by Amity Shlaes
As 1933 ended, it was clear that the administration was now thinking about more radical goals for power. In December, Arthur Morgan, whom Willkie had found easier than Lilienthal, also turned sharp. Morgan held a press conference to show off a ten-million-volt generator and talk about the future of power transmission. He also took the occasion to note that the TVA would supply Tupelo with power for $12,370 the next year, compared with the $31,144 the town had paid in 1933. Morgan warned, the paper reported, that in taking over private plants in its territory, the TVA did not plan to buy inflated shares of private companies. The government would not be bilked by Willkie’s Commonwealth and Southern. The president, Frankfurter, Lilienthal—all were sanguine. Willkie realized he was up against no ordinary opponent.
a year of prosecutions
January 1934
Unemployment: 21.2 percent
Dow Jones Industrial Average: 100
AT THE NEW YEAR the papers carried a report that the Justice Department was creating a division to look into civil and criminal infractions of the tax code. But taxes were not the only area where the Roosevelt administration was on the hunt. Both the administration and Congress would step up efforts to see that justice was carried out in the cases of all those who might have misstepped in the period of the crash. J. P. Morgan’s executives, other Wall Streeters, the utilities would all be targets.
Clearing out the corrupt forces that had brought the crash in the first place seemed to the New Dealers the best way to recovery. Nineteen thirty-three had been a year of experiment; 1934 would be a year of prosecution. The Davids of the New Deal—not only the literal David, David Lilienthal, in this instance, but also Roosevelt’s young prosecutors—would go up against the Goliaths of the old world.
It was obvious who the Goliaths would be: Sam Insull and Andrew Mellon. Both men were so old as to be from another era—Victorians: Insull was born in 1859, Mellon even before that in 1855. Both were anglophiles—Insull, of course, actually came from Britain. Shareholders in Insull utilities had lost millions when his empire collapsed in 1932. Investors had paid $88 million for Insull’s special gold debentures; now, after all the sales, only $460,000 in cash stood behind the engraved certificates. Time magazine estimated that all told, Insull’s losses had cost shareholders hundreds of millions. In Chicago, city coffers were so bare that teachers had gone many months without pay. The guilt of Insull seemed to mount as the downturn extended.
Mellon was an equally enticing target. As treasury secretary, he had presided over a market in which everyone else lost their cash. If Insull was a national target, then Mellon was both a national and an international one. In the Soviet Union, Madame Krupskaya, Lenin’s widow, happened just then to be arguing for the publication of a series of didactic children’s books: in one of them, a Marxist version of Jack and the Beanstalk, Jack the Giant Killer slew Andrew Mellon, caricature of capitalism. What the prosecutors hoped was to finish the work of the progressives of the 1920s—the attack on Mellon by Wright Patman in Congress, the attack on Insull that Paul Douglas had begun in Chicago, for instance. Ferdinand Pecora had made a stunning start on this as counsel to a subcommittee in charge of an inquiry into the stock market. Pecora had had J. P. Morgan on the stand in May of the previous year, and the country would not soon forget that. It had emerged that Morgan, the leading figure in the world of finance, had not paid any income tax in 1931 or 1932. This was the sort of revelation that warranted replicating.
But there was a hitch. Both Insull and Mellon were still popular in their towns, among the people who knew them well. In the context of the credit that Insull had built up with citizens, even the collapse of his companies might not convince Chicago of his evil. As for Mellon, many Pittsburghers were still loyal. Both observers and prosecutors understood therefore that the men might win court victories on home turf. Still, in an odd way acquittal at home might even strengthen the Feds’ case—it would be a form of proof of the corruption of local politics and the need for national intervention.
Over at Commonwealth and Southern, Willkie felt the concern strengthen. Months had passed, and now the utilities index was still in the 20s. Would it go into the teens? He could see that the New Dealers were consolidating their power. Lilienthal was giving speeches in small towns about the electricity he would bring. And Roosevelt, the word was, was planning to nominate Rex Tugwell to the undersecretary slot at the Department of Agriculture, a promotion. The New Dealers were becoming stronger. Willkie, like Insull, was a utilities man, and in such a world, Commonwealth and Southern could also become a target. Willkie’s wife, Edith, disapproved of the New Deal—so much that he teased her about it.
But Willkie reassured himself that there were still many reasons both he and Commonwealth and Southern would be all right. He still saw himself as more like Roosevelt than Insull. Willkie was still looking for a way to square his vision of reform, which was more Wilsonian, with FDR’s protean version. A few years earlier, at a conference, Willkie had actually encountered Insull. The discussion had been about press criticism of the utilities industry. Insull had complained about it; Willkie had countered by telling the older man that he believed press criticism was healthy for enterprise. Insull had rebutted Willkie’s rebuttal: “Mr. Willkie, when you are older you will know more.” This disdain for free speech came from another world, a world that was not Willkie’s.
As for the differences between Insull’s empire and Commonwealth and Southern, there was evidence. In 1932, James Bonbright had published a book attacking holding companies while praising Commonwealth and Southern as a corporate model that functioned as a holding company should, making capital available to its subsidiaries in the most efficient fashion. What’s more, Willkie was now in the process of preparing, rather publicly for that matter, to clean house further at Commonwealth and Southern. And of course Willkie had his old acquaintance with Newton Baker, one of the Democrats’ leaders in the area of utility reform. He was also quite friendly with Oswald Ryan; they knew each other from Indiana. Now Ryan was general counsel to the Federal Power Commission, Willkie’s principal regulator. Willkie supposed he might observe the attacks on figures like Insull and learn from them.
But he did not think for long, for he had his work cut out with Morgan and Lilienthal. On January 4, he finally concluded a geographic truce with the TVA. Commonwealth and Southern agreed to sell the TVA a transmission line and properties near Norris Dam. The agreement also divided up the South with the TVA—until 1937, or the completion of the new Norris Dam Power House, whichever came first. Commonwealth and Southern could not sell power in TVA’s new distribution area, and the TVA could not sell to Commonwealth and Southern customers outside certain counties.
The arrangement bought Willkie time. Like Lilienthal, he and the power companies in the South knew how to use that time to their advantage. They were now going to court and winning injunctions to halt TVA construction. The administration might think in Frankfurter terms, but the average southern judge did not—even if he was a Democrat. The fall’s midterm elections could change matters as well. Roosevelt’s Democrats might not do so well, Willkie thought. Then Lilienthal, who came across as so arrogant in meetings, might begin to understand that he had to be reasonable. The Supreme Court might find the TVA itself unconstitutional. In the end, Willkie told himself as he regrouped, Commonwealth and Southern could still win.
Meanwhile, the two Goliaths were distracting the country, taking the country’s eyes off C & S. The beginning of the year found Insull ensconced in Athens, Greece, a fugitive from justice. Alone walking about Athens, Insull realized now that he regretted some of his past—especially the fact that his brother Martin had written negatively about Roosevelt. Insull’s prophecy about the consequence of ad hominem attacks was coming true. As soon as FDR was elected, Insull had known he was in for trouble. Still he believed, legitimately enough after Roosevelt’s “Ishmael and Insull” speech of the campaign, that an American trial would be political and unfair.
Insull was buying time, as well. He wanted to be in Britain, but Greece, unlike Britain, did not have an extradition treaty with the United States, so he was safe, at least for the moment. His wife joined him there. In Chicago, federal lawyers were using a young technology, the photostat, to work up a case so extensive that its documents, taken together, weighed two tons. The prosecutors wanted to get him on mail fraud, for sending out stock prospectuses that included false promises of profit. The State Department had begun pressuring the Greek government, and the Greeks for their part repeatedly assured the State Department that they would force the fugitive out and deliver him up. Yet the Greek government agonized—there was a domestic audience to consider, and it did not want to seem entirely under the American thumb. Insull’s lawyers and doctors discovered they could win repeated stays and postponements for their client with the argument that Insull was in ill health. And so he was: Insull had diabetes. Insull’s status became a national story in the States, where papers reported that Greek police were guarding the invalid’s door.
Mellon was also in the news. In February, Roosevelt nominated Robert Jackson, a young prosecutor from his own state, to become general counsel of the Bureau of Internal Revenue at Treasury. The idea was to beef up investigative and prosecutorial work. On March 11 came news that Homer Cummings, Roosevelt’s attorney general, was preparing a tax suit against Mellon, as well as against T. S. Lamont of J. P. Morgan and Thomas Sidlo, a law partner of the reformer Newton Baker, of Cleveland. Seeing this last name may have troubled Willkie—Roosevelt was reaching dangerously near to his corner of the world. The attorney general would also look into the finances of Jimmy Walker, the New York mayor whose resignation Roosevelt had provoked in 1932 in the midst of a legislative inquiry into city corruption.
The question in the tax suits was whether it had been legal for Mellon, Lamont, and the others to use certain tax loopholes in preparing their returns. Lamont, the son of Thomas W. Lamont, another Wall Street giant, and the brother of the socialist Corliss, had sold stock at a loss, then deducted the loss on his 1930 return, and then permitted his wife to repurchase shares of stock in the same company. The investigation of Mellon was looking into whether he had underpaid taxes by a million dollars in 1931. It might not be as dramatic a charge as the one against Morgan; still, it made for good press.
But taxes were not the only front on which the attorney general attacked. Cummings was also announcing an investigation into the Aluminum Company of America, a Mellon company, to determine whether it broke antitrust laws.
Even as the country digested this news, Insull was again in the papers. On March 5 the Greek government gave Insull forty-eight hours to leave, but Insull won a medical stay. The U.S. consulate kept watch on his building from the balcony of the consulate, only a block away. Yet on March 15 Insull vanished, somehow managing to escape his apartment out the back way. He had evaded the Greek police, a national embarrassment of a magnitude that provoked a cabinet crisis. After several days came reports that the fugitive was aboard a tramp steamer, the Maiotis, heading toward Egypt. The State Department quickly asked Joseph Robinson, Senate majority leader, to put through special legislation that would enable U.S. officers to snatch up Insull in countries where the United States exercised extraterritorial powers, such as Egypt. The bill passed without debate, and Roosevelt signed it on March 23.
Meanwhile, however, both the mortified Greeks and others had lost track of the Maiotis, and in Alexandria crowds scanned the horizon for a glimpse of Insull. “Not since the passage through the Suez Canal of Mahatma Gandhi has any individual been so awaited,” wrote the normally staid New York Times. Within a day or so Greek authorities were in wire contact with the owners of the Maiotis, and a few days later the Maiotis docked at Istanbul to pick up provisions—potatoes, macaroni, salad. Washington demanded that Turkish authorities arrest Insull, and unlike the Greeks they complied immediately, subjecting Insull to a mock trial. Soon the septuagenarian was traveling toward the United States in State Department custody; the name of the ship bearing the captive was, appropriately, Exilona.
In April, Roosevelt nominated Tugwell as undersecretary. By now the prominence that the journalist Arthur Krock had noted was beginning to show its painful side. Tugwell had spent the year fighting, with FDR’s support, for a radical updating of the old Food and Drug legislation, the idea being to regulate more thoroughly from Washington “the purveyors of doubtful nostrums and unregulated foods,” as he put it later. Others however saw his effort as an outrageous theft of a function normally provided by the private sector—quality control. At one point Eleanor Roosevelt, who herself had a sense of humor, invited Rex to lunch. The lady seated next to him, Tugwell would later report, “turned out to be one of the editors of Good Housekeeping, a magazine that offered to approved products something known as the Good Housekeeping Seal of Approval.” Tugwell commented that “the lady in question was very high and mighty.” The guest from the magazine spoke angrily to Tugwell—probably more so than Mrs. Roosevelt had intended. But “the situation was saved,” Tugwell concluded later, “in a most unexpected way: an awkward waiter spilled a bowl of tomato soup in my lap and I was able to withdraw without dishonor.” Nonetheless, the event stuck with Tugwell: still an idealist, he could not see why the Good Housekeeping lady had been so angry.
Now Tugwell did what he could before his confirmation hearings, to establish that he was a moderate. He delivered a mild and inspiring speech to Dartmouth students in which he told them that coming into the world, they would confront “not revolution but the same old system with some new changes.” Tugwell spoke too to the American Society of Newspaper Editors, on the twenty-first. The journalist Frank Kent reported that Tugwell had succeeded in his mission of taming the press: “He buttered the editors until they glistened like greased poles in the sunshine.” Tugwell’s point, though, was a real one: there was no treason in being an economic planner.
Then suddenly it was May, and Mellon’s turn again. Homer Cummings charged that Mellon had earned $9.2 million in 1931, not the $6.8 million that Mellon claimed. Sidlo settled. But Mellon, normally quiet, struck back, accusing Cummings of a “campaign of terror” designed to railroad the jury in Pittsburgh into indicting Mellon. Mellon had not underpaid his taxes, as Cummings was suggesting, Mellon’s lawyers said. He had overpaid them, and would now appeal for a refund. On May 8, the grand jury in Pittsburgh refused to indict Mellon. “Not a true bill,” someone in the jury room—probably a juror—wrote on the government’s charges that were handed back to the judge. But for the administration, the event was not entirely a loss: prosecutors figured that in the eyes of the country, even publicizing Mellon’s income would hurt him. The same day that Mellon went free, Insull gave himself up as a prisoner at Cook County Jail. He moved into the hospital ward, sharing the space with thirteen-year-old George Rogalski, who had confessed to kidnapping a two-and-a-half-year-old girl. The papers reported that a crowd of 3,000 had watched Insull enter.
Meanwhile, Morgenthau, whom Roosevelt had just made treasury secretary, was not planning to give up. When newspapers criticized the assault on Mellon, Jackson had turned to Morgenthau to ask whether the prosecution was worth it. As Morgenthau recalled the exchange, he commented, “You can’t be too tough in this trial to suit me.” Jackson then jumped up, exclaiming, “Thank God I have that kind of boss.” Morgenthau had then gone one better: “Wait a minute. I consider that Mr. Mellon is not on trial but Democracy and the privileged rich and I want to see who will win.”
The fury surprised some of Roosevelt’s earlier allies. James Warburg, the departed financial adviser, was in the process of preparing and publishing two books pointing out the economic errors he felt Roosevelt had made—The Money Muddle, which came out that May, about the gold standard, and another, It’s Up to Us, a counterattack on New Deal economics. The Money Muddle quickly became a best seller. Now Warburg thought about broadening his arguments—would Roosevelt stop at nothing? Ray
Moley had taken his distance and left the administration. He started his own weekly magazine, Today, financed by Vincent Astor and Averell Harriman. He still admired Roosevelt, but was baffled at the inconsistencies. He later would write his own, softer version of Warburg’s analysis, saying that the surprise at beholding Roosevelt “arose chiefly from the wonder that one man could have been so flexible as to permit himself to believe so many things in so short a time. But to look upon these policies as the result of a unified plan was to believe that the accumulation of stuffed snakes, baseball pictures, school flags, old tennis shoes, carpenter’s tools, geometry books and chemistry sets in a boy’s bedroom could have been put there by an interior decorator.”
Tugwell for his part was still in the game, anxious about his confirmation hearings for the undersecretary post, scheduled for June. In March, Congress had turned against Roosevelt for the first time and supported the American Legion, when it overrode his veto of legislation increasing government employees’ pay and veteran pensions. Like all of the brain trusters in Washington, Tugwell had not appreciated the level of pressure in Washington until he experienced it. Keeping his family happy while he was always at work was a problem, especially since he was emerging as the favorite target. It didn’t help matters that he had taken a salary cut to leave Columbia. As assistant secretary of agriculture, Tugwell was responsible for enforcing the Pure Food and Drug Act. In early June, the New York Times got a hold of a tiny but painful story: Sometime at the beginning of the year, Tugwell had been forced to fine his own father. The agriculture department had determined that the canning firm of Tugwell and Wiseman—Tugwell’s father, Charles, was a partner—had mislabeled cans of grapefruit and orange juice in a “false and misleading” way to disguise the fact that sugar had been added to a product labeled natural. For Tugwell, who adored his parent and knew so much about the man’s financial struggles, the headline must have been bitter: “Tugwell Fines Father.”