Constitutional Law, Politics, Society

J.P. Morgan And The Reverse Bailout That Saved The U.S.

Submitted by Mark Esposito, Guest Blogger

Author’s note: Another in a series of obscure American history viginettes.

Bush’s multi-trillion dollar bailout was nothing new in American history; the money just flowed in a different direction. In America, where the banking monarchy has long memories and keeps ledger books going back centuries, it was just repayment of a debt incurred before the turn of the last century to a new generation of our financial princes.

Things were getting desperate for President Grover Cleveland in the early months of 1895. The U.S. economy was collapsing under the burden of falling prices and rising unemployment that began with the Panic of 1893. Now eighteen months later, millions were unemployed. Without a central banking system and a currency backed by gold, the Treasury’s reserves were dropping too.  Normally, the Treasury held gold reserves comfortably above the statutory floor of $100 million. By January 24, 1895, the Treasury has only $68 million. Scarcely a week later was it down $45 million.

Nervous investors began to demand gold for their dollars and a run on the Treasury was inevitable. The proposed plan to subsidize the gold standard with silver reserves only made creditors more anxious and the run accelerated.  For his part, Cleveland tried to avert the disaster. With his Treasury Secretary, John Carlisle, Cleveland had proposed a plan to sell government bonds to the public to raise $60 million. The rapid run on the Treasury made than tedious process unworkable. The concern at the White House grew when Carlisle confidentially advised the President that the Treasury had gold reserves of $9 million, and that one single investor held a draft ostensibly worth $10 million. Insolvency o f the government was inevitable unless a source of funding could be found – indeed a bailout of the U.S. government was the only hope.

Enter Wall Street financial baron John Pierpont Morgan. Son and grandson of Wall Street bankers, Morgan may have been the most repulsive man on the Street.  Suffering from a visage marked by chronic rosacea, Morgan avoided the public eye which only added to his reputation as a secretive, voracious gobbler of railroads and other businesses.  Morgan was the original Wall Street shark, swooping in to grab an unsuspecting company and then retreating into the murky waters of finance leaving only the remnants of his presence. Using his financial power to extract concessions from major U.S. companies, he insinuated himself onto scores of managing boards by exchanging forgiveness of debt for seats.  He used the knowledge derived therefrom to grow his steel trust into America’s first billion dollar business.

Morgan was keenly aware of the Government’s plight, and like all captains of industry saw both danger and opportunity.  His financial empire founded on commercial railroad service needed a stable and growing economy. An imploding government was contrary to those needs, and Morgan understood that what was good for the U.S. Treasury was also good for business — his business.

Grover Cleveland well-knew Morgan’s reputation, and avoided his offers of help as long as he could. Finding no alternate, Cleveland reluctantly agreed to see him only when reports of Morgan’s trip to Washington eased the run on the Treasury. Perhaps Cleveland could use the banker’s prestige but avoid using his money to save the Country. No such luck.

Sitting before an anxious President, his Treasury Secretary, and Attorney General Richard Olney, Morgan was once again presiding over a meeting of another board of directors.  To Morgan, the issues were the same – how to save a failing business and avoid disaster for the investors. The President protested that a private bailout wasn’t truly necessary and that he expected an upturn in the economy would save the day. Morgan drolly replied. “If that $10 million draft is presented, [and] you can’t meet it, it will be all over before three o’clock.” Shocked that someone other than the President’s inner circle knew the truth, Cleveland listened. Morgan proposed an immediate private sale of government bonds to Morgan and his syndicate. In exchange, Morgan would give the Treasury the gold it needed ($100 million) to meet its current and anticipated obligations. The President asked if it was legal, and Morgan nonchalantly replied, it was by virtue of a Civil War statute, “four thousand and something.” Olney checked and it was all quite legal – but politically dangerous for the President. The public was none too fond of Wall Street types and Morgan the biggest “type” of them all. Still things were desperate and Morgan assured the President that gold would not be shipped abroad until the goal of the plan was reached. Cleveland said that $60 million would be fine, trying to save some dignity from the situation.

Morgan was as good as his word and the bonds were sold and gold filled the Treasury. The run stopped and, as Cleveland predicted, the economy stabilized.  Morgan had co-signed for the U.S. debt and like a happy teen with a new car, the economy took off.  Morgan now stood to make millions more than he paid.

 The political price Cleveland anticipated  had to be paid. Many on the left contended the President “sold” the government to Wall Street. When Morgan refused to reveal his profits on the deal, the party grew more enraged. At the Democratic Convention the party rallied to William Jennings Bryan who delivered the famous line that mankind was being crucified on a “cross of gold.” He would lose the next three elections.

Morgan would go on to bailout both the New York City Stock Exchange and the City of New York  in the coming decades, but neither would win him public approval. Indeed, President Teddy Roosevelt centered his “trust busting” canpaign on the insidious network of interlocking boards of directors that created the monopolies which Morgan epitomized. Still, there is no denying that Morgan saved the nation when no one else stepped forward. Whether he did so out of patriotism, profit , or some combination is debatable, but the fact that he did is not.

Source: HistoryNet.com (adapted from H.W. Brands, Upside Down Bailout)

~Mark Esposito, Guest Blogger

36 thoughts on “J.P. Morgan And The Reverse Bailout That Saved The U.S.”

  2. Midas Mulligan
    1, February 7, 2011 at 1:16 pm
    And a gold standard is what we should be on now. That way government cant devalue our money.

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    You can thank Nixon for that move.

  3. Buckeye,

    I know I read somewhere the other day that one of these tycoons had a huge safe in his mansion … I tried to find the info again but can’t remember where it was or who the tycoon was … that’s the problem with clicking on links within an article and then erasing the browsing history.

  4. Blouise

    I read that, too. They must have had big safes in those days! And better security than can be found today. 🙂

  5. And a gold standard is what we should be on now. That way government cant devalue our money.

  6. Buckeye,

    Your question intrigued me so I went hunting … so far this is what I found:

    “In 1895, at the depths of the Panic of 1893, the Federal Treasury was nearly out of gold. President Grover Cleveland arranged for Morgan to create a private syndicate on Wall Street to supply the U.S. Treasury with $65 million in gold, half of which came from Europe, ”

    … he raised the other half here at home from those within the private syndicate. These people were big on gold to the point that Morgan supported William McKinley, who was elected in 1896 and reelected in 1900 on a gold standard platform.

  7. Fascinating! Thanks, Mespo.

    Just a couple of questions. Where and how did he get the gold in the first place? How was it stored and who guarded it? Fascinating.

  8. Blouise,
    I haven’t heard that comment in many years as well. You do realize that I am roting for the Steelers as the lesser of two evils, don’t you?
    Buddha,
    I forgot about all that recent “good” work by Morgan!

  10. rafflaw,

    Up your nose with a garden hose! (Haven’t used that one since I was 8 years old.) 👿

  11. mespo727272
    1, February 6, 2011 at 12:00 pm
    Thanks, Blouise. I enjoyed the story, too. I am still working on my Second Amendment installment. Darn litigation gets in the way.

    As for your “Go Packers,” comment, I heartily agree. I just added the warm “place” I’d like them to go to. 🙂

    ============================================================

    Isn’t it ridiculous how earning a living impedes one’s leisurely pursuit of fun?

    As for your misplaced loyalty and Pittsburgh … I have decided to look at it this way: it is said that a woman/man, in order to be considered truly beautiful/handsome, must have a flaw … Pittsburgh is your flaw …… 8)

  12. Anonymously Yours
    1, February 6, 2011 at 11:50 am
    Blouise,

    Your problem with the Packers could be solved if you would just write it in pencil….erase the middle of the P and the top of the A…then you have it correct…lol…

    =========================================================

    You can not be a Steeler’s fan! Steeler’s fans are crybabies and philistines … we are going to have to have a serious talk about this.

  13. Mespo,
    Great article. Was the $10 million dollar draft owned by Morgan?
    I guess the US government “owed” Wall Street a bailout this time!
    By the way, the Steelers have to win today because us Bears fans couldn’t survive knowing the Packers were World Champs!

  14. Thanks, Blouise. I enjoyed the story, too. I am still working on my Second Amendment installment. Darn litigation gets in the way.

    As for your “Go Packers,” comment, I heartily agree. I just added the warm “place” I’d like them to go to. 😀

  15. Blouise,

    Your problem with the Packers could be solved if you would just write it in pencil….erase the middle of the P and the top of the A…then you have it correct…lol…

  16. … when I say the Panic of 1893 brought Cleveland down I should have been clearer … it brought his party down.

  17. Wonderful article and not something routinely taught in the classroom.

    When I checked the ranking of President polls I find Grover Cleveland firmly ensconced in the second quartile with John Adams and Lyndon Johnson though his highest ranking came from the poll done in 2005 by … wait for it … yes, the Wall Street Journal.

    Cleveland was the leader of the pro-business Democrats who opposed high tariffs, free silver, inflation, imperialism and subsidies to business, farmers or veterans. He was an icon for American conservatives. The Panic of 1893 (based largely on a Railroad bubble)brought Cleveland down. The result was a political realignment that launched the Progressive Era.

    A personal side note … the house I live in was supposed to have been built in 1893 but due to the economic situation at the time, the farmer who built the house decided to wait until 1896 when things were better. Do I thank Mr. Morgan for the roof over my head?

    Thanks, mespo, really great read!

    (Go Packers!)

  19. Good post John. It’s always interesting to hear pieces of history that don’t make it into mainstream public discourse.

    Thanks for the post.

  20. He was responsible for the destruction the railroads, the building of the railroad….the destruction of the Roosevelt’s family fortunes….the Vanderbilt s profited greatly from this era as well….

    I understand that Chase had a vault at his home in Florida that was larger than any bank vault he controlled in New York….I suppose it helps to have been the Secretary of the Treasury….even if only for a little while….

    Thanks for the story kind sir…

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