Partners in Banking, commissioned and underwritten by Brown Brothers Harriman & Co. for its 150th anniversary, is justly advertised as "probably the only illustrated history of its kind ever published. Though the author, a Barnard College (Columbia University) English professor and former editor of Harper's, is obviously no radical, the study is valuable for the wealth of data assembled from the firm's historical files (of which he was made director) and from numerous interviews with members of the Brown family. (1) From this skeleton of information, it is possible to begin to "flesh out" the story of the nation's largest and oldest private bank.
Early History, 1818-1931
The original Brown Brothers merchant bank was established in Philadelphia in 1818 by the sons of Alexander Brown, a successful Belfast linen merchant who immigrated to Baltimore in 1800. His aggressive business practices won him a monopoly of the Baltimore linen trade and, by 1821, he was one of America's first millionaires. In 1834, James Brown moved the main offices to New York, through whose port, at that time, passed almost one-third of the nation's exports and over one-half of its imports. With one brother in New York, one in Baltimore (todayts Baltimore brokerage firm Alexander Brown and Sons is a descendent) and one in Liverpool, plus many "agents" throughout the South, the family firm was one of the leading financiers of the cotton trade between the South and Liverpool.
By 1838, Brown Brothers was out of the risky and speculative dry goods operations entirely and had expanded heavily into financial operations linked with trade. With approximately two-thirds of the company's engagements arising out of exports of British manufactures, the Brown brothers naturally had a heavy interest in facilitating andcheapening trade. They invested in the insurance of cargoes and vessels, shipping and trans-oceanic communication.
In the field of cargo and vessel insurance, William, the Liverpool-based brother, was one of the first trustees of Liverpool Fire and Life Insurance Company, oldest unit in the present Royal Globe Insurance Companies, Ltd. James Brown (in New York) was one of the largest early stockholders in Atlantic Mutual Insurance Company and, from 1886 to the present, a Brown Brothers partner has always been a trustee.
In the field of shipping, William was one of the largest original Cunard stockholders. James was the principal owner of the first U.S. transatlantic steamship line, the Collins Line (which folded in 1858 after Congress cut off its $385,000 annual mail subsidy). James was also involved in shipbuilding as principal owner of the Novelty Iron Works which, in the early 1850's, employed over 1,000 men, turning out the largest and most powerful marine engines yet built.
The Browns were major backers of the transatlantic cable which vastly accelerated foreign exchange transactions. William was the president of Cyrus Field's Atlantic Telegraph Company of Great Britain.
The Browns also worked to further U.S. (and British) transportation to the Western frontier. William, at the request of the British Government, organized (and was chairman of) a project to build an Honduras Interoceanic Railway, thougn nothing came of it. In a separate development, Brown Brothers and William H. Aspinwall gained control of both the Pacific Mail Steamship Company and the Panama Railway. By 1869, Pacific Mail had 23 first class ships operating between New York and Aspinwall (now Colon, Panama), between Panama and San Francisco and across the Pacific to Japan and China. (2)
Domestically, the firm invested in various railroads and urban transportation systems (e.g., Bangor and Aroostook Railroad and the St. Louis Street Railways) and long distance transmission of hydroelectric power (Westinghouse's Niagra generating plants).
With the advent of the First World War, as the United States took its first steps towards becoming the world's dominant creditor and military power, Brown Bros. & Co. (and, as will be shown later, the Harriman interests) were instrumental in developing mechanisms to stabilize European currencies. Soon after the outbreak of the War in 1914, James Brown was appointed to a committee of three leading bankers to formulate a report and to make recommendations to the Federal Reserve Board on ways of regulating the international exchange situation. (3) Brown Brothers, as managers of a syndicate of American banks and the Credit Lyonnais (Paris), as managers of French banks, arranged a $20 million credit in 1915 - the first financing by any American bank for France during the War and the first commercial export credit in dollars (vs. pound sterling) ever issued by a syndicate.
This permitted French banks to buy in the United States without having to export to get foreign exchange. In another demonstration of the firm's international monetary expertise (and closeness to the highest government offices), Brown Brothers' Auditing Department, during the Second World War, handled all reports and license applications for the U.S. Treasury Department's Foreign Funds Control Program, blocking the assets in the United States of nationals of countries occupied by the Germans.
The firm's emphasis on international finance is further demonstrated by the fact that since 1965, it has had as a general partner Robert V. Roosa, who is considered one of the nation's top authorities on the international monetary system. As President Kennedy's Under Secretary of the Treasury for Monetary Affairs (1961-64), he was in charge of U.S. efforts to reverse the flow of dollars out of the country and to stabilize U.S. international monetary hegemony. As part of their 150th anniversary celebration this year, Brown Brothers sponsored a Sesquicentennial Symposium for leading foreign bankers and American industrialists at the Sun Valley, Idaho ski resort developed by W.A. Harriman. (4)
Merger with the Harriman Banks
In the wake of the 1929 financial market crash, Brown Brothers and Co. found itself (as did many other banking institutions) with a large number of "undigested securities" on hand -- that is, new issues of the stocks or bonds of various corporations, governments or municipalities which the firm had underwritten in the expectation of selling them at a profit but which, after the crash, could not be sold without taking considerable losses (5) The firm's lack of capital was further aggravated by the fact that several of the elder and wealthier partners had recently died or resigned and the firm had been unable to accumulate profits sufficient to offset the withdrawal of their funds.
This search for new capital led to the eventual merger in January 1931 of Brown Brothers and Co., W.A. Harriman and Co., Inc. and Harriman Brothers and Co. (the latter two being private banking and investment houses) to form the present day Brown Brothers Harriman & Co. Both the Harriman firms were relative newcomers to the financial world (founded in 1919 and 1927 respectively) but had behind them the millions (estimated to be from $75 to $100 million) inherited by the two sons, W. Averell and E. Roland, of the Illinois Central and Union Pacific railroad baron, E.H. Harriman.
The merger itself would make an interesting case study of the role of family and school relationships in the business and financial world. While the record of cooperation and links between the firms dates from the marriage of Charles Simon, Manager of Brown Brothers Foreign Exchange Department with E,H. Harriman's sister, the closest ties were the result of school and boyhood friendships: "Friendships made or reinforced at college...seem, in retrospect, to have made the merger all but inevitable." (6) Four of the twelve Brown Brothers partners at the time of the merger had been friends of E. Roland Harriman at Yale. Two, L. Tighe (later Treasurer of Yale) and C.D. Dickey III (whose father and grandfather were Brown Brothers partners) graduated one year ahead of Roland. Two others, E.S. James and R.A. Lovett, had been friends of the Harriman brothers since boyhood. It was these young members of the firm who were largely responsible for affecting the merger." (7)
E.S. James, son of a wealthy New York lawyer, had been one of a group of friends Roland took along in 1915 when his mother let him have the family yacht, The Sultana, to go out to San Francisco via the recently opened Panama Canal. When James' Yale classmates, Knight Woolley and Prescott Bush (both now Brown Brothers partners) went to work in the mid-twenties with the two Harriman banking houses, his Park Avenue duplex apartment was the "old nest" where Woolley and Bush often stayed when they were in town.
Robert Lovett was the son of "Judge" Lovett, E.H. Harriman's general counsel and administrator of Harriman's estate after his death -- he also assumed the presidency of the Union Pacific and other Harriman railroads. Lovett married Adele Brown, daughter of a Brown Brothers senior partner and was admitted as a partner to the firm in 1926. That same year, he was also elected a director and member of the executive committee of the Harrimans' Union Pacific - both Harriman brothers were also Union Pacific directors. It was Lovett who introduced Roland to the woman he eventually married. Little wonder that "Mr. Lovett was able to bring to the merger negotiations a long and intimate association with the Harrimans and a thorough knowledge of and devotion to the Brow Brothers tradition in banking." (8)
The Harrimans and International Diplomacy
Domestically, the Harriman sons had retained their inherited financial interest in railroads and had expanded into other areas of the transportation field. W.A. Harriman & Co. backed a number of steamship companies and took an early lead in air transportation in 1928, heavily financing the Aviation Corporation of America, the progenitor of Pan American Airways and American Airlines. Through the acquisition in 1928 of a controlling interest in American Trustee Share Corporation which sold over $60 million of "Diversified Trustee Shares" it pioneered in the development of "Fixed Investment Trusts."
Through their partnership bank, the Harriman others & Co. (begun with $4 million), W.A. and E.R. Harriman did a profitable business in bankers acceptances and foreign exchange, had a seat on the New York Stock Exchange and carried out an extensive brokerage business. The Harrimans drafted Roland's Yale classmate, Mnight Wioolley, from the foreign department of the American Exchange ational ank to be general manager of this operation.
The Harrinans also expanded heavily overseas. Through a branch office in Berlin opened in 1922, .A. Harriman & Co. became one of the first American investment houses to assist in rebuilding European industry after World War I, granting short-term credits to a wide variety of German industries, helping finance zinc mines in Polish Silesia and offering in the American market the securities of a number of European countries.
Unfortunately, Partners in anrking devotes little space to the Harriman background, for which the reader must look elsewhere. Of particular interest is the story of W.A. Harriman's introduction to foreign diplomacy. One of his earliest trips abroad was in 1905 when, at the age of 14, he accompanied his father on a business trip to Japan. According to the older Harriman's biographer, George Kennan:
The clearly defined objective [of the trip] that he [E.H.H.] had in view...was the extension of American influence and the promotion of American commerce in the Far East; but beyond this...was a plan for a round-the-world transportation line, under unified American control, by way of Japan, anchuria, Siberia, European Russia, and the Atlantic Ocean. Such a railroad and steamship line...would unite for commercial purposes four of the most populous countries on the globe; and would enable the United States not only to take a commanding position in the Orient, but to supply the wants and direct in some measure the commercial activities of hundreds of millions of people in the least developed arts of Europe and Asia."(9)
Though the plan failed to materialize, the younger Harriman went on to negotiate several lucrative investments in Russia and Eastern Europe and became one of the key diplomatic advisors on Russian affairs and the Cold War to several U.S. presidents. His description of his "first experience with Soviet policy" is worth uoting in some detail for it gives an insight into the way an international investment banker looks at and tries to shape diplomacy:
At the end World War I, I recognized that the United States would be more active in international finance, so I established a rather small international banking business. 1 also believed that the Russian Revolution would have a most important effect on the world and I wanted to understand it. being businessmen, we began to do business with them. We gave some export credits to the Soviets and found that they repaid punctually....With a small group I took an interest in a concession for the exploitation of manganese deposits in Georgia. It was the largest producing area of manganese at that time in the world. Then when we began to have some difficulties I went to Russia...and in December, 1926, I saw the Soviet leaders, with the exception of Stalin. After a long talk with Trotsky [then the chairman of the Government's concessions committee], I made up my mind that a change had taken place in the thinking of the Soviet leaders though they hadn't yet announced it....
Lenin didn't think that the Soviet Union could possibly develop its own industries and resources without outside help, and so he thought it would be a good idea to employ foreign firms to develop the resources on the basis of 20-year concessions. After 20 years, the Soviets could take them over. Stalin and others thought they should not ask for outside assistance - that it was too dangerous to their fundamental principles. I felt this thinking would get the upper hand. So when I got home I recommended that we negotiate a release of the concessions, which we did. It took about a year, and because it was during the period when it was to the advantage of Soviet officials to get foreigners out, we made quite a good deal." (10)
Harrimants extensive overseas financial and diplomatic experience evidently contributed to his being one of the first large U.S. industrialists and financiers to recognize the growing strategic importance to the American economy of foreign markets and sources of supply and the increasing interdependence of the economies of the industrialized nations. At the time, the Republican Party, of which he was a member, locked its current liberal internationalist wing and was controlled primarily by large industrialists and financiers who had not reached this point of view, So he became a Democrat.
I was a good hard-shelled Reublican until 1928. That year I voted for Al Smith against Hoover for several reasons. I thought Republican isolationism was disastrous. I thought the Wilsonian policy of supporting the League of Nations was essential....I saw things were going very badly in Europe. They were going very badly in Germany during the period of their runaway inflation, and I couldn't help but believe we would suffer as a consequence. I also knew that we could not continue to lend money abroad and expect to be repaid unless we changed our tariff policies. Finally, I was concerned over the stockmarket...but when restraints were proposed, the Republicans dodged it. (11)
The 1933 Banking Act
In 1931, Brown Brothers Harriman not only accepted deposits and carried on a commercial banking business, it was also one of the "Big Four" houses engaged in investment banking and underwriting and distributing securities (the others were J.P. Morgan & Co., Kuhn, Loeb & Co. and Lee Higginson & Co.). But the 1933 Banking Act, following the "bank holiday" crisis in the first days of Franklin Roosevelt's first term, stipulated that commercial and investment banking must be divorced from each other. Commercial banks (such as National City and Chase National) were required to divest their securities dealing affiliates. Private banking houses were required to choose between the underwriting business and banking. Most private banks (including Alexander Brown & Sons,. J.W. Seligman and Lazard Freres) chose to give up deposit banking.
But Brown Brothers Harriman, with 65 percent of its recent business in financing exports and imports by letters of credit, receiving deposits, making loans and buying and selling foreign exchange, and with a large majority of the partners more interested in banking than the issue business, chose to remain a commercial banking house. (12) Under the Bank Act, the firm could continue to underwrite federal, state and municipal bond issues (as could other commercial banks) and, being a partnership (vs. a corporation), was able to retain its New York Stock Exchange seat and act as brokers and investment counselors for its clients, buying and selling stock on a commercial basis.
Through main offices in New York, Boston and Philadelphia and its branch offices in St. Louis, Chicago and Zurich, Switzerland, Brown Brothers Harriman offers a package of services that can be matched by only one other firm (Laidlaw & Co.). "The bank's deposits are not large by New York standards [$360 million at the end of 1968] but its sophistication and expertise are eagerly sought by many major corporations." (13)
1. His research assistant, Sarah B. Brown, is the granddaughter of one partner and is married to the grandson and namesake of another partner.
2. Much Later Pacific Mail was bought out by E.H. Harriman, whose sons subsequently merged the family fortune with that of the Browns.
3.The other two bankers on the committee were Ben Strong, Jr., president of Bankers Trust Co., and Albert H. Wiggin, president of Chase National Bank.
4. The New York Times, May 2, 1968.
5. Brown Brothers was one of the main underwriters of Latin American municipal bonds (especially for Argentina, Chile and Peru); these made up a sizeable portion of the "undigested securities."
6. Partners in Banking, p. 6.
7. ILid., p. ll. At least eleven of the twenty-one current Brown Brothers Harriman partners attended Yale. Their prep schools include St. Paul's, Hill, Hotchkiss, Andover, Exeter and Groton
8. Partners in Banking p. 18.
9. George Kennan, E.H. Harriman; A Biography, New York, 1922, Vol. II, p. 2. Harriman's plan was to et control of the South anchuria Railway (won by Japan from Russia), buy the Chinese Eastern, acquire transportation and trackage rights over the trans-Siberian and Russian Government railroads, connect these with the Pacific Mail Steamship Co. and U.S. railroad systems he already controlled and connect the termini by establishing a transatlantic steamship line from the United States to Russia. Harrimants financial backers, Kuhn, Loeb & Co., who had floated Japanese war bonds, had assured him that this was the time to act. 10. The New York Times Magazine, March 5, 1967. The difficulties with the Russians referred to arose from the following: the contract provided a flat royalty to the government on each ton of ore mined. Therefore, it was to the Russian's advantage to have as much ore mined as possible but it was to the company's advantage to keep production down and prices up. Also the Russians had opened a competing manganese mine in the Ukraine (Newsweek. Julv 23, 1956) 11.The New York Times Magazine, March 5, 1967 12. The four partners who preferred investment banking joined with several others to form Harriman, Ripley & Co. 13. The New York Times, February 6, 1968.
