Edison to Enron: Energy Markets and Political Strategies

Book 2 Internet Appendices

Chapter 3: Expanding Horizons (1907—1919)

• 3.1 Insull and the Financial Crisis of 1914: Letter to William Beale
• 3.2 World War I’s Coal Transportation Crisis
• 3.3 Insull’s Argument for America’s Entry into World War I
• 3.4 Insull on Government Intervention
• Bibliography (PDF)

3.1 Insull and the Financial Crisis of 1914: Letter to William Beale

The financial crisis, which reached America soon after World War I broke out in Europe, rocked Insull in a way that is known to history only through a letter dated September 15, 1914, to William G. Beale (reprinted below). Beale was away in London, and Insull exhorted him to return to Chicago. (The panics of 1893, 1896, and 1907—not only the panic of 1914—were also notable in Insull’s career [Insull, 1937: 12].)

A partner of Chicago’s Isham, Lincoln, and Beale, Beale served as chief outside council to Commonwealth Edison and was as close as anybody to being Insull’s right hand man. “Beale was adroit in functions ranging from the intricacies of corporate law to the rough and tumble of politics,” Forrest McDonald explained. Although only seven years Insull’s senior, Beale “played the role of the old counselor,” McDonald added. “Whenever Insull’s aggressiveness, daring, or violent temper threatened to lead him into rash action, it was Billy Beale—and for a decade, Beale alone—who deterred him” (90).

My dear Beale:

I was very glad to get copies of your telegrams to your firm and also the one direct to myself from Arnhem. The situation over here is really far from satisfactory. As you probably know, the stock exchanges are closed, the banks are all on a clearing house certificate basis, and no gold is paid out or shipped which possibly can be avoided. The money rate at the banks is seven per cent and it is a common thing to pay eight per cent and higher for money. There has been more or less tendency to hoard money, although not to any great extent, and there has also been a tendency to demand gold in payment for coupons, although not to any great extent. I have been met with such demands in connection with the bond coupons of the Commonwealth Edison Company for the first time since I have been in business. No securities whatever are being sold; I refer not only to the stock exchange houses, but to the operation of the bond houses as well, except possibly a few municipal bonds are still going out. Exactly where the situation is going to end nobody knows. Everybody is putting the best face on possible and taking the position in all they have to say that all will work out right in the end. It is just as well to make that statement as any other, but the fact is that none of us knows where it will work out.

I have been engaged for the last six weeks in cutting the expenses of all the concerns that I run, and I am just as drastic in my treatment in running the affairs of the Commonwealth Edison Company as I am in some little company in Oklahoma. I have laid off in the Commonwealth Edison Company alone, around 1000 men in the last six weeks.

I do not know that you could have done anything to help our situation if you had been home for the last six weeks, but with such a tense business situation, my advice to you personally, is to come home as soon as you possibly can. I do not know that there is anything in particular for you to do, when you do get home, which could not be done by your office in your absence, but the fact is, we are passing through the most tremendous crisis in business that I have known since I first went into business and, therefore, it seems the proper thing for everybody, whether they are conducting the business themselves or advising the people who do conduct such business, to be home and on the job….

Yours sincerely,

P.S. Of course, what I say above is absolutely confidential and intended only for you. When I talk about the condition of business around town, I state that everything is all right and laugh and smile and people think I have not a care on earth, but the situation is really serious. I assume we will all get through somehow, but how, nobody knows at this time. There is just one little bit of satisfaction, namely, that practically everybody is about in the same boat.

3.2 World War I’s Coal Transportation Crisis

Outside of a supply interruption from a major strike in 1902, which involved more than 100,000 workers of the United Mine Workers of America, the U.S. coal industry was characterized by surplus output and price wars, not shortages and price spikes. This changed with the “coal crisis” between August 1916 and March 1918 (Hunt: 31) when demand outpaced supply, prices soared, and economic hardship resulted.

As documented in studies, including one by the United States Coal Commission, the hot point in this crisis was transportation from the mines, not coal capacity at the mines. Specifically, available, saleable coal output could not be delivered to waiting markets due to insufficient rail cars and associated yard space and terminals (Hunt: 31—32). Indeed, surplus capacity at the mines was estimated by one third and one half (Hamilton and Wright: 56—57). And so it was that financial distress was common—such as two dozen bankrupt coal operators in Illinois in 1914/15, accounting for 20 percent of the state’s output (Hamilton and Wright: 64).

Understanding the “great car shortage” (Final Minutes: 23) as behind the coal crisis demotes other explanations, even scapegoats such as coal operators or the railroads themselves. Stated one study, What the Coal Commission Found:

It does not appear from the record that the high prices themselves are the cause of the shortage, but rather that a disturbed condition of the market brought on by a shortage made possible high prices and consequently large profits,” one study concluded. It is added: “Nor is there evidence that the shortage and high prices of bituminous coal are the result of combination in restraint of trade (Hunt: 32).

Blaming high prices on “coal brokers, speculators, and interlopers” (Final Minutes: 24) was also chasing effects rather than causes.

America’s first energy crisis was exacerbated by manpower lost to the war (Final Minutes: 162), as well as a particularly harsh winter in 1917/18. But the fundamental cause was state and federal regulation that weakened the railroad industry and kept coal from reaching markets at a time of growing demand. “The railroad industry of the country has not expanded in the last ten years as much as the bituminous coal industry,” one study complained in 1925 (Devine: 291).

Physical shortages paralyzed schools, business, and factories in the deadly winter of 1917/18—and led to emergency government edicts to allocate scarce supply and spread the pain.

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In April 1917, the Council on National Defense organized the Committee on Coal Production to focus on the problem of lagging delivered supply. Little could be done, however, and still higher prices after America’s entry into war prompted a mid-year meeting of coal operators in Washington, D.C., called by Secretary Franklin Lane of the Department of Interior. Led by Francis Peabody, coal operators agreed to limit prices at the mine to $3.50 per ton for Illinois, with congruent prices for special grades of coal.

The next day, however, the so-called Lane-Peabody price agreement was repudiated by Secretary of War Newton Baker and by Secretary of the Navy Josephus Daniels (Hunt: 78). The impasse at the federal level led to a public hearing on August 17 in Springfield, Illinois, called by Governor Frank Lowden, but coal operators stayed away, citing their June agreement on the federal level and antitrust concerns about a joint appearance (“Wilson Acts”).

In response, Governor Lowden, with full support from Samuel Insull as head of the Council of National Defense of Illinois (CNDI), threatened to seize the mines. Illinois coal director, Orrin Carter, readied a price decree for the state. Levy Mayer, chairman of CNDI’s law and legislation committee, offered legal support for the actions, calling the state’s “abnormal and incomparable” coal situation the result of “a combination of rapacious greed and utter irresponsibility to the requirements and necessities of war conditions” (“Wilson Acts”).

Still, the coal operators held firm. Legally, they believed that only federal action was constitutional. There was no conspiracy at work, just the economic law of supply and demand skewed by the unintended consequences of government intervention.

A week later, a coal conference called by Samuel Insull with 13 state Councils of National Defense ended with a request to President Wilson to use his Lever Act authority to “immediately” fix coal prices “in order that distribution may be made equitably in all parts of the country” (“Chicago Conference”). Various studies estimating coal production costs and reasonable profits were proffered, and the newly created U.S. Fuel Administration, with input from the Federal Trade Commission, set guidelines for industry operators to set prices at the mine and fix allowable commissions for downstream parties (Hunt: 292—93). The methodology was complicated, with “a series of orders governing deductions for improperly prepared coal, price differentials on special sized screenings mixtures and mine-run, and surcharges on coal cleaned and screened by special processes” (Hunt: 79).

In April 1918, a 13-zone pricing system was introduced complete with a new permit bureau (Hunt: 80). Price regulation was not only subjective and complex; it was ripe for gaming on the one hand and unintended consequences on the other and subject to revision.

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Artificially low prices at the mine from government action, in fact, did little more than increase the opportunity for middlemen to buy and resell the (coal) commodity, monies that would have gone to mine operators and coal-carrying railroads to spur reinvestment and capacity additions. “In times of shortage speculation develops,” as one study posited. “Irresponsible ‘snowbirds’ appear, and even the ‘legitimate’ wholesalers buy and sell among themselves, and put up their prices as high as the market will bear. Coal may pass through—not the hands, but the books, of three or even four jobbers in its way from the mine to retailer, each of the series increasing the price by an additional marking, which represents no real service but merely the transfer of title to the coal while it is in transit” (Devine: 304).

Such government policy added bad (wartime) regulation to bad (prewar) regulation. A major theme of political economy is the propensity of government intervention to expand in response to its own shortcomings. Political economist Alfred Kahn has identified the “historical principle” of “one [government] interference with competition necessitate[ing] another and yet another.” James McKie (1970: 9) has described the “tar baby effect” of government intervention reacting to the “compensating variation” of entrepreneurs working under regulatory constraints. Other regulatory economists have similarly interpreted this dynamic (Bradley, 1996a: 1770-71). Samuel Insull, no trained economist, and thus prey to visible-hand government action rather than the invisible hand of markets, fronted this negative dynamic during wartime.

3.3 Insull on America’s Entry into World War I

The historiography of World War I on the American home front is incomplete without an understanding of the role Samuel Insull played during the neutral period in particular and after. Few played as important a role as Insull in moving America toward war on the side of the Allies, and as a volunteer bureaucrat Insull was a pivotal figure in wartime regulation, particularly in energy markets.

Insull strenuously defended America’s entry into World War I. Soon after war was declared, Insull told three thousand student officers at Fort Sheridan in Illinois:

“The real cause of this country’s engagement in this struggle is not merely a desire to assert the rights of international law as to free intercourse on the high season, but I think the underlying cause is the repugnance that the American people feel toward the methods adopted by the German Empire.” He continued:

I would go a little farther than [President] Wilson and … not distinguish between the German military class and the rest of the people of Germany. I reassert that it was the repugnance of the people of this republic toward the actions and the attitude of the people of the German empire that brought us into the war and, so far as America is concerned, her position is that she will unhesitatingly cast her lot with those who are opposed to German methods of kultur, German methods of government and German methods of nonparticipation in governmental affairs by the people (Chicago Herald, 1917).

After the war, Insull revisited the rationale for war:

It is often little things that decide great issues. Take America’s entrance into the war, for example. You would have thought that the LUSITANIA affair would have provoked a declaration of war, if anything would, but it did not.

However, a few days after that disaster the German Government published an order that American ships must comply with certain rules in order to pass the German submarine blockade. There were to be only two ships allowed to pass each week, and there were many other similar regulations, but the important point was that those ships that passed had to be painted in such a way as to suggest the old prison uniforms—those striped things that were used before the uniform was changed to one of a neutral color.

This gave us a wonderful opportunity, and we used it for all that it was worth. We saw to it that cartoons appeared in every small paper throughout the land showing Uncle Sam wearing a prison uniform at the Kaiser’s bidding. This struck home to the man in the street much more forcibly than had the LUSITANIA disaster and it really cast the die for America’s entrance into the war upon the allied side (quoted in Berry: 28—29).

Insull was careful to not rock the boat during the neutral period. After the Chicago Daily Tribune reported that Insull had criticized President Wilson’s approach to the European war, Insull rejoined in a published letter:

I have made it a practice since the start of the war not to make any criticism of the president of the United States. Nothing I said at the luncheon given to Gov. Whitman yesterday could be in any way construed as a criticism of the president or the administration. All I did was to strongly urge an increased army and navy for the United States (Insull, 1915).

3.4 Insull on Government Intervention

Samuel Insull, politically active, frequently spoke about government in the economy. In addition to his views described in Edison to Enron, these quotations shed light on the depth of his views. In an address at the University of Chicago in 1921, Insull related his views on several subjects.

On wealth and monetary expansion by government:

You cannot create wealth by legislation; you cannot create wealth by the issue of paper money of any description. You can run a printing press to issue pieces of paper which you call worth a certain value, but there is relatively little difference between the credit of a nation and the credit of an individual (Insull: 7—8).

On the threat of expansive regulation:

[O]ne of the greatest possible benefits to business would be for most of the legislative bodies of the country to shut up and go home and leave business alone, and I am not a man who does not believe in proper regulation of all classes of business. But what I think is, they need a rest, and they need the legislators to go home and take off their coats and help create the wealth that is necessary to straighten out not only this country, but the rest of the world (Insull: 18—19).

On municipal ownership (and the role of the academy in fostering socialist ideas):

Most of the ideas as to municipal ownership come from faculties of institutions like the University of Chicago, and their students. I receive a great many letters from students telling me they want to write a thesis on municipal ownership, and they always want me to tell them the points in their favor; it is seldom they want me to tell them the points in favor of private ownership.

But it is hardly necessary for me to discuss municipal ownership. We have had a really fine specimen of government ownership in this country, the taking over of the railroads and then finally handing them back to the owners in such poor condition. The country is suffering from a tragedy in governmental ownership today that should convince everybody that the function of government is to do as little as possible beyond the maintenance of order and see to it that everybody has a square deal (Insull: 19—20).

Insull favored less regulation over more in the abstract and was apologetic for the need for regulation in his industry. “Regulation interferes with our liberty of action, and that is very unpleasant to a man of positive character who has been used in the public-utility business to do about as he pleased,” he stated (1916: 61). And he shared his “secret” (1922: 310) of the power of self-regulation—market forces—in different public utilities industries (electricity, streetcars, and telephony).

“We managers of public-utility companies have no more control over rates than you have,” he said.

The Illinois Commerce Commission hasn’t any control over them. City councils and village board have no control. I could no more maintain a rate that was too high than I could push back the Atlantic Ocean. Neither could any other utility manager.

Insull explained:

Economic law is the governor of rates. It is an automatic adjustment that goes on relentlessly. Managers and commissioners can influence it only momentarily (1922: 310).

Yet Insull was the father of public utility regulation of his industry. “I was one of the first men in my line of business to recognize … the futility and the destructiveness to capital and the destructiveness to cheap service, of competition as a means of regulation,” he opined (1911: 246-47). He added: “The more closely our business is supervised and regulated the greater are the chances of our being protected against ruinous competition, which today is mainly instigated by those who desire to take this means of acquiring our existing business” (1910: 156). Insull quoted the president of the National City Bank of New York who praised the “recognized monopoly” as protection against “‘strike corporations’ … endangering old investments” (1911: 228).

But capital was scarce and bankers were not dumb—why would they finance upstarts in the face of the existing company operating under the principle of concentration? If natural monopoly was indeed natural, then only incompetent incumbents should fear the raiders. Why, then, should Insull give blanket approval to bad business performance that needed the threat of competition, if not actual entry of a new competitor? And what about regulatory failure in relation to market failure. Insull did have pangs of conscience about government control.

In his many speeches, Insull never posed this question much less answered it. But in a slightly different context he lamented the fact of how isolated plants and isolated systems were oversized because of “engineers’ prejudice” (1913: 421), thus creating pockets of competition against companies based on larger, remote generation and networked transmission. He charged, controversially if not peculiarly, that consulting engineers had a perverse incentive to oversize their plant, and that bankers and investors irrationally put up with losses or simply did not understand how more money could be made (1913: 421-22). Such was “the most serious obstacle” to his principle of concentration (1913: 421).

Bibliography: Book 2, Chapter 3 Internet Appendices

Berry, Burton. “Mr. Samuel Insull.” Loyola University of Chicago Archives. Samuel Insull Papers, 1799—1970. Box 17. Folder 2.

Bradley, Robert. Oil, Gas and Government: The U.S. Experience. Lanham, MD: Rowman & Littlefield, 1996.

“Chicago Conference Asks U.S. Fix Retail Coal Rate.” Chicago Examiner, August 24, 1917. Loyola University Chicago Archives and Special Collections. Samuel Insull Papers, 1799—1970. Box 73. Folder 5.

Council of National Defense of Illinois. Final Minutes (1919). Loyola University Chicago Archives and Special Collections. Samuel Insull Papers, 1799—1970. Box 19. Folder 15. (Final Minutes)

Devine, Edward. Coal. Bloomington, IL.: American Review Service Press, 1925.

Hamilton, Walton, and Helen Wright. The Case of Bituminous Coal. New York: Macmillan, 1926.

Hunt, E. H., et al., eds. What the Coal Commission Found. Baltimore: Williams & Wilkins, 1925.

“Insull Tells ‘Rooks’ Reasons for the War.” Chicago Herald, September 10, 1917.

———. “Twenty-five Years of Central-Station Commercial Development.” Lecture delivered at the convention of the National Electric Light Association, St. Louis, MO, May 25, 1910. Reprinted in Insull,Central-Station Electric Service (1915), 144—57. Chicago: Privately Printed, 1915.

———. “Dinner in Honor of Messrs. S. Z. de Ferranti, C. H. Merz, and Arthur Wright, of London.” New York City, September 28, 1911. Reprinted in Insull, Central-Station Electric Service (1915), 215—33. Chicago: Privately Printed, 1915.

———. “Present and Future of Distribution of Electrical Energy.” Lecture to the “Cooperation Conference,” Association Island, Lake Ontario, NY, September 4, 1913. Reprinted in Insull, Central-Station Electric Service, 414—26. Chicago: Privately Printed, 1915.

Insull, Samuel. Letter to Chicago Daily Tribune. May 29, 1915. Loyola University Chicago Archives and Special Collections. Samuel Insull Papers, 1799—1970. Box 73. Folder 1.

———. “Public-Utility Commissions and Their Relations With Public-Utility Companies” (1916). Reprinted in Insull, Public Utilities in Modern Life (1924), 54—68. Chicago: Privately Printed, 1924. Chicago: Privately Printed, 1924.

———. Address before the Commerce Club of the University of Chicago. November 17, 1921. Loyola University Chicago Archives and Special Collections. Samuel Insull Papers, 1799—1970. Box 20. Folder 8.

———. “Why I Am In the Utility Business.” Speech to the Mid-Day Luncheon Club, Springfield, Illinois. January 25, 1922. Reprinted in Insull, Public Utilities in Modern Life, 304—15. Chicago: Privately Printed, 1924.

Insull, Samuel. Transcript of Questionnaire of Mr. Samuel Insull, Corporation Securities Co. Directors Suit, ca. 1937. Loyola University Chicago Archives and Special Collections. Samuel Insull Papers, 1799—1970. Box 52. Folder 11.

Kahn, A. The Economics of Regulation, 2 vols. New York: John Wiley & Sons, 1971.

McKie, James. “Regulation and the Free Market: The Problem of Boundaries,” Bell Journal of Economics,Spring 1970, 6—26.

McDonald, Forrest. Insull. Chicago: University of Chicago Press, 1962.

“Wilson Act to Cut Price of Coal.” Chicago Examiner, August 18, 1917. Loyola University Chicago Archives and Special Collections. Samuel Insull Papers, 1799—1970. Box 73. Folder 5.