegie was a prominent American industrialist and philanthropist in the late 19th and early 20th centuries. He was born in Scotland in 1835 and immigrated to the United States with his family in 1848. Carnegie started his career as a bobbin boy in a cotton factory and eventually became a successful entrepreneur in the steel industry. He built Carnegie Steel Corporation into one of the largest and most profitable companies in the world. Carnegie believed in the concept of wealth redistribution and donated a significant portion of his fortune to various educational, cultural, and scientific initiatives. His philanthropic efforts included the establishment of public libraries, universities, and research centers. Andrew Carnegie’s life and achievements serve as an inspiration for entrepreneurs and philanthropists alike.
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The following is Methods of Prosperity newsletter number 12. It was originally deployed September 7, 2023. As of May 16, 2024, original subscribers have received up to issue number 48 (Sam Walton, continued).
Part 12: John Pierpont Morgan
TL;DR
In the early 20th century, the American steel industry was transformed by the actions of two key figures: Andrew Carnegie, a leading industrialist, and J.P. Morgan, a powerful banker. In 1901, Morgan saw an opportunity to consolidate the burgeoning steel industry under one umbrella, thereby increasing profits by reducing competition. Carnegie, seeking to retire and focus on philanthropy, sold his Carnegie Steel Corporation to Morgan. This deal led to the creation of the United States Steel Corporation, which, with a capitalization of $1.4 billion, controlled 60% of the steel production, marking Morgan as a dominant force in the industry. This merger not only reshaped the steel industry by reducing competition and increasing prices but also allowed Carnegie to dedicate his wealth to philanthropic efforts, notably in education and science.
J.P. Morgan was born in 1837 into a wealthy family and was groomed for a career in finance. He became a significant player in the banking world, contributing to the stabilization of the American financial market and the financing of railroads. Morgan’s acquisition of Carnegie Steel for $493 million (equivalent to over $15 billion today) illustrated the dramatic decrease in the purchasing power of money over time. He was instrumental in significant financial dealings, including the bailout of the U.S. economy during the Panic of 1893 and playing a critical role in the financial stabilization during the Panic of 1907. Morgan’s efforts in consolidating industries and stabilizing the economy foreshadowed modern regulatory and financial structures, including the establishment of the Federal Reserve System. He passed away in 1913, leaving behind a legacy of financial innovation and philanthropy.
Key lessons:
The bigger your company gets, the bigger a threat you are.
Owning a yacht is a great way to make more deals.
Master the art of letting others get your way.
Make them come to you for financial help.
Delayed gratification is a superpower.
Your reputation precedes you.
In the early 20th century, a momentous event unfolded in the American steel industry, forever changing its landscape. At the heart of this tale were two titans of their respective fields: Andrew Carnegie, the celebrated industrialist, and J.P. Morgan, the formidable banker.
It was the year 1901 when J.P. Morgan, an influential figure in American finance, set his sights on the booming steel industry. He recognized the potential for immense power and wealth that lay within its grasp. The steel industry was undergoing a remarkable expansion, surpassing even the once-dominant British production. Morgan discerned an opportunity to consolidate this growing industry, reducing competition and increasing profits.
Meanwhile, Andrew Carnegie, the renowned entrepreneur, had amassed a vast empire with his Carnegie Steel Corporation. Having started as a humble bobbin boy in a cotton factory, he had risen to the pinnacle of success in the steel industry. Yet, Carnegie’s ambitions extended beyond mere financial prosperity. He yearned to devote his energies to philanthropy, to leave a legacy of profound significance.
Thus, the gears of fate began to turn. Carnegie, driven by his desire to retire from the relentless world of business, made the monumental decision to sell his steel company. His vision was to redirect his considerable wealth towards noble causes that could transform society for the better.
And so it came to pass that Carnegie’s Carnegie Steel Corporation merged with nine other prominent steel companies, skillfully orchestrated by J.P. Morgan. The result was the creation of an unparalleled behemoth, the United States Steel Corporation, with a staggering capitalization of $1.4 billion. This new entity stood as a symbol of Morgan’s ambition and domination. With this merger, Morgan achieved control over 60% of the entire steel industry, becoming the unrivaled kingpin of steel production.
Under Morgan’s leadership, the United States Steel Corporation flourished, employing a staggering 168,000 workers. The consolidation of the steel industry brought forth a new era, one marked by increased prices, profits, and the curtailing of competition. It was a decisive move that would forever reshape the course of the steel industry, firmly placing it under the control of this formidable financier.
For Carnegie, this merger was not merely an avenue to relinquish his business interests; it was a transition towards a life dedicated to the greater good. His philanthropic endeavors would soon take center stage as he channeled his vast wealth towards educational, cultural, and scientific initiatives. His legacy would be etched in the founding of public libraries, universities, and research centers, leaving an indelible mark on society.
JP Morgan acquired Carnegie Steel for $493 million in 1901. In our modern era, the equivalent buying power would be exactly $15,449,254,237.76, which means purchasing power has declined more than 30 times. In other words, what you could buy with $493 million in 1901 would cost you over $15 billion in 2023. Your dollar has decreased in purchasing power by an average of 2.8% every year since 1901.
John Pierpont Morgan was born on April 17, 1837, in Hartford, Connecticut. He was the son of Junius Spencer Morgan, a wealthy financier, and Juliet Pierpont. Morgan was educated in Boston and later attended the University of Goettingen in Germany. His formal schooling in the USA and Europe prepared him for a career in finance.
As a child, he suffered from illness which kept him isolated, but this gave him time to learn how to play solitaire. In a sense, that may have reinforced something in his personality. He seemed to possess a natural inclination towards delayed gratification. This is a psychological trait which is present in the personalities of many wealthy people. JP Morgan would later play solitaire as he patiently waited for business partners to come around to his way. More on that later.
Morgan was groomed by his father to take over the family’s financial business. He began his financial career as an accountant with the New York banking firm of Duncan, Sherman & Company, which was the American representative of his father’s London firm.
A huge fan of Napoleon Bonaparte, there’s evidence to conclude that he admired Napoleon’s leadership and tactical skills as these traits align with Morgan’s own business acumen. Morgan became an avid art collector, acquiring pieces from antiquity to masterpieces from artists like Rembrandt, Rubens, and Raphael.
In the early 1860s, he gained the confidence to launch his own company, J. Pierpont Morgan & Co. after he purchased a shipload of coffee in New Orleans in 1861 and sold it to local merchants in New York at a profit. He was starting to take calculated risks, against his father’s risk-averse guidance.
Suddenly, war broke out. It was a common practice among wealthy men during the Civil War to hire a substitute soldier, as patriotism could be bought for hard cash. J.P. Morgan paid $300. This was the legally allowed fee to purchase a substitute soldier and evade military service. His efforts were more useful as a banker, as he would be needed to rescue the United States from financial ruin in the future.
His first wife, Amelia Sturges, also known as Mimi, died from tuberculosis a few months after their wedding in 1861. John Pierpont Morgan’s second wife was Frances Louisa Tracy, whom he married in 1865. They had four children together.
Behind every wealthy man is sometimes a wife, but usually it’s another wealthy man. JPM’s father, Junius Spencer Morgan, had a close relationship with Anthony Joseph Drexel. Drexel was a respected banker with a strong network of contacts. He had been in the banking business for over 20 years and had a good reputation on Wall Street. Drexel also had experience in financing railroads, which was a major industry at the time. By comparison, the tech industry of today has transformed the way people live and work, and has provided a vehicle for many billionaires. The railroad industry was subject to government regulation due to its monopoly power, and the tech industry faces similar scrutiny today. For example, on September 6, 2023, Google reached a settlement in a long-running antitrust case. Other large tech companies including Apple and Amazon have been hit with a series of antitrust lawsuits by the U.S. federal government and states on charges they are operating monopolies and abusing their power. We can thank captains of industry like Rockefeller, Carnegie, and JP Morgan for starting this American tradition.
In 1871, J.P. Morgan partnered with Philadelphia banker Anthony Drexel to form Drexel, Morgan & Co., a private merchant banking house in New York City. The partnership initially served as an agent for Europeans investing in the United States. Over the next generation, the partnership assumed the leading role in financing America’s railroads, as well as stabilizing and revitalizing Wall Street’s chaotic securities markets. The firm created a national capital market for industrial companies, a market that had previously existed only for railroads and canals. Two years after Drexel’s death in 1893, Drexel, Morgan & Co. was renamed J.P. Morgan & Co., one of the original predecessors of what is today JPMorgan Chase.
One of the biggest deals Morgan made was with the son of Cornelius Vanderbilt in 1879. In 1879, William Henry Vanderbilt approached Morgan about the possible sale of 250,000 shares of the New York Central Railroad. This was a significant financial transaction. At the time, it was the largest block of stock ever publicly offered. Vanderbilt was known to have encouraged speculators to sell the company short, driving down the price, and then buy all the stock available so short sellers could not obtain shares to cover their short position. Morgan was able to find buyers for the shares and managed to close the transaction without lowering the share price. The deal established Morgan’s reputation as an expert railroad financier and mobilizer of capital. JP Morgan made sure the sale put him on the New York Central board of directors.
A very wealthy man at this point, J.P. Morgan acquired his first yacht in 1881. The yacht was a 185-foot steam sailor named Corsair. If we learn one thing from J.P. Morgan, it’s the value of owning a yacht for the purpose of making more deals. Morgan had persistence, and an uncanny ability to wait for business partners to come around to his way, especially if they had no choice. In 1893 J.P. Morgan invited the presidents of the New York Central Railroad and the Pennsylvania Railroad aboard the Corsair to end the rate wars between the two railroads. He kept the yacht at sea until the men negotiated. The rate wars had been going on for years, and they were costing both railroads money. Morgan argued that the wars were also hurting the American economy by discouraging investment. He convinced the presidents of the two railroads to agree to stop competing with each other and to divide up the territory they served. Known as The Corsair Pact, it was a major victory for Morgan, and it helped to solidify his position as the most powerful banker in the United States. It also helped to stabilize the American economy and to pave the way for the further consolidation of the railroad industry.
On May 3, 1893, a massive sell-off sent share prices tumbling across the board. The slowdown in railroad expansion, deflation dating back to the Civil War, and an unstable world economy led to a run on the banks. The following day, the National Cordage Company, a near-monopoly of American rope makers and a stock-market favorite, went into receivership, and the day after that, the market crashed even more drastically. As stocks fell, people exchanged greenbacks for gold, and the U.S. Treasury became unable to give people gold in exchange for currency, which compounded the crisis, as the treasury was required by the Sherman Silver Purchase Act to provide silver or gold in exchange for these. Over 500 banks in the nation failed over the course of the panic. The Panic of 1893 has been traced to many causes, but one thing was certain: J.P. Morgan was rich, and someone had to bail out America.
At 58 years old, his net worth was $4 million. U.S. gold reserves were less than sufficient to cover liabilities. Without gold, the U.S. dollar was worthless. Remember, this was before the dollar became a full-on fiat currency backed by nothing but faith in the military industrial complex that it is today. The U.S. was in danger of defaulting beyond recovery in 1894. J.P. Morgan offered a deal to U.S. president Cleveland to rescue America from financial catastrophe. Cleveland wanted to do what the U.S. had always done before: sell bonds directly to the public. Only Congress could borrow money, and Cleveland didn’t like the idea of a bail out from one man. Nevertheless, Morgan insisted on meeting with Cleveland.
In 1895, J.P. Morgan saved America from default by using an obscure coin loophole that allowed him and some fellow international financiers to replenish the Treasury’s gold stocks. The loophole was an obscure, Civil War-era statute that authorized Treasury Secretary Salmon P. Chase to issue bonds that could be offered for coin. If the gold bailout Morgan was proposing could be considered a bailout in coin, it would not require Congressional approval. Attorney General Olney investigated and gave it the okay, and the country was saved. Morgan co-signed for the U.S. debt, and the economy took off, which allowed him to potentially make millions more than he paid.
J.P. Morgan bought Carnegie Steel in March 1901. In November 1901, J.P. Morgan formed the Northern Securities Company, along with railroad owner James J. Hill, E.H. Harriman, and their associates. The purpose of the company was to acquire stock in two railroads, the Northern Pacific and the Great Northern, and other associated lines. The company was capitalized at $400 million, and Hill served as president. The formation of the Northern Securities Company was seen as a threat to competition and was challenged by the federal government, which filed an antitrust lawsuit against the company in 1902. The Sherman Antitrust Act of 1890 is a United States antitrust law that was passed by Congress and is named for Senator John Sherman, its principal author. The act banned businesses from colluding or merging to form a monopoly and prevented these groups from dictating, controlling, and manipulating prices in a particular market. In 1904, the U.S. Supreme Court ruled that the federal government had the right to break up the Northern Securities Company. The ruling was a significant victory for the government and established the principle that the federal government had the power to regulate monopolies. The Northern Securities Company was dissolved by the U.S. government in 1904.
Then, another financial crisis struck America. In mid-October of 1907, the New York Stock Exchange fell almost 50% from its peak the previous year. The panic occurred during a time of economic recession, and there were numerous runs on banks and on trust companies. U.S. President Theodore Roosevelt needed help. Morgan was one of the most powerful financiers in the country at the time and had a reputation for being able to stabilize financial markets. Roosevelt asked Morgan to help organize collective action to rescue institutions and generally convey confidence back into the market. Morgan convened a meeting of leading financiers at his mansion on 34th Street, and together they worked to stabilize the financial system. To persuade these financiers to buy out the failing trusts who triggered the crisis, his tactic of holding his audience captive once again controlled the situation.
According to the legend, he locked these decision makers in his library while he played solitaire. Eventually, they came around to his way, signing a contract to fund a pool of $25 million in order to save the U.S. economy.
Eventually, the U.S. installed the Federal Reserve system. In 1910, an investment associate of J.P. Morgan, Nelson W. Aldrich and Henry P. Davison, senior partner of the J.P. Morgan Co., and Benjamin Strong, head of J.P. Morgan’s trust, along with Assistant Secretary of the Treasury, A. Piatt Andrew, and Paul Warburg, partner in the New York banking house of Kuhn, Loeb & Co. as well as president of the National City Bank of New York, Frank A. Vanderlip, secretly designed the new financial system. Prior to 1913, Morgan was the one-man central bank. He died March 31, 1913 in Rome. He was 75 years old. His son Jack took over the family business.
Stay tuned for next week, where we will meet the founder of a famous international banking dynasty that you’ve heard of.
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–Sean Allen Fenn
