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The House of Morgan: An American Banking Dynasty and the Rise of Modern Finance.

Ron Chernow's book describes the evolution of financial markets from the perspective of one of its most enduring institutions, "The House of Morgan." His approach is apt: in its early years, Morgan's played a major role in defining the nature of investment banking. More recently, government intervention and increased competition have led the bank to diversify into more speculative activities such as trading and hostile takeovers. The author exploits the interesting contrast between earlier years when banking, conducted under the "Gentleman Banker's Code," was governed by propriety and today's environment of hostile takeovers where the bank's loyalties are more transient and scandals are a common occurrence. The contrast between these eras is particularly evident with Morgan's because of J. P. Morgan's aversion to speculative ventures.

As one might imagine, the history of the House of Morgan involves many controversies. These revolve around issues such as the abuse of market power, war-time loyalties and ethics. The author deals with the controversies in an even-handed way. His in-depth character studies provide a motivation for the behavior of the people involved and permit the reader to draw his or her own judgments. The characterizations also lend continuity to the bank's story and provide a vivid means of understanding the evolution of the bank. Chernow has clearly devoted a lot of effort to understanding the people about whom he was writing. The larger-than-life characters involved in the bank are one of the features which make the book so enjoyable.

The Morgan investment bank was conceived in 1838 in London by George Peabody. In fact, the first Morgan, Junius, did not become a partner until 1854. His son, John Pierpont (J. P.), commenced operations in New York a few years later. He quickly established himself through his dealings with the railroad industry. Eventually, a good portion of his power derived from the variety of trusts over which he exercised control. J. P. emerges from the book as a gruff banker with a keen eye for profit. His sense of social responsibility was well-developed, if somewhat anachronistic: he opposed both socialism and competition and, through this philosophy, saw many of his actions as a service to society. The public, of course, took a dim view of his dealings. To the end, he was baffled at the public's mistrust. Nevertheless, he was respected by other businessmen for his integrity and honesty.

Pierpont died in 1913 and his son, John Pierpont, Jr. (Jack), succeeded him. Although Jack possessed many of his father's qualities and the bank thrived during his tenure, he never achieved the same stature as his father. Jack's sons entered the firm as well, but their role was diminished by the quantity and quality of management talent brought on during their father's term as well as the diminished role of the bank resulting from government intervention. As a result, the Morgan dynasty, as such, ended with Jack. The bank, of course, has maintained a significant role in financial markets. Nevertheless, it has never regained the stature it possessed under Pierpont.

Chernow breaks the history of the Morgan Bank into three eras. The first two, "The Baronial Age" (1838-1913) and "The Diplomatic Age" (1913-1948) relate the bank's evolution and describe its operation during its heyday. This period in the bank's history is marked by strict adherence to the "Gentleman Banker's Code": banks were very loyal to their customers who, in turn, would not search for another institution. This relationship was respected by other banks who would not attempt to steal one another's clients. This sense of responsibility connotes the air of integrity which personified the Morgan dynasty. Of course, the code also protected monopoly profits and led to a number of anti-trust investigations, culminating with the Glass-Steagall Act of 1933 (separating the underwriting and deposit-taking functions of banks).

The final era, which Chernow dubs "The Casino Age," describes the breakdown of "relationship banking" and the bank's evolution into other areas of financial services. While the first two sections of the book are valuable for their historical insights, this section is more timely in light of the numerous crises and calls for reforms in the financial sector.

As the name suggests, the author takes a dim view of the direction which banking has taken in the past several decades. He is particularly disturbed at the banks' role in promoting hostile takeovers, pointing out that this activity has often been counterproductive and places the firm in the position of representing one of its clients against another-the antithesis of relationship banking. He points, moreover, to the number of scandals in which the bank and its employees have been involved in recent years (e.g., the Guiness affair and incidents of insider trading). He bemoans the loss of integrity which was once the House of Morgan's trademark. In fact the author is much more critical of the recklessness of the Casino Age than of the anti-competitive practices of earlier eras.

This last section provides a nice addition to the academic writings on financial fragility (by Hyman Minsky, Benjamin Friedman, and many others) and Liar's Poker, Michael Lewis's personal account of life as a security salesman for Salomon Brothers.

The book's academic value is enhanced by Chernow's extensive documentation, his command of the subject, and his skill in describing events within the bank in the context of developments in the outside world. Cause and effect is evident throughout the entire book providing the reader with a new perspective on events in U. S. and world economic history. On the other hand, many incidents are related through anecdotes and other materials gleaned from personal memoirs. The reader looking for rigorous hypotheses tests and tables of statistics will not find them here. This mitigates the book's value as a reference to the evolution of modern banking, but it is, nevertheless, an excellent source of background and insights one might not find in a work intended for a more scholarly audience.

The book is quite long (720 pages), but the insights it provides and Chernow's writing style make it a good investment.
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Author:Bivin, David G.
Publication:Southern Economic Journal
Article Type:Book Review
Date:Jul 1, 1992
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