The Farthest Fall

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

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.