by Amity Shlaes
That did not, however, exclude another point in which Mellon firmly believed: any man had the right to use legal loopholes. This was the traditional common-law distinction between avoidance, which was legal, and tax evasion, which was not. And Mellon, too, might quote Learned Hand, for in Helvering, the judge had also said that there was “nothing sinister in so arranging one’s affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right for nobody owes any public duty to pay more than the law demands…to demand more in the name of morals is mere cant.”
Mellon’s argument was the same as Insull’s: to prosecute a man for doing something that was legal was not acceptable. A number of people within the Treasury agreed, quietly. One, it later emerged, was Elmer Irey of the special intelligence unit of the Treasury. Irey had gotten to know Mellon while investigating the Capone brothers of Chicago; a civil servant for many decades, he would later publish a book about his targets, The Tax Dodgers.
Yet Irey had been reluctant in this instance. “The Roosevelt administration made me go after Andy Mellon,” he told the coauthor of his memoirs. Jackson, Irey recalled, had insisted on his help: “You are qualified and I need help.” Morgenthau himself also called Irey after Irey hesitated: “Irey, you can’t be 992/3 percent on the job. Investigate Mellon. I order it.” Irey demurred, explaining that he was friendly with Mellon, who was, after all, his former boss. He also added that from what he knew of Mellon, Mellon was innocent. But Morgenthau would not relent: “I’m directing you to go ahead, Irey.” Irey sent one of his most skilled agents, Ralph Read of San Francisco, to help Jackson’s prosecution team.
Shortly, the prosecuting team scored what they considered a coup. They got Mellon to confirm that he had used five of the loopholes on his old list. Morgenthau considered this admission, made under oath, as extremely damning. “Things that the courts approved outraged the Secretary’s personal sense of justice,” the coauthor of his memoirs, John Morton Blum, noted.
Mellon had the wherewithal to defend himself, and so did Insull. The power industry generally, if not the monolith the antitrusters depicted, was still organized enough to begin a countering action. In September a few shareholders of the Alabama Power Company went to court to protest Commonwealth and Southern’s agreements with the TVA. Specifically, they asked that the court invalidate the sale of properties to the TVA. Loomis was perturbed at all the lawsuits; it was heartbreaking to see what had been a bold industry descend into perpetual litigation. He continued to withhold his talents therefore from the business sector: “He didn’t want to have to fight the world,” a relative noted. And this action seemed to work against Willkie. But while Willkie was a nominal defendant, via Commonwealth and Southern, the suit was also much in Willkie’s interest, for it sought to curtail the TVA’s authority. The Wilson Dam had been built in the name of national defense. The TVA had been permitted in the name of making a southern river navigable. Did their existence now give the government the right to litigate a takeover of the power business? The case, known later as Ashwander, might come before the Supreme Court, which could then invalidate the entire TVA.
On the last Sunday in September, Roosevelt delivered the sixth of his Fireside Chats. The talk summarized the administration’s new attitude. First, it went back and forth on the correct policy to bring about recovery. On the one hand Roosevelt rallied the country in a collective campaign, calling for the “united action of management and labor” to bring recovery and proudly pronounced that “we are bringing order out of chaos.” On the other hand he insisted that the country still counted on “the driving power of individual initiative.” The president also complained about labor unrest. He spoke about a model overseas—Labourite Britain. “Did England let nature take her course? No.” As the British press had already noted, Roosevelt said, much of the New Deal program was merely an effort to catch up to Britain’s reforms.
In addition, Roosevelt asked for time: “There should be at least a full and fair trial given to these means of ending industrial warfare,” he said in regard to the NRA. Finally, he railed against corruption—“thoroughly unwholesome conditions in the field of investment”—and made the correction of trouble a principal task of recovery.
In autumn came Insull’s moment. After posting bail, and a long summer in the Seneca Hotel on Chestnut Street preparing his statements, Insull was ready. The federal prosecutors put forward eighty-three witnesses to show that Insull had criminally defrauded shareholders. The prosecutors told themselves that the sheer volume of their work ought to convince.
But Insull was about to strike back. Called to the stand, he began, not with the structure of his business as it stood in 1930 or 1932, but with his own story. It was an American classic: a poor childhood in Britain. A period as Thomas Edison’s assistant, and then, the master’s accountant. Opportunity in Chicago. The recent failures: “My judgment may be discredited, but certainly my honor will be vindicated,” he said. The federal prosecutor, Leslie Salter, brought out Insull’s salary to embarrass him—$500,000. Insull’s attorney responded by showing tax returns that demonstrated Insull had given away more than his salary in charity in several years. When the business failed, Insull had not fled; on the contrary, he poured his own money into it. One of his problems was that he borrowed too much against his own name. The move to Europe had only come later. To the Chicago jury, which had known Insull longer than the prosecutors, the story was not one of simple crime and theft, but rather of the challenges of city building.
On a Saturday afternoon in late November, the jury reported out its verdict: not guilty. Insull celebrated—and was “showered with telegrams of congratulations,” noted the Nation sourly. To the magazine, the case simply illustrated “the difficulty of sending a rich man to jail.” Still, observers in the utilities world took note. Insull might have been a rogue. He might have handed out shares in his corporations too freely. He had lost the money of thousands of shareholders. And he had used aggressive accounting tactics. But in his day he had also achieved much: lighting up Chicago, earning enormous sums for some shareholders, building the opera. The British trade journal was in fact correct: Insull had done first many of the things that Willkie was now trying at Commonwealth and Southern and David Lilienthal and Arthur Morgan were trying at the TVA. To condemn Insull was to condemn enterprise.
Still, the New Dealers were not downcast, for sentiments such as those of the Chicago jurors toward Insull were not hurting the Democratic Party. On the contrary, the November election of a few weeks before had been a Democratic sweep, strengthening the number of Roosevelt’s party allies in Congress. The days after the election found Democrats claiming 9 new senate seats, giving them a 69-seat majority. The crucial two-thirds majority was in Democratic hands. In the House, the early returns showed Democrats holding 318 seats compared with the Republicans’ 99, and later it would emerge that the Democrats had done even better. In Illinois, the land of Insull and Lincoln, Democrats had gained several congressional seats. Congressman Oscar De Priest, the sole black member of Congress and a Republican, was defeated. Voters selected to replace him with another black man, the Democrat and Harvard graduate Arthur Mitchell. The switch reflected a national trend: African Americans were becoming Democrats in great numbers for the first time since the Civil War. Pennsylvania elected a strong advocate of organized labor, Democrat Joseph Guffey, to the Senate, displacing Mellon’s old spokesman, the pro-tariff Senator Reed. Where the New Deal was faltering economically, it was gaining politically. Roosevelt’s radio voice was succeeding.
Relieved, the prosecutors regrouped. They noted that in the lower courts, NRA lawyers were winning some victories. The point at which the Supreme Court must affirm the NRA’s constitutionality was drawing near. That month, just before the election, a federal jury at the courthouse in downtown Brooklyn had convicted the four Schechters. It was the first felony case that the Justice Department won under the NRA, and Walter Rice, the special federal prosecutor,
was triumphant, calling it “a sweeping victory of immense importance.” The brothers faced two-year sentences. Schechter was in the running to become the Supreme Court test case.
Tugwell relaxed with the president in Warm Springs, writing in his diary on November 23, “I spent nearly the whole day with FDR yesterday. Went to the pool and swam, he driving his own car. Went back and had lunch with him and talked until five in the afternoon.” He was just back from a trip to Italy, and had got the chance with Mussolini that he had missed with Stalin. Like other Americans before him—Thomas W. Lamont, for example—Tugwell was impressed. Their meeting had been in a large rectangular room in which Mussolini sat at one end, positioned to intimidate. But, Tugwell noted to himself, the dictator had got up to meet him halfway. Now Tugwell and Roosevelt talked about international economics, both concluding that the United States could not be too optimistic about foreign trade.
“I felt again,” Tugwell wrote of Roosevelt in his diary, “as I have before that my mind runs with him as with almost no one I ever knew before,” adding: “I wish I had more wisdom…. I think he overestimates my intelligence; he couldn’t overestimate my loyalty and affection.” Even the small jokes that Roosevelt made at his expense only made him feel closer. Just before Christmas, cabinet members dining at the White House would comment on the poor quality of the champagne; the president later asked Harold Ickes whether he had “ever tasted worse champagne,” then pointed out, laughing, that it was domestic champagne from New York, recommended to Mrs. Roosevelt by Rex.
In Washington several hundred social workers, labor leaders, and economists gathered at a conference on economic security. Frances Perkins declared that the country was being swept “by a wave of enthusiasm for the President’s promised program of social security.” Among those attending was Paul Douglas of Chicago, who presented a program for unemployment insurance that would pay benefits for twenty to twenty-six weeks. Roosevelt threw some cold water on the meeting when he rejected “fantastic” schemes and focused narrowly on plans for unemployment insurance such as Douglas was proposing. Still, the mood was more hopeful than it had been even in 1932.
On November 10, Roosevelt appointed Marriner Eccles, the Utah banker, as governor of the Federal Reserve Board, the top Washington position at the Fed. Accepting the job, Eccles, like so many Republican progressives before him, declared allegiance to Roosevelt and his party. “Previous to the last national election, I had always supported the Republican national ticket,” Eccles said, “but I was not satisfied with their policies, which were not sufficiently liberal and progressive to meet changed conditions.” “Governor Eccles will run the Fed as the White House wants it run,” wrote Time’s editors, always to the point.
“Americans are following Roosevelt…as the Israelites followed Moses,” concluded the London Morning Post, abashed to see such behavior in the world’s most independent people. Eccles envisioned new Federal Reserve legislation, which indeed would become law the following year. Under the new Federal Reserve Act, monetary officials in Washington would control the money, supplanting New York. The law would give the Washington Fed the power to buy and sell bonds and therefore to control the quantity of money and credit in a more formal way. As chief in Washington, Eccles would also get a new title: he and subsequent Federal Reserve heads would not be governor. They would be chairman.
As for Willkie, he was now not sure whether to fight publicly. His company’s stock was dropping at 1¼. On the one hand Roosevelt was making his threats more explicit than before. On November 18 the president traveled to Tupelo—the TVA’s first municipal customer—to announce that what was being done here was “going to be copied in every state of the Union before we get through.” Where was Roosevelt’s mention of the fact that TVA was heavily subsidized? On the other hand the president was trying to reassure industry. After the election—only days after—Roosevelt wrote to Newton Baker, “One of my principal tasks is to prevent bankers and businessmen from committing suicide!” The president issued a round of invitations to power executives, and there was one for Willkie.
The Commonwealth and Southern president duly attended his meeting, greeting the president with a reminder that Commonwealth and Southern was the president’s power provider in Warm Springs: “We give you good service, don’t we?” Roosevelt announced that his talks with the industry had been “entirely amicable.” There was an element of satisfaction there. Now that Roosevelt had two more years, it was just as well that Willkie was dealing not only with Lilienthal but also the ultimate arbiter of utilities’ future in the United States.
After his meeting, Willkie wired Edith, who was an old critic of FDR’s: CHARM EXAGGERATED STOP I DIDN’T TELL HIM WHAT YOU THINK OF HIM.
As 1934 moved toward a close, Willkie confronted two realities. The first was that as much as he wanted to fight back more openly, he could not. It would be irresponsible toward his shareholders to declare war against Lilienthal; he would then have “blood on his hands,” as he had told Lilienthal. Both Willkie and Commonwealth and Southern simply had too much to lose. They had to work out more deals.
The second reality was that in the battle between David and Goliath in this particular industry—utilities—he was not, in the end, going to find a way to ally himself with the Davids. Uncomfortable as it made him feel, Willkie had to admit that he was finding himself siding with the monster.
the chicken versus the eagle
November 1, 1934
Unemployment (November): 23.2 percent
Dow Jones Industrial Average: 93
THERE WAS ONE MAN WHO HAD NOTHING left to lose. He was Martin Schechter of the Brooklyn Schechters, the chicken butchers whom the Justice Department was prosecuting for violating the NRA. On November 1, the day they lost the first time in court, Martin and his brothers decided that they, the chicken, would fight back against the Blue Eagle. Within a year, their story would move from obscurity to the center of the debate about the New Deal.
More unlikely heroes than the Schechter brothers of East Fifty-second Street and Rockaway would have been hard to find. Unlike Willkie, they had neither a legal education nor corporate money behind them. Unlike Insull, they were unknown and unable to purchase city officials. Unlike the wealthy East Siders of their city, they had no social status to fall back on. Unlike their opponents in the Justice Department, the Schechters were inconsistent, almost comically ambivalent, about their case. These were not board members, not stock market players, but rather slaughterhouse men who served a market as humble as they were. Their English was laughable.
The name Schechter actually means “ritual butcher” in Yiddish. It derives from the Hebrew word for the same thing, shochet. Centuries before Martin and his brothers opened their business, both terms were used to describe those qualified to perform ritual slaughter of animals as required under Jewish dietary law. The brothers’ parents, David and Molly, had brought them over from Europe. The 1930 census, by Herbert Hoover’s old Commerce Department, says they were from Poland. Sam, Alex, and Aaron, who was also known as Abe, are on the list. The children were born in Hungary, while the family was in transit to the United States. There was also another brother, Martin, though he was not listed with the family in the census. David, the father, gave his profession as “rabbi” to the census worker, who in turn described his workplace as a “church”—this was the period when Americanization meant Christianization. In those years the term “rabbi” had a looser meaning than it does today; the fact that David was a rabbi could have meant that he was ordained, and it could have meant that he was merely a pious scholar. Still, the label meant that David Schechter ran a religious household.
For several years the brothers operated two firms: ALA Schechter Poultry Corp. and the Schechter Live Poultry Market. Their product spanned the range of poultry: leghorn fowl, colored fowl, heavy “fancy Indianas,” and broilers that could cost as much as 27 cents a pound. Chickens were shipped to New York markets from across the country. There the Sche
chters bought them, then slaughtered and sold them, mostly to retailers. In short, the Schechters were middlemen who took their cut. This was just the sort of economic activity of which Tugwell disapproved and against which the Agricultural Adjustment Act tax had been directed.
The men operated a kosher business: the value in their product was that it conformed to Jewish dietary law. They employed rabbis and Jewish ritual slaughterers, shochtim. As was appropriate, these workers observed the Sabbath, halting work on Friday afternoon and returning only after sundown on Saturday. Kashruth, the principle of keeping kosher, was about religion, but it had an earthly purpose as well. It had long served as a primitive but effective health code—one of the first health codes. Sorting out dangerously unhealthy animals of any sort was a core principle of kashruth; the Jewish proscription against eating pork probably came out of caution about trichinosis, a disease that often affected pigs in Europe and here.
The main fears were simple infection and tuberculosis. Everyone knew someone who had died of TB—from the children on the streets of Brownsville to Benjamin Strong, the New York Federal Reserve head whom the disease felled in the late 1920s. The word glatt in the phrase “glatt kosher” meant “smooth,” referring to the desirable smoothness of the lung of the nontubercular animal. Tuberculosis was mainly passed through meat and milk, but businesses like the Schechters’ were also cautious about poultry, which could pass along infection. Part of the value of their product was the health guarantee of the shochtim. Unhealthy birds the shochtim ceremoniously discarded. Customers, whether they were retailers or families, also had the right to choose their birds, and this in turn ensured that everyone involved had a chance to determine whether the product was as healthy as possible. Kashruth was not a modern health code, but it was a health code, a ghetto version of the Good Housekeeping Seal so angrily defended at the White House lunch by Tugwell’s table neighbor.