Worldly Philosophers Club

The Worldly Philosophers, Vol.1, Number 22	November 11, 2007
THE Worldly Philosophers Club For Individualists Who Seek Worldly Wisdom

Archives

About the Editor

J.P Morgan

J.P. MORGAN & THE PANIC OF 1907: LESSONS ONE HUNDRED YEARS LATER
By Mark Skousen

In this issue . . . -

	The story of America’s premier private banker and the Panic of 1907
	The two most important virtues of the wise financier
	What should a businessman do with his wealth when he dies?
	Why it pays to be bullish on America

"Remember, my son, that any man who is a bear on the future of this country will go broke."
-- J. P. Morgan

Dear Worldly Philosopher,

A few weeks ago, Alex Green, chairman of Investment U and a long-time friend, joined me here in New York to celebrate my birthday. Since my birthday falls on October 19, the day the stock market crashed in 1987, our conversation naturally turned to the subject of crashes and panics.

In fact, it was only a few months ago -- in August of this year -- that the world’s financial markets were headed toward a classic crash due to the mortgage credit collapse here in the United States. Fortunately, the Federal Reserve and other central banks intervened by cutting interest rates and injecting much needed liquidity to keep it from happening.

Twenty years ago, on the eve of the 1987 crash, I gave a paper at an economics conference on the subject, "Who Predicted the 1929 crash?" Maybe doing research for this paper made me start thinking about stock market crashes, and encouraged me to issue an all-out "sell signal" six weeks before the 1987 crash.

I pointed out to Alex that 2007 marks the anniversary of another great crash: the Panic of 1907. (There must be something crazy about years that end in 7.)

The atmosphere was eerily similar to many of the circumstances today. A Republican moralist was in the White House. The economy was booming, but a credit crunch had developed. A year earlier a natural disaster struck the nation.

No, I’m not talking about George W. Bush or Hurricane Katrina. In 1907, the President was Theodore Roosevelt, who railed against the big corporations. And the natural disaster was the San Francisco earthquake and fires. The American economy was growing at a remarkable 7% growth rate, yet when the third largest bank, Kickerbocker Trust, collapsed and a major stock, United Copper, crashed, panic spread rapidly on Wall Street. This confirms my main thesis in my new book, Investing in One Lesson, that Wall Street isn’t Main Street, and the economy and the stock market are two different animals.

America did not have a central bank in 1907 to prevent a stock market crash, nor did it have federal deposit insurance to protect citizens from bank panics.

The Courageous J. P. Morgan

But they did have the indomitable J. P. Morgan, the private central banker. When the stock market crashed in October, 1907, threatening the collapse of virtually every commercial bank, the seventy-year-old Jupiter went into action. Despite suffering from a bad cold, he summoned the Secretary of the Treasury to New York and demanded that the U. S. Treasury transfer several tons of gold and silver and bales of paper money to make available to major banks. Then he ordered all the New York bankers and trust officers to meet privately behind closed doors at his famous library decorated by art works he had collected from around the world. When they arrived, he locked the doors and wouldn’t let them out until they had agreed to make emergency loans to troubled banks. After hours of negotiation, the lock jam was broken, and Wall Street and the country were saved from financial disaster.

In honor of J. P. Morgan’s heroics, Alex and I paid tribute to this king of finance by visiting the newly refurbished J. P. Morgan Library in mid-town Manhattan. (We would have liked to have visited his famous downtown offices at 23 Wall Street, but they have been converted to condominiums following the unfortunate sale by J. P. Morgan & Co., which moved their headquarters uptown in the late 1990s.) If you come to New York, the Morgan Library a must see tourist attraction. In addition to his private library and greeting room, you’ll see some remarkable paintings, sculptures, and original manuscripts and letters by authors, playwrights, and composers, such as Mark Twain, Charles Dickens ("A Christmas Carol"), and Beethoven.

I’ve always admired this imperial wizard. Critics like Marxist writer Matthew Josephson called him a "robber baron," a wrong-headed label. He didn’t just live off his father’s largess, but made his father proud by financing railroads, oil, and steel and transforming America into the world’s leading economy by the late 19th century. In 1901, symbolizing entrance into the 20th century, he financed U. S. Steel Corp., the first billion dollar IPO, with Andrew Carnegie.

But Pierpont wasn’t simply a greedy self-interested businessman. He was both religious and patriotic. He twice saved the U. S. Treasury from the gold drains and near bankruptcy in the 1890s, and as noted served as quasi-central banker in restoring order during the Panic of 1907. He was deeply committed to good causes through his Episcopal Church. He helped establish the Metropolitan Museum of Art in New York City, and donated many of his art works to the museum.

Morgan’s Character

Morgan enjoyed money and power, but character and trust were essential. He was once asked by a reporter, "Is not commercial credit based primarily upon money or property?"

"No sir," replied Morgan. "The first thing is character."

"Before money or property?"

"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."

In his later years, Morgan took extensive vacations to Europe to collect art and meet with European financiers. He smoked over a dozen Cuban cigars a day, and still lived to the ripe age of 76. He died in 1913, almost in time to see the creation of the Federal Reserve. (The J. P. Morgan of the 1929 crash is actually his son Jack, who looked much like his father, except for the elder’s grotesque purple nose!).

The Story of the Bull and the Bear

Pierpont Morgan was always an optimist about America. Whenever I hear a doomsdayer speak badly about the future of this great country, I tell him the story of J. P. Morgan, the bull on Wall Street, and a Chicago commodity trader, who was always bearish on the stock market. They corresponded over the years, always arguing about the direction of the markets. Finally, Morgan invited his friend to visit New York City for the first time around the turn of the century. They met at Morgan’s offices at 23 Wall Street, across the stock exchange, and immediately started arguing about the stock market. As usual, the commodity trader was bearish and Morgan was bullish. Finally, they postponed their argument and decided to go out to lunch.

As the two walked up Fifth Avenue, the commodity trader commented on the beauty and magnificent of the skyscrapers in New York. "I’ve never seen anything like these buildings in Chicago," he said with admiration.

At that point, J. P. Morgan stopped the man and said, "You know, it’s a funny thing about these New York skyscrapers……Not a single one was built by a bear!"

Good living, AEIOU,

Mark

P. S. Join us next year for FreedomFest, the private conference for worldly philosophers: www.freedomfest.com, or call Tami Holland at 1-866-266-5101: 8 themes, 88 speakers, and more than 888 attendees. July 9-12, 2008, at Bally's/Paris Resort. 7-11 in Las Vegas!