Can financial elites serve the public good?


This is one of a series of interviews by Bloomberg columnists on how to address the world’s most pressing challenges in politics. It is arranged for length and clarity.

Justin Fox: Your new book is about the more than 200-year history of the Brown Brothers Harriman banking partnership. I had heard of the Brown Brothers before and had a vague idea that it was honorable and prestigious. I was comforted by a passage in your book in which the Brown Brothers ’partner, in 1958, says,“ Our friends tell us about the fine work we do, and then admit that they’re not quite sure what we’re doing. ”So I’m not the only one! What exactly is the job of this company?

Zachary Karabell, president, River Twice Research and author, “Inside Money: The Brown Harriman Brothers and the American Way of Power”: Their business has changed radically over 220 years. It started as a modest bedding import firm in Baltimore. The founder, Alexander Brown, was a canvas exporter from Belfast who escaped sectarian violence. The company has changed so much over the decades that their business today has almost nothing to do with their business at various points in the 19th century. They are now a private commercial bank. They do a lot of custody work. They do a lot of foreign exchange and adjust securities traded abroad in the United States. And they work on wealth management.

JF: The Brown Brothers say it was founded in 1818, but your story of the partnership begins before that, when Alexander Brown appears in Baltimore.

ZK: There were three different Brown houses run by these brothers, and in 1818 it was the first time that the word Brown Brothers appeared. But it began when Alexander Brown opened his business in Baltimore in 1800. Then he brings his sons to work, who have been working in trading houses for generations: Barings, Rothschilds, Fuggers. What is unusual is that this firm creates a culture that then lasts and shapes basically all of American economic history since then.

JF: Their most important moment in the American economy seems to have been in the 1830s, with cotton. Is it true that more than 10% of U.S. trade with Britain went through their hands?

ZK: Somewhere between 10% and 20%. The reason why it is difficult to count is that there was not so much trade that they did directly, but trade that they facilitated through letters of credit. Letters of credit are what guaranteed a cotton seller in the United States that, after being delivered to England, he would be paid and assure the one who buys it in England that he would not have to pay for something that would never be delivered.

Brown Brothers becomes a facilitator. They simply take a little of all these transactions, but by the 1830s they were looking for a way to get out of the physical trade because it could not be scaled, it was always sensitive to loss and made them really accomplices in the slave trade. They hate slavery, and yet they benefit from slavery – much like the entire northern economy at the time. That’s why the civil war is happening in part, isn’t it? It’s not just that you can’t be half slaves and half morally free, as Lincoln said. It’s that you can’t really be that economical.

JF: If your largest export industry is built on slavery …

ZK: Then you are a de facto slave economy. The Brown brothers managed to get out of the physical commodity trade. Paper relief creates a new form of money, a new form of currency. It is a private paper signed by the Brown brothers that lubricates this entire system until the later part of the 19th century and makes them wealthy.

JF: They also issued credentials to wealthy tourists going to Europe.

ZK: He was the forerunner of the traveler’s check. When American Express commercialized and commercialized traveler’s checks in the 20th century, anyone could only pay and get a traveler’s check. For the Brown Brothers, you had to sign up for it. They thought, “If we grant letters of credit to travelers whose credit is not good, it will have a negative reputation for us.” Thus they create letters from these travelers, which facilitate the first great prosperity after the civil war of all these Americans going to Europe. Their letters were part of the way America is starting to look at the world.

JF: What else were they involved in at the time?

ZK: In the 1840s and 1850s, Alexander Brown’s New York son, James Brown, met a man named Edward Knight Collins – who was, not coincidentally, a friend of PT Barnum. They are building the first line of American passenger steamers across the Atlantic and breaking all speed records. They helped create the age of money. Cornelius Vanderbilt, who created the domestic age of steam, was completely uninterested in the transatlantic [crossings] because there was too much tied up capital and too much risk. But the Brown brothers created it.

JF: In a horrible way, they also experienced risk.

ZK: The SS Arctic, which was the jewel of the Collins line, was the Titanic of its time, with beautiful state rooms, good customer service, and good food, none of which had previously been part of the transatlantic crossing. In a total monstrous accident, he encounters a French trawler and sinks, and the crew is rescued and the women and children are allowed to drown. And some of the women and children who get lost are the daughter of James Brown and his grandson. It is a very tragic end to a business venture and it scarred them literally and figuratively.

JF: After that they get out of the steamboats?

ZK: They get completely out of it and they get out of speculative capital. The fact is that most people who invested in railways in the late 19th century lost everything and we will never hear of them. And most of the people who minted mints on the railroads aren’t people who built railroads – they’re people who buy bonds that were built by railroads after bond failures. But the Brown brothers say, look, this is too much speculative capital. Being a partnership, any penny they deposit on their own could lose. There is no shareholder base to cover losses. Thus they remain on the margins of the rise of the railways in the late 19th century. The result is that they never become Carnegie, Vanderbilt rich. But they are also not in the same way in public, and therefore they do not have the same level of public anger.

JF: And until this moment, the show was still hosted by family members?

ZK: They were really family members until the 1930s. One of the extraordinary things about them is that the culture of the company, which is indelibly impressed by the patriarch and his four sons, remains even as family members fade in the 1930s. Although it ceases to be a family business, it still remains a solid partnership with exactly the same ethos.

JF: 1930 EH Harriman merges his firm with the Brown Brothers, to create the Brown Brothers Harriman. No firm in particular took risks in the 1920s, but at the beginning of the Great Depression, everyone was in trouble.

ZK: In the early 20th century, this small class of WASP elites emerged in the United States. They are all men, they are all white and they go to the same set of schools. For the Brown and for Harriman it was the Groton-Yale axis. The next generation of Brown and Harriman and their friends all went to Yale together between 1910 and 1919. About half of the Harriman Brothers ’partners in their thirties are Skull and Bones, which is why you have this later conspiratorial view of a little Kabbalah marrying and ruling the world.

In 1930, it was said that Harriman had too much capital and too little work, and the Brown Brothers too much work and too little capital. They combine very easily because they are friends and there are not many moving parts.

JF: Then comes the Glass-Steagall Act. How did that affect the Brown Harriman brothers?

ZK: The [partners] they realized that public confidence in finance was deeply undermined and recognized that you need to have laws that convince people that the system is managed in the public good, not just for private gain. So the brown partners support Glass-Steagall; support the creation of a Securities Commission; and support the breakup of the firm into an investment and commercial bank. The Brown Harriman brothers who are still a commercial bank today. The investment bank is taken away, in one of the big ironies, ending up as Drexel Burnham, which produces Michael Milken. It represents a complete inversion of the public good and the private interest: the model of the 1980s was that the private interest is everything that drives things, and as for the public – if it is not cursed – then who cares?

JF: Among the people who were partners in that period were Averell Harriman, who continued to be governor of New York and secretary of commerce; Prescott Bush, who is best known for his offspring and who himself was a U.S. senator from Connecticut; and Robert Lovett, who basically created the Air Force.

ZK: Lovett was an assistant war minister under Henry Stimson, who was a Republican brought in by Roosevelt to prepare the unity government for war. As World War II turns, Germany builds the Luftwaffe, and Lovett has the task of building a modern aviation almost from scratch: supply chains and logistics, design and engineering, are really complex. By 1944, the United States was producing more aircraft than any country in the world, and before that it had made almost none.

Then Lovett becomes Undersecretary of State under George Marshall. He was the chief administrator of the Marshall Plan and one of the hidden architects of the General Agreement on Tariffs and Trade, the forerunner of the World Trade Organization.

JF: In recent years, a bit of attention has been paid to the WASP elite. We don’t want to be led by WASPs anymore, but it would be nice to have this semi-cohesive elite capable of doing some things.

ZK: I don’t share that longing. You and I wouldn’t necessarily have had this conversation if everything was still defined by that club WASP elite. I don’t want a world where it’s exclusive, controlled and inaccessible. But the ethos of public services is something that has been lost, especially in the financial and technological world. It is not a cure-all, but it is an element of culture that stock capitalism and technological utopianism have misled or eradicated. It is not about going back to some mythical past in which the system works. It is about which elements of that system could be feasibly and constructively integrated into our present.

JF: Do you think the Brown brothers could play a part in that?

ZK: I don’t think so, although I think it’s interesting that they team up with 5,000 employees around the world, $ 2 billion in revenue and $ 500 million in profits are fairly evenly distributed among those partners and employees. The question is, why don’t we care about such a story, but do we really care about the implosion of the Lehman brothers, or are we really interested in a hedge fund that implodes or a private equity company that makes too much money?

The dramatic ups and downs are interesting. “I’ll do some custody work, I’ll help you sell foreign currency and I’ll make some money on every transaction” is not a great story. But man, without people doing it, we’re lost. I think respecting companies that provide valuable service for a reasonable fee should take up more of our space about what capitalism can be.

Brown Brothers is like Zelig. Every important moment in American history, in the back row on the left stands the Brown Brothers banker, who has no desire to be a story, but without whom the story would not exist. There was this ethos of private benefit, of the public good, which we are looking at the gimlet with our eyes these days. It seems self-service. I guess selfless and selfish can coexist. Human beings do not have to be one or the other. We are a muddy mixture of all of the above.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Justin Fox is a Bloomberg Opinion columnist covering the business. He was the editorial director of the Harvard Business Review and wrote for Time, Fortune and American Banker. He is the author of the book “The Myth of the Rational Market”.


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