Forgotten Man, The (3 page)

Yet another hero was the British-born Sam Insull, who had started out in America keeping Edison’s books. While on the East Coast with Edison, Insull had discovered that selling electric irons to Schenectady housewives was a good way to increase household use of power. His second insight had involved the economy of scale. Wall Street believed that each family or street needed a generator. There was even the idea that each gentleman should have his own generator, just like his own yacht; J. P. Morgan had one belching on his property in New York’s Murray Hill. But Insull, feeling that the yacht was inefficient, had gone to Chicago. What Wall Street could not see, La Salle Street perceived, providing Insull capital to finance central power stations. In this fashion he achieved a miracle: he established power prices that were acceptable to the small consumer.

Insull’s Chicago was a rough place. Before the war a college student from Indiana named David Lilienthal described his experience on a visit in 1917: he came across a crowd surrounding a puddle, and stuck his head among the others to see “what these busy-men-of-the-world were watching with such evident enjoyment.” It was “but a tiny mouse, swimming about in the pool.” Lilienthal was disgusted to see that “whenever he would struggle to a place of safety—someone would stick out his mahogany cane and throw the poor quivering thing back to his death. When this would happen,” Lilienthal noted, “some portly comfortable looking son-of-a-gun would shift his cigar and chuckle.” The young man commented on the Chicagoans in his diary: “And such creatures expect mercy for themselves from some higher authority, as they are to mice!”

Where others saw lawlessness, though, Insull saw opportunity. He was brave, he was aggressive—a frontier man—and few laws stood in his way. Insull wired the city, then the state, and then other parts of the country—like Ford, always plowing cash back into projects. When banks could not provide cash, he had used equity vehi
cles to raise the money, repeatedly creating holding companies, parent companies that owned operating utilities.

Critics said that he was watering down stock. But all Insull saw was the need for cash—the industry was the world’s most promising and would grow only if it got capital. And it did: the line on graphs of the American utilities industry in the 1910s and ’20s moved up in an incontrovertible diagonal, consumption increasing each year, even in the early 1920s recession, seemingly independent of the overall economy. At his high point Insull provided a full eighth of America’s electrical power. To reward Chicago for the prosperity it had given him, Insull would spend the late 1920s building an opera house as ambitious as his business empire: a forty-five-story giant equipped with electric elevators designed so that every seat in the house, including the high gallery seats, would offer as good a view as the dress circle. Insull’s opera house had no boxes for aristocracy; he wanted to prove that the world of electricity was a democratic one. The plans revealed a building in the shape of an armchair, a symbolic throne for Insull. The armchair faced west, the ultimate gesture of defiance toward New York.

On Wall Street, there were other, different figures to watch. Henry Morgenthau Sr., Felix Warburg, and Bernard Baruch were joining the Morgans as leaders in the financial district in the early part of the century. Some were continuing the success of a dynasty—Warburg. Others were bent on establishing new dynasties—Morgenthau especially. In the 1920s a young man named Alfred Lee Loomis had taken a firm that was nearing bankruptcy, Bonbright, to heights of profitability with innovative investments in Insull’s industry, public utilities. Half of the nation’s homes were electrified; together with his friend and partner Landon Thorne, Loomis wanted to electrify the rest. The industry began recruiting talent wildly. One of its finds was a corporate lawyer who had worked for Firestone, one of the tire companies in Akron, Wendell Willkie.

Like Insull, Alfred Lee Loomis and Thorne had seen that older investment houses were not sure they wanted to pour cash into the new utilities industry. And like Insull, they had seen the efficiency of
holding companies: little local companies could save cash if they banded together into “superpowers.” One of the most promising markets, they had recognized, was the South, a laggard in modernization. Electrifying the South, they had realized, would also do enormous social good. As it was often said, the South was tired of living in the dark. Lone state companies could not do the work; they needed to hook up a network and share resources. Georgia Power Company had provided indifferent service to some customers, in part because it lacked the advantages of a larger holding company. One customer who wrote to complain was a polio patient from Warm Springs, Georgia—Franklin Roosevelt, the future New York governor.

In the 1920s two other big figures loomed large. The first was the treasury secretary, Andrew Mellon of Pittsburgh. Mellon’s father, whose family had come from county Tyrone in Ireland, had been a faithful reader of Benjamin Franklin: “The way to wealth, if you desire it, is as plain as the way to market. It depends chiefly on two words, industry and frugality. That is, waste neither time nor money, but make the best use of both.” Thomas Mellon, a merchant banker, believed in investing in commodities, but also, like Insull, in investing in ideas. Among the new bank’s first visitors—while Andrew was still a student—had been a twenty-one-year-old bookkeeper with a scheme to build fifty coke ovens. He thought he could serve the growing steel industry, but he needed $10,000. An agent whom Mellon sent to evaluate Frick wrote: “Lands good, ovens well built, manager on job all day, keeps books evenings, may be a little too enthusiastic about pictures but not enough to hurt.” Judge Mellon struck a deal with him.

That man, Henry Clay Frick, remained affiliated with the Mellons from that point on. He and Andrew, good friends, traveled to Europe together; on such a trip Andrew started to build an art collection, buying his first picture.

But what was more important at the time was that Andrew also built a great business empire. He and his brother Richard created first a national bank, then a steel concern, and then an empire. Young
Mellon cornered the bauxite market. He shared in the profits of Carnegie Steel, of which Frick was president. The Mellons together established the enormous Aluminum Company of America; later they picked up Bethlehem Steel. They invested in Spindletop, the Texas gusher that opened the Gulf Coast oil industry. By the time Hoover reached adulthood, the Mellons also were players in the steel, railway, construction, and insurance industries. Succeeding Andrew Carnegie and Henry Clay Frick, Andrew Mellon ruled Pittsburgh in a way that not even the president ruled Washington.

Mellon had stayed close to his father’s original formula: thrift that emphasized the accumulation of capital. But he had also created value—and not merely by cornering a market as a robber baron would, though he had done this with bauxite. Mellon invested in new innovations, functioning as an early version of the modern venture capitalist. The magazine
World’s Work
described the Mellon formula thus: “Find a man who can run a business and needs capital to start or expand. Furnish the capital and take shares in the business, leaving the other man to run it except when he is in trouble. When the business has growth sufficiently to pay back the money, take the money and find another man running a business and in need of money and give it to him, on the same basis.”

In the late 1880s an inventor named Charles M. Hall had showed up in Mellon’s offices. Hall had developed a new way to smelt aluminum, but he lacked capital to sell his product. Mellon, for his part, agreed to lend $250,000 in return for a controlling share of a new firm, the Pittsburgh Reduction Company. Pittsburgh Reduction, iterations later, became the Aluminum Company of America.

Hoover himself, impressed, later recounted an anecdote an official from the same company would tell him about working with Mellon. The Mellon Bank had refused to lend to an inventor. But Mellon told the man, “I sometimes personally loan money on the security of character.” Mellon gave the man $10,000 and then invested yet more, and then yet more when the pilot showed prospects. For his cash efforts, Mellon eventually agreed to a fifty-fifty ownership. The inventor wondered aloud why Mellon was settling only for half. Now
that his project had value, Hall reminded Mellon, Mellon might foreclose and own all. But the answer came back: “The Mellons never did business that way.”

To Mellon the formula was obvious—invest in the private sector, do not intervene too much, wait silently, and the returns would be all the greater. Eventually, he was so successful at producing innovations that he created the Mellon Institute in Pittsburgh to make the resources of his empire available to other, less innovative companies. The institute came under the general Mellon rubric “self-improvement,” though whether that “self” was Mellon or his business or the U.S. economy generally even he left unclear. In the same spirit, Mellon also undertook to improve his knowledge of the French language at around the same point. It was an early version of the modern science think tank. Companies brought their cash to the Mellon Institute; this funded scientists who could solve their problems through efficient applied research. Hundreds of books and papers, as well as more than 600 patents, resulted. By the time he entered public life, Mellon would serve on the board of more than 150 corporations, presiding over hundreds of millions.

When it came to the press, Mellon was suspicious—Victorian, in fact. More than Coolidge, he hid from newspapermen, even when he had good news. To show off was, to his mind, as to Coolidge’s, unseemly. Besides, it brought on bad luck. As a result, he lost out on his share of puff pieces. And he was often surprised to find that the press did not side with him when he needed it. He once found himself calling a newspaper editor he had never met to tell the man he had a story wrong—Mellon’s son was not sick, as the paper had alleged. Mellon lore was so scarce that people ended up trafficking in the stereotype of Mellon as miser. They noted that Mellon rarely spoke, that he seemed “half-frightened” (columnist Drew Pearson), and that he was quick to dismiss ideas that he considered shallow. He was reported to be an incredible penny-pincher. His wife left him. Mellon’s son Paul, who bore great affection for his father, also found much to criticize. He later compared Andrew to Soames Forsyte, the cold husband and “Man of Property” in John Galsworthy’s novels,
who also collected pictures. Paul wrote later of Andrew’s “ice water smile.”

The last of the giants was Herbert Hoover himself. On the surface, again, he seemed much like the others, with the same story of success. A Quaker, Hoover had been born in 1874 in West Branch, Iowa. He had been orphaned as a child and, like the Mellon men, demonstrated early a love of thrift, enterprise, and new technology. Before she died, his mother led Quaker meetings, and, observing her, Hoover acquired a sense of righteousness: if one was truly a leader, the rest would be silent and follow. There was no reason to criticize a leader. He was the sort of boy who seemed years older than the rest, the one who always jingled a ring of keys in his pocket. An uncle, Henry John Minthorn, later recalled that he had trouble when he asked the boy to ride a horse; the youth persisted in preferring bicycles.

As an undergraduate at a new university, Stanford, Hoover made the brilliant move of studying geology and engineering. By reason of geography the university had advanced instructors, themselves pioneering mining even as they taught it. When the professors were not in the classroom, they were surveying the frontier. In the space of several years, therefore, Hoover acquired a grounding that the best miners across the world could only hope for, studying the newest techniques for finding minerals, paleontology, engineering, and chemistry. In those years the great nations were on a gold standard. Economies depended upon gold in the way that, for example, they depend on microchips today. Yet only a few engineers knew how to get that gold out of the ground. As Hoover would later note in his memoirs, snobbery made Britain and the Continent reluctant to elevate engineering above the status of a trade: “the European universities did not acknowledge engineering as a profession until long after America had done so.”

Europe’s loss was the gain of the gentlemen at Stanford—especially Herbert Hoover. The discovery of gold deep below the surface in western Australia coincided with Hoover’s Stanford graduation. A London firm, Bewick Moreing, offered the graduate a starting sal
ary of $6,000, the equivalent of $124,000 today. The firm would send him to that corner of the world, where mining was the most challenging but also, potentially, the most rewarding. The place was rough; at a mine called the Sons of Gwalia, he endured blackflies, white heat, and seemingly inferior Australian labor—“noddle heads,” he called the workers. Still the principles were the same: thorough, serious work, U.S. engineering technique.

By the time he was twenty-five, Hoover had brought a failing mine to fabulous profitability. Next he oversaw the rehabilitation of mining throughout the region. He acknowledged that his work in Australia was “practically a new science” but was not content with his gains there, raking in thousands in stock market winnings on the side. By the age of twenty-seven, Hoover had turned around the production and the books of mines in the United States, Australia, and China. He and Lou, his wife, lived in Tientsin, China, where they helped rescue others in the Boxer Rebellion. Then it was on to London, where the Hoovers lived in style—with a chauffeur, even. The prewar London of that time was a truly international city, a city that showed off the gold standard at its best. The gold that Hoover dug out of the mines helped the standard to function, in turn making global trade possible.

In foreign places, without peers to challenge him, Hoover became accustomed to solo management. Ignoring the noddles seemed the fastest route to success and the best way to avoid painful criticism. Hoover’s pride grew with each project. It was said of Hoover that there was “no cleverer engineer in the two hemispheres.” Luck makes talent look like genius, and every era has its own kind of luck. In Hoover’s era, luck blessed mining engineers. It was an era of commodities. In 1901, the first item on the Dow Jones Industrial Average was Amalgamated Copper, the last U.S. Steel Preferred. In between were also mostly commodity-driven companies: American Sugar, National Lead.