The Enron of the 1920s

Louis Proyect lnp3 at
Tue Dec 4 09:00:41 MST 2001

(I posted this in February)

Until recently whenever the subject of "deregulation" came up on
television, my eyes tended to glaze over. It was typical McNeil-Lehrer
fare, usually some liberal Democrat or PIRG staffer facing off a Texas
Congressman named something like Bob Clyde Wyatt Junior who argued that
unless the government got out of the way of "bidness," the economy would

All that changed when the rolling blackouts began in California this winter
leaving millions of people without electricity. That phenomenon has
triggered a lot of discussion, with rightwingers arguing that the problem
is that the deregulation did not go far enough and liberals calling for a
return to control of the utilities and the power companies that supply them.

In California, the utilities, which are still regulated, sell to the public
as has been true traditionally. However, the companies that supply the raw
power--the wholesalers in effect--are totally unregulated and may not even
be located in the state. These private, unregulated suppliers appear to be
run by men like the character Harry Lime in Graham Green's "The Third Man"
who made a fortune selling tainted penicillin in post-WWII Vienna.

In keeping with Graham Green's sense of skullduggery, we discover
conspiracies galore in California, or at least intimations of such. When I
posted an item to the Marxism list from the computer trade press alleging
that the blackout is tied to a spike in Internet electricity usage, Michael
Perelman replied that this was disinformation spread by the coal companies!
At least nobody can blame it on the Communists any more.

Over the past week or so, as I have begin to think more and more about
these issues, a number of questions began to take shape. First of all, why
would the ruling class allow such a threat to the ongoing stability of
capital accumulation take place? Wasn't it foolish to allow greedy,
essentially small-time power companies get in the way of the functioning of
Silicon Valley, agribusiness, the entertainment industry and everything
else that is synonymous with California? Was it possible that the whole
thing was just meant to scare the state into anteing up more money for
power? If so, what was the answer? More regulation in the Ralph Nader vein?
Or was it possible that the changes taking place in California were
symptomatic of deeper changes in the capitalist economy, *not* amenable to
policy review or reform?

It seemed that many of these developments lent themselves to Jim O'Connor's
"Second Contradiction" thesis, notwithstanding his erroneous conviction
that these kinds of destabilizing events in the public arena will in
themselves prove sufficient to jar the ruling class into structural reform.
This, after all, is a ruling class that risked nuclear war with the USSR in
order to regain control of sugar and tobacco assets in Cuba. Sort of like
cutting off your nose to spite your face.

So to answer those questions, I am embarking on a series of posts examining
the whole "deregulation" question, with looks at least these specific
areas: transportation, communications, public utilities and finance. More
topics may be added as I become more familiar with the terrain.

In this first post I want to look at the historical background which led to
regulation itself. Much of the data is derived from Daniel Yergin's "The
Commanding Heights", a 1998 Simon and Schuster book that is fairly
intoxicated with the whole movement toward "neoliberalism" and
"globalization". Although Yergin's ideology is completely false and
obnoxious, he does at least come up with some interesting background
information, unlike the awful Thomas Friedman of the NY Times, another
neoliberalism/globalization cheerleader, who hasn't had an interesting
thing to say in the past quarter century. He seems to be vying for the A.M.
Rosenthal memorial chair.

>From Yergin we learn that the first attempts at regulation originate with
the Interstate Commerce Commission of the late 1800s, an attempt to reign
in the railroad industry which had virtually on its own created the
populist radicalization. To counteract the robber barons, a board of 5
commissioners were elected to staggered six-year terms. This effort was
supported by figures such as Theodore Roosevelt, who was the first to use
the term "muckrakers", borrowed from Bunyan's "Pilgrim's Progress."

A key figure in the early days of regulation was "the people's lawyer of
the Progressive Era," Louis Brandeis. Brandeis was not that impressed with
Teddy Roosevelt, whom he regarded as being in favor of "regulated
monopoly", while he was in favor of "regulated competition". Needless to
say, such figures never considered removing the source of the evil: private
ownership of the means of production.

Regulation fell somewhat out of favor during the 1920s, the so-called "Jazz
Age", which was not unlike our own greed-infested, philistine 1970s, 80s,
90s and on, mingling disco, rap and other escapist popular art forms with
worship of real estate, mutual funds and situation comedies. Even Lincoln
Steffens, the best-known muckraker, got on board, declaring that "big
business in America is producing what the Socialists held up as their goal:
food, shelter, clothing for all." One might regard Steffens as a kind of
premature market socialist.

All of a sudden capitalism became less fashionable after the Great Stock
Market Crash of 1929.

Perhaps no more apt symbol of the excesses of 1920s capitalism was one
Samuel Insull, the Michael Milken of his day. Insull, like the sharks in
present-day California, built a complex and bewildering corporate pyramid
out of power utilities that left investors penniless and consumers in
misery. His chicanery gave birth to a word "Insullism" that inspired John
Dos Passos to devote a section to him in the final pages of "The Big
Money," the concluding installment in the great USA trilogy:

"Samuel Insull landed in America on a raw March day in eighty-one.
Immediately he was taken out to Menlo Park, shown about the little group of
laboratories, saw the strings of electriclightbulbs shining at intervals
across the snowy lots, all lit from the world's first central electric
station. Edison put him right to work and he wasn't through till midnight.
Next morning at six he was on the job; Edison had no use for any nonsense
about hours or vacations. Insull worked from that time on until he was
seventy without a break; no nonsense about hours or vacations. Electric
power turned the ladder into an elevator.

"Young Insull made himself indispensable to Edison and took more and more
charge of Edison's business deals. He was tireless, ruthless, reliable as
the tides, Edison used to say, and fiercely determined to rise.

"In ninety-two he induced Edison to send him to Chicago and put him in as
president of the Chicago Edison Company. Now he was on his own. My
engineering, he said once in a speech, when he was sufficiently czar of
Chicago to allow himself the luxury of plain speaking, has been largely
concerned with engineering all I could out of the dollar.

"He was a stiffly arrogant redfaced man with a close-cropped mustache; he
lived on Lake Shore Drive and was at the office at 7:10 every morning. It
took him fifteen years to merge the five electrical companies into the
Commonwealth Edison Company. Very early I discovered that the first
essential, as in other public utility business, was that it should be
operated as a monopoly.

"When his power was firm in electricity he captured gas, spread out into
the surrounding townships in northern Illinois. When politicians got in his
way, he bought them, when laborleaders got in his way he bought them.
Incredibly his power grew. He was scornful of bankers, lawyers were his
hired men. He put his own lawyer in as corporation counsel and through him
ran Chicago. When he found to his amazement that there were men (even a
couple of young lawyers, Richberg and Ickes) in Chicago that he couldn't
buy, he decided he'd better put on a show for the public;

"Big Bill Thompson, the Builder:
punch King George in the nose,
the hunt for the treeclimbing fish,
the Chicago Opera.

"It was too easy; the public had money, there was one of them born every
minute, with the founding of Middlewest Utilities in nineteen twelve Insull
began to use the public's money to spread his empire. His companies began
to have open stockholders' meetings, to ballyhoo service, the small
investor could sit there all day hearing the bigwigs talk. It's fun to be
fooled. Companyunions hypnotized his employees; everybody had to buy stock
in his companies, employees had to go out and sell stock, officeboys,
linemen, trolleyconductors. Even Owen D. Young was afraid of him. My
experience is that the greatest aid in the efficiency of labor is a long
line of men waiting at the gate."

In an attempt to forestall proletarian revolution, all sorts of measures
were adopted by FDR's New Deal. Some of these fell in the category of
social welfare, while others were in the regulation vein embraced by his
uncle Theodore at the turn of the century. The New Deal considered
regulation a lesser evil to nationalization, which was generally the
solution backed in countries where there was a strong labor movement and
working class parties.

One of the first targets of the regulators was the finance industry, which
was widely seen as the cause of the Great Crash. So the Securities and
Exchange Commission (SEC) was created and Joseph Kennedy, the bootlegger,
slumlord and financier-thief, was put in charge of it. When critics
complained that Kennedy (father of Jack, Robert and Ted) was a master
speculator, FDR blithely responded that it was all to the good, since
Kennedy knew the tricks of the trade. Later on Ted Kennedy would follow the
example of his father by using his senatorial powers to deregulate
transportation. In either case--regulation or deregulation--a particular
ruling class family would find itself looking after the interests of the
class as a whole.

Overseeing the creation of the SEC was one James Landis, the son of
missionaries, who became one of the "prophets of regulation" in the words
of historian Thomas McCraw. After designing the SEC, Landis moved on to
create the Public Utility Holding Act of 1935, which laid the groundwork
for the Federal Power Commission, at whose doorsteps the current crisis in
California can be placed. The SEC and the FPC were soon joined by the FCC
(communications) and Civil Aeronautics Board.

Landis explained the purpose of all these regulatory commissions in "The
Administrative Process," a bible for regulators. They would in effect
constitute a fourth branch of government, designed to protect the public
interest against predatory corporations. Not only would they protect the
capitalist system from the shocks and abuses of individual corporations,
they would help the ruling class foster the illusion that solutions to
working people's problems could be forthcoming short of the adoption of
socialism. As FDR said, "I am against private socialism as thoroughly as I
am against governmental socialism. The one is equally dangerous as the
other; and destruction of private socialism is utterly essential to avoid
governmental socialism."

Louis Proyect
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