The power and weakness of capitalist ethics

Brown Brothers Harriman has never ranked among the flashier or more famous of U.S. financial institutions. But then, neither has it ever ranked among the more notorious or infamous. Formed in a merger between its two namesakes in 1931, with roots in the early 19th century, the Wall Street bank has long been a reputable going concern that, especially of late, has largely avoided the spotlight.

The staidness of the bank is precisely what attracted Zachary Karabell to writing what he calls its "secret history." That quality, Karabell contends in his new book, Inside Money, makes it an ideal window into the prodigious, if at times destructive, history of U.S. finance. It also contains a "lesson for what capitalism can be," something different from the winner-take-all model of the early 21st century. In the better capitalism Karabell imagines, bankers' moderation would set guardrails against capitalism's inevitably destructive tendencies.

There is another reason why Karabell sees Brown Brothers Harriman as a fitting subject for an epic, centuries-spanning chronicle: the influence that several of its partners—Averell Harriman and Robert Lovett—wielded in forging post-World War II U.S. foreign policy. To understand the American Century, Karabell contends, one must apprehend this fusion of private finance and public power, appreciating an unappreciated source of the U.S. Cold War mentality: the ethos of Brown Brothers Harriman. It was an ethos of commercial honor and fidelity but also of a quiet power, comfortable in its skin, forged in the boom-and-bust world of early U.S. finance, fashioned later in Yale secret societies and New York social clubs.

Both finance and foreign power have proved to be fragile phenomena historically. Banks boom and bust. Empires rise and fall. Tacking between histories, Karabell's account poses the general question of whether ethical restraint is, for long, ever sufficient to discipline unruliness or stave off decline.

Focused on Brown Brothers, the first part of the book is an excellent history of 19th-century U.S. finance. Patriarch Alexander Brown migrated from Belfast to Baltimore in 1800 to thrive in the linen trade. His sons founded Brown Brothers branches in Philadelphia in 1818 and New York City in 1825. They financed trade in goods but soon specialized in money markets. Back then, the money market, if backed in principle by a hard metal standard, was a world of privately issued paper notes. It revolved around the reputation and trust of paper note issuers and brokers, as the prices of notes hinged on confidence in their stated face values. In this fractional reserve banking system, there was never enough gold and silver in the vaults to back the face values of all notes in circulation. The speculative booms of the 19th century were fueled by paper credit. However, if confidence ever collapsed, panics and devastating financial crisis followed.

Even though during the U.S. Civil War the federal government asserted more control over bank note issues, part of what maintained the system was faith in a few august banking establishments. Brown Brothers counted among them. Over the course of the century, the bank's center of gravity moved to Wall Street. Partners cultivated reputations worthy of the faith vested in the firm. In business, they could not partake in rampant or greedy speculation, instead "forever steering a course between caution and too much caution." In society, partners displayed the good graces requisite to their class, wealth, and social standing. Partners excelled at all this, and the bank thrived. Never did any imagine pursuing public office.

Nonetheless, the bank became entangled with state power. Karabell is surely right to underscore the private regulation of 19th-century U.S. banking. Still, Brown Brothers might have gone bankrupt during the Panic of 1837 without a bailout from the Bank of England—an early branch of the firm located in Liverpool to participate in the trans-Atlantic cotton trade, later hived off, made the call. In the early 20th century, when partners sought to make good on their investments in the public bonds of Nicaragua, it brought to bear U.S. gunboat diplomacy. A U.S. Marines outfit decamped to Central America to secure payments. The firm took complete control of the Nicaraguan Central Bank, among other assets. The partnership, if always prosperous, never quite reached the pecuniary pinnacle of U.S. finance, if only because it failed to establish an important foothold in the 19th-century railroad industry, where, apart from Carnegie and Rockefeller, the era's greatest fortunes were made. During the Great Depression, when Brown Brothers was again about to fail, it formed a partnership with Harriman Brothers. The patriarch of the latter family, E.H. Harriman, had indeed struck it rich in late 19th-century railroading, with a large stake in the transcontinental Union Pacific, a railroad born from favorable public subsidy.

Financial necessity formed a partnership in 1931 out of the Browns and Harrimans. Karabell also underscores that the new partners had all chummed around first at Yale University and later in Connecticut bar cars. By then, an American financial WASP elite, a capital-E Establishment of so-called white Anglo-Saxon Protestants, was in place. These men, Karabell writes, had "internalized a way of thinking about themselves and the larger society … a quiet but strong faith, public affirmations of modesty, abjuring obvious greed, the gospel not just of wealth but of work, and a strong belief that with privilege and power came responsibility." The last third of Inside Money is largely preoccupied with how this Establishment influenced post-World War II U.S. foreign-policy making.

As the firm slowly moved away from its family roots, two partners, Averell Harriman and Robert Lovett, become the leading figures. Both took many leaves of absence as bankers to enjoy decorated diplomatic careers. Karabell tracks their activities dutifully, from Lovett's stints in the U.S. military and State Department as George Marshall's righthand man, before he became Harry Truman's defense secretary during the Korean War, to Harriman's peripatetic course, which included stops, among others, as Franklin D. Roosevelt's ambassador to the Soviet Union during World War II, Truman's commerce secretary, a one-term governor of New York, and an ultimately dovish member of the group of "Wise Men" who advised John F. Kennedy and Lyndon B. Johnson on Vietnam, earning the moniker of ambassador-at-large.

Rightly, Karabell grants both men credit for the implementation of George Kennan's policy of containment in the early years of the Cold War. While Karabell attempts no general new interpretation of the pivotal events of these years, it is nonetheless illuminating to place Harriman and Lovett in the context of Brown Brothers Harriman's longer history. Unlike Kennan or, say, Dean Acheson, not all American Cold Warriors were of an intellectual bent. What motivated some was just that they "believed in the capitalism they helped create." Alexander Brown would have recognized their governing creed of "work, duty, action" but also "discretion." Powerful men should exercise power responsibly and (ideally) quietly. Further, Karabell suggests that the sensibility of Brown Brothers Harriman partners helped distinguished advocates of containment, however forceful, from the more brazen defenders of "rollback," such as the Dulles brothers, who more actively sought confrontation with the Soviet Union.

To draw out the larger lessons of this history, Karabell returns to banking, concluding the book with chapters on how Brown Brothers Harriman became the sleepy if still reputable bank it remains today. The firm's history, he argues, proves that bankers can be at once self-serving and in service to society. Prudent financial institutions, while making money, can set limits on profit-oriented recklessness to the public's benefit. Karabell makes one good point, emphasizing the never-changing partnership structure of Brown Brothers Harriman. The firm risked partners' capital, never the public's money. True, the largest U.S. investment banks (Goldman Sachs, Merrill Lynch, Bear Stearns, Lehman Brothers) that engaged in excessive risk-taking in the run-up to the Great Recession had all transformed since the 1980s from partnerships to publicly traded companies. The top bankers at these financial institutions were not ever risking their own financial skins, even before they got bailed out by U.S. taxpayers.

In finance, undoubtedly private ethics matters. But just how much? Karabell is right to underscore the connection between public power and private finance in the story of Brown Brothers Harriman. But that connection runs deeper than even his account suggests. Root and branch, money and sovereignty are always intertwined, although the exact linkages differ over time. It is better to detail and explain these linkages than to characterize the 19th-century financial system as "private"—Brown Brothers was bailed out by the Bank of England in 1837, after all.

Karabell writes that when the 19th-century banking system collapsed during the Great Depression, almost all the firm's partners accepted New Deal regulations, even the more conservative. But he could have done more to acknowledge that it was the undoing of that (imperfect) regulatory regime since the 1980s, more so than bankers' greed, that has been responsible for the most egregious financial sins of the past decades. After all, since 2008, it has been new regulations, and not reborn ethics, that have barred pre-2008 levels of leverage among the great U.S. investment banks (thankfully, or the COVID-19 financial crisis would have been far worse). Surely, Karabell is correct: The world needs more ethical bankers. No less, however, it needs good laws on the books and excellent public servants enforcing them.

As it happens, as an example of private moralized banking Brown Brothers Harriman has far from a pristine record. Karabell admits this: There "is no way to sugarcoat the fact that the Browns," as key financiers of the antebellum cotton trade, "profited greatly from slavery." In Nicaragua, the firm participated in a sorry chapter in the history of U.S. imperialism. Karabell could have emphasized more that E.H. Harriman's Union Pacific depended on the dispossession of Native Americans. Other readers, like this one, may experience dissonance coming across, amid high praise for Brown Brothers Harriman's ethics, such whopping qualifications.

There is a final thread that Karabell might have pulled through the book, although he did not. It has to do with the fate not of U.S. finance but the post-World War II U.S. foreign-policy establishment. Comparing finance and foreign policy, there seems to be a parallel story, with both roads leading to rashness, undermining the legitimacy of Ivy League-educated elites.

It was the presidential administration, after all, of George W. Bush, the grandson of Brown Brothers Harriman partner and Connecticut Sen. Prescott Bush (who emerges from Karabell's account as a cheerful Yalie but not at a very memorable banker or senator), that in 2003—the moment U.S. investment banks, hardly emulating Brown Brothers Harriman's historic standard of prudence, were going all in on heedless financial speculation into U.S. residential mortgages—swaggered into a feckless invasion of Iraq while articulating a brash logic of U.S. foreign power that would have scarcely been recognizable to Averell Harriman or Robert Lovett, any more than they would have recognized putting all their partners' chips into a gamble on the mortgage-backed securities market. In neither case did a prior history of disciplined self-restraint prevent a disastrous failure of excess. U.S. domestic and foreign policy are still carried out in the wreckage of both these gambles.

Inside Money can be read as a rather convincing declension narrative of the 20th-century U.S. establishment, financiers, and foreign-policy mavens alike.