by
Freeman
Submitted by Comrade Walter Alter
On July 18, Senators Phil
Gramm (R-Tex.) and Charles Schumer (D-N.Y.) introduced into the Congress Federal
legislation for extreme deregulation of the U.S. power grid. The bill would take
the nation backwards, to the era of the 1920s, when very little electric power
regulation existed, and the Wall Street-City of London financier oligarchy ran
America's electric utility policy, and a good part of its economic policy, as
its own fiefdom. This contributed to the speculative orgy that culminated in the
Great Depression.
The Gramm-Schumer bill calls for the dissolution of the
Public Utility Holding Company Act (PUHCA), which was passed by the U.S. Congress
in August 1935. President Franklin D. Roosevelt, who along with other patriots
had pushed for the Act, signed it into law on Aug. 26, 1935.
The PUHCA was
passed--along with the Federal Power Act, which was also adopted in 1935--in one
of the fiercest battles in the nation's 225-year history. The Wall Street forces
demanded that they be allowed to do as they pleased, and that Federal regulation
with teeth--as opposed to the state ``supervision'' which existed at the time--was
out of the question.
During the 1920s, the financier oligarchy, led by J.P.
Morgan Bank, employed speculative ``holding companies''--such as Morgan Bank's
two big holding companies, the United Corp., and the General Electric Corp.--to
buy up, through a large number of mergers, most of the nation's electric power-generating
and transmission-line capacity. It also bought up a lot of the natural resources
that went into electricity generation, including coal and natural gas, and it
even attempted to monopolize water sources for hydroelectric power. It obtained
a hammer-lock on America's electric power generation, as was obtained over few
other economic processes in history.
But this is not just another ``resource''
or ``commodity.'' This is the supply of vital electrical energy, which heats and
electrifies homes, drives farm processes, and powers factories, a form of hard
infrastructure that is indispensable to the nation's advancement, or even continued
survival.
Under the Wall Street plan, one holding company would buy anywhere
from 50 to 300 operating companies. These companies generated electric power or
transmitted it along transmission lines; that is, they did the actual work of
altering nature for the benefit of man. Then, for speculative purposes, a new
holding company would be set up above the existing holding company. The new holding
company would put up only a small amount of its own money, but would buy a controlling
share in the existing holding company. This built in great leverage. Through manipulation,
it would collect much of the stock dividends and bond yields of the existing holding
company. It would also impose fees on the existing holding company, which would,
in turn, pass on the fees and otherwise loot the operating companies, in order
to keep the cash flowing to the top-most level of the holding companies.
This
pillaged existing physical plant and equipment. The holding companies also charged
customers higher prices. In a model of operation which is known today as ``shareholders'
value,'' the U.S. electricity and power supply physical capacity was sucked up
to transfer wealth to the swelling cancerous mass of speculative fictitious paper.
This
contributed heavily to the speculative bubble, which burst in 1929. Millions of
people who were common stockholders in the utility holding companies, lost hundreds
of millions of dollars. Between 1929 and 1935, American power production fell
by almost one-third. This decimated the economy. Despite this, the oligarchical
financiers would not give up their utility holding companies, nor their control
and use of the U.S. power-producing and transmitting system as a speculative plaything.
On
March 12, 1935, President Roosevelt sent the Public Utility Holding Company bill,
to regulate the industry, to Congress. It was sponsored by Sen. Burton Wheeler
(D-Mont.) and Rep. Sam Rayburn (D-Tex.), and after its passage, it came to be
known as the Public Utility Holding Company Act, or the Wheeler-Rayburn Act.
Writing
about this Act, Roosevelt said, ``Through the device of these pyramided holding
companies, small groups of men with a disproportionately small investment were
able to dominate and to manage solely in their own interest tremendous capital
investments of other people's money.'' Elsewhere, he accused them of ``looting.''
The Act called for breaking up the holding companies, setting the basis to pass
on the soundness of the securities issued, and along with the Federal Power Act
of 1935, setting up the regulation of the electric utilities, including ``rate-making,''
which set a policy of pricing electricity on the principle of ``parity pricing,''
as in farming. Parity means that the producer is guaranteed a price that enables
him to cover his operating costs, plus a margin of surplus for investment in new
and modernized plant and equipment. This system worked successfully for more than
60 years.
This remarkable achievement, won after one of the most intense
battles with the forces of Wall Street in history, established the fundamental
principle of the General Welfare clause of the U.S. Constitution: that the government
has the right, and the obligation, to set policies that direct credit, energy,
and, more broadly, all economic policy, to the effect of securing high rates of
scientific and economic growth, and the cognitive and material development of
current and future generations.
Now, the same Wall Street forces, having
never given up on their ``right to loot,'' are attempting to undo the achievement
of the PUHCA of 1935. Here, we learn from looking at the devastation that deregulation
and the speculative policy wrought on the U.S. power industry--and the entire
U.S. economy--during the 1920s and early 1930s. We also look at FDR's courageous
fight to regulate the industry, the benefits therefrom, and what we can apply
today.
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The Electric Power System The U.S. power industry had its roots in
the American System of Economics; it rejected the dictates of Wall Street. Thomas
Alva Edison (1847-1931) played a major role in electricity generation and transmission.
He was set on his path by the ``Philadelphia Interests,'' the nationalist faction
of industrializers, which was led by economist Henry Carey. Representing this
group, William Jackson Palmer had set Edison up in 1872 to advance the work on
the telegraph. In 1882, Edison developed the nation's first central electricity
generating station at Pearl Street in New York City. The steam-powered generator
served 5,500 street lamps.
However, the financial interests of J.P. Morgan
moved in on Edison. The Morgan firm, formed in London in the 1840s, represented
the heart of British financier designs. In 1882, Morgan had used his financial
leverage to force his way into a partnership with Edison. In 1892, J.P. Morgan
pushed Edison out of Edison General Electric Co., which Edison had helped found,
while at the same time, Morgan merged Edison General Electric with the Thomson-Houston
Electrical Co. This newly merged company soon changed its name to General Electric.
From its beginning, up through the early 1930s, the Morgan-controlled General
Electric owned a substantial interest in power-generating stations in America.
The
public power system, in which the generating and/or transmission facilities were
owned by a public institution--either of a state, city, or municipality--grew.
In 1912, there were 1,737 public power systems in America; by 1923, there were
3,066 public systems, serving one out of every eight electricity consumers. The
public systems charged often one-third to one-half less for electricity per kilowatt
hour than the private utilities--which did what they could to sabotage the public
systems.
The type of holding company which destroyed the country, and which
Roosevelt confronted, was typified by two groups: the Samuel Insull group and
the House of Morgan.
During the 1900s, if an individual bought several companies,
he would often form a holding company as a legal instrument to direct them. A
holding company need not be speculative and destructive; it could be just a vehicle
to direct companies located in several localities in one state, or in several
states.
However, the holding companies shifted their character toward speculation,
especially under the impress of the Presidency of Calvin Coolidge (1923-29). Coolidge
promoted speculation, under the influence both of his Treasury Secretary Andrew
Mellon, the patriarch of the Mellon financier interests, and of the House of Morgan.
Under the rubric of a ``return to normalcy,'' and the ``Roaring Twenties,'' the
Coolidge Presidency instituted policies that fuelled the growth of the speculative
bubble, while also destroying some sectors of the real economy, such as agriculture.
In
the electric utility industry, a takeover boom was launched: Between 1922 and
1927, the utility holding companies, swallowed more than 300 small to medium-sized
private companies, per year. The holding companies financed the takeover of the
smaller companies by issuing either new debt or new stock. The new stock issues
of the utility holding companies were snapped up. As a result, the electric utilities
could issue as much stock as they wished. During the 1920s, one-third of all corporate
financing in America was issued by private power companies. While some of this
was spent for physical expansion, during the second half of the 1920s, most of
it was spent on financial takeovers or for speculative purposes. The private electric
holding company was leading the speculative stock market boom.
The holding
company did not care about electricity generation as such, but on increasing the
flow of funds into the coffers of the Morgans, Mellons, du Ponts, and so forth.
Consider a typical holding company, which owned 100 operating companies which
generated power, to see how this worked.
The holding company bought stock
in each of the 100 operating companies, whereby it owned them. It would then instruct
the companies to pay high dividends, most of which would flow to the holding company,
which produced nothing. The cash flow would permit the stock of the holding company
to rise on the stock market, because it was showing good earnings. Based on the
strength of its stock price, the holding company would undertake a new issue of
stock, to take in even more money. All the while, the holding company's instructions
to the 100 operating companies to make high-dividend payouts, would lead to a
destruction of the financial status of the operating companies; often, this would
entail a physical looting of the companies.
This would be taken to another
level of pyramiding, where holding company E would own holding company D, which
would own holding company C, and so forth. Thus, the dividends are recapitalized
again and again, upon which the mass of fictitious stock of all the holding companies
is sustained. Further, this puts a tremendous strain on the dividends of the 100
operating companies, which are the ultimate, but limited source of the dividends
for the pyramided structure.
There was another method of looting: Have the
holding companies charge the operating companies exorbitant fees. According to
one history of the period, in 1930, the Senate Interstate Commerce Committee held
hearings in which it found that utility holding companies' servicing fees imposed
upon subsidiary companies often ``|`milk[ed]' the subsidiaries [so that] in many
instances they yielded profits ranging from 51 to 321% of the cost of the services
performed.''
This led to higher charges to the customer for electricity,
in order to support the dividends and other rates of return on the mass of fictitious
paper.
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The
Fight for the PUHAC On March 12, 1935, President Roosevelt introduced to Congress
the Public Utility Holding Company Act (PUHCA), an act with two titles, and of
which Title|I had a bombshell feature: It stated that many utility holding companies
had no useful economic function, but were largely for pyramiding (speculation).
It stated that the utility companies should voluntarily get rid of those holding
companies which had no useful function. But, should that not be carried through,
within five years, on Jan. 1, 1940, the Securities and Exchange Commission (SEC)
would be empowered to compel the dissolution of every holding company which did
not establish an economic reason for its existence. Most holding companies would
be dismantled. This was called the ``death sentence clause.'' The death sentence
caught everyone's attention.
The PUHCA had other powerful provisions. Within
Title|I, it stipulated for the utility industry, that the SEC should: regulate
securities issues and intercompany transactions, lay down the principle that a
holding company should not benefit from financial dealings with its own subsidiaries,
and demand uniform systems of reporting and accounting.
Title II of PUHCA
authorized the Federal Power Commission to integrate the utility operating companies
into regional systems on the basis of technical efficiency, not of speculative
manipulation.
Taken as a totality, what the PUHCA meant is that before a
utility holding company could issue stock and other securities, it had to register
them and be cleared by the SEC. It could no longer issue unlimited amounts of
stocks, and the level it set dividends at, had to be reasonable, and not result
in looting the capital base and operating cash flow of the company. It also could
not use fees and other devices to loot its subsidiaries. Its books had to be understandable
by outside parties, rather than a bewildering maze of transactions meant to mask
internal looting.
Supplementing the PUHCA, Roosevelt pushed through Congress
the Federal Power Act (FPA) of 1935. The FPA expanded the powers of the Federal
Power Commission to ``regulate electric utilities' wholesale rates and transactions.''
Thus, the Federal Power Commission--which, in 1977, became the Federal Energy
Regulatory Commission (FERC), but continued to execute the same function--``establishes
just and reasonable rates for the transmission and sale of wholesale electric
power in interstate commerce. It also regulates permanent interconnections of
electric utilities and promotes the adequacy of interstate electric power service.''
Roosevelt
had drawn a line in the sand: Either the Wall Street-run utility companies would
stop their criminal looting of their underlying operating companies, their giant
run-up of the utility company stock prices, their pyramiding of holding company
upon holding company, etc., and accept the setting of fair electricity prices
and the development of the physical capacity of the utility industry, or they
would be dismantled.
Faced with this choice, the Morgan-led Wall Street
forces snarled, ``No,'' they would not give up their criminal looting. They would
not accept Roosevelt's offer, because that entailed giving up their power, and
adopting a perspective of industrial development that was alien to them.
Roosevelt
knew the J.P. Morgan Bank well. In January 1933, before he took office as President,
and while he was forming his cabinet, Roosevelt wrote to an acquaintance, ``There
will be no one in [the cabinet] who knows the way to 23 Wall Street. No one who
is linked in any way with the power trust or with the international bankers.''
On
March 12, 1935, Roosevelt introduced the Public Utility Holding Company Act, sponsored
by Senator Wheeler and Representative Rayburn. The Wall Street financiers, led
by Morgan Bank, fumed with rage. John W. Davis, the general counsel of Morgan
Bank, stated before the American Bar Association that the PUHCA was the ``gravest
threat to the liberties of the American citizen that has emanated from the halls
of Congress in my time.'' In September 1935, Davis was the lawyer for the Edison
Electric Institute, the lobbying arm for the electric utility industry, when it
joined with one of its members, the American States Public Service Co., in the
first suit against the PUHCA.
S.R. Inch, president of the Morgan-controlled
Electric Bond and Share, said that the bill ``would be the nationalization of
the industry.''
A slander campaign concerning President Roosevelt's mental
health was coordinated at the highest levels, and uttered publicly. In May 1935,
at a conference of bankers, Thomas McCarter, president of the Edison Electric
Institute, stated about Roosevelt's ardent advocacy of the PUHCA: ``The President
has an obsession on this subject. It is a condition of mind that even many of
his closest associates in Washington do not understand.'' A few weeks later, before
1,200 utility executives at the Institute's annual meeting, he repeated this crack.
Privately, this rumor was being circulated in Wall Street circles. Then, the July
8 issue of Henry Luce's Time magazine gave it wide circulation, writing that Washington
correspondents were being hit with queries from their home newspaper asking whether
the President was on the verge of a mental collapse. Said Time, ``He had, according
to the tales roaring through the country in whispers, grown mentally irresponsible.
Hadn't you heard that during a press conference he had a fit of laughter, had
to be hurriedly wheeled out of the room? Why, his intimates were taking the greatest
care not to have him make a spectacle of himself. And when he heard the Supreme
Court's NRA verdict, he was supposed to have succumbed to a violent fit of hysterics.''
Wall
Street and the power industry spent $1.5 million attempting to defeat the PUHCA,
a significant sum in those days. They flooded congressmen with telegrams against
the bill. It was discovered, however, that tens of thousands of those telegrams
were forged. A Western Union manager from Warren, Pennsylvania testified before
a Senate committee authorized to investigate the matter, that he had collaborated
with a utility industry executive, in forging the names of 1,000 people from the
city directory onto telegrams, which were sent to members of Congress opposing
PUHCA.
On June 11, the Senate voted up the PUHCA by a vote of 56-32. But
in the House, a rump group, calling itself ``conservative Democrats,'' some of
whom were in active contact with the utility holding companies, refused to support
the bill. Ultimately, an amended version of the bill passed the House and was
signed into law by President Roosevelt.
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The
TVA and the REA President Roosevelt also tackled the power question in two other
exciting ways: On May 18, 1933, he signed into law the Act authorizing the Tennessee
Valley authority (TVA). It covered the Tennessee River Valley, which spanned 41,000
square miles and parts of seven states. The area was economically terribly backward,
and was overrun by the raging waters of the Tennessee River and its tributaries,
which periodically destroyed millions of acres of farmland, as well as business
and homes. The TVA provided integrated flood control, hydroelectric power, and
irrigation. It provided scientific farming, brought in industry, eliminated malaria,
conquered illiteracy, and many other achievements. One of its greatest accomplishments
is that it electrified the area, which the utility companies had been unwilling
to do. In the 1930s, before the TVA was built, the average person in the Tennessee
Valley used only 60% as much electricity as the average person in the nation as
a whole; but already by 1939, the average person in the Tennessee Valley used
1.25 times the amount of electricity as the average person in the nation.
In
May 1935, while the fight against the utility holding companies was going on,
the Rural Electrification Administration (REA) was created. The large utilities
would not string transmission lines in most rural areas, because it was not profitable,
and was indeed a money-losing proposition. The REA created cooperatives of farmers
and rural people, who undertook with the REA to construct transmission lines for
rural areas. At the end of 1934, only 10.9% of all U.S. farms had electricity,
while in the state of Mississippi, less than 1%, and in Tennessee only 3% of the
farms had electricity. As a result of the work of REA, by 1941, four out of ten
American farms had electricity; by 1950, nine out of ten.
As a result of
the PUHCA and the Federal Power Act of 1935, for the next 60 years, the United
States had the overall conditions for a steady supply of abundant energy, whose
price was falling by a modest, but important amount decade by decade. This played
a vital role in providing economic development to America, at least until the
``post-industrial'' policies introduced since 1967 seriously forced contraction.
Now,
the same Wall Street forces that ran the utility holding companies, and which
opposed the PUHCA in the 1930s, are calling for the abolition of the PUHCA, as
a keystone feature of deregulating America's power system. Those who do not have
short memories, should realize that this would take America back to a period of
speculation, rising energy prices, looting of the energy infrastructure, and destruction
of the economy.
