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J. P. Morgan in London and New York before 1914

Published online by Cambridge University Press:  11 May 2011

Leslie Hannah
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Abstract

Before 1914, London had a stock exchange that was larger and qualitatively more developed than New York's. Yet the London Stock Exchange has received a bad press from historians, while the New York Exchange has achieved star billing. This forensic reexamination of J. P. Morgan–a player in both markets–suggests that such a historiography is egregiously biased. Morgan's higher profi ts in New York derived partly from insider deals and partly from monopolistic exactions that U.S. protectionism facilitated but that proved more problematic in the U.K.'s open, competitive markets. Morgan's contributions to the impressive catch-up process by the New York Exchange are more plausibly viewed as successful emulation of European securities-market precedents on routine matters than of the allegedly path-breaking “information-signaling” innovations of more Panglossian accounts.

Type
Research Article
Information
Business History Review , Volume 85 , Issue 1 , Spring 2011 , pp. 113 - 150
Copyright
Copyright © The President and Fellows of Harvard College 2011

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References

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59 The market in 1899–1900 valued the constituent firms’ equity and bonds at $793 million, 17 percent above their asset value; after the merger they were valued (at average first year prices) at $1.133 billion, 94 percent above asset value (Bureau, Steel Industry, 20–21, 37, 170). The difference between the two suggests the capitalized value of expected future increased profits was $287 million. The value of the common stock then was $223m, implying that, absent these expectations, the common would have been worthless.

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63 The only steelmakers of remotely similar scale in Europe—Armstrong-Whitworth and Vickers in the U.K. and Krupp in Germany—had 1900 capitalizations in the $47–$67 million range.

64 Economist, 28 June 1902, 1007–8; Carosso, The Morgans, 497.

65 Economist, 1 Nov. 1902, 1674–75; Barker, Theodore C. and Robbins, Michael, A History of London Transport, vol. 2 (London, 1974), 70–74, 77–84. Morgan was wise (or lucky) to lose this contest: by 1907 Speyer had accumulated large losses on Underground Electric Railways.Google Scholar

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67 For recent judicial condemnation of a breach of trust by vendor directors in the (different) Olympia case, see the Economist, 7 Apr. 1900, 496. American businessmen at this time still spoke of the U.K., with some distaste, as an exceptionally litigious society. The risk of judicial condemnation arose because there were already some signs of British corporate law veering to a principles-based (and the U.S. to a rules-based) regime.

68 Economist, 3 May 1902, 690, 10 May 1902, 733, 17 May 1902, 778; Statist, 3 May 1902, 893. Such contemporary opinion implies that financial economists, anachronistically using modern shareholder protection checklists to conclude that all countries then had equal (very low) shareholder protections, may be missing something.

69 In 1900 the largest European quoted industrial, J. & P. Coats, had a market capitalization of $120 million, though some railways, banks, and the Suez Canal were larger.

70 Ellerman left the largest-ever British fortune in 1933 ($179 million, or $161 million adjusted to 1914 prices by the S & P 500 common stock index). Morgan left $68 million in 1914.

71 Later, IMM obtained a listing on the less fussy Liverpool Stock Exchange.

72 The White Star line was sold to the Royal Mail shipping group in 1927, which itself was liquidated five years later.

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79 Abe De Jong, Steven Ongena, and Marieka van der Poel, “The International Diversification of Banks and the Value of Their Cross-Border M&A Advice,” CEPR Discussion Paper, no. 7735, Mar. 2010; J. Bradford De Long, “Stockholder Gains from Focusing versus Diversifying Mergers,” Journal of Financial Economics 59 (2001): 221–52.CrossRefGoogle Scholar

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85 Ibid., 218–19. Clapham points out that even well-advertised and underwritten issues could cost only $125,000: 2.5 percent on a $5 million issue, but much more on smaller issues (though for them expenses could be kept to only a few thousand).

86 Marc Flandreau, Norbert Gaillard, and Sebastian Nieto-Parra, “The End of Gatekeeping: Underwriters and the Quality of Sovereign Bond Markets, 1815–2007,” Centre Emile Bernheim working paper 10/017, Solvay, Brussels, July 2009. Despite the generally competitive nature of London financial services, there was higher (NYSE-style) concentration in this specialist market: two merchant banks (Rothschild and Baring) and one British joint-stock bank (Hongkong & Shanghai) underwrote nearly two-thirds of London's overseas government bond issues.

87 Ziegler, Sixth Great Power, 199–200.

88 Boyce, Gordon and Ville, Simon, The Development of Modern Business (Houndmills, 2002), 106CrossRefGoogle Scholar. The favored contemporary term for the alleged problem was “water:” capital which could not be adequately remunerated and whose market price would thus fall below par. Armstrong, John, “Hooley and the Bovril Company,” Business History 28 (Jan. 1986): 31, suggests it was about a third of Hooley issues. The post-issue stock prices of U.S. Steel suggest a similar amount of overcapitalization in that Morgan issue. The logic of comparing a rogue in one market with a paragon in another is also unclear.CrossRefGoogle Scholar

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92 Rutterford, Janette, “The Merchant Banker, the Broker and the Company Chairman,” Accounting, Business and Financial History 16 (Mar. 2006): 45–68CrossRefGoogle Scholar; Ziegler, Sixth Great Power, 288; Harvey, Charles, The Rio Tinto Company, 1873–1954 (Penzance, 1981), 107. O'Hagan (Leaves) is largely silent about his fees, and his few disclosures, ranging from 2.5 percent for Stanhope Main Colliery (a small company formation without underwriting) to 12.5 percent for Plymouth Breweries (in which he bought several companies outright, merged them and distributed all securities), are for very different services. Scott Lings, the Manchester promoter, charged only 2.5 percent for the complex negotiation of a multifirm merger and $22 million IPO, in which the vendors (unwisely as it turned out) eschewed underwriting (Macrosty, Trust Movement, 162).Google Scholar

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94 Franks, Julian, Mayer, Colin, and Rossi, Stefano, “Ownership: Evolution and Regulation,” Review of Financial Studies 22, no. 10 (2009): 4009–56. The London offices of some north American firms like the Canadian Pacific, the Pennsylvania Railroad and Kodak, did, however, manage to reduce the psychological distance and costs.CrossRefGoogle Scholar

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96 Ibid., 210.

97 Ramirez (“Did J. P. Morgan's Men,” 669) points out that, after allowing for leverage, the correct figure for De Long's population is a 14 percent outperformance. Both calculations are compromised by biased sampling (see note 101 below). Using a different research strategy—assessing the effects of Morgan directors' sudden resignation from many corporate boards in response to public criticism in 1914—dash;M. S. Simon (“The Rise and Fall of Bank Control in the United States, 1890–1939,” American Economic Review 88 [Dec. 1998]: 1077–93) suggests outperformance of 6 to 7 percent. Such low figures raise stronger questions about the net benefit of high intermediation fees.

The logic of evaluating an equal-weighted rate of return for only fifteen Morgan stocks over various years within the period 1895–1913, against the size-weighted NYSE index for the different 1890–1914 period is obscure. Even if the arrays of component annual returns were identical, this test would pronounce them different. Moreover some of the investor returns he calculates were only available to insiders or syndicate members. For example, he calculates the stockholder return on International Harvester from 1902 (when it was formed as an unquoted company) not from 1908 (when it was first listed on the NYSE and available to public investors).

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99 Ratios of market value to book assets were calculated for 2 January 1900 from stock prices in the Stock Exchange Daily Official List and balance sheets in the Guildhall Library collection. The control group was a random sample of thirty other London-listed firms. The top issuers “outperformed” the control group by 12 percent. I included all securities in the numerator, so these figures are comparable to Ramirez's leverage-corrected Morgan outperformance figure of 14 percent.

100 For parallel cases today see Rüdiger Fahlenbrach, Angie Low, and René M. Stulz, “The Dark Side of Outside Directors: Do They Quit When They Are Most Needed?” NBER Working Paper no. 15917, Apr. 2010.

101 Author's calculations from Audit Company, Directory of Directors in the City of New York (New York, 1899)Google Scholar, and Anon., The Financiers of Philadelphia: A Practical Directory of Directors (Philadelphia, 1900) for 1899/1900 directorshipsGoogle Scholar. De Long states his population is twenty companies that the Pujo Committee identified as having Morgan directors in 1913. In fact, it is a nonrandom sample of such firms (Pujo Committee, Report, Washington, D.C., 1913, exhibits 197 and 1011). He suggests that “satisfactory data” were “unavailable” for two firms. For one acknowledged omission—Pere Marquette—its common stocks were near worthless and Morgan's involvement resulted from his buying it in 1905 without due diligence (Hungerford, Edward, Men of Erie [New York, 1946], 220). The omission of banks with Morgan directors also biases the results: they had a slightly worse market-to-par ratio than the nearest size-matched pairs in the same cities (author's calculation from data in Commercial and Financial Chronicle Bank and Quotation Section 94 [Jan. 1912]: 60, 62).Google Scholar

102 De Long, “Did J. P. Morgan's Men,” 210; Carosso, Investment Banking, 112.

103 Miwa, Yoshiro and Ramseyer, Mark, The Fable of the Keiretsu: Urban Legends of the Japanese (Chicago, 2006)CrossRefGoogle Scholar; and Fohlin, Caroline, Finance Capitalism and Germany's Rise to Industrial Power (New York, 2006).Google Scholar

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105 Bunting, Rise, 155–56. U.S. “backwardness” in this respect was in industrials, not utilities and banks, where institutions like the Interstate Commerce Commission and the Comptroller of Currency did at least as good a job of accounting regulation as the general British disclosure laws, sector-specific regulation and LSE listing rules.

106 Schisgall, Oscar, Eyes on Tomorrow: The Evolution of Procter & Gamble (Chicago, 1981), 51.Google Scholar

107 Historical American company accounts are now available on line at www.il.proquest. com.

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109 Moody, Analyses. Post-1909 editions extended the system to many more bonds and stocks.

110 For example, the Bureau of Corporations (Steel Industry, 16), in its careful forensic accounting assessment of the constituents of U.S. Steel, noted that Morgan's flagship Federal Steel promotion was not as overcapitalized as the four steel companies promoted by Moore.

111 Dealing costs were also relatively high in New York, prompting some American millionaires like Rockefeller to buy NYSE seats (and others to trade U.S. stocks over the counter, on the rival New York Consolidated Exchange or in London) purely to avoid them.

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113 Author's calculations from the lists in Payne, Peter L., “The Emergence of the LargeScale Company in Great Britain, 1870–1914,” Economic History Review, 2nd ser., 20 (1967): 539–40; and Bunting, Rise, 163–64. Twelve percent of the British firms were provincially listed but these were also traded by LSE brokers. In the U.S., by contrast, many large American companies were unlisted or only listed on Philadelphia, Boston, Pittsburgh, Chicago, Baltimore, London and/or the (still informal) New York curb.CrossRefGoogle Scholar

114 Davis and Cull, International Financial Markets, 63. It is sometimes forgotten by those who cite the classic article in this journal by Navin, T. R. and Sears, M. V., “The Rise of a Market for Industrial Securities, 1887–1902,” Business History Review 24 (June 1955): 105– 38, that it describes a market developing later than European equivalents, that remained half empty. Michie (London and New York Stock Exchanges, 230) estimates that the share of the NYSE in U.S. corporate securities declined from 60 percent in 1902 to 45 percent by 1914.CrossRefGoogle Scholar

115 Lamoreaux, Naomi, Levenstein, Margaret, and Sokoloff, Kenneth, “Financing Innovation in the Second Industrial Revolution: Cleveland, Ohio, 1870–1920,” in Financing Innovation in the United States, 1870 to Present, ed. Lamoreaux, Naomi, Sokoloff, Kenneth, and Janeway, W. H. (New York, 2007).CrossRefGoogle Scholar

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118 In 1913, the Paris Bourse and the NYSE were the same size (Cassis, Capitals, 106), at a time when French real GDP was about a third of the United States'. The five hundred investment analysts who then worked in the research department of the Crédit Lyonnais were arguably the largest and most technically competent team of “information signalers” in the world.

119 This is not to deny the extensive literature (Rousseau, Paul L. and Wachtel, Peter, “What Is Happening to the Impact of Financial Deepening on Economic Growth?” Economic Inquiry 49 [Jan. 2011]: 276–88) showing positive, if weakening, correlations between stock exchange development and growth. However, a general model of stock exchange development that fits Rwanda in 2000 but not the U.S. in 1900 may benefit from further elaboration.CrossRefGoogle Scholar

120 However, U.S. costs of financial intermediation (7 percent for IPOs) have remained stubbornly above Europe's (4 percent) (Mark Abrahamson, Tim Jenkinson, and Howard Jones, “Why Don't U.S. Issuers Demand European Fees for IPOs?” Oxford Saïd Business School Working Paper, Nov. 2009).