Thursday, May 20, 2021

capitalists who put morals above money



The Wall Street Capitalists Who Put Morals Above Money

Wall Street, 1847
Credit...Library of Congress

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Brown Brothers Harriman and the American Way of Power
By Zachary Karabell

There is a line at the end of “Inside Money,” a history of a private Wall Street partnership, that it regarded risk management not as a box to be checked but as a “first principle.” It’s a powerful idea, and it explains how Brown Brothers Harriman has survived two full centuries without going bust, or recklessly pursuing growth, or blowing its capital in any of the speculative bubbles from steamships and railroads to real estate and bitcoin that have inflated since the presidency of James Monroe.

The vital ingredient in Brown Brothers’ success — which Zachary Karabell reminds us of again and again — is that the firm was not acting as an agent for “anonymous shareholders.” It was investing its own capital, and this all but required that it act with prudence.

Other firms were better known, and frankly, others had more dramatic stories. Yet there is something quietly stirring in the tale of Alexander Brown, a Belfast linen merchant who emigrated (exactly why no one knows) to Baltimore in 1800, and together with his four sons became, first, a major linen importer, then a dealer in cotton, coffee, copper, iron and sugar, then a financier.

Karabell, the author of several books on business and history, uses Brown Brothers as a lens into the nation’s growth, and especially in the early decades, it’s an apt device. In 1827, Alexander invested $50,000, a daunting sum, in seed capital for the Baltimore & Ohio, America’s first passenger railroad, a technology so unproven that the directors planned for horse-drawn carriages if steam power failed. Just as consequentially, the firm financed the growing trans-Atlantic trade. Regrettably, it became a major facilitator of slave-picked cotton.

Antebellum America learned capitalism on the fly, challenged by its expansive and difficult terrain and buffeted by periodic financial busts that, with rare exception, Brown Brothers navigated with aplomb. The young country needed oceans of capital; the Browns provided it with prudent restraint.

We don’t hear much about the Browns personally, but what we hear is stalwart. They lived in plain homes, dressed in merchant waistcoats, rode in one-horse coupes. They never quarreled, though they occasionally disagreed over the proper level of risk. “Don’t deal with people about whose character there is question,” intoned Alexander, sounding much like an amalgam of Ben Franklin and Warren Buffett. “It is far better to lose the business.” His eldest son, William, dispatched across the pond to run the Liverpool trade, loyally echoed Alexander. “The primary object is safety.”

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No scandal touches these Presbyterian do-gooders — no purloined bonds, no dark sheep. Their driving ethos was as much community as profit. We hear from Grace, the matriarch, not compassion but prim censoriousness when one of her offspring became agitated over a rough patch in business: “I should be ashamed if any son of mine were not man enough to bear misfortune, when it comes.”

Though Alexander urged his sons to focus on their strengths — “shoemaker, stick to thy last” was a favorite proverb — the Browns gradually and carefully diversified, into merchant banking, stocks and bonds, letters of credit, foreign exchange. Karabell understands the vital role of credit, especially in early America. How would a merchant finance goods whose destination was an ocean away? Bankers stepped into the breach, issuing a private version of currency.

The House of Brown (ultimately split among Liverpool, New York and Baltimore branches) prospered, of course — otherwise no book. Its partners remained discreet, philanthropic, self-consciously civic. They took in nonfamily members, but most were similarly bred: Groton, Yale, Protestantism. Later generations were distinctly genteel. Consider that Thatcher Brown, a future managing partner, agonized at Yale in the 1890s over the momentous question of whether to take up smoking. His father, John Crosby Brown, earnestly reminded him of the stakes: “You have come to one of the crises in your life my son.”

This is not exactly mini-series material, and the Browns’ stolid rectitude presents any would-be chronicler with a challenge. Indeed, the subjects went out of their way to avoid the headlines. Dissuaded by their so-so investment in B&O, and a more disastrous escapade in shipping, the Browns avoided the rampant railroad speculations of the Gilded Age. As Karabell candidly admits, “Because they sidestepped the railroads, Brown Brothers became relatively less influential and relatively smaller.”

However, in the 20th century, with America nurturing imperial ambitions, the firm uncharacteristically went astray, making a highhanded attempt (with State Department encouragement) to invest in, and reorganize, the finances of Nicaragua. The investment was ultimately rescued by an occupying force of several thousand United States Marines. Karabell frames this episode as a precursor to Brown Brothers’ rise to the pinnacle of American political power. He abruptly transitions to the saga of E. H. Harriman, a railroad baron, and his son Averell. During the Great Depression, Averell’s well-capitalized investment bank merged with the troubled Brown Brothers, and they managed to ride out the storm.

From here, the book is not much about Wall Street at all — rather, it is about the singular careers in public service of three of the partners: Averell, a roving ambassador and high-level minister on call; Robert Lovett, who implemented the Marshall Plan and was a key figure in formulating Cold War-era foreign policy; and Prescott Bush, a plucky Midwestern Yale man and talented salesman, eventually a United States senator, who would sire a political dynasty.

As with the Browns, the Harrimans today are for the most part overlooked (how many visitors to Harriman State Park are even dimly aware of the park’s benefactor?). Karabell rightly describes these banker-financiers as pillars of the American establishment. But their public careers, while interesting, have little bearing on the firm. The author stitches his story together with gauzy generalizations, like “The rise of a WASP elite that moved seamlessly between government and finance cemented the bonds between money and political power.”

Karabell suggests that during and after the Progressive Era, financiers entered politics to temper the public’s reaction against “wealth and privilege.” He writes of bankers generally that “they realized that if they didn’t step into the political fray, they could be deluged by the tide.” But he does not present evidence that the partners felt “deluged.” Rather, he repeatedly shows that they were animated by a goal of public service, and a general belief that the postwar capitalist democratic order was preferable to communism.

Karabell’s leitmotif is the pre-eminence of money in America’s growth, and in its culture, but his frequent flights of rhetoric — “Money can create a nation,” “Money is the power contained in the atom” — will not be to everyone’s taste.

His narrative of a firm that remained private and true to its credo is engaging and new. But it is hard to credit Karabell’s judgment that despite Brown Brothers’ smaller size, “its influence and reach were as extensive as the flashier J. P. Morgan & Co., or the much larger Chase National Bank.” Similarly, when the author writes that the firm’s “centrality” is easy to overlook, we can hear him straining. Alas, no amplification is needed to elicit our interest in the understated Browns. Shoemaker, stick to thy last.

Roger Lowenstein is the author, most recently, of “America’s Bank: The Epic Struggle to Create the Federal Reserve.”

Brown Brothers Harriman and the American Way of Power
By Zachary Karabell
Illustrated. 448 pp. Penguin Press. $30.

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