Dan Snow's History Hit - The Bank That Sacked Its Customers

Episode Date: June 2, 2021

When we think of investment banking we think of high-risk trades, profit at any cost and big bonuses but there is an institution that sees it differently; Brown Brothers Harriman. Brown Brothers was founded in 1818 and is one of the oldest banks in the US. It has maintained its cautious ethos ever since and in a world of unforeseen but actually quite foreseen catastrophes it begs the question as to what do you want your banks and companies to be like. chasing 100x profits or slow and steady? Zachary Karabell joins Dan for the story of the bank that sacked its customers, in the 80s, which bears the institutional memory of ships cargoes lost, financial collapses, pandemics and busts. 

Hi everyone, welcome to Dan Snow's History Hit. In a world of unforeseen, but actually quite foreseen, catastrophes, how do we want our banks and our companies to act? Should they be doing what we've assumed they should be doing probably since the great bang of the 1980s, which is chase around, being unbelievably agile, bringing in 100x profits, destroying industries with daring new technological solutions? Or should they be slow and steady? Well, this is a story of a very different kind of bank.

It's a history of one of the oldest banks in America, a bank with its fingerprints all over US and world history. It's a story of a bank that actually ended up having too many customers, so it sacked its customers rather than expand too fast. It's a bank that treasures its institutional memory, a history of ships sinking in the Atlantic and losing cargos, of previous financial collapses, of pandemics, of booms and busts. This is the story of Brown Brothers Harriman,

a bank that probably like you I've actually never heard of. The writer Zachary Carrabelle brought it my attention, you may remember Zachary, he came on the pod to talk about Suez Canal the other day when it was blocked, the subject of one of his previous books. And he said his next book was on this rather remarkable institution. So I got him back on the pod to talk about this very unusual American financial institution. If you want to learn more about 19th century history, when this bank was founded, you can do so at historyhit.tv. We've got hundreds of podcasts there. You can listen to them without the ads. We've also got documentaries by the barrel full. We've got ships, cargos heaving with documentaries from all periods, from the Stone Age right up to the present day. Just head

over to historyhit.tv and sign up to a revolution in history broadcasting. It's a kind of safe, steady investment I think Brown Brothers Harriman would approve of. But in the meantime, everyone, enjoy this interview with Zachary Caramell. Hey, buddy, thanks for coming back on the podcast. Thanks for having me back. Hey, buddy, thanks for coming back on the podcast. Thanks for having me back. You've done one of these very cool things,

which is you found a kind of institution or a thing that basically labels you tell the whole story of Western capitalism through one brilliant organization. But I've never heard of them before, I have to admit. Like, what is, who are Brown Brothers Harriman? So I like to find topics of history that allow me to write something that's trenchant for our present. And sometimes those are obvious stories in the past that speak to our moment. And sometimes they're less obvious ones. And in the case of Brown Brothers Harriman, it is a less obvious one, even within the financial world, right? People who are aware of all the players.

Many people have heard of Brown Brothers Harriman, but most of them don't realize that it still exists. So I would tell people I was writing the book and they would go, oh, right, right. Are they still around? And the funny thing is not only are they still around, but they have 5,000 employees. They probably have $2 billion in revenue a year. Yeah, they're around. They're around, yeah. They're around, as are a bunch of their sort of splinter firms like Brown Shipley, which was an old Liverpool-based bank that became incredibly important to the

evolution of British banking and central banking. So they are not a firm that has ever drawn attention because they are a firm that has never wanted to draw attention. Even its partners today will say a good day is when they wake up and they're not in the news. So they were greeting the publication of this book with some degree of trepidation. I'll bet they were. So when does the story begin? It begins in 1800 when an Irish linen merchant named Alexander Brown leaves the Troubles in Northern Ireland around Belfast. He's a linen merchant then, and he moves to Baltimore to be a linen merchant in the United States, importing Irish linens into

the United States. And then that quickly morphs into an entire merchant trading empire. And before we get too into it, just so people know, the reason this story is interesting is not because longevity, right? There are a few things that actually have survived as businesses for 200 plus years. But that in and of itself would not make it an interesting story, right? An old person is an old person, an old firm is an old firm. What's interesting about them is how central they became to the creation of American capitalism and then the creation of American power in the 20th century. So they are kind of woven into the fabric, not just of capitalism, but the rise of the United States as a global power, for better and for worse. So this merchant goes across. Let's deal with the first bit. What does it tell us about early

independent US capitalism? What is the important thing to learn for us about the early chapter of this organization? So the early thing to learn, which I think I demonstrate, but I suppose is arguable, is that more than anywhere in the world in the 19th century, if you had an idea and a plan and a dream, you could find money in America to make it. That didn't mean you'd succeed. So fortunes were, as the cliche goes, easily won and easily lost. But this thing called money, right, essentially in the United States, and what I mean by that is actually paper money, not gold, not silver, not land, not people, all of which were the historical stores of wealth, right? If you were a wealthy aristocrat in Europe or in England, most of your wealth was bound up either in land,

livestock, or people. And getting it liquid was always a profound challenge. In the United States, there was plentiful land. So there wasn't a supply demand issue for land. So land was cheap. There were not enough people. So I guess you could say labor was expensive, but that's a whole other issue of the slave system in the South. Nonetheless, money was easy to get. There were banks that were just printing paper promises with abandon. They were called wildcat banks. And far more than anywhere else in the world, you could transform your idea into concrete reality fueled by this thing called money. And Brown Brothers is part of the creation of paper money because they are the ones who facilitate a vast percentage of transatlantic trade between Liverpool, between the UK and the United States throughout the first part of the

19th century, writing basically these letters of credit, which are paper promises that make sure that someone who's exporting will be paid and someone who's importing will get the goods. So it's kind of a venture capital story, this. Yeah, they are the classic original merchant bank. So they do a little bit of everything. Speaking of classic merchant bank, I nod sagely. What the hell is a merchant bank? I made the thing about Lehman Brothers once. And how do these people go from traders to bankers? So again, Brown Brothers is essentially the WASP older version of Lehman Brothers. And how do these people go from traders to bankers? So again, Brown Brothers is essentially the WASP older version of Lehman Brothers. And a merchant bank literally meant a bunch of merchants decided to start banking because it was a natural outgrowth of being a merchant if you're going to import and export goods.

So a lot of merchants realize, and the Rothschilds realize this in Europe, and the Browns realize this in the United States, as do the Barings and a whole series of other famous houses, that any ship that travels with goods that you have paid for that are trying to sell somewhere else can be lost. The ship can be sunk, or the buyers on the other side could decide at the last moment they don't want to buy, or they could be unable to buy. So you're always vulnerable. Insurance grows up to cover some of that. But what a lot of these houses do is also see an immense amount of capital is tied up in each shipment. If you can not be responsible for that, if you can simply help other people do it, you can grow much more quickly, you can grow much larger, you can become more affluent and less exposed to any one individual risk. And that's essentially what the Browns become.

Is it also a story about social mobility? Was it easier for them to enter the elite in this swashbuckling new republic than it was in the old class-bound UK? It certainly was. And de Tocqueville, when he comes over to the United States in the 1830s, one of the things he chronically remarks on in his long disquisition about American culture is the ease of that mobility and the ease of rising. And the only elites there really were in the first part of the 19th century in the United States were either farmers who had some land or slave owners. And slave owners were a whole other class and issue,

meaning you wouldn't become a slave owner if you lived in Baltimore, even though Baltimore did have slaves. But it was not a plantation city, so you would not have been a slave plantation master. So there was more social mobility, also because most of the elites in the United States themselves had not been there very long.

There were some great families in Virginia. I mean, it depended on where you were. And yet, there is something quite aristocratic that develops about the family. I mean, the plates are all shifting. It's a kind of turbulent period. And then they do become quite deeply entrenched as a powerful, privileged, it's right to say, family. Yes.

And it remains until the 20th century, a family business run as a partnership that is controlled by family members, descendants of Alexander Brown, point of capital, meaning they are doling it out. And every dollar they dole out, unlike modern financial companies, comes from their own pockets. They are a partnership and they're for everything they do. They have to weigh the risk of personal loss. So at no point are the Browns swashbuckling. They are the stolid men. And to be honest, they are all men. They are the stolid men of rectitude. They are the ones who are more like the priests in the temple than they are themselves out there in the melee, because they're so acutely aware of loss,

and they're so acutely aware of risk. But in the process, they facilitate massive change in the United States. They fund the first railroad, literally the first railroad in North America that uses a steam engine. They copy a little bit from Stevenson's Railway from Manchester to Liverpool, but they are the only ones in the United States that think about we're going to underwrite a steam engine that carries cars, that carries both passengers and freight. And it's called the Baltimore on Ohio. It begins in 1828, makes them absolutely no money. So that fuses the other part of the family's kind of ethos, which is take measured risks and honor the public good, because unless the community in which you're embedded thrives, you're not going to thrive. They underwrite the first major American steamship line from Baltimore to Liverpool

called the Collins Line, which competes with Cunard's ships. And Cunard's ships are taken out of commission briefly during the Crimean War. So they have the roots to themselves and probably would have ended up owning those roots, meaning Cunard would have been an afterthought as a transatlantic. There would have been no Titanic. But one of their ships goes down really tragically in 1854. And that had cost them a lot of money, several million dollars of their own money, which was a lot of money in those days. And not only it was a speculative venture, right? None of those ship crossings in the 1850s made Cunard or Collins any money. They were all underwritten by the government in the case of the UK, the Post, and in the

case of the United States, the Congress. But that teaches them, don't speculate. I mean, they kind of knew it anyway, but the sons had to relearn the lessons of the father. What stage did they start finding themselves involved in politics? I mean, for example, the War of 1812, they must have been like, Jesus, these idiots. When does this nexus between capital and politics really start? So what's fascinating is in the 19th century, it would not have occurred to any of these captains of capital to get involved in politics. Politics was someone else's

game. And people like J.P. Morgan, one of the titans of American capitalism in the late 19th century, much preferred to either buy his politicians or pay them off in other ways than to himself be one. He felt he could have much more influence being J.P. Morgan than he would have being like Senator Morgan. And it's not until the 20th century in the United States that this fusion between business and politics in the form of people who had made money either in industry or in finance start to become central to shaping policy in Washington. And that really blossoms during the New Deal, but it is hypercharged by World War II. And there again, Brown Brothers, so there's a line in the book, Brown Brothers made the money that made America,

and then they made the international system. So they kind of transposed their formula for success that had been a private family partnership formula for success onto the world stage when the United States emerges from World War II as the most powerful nation by default, and then crafts the rules of this post-war order that are with us today. And there were three main partners of Brown Brothers. Prescott Bush, who is indeed the father of George H.W. Bush and the grandfather of George W. Bush. And that's where the Bush family money comes from. It comes from Brown Brothers. Averill Harriman, who had been the scion of a railroad family, a railroad baron named E.H. Harriman. And Robert Lovett, who most people don't remember now, but was Assistant Secretary of War, Undersecretary of State, and then Secretary of War during the Korean War, and is kind of present at the creation of every major Cold War institution. organization, creates the modern defense department, helps create the modern CIA. So these are all

these characters who go from their mahogany desks at Brown Brothers to the central quarters of power in Washington. And what do they take with them? What have they learned working at those mahogany desks? So there's a prep school that started in the late 19th century called Groton, which was modeled on Matthew Arnold and modeled on the English public schools of the time. And the motto of the school is to reign is to serve. And this idea of service is embedded in this group of elites, right? And they go to Yale and they're all part of Skull and Bones, which is one of the Yale secret societies that has been a source of endless conspiracy theories about the cabal controlling the levers, not just of finance, but of government. And Brown Brothers itself, for a long period of time in the 1960s, was

seen as exhibit A of that conspiracy theory, you know, that there's a small group of people who all went to the same schools and all were in these secret societies and kind of got together and wrote the rules. And if you weren't part of that world, I think optically it's understandable why you thought that, right? Because they did all go to these select schools. But they had this, I think, ethos that if they were to thrive personally, their society and their community and their country had to thrive. And it was up to them to serve the greater good and not just their individual good.

Now, you could criticize all that for its embedded self-dealing and self-interest, because it is certainly true that the rules they wrote, the rules of free trade that were embodied in the general agreement on tariffs and trade after the war that became the WTO, that the rules of Bretton Woods, which establishes the dollar and not the British pound as the primary means of exchange globally, which it is today, all that benefited them immensely. But they also did that because they understood that their individual benefit was tethered to the public good, defined by them, admittedly. defined by them, admittedly.

You're listening to Dan's Nice History. I'm talking to Zachary Caramel about a very different kind of bank. More after this. Okay, Tristan, you've got 50 seconds. Go. Right, so Dan's given me a few seconds to sell the Ancients podcast. What is the Ancients, I hear you say? Well, it's like Dan's show, except just ancient history.

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Chasing Shadows, where samurai warlords and shinobi spies teach us the tactics and skills needed not only to survive, but to conquer. Whether you're preparing for Assassin's Creed Shadows or fascinated by history and great stories, listen to Echoes of History, a Ubisoft podcast brought to you by history hits there are new episodes every week is there a nostalgic sense in this story that early to mid-century US capitalism that was turned to the public good is at variance with the swashbuckling I'll use that word again this time perhaps correctly capitalism that gave us the subprime mortgage crisis that some of the practices of

modern and people call it late capitalism on the internet which I think sounds very clever but I don't really know what it is so I will that expression, which is different to this and is all about wild speculation and spending money that isn't yours to place gigantic bets. So I suppose someone could read the book and accuse me of a degree of nostalgia, which is unintended. I'm not a big fan of nostalgia. I'm a big fan of personal nostalgia. It's great to think about your own personal history and be wistful. I think doing that as a collective thing is a problem because most of history, as you know better than anyone doing this show, is a messy mix of just about every aspect of the human condition.

And in order to be truly nostalgic for some reified moment in time, you really have to avoid looking at a lot of the mess. So just that caveat to be said that I think capitalism, money is like the quicksilver power unleashed in the atom. And you need to respect the fact that it can create, but it can destroy. And you want the people who are at its distribution point to be mindful or maybe more mindful of the destructive power than they are leaping over themselves because they think they can make a quick buck. And that I think is key. And a partnership just by its structure does that more than these publicly traded companies, because you're always aware that you can lose your money.

The thing about the subprime, the thing about the global financial crisis in 2008, the thing about a lot of what's gone on in our pandemic world is that most of the money people make and therefore stand to lose is not theirs. And that's a very different equation. If I hand you a million dollars and say, go to town, you might not just wager that million, but if someone can give you 10 million and you're not personally liable, if it all goes away, you're probably just wager that million, but if someone can give you 10 million and you're not personally liable if it all goes away, you're probably going to take that. If it's your money, you're like, okay, maybe I'll do 50,000. So I think partnership structures, and this is where

the Browns are interesting, embed you more intimately in exactly what you're doing, which is you're playing with fire. Now, fire made Western and global civilization, right? But it also burns things down. The same is true of money. A partnership does that, but so does a family. I mean, there's something quite conservative about this capitalism, isn't there? And also exclusive. Small C conservative, yes. Yeah, definitely small C conservative. Modern conservatism with a big C in the US means God knows what, but it ain't small C conservative. It's also the kind of capitalism that's called the old boys clubs. It has been resistant to change, to new communities, people of colour, whatever it might be. I mean, it is in many ways kind of as conservative as the great aristocratic landed estates of Britain, of the country that its founders left behind, right?

You are mindful of who's coming after, you want to leave legacy, but that means it can be harder for other people to break into that system. Yeah, I think what's interesting about Brown Brothers in light of that is it was a family firm until the 1930s when the last of the family partners ceases to be running it. But they managed to maintain the same culture of the family since then, over 90 years. So where most firms break down that are family firms is when the family members inevitably, after several generations, it's hard to replicate. Kids aren't interested. They're not as skilled.

You name it. So the story of Lehman Brothers, which is more familiar to people because it imploded so spectacularly, by the time it does, there are no Lehmans left in that equation. And the culture departs from that family tradition of it's our money and we're not going to lose it. Brown Brothers maintains an ethos that I've described of public service, of cautiousness, of mindfulness, of client centric-ness, even when all the Browns are not involved in the center of the running of the business. And that's unusual. Yeah, because if I was a customer, I'd be like, guys, you're going to

pile everything to Bitcoin. What's going on around here? My friend's portfolio is doing much better than my stuff with you. So I have a story about that. At the very end of the book, a partner told me that in the 1980s, Brown Brothers, and again, by the 1980s, Brown Brothers is a complete afterthought on Wall Street. Because all these companies are going public, you know, Citibank and HSBC and Morgan Stanley. And they're the ones raking in the money and the boom times of the 80s and Brown Brothers remains kind of a sleepy bank. But they did this

very particular kind of business where they would help other banks deal in foreign exchange. They'd always been very good at foreign exchange in a time when there were no public foreign exchange rates in the 19th century. So they knew how to help HSBC and Lloyds of London and Citibank and all these settle some of their trades in different currencies. A really sort of arcane aspect of the financial world, but an incredibly necessary one. Doesn't carry a lot of money per trade, but could do a lot. And they were very good at it. And all these cross-border transactions are booming in the 80s. And all these banks were going to Brown Brothers to help them facilitate it. So much so that Brown Brothers couldn't handle it. And they sat down and they thought, okay, what should we do here?

And they informed all their clients that they should look for someone else to do their business because they didn't want to scale up. They didn't want to build the business to meet the demand. They wanted to take the business that met their capacity, which is completely alien to all these other firms, right? I mean, Goldman and all these others would have thought, okay, how do I hire 5,000 people and open offices in 10 different places? So they fired their clients in order to stay the size they wanted to stay. And don't get me wrong, I mean, they're profitable and they like making money, but they don't like making money at the cost of their culture and of their size. And that makes them highly unusual. And it also makes them largely uninteresting to people in a world where the

spectacular, the Icaruses attract all the attention. And as somebody that writes history and is interested in history, it's always so fascinating to see examples of history really mattering in areas that aren't just you and me and kind of bookline studies and chatting about it. This is the coldest, hardest, this is like making money, right? So why do they place so much stock in that tradition and how do they maintain it? Why did they make that decision? I think embedded in their DNA, and companies have a cultural DNA, there is always a greater chance you will lose everything than make everything. And every single decision you have to make, you have to be mindful of that. Every time you go to bed at night, you have to be positioned for a crisis when you wake up. Because the time

to be positioned for that crisis is not during, right? They're the ones who were always ready for a pandemic. Because there's always a crisis. And I do say in the book, and I mean this, you do not want a financial system that is governed entirely by Brown Brothers Harriman. They never would have funded Elon Musk. They never would have funded highly speculative ventures, or at least they wouldn't have been the lead. They might have put a little money in, but they wouldn't have been the main underwriters of it. And that too is crucial.

They always put in a little money. They put in a little money to the transatlantic cable in the 1860s because it was a little money. If it's a hub and spoke, you want your spokes to be a few Elon Musk underwritings and you want your hub to be Brown Brothers, Harriman. You want it to be a partnership. You want it to be people who are like,

you know what? It might be a great idea, but it's not for us. There's too much risk. They managed to maintain that. I'm not sure how. It's who they attract to. I mean, if you interviewed a Brown Brothers Harriman in the 1970s, you were not the go-getter right you were the the straight arrow but we undervalue that in our

culture it's what's the balance i'm guessing having witnessed global capitalism almost collapsed twice in the last 12 years i'm guessing maybe that's a little easier to teach to the youngsters coming in on the graduate program these days yeah so you can never time what the world will be when the book that you wrote is actually published. And oddly enough, I feel this is far more relevant to our moment than I expected it to be for that very reason. Meaning we have all become acutely aware that everything can turn on a dime in our world, right? The pandemic was nothing but a reminder that everything that seems solid can dissipate quickly, that the gossamer threads that connect us all are far more gossamer than we think. And we should be living our lives

with that awareness, not that fear, right? Brown Brothers Harriman, interestingly enough, was never scared that tomorrow would bring a catastrophe. They were just mindful that it always could. What's interesting about historical memory is that what's so fascinating about 2008 and the near collapse of our financial system and 2020, which was a pandemic, is they're very common. Those events have been very, very common in our history. They just didn't happen to be common in the 30 years that made up most people's experience in kind of 2003. But those are things that the 19th century

is absolutely littered with catastrophic banking collapses, right? So we should be more mindful of that. And that is, I think, one of the main lessons of the book, that you take risks as a satellite to your core. You don't make risks your core. And you don't do that culturally, you don't do that societally. and companies have entered the fray and been hypercharged by the pandemic, the tech lords of today, the Googles and the Facebooks and the Amazons. And the linkage there is the elites of the 20th century in the United States, and I think in many other countries as well, understood that their position in society demanded them to serve society, even if that was self-serving.

It demanded them to serve. And you don't have self-serving, it demanded them to serve. And you don't have a lot of evidence of that in tech land today. There's not a slew of people kind of stepping up from these tech companies and engaging the EU in, okay, if some of these practices are anti-competitive or violate privacy, how should we structure ourselves in a way that serves the needs of this community and also allows us to do what we're doing, much of which is creative and powerful and interesting and dynamic? And there's a kind of cricket silence in a way that the Brown Brothers firm and culture of the 20th century propelled them to help address those issues of the commons. And I think that is absolutely crucial.

It's like, to be really cheeky about it, it's the Spider-Man theory of history, right? With great power comes great responsibilities. And embodying that, embedding that in your ethos, I think is vital for the health of society. Elites need to believe that they have a responsibility, that they're not islands of wealth trying to protect themselves with moats

against the marauding forces of populism. They are people embedded in the same culture and the same world, and they have a responsibility because they have more to give more and to do more. On my dark moments, I sometimes think, what if this new spasm of the Industrial Revolution we're in means that elites don't have to make that decision

that the Brown brothers made. Henry Ford and these kind of giant, they were obviously really problematic characters, but deep down, they kind of knew their wealth depended on the stability and well-being and literacy and all those things and health of big communities. What happens if Zuckerberg and Musk and all those guys and Bessels make different decisions? I find that one of the big questions of our time. Right. And I think, again, this history illuminates some of that and illuminates the necessity of those individuals placed for whatever reason in an unbelievably privileged, powerful, and

affluent position that comes with responsibilities. It just does. And if you're going to be missing in action, that's going to have negative consequences, not just for you, but for the world around you. Well, thank you very much for reminding all those people of their responsibilities. And I hope this book is one of those ones that ends up on the all the power lists everyone has to read. I'm sure it will. Thank you very much for coming on. What was the book called? It is called Inside Money, Brown Brothers Harriman and the American Way of Power. Thank you very much, Zachary Carrabelle. Thank you for coming on the podcast.

Thank you again. I feel we have the history on our shoulders. All this tradition of ours, our school history, our songs, this part of the history of our country, all were gone and finished. Hi everyone, thanks for reaching the end of this podcast. Most of you are probably asleep, so I'm talking to your snoring forms, but anyone who's awake, it would be great if you could do me a quick favour, head over to wherever you get your podcasts, and rate it five stars, and then leave a nice glowing review. It makes a huge difference, for some reason, to how these podcasts do. Madness, I know, but them's the rules.

Then we go further up the charts, more people listen to us, and everything will be awesome. So thank you so much. Now sleep well.