Inside Money: Brown Brothers Harriman and the American Way of Power

ISBN-13: 9780143110842

Media Type: Paperback

Publisher: Penguin Publishing Group

Publication Date: 05-31-2022

Pages: 448

Product Dimensions: 5.40(w) x 8.30(h) x 1.10(d)

Zachary Karabell was educated at Columbia, Oxford, and Harvard, where he received his PhD. He is a prolific commentator, both in print and on television, and the author of a dozen previous books, including The Last Campaign, which won the Chicago Tribune's Heartland Prize, and The Leading Indicators. He is also a longtime investor, former financial services executive, and the founder of the Progress Network.

Read an Excerpt

Introduction


In the cold dark of a premarket December morning in 1930, four clerks emerged from the service entrance of the office building at 39 Broadway, each with a cart loaded with documents. They hauled those carts for only a few blocks, to the newly refurbished and expanded offices at 59 Wall Street, the marbled site of one of the most storied firms on Wall Street, Brown Brothers. The carts contained stock and bond certificates that the Harriman family, whose fortune had been born in the railroad boom, had accumulated from Europe and the United States, tens of millions of dollars of notes that were themselves precious assets. The street was barely stirring, but each trip of several hundred yards was escorted by a security guard, armed and alert.

The day before, a small innocuous headline had explained why those clerks were transferring millions of dollars from one office to another: big banking houses decide on merger. Though meriting a front page mention in The New York Times, the announcement was dwarfed by the two major stories of that day in 1930: the collapse of the mammoth Bank of United States and the demand by President Herbert Hoover that Congress pass an emergency employment bill to stem the bleeding in the U.S. labor market. In the weeks and months ahead, stories of collapse and chaos would proliferate, but the new banking house survived and thrived. That was surprising, though it shouldn’t have been. Brown Brothers had always survived, through crisis after crisis, as it still does today.

What we now call the Great Depression was in full force on December 12, 1930, the day of the announcement. More than 1,200 banks had already closed their doors, their deposits lost forever as vaults were drained by panicked customers who had watched the stock market collapse at the end of 1929 and who had then seen a brief false dawn followed by much worse. No federal deposit insurance covered those losses, and no safety net existed to cushion the fall. The panic infected every segment of society, from farming to banking, from manufacturing to retail, and then spread throughout the world.

Yet no outward sign of distress would have been noticed one fall day in 1930 when a group of nattily dressed young men chartered a railcar on the New Haven line to take them from Grand Central Station to their college reunion at Yale. They were a self-confident lot, in their midthirties, ambitious, all of them born to wealth, none of them having known a day of want. Among them was a tall and lanky man named Prescott Bush. He had married well, wedding the daughter of George Herbert Walker of St. Louis, who had started his own investment firm before becoming president of
W. A. Harriman & Co., founded by Averell Harriman, the debonair yet tight-lipped eldest son of the pugnacious railroad baron E. H. Harriman. Prescott had gone from selling rubber flooring to working as a vice president at Harriman with his college friend Roland “Bunny” Harriman, Averell’s younger and more easy going brother. Roland wasn’t on the train that day, but Ellery James and Knight Woolley were. Ellery was a partner at Brown Brothers, and Knight, who was rarely without a bespoke double-breasted suit, was managing partner of another one of the Harriman firms. These young men were entwined by professional and personal bonds, each having been sworn into Yale’s exclusive Skull and Bones society before enlisting in the military for America’s brief and bloody participation in World War I. Their tight circle included not only the Harriman brothers but also the wiry, intense Robert A. Lovett, whose father, Robert S. Lovett, had served as the elder Harriman’s general counsel.

But while they had reveled in the prosperity of the 1920s, they were not immune to the storms outside in 1930. As they headed to their reunion, cosseted in their private car, playing poker for stakes well in excess of the average weekly wage for millions of Americans, they knew that all was not well in the world. Both Harriman and Brown Brothers were teetering under the weight of credit they had extended to businesses that could no longer repay. Given the deep personal connections between the partners of the firms, it must have seemed organic when the idea of a merger was broached over poker and scotch. Other firms weren’t merging; they were collapsing, and both Harriman and Brown Brothers needed to shore up their business and preserve their capital.

Brown Brothers had more than a century on Harriman’s firm. It was a titan of Wall Street, but in reputation and standing rather than size. It was not particularly large in assets, but its influence and reach were as extensive as the flashier J.P. Morgan & Co. or the much larger Chase National Bank, which was infused with Rockefeller money. Because Brown Brothers was a partnership without one figurehead, it attracted neither notoriety nor much public attention, and it did not have the benefit of one man’s fortune ever at the ready. The partners of Brown Brothers shunned the public spotlight and cultivated a sterling reputation within the close-knit world of finance and banking. To become a partner, each man had to be invited and then was required to contribute his share to the firm’s working capital. Like all partnerships, Brown Brothers lent and invested the partners’ money. Each deal had to be assessed in terms of how much of their own personal fortune they were willing to risk. In sharp contrast to the investment banks and venture firms and private equity groups of today, the partners at Brown Brothers were not agents acting on behalf of anonymous shareholders or mammoth institutions. Every Brown Brothers partner was personally exposed. They could gain immensely or lose painfully from each deal.

But by the end of 1930, as the economic collapse accelerated not just in the United States but around the world, transactions and deals that had looked sound and wise a year earlier turned sour. Even after each of the Brown Brothers partners had ponied up more money to cover losses, they were skirting peril. The firm had been in business for more than 120 years, since Alexander Brown set up shop, aided by his four sons, in Baltimore. It was unclear whether it could last into 1931. Thatcher Brown, great-grandson of Alexander and managing partner of his firm, saw that drastic action was necessary. Though nearly a generation separated him from those young bucks on the train, Thatcher, a product of the same schools and the same upbringing, was essentially an older version of them. The cohort of younger Yale grads saw the opportunity, but it was Thatcher and his older cousin James who understood the need. So did Averell Harriman, who was flush with the millions provided by his father’s fortune. He had money, but his business was struggling as well. Brown Brothers had the history and the standing. And so, following that genial conversation over cards and drinks in a first-class railcar, it was agreed that the two firms would merge to save both, with the fortune of Harriman attached to the reputation of Brown Brothers.

For Wall Street, that innocuous December New York Times headline wasn’t so innocuous. It signaled to the financial world that two of the major players of Wall Street would, at least for the moment, be fine. In a time of rampant bank closures and widespread panic, the announcement of the formation of Brown Brothers Harriman was a respite, a message that said, “It will be all right; there is shelter in the storm.”

The Great Depression would get considerably worse before it got better, but Brown Brothers Harriman remained standing and became a pillar of what would soon be called the American Establishment. Its partners would play a central role in the creation of what Time’s founding editor and fellow Yale alum Henry Luce dubbed “the American century,” a mid-twentieth century imperium that saw a marriage of American money and American power that spanned the globe. It didn’t last a century, but at its apex, the American century was staffed by Brown Brothers. Prescott Bush served as a U.S. senator for Connecticut and progenitor of two presidents. Lovett became assistant secretary of war, assistant secretary of state, and finally secretary of defense during the height of the Korean War. Averell Harriman would have a long career as a diplomat and statesman, serving as Franklin Roosevelt’s envoy to Stalin, secretary of commerce under Truman and then governor of New York and finally as the most senior diplomat in the Kennedy and Johnson State Department, though not, to his unspoken chagrin, as secretary of state. These men were, as Dean Acheson (who to his everlasting pride was secretary of state) would later remark, present at the creation. They defined the Cold War political and economic system that governed the world after World War II, a system that remains largely, if shakily, in place. Directly or indirectly, this cohort created every major institution that shapes the international system today, from the World Trade Organization to NATO to the United Nations to the World Bank. They established the primacy of the almighty dollar. And they built the appara- tus of the American national security state, including the Defense Department, the National Security Council and the CIA.

The influence of the firm, however, is even deeper than that, spanning nearly the entire history of the United States. The firm started, as most ventures do, innocuously enough, founded at the turn of the nineteenth century by an immigrant with modest dreams, an Irish refugee fleeing the sectarian violence of his homeland. He set up a linen importing business in Baltimore, which morphed into a merchant bank, and as it grew and evolved under his sons, Brown Brothers helped turn the United States into a country where money had an outsized role. The American economic system was messy, chaotic and often hugely destructive even as it unlocked unprecedented potential. The House of Brown, straddling the Atlantic with branches in Liverpool, Baltimore, Philadelphia and New York, was at the center of the alchemy, managed by a family of upright, God-loving bankers, fathers and sons and then grandsons, steeped in rectitude and service, at times dull, always—more or less—honorable. In a world where money was plentiful, and promiscuously so, it helped to have stolid bankers at the choke point, regulating the flow, steering through crises, keeping the excesses of greed and panic at bay.

In the United States, the pursuit of profit was woven into the founding fabric, not as explicitly as the pursuit of happiness but there all the same. The Jeffersonian ideal was a nation of yeoman farmers guarding their freedoms and independence, but it was Alexander Hamilton’s financial system that ultimately defined the economy. Following the Revolutionary War and then the War of 1812, which sealed American independence, the United States began its ascent to become the world’s largest economy within little more than a century. How that happened has been a source of constant debate. Perhaps it was a function of a vastly fruitful continent, the lack of regional competition, the protection afforded by two oceans, the influx of immigrants who brought their own dreams and ambitions and then inscribed those on a new nation, or none of those or all of them. But perhaps the key lies in one of Alexis de Tocqueville’s many piercing observations: “I know of no other country where love of money has such a grip on men’s hearts.”

One of the prerequisites for rapid economic growth is capital. Land, property and labor are all vital, but none are liquid. For much of human history, wealth locked up in land and property was rarely turned into productive capital to fund businesses or ideas. That began to change in the nineteenth century, and the United States was ground zero for the shift. Money, especially in the form of paper promises, was a fuel. In the United States, making money and putting it in motion came easily, often too easily. Money flooded markets, and then receded. It unlocked potential, and then unleashed havoc. Unburdened by an entrenched aristocracy of land or church, and with the Jeffersonian ideal of yeoman farmers shunted aside in favor of a Hamiltonian economy, nineteenth-century America became a land of money.

Until the Civil War, it wasn’t federal money. There were coins minted by the federal government, but those floated in a sea of paper promises issued by different banks and merchant firms such as Brown Brothers. Coins mattered, but paper was everywhere. It was a bewildering mix, kaleidoscopic and constantly changing. There is always a tension between order and chaos, and it is hard to find the right balance between just enough chaos to nurture innovation and enough order to keep everything from unwinding. Hence the sharp and constant economic crises of the nineteenth century. But that roiling, unsettling and harmful though it could be, was outweighed by the advantages. If you had a good idea in America, you had a better chance than anywhere in the world of finding money to fund it. Capital rarely flowed evenly; the 1870s and 1880s were flush with capital for the railroads but not so much for the working class or the farmers. Throughout the nineteenth century, there was paper money and credit, but there was also gold and silver, land and labor. The United States was fluid compared with the Old World, but it was easier to lose a fortune or never make one than to ascend the heights.

Brown Brothers acted as a conduit. From early in the nineteenth century, it became one of the primary channels through which money flowed. And flow it did, to merchants and their ships, to cotton plantations and to railroads and new farms and new towns and new businesses in the sprawling vastness of the continent. Brown Brothers facilitated that trade, first between Liverpool and Baltimore, and then once off-loaded by stevedores onto wagons, from Baltimore to the Ohio Valley. It funded, with offices in England and the Americas, successive generations of ocean-crossing vessels, some of which it owned outright, and for a brief moment, the house had a monopoly on the shipment of the Royal Mail from England to the United States. The Browns spurred the birth of transatlantic steamships and underwrote the Collins Line, which might have surpassed Cunard had it not been for a tragic accident. They created the first railroad, the one we all know from games of Monopoly, the Baltimore & Ohio line, the B&O. They expanded to Philadelphia and to New York, and their reach grew. They were financial innovators and one of the largest cotton merchants in the world. So influential was Brown Brothers by the mid-nineteenth century that when the thunderous celebrity preacher Henry Ward Beecher wanted to make a point from his pulpit in Brooklyn, he constructed an entire sermon lambasting his congregants for placing more faith in letters of credit issued by Brown Brothers than they did in God.

Brown Brothers was, in short, woven into the economic fabric of nineteenth-century America, its transportation network and its trade, with the cotton South and the agrarian West, with England and by extension with the rest of the world. It provided the credit that was more trusted than the notes issued by governments or the promises printed with abandon by the wildcat banks that dotted the American frontier. Paper issued by the House of Brown was essential to commerce, and without trusted paper, trade at the scale and scope required would have been impossible. The Browns determined exchange rates, and they provided travelers with letters to use abroad, which was a necessary prerequisite to a more interconnected world. Wherever American commerce flowed, Brown Brothers was there to keep it flowing. It didn’t just make money for itself; it made money for America. And without money, there would be no rise of the United States as a global power.

In the nineteenth century, the economic ambitions of the United States focused primarily on conquering the continent. But the conse vative quali- ties that allowed Brown Brothers to thrive and survive in the first half of the century kept them largely on the sidelines of the investment craze of the second half of the nineteenth century: the railroads. Alexander Brown and his sons had helped create the first American railroad in the 1830s, but they largely eschewed the railroad boom in the decades after the 1860s. Fortunes were there to be made, but most of the railroads went bust, leaving their investors with worthless stocks. The innate caution of Brown Brothers prevented them from reaching the heights of J.P. Morgan, but it almost certainly protected them from being deluged by waves of bankruptcies and failures. Then the Great Depression hit.

The merger of Brown Brothers and Harriman blended two distinct cultures born of different paths to success. In the late nineteenth century, the lasting money was usually made by those who picked up the pieces after the initial railroad investors had lost everything, which was how E. H. Harriman built his empire. He was, in the 1890s, the nouveau riche, crass and aggressive, a rough and tough bundle of intensity. He courted attention where the partners of Brown Brothers avoided it. But while Edward Harriman and Alexander Brown could hardly have been more unalike, by the time Harriman’s fortune merged with the House of Brown in the 1930s, the world of his sons and of the next generations of Browns was more similar than not, nurtured by a small set of boarding schools and colleges that distilled the values of their fathers into a coherent, rigid web of money, duty and service that became the backbone of “the Establishment.”

The world this elite created after 1945 was not by design or intent. After the ravages of the Depression and a harrowing war, the United States found itself with immense relative power confronted by an adversary in the Soviet Union that was championing a system antithetical to its own. Whether the conflict of the Cold War was inevitable, Brown Brothers and the Establishment saw no other path. To meet the challenge, they distilled a formula to defend the world they knew and that they believed would serve everyone just as it had served them. The framework they erected unleashed the pro- ductive capital of the world, and established the foundation for the globalization of commerce and capital that so defined the rest of the twentieth century and the beginning of the twenty-first.

Having reached the apex of its influence in the y ars immediately following World War II, Brown Brothers, by the end of the twentieth century, had faded in relevance. Its competitors, the firms of Goldman Sachs, J.P. Morgan, Morgan Stanley, and so many others, elected to go public in the 1980s, turning what had been skin-in-the-game partnerships into publicly traded entities relying on shareholder capital instead of their own. Those firms used that money. They accumulated almost unprecedented wealth, and they courted attention. That allowed them to outstrip Brown Brothers in size and scope, and, perhaps most critically, in greed and ambition. And then, in 2008, they almost destroyed the system they had made and that had made them.

Brown Brothers Harriman stayed out of that fray. Today the firm remains a large global financial institution with more than five thousand employees across the world. Its business has changed radically. It now acts as a custodian for trillions of dollars of global assets, a large amount of money that earns the firm relatively small but steady fees. Its culture revolves around service. In cleaving to the idea of a partnership, the company didn’t join the drunken capital party of the 1990s and 2000s and never rose so high that it could jeopardize the entire financial system. In that crucial sense, it stands as a reminder of what once was, and perhaps what all these banks should have remained. Mention the firm today, and many wonder if it still exists, if they wonder at all; others shake their heads and sigh as if to say, “How sad.” It is not at all. Given how close the global financial system came to the abyss in 2008‒9, and given that it was caused by the detachment of personal gain from public risk, the quiet continuance of Brown Brothers Harriman is a lesson for what capitalism can be. It provided the fuel, and it also set boundaries.

For sure, its particular ethos of service could mask a multitude of sins. Without question, it was self-serving and self-enriching, but more often than not it also served the needs of society at large. That was not without its own excesses. The firm was crucial to the cotton trade, and cotton depended on the labor of enslaved men and women. At the beginning of the twentieth century, Brown Brothers plunged into financing businesses and banks in Central America, indifferent to the disruptions that ensued, and then worked closely with the U.S. government to overthrow a government that threatened its investments. That was the darker side of how money made the world.

We live in a time when we have all become acutely aware of the role of capital as the glue binding our economy and as tinder that can cause it to implode. Spread widely, it can be a ballast; spread too unevenly, it can open fissures. Money can create a nation; it can energize technology revolutions, from the steamships and the railroads to the internet and the smartphone. But it can also unleash greed and deluge industries and countries, causing shocks that can shake society to its core. It can spread wealth but also concentrate it. It is indifferent to inequality. Nonetheless, the American formula, a capitalism distilled in the mid-twentieth century composed of rules and laws designed by Americans and cemented by the dollar, has been the formula for the world, from a China governed by the Communist Party whose economy is capitalist to the core, to a Nigeria whose government may be corrupt but whose society is market driven, from Scandinavian countries whose social contract flirts with socialism to authoritarian regimes in the Middle East that suppress expression but court investment.

Fiat money and the dollar are the bedrock of the global system, and Brown Brothers is part of the underwritten history of how that world came to be. Money is the power contained in the atom, which is why having people who believe their role is to serve the greater good and consider themselves stewards is a necessary prerequisite for a stable society. The Hippocratic oath does not guarantee that doctors will do good, but it tries to ensure that they knowingly do no harm. And in an age of pandemics and economic crises, Brown Brothers also demonstrates that being ever prepared for a storm is not just prudent; it is imperative.

The story of the Brown Brothers is the secret history of Wall Street. It is a story of sustainable capitalism. You might not like it if you object to capitalism, but you might want to emulate it to guard against capitalism’s inevitable excesses and imbalances. After the 1980s, their model of capitalism was superseded by more avaricious and ultimately more toxic variants, which is all the more reason to remember that other paths are possible. The partners of Brown Brothers have never wanted to be the story, and that reticence has made the firm’s centrality easy to overlook. But it is an underground river that flows through the American past, and its saga is a window into the crucial nexus of money, power and influence that made America. It is at times a heroic tale, sometimes prosaic and beneath the veneer of gentility, occasionally brutal and rapacious. But such is the history of America, of global capitalism and of any rise to power. Celebrated or reviled, it is necessary history, and in the case of Brown Brothers, one that has never been adequately understood. This is their story, and ours.

Table of Contents

Introduction 1

Chapter 1 Coming to America 13

Chapter 2 The B & O 41

Chapter 3 Everybody is Speculating 63

Chapter 4 Dreams of the Arctic 87

Chapter 5 A Very Civil War 113

Chapter 6 A Nice Sense of Commercial Honor 133

Chapter 7 Nothing is Impossible 157

Chapter 8 The Republic of Brown Brothers 183

Chapter 9 Saving Money 211

Chapter 10 The Tapped 231

Chapter 11 The Business of America 249

Chapter 12 From the Ashes 273

Chapter 13 "We Were Very Hard Workers" 301

Chapter 14 A Call to Service 325

Chapter 15 The Wise Men 345

Chapter 16 In the Valley 369

Chapter 17 When is Enough Enough? 393

Acknowledgments 407

Notes 409

Index 427