BIG LITTLE MAN

By Warren Haskin

Presented to

The Chicago Literary Club

November 15, 2004

In late October 1929, the stock market crashed. A few days later, November 4th, the Chicago Civic Opera opened at its new permanent home on the ground floor of the forty-two storey building at the corner of Madison Avenue and Wacker Drive. The building, and the opera theatre it housed, were the brainchildren of Samuel Insull, who controlled both Commonwealth Edison and Peoples Gas.

Although no one realized it at the time, the stock market crash marked the start of the Great Depression. Insull was not alarmed. In fact, one of his first moves was to rescue those of his employees with margin accounts who had to respond to margin calls from brokers. He did this by supplying them with additional capital from his own personal holdings. In January 1930, when the city of Chicago was unable to pay its employees, he went to its aid and enabled it to pay its police, firemen and teachers. He spent hugely on capital improvements during 1930, one of the few captains of industry who actually heeded President Hoover’s plea to continue business as usual at the start of the Depression (in fact, Insull embarked on a huge expansion program). For almost three years following the crash, Insull operated as though nothing had changed, and his companies appeared to thrive. But his fortunes changed and in 1932 his holding companies, although not the operating companies, went into receivership.

Today, if he is remembered at all, Insull is remembered as one of the biggest scoundrels of the business world. Indeed, he topped the list in a 1960s poll of more than 400 business executives conducted by a professor of business at the University of Michigan. Now, after a period when he seemed to vanish into relative obscurity, Insull is again mentioned in the press by way of comparison to present-day executives who have been indicted for business fraud. When the names Enron, Global Crossing, World Com and Adelphia are mentioned, the name Insull is likely to leap to the minds of persons familiar with Chicago’s business history. An editorial in the Chicago Tribune in December 2003 reported, as though these were proven facts, that Insull and his companies crashed because of “the crooked accounting, the hidden debt and the stock fraud.” A business writer in the same year said Insull’s Commonwealth Edison was “exposed as an abusive monopoly built on systemic fraud.” Edwin Darby in a 1986 book said that Insull had “put together a vast utility empire with watered stock, bonds and ‘Chinese paper.’” Words such as “disgraced,” “rogue,” “infamous,” “bandit,” “stock manipulator” are used when referring to Insull. But in the eyes of many, Insull is only a scapegoat for the age when so many lost so much.

Why is Insull remembered as a scoundrel and does he deserve that reputation?

Insull was born in 1859 in London, the son or a lay preacher. Physically, he was small, hence the title of this paper. (I will mention here that when I was asked in May for the title of my paper, I had not decided what my subject was going to be. I selected the title “Big Little Man,” thinking that this would preserve the tradition of the Club of not giving away the subject by the title while at the same time allowing me flexibility. I could talk on any number of famous, or not so famous, persons who had a connection to Illinois, such as, for example, Stephen A. Douglas or Kenesaw Mountain Landis. When the name Samuel Insull occurred to me, I discovered, sure enough, that he was of less than average size.) Sam’s father wanted him to become a minister but Sam had other ideas. At age 14, after an education that was probably average or above average for someone of his class, Sam found a low-paying job as an office boy with a firm of auctioneers. While employed by the firm, he learned shorthand and was able to supplement his income by working as a stenographer several evenings a week.

Sam was a dynamo, with a need for only a few hours of sleep at night. He taught himself bookkeeping and read books on economics and history as well as the important and popular literature of the day. He even joined a literary society, similar, I guess, to the Chicago Literary Club. When not yet twenty, he was asked to address the society. He chose his topic from an American magazine, Scribner’s Monthly, and the topic concerned a thirty-one year old inventor named Thomas A. Edison. This was a turning point in Sam’s life, for Edison became his hero.

At this point, having worked for the auctioneers for more than four years, Insull was fired to make way for the son of an important customer. Although this event rankled Insull all of his life, it turned out to be a blessing in disguise. He applied for and obtained a job as the secretary for what was advertised as an American banker in London but whose main activity was not banking but acting as the European representative of Thomas Edison. The job brought him into contact with Edison’s chief engineer, who came to London on an assignment. As the two worked together on Edison’s London affairs, the engineer, impressed by Insull’s mastery of Edison’s business and his attention to detail, decided that young Sam would be just the right person to act as Edison’s private secretary. When this job opened up, Sam was hired to fill it. He came to New York in 1881, now at the mature age of 21, to serve the genius Edison, not so old himself at 34.

Edison had invented the stock ticker, the telegraph, and the phonograph, and would later invent the motion picture and the principles underlying radio and television, but his most important inventions were the incandescent light bulb, electric light, electric power and electric transportation, and it was these devices that absorbed Edison for the next several years and Insull for most of the rest of his life. Edison was brilliant but disorganized. He recognized in Insull someone who could make his business orderly and efficient, and that is what Insull did. He became not only Edison’s private secretary—the job for which he had been hired—but his right hand man and factotum. He took charge not only of Edison’s personal affairs but his business affairs as well. As most schoolboys learn, Edison’s work habits were, not to put too fine a point on it, eccentric. In his first day, or rather night, on the job, Insull listened while Edison explained that his financial backers who had invested funds in his electric inventions were refusing to invest more to manufacture them or to build a central station to exploit them and that he was sending the engineer—the man who had only hours earlier met Insull as he disembarked the ship—to Europe to sell securities to finance these activities. He wanted advice as to where and to whom to sell them. Edison, Insull and the engineer worked until four in the morning, by which time Insull had thoroughly analyzed Edison’s financial situation and advised him and the engineer on exactly what needed to be done to raise the cash in Europe. Insull then accompanied the engineer to the ship departing for England, returned for a few hours of sleep, and then began the next working day. Edison soon discovered that Insull’s capacity for work was equal to his own and that neither the number of hours or the time of day was an impediment to the accomplishment of what needed to be done.

Insull’s rise in the Edison empire was swift and sure. By 1886 he was in charge of the Edison Machine Works in Schenectady, New York. The plant began with 200 employees and six years later it employed more than 6,000 workers. In 1889, there was a reorganization with several competitors, resulting in the formation of the Edison General Electric Company, and in 1892 a consolidation with another competitor was completed. The resulting company, called General Electric Company, had no place for Edison, who had in any case lost interest in electricity and was busy inventing and developing his other interest such as the motion picture, but did offer a position to Insull. The latter was furious because the original plan had been for Edison General Electric to be the surviving entity but J.P. Morgan, whose financing was essential to both companies, had insisted that it be the other way around. Insull therefore agreed to work for the consolidated company temporarily to assist in the operational consolidation while he looked for a permanent position. Within a matter of weeks he had agreed to become president of the Chicago Edison Company. On July 1 of 1892, he moved to Chicago and took up his new duties. Insull took the job on the condition that the company build a new plant to increase its generating capacity. This was agreed to and the plant was paid for by the issuance to Insull of $250,000 of stock, which he paid for using a loan from Marshall Field. Insull was 32 years old.

Insull believed that the only sensible way to sell electricity was to have no competition, so he set out to create a monopoly. At the same time as he was building the new power station at Harrison Street and the river, he made plans to buy his two largest competitors, which he was able to do in short order. In 1893 two events combined to strengthen Insull’s plan. One was the financial panic of that year, which weakened Insull’s competitors and eventually led to their selling out to Chicago Edison. The other was the Columbian Exposition or World’s Fair of 1893, which demonstrated to the world what could be done with electricity. When the Fair closed, General Electric needed to dispose of several huge generators. Insull was able to buy them at a favorable price and install them in the Harrison Street plant, as a result of which it became the largest electric power station in the world.

Insull was now well on the way to establishing a monopoly. At this time, industrial companies acquired electricity from their own generators. Central station electricity was used almost exclusively for lighting and was considered a novelty and an expensive luxury. Insull intended to make it available to the masses. To do so presented a technological challenge because for practical purposes electricity could not be stored but had to be produced, transported, delivered and consumed at the same time. Since fixed costs were high, most operators concluded that greater profits could be achieved only by serving relatively few customers and charging them high rates, Insull reached the opposite conclusion: the more customers the greater the profits. This in turn was based on his insight that charges for service should be based not simply on a uniform flat rate but on a sliding scale based on usage, a quantity discount as it were. Insull’s insight eventually led to the adoption of the so-called load factor, which became the pattern for rate-making everywhere. Rates came down steadily and the number of customers grew. In 1892, Chicago was a city of one million with only 5,000 users of electric lights; twenty years later, Chicago Edison had 200,000 customers. The average rate of 20 cents per kilowatt-hour in 1892 fell to 2 ½ cents in 1909; the comparable cost in other cities was as much as three times the cost in Chicago. In 1907, Insull merged his two companies—Chicago Edison and Commonwealth Electric—to form Commonwealth Edison Company.

Insull pioneered two other features that became common in the utilities business. One was the open-end mortgage, which Insull, with the help of the Chicago law firm of Isham, Lincoln & Beale, introduced to American capitalism in 1898. Another was the concept that a utility, given the fact that it was best operated as a monopoly, should be subject to government regulation. It was largely through Insull’s work that this came about, first in Wisconsin and finally, in Illinois, in 1914.

Insull married in 1899 and the next year his only child, Samuel Insull, Jr., was born.

Owing to the hatred of New York bankers that Insull had developed while working with Edison in the East, Insull decided that financing for his businesses would be done in Chicago, not New York. The instrument of Insull’s Chicago-originated financing was Harold Stuart and the Chicago bond firm of Halsey Stuart and Company. Ultimately, some would say, Insull’s abhorrence of New York bankers was to contribute to his downfall.

In 1901, Charles Yerkes, who controlled what were then called the traction companies, sold his interests and left Chicago. Like most transportation companies, those in Chicago generated their own power. Insull realized this made no sense; the traction companies could not possibly produce their own power as cheaply as Insull’s companies could since they did not have the alternate market for power that Insull’s companies had. He persuaded the traction companies to buy the power from his Chicago Edison. The beauty of his plan was that the transportation needs represented and off-peak load, transportation being a need that occurred in the morning and again at the end of the day, whereas electric light was consumed before and after the transportation. Insull began to describe what he was doing as “massing production,” a phrase that became commonplace in its shortened version, “mass production.” By 1909, more than half of the output of Insull’s companies provided power for transportation.

At about this time, Insull became a country gentleman, acquiring a farm in what is now Vernon Hills, which he expanded by buying all of the surrounding farms, thereby extending his landholdings to more than 4,000 acres. The farm, known as Hawthorn Farm, has long since been subdivided, but the mansion Insull built still stands and is known as the Cuneo Museum and Gardens. It was acquired by John Cuneo, founder of the Cuneo Press and Hawthorn-Melody Dairy.

In 1914 Insull became the owner of his largest customer, the elevated companies, and a year earlier became Chairman of the Board of Peoples Gas. The latter company was in dire straights when Insull became involved and in the early twenties and Insull rescued it. His companies now furnished all of the electric and gas needs of the entire Chicago area.

By 1930, Insull’s empire included Commonwealth Edison, furnishing electricity to the Chicago area; Peoples Gas, providing natural gas to Chicago; Public Service of Northern Illinois, supplying electricity and gas to 300 communities around Chicago; Middle West Utilities Company, supplying electricity and gas to more than 5,000 communities in 32 states; Midland Utilities Company, serving 700 Indiana cities and towns with electric and gas power; Chicago’s elevated companies, and three interurban electric railways connecting Chicago and its suburbs. The companies had more than 600,000 stockholders and more than 500,000 bondholders. They served more than 4 million customers and produced more than one-eighth of the electricity and gas consumed in the United States.

Insull was a folk hero to many, most notably the employees of his companies and the citizens of Chicago. But if he had few real enemies, there were many who would not be unhappy if he failed. These included the House of Morgan, displeased that Insull had shown that financing could be achieved without the help of Wall Street, various politicians who understood that anti-business demagoguery appealed to certain members of the public, and certain newspapers, notably the Hearst chain. When his downfall came, the supporters of Insull found themselves seriously outnumbered by his detractors.

In 1927 and 1928, Cyrus Eaton and his investment house Otis and Company began buying stock in Insull’s companies. Feeling threatened, Insull formed two investment trusts—Insull Investment Utilities and Corporation Securities Company of Chicago. These two vehicles were controlled by Insull and in turn were the largest stockholders in the operating companies. But Eaton was still a menace and Insull decided he must be bought out. To do so he needed to borrow and for once the Chicago banks could not supply the money. Insull was forced to arrange for the two holding companies to borrow from New York banks, whom Insull had theretofore avoided, and pledge the stock of the three major operating companies. By the end of 1931 the market value of the holding companies and the operating companies had fallen drastically, and the New York banks now had Insull’s fate in their hands. In early 1931, the banks refused to refinance a small note of one of the operating companies and it and the two holding companies were forced into receivership. The three major operating companies—Commonwealth Edison, Peoples Gas, and Public Service of Northern Illinois—were not only solvent but thriving, and Insull remained active and very much in charge of them. But the bankers wanted him out of those companies as well. They nominated Stanley Field, nephew of Marshall Field, President of the Field Museum and a close friend of Insull’s, to ask for his resignation. In June 1932, Insull resigned from those companies. He was 72 years old.

Insull retired to Paris where for a time he and his wife lived in relative obscurity. But the newspapers and the politicians soon were in full cry. The Cook County State’s Attorney began an investigation and in September the front page headlines featured Insull on almost every day. Presidential candidate Franklin Roosevelt got into the act, attacking Insull in virtually every campaign speech, followed by almost every Democratic candidate for office, local, state or national. In early October, the Cook County grand jury indicted Insull for embezzlement.

The front pages of the Chicago Tribune in late September and early October 1932 were dominated by three stories. The Roosevelt-Hoover presidential campaign was one story. Another was the World Series between the Cubs and the Yankees, which the Yankees won in four straight. Game three, played at Wrigley Field, was the game in which Babe Ruth supposedly hit the “called shot” home run. This detail was not in fact reported by the Trib, and in fact was probably not true, but the story did mention that after the second strike the Babe in a theatrical gesture held up two fingers, as though to say he was going to do something decisive on the next pitch in the strike zone, which as everyone knows he did.

The third story—the dominant one—was about Insull. State’s Attorney John Swanson cabled Insull in Paris asking that he return voluntarily for questioning. Insull did not reply. When contacted by the Tribune’s Paris correspondent, Insull said simply, “I have nothing to say.”

At this point, the affair took on comic opera overtones. Insull left Paris and moved to Athens because there was no extradition treaty between Greece and the United States. In November 1932 the United States ratified an extradition treaty with Greece and asked the Greek government to order Insull’s extradition, but Greece refused on the ground that embezzlement had not been proved to the satisfaction of the Greek judges charged with making the decision. Insull was then indicted under federal law for mail fraud; extradition was again refused, this time because the charge was not a crime under Greek law. In May 1933, Insull was indicted for a third offense, violation of the Bankruptcy Act. Political pressure was exerted on the Greek government, which still refused to extradite but ordered Insull to leave the country by March of 1934. Insull left Greece on a ship and cruised the Mediterranean, pondering what to do next. Congress hurriedly passed a bill authorizing the executive department to arrest Insull, and when the ship stopped at Instanbul the State Department demanded that Turkey arrest Insull. The Turks removed Insull from the ship and delivered him to an American official at the United States embassy. He was taken to New York and then to Chicago, arriving in May 1934.

His first trial, the federal trial for mail fraud, was scheduled for October. Insull used the time between his return and the trial to dictate his memoirs.

The government’s theory was that the formation of one of the holding companies was a fraudulent scheme to use the mails to sell worthless securities to the public in 1930 and 1931. The defendants were Insull, his son Samuel, Jr. and 15 others, including Harold Stuart of Halsey Stuart and Company, and several employees of various Insull companies and of Halsey Stuart. The Insulls were represented by Floyd Thompson, a former justice of the Illinois Supreme Court, unsuccessful candidate for governor in 1928, and later a partner in the law firm now known as Jenner & Block. The chief prosecutor was Dwight H. Green, the United States Attorney for the Northern District of Illinois, and later a successful candidate for governor. The government called more than 80 witnesses. When the defense’s turn came, Insull was the first witness. Over the objections of the prosecution that the testimony was irrelevant, Insull described his boyhood, his coming to America and working for Edison, his move to Chicago and his successes in bringing low cost energy to the people of the State. The jury was dazzled. More witnesses were called but the decisive testimony was that of Insull. When the jury retired, it reached its decision in minutes. To avoid giving the impression that it had been bribed, however, it waited two hours to announce its verdict. All defendants were found not guilty.

There remained the state indictment for embezzlement and the federal indictment for violation of the Bankruptcy Act. Insull and his brother, Martin, were tried and acquitted in the embezzlement trial and the third trial ended in a directed verdict of acquittal.

After the last of the three trials, in mid-1935, Insull and his wife settled in Paris. He returned to Chicago a few times to visit his son and grandson and in July 1938 he died of a heart attack in a Paris subway. The obituaries took a milder tone that the newspaper stories of the early 30s. The Chicago Tribune, while noting that the collapse of his vast empire had brought ruin to thousands of investors, described his career as “one of the most spectacular . . . in the modern world of business and finance and adventure.” The New York Times said: “The tide that swept him away. . . is still causing profound economic and governmental changes. It has thrown new safeguards around the nation’s investors. For good or for ill, it has put the Government into the business of producing and distributing electric power. We have exchanged what came to be known as ‘Insullism’ for something else, though no one yet knows precisely what it is. . . . A man of real and solid abilities, [Insull] was the victim not merely of his own defects but of the period in which he lived.”

Samuel Insull, Jr., continued for a time to work for some of the companies his father had founded. He served in the Navy during World War II and after the War went into the insurance agency business. He died in 1983, at age 82. Like his father, he had only one child, a son. Samuel Insull III, was born in 1931. This Insull did not enter the utility business. He became a lawyer. After a few years in the law department of a corporation, he retired, still in his thirties. When he died in 1997, the Insull line came to an end.

What is the legacy of Samuel Insull? Does he deserve the label of scoundrel? There is no doubt that Insull is responsible, at least in part, for our present system of federal securities regulation. One of President Roosevelt’s first acts after his inauguration was to send a message to Congress urging the passage of what he called the “Truth in Securities Law,” which was quickly enacted as the Securities Act of 1933. Insull had something to do with that, for Roosevelt had made him one of the principal whipping boys of the 1932 campaign. Even more directly was Insull responsible for the Public Utility Holding Company Act of 1935, which was intended to achieve simplification of public utility holding company systems such as the two controlled by Insull. The legislation creating the Tennessee Valley Authority was another response to the Insull crash. He was also responsible, one could say, for the loss of millions of dollars by the investors who demonstrated their faith in his genius by buying the stocks and bonds of his holding companies and were wiped out or nearly so when these companies went into receivership. These things Insull was responsible for, although they reflect no credit on him.

But there are many things that do reflect credit on Samuel Insull. As previously mentioned, Insull was one of the few tycoons who paid more than lip service to President Hoover’s plea that the nation’s businesses continue to expand and make capital expenditures after the Depression began. Also, aside from himself and a few of his executives, none of the employees of the Insull companies lost his job. The operating companies not only survived, they thrived, and the investors in those companies lost little or nothing. These companies continued after Insull’s death to supply about one-eighth of the electricity and gas consumed in the United States, and at prices below the national average.

Insull’s many accomplishments have tended to be overlooked. He started--one could almost say invented—the concept of centralized electric supply. He discovered the principles of load factors on which utility rates are based. He popularized “mass production” and its concomitant—low cost selling—before Henry Ford came along. He formulated the concept of the open-end mortgage. More than any one else he encouraged and was responsible for government regulation of public utilities. These things he pioneered, but the public did not know or does not remember that he did so, because he became the symbol of the excesses of business that the public and the politicians needed in order to find scapegoats for the Depression.

Insull’s biographer, Forrest McDonald, notes a fascinating irony: “The sponsors or [the Tennessee Valley Authority] were determined to use it as a means of demonstrating to American utilities how a unified power system should be run, and as a ‘yardstick’ for measuring rates and standards of service. Before this could be done, however, the directors of the project themselves had to learn how to run a unified power system. The embarrassing fact of the matter was that the American systems were easily the best managed in the world, but under the circumstances it would obviously be awkward to pattern the T.V.A. after one of them. Accordingly, [officials of T.V.A.] went to England to study the British grid system—which had the great political virtue of being government-owned—in order to pattern the T.V.A. after it.” In fact, the British system had been taught to the British by none other than Samuel Insull.

The public perception of Samuel Insull did not change after he was acquitted in his three trials. Now, 70 years later, it is unlikely that it will. Perhaps he will simply be forgotten, which is probably what he would have wished.