John Pierpont Morgan on Trust

In the aftermath of the Panic of 1907 and its powerful impact on the national economy, a special U.S. congressional subcommittee was formed in 1912 to investigate the “money trust.” Headed by lead attorney Samuel Untermyer, the Pujo Committee seek to reveal the true power and network vested among Wall Street bankers, especially within the House of Morgan.

Known as America’s de facto central banker, it is no accident that J.P. Morgan was born in 1837, the year after the “hard money” Andrew Jackson famously killed the Second Bank of the United States. It is also no accident that Morgan died in 1913, the year the Federal Reserve was born. From his brilliant feats of concentration (Morgan worked only a few hours a day) to his coolness under fire (Morgan had to obtain an 11th hour anti-trust waiver from Teddy Roosevelt to acquire Tennessee Iron & Coal in order to halt the Panic of 1907), Morgan relied on his reputation and trust network to get things done. The Pujo Report ultimately revealed the extent of Morgan’s influence: the House of Morgan controlled over $22 billion in resources and capitalization through 341 directorships in 112 corporations (equivalent to 60% of U.S. GDP in 1912, or nearly $9 trillion in today’s dollars). The following exchange between Samuel Untermyer and John Pierpont Morgan is now forever immortalized in the financial annals.

Mr. Untermyer. Is not commercial credit based primarily upon money or property?

Mr. Morgan. No, sir; the first thing is character.

Mr. Untermyer. Before money or property?

Mr. Morgan. Before money or anything else. Money cannot buy it … Because a man I do not trust could not get money from me on all the bonds in Christendom.

Today, trust is a commodity that has been lost in the financial industry. Beginning in the early 1980s and culminating in the birth of the junk bond market, the derivatives market, and now algorithmic trading, the Rothschilds and Lazards days of personal relationships have degenerated into a series of empty transactions. We are pushed into a multitude of products by banks and funds alike for the sake of higher fees; and we no longer know our personal banker.

The Panic of 1907 began as a liquidity crisis among trust companies, ultimately morphing into a crisis of confidence. Similar to the late 2007 to early 2009 financial crisis, the Panic of 1907 traced its roots to the explosion of a “shadow banking system” (i.e. the trust companies) outside the purview and protection of the New York Clearing House. By early 1907, New York trust companies held almost as much assets as New York banks (source: Atlanta Fed), with much of it “invested” in illiquid real estate or as margin loans for speculative purposes. During a typical bank run, the New York Clearing House would step in and issue “Clearing House Certificates” to panicky depositors. This was not the case with trust companies. Once a run developed, here was no effective system to stop its spread. Only the reputation and resources of J.P. Morgan were able to bail out the trust companies and the New York Stock Exchange.

We continue to believe that the U.S. financial system (and society) overall is evolving into one where personal trust and relationships are of paramount importance. At CB Capital, trust has always been of paramount importance–but going forward, power will no longer be derived from financial capital or intelligence, but from trust alone. Or as J.P. Morgan would put it: Character.

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