Steve Reads

This is a book that we all ought to be reading right now. Today, investment banks’ primary mode of self-defense is to argue that capitalism needs them. Brandeis argues vigorously to the contrary, and it’s not at all hard to carry his arguments from the nineteen-teens directly to now.

When we tip our hat to bankers, we typically honor their role as intermediaries: they direct money from depositors to valuable investment opportunities. Most depositors cannot be expected to evaluate the claims of businessmen, so bankers function as a vehicle for judging risk and establishing reputations. Hence the now-famous dialogue between J.P. Morgan and Samuel Untermyer:

Untermyer: “Is not commercial credit based primarily upon money or property?”

Morgan: “No sir. The first thing is character.”

Untermyer: “Before money or property?”

Morgan: “Before money or property or anything else. Money cannot buy it…because a man I do not trust could not get money from me on all the bonds in Christendom.”

You will presumably find few people today who view bankers as this sort of lantern-jaw-held-steady, coldly-responsible übermenschen.

On the other side of the risk-judging coin, bankers are supposed to finance the little guy. The entrepreneur just starting out who needs a few dollars at the right moment — this man is capitalism’s hero, and he’s the one to whom bankers are supposed to direct money. As the entrepreneurs’ hero, the banker is supposed to be our hero as well.

Think again, says Brandeis; bankers only give money to enterprises which have proven that they hold no risk whatsoever. In an absolutely devastating chapter entitled “Big Men And Little Business” (search ahead in that link for “Chapter VII”), Brandeis gives example upon example of how America’s rise to industrial might owed nothing to the bankers. In fact, J.P. Morgan’s main job was to combine pre-existing businesses — on which inventors had toiled thanklessly for years — into monopolies (the famous “trusts”). It was news to me that the House of Morgan was responsible for the behemoth known as General Electric. And I was floored by Brandeis’s description of Morgan’s role in forming AT&T; I include that description, which is actually a long quote from Herbert N. Casson’s History of the Telephone, below the fold.

So we don’t need “the great banks” to keep capitalism churning. It gets worse, says Brandeis: the “great banks,” in their mania to form monopolies, destroy businesses along the way. A lot of Brandeis’s anger in Other People's Money comes from his fight against the Morgan acquisition of the New Haven railroad, which larded the New Haven up with debt that it couldn’t support, and eventually led to its collapse — reminiscent, today’s reader will note, of the 1980s’ leveraged-buyout craze. “Was there ever a more be-bankered railroad than the New Haven?” asks Brandeis, along the way probably using “be-bankered” for the only time in the history of the English language.

The banks’ failure might not be quite so offensive, were they not doing all their work with “other people’s money.” The banks’ main chore is to take $1 from depositors and turn it, through loans, into whatever the government allows them to turn it into — $10, say. The people have granted banks that right under the expectation that they’ll guard those deposits carefully. The banks have manifestly failed to do so. Brandeis’s disgust is palpable on every page.

The solution, he says, is to sidestep the banks altogether. Form depositor-owned co-ops. If the railroads want to raise money, they don’t need banks; they have (or had, at least) thousands of stations from which they can solicit capital from their riders. We’ve been deceived into thinking that we need banks, when what we need is capital to fuel innovation.

Other People's Money is a devastating book, written with eloquence, force, and passion. This befits Brandeis, the future Supreme Court justice and one of history’s greatest Americans. As it turns out, he wrote a book that applies just as well in the early 21st century as it did in the early 20th.

Perhaps the best part, for my busy readers, is that Other People's Money is only 100 pages long. You can polish it off in one sitting. I suspect you’ll be as floored as I was by how effortlessly Brandeis’s arguments carry over to today.

“The only man who had money and dared to stake it on the future of the telephone was Thomas Sanders, and he did this not mainly for business reasons. Both he and Hubbard were attached to [Alexander Graham] Bell primarily by sentiment, as Bell had removed the blight of dumbness from Sanders’ little son, and was soon to marry Hubbard’s daughter. Also, Sanders had no expectation, at first, that so much money would be needed. He was not rich. His entire business, which was that of cutting out soles for shoe manufacturers, was not at any time worth more than thirty-five thousand dollars. Yet, from 1874 to 1878, he had advanced nine-tenths of the money that was spent on the telephone. The first five thousand telephones, and more, were made with his money. And so many long, expensive months dragged by before any relief came to Sanders, that he was compelled, much against his will and his business judgment, to stretch his credit within an inch of the breaking-point to help Bell and the telephone. Desperately he signed note after note until he faced a total of one hundred and ten thousand dollars. If the new ’scientific toy’ succeeded, which he often doubted, he would be the richest citizen in Haverhill; and if it failed, which he sorely feared, he would be a bankrupt.

Sanders and Hubbard were leasing telephones two by two, to business men who previously had been using the private lines of the Western Union Telegraph Company. This great corporation was at this time their natural and inevitable enemy. It had swallowed most of its competitors, and was reaching out to monopolize all methods of communication by wire. The rosiest hope that shone in front of Sanders and Hubbard was that the Western Union might conclude to buy the Bell patents, just as it had already bought many others. In one moment of discouragement they had offered the telephone to President Orton, of the Western Union, for $100,000; and Orton had refused it. ‘What use,’ he asked pleasantly,’ could this company make of an electrical toy?’

“But besides the operation of its own wires, the Western Union was supplying customers with various kinds of printing-telegraphs and dial-telegraphs, some of which could transmit sixty words a minute. These accurate instruments, it believed, could never be displaced by such a scientific oddity as the telephone, and it continued to believe this until one of its subsidiary companies — the Gold and Stock — reported that several of its machines had been superseded by telephones.

“At once the Western Union awoke from its indifference. Even this tiny nibbUng at its business must be stopped. It took action quickly, and organized the ‘American Speaking-Telephone Company,’ and with $300,000 capital, and with three electrical inventors, Edison, Gray, and Dolbear, on its staff. With all the bulk of its great wealth and prestige, it swept down upon Bell and his little body-guard. It trampled upon Bell’s patent with as little concern as an elephant can have when he tramples upon an ant’s nest. To the complete bewilderment of Bell, it coolly announced that it had the only original telephone, and that it was ready to supply superior telephones with all the latest improvements made by the original inventors — Dolbear, Gray, and Edison.

“The result was strange and unexpected. The Bell group, instead of being driven from the field, were at once lifted to a higher level in the business world. And the Western Union, in the endeavor to protect its private lines, became involuntarily a ‘bell-wether’ to lead capitalists in the direction of the telephone.”

Even then, when financial aid came to the Bell enterprise, it was from capitalists, not from bankers, and among these capitalists was William H. Forbes (son of the builder of the Burlington) who became the first President of the Bell Telephone Company. That was in 1878. More than twenty years later, after the telephone had spread over the world, the great house of Morgan came into financial control of the property. The American Telephone & Telegraph Company was formed.