by Vanda Krefft
Of course, they both knew better. Once Mayer concluded his performance, Fox began his.
Yes, he told Mayer, he had been doing a lot of thinking since their last meeting and he had realized that Mayer was right. It would have been only fair for Mayer, Thalberg, and Rubin to profit from the Loew’s stock sale. It was time to correct the error. After all, what did a big number like $50 million mean anyway? If the price had been $48 million or $52 million instead, Fox said, “We would have paid it just the same.” Fox offered to give Mayer, Thalberg, and Rubin a total of $2 million in cash after completion of the merger.
It was a thinly veiled bribe, and indicating what he expected in return, Fox started to explain his difficulties with the Justice Department. “I know all about that,” Mayer said, according to Fox.* “I caused the record to be changed from a consent to a restriction on acquiring these shares. That was a perfectly simple matter for me to do.” Fox would later decide that Mayer was just talking through his hat. At the time, though, he believed him—and the idea that someone could so cavalierly change Justice Department records made him feel “rather ashamed of being a citizen of this nation.”
Mayer promised to try to change the record back. It would be difficult, he said, but he thought he could do it. He would have to, in order to get his money.
Believing that he and Mayer were now “the best of friends,” Fox thought it would be short work to get the Fox-Loew’s merger back on track to completion.
Fox’s other pressing concern was to get the money to pay off his debts, especially the $15 million that would be due to AT&T on February 24, 1930, and the $12 million due to Halsey, Stuart on April 1, 1930. Tension had arisen with those two principal creditors. Within a week after he bought the Loew family’s stock, Halsey, Stuart president Harry Stuart came to Fox’s office and accused him of having made “a terrific blunder.” The 400,000 Loew’s shares were no guarantee of control, Stuart argued, because they represented less than one-third of the total shares outstanding. Stuart insisted that Fox had to get a numerical majority of Loew’s shares, “or you will be wiped out.”
Stuart had cause for worry. During the month leading up to Fox’s announcement of the deal, stock market activity in Loew’s had been unusually intense. Between February 1 and 28, some 493,000 Loew’s shares changed hands, and the price had risen from about $65 in early January to $75–$80 in early March. The trade press assumed that Fox had been buying heavily in order to have a numerical majority of shares once he acquired the Loew family’s stock, but according to Fox, he hadn’t been involved. Possibly it had been the Warner brothers, anticipating that they would prevail in the bidding for the Loew family’s stock.
Stuart feared that if there weren’t already a plot afoot to blockade Fox’s control of Loew’s, there soon would be. Specifically, he suspected that the Loew family would take the $40 million Fox had paid them—go-between Nicholas Schenck had received a $10 million commission—and buy another 400,000 shares in the open market. At prevailing prices, they could do so for $30–$32 million. According to Fox, Stuart told him to buy the additional Loew’s shares on margin and to put the new shares in other people’s names to avoid detection by the Justice Department. A few days later, Otterson also began to pressure Fox to get a 51 percent majority.
Fox didn’t want to buy more Loew’s stock. He didn’t believe there was any threat to his position, especially not from the Loew family. To make sure, he asked them. They assured him that they had no intention of buying more shares and that they intended to stand by the deal. They also promised to make sure that none of their friends bought Loew’s stock on their behalf.
Still, Stuart and Otterson did not relent. To maintain good relations, Fox acceded to their wishes. “I stripped the companies of all the cash they had,” he said. He also borrowed all the money he could from banks, putting up the newly acquired shares as collateral, and bought on margin from stockbrokers. He stopped buying when, after spending about $23 million for another 260,900 Loew’s shares, he ran out of money. “We probably would have bought a hundred thousand more [shares], but we did not have anything to buy it with any more.”
These were the additional shares that piqued the interest of the two young Justice Department agents who visited Fox’s office in the late spring or early summer of 1929.
Stuart and Otterson’s worry turned out to have been a false alarm. The Loew family kept its word. Fox was able to buy more stock “with little or no competition.”
Despite the urgency of antitrust and refinancing matters during the first half of 1929, Fox gave them only partial attention. It was easier to hold a few meetings, assign a few lawyers, throw money at Louis B. Mayer, and believe his troubles would clear, as they always had in the past. Success encouraged that conceit. The first half of 1929 proved the most profitable six months in Fox Film history—due mostly to the introduction of sound, which attracted larger audiences than ever to the movies, and to Fox’s increased ownership of theaters, which resulted in more bookings than ever for Fox movies.
During the first half of 1929, aiming to reach total seating capacity of 1 million by the end of the year, Fox kept buying more and more theaters, with still more money he didn’t have. His largest acquisition took place in early July 1929, when he agreed to pay $20 million for a 49.5 percent stock interest in Britain’s most important exhibition circuit, the Gaumont chain of more than 300 movie theaters. Gaumont had always been a tough customer for Fox Film, renting less than $500,000 worth of movies a year, while Fox believed it had the potential to pay ten times as much. Although British law prohibited majority ownership of Gaumont from falling into foreign hands, the proposed new five-member board of directors would be set up to protect Fox. It would include two of Gaumont’s former owners, two Fox nominees, and as the swing vote, Lord Lee of Fareham, who, having been a close friend of Theodore Roosevelt, was considered sympathetic to American business interests.
Fox expected the Gaumont shares to pay for themselves within five years through increased film rental income to Fox Film. Still, $20 million was a lot to pile onto an existing short-term debt burden of $73 million, resulting from all the Loew’s stock purchases. Fox consulted with Stuart and Otterson. Both, he said, strongly encouraged him to buy Gaumont. That made sense. At an 8 percent commission rate, Halsey, Stuart would make more money refinancing a $93 million debt than a $73 million debt, and Otterson’s ERPI would be guaranteed the $7.5 million job of installing its Western Electric equipment in Gaumont’s three hundred–plus theaters.* According to Fox, Otterson had already tried and failed to win Gaumont’s business on his own. With their backing, Fox went ahead, feeling “perfectly secure and safe.” Later, Stuart and Otterson would deny knowing anything about the Gaumont deal beforehand.
During the first half of 1929, Fox also bought the Walter Reade chain of fifteen theaters in New York and New Jersey; the Schine circuit of ninety-eight theaters in upstate New York and Ohio; Seattle’s newly built $1 million Mayflower Theatre, to be renamed the Fox Theatre; and, for $3 million, Sid Grauman’s controlling interest in the Chinese Theatre in Los Angeles.
Topping the Fox circuit, a bookend to New York’s Roxy Theatre, the staggeringly ostentatious $4.65 million San Francisco Fox Theatre opened on June 28, 1929. With five thousand seats, it was the largest movie theater west of New York and the first one anywhere built specifically for sound. The magnificently baroque building, occupying the triangular plot of land bounded by Market, Hayes, and Polk Streets, was stuffed to dizzying excess with Old World–style furniture, paintings, draperies, and other appointments.
Eva Fox had personally supervised the interior decoration. If her taste was not particularly educated or sophisticated, it nevertheless retained the same striver’s sincerity that had marked the hodgepodge accumulation of artworks in the Fox home. Everything about the San Francisco Fox appealed for awestruck approval: the Grand Lobby with its fifty-foot-high ceiling, the $36,000 rose-and-gold carpet, the bronze-and-etched glass cha
ndeliers, and the “Golden Stairs of Enchantment,” a huge curved stairway modeled after that of the Paris opera house. Throughout the hallways and salons were a Gobelin tapestry, vases owned by the late Russian czar, a Sèvres urn clock, carved wooden benches, and chairs upholstered in silk damask. Even though Eva’s spending sent costs soaring beyond the original $2 million estimate, Fox didn’t restrain her. The San Francisco Fox was to be their shared vision, a “Utopian Symphony of the Beautiful.”
On opening night, the studio sponsored a six-hour outdoor celebration with a parade, fireworks, dancing in the streets, and an outdoor vaudeville show. An estimated fifty thousand to seventy-five thousand spectators turned out. By special train from Los Angeles, Fox Film imported about fifty prominent celebrities: among them were all the major Fox Film stars along with, from other studios, Joan Crawford, Loretta Young, Douglas Fairbanks Jr., Gary Cooper, Louis B. Mayer, Irving Thalberg, and Jack Warner.
No one paid much attention to the fact that William Fox did not attend. By now, he was mostly an abstraction, the mask at the top of the totem pole, awesome and fearsome in his power but, except to a very few, unseen and unknown.
In mid-1929, Fox also started a new company, Grandeur, to develop widescreen technology. Mainly, he wanted to protect movie industry revenues from the looming threat of television. General Electric and its subsidiary RCA had been working on the new medium for several years, and after the first successful electronic broadcast in September 1927, the arrival of small-screen entertainment in American homes seemed imminent. Fox realized that television would do far more damage to the movies than radio had done at the beginning of the decade. To survive, he believed, the movies would have to become more spectacular.
Accordingly, in 1927, he bought the patents to a 70mm, alleged three-dimensional film process from a New Orleans inventor and set Fox-Case engineers to work on refining the technology. When the task proved more difficult than expected, Fox hired George Mitchell, a Nebraska-born, self-taught mechanical genius with a fifth-grade education who had invented the industry’s leading 35mm motion picture camera.
“Gee whiz, this thing will never work,” Mitchell told Fox after examining the New Orleans inventor’s camera. “It’s the wrong principle.”
“Well, I saw a picture of Niagara Falls and it was beautiful,” Fox retorted.
After Mitchell set up a demonstration and explained the flaws, Fox became “madder than the devil” and “bawled the hell out of me for bustin’ up his little dream,” Mitchell recalled. “The dream was no good, but he was sore because I had destroyed it. Then he asked me could I make a 70mm camera, and I said, ‘Sure I could.’ So I made one, then two.”
Fox decided to buy the Mitchell Camera Company. Now all he needed was a high-quality projector. For that, he turned to Harley L. Clarke, a Chicago utilities magnate who had recently entered the motion picture equipment business. A short, stocky figure in his late forties, Clarke owned a controlling interest in the International Projector Company, which manufactured more than 75 percent of all movie projectors used worldwide. The two had met in 1928, when Clarke, hoping to solicit business, showed up at Fox’s office with a letter of introduction from their mutual banker, Harry Stuart.
“Don’t trust him further than you can see. He will make every kind of promise and do nothing,” Stuart warned Fox soon afterward, explaining that he had written his letter of introduction only because Clarke had asked for it and because he felt he could not refuse such a request from a client.
But Clarke seemed to have the Midas touch. An engineering studies dropout from the University of Michigan, he had acquired a small utility property in Vincennes, Indiana, and used that as the basis to form the Utilities Power and Light Corporation, a holding company that grew to include electricity and gas providers in midwestern, southern, and eastern states and in Great Britain. By February 1929, Utilities Power and Light had total assets of $400 million. Most of the financiers who did business with Clarke, Fox noticed, made a lot of money. Fox decided that Clarke was “a fine, decent sort of chap.”
At first, Fox hired Clarke simply to build a Grandeur projector on a cost-plus basis. Then, midway through, Clarke proposed that they go into business together. Fox couldn’t resist. On May 24, 1929, with each owning 50 percent of the company, they formed Grandeur, Inc., to manufacture and market widescreen equipment.
Clarke’s true nature soon surfaced. The day after Grandeur’s inception, he wrote to Fox to confirm that he was negotiating to buy Mitchell Camera for their benefit on a fifty-fifty basis. That was a lie. On June 6, although Fox provided $50,000 as half of the initial payment for the company, Clarke bought Mitchell Camera for himself. Fox discovered this fact several weeks later. He also learned that Clarke had acquired, also for himself, four projector-lamp manufacturing companies. It was Fox who had told Clarke about the four companies and had explained their importance. They were the only U.S. companies licensed to make projector lamps, which were an essential component of motion picture projectors. Fox had told Clarke that he intended to buy the companies himself.
A heated argument ensued, but neither man gave in completely. Instead, Clarke consented to turn Mitchell Camera over to Grandeur at the price he’d paid—his usual practice was to add a hefty markup—while Fox agreed to let Clarke keep the four lamp companies. Clarke also paid Fox $2 million, to be used by Fox to buy half of the Grandeur company’s stock. Despite Clarke’s deceit, Fox went forward, signing a contract on June 24, 1929, for Fox Theatres to buy a large number of Grandeur projectors.
Fox also looked the other way as Clarke set up a new holding company, General Theatres Equipment (GTE), on July 11, 1929, for all his motion picture enterprises. Rather than follow the traditional method of pricing the company’s stock based on the physical asset, or “book value,” of the component companies, Clarke used the speculative value, also known as the “nominal value.” That is, he stated GTE’s worth on the basis of its future earning power—or, more accurately, what he hoped he could persuade investors would be the future earning power. This highly dubious practice, commonly known as stock watering, resulted in component companies that altogether had a book value of $4.76 million being represented by GTE as worth about $43.05 million. To conceal the true financial picture from the public, GTE’s advertising circular did not include a consolidated balance sheet, a listing of assets and liabilities that was generally considered an essential document for prospective investors.
Clarke named himself president of GTE and vested control of the company in three voting trust certificates. He owned one of them. Two of his bankers held the others. Bankers also made up GTE’s eleven-member board of directors. In other words, not only was GTE not worth anywhere near what it was purported to be worth, but also it was to be led by people who had no hands-on experience in the motion picture industry.
Assisted by Chase Bank chairman Albert Wiggin and the Halsey, Stuart firm, Clarke then hoodwinked the public into buying GTE shares. Through a highly profitable reselling scheme, networks of bankers and brokers quickly worked the share price up from $20 to $65. Fox thought the GTE shares had an intrinsic value of no more than $1, and that the company was “nothing more or less than a bag of wind.”
Fox didn’t protest. He believed that widescreen technology would prove just as revolutionary as sound and, aware that other companies were developing their own systems, he wanted to get there first with Grandeur.
It was too much for one person to handle alone, too many directions to watch over all at once. Bound by the habits of a lifetime, Fox would not relinquish any degree of control. Overextended, he made bad decisions about important relationships.
His partnership with Harley Clarke wasn’t Fox’s only ill-considered alliance. In early May 1929, he agreed to join the board of directors of the newly formed Ungerleider Financial Corporation (UFC), an investment trust that started with cash capital of $25 million and planned to expand up to at least $750 million. Investment trusts were a sort of
early version of mutual funds, set up with professionals trading in securities on behalf of individual investors. In the late 1920s, they often operated as glorified pyramid schemes, using borrowed money to invest in other investment trusts and thus inflating market value far beyond asset value. Although Fox’s fellow UFC directors included such respectable names as General Motors founder William C. Durant and the treasurer of Loew’s, Inc., David Bernstein, Ungerleider himself was a dubious character. A former saloon owner in Bridgeport, Ohio who had closed that business in May 1919, just before enactment of the state’s prohibition law,* he then took up work as a stockbroker and, holding a margin account for President Harding, became involved in the Teapot Dome scandal.
After only three weeks, Fox resigned from the UFC directorship. He didn’t publicly disclose his reasons, but probably he saw what investigators would learn later: Ungerleider’s methods included bribing government officials such as New York City mayor Jimmy Walker and federal judge Martin T. Manton for inside information and actions favorable to his investments.
That was a relationship Fox was well rid of. Not so wise was his abrupt alienation of Samuel “Roxy” Rothafel, the manager and impresario of his flagship 5,920-seat Roxy Theatre. Granted, the pompous and manipulative Rothafel was not easy to like up close. Since Fox bought the Roxy in March 1927, the two had clashed frequently—Fox believed that Rothafel was spending too freely so that the theater was not as profitable as it might be, while Rothafel chafed under criticism of his otherwise widely admired showmanship. By the spring of 1929, Fox and Rothafel no longer spoke directly, not even by phone, but instead communicated through Fox Film’s East Coast head of publicity, Glendon Allvine, who shuttled back and forth between Rothafel’s office at the Roxy and Fox’s at 850 Tenth Avenue. Then, in early April 1929, Rothafel broke the silence and, over lunch, asked Fox to build him an 8,000-seat theater. He had already picked out the site, a 305-by-200-foot strip of land next to the Roxy Theatre, in the block bounded by Sixth and Seventh Avenues and Fiftieth and Fifty-First Streets. It was the only available property in the Theater District large enough for a “super theater.” They would make millions, Rothafel said. Fox listened calmly. By 3:00 p.m. that day, he had bought the land for $3 million.