ALEXANDRIA, VA (July 30, 1999) -- "Aqua pura," pure water, is the label financial journalists promptly stuck to the stock of newly formed U.S. Steel in 1901. The investor-syndicate led by J. P. Morgan (the man himself) paid an unheard of 12 times annual earnings for Carnegie Steel in joining it to two other recently merged steel companies. People wondered aloud and in print if the then-largest company in the world would ever earn enough to pay a dividend to stockholders.
I leave my fellow Fools to their own devices interpreting this historical morsel with the assurance that it is but one of many fascinating facts proffered for readers to mull in Jean Strouse's beautifully rendered, richly textured new biography of John Pierpont Morgan -- perhaps the quintessential Rule Breaker.
In the 70 years following Morgan's death in 1913, two conflicting images of the redoubtable financier -- hero of economic progress versus icon of capitalist greed -- had been established from extant biographies (authored in one case by his favorite son-in-law) and narrative whims of writers such as John Dos Passos.
Those in the "icon of capitalist greed" camp were aided in their narrative endeavors by Morgan's own physiognomy -- piercing eyes, a bulbous nose, a florid complexion, and an abrupt manner. For all that seemed to be known of Morgan, his private life, his business deals, and his collection of art and manuscripts (he owned three Guttenberg bibles), literal vaults of personal papers remained untouched for decades at the J. P. Morgan library.
Jean Strouse, displaying some Morgan-like determination of her own, spent 15 years poring over uncataloged archives that included the diaries of his wife and daughters, surviving personal letters, and mountains of business records in her attempt to transform the caricature-like biographical renderings of Morgan into a magnificently wrought full-life, full-size portrait.
She succeeds with her book Morgan, American Financier.
Morgan is a work that takes into account family history (his ne'er do well maternal uncle, James Pierpont, penned the classic Yuletide carol "Jingle Bells"), his internationally itinerant boyhood, an emotionally neglectful mother, an early marriage and subsequent loss of his first wife, a remote and demanding (but ultimately respectful and proud) father, and cycles of his own depression (and how he and those around him coped with those periods).
The book also covers his professional career as he presided over some of the most important transformations in American business and finance coming into the 20th century: attracting European capital to cash-poor post-Civil War America for investment in both the U.S. government as well as private business; establishing quarterly reporting of financial results on a volunteer basis as simply good business; shepherding along a transformation from primarily debt-based investing to equity-based investing (creating the instrument of preferred stock in the process).
Perhaps most significantly, Strouse's biography grapples with the incredibly complex issue of the double-edged nature of Morgan's grand, high-minded vision the two sides of which correspond to the competing images of Morgan in popular culture: rapacious financier versus hero of American industry.
Asked by Samuel Unterneyer, counsel to the Pujo Committee (part of the House Banking and Currency Committee investigations), why he had amalgamated large corporations, Morgan replied:
"If it is good business for the interests of the country to do it, I do it."
"But Mr. Morgan," objected [Samuel] Untermeyer, "is not a man likely, quite subconsciously to imagine that things are for the interests of the country when they are good business?"
"No, sir," said Morgan.
Untermeyer: "You think that you are able to justly and impartially differentiate where your own interests are concerned, just as clearly as though you had no interest at stake, do you?"
Morgan: "Exactly, sir."
Untermeyer: "And you are acting on that assumption all the time, are you not?"
Morgan: "I always do, sir."
Untermeyer: "Of course, there is a possibility of your judgment being mistaken, is there not?"
Morgan gave a disarming reply: "Oh, I may be wrong in my judgment, but I do not think it lies in that direction."
Morgan's security in his own judgment left him bewildered and tongue-tied in attempts to satisfy questioning of his basic premises. This disconnect is brought into context most forcefully by Strouse's retelling of the Pujo Committee hearings near the end of his life in 1912.
Through the at times farcical transcript of the hearings, though, emerges a sort of clarity that points to the enduring nature of the issues then under investigation: concentrations of power and money and essentially who gets to decide what's best for the product-buying, farming, railroad-riding, small-business owning, telephone-talking, computer-using, Internet-browsing, broker-bypassing, individual-investor citizens of the United States.
Testimony during the Pujo hearings revealed to the public that two-thirds of the gross national product (GNP) was then controlled by 18 financial institutions. In today's terms, two-thirds of the GNP would be roughly $5 trillion.
On the question of free market competition versus monopoly concentration, Untermeyer suggested: "You are opposed to competition, are you not?"
Morgan declined the suggestion: "No. I do not mind competition...."
Untermeyer pressed: "You are an advocate of combination and cooperation, as againstcompetition, are you not?"
Morgan chose the less incendiary word: "Yes: cooperation I should favor."
"Combination as against competition?"
"I do not object to competition, either," Morgan said. "I like a little competition."
Then [Morgan] asked if he might continue for a moment on a "sensitive" subject which he really did not "want to talk of... This is probably the only chance I will have to speak of it."
"Certainly," Untermeyer nodded. "You mean the subject of combination and concentration?"
"Yes." Perhaps thinking of the consolidations that had failed, and the competitive pressures that had given rise to the trusts, Morgan went on: "The question of control. Without you have control, you cannot do anything."
Untermeyer did not understand. "Unless you have got control, you cannot do what?"
"Unless you have got actual control, you cannot control anything," Morgan enigmatically repeated.
Untermeyer: "Well, I guess that is right. Is that the reason you want to control everything?"
Morgan: "I want to control nothing...."
Strouse makes the point quite well that Morgan never saw himself as wanting to control anything, only as wanting to do the right thing to create value and as being duty-bound to do all in his power to carry forward the creation of value -- for shareholders as well as in the national interest. A great part of his work he did by aligning interests: for example encouraging (if, indeed, at times leveraged encouragement) the U.S. government not to retreat from a gold-backed currency once it had been re-instituted after the Civil War because to do so would disappoint European investors who would withdraw their highly desirable capital and redeploy it in more secure investment vehicles.
Throughout his career, the securities Morgan was involved in increased in value merely from his association because of his demonstrated willingness to stand by companies and see them through (often frequent in the case of the railroads) financial hardships. The element that financial journalists of 1901 failed to factor into their "aqua pura" valuation of U.S. Steel was the human one -- J. P. Morgan being the particular human being in that case. It is the human factor that underlies the migration of corporate valuations from book value to multiples of annual earnings and beyond.
In his day, Morgan worked to leverage all the human ability at his disposal and under his influence to create value for the United States and, in particular, for the companies he backed. (That is, of course, not to gloss over his own wealth, but when he died and the extent of his personal fortune of $80 million was reported in the news, Rockefeller is said to have said: "And to think, he wasn't even a rich man.")
In creating value for himself as well as his fellow shareholders, Morgan showed glimpses of what human beings can do in cooperation. The market that knew and trusted Morgan as a great man and a good investor allowed him to create securities valued at 12 times annual earnings. What ultimately mattered then and matters now is not what is printed in the financial media, but rather what individual investors know and believe about where they choose to put their money.
Jean Strouse's biography of Morgan provides a wonderful history of a magnificently fascinating career as well as an invitation to ponder the value of the voluntary cooperation and combination of thousands and thousands of individual investors who also happen to be the product-buying, farming, railroad-riding, small-business owning, telephone-talking, computer-using, Internet-browsing, broker-bypassing, individual-investor citizens of the United States.
For her remarkable achievement in writing Morgan, we are delighted to present Jean Strouse with the July 1999 Motley Fool Jester Award.