Brandeis, Liberalism, and the Battle against Banks, One Hundred Years On

Goldengoose by Michael Blim

The goose that lays golden eggs has been considered a most valuable possession. But even more profitable is the privilege of taking the golden eggs laid by somebody else’s goose. The investment bankers and their associates now enjoy that privilege. They control the people through the people’s own money.

–Louis Brandeis, Other People’s Money and How the Bankers Use It (1914)

While the national debt struggle is getting the headlines, the bankers’ lobbyists in the backrooms of the Capitol are trying to undo the Dodd-Frank Act. It is a full-out assault ranging from trying to water down and if possible eliminate statute-mandated regulations to getting Republican members of Congress to chop big chunks off the budgets of the agencies that are trying to implement and enforce the new law. Taking Elizabeth Warren’s head was thrown in for good measure, and there were whispers that the President’s praetorian guard did not lament the passing of the President’s “dear friend.”

Almost a hundred years ago, Louis Brandeis and other progressive reformers were trying to break the hold the banks had on the American economy. Big bank power was near absolute, and their regard for government power scant. After Theodore Roosevelt in 1902 had sued to break up J.P. Morgan’s Northern Securities railroad trust, Morgan called on the President at the White House. “If we have done something wrong,” he said, “send your man to my man and they can fix it up.” Roosevelt refused, reflecting:

“That is a most illuminating illustration of the Wall Street point of view. Mr. Morgan could not help regarding me as a big rival operator who either intended to ruin all his interests or else could be induced to come to an agreement to ruin none.” (W.H. Brands, American Colossus, 2010, 547)

Not much has changed. The Wall Street moguls still don't take much guff from Presidents. Why should they? After the 2008 crash, the federal government bailed out the big banks, bent anti-trust rules to allow them to absorb competitors and increase market share, all the while the banks waged war to escape regulation, paid mind-boggling bonuses once again, and stiffed the very mortgage borrowers whom they ripped off and are now repossessing.

Nor, unfortunately, has the reform impulse changed much. Then, as now, reformers had three choices: nationalize the banks, charter them as public utilities, or create government capacity to guard the public interest. Then as now, reformers chose to forgo nationalization or the transformation of banks into public utilities, and opted for regulation. Good things were done, as Brandeis provided the Wilson Administration with the policy recommendations that could begin untangling the unholy alliances via cross-shareholding and interlocking directorates whereby two syndicates, Morgan’s and John D. Rockefeller’s, controlled the national banking industry. However, whatever teeth the Federal Reserve Act of 1913 possessed owed not to Brandeis but to William Jennings Bryan, then Secretary of State and the leading liberal (and anti-imperialist) of the day, now considered falsely thanks to the movie Inherit the Wind as to have been a delusional, Bible-beating windbag. It was Bryan who insisted that the federal government alone, and not the banks, should issue currency, and that the Federal Reserve Board be nominated by the President and approved by the Senate. Brandeis came around to Bryan’s position and helped convince a reluctant Woodrow Wilson.

But it is a bit puzzling why Brandeis, a proponent of anti-trust action to maintain competitive markets, should have settled for the weak tea of federal regulation when the need for something stronger was so obvious. Though progressive muckrakers at the turn of the 20th Century had exposed the crimes of almost every industry you can name, it was Brandeis in a 9-part series in Harper’s Weekly in 1913 and 1914 who called out the banks in the most damaging terms. “We must break the Money Trust or the Money Trust will break us,” he cried in conclusion.

How right he was then, but how little he left behind – certainly nothing that withstood the banking collapse that caused the Great Depression. The New Deal’s several acts that imposed more regulation upon banks, including the crucial separation of commercial from investment banking, are often referred to as the fulfillment of the Brandeisian anti-trust program. Despite Brandeis’ wish (along with that of Wilson), according to his biographer Melvin Urofsky, “to restore an older, more idyllic, and probably semi-mythical past in which there had been a balance among the country’s various political and economic groups,” (Louis Brandeis: A Life, 2009, 384) the great efforts to regulate banking he led left the big banks standing. The nation’s financial circuits continued to go through New York, no less than they had before progressives put banking reform on the agenda.

And here we are once more, with a dangerous, irresponsible banking system. Indeed the irony is greater, for this time we recently nationalized most major banks, only to recapitalize them and give them back to the boards and executives who had bankrupted them, and to the stockholders whose bacon was saved by government money. Amidst all the chicanery and the hypocrisy necessary for concluding such a coup, taking and keeping the big banks was never considered. Nor, despite the urgings of economists such as Joseph Stiglitz, were national banks converted into public utilities to take their place alongside the other industries that facilitate the national economy such as natural gas, electricity, and telecommunications. Instead, the Dodd-Frank Act tried to plug all the holes in the leaky bucket of American finance, each in the face of fierce opposition and open bank bribery via “campaign contributions” that too often compromised the final outcome. The so-called Volker provision survived final passage, but only with highly equivocal and theoretical language under which the Federal Reserve could decide that a bank is just too big for the national interest. This time, banks are banned from trading with their own money, though nothing stops them, as I noted in my last post, from gambling once more in a derivatives market no less a threat to the financial system that it was before the 2008 crash.

American liberals since the demise of the Populist movement at the turn of the 20th Century have consistently stopped at the water’s edge when it came to putting banks in their place. Since the time of Brandeis, American liberals have ignored the alternatives I have outlined and have narrowed the problem of protecting the public interest in banking and in big business generally as a choice between regulation and breaking up monopolies. The first choice accepted monopoly as the mature state of capitalism, and the second believed that capitalism required competitive markets in order to satisfy society’s needs.

This is a false choice. First, because there are and have always been other choices. Second, because regulations are so easily eroded and plundered by the actions of powerful banks that they simply develop new predatory and dangerous ways to generate monopoly profits. They now know too that they operate with a government guarantee, as the big banks still standing are bigger than before, and so obviously too big to fail.

The retreat from combating monopoly power in banking and finance and a niggardly commitment to economic equality are the reasons American liberalism falls short of a political majority.

It is why this weekend’s headlines are about the national debt and not the threat of final defeat of financial reform. Hardly bread and circuses, but Republicans and finally President Obama are making it a serious distraction.