INSULL, SAMUEL 1859-1938

Electricity magnate

Symbol

In the 1930s Samuel Insull was the symbol of the unprincipled, greedy businessman. His gigantic electricity-generating empire, a series of more than seventy shaky firms piled one on top of the other, had collapsed during the Depression, losing a million investors $2 billion to $3 billion. Indicted for fraud, Insull fled to Europe, from where he was extradited to stand trial. The sensational proceedings occupied the public for months. The writer John Dos Passos described him as "a stiffly arrogant redfaced man with a closecropped mustache," who was "the deposed monarch of superpower." During the 1932 presidential campaign Franklin Roosevelt attacked him repeatedly, denouncing industrialists like "the Insulls, whose hand is against every man's." By most accounts of the day he was shameless and ruthless. But he was also Thomas Edison's personal secretary, a poor boy made good, a business genius, and the builder of the greatest public utilities industry in the United States.

Horatio Alger

Insull was able to weather the investigations and trials of the 1930s with a certain degree of public support because his background was, in many ways, a classic Horatio Alger story of a poor boy rising to wealth. Born and reared in England, Insull was one of eight children. His father was a temperance crusader of modest means, Young Insull briefly attended private school in Oxford with some of England's most privileged children. Teased and slighted by his upper-class school-mates, Insull embarked on a lifelong drive to earn respectability and wealth. In 1874 the Insull family moved to London, and Insull took work as an office boy. He quickly proved to be diligent and precise in his work habits, learning shorthand after hours and establishing a good reputation as a clerk. In 1879 he began work with the London branch of Thomas Edison's company. He was so successful at his job that in 1881 he immigrated to America to become Edison's personal secretary. He became an American citizen in 1896.

Utilities

Insull arrived just as Edison was about to introduce commercial electric lighting. Insull became Edison's financial manager, finding the money necessary to build the nation's first electricity-generating plants and electric lines. Insull managed to hunt up investors such as Henry Villard and J. P. Morgan to finance the projects. In 1889 he was one of the original directors of the Edison General Electric Company, organizing its manufacturing base and corporate and sales operations. A takeover of General Electric by eastern financiers such as Morgan left Insull powerless and bitter. In 1892 he relocated west, out of the circle of eastern financiers, becoming the president of the Chicago Edison Company. He went on to make Chicago Edison a model of the industry.

Monopolist,

The early days of the electricity-generating industry were dominated by several problems Insull deftly resolved. One was competition from the gas industry, which at the turn of the century produced light as cheaply and effectively as did electricity. Another problem concerned the virtues of decentralized versus centralized power generation. Initially bankers and investors would only fund decentralized power generators, building by building, localizing power use. Centralized power required enormous sums of capital up front, and the returns were not certain: central plants, for example, continued operating during the day when usage was low, wasting electricity, whereas power plants located in individual buildings could tailor their electricity generation to specific uses. These factors combined to lead most observers to guess that electricity would be a luxury item, of limited use in the future, Insull's vision was far grander. He was among the first to postulate the idea of generating electricity for mass use (in fact coining the term mass production). First, however, he had to resolve the problems plaguing the electricity industry. He recruited bright engineering talent to help refine the production of electricity, introducing the world's first steam turbines to his plants in 1902. Second, he revolutionized utilities financing, introducing open-end mortgages and high-yield bonds to gain investor support. Third, he proved centralized generation profitable by powering electric railways, industry, and an ever-expanding base of consumers. His objective was to supply consumers at the lowest possible price, expanding electric service to millions of homes and broadening the base of his returns. In order to do this, of course, Chicago Edison had to be the exclusive electricity generator for the Chicago area. He made Edison a powerful monopoly, gobbling up competitors, especially during the economic depression of 1893 to 1897. By 1905 annual electricity production for Chicago Edison doubled for the seventh time in thirteen years; by 1907 the company was sixty times larger than it was when Insull took the helm. Chicago Edison was the nation's leading electricity-generating company.

Success

Insull's success in Chicago laid the foundation for his national ambitions. In 1912 he formed the Middle West Utilities Company, a holding company designed to facilitate electrification of the Midwest. It began acquiring local generating companies and electric traction systems, expanding their operations to wider groups of consumers. World War I advanced Insull's efforts. He was head of the Illinois Council of National Defense, a state agency formed to coordinate propaganda and regulate the economy. The federal Council of National Defense spent $2 million to improve electrification of vital industries, moneys naturally benefiting Insull and other utilities magnates in the long run. During the war Chicago Edison (now named Commonwealth Edison) increased its sales fivefold. Insull's participation in the war effort also transformed his business in two other ways. First, his experience as a war propagandist familiarized him with modern advertising techniques, and after the war he formed the Illinois Public Utility Information Committee and other public relations firms to promote the public reputation of the utilities industries. Second, his experience on war-bond drives convinced him to restructure public investment in his utilities. Insull began selling cheap corporate bonds to his electricity customers. By 1930 more than one million people had invested in the Insull companies.

Power

Insull's innovative financial and operational strategies made the 1920s the heyday of his success. Three Insull companies—Commonwealth Edison; Peoples Gas, Light and Coke; and Public Service of Northern Illinois—each earned more than SI75 million annually. Middle West and several hundred subsidiaries were worth $1.2 billion. All totaled, Insull companies were worth nearly $3 billion, had more than one million stockholders, served four million customers, and produced as much electricity and gas as any entire nation on earth other than the United States. Insull's personal fortune was $150 million in 1929. His prestige and power in the United States were matched only by other industrialists of the caliber of Henry Ford or J. P. Morgan. Yet he was about to suffer a devastating series of attacks that would make him one of the most vilified individuals in the nation.

Crash

For Insull several different problems combined with the stock-market crash of 1929 to destroy his fortune and fame. The first was a series of scandals in the utilities business that badly tarnished the reputation of power generation. In 1927 and 1928 congressional committees revealed widespread influence peddling by utilities companies in the Pennsylvania and Illinois elections of 1926. Public sympathy for the utilities business was further undermined by disputes over the proposed Boulder Dam and the federally owned Muscle Shoals plant in Alabama. Politicians hostile to the utilities began speaking of a "power trust," rhetoric bound to impact a monopolist such as Insull. What really destroyed Insull, however, was an attempt to protect Commonwealth Edison from a stock buyout by Cyrus S. Eaton, a Cleveland financial raider. To protect his shares Insull formed the Insull Utility Investments Company and Corporation Securities Company of Chicago, pyramiding his utilities holdings and investment holdings. He refinanced Middle West Utilities, splitting its stock, eliminating its debt, and placing future dividends on a stock, rather than a cash, basis. These moves protected Insull's control of his stock but did not help with shares Eaton had already purchased, as the stock boom of 1929 continually raised the value of Eaton's shares of Commonwealth Edison. Following the crash, with prices declining, Insull bought out Eaton, borrowing money from a variety of sources, including his former enemies in New York. Confident that the Depression would turn out to be brief, Insull was sure he could repay the debt. He was, of course, wrong. As prices in Insull securities continued to fall, the New York bankers turned bearish, driving the stock to lower levels and eliminating their worth as loan collateral. Insull Utility Investments and Corporation Securities were bankrupt; New York took control of Commonwealth, Middle West, and Insull's remaining holdings; Insull resigned from the chairmanships of more than seventy of his companies that were defeated. He had lost everything.

Scapegoat

What happened next was sensational and occupied the press for months. In defeat Insull became a public scapegoat for the impersonal economic forces that had brought on the Depression. He was a ready candidate for the task, as the public stockholders of Insull's companies—ordinary people such as farmers, teamsters, and schoolteachers—had lost their investments when Insull lost his companies. His financial maneuverings of 1930 and 1931 were complex, multifaceted, amoral, and quite possibly illegal; the taint of scandals of the 1920s burdened Insull. John Swanson, state's attorney for Cook County in Chicago, maximized the political potential of this burden during the elections of 1932: on 4 October he secured from a grand jury indictments against Insull for embezzlement, larceny, and mail fraud.

Trial

Getting Insull to face trial was more difficult. After the loss of his power empire, Insull had gone to Europe to rest and recuperate. In 1933 the government moved to force his return for the criminal indictments, chasing him from Paris to Italy to Greece. Greece had no extradition treaties with the United States, but political pressure from the Roosevelt administration prevailed: Insull was returned to the United States in May 1934. On 2 October 1934, at age seventy-four, Insull went on trial in Chicago. The gist of the fifty-page, twenty-five-count indictment was that Insull had engaged in a "simple conspiracy to swindle, cheat and defraud the public." The affair was hardly simple, and the details of Insull's finances bored the jury. But Insull's testimony was riveting, and it was wired to papers around the country. Rather than focus on the details of the indictment, Insull's attorney deftly led the old man to recount his rise from poverty to wealth. In the end the trial was about contrasting stereotypes: Insull the unscrupulous magnate versus Insull the poor boy made good. Horatio Alger won out. Insull was acquitted of all charges. He spent the remainder of his life in exile, retired on the pensions from his former companies. He died in Paris on 16 July 1938.

Source:

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

Samuel Insull Trial: 1934

Defendants: Samuel Insull, Samuel Insull, Jr., Harold L. Stuart, and 13 others
Crime Charged: Use of the mails to defraud
Chief Defense Lawyers: Frederick Burnham, James J. Condon, Harry S. Ditchburne, William H. Haight, John J. Healy, Charles E. Lounsbury, J. Fred Reeve, and Floyd E. Thompson
Chief Prosecutors: Dwight H. Green and Leslie Salter
Judge: James H. Wilkerson
Place: Chicago, Illinois
Dates of Trial: October 2-November 24, 1934
Verdict: Not guilty

SIGNIFICANCE: Many people consider the Samuel Insull case to be the father of the Federal Securities and Exchange Act. The revelations of the trial produced immediate legislation to regulate the issuance of securities, control stock exchanges, and protect the unwary from holding companies. The trial gives insight into a time when a stock manipulator could build a pyramid of commercial wealth, making as much as a million dollars a week, at the expense of thousands of small investors doomed innocently to ruin.

Samuel Insull was a 21-year-old Englishman in 1881 when inventor Thomas Alva Edison brought him to America as his private secretary. Eleven years later, Insull was Edison's most trusted adviser, with discretion to handle all the inventor's financial matters.

In Schenectady, N.Y., the Edison General Electric Company was losing money. Edison dispatched Insull upstate: "Whatever you do, Sammy, make either a brilliant success of it or a brilliant failure. Just do something." Within a few years after Insull took charge, the company had grown from 200 employees to 6,000. Soon it was the well-established General Electric Company, or GE.

In 1892, Insull became president of Chicago Edison Company. He borrowed $250,000 from Marshall Field and began buying the independent electricity-generating plants that were proliferating in Chicago. By 1907, his Commonwealth Edison Company served the entire city, and investors had put in hundreds of millions of dollars.

Inventor of the "Power Pool"

Meantime, Insull acquired small electric companies in surrounding counties. Eventually his Public Service Company of Northern Illinois served half the state—some 6,000 square miles. Insull built the world's largest generating plants, with long transmission lines, reducing production costs and consumer rates and increasing efficiency and profits. A reliable "power pool," as he called it (it was entirely his idea), supplied the network covering all Chicago and northern and central Illinois.

By the 1920s, Insull had reorganized the near-bankrupt People's Gas Light & Coke Company (its stock rose from $20 to $400 a share). He controlled Chicago's elevated rail lines and its commuter trolleys. His utilities companies operated in 39 of the 48 states. The man was worth more than $100 million. To trusting investors, his name was magic.

In 1907, when Chicago banks refused to handle the unknown Commonwealth Edison Company securities, Insull had found Halsey, Stuart & Company. Over the years, the firm, headed by Harold L. Stuart, had sold more than 2 billion dollars of Insull properties stock.

Threatened with loss of control when the 1926-29 bull market saw new investment trusts buying up shares in his companies, Insull organized Insull Utility Investments, Inc. He and Halsey, Stuart would hold enough securities of the operating companies to keep him in command. The investment company's common stock opened at $30 a share, boomed to $147, then settled at $100.

Next, in September 1929, Insull created another investment company, Corporation Securities Company of Chicago. An offering circular was mailed to potential investors. Despite the "Black Friday" stock-market crash five days later, faith in Insull was so strong that within a year the public had bought $100 million of the new securities.

But the Great Depression steadily overpowered the Insull empire. By 1932, his holding companies were petitioning for bankruptcy. The operating companies—Commonwealth Edison, Peoples Gas, and Public Service of Northern Illinois—survived, with Insull still in charge. In June, however, he resigned, citing ill health and advanced age (he was 73). He and his wife sailed for Europe.

By September, word reached Insull in Paris: His affairs were under investigation. The Insulls moved to Greece, which had no treaty of extradition with the United States.

Accountants announced findings: Investors in Middle West Utilities had lost more than $700 million. Those in Corporation Securities had lost $85 million. Collateral had been "cross loaned" between the Insull companies. Favored creditors had been given preference. Millions in questionable brokerage fees had been taken from assets. Padded payrolls had included Insull's relatives and friends. Immense secret profits had been paid to as many as 1,600 favorites. They had bought 250,000 shares of Insull Utility Investments common stock at $12 before it opened at $30 and zoomed to $147; selling at only the opening price would have produced $4,500,000 in profits.

Arrested in Istanbul

A Cook County grand jury indicted Insull and his brother Martin for embezzlement from the Middle West Utilities Company and Mississippi Valley Utilities Investment Company. A federal grand jury indicted Insull and 16 others, including Samuel, Jr., who had joined his father's business in the 1920s, and Harold L. Stuart, for using the mails to defraud.

Insull disappeared. Congress passed a special bill allowing U.S. authorities to arrest him in any country where it had extraterritorial rights. Found aboard a ship bound for Egypt, he was arrested in Istanbul and returned under heavy guard to America.

U.S. Attorney Dwight H. Green's opening at the trial on October 2, 1934, charged that the defendants, through Utility Securities Company, fraudulently schemed to induce investors nationwide to buy the common stock of Corporation Securities Company at inflated prices. He also charged that Insull-controlled companies had maintained a fictitious market for the common stock, thus misleading prospects as to its value. To carry out the scheme, the defendants had used the mails to send circulars to those they intended to defraud.

"The Jewels of the Insull Empire"

Eighty witnesses identified books and records. Another 50 had been solicited and bought stock. As countless company names became blurs in jurors' minds, the big picture grew clear: The government was out to prove that Insull's success had been gained—repeatedly—by having one Insull electric company sell properties to another Insull electric company at a splendid profit, with the second company then selling to a third. The holding companies—the securities of which were proclaimed by a Halsey, Stuart salesman as "the jewels of the Insull empire"—and the investment companies had been created to expand the bubble … until the Depression deflated everything.

The specific charge against Samuel Insull and his cronies was that the circular mailed by Halsey, Stuart & Company inviting subscribers to buy stock in Corporation Securities was false and deceptive: The company, it said, would open with $80 million in assets, whereas it actually had only a bank loan of $3.5 million and 304,000 shares of Insull Utility Investments for which it had paid $7 million. And the circular failed to state that most of the stock the company intended to buy was common stock paying only a stock dividend, not cash.

Chief defense lawyer Floyd E. Thompson, a highly respected former Illinois Supreme Court justice, skillfully brought out his client's English training in business, his success with Thomas Edison and GE, the vast saving in the cost of electricity his "power pool" had generated, and his accumulation of utility companies to assure their continuing control and hold off government ownership.

Insull further testified that divisions of stock were in line with prevailing corporate practice, that stock dividends (rather than cash) were common and represented earnings plowed back to increase equity value. As to the offending circular, Insull said its statement of assets was based on completion of financing, entirely in accordance with market practice.

Next, Insull testified on the "buoyant" optimism of the financial community in March 1930, after the crash, and on how the Corporation Securities Company's portfolio depreciated some $45 million in late 1930, then appreciated $86 million in early 1932, when people thought the Depression was over. He and his associates had done nothing unusual in "supporting the market," he said; even the United States did it for government bonds. He himself had borrowed $5 million to bolster Corporation Securities Company, then borrowed a million from GE to reduce the bank loan. But by April 1932 his holding companies had gone into receivership. To avoid bankruptcy, he had given his creditors everything he had. He now owned no property, had no income, and depended on his son for food and shelter.

"We are Trying that Age"

The gist of the Insull defense was that the government had to find someone to blame for the ills the Depression had caused. Samuel Insull, as the magic name in the era of million-dollar risks and losses, was the logical culprit. Thompson summarized:

Gentlemen, you have had a description here of an age in American history which we hope never will be repeated. We are trying that age. There is no proof here that anyone had any wrongful motive. There is proof that these men believed implicitly in the business venture in which they were engaged, and they poured their own fortunes and their own good names into it.

The jury agreed. It found all of the defendants not guilty.

Insull faced two more trials. In March 1935, a Cook County jury found him not guilty on the charge of embezzlement. In June in federal district court, he and his son and Harold Stuart were found not guilty of illegally transferring property with intent to prefer selected creditors and defeat the purpose of the Bankruptcy Act.

Insull returned to Paris, where he dropped dead on the street at 78. It was reported that his assets then were $1,000; his debts, $14 million.

—Bernard Ryan, Jr.

Suggestions for Further Reading

Busch, Francis X. Guilty or Not Guilty? New York: Bobbs-Merrill Co., 1952.

Davidson, Carla. "Chicago Transit," American Heritage (December 1985) 33-34.

Fleming, Thomas J. "Good-bye to Everything!" American Heritage (August 1965) 89.

Fuhrman, Peter. "Do it big, Sammy," Forbes (July 13, 1987) 278-280.

Michaels, James W. "History lesson," Forbes (December 24, 1990) 38-40.

Phillips, Cabell. The New York Times Chronicle of American Life from the Crash to the Blitz: 1929-1939. New York: Macmillan Co., 1969.

Sifakis, Carl. The Encyclopedia of American Crime. New York: Facts On File, 1982.

Samuel Insull

Samuel Insull (1859-1938), English-born American entrepreneur, organized a utilities empire in the 1920s valued at over $3 billion.

Samuel Insull was born on Nov. 11, 1859, in London. He attended school until the age of 14, when he became an apprentice clerk. After several jobs he was employed by the London manager for Thomas Edison. When he turned 21, Insull went to the United States, where he worked as Edison's secretary.

Edison liked Insull's stamina and audaciousness, and when the Edison General Electric Company was organized in 1899, Insull was made second vice president in charge of manufacturing and sales. Insull's biggest opportunity came when he took over the Chicago Edison Company, which had at least six competitors in the city. Slowly Insull combined the concerns into Commonwealth-Edison, using business methods which his critics called unfair. However, Insull's success was not due to manipulation alone; he also insisted on improved equipment such as the Curtis turbine, which allowed a wider distribution of electricity. Operating on his own, he expanded his interests into surface and elevated transit lines.

In 1912 Insull organized a conglomerate that became the symbol of "Insullism"—Middle West Utilities. With assets over $2 million, this maze of holding companies served at least 1,718,000 customers from 324 steam plants, 196 hydroelectric generating plants, and 328 ice plants.

During the 1920s Insull continued his pattern of using holding companies to control assets. By 1930 the empire consisted of five systems with assets over $2.5 billion that produced almost one-eighth of the total electric power in the United States.

Insull was recognized as one of the nation's important business leaders and received honorary degrees from several universities. The French government awarded him a knighthood in the Legion of Honor. In politics he supported both major parties as it suited his interests. His most notable philanthropic activities included support for the $20 million Chicago Civic Opera House and a donation of $160,000 to establish the London Temperance Hospital.

Insull's empire was in financial trouble in 1929, when the stock market crash and ensuing Depression sealed its doom. In June 1932 he was removed as executive officer of his companies and left for Paris virtually destitute. He was indicted on charges of fraud and embezzlement but fled to Greece, where he fought extradition. Finally returning to the United States for trial, he was acquitted. He fell into obscurity and died in Paris on July 16, 1938.

Further Reading

Only two books cover Insull's career: M. L. Ramsay is hostile to him in Pyramids of Power: The Story of Roosevelt, Insull and the Utility Wars (1937), and Forest McDonald shows sympathy in Insull (1962), which is the only full-length biography. □