Insull Utilities Trusts collapse
The collapse of Insull Utilities Trusts is a significant event in the history of American utilities and corporate governance. Samuel Insull, who initially gained prominence by expanding electric power accessibility, built a vast empire comprising over eighty-five companies, utilizing a complex system of holding companies. However, the onset of the Great Depression in 1929 severely impacted his businesses, leading to reduced revenue from both electric usage and passenger rail services. The situation deteriorated further with the bankruptcy of the Chicago Rapid Transit Company in 1932, triggering a chain reaction of failures within Insull's network.
As investigations ensued, Insull faced allegations of corporate fraud and mismanagement, resulting in his indictment. Although he fled initially to avoid prosecution, he was later extradited to stand trial, where he was ultimately acquitted of all charges. Despite his legal victory, the fallout from his empire's collapse was profound, leading to substantial financial losses for investors. This incident prompted significant legislative reforms, including the Securities Act of 1933 and the Public Utilities Holding Company Act of 1935, aimed at increasing investor protections and regulating utility ownership structures. Insull's story concludes with his demise in 1938, marked by a stark contrast from his earlier wealth and influence, leaving a lasting impact on the utility industry and investor regulations in the United States.
Insull Utilities Trusts collapse
The Event Failure of Chicago’s public utilities network
Also known as Insull Trusts scandal
Date 1932
Place Chicago, Illinois
A network of public utility companies and electric-powered interurban railways, the Insull Trusts was originally created through highly leveraged financing. The financial disruptions of the Great Depression and suspect corporate governance caused the network to fold. However, the scandal had the salutary effect of calling national attention to the need for stronger government utilities regulation, prompting the U.S. Congress to enact legislation designed to prevent a repetition of the Insull scandal.
Samuel Insull, the person most responsible for creating the Insull network, began his career working for the inventor Thomas Edison. In 1889, he rose to the vice presidency of Edison General Electric Company; three years later, he became president of the Chicago Edison Company. During the first decade of the twentieth century he formed Chicago’s Commonwealth Edison Company, which he made the world’s biggest producer of electricity. Along the way, he unified rural electrification projects and won control of financially shaky electric commuter trains to create an integrated electrical conglomerate. He won admiration for helping to make electric power cheap and abundant. His utilities empire eventually encompassed more than eighty-five corporations of which he was a director. He also chaired the boards of sixty-five corporations and was president of eleven. His utility empire reached a value of $4 billion. He achieved this control through a trust system—a series of holding companies—that allowed him to organize his companies in a pyramid fashion, with a series of highly leveraged companies owning shares in one another.
Insull’s Downfall
After the Great Depression began in 1929, passenger traffic on the Insull railroads dropped, and as people lost their jobs, they cut expenses by using less electricity in their homes. Both developments caused Insull’s companies to lose revenue. This decline began in 1929, but the Insull empire’s collapse was not triggered until 1932, when the Chicago Rapid Transit Company went bankrupt, which was followed by the bankruptcies of many of its affiliated companies.
After a government investigation into these collapses was made, Insull was indicted for perpetrating a corporate fraud and cheating investors out of millions of dollars. The seventy-three-year-old Insull fled the country to avoid prosecution, but a scapegoat was needed, so he was later brought back to face trial. His indictment for fraud sufficed to convince unhappy investors that the government was taking action. In the trial that followed, government prosecutors pointed out that while 25 percent of Americans had been out of work in 1931, Insull was receiving a salary of nearly one-half million dollars. Ultimately, however, Insull was acquitted on all charges. During the trial, he claimed to have left the country for fear that if he were tried, his case would have become a political trial because the state prosecutor was running for reelection.
Impact
The most dramatic result of the collapse of Insull’s empire was investors’ loss of millions of dollars. President Franklin D. Roosevelt mentioned Insull in his pleas to Congress to pass the Securities Act of 1933, which gave investors greater protection. Congress also enacted the Public UtilitiesHolding Company Act in 1935 to bar the creation of more investor-owned utility empires. Additional federal energy regulations followed with Congress’s passage of the Rural Electrification Act in 1936 and its expansion of the Tennessee Valley Authority. Insull himself lived only a few more years, dying in 1938 at the age of seventy-eight. Although at one time he had been worth more than $150 million, he died nearly penniless.
Bibliography
Busch, Francis X. Guilty or Not Guilty? An Account of the Trials of the Leo Frank Case, the D. C. Stephenson Case, the Samuel Insull Case, and the Alger Hiss Case. Buffalo, N.Y.: William S. Hein, 1998.
McDonald, Forrest. Insull. Chicago: University of Chicago Press, 1962.
Wasik, John F. The Merchant of Power: Sam Insull, Thomas Edison, and the Creation of the Modern Metropolis. New York: Palgrave Macmillan, 2006.