The American Way of Power — Zachary Karabell

The American Way of Power — Zachary Karabell

The American Way of Power — Zachary Karabell

Our economy wouldn’t be the same without it … Inside Money, written by prolific author Zachary Karabell, takes readers on a historical journey of the private investment firm Brown Brothers Harriman. In this episode, Karabell discusses the vital role that Brown Brothers played in building our capital market system and nation with host Charles Mizrahi.

Topics Discussed:

  • An Introduction to Zachary Karabell (00:00:00)
  • Facilitators of Trade (00:06:20)
  • Character is King (00:14:39)
  • B&O Railroad (00:21:36)
  • Transatlantic Trade (00:28:58)
  • The Capital Market System (00:35:51)
  • Brown Brothers Today (00:44:21)

Guest Bio:

Zachary Karabell is an author, columnist, podcast host and founder of the Progress Network. After attaining a Ph.D. from Harvard University, Karabell authored 13 books that span history, economics and international relations. His latest book is below. It provides a detailed history of the private investment firm Brown Brothers and describes how it helped shape current American finance.

In addition, Karabell is the host of “What Could Go Right?” where he sits down with various experts in politics, economics and the arts.

Resources Mentioned:

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Read Transcript

ZACHARY KARABELL: I kept trying to ask them: “Why didn’t you go public?” And they were like: “Why didn’t we become purple?” It wasn’t even part of their mindset. And part of that is that, when you go over public, the incentive structures change. If you’re Tim Cook at Apple, you could personally make $10 million from a deal. You’re never going to lose $10 million from a deal. That’s going to be dispersed among shareholders. Brown Brothers, [with] every deal they do, it’s partners’ money. And they could lose the money.

CHARLES MIZRAHI: My guest today is Zachary Karabell. Zachary is a prolific author on the subjects of history, economics and international relations. He’s written 13 books! His latest book is, Inside Money: Brown Brothers Harriman and the American Way of Power. The book is a sweeping history of the legendary private investment firm and how it has evolved from the early 1800s to the present.

CHARLES MIZRAHI: Inside Money gives the reader a tour of American finance and the massive role that Brown Brothers played in building our nation.

CHARLES MIZRAHI: I recently sat down with Zachary, and we talked about how Brown Brothers helped create the capital market system and the lessons we can learn from its approach to finance.

CHARLES MIZRAHI: Zachary, thanks so much for coming on the show. I greatly appreciate it. After I read your book, I had to speak to you. There were so many things that I learned, so let’s get right to it. The name of the book is, Inside Money: Brown Brothers Harriman and the American Way of Power. Welcome to the show, man.

ZACHARY KARABELL: Thank you, Charles.

CHARLES MIZRAHI: OK. Zachary, you wrote a lot of books — 13 of them. And this is number 13. My first question is: Why did you write about Brown Brothers? When I worked on Wall Street, I used to pass its office building. I didn’t think anyone — who was living — still worked there. It was about as boring as can be. Its logo wasn’t a logo. It was just a name on a building. You never saw anyone walk in or out. I never met anyone on Wall Street who came from Brown Brothers. So, why did you pick what seems to be a boring, staid and non-flashy company to write a book about?

ZACHARY KARABELL: First, thank you for that scintillating introduction to the topic. I wanted to write a book about the crucial and central role of money in creating American power in the 19th century. And then, [I wanted to write about] the way in which the men who made the money — and they were all men. This is a book about white men — for better and worse. And the men who made money in the 19th century created the global economic — and to some degree international — system of the 20th century.

ZACHARY KARABELL: So, the men who made the money in the 19th century created the international system of the 20th century. And the partners of Brown Brothers, in the middle of the 20th century, were crucial to the formation of the architecture of the world that we live in today. The World Trade Organization, United Nations, national security state, Pentagon, Department of Defense — All of them are outgrowths of World War II. And several Brown Brothers partners were present at the creation [according to] Dean Acheson.

ZACHARY KARABELL: And then, what happened? Where did that mid-20th-century WASP establishment elite go? What happened to it, and what replaced it in the late 20th and early 21st century? There is no firm that can tell that story other than Brown Brothers. It was around from 1800 to today — even though most people don’t even realize that.

ZACHARY KARABELL: I knew two things when I wrote the book. I knew what you just said. It was a statement of rectitude. And that was going to be a challenge to write a narrative about. And it’s one of the reasons why there’s no book about them.

ZACHARY KARABELL: I did that once before in my writing career. I wrote a short biography of Chester Alan Arthur — who most people don’t even know was president of the United States in 1891. Therefore, he’s not one of the more memorable presidents. I think it’s interesting to write about things that no one writes about — as long as there’s a reason. And the fact that it’s been around for 225 years is not in and of itself a reason. Living long doesn’t necessarily [mean] living interesting.

ZACHARY KARABELL: But they are a way to tell the story I just told. As I got into the book, and learned about them in a way I didn’t fully know, their 19th century presence in the United States was much more central than I even realized. The fact that [Brown Brothers] is still around — and its profile is as you described it — says something profound about what Wall Street and the financial system have become. It says something profound — and not in a good way — about what Wall Street has become — and what it could have been or could still morph into in the future.

CHARLES MIZRAHI: Hold on to all of the 21st century stuff. We’ll get to that in a second. Those who want to continue listening, do so. You know what I find fascinating about this book? I’ll tell you how I found you. Every Saturday, I look through the review section of the Wall Street Journal. And I look through all the book reviews. They’re great. I live for that Saturday edition. When it doesn’t come on Saturday, I get really peeved.

CHARLES MIZRAHI: In the four sections of the Wall Street Journal, the reviews section has a tremendous number of books and wisdom in there. You can read the reviews. And some of them are absolutely great. I saw your book and said: “I’m always interested in economic history — how we became what we are and why the United States became what it is.” What were the differences?

CHARLES MIZRAHI: Your book wasn’t an easy read. It wasn’t something that you’d sit down and breeze through. It was a little dense at times. You go into a lot of detail. There was a lot of stuff. I found myself going “bleh.” But then, you start moving on, and holy smokes. So, with that set-up, I want to step all the way back to the beginning of the book. The Lehman Brothers started in cotton in the South. The Brown family started there as well. And when you read the history of Brown Brothers — later Brown Brothers Harriman — it’s really about the economic development of the United States through this firm.

ZACHARY KARABELL: Yep. That’s exactly right. At one point, I joked that they’re a little like the Zelig of American financial history. In every crucial moment of the evolution of the United States, there’s a Brown Brothers banker in the second row — bank back left — looking like a banker who has no interest in being the story. But without them, there is no story. They are the lubricant for the system that makes these things possible — like the creation of the first major passenger steam railroad in the United States and in the world. The B&O railroad was the first…

CHARLES MIZRAHI: Hold on. Don’t get ahead. Let’s go right from the beginning. So, you have this immigrant. Start us from there. He comes to the United States from Ireland and gets into linens, right?

ZACHARY KARABELL: He was an Irish linen merchant. Linen was the big product of Ireland. He flees the troubles. Alexander Brown flees Belfast. He was an upper-middle-class successful merchant who was caught in the Protestant/Catholic/English triangle that beset Ireland in the late 18th century until the late 20th century. And he went to Baltimore because he had a cousin in there in 1800.

CHARLES MIZRAHI: Baltimore was a pretty cool place back in the 1800s. It was an economic hub. Why?

ZACHARY KARABELL: Baltimore, Philadelphia and New York had already supplanted Boston as the primary economic trading hubs with Britain. Even after the Revolutionary War, the primary economic relationship between the United States and the world was with Great Britain. So, all the trade went through Baltimore, Philadelphia or New York.

CHARLES MIZRAHI: Why is Baltimore so important? Why is a trade center around there?

ZACHARY KARABELL: First of all, it was close to the tobacco South up until 1800. So, all those tobacco plantations needed to ship their tobacco abroad. They did so through Baltimore. And then, as tobacco gave way to cotton — starting in the 1790s with Eli Whitney and the cotton gin — Baltimore became the primary cotton trading hub to Liverpool, which was the primary hub in the UK. And that’s how the Brown family made big money.

ZACHARY KARABELL: They moved out of the linen trade. They traded a lot of other stuff. At one point, in the 1820s, they traded just about everything there was to be traded. And they owned a bunch of ships. But they got into the cotton trade — as you just alluded to — with Lehman Brothers. In many ways, the Brown Brothers of the 19th century is like an earlier, precursor WASP version of Lehman Brothers. It was a very different culture. And part of the book is about that.

CHARLES MIZRAHI: Forget the culture. It was the opportunity there. People don’t realize that cotton was the semiconductor of its day. It was everywhere — ubiquitous. It was important. It had a large percentage of GDP — especially in the United States. And the most important thing was that you needed a way to facilitate buyer and seller transactions. As you wrote in the book, there was no clearinghouse between the two parties.

ZACHARY KARABELL: And there’s no foreign exchange system. So, all the cotton is grown in the United States and sold in Britain. It’s grown in a dollar economy, and it’s sold in a pound economy. Someone had to figure out what the right ratio was between dollars and pounds — without there being any international clearing. There was no printed rate.

ZACHARY KARABELL: The Browns became so important to the cotton trade. First of all, they controlled somewhere between 10% and 15% of the cotton trade by 1830. And a lot of that had to do with Alexander Brown’s older son, William Brown — who was dispatched to Liverpool. And he became a grandee in Britain. In fact, he became a member of Parliament and one of the richest men in Liverpool. I could have written a whole book about the English legacy of Brown Brothers — which becomes something called: Brown Shipley.

ZACHARY KARABELL: They became such a trusted merchant of cotton that their rates — dollar to pound — became the rates for a while. They were called Brown’s published rates, and they were used by all the other merchants as reference points for how to do this.

ZACHARY KARABELL: The other thing you allude to is — and this wasn’t a cotton issue as much as an ocean-bearing trade issue. If I part with my goods — and I’m a cotton merchant and want to sell something abroad — how do I know that someone is going to pay me for it on the other side? Once the cotton leaves, it’s gone. If you’re the person on the other side, you want to know: “How do I know that I’m going to get the goods if I pay for them?” That’s what merchants do. They solve for that problem. And the Browns quickly moved away from being physical merchants of cotton to paper facilitators of all cotton trade. Also, there’s only so much you can scale with physical trade. You need ships, bulk…

CHARLES MIZRAHI: And warehouses…

ZACHARY KARABELL: It’s a capital-intensive business. They also didn’t want to be complicit in the slave system — even though they were completely complicit in it. And the more they could step away by dealing with paper and not the physical trade of cotton — and having agents in mobile and New Orleans — the more they could semi-rationalize their complicity in a system they knew was profoundly immoral — but from which they immensely profited.

CHARLES MIZRAHI: We could say the same thing today with the way that iPhones are made in sweatshops in China. A lot of the goods that we get from China — we’re complicit in a sense because we’re buying it. But we don’t promote it. It’s not something that we’re proud of doing. It’s something that we try to stay an arm’s length away. I totally get it.

ZACHARY KARABELL: That was their issue. And one of the things I realized when writing the book was — I got a PhD in American history, and I thought about these things. But I hadn’t thought about them in that way.

ZACHARY KARABELL: On the eve of the Civil War, one of the reasons that Lincoln says you can’t have a nation that’s half slave and half free was [he] recognized that so much of the northern economy — and Brown Brothers is Exhibit A for this — was embedded in cotton profits.

ZACHARY KARABELL: So, even if you weren’t growing it or working on a plantation, you were benefiting from the system. I think part of what he was saying was that a half-slave nation was an entirely-slave economy. You couldn’t have half-free and half-slave economies because they weren’t separate. They were one economy that the North benefitted from. And if that was morally untenable, at some point, you had to end it — which the British had done way earlier.

CHARLES MIZRAHI: Yeah, but hang on. The British did away with it on their shores but were certainly happy to do it on ours and let us do the dirty work.

ZACHARY KARABELL: It’s the outsourcing of morality.

CHARLES MIZRAHI: That’s what we do today with semiconductors and electronics. So, I think it’s morally wrong to judge a society out of context of its time.

ZACHARY KARABELL: My point in this is one can acknowledge, look at and confront without judging.

CHARLES MIZRAHI: Yeah, I’m good. I’m totally good. You don’t have to go any further than that. So, for this relationship to have a buyer and seller transaction — by the way, the Rothschilds were the same way. He sent his sons to the four corners of the Earth. They were the trusted agents for facilitation. There was no capital market system. There was no way to get goods from A to B with currency, fluctuations and currency exchange. You needed someone with a solid reputation to say: “I’ll take the money, charge a fee and make sure the other party’s going to get it and charge a fee there.” It was a brilliant system, and I think the phrase the Browns used was: “Character is king.” Reputation was everything. And I think the phrase was: “Shoemaker know thy last.”

ZACHARY KARABELL: It’s: “Stick to thy last.” It was Alexander Brown’s constant. And he wrote all these letters to his kids from 1800 until his death in the early 1830s. They’re this compendium of homilies. They read like a weird amalgam of Polonius’ wisdom.

CHARLES MIZRAHI: It’s like Poor Richard’s. I was thinking of Poor Richard’s from Ben Franklin. I guess that was the style in those days, right?

ZACHARY KARABELL: It was. And he’s constantly lecturing his kids and drumming home what we would consider to be business clichés. Trust as hard to gain and easy to lose. Only go into business with reputable people. Know your customers.

CHARLES MIZRAHI: It’s the same thing everyone does every year when they flock to Omaha, Nebraska to listen to Berkshire. Warren Buffett said that you can’t make a good deal with a bad person.

ZACHARY KARABELL: It’s a great point. I hadn’t thought about them. The Buffett example is perfect. But unlike Buffett, they actually created a multi-generational business. And what’s fascinating about Brown Brothers is that, by the time Lehman Brothers implodes, there are no Lehmans left. There are no Brown family members running Brown Brothers. There were four generations that ran it.

ZACHARY KARABELL: But the culture remained completely like what Alexander Brown lays out in 1810. A time of chaos is not a time to take risk. The time to be prepared for crisis is before — not during. Crises will happen, right? This was a family that understood it needed to go to sleep prepared for the world to negatively change [the next day]. It does, and it will. It always has. And you’ll never know when. Nobody writes you a letter the day before and says: “Oh, by the way…”

CHARLES MIZRAHI: In the market, they say: “Nobody rings a bell at the top.” No one’s going to ring a bell and tell you tomorrow. So, your reputation had better be good. The people you do business with better be accountable, and you had better vetted them properly and hit the right exchange rate. So, your books are really even at the end of the night. And that’s so the opposite of what Wall Street became.

ZACHARY KARABELL: That’s what’s fascinating. That culture in no way precluded them from making a lot of money. Alexander Brown was one of the richest men in the United States in the 1830s. We don’t remember that the way we remember the Astor family. The Astor family wanted its name everywhere — Astor Place and foundations. We don’t remember it the way we remember Vanderbilt or Carnegie. They wanted their names out there.

ZACHARY KARABELL: The other part of the culture was: Your clients, business and the family were what mattered. This was a press-shy family, and it’s a press-shy firm. This is a firm that in the 19th, 20th and 21st centuries did not want a book written about it. And there’s a reason that there are no books written about it. Unlike all those others, their aspiration to greatness was more embedded in what they were doing and what they achieved than making their name famous.

CHARLES MIZRAHI: You don’t see: “A trader from Brown Brothers did so-and-so today” or “took a huge position and almost sunk the firm.” You heard about it in 2008 during the financial crisis. It wasn’t too big to fail. It wasn’t overleveraged. It wasn’t involved in any of this crap. But let’s hold on to that because I definitely want to get to it. You just jumped 200 years. I’m still fascinated with what happened at the point. I think it’s so important. Many of us wake up on third base thinking we hit a triple. But it’s these guys — who built this financial system — who set America apart and propelled it ahead of every other nation on Earth. They created the financial plumbing.

ZACHARY KARABELL: But even in the 19th century, by the time the children inherit the father’s empire in the 1830s — and it’s right to the children. William is in Liverpool, and James is in New York. The other two brothers sort of step aside. They are not temperamentally suited. They were quite competent. There were four of them. So, the two sons give the business over to the next generation — to one son in New York and a bunch of non-Brown partners in Liverpool — who then become leaders of the Bank of England.

ZACHARY KARABELL: What’s amazing is that they knew they were born on third base. They didn’t pretend they’d hit a triple. Their whole mantra — the mantra of the fathers to the sons was: “If you’re born on third base, you had better think about what your responsibility is to the larger society that you are in a position of privilege toward.”

ZACHARY KARABELL: The other aspect of their culture was: We can’t thrive privately unless the commons — on which we’re embedded — thrives as well. That’s why they helped build the B&O railroad in 1828 — to make Baltimore competitive with Philadelphia and New York. Funding a railroad wasn’t going to make them any money. And it did not make them any money. They, unlike a lot of other railroad investors, didn’t lose all their money. But it wasn’t done for that. It was done as a public works [project] — funded by private money for public good.

ZACHARY KARABELL: And that’s another aspect that I found fascinating. It’s the idea that, if you’re born on third base, claim it. Don’t pretend you’re special. You are special. You’re not special because you’re better. You’re special because you’re privileged. And if you’re privileged, own it. And then, what are your responsibilities to the larger society?

CHARLES MIZRAHI: So, you keep bringing it up the B&O. So, let’s talk about B&O railroad — monopoly fame. The B&O railroad — Baltimore to Ohio — is a really important point. At the time, travel within the United States was enormously difficult. Just to travel from New York to Baltimore — which you can now do in about a four-hour drive — took about four days.

ZACHARY KARABELL: And that’s if the weather was good.

CHARLES MIZRAHI: To get from Boston — I remember reading McCullough’s book on Adams. It was easier to go from Boston to New York via the Atlantic Ocean than it was riding a horse. It was through these Indian trails — which were extremely small and narrow. And it was cold and hazardous. It took such a long time. And that’s another thing we take for granted. We’re able to seamlessly transport goods throughout this country. To do that back in the day — and the advent of the B&O — meant creating a railroad. It was the Tesla of its day, agreed?

ZACHARY KARABELL: Exactly. It was the moonshot.

CHARLES MIZRAHI: It was a moonshot.

ZACHARY KARABELL: And it was done entirely because the biggest change in those years was the opening of the Erie Canal — from Albany to Lake Erie and Buffalo. That allowed for water transport from the original coastal areas, over the Adirondacks, to what was then the Ohio Valley — or the opening of that area of the United States. And that’s partly what gave New York incredible advantages. It had other advantages — a great harbor. But that was the real leapfrog moment. Philadelphia started building a canal — the Susquehanna — which was also going to connect it to the interior.

CHARLES MIZRAHI: Let me stop. I want our listeners to get up to speed on this. Goods were coming in from all ports — England, France and other countries — to New York, Philadelphia and Baltimore. As the country expanded westward, you now had to get these goods from point A to the West. And the West was a formidable barrier. There were mountains. There were valleys. There were waterways. It was a technological marvel that they could get goods from point A to B. So, the way to do it was through the canal system — through the waterway. These guys came up and said: “You know what? We’re going to do a moonshot.” And the moonshot is a railroad.

ZACHARY KARABELL: They were behind, right?

CHARLES MIZRAHI: Baltimore was behind.

ZACHARY KARABELL: So, the by the time they could have built a canal, it would have been too late in Philadelphia and New York City — and to some degree, the District of Columbia. It was also funding a canal. And to your point: For anybody who understands the geography of the United States, there are no East to West natural waterways in the United States. The Ohio River does a diagonal. But they’re not between the Mississippi and the Atlantic.

CHARLES MIZRAHI: It’s north to south access.

ZACHARY KARABELL: It’s all north to south, and everything else is through mountains. So, humans had to create ways to get from east to west. It was both a moonshot and a Hail Mary simultaneously — to use two clichés. And they said: “We’re going to be behind, so we’re going to do this thing.” There had been one small passenger railroad in Manchester — or in that area of the Midlands in the UK. And they didn’t even know that steam engines would work. They had a whole contingency. They were going to have the train drawn on tracks by horses.

CHARLES MIZRAHI: By the way, you wrote it in the book. They tried that. It was a race to see if that technology or the new technology…

CHARLES MIZRAHI: I started reading more books about it. I really need to read a lot more. There’s one book that was all about the steam engine being a revolution. These things blew up. They were hazardous.

ZACHARY KARABELL: Yeah. In fact, there was a test race for the B&O with the directors. And the horse actually won because the steam engine exploded. That was always a problem. You never wanted your engine to explode. People died. Trains were dangerous. People died on trains in those years.

CHARLES MIZRAHI: The trains were an issue way into the 1870s and 1880s — when east to west and west to east were going on the same tracks. So, the timing had to be perfect. And that’s why they created…

CHARLES MIZRAHI: Just as an aside, I collected pocket railroad watches. These things had to be accurate because so many lives were lost when they used the same tracks and crashed. So, they used to have railroad watches. The railroad men had to pay for it on their own. They were spot-checked. They had to be within 10 to 15 seconds in different positions. So, we take a lot of this stuff for granted. Moving goods from point A to B was not only hazardous and costly, but in many cases, it was impossible because of nature.

ZACHARY KARABELL: So, they build this thing. But they don’t put up all the money. They galvanize the entire city of Baltimore. There’s a stock issue. It raises a public stock issue, and people invest in it the way they would invest in war bonds later on. It’s an act of civic engagement. And the state of Maryland puts in some money.

ZACHARY KARABELL: In these years, one of the big contests before the Civil War was how much the federal government should spend on public works and infrastructure. Now, we’re having a debate about whether or not we should spend $1 trillion on roads and high-speed internet. In those years, it wasn’t even clear to people that the federal government had been empowered to spend money on infrastructure.

CHARLES MIZRAHI: And especially intrastate. Why should Rhode Island pay taxes for Maryland to build a railroad?

ZACHARY KARABELL: So, there had been some money for the Cumberland Road — which was another big public work. Basically, the B&O was funded by the state of Maryland and the Brown family — but not by the federal government. It eventually gets built. But like everything else, it takes longer and costs more than expected. And frankly, it doesn’t work. It doesn’t work in the sense that it doesn’t make Baltimore competitive as an economic hub — compared to Philadelphia and New York.

ZACHARY KARABELL: And New York had so many advantages at that point that it isn’t clear that anything could have changed its trajectory. But it certainly changed the railroad trajectory in the United States.

CHARLES MIZRAHI: It creates it. It’s the start. Right?

ZACHARY KARABELL: Yes.

CHARLES MIZRAHI: It’s the start of the system.

ZACHARY KARABELL: And what’s fascinating is that the Browns don’t get involved in the later 19th century railroad boom.

CHARLES MIZRAHI: That’s speculation. These guys stayed away from all sorts of speculation.

ZACHARY KARABELL: And as anybody who has looked at this knows, the people who made money on the railroads in the late 19th century were almost never the people who built the them. The people who built the railroads — who funded the first railroad companies — went bankrupt. The people who made money — the JPMorgan’s, Frick’s and Huntington’s — made it by buying the bonds for pennies after the initial investors went bust.

CHARLES MIZRAHI: They were the original value investors. All the risk was taken out. They were basically buying distressed assets for pennies on the dollar. They controlled huge amounts and created monopolies.

CHARLES MIZRAHI: They created this B&O railroad. So, it was now possible to ship goods westward. And by the 1820s or so, the transatlantic trade was still dominating in a big way by cotton. Everyone was making money from cotton in so many different ways. Move forward another 30 to 40 years. Getting mail was a big deal. To get it from one side of the Atlantic to the other [was a big deal]. Tell us about that.

ZACHARY KARABELL: The British Royal Mail, which is part of the British government, pays for an upgrade in the transatlantic mail trade. And it supports Samuel Cunard — who is a Canadian Nova Scotian and creates what becomes the Cunard Line. Most people know it from the Titanic. Cunard and White Star did the Titanic.

ZACHARY KARABELL: The American version of it was funded by Brown and a man named Edward Knight Collins. It’s called the Collins Line. And Edward Nye Collins is a P.T. Barnum figure. He’s a prototypical hustler. He’s the kind of guy who like buys nice clothes but can’t be bothered to button his shirt. He’s every bit the hustler — crude. And he’s exactly the kind of person that the Brown family would have really looked down on as a provincial hustler, speculator and risk-taker.

ZACHARY KARABELL: But James Brown — who was the younger son and had taken over the New York office — was feeling overshadowed by his brother, William, who was becoming the head of the house. And he was convinced by Collins to help underwrite these new steamships.

CHARLES MIZRAHI: By the way, let me interject. It’s a big risk. This is outside of their wheelhouse — pun intended.

ZACHARY KARABELL: William had wanted to do the same thing in the late 1810s. He’d wanted to open a cotton mill. And he tried to convince his father: “We’ll put the money in. We’ll do a cotton mill. We’re doing the cotton trade. Why don’t we vertically integrate and start making the cloth?” And the father said: “Oh, my son. That’s such a dumb idea.” People who don’t stick to their last — who diversify — are the ones who lose money and get into too many business lines.

CHARLES MIZRAHI: By the way, this is Warren Buffett. Stay within your circle of competence. The father wisely saw that they were not going to have a competitive edge. What are we doing?

ZACHARY KARABELL: James wanted to show up his brother and make a mark. He was convinced, by Collins, to put in $1 million of the firm’s money — which was a good chunk then. It was not enough to sink the firm if it had all been lost. So, it was risk capital, but it wasn’t like betting the farm. But it still was a venture. Eventually, because of the Mexican war, Collins convinces Congress to subsidize the Collins Line. He basically said: “The English are owning the transatlantic trade with the Cunard Line because the British government is paying for the ships. Do you really want that?”

ZACHARY KARABELL: And when the Mexican war came on — and everybody got nationalistic and full of national security — people in Congress were saying: “We can’t let the British own the transatlantic trade. We have to have our own ships.” Then, Collins was able to convince Congress to start underwriting the Collins Line for eight years. And those were expensive. Each ship was losing hundreds of thousands of dollars.

CHARLES MIZRAHI: And the reason the government was subsidizing that was because they were carrying U.S. mail back and forth. The U.S. mail was being carried by English ships. So, national pride also motivated them to do that.

ZACHARY KARABELL: And as the United States continued to get more powerful, there was a sense of: “We’re going to want a Navy. We’re not going to want the sea lines owned by the British forever.” So, there was also that future-looking aspect to it. And Collins becomes publicly prominent. The ships are fast. They partly market themselves on trying to break speed records for the crossing.

CHARLES MIZRAHI: How long does it take?

ZACHARY KARABELL: It cuts down four to seven weeks — from wind — to anywhere from 10 to 20 days. Speeds are very different depending on the winds.

CHARLES MIZRAHI: If you think about that, that cuts the travel down by let’s say 70%. That’s like someone coming up with an invention today to fly from New York to California — which takes six hours — in two to three hours. That’s pretty amazing!

ZACHARY KARABELL: And it’s on a regular schedule — which it already started prior to that. These packet lines. It was the first time that ships actually left at a set time and date. It used to be that ships left when their holes were full of cargo. So, you’d show up at the docks and say: “I’m looking for passage.” And they’d say: “We’re either going to leave tomorrow or in two weeks — depending on how long it takes us to fill up the hold.” The packet lines and steam ships left on a schedule. That’s one of those boring things, but it’s revolutionary.

CHARLES MIZRAHI: Think about this now. If you wanted to ship something here, you’d put your goods on a truck. When is this going to be in California? As soon as we fill the truck up. And once the truck is filled, it could be a day. It could be another month and a half.

ZACHARY KARABELL: That’s tough for perishables. So, it’s going quite well — except for the fact that it’s not economically viable without government subsidy. Convincing Congress to keep subsidizing it after the end of the Mexican war — because these things wax and wane. People are like: “We’ve got to defend our shores and stand up against foreign adversaries or competitors.” That crests during a war. Then, the war ends, and people are like: “Why are we spending all this money?”

ZACHARY KARABELL: The British, meanwhile, keep spending all this money. And in fact, for a brief moment in 1852, it seemed like the U.S. was actually going to own the transatlantic routes. All the Cunard ships were diverted to the Black Sea by the British government because of the Crimean War.

ZACHARY KARABELL: But that’s a total false dawn. And then, there’s a huge disaster where the jewel of the Collins Line sinks in the Arctic. It sinks in a totally freak accident. Ships rarely run into each other. The sea lanes are not that crowded. So, the ship sinks. James Brown’s granddaughter and child die. They drown in the ship. They happen to be on the crossing. And it’s used by the Brown family as a cautionary tale.

ZACHARY KARABELL They are not arrogant enough to believe that God personally intervened to teach them a lesson about speculation — which would have been the height of Protestant arrogance. “We’re important enough for God to do this.” But they certainly take it as: “We tried to burst into the public — to be one of the hustlers or movers and shakers…

CHARLES MIZRAHI: It’s not our way. This doesn’t work for us. And it’s also a tragedy. A good part of the family dies. I think they’re buried here in Brooklyn, right?

ZACHARY KARABELL: Yeah, they’re buried at the Plymouth Church — or near there. It’s interesting: Henry Ward Beecher is the celebrity preacher — the Billy Graham of his day. Beecher takes this as an opportunity to stick it to the Brown family.

ZACHARY KARABELL: Beecher is an interesting, colorful character. He ends up having one of the trials of the century because of his own adulterous affair. It becomes a media event later on.

ZACHARY KARABELL: But he basically uses the sinking of the ship to thunderously decry the materialism and greed of Americans — and he holds up the Browns as Exhibit A. He doesn’t go quite so far as to say it. But he basically says: “God is punishing the capitalists and the Brown family. And so, we mourn the loss of life, but they had it coming.

CHARLES MIZRAHI: And just as a side note: His sister is Harriet Beecher Stowe — who wrote Uncle Tom’s Cabin. I remember reading that, when Lincoln met her, he said: “So, you’re the little lady that caused this war.”

CHARLES MIZRAHI: OK, so this is a big deal. We’re in the 1850s now. You see the Brown Brothers in the beginning phase of creating a capital market system. And they’re behind transportation. I’m sorry. Before that, [they’re behind] letters of credit. They’re facilitating buyer and seller [transactions] and acting as a merchant bank. They’re behind exchange rates, capital markets and transportation. And you never hear about them. They blend into the background.

ZACHARY KARABELL: And they do that because they’re not willing to speculate on the railroads. But they’re willing to make a lot of money by doing a lot of other stuff. And they’re willing to be in the second position. So, a lot of the railroad deals — when these things are refinanced — are syndicates.

ZACHARY KARABELL: J.P. Morgan makes a huge amount of money because he becomes the leader of a lot of syndicates. It’s not like Morgan is putting up all this money to buy the vestiges of the Union Pacific, Illinois Central or all the different railroads that he’s invested in. He says: “OK, I’ll put it in the first capital.” And then, he gets all these other people to put in capital.

ZACHARY KARABELL: And the Browns are often part of those capital groups. They’re just not in the top five investors. They’ll put in a little here and there. But it’s all within a risk spectrum of never having too much to lose, being exposed to any one line and operating them. And they’re never underwriting a new railroad. To some degree, they could no more not be in railroads than an investor in the 1990s could not be in tech. But they’re not underwriting the risky. They steer clear of risk capital.

ZACHARY KARABELL: And so, they occupy niches of the market. They get into secondary finance. This is very wonky stuff, and I don’t actually write about this a lot in the book. It’s too wonky — even for me. What they were doing in the 1880s and 1890s — just like what they’re doing today — is pretty wonky. But it’s necessary. It’s the lubrication to the system. And I think their willingness to make quiet money is also an underrated necessity in a financial system.

CHARLES MIZRAHI: So, let’s move forward. Let’s move all the way to when Prescott Bush, the Yale crowd and all the WASPs come into play in the 1920s, 1930s and 1940s. The firm becomes the poster child of good breeding and people who believe they’re destined to run the market.

ZACHARY KARABELL: They believe that because that message has been hammered home by the Brown family — by these letters. With great power comes great responsibility. It’s the Spider-Man theory of history. It’s the plain fields of Groton. And they all go to Groton. The Roosevelts go to Groton. The Browns all go to Groton. They all go to Yale.

ZACHARY KARABELL: And at the time, those schools are the finishing schools for the elite. And I don’t say that with any particular judgment. They were the finishing schools in that their importance was less about what anyone learned. There was a rote curriculum. They memorized Livy and learned Latin. But it was more about training their characters and preparing them to be the leaders of society.

ZACHARY KARABELL: It’s the belief that if you’re privileged, have money, and are white, male and Protestant, you have a responsibility to lead society. And that’s your role. The Browns — that’s their mother’s milk. And that’s crystallized at Yale in the 1910s — when all these [people] would soon become the leading partners of the firm in the 1930s.

ZACHARY KARABELL: You alluded to Prescott Bush, who’s the patriarch of the Bush family dynasty. Most people don’t realize that Prescott Bush’s money — the money that leads to the Bushes — is a combination of Harriman Railroad money and Brown Brothers financial money.

ZACHARY KARABELL: Another partner was Robert Lovett. He was also a combination of the Harriman and Brown families. He eventually becomes Assistant Secretary of War in World War II. He helps create the modern Air Force and becomes the No. 2 to George Marshall — both at the State Department and Defense Department. And that role is crucial to the creation of the atomic bomb, modern Air Force, General Agreement on Tariffs and Trade — which is the precursor of the WTO and the National Security Act of 1947.

ZACHARY KARABELL: And then, there’s Averell Harriman, who occupies 10 different roles — the Secretary of Commerce, Ambassador of Moscow, Governor of New York and Assistant Secretary of State. He’s also one of the architects of the policy toward Vietnam under Kennedy. And Lovett, too, becomes an advisor to both Kennedy and Johnson as the “wise men.” And they do this because they believe they have a responsibility to serve.

CHARLES MIZRAHI: Where does Barbara Bush’s family come in? I’m sorry, Prescott’s wife: Dorothy.

ZACHARY KARABELL: Dorothy Walker.

CHARLES MIZRAHI: Walker, yes.

ZACHARY KARABELL: Dorothy Walker is the daughter of George Walker — who had been hired by Averell Harriman to be the president of Harriman & Co. — Harriman’s investment firm in the 1920s. That was the product of E. H. Harriman’s railroad fortune.

ZACHARY KARABELL: George Herbert Walker was apparently not good at running a firm. But I don’t think Harriman actually wanted anyone to run his firm. He hired someone to do it because he needed to. But he was not good at delegating. And his younger brother, Roland, ended up running more of it. But Walker was a really good golfer and a great man about town. He liked buying houses — including the one in Kennebunk, which becomes Walker’s point.

ZACHARY KARABELL: So, that’s the Walker money. And then Prescott himself starts working at Harriman. And then, when Harriman and Brown Brothers merged in 1930 as a defense against the Great Depression, Prescott became one of the leading partners of Brown Brothers Harriman in the 1930s.

CHARLES MIZRAHI: Bring us to today. Where’s Brown Brothers today?

ZACHARY KARABELL: Weirdly enough, it still exists. It has 5,000 employees. It makes somewhere between $2 billion and $2.5 billion in revenue. And it probably makes between $500 million and $700 million in profit. That’s a lot of money. It may not be a lot of money compared to Goldman Sachs. And it’s not a lot of money compared to JPMorgan. But for a human organization that remained a partnership and private company…

ZACHARY KARABELL: And what’s interesting is — back to what you began the interview with — you passed them. You never knew anyone worked there. They’re never in the news. The last time Brown Brothers was on the front page was probably when the partners retired in 1968. It was when Lovett, Bush and Harriman all retired in 1968. After, they had a 150th anniversary party.

ZACHARY KARABELL: If it was publicly traded, I don’t know if it would be $8 billion or $15 billion. It’s a big company in human terms of a small to mid-cap company. The fact that we don’t remember them — and don’t even acknowledge them today — has to do with the perversion — and I use that word purposely — of what financial capitalism has defined itself as. It’s not what it needs to be, but it’s what it is today. And that’s a product of all of these companies going public in the 1980s.

ZACHARY KARABELL: But Brown Brothers never goes public. It doesn’t even occur to them. I kept trying to ask them: “Why didn’t you go public?” And they’re like: “Why didn’t we become purple?” It wasn’t even part of their mindset to go public. And part of that is that when you go public, the incentive structures change. If you’re Tim Cook at Apple, you could personally make $10 million from a deal. You’re never going to lose $10 million from a deal. That’s going to be dispersed among shareholders. Brown Brothers, [with] every deal they do, it’s partners’ money. And they could lose the money.

CHARLES MIZRAHI: Some say that was the sea change of Wall Street in the early 1980s. Bear Stearns was a partnership. And any deal you went into, it was your partnership capital on the line. And Goldman Sachs as well. Once you take that out — where it’s heads I win and tails I don’t lose — why the hell not?

ZACHARY KARABELL: Right. And that makes total sense from an incentive structure. My point about Brown Brothers is one: There’s the problem of human beings and what narratives we pay attention to. One of the ironies of Brown Brothers is that because of Glass-Steagall in 1933, they hive off their investment bank. You have to do that by law. You can’t be a commercial and investment bank. They stay a commercial bank because that was most of their business. Their investment bank eventually becomes Drexel Burnham Lambert. And eventually, it becomes Michael Milken. Say what you will about Milken. Milken becomes an icon of a particular moment on Wall Street and infamous. Brown Brothers is forgotten.

ZACHARY KARABELL: Part of what I’m trying to say in the book is: We shouldn’t forget what’s foundational to a system and lionize what is toxic or really exciting. And that’s the problem with how we understand capitalism. A capitalism that understands its responsibility to the larger society — that’s unabashed in its pursuit of profit but has a sense of where risk exists … And a capitalism that understands private good and is embedded in public good is the story of Brown Brothers for 200 years.

ZACHARY KARABELL: And it could be the story in the future. We choose the systems that we want to live in — ever-present and into the future. Nothing is written. We have the ability to rewrite, redefine, recreate and recast. And I hope that the book points in a different direction — to where capitalism could be.

ZACHARY KARABELL: And my final point about this is: You don’t want a world composed of only Brown Brothers.

ZACHARY KARABELL: One, I don’t want a Brown Brothers world because you and I wouldn’t have had a seat at that table. It was very exclusionary. It was very particular about who was allowed to be in those rooms. And the second thing is that you don’t want a capitalism world where only risk is driving decisions. You do want Tesla. You do want innovation.

CHARLES MIZRAHI: All the innovation that we’ve had — Brown Brothers would have never funded any of that.

ZACHARY KARABELL: So, you don’t want a world of only Brown Bothers. But if you’re talking about a hub and periphery — or hub and spokes — today, the hub has become risk capital. And that’s probably overstating it. With all the regulations after 2008 and 2009, the big money center banks are highly constrained about the risks they can take. So, I understand this is more complicated.

ZACHARY KARABELL: But in bold terms, I think you want people at the core of the capitalist system who are profoundly mindful that money is power. And power can do great good but can also do harm. It’s like a force of nature. It can deluge. It can irrigate. And you want the people who are at the epicenter of it to understand that alchemical power and be mindful and respectful of it. And then, on the periphery, you want the Elon Musks, hedge funds and VC funds who say: “I want to try to get 100 to one for my money. I don’t care if I do nine zeros — as long as one is a home run.” And I think that’s great.

CHARLES MIZRAHI: Without that, you wouldn’t have the Googles of this world. They went to those places. So, I do hear what you’re saying. And I don’t disagree. I do agree that there needs to be a balance. But I think what I’m hearing from you is not money and power for its own sake but for doing good. I got it — the responsibility that this gives you. You can’t just take money and accumulate it for its own sake. You were privileged to get that.

CHARLES MIZRAHI: I think they all felt — and correct me if I’m wrong — they were in a responsible position. And this wasn’t something like: “I’m part of this great thing. Let me go piss money out the window. Let me buy a $2000 bottle of champagne or go to a strip club.” They didn’t do that. They said: “With this power, let me see how I can serve the greater good. Because in turn, it will benefit me as well as society.”

ZACHARY KARABELL: It’s self-interested selflessness.

CHARLES MIZRAHI: Yeah, that’s true. And there’s nothing wrong with that. We swing to extremes. One extreme is not going to be good. And the other extreme is certainly not going to be good. It has to be a seesaw. It doesn’t go up or down. It hovers in the middle somewhere. I think that would be ideal. And you have some business leaders today who do that.

ZACHARY KARABELL: But I think there are not enough in the financial world. And I think Brown Brothers can represent a possible path. The fact that it is still around and amazingly profitable — and we don’t pay attention to it.

CHARLES MIZRAHI: I hear what you’re saying. But in 2007 and 2008, all these guys got spanked. You go to the extreme of risk in order to make huge amounts of return and leverage. You come to these kinds of attitude adjustments once every 10 years. And the system does change. But in terms of making money, the net profit of Brown Brothers is maybe half of what some hedge fund guys made last year.

ZACHARY KARABELL: Totally. But you also want a world of people who are responsible corporate citizens. They’re not flashy. It’s back to the singles and home runs thing.

CHARLES MIZRAHI: You want a world of Elon Musks. You want a few Elon Musks. You want a few Steve Jobs’s. But in terms of the rest, you want more Warren Buffetts. You want more Charlie Mungers. I do hear what you’re saying. I can’t make a conclusionary statement as to what the ideal is because the answer is: It depends. Risk on, risk off. There are certain times we should hit the pedal to the metal. And other times, we should be taking our feet off the gas.

ZACHARY KARABELL: To echo what you just said — which is in the book — the idea is no matter which of those parts of the equation you’re on, there is a public good that you are responsible for. I think it’s essential for everybody. Nobody gets a pass on that equation. And I’m particularly critical of tech elites today — even more than financial elites. They seem to be in some sort of La La Land about the public dimensions of their private effects.

ZACHARY KARABELL: We would all be better served by constantly creating a culture that is aware of the connectivity. No man is an island. No company can do this alone. We’re all part of a larger society. And look, I know these things can sound hopelessly idealistic in a cynical world. But I think we could use some more idealism.

CHARLES MIZRAHI: OK, let’s leave it there. I can’t top that. That rules out Google, Facebook and a whole bunch of other companies that you just threw under the bus. I think in a capitalist system, it really cuts you down to size at some point. They become too big and overpowering, and the marketplace will look for an alternative. And it’ll find it.

CHARLES MIZRAHI: I remember that, in the late 1990s and early 2000s, the big thing was the anti-trust against Microsoft and Internet Explorer. And the marketplace found a way to break that so-called monopoly. They had new browsers come out. Where is Internet Explorer today in terms of the browser wars?

ZACHARY KARABELL: Gone.

CHARLES MIZRAHI: The marketplace took care of that. So, I do hear what you’re saying. And I don’t know what the proper mix is. But I’m glad you brought up the question. I’m glad you tried to address it in the book. I don’t agree with everything at the end. You’re trying to come to an endpoint of what you learned from all of this — with Brown Brothers on one side and Merrill Lynch or the Bank of America in 2007 and 2008…

CHARLES MIZRAHI: OK. I’m with you. Zachary Karabell, thanks so much. I really enjoyed this conversation. The name of the book is, Inside Money: Brown Brothers Harriman and the American Way of Power. It’s a good read. I want to tell you: It’s heavily researched, man. You did a phenomenal job doing that. In fact, at some points, I kept saying: “How the hell does he know that?” But I do remember listening to something you said on another podcast where, on their 150th anniversary, they basically made this an easy job for you by opening the archives. Because they were there.

ZACHARY KARABELL: It was not the hardest research.

CHARLES MIZRAHI: Yeah, but don’t tell your publisher that. Let them think that you worked really hard doing that. All right. Zachary, thanks so much for being on the show. I greatly appreciate it.

ZACHARY KARABELL: Thank you, Charles.

CHARLES MIZRAHI: Thanks for listening to this episode of The Charles Mizrahi Show. If you’re a new listener, welcome! If you’ve been listening for a while, we’re glad to have you back. Either way, we’d love to know what you think of the show. Please leave a review if you listen on Apple Podcasts. Reviews make it easier for others to find the show. You can also see the video of the interview on The Charles Mizrahi Show channel on YouTube.

 

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