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In 1860, he became the American agent for his father’s firm and made his first fortune on commissions for selling US bonds in Europe during the Civil War. Like many upper-class Americans, Morgan avoided service in the Civil War by paying three hundred dollars for a substitute. Later he inherited his father’s firm and formed his own partnerships, first Dabney, Morgan & Co. and then Drexel, Morgan and Co. He formed a syndicate that successfully challenged Jay Cooke’s monopoly of government finance.

Morgan’s eminence grew in 1879, when he sold British investors 150,000 shares of the New York Central Railroad that William H. Vanderbilt, Cornelius’s son, wanted to divest himself of in order to diversify his holdings. By holding the proxies of the British investors, Morgan got a place on the New York Central’s board and a foothold in the railroad industry. With Vanderbilt’s approval, Morgan sought to end a war between the New York Central and the Pennsylvania Railroad by persuading their directors to work out a truce aboard his yacht on the Hudson River. Morgan frequently invited quarreling railroad chiefs to settle their differences at his dinner table, in his library, or on his yacht, named the
Corsair
, in keeping with his piratical reputation.

Morgan transferred the technique of consolidation from the railroad industry to other industries. Morgan created General Electric, American Telegraph and Telephone (AT&T), the Pullman Company, National Biscuit (Nabisco), and International Harvester. Morgan’s most famous consolidation was the 1901 merger that produced US Steel, the world’s first billion-dollar company. He paid $480 million for Carnegie Steel, making Carnegie the richest person in the world. The initial capitalization of US Steel—a billion dollars—was twice the US federal budget.

The process by which the House of Morgan acquired, consolidated, and reorganized railroads and other companies and controlled them by placing Morgan partners on their boards of directors came to be known as “Morganization.” Morganization was popular with shareholders and entrepreneurs who believed that Morgan’s reputation helped the companies attract investment. Charles S. Mellen, the president of the New York, New Haven and Hartford Railroad, declared, “I wear the Morgan collar, and I am proud of it.”
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When a railroad executive spoke about his railroad, Morgan exploded: “
Your
railroad? Your railroad belongs to my clients.”

By 1900, Morgan and his partners had a place on the boards of directors of companies that accounted for over a quarter of the wealth of the United States. Did Morganization produce criminal monopolies or efficient firms that benefited from technological and commercial economies of scale? The historian of business Alfred D. Chandler Jr. noted that many of the largest US firms in industries such as petroleum, transportation equipment, rubber, chemicals, and food products were the same in 1973 as in 1917. These market-dominating “center firms” tended to be more capital-intensive and technologically advanced than small, labor-intensive “peripheral firms” in the same industry. Chandler found a similar pattern among the center firms of Britain, Germany, France, and Japan, which suggests that the formation of large manufacturing corporations in the second industrial era could only be explained in terms of efficiency, not local conspiracies against the public good. Building on Chandler’s work, Thomas K. McCraw concluded that these international comparisons discredit polemical accounts of the rise of nefarious “trusts.”
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The economist Bradford DeLong has concluded that Morganization did produce value for its beneficiaries.
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HOW J. P. MORGAN BAILED OUT THE UNITED STATES

Morgan was so powerful that it was necessary for him to intervene to help rescue the federal government from financial crises in 1895 and 1907. In 1895, after the Panic of 1893 had caused a depletion of the US Treasury’s gold reserves, Morgan visited Democratic president Grover Cleveland in the White House and promised help. On returning to New York, he locked a number of leading financiers in the ornately decorated library of his lavish mansion and refused to allow them to leave until they had agreed to contribute money to a syndicate that would bail out the federal government by supplying the Treasury with gold in return for federal bonds. The plan worked, but outrage among populist Democrats contributed to the party’s nomination of William Jennings Bryan in 1896 and 1900, when Morgan and other American financiers and industrialists, mobilized by Mark Hanna, contributed record-breaking sums of money to defeat Bryan and elect McKinley twice.

Again in 1907, Morgan was reluctantly called upon by President Theodore Roosevelt to help avert a financial crisis. On the evening of Thursday, October 24, 1907, most of the leading bankers in New York were summoned to Morgan’s library. Morgan ordered them to figure out a way to restore public confidence in the banks, then retired to his office to play solitaire. The plan the bankers worked out was to allow banks to settle their accounts among themselves in New York Clearing House notes, freeing them to lend out their clearing-house balances in the form of cash to depositors. The system had been used successfully in earlier panics. In addition, Morgan raised $13 million in call money for the stock exchange, while John D. Rockefeller contributed $10 million to the national banks in addition to $10 million from the US Treasury.

Shocked by the dependence of the federal government on the private power of the House of Morgan in 1895 and 1907, Congress decided to create an American central bank. On December 1913, eight months after J. P. Morgan died in Rome, President Woodrow Wilson signed the Federal Reserve Act into law. The legislation was based on a 1912 report by the National Monetary Commission, headed by the powerful chair of the Senate Finance Committee, Rhode Island senator Nelson W. Aldrich. Several members of the commission—Aldrich, Paul M. Warburg, Henry P. Davison, Frank A. Vanderlip, A. Piatt Andrew, and Benjamin Strong, a vice president at Bankers Trust, who later became the highly capable first governor of the New York Federal Reserve—had secretly traveled to the Millionaire’s Club at Jekyll Island, Georgia. They told journalists they were going duck hunting, and Davison and Vanderlip in the earshot of train personnel and other passengers called each other Orville and Wilbur.

The Aldrich plan that emerged from these discussions combined a central board of private bankers with regional reserve banks. The Democratic majority in Congress reduced the influence of private bankers by adding a presidentially appointed governing board in Washington. At the insistence of southerners and westerners who feared the domination of central banking by the New York financial community, a decentralized system of regional Federal Reserve banks was created, in what ultimately proved to be the vain hope that this would limit the influence on the Federal Reserve of the New York financial community.

PROGRESSIVISM IN AMERICA

In response to the challenges posed by giant industrial corporations, some Americans advocated doing nothing at all. Herbert Spencer’s laissez-faire doctrine was championed in the United States by William Graham Sumner of Yale and Edward Livingston Youmans, the editor of
Popular Science Monthly
, founded in 1872. Asked by the champion of land reform, Henry George, what he would do about social problems, Youmans replied: “Nothing! You and I can do nothing at all. It’s all a matter of evolution. We can only wait for evolution. Perhaps in four or five thousand years evolution may have carried men beyond this state of things. But we can do nothing.”
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Other Americans were not willing to wait four or five thousand years for social progress. Many American academics had studied in Imperial Germany and had been impressed by the social reforms and economic regulation that Chancellor Otto von Bismarck’s regime had undertaken since the founding of the united Reich in 1871. In the late nineteenth century, even as the authoritarian government of Imperial Germany outlawed unions and the Social Democratic Party, it passed reforms: health insurance (1883), accident insurance (1884), and old age and disability pensions (1889). By World War I Britain under David Lloyd George had adopted many similar reforms. Admirers of these reforms in America adopted the name “progressive” for themselves by translating the German word
Fortschrittliche.
Their counterparts in Britain called themselves the New Liberals, and by the 1930s “liberal” came to be preferred to “progressive” by Americans like Franklin Roosevelt, who described himself as “slightly left of center.”

The American progressives were influenced by the German historical school of economics, which dismissed classical liberal economics in the tradition of Adam Smith and David Ricardo as superficial “Manchester liberalism.” According to the historical school, political economy was a form of statecraft, not a science modeled on physics that could identify “laws” of economics that would be valid in all societies and all times. The historical school was influenced by Friedrich List, who had argued that Germany should model itself on the United States by creating a large internal market and using a protective tariff to promote its infant industries; in addition, List dreamed of American-style democracy for Germany, not Bismarckian authoritarianism. List had been an evangelist for the American school of developmental capitalism associated in the first half of the nineteenth century with Hamilton, Clay, Raymond, Carey, and others. The American progressives of the 1900s who imported German historical school ideas were thus, in a sense, reimporting the modified themes of the earlier American school of political economy. They went on to found the institutional school of American economics, which had a profound influence on American reform in the first half of the twentieth century, even though it was marginalized in the American academy after World War II by excessively abstract, unrealistic approaches to economics. Similar themes are found in the “evolutionary economics” of the late twentieth and early twenty-first centuries that drew inspiration from the economist Joseph Schumpeter’s vision of technology-driven “creative destruction.”
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In the early twentieth century, the radical left was marginal, especially after World War I brought about the collapse of the Socialist Party, followed by the postwar Red Scare. The major debate was between champions of neo-Hamiltonian developmental capitalism and neo-Jeffersonian producerists, who idealized small producers. The former school can be called by Theodore Roosevelt’s term, the New Nationalism; the latter, by Woodrow Wilson’s phrase, the New Freedom. New Nationalists favored economies of scale, but within the context of stakeholder capitalism. Their idea of reform was increasing partnership among large, efficient corporations, a strengthened federal government, and (for some) national labor unions. The neo-Jeffersonian producerists of the New Freedom school sought to use federal and state laws to tilt the playing field toward small businesses, small distributors, and small banks. Both schools opportunistically denounced their adversaries for interfering with the market, but each school favored government intervention in the economy in order to promote its vision of the future of American society.

THE NEW NATIONALISM

In his influential book
Relation of the State to Industrial Action
(1887), the economist Henry Carter Adams distinguished industries with increasing returns from those with constant or diminishing returns. In industries with increasing returns to scale, the greater efficiency of large units meant that the largest firm would be likely to drive its rivals out of existence and become a monopoly. Adams argued that an industry with increasing returns to scale would tend to be either an “irresponsible, extralegal monopoly, or a monopoly established by law and managed in the interest of the public.”
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In his 1909 manifesto
The Promise of American Life
, the progressive journalist Herbert Croly, the founding editor of the
New Republic
, wrote: “The constructive idea behind a policy of the recognition of the semi-monopolistic corporations is, of course, the idea that they can be converted into economic agents . . . unequivocally for the national economic interest.”
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The trade-union leader Samuel Gompers favored the formations of industrial trusts capable of negotiating with labor unions. At J. P. Morgan’s death, a socialist is supposed to have said: “We grieve that he could not live longer, to further organize the productive forces of the world, because he proved in practice what we hold in theory, that competition is not essential to trade and development.”
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This progressive version of America’s tradition of Hamiltonian developmental capitalism found a champion in Theodore Roosevelt. Roosevelt condemned “malefactors of great wealth.” He wrote: “Of all forms of tyranny the least attractive and the most vulgar is the tyranny of mere wealth, the tyranny of a plutocracy.”
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But TR did not believe that breaking up large corporations could restore a golden age of equality among small farmers and small shopkeepers. He complained: “Much of the legislation not only proposed but enacted against trusts is not one whit more intelligent than the medieval bull against the comet, and has not been one particle more effective.” In his annual address to Congress in 1902, he wrote: “These big aggregations are an inevitable development of modern industrialism, and the effort to destroy them would be futile. The line of demarcation we draw must always be on conduct, not on wealth; our objection to any given corporation must be, not that it is big, but that it behaves badly.”
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In his “New Nationalism” speech at Osawatomie, Kansas, in 1910, Roosevelt observed: “The effort at prohibiting all combination has substantially failed. The way out lies, not in attempting to prevent such combinations, but in completely controlling them in the interest of the public welfare.”
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Critics noted that when Roosevelt distinguished “good trusts” from “bad trusts,” the good trusts were often organized by J. P. Morgan, who funded his campaigns. For example, although his Justice Department successfully brought an antitrust suit against the Morgan-backed Northern Securities railroad trust, TR saw US Steel as a good trust, and when a lawsuit against it was brought under the Sherman Act, a federal district court agreed, throwing out the suit in a 1915 decision upheld by the Supreme Court in 1920. The satirist Finley Peter Dunne, in Irish dialect, restated Roosevelt’s distinction between good and bad trusts: “ ‘The trusts,’ says [Roosevelt], ‘are heejous monsthers built up be th’inlightened intherprise iv th’ men that have done so much to advance progress in our beloved country,’ he says. ‘On wan hand I wud stamp thim undher fut; on th’other hand not so fast.’ ”
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