Forgotten Man, The (26 page)

Richberg and the Justice Department were on the hunt for a test case through which they might prove that the National Recovery Administration was constitutional. They had not yet settled on a case, or even an industry. One possibility that emerged over the course of 1934 had to do with the oil code, one of Ickes’s babies. Ickes, like Lilienthal and Frankfurter, tended to see life in legal terms. When markets didn’t cooperate with legal precepts, that was because they were being insufficiently policed. He had discovered that at numerous points oil was being extracted clandestinely and illegally, outside his NIRA production quotas, and sold at prices that undercut the policy to force prices upward. He was outraged and opened a campaign against the oil bootleggers, describing them as possessed of a “sly animal cunning.” He also sent investigators all over East Texas to catch the violators—the purveyors of illegal “hot oil.” Hot oil, officials at the Justice Department believed, might be best positioned to win them a victory in the Supreme Court. One of the principal aims of Justice at this point was to prove that the NRA did not violate the commerce clause, which confined Washington’s regulatory authority to interstate commerce. Oil traffic was clearly interstate activity.

And hot oil was not the only violation that officials were reviewing. There was the case of William Elbert Belcher, who had refused to enforce the timber code at his lumberyard in Centerville, Alabama. Belcher had paid his workers less than the 24 cents an hour that the code required—perhaps only 7½ cents.

Poultry was a sector that many of the New Dealers expected to be transferred to the public or cooperative sector. Tugwell had sought to distract Roosevelt from the burden of office by taking him out to an experimental government center at Beltsville, Maryland. There, only ten miles from the White House, the government maintained swine, cattle, and “a large poultry breeding operation.” The poultry trade of course was known as a messy one—distasteful to the eye, smelly, and on the East Coast, often run by Jewish immigrants who
ended up in court for corruption, crime, or worse. Animal slaughter was also a topic made for headlines. In these days, in which antibiotics were unknown, there always remained the possibility that a merchant who did not conduct his business properly might sell fatally tubercular meat or milk. And clean food was square in Tugwell’s “bailiwick.

A young Harvard lawyer, Walter Lyman Rice, had already successfully prosecuted a member of the New York chicken industry for violating antitrust provisions. His case had made it to the Supreme Court, which had determined that the live poultry business fell under the jurisdiction of federal laws and was covered under the Commerce clause. The NRA lawyers began to strategize about chickens: if government attorneys could target a poultry dealer—and show, in effect, that he was endangering consumer health by violating NRA rules—that would put the virtuous qualities of the NRA in the best possible light.

Beginning in June, inspectors had begun visiting ALA Schechter poultry, a slaughterhouse in Brooklyn, looking for poultry code violations and taking notes. One of the inspectors later confirmed in testimony that the case had been set up in order to clean out the poultry trade, known for its corruption: “We are going to get an indictment and convict the Schechter brothers and that will be a whip over it,” he had been told. Over the course of the summer inspectors swarmed the Schechters’ business. They looked for, and found, evidence of violations of the 40–48-hour workweek mandated under the NRA; they also found that the Schechters, like Belcher, had not always paid the minimum wage mandated by the bill.

By July, or just a few weeks after the first visits from the code officials, a grand jury had indicted the Schechters on not one or two but sixty counts. Some of charges were criminal ones, which meant they would not only have to pay fines if convicted, but also might have to serve time in jail. Among the charges were that they had threatened violence against agents and inspectors; that through illegal transactions they had burdened the freedom of interstate commerce and
were subject to federal regulation; and that they had also violated NRA code rules involving hours and pay. The prosecutors said that the Schechters had violated code rules about the selection of chickens and that they had, in the same weeks as the inspector’s visits, “knowingly, willfully and unlawfully sold for human consumption an unfit chicken” to a buyer, a man named Harry Strauber. Finally—and this escalated matters—the Schechters were charged with conspiracy to flaunt the code. The case would come to be known as the Sick Chicken case, and would be heard now, in the autumn.

In order to investigate the way that cases such as
Belcher, Schechter,
or Andrew Mellon’s demanded, government agencies needed staff. They also found that prosecution became easier if they revised the rules of the game. In the instance of Insull, that meant proving crime and fraud in his bankruptcies. Insull argued that this amounted to illegal retroactive action; prosecutors were imposing current law and sensibility on a different time. As he told his State Department escort on the
Exilona,
“What I did, when I did it, was honest; now, through changed conditions, what I did may or may not be called honest.” He and Mellon had commiserated—Mellon had written him, he told the escort, to sympathize.

When it came to Mellon, the rule changing involved the definition of what constituted illegal tax behavior. It also meant creating staff to find such behavior. At the Treasury, therefore, Morgenthau acted, dramatically increasing the number of tax officials. Between 1934 and 1935, the staff at the Bureau of Internal Revenue rose to 16,000 from some 11,000.

The New Dealers were comfortable with all these changes. Morgenthau was beginning to feel at home in his office, and was thinking of putting his own stamp on Mellon’s old department. In October 1934 he announced the establishment of a Treasury Department Section of Painting and Sculpture, its purpose to “secure suitable art of the best quality available for the embellishment of public buildings.” Mellon collected classical art; Morgenthau would collect more modern art—and do it on behalf of the American people. Mellon
had disliked tax loopholes. Morgenthau disliked them too, but wanted what Mellon had not—to punish taxpayers for using those loopholes, even when government had created them intentionally.

When it came to taxes, the law was shifting in Morgenthau’s favor. In a case involving stock shares,
Helvering v. Gregory,
Judge Learned Hand that year found that it was illegal to use a corporate device for tax purposes for which it was not intended. Even Justice Sutherland was going along. He would affirm the finding, writing at the new year that “to hold otherwise would be to exalt artifice above reality.”

Mellon was likely surprised at Morgenthau’s tactics. His dislike of loopholes had been less on moral grounds and more on practical ones. As secretary he had preferred a broad tax base to one with numerous exceptions and had even asked the Bureau of Revenue to supply him with “a memorandum setting forth the various ways by which an individual may legally avoid tax.” With each of his many rate cuts, he had tried also to reduce loopholes. A simple system had always seemed to him the best way for the government to get the most money. “A removal of the artificial value of tax exemption will restore all securities to natural conditions,” he had written in
Taxation: The People’s Business.

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 99
²
/
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 vindi
cated,” 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.