Edison to Enron: Energy Markets and Political Strategies

Book 2 Internet Appendices

Chapter 4: Peak and Peril (1919—1929)

• 4.1 Anti-Electricity, Anti-Capitalism
• 4.2 Insull and Electric Vehicles
• 4.3 Insull’s Views: Some Quotations
• 4.4 Federal Trade Commission Investigation
• 4.5 Was Cyrus Eaton a Threat to Insull’s Empire?
• Bibliography (PDF)

4.1 Anti-Electricity, Anti-Capitalism

An attack on modernization and consumerism—and thus electricity in the Insull (pre-New Deal) era—has been undertaken by Ronald Tobey in his book Technology as Freedom (University of California Press, 1996). Subtitled The New Deal and the Electrical Modernization of the American Home, Tobey challenges the pro-consumer story of electricity in every way.

Tobey challenges the common notion that the market’s commercialization of electricity prior to the New Deal was orderly, efficient, beneficial, and fair. He claims:

1. The use of electrical appliances suffered from a lack of standardization, product glitches, and repair-work deficiencies.
2. Market penetration was unsatisfactory due to high electricity rates and expensively priced appliances.
3. Wealth inequality allowed only the rich to buy the new, luxury goods.
4. Electrical appliances increased the labor of homemakers.

Regarding Tobey’s first and third points, this is indeed part of the cycle of new product development. Competing products may create usage problems from a lack of common standards (such as the size of plugs for the wall). Electricity was no exception, but industry best-practices (created and promulgated through trade associations) addressed the problem in the 1920s.

New products are also rarely mass produced. They begin as niche products that only certain consumers can afford to buy or want to buy. The revenue from these early adopters then allow for greater production to reach a wider audience. Assuming the good is in demand, the result can be mass production for mass consumption, which was the case for many electrical appliances.

Appliance makers and power sellers were equally at fault, according to Tobey:

[Appliance] prices remained high during the [1920s] decade, as utilities and manufacturers sought to satisfy the luxury market. They failed to create a true mass market for the domestic services (33).

Tobey’s thesis is that the free market got it all wrong until the New Deal came to the rescue by electrifying the countryside and promoting appliance adoption. “The New Deal sought to make the owners-occupied, electronically modern dwelling a major asset for lifelong security for all families, protecting them from the ragged winds of capitalism’s uncertain wage labor market,” he asserts (6).

And a chicken in every pot turned into electricity and related energy appliances in the home.

“As a national revolution of social modernization, electrical modernization resulted directly from the New Deal’s transformation of the nation’s homes” (6).

Yet growth rates between 1922 and 1929 for six major appliances exceeded the growth rate of the same between 1929 and 1940 presented on page seven of Tobey’s book, contradicting his message. Yes, absolute penetration grew during the Great Depression because of the New Deal’s visible hand of the Rural Electrification Administration and its subsidies. But the Great Depression that the New Deal did not cure but prolonged ruptured the invisible hand of self-help. Restated, public resources spent on electricity came from the private sector, leaving less disposable income from taxpayers to spend on energy and labor saving devices.

The Thomas Edison/Samuel Insull story of Part I of Edison to Enron chronicles fact after fact about how capitalism and the market process, not central government direction, birthed and grew the electricity industry. From generators to wires to applications, whole industries spontaneously emerged as if led by an invisible hand.

It is hard to imagine that central government planning, say a federal Department of Electricity, could have replicated the work of Thomas Edison or devised and applied the business model of Samuel Insull. Short of omniscience, political planners with a variety of motivations and imperfections would have produced a variety of results that were otherwise under the discipline of tough-love profit/loss.

Tobey’s most peculiar argument is the claim, despite the title of his book, that electricity did not aid the homemaker. Just the opposite: “labor-saving devices made her labor in the home longer and harder, not easier” (4).

I queried Professor Tobey in July 2010 [(From: Ronald Tobey [mailto:tobey@cpl.net]
Sent: Tuesday, July 27, 2010 3:31 PM To: ‘Robert Bradley’ Subject: RE: Introduction] to try to better understand his views in light of my criticism. His response was formalistic and dodgy.

I think that the book, Technology as Freedom, essentially answers all these questions you raise. The consumerism thesis about electrification dominated both historians of economics and of technology at the time I was researching and writing. As you look at the kind of evidence the book presents, I think you might pay special attention to several matters.

Electrification of homes (as set up in apartments, single family detached dwellings, shared living arrangements, etc.) was not electrical modernization of home economics or home technology. There was no mass market for electrical appliances in the 1920s, for, as it turns out, structural reasons, which are discussed in the book. The two top reasons: (1) most homes were rented, not owned. (2) Most rental homes and a significant percentage of owned homes which did not have the electrical infrastructure to carry heavy loads of lights and/or appliances. The New Deal and the way the New Deal was carried forward after 1945 changed this situation by increasing home ownership, financing new homes that would have upgraded electrical infrastructure standards, and in renovation of older homes. A great deal of the book presents evidence about these two top reasons.

Coinciding with the structural impediments to mass electrical modernization in the 1920s was the prevailing interest of the electrical utilities, also discussed in the book at length. The utilities in the decade saw their greatest opportunities for growth in replacement of industrial stand-alone electrical generation by (their—the utilities) centrally generated and distributed electricity. So the utilities made electrical modernization (as distinct from electrification, for which they had legal obligations as a result of their chartering) of second level importance.

This situation dramatically changed with the Great Depression. The great decrease of manufacturing and industries ended them as a growth market for the utilities. As a result, the utilities turned to electrical modernization of the home as the only growth market available, to give them the revenue to pay for the debt incurred in the 1920s in building increased normal load as well as peak generating capacity for industrial use. After 1933, the utilities found receptive aid for domestic electrical modernization in the New Deal and they made the most of it. By the 1940s, the utilities and electrical appliance manufacturers had successfully written the laws that made electrical modernization the standard for housing after 1945. The New Deal in electrical modernization did not disappear, however, it became the invisible infrastructure. That anyway is the story I tell in the book.

As a political matter, I know that the book seems to be an argument for progressive governmental intervention in the 1930s, but personally, I am quite conservative politically. In the history of technology discipline, the book is considered as taking a very conservative stance on a host of issues (not necessarily issues of interest to an economist).

As for your specific questions, I’m not sure how to answer about “negative” and “bad”, so I’ll let them pass. I don’t know that a New Deal for the 1920s would have produced greater electrical modernization than private industry was doing. For both government and for industry, the problem was that structural divisions prevented a mass market. I would think that the bad experience with government management (e.g., of railroads) in WWI would have prevented anything like a New Deal from taking place in the 1920s. And note again that the New Deal in Electrical modernization in the 1930s was not (except in political rhetoric) government vs private industry. Private industry was present and influential at every step of the New Deal enframing of electrical modernization.

I think that the Great Depression and the New Deal was a special and unique moment. I think that centralized governmental planning, in place of free capitalism and markets, has proved to be a long term disaster every where it has been tried. But that wasn’t the issue I was addressing in the book.

4.2 Insull and Electric Vehicles

Insull’s interest in electric vehicles began when gasoline-powered cars made their entrance in the mid-to-late 1890s. Chicago Edison purchased electric cars made by Chicago’s Kimball Carriage Manufacturing Company, which in turn purchased equipment from Fischer Equipment Company in the city (“Early Use”).

In 1921, Commonwealth Edison hosted an electric automobile show (Crissey: 43).

The company’s battery-driven vehicles numbered 200, and the company maintained “an extensive testing and research laboratory” (Crissey: 49—50).

Insull never gave up on electric vehicles as far as them being part of a company’s fleet. But he was smart enough not to try to commercialize them in any practical way.

4.3 Insull’s Views: Some Quotations

Education

Education to Insull was less a formal process (classroom and degrees) than it was an ongoing curiosity about things and events and a passion to learn on the job. His example and inspiration was himself, not to mention Thomas Edison.

Insull urged workers to be students at work and learn by teaching others on the job. His message to students was always practical. “I am not coming here to give you a lot of theories,” he once said. “I am here to speak as a man who started at the bottom rung of the ladder and, by hard work and great sacrifice, and with the assistance of many loyal friends, has managed to mount step by step” (1924: 10).

“But Education needs to learn something from Business, too, before each can do for the other all that it has an opportunity to do.

To one who has had to get his education in the college of experience, it sometimes seems that young men come out of college unnecessarily limited in practical knowledge of the world they are going to live in and especially limited in knowledge of the business world. They seem too often to be lacking in elementary understanding of how the world—organized society—functions; lacking in understanding of the simple fundamentals that underlie getting on in the world, whether in business or in the professions; lacking realization that their college training will not get them what they want until it has been leavened by considerable practical experience.

One cannot get on in this world in any field of endeavor without hard grinding-work at some stage of his career. Too many young men seem to come out of college without adequate appreciation of that. Is this so because the teachers have not held the fact before the young men? Or is it because, for intelligent young men, college requirements are too easy and do not make them acquire the habit of work? Or is it due somewhat to both causes?

The College men usually expect promotion too quickly. This is said from experience. They come into the business in which I am engaged and because of educational advantages they expect to go right on up to executive positions over the heads of men who are years beyond them in the Knowledge that can come only from practical experience.

The college man too often seems to expect that, because of his diploma, Opportunity will come to him conspicuously labeled as such in large red letters and with handle on it for him to grasp. But Opportunity, generally bears no label. In business, it is oftenest lurking in the little somethings just beyond one’s particular job that one gets a chance to do; in acting upon an idea promptly and decisively; in knowing one’s daily job and then a few steps beyond that job.

If one has inclination and aptitude for thus uncovering opportunity, education will give him enormous advantage over the man of equal ability but lacking education. This advantage will not pay dividends immediately after one comes out of college, and the collegian should be made to realize that. It must be strengthened by practical experience in business. But when the college man is 30 or 40 and beyond he is almost certain to be beyond the man of equal ability—but lacking education.

The field of economics is another in which the college man is woefully weak. Business is founded upon the science of economics and one cannot succeed in it without some knowledge of that science. There is much false economics. Most of it comes, as business men see it, from institutions of learning where it is propagated by men who have little or no practical experience.

True economics can be taught. If the other simple fundamentals, which I have suggested, cannot be specifically taught, it would seem that the student can at least be put on notice that he must learn them when he goes out into the world. Not to give him notice in respect to these simple fundamentals is to omit an important detail in his education.

Perhaps this may suggest that educators should make themselves better acquainted with the way the business world functions so that students may be better prepared for its practicalities.

Thus Education can make itself more helpful to Business and, in obedience to the laws which Business so well understands, the reciprocal reaction will be the advantage of Education.

Government

Insull stated the following in his 1920 lecture “The Engineer’s Influence in Public Utilities”: “The average politician makes wild statements in relation to public utilities, often without the slightest relationship to the facts in the case” (1920: 207).

To counter such misinformation, Insull called on the engineer.

“When this happens, how different would be the impression produced on the public mind, if the engineer would apply his power of reasoning to the question under discussion and would then take some pains to acquaint the public with exact facts of the case (1920: 207-208).

Insull complained in the same talk about “the absurd rubbish that political speakers have uttered” (1920: 208).

Thrift

“We are often told that self preservation is the first law of nature, and certainly thrift is a handmaiden of self preservation” (1924: 3).

“Samuel Smiles, another distinguished English writer, says that thrift began before civilization. I think it began before civilization, because I think Mr. Squirrel and those of his kind were thrifty long before modern civilization.” (1924: 4).

“The first effort at savings … means self discipline. It assists in the formation of character. It is the start of self reliance … It is a start toward making a man of you or a woman of you, and a good citizen of you” (1924: 5).

“Habits of thrift in many matters must inevitably tend towards economy in other directions: economy of time, concentration of thought, habits of organizing one’s self, so to speak, coordinating one’s efforts and developing and broadening the mind” (1924: 7).

“The only way to ever be rich is to spend less than you make.” (1925: 25).

Work

“Work is a very great pleasure” (1925a: 26).

“The return you get on it is way beyond your deserts” (1925a: 26).

“The pleasure you get….out of the possibility of making two blades of grass grow where one grew before” (1925a: 26).

“Be engaged in a business that you like and that you are proud of and that you want to make your life work” (1925a: 22).

Corporate Culture

Forrest Crissey in his 1922 history of Commonwealth Edison Company described the corporate culture at Commonwealth Edison as follows:

Employees are encouraged to enter the Commonwealth Edison service as a career. They are told that the highest offices in the organization are not beyond the reach of their ambition. Probably every executive in the company has gown up from the ranks. The president was a shorthand writer who became secretary and man of affairs to Thomas A. Edison; one vice-president, an engineer, started by testing underground “Edison tubes” in the streets, another began as an office boy, a third as a stenographer, and still another as a bookkeeper. It has been the general policy rule that the business shall be developed by the brains within the organization, and such financial arrangements have been made that it is believed that no faithful employee who spends his working years in the service need feel the dread of coming to want in his old age (47—48).

Success

“Scrupulous integrity” … “a desire to meet one’s financial obligations” … “a desire to get on, to accomplish something” … “a desire to be of use in the world” (1922: 361).

“Express yourselves forcibly, grammatically, correctly” (1922: 361).

“The money-making side of it is merely incidental” (1922: 361).

“As one grows older, the biggest and most impelling thing, the thing that spurs us to keep at it, is the sense of responsibility to those who work with us, and the pleasure of leadership in our work with them.” (1922: 361).

Health

“The first thing is to take care of your health” (1925b: 7).

“The greatest nuisance is the sick employee” (1925b: 7).

“Sickness as a rule in probably 90 percent of the cases is avoidable if a man will learn how to take care of himself” (1925b: 7).

4.4 Federal Trade Commission Investigation

On February 15, 1928, after nine hours of often acrimonious debate, the United States Senate approved 46 to 31 the so-called Walsh Resolution. The approved text read:

Resolved, that the Federal Trade Commission is hereby directed to inquire into and report to the Senate, by filing with the secretary thereof, within each 30 days after the passage of this resolution and finally on the completion of the investigation (any such inquiry before the commission to be open to the public and due notice of the time and place of all hearings to be given by the commission, and the stenographic report of the evidence taken by the commission to accompany the partial and final reports), upon:

(1) the growth of the capital assets and capital liabilities of public utility corporations doing an interstate or international business supplying either electrical energy in the form of power or light or both, however produced, or gas, natural or artificial, or corporations holding the stocks of two or more public utility corporations operating in different states, and of non-public-utility corporations owned or controlled by such holding companies;

(2) the method of issuing, the price realized or value received, the commissions or bonuses paid or received and other pertinent facts with respect to the various security issues of all classes of corporations herein named, including the bonds and other evidences of indebtedness thereof, as well as the stocks of the same;

(3) the extent to which such holding companies or their stockholders control or are financially interested in financial, engineering, construction and/or management corporations, and the relation, one to the other, of the classes of corporations last named, the holding companies and the public utility corporations;

(4) the services furnished to such public utility corporations by such holding companies and/or their associated, affiliated and/or subsidiary companies, and

(5) the value or detriment to the public of such holding companies owning the stock or otherwise controlling such public utility corporations, immediately or remotely, with the extent of such ownership or control, and particularly what legislation, if any , should be enacted by Congress to correct any abuses in the organization or cooperation of such holding companies.

The commission is further empowered to inquire and report whether and to what extent such corporations or any of the officers thereof, or any one in their behalf or in behalf of any organization of which any such corporation may be a member, through the expenditure of money or through the control of the avenues of publicity, have made any and what effort to influence or control public opinion on account of municipal or public ownership of the means by which power is developed and electrical energy is generated and distributed, or since 1923 to influence or control elections: Provided, That the elections herein referred to shall be limited to the elections of President, Vice-President and Members of the United States Senate.

The commission is hereby further directed to report particularly whether any of the practices heretofore in this resolution stated tend to create a monopoly or constitute violation of the federal anti-trust laws.

[Text of the Resolution as Passed by the Senate: Reprinted “Federal Trade Commission to Investigate.” in Electrical World, February 18, 1928, p. 367.]

Such began a regulatory odyssey that would grew into formal regulation with the Federal Power Act of 1935 and accelerate thereafter.

4.5 Was Cyrus Eaton a Threat to Insull’s Empire?

The tragedy of Samuel Insull can be tied to several things, the most important of which was the expenditure of large sums of money to buy out the shares that Cyrus Eaton held in Insull’s firms. At the end of 1930, he paid Eaton “$56 million for his shares: $48 million in cash (debt financed) and the balance at the going price of IUI and CSCC stock” (Bradley: 189). Insull thought Eaton meant to take over his empire. But was this really true?

There is no doubt that Eaton was a takeover artist. “He was a man of vast ambition and wily talent, and when he moved into the big leagues of utility operations in the early twenties, he had acquired tools to match his talent: a large investment bank and a holding company. Swiftly, silently, sharklike, he began acquiring enormous holdings” (McDonald: 279). There is also no question that, in 1927/28, Eaton began buying large blocks of common stock in Insull’s Big Four companies: Commonwealth Edison, Peoples Gas, Public Service, and Middle West (McDonald: 279). Moreover, he was making the purchases through nominees, disguising his own direct involvement (ibid.).

But at Insull’s trial, Eaton testified that he had had no interest in taking over Insull’s companies and that he had told him so. “‘In December, 1929,’ Eaton related,

I came to Chicago to discuss my holdings in the operating companies with Insull. I wanted to assure him that our large investments in these companies would not affect his control. I told him that Continental Shares [Eaton’s investment trust] was organized as an investment company, not for quick turnover, and that we acquired his stocks as they offered the best opportunity in the utilities field (“Tell of Deals with Insull”).

Five months later, Eaton stated under oath that he asked Insull to take operating control of all of Eaton’s utility holdings.

“In May, 1930, I had a conversation with Insull in his office. Martin Insull, Samuel Insull Jr., and Harold L. Stuart were also present. I told them that my associates were planning to put our assets in a holding company and wanted to know if Insull would consider joining in the foundation of the company. I was anxious to devote my time to the steel business and wanted to learn if he would take charge of our utilities holdings and management” (ibid.).

On Eaton’s telling, then, he never wanted to take over Insull’s empire, and immediately after returning home from the May 1930 meeting, Eaton wrote Insull as much. “In going to Chicago, it was my particular desire that a way be found whereby this block of [Insull] stock might constitute a basis for working together” (ibid.). Insull biographer Forrest McDonald describes the deal in this way: “[Eaton] offered to consolidate all his [utility] holdings with those of Insull, under Insull’s exclusive management, no strings attached. The consolidation would have greatly strengthened Insull’s group and furnished a considerable number of companies easily integrated with those of Middle West” (McDonald: 287).

Insull rejected the offer. According to a newspaper report on Eaton’s testimony: “Insull believed he was too old to engage in so large an undertaking and offered to buy the operating company holdings ‘if my main objective was to get cash.’” Insull offered $350 per share; Eaton wanted $400, and Eaton returned home without a deal. A week later, Eaton agreed to Insull’s price, and Insull took the fatal step (“Tell of Deals with Insull”).

Thus Insull appears to have overreacted to Eaton’s purchases and foolishly expended money he could not afford, at the worst time (the onset of the Great Depression), in order to buy Eaton out. But in Insull’s mind, something unthinkable was afoot. After all, Eaton was asking him to be his employee. Insull, who had turned 70 in November 1929, desperately wanted to hand his empire on to his son.

Cyrus Eaton might permit Sam himself to reign as though he were a real emperor and still “The Chief,” just as the late Roman Empire’s Germanic generals allowed native Romans to reign as though they were real emperors. But like those hapless Romans, Sam would have been an emperor who had no power to determine the future fate of his throne. In that sense, although the appearance of Insull’s empire might have remained, the reality would have been that Eaton had conquered it.

In retrospect, Insull should have taken his change in position gracefully and moved forward, much as, in 1997, Kenneth L. Lay should have ceded the CEO reigns to Richard Kinder and moved on with his plan to leave Enron for greener pastures in investment banking (his original plan). Egos of those who achieve the status of Great Man, particularly in the twilight of there careers, can be dangerous catalysts.

Bibliography: Chapter 4 Internet Appendices

Bradley, Robert L., Jr. Edison to Enron: Energy Markets and Political Strategies. Salem, MA: Scrivener Publishing, 2011.

Crissey, Forrest. “Story of the Commonwealth-Edison Company,” 1922. Loyola University Chicago Archives and Special Collections. Samuel Insull Papers, 1799—1970. Box 50. Folder 6.

“Early Use of the Electric Automobile by Mr. Samuel Insull.” Loyola University Chicago Archives and Special Collections. Samuel Insull Papers, 1799—1970. Box 73. Folder 4.

“Federal Trade Commission to Investigate.” Electrical World, February 18, 1928, p. 367. Loyola University Chicago Archives and Special Collections. Samuel Insull Papers, 1799—1970. Box 74. Folder 3.

Insull, Samuel. “The Engineer’s Influence in Public Utilities” (1920). Reprinted in Insull, Public Utilities in Modern Life, 207—15. Chicago: Privately Printed, 1924.

———. Training for Leadership” (1922). In Insull, Public Utilities in Modern Life, 358—61. Chicago: privately printed, 1924.

———. “Thrift,” May 1924. Loyola University Chicago Archives and Special Collections. Samuel Insull Papers, 1799—1970. Box 21. Folder 4.

———. “Speech before Northwestern University School of Commerce” (1925a). May 9, 1925. Loyola University Chicago Archives and Special Collections. Samuel Insull Papers, 1799—1970. Box 21. Folder 5.

———. “Commencement Address, Armour Institute of Technology” (1925b). May 28, 1925. Loyola University Chicago Archives and Special Collections. Samuel Insull Papers, 1799—1970. Box 21. Folder 5.

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

“Tell of Deals with Insull.” Chicago Tribune, November 13, 1934.

Tobey, Ronald. Technology as Freedom. Berkeley: University of California Press, 1996.