Democracy or Economic Concentration. Your Choice

In taking on against power-hungry tycoons 100 years ago, Louis Brandeis became the social conscience of the most capitalist country in the world. Who will be Israel’s savior from the oligarchs?

Guy Rolnik
Guy Rolnik
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Guy Rolnik
Guy Rolnik

He was one of the most famous jurists in the world, and one of the most influential in the United States during the last century. His quip, “Sunlight is said to be the best of disinfectants” is well-quoted. He set precedents and invented new methods. He completed Harvard Law School at the tender age of 20 with the highest grade average in the institution’s history, a record only broken 80 years later.

Louis Brandeis: Zionist, man of law, and warrior for social justice.

He became a successful, wealthy lawyer just a few years after opening his firm. But instead of accruing riches and power, he devoted his law career to cases for the good of society, such as protecting workers and consumers. The first Jew to be appointed to the Supreme Court, he was also one of the fathers of the Zionist movement in America.

Louis Dembitz Brandeis, 1856-1941, was one of the greatest spiritual leaders the Jewish people had over the last hundred years. With talent and intelligence, he overcame a poor background to become one of the most influential characters in American legal and business circles. Woodrow Wilson, the 28th president of the United States, based his platform and policy in no small part on Brandeis’ ideas.

In Israel, Brandeis is a deeply familiar figure to first year law school students and the loftiest of justices alike. His ideas, his rulings and his articles, ranging in topic from privacy to monopolies, were revolutionary. His appointment to the highest court in America in 1916 was considered a breakthrough for the status of Jews in American society, and his contribution to the U.S. Zionist movement and to American support for the establishment of Israel are known to all students of Zionist history.

Yet the most important chapter in his professional career, the dearest to his heart, remains virtually in Israeli circles. His most important role in history was his career-long war against the tycoons, bankers, monopolies and cartels that ruled the American economy at the start of the last century.

These people, sometimes called the “robber barons,” are all too reminiscent of the 10 most powerful families dominating Israel’s economy today.

By using other people’s money, by direct or indirect control of the banks and other financial institutions, and through their cartels and monopolies, these Americans had become the true rulers of the economy: stronger than the government − stronger than the Executive Branch, Congress and the Senate.

Brandeis, born to an immigrant Jewish family from Czechoslovakia, was a brilliant pupil in school and later at Harvard. His law firm, which he opened together with a college friend, quickly took off and made Brandeis wealthy. But here his career took an unusual turn. Instead of continuing to accrue power, money and contacts, he chose cases that advanced the public interest: exploited workers, defrauded consumers, cases of insurance gone sour. He shunned cases he considered “bad” and devoted a growing portion of his career to legal battles that quickly made him what The Economist magazine once called “a Robin Hood of the law”.

Free market stalwart

Don’t hasten to coin him some sort of “social activist” who hails from the left of economic thought, though. Unlike Israel’s version of social activists, Brandeis was a great believer in the free market and competition. The terms competition, freedom, efficiency, innovation and progress appear almost obsessively in his writings.

His war against the American oligarchy in the early 20th century was not based on Marxist or communist ideas. Rather he was guided by his belief in the power of freedom, competition and innovation. He understood that the greatest enemies of these concepts were the American capitalists, who colluded to depress competition, innovation and the development of the American economy.

Brandeis used the word “oligarchy” to describe America’s economic leaders, bankers and business leaders. Israel’s tycoons are loathe to be called oligarchs. They keep trying to tell the public that they’re just “businessmen” and that the sobriquet “oligarchs” is confined to Russian tycoons who bought deprivatized government companies from Moscow on the cheap.

Yet based on economic law, the shoe fits, even if a given person didn’t buy even one company from the state. Because the moment they have tremendous power, concentration, cross-interests and control cartels and monopolies, by the definition handed down by Justice Brandeis, they are oligarchs.

There isn’t a lawyer in the Holy Land who doesn’t know Brandeis’ famous statement about sunlight. It appears in a number of court verdicts. Yet few know that his great life work began years before he joined the Supreme Court: it is sharply described in his book “Other People’s Money and How the Bankers Use It,” published in 1914, on which he then based a series of articles in Harper’s Weekly.

When talking about bankers, Brandeis didn’t mean people who engage in banking, but people who turned their banks into levers to build gigantic financial and industrial conglomerates, called trusts.

The robber barons organized their conglomerates as trusts, so after their death, their management would pass to their heirs without paying estate tax. These conglomerates controlled the strongest monopolies and cartels at the start of the 20th century, notably railroads and steelworks and later, phone and telegraph companies as well. In today’s terms these are our cellular providers, retailers, insurers and the energy firms.

The true danger

TheMarker has devoted great effort in warning of the dangers in store for the Israeli economy and democracy as a result of the formation of families controlling the economy, most of which derive their power from holdings in cartels, monopolies and financial institutions. In the last two years we have concluded that the heavy concentration of power in the economy constitutes a danger not only to each industry and sector in which they operate. They constitute a far broader clear and present danger to democracy.

Last week, after reading “Other People’s Money,” based on articles written nearly 100 years ago, I was astonished to discover that there really is nothing new under the sun. Brandeis wrote it all long ago, with far greater talent, directness and force.

In his writings, he presents the great damage caused to the American economy, to innovation, to development and to consumers by the monopolies, the cartels, the concentration of power, the cross-holdings, the double interests and the combination of industrial companies with financial ones. And he repeats: the real danger isn’t the negative effect on prices, on consumers and on efficiency. It is to democracy. This is the true danger of concentrated economic power, and thus he ruled: “We can have democracy in this country, or we can have great wealth concentrated in the hands of a few, but we can’t have both.”

Yes, Brandeis said 100 years ago that concentration of wealth in the hands of the few is the greatest danger democracy faces.

He didn’t mean wealth in its usual Marxist context. Remember, he was a free market advocate. He didn’t see a danger to society in rich people who made money from successful business.

The damage is caused by people whose power derives from their control over other people’s money: the ones who control the great trusts, the banks, the public companies, the conglomerates. They are the ones who pose the danger to the economy and to democracy, he said.

A mockery of theIsraeli public debate

Brandeis’ economic, social and legal views make a mockery of the usual debate about left or right, capitalist or socialist in Israel.

The Israeli capitalist pigs call their opponents “socialists” or “communists,” to show that their proposals are doomed to fail, as communism failed.

But the opposite is true: Israel’s “capitalists” hate capitalism and the free market. They don’t want competition and think the state’s job is to give them franchises and then leave them alone as they build monopolies and cartels that strangle progress.
Meanwhile, “socially minded” Israelis use their hatred of the rich to preserve the power of a handful of violent unions that are themselves cartels and monopolies.

They all need to read Brandies, the social conscience of the most fiercely capitalist nation in the world, and pass a copy to their lawyers and economic advisers too.

Brandeis was a lawyer who when in private business didn’t hesitate to take on the most powerful, violent magnates in public view. He didn’t hesitate when the press, which was controlled by the tycoons, savaged him. Brandeis knew the risks he was taking when confronting the American oligarchy. Apparently the people attempting to keep him from the Supreme Court weren’t anti-Semites: they were tycoons who didn’t want the man who understood their business models all too well, and who understood the damage they were causing to progress, development and competition, to reach the highest position in American law.

William Douglas, who headed the U.S. Securities and Exchange Commission and succeeded Brandeis in the Supreme court, was considered a liberal judge.

“Brandeis was a militant crusader for social justice whoever his opponent might be. He was dangerous not only because of his brilliance, his arithmetic, his courage. He was dangerous because he was incorruptible,” Douglas wrote.

Before Brandeis came along, economists and lawyers usually shrugged and said, it is the nature of economics to create monopolies and cartels. Some claimed that the advantages of size compensated for the disadvantages. But Brandeis believed that concentration, cartels, monopolies and pyramids headed by people who control other people’s money are not natural. He argued that they could and should be broken.

Where is Israel’s Brandeis? Where is the lawyer, economist or public figure with thorough economic understanding, who, free of hollow slogans about “capitalism and “socialism,” will rise up and say “No more?” Where is a leader who cares and doesn’t settle for lip service, a person willing to take on the most powerful forces in the economy?

How pathetic it is that our most august judicial figures nestle in the embrace of this or that oligarch, choosing comfort and respect and prestige − and cocktail parties − over the public good.

Thus wrote Brandeis

Here are some quotes and extracts from from “Other People’s Money and How the Bankers Use It.”

The book opens with the following: “President Wilson, when governor, declared in 1911: ‘The great monopoly in this country is the money monopoly. So long as that exists, our old variety and freedom and individual energy of development are out of the question. A great industrial nation is controlled by its system of credit. 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, even if their actions be honest and intended for the public interest, are necessarily concentrated upon the great undertakings in which their own money is involved and who, necessarily, by every reason of their own limitations, chill and check and destroy genuine economic freedom.’”

Later in the first chapter: “The dominant element in our financial oligarchy is the investment banker. Associated banks, trust companies and life insurance companies are his tools. Controlled railroads, public service and industrial corporations are his subjects. Though properly but middlemen, these bankers bestride as masters America’s business world, so that practically no large enterprise can be undertaken successfully without their participation or approval.”

Yet later in that chapter: “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.”
You have to doff your hat at Brandeis for his powers of articulation − “They control the people through the people’s own money” indeed.

He goes on:“If the bankers’ power were commensurate only with their wealth, they would have relatively little influence on American business. Vast fortunes like those of the Astors are no doubt regrettable. They are inconsistent with democracy. They are unsocial. And they seem peculiarly unjust when they represent largely unearned increment. But the wealth of the Astors does not endanger political or industrial liberty... It lacks significance largely because its owners have only the income from their own wealth.

“The Astor wealth is static. The wealth of the Morgan associates is dynamic. The power and the growth of power of our financial oligarchs comes from wielding the savings and quick capital of others. In two of the three great life insurance companies the influence of J. P. Morgan & Co. and their associates is exerted without any individual investment by them whatsoever. Even in the Equitable, where Mr. Morgan bought an actual majority of all the outstanding stock, his investment amounts to little more than one-half of one per cent. of the assets of the company. The fetters which bind the people are forged from the people’s own gold.

“More serious, however, is the effect of the Money Trust in directly suppressing competition. ... But far more serious even than the suppression of competition is the suppression of industrial liberty, indeed of manhood itself, which this overweening financial power entails. The intimidation which it effects extends far beyond ‘the banks, trust companies, and other institutions seeking participation from this inner group in their lucrative underwritings’; and far beyond those interested in the great corporations directly dependent upon the inner group. Its blighting and benumbing effect extends as well to the small and seemingly independent business man, to the vast army of professional men and others directly dependent upon ‘Big Business,’ and to many another.

“Nearly every enterprising businessman and a large part of our professional men have something to sell to, or must buy something from, the great corporations to which the control or influence of the money lords extends directly, or from or to affiliated interests. Sometimes it is merchandise; sometimes it is service; sometimes they have nothing either to buy or to sell, but desire political or social advancement. Sometimes they want merely peace. Experience shows that ‘it is not healthy to buck against a locomotive,’ and ‘Business is business.’”

Dear reader, read that again. Our businessmen, politicians, regulators and managers feel that themselves: their friends advise them not to buck the locomotive in which sit Israel’s oligarchs.

“Here and there you will find a hero − red-blooded, and courageous, − loving manhood more than wealth, place or security, − who dared to fight for independence and won. Here and there you may find the martyr, who resisted in silence and suffered with resignation. But America, which seeks ‘the greatest good of the greatest number,’ cannot be content with conditions that fit only the hero, the martyr or the slave,” he writes in the second chapter.

It is time for Israel’s oligarchs and those feeding from their troughs, whether in business, politics or the media, to ask themselves − who are they? Heroes, martyrs or slaves, and doesn’t Israel deserve better?

“Protection to minority stockholders demands that corporations be prohibited absolutely from making contracts in which a director has a private interest, and that all such contracts be declared not voidable merely, but absolutely void,” he writes in Chapter 3.
“In the case of railroads and public-service corporations ‏(in contradistinction to private industrial companies‏), such prohibition is demanded, also, in the interests of the general public. For interlocking interests breed inefficiency and disloyalty; and the public pays, in higher rates or in poor service, a large part of the penalty for graft and inefficiency.

“Indeed, whether rates are adequate or excessive cannot be determined until it is known whether the gross earnings of the corporation are properly expended. For when a company’s important contracts are made through directors who are interested on both sides, the common presumption that money spent has been properly spent does not prevail.”

From Chapter 5:
“Now, how has this great wealth been accumulated? Some of it was natural accretion. Some of it is due to special opportunities for investment wisely availed of. Some of it is due to the vast extent of the bankers’ operations. Then power breeds wealth as wealth breeds power. But a main cause of these large fortunes is the huge tolls taken by those who control the avenues to capital and to investors. There has been exacted as toll literally ‘all that the traffic will bear.’”

As in Israel 2010, America’s oligarchs thought the public owed them for progress: they provided the businesses, they provided the jobs. But Brandeis, a brilliant commercial lawyer who knew the business world inside out, saw through the slogans. He knew the truth, and wrote, in Chapter 7: “J. P. Morgan & Co. declare, in their letter to the Pujo Committee, that ‘practically all the railroad and industrial development of this country has taken place initially through the medium of the great banking houses.’ That statement is entirely unfounded in fact.

“On the contrary nearly every such contribution to our comfort and prosperity was ‘initiated’ without their aid. The ‘great banking houses’ came into relation with these enterprises, either after success had been attained, or upon ‘reorganization’ after the possibility of success had been demonstrated, but the funds of the hardy pioneers, who had risked their all, were exhausted.

“This is true of our early railroads, of our early street railways, and of the automobile; of the telegraph, the telephone and the wireless; of gas and oil; of harvesting machinery, and of our steel industry; of textile, paper and shoe industries; and of nearly every other important branch of manufacture. ... But the instances are extremely rare where the original financing of such enterprises was undertaken by investment bankers, great or small.”

Brandeis ends his book with a quote from Woodrow Wilson:
“No country can afford to have its prosperity originated by a small controlling class. The treasury of America does not lie in the brains of the small body of men now in control of the great enterprises. ... It depends upon the inventions of unknown men, upon the originations of unknown men, upon the ambitions of unknown men. Every country is renewed out of the ranks of the unknown, not out of the ranks of the already famous and powerful in control.”

The next time our prime minister or some politician summons “Israel’s economic leaders”, they should read Brandeis again. These are not the men who brought innovation and development to Israel’s economy. These are men who have money and power and whose monopolies, cartels and conglomerates will suppress development and progress, as Brandeis says.

It is the unknown, anonymous entrepreneur who will bring innovation and progress to our nation, as Louis Brandeis − ardent Zionist, great man of law, brilliant economist and warrior for social justice − imagined a hundred years ago.



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