The Panic of 1893: Boosting Bankers' Money and Power: Legendary Finance Mogul J.P. Morgan, One of the Original Proponents of Public-Private Partnerships, Promoted Central Banking and Laid the Groundwork for the Federal Reserve

By Adelmann, Bob | The New American, April 18, 2011 | Go to article overview

The Panic of 1893: Boosting Bankers' Money and Power: Legendary Finance Mogul J.P. Morgan, One of the Original Proponents of Public-Private Partnerships, Promoted Central Banking and Laid the Groundwork for the Federal Reserve


Adelmann, Bob, The New American


Junius Morgan was, at best, a third-tier English banker in the 1850s, who was fortunate to have had a hand in a number of lucrative financings, mostly for industries seeking seasonal financing. His conservative nature was partly a cause of his lack of distinction. He'd inherited a substantial sum when his father died and was exceedingly careful when risking any part of it. One of the maxims Junius instilled into his son, John Pierpont Morgan, was, "Never under any circumstances do an action which could be called into question if known to the world."

The two first-tier international banking families were the Baring Brothers and the Rothschilds. Barings financed the Louisiana Purchase and the French indemnity payment after Napoleon's loss to the Duke of Wellington at Waterloo. So influential was Barings that the Duke of Richelieu commented: "There are six great powers in Europe: England, France, Prussia. Austria, Russia, and Baring Brothers." It enjoyed an exclusive list of clients: the governments of Russia, Norway, Austria, Chile, Argentina, Canada, Australia, and the United States.

The other pre-eminent international banking family, the Rothschilds, served as the agent bank for England, and was spreading its influence into countries not served by Barings.

It was a rarified world--one that Junius aspired to join. There was only so much he could accomplish on his own, with his relatively limited capital base, or as Ron Chernow, author of The House of Morgan, put it: "Only so much glory could be gained from trading Chinese tea or Peruvian guano or selling iron rails to Commodore Vanderbilt." He needed something outrageously profitable that would propel him into the top tier. His opportunity came in 1870. The French provisional government was seeking a loan of $50 million, but it was turned down by both the Rothschilds and Barings. Putting together a syndicate of other banks, Junius offered bonds to investors with a par value of $100 at $85, meaning the bonds were sold to investors at a discount. (It was like buying a $100 bill for $85, but you couldn't get the $ 100 bill for two years.) The 15-percent discount reflected not only the risk that the French might not be able to repay the loan, but gave investors an extraordinary opportunity for substantial profits if the French did repay it.

When the French did repay the loan by buying back the bonds at par in 1873, Junius was catapulted into the top tier. And it was this lesson of recognizing opportunity and seizing it that he inculcated into the mind of his son, John Pierpont.

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Pierpont, as he liked to be called, already had shown a flair for recognizing opportunity. During the Civil War, the U.S. federal government had 5,000 obsolete Halls carbines stored in an armory in New York, for which it had paid $3.50 apiece. An entrepreneur, Simon Stevens, saw an opportunity to refurbish the weapons and then sell them back to the government. Lacking the capital, he borrowed $20,000 from Pierpont for a share of any profits. Stevens "rifled" the smooth-bore carbines, thus improving their accuracy, and sold them to Major General John C. Fremont for $22 each. In a three-month period, the government bought back its own rifles at six times their original price. Pierpont pocketed $5,400 on the deal.

During the last 30 years of Junius' life (he died in 1890), he and his son worked closely together, despite being separated by the Atlantic Ocean. Junius would often travel to New York and stay with Pierpont for months at a time, while Pierpont would return the favor in the fall, staying in London with his father. In the meantime, they had a steady and fulsome communication by mail. And by the late 1880s, Pierpont knew an opportunity when he saw one.

The Panic of 1893

The "opportunity," referred to later by historians as the Panic of 1893, had its roots in Argentina. In the early 1890s, British investors became enamored over investment prospects in Argentina and began to invest heavily there with the encouragement of the Argentinean agent bank, Baring Brothers. …

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