Why Franklin Delano Roosevelt is a Worthy Mentor
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
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.
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
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
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.
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
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
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.
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.
Copyright 1995-2003 Freeman
Visit: Satanic Reds