Wall Street History

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Wall Street History

05/20/2005

Charlie Merrill, Part I

Last week I had some thoughts on the Wall Street of 1955,
courtesy of a book written back then by noted business writer
Martin Mayer. I mentioned Mayer’s admiration for Charlie
Merrill, the founder of Merrill Lynch, and I thought I’d give a
brief biography of Merrill himself using Mayer’s book, “Wall
Street: Men and Money,” as well as other sources I have here in
my library. It was Merrill, after all, who brought Wall Street to
Main Street.

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Charlie Merrill was born in Green Cove Springs, south of
Jacksonville, FL, in 1885. The son of a doctor who operated a
pharmacy on the side, Merrill was not a good student. In fact,
after being sent to Worcester Academy in Massachusetts
following elementary school, and then stints at Amherst College
and Michigan Law School, as best as I can ascertain he never
graduated. [How one could get into law school without an
undergrad degree back in those days I’m not sure, but two of my
sources say this was so. Maybe it was a joint program of some
sort.]

Following his school experience, Merrill attempted to pursue a
career as a professional baseball player but he soon realized he
lacked the talent to make the big leagues. Then in 1907 his
future father-in-law offered him a Wall Street related job in
Manhattan, just in time for the Panic of 1907, whereupon he not
only lost his job, he broke up the engagement.

In 1909 he took a job at George H. Burr & Co. and was told to
establish a bond trading and sales operation. At this time
Charlie Merrill began to formulate his philosophy on dealing
with the retail brokerage client. In 1911 he wrote an article for
Leslie’s Illustrated Weekly, “Having thousands of customers
scattered throughout the United States is infinitely preferable to
being dependent upon the fluctuating buying power of a smaller
and perhaps on the whole wealthier group of investors in any one
section.”

And so it was that in 1914 Charlie Merrill created Charles E.
Merrill & Co. with friend Edmund Lynch, which then became
Merrill Lynch & Co. [The original documents omitted the
comma between the two names and it has stuck ever since.] One
banker commented at the time “Merrill could imagine the
possibilities; Lynch imagined what might go wrong in a
malevolent world.” Market historian Robert Sobel notes in “The
Pursuit of Wealth”:

“Naturally, Merrill hoped to do a sizeable business in an
environment that became increasingly competitive after the
outbreak of World War I. Even so, he was more restrained than
most, hoping to attract a different kind of clientele than did most
of the small houses of the period. He targeted conservative
individuals, who at that time were not interested in stocks and
bonds, but instead put their savings into bank accounts. Merrill
was convinced this was a large, untapped market, and his
advertisements of the period were geared to such people. He
trained his salesmen carefully, admonishing them to consider
themselves teachers and consultants more than hucksters. ‘I
notice a very unfortunate tendency [on the part of our salesmen]
to dwell upon the profits a customer is likely to make instead of
the merit of an issue as an investment,’ he wrote in 1916. ‘We
try to be conservative and careful.’ The salesmen were asked to
‘bear in mind that in every sale you are either destroying or
building good will [for the next sale], which is our most valuable
asset.’”

Both Merrill and Lynch served stints in the Army during World
War I and their firm was run by associates while they were
away; once back, Charlie Merrill focused on building up the
enterprise. But by early 1928 he became convinced that high
stock prices bore no relation to reality and in March of that year
he suggested to his clients that they lighten up their portfolios.
It’s kind of interesting what Merrill thought of valuations back
then, in light of the constant debate on the topic in the Wall
Street of today.

“The average P/E (price / earnings) ratio for stocks, which had
been 9.2 in 1924, had risen to 20 in 1927 [Ed. note: 2005’s P/E
on the S&P 500 is about 20 as well], an unheard of level. Some
spoke of a new era in which such multiples would be the norm,
but Merrill was suggesting that his clients lighten their portfolios.
‘Now is the time to get out of debt,’ he wrote on March 21, 1928.
‘We do not urge you sell securities indiscriminately, but we do
advise in no uncertain terms that you take advantage of the
present high prices and put your own financial house in order.’”
[Robert Sobel, “The Pursuit of Wealth”]

By the way, the Dow Jones Industrial Average closed at 206 on
3/21/28 and would peak at 381 the next year so Charlie was a
wee bit early. Shortly after the October 1929 Crash, however,
Merrill transferred all his brokerage clients and employees to E.
A. Pierce and went into semi-retirement. But Charlie was forced
to spend more time in the business following the death of Lynch
in 1938.

Then in 1939 Mr. Pierce had difficulties and an old associate,
Winthrop Smith, urged Charlie Merrill to absorb Pierce and a
smaller house, transforming it into Merrill Lynch, Pierce &
Cassatt. In 1941 Merrill purchased New Orleans-based Fenner
& Beane, and out of this came Merrill Lynch, Pierce, Fenner &
Beane; the largest brokerage operation in the nation with 100
offices.

Charlie Merrill wasn’t in the best of health, owing in large part to
his enjoying the good life perhaps a bit too much, and in 1944 he
suffered a heart attack, after which he was basically a part-time
worker, though it was still clear who was boss, even as Winthrop
Smith assumed more of the day-to-day leadership which led to
Merrill Lynch, Pierce, Fenner & Smith. Meanwhile, Charlie
Merrill chose to focus his attention on the firm’s sales operations
and public relations. Robert Sobel comments in a different book,
“The Great Boom”:

“Merrill hoped to convince a public with memories of the market
crash of 1929 that investment in stocks was now prudent and that
brokers could be honorable and forthright. If potential small
investors were persuaded that the broker was a professional in
every sense of the term, they might be induced to use his
services. This was a segment of the population brokers
traditionally had ignored; they had discouraged individuals with
only a few hundred dollars from investing.”

Charlie Merrill believed that even small investors in time could
accumulate considerable assets. Merrill was hoping to do for
Wall Street what chain stores had done for retailing: “make
smaller profits per client but larger overall revenues through
volume.” [Sobel]

Back in these days, the New York Stock Exchange mandated
minimum commissions and most of the Street charged far more.
But Charlie Merrill was constantly campaigning for lower rates.
He expanded Merrill Lynch’s research operations and whereas
other brokerage firms back then charged for it, Charlie Merrill’s
boys passed it out for free. The brokers were paid salaries, not
commissions, and Merrill Lynch was aggressive in promoting
this. There was to be no pressuring the client. “The interests of
our customers MUST come first,” was emblazoned on an early
training brochure.

We’ll pick up the story next week including Charlie Merrill’s
declaration of principles.

But I just have to add a note about last week’s piece and the
comment of investment adviser Major Angas: “OUR
CUSTOMERS HAVE YACHTS.” George L. wrote in with
some great background.

“I remember Martin Mayer’s book when it was first issued. In
1940 Fred Schwed had penned one under the title “Where are the
Customers’ Yachts?” This title was taken from an epic Wall
Street wag who told the story of a ‘customer’s man’ (that’s what
we used to be called) walking with a client by a riverside near the
marina after a particularly weak spell in the market. As I recall
it, when the broker pointed out the bankers’ yachts, then the
lawyers’ yachts, and then the brokers’ yachts, the customer is
said to have asked, ‘Yes, but where are the customers’ yachts?’”

Thanks, George, and to all, keep those cards and letters coming.

Sources:

David Colbert, “Eyewitness to Wall Street”
John Steele Gordon, “The Great Game”
Martin Mayer, “Wall Street: Men and Money”
Robert Sobel, “The Pursuit of Wealth”
Robert Sobel, “The Great Boom”

Wall Street History will return May 27.

Brian Trumbore

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