During the Panic of 1893, JP Morgan Used $60 Million in Bonds to Bail Out the United States Government
In the early months of 1895, things were getting desperate for US President Grover Cleveland. The country's economy was collapsing because of falling prices and rising unemployment that began with the Panic of 1893. Eighteen months later, millions were unemployed and the treasury’s reserves were dropping too. Normally, the Treasury held gold reserves above the statutory floor of $100 million. But by January 24, 1895, the Treasury has only $68 million. Scarcely a week later it was down $45 million.
Nervous investors started to demand gold for their dollars. A run on the Treasury was inevitable and the plan to subsidize the gold reserves with silver only made creditors more anxious. President Cleveland tried to avert the disaster. With Treasury Secretary John Carlisle, the President had proposed a plan to sell government bonds to the public to raise $60 million.
But the rapid run on the Treasury made the process unworkable. The concern at the White House grew even more when Carlisle confidentially advised the President that the Treasury had $9 million gold reserves, and that a single investor held a draft worth $10 million. Insolvency of the government was inevitable unless a source of funding could be found – indeed a bailout of the U.S. government was the only hope.
Enter Wall Street financial baron John Pierpont Morgan. Suffering from a face marked by chronic rosacea, Morgan avoided the public attention which only added to his reputation as a secretive, voracious gobbler of railroads and other businesses. J.P. Morgan was the original Wall Street shark, swooping in to grab an unsuspecting company and then retreating into the murky waters of finance leaving only the remnants of his presence.
Using his financial prowess to extract concessions from major U.S. companies, he insinuated himself onto scores of managing boards by exchanging payment of debt for seats. He used the knowledge derived therefrom to grow his steel trust into America’s first billion-dollar business.
Morgan was aware of the Government’s plight and saw both danger and opportunity. His financial empire founded on commercial railroad service needed a stable and growing economy. An imploding government is not good for his business, and Morgan understood that what was good for the U.S. Treasury was also good for business — his business.
President Grover Cleveland knew Morgan’s reputation, and avoided his offers of help as long as he could. Finding no alternate, Cleveland reluctantly agreed to see him only when reports of Morgan’s trip to Washington eased the run on the Treasury. Cleveland thought he could use the banker’s prestige but avoid using his money to save the country. No such luck.
To Morgan, the issues were the same – how to save a failing business and avoid disaster for the investors. Sitting before an anxious President, his Treasury Secretary, and Attorney General Richard Olney, Morgan was once again presiding over a meeting of another board of directors.
The President insisted that a private bailout wasn’t really necessary and that he expected an upturn in the economy would make things better. Morgan replied, “If that $10 million draft is presented, you can’t meet it, it will be all over before three o’clock.” Shocked that someone other than the President’s inner circle knew the truth, Cleveland reluctantly listened.
Morgan proposed the private sale of government bonds be sold immediately to Morgan and his syndicate. In return, Morgan would give the Treasury the gold it needed - $100 million - to meet its current and anticipated obligations.
The President asked if everything was legal, and Morgan replied, it was by virtue of a Civil War statute, “four thousand and something.” Olney checked and it was all quite legal – but politically dangerous for the President. The public was not fond of Wall Street personalities and Morgan was the biggest "personality" of them all. Morgan assured the President that gold would not be shipped abroad until the goal of the plan was reached. Trying to save some dignity from the situation, Pres. Cleveland said that thy don't need $100 million, $60 million would be fine.
Morgan was as good as his word and the bonds were sold and gold filled the Treasury. The run stopped and the economy stabilized. Morgan had co-signed for the U.S. debt and the economy took off. Morgan now stood to make millions more than he paid.
The political price Cleveland anticipated had to be paid. Many on the left contended the President “sold” the government to Wall Street. When Morgan refused to reveal his profits on the deal, the party grew more enraged. At the Democratic Convention the party rallied to William Jennings Bryan who delivered the famous line that mankind was being crucified on a “cross of gold.” He would lose the next three elections.
Morgan would go on to bailout both the New York City Stock Exchange and the City of New York in the coming decades, but neither would win him public approval.
Indeed, President Teddy Roosevelt centered his “trust busting” campaign on the insidious network of interlocking boards of directors that created the monopolies which Morgan epitomized. Still, there is no denying that Morgan saved the nation when no one else stepped forward. Whether he did so out of patriotism, profit, or some combination is debatable, but the fact that he did is not.