An American Banking Dynasty and the Rise of Modern Finance by Ron Chernov is a history of the modern banking system in the US from 1838 to 1989 told through the history of the J. P Morgan bank. The book chronicles the bank beginning in the baronial age which ended with the death of J. Pierpont Morgan in 1913, the diplomatic age from 1913 to 1948, and the post war casino age from 1948 to 1989, when the book was written. There were three significant events that shaped the future of the bank and the banking industry in the United States.
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In the baronial age it was the Panic of 1907. In the diplomatic age it was the passage of the Glass-Steagall act of 1933. In the casino age it was the development of merchant banking and leveraged buyouts that led to the Crash of 1987. J. Pierpont Morgan’s actions during the Panic of 1907 solidified the bank’s reputation and firmly established it as the most powerful and influential bank of its era. The stock market crash in 1907 spurned both a run on banks as people tried to withdraw their money, as well as the massive selling of trust stocks. J.
Pierpont Morgan engineered a plan that saved numerous brokerage houses, kept the stock market open and bailed out the city of New York. In 1907, almost half of the loans made by New York banks were backed by securities as collateral and the trusts didn’t keep the cash reserves of the commercial banks on hand, making them vulnerable to runs in a time of panic. At the time, there was very little government regulation on banks and trust companies. There was also no central bank to regulate the money supply or the stock exchange. The direct result of the Panic of 1907 was the Federal Reserve System.
The Fed consisted of twelve regional reserve banks placed under a central federal authority. This gave the government the ability to offset sudden credit contraction in the private sector to keep banks, brokerages, and trust companies solvent in times of crisis. In 1933, the Glass-Steagall Act was passed in the wake of the stock market crash of 1929, nationwide commercial bank failures, and the Great Depression. This act separated traditional banking activities into two separate entities. Commercial banks which could accept deposits and lend money, and investment banks which could issue securities.
A major reason for the stock market crash was overzealous commercial bank investment in the stock market. The reasoning behind Glass-Steagall was that is would eliminate the risk banks could take with their depositors money in the stock market. Glass-Steagall also established the Federal Deposit Insurance Corporation (FDIC) which would guarantee deposits held by commercial banks. The effect on J. P Morgan and Company was the spin off of Morgan Stanley. J. P. Morgan and Company would remain a commercial deposit bank and Morgan Stanley would be a separate investment bank.
Although they would remain in close ties for a long time, the House of Morgan would never be united. The 1980’s had several parallels to the 1920’s. The stock market was booming, Republicans enacted numerous tax cuts, and low interest rates resulted in lots of cash. All were factors leading to the crash of 1987. The other significant factors were the enactment of Rule 415 by the SEC, rise of merchant banking, the growing fad of the leveraged buyout (LBO). Rule 415 allowed shelf registrations by companies, which could be sold on short notice, reducing the need for traditional underwriters such as Morgan Stanley.
This forced investment banks to secure profits other ways, which led to the rise of merchant banking and LBO’s. In an LBO a company and outside investors borrowed money to acquire a company and used it’s assets as collateral for the loans which are repaid from future earning or selling assets. This practice saddled healthy companies with loads of debt. This led to the stock market increase while actually making companies financially weaker. Healthy companies had to acquire debt to either merge or be taken over. This was an unseen result of rule 415 and other government regulations and ultimately led to the crash of 1987.
However due to the government regulations enacted as a result of past crashes, the Federal Reserve was able to act as a source of liquidity and credit, and was able to drop interest rates which was able to support the economic and financial system. These actions were able to avert the severe recessions that had followed the previous crashes. The Panic of 1907, the Glass-Steagall act of 1933, and the development of merchant banking in the 1980’s were significant events in the history of banking in the Unites States, and the Morgan banks were intricately involved in all three. The J. P. Morgan bailout of the Panic of 1907 could not have een possible in 1987 because of the magnitude of the crisis, just as the government was not prepared to deal with the Panic of 1907 at the time it occurred. The lessons learned from the Great Depression and the contributions that J. P Morgan had made to the formation of government regulation and policy averted another depression in the 1990’s. J. P. Morgan remains one of the largest banks in the United States to this day, and although its influence is not the same as it was in its heyday, it has been intimately involved in the formation of the modern banking system in place in the world today.