U.S. Intellectual History Blog

Louis Brandeis: "the curse of bigness" in an era of "too big to fail"

Most of the recent Federal bailouts of U.S. financial and automobile corporations were justified under some version of the concept of “too big to fail.” This is to say that some companies have become so intertwined with the rest of the economy that, even if their financial collapse is entirely earned, they should not be allowed to go bankrupt, lest too many other entities also collapse through no fault of their own. The notion of “too big to fail” has played a prominent role in dozens of U.S. bailouts, such as those of Chrysler in 1980 or New York City in 1975, and is in no way limited to the current crisis.

Today GM and Chrysler prominently fit the bill of “too big to fail”: not only do their large number of employees mean that bankruptcy would put an unacceptably large number of people out of work, but these companies’ failures would be the harbinger of a cascade of bankruptcies that would follow as the smaller companies who supply them with parts would probably fold after losing their biggest customers, and other automobile manufactures, in turn, would suffer without the parts manufacturers. But the most prominent contemporary example of such a firm is, of course, AIG, the financial company whose massive losses and interconnections with other financial concerns have motivated two very different presidential administrations to offer federal support totaling, as of this writing, $170 billion.

On the Tonight Show, President Obama invoked this rationale with regard to the company. “So the problem with AIG was that it owed so much and was tangled up with so many banks and institutions that if you had allowed it to just liquidate, to go into bankruptcy, it could have brought the whole financial system down. So it was the right thing to do to intervene in AIG.”

AIG itself touts its own size as a reason to justify such government largesse, as its own analysis, reported in Time magazine, reveals. “The extent and interconnectedness of AIG’s business is far-reaching and encompasses customers across the globe ranging from governmental agencies, corporations and consumers to counterparties. A failure of AIG could create a chain reaction of enormous proportion.” The same article, written by Bill Saporito, explains the potential negative consequences of the firm’s bankruptcy. “Among other effects, it could lead to mass redemptions of insurance policies, which would theoretically destabilize the industry; the withdrawal of $12 billion to $15 billion in U.S. consumer lending in a credit-short universe; and even damage airframe maker Boeing and jet-engine maker GE, since AIG’s aircraft-leasing unit buys more jets than anyone else.”

The upshot of all of this appears to be that sufficient size has become a Federal insurance policy against a company’s own incompetence and criminality. This is clearly unacceptable, from both the perspective of “moral hazard” (it actually encourages behavior that we would presumably like to minimize) and that of “class warfare” (it creates a double standard for wealthy corporations that does not apply to those of more limited means). But what, on the other hand, should we do? Large bankruptcies really are bad, and they really do harm lots and lots of people who have nothing to do with bringing them about. Thus it seems more and more reasonable to me lately that companies should just simply should not be allowed to get this big in the first place, an idea also briefly advanced in a New York Times op-ed by Michael Lewis and David Einhorn. “Another good solution to the too-big-to-fail problem,” they wrote on January 4, “is to break up any institution that becomes too big to fail.”

This line of reasoning put me in mind of Progressive era jurist Louis Brandeis, who famously found the “bigness” of large corporations to be one of the more egregious sins bedeviling the nation. I had thought that the current crisis might bring about a resurgence of interest in Brandeis, but so far I have yet to see one. (One might think that at least David Brooks, who loves to dredge up forgotten social scientists in his columns, might have said a few words about him!) To be honest, I don’t know much about the man myself, beyond the most basic: he was a crusading attorney appointed to the Supreme Court by Woodrow Wilson, and later in life became an ardent Zionist. He is also well-known in legal circles for his concern with facts as opposed to abstract logical reasoning, the creation of the “Brandeis brief,” and the development of the concept of the right to privacy.

Certainly an impressive résumé, but none of this really relates to what I was interested in: Brandeis’s positions on the dangers of corporate size. I looked into his 1914 collection of essays decrying the “money trust,” called Other People’s Money: And How the Bankers Use It. Honestly, it was the only book of his that I had heard of, and the title certainly made it seem relevant to the current crisis. After reading a few of his essays, however, it became apparent why the popular political media will not be overrun with Brandeis artices the way they were with pieces on Keynes a month or two ago: the issues that concerned Brandeis are rooted in behaviors that seem particularly characteristic of the nineteenth century. Specifically, he saw the large size of the corporations in his day not necessarily as an inherent problem, but as a tool that could be used to nefarious ends. His major concern appears to have been the tendency toward mononpoly, which would stifle competition and lead ultimately to significant harm to workers and consumers. And the financial industry, in Brandeis’s view, was the worst offender. In the essay “Our Financial Oligarchy,” Brandeis quotes then-Governor Woodrow Wilson on this point.

The great monopoly in this country is the money monopoly…Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men, who…are necessarily concentrated upon the great undertakings in which their own money is involved and who, necessarily,…chill and check and destroy genuine economic freedom.

Wilson’s concern, therefore, is not that these companies shouldn’t be too big lest the rest of us wind up on the hook for their failures. Instead he, and Brandeis, are more worried about the consequences of the success of such businesses. Brandeis believed that there is a point at which greater size would begin to limit the efficiency of a corporation, and the only reason a business’s managers would seek to grow beyond that point was to profit from anti-competitive activities. As one example, he noted that the House of Morgan essentially paid fees to itself out of the proceeds for underwriting the formation of U.S. Steel. “This sum of $62,500,000 was only a part of the fees paid for the service of monopolizing the steel industry.”

As much as Brandeis detested monopolies, however, he was not terribly interested in breaking them up. According to Philip Cullis, author of “The Limits of Progressivism: Louis Brandeis, Democracy and the Corporation” (Journal of American Studies, 30 [1996], 3: 381-404), “the accusation that dominated his indictment of the trusts–that they relied on unfair practices to dominate industries–also led him to downplay the need for the government to break up large firms.” (383) This is because Brandeis “believed that, in comparison with action against unfair practices, limiting corporate size was of secondary importance.” (395) Moreover, while Brandeis’s own actions in publicizing such unfair practices “enhanced public enthusiasm for reforming business conduct, it also undermined support for limiting corporate size.” (394) In general, Cullis concludes, “Progressives assumed that the solution was to make big business good, rather than to make it small.” (404)

Despite the fact that he wrote a book called The Curse of Bigness, then, Brandeis was unable to provide much guidance on the “too big to fail” question. This is mainly for two reasons: first, the government was not yet in the business of directly bailing out companies, so the issue simply was not on his radar; and second, he did not oppose corporate size per se. It appears that those who seek to limit the size of corporations must look elsewhere for intellectual support.

6 Thoughts on this Post

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  1. The notion of “Bigness” in relation to corporations and American life drives some of the discussion in Schlesinger’s third volume in the Age of Roosevelt series, The Politics of Upheaval (1960). Schlesinger makes good use of Brandeis to split Roosevelt’s cabinet in half, creating Brandeisian New Dealers and otherwise. My reading of the book has been interrupted recently, so I can’t recall which branch of New Dealers were for and against him (I think the Second New Deal enthusiasts were more Brandeisian). I contribute this, however, to underscore the fact that Brandeis wasn’t forgotten by historians dealing with economics and politics post Wilson and after the Progressive Era. – TL

  2. Mike,
    This is a great post. But as I read both it, your conclusion does not seem to follow from the argument. You note: “Brandeis believed that there is a point at which greater size would begin to limit the efficiency of a corporation, and the only reason a business’s managers would seek to grow beyond that point was to profit from anti-competitive activities. As one example, he noted that the House of Morgan essentially paid fees to itself out of the proceeds for underwriting the formation of U.S. Steel. “This sum of $62,500,000 was only a part of the fees paid for the service of monopolizing the steel industry.” Then, quoting Cullis, you conclude that Brandeis was not terribly interested in breaking up large firms so much as eliminating unfair practices. But as I follow Brandeis’s logic, to limit unfair practices would eliminate the purpose and incentive of growing beyond a certain point because of the limitations to efficiency that size imposes. Large firms with no incentive to maintain their size would then of their own initiative either break themselves up by selling off parts of their business or suffer the consequences of under-performance. So beginning with regulation to minimize unfair practices takes care of the problem of size. Am I reading you/him correctly?

  3. David:

    You’re exactly right. Brandeis’s basic point about bigness is that a firm that is, if I may oversimplify, big but not evil didn’t really pose a problem. So if we regulate evil, big will take care of itself.

    But I meant to suggest that the too big to fail phenomenon seems to suggest that this might not always be true. Brandeis would not have agreed but was also writing before the issue became relevant. Thus I’d say he was silent on the question rather than wrong about it.


  4. Excellent article Mike, very interesting reading. I must say I’m pretty startled with the “too big to fail” phenomenon. It seems a bit odd to me how these corporations get free money just because they’re “big”. I don’t quite understand the concept of giving out the money for nothing, why not run a series of government project that would give the corporation a chance to start up again and continue on its own after a while. I admit it would be hard for AIG but corporations like GM, Chrysler and Ford should not have been given the money that easily.

    Take care, Lorne

  5. Brandeis was correct for his time. Mid and big corps are generally OK, but gigantic, humongous, Goliath types are dangerous. It’s interesting that conservatives want small government but big business.

  6. I believe that–appropriate enough for our time–Brandeis thought that no business should become more complex than its owners and top managers could fully understand. Top management of Wall Street firms failed this test and failed miserably.

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