Published by EH.Net (May 2014)

Susie J. Pak, Gentlemen Bankers: The World of J.P. Morgan.  Cambridge, MA: Harvard University Press, 2013. 356 pp. $55 (cloth), ISBN: 978-0-674-07303-6.

Reviewed for EH.Net by Joseph M. Santos, Department of Economics, South Dakota State University.

In Gentlemen Bankers: The World of J.P. Morgan, Susie J. Pak, an assistant professor of history at St. John’s University, artfully maps the economic strength and political influence of J.P. Morgan & Co. in the early twentieth century to an American social hierarchy based on race and religion and preserved by an inviolable right to private association.  This mapping reflects the overarching theme in Gentlemen Bankers: the financial system, despite its unmistakable norms and idiosyncrasies, is shaped by society – its rules govern and enable bankers, who, in turn, preserve its hierarchy.

Pak begins her study of J.P. Morgan & Co. – and private banking more generally – in 1837, with the birth of Pierpont Morgan, who reorganized his father’s and other kindred firms into what became the House of Morgan.  The framework for Pak’s overarching theme is the syndicate model of private banking and the unlimited liability partnership structure of most private banks in the early twentieth century.  Ostensibly, Morgan embraced the syndicate model of private banking because it enabled the bank to share risks of financing large ventures the firm could not alone underwrite, of course; and, because Morgan disliked competition, which, in his view, wasted resources.  Through the syndicate model, the bank cooperated with would-be competitors and, thus, avoided price wars over new issues.

Though, as Pak rightly notes, there is much more to this story.  Essentially, the syndicate model produced hierarchical banking networks, often structured as pyramids with J.P. Morgan & Co. at or very near the top.  Crucially, these networks had both economic and social orientations.  Networks effectively reduced financial frictions by providing participants information and a financial safety net.  And, networks enabled participants to accumulate social capital that reflected norms within their segment of (high) society.  In effect, participants used their social capital to differentiate their financial capital – an otherwise-fungible product – and, thus, afford themselves some degree of pricing power.  Moreover, participants monitored each other and, thus, preserved their social capital because doing so was incentive compatible, thanks to the unlimited liability partnership structure of private banks at that time.  As Pak writes, “businessmen may not have originated social and economic hierarchies, but they were affected by them, also deeply committed to them, and enabled by them” (p. 44).

Early on, Pak presents several characteristics of J.P. Morgan & Co.’s syndicates and partners from 1894 to 1934.  In several tables and figures, we learn the numbers of syndicated deals and private-banking clients, the names and underwriting shares of syndicate participants, the family ties and educational and religious affiliations of partners, and the locations (pictured on street-level grid maps of Manhattan) of their private residences and social clubs.  Later on, in a detailed analysis of these data, we learn how partners and their extended families used – wittingly or otherwise – the domestic space, itself a complex hierarchy based on seniority and gender, to construct and preserve social networks and, thus, accumulate social capital.  We also learn how the public and private spaces of another private bank, Kuhn, Loeb & Co., were analogously intertwined, though mostly separated – and deliberately so – from the public and private spaces of J.P. Morgan & Co.  How anti-Semitism shaped economic and social networks in the private-banking community of so-called Yankee (J.P. Morgan & Co.) and German-Jewish (Kuhn, Loeb & Co.) houses is an important and forceful part of Pak’s story.

Throughout the book, Pak reminds us that the public’s efforts to investigate – and, at times, litigate – alleged cases of financial excess predate the last crisis.  Populist backlashes and regulatory challenges in the aftermath of financial crises are not new.  Pak explores in great detail the Pujo and Pecora Hearings in the wakes of the Panic of 1907 and the Crash of 1929, respectively, and, more broadly, the progressive critique, led by Louis D. Brandeis, of the Money Trust.  According to Pak, both private bankers and their progressive-era critics were products of society in their time, when both sides recognized the (property) rights of individuals and firms to associate privately.  Thus, investigators never revealed, monitored, or regulated the complex ways economic and social networks in the banking community evolved and sustained themselves, intentionally or otherwise.  Instead, investigators regulated activities in the public (economic) space, forcing private bankers to surrender interlocking directorships and inter-bank stock ownership, for example, while leaving the private (social) space – and with it the sinews of bankers’ economic and political influence – intact.

Pak has written an important book in which she proffers a smart business history of the House of Morgan and early twentieth-century American private banking more generally.  Moreover, she persuasively demonstrates the great deal we gain by writing business history in the context of social history.  Some readers may wish for more on how specifically banks effectively generated profit from their social networks – a theory of the early twentieth-century private-banking firm in a social context, essentially.  Such a theory could inform regulatory policy making today (though banking since the Second World War is understandably beyond the scope of this book).  For example, how might social networks in whatever form they take today shape how banks respond to regulations requiring them to reduce the size of their balance sheets, increase capital, or abide by Volcker rules?  This is not a criticism of the book, of course; rather it reflects the great deal Pak’s insight contributes to our understanding of the financial world, then and now.

Joseph M. Santos is the Dykhouse Scholar in Money, Banking, and Regulation in the Department of Economics at South Dakota State University, where he teaches macroeconomics and monetary economics.  He is the author of “Back to the Futures: The Winnipeg Grain Exchange and the Creation of the Canadian Wheat Board,” forthcoming in the Canadian Journal of Economics.

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