- Stephen Salsbury
Insull, Samuel (11 November 1859–16 July 1938), electric utilities executive and holding company entrepreneur, was born in London, England, the son of Samuel Insull, a clergyman, and Emma Short, sometime keeper of Insull’s Temperance Hotel. Insull started work in a London auctioneering house for five shillings a week. In 1881 he left London for the United States, where he became the personal secretary of Thomas Edison, who was then developing his incandescent lighting system. Insull took part in the establishment of New York City’s Pearl Street electric generating station, which provided power for the world’s first incandescent lighting network. In 1889 he became an executive with the pioneer electrical equipment manufacturer, General Electric. Insull later wrote that Edison “grounded me in the fundamentals … no one could have had a more considerate and fascinating teacher” (Hughes, p. 203). In 1892 Insull gave up the vice presidency of a $50 million company (General Electric) to assume the presidency of an $885,000 corporation, the Chicago Edison Company (after 1907, Commonwealth Edison), which supplied power to a low-voltage, direct-current network of incandescent lights. When Insull joined Chicago Edison, the economic and technical requirements of large-scale electricity utilities were little understood.
From the first, Insull had a clear concept of the economics of power production: it was capital intensive. Electricity was a perishable commodity that could not (with minor exceptions) be stored, and the market demand varied throughout the day. Furthermore, steam generators could not be turned off or on at will. They required many hours to come on-line and had to be kept spinning at maximum capacity with ample reserves for peak consumption demand. During nonpeak periods, power sales often fell to 10 percent or less of production. By 1900 Insull had learned that his users seldom bought more than 25 percent of his generating capacity. The load factor was such that nearly 75 percent of the capital and an equal amount of the production costs were wasted. The existence of large amounts of unsold power caused Insull to search for ways to bring new users on-line, which led him to a strategy of lowering power charges.
Insull installed meters (instead of charging flat, fixed monthly rates for each Chicago Edison customer and then kept meticulous records of power consumption. This enabled him to discern demand patterns and thereby to discover that various users experienced their peak demand at different times: street railways peaked between 6:30 a.m. and 9:00 a.m. and between 4:00 p.m. and 6:30 p.m. Electric lights peaked in the evening between 5:00 and 9:00. Time zones also influenced peak power requirements.
By 1900 Insull’s business strategy had become clear. He took advantage of the economies of scale by concentrating electricity production in ever-larger generating stations, and he closed small, inefficient generating plants. He increased his load partly by merging with more than twenty rival Chicago-area power producers, thereby adding their customers to his system. He took advantage of the load diversity that resulted when customers’ consumption peaked at different times. Insull offered very low rates to industries that used power at nonpeak times. His production costs kept falling, and Chicago’s power rates ranked among the world’s lowest. Insull’s concepts of power production were soon followed by most American utilities.
Insull faced many obstacles, both political and technological, in achieving his large-scale utility system. He battled with the corrupt Chicago City Council, whose members tried to extort money from utilities. Insull became an astute politician. His consistent efforts—he was not above bribing city councillors or elected state officials—resulted in the transfer of utilities regulation from local authorities to the state of Illinois. He advocated state regulation in order to soften criticism arising from his creation of a giant private power monopoly. Insull felt little threat from honest regulators because he knew that his policies would improve service and lower rates. He also worked to convince the electric utility lobby, the National Electric Light Association (NELA), to support state regulation and was active in the National Civic Federation, which by 1907 had subscribed to the NELA’s views on state regulation. In that year the Civic Federation issued a report that became the basis for early utilities regulatory commissions founded in such states as Wisconsin and Massachusetts.
Technological imperatives drove Insull. The main problem in the 1890s was that technology made the formation of large systems difficult. Each major power user generated its own electricity. The Edison system used direct current (DC). The transmission of direct current at low voltages, especially 600 volts or fewer, required thick, expensive copper wires. Edison’s system was not economical outside of densely populated cities. In contrast, Westinghouse developed alternating current (AC), which relied on high-voltage transmission (the higher the voltage the more efficient the transmission). Westinghouse’s first commercial incandescent lights began in 1886 and used power transmitted at 1,000 volts, which was transformed at the point of consumption into a fifty-volt current. Alternating current’s main advantage lay in cheap, long-distance transport of electricity; it was chosen by most suburban towns. Even within AC or DC systems there were many choices made to suit individual large customers. Traction used 600-volt DC, and various industries requested that power be delivered using different cycles, which ranged from 25-cycle currents up to 133-1/3 cycles. In the early 1890s it was impossible to convert DC to AC, and changing frequencies and voltages was difficult.
Insull pioneered the commercial use of technological breakthroughs. In 1894, within two years of his arrival in Chicago, he built individual generators that each produced 2,400 kilowatts of direct current. The units were propelled by 1,250-horsepower condensing, reciprocating steam engines. In 1900 Insull placed the first order, by an American electric utility, for a 5,000-kilowatt steam turbine; 12,000-kilowatt steam turbines became standard by 1905. For a time, Chicago Edison had the largest steam turbine generators in the United States. Insull used technology to ensure that all of Chicago’s electric-generating capacity could fall under one company. His new power-generation units supplied all kinds of power. By 1900 he used a rotary convertor (Chicago Edison was the first American utility to install one, although Boston Edison first experimented with this invention) to change direct current into alternating current and vice versa. Chicago Edison also mastered the use of transformers and frequency changers, which allowed power to be converted from one voltage to another and determined the number of cycles delivered. By 1910 Commonwealth Edison produced at its main central generating stations a three-phase alternating current of 9,000 volts and twenty-five cycles. For long-distance transmission, transformers converted this power into AC with 20,000 volts. Within the city itself, rotary converters and frequency changers converted power into the 110-volt DC 60-cycle current required by the incandescent lighting systems and the 600-volt DC needed by the city’s streetcars and elevated trains.
The search for an increased load factor and diversity caused Insull to gain control of all the city and suburban power users, including the city’s vast traction system which, in 1908, accounted for 65 percent of power consumption. Starting about 1910 Insull expanded his system into Indiana, Wisconsin, Ohio, and other midwestern states. This required vast amounts of capital, and Insull raised it through holding companies that bought control of operating companies. Insull created one of the most complex financial structures ever known in American business. Some of the most important holding companies were Insull Utilities Investments Incorporated, Corporation Securities of Chicago, and Middle West Utilities. Insull used the holding companies to purchase the controlling share of the many operating companies, such as Chicago’s Commonwealth Edison, Wisconsin Power & Light, and Public Service Corporation of Indiana. Insull guaranteed his control by a simple strategy. He sold bonds in the holding companies to the general public and paid the interest on the holding company bonds from dividends received from the operating companies. Insull’s bondholders had no vote in the holding companies, and through voting the common shares he elected the boards of directors who appointed managers who set policy for the operating firms.
The stock market crash of 1929 did not destroy Insull. The real damage came in 1931, when business activity fell drastically, reducing power consumption and traction riding. The operating companies could not pay enough dividends to meet interest payments on the holding company bonds. For example, Insull’s Chicago, North Shore & Milwaukee Railway (the North Shore Line), an operating company, considered by many to be the best-run and most-modern interurban electric railway in the world, had in 1929 a gross income exceeding $8 million and profits of about $750,000. By 1931 gross revenues were only one-half of those in 1929. The line had a net loss of nearly $750,000. The North Shore’s financial performance was actually better than that of most other American traction companies. Insull’s electric utilities also suffered major earnings falls.
In 1931 Insull’s holding companies faced an increasing cash squeeze. The Chicago utilities entrepreneur had numerous enemies, especially New York’s powerful House of Morgan, which resented Insull’s effort to avoid Wall Street by arranging his finances through local Chicago institutions. The end came in April 1932, when Owen D. Young, chairman of the board of General Electric, and a group of New York bankers pushed into bankruptcy several of Insull’s holding companies, including the Corporations Securities Company of Chicago, Insull Utility Investments, and Middle West Utilities Company. The loss by the public was very large. In 1932 the public owned more than $2.6 billion of securities in Insull’s holding and operating companies. When all claims had been settled, the public loss amounted to $638 million or 24.1 percent of their value.
Insull was condemned as a reckless financier who built holding companies out of thin air for huge profits. Frederick Lewis Allen, writing in 1935, argued that “because it was so easy to show profits, the stock could be watered and the magnates at the centre of things could make much money through financing operations. Because so much money could be made, the systems became more and more ambitious and tried to get hold of more and more operating companies. … It was an endless sequence; and it was enough to turn the head of any but the coolest of financiers” (Allen, pp. 276–77). Allen asserted that Insull’s head had been turned thoroughly by 1926.
After the collapse Insull fled to Europe. He was taken into custody off the coast of Turkey from a Greek steamship and returned to the United States. Between 1934 and 1935 he was tried three times on separate charges of mail fraud, embezzlement, and violations of the bankruptcy act. He was acquitted each time. Afterward, Insull retired to Europe, where he died a few years later of heart failure in a Paris metro station. He had been married to Margaret Anna Bird, with whom he had had one child, a son; Samuel Insull, Jr., born in 1900, went into his father’s utility business.
Since the 1960s the view of Insull has changed substantially. Thomas Hughes, a leading historian of the electric power industry, concluded in 1983 that “contrary to public opinion, the origins of developments of several leading electric utility holding companies [including Insull’s] are to be found rooted more deeply in technology and management than in finance” (Hughes, p. 393). Arthur Taylor, writing in the Summer 1962 Business History Review, concluded that the public’s “percentage of loss … [was] lower than that sustained by investors in some other significant areas of the economy” (p. 260). However, the losses hit the Insull empire unevenly. Of the total $638 million lost by the public, slightly more than $517 million had been invested in seven holding companies. The public lost nearly all of the monies it invested in these firms. The other major disaster area was traction, especially the four operating companies that accounted for $78 million of investor losses. There was comparatively little water in the traction shares; the street and interurban traffic suffered from a loss of business because of the automobile and the downturn in riding during the depression. Furthermore, Insull purchased control of traction not as a speculative venture but as a direct result of his successful attempt to create load diversity for his electric utility corporations. In contrast, most of the major operating utilities such as Commonwealth Edison, Wisconsin Power & Light, and dozens of smaller utilities avoided bankruptcy, paid all of the interest on their debts, and retired debt according to plan. Most kept up dividends, albeit at a reduced rate, during the depression’s depth.
In 1929, at the height of his career, Insull was the most powerful man in Chicago and through his control of various holding companies, was responsible for between $2 to $3 billion invested in electric and other utilities, such as natural gas. His organization provided nearly 10 percent of the nation’s electric power and served 5,000 communities in thirty-two states. Insull’s financial collapse in 1932 was one of the largest in America’s history and quickly turned him from a widely admired industrial statesman into a scapegoat for the financial excesses that allegedly caused the Great Depression of the 1930s.
The early evaluation of Insull’s career was generally unfavorable and is typified by Frederick Lewis Allen’s The Lords of Creation (1935; repr. 1966). Forrest McDonald published his full-scale biography, Insull, in 1962. Insull’s early technical career before 1900 can be traced in Harold C. Passer’s excellent volume The Electrical Manufacturers, 1875–1900 (1953). The best picture of Insull and the technological imperatives of power producing is in Thomas P. Hughes, Networks of Power: Electrification in Western Society, 1880–1930 (1983). For Insull’s role in traction see William D. Middleton, North Shore: America’s Fastest Interurban (1964). A short biography of Insull is in John N. Ingham, Biographical Dictionary of American Business Leaders (1983). For an estimation of the public’s losses in Insull’s collapse see Arthur R. Taylor, “Losses to the Public in the Insull Collapse: 1932–1946,” Business History Review 34 (Summer 1962): 188–204. An obituary is in the New York Times, 17 July 1938.