What were the results of the victory of government power in the 1930s?
What were the results of the victory of government power in the 1930s?
W e can work with them.
That’s the attitude of young business toward Washington — especially new, superstar businesses.
Euphoric after the exponential growth of their enterprises, such entrepreneurs just can’t imagine they won’t succeed in convincing Washington to leave them alone to grow some more. These can-do heroes tell themselves they can even teach Washington a thing or two.
Hence the actions of LinkedIn founder Reid Hoffman recently. First, Hoffman donated $10 million to the Democrat presidential campaign. Then, Hoffman proffered his advice: Rotate out Lina Khan, chair of one of Microsoft’s regulators, the Federal Trade Commission. Khan, Hoffman allowed, was “waging war on American business.”
What emboldened Hoffman to speak truth to power when everyone else cowers? His own power. The prospects of his recent artificial-intelligence work at Inflection AI, or his venture-capital firm, Village Global. The healthy earnings that Microsoft, LinkedIn’s parent, announced last month might have something to do with it. Maybe Hoffman tells himself that he’ll fare better than his predecessors, including Bill Gates, who found himself mired in a pointless antitrust suit brought by the Justice Department of a moderate Democrat, President Bill Clinton.
Still, even if Hoffman secures his objective — prevailing over Senator Bernie Sanders and labor unions, who promptly sought to block his drive for a Khan ouster — his new industry won’t win the right to grow, or fail, as it sees fit. No matter what price the industry pays for comity. Companies like Hoffman’s are just good enough that the government can’t resist attempting to break them, over and over.
That at least is the evidence from a recent book on the industry that once boasted more potential than LinkedIn, Microsoft, or even AI today: utilities.
As Richard F. Hirsh documents in Powering America’s Farms: The Overlooked Origins of Rural Electrification, this story starts with the tremendous, sudden expansion of long-distance power transmission. In 1917, only 24 percent of all dwellings enjoyed electric service. By 1925, thanks almost entirely to private companies, that share would surge past 50 percent, and by 1930, the first full year of the Great Depression, the level was 68.2 percent. Throughout the 1920s, the prices consumers paid for wattage dropped as well.
This feat was achieved by a mix of scientific and corporate-governance innovators. Part model citizen, part genius, part fool, and part rogue, these innovators were themselves a mix. Innovators always are.
An early example of such a figure, though Hirsh doesn’t develop this part of the story, was Sam Insull, an early utilities titan in Chicago. Telling himself he was offering a super-pension to his employees, Insull gave or sold shares in company stock to workers. He leaned on employees to show their loyalty by investing in his projects, and even handed out commissions when they managed to lure friends into purchases. Thousands of outsiders bought Insull’s shares as well. In the strong market of the 1920s, such purchases appeared to assure these investors a comfortable retirement. In the 1930s, however, Insull scrambled to stay liquid, diverting money from one investment to another. No matter: Plunging with the stock market, shares in Insull’s holding companies became worthless. The voice of the disappointed shareholders was the opera diva Rosa Raisa, who publicly portrayed Insull as a kind of Bernie Madoff. The soprano had given this “god of American business” hundreds of thousands to invest, she told the papers, and now that money was gone.
Still, as Insull’s biographers Forrest McDonald and John Wasik show, Insull was no Madoff. Surveying the great balance sheet of history, these authors point to evidence that Insull’s achievement offset much of the shareholder disaster. For Insull not only divined earlier than others the imperative of establishing a grid, but also managed to raise the capital and build one, thereby lighting up Chicago while other cities still remained in the dark.
As the 1930s moved closer, dynamos like Insull looked forward to doing more. With a temerity they would later rue, they proposed “a superpower network of nationwide scope.” In the early 1920s, observers blamed utility companies. Commentators noted, accurately enough, that contempt for the farmer predominated in the fast-moving business crowd generally. Rural America had once been prosperous America, and farmers were regarded as the nation’s noblest citizens.
But by the Roaring Twenties, farmers were perceived as stuck in the 19th century, a population that had morphed, in the words of historian David Danbom, from “backbone to backwater.” Farms operated on horses, steam, and gasoline. The farmers prized their own ways and mocked the fast-talking businessmen. For that too, they earned the city operators’ contempt. Commented an editor of Wisconsin Farmer magazine: “Woe to the conscientious objector in agriculture who persists in growing whiskers of wearing overalls to the bank. Open derision is the share of him. . . .”
But snobbery was the least of the obstacles to wiring America’s vast farm territory. Utilities were a capital-intensive and risky business. Companies need to spend upfront, building power stations and laying lines. The price of that upfront investment moved yet higher in rural areas, where wiring just two farms can mean laying miles of additional lines. Profits would have to come later, when farmers took advantage of electricity.
But the utilities quickly discovered that the farmers who did pay, or help pay, to get an electricity line to and across their land used it merely, as Hirsh reports, “to hang a 50-watt bulb.” Prices for commodities dropped dramatically in the 1920s. Farms were struggling. One way out was to make farms more productive, eking out a profit even at lower prices. Yet some of the equipment that would generate such productivity gains at farms had not yet been invented.
“There is not enough electrical machinery developed at the present time which the farmer can use profitably to make it possible for him to become a large consumer,” commented the author of a circular produced by the University of Wisconsin’s College of Agriculture in 1923.
The Bezoses and Hoffmans of a century ago swung into action to put into place the pieces needed to extend the grid further into farming country. First, they crafted holding companies and joined forces to raise the necessary capital. The star actor was Wendell Willkie of Commonwealth & Southern, incorporated in 1929 and parent to three electric holding companies operating in multiple states. Without much evidence, Hirsh classes Willkie as a rogue. But Willkie saw himself as a new progressive, as Hoffman sees himself, and the opposite of the Insull caricature: The efficiencies of his holding companies would inevitably bring the price of power down in the South.
Willkie’s firm and others invested millions on the demand side of the utilities equation. Hirsh, to his credit, showcases a key institution in the undertaking: the Committee on the Relation of Electricity to Agriculture, or CREA, established by the utilities industry in 1923. The CREA, a kind of local and private version of the alphabet institutions that would come with the New Deal, funded engineers at colleges, farm associations, and governments, mostly local, in a great campaign to invent, upgrade, build, advertise, and fund machines to amp up productivity at farms. This would, it was said, get “agriculture a place in the business world.”
Hirsh provides a lovely study of Minnesota and Wisconsin, where local committees under the auspices of the CREA found ways to both encourage invention and bring electric incubators, milking machines, and electric plows to farms. There were also improvements to the farmhouse itself, such as ranges and irons. “More light, more eggs,” read a GE advertisement that showcased the increased productivity of the lighted henhouse.
Soon officials didn’t have to advertise. The results spoke for themselves. Before electricity, 40 percent of infant pigs died; after the arrival of electric heaters, the piglet mortality rate was only 3 percent. In Virginia, a farmer installed electric lights to trap tomato worm moths, cutting dramatically damage to his tomatoes and increasing revenues by $2,000 to $4,000. There were some flops. Electric plows proved a bust, gas powered tractors proved better. What mattered was that the general gains to farmers were real, and that these Tocquevillean projects — companies and locals improving their own lot — were the ones causing them.
Naturally the power trusts, as the utilities giants were known by skeptics, met with harsh criticism. Their efforts with machines and appliances were trashed as a cynical venture crafted to addict farms to electricity. When the Depression hit, some of the complex utilities failed, Insull’s most spectacularly. In a creepy line, presidential candidate Franklin Roosevelt promised that, if elected, he would punish “the Ishmaels and the Insulls, whose hand is against every man,” a reference to the beleaguered Insull, who would spend his old age in court. Monopolies and price gougers would be obliterated. One of President-elect Roosevelt’s first moves was to moot a vast expansion of government involvement in the power business, what would become the Tennessee Valley Authority, or TVA. This vast government hydropower system would be based square in Commonwealth and Southern’s territory.
Yet younger executives like Willkie told themselves they could work with any government, including FDR’s. After all, their own records also spoke for themselves. Thanks to the CREA, utilities companies and the farmers, the share of farms electrified had already jumped from 2.8 percent in 1923 to 11.4 percent in 1933. The math suggested that farms would be about half electrified by 1938. The consumer – likewise a theme of Lina Khan – had not done so poorly. The prices that consumers were charged were trending down.
The utilities’ first move in the conciliation department was one familiar to us today: rebranding. Dropping its old trade organization on the assumption it had been tainted by the rogues, the industry established a new one, the Edison Electric Institute, Edison being a name with which even progressives could not quarrel. Holding companies would be reduced or purged, the industry promised. The Edison Electric Institute would proceed with “an attitude of frankness and ready cooperation in its dealings with the public and with regulatory bodies.” By the year Roosevelt took office, 1933, capital markets had dried up and the utilities themselves were struggling: The record shows that they raised $56 million from securities sales that year, a fraction of the amount they raised in 1929.
Willkie jumped into the role of industry ambassador. His first meeting with one of the TVA’s directors, David Lilienthal, took place at Washington’s Cosmos Club, and sounds very much like the meetings between high-tech CEOs with FTC officials or the Justice Department today. Lilienthal was already known as a progressive, having studied law under Felix Frankfurter at Harvard. Still, Willkie thought, he might start with what he and Lilienthal had in common: Both men were Democrats, both attorneys, both in the power business, and both Hoosiers. Such factors, one could imagine, would enable Willkie to schmooze Lilienthal into a deal.
Yet come September, 1933, the TVA announced its own rate schedule for its power customers, with prices set low, the idea being the TVA could force private enterprises into honest competition. The industry went along with the “measuring rod,” though it must have been tough, given its vastly reduced ability to raise its own capital. In many further meetings and voluminous correspondence, Willkie tried out on Lilienthal the logical idea of a division of labor — TVA would make the hydropower, and private companies would sell it. Willkie noted that while the TVA had cash for the moment, its initial appropriation was only $50 million. There might not be another. Over time, Willkie would pay hundreds of millions for a contract to distribute Lilienthal’s hydropower. Lilienthal would surely bite.
But Lilienthal didn’t bite. In fact, he expressed indignation. “I was shaken by his assumption that the whole TVA would amount to nothing more than selling a little power to his companies,” Lilienthal later recalled. Despite Willkie’s courtship and cajoling, an existing contract between the U.S. Army Engineers and Willkie’s Alabama Power and Light was not renewed when it expired in 1934. Instead of partnering with the utilities, as Willkie came to see over the ensuing months, Lilienthal was furiously building out the TVA.
And he had a mighty backer. For Roosevelt was a hydropower fanatic, in the way politicians have been fanatic about wind power in recent decades. Government dams were rising across the land. Lilienthal blithely pirated the private sector’s old tactic of encouraging consumers to buy appliances, and elicited from Roosevelt an executive order to fund the federal government’s entry into the appliance business. Naturally, the prices for these appliances were set remarkably low as well. Perhaps relatedly, over the course of 1934 and 1935, politicians became increasingly enthusiastic about the TVA. In 1935, both U.S. senators from Tennessee for example now backed appropriations of hundreds of millions to TVA. The TVA had pinned private utilities companies down.
Actually the administration’s was more of a pincer action, as utilities shortly discovered. For in 1935, also, initially, by executive order, the president created the Rural Electrification Administration. The REA’s ostensible purpose was to find ways to fund rural electric systems. As head Roosevelt tapped Morris Cooke, who in the 1920s, while a counselor to Pennsylvania governor Gifford Pinchot, had developed an ambitious “Giant Power” program, through which the state would take over wiring Pennsylvania. Fortunately for utilities, the Pennsylvania legislature had turned down the plan as “communistic.”
Nonetheless, the industry started out by telling itself it could get along with the REA. Cooke came on soft. In an early press conference in May, 1935, Cooke announced REA would work with private companies and, as Hirsh reports, did not expect “any trouble with companies.” Cooke also told the public that “we are not attempting to change the balance from private to public cooperation and could not do so even if we wanted to.” The utilities chose to take Cooke at his word and, that July, offered to wire about 250,000 homes in exchange for $238 million. As Hirsh points out, a comment in the New York Times in August doubtless consoled the beleaguered power executives: “As 95 percent of the electric industry is in the hands of private operating companies, the administration’s funds will be dispensed in that proportion.”
Over time, however, it emerged that Cooke too sought to supplant. “Instead of lending money primarily to power companies, the REA dispensed it to farmer cooperatives,” reports Hirsh, including ones created by TVA, such as the Alcorn Co-op, which used the federal funds that flowed to them to establish their own power distribution operations. By 1937, and after Congress had passed a law reinforcing the president’s executive order, the record was clear. Only 2.2 percent of the money the REA lent up to November, 1937 went to private companies, whereas nearly 80 percent went to the REA-stewarded co-ops. Together, the TVA, the REA, the government’s Public Works Administration, and yet another new institution, the Electric Home and Farm Authority, “swamped,” as Hirsh puts it, any resources the private utilities could marshal.
The pincer squeezed the utilities, but what downed them was a hammer. This was the 1935 Public Utilities Holding Company Act, or PUHCA, which made illegal holding companies and many other forms of governance utilities needed to raise capital. The Lina Khan role of enforcement was played by William O. Douglas of the Securities and Exchange Commission, who curated the government’s defense in cases against the PUHCA brought by the Edison Electric Institute and companies. The industry argued that the government was illegally competing with the private sector. In Electric Bond & Share Company v. Securities and Exchange Commission, the Supreme Court ruled that the utilities didn’t even have standing to make such a charge. Conveniently for the Roosevelt Administration, the court skirted the question of the constitutionality of the TVA.
What were the results of the victory of government power in the 1930s? One was that at least one aggressor in government was handsomely rewarded by the boss; in 1939, Roosevelt tapped William O. Douglas for the Supreme Court. Another was to deprive the economy of an engine of recovery, a dynamic industry that could have pulled the country forward faster, as energy innovations such as fracking did subsequent to the 2008 financial crisis. Nearly every year, after all, even in the Depression, power usage went up.
Yet another result was that the South was wired, albeit more slowly, less efficiently, and more expensively than it could have been. The innovations came more slowly; the innovators were, by and large, too busy fighting in court. The cost was as political as economic: The federal government power effort disenfranchised state and local governments, and citizens, and trained the South in the belief that good things have to come from Washington. Despairing at this new trend, Willkie entered politics as a Republican, dropping perhaps the most accurate phrase about the New Deal ever offered. The New Deal was a mere “bed time story,” Willkie said, that progressives told the public. When Willkie challenged Roosevelt for the presidency in 1940, Roosevelt moved center, turning away from wild plans for a while. That was probably beneficial — for our economy.
For the Hoffmans and Bezoses of our own time, there are other takeaways. The TVA story suggests executives should take officials’ past seriously: The young Cooke’s statements and progressive work in Pennsylvania did portend his aggressive behavior as REA head. A trap may close slowly, as the New Deal’s trap did. But close it will.
A final point from Powering American Farms is the relevance of the school of thought known as Public Choice Theory. Public Choicers hold that government never truly wants to work with companies, though it will, for a time, out of convenience. Government is neither more angelic nor more devilish than private companies, it is merely their competitor. The old Tennessee Valley Authority is still out there now, luring custom with low rates, though this time the target market isn’t dirt farmers but crypto miners. Hirsh recognizes that the story of utilities in the 1930s represents more than isolated tragedy; he calls it a “cautionary tale.” His critique, however, is itself cautious enough to suggest he wouldn’t buy the categoric Public Choice argument. Nonetheless, the evidence he offers does support Public Choice Theory. And warrants heeding, whatever befalls Lina Khan.