The Farthest Fall

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It is easy to make money in a bull market. Just look at the thousands of Wall Streeters who have done so in recent years, as the Dow Jones Industrial Average has broken through thousand mark after thousand mark. But as they drive around in their Range Rovers, smoke their fifteen-dollar cigars, and discreetly pull back their shirt cuffs to reveal a glimpse of a Rolex, these beneficiaries of the greatest bull market in the history of Wall Street might spare a moment to think about Samuel Insull.

In the summer of 1929, securities in Insull’s companies were appreciating at the rate of seven thousand dollars a minute. His utilities empire, centered in Chicago, extended into thirty-nine states. With his cookie-duster mustache, velvetcollared overcoat, neatly turned Homburg, spats, and elegant walking stick, he was, for the 1920s, the very model of the modern major capitalist.

Only three years later, however, his companies were in ruins, and he was a fugitive from justice. Franklin Roosevelt, running for President, would refer contemptuously to “the Ishmaels and the Insulls, whose hand is against every man’s.” It was one of the greatest falls in the history of capitalism.

Samuel Insull was born in London in 1859. His father was a nonconformist preacher, and his mother operated Insull’s Temperance Hotel. Although the family was anything but rich, they managed to send their son to a good school, where he showed a quick mind and considerable aptitude for hard work. When he was fourteen, he became a junior clerk to a firm of auctioneers.

Four years later he got the lucky break so characteristic of Horatio Alger stories, both real and fictional. George E. Gourard, Thomas Edison’s London representative, hired lnsull as his secretary. So impressed was he with his young protégé that in 1881, when lnsull was only twenty-one, he was sent to this country to become private secretary to the great man himself. In a few years he was Edison’s most tnusted business adviser.

Before long Edison decided to put lnsull in charge of the fledgling Edison General Electric Company, which was not then doing well. lnsull quickly turned the company around. When he had gone to what would soon be called just General Electric, it employed two hundred men. When he left, less than a decade later, it employed six thousand, and Insull, at the still-young age of thirty-three, earned a then-princely thirty-six thousand dollars a year.

But Insull was restless. He admired Edison, but he wanted to be out from under his thumb. He accepted the presidency of Chicago Edison, one of that city’s infant power companies, which, despite its name, was not controlled by the inventor. Insull’s salary was only one-third what he had been earning at General Electric, but he quickly borrowed $250,000 from Marshall Field to buy a substantial amount of stock in Chicago Edison and set about to make it the dominant power company in the area.

The year after Insull arrived in Chicago, the World’s Columbian Exposition provided a perfect showcase for the wonders and possibilities of electricity. Chicago Edison and the small Commonwealth Electric Company provided the power. Instill soon convinced the latter company that he should be its president too. He ran both companies until he merged them into Commonwealth Edison in 1907. That year also, he secured a forty-year exclusive franchise from the city of Chicago “to distribute electric power within the present or future limits of the municipality.” To put it another way, Insull now had a monopoly in America’s second-largest city to supply a commodity for which the demand was growing exponentially. In 1902 we used just 6 billion kilowatt-hours; in 1929,118 billion.

Insull, however, was already expanding beyond Chicago itself, buying up small utilities in the surrounding counties and combining them into the Public Service Company of Northern Illinois. And he was always highly innovative. He introduced metering, and when Sir Charles Algernon Parsons developed the compound steam turbine, Insull immediately recognized its potential to produce electricity that could be transmitted over long distances in unprecedented amounts. When his board of directors was reluctant to take the gamble, Insull personally guaranteed the cost. The turbine quickly became so fundamental to the power industry that only twenty-five years later a plaque to mark its historical importance was placed on the Fisk Street power station where Insull had had the first one installed.

As InsulPs reputation as a financial and managerial wizard spread, so did his involvement in numerous other enterprises. He turned around the sinking Peoples Gas, Light & Coke Company and Chicago’s streetcar and elevated-railway franchises. He also began selling stocks and bonds in his myriad companies to his employees and customers. Partly this was to help finance his unending expansion, and partly it was to guard against a spreading movement for the public ownership of utilities. By the 1920s Insull’s empire served 1.8 million households and businesses.

But while Samuel Insull had pioneered the utility industry, it was not long before others recognized the potential of companies that were natural monopolies and were often regulated by pliable politicians who allowed those companies to charge on a cost-plus basis, assuring steady profits. Insull feared losing control of his many properties, and he increasingly turned to the device of the holding company to make sure that he didn’t.

A holding company is simply a corporation that exists to hold the securities of other corporations. When corporations’ stocks were pyramided one on top of another, the holding company allowed someone with little actual investment to control vast economic assets. To oversimplify somewhat, a person holding 51 percent of the stock of a holding company would control all the companies that the holding company held 51 percent or more of the stock in, and all the companies that those companies in turn held 51 percent or more of the stock in, and so on.

The downside, of course, was that holding companies were top-heavy. Producing no wealth of their own, they depended on the income from the companies at the bottom of the pyramid to finance the costs of their investments, and most of them were highly leveraged, financed almost totally with borrowed money.

As long as Wall Street was booming, however, all was well, and Instill could finance his house-of-cards financial structure by selling more and more bonds and stocks. In the first eight

The prosecution tried to use InsulPs own books as evidence. A lawman on the jury said the crooks he’d known kept no books.

months of 1929, the stock of Insull Utility Investments—one of dozens of Insull-controllcd companies—rose from $30 a share to $147. But the first eight months of 1929 were easy on Wall Street; it was the ninth and tenth months of that year that separated the men from the boys.

When the bears took over, the Insull empire, financed by ever more issues of securities, began to unravel, despite the fact that Insull himself tried his best to stem the disaster. He borrowed five million dollars personally from a New York bank and turned it over to the companies. He sold his four-thousand-acre estate, turned in his half-million-dollar life insurance policy, and finally gave all his personal property to his companies’ creditors. But it was no use. In April 1932 the Insull empire, or what was left of it, went into receivership. “I wish my time on earth had already come,” he said wearily.

It appeared that the losses would total nearly $800 million, a titanic sum by the standards of the day, and an army of examiners began poring over the bewilderingly complicated transactions among Insull’s many companies. Meanwhile, ambitious district attorneys piled on, hoping to exploit the public fury that was causing Insull to receive in the mail an average of twenty death threats a day. Two months after his companies had gone into receivership, Insull fled abroad, fearing he could not get a fair trial. Hc was soon indicted by both state and federal grand juries for embezzlement, mail fraud, and conspiracy to evade the national bankruptcy act. After months of seeking refuge in countries that lacked extradition treaties with the United States, he was taken into custody and returned for trial. A famous picture appeared in hundreds of newspapers, showing Insull entering the Cook County Jail, a look of utter defeat on his face.

The government tried to make its case using Insull’s own books as evidence. A former sheriff who sat on the first jury noted that the only crooks he knew about kept no books, falsified them, or destroyed them. After seven weeks of testimony the jury took exactly five minutes to find Insull not guilty and then for the sake of propriety waited two hours before announcing their verdict. Twice more he was tried; twice more the juries acquitted him. Samuel Insull was guilty of nothing more than having failed in business.

A few years later he died of a heart attack in the Paris subway, at the age of seventy-nine. With no papers on him his body lay unidentified for several hours, and police found only eight francs in his pockets. Newspapers reported that a man once among the richest in the world had died a beggar’s death. It was the ultimate indignity for this dignified and honest, if perhaps foolish, man. The truth, of course, was that when he collapsed, someone had robbed his corpse of his wallet.