Business
Adventures
Twelve Classic Tales from
the World of Wall Street
John Brooks
Contents
1 The Fluctuation
THE LITTLE CRASH IN ’62
2 The Fate of the Edsel
A CAUTIONARY TALE
3 The Federal Income Tax
ITS HISTORY AND PECULIARITIES
4 A Reasonable Amount of
Time
INSIDERS AT TEXAS GULF SULPHUR
5 Xerox Xerox Xerox Xerox
6 Making the Customers
Whole
THE DEATH OF A PRESIDENT
7 The Impacted Philosophers
NON-COMMUNICATION AT GE
8 The Last Great Corner
A COMPANY CALLED PIGGLY WIGGLY
9 A Second Sort of Life
DAVID E. LILIENTHAL, BUSINESSMAN
10 Stockholder Season
ANNUAL MEETINGS AND CORPORATE
POWER
11 One Free Bite
A MAN, HIS KNOWLEDGE, AND HIS JOB
12 In Defense of Sterling
THE BANKERS, THE POUND, AND THE
DOLLAR
Index
1
The Fluctuation
daytime
adventure serial of the well-to-do—
would not be the stock market if it did
not have its ups and downs. Any boardroom sitter with a taste for Wall Street
lore has heard of the retort that J. P.
THE
STOCK
MARKET—the
Morgan the Elder is supposed to have
made to a naïve acquaintance who had
ventured to ask the great man what the
market was going to do. “It will
fluctuate,” replied Morgan dryly. And it
has
many
other
distinctive
characteristics. Apart from the economic
advantages and disadvantages of stock
exchanges—the advantage that they
provide a free flow of capital to finance
industrial expansion, for instance, and
the disadvantage that they provide an all
too convenient way for the unlucky, the
imprudent, and the gullible to lose their
money—their development has created a
whole pattern of social behavior,
complete with customs, language, and
predictable responses to given events.
What is truly extraordinary is the speed
with which this pattern emerged full
blown following the establishment, in
1611, of the world’s first important stock
exchange—a roofless courtyard in
Amsterdam—and the degree to which it
persists (with variations, it is true) on
the New York Stock Exchange in the
nineteen-sixties.
Present-day stock
trading in the United States—a
bewilderingly vast enterprise, involving
millions of miles of private telegraph
wires, computers that can read and copy
the Manhattan Telephone Directory in
three minutes, and over twenty million
stockholder participants—would seem
to be a far cry from a handful of
seventeenth-century Dutchmen haggling
in the rain. But the field marks are much
the same. The first stock exchange was,
inadvertently, a laboratory in which new
human reactions were revealed. By the
same token, the New York Stock
Exchange is also a sociological test
tube, forever contributing to the human
species’ self-understanding.
The behavior of the pioneering Dutch
stock traders is ably documented in a
book
entitled
“Confusion
of
Confusions,” written by a plunger on the
Amsterdam market named Joseph de la
Vega; originally published in 1688, it
was reprinted in English translation a
few years ago by the Harvard Business
School. As for the behavior of present-
day American investors and brokers—
whose traits, like those of all stock
traders, are exaggerated in times of
crisis—it may be clearly revealed
through a consideration of their
activities during the last week of May,
1962, a time when the stock market
fluctuated in a startling way. On Monday,
May 28th, the Dow-Jones average of
thirty leading industrial stocks, which
has been computed every trading day
since 1897, dropped 34.95 points, or
more than it had dropped on any other
day except October 28, 1929, when the
loss was 38.33 points. The volume of
trading on May 28th was 9,350,000
shares—the seventh-largest one-day
turnover in Stock Exchange history. On
Tuesday, May 29th, after an alarming
morning when most stocks sank far
below their Monday-afternoon closing
prices, the market suddenly changed
direction,
charged
upward
with
astonishing vigor, and finished the day
with a large, though not record-breaking,
Dow-Jones gain of 27.03 points.
Tuesday’s record, or near record, was in
trading volume; the 14,750,000 shares
that changed hands added up to the
greatest one-day total ever except for
October 29, 1929, when trading ran just
over sixteen million shares. (Later in the
sixties, ten, twelve, and even fourteenmillion
share
days
became
commonplace; the 1929 volume record
was finally broken on April 1st, 1968,
and fresh records were set again and
again in the next few months.) Then, on
Thursday, May 31st, after a Wednesday
holiday in observance of Memorial Day,
the cycle was completed; on a volume of
10,710,000 shares, the fifth-greatest in
history, the Dow-Jones average gained
9.40 points, leaving it slightly above the
level where it had been before all the
excitement began.
The crisis ran its course in three days,
but, needless to say, the post-mortems
took longer. One of de la Vega’s
observations about the Amsterdam
traders was that they were “very clever
in inventing reasons” for a sudden rise
or fall in stock prices, and the Wall
Street pundits certainly needed all the
cleverness they could muster to explain
why, in the middle of an excellent
business year, the market had suddenly
taken its second-worst nose dive ever up
to that moment. Beyond these
explanations—among which President
Kennedy’s April crackdown on the steel
industry’s planned price increase ranked
high—it was inevitable that the
postmortems should often compare May,
1962, with October, 1929. The figures
for price movement and trading volume
alone would have forced the parallel,
even if the worst panic days of the two
months—the twenty-eighth and the
twenty-ninth—had not mysteriously and,
to some people, ominously coincided.
But it was generally conceded that the
contrasts were more persuasive than the
similarities. Between 1929 and 1962,
regulation of trading practices and
limitations on the amount of credit
extended to customers for the purchase
of stock had made it difficult, if not
actually impossible, for a man to lose all
his money on the Exchange. In short, de
la Vega’s epithet for the Amsterdam
stock exchange in the sixteen-eighties—
he called it “this gambling hell,”
although he obviously loved it—had
become considerably less applicable to
the New York exchange in the thirtythree years between the two crashes.
THE
1962 crash did not come without
warning, even though few observers
read the warnings correctly. Shortly after
the beginning of the year, stocks had
begun falling at a pretty consistent rate,
and the pace had accelerated to the point
where the previous business week—that
of May 21st through May 25th—had
been the worst on the Stock Exchange
since June, 1950. On the morning of
Monday, May 28th, then, brokers and
dealers had reason to be in a thoughtful
mood. Had the bottom been reached, or
was it still ahead? Opinion appears, in
retrospect, to have been divided. The
Dow-Jones news service, which sends
its subscribers spot financial news by
teleprinter,
reflected
a
certain
apprehensiveness between the time it
started its transmissions, at nine o’clock,
and the opening of the Stock Exchange,
at ten. During this hour, the broad tape
(as the Dow-Jones service, which is
printed on vertically running paper six
and a quarter inches wide, is often
called, to distinguish it from the Stock
Exchange price tape, which is printed
horizontally and is only three-quarters of
an inch high) commented that many
securities dealers had been busy over
the weekend sending out demands for
additional collateral to credit customers
whose stock assets were shrinking in
value; remarked that the type of
precipitate liquidation seen during the
previous week “has been a stranger to
Wall Street for years;” and went on to
give several items of encouraging
business news, such as the fact that
Westinghouse had just received a new
Navy contract. In the stock market,
however, as de la Vega points out, “the
news [as such] is often of little value;”
in the short run, the mood of the
investors is what counts.
This mood became manifest within a
matter of minutes after the Stock
Exchange opened. At 10:11, the broad
tape reported that “stocks at the opening
were mixed and only moderately
active.”
This
was
reassuring
information, because “mixed” meant that
some were up and some were down, and
also because a falling market is
universally regarded as far less
threatening when the amount of activity
in it is moderate rather than great. But
the comfort was short-lived, for by
10:30 the Stock Exchange tape, which
records the price and the share volume
of every transaction made on the floor,
not only was consistently recording
lower prices but, running at its maximum
speed of five hundred characters per
minute, was six minutes late. The
lateness of the tape meant that the
machine was simply unable to keep
abreast of what was going on, so fast
were trades being made. Normally,
when a transaction is completed on the
floor of the Exchange, at 11 Wall Street,
an Exchange employee writes the details
on a slip of paper and sends it by
pneumatic tube to a room on the fifth
floor of the building, where one of a
staff of girls types it into the ticker
machine for transmission. A lapse of two
or three minutes between a floor
transaction and its appearance on the
tape is normal, therefore, and is not
considered by the Stock Exchange to be
“lateness;” that word, in the language of
the Exchange, is used only to describe
any additional lapse between the time a
sales slip arrives on the fifth floor and
the time the hard-pressed ticker is able
to accommodate it. (“The terms used on
the Exchange are not carefully chosen,”
complained de la Vega.) Tape delays of
a few minutes occur fairly often on busy
trading days, but since 1930, when the
type of ticker in use in 1962 was
installed, big delays had been extremely
rare. On October 24, 1929, when the
tape fell two hundred and forty-six
minutes behind, it was being printed at
the rate of two hundred and eighty-five
characters a minute; before May, 1962,
the greatest delay that had ever occurred
on the new machine was thirty-four
minutes.
Unmistakably, prices were going
down and activity was going up, but the
situation was still not desperate. All that
had been established by eleven o’clock
was that the previous week’s decline
was continuing at a moderately
accelerated rate. But as the pace of
trading increased, so did the tape delay.
At 10:55, it was thirteen minutes late; at
11:14, twenty minutes; at 11:35, twentyeight minutes; at 11:58, thirty-eight
minutes; and at 12:14, forty-three
minutes. (To inject at least a seasoning
of up-to-date information into the tape
when it is five minutes or more in
arrears, the Exchange periodically
interrupted its normal progress to insert
“flashes,” or current prices of a few
leading stocks. The time required to do
this, of course, added to the lateness.)
The noon computation of the Dow-Jones
industrial average showed a loss for the
day so far of 9.86 points.
Signs of public hysteria began to
appear during the lunch hour. One sign
was the fact that between twelve and
two, when the market is traditionally in
the doldrums, not only did prices
continue to decline but volume continued
to rise, with a corresponding effect on
the tape; just before two o’clock, the
tape delay stood at fifty-two minutes.
Evidence that people are selling stocks
at a time when they ought to be eating
lunch is always regarded as a serious
matter. Perhaps just as convincing a
portent of approaching agitation was to
be found in the Times Square office (at
1451 Broadway) of Merrill Lynch,
Pierce, Fenner & Smith, the undisputed
Gargantua of the brokerage trade. This
office was plagued by a peculiar
problem: because of its excessively
central location, it was visited every day
at lunchtime by an unusual number of
what are known in brokerage circles as
“walk-ins”—people who are securities
customers only in a minuscule way, if at
all, but who find the atmosphere of a
brokerage office and the changing prices
on its quotation board entertaining,
especially in times of stock-market
crisis. (“Those playing the game merely
for the sake of entertainment and not
because of greediness are easily to be
distinguished.”—de la Vega.) From long
experience, the office manager, a calm
Georgian named Samuel Mothner, had
learned to recognize a close correlation
between the current degree of public
concern about the market and the number
of walk-ins in his office, and at midday
on May 28th the mob of them was so
dense as to have, for his trained
sensibilities, positively albatross-like
connotations of disaster ahead.
Mothner’s troubles, like those of
brokers from San Diego to Bangor, were
by no means confined to disturbing signs
and portents. An unrestrained liquidation
of stocks was already well under way;
in Mothner’s office, orders from
customers were running five or six times
above average, and nearly all of them
were orders to sell. By and large,
brokers were urging their customers to
keep cool and hold on to their stocks, at
least for the present, but many of the
customers could not be persuaded. In
another midtown Merrill Lynch office, at
61 West Forty-eighth Street, a cable was
received from a substantial client living
in Rio de Janeiro that said simply,
“Please sell out everything in my
account.” Lacking the time to conduct a
long-distance argument in favor of
forbearance, Merrill Lynch had no
choice but to carry out the order. Radio
and television stations, which by early
afternoon had caught the scent of news,
were now interrupting their regular
programs with spot broadcasts on the
situation; as a Stock Exchange
publication has since commented, with
some asperity, “The degree of attention
devoted to the stock market in these
news broadcasts may have contributed
to the uneasiness among some
investors.” And the problem that brokers
faced in executing the flood of selling
orders was by this time vastly
complicated by technical factors. The
tape delay, which by 2:26 amounted to
fifty-five minutes, meant that for the most
part the ticker was reporting the prices
of an hour before, which in many cases
were anywhere from one to ten dollars a
share higher than the current prices. It
was almost impossible for a broker
accepting a selling order to tell his
customer what price he might expect to
get. Some brokerage firms were trying to
circumvent the tape delay by using
makeshift reporting systems of their
own; among these was Merrill Lynch,
whose floor brokers, after completing a
trade, would—if they remembered and
had the time—simply shout the result
into a floorside telephone connected to a
“squawk box” in the firm’s head office,
at 70 Pine Street. Obviously, haphazard
methods like this were subject to error.
On the Stock Exchange floor itself,
there was no question of any sort of
rally; it was simply a case of all stocks’
declining rapidly and steadily, on
enormous volume. As de la Vega might
have described the scene—as, in fact, he
did rather flamboyantly describe a
similar scene—“The bears [that is, the
sellers] are completely ruled by fear,
trepidation, and nervousness. Rabbits
become elephants, brawls in a tavern
become rebellions, faint shadows
appear to them as signs of chaos.” Not
the least worrisome aspect of the
situation was the fact that the leading
bluechip stocks, representing shares in
the country’s largest companies, were
right in the middle of the decline;
indeed,
American Telephone
&
Telegraph, the largest company of them
all, and the one with the largest number
of stockholders, was leading the entire
market downward. On a share volume
greater than that of any of the more than
fifteen hundred other stocks traded on
the Exchange (most of them at a tiny
fraction
of
Telephone’s
price),
Telephone had been battered by wave
after wave of urgent selling all day, until
at two o’clock it stood at 104¾—down
6⅞ for the day—and was still in full
retreat. Always something of a
bellwether, Telephone was now being
watched more closely than ever, and
each loss of a fraction of a point in its
price was the signal for further declines
all across the board. Before three
o’clock, I.B.M. was down 17½ points;
Standard Oil of New Jersey, often
exceptionally resistant to general
declines, was off 3¼; and Telephone
itself had tumbled again, to 101⅛. Nor
did the bottom appear to be in sight.
Yet the atmosphere on the floor, as it
has since been described by men who
were there, was not hysterical—or, at
least, any hysteria was well controlled.
While many brokers were straining to
the utmost the Exchange’s rule against
running on the floor, and some faces
wore expressions that have been
characterized by a conservative
Exchange official as “studious,” there
was the usual amount of joshing,
horseplay, and exchanging of mild
insults. (“Jokes … form a main
attraction to the business.”—de la Vega.)
But things were not entirely the same.
“What I particularly remember is feeling
physically exhausted,” one floor broker
has said. “On a crisis day, you’re likely
to walk ten or eleven miles on the floor
—that’s been measured with pedometers
—but it isn’t just the distance that wears
you down. It’s the physical contact. You
have to push and get pushed. People
climb all over you. Then, there were the
sounds—the tense hum of voices that you
always get in times of decline. As the
rate of decline increases, so does the
pitch of the hum. In a rising market,
there’s an entirely different sound. After
you get used to the difference, you can
tell just about what the market is doing
with your eyes shut. Of course, the usual
heavy joking went on, and maybe the
jokes got a little more forced than usual.
Everybody has commented on the fact
that when the closing bell rang, at three-
thirty, a cheer went up from the floor.
Well, we weren’t cheering because the
market was down. We were cheering
because it was over.”
was it over? This question occupied
Wall Street and the national investing
community all the afternoon and evening.
During the afternoon, the laggard
Exchange ticker slogged along, solemnly
recording prices that had long since
become obsolete. (It was an hour and
nine minutes late at closing time, and did
not finish printing the day’s transactions
until 5:58.) Many brokers stayed on the
Exchange floor until after five o’clock,
straightening out the details of trades,
and then went to their offices to work on
BUT
their accounts. What the price tape had
to tell, when it finally got around to
telling it, was a uniformly sad tale.
American Telephone had closed at
100⅝, down 11 for the day. Philip
Morris had closed at 71½, down 8¼
Campbell Soup had closed at 81, down
10¾. I.B.M. had closed at 361, down
37½. And so it went. In brokerage
offices, employees were kept busy—
many of them for most of the night—at
various special chores, of which by far
the most urgent was sending out margin
calls. A margin call is a demand for
additional collateral from a customer
who has borrowed money from his
broker to buy stocks and whose stocks
are now worth barely enough to cover
the loan. If a customer is unwilling or
unable to meet a margin call with more
collateral, his broker will sell the
margined stock as soon as possible; such
sales may depress other stocks further,
leading to more margin calls, leading to
more stock sales, and so on down into
the pit. This pit had proved bottomless
in 1929, when there were no federal
restrictions on stock-market credit.
Since then, a floor had been put in it, but
the fact remains that credit requirements
in May of 1962 were such that a
customer could expect a call when
stocks he had bought on margin had
dropped to between fifty and sixty per
cent of their value at the time he bought
them. And at the close of trading on May
28th nearly one stock in four had
dropped as far as that from its 1961
high. The Exchange has since estimated
that 91,700 margin calls were sent out,
mainly by telegram, between May 25th
and May 31st; it seems a safe
assumption that the lion’s share of these
went out in the afternoon, in the evening,
or during the night of May 28th—and not
just the early part of the night, either.
More than one customer first learned of
the crisis—or first became aware of its
almost spooky intensity—on being
awakened by the arrival of a margin call
in the pre-dawn hours of Tuesday.
If the danger to the market from the
consequences of margin selling was
much less in 1962 than it had been in
1929, the danger from another quarter—
selling
by
mutual
funds—was
immeasurably greater. Indeed, many
Wall Street professionals now say that at
the height of the May excitement the
mere thought of the mutual-fund situation
was enough to make them shudder. As is
well known to the millions of Americans
who have bought shares in mutual funds
over the past two decades or so, they
provide a way for small investors to
pool their resources under expert
management; the small investor buys
shares in a fund, and the fund uses the
money to buy stocks and stands ready to
redeem the investor’s shares at their
current asset value whenever he
chooses. In a serious stock-market
decline, the reasoning went, small
investors would want to get their money
out of the stock market and would
therefore ask for redemption of their
shares; in order to raise the cash
necessary to meet the redemption
demands, the mutual funds would have to
sell some of their stocks; these sales
would lead to a further stock-market
decline, causing more holders of fund
shares to demand redemption—and so
on down into a more up-to-date version
of the bottomless pit. The investment
community’s collective shudder at this
possibility was intensified by the fact
that the mutual funds’ power to magnify a
market decline had never been seriously
tested; practically nonexistent in 1929,
the funds had built up the staggering total
of twenty-three billion dollars in assets
by the spring of 1962, and never in the
interim had the market declined with
anything like its present force. Clearly, if
twenty-three billion dollars in assets, or
any substantial fraction of that figure,
were to be tossed onto the market now, it
could generate a crash that would make
1929 seem like a stumble. A thoughtful
broker named Charles J. Rolo, who was
a book reviewer for the Atlantic until he
joined Wall Street’s literary coterie in
1960, has recalled that the threat of a
fund-induced
downward
spiral,
combined with general ignorance as to
whether or not one was already in
progress, was “so terrifying that you
didn’t even mention the subject.” As a
man whose literary sensibilities had up
to then survived the well-known
crassness of economic life, Rolo was
perhaps a good witness on other aspects
of the downtown mood at dusk on May
28th. “There was an air of unreality,” he
said later. “No one, as far as I knew, had
the slightest idea where the bottom
would be. The closing Dow-Jones
average that day was down almost
thirty-five points, to about five hundred
and seventy-seven. It’s now considered
elegant in Wall Street to deny it, but
many leading people were talking about
a bottom of four hundred—which would,
of course, have been a disaster. One
heard the words ‘four hundred’ uttered
again and again, although if you ask
people now, they tend to tell you they
said ‘five hundred.’ And along with the
apprehensions there was a profound
feeling of depression of a very personal
sort among brokers. We knew that our
customers—by no means all of them rich
—had suffered large losses as a result of
our actions. Say what you will, it’s
extremely disagreeable to lose other
people’s money. Remember that this
happened at the end of about twelve
years of generally rising stock prices.
After more than a decade of more or less
constant profits to yourself and your
customers, you get to think you’re pretty
good. You’re on top of it. You can make
money, and that’s that. This break
exposed a weakness. It subjected one to
a certain loss of self-confidence, from
which one was not likely to recover
quickly.” The whole thing was enough,
apparently, to make a broker wish that he
were in a position to adhere to de la
Vega’s cardinal rule: “Never give
anyone the advice to buy or sell shares,
because,
where
perspicacity
is
weakened, the most benevolent piece of
advice can turn out badly.”
was on Tuesday morning that the
dimensions of Monday’s debacle
became evident. It had by now been
calculated that the paper loss in value of
all stocks listed on the Exchange
IT
amounted to $20,800,000,000. This
figure was an all-time record; even on
October 28, 1929, the loss had been a
mere $9,600,000,000, the key to the
apparent inconsistency being the fact that
the total value of the stocks listed on the
Exchange was far smaller in 1929 than
in 1962. The new record also
represented a significant slice of our
national income—specifically, almost
four per cent. In effect, the United States
had lost something like two weeks’
worth of products and pay in one day.
And,
of
course,
there
were
repercussions abroad. In Europe, where
reactions to Wall Street are delayed a
day by the time difference, Tuesday was
the day of crisis; by nine o’clock that
morning in New York, which was
toward the end of the trading day in
Europe, almost all the leading European
exchanges were experiencing wild
selling, with no apparent cause other
than Wall Street’s crash. The loss in
Milan was the worst in eighteen months.
That in Brussels was the worst since
1946, when the Bourse there reopened
after the war. That in London was the
worst in at least twenty-seven years. In
Zurich, there had been a sickening thirtyper-cent selloff earlier in the day, but
some of the losses were now being cut
as bargain hunters came into the market.
And another sort of backlash—less
direct, but undoubtedly more serious in
human terms—was being felt in some of
the poorer countries of the world. For
example, the price of copper for July
delivery dropped on the New York
commodity market by forty-four onehundredths of a cent per pound.
Insignificant as such a loss may sound, it
was a vital matter to a small country
heavily dependent on its copper exports.
In his recent book “The Great Ascent,”
Robert L. Heilbroner had cited an
estimate that for every cent by which
copper prices drop on the New York
market the Chilean treasury lost four
million dollars; by that standard, Chile’s
potential loss on copper alone was
$1,760,000.
Yet perhaps worse than the knowledge
of what had happened was the fear of
what might happen now. The Times
began a queasy lead editorial with the
statement that “something resembling an
earthquake hit the stock market
yesterday,” and then took almost half a
column to marshal its forces for the
reasonably
ringing
affirmation
“Irrespective of the ups and downs of
the stock market, we are and will remain
the masters of our economic fate.” The
Dow-Jones news ticker, after opening up
shop at nine o’clock with its customary
cheery “Good morning,” lapsed almost
immediately into disturbing reports of
the market news from abroad, and by
9:45, with the Exchange’s opening still a
quarter of an hour away, was asking
itself the jittery question “When will the
dumping of stocks let up?” Not just yet,
it concluded; all the signs seemed to
indicate that the selling pressure was
“far from satisfied.” Throughout the
financial world, ugly rumors were
circulating about the imminent failure of
various securities firms, increasing the
aura of gloom. (“The expectation of an
event creates a much deeper impression
… than the event itself.”—de la Vega.)
The fact that most of these rumors later
proved false was no help at the time.
Word of the crisis had spread overnight
to every town in the land, and the stock
market had become the national
preoccupation. In brokerage offices, the
switchboards were jammed with
incoming calls, and the customers’ areas
with walk-ins and, in many cases,
television crews. As for the Stock
Exchange itself, everyone who worked
on the floor had got there early, to batten
down against the expected storm, and
additional hands had been recruited from
desk jobs on the upper floors of 11 Wall
to help sort out the mountains of orders.
The visitors’ gallery was so crowded by
opening time that the usual guided tours
had to be suspended for the day. One
group that squeezed its way onto the
gallery that morning was the eighthgrade class of Corpus Christi Parochial
School, of West 121st Street; the class’s
teacher, Sister Aquin, explained to a
reporter that the children had prepared
for their visit over the previous two
weeks by making hypothetical stockmarket investments with an imaginary
ten thousand dollars each. “They lost all
their money,” said Sister Aquin.
The
Exchange’s
opening was
followed by the blackest ninety minutes
in the memory of many veteran dealers,
including some survivors of 1929. In the
first few minutes, comparatively few
stocks were traded, but this inactivity
did not reflect calm deliberation; on the
contrary, it reflected selling pressure so
great that it momentarily paralyzed
action. In the interests of minimizing
sudden jumps in stock prices, the
Exchange requires that one of its floor
officials must personally grant his
permission before any stock can change
hands at a price differing from that of the
previous sale by one point or more for a
stock priced under twenty dollars, or by
two points or more for a stock priced
above twenty dollars. Now sellers were
so plentiful and buyers so scarce that
hundreds of stocks would have to open
at price changes as great as that or
greater, and therefore no trading in them
was possible until a floor official could
be found in the shouting mob. In the case
of some of the key issues, like I.B.M.,
the disparity between sellers and buyers
was so wide that trading in them was
impossible even with the permission of
an official, and there was nothing to do
but wait until the prospect of getting a
bargain price lured enough buyers into
the market. The Dow-Jones broad tape,
stuttering out random prices and
fragments of information as if it were in
a state of shock, reported at 11:30 that
“at least seven” Big Board stocks had
still not opened; actually, when the dust
had cleared it appeared that the true
figure had been much larger than that.
Meanwhile, the Dow-Jones average lost
11.09 more points in the first hour,
Monday’s loss in stock values had been
increased by several billion dollars, and
the panic was in full cry.
And along with panic came near
chaos. Whatever else may be said about
Tuesday, May 29th, it will be long
remembered as the day when there was
something very close to a complete
breakdown of the reticulated, automated,
mind-boggling complex of technical
facilities that made nationwide stocktrading possible in a huge country where
nearly one out of six adults was a
stockholder. Many orders were executed
at prices far different from the ones
agreed to by the customers placing the
orders; many others were lost in
transmission, or in the snow of scrap
paper that covered the Exchange floor,
and were never executed at all.
Sometimes brokerage firms were
prevented from executing orders by
simple inability to get in touch with their
floor men. As the day progressed,
Monday’s heavy-traffic records were not
only broken but made to seem paltry; as
one index, Tuesday’s closing-time delay
in the Exchange tape was two hours and
twenty-three minutes, compared to
Monday’s hour and nine minutes. By a
heaven-sent stroke of prescience,
Merrill Lynch, which handled over
thirteen per cent of all public trading on
the Exchange, had just installed a new
7074 computer—the device that can
copy the Telephone Directory in three
minutes—and, with its help, managed to
keep its accounts fairly straight. Another
new Merrill Lynch installation—an
automatic teletype switching system that
occupied almost half a city block and
was intended to expedite communication
between the firm’s various offices—also
rose to the occasion, though it got so hot
that it could not be touched. Other firms
were less fortunate, and in a number of
them confusion gained the upper hand so
thoroughly that some brokers, tired of
trying in vain to get the latest quotations
on stocks or to reach their partners on
the Exchange floor, are said to have
simply thrown up their hands and gone
out for a drink. Such unprofessional
behavior may have saved their
customers a great deal of money.
But the crowning irony of the day was
surely supplied by the situation of the
tape during the lunch hour. Just before
noon, stocks reached their lowest levels
—down twenty-three points on the DowJones average. (At its nadir, the average
reached 553.75—a safe distance above
the 500 that the experts now claim was
their estimate of the absolute bottom.)
Then they abruptly began an
extraordinarily vigorous recovery. At
12:45, by which time the recovery had
become a mad scramble to buy, the tape
was fifty-six minutes late; therefore,
apart from fleeting intimations supplied
by a few “flash” prices, the ticker was
engaged in informing the stock-market
community of a selling panic at a
moment when what was actually in
progress was a buying panic.
great turnaround late in the morning
took place in a manner that would have
appealed to de la Vega’s romantic nature
—suddenly and rather melodramatically.
The key stock involved was American
Telephone & Telegraph, which, just as
on the previous day, was being
universally
watched
and
was
unmistakably influencing the whole
market. The key man, by the nature of his
job, was George M. L. La Branche, Jr.,
senior partner in La Branche and Wood
& Co., the firm that was acting as floor
specialist
in
Telephone.
(Floor
specialists are broker-dealers who are
responsible for maintaining orderly
markets in the particular stocks with
which they are charged. In the course of
THE
meeting their responsibilities, they often
have the curious duty of taking risks with
their own money against their own better
judgment. Various authorities, seeking to
reduce the element of human fallibility in
the market, have lately been trying to
figure out a way to replace the
specialists with machines, but so far
without success. One big stumbling
block seems to be the question: If the
mechanical specialists should lose their
shirts, who would pay their losses?) La
Branche, at sixty-four, was a short,
sharp-featured, dapper, peppery man
who was fond of sporting one of the
Exchange floor’s comparatively few Phi
Beta Kappa keys; he had been a
specialist since 1924, and his firm had
been the specialist in Telephone since
late in 1929. His characteristic habitat—
indeed, the spot where he spent some
five and a half hours almost every
weekday of his life—was immediately
in front of Post 15, in the part of the
Exchange that is not readily visible from
the visitors’ gallery and is commonly
called the Garage; there, feet planted
firmly apart to fend off any sudden
surges of would-be buyers or sellers, he
customarily stood with pencil poised in
a
thoughtful
way
over
an
unprepossessing loose-leaf ledger, in
which he kept a record of all outstanding
orders to buy and sell Telephone stock at
various price levels. Not surprisingly,
the ledger was known as the Telephone
book. La Branche had, of course, been at
the center of the excitement all day
Monday, when Telephone was leading
the market downward. As specialist, he
had been rolling with the punch like a
fighter—or to adopt his own more
picturesque metaphor, bobbing like a
cork on ocean combers. “Telephone is
kind of like the sea,” La Branche said
later. “Generally, it is calm and kindly.
Then all of a sudden a great wind comes
and whips up a giant wave. The wave
sweeps over and deluges everybody;
then it sucks back again. You have to
give with it. You can’t fight it, any more
than King Canute could.” On Tuesday
morning, after Monday’s drenching
eleven-point drop, the great wave was
still rolling; the sheer clerical task of
sorting and matching the orders that had
come in overnight—not to mention
finding a Stock Exchange official and
obtaining his permission—took so long
that the first trade in Telephone could not
be made until almost an hour after the
Exchange’s opening. When Telephone
did enter the lists, at one minute before
eleven, its price was 98½—down 2⅛
from Monday’s closing. Over the next
three-quarters of an hour or so, while the
financial world watched it the way a sea
captain might watch the barometer in a
hurricane, Telephone fluctuated between
99, which it reached on momentary
minor rallies, and 98⅛, which proved to
be its bottom. It touched the lower figure
on three separate occasions, with rallies
between—a fact that La Branche has
spoken of as if it had a magical or
mystical significance. And perhaps it
had; at any rate, after the third dip buyers
of Telephone began to turn up at Post 15,
sparse and timid at first, then more
numerous and aggressive. At 11:45, the
stock sold at 98¾; a few minutes later, at
99; at 11:50, at 99⅜; and finally, at
11:55, it sold at 100.
Many commentators have expressed
the opinion that that first sale of
Telephone at 100 marked the exact point
at which the whole market changed
direction. Since Telephone is among the
stocks on which the ticker gives flashes
during periods of tape delay, the
financial community learned of the
transaction almost immediately, and at a
time when everything else it was hearing
was very bad news indeed; the theory
goes that the hard fact of Telephone’s
recovery of almost two points worked
together with a purely fortuitous
circumstance—the psychological impact
of the good, round number 100—to tip
the scales. La Branche, while agreeing
that the rise of Telephone did a lot to
bring about the general upturn, differs as
to precisely which transaction was the
crucial one. To him, the first sale at 100
was insufficient proof of lasting
recovery, because it involved only a
small number of shares (a hundred, as
far as he remembers). He knew that in
his book he had orders to sell almost
twenty thousand shares of Telephone at
100. If the demand for shares at that
price were to run out before this twomillion-dollar supply was exhausted,
then the price of Telephone would drop
again, possibly going as low as 98⅛ for
a fourth time. And a man like La
Branche, given to thinking in nautical
terms, may have associated a certain
finality with the notion of going down
for a fourth time.
It did not happen. Several small
transactions at 100 were made in rapid
succession, followed by several more,
involving larger volume. Altogether,
about half the supply of the stock at that
price was gone when John J. Cranley,
floor partner of Dreyfus & Co., moved
unobtrusively into the crowd at Post 15
and bid 100 for ten thousand shares of
Telephone—just enough to clear out the
supply and thus pave the way for a
further rise. Cranley did not say whether
he was bidding on behalf of his firm, one
of its customers, or the Dreyfus Fund, a
mutual fund that Dreyfus & Co. managed
through one of its subsidiaries; the size
of the order suggests that the principal
was the Dreyfus Fund. In any case, La
Branche needed only to say “Sold,” and
as soon as the two men had made
notations of it, the transaction was
completed. Where-upon Telephone
could no longer be bought for 100.
There is historical precedent (though
not from de la Vega’s day) for the single
large Stock Exchange transaction that
turns the market, or is intended to turn it.
At half past one on October 24, 1929—
the dreadful day that has gone down in
financial history as Black Thursday—
Richard Whitney, then acting president
of the Exchange and probably the bestknown figure on its floor, strode
conspicuously (some say “jauntily”) up
to the post where U.S. Steel was traded,
and bid 205, the price of the last sale,
for ten thousand shares. But there are
two crucial differences between the
1929 trade and the 1962 one. In the first
place, Whitney’s stagy bid was a
calculated effort to create an effect,
while Cranley’s, delivered without
fanfare, was apparently just a move to
get a bargain for the Dreyfus Fund.
Secondly, only an evanescent rally
followed the 1929 deal—the next
week’s losses made Black Thursday
look no worse than gray—while a
genuinely solid recovery followed the
one in 1962. The moral may be that
psychological gestures on the Exchange
are most effective when they are neither
intended nor really needed. At all
events, a general rally began almost
immediately. Having broken through the
100 barrier, Telephone leaped wildly
upward: at 12:18, it was traded at 101¼;
at 12:41, at 103½; and at 1:05, at 106¼.
General Motors went from 45½ at 11:46
to 50 at 1:38. Standard Oil of New
Jersey went from 46¾ at 11:46 to 51 at
1:28. U.S. Steel went from 49½ at 11:40
to 52⅜ at 1:28. I.B.M. was, in its way,
the most dramatic case of the lot. All
morning, its stock had been kept out of
trading
by
an
overwhelming
preponderance of selling orders, and the
guesses as to its ultimate opening price
varied from a loss of ten points to a loss
of twenty or thirty; now such an
avalanche of buying orders appeared
that when it was at last technically
possible for the stock to be traded, just
before two o’clock, it opened up four
points, on a huge block of thirty thousand
shares. At 12:28, less than half an hour
after the big Telephone trade, the DowJones news service was sure enough of
what was happening to state flatly, “The
market has turned strong.”
And so it had, but the speed of the
turnaround produced more irony. When
the broad tape has occasion to transmit
an extended news item, such as a report
on a prominent man’s speech, it
customarily breaks the item up into a
series of short sections, which can then
be transmitted at intervals, leaving time
in the interstices for such spot news as
the latest prices from the Exchange floor.
This was what it did during the early
afternoon of May 29th with a speech
delivered to the National Press Club by
H. Ladd Plumley, president of the United
States Chamber of Commerce, which
began to be reported on the Dow-Jones
tape at 12:25, or at almost exactly the
same time that the same news source
declared the market to have turned
strong. As the speech came out in
sections on the broad tape, it created an
odd effect indeed. The tape started off
by saying that Plumley had called for “a
thoughtful appreciation of the present
lack of business confidence.” At this
point, there was an interruption for a few
minutes’ worth of stock prices, all of
them sharply higher. Then the tape
returned to Plumley, who was now
warming to his task and blaming the
stock-market plunge on “the coincidental
impact of two confidence-upsetting
factors—a
dimming
of
profit
expectations and President Kennedy’s
quashing of the steel price increase.”
Then came a longer interruption, chockfull of reassuring facts and figures. At its
conclusion, Plumley was back on the
tape, hammering away at his theme,
which had now taken on overtones of “I
told you so.” “We have had an awesome
demonstration that the ‘right business
climate’ cannot be brushed off as a
Madison Avenue cliché but is a reality
much to be desired,” the broad tape
quoted him as saying. So it went through
the early afternoon; it must have been a
heady time for the Dow-Jones
subscribers, who could alternately
nibble at the caviar of higher stock
prices and sip the champagne of
Plumley’s jabs at the Kennedy
administration.
was during the last hour and a half on
Tuesday that the pace of trading on the
Exchange reached its most frantic. The
official count of trades recorded after
three o’clock (that is, in the last half
hour) came to just over seven million
shares—in normal times as they were
reckoned in 1962, an unheard-of figure
even for a whole day’s trading. When the
closing bell sounded, a cheer again
arose from the floor—this one a good
deal more full-throated than Monday’s,
IT
because the day’s gain of 27.03 points in
the Dow-Jones average meant that
almost three-quarters of Monday’s
losses had been recouped; of the
$20,800,000,000 that had summarily
vanished on Monday, $13,500,000,000
had now reappeared. (These heartwarming figures weren’t available until
hours after the close, but experienced
securities men are vouchsafed visceral
intuitions of surprising statistical
accuracy; some of them claim that at
Tuesday’s closing they could feel in their
guts a Dow-Jones gain of over twentyfive points, and there is no reason to
dispute their claim.) The mood was
cheerful, then, but the hours were long.
Because of the greater trading volume,
tickers ticked and lights burned even
farther into the night than they had on
Monday; the Exchange tape did not print
the day’s last transaction until 8:15—
four and three-quarters hours after it had
actually occurred. Nor did the next day,
Memorial Day, turn out to be a day off
for the securities business. Wise old
Wall Streeters had expressed the opinion
that the holiday, falling by happy chance
in the middle of the crisis and thus
providing an opportunity for the cooling
of overheated emotions, may have been
the biggest factor in preventing the crisis
from becoming a disaster. What it
indubitably did provide was a chance
for the Stock Exchange and its member
organizations—all of whom had been
directed to remain at their battle stations
over the holiday—to begin picking up
the pieces.
The insidious effects of a late tape
had to be explained to thousands of
naïve customers who thought they had
bought U.S. Steel at, say, 50, only to find
later that they had paid 54 or 55. The
complaints of thousands of other
customers could not be so easily
answered. One brokerage house
discovered that two orders it had sent to
the floor at precisely the same time—
one to buy Telephone at the prevailing
price, the other to sell the same quantity
at the prevailing price—had resulted in
the seller’s getting 102 per share for his
stock and the buyer’s paying 108 for his.
Badly shaken by a situation that seemed
to cast doubt on the validity of the law of
supply and demand, the brokerage house
made inquiries and found that the buying
order had got temporarily lost in the
crush and had failed to reach Post 15
until the price had gone up six points.
Since the mistake had not been the
customer’s, the brokerage firm paid him
the difference. As for the Stock
Exchange itself, it had a variety of
problems to deal with on Wednesday,
among them that of keeping happy a team
of television men from the Canadian
Broadcasting Corporation who, having
forgotten all about the United States
custom of observing a holiday on May
30th, had flown down from Montreal to
take pictures of Wednesday’s action on
the Exchange. At the same time,
Exchange officials were necessarily
pondering the problem of Monday’s and
Tuesday’s scandalously laggard ticker,
which everyone agreed had been at the
very heart of—if not, indeed, the cause
of—the most nearly catastrophic
technical snarl in history. The
Exchange’s defense of itself, later set
down in detail, amounts, in effect, to a
complaint that the crisis came two years
too soon. “It would be inaccurate to
suggest that all investors were served
with normal speed and efficiency by
existing facilities,” the Exchange
conceded,
with
characteristic
conservatism, and went on to say that a
ticker with almost twice the speed of the
present one was expected to be ready for
installation in 1964. (In fact, the new
ticker and various other automation
devices, duly installed more or less on
time, proved to be so heroically
effective that the fantastic trading pace
of April, 1968 was handled with only
negligible tape delays.) The fact that the
1962 hurricane hit while the shelter was
under construction was characterized by
the Exchange as “perhaps ironic.”
There was still plenty of cause for
concern on Thursday morning. After a
period of panic selling, the market has a
habit of bouncing back dramatically and
then resuming its slide. More than one
broker recalled that on October 30, 1929
—immediately after the all-time-record
two-day decline, and immediately
before the start of the truly disastrous
slide that was to continue for years and
precipitate the great depression—the
Dow-Jones gain had been 28.40,
representing a rebound ominously
comparable to this one. In other words,
the market still suffers at times from
what de la Vega clinically called
“antiperistasis”—the
tendency
to
reverse itself, then reverse the reversal,
and so on. A follower of the
antiperistasis system of security analysis
might have concluded that the market
was now poised for another dive. As
things turned out, of course, it wasn’t.
Thursday was a day of steady, orderly
rises in stock prices. Minutes after the
ten-o’clock opening, the broad tape
spread the news that brokers everywhere
were being deluged with buying orders,
many of them coming from South
America, Asia, and the Western
European countries that are normally
active in the New York stock market.
“Orders still pouring in from all
directions,” the broad tape announced
exultantly just before eleven. Lost money
was magically reappearing, and more
was on the way. Shortly before two
o’clock, the Dow-Jones tape, having
proceeded from euphoria to insouciance,
took time off from market reports to
include a note on plans for a boxing
match between Floyd Patterson and
Sonny Liston. Markets in Europe,
reacting to New York on the upturn just
as they had on the downturn, had risen
sharply. New York copper futures had
recovered over eighty per cent of their
Monday and Tuesday-morning losses, so
Chile’s treasury was mostly bailed out.
As for the Dow-Jones industrial average
at closing, it figured out to 613.36,
meaning that the week’s losses had been
wiped out in toto, with a little bit to
spare. The crisis was over. In Morgan’s
terms, the market had fluctuated; in de la
Vega’s terms, antiperistasis had been
demonstrated.
that summer, and even into the
following year, security analysts and
other experts cranked out their
explanations of what had happened, and
so great were the logic, solemnity, and
detail of these diagnoses that they lost
only a little of their force through the fact
that hardly any of the authors had had the
slightest idea what was going to happen
before the crisis occurred. Probably the
most scholarly and detailed report on
who did the selling that caused the crisis
was furnished by the New York Stock
Exchange itself, which began sending
elaborate questionnaires to its individual
and corporate members immediately
after the commotion was over. The
Exchange calculated that during the three
ALL
days of the crisis rural areas of the
country were more active in the market
than they customarily are; that women
investors had sold two and a half times
as much stock as men investors; that
foreign investors were far more active
than usual, accounting for 5.5 per cent of
the total volume, and, on balance, were
substantial sellers; and, most striking of
all, that what the Exchange calls “public
individuals”—individual investors, as
opposed to institutional ones, which is to
say people who would be described
anywhere but on Wall Street as private
individuals—played an astonishingly
large role in the whole affair, accounting
for an unprecedented 56.8 per cent of the
total volume. Breaking down the public
individuals into income categories, the
Exchange calculated that those with
family incomes of over twenty-five
thousand dollars a year were the
heaviest and most insistent sellers, while
those with incomes under ten thousand
dollars, after selling on Monday and
early on Tuesday, bought so many shares
on Thursday that they actually became
net buyers over the three-day period.
Furthermore,
according
to
the
Exchange’s calculations, about a million
shares—or 3.5 per cent of the total
volume during the three days—were
sold as a result of margin calls. In sum,
if there was a villain, it appeared to
have been the relatively rich investor not
connected with the securities business—
and, more often than might have been
expected, the female, rural, or foreign
one, in many cases playing the market
partly on borrowed money.
The role of the hero was filled,
surprisingly, by the most frightening of
untested forces in the market—the
mutual funds. The Exchange’s statistics
showed that on Monday, when prices
were plunging, the funds bought 530,000
more shares than they sold, while on
Thursday, when investors in general
were stumbling over each other trying to
buy stock, the funds, on balance, sold
375,000 shares; in other words, far from
increasing the market’s fluctuation, the
funds actually served as a stabilizing
force. Exactly how this unexpectedly
benign effect came about remains a
matter of debate. Since no one has been
heard to suggest that the funds acted out
of sheer public-spiritedness during the
crisis, it seems safe to assume that they
were buying on Monday because their
managers had spotted bargains, and
were selling on Thursday because of
chances to cash in on profits. As for the
problem of redemptions, there were, as
had been feared, a large number of
mutual-fund shareholders who demanded
millions of dollars of their money in
cash when the market crashed, but
apparently the mutual funds had so much
cash on hand that in most cases they
could pay off their shareholders without
selling substantial amounts of stock.
Taken as a group, the funds proved to be
so rich and so conservatively managed
that they not only could weather the
storm but, by happy inadvertence, could
do something to decrease its violence.
Whether the same conditions would exist
in some future storm was and is another
matter.
In the last analysis, the cause of the
1962 crisis remains unfathomable; what
is known is that it occurred, and that
something like it could occur again. As
one of Wall Street’s aged, everanonymous seers put it recently, “I was
concerned, but at no time did I think it
would be another 1929. I never said the
Dow-Jones would go down to four
hundred. I said five hundred. The point
is that now, in contrast to 1929, the
government, Republican or Democratic,
realizes that it must be attentive to the
needs of business. There will never be
apple-sellers on Wall Street again. As to
whether what happened that May can
happen again—of course it can. I think
that people may be more careful for a
year or two, and then we may see
another speculative buildup followed by
another crash, and so on until God makes
people less greedy.”
Or, as de la Vega said, “It is foolish to
think that you can withdraw from the
Exchange after you have tasted the
sweetness of the honey.”
2
The Fate of the Edsel
RISE AND FLOWERING
the calendar of American economic
life, 1955 was the Year of the
Automobile. That year, American
IN
automobile makers sold over seven
million passenger cars, or over a million
more than they had sold in any previous
year. That year, General Motors easily
sold the public $325 million worth of
new common stock, and the stock market
as a whole, led by the motors, gyrated
upward so frantically that Congress
investigated it. And that year, too, the
Ford Motor Company decided to
produce a new automobile in what was
quaintly called the medium-price range
—roughly, from $2,400 to $4,000—and
went ahead and designed it more or less
in conformity with the fashion of the day,
which was for cars that were long, wide,
low, lavishly decorated with chrome,
liberally supplied with gadgets, and
equipped with engines of a power just
barely insufficient to send them into
orbit. Two years later, in September,
1957, the Ford Company put its new car,
the Edsel, on the market, to the
accompaniment of more fanfare than had
attended the arrival of any other new car
since the same company’s Model A,
brought out thirty years earlier. The total
amount spent on the Edsel before the
first specimen went on sale was
announced as a quarter of a billion
dollars; its launching—as Business
Week declared and nobody cared to deny
—was more costly than that of any other
consumer product in history. As a starter
toward getting its investment back, Ford
counted on selling at least 200,000
Edsels the first year.
There may be an aborigine
somewhere in a remote rain forest who
hasn’t yet heard that things failed to turn
out that way. To be precise, two years
two months and fifteen days later Ford
had sold only 109,466 Edsels, and,
beyond a doubt, many hundreds, if not
several thousands, of those were bought
by Ford executives, dealers, salesmen,
advertising men, assembly-line workers,
and others who had a personal interest in
seeing the car succeed. The 109,466
amounted to considerably less than one
per cent of the passenger cars sold in the
United States during that period, and on
November 19, 1959, having lost,
according to some outside estimates,
around $350 million on the Edsel, the
Ford Company permanently discontinued
its production.
How could this have happened? How
could a company so mightily endowed
with
money,
experience,
and,
presumably, brains have been guilty of
such a monumental mistake? Even before
the Edsel was dropped, some of the
more articulate members of the carminded public had come forward with
an answer—an answer so simple and so
seemingly reasonable that, though it was
not the only one advanced, it became
widely accepted as the truth. The Edsel,
these people argued, was designed,
named, advertised, and promoted with a
slavish adherence to the results of
public-opinion polls and of their
younger cousin, motivational research,
and they concluded that when the public
is wooed in an excessively calculated
manner, it tends to turn away in favor of
some gruffer but more spontaneously
attentive suitor. Several years ago, in the
face of an understandable reticence on
the part of the Ford Motor Company,
which enjoys documenting its boners no
more than anyone else, I set out to learn
what I could about the Edsel debacle,
and my investigations have led me to
believe that what we have here is less
than the whole truth.
For, although the Edsel was supposed
to be advertised, and otherwise
promoted, strictly on the basis of
preferences expressed in polls, some
old-fashioned snake-oil-selling methods,
intuitive rather than scientific, crept in.
Although it was supposed to have been
named in much the same way, science
was curtly discarded at the last minute
and the Edsel was named for the father
of the company’s president, like a
nineteenth-century brand of cough drops
or saddle soap. As for the design, it was
arrived at without even a pretense of
consulting the polls, and by the method
that has been standard for years in the
designing of automobiles—that of
simply pooling the hunches of sundry
company committees. The common
explanation of the Edsel’s downfall,
then, under scrutiny, turns out to be
largely a myth, in the colloquial sense of
that term. But the facts of the case may
live to become a myth of a symbolic sort
—a modern American antisuccess story.
origins of the Edsel go back to the
fall of 1948, seven years before the year
of decision, when Henry Ford II, who
had been president and undisputed boss
of the company since the death of his
grandfather, the original Henry, a year
earlier, proposed to the company’s
executive committee, which included
Ernest R. Breech, the executive vicepresident, that studies be undertaken
THE
concerning the wisdom of putting on the
market a new and wholly different
medium-priced car. The studies were
undertaken. There appeared to be good
reason for them. It was a well-known
practice at the time for low-income
owners of Fords, Plymouths, and
Chevrolets to turn in their symbols of
inferior caste as soon as their earnings
rose above five thousand dollars a year,
and “trade up” to a medium-priced car.
From Ford’s point of view, this would
have been all well and good except that,
for some reason, Ford owners usually
traded up not to Mercury, the company’s
only medium-priced car, but to one or
another of the medium-priced cars put
out by its big rivals—Oldsmobile,
Buick, and Pontiac, among the General
Motors products, and, to a lesser extent,
Dodge and De Soto, the Chrysler
candidates. Lewis D. Crusoe, then a
vice-president of the Ford Motor
Company, was not overstating the case
when he said, “We have been growing
customers for General Motors.”
The outbreak of the Korean War, in
1950, meant that Ford had no choice but
to go on growing customers for its
competitors, since introducing a new car
at such a time was out of the question.
The company’s executive committee put
aside the studies proposed by President
Ford, and there matters rested for two
years. Late in 1952, however, the end of
the war appeared sufficiently imminent
for the company to pick up where it had
left off, and the studies were
energetically resumed by a group called
the
Forward
Product
Planning
Committee, which turned over much of
the detailed work to the LincolnMercury Division, under the direction of
Richard Krafve (pronounced Kraffy), the
division’s assistant general manager.
Krafve, a forceful, rather saturnine man
with a habitually puzzled look, was then
in his middle forties. The son of a
printer on a small farm journal in
Minnesota, he had been a sales engineer
and management consultant before
joining Ford, in 1947, and although he
could not have known it in 1952, he was
to have reason to look puzzled. As the
man directly responsible for the Edsel
and its fortunes, enjoying its brief glory
and attending it in its mortal agonies, he
had a rendezvous with destiny.
December, 1954, after two years’
work, the Forward Product Planning
Committee submitted to the executive
committee a six-volume blockbuster of a
report summarizing its findings.
Supported by copious statistics, the
report predicted the arrival of the
American millennium, or something a lot
like it, in 1965. By that time, the
Forward Product Planning Committee
estimated, the gross national product
would be $535 billion a year—up more
IN
than $135 billion in a decade. (As a
matter of fact, this part of the millennium
arrived much sooner than the Forward
Planners estimated. The G. N. P. passed
$535 billion in 1962, and for 1965 was
$681 billion.) The number of cars in
operation would be seventy million—up
twenty million. More than half the
families in the nation would have
incomes of over five thousand dollars a
year, and more than 40 percent of all the
cars sold would be in the medium-price
range or better. The report’s picture of
America in 1965, presented in crushing
detail, was of a country after Detroit’s
own heart—its banks oozing money, its
streets and highways choked with huge,
dazzling medium-priced cars, its newly
rich, “upwardly mobile” citizens racked
with longings for more of them. The
moral was clear. If by that time Ford had
not come out with a second mediumpriced car—not just a new model, but a
new make—and made it a favorite in its
field, the company would miss out on its
share of the national boodle.
On the other hand, the Ford bosses
were well aware of the enormous risks
connected with putting a new car on the
market. They knew, for example, that of
the 2,900 American makes that had been
introduced since the beginning of the
Automobile Age—the Black Crow
(1905), the Averageman’s Car (1906),
the Bug-mobile (1907), the Dan Patch
(1911), and the Lone Star (1920) among
them—only about twenty were still
around. They knew all about the
automotive casualties that had followed
the Second World War—among them
Crosley, which had given up altogether,
and Kaiser Motors, which, though still
alive in 1954, was breathing its last.
(The members of the Forward Product
Planning Committee must have glanced
at each other uneasily when, a year later,
Henry J. Kaiser wrote, in a valediction
to his car business, “We expected to toss
fifty million dollars into the automobile
pond, but we didn’t expect it to
disappear without a ripple.”) The Ford
men also knew that neither of the other
members of the industry’s powerful and
well-heeled
Big
Three—General
Motors and Chrysler—had ventured to
bring out a new standard-size make
since the former’s La Salle in 1927, and
the latter’s Plymouth, in 1928, and that
Ford itself had not attempted to turn the
trick since 1938, when it launched the
Mercury.
Nevertheless, the Ford men felt
bullish—so remarkably bullish that they
resolved to toss into the automobile
pond five times the sum that Kaiser had.
In April, 1955, Henry Ford II, Breech,
and the other members of the executive
committee officially approved the
Forward Product Planning Committee’s
findings, and, to implement them, set up
another agency, called the Special
Products Division, with the star-crossed
Krafve as its head. Thus the company
gave its formal sanction to the efforts of
its designers, who, having divined the
trend of events, had already been
doodling for several months on plans for
a new car. Since neither they nor the
newly organized Krafve outfit, when it
took over, had an inkling of what the
thing on their drawing boards might be
called, it became known to everybody at
Ford, and even in the company’s press
releases, as the E-Car—the “E,” it was
explained, standing for “Experimental.”
The man directly in charge of the ECar’s design—or, to use the gruesome
trade word, “styling”—was a Canadian,
then not yet forty, named Roy A. Brown,
who, before taking on the E-Car (and
after studying industrial design at the
Detroit Art Academy), had had a hand in
the designing of radios, motor cruisers,
colored-glass
products,
Cadillacs,
Oldsmobiles, and Lincolns.* Brown
recently recalled his aspirations as he
went to work on the new project. “Our
goal was to create a vehicle which
would be unique in the sense that it
would be readily recognizable in styling
theme from the nineteen other makes of
cars on the road at that time,” he wrote
from England, where at the time of his
writing he was employed as chief stylist
for the Ford Motor Company, Ltd.,
manufacturers of trucks, tractors, and
small cars. “We went to the extent of
making photographic studies from some
distance of all nineteen of these cars,
and it became obvious that at a distance
of a few hundred feet the similarity was
so great that it was practically
impossible to distinguish one make from
the others.… They were all ‘peas in a
pod.’ We decided to select [a style that]
would be ‘new’ in the sense that it was
unique, and yet at the same time be
familiar.”
While the E-Car was on the drawing
boards in Ford’s styling studio—
situated, like its administrative offices,
in the company’s barony of Dearborn,
just outside Detroit—work on it
progressed under the conditions of
melodramatic, if ineffectual, secrecy that
invariably attend such operations in the
automobile business: locks on the studio
doors that could be changed in fifteen
minutes if a key should fall into enemy
hands; a security force standing roundthe-clock guard over the establishment;
and a telescope to be trained at intervals
on nearby high points of the terrain
where peekers might be roosting. (All
such precautions, however inspired, are
doomed to fail, because none of them
provide a defense against Detroit’s
version of the Trojan horse—the jobjumping stylist, whose cheerful treachery
makes it relatively easy for the rival
companies to keep tabs on what the
competition is up to. No one, of course,
is better aware of this than the rivals
themselves, but the cloak-and-dagger
stuff is thought to pay for itself in
publicity value.) Twice a week or so,
Krafve—head down, and sticking to low
ground—made the journey to the styling
studio, where he would confer with
Brown, check up on the work as it
proceeded, and offer advice and
encouragement. Krafve was not the kind
of man to envision his objective in a
single revelatory flash; instead, he
anatomized the styling of the E-Car into
a series of laboriously minute decisions
—how to shape the fenders, what pattern
to use with the chrome, what kind of
door handles to put on, and so on and on.
If Michelangelo ever added the number
of decisions that went into the execution
of, say, his “David,” he kept it to
himself, but Krafve, an orderly-minded
man in an era of orderly-functioning
computers, later calculated that in styling
the E-Car he and his associates had to
make up their minds on no fewer than
four thousand occasions. He reasoned at
the time that if they arrived at the right
yes-or-no choice on every one of those
occasions, they ought, in the end, to
come up with a stylistically perfect car
—or at least a car that would be unique
and at the same time familiar. But Krafve
concedes today that he found it difficult
thus to bend the creative process to the
yoke of system, principally because
many of the four thousand decisions he
made wouldn’t stay put. “Once you get a
general theme, you begin narrowing
down,” he says. “You keep modifying,
and then modifying your modifications.
Finally, you have to settle on something,
because there isn’t any more time. If it
weren’t for the deadline you’d probably
go on modifying indefinitely.”
Except for later, minor modifications
of the modified modifications, the E-Car
had been fully styled by midsummer of
1955. As the world was to learn two
years later, its most striking aspect was a
novel, horse-collar-shaped radiator
grille, set vertically in the center of a
conventionally low, wide front end—a
blend of the unique and the familiar that
was there for all to see, though certainly
not for all to admire. In two prominent
respects, however, Brown or Krafve, or
both, lost sight entirely of the familiar,
specifying a unique rear end, marked by
widespread horizontal wings that were
in bold contrast to the huge longitudinal
tail fins then captivating the market, and
a unique cluster of automatictransmission push buttons on the hub of
the steering wheel. In a speech to the
public delivered a while before the
public had its first look at the car,
Krafve let fall a hint or two about its
styling, which, he said, made it so
“distinctive” that, externally, it was
“immediately recognizable from front,
side, and rear,” and, internally, it was
“the epitome of the push-button era
without wild-blue-yonder Buck Rogers
concepts.” At last came the day when the
men in the highest stratum of the Ford
Hierarchy were given their first glimpse
of the car. It produced an effect that was
little short of apocalyptic. On August 15,
1955, in the ceremonial secrecy of the
styling center, while Krafve, Brown, and
their aides stood by smiling nervously
and washing their hands in air, the
members of the Forward Product
Planning Committee, including Henry
Ford II and Breech, watched critically
as a curtain was lifted to reveal the first
full-size model of the E-Car—a clay
one, with tinfoil simulating aluminum
and chrome. According to eyewitnesses,
the audience sat in utter silence for what
seemed like a full minute, and then, as
one man, burst into a round of applause.
Nothing of the kind had ever happened at
an intracompany first showing at Ford
since 1896, when old Henry had bolted
together his first horseless carriage.
of the most persuasive and most
frequently cited explanations of the
Edsel’s failure is that it was a victim of
the time lag between the decision to
produce it and the act of putting it on the
market. It was easy to see a few years
later, when smaller and less powerful
cars, euphemistically called “compacts,”
ONE
had become so popular as to turn the old
automobile status-ladder upside down,
that the Edsel was a giant step in the
wrong direction, but it was far from easy
to see that in fat, tail-finny 1955.
American
ingenuity—which
has
produced the electric light, the flying
machine, the tin Lizzie, the atomic bomb,
and even a tax system that permits a man,
under certain circumstances, to clear a
profit by making a charitable donation *
—has not yet found a way of getting an
automobile on the market within a
reasonable time after it comes off the
drawing board; the making of steel dies,
the alerting of retail dealers, the
preparation
of
advertising
and
promotion campaigns, the gaining of
executive approval for each successive
move, and the various other gavotte-like
routines that are considered as vital as
breathing in Detroit and its environs
usually consume about two years.
Guessing future tastes is hard enough for
those charged with planning the
customary annual changes in models of
established makes; it is far harder to
bring out an altogether new creation, like
the E-Car, for which several intricate
new steps must be worked into the dance
pattern, such as endowing the product
with a personality and selecting a
suitable name for it, to say nothing of
consulting various oracles in an effort to
determine whether, by the time of the
unveiling, the state of the national
economy will make bringing out any
new car seem like a good idea.
Faithfully executing the prescribed
routine, the Special Products Division
called upon its director of planning for
market research, David Wallace, to see
what he could do about imparting a
personality to the E-Car and giving it a
name. Wallace, a lean, craggy-jawed
pipe puffer with a soft, slow, thoughtful
way of speaking, gave the impression of
being the Platonic idea of the college
professor—the very steel die from
which the breed is cut—although, in
point of fact, his background was not
strongly academic. Before going to Ford,
in 1955, he had worked his way through
Westminster College, in Pennsylvania,
ridden out the depression as a
construction laborer in New York City,
and then spent ten years in market
research at Time. Still, impressions are
what count, and Wallace has admitted
that during his tenure with Ford he
consciously stressed his professorial air
for the sake of the advantage it gave him
in dealing with the bluff, practical men
of Dearborn. “Our department came to
be regarded as a semi-Brain Trust,” he
says, with a certain satisfaction. He
insisted, typically, on living in Ann
Arbor, where he could bask in the
scholarly aura of the University of
Michigan, rather than in Dearborn or
Detroit, both of which he declared were
intolerable after business hours.
Whatever the degree of his success in
projecting the image of the E-Car, he
seems, by his small eccentricities, to
have done splendidly at projecting the
image of Wallace. “I don’t think Dave’s
motivation for being at Ford was
basically economic,” his old boss,
Krafve, says. “Dave is the scholarly
type, and I think he considered the job an
interesting challenge.” One could
scarcely ask for better evidence of
image projection than that.
Wallace clearly recalls the reasoning
—candid enough—that guided him and
his assistants as they sought just the right
personality for the E-Car. “We said to
ourselves, ‘Let’s face it—there is no
great difference in basic mechanism
between
a
two-thousand-dollar
Chevrolet and a six-thousand-dollar
Cadillac,’” he says. “‘Forget about all
the ballyhoo,’ we said, ‘and you’ll see
that they are really pretty much the same
thing. Nevertheless, there’s something—
there’s got to be something—in the
makeup of a certain number of people
that gives them a yen for a Cadillac, in
spite of its high price, or maybe because
of it.’ We concluded that cars are the
means to a sort of dream fulfillment.
There’s some irrational factor in people
that makes them want one kind of car
rather than another—something that has
nothing to do with the mechanism at all
but with the car’s personality, as the
customer imagines it. What we wanted
to do, naturally, was to give the E-Car
the personality that would make the
greatest number of people want it. We
figured we had a big advantage over the
other manufacturers of medium-priced
cars, because we didn’t have to worry
about changing a pre-existent, perhaps
somewhat obnoxious personality. All we
had to do was create the exact one we
wanted—from scratch.”
As the first step in determining what
the E-Car’s exact personality should be,
Wallace decided to assess the
personalities of the medium-priced cars
already on the market, and those of the
so-called low-priced cars as well, since
the cost of some of the cheap cars’ 1955
models had risen well up into the
medium-price range. To this end, he
engaged the Columbia University Bureau
of Applied Social Research to interview
eight hundred recent car buyers in
Peoria, Illinois, and another eight
hundred in San Bernardino, California,
on the mental images they had of the
various automobile makes concerned.
(In undertaking this commercial
enterprise, Columbia maintained its
academic independence by reserving the
right to publish its findings.) “Our idea
was to get the reaction in cities, among
clusters of people,” Wallace says. “We
didn’t want a cross section. What we
wanted was something that would show
interpersonal factors. We picked Peoria
as a place that is Midwestern,
stereotyped, and not loaded with
extraneous factors—like a General
Motors glass plant, say. We picked San
Bernardino because the West Coast is
very important in the automobile
business, and because the market there is
quite different—people tend to buy
flashier cars.”
The questions that the Columbia
researchers fared forth to ask in Peoria
and San Bernardino dealt exhaustively
with practically everything having to do
with automobiles except such matters as
how much they cost, how safe they were,
and whether they ran. In particular,
Wallace
wanted
to
know
the
respondents’ impressions of each of the
existing makes. Who, in their opinion,
would naturally own a Chevrolet or a
Buick or whatever? People of what age?
Of which sex? Of what social status?
From the answers, Wallace found it easy
to put together a personality portrait of
each make. The image of the Ford came
into focus as that of a very fast, strongly
masculine car, of no particular social
pretensions, that might characteristically
be driven by a rancher or an automobile
mechanic. In contrast, Chevrolet
emerged as older, wiser, slower, a bit
less rampantly masculine, and slightly
more distingué—a clergyman’s car.
Buick jelled into a middle-aged lady—
or, at least, more of a lady than Ford, sex
in cars having proved to be relative—
with a bit of the devil still in her, whose
most felicitous mate would be a lawyer,
a doctor, or a dance-band leader. As for
the Mercury, it came out as virtually a
hot rod, best suited to a young-buck
racing driver; thus, despite its higher
price tag, it was associated with persons
having incomes no higher than the
average Ford owner’s, so no wonder
Ford owners had not been trading up to
it. This odd discrepancy between image
and fact, coupled with the circumstance
that, in sober truth all four makes looked
very much alike and had almost the same
horsepower under their hoods, only
served to bear out Wallace’s premise
that the automobile fancier, like a young
man in love, is incapable of sizing up the
object of his affections in anything
resembling a rational manner.
By the time the researchers closed the
books on Peoria and San Bernardino,
they had elicited replies not only to these
questions but to others, several of which,
it would appear, only the most abstruse
sociological thinker could relate to
medium-priced cars. “Frankly, we
dabbled,” Wallace says. “It was a
dragnet operation.” Among the odds and
ends that the dragnet dredged up were
some that, when pieced together, led the
researchers to report:
By looking at those respondents whose annual incomes
range from $4,000 to $11,000, we can make an …
observation. A considerable percentage of these
respondents [to a question about their ability to mix
cocktails] are in the “somewhat” category on ability to
mix cocktails.… Evidently, they do not have much
confidence in their cocktail-mixing ability. We may
infer that these respondents are aware of the fact that
they are in the learning process. They may be able to
mix Martinis or Manhattans, but beyond these popular
drinks they don’t have much of a repertoire.
Wallace, dreaming of an ideally
lovable E-Car, was delighted as returns
like these came pouring into his
Dearborn office. But when the time for a
final decision drew near, it became clear
to him that he must put aside peripheral
issues like cocktail-mixing prowess and
address himself once more to the old
problem of the image. And here, it
seemed to him, the greatest pitfall was
the temptation to aim, in accordance
with what he took to be the trend of the
times, for extremes of masculinity,
youthfulness, and speed; indeed, the
following passage from one of the
Columbia reports, as he interpreted it,
contained a specific warning against
such folly.
Offhand we might conjecture that women who drive
cars probably work, and are more mobile than nonowners, and get gratifications out of mastering a
traditionally male role. But … there is no doubt that
whatever gratifications women get out of their cars,
and whatever social imagery they attach to their
automobiles, they do want to appear as women.
Perhaps more worldly women, but women.
Early in 1956, Wallace set about
summing up all of his department’s
findings in a report to his superiors in
the Special Products Division. Entitled
“The Market and Personality Objectives
of the E-Car” and weighty with facts and
statistics—though
generously
interspersed with terse sections in italics
or capitals from which a hard-pressed
executive could get the gist of the thing
in a matter of seconds—the report first
indulged in some airy, skippable
philosophizing and then got down to
conclusions:
What happens when an owner sees his make as a car
which a woman might buy, but is himself a man? Does
this apparent inconsistency of car image and the
buyer’s own characteristics affect his trading plans?
The answer quite definitely is Yes. When there is a
conflict between owner characteristics and make
image, there is greater planning to switch to another
make. In other words, when the buyer is a different
kind of person from the person he thinks would own
his make, he wants to change to a make in which he,
inwardly, will be more comfortable.
It should be noted that “conflict,” as used here,
can be of two kinds. Should a make have a strong and
well-defined image, it is obvious that an owner with
strong opposing characteristics would be in conflict.
But conflict also can occur when the make image is
diffuse or weakly defined. In this case, the owner is in
an equally frustrating position of not being able to get a
satisfactory identification from his make.
The question, then, was how to steer
between the Scylla of a too definite car
personality and the Charybdis of a too
weak personality. To this the report
replied, “Capitalize on imagery
weakness of competition,” and went on
to urge that in the matter of age the E-Car
should take an imagery position neither
too young nor too old but right alongside
that of the middling Olds-mobile; that in
the matter of social class, not to mince
matters, “the E-Car might well take a
status position just below Buick and
Oldsmobile”; and that in the delicate
matter of sex it should try to straddle the
fence, again along with the protean Olds.
In sum (and in Wallace typography):
The most advantageous personality for the E-Car
might well be THE SMART CAR FOR THE
YOUNGER EXECUTIVE OR PROFESSIONAL
FAMILY ON ITS WAY UP.
Smart car: recognition by others of the owner’s
good style and taste.
Younger: appealing to spirited but responsible
adventurers.
Executive or professional: millions pretend to this
status, whether they can attain it or not.
Family: not exclusively masculine; a wholesome
“good” role.
On Its Way Up: “The E-Car has faith in you, son;
we’ll help you make it!”
Before spirited but responsible
adventurers could have faith in the ECar, however, it had to have a name.
Very early in its history, Krafve had
suggested to members of the Ford family
that the new car be named for Edsel
Ford, who was the only son of old
Henry; the president of the Ford Motor
Company from 1918 until his death, in
1943; and the father of the new
generation of Fords—Henry II, Benson,
and William Clay. The three brothers
had let Krafve know that their father
might not have cared to have his name
spinning on a million hubcaps, and they
had consequently suggested that the
Special Products Division start looking
around for a substitute. This it did, with
a zeal no less emphatic than it displayed
in the personality crusade. In the late
summer and early fall of 1955, Wallace
hired the services of several research
outfits, which sent interviewers, armed
with a list of two thousand possible
names, to canvass sidewalk crowds in
New York, Chicago, Willow Run, and
Ann Arbor. The interviewers did not ask
simply what the respondent thought of
some such name as Mars, Jupiter, Rover,
Ariel, Arrow, Dart, or Ovation. They
asked what free associations each name
brought to mind, and having got an
answer to this one, they asked what
word or words was considered the
opposite of each name, on the theory
that, subliminally speaking, the opposite
is as much a part of a name as the tail is
of a penny. The results of all this, the
Special Products Division eventually
decided, were inconclusive. Meanwhile,
Krafve and his men held repeated
sessions in a darkened room, staring,
with the aid of a spotlight, at a series of
cardboard signs, each bearing a name,
as, one after another, they were flipped
over for their consideration. One of the
men thus engaged spoke up for the name
Phoenix, because of its connotations of
ascendancy, and another favored Altair,
on the ground that it would lead
practically all alphabetical lists of cars
and thus enjoy an advantage analogous to
that enjoyed in the animal kingdom by
the aardvark. At a certain drowsy point
in one session, somebody suddenly
called a halt to the card-flipping and
asked, in an incredulous tone, “Didn’t I
see ‘Buick’ go by two or three cards
back?” Everybody looked at Wallace,
the impresario of the sessions. He puffed
on his pipe, smiled an academic smile,
and nodded.
card-flipping sessions proved to be
as fruitless as the sidewalk interviews,
and it was at this stage of the game that
Wallace, resolving to try and wring from
genius what the common mind had failed
to yield, entered into the celebrated carnaming correspondence with the poet
Marianne Moore, which was later
published in The New Yorker and still
later, in book form, by the Morgan
Library. “We should like this name … to
convey, through association or other
conjuration, some visceral feeling of
elegance, fleetness, advanced features
and design,” Wallace wrote to Miss
Moore, achieving a certain feeling of
elegance himself. If it is asked who
among the gods of Dearborn had the
THE
inspired and inspiriting idea of enlisting
Miss Moore’s services in this cause, the
answer, according to Wallace, is that it
was no god but the wife of one of his
junior assistants—a young lady who had
recently graduated from Mount Holyoke,
where she had heard Miss Moore
lecture. Had her husband’s superiors
gone a step further and actually adopted
one of Miss Moore’s many suggestions
—Intelligent Bullet, for instance, or
Utopian Turtletop, or Bullet Cloisonné,
or Pastelogram, or Mongoose Civique,
or Andante con Moto (“Description of a
good motor?” Miss Moore queried in
regard to this last)—there is no telling to
what heights the E-Car might have risen,
but the fact is that they didn’t.
Dissatisfied with both the poet’s ideas
and their own, the executives in the
Special Products Division next called in
Foote, Cone & Belding, the advertising
agency that had lately been signed up to
handle the E-Car account. With
characteristic Madison Avenue vigor,
Foote, Cone & Belding organized a
competition among the employees of its
New York, London, and Chicago offices,
offering nothing less than one of the
brand-new cars as a prize to whoever
thought up an acceptable name. In no
time at all, Foote, Cone & Belding had
eighteen thousand names in hand,
including Zoom, Zip, Benson, Henry, and
Drof (if in doubt, spell it backward).
Suspecting that the bosses of the Special
Products Division might regard this list
as a trifle unwieldy, the agency got to
work and cut it down to six thousand
names, which it presented to them in
executive session. “There you are,” a
Foote, Cone man said triumphantly,
flopping a sheaf of papers on the table.
“Six thousand names, all alphabetized
and cross-referenced.”
A gasp escaped Krafve. “But we
don’t want six thousand names,” he said.
“We only want one.”
The situation was critical, because the
making of dies for the new car was
about to begin and some of them would
have to bear its name. On a Thursday,
Foote, Cone & Belding canceled all
leaves and instituted what is called a
crash program, instructing its New York
and Chicago offices to set about
independently cutting down the list of six
thousand names to ten and to have the
job done by the end of the weekend.
Before the weekend was over, the two
Foote, Cone offices presented their
separate lists of ten to the Special
Products Division, and by an almost
incredible coincidence, which all hands
insist was a coincidence, four of the
names on the two lists were the same;
Corsair, Citation, Pacer, and Ranger had
miraculously survived the dual scrutiny.
“Corsair seemed to be head and
shoulders above everything else,”
Wallace says. “Along with other factors
in its favor, it had done splendidly in the
sidewalk
interviews.
The
free
associations with Corsair were rather
romantic—‘pirate,’
‘swashbuckler,’
things like that. For its opposite, we got
‘princess,’ or something else attractive
on that order. Just what we wanted.”
Corsair or no Corsair, the E-Car was
named the Edsel in the early spring of
1956, though the public was not
informed until the following autumn. The
epochal decision was reached at a
meeting of the Ford executive committee
held at a time when, as it happened, all
three Ford brothers were away. In
President Ford’s absence, the meeting
was conducted by Breech, who had
become chairman of the board in 1955,
and his mood that day was brusque, and
not one to linger long over
swashbucklers and princesses. After
hearing the final choices, he said, “I
don’t like any of them. Let’s take another
look at some of the others.” So they took
another look at the favored rejects,
among them the name Edsel, which, in
spite of the three Ford brothers’
expressed interpretation of their father’s
probable wishes, had been retained as a
sort of anchor to windward. Breech led
his associates in a patient scrutiny of the
list until they came to “Edsel.” “Let’s
call it that,” Breech said with calm
finality. There were to be four main
models of the E-Car, with variations on
each one, and Breech soothed some of
his colleagues by adding that the magic
four—Corsair, Citation, Pacer, and
Ranger—might be used, if anybody felt
so inclined, as the subnames for the
models. A telephone call was put
through to Henry II, who was
vacationing in Nassau. He said that if
Edsel was the choice of the executive
committee, he would abide by its
decision, provided he could get the
approval of the rest of his family. Within
a few days, he got it.
As Wallace wrote to Miss Moore a
while later: “We have chosen a name.…
It fails somewhat of the resonance,
gaiety, and zest we were seeking. But it
has a personal dignity and meaning to
many of us here. Our name, dear Miss
Moore, is—Edsel. I hope you will
understand.”
may be assumed that word of the
naming of the E-Car spread a certain
amount of despair among the Foote,
Cone & Belding backers of more
metaphorical names, none of whom won
a free car—a despair heightened by the
fact that the name “Edsel” had been
ruled out of the competition from the
first. But their sense of disappointment
was as nothing compared to the gloom
that enveloped many employees of the
Special Products Division. Some felt
IT
that the name of a former president of the
company, who had sired its current
president, bore dynastic connotations
that were alien to the American temper;
others, who, with Wallace, had put their
trust in the quirks of the mass
unconscious, believed that “Edsel” was
a disastrously unfortunate combination
of syllables. What were its free
associations? Pretzel, diesel, hard sell.
What was its opposite? It didn’t seem to
have any. Still, the matter was settled,
and there was nothing to do but put the
best possible face on it. Besides, the
anguish in the Special Products Division
was by no means unanimous, and Krafve
himself, of course, was among those
who had no objection to the name. He
still has none, declining to go along with
those who contend that the decline and
fall of the Edsel may be dated from the
moment of its christening.
Krafve, in fact, was so well pleased
with the way matters had turned out that
when, at eleven o’clock on the morning
of November 19, 1956, after a long
summer of thoughtful silence, the Ford
Company released to the world the glad
tidings that the E-Car had been named
the Edsel, he accompanied the
announcement with a few dramatic
flourishes of his own. On the very stroke
of that hour on that day, the telephone
operators in Krafve’s domain began
greeting callers with “Edsel Division”
instead of “Special Products Division”;
all stationery bearing the obsolete
letterhead of the division vanished and
was replaced by sheaves of paper
headed “Edsel Division”; and outside
the building a huge stainless-steel sign
reading
“EDSEL
DIVISION”
rose
ceremoniously to the rooftop. Krafve
himself managed to remain earthbound,
though he had his own reasons for
feeling buoyant; in recognition of his
leadership of the E-Car project up to that
point, he was given the august title of
Vice-President of the Ford Motor
Company and General Manager, Edsel
Division.
From the administrative point of view,
this
off-with-the-old-on-with-the-new
effect was merely harmless window
dressing. In the strict secrecy of the
Dearborn test track, vibrant, almost fullfledged Edsels, with their name graven
on their superstructures, were already
being road-tested; Brown and his fellow
stylists were already well along with
their designs for the next year’s Edsel;
recruits were already being signed up
for an entirely new organization of retail
dealers to sell the Edsel to the public;
and Foote, Cone & Belding, having been
relieved of the burden of staging crash
programs to collect names and crash
programs to get rid of them again, was
already deep in schemes for advertising
the Edsel, under the personal direction
of a no less substantial pillar of his trade
than Fairfax M. Cone, the agency’s head
man. In planning his campaign, Cone
relied heavily on what had come to be
called the “Wallace prescription”; that
is, the formula for the Edsel’s
personality as set forth by Wallace back
in the days before the big naming bee
—“The smart car for the younger
executive or professional family on its
way up.” So enthusiastic was Cone
about the prescription that he accepted it
with only one revision—the substitution
of “middle-income” family for “younger
executive,” his hunch being that there
were more middle-income families
around than young executives, or even
people who thought they were young
executives. In an expansive mood,
possibly induced by his having landed
an account that was expected to bring
billings of well over ten million dollars
a year, Cone described to reporters on
several occasions the kind of campaign
he was plotting for the Edsel—quiet,
self-assured, and avoiding as much as
possible the use of the adjective “new,”
which, though it had an obvious
application to the product, he considered
rather lacking in cachet. Above all, the
campaign was to be classic in its
calmness. “We think it would be awful
for the advertising to compete with the
car,” Cone told the press. “We hope that
no one will ever ask, ‘Say, did you see
that Edsel ad?’ in any newspaper or
magazine or on television, but, instead,
that hundreds of thousands of people
will say, and say again, ‘Man, did you
read about that Edsel?’ or ‘Did you see
that car?’ This is the difference between
advertising and selling.” Evidently
enough, Cone felt confident about the
campaign and the Edsel. Like a chess
master who has no doubt that he will
win, he could afford to explicate the
brilliance of his moves even as he made
them.
Automobile men still talk, with
admiration for the virtuosity displayed
and a shudder at the ultimate outcome, of
the Edsel Division’s drive to round up
retail dealers. Ordinarily, an established
manufacturer launches a new car through
dealers who are already handling his
other makes and who, to begin with, take
on the upstart as a sort of sideline. Not
so in the case of the Edsel; Krafve
received authorization from on high to
go all out and build up a retail-dealer
organization by making raids on dealers
who had contracts with other
manufacturers, or even with the other
Ford Company divisions—Ford and
Lincoln-Mercury. (Although the Ford
dealers thus corralled were not obliged
to cancel their old contracts, all the
emphasis was on signing up retail outlets
exclusively dedicated to the selling of
Edsels.) The goal set for Introduction
Day—which, after a great deal of soul-
searching, was finally established as
September 4, 1957—was twelve
hundred Edsel dealers from coast to
coast. They were not to be just any
dealers, either; Krafve made it clear that
Edsel was interested in signing up only
dealers whose records showed that they
had a marked ability to sell cars without
resorting to the high-pressure tricks of
borderline legality that had lately been
giving the automobile business a bad
name. “We simply have to have quality
dealers with quality service facilities,”
Krafve said. “A customer who gets poor
service on an established brand blames
the dealer. On an Edsel, he will blame
the car.” The goal of twelve hundred
was a high one, for no dealer, quality or
not, can afford to switch makes lightly.
The average dealer has at least a
hundred thousand dollars tied up in his
agency, and in large cities the investment
is much higher. He must hire salesmen,
mechanics, and office help; buy his own
tools, technical literature, and signs, the
latter costing as much as five thousand
dollars a set; and pay the factory spot
cash for the cars he receives from it.
The man charged with mobilizing an
Edsel sales force along these exacting
lines was J. C. (Larry) Doyle, who, as
general sales-and-marketing manager of
the division, ranked second to Krafve
himself. A veteran of forty years with the
Ford Company, who had started with it
as an office boy in Kansas City and had
spent the intervening time mainly selling,
Doyle was a maverick in his field. On
the one hand, he had an air of kindness
and consideration that made him the very
antithesis of the glib, brash denizens of a
thousand automobile rows across the
continent, and, on the other, he did not
trouble to conceal an old-time
salesman’s skepticism about such things
as analyzing the sex and status of
automobiles, a pursuit he characterized
by saying, “When I play pool, I like to
keep one foot on the floor.” Still, he
knew how to sell cars, and that was
what the Edsel Division needed.
Recalling how he and his sales staff
brought off the unlikely trick of
persuading substantial and reputable
men who had already achieved success
in one of the toughest of all businesses to
tear up profitable franchises in favor of
a risky new one, Doyle said not long
ago, “As soon as the first few new
Edsels came through, early in 1957, we
put a couple of them in each of our five
regional sales offices. Needless to say,
we kept those offices locked and the
blinds drawn. Dealers in every make for
miles around wanted to see the car, if
only out of curiosity, and that gave us the
leverage we needed. We let it be known
that we would show the car only to
dealers who were really interested in
coming with us, and then we sent our
regional field managers out to
surrounding towns to try to line up the
No. 1 dealer in each to see the cars. If
we couldn’t get No. 1, we’d try for No.
2. Anyway, we set things up so that no
one got in to see the Edsel without
listening to a complete one-hour pitch on
the whole situation by a member of our
sales force. It worked very well.” It
worked so well that by midsummer,
1957, it was clear that Edsel was going
to have a lot of quality dealers on
Introduction Day. (In fact, it missed the
goal of twelve hundred by a couple of
dozen.) Indeed, some dealers in other
makes were apparently so confident of
the Edsel’s success, or so bemused by
the Doyle staff’s pitch, that they were
entirely willing to sign up after hardly
more than a glance at the Edsel itself.
Doyle’s people urged them to study the
car closely, and kept reciting the litany
of its virtues, but the prospective Edsel
dealers would wave such protestations
aside and demand a contract without
further ado. In retrospect, it would seem
that Doyle could have given lessons to
the Pied Piper.
Now that the Edsel was no longer the
exclusive concern of Dearborn, the Ford
Company was irrevocably committed to
going ahead. “Until Doyle went into
action, the whole program could have
been quietly dropped at any time at a
word from top management, but once the
dealers had been signed up, there was
the matter of honoring your contract to
put out a car,” Krafve has explained. The
matter was attended to with dispatch.
Early in June, 1957, the company
announced that of the $250 million it had
set aside to defray the advance costs of
the Edsel, $150 million was being spent
on basic facilities, including the
conversion of various Ford and Mercury
plants to the needs of producing the new
cars; $50 million on special Edsel
tooling; and $50 million on initial
advertising and promotion. In June, too,
an Edsel destined to be the star of a
television commercial for future release
was stealthily transported in a closed
van to Hollywood, where, on a locked
sound stage patrolled by security guards,
it was exposed to the cameras in the
admiring presence of a few carefully
chosen actors who had sworn that their
lips would be sealed from then until
Introduction Day. For this delicate
photographic operation the Edsel
Division cannily enlisted the services of
Cascade Pictures, which also worked
for the Atomic Energy Commission, and,
as far as is known, there were no
unintentional leaks. “We took all the
same precautions we take for our A.E.C.
films,” a grim Cascade official has since
said.
Within a few weeks, the Edsel
Division had eighteen hundred salaried
employees and was rapidly filling some
fifteen thousand factory jobs in the
newly converted plants. On July 15th,
Edsels began rolling off assembly lines
at Somerville, Massachusetts; Mahwah,
New Jersey; Louisville, Kentucky; and
San Jose, California. The same day,
Doyle scored an important coup by
signing up Charles Kreisler, a Manhattan
dealer regarded as one of the country’s
foremost practitioners in his field, who
had represented Oldsmobile—one of
Edsel’s self-designated rivals—before
heeding the siren song from Dearborn.
On July 22nd, the first advertisement for
the Edsel appeared—in Life. A twopage spread in plain black-and-white, it
was impeccably classic and calm,
showing a car whooshing down a
country highway at such high speed that
it was an indistinguishable blur. “Lately,
some mysterious automobiles have been
seen on the roads,” the accompanying
text was headed. It went on to say that
the blur was an Edsel being road-tested,
and concluded with the assurance “The
Edsel is on its way.” Two weeks later, a
second ad appeared in Life, this one
showing a ghostly-looking car, covered
with a white sheet, standing at the
entrance to the Ford styling center. This
time the headline read, “A man in your
town recently made a decision that will
change his life.” The decision, it was
explained, was to become an Edsel
dealer. Whoever wrote the ad cannot
have known how truly he spoke.
the tense summer of 1957, the
man of the hour at Edsel was C. Gayle
Warnock, director of public relations,
whose duty was not so much to generate
public interest in the forthcoming
product, there being an abundance of
that, as to keep the interest at white heat,
and readily convertible into a desire to
buy one of the new cars on or after
Introduction Day—or, as the company
came to call it, Edsel Day. Warnock, a
dapper, affable man with a tiny
mustache, is a native of Converse,
Indiana, who, long before Krafve drafted
him from the Ford office in Chicago, did
a spot of publicity work for county fairs
—a background that has enabled him to
spice the honeyed smoothness of the
DURING
modern public-relations man with a
touch of the old carnival pitchman’s
uninhibited spirit. Recalling his
summons to Dearborn, Warnock says,
“When Dick Krafve hired me, back in
the fall of 1955, he told me, ‘I want you
to program the E-Car publicity from now
to Introduction Day.’ I said, ‘Frankly,
Dick, what do you mean by “program”?’
He said he meant to sort of space it out,
starting at the end and working
backward. This was something new to
me—I was used to taking what breaks I
could get when I could get them—but I
soon found out how right Dick was. It
was almost too easy to get publicity for
the Edsel. Early in 1956, when it was
still called the E-Car, Krafve gave a
little talk about it out in Portland,
Oregon. We didn’t try for anything more
than a play in the local press, but the
wire services picked the story up and it
went out all over the country. Clippings
came in by the bushel. Right then I
realized the trouble we might be headed
for. The public was getting to be
hysterical to see our car, figuring it was
going to be some kind of dream car—
like nothing they’d ever seen. I said to
Krafve, ‘When they find out it’s got four
wheels and one engine, just like the next
car, they’re liable to be disappointed.’”
It was agreed that the safest way to
tread the tightrope between overplaying
and underplaying the Edsel would be to
say nothing about the car as a whole but
to reveal its individual charms a little at
a time—a sort of automotive strip tease
(a phrase that Warnock couldn’t with
proper dignity use himself but was
happy to see the New York Times use for
him). The policy was later violated now
and then, purposely or inadvertently. For
one thing, as the pre-Edsel Day summer
wore on, reporters prevailed upon
Krafve to authorize Warnock to show the
Edsel to them, one at a time, on what
Warnock called a “peekaboo,” or
“you’ve-seen-it-now-forget-it,” basis.
And, for another, Edsels loaded on vans
for delivery to dealers were appearing
on the highways in ever-increasing
numbers, covered fore and aft with
canvas flaps that, as if to whet the desire
of the motoring public, were forever
blowing loose. That summer, too, was a
time of speechmaking by an Edsel
foursome consisting of Krafve, Doyle, J.
Emmet Judge, who was Edsel’s director
of merchandise and product planning,
and Robert F. G. Copeland, its assistant
general sales manager for advertising,
sales promotion, and training. Ranging
separately up and down and across the
nation, the four orators moved around so
fast and so tirelessly that Warnock, lest
he lose track of them, took to indicating
their whereabouts with colored pins on a
map in his office. “Let’s see, Krafve
goes from Atlanta to New Orleans,
Doyle from Council Bluffs to Salt Lake
City,” Warnock would muse of a
morning in Dearborn, sipping his second
cup of coffee and then getting up to yank
the pins out and jab them in again.
Although most of Krafve’s audiences
consisted of bankers and representatives
of finance companies who it was hoped
would lend money to Edsel dealers, his
speeches that summer, far from echoing
the general hoopla, were almost
statesmanlike in their cautious—even
somber—references to the new car’s
prospects. And well they might have
been, for developments in the general
economic outlook of the nation were
making more sanguine men than Krafve
look puzzled. In July, 1957, the stock
market went into a nose dive, marking
the beginning of what is recalled as the
recession of 1958. Then, early in
August, a decline in the sales of
medium-priced 1957 cars of all makes
set in, and the general situation
worsened so rapidly that, before the
month was out, Automotive News
reported that dealers in all makes were
ending their season with the secondlargest number of unsold new cars in
history. If Krafve, on his lonely rounds,
ever considered retreating to Dearborn
for consolation, he was forced to put that
notion out of his mind when, also in
August,
Mercury,
Edsel’s
own
stablemate, served notice that it was
going to make things as tough as possible
for the newcomer by undertaking a
million-dollar, thirty-day advertising
drive aimed especially at “priceconscious buyers”—a clear reference to
the fact that the 1957 Mercury, which
was then being sold at a discount by
most dealers, cost less than the new
Edsel was expected to. Meanwhile,
sales of the Rambler, which was the only
American-made small car then in
production, were beginning to rise
ominously. In the face of all these evil
portents, Krafve fell into the habit of
ending his speeches with a rather
downbeat anecdote about the board
chairman of an unsuccessful dog-food
company who said to his fellow
directors, “Gentlemen, let’s face facts—
dogs don’t like our product.” “As far as
we’re concerned,” Krafve added on at
least one occasion, driving home the
moral with admirable clarity, “a lot will
depend on whether people like our car
or not.”
But most of the other Edsel men were
unimpressed by Krafve’s misgivings.
Perhaps the least impressed of all was
Judge, who, while doing his bit as an
itinerant speaker, specialized in
community
and
civic
groups.
Undismayed by the limitations of the
strip-tease policy, Judge brightened up
his lectures by showing such a
bewildering array of animated graphs,
cartoons, charts, and pictures of parts of
the car—all flashed on a CinemaScope
screen—that his listeners usually got
halfway home before they realized that
he hadn’t shown them an Edsel. He
wandered
restlessly
around
the
auditorium as he spoke, shifting the
kaleidoscopic images on the screen at
will with the aid of an automatic slide
changer—a trick made possible by a
crew of electricians who laced the place
in advance with a maze of wires linking
the device to dozens of floor switches,
which, scattered about the hall,
responded when he kicked them. Each of
the “Judge spectaculars,” as these
performances came to be known, cost
the Edsel Division five thousand dollars
—a sum that included the pay and
expenses of the technical crew, who
would arrive on the scene a day or so
ahead of time to set up the electrical rig.
At the last moment, Judge would
descend melodramatically on the town
by plane, hasten to the hall, and go into
his act. “One of the greatest aspects of
this whole Edsel program is the
philosophy
of
product
and
merchandising behind it,” Judge might
start off, with a desultory kick at a
switch here, a switch there. “All of us
who have been a part of it are real proud
of this background and we are anxiously
awaiting its success when the car is
introduced this fall.… Never again will
we be associated with anything as
gigantic and full of meaning as this
particular program.… Here is a glimpse
of the car which will be before the
American public on September 4, 1957
[at this point, Judge would show a
provocative slide of a hubcap or section
of fender].… It is a different car in every
respect, yet it has an element of
conservatism which will give it
maximum appeal.… The distinctiveness
of the frontal styling integrates with the
sculptured patterns of the side treatment.
…” And on and on Judge would
rhapsodize, rolling out such awesome
phrases as “sculptured sheet metal,”
“highlight character,” and “graceful,
flowing lines.” At last would come the
ringing peroration. “We are proud of the
Edsel!” he would cry, kicking switches
right and left. “When it is introduced this
fall, it will take its place on the streets
and highways of America, bringing new
greatness to the Ford Motor Company.
This is the Edsel story.”
drum-roll climax of the strip tease
was a three-day press preview of the
Edsel, undraped from pinched-in snout
to flaring rear, that was held in Detroit
and Dearborn on August 26th, 27th, and
28th, with 250 reporters from all over
the country in attendance. It differed
from previous automotive jamborees of
its kind in that the journalists were
invited to bring their wives along—and
many of them did. Before it was over, it
had cost the Ford Company ninety
THE
thousand dollars. Grand as it was, the
conventionality of its setting was a
disappointment to Warnock, who had
proposed, and seen rejected, three
locales that he thought would provide a
more offbeat ambiance—a steamer on
the Detroit River (“wrong symbolism”);
Edsel, Kentucky (“inaccessible by
road”); and Haiti (“just turned down
flat”). Thus hobbled, Warnock could do
no better for the reporters and their
wives when they converged on the
Detroit scene on Sunday evening, August
25th, than to put them up at the
discouragingly named Sheraton-Cadillac
Hotel and to arrange for them to spend
Monday afternoon hearing and reading
about the long-awaited details of the
entire crop of Edsels—eighteen
varieties available, in four main lines
(Corsair, Citation, Pacer, and Ranger),
differing mainly in their size, power, and
trim. The next morning, specimens of the
models themselves were revealed to the
reporters in the styling center’s rotunda,
and Henry II offered a few words of
tribute to his father. “The wives were
not asked to the unveiling,” a Foote,
Cone man who helped plan the affair
recalls. “It was too solemn and
businesslike an event for that. It went
over fine. There was excitement even
among the hardened newspapermen.”
(The import of the stories that most of
the excited newspapermen filed was that
the Edsel seemed to be a good car,
though not so radical as its billing had
suggested.)
In the afternoon, the reporters were
whisked out to the test track to see a
team of stunt drivers put the Edsel
through its paces. This event, calculated
to be thrilling, turned out to be hairraising, and even, for some, a little
unstringing. Enjoined not to talk too
much about speed and horsepower, since
only a few months previously the whole
automobile industry had nobly resolved
to concentrate on making cars instead of
delayed-action bombs, Warnock had
decided to emphasize the Edsel’s
liveliness through deeds rather than
words, and to accomplish this he had
hired a team of stunt drivers. Edsels ran
over two-foot ramps on two wheels,
bounced from higher ramps on all four
wheels, were driven in crisscross
patterns, grazing each other, at sixty or
seventy miles per hour, and skidded into
complete turns at fifty. For comic relief,
there was a clown driver parodying the
daredevil stuff. All the while, the voice
of Neil L. Blume, Edsel’s engineering
chief, could be heard on a loudspeaker,
purring about “the capabilities, the
safety,
the
ruggedness,
the
maneuverability and performance of
these new cars,” and skirting the words
“speed” and “horsepower” as delicately
as a sandpiper skirts a wave. At one
point, when an Edsel leaping a high
ramp just missed turning over, Krafve’s
face took on a ghastly pallor; he later
reported that he had not known the
daredevil stunts were going to be so
extreme, and was concerned both for the
good name of the Edsel and the lives of
the drivers. Warnock, noticing his boss’s
distress, went over and asked Krafve if
he was enjoying the show. Krafve
replied tersely that he would answer
when it was over and all hands safe. But
everyone else seemed to be having a
grand time. The Foote, Cone man said,
“You looked over this green Michigan
hill, and there were those glorious
Edsels, performing gloriously in unison.
It was beautiful. It was like the
Rockettes. It was exciting. Morale was
high.”
Warnock’s high spirits had carried
him to even wilder extremes of fancy.
The stunt driving, like the unveiling, was
considered too rich for the blood of the
wives, but the resourceful Warnock was
ready for them with a fashion show that
he hoped they would find at least equally
diverting. He need not have worried.
The star of the show, who was
introduced by Brown, the Edsel stylist,
as a Paris couturière, both beautiful and
talented, turned out at the final curtain to
be a female impersonator—a fact of
which Warnock, to heighten the
verisimilitude of the act, had given
Brown no advance warning. Things
were never again quite the same since
between Brown and Warnock, but the
wives were able to give their husbands
an extra paragraph or two for their
stories.
That evening, there was a big gala for
one and all at the styling center, which
was itself styled as a night club for the
occasion, complete with a fountain that
danced in time with the music of Ray
McKinley’s band, whose emblem, the
letters “GM”—a holdover from the days
of its founder, the late Glenn Miller—
was emblazoned, as usual, on the music
stand of each musician, very nearly
ruining the evening for Warnock. The
next morning, at a windup press
conference held by Ford officials.
Breech declared of the Edsel, “It’s a
husky youngster, and, like most other
new parents, we’re proud enough to pop
our buttons.” Then seventy-one of the
reporters took the wheels of as many
Edsels and set out for home—not to
drive the cars into their garages but to
deliver them to the showrooms of their
local Edsel dealers. Let Warnock
describe the highlights of this final
flourish:
“There
were
several
unfortunate occurrences. One guy simply
miscalculated and cracked up his car
running into something. No fault of the
Edsel there. One car lost its oil pan, so
naturally the motor froze. It can happen
to the best of cars. Fortunately, at the
time of this malfunction the driver was
going through a beautiful-sounding town
—Paradise, Kansas, I think it was—and
that gave the news reports about it a nice
little positive touch. The nearest dealer
gave the reporter a new Edsel, and he
drove on home, climbing Pikes Peak on
the way. Then one car crashed through a
tollgate when the brakes failed. That
was bad. It’s funny, but the thing we
were most worried about—other drivers
being so eager to get a look at the Edsels
that they’d crowd our cars off the road—
happened only once. That was on the
Pennsylvania Turnpike. One of our
reporters was tooling along—no
problems—when a Plymouth driver
pulled up alongside to rubberneck, and
edged so close that the Edsel got
sideswiped. Minor damage.”
in 1959, immediately after the
demise of the Edsel, Business Week
stated that at the big press preview a
Ford executive had said to a reporter, “If
the company weren’t in so deep, we
never would have brought it out now.”
However,
since
Business
Week
neglected to publish this patently
sensational statement for over two years,
and since to this day all the former
ranking Edsel executives (Krafve
included,
notwithstanding
his
preoccupation with the luckless dogfood company) firmly maintained that
right up to Edsel Day and even for a
LATE
short time thereafter they expected the
Edsel to succeed, it would seem that the
quotation should be regarded as a highly
suspect archaeological find. Indeed,
during the period between the press
preview and Edsel Day the spirit of
everybody associated with the venture
seems to have been one of wild
optimism. “Oldsmobile, Goodbye!” ran
the headline on an ad, in the Detroit Free
Press, for an agency that was switching
from Olds to Edsel. A dealer in
Portland, Oregon, reported that he had
already sold two Edsels, sight unseen.
Warnock dug up a fireworks company in
Japan willing to make him, at nine
dollars apiece, five thousand rockets
that, exploding in mid-air, would release
nine-foot scale-model Edsels made of
rice paper that would inflate and
descend like parachutes; his head reeling
with visions of filling America’s skies
as well as its highways with Edsels on
Edsel Day, Warnock was about to dash
off an order when Krafve, looking
something more than puzzled, shook his
head.
On September 3rd—E Day-minus-one
—the prices of the various Edsel models
were announced; for cars delivered to
New York they ran from just under
$2,800 to just over $4,100. On E Day,
the Edsel arrived. In Cambridge, a band
led a gleaming motorcade of the new
cars up Massachusetts Avenue; flying out
of Richmond, California, a helicopter
hired by one of the most jubilant of the
dealers lassoed by Doyle spread a giant
Edsel sign above San Francisco Bay;
and all over the nation, from the
Louisiana bayous to the peak of Mount
Rainier to the Maine woods, one needed
only a radio or a television set to know
that the very air, despite Warnock’s
setback on the rockets, was quivering
with the presence of the Edsel. The tone
for Edsel Day’s blizzard of publicity
was set by an ad, published in
newspapers all over the country, in
which the Edsel shared the spotlight
with the Ford Company’s President Ford
and Chairman Breech. In the ad, Ford
looked like a dignified young father,
Breech like a dignified gentleman
holding a full house against a possible
straight, the Edsel just looked like an
Edsel. The accompanying text declared
that the decision to produce the car had
been “based on what we knew, guessed,
felt, believed, suspected—about you,”
and added, “YOU are the reason behind
the Edsel.” The tone was calm and
confident. There did not seem to be
much room for doubt about the reality of
that full house.
Before sundown, it was estimated,
2,850,000 people had seen the new car
in dealers’ showrooms. Three days later,
in North Philadelphia, an Edsel was
stolen. It can reasonably be argued that
the crime marked the high-water mark of
public acceptance of the Edsel; only a
few months later, any but the least
fastidious of car thieves might not have
bothered.
DECLINE AND FALL
most striking physical characteristic
of the Edsel was, of course, its radiator
grille. This, in contrast to the wide and
horizontal grilles of all nineteen other
American makes of the time, was
slender and vertical. Of chromiumplated steel, and shaped something like
an egg, it sat in the middle of the car’s
front end, and was embellished by the
THE
word “EDSEL” in aluminum letters
running down its length. It was intended
to suggest the front end of practically any
car of twenty or thirty years ago and of
most contemporary European cars, and
thus to look at once seasoned and
sophisticated. The trouble was that
whereas the front ends of the antiques
and the European cars were themselves
high and narrow—consisting, indeed, of
little more than the radiator grilles—the
front end of the Edsel was broad and
low, just like the front ends of all its
American competitors. Consequently,
there were wide areas on either side of
the grille that had to be filled in with
something, and filled in they were—with
twin panels of entirely conventional
horizontal chrome grillwork. The effect
was that of an Oldsmobile with the prow
of a Pierce-Arrow implanted in its front
end, or, more metaphorically, of the
charwoman trying on the duchess’
necklace. The attempt at sophistication
was so transparent as to be endearing.
But if the grille of the Edsel appealed
through guilelessness, the rear end was
another matter. Here, too, there was a
marked departure from the conventional
design of the day. Instead of the
notorious tail fin, the car had what
looked to its fanciers like wings and to
others, less ethereal-minded, like
eyebrows. The lines of the trunk lid and
the rear fenders, swooping upward and
outward, did somewhat resemble the
wings of a gull in flight, but the
resemblance was marred by two long,
narrow tail lights, set partly in the trunk
lid and partly in the fenders, which
followed those lines and created the
startling illusion, especially at night, of a
slant-eyed grin. From the front, the Edsel
seemed, above all, anxious to please,
even at the cost of being clownish; from
the rear it looked crafty, Oriental, smug,
one-up—maybe a little cynical and
contemptuous, too. It was as if,
somewhere between grille and rear
fenders, a sinister personality change
had taken place.
In other respects, the exterior styling
of the Edsel was not far out of the
ordinary. Its sides were festooned with a
bit less than the average amount of
chrome, and distinguished by a gougedout bullet-shaped groove extending
forward from the rear fender for about
half the length of the car. Midway along
this groove, the word “EDSEL” was
displayed in chrome letters, and just
below the rear window was a small
grille-like decoration, on which was
spelled out—of all things—“EDSEL.”
(After all, hadn’t Stylist Brown declared
his intention to create a vehicle that
would be “readily recognizable”?) In its
interior, the Edsel strove mightily to live
up to the prediction of General Manager
Krafve that the car would be “the
epitome of the push-button era.” The
push-button era in medium-priced cars
being what it was, Krafve’s had been a
rash prophecy indeed, but the Edsel rose
to it with a devilish assemblage of
gadgets such as had seldom, if ever,
been seen before. On or near the Edsel’s
dashboard were a push button that
popped the trunk lid open; a lever that
popped the hood open; a lever that
released the parking brake; a
speedometer that glowed red when the
driver exceeded his chosen maximum
speed; a single-dial control for both
heating and cooling; a tachometer, in the
best racing-car style; buttons to operate
or regulate the lights, the height of the
radio antenna, the heater-blower, the
windshield wiper, and the cigarette
lighter; and a row of eight red lights to
wink warnings that the engine was too
hot, that it wasn’t hot enough, that the
generator was on the blink, that the
parking brake was on, that a door was
open, that the oil pressure was low, that
the oil level was low, and that the
gasoline level was low, the last of which
the skeptical driver could confirm by
consulting the gas gauge, mounted a few
inches away. Epitomizing this epitome,
the automatic-transmission control box
—arrestingly situated on top of the
steering post, in the center of the wheel
—sprouted a galaxy of five push buttons
so light to the touch that, as Edsel men
could hardly be restrained from
demonstrating, they could be depressed
with a toothpick.
Of the four lines of Edsels, both of the
two larger and more expensive ones—
the Corsair and the Citation—were 219
inches long, or two inches longer than
the biggest of the Oldsmobiles; both
were eighty inches wide, or about as
wide as passenger cars ever get; and the
height of both was only fifty-seven
inches, as low as any other mediumpriced car. The Ranger and the Pacer,
the smaller Edsels, were six inches
shorter, an inch narrower, and an inch
lower than the Corsair and the Citation.
The Corsair and the Citation were
equipped with 345-horsepower engines,
making them more powerful than any
other American car at the time of their
debut, and the Ranger and the Pacer
were good for 303 horsepower, near the
top in their class. At the touch of a
toothpick to the “Drive” button, an idling
Corsair or Citation sedan (more than
two tons of car, in either case) could, if
properly skippered, take off with such
abruptness that in ten and three-tenths
seconds it would be doing a mile a
minute, and in seventeen and a half
seconds it would be a quarter of a mile
down the road. If anything or anybody
happened to be in the way when the
toothpick touched the push button, so
much the worse.
the wraps were taken off the
Edsel, it received what is known in the
theatrical business as a mixed press. The
automotive editors of the daily
newspapers stuck mostly to straight
descriptions of the car, with only here
and there a phrase or two of appraisal,
some of it ambiguous (“The difference in
style is spectacular,” noted Joseph C.
Ingraham in the New York Times) and
some of it openly favorable (“A
handsome
and
hard-punching
newcomer,” said Fred Olmstead, in the
Detroit Free Press). Magazine criticism
was generally more exhaustive and
occasionally more severe. Motor Trend,
the largest monthly devoted to ordinary
automobiles, as distinct from hot rods,
WHEN
devoted eight pages of its October,
1957, issue to an analysis and critique of
the Edsel by Joe H. Wherry, its Detroit
editor. Wherry liked the car’s
appearance, its interior comfort, and its
gadgets, although he did not always
make it clear just why; in paying his
respects to the transmission buttons on
the steering post, he wrote, “You need
not take your eyes off the road for an
instant.” He conceded that there were
“untold opportunities for more … unique
approaches,” but he summed up his
opinion in a sentence that fairly
peppered the Edsel with honorific
adverbs: “The Edsel performs fine,
rides well, and handles good.” Tom
McCahill, of Mechanix Illustrated,
generally admired the “bolt bag,” as he
affectionately called the Edsel, but he
had
some
reservations,
which,
incidentally, throw some interesting light
on an automobile critic’s equivalent of
an aisle seat. “On ribbed concrete,” he
reported, “every time I shot the throttle
to the floor quickly, the wheels spun like
a gone-wild Waring Blendor.… At high
speeds, especially through rough
corners, I found the suspension a little
too horsebacky.… I couldn’t help but
wonder what this salami would really
do if it had enough road adhesion.”
By far the most downright—and very
likely the most damaging—panning that
the Edsel got during its first months
appeared in the January, 1958, issue of
the
Consumers
Union
monthly,
Consumer Reports, whose 800,000
subscribers probably included more
potential Edsel buyers than have ever
turned the pages of Motor Trend or
Mechanix Illustrated. After having put a
Corsair through a series of road tests,
Consumer Reports declared:
The Edsel has no important basic advantages over
other brands. The car is almost entirely conventional in
construction.… The amount of shake present in this
Corsair body on rough roads—which wasn’t long in
making itself heard as squeaks and rattles—went well
beyond any acceptable limit.… The Corsair’s handling
qualities—sluggish, over-slow steering, sway and lean
on turns, and a general detached-from-the-road feel—
are, to put it mildly, without distinction. As a matter of,
simple fact, combined with the car’s tendency to shake
like jelly, Edsel handling represents retrogression rather
than progress.… Stepping on the gas in traffic, or in
passing cars, or just to feel the pleasurable surge of
power, will cause those big cylinders really to lap up
fuel.… The center of the steering wheel is not, in CU’s
opinion, a good pushbutton location.… To look at the
Edsel buttons pulls the driver’s eyes clear down off the
road. [Pace Mr. Wherry.] The “luxury-loaded” Edsel
—as one magazine cover described it—will certainly
please anyone who confuses gadgetry with true luxury.
Three months later, in a roundup of all
the 1958-model cars, Consumer Reports
went at the Edsel again, calling it “more
uselessly overpowered … more gadget
bedecked, more hung with expensive
accessories than any car in its price
class,” and giving the Corsair and the
Citation the bottom position in its
competitive ratings. Like Krafve,
Consumer Reports considered the Edsel
an epitome; unlike Krafve, the magazine
concluded that the car seemed to
“epitomize the many excesses” with
which Detroit manufacturers were
“repulsing more and more potential car
buyers.”
yet, in a way, the Edsel wasn’t so
bad. It embodied much of the spirit of its
time—or at least of the time when it was
designed, early in 1955. It was clumsy,
powerful, dowdy, gauche, well-meaning
—a de Kooning woman. Few people,
apart from employees of Foote, Cone &
Belding, who were paid to do so, have
adequately hymned its ability, at its best,
to coax and jolly the harried owner into
a sense of well-being. Furthermore, the
AND
designers of several rival makes,
including Chevrolet, Buick, and Ford,
Edsel’s own stablemate, later flattered
Brown’s styling by imitating at least one
feature of the car’s much reviled lines—
the rear-end wing theme. The Edsel was
obviously jinxed, but to say that it was
jinxed by its design alone would be an
oversimplification, as it would be to say
that it was jinxed by an excess of
motivational research. The fact is that in
the short, unhappy life of the Edsel a
number of other factors contributed to its
commercial downfall. One of these was
the scarcely believable circumstance
that many of the very first Edsels—those
obviously destined for the most glaring
public limelight—were dramatically
imperfect. By its preliminary program of
promotion and advertising, the Ford
Company had built up an overwhelming
head of public interest in the Edsel,
causing its arrival to be anticipated and
the car itself to be gawked at with more
eagerness than had ever greeted any
automobile before it. After all that, it
seemed, the car didn’t quite work.
Within a few weeks after the Edsel was
introduced, its pratfalls were the talk of
the land. Edsels were delivered with oil
leaks, sticking hoods, trunks that
wouldn’t open, and push buttons that, far
from yielding to a toothpick, couldn’t be
budged with a hammer. An obviously
distraught man staggered into a bar up
the Hudson River, demanding a double
shot without delay and exclaiming that
the dashboard of his new Edsel had just
burst into flame. Automotive News
reported that in general the earliest
Edsels suffered from poor paint, inferior
sheet metal, and faulty accessories, and
quoted the lament of a dealer about one
of the first Edsel convertibles he
received: “The top was badly set, doors
cockeyed, the header bar trimmed at the
wrong angle, and the front springs
sagged.” The Ford Company had the
particular bad luck to sell to Consumers
Union—which buys its test cars in the
open market, as a precaution against
being favored with specially doctored
samples—an Edsel in which the axle
ratio was wrong, an expansion plug in
the cooling system blew out, the powersteering pump leaked, the rear-axle
gears were noisy, and the heater emitted
blasts of hot air when it was turned off.
A former executive of the Edsel
Division has estimated that only about
half of the first Edsels really performed
properly.
A layman cannot help wondering how
the Ford Company, in all its power and
glory, could have been guilty of such a
Mack Sennett routine of buildup and
anticlimax. The wan, hard-working
Krafve explains gamely that when a
company brings out a new model of any
make—even an old and tested one—the
first cars often have bugs in them. A
more startling theory—though only a
theory—is that there may have been
sabotage in some of the four plants that
assembled the Edsel, all but one of
which had previously been, and
currently also were, assembling Fords
or Mercurys. In marketing the Edsel, the
Ford Company took a leaf out of the
book of General Motors, which for years
had successfully been permitting, and
even encouraging, the makers and sellers
of its Oldsmobiles, Buicks, Pontiacs,
and the higher-priced models of its
Chevrolet to fight for customers with no
quarter given; faced with the same sort
of intramural competition, some
members of the Ford and LincolnMercury Divisions of the Ford Company
openly hoped from the start for the
Edsel’s downfall. (Krafve, realizing
what might happen, had asked that the
Edsel be assembled in plants of its own,
but his superiors turned him down.)
However, Doyle, speaking with the
authority of a veteran of the automobile
business as well as with that of Krafve’s
second-in-command, pooh-poohs the
notion that the Edsel was the victim of
dirty work at the plants. “Of course the
Ford and Lincoln-Mercury Divisions
didn’t want to see another Ford
Company car in the field,” he says, “but
as far as I know, anything they did at the
executive and plant levels was in
competitive good taste. On the other
hand, at the distribution and dealer level,
you got some rough infighting in terms of
whispering and propaganda. If I’d been
in one of the other divisions, I’d have
done the same thing.” No proud defeated
general of the old school ever spoke
more nobly.
It is a tribute of sorts to the men who
gave the Edsel its big buildup that
although cars tending to rattle, balk, and
fall apart into shiny heaps of junk kept
coming off the assembly lines, things
didn’t go badly at first. Doyle says that
on Edsel Day more than 6,500 Edsels
were either ordered by or actually
delivered to customers. That was a good
showing, but there were isolated signs of
resistance. For instance, a New England
dealer selling Edsels in one showroom
and Buicks in another reported that two
prospects walked into the Edsel
showroom, took a look at the Edsel, and
placed orders for Buicks on the spot.
In the next few days, sales dropped
sharply, but that was to be expected once
the bloom was off. Automobile
deliveries to dealers—one of the
important indicators in the trade—are
customarily measured in ten-day
periods, and during the first ten days of
September, on only six of which the
Edsel was on sale, it racked up 4,095;
this was lower than Doyle’s first-day
figure because many of the initial
purchases were of models and color
combinations not in stock, which had to
be factory-assembled to order. The
delivery total for the second ten-day
period was off slightly, and that for the
third was down to just under 3,600. For
the first ten days of October, nine of
which were business days, there were
only 2,751 deliveries—an average of
just over three hundred cars a day. In
order to sell the 200,000 cars per year
that would make the Edsel operation
profitable the Ford Company would
have to move an average of between six
and seven hundred each business day—a
good many more than three hundred a
day. On the night of Sunday, October
13th, Ford put on a mammoth television
spectacular for Edsel, pre-empting the
time ordinarily allotted to the Ed
Sullivan show, but though the program
cost $400,000 and starred Bing Crosby
and Frank Sinatra, it failed to cause any
sharp spurt in sales. Now it was obvious
that things were not going at all well.
Among the former executives of the
Edsel Division, opinions differ as to the
exact moment when the portents of doom
became unmistakable. Krafve feels that
the moment did not arrive until sometime
late in October. Wallace, in his capacity
as Edsel’s pipe-smoking semi-Brain
Truster, goes a step further by pinning
the start of the disaster to a specific date
—October 4th, the day the first Soviet
sputnik went into orbit, shattering the
myth of American technical preeminence and precipitating a public
revulsion against Detroit’s fancier
baubles. Public Relations Director
Warnock maintains that his barometric
sensitivity to the public temper enabled
him to call the turn as early as midSeptember; contrariwise, Doyle says he
maintained his optimism until midNovember, by which time he was about
the only man in the division who had not
concluded it would take a miracle to
save the Edsel. “In November,” says
Wallace, sociologically, “there was
panic, and its concomitant—mob
action.” The mob action took the form of
a concerted tendency to blame the design
of the car for the whole debacle; Edsel
men who had previously had nothing but
lavish praise for the radiator grille and
rear end now went around muttering that
any fool could see they were ludicrous.
The obvious sacrificial victim was
Brown, whose stock had gone through
the roof at the time of the regally
accoladed debut of his design, in August,
1955. Now, without having done
anything further, for either better or
worse, the poor fellow became the
company scapegoat. “Beginning in
November, nobody talked to Roy,”
Wallace says. On November 27th, as if
things weren’t bad enough, Charles
Kreisler, who as the only Edsel dealer in
Manhattan provided its prize showcase,
announced that he was turning in his
franchise because of poor sales, and it
was rumored that he added, “The Ford
Motor Company has laid an egg.” He
thereupon signed up with American
Motors to sell its Rambler, which, as the
only domestic small car then on the
market, was already the possessor of a
zooming sales curve. Doyle grimly
commented that the Edsel Division was
“not concerned” about Kreisler’s
defection.
By December, the panic at Edsel had
abated to the point where its sponsors
could pull themselves together and begin
casting about for ways to get sales
moving again. Henry Ford II, manifesting
himself to Edsel dealers on closed-
circuit television, urged them to remain
calm, promised that the company would
back them to the limit, and said flatly,
“The Edsel is here to stay.” A million
and a half letters went out over Krafve’s
signature to owners of medium-priced
cars, asking them to drop around at their
local dealers and test-ride the Edsel;
everyone doing so, Krafve promised,
would be given an eight-inch plastic
scale model of the car, whether he
bought a full-size one or not. The Edsel
Division picked up the check for the
scale
models—a
symptom
of
desperation indeed, for under normal
circumstances
no
automobile
manufacturer would make even a move
to outfumble its dealers for such a tab.
(Up to that time, the dealers had paid for
everything, as is customary.) The
division also began offering its dealers
what it called “sales bonuses,” which
meant that the dealers could knock
anything from one hundred to three
hundred dollars off the price of each car
without reducing their profit margin.
Krafve told a reporter that sales up to
then were about what he had expected
them to be, although not what he had
hoped they would be; in his zeal not to
seem unpleasantly surprised, he
appeared to be saying that he had
expected the Edsel to fail. The Edsel’s
advertising campaign, which had started
with studied dignity, began to sound a
note of stridency. “Everyone who has
seen it knows—with us—that the Edsel
is a success,” a magazine ad declared,
and in a later ad this phrase was twice
repeated, like an incantation: “The Edsel
is a success. It is a new idea—a YOU
idea—on the American Road.… The
Edsel is a success.” Soon the even less
high-toned but more dependable
advertising themes of price and social
status began to intrude, in such sentences
as “They’ll know you’ve arrived when
you drive up in an Edsel” and “The one
that’s really new is the lowest-priced,
too!” In the more rarefied sectors of
Madison Avenue, a resort to rhymed
slogans is usually regarded as an
indication of artistic depravity induced
by commercial necessity.
From the frantic and costly measures
the Edsel Division took in December, it
garnered one tiny crumb: for the first
ten-day period of 1958, it was able to
report, sales were up 18.6 percent over
those of the last ten days of 1957. The
catch, as the Wall Street Journal alertly
noted, was that the latter period
embraced one more selling day than the
earlier one, so, for practical purposes,
there had scarcely been a gain at all. In
any case, that early-January word of
meretricious cheer turned out to be the
Edsel Division’s last gesture. On
January 14, 1958, the Ford Motor
Company announced that it was
consolidating the Edsel Division with
the Lincoln-Mercury Division to form a
Mercury-Edsel-Lincoln Division, under
the management of James J. Nance, who
had been running Lincoln-Mercury. It
was the first time that one of the major
automobile companies had lumped three
divisions into one since General Motors’
merger of Buick, Oldsmobile, and
Pontiac back in the depression, and to
the people of the expunged Edsel
Division
the
meaning
of
the
administrative move was all too clear.
“With that much competition in a
division, the Edsel wasn’t going
anywhere,” Doyle says. “It became a
stepchild.”
the last year and ten months of its
existence, the Edsel was very much a
FOR
stepchild—generally neglected, little
advertised, and kept alive only to avoid
publicizing a boner any more than
necessary and in the forlorn hope that it
might go somewhere after all. What
advertising it did get strove quixotically
to assure the automobile trade that
everything was dandy; in mid-February
an ad in Automotive News had Nance
saying,
Since the formation of the new M-E-L Division at Ford
Motor Company, we have analyzed with keen interest
the sales progress of the Edsel. We think it is quite
significant that during the five months since the Edsel
was introduced, Edsel sales have been greater than the
first five months’ sales for any other new make of car
ever introduced on the American Road.… Edsel’s
steady progress can be a source of satisfaction and a
great incentive to all of us.
Nance’s comparison, however, was
almost meaningless, no new make ever
having been introduced anything like so
grandiosely, and the note of confidence
could not help ringing hollow.
It is quite possible that Nance’s
attention was never called to an article
by S. I. Hayakawa, the semanticist, that
was published in the spring of 1958 in
ETC: A Review of General Semantics, a
quarterly magazine, under the title, “Why
the Edsel Laid an Egg.” Hayakawa, who
was both the founder and the editor of
ETC, explained in an introductory note
that he considered the subject within the
purview of general semantics because
automobiles, like words, are “important
… symbols in American culture,” and
went on to argue that the Edsel’s flop
could be attributed to Ford Company
executives who had been “listening too
long to the motivation-research people”
and who, in their efforts to turn out a car
that would satisfy customers’ sexual
fantasies and the like, had failed to
supply reasonable and practical
transportation, thereby neglecting “the
reality principle.” “What the motivation
researchers failed to tell their clients …
is that only the psychotic and the gravely
neurotic act out their irrationalities and
their
compensatory
fantasies,”
Hayakawa admonished Detroit briskly,
and added, “The trouble with selling
symbolic
gratification
via
such
expensive items as … the Edsel
Hermaphrodite … is the competition
offered by much cheaper forms of
symbolic gratification, such as Playboy
(fifty cents a copy), Astounding Science
Fiction (thirty-five cents a copy), and
television (free).”
Notwithstanding the competition from
Playboy, or possibly because the
symbol-motivated
public
included
people who could afford both, the Edsel
kept rolling—but just barely. The car
moved, as salesmen say, though hardly at
the touch of a toothpick. In fact, as a
stepchild it sold about as well as it had
sold as a favorite son, suggesting that all
the hoopla, whether about symbolic
gratification or mere horsepower, had
had little effect one way or the other.
The new Edsels that were registered
with the motor-vehicle bureaus of the
various states during 1958 numbered
34,481—considerably fewer than new
cars of any competing make, and less
than one-fifth of the 200,000 a year
necessary if the Edsel was to show a
profit, but still representing an
investment by motorists of over a
hundred million dollars. The picture
actually brightened in November, 1958,
with the advent of the Edsel’s secondyear models. Shorter by up to eight
inches, lighter by up to five hundred
pounds, and with engines less potent by
as much as 158 horsepower, they had a
price range running from five hundred to
eight hundred dollars less than that of
their predecessors. The vertical grille
and the slant-eyed rear end were still
there, but the modest power and
proportions
persuaded
Consumer
Reports to relent and say, “The Ford
Motor Company, after giving last year’s
initial Edsel model a black eye, has
made a respectable and even likable
automobile of it.” Quite a number of
motorists seemed to agree; about two
thousand more Edsels were sold in the
first half of 1959 than had been sold in
the first half of 1958, and by the early
summer of 1959 the car was moving at
the rate of around four thousand a month.
Here, at last, was progress; sales were
at almost a quarter of the minimum
profitable rate, instead of a mere fifth.
On July 1, 1959, there were 83,849
Edsels on the country’s roads. The
largest number (8,344) were in
California, which is perennially beset
with far and away the largest number of
cars of practically all makes, and the
smallest number were in Alaska,
Vermont, and Hawaii (122, 119, and
110, respectively). All in all, the Edsel
seemed to have found a niche for itself
as an amusingly eccentric curiosity.
Although the Ford Company, with its
stockholders’ money still disappearing
week after week into the Edsel, and with
small cars now clearly the order of the
day, could scarcely affect a sentimental
approach to the subject, it nonetheless
took an outside chance and, in midOctober of 1959, brought out a third
series of annual models. The 1960 Edsel
appeared a little more than a month after
the Falcon, Ford’s first—and instantly
successful—venture into the small-car
field, and was scarcely an Edsel at all;
gone were both the vertical grille and
the horizontal rear end, and what
remained looked like a cross between a
Ford Fairlane and a Pontiac. Its initial
sales were abysmal; by the middle of
November
only
one
plant—in
Louisville, Kentucky—was still turning
out Edsels, and it was turning out only
about twenty a day. On November 19th,
the Ford Foundation, which was
planning to sell a block of its vast
holdings of stock in the Ford Motor
Company, issued the prospectus that is
required
by
law
under
such
circumstances, and stated therein, in a
footnote to a section describing the
company’s products, that the Edsel had
been “introduced in September 1957 and
discontinued in November 1959.” The
same day, this mumbled admission was
confirmed and amplified by a Ford
Company spokesman, who did some
mumbling of his own. “If we knew the
reason people aren’t buying the Edsel,
we’d probably have done something
about it,” he said.
The final quantitative box score
shows that from the beginning right up to
November 19th, 110,810 Edsels were
produced and 109,466 were sold. (The
remaining 1,344, almost all of them
1960 models, were disposed of in short
order with the help of drastic price
cuts.) All told, only 2,846 of the 1960
Edsels were ever produced, making
models of that year a potential
collector’s item. To be sure, it will be
generations before 1960 Edsels are as
scarce as the Type 41 Bugatti, of which
no more than eleven specimens were
made, back in the late twenties, to be
sold only to bona-fide kings, and the
1960 Edsel’s reasons for being a rarity
are not exactly as acceptable, socially or
commercially, as the Type 41 Bugatti’s.
Still, a 1960-Edsel Owners’ Club may
yet appear.
The final fiscal box score on the
Edsel fiasco will probably never be
known, because the Ford Motor
Company’s public reports do not include
breakdowns of gains and losses within
the individual divisions. Financial buffs
estimate, however, that the company lost
something like $200 million on the Edsel
after it appeared; add to this the
officially announced expenditure of
$250 million before it appeared,
subtract about a hundred million
invested in plant and equipment that
were salvageable for other uses, and the
net loss is $350 million. If these
estimates are right, every Edsel the
company manufactured cost it in lost
money about $3,200, or about the price
of another one. In other, harsher words,
the company would have saved itself
money if, back in 1955, it had decided
not to produce the Edsel at all but simply
to give away 110,810 specimens of its
comparably priced car, the Mercury.
end of the Edsel set off an orgy of
hindsight in the press. Time declared,
“The Edsel was a classic case of the
wrong car for the wrong market at the
wrong time. It was also a prime example
of the limitations of market research,
with its ‘depth interviews’ and
THE
‘motivational’ mumbo-jumbo.” Business
Week, which shortly before the Edsel
made its bow had described it with
patent solemnity and apparent approval,
now pronounced it “a nightmare” and
appended a few pointedly critical
remarks about Wallace’s research,
which was rapidly achieving a
scapegoat status equal to that of Brown’s
design. (Jumping up and down on
motivational research was, and is,
splendid sport, but, of course, the
implication that it dictated, or even
influenced, the Edsel’s design is entirely
false, since the research, being intended
only to provide a theme for advertising
and promotion, was not undertaken until
after Brown had completed his design.)
The Wall Street Journal’s obituary of the
Edsel made a point that was probably
sounder, and certainly more original.
Large corporations are often accused of rigging
markets, administering prices, and otherwise dictating
to the consumer [it observed]. And yesterday Ford
Motor Company announced its two-year experiment
with the medium-priced Edsel has come to an end …
for want of buyers. All this is quite a ways from auto
makers being able to rig markets or force consumers
to take what they want them to take.… And the
reason, simply, is that there is no accounting for tastes.
… When it comes to dictating, the consumer is the
dictator without peer.
The tone of the piece was friendly and
sympathetic; the Ford Company, it
seemed, had endeared itself to the
Journal by playing the great American
situation-comedy role of Daddy the
Bungler.
As for the post-mortem explanations
of the debacle that have been offered by
former Edsel executives, they are
notable for their reflective tone—
something like that of a knocked-out
prize fighter opening his eyes to find an
announcer’s microphone pushed into his
face. In fact, Krafve, like many a
flattened pugilist, blames his own bad
timing; he contends that if he had been
able to thwart the apparently immutable
mechanics and economics of Detroit,
and had somehow been able to bring out
the Edsel in 1955, or even 1956, when
the stock market and the medium-pricedcar market were riding high, the car
would have done well and would still
be doing well. That is to say, if he had
seen the punch coming, he would have
ducked. Krafve refuses to go along with
a sizable group of laymen who tend to
attribute the collapse to the company’s
decision to call the car the Edsel instead
of giving it a brisker, more singable
name, reducible to a nickname other than
“Ed” or “Eddie,” and not freighted with
dynastic connotations. As far as he can
see, Krafve still says, the Edsel’s name
did not affect its fortunes one way or the
other.
Brown agrees with Krafve that bad
timing was the chief mistake. “I frankly
feel that the styling of the automobile had
very little, if anything, to do with its
failure,” he said later, and his frankness
may pretty safely be left unchallenged.
“The Edsel program, like any other
project planned for future markets, was
based on the best information available
at the time in which decisions were
made. The road to Hell is paved with
good intentions!”
Doyle, with the born salesman’s
intensely personal feeling about his
customers, talks like a man betrayed by a
friend—the American public. “It was a
buyers’ strike,” he says. “People weren’t
in the mood for the Edsel. Why not is a
mystery to me. What they’d been buying
for several years encouraged the
industry to build exactly this kind of car.
We gave it to them, and they wouldn’t
take it. Well, they shouldn’t have acted
like that. You can’t just wake up
somebody one day and say, ‘That’s
enough, you’ve been running in the
wrong direction.’ Anyway, why did they
do it? Golly, how the industry worked
and worked over the years—getting rid
of gear-shifting, providing interior
comfort, providing plus performance for
use in emergencies! And now the public
wants these little beetles. I don’t get it!”
Wallace’s sputnik theory provides an
answer to Doyle’s question about why
people weren’t in the mood, and,
furthermore, it is sufficiently cosmic to
befit a semi-Brain Truster. It also leaves
Wallace free to defend the validity of his
motivational-research studies as of the
time when they were conducted. “I don’t
think we yet know the depths of the
psychological effect that that first
orbiting had on us all,” he says.
“Somebody had beaten us to an
important gain in technology, and
immediately people started writing
articles about how crummy Detroit
products were, particularly the heavily
ornamented
and
status-symbolic
medium-priced cars. In 1958, when none
of the small cars were out except the
Rambler, Chevy almost ran away with
the market, because it had the simplest
car. The American people had put
themselves on a self-imposed austerity
program. Not buying Edsels was their
hair shirt.”
any relics of the sink-or-swim
nineteenth-century days of American
industry, it must seem strange that
Wallace can afford to puff on his pipe
and analyze the holocaust so amiably.
The obvious point of the Edsel’s story is
the defeat of a giant motor company, but
what is just as surprising is that the giant
did not come apart, or even get seriously
hurt in the fall, and neither did the
majority of the people who went down
with him. Owing largely to the success
of four of its other cars—the Ford, the
Thunderbird, and, later on the small
TO
Falcon and Comet and then the Mustang
—the Ford Company, as an investment,
survived gloriously. True, it had a bad
time of it in 1958, when, partly because
of the Edsel, net income per share of its
stock fell from $5.40 to $2.12, dividends
per share from $2.40 to $2.00, and the
market price of its stock from a 1957
high of about $60 to a 1958 low of under
$40. But all these losses were more than
recouped in 1959, when net income per
share was $8.24, dividends per share
were $2.80, and the price of the stock
reached a high of around $90. In 1960
and 1961, things went even better. So the
280,000 Ford stockholders listed on the
books in 1957 had had little to complain
about unless they had sold at the height
of the panic. On the other hand, six
thousand white-collar workers were
squeezed out of their jobs as a result of
the
Mercury-Edsel-Lincoln
consolidation, and the average number
of Ford employees fell from 191,759 in
1957 to 142,076 the following year,
climbing back to only 159,541 in 1959.
And, of course, dealers who gave up
profitable franchises in other makes and
then went broke trying to sell Edsels
weren’t likely to be very cheerful about
the experience. Under the terms of the
consolidation of the Lincoln-Mercury
and Edsel Divisions, most of the
agencies for the three makes were
consolidated, too. In the consolidation,
some Edsel dealers were squeezed out,
and it can have been small comfort to
those of them who went bankrupt to
learn later that when the Ford Company
finally discontinued making the car, it
agreed to pay those of their former
colleagues who had weathered the crisis
one-half of the original cost of their
Edsel signs, and was granting them
substantial rebates on all Edsels in stock
at the time of discontinuance. Still,
automobile dealers, some of whom work
on credit margins as slim as those of
Miami hotel operators, occasionally go
broke with even the most popular cars.
And among those who earn their living
in the rough-and-tumble world of
automobile salesrooms, where Detroit is
not always spoken of with affection,
many will concede that the Ford
Company, once it had found itself stuck
with a lemon, did as much as it
reasonably could to bolster dealers who
had cast their lot with Edsel. A
spokesman for the National Automobile
Dealers Association has since stated,
“So far as we know, the Edsel dealers
were generally satisfied with the way
they were treated.”
Foote, Cone & Belding also ended up
losing money on the Edsel account, since
its advertising commissions did not
entirely
compensate
for
the
extraordinary expense it had gone to of
hiring sixty new people and opening up a
posh office in Detroit. But its losses
were hardly irreparable; the minute there
were no more Edsels to advertise, it was
hired to advertise Lincolns, and although
that arrangement did not last very long,
the firm has happily survived to sing the
praises of such clients as General
Foods, Lever Brothers, and Trans World
Airways. A rather touching symbol of
the loyalty that the agency’s employees
have for its former client is the fact that
for several years after 1959, on every
workday its private parking lot in
Chicago was still dotted with Edsels.
These faithful drivers, incidentally, are
not unique. If Edsel owners have not
found the means to a dream fulfillment,
and if some of them for a while had to
put up with harrowing mechanical
disorders, many of them more than a
decade later cherish their cars as if they
were Confederate bills, and on Used Car
Row the Edsel is a high-premium item,
with few cars being offered.
By and large, the former Edsel
executives did not just land on their feet,
they landed in clover. Certainly no one
can accuse the Ford Company of giving
vent to its chagrin in the old-fashioned
way, by vulgarly causing heads to roll.
Krafve was assigned to assist Robert S.
McNamara, at that time a Ford
divisional vice-president (and later, of
course, Secretary of Defense), for a
couple of months, and then he moved to
a staff job in company headquarters,
stayed there for about a year, and left to
become a vice-president of the Raytheon
Company, of Waltham, Massachusetts, a
leading electronics firm. In April, 1960,
he was made its president. In the middle
sixties he left to become a high-priced
management consultant on the West
Coast. Doyle, too, was offered a staff
job with Ford, but after taking a trip
abroad to think it over he decided to
retire. “It was a question of my
relationship to my dealers,” he explains.
“I had assured them that the company
was fully behind the Edsel for keeps,
and I didn’t feel that I was the fellow to
tell them now that it wasn’t.” After his
retirement, Doyle remained about as
busy as ever, keeping an eye on various
businesses in which he has set up
various friends and relatives, and
conducting a consulting business of his
own in Detroit. About a month before
Edsel’s consolidation with Mercury and
Lincoln, Warnock, the publicity man, left
the division to become director of news
services for the International Telephone
& Telegraph Corp., in New York—a
position he left in June, 1960, to become
vice-president
of
Communications
Counselors, the public-relations arm of
McCann-Erickson. From there he went
back to Ford, as Eastern promotion chief
for Lincoln-Mercury—a case of a head
that had not rolled but had instead been
anointed. Brown, the embattled stylist,
stayed on in Detroit for a while as chief
stylist of Ford commercial vehicles and
then went with the Ford Motor Company,
Ltd., of England, where, again as chief
stylist, he was assigned to direct the
design of Consuls, Anglias, trucks, and
tractors. He insisted that this post didn’t
represent the Ford version of Siberia. “I
have found it to be a most satisfying
experience, and one of the best steps I
have ever taken in my … career,” he
stated firmly in a letter from England.
“We are building a styling office and a
styling team second to none in Europe.”
Wallace, the semi-Brain Truster, was
asked to continue semi-Brain Trusting
for Ford, and, since he still didn’t like
living in Detroit, or near it, was
permitted to move to New York and to
spend only two days a week at
headquarters. (“They didn’t seem to care
any more where I operated from,” he
says modestly.) At the end of 1958, he
left Ford, and he has since finally
achieved his heart’s desire—to become
a full-time scholar and teacher. He set
about getting a doctorate in sociology at
Columbia, writing his thesis on social
change in Westport, Connecticut, which
he investigated by busily quizzing its
inhabitants; meanwhile, he taught a
course on “The Dynamics of Social
Behavior” at the New School for Social
Research, in Greenwich Village. “I’m
through with industry,” he was heard to
declare one day, with evident
satisfaction, as he boarded a train for
Westport, a bundle of questionnaires
under his arm. Early in 1962, he became
Dr. Wallace.
The subsequent euphoria of these
former Edsel men did not stem entirely
from the fact of their economic survival;
they appear to have been enriched
spiritually. They are inclined to speak of
their Edsel experience—except for those
still with Ford, who are inclined to
speak of it as little as possible—with the
verve and garrulity of old comrades-inarms hashing over their most thrilling
campaign. Doyle is perhaps the most
passionate reminiscer in the group. “It
was more fun than I’ve ever had before
or since,” he told a caller in 1960. “I
suppose that’s because I worked the
hardest ever. We all did. It was a good
crew. The people who came with Edsel
knew they were taking a chance, and I
like people who’ll take chances. Yes, it
was a wonderful experience, in spite of
the unfortunate thing that happened. And
we were on the right track, too! When I
went to Europe just before retiring, I
saw how it is there—nothing but
compact cars, yet they’ve still got traffic
jams over there, they’ve still got parking
problems, they’ve still got accidents.
Just try getting in and out of those low
taxicabs without hitting your head, or try
not to get clipped while you’re walking
around the Arc de Triomphe. This smallcar thing won’t last forever. I can’t see
American drivers being satisfied for
long with manual gear-shifting and
limited performance. The pendulum will
swing back.”
Warnock, like many a public-relations
man before him, claims that his job gave
him an ulcer—his second. “But I got
over it,” he says. “That great Edsel team
—I’d just like to see what it could have
done if it had had the right product at the
right time. It could have made millions,
that’s what! The whole thing was two
years out of my life that I’ll never forget.
It was history in the making. Doesn’t it
all tell you something about America in
the fifties—high hopes, and less than
complete fulfillment of them?”
Krafve, the boss of the great team
manqué, is entirely prepared to testify
that there is more to his former
subordinates’ talk than just the romantic
vaporings of old soldiers. “It was a
wonderful group to work with,” he said
not long ago. “They really put their
hearts and guts into the job. I’m
interested in a crew that’s strongly
motivated, and that one was. When
things went bad, the Edsel boys could
have cried about how they’d given up
wonderful opportunities to come with
us, but if anybody did, I never heard
about it. I’m not surprised that they’ve
mostly come out all right. In industry,
you take a bump now and then, but you
bounce back as long as you don’t get
defeated inside. I like to get together
with somebody once in a while—Gayle
Warnock or one of the others—and go
over the humorous incidents, the tragic
incidents.…”
Whether the nostalgia of the Edsel
boys for the Edsel runs to the humorous
or to the tragic, it is a thought-provoking
phenomenon. Maybe it means merely
that they miss the limelight they first
basked in and later squirmed in, or
maybe it means that a time has come
when—as in Elizabethan drama but
seldom before in American business—
failure can have a certain grandeur that
success never knows.
* The word “styling” is a weed deeply embedded
in the garden of automobilia. In its preferred sense, the
verb “to style” means to name; thus the Special
Products Division’s epic efforts to choose a name for
the E-Car, which will be chronicled presently, were
really the styling program, and what Brown and his
associates were up to was something else again. In its
second sense, says Webster, “to style” means “to
fashion in … the accepted style”; this was just what
Brown, who hoped to achieve originality, was trying
not to do, so Brown’s must have been the antistyling
program.
* For details on this product of the national
creativity, see Chapter 3.
3
The Federal Income
Tax
I
BEYOND A DOUBT,
many prosperous and
ostensibly intelligent Americans have in
recent years done things that to a naïve
observer might appear outlandish, if not
actually lunatic. Men of inherited
wealth, some of them given to the
denunciation of government in all its
forms and manifestations, have shown
themselves to be passionately interested
in the financing of state and municipal
governments, and have contributed huge
sums to this end. Weddings between
persons with very high incomes and
persons with not so high incomes have
tended to take place most often near the
end of December and least often during
January. Some exceptionally successful
people, especially in the arts, have been
abruptly and urgently instructed by their
financial advisers to do no more gainful
work under any circumstances for the
rest of the current calendar year, and
have followed this advice, even though
it sometimes came as early as May or
June. Actors and other people with high
incomes from personal services have
again and again become the proprietors
of sand-and-gravel businesses, bowling
alleys,
and
telephone-answering
services, doubtless adding a certain élan
to the conduct of those humdrum
establishments. Motion-picture people,
as if fulfilling a clockwork schedule of
renunciation and reconciliation, have
repeatedly abjured their native soil in
favor of foreign countries for periods of
eighteen months—only to embrace it
again in the nineteenth. Petroleum
investors have peppered the earth of
Texas with speculative oil wells, taking
risks far beyond what would be dictated
by
normal
business
judgment.
Businessmen travelling on planes, riding
in taxis, or dining in restaurants have
again and again been seen compulsively
making entries in little notebooks that, if
they were questioned, they would
describe as “diaries;” however, far from
being spiritual descendants of Samuel
Pepys or Philip Hone, they were writing
down only what everything cost. And
owners and part owners of businesses
have arranged to share their ownership
with minor children, no matter how
young; indeed, in at least one case of
partnership agreement has been delayed
pending the birth of one partner.
As hardly anyone needs to be told, all
these odd actions are directly traceable
to various provisions of the federal
income-tax law. Since they deal with
birth, marriage, work, and styles and
places of living, they give some idea of
the scope of the law’s social effects, but
since they are confined to the affairs of
the well-to-do, they give no idea of the
breadth of its economic impact.
Inasmuch as almost sixty-three million
individual returns were filed in a typical
recent year—1964—it is not surprising
that the income-tax law is often spoken
of as the law of the land that most
directly affects the most individuals, and
inasmuch as income-tax collections
account for almost three-quarters of our
government’s gross receipts, it is
understandable that it is considered our
most important single fiscal measure.
(Out of a gross from all sources of a
hundred and twelve billion dollars for
the fiscal year that ended June 30th,
1964, roughly fifty-four and a half
billion came from individual income
taxes and twenty-three and a third billion
from corporation income taxes.) “In the
popular mind, it is THE TAX,” the
economics professors William J. Shultz
and C. Lowell Harriss declare in their
book “American Public Finance,” and
the writer David T. Bazelon has
suggested that the economic effect of the
tax has been so sweeping as to create
two quite separate kinds of United States
currency—before-tax money and aftertax money. At any rate, no corporation is
ever formed, nor are any corporation’s
affairs conducted for as much as a single
day, without the lavishing of earnest
consideration upon the income tax, and
hardly anyone in any income group can
get by without thinking of it
occasionally, while some people, of
course, have had their fortunes or their
reputations, or both, ruined as a result of
their failure to comply with it. As far
afield as Venice, an American visitor a
few years ago was jolted to find on a
brass plaque affixed to a coin box for
contributions to the maintenance fund of
the Basilica of San Marco the words
“Deductible for U.S. Income-Tax
Purposes.”
A good deal of the attention given to
the income tax is based on the
proposition that the tax is neither logical
nor equitable. Probably the broadest and
most serious charge is that the law has
close to its heart something very much
like a lie; that is, it provides for taxing
incomes at steeply progressive rates,
and then goes on to supply an array of
escape hatches so convenient that hardly
anyone, no matter how rich, need pay the
top rates or anything like them. For
1960, taxpayers with reportable incomes
of between two hundred thousand and
five hundred thousand dollars paid, on
the average, about 44 per cent, and even
those few who reported incomes of over
a million dollars paid well under 50 per
cent—which happened to be just about
the percentage that a single taxpayer was
supposed to pay, and often did pay, if his
income was forty-two thousand dollars.
Another frequently heard charge is that
the income tax is a serpent in the
American Garden of Eden, offering such
tempting opportunities for petty evasion
that it induces a national fall from grace
every April. Still another school of
critics contends that because of its
labyrinthine quality (the basic statute, the
Internal Revenue Code of 1954, runs to
more than a thousand pages, and the
court rulings and Internal Revenue
Service regulations that elaborate it
come to seventeen thousand) the income
tax not only results in such idiocies as
gravel-producing actors and unborn
partners but is in fact that anomaly, a law
that a citizen may be unable to comply
with by himself. This situation, the
critics declare, leads to an undemocratic
state of affairs, for only the rich can
afford the expensive professional advice
necessary to minimize their taxes legally.
The income-tax law in toto has
virtually no defenders, even though most
fair-minded students of the subject agree
that its effect over the half century that it
has been in force has been to bring about
a huge and healthy redistribution of
wealth. When it comes to the income tax,
we almost all want reform. As
reformers, however, we are largely
powerless, the chief reasons being the
staggering complexity of the whole
subject, which causes many people’s
minds to go blank at the very mention of
it, and the specific, knowledgeable, and
energetic advocacy by small groups of
the particular provisions they benefit
from. Like any tax law, ours had a kind
of immunity to reform; the very riches
that people accumulate through the use of
tax-avoidance devices can be—and
constantly are—applied to fighting the
elimination of those devices. Such
influences, combined with the fierce
demands made on the Treasury by
defense spending and other rising costs
of government (even leaving aside hot
wars like the one in Vietnam), have
brought about two tendencies so marked
that they have assumed the shape of a
natural political law: In the United
States it is comparatively easy to raise
tax rates and to introduce tax-avoidance
devices, and it is comparatively hard to
lower tax rates and to eliminate taxavoidance devices. Or so it seemed until
1964, when half of this natural law was
spectacularly challenged by legislation,
originally proposed by President
Kennedy and pushed forward by
President Johnson, that reduced the basic
rates on individuals in two stages from a
bottom of 20 per cent to a bottom of 14
per cent and from a top of 91 per cent to
a top of 70 per cent, and reduced the top
tax on corporations from 52 per cent to
48 per cent—all in all, by far the largest
tax cut in our history. Meanwhile,
however, the other half of the natural
law remains immaculate. To be sure, the
proposed tax changes advanced by
President Kennedy included a program
of substantial reforms to eliminate taxavoidance devices, but so great was the
outcry against the reforms that Kennedy
himself soon abandoned most of them,
and virtually none of them were enacted;
on the contrary, the new law actually
extended or enlarged one or two of the
devices.
“Let’s face it, Clitus, we live in a tax
era. Everything’s taxes,” one lawyer
says to another in Louis Auchincloss’s
book of short stories called “Powers of
Attorney,” and the second lawyer, a
traditionalist, can enter only a token
demurrer. Considering the omnipresence
of the income tax in American life,
however, it is odd how rarely one
encounters references to it in American
fiction. This omission probably reflects
the subject’s lack of literary elegance,
but it may also reflect a national
uneasiness about the income tax—a
sense that we have willed into existence,
and cannot will out of existence, a
presence not wholly good or wholly bad
but, rather, so immense, outrageous, and
morally ambiguous that it cannot be
encompassed by the imagination. How in
the world, one may ask, did it all
happen?
income tax can be truly effective only
in an industrial country where there are
many wage and salary earners, and the
annals of income taxation up to the
present century are comparatively short
and simple. The universal taxes of
ancient times, like the one that brought
Mary and Joseph to Bethlehem just
before the birth of Jesus, were
invariably head taxes, with one fixed
sum to be paid by everybody, rather than
AN
income taxes. Before about 1800, only
two important attempts were made to
establish income taxes—one in Florence
during the fifteenth century, and the other
in France during the eighteenth.
Generally speaking, both represented
efforts by grasping rulers to mulct their
subjects. According to the foremost
historian of the income tax, the late
Edwin R. A. Seligman, the Florentine
effort withered away as a result of
corrupt and inefficient administration.
The eighteenth-century French tax, in the
words of the same authority, “soon
became honeycombed with abuses” and
degenerated into “a completely unequal
and thoroughly arbitrary imposition upon
the less well-to-do classes,” and, as
such, it undoubtedly played its part in
whipping up the murderous fervor that
went into the French Revolution. The
rate of the ancien-régime tax, which
was enacted by Louis XIV in 1710, was
10 per cent, a figure that was cut in half
later, but not in time; the revolutionary
regime eliminated the tax along with its
perpetrators. In the face of this
cautionary example, Britain enacted an
income tax in 1798 to help finance her
participation in the French revolutionary
wars, and this was, in several respects,
the first modern income tax; for one
thing, it had graduated rates, progressing
from zero, on annual incomes under sixty
pounds, to 10 per cent, on incomes of
two hundred pounds or more, and, for
another, it was complicated, containing a
hundred and twenty-four sections, which
took up a hundred and fifty-two pages.
Its unpopularity was general and
instantaneous, and a spate of pamphlets
denouncing it soon appeared; one
pamphleteer, who purported to be
looking back at ancient barbarities from
the year 2000, spoke of the income-tax
collectors of old as “merciless
mercenaries” and “brutes … with all the
rudeness that insolence and selfimportant ignorance could suggest.”
After yielding only about six million
pounds a year for three years—in large
part because of widespread evasion—it
was repealed in 1802, after the Treaty of
Amiens, but the following year, when the
British treasury again found itself in
straitened circumstances, Parliament
enacted a new income-tax law. This one
was extraordinarily far ahead of its time,
in that it included a provision for the
withholding of income at the source,
and, perhaps for that reason, it was hated
even more than the earlier tax had been,
even though its top rate was only half as
high. At a protest meeting held in the
City of London in July, 1803, several
speakers made what, for Britons, must
surely have been the ultimate
commitment of enmity toward the
income tax. If such a measure were
necessary to save the country, they said,
then they would reluctantly have to
choose to let the country go.
Yet gradually, despite repeated
setbacks, and even extended periods of
total oblivion, the British income tax
began to flourish. This may have been,
as much as anything else, a matter of
simple habituation, for a common thread
runs through the history of income taxes
everywhere: Opposition is always at its
most reckless and strident at the very
outset; with every year that passes, the
tax tends to become stronger and the
voices of its enemies more muted.
Britain’s income tax was repealed the
year after the victory at Waterloo, was
revived in a halfhearted way in 1832,
was sponsored with enthusiasm by Sir
Robert Peel a decade later, and
remained in effect thereafter. The basic
rate during the second half of the
nineteenth century varied between 5 per
cent and less than 1 per cent, and it was
only 2½ per cent, with a modest surtax
on high incomes, as late as 1913. The
American idea of very high rates on high
incomes eventually caught on in Britain,
though, and by the middle 1960’s the top
British bracket was over 90 per cent.
Elsewhere in the world—or at least in
the economically developed world—
country after country took the cue from
Britain and instituted an income tax at
one time or another during the nineteenth
century. Post-revolutionary France soon
enacted an income tax, but then repealed
it and managed to get along without one
for a number of years in the second half
of the century; eventually, though, the
loss of revenue proved to be intolerable,
and the tax returned, to become a fixture
of the French economy. An income tax
was one of the first, if not one of the
sweetest, fruits of Italian unity, while
several of the separate states that were
to combine into the German nation had
income taxes even before they were
united. By 1911, income taxes also
existed in Austria, Spain, Belgium,
Sweden,
Norway,
Denmark,
Switzerland,
Holland,
Greece,
Luxembourg, Finland, Australia, New
Zealand, Japan, and India.
As for the United States, the enormous
size of whose income-tax collections
and the apparent docility of whose
taxpayers are now the envy of
governments everywhere, it was a
laggard in the matter of instituting an
income tax and for years was an
inveterate backslider in the matter of
keeping one on its statute books. It is
true that in Colonial times there were
various revenue systems bearing some
slight resemblance to income taxes—in
Rhode Island at one point, for example,
each citizen was supposed to guess the
financial status of ten of his neighbors, in
regard to both income and property, in
order to provide a basis for tax
assessments—but such schemes, being
inefficient and subject to obvious
opportunities for abuse, were shortlived. The first man to propose a federal
income tax was President Madison’s
Secretary of the Treasury, Alexander J.
Dallas; he did so in 1814, but a few
months later the War of 1812 ended, the
demand for government revenue eased,
and the Secretary was hooted down so
decisively that the subject was not
revived until the time of the Civil War,
when both the Union and the
Confederacy enacted income-tax bills.
Before 1900, very few new income
taxes appear to have been enacted
anywhere without the stimulus of a war.
National income taxes were—and until
quite recently largely remained—war
and defense measures. In June of 1862,
prodded by public concern over a public
debt that was increasing at the rate of
two million dollars a day, Congress
reluctantly passed a law providing for
an income tax at progressive rates up to
a maximum of 10 per cent, and on July
1st President Lincoln signed it into law,
along with a bill to punish the practice
of polygamy. (The next day, stocks on the
New York Exchange took a dive, which
was probably not attributable to the
polygamy bill.)
“I am taxed on my income! This is
perfectly gorgeous! I never felt so
important in my life before,” Mark
Twain wrote in the Virginia City,
Nevada, Territorial Enterprise after he
had paid his first income-tax bill, for the
year 1864—$36.82, including a penalty
of $3.12 for being late. Although few
other taxpayers were so enthusiastic, the
law remained in force until 1872. It was,
however, subjected to a succession of
rate reductions and amendments, one of
them being the elimination, in 1865, of
its progressive rates, on the arresting
ground that collecting 10 per cent on
high incomes and lower rates on lower
incomes
constituted
undue
discrimination against wealth. Annual
revenue collections mounted from two
million dollars in 1863 to seventy-three
million in 1866, and then descended
sharply. For two decades, beginning in
the early eighteen-seventies, the very
thought of an income tax did not enter the
American mind, apart from rare
occasions when some Populist or
Socialist agitator would propose the
establishment of such a tax designed
specifically to soak the urban rich. Then,
in 1893, when it had become clear that
the country was relying on an obsolete
revenue system that put too little burden
on businessmen and members of the
professions,
President
Cleveland
proposed an income tax. The outcry that
followed was shrill. Senator John
Sherman, of Ohio, the father of the
Sherman Antitrust Act, called the
proposal “socialism, communism, and
devilism,” and another senator spoke
darkly of “the professors with their
books, the socialists with their schemes
… [and] the anarchists with their
bombs,” while over in the House a
congressman from Pennsylvania laid his
cards on the table in the following terms:
An income tax! A tax so odious that no administration
ever dared to impose it except in time of war.… It is
unutterably distasteful both in its moral and material
aspects. It does not belong to a free country. It is class
legislation.… Do you desire to offer a reward to
dishonesty and to encourage perjury? The imposition of
the tax will corrupt the people. It will bring in its train
the spy and the informer. It will necessitate a swarm of
officials with inquisitorial powers.… Mr. Chairman,
pass this bill and the Democratic Party signs its death
warrant.
The proposal that gave rise to these
fulminations was for a tax at a uniform
rate of 2 per cent on income in excess of
four thousand dollars, and it was enacted
into law in 1894. The Democratic Party
survived, but the new law did not.
Before it could be put into force, it was
thrown out by the Supreme Court, on the
ground that it violated the Constitutional
provision forbidding “direct” taxes
unless they were apportioned among the
states
according
to
population
(curiously, this point had not been raised
in connection with the Civil War income
tax), and the income-tax issue was dead
again, this time for a decade and a half.
In 1909, by what a tax authority named
Jerome Hellerstein has called “one of
the most ironic twists of political events
in American history,” the Constitutional
amendment (the sixteenth) that eventually
gave Congress the power to levy taxes
without apportionment among the states
was put forward by the implacable
opponents of the income tax, the
Republicans, who took the step as a
political move, confidently believing
that the amendment would never be
ratified by the states. To their dismay, it
was ratified in 1913, and later that year
Congress enacted a graduated tax on
individuals at rates ranging from 1 per
cent to 7 per cent, and also a flat tax of 1
per cent on the net profits of
corporations. The income tax has been
with us ever since.
By and large, its history since 1913
has been one of rising rates and of the
seasonable appearance of special
provisions to save people in the upper
brackets from the inconvenience of
having to pay those rates. The first sharp
rise took place during the First World
War, and by 1918 the bottom rate was 6
per cent and the top one, applicable to
taxable income in excess of a million
dollars, was 77 per cent, or far more
than any government had previously
ventured to exact on income of any
amount. But the end of the war and the
“return to normalcy” brought a reversal
of the trend, and there followed an era of
low taxes for rich and poor alike. Rates
were reduced by degrees until 1925,
when the standard rate scale ran from
1½ per cent to an absolute top of 25 per
cent, and, furthermore, a great majority
of the country’s wage earners were
relieved of paying any tax at all by being
allowed personal exemptions of fifteen
hundred dollars for a single person,
thirty-five hundred dollars for a married
couple, and four hundred dollars for
each dependent. This was not the whole
story, for it was during the twenties that
special-interest provisions began to
appear, stimulated into being by the
complex of political forces that has
accounted for their increase at intervals
ever since. The first important one,
adopted in 1922, established the
principle of favored treatment for capital
gains; this meant that money acquired
through a rise in the value of investments
was, for the first time, taxed at a lower
rate than money earned in wages or for
services—as, of course, it still is today.
Then, in 1926, came the loophole that
has undoubtedly caused more gnashing
of teeth among those not in a position to
profit by it than any other—the
percentage depletion allowance on
petroleum, which permits the owner of a
producing oil well to deduct from his
taxable income up to 27½ per cent of his
gross annual income from the well and
to keep deducting that much year after
year, even though he has deducted the
original cost of the well many times
over. Whether or not the twenties were a
golden age for the American people in
general, they were assuredly a golden
age for the American taxpayer.
The depression and the New Deal
brought with them a trend toward higher
tax rates and lower exemptions, which
led up to a truly revolutionary era in
federal income taxation—that of the
Second World War. By 1936, largely
because of greatly increased public
spending, rates in the higher brackets
were roughly double what they had been
in the late twenties, and the very top
bracket was 79 per cent, while, at the
low end of the scale, personal
exemptions had been reduced to the
point where a single person was
required to pay a small tax even if his
income was only twelve hundred
dollars. (As a matter of fact, at that time
most industrial workers’ incomes did not
exceed twelve hundred dollars.) In 1944
and 1945, the rate scale for individuals
reached its historic peak—23 per cent at
the low end and 94 per cent at the high
one—while
income
taxes
on
corporations, which had been creeping
up gradually from the original 1913 rate
of 1 per cent, reached the point where
some companies were liable for 80 per
cent. But the revolutionary thing about
wartime taxation was not the very high
rates on high incomes; indeed, in 1942,
when this upward surge was
approaching full flood, a new means of
escape for high-bracket taxpayers
appeared, or an old one widened, for the
period during which stocks or other
assets must be held in order to benefit
from the capital-gains provision was
reduced from eighteen months to six.
What was revolutionary was the rise of
industrial wages and the extension of
substantial tax rates to the wage earner,
making him, for the first time, an
important contributor to government
revenue. Abruptly, the income tax
became a mass tax.
And so it has remained. Although
taxes on big and middle-sized
businesses settled down to a flat rate of
52 per cent, rates on individual income
did not change significantly between
1945 and 1964. (That is to say, the basic
rates did not change significantly; there
were temporary remissions, amounting
to anywhere from 5 per cent to 17 per
cent of the sums due under the basic
rates, during the years 1946 through
1950.) The range was from 20 per cent
to 91 per cent until 1950; there was a
small rise during the Korean War, but it
went right back there in 1954. In 1950,
another important escape route, the socalled “restricted stock option,” opened
up, enabling some corporate executives
to be taxed on part of their compensation
at low capital-gains rates. The
significant change, invisible in the rate
schedule, has been a continuation of the
one begun in wartime; namely, the
increase in the proportionate tax burden
carried by the middle and lower income
groups. Paradoxical as it may seem, the
evolution of our income tax has been
from a low-rate tax relying for revenue
on the high income group to a high-rate
tax relying on the middle and lowermiddle income groups. The Civil War
levy, which affected only one per cent of
the population, was unmistakably a rich
man’s tax, and the same was true of the
1913 levy. Even in 1918, at the height of
the budget squeeze produced by the First
World War, less than four and a half
million Americans, of a total population
of more than a hundred million, had to
file income-tax returns at all. In 1933, in
the depths of the depression, only three
and three-quarters million returns were
filed, and in 1939 an élite consisting of
seven hundred thousand taxpayers, of a
population of a hundred and thirty
million, accounted for nine-tenths of all
income-tax collections, while in 1960 it
took some thirty-two million taxpayers
—something over one-sixth of the
population—to account for nine-tenths of
all collections, and a whopping big ninetenths it was, totalling some thirty-five
and a half billion dollars, compared to
less than a billion in 1939.
The historian Seligman wrote in 1911
that the history of income taxation the
world over consisted essentially of
“evolution toward basing it on ability to
pay.” One wonders what qualifications
he might add, on the basis of the
American experience since then, if he
were still alive. Of course, one reason
people with middle incomes pay far
more in taxes than they used to is that
there are far more of them. Changes in
the country’s social and economic
structure have been as big a factor in the
shift as the structure of the income tax
has. It remains probable, though, that, in
actual practice, the aboriginal income
tax of 1913 extracted money from
citizens with stricter regard to their
ability to pay than the present income tax
does.
the faults of our income-tax
law, it is beyond question the bestWHATEVER
obeyed income-tax law in the world, and
income taxes are now ubiquitous, from
the Orient to the Occident and from pole
to pole. (Practically all of the dozens of
new nations that have come into being
over the past few years have adopted
income-tax measures. Walter H.
Diamond, the editor of a publication
called Foreign Tax & Trade Briefs, has
noted that as recently as 1955 he could
rattle off the names of two dozen
countries, large and small, that did not
tax the individual, but that in 1965 the
only names he could rattle off were
those of a couple of British colonies,
Bermuda and the Bahamas; a couple of
tiny republics, San Marino and Andorra;
three oil-rich Middle Eastern countries,
the Sultanate of Muscat and Oman,
Kuwait, and Qatar; and two rather
inhospitable countries, Monaco and
Saudi Arabia, which taxed the incomes
of resident foreigners but not those of
nationals. Even Communist countries
have income taxes, though they count on
them for only a small percentage of their
total revenue; Russia applies different
rates
to
different
occupations,
shopkeepers and ecclesiastics being in
the high tax bracket, artists and writers
near the middle, and laborers and
artisans at the bottom.) Evidence of the
superior efficiency of tax collecting in
the United States is plentiful; for
instance, our costs for administration
and enforcement come to only about
forty-four cents for every hundred
dollars collected, as against a rate more
than twice as high in Canada, more than
three times as high in England, France,
and Belgium, and many times as high in
other places. This kind of American
efficiency is the despair of foreign tax
collectors. Toward the end of his term in
office Mortimer M. Caplin, who was
commissioner of Internal Revenue from
January, 1961, until July, 1964, held
consultations with the leading tax
administrators of six Western European
countries, and the question heard again
and again was “How do you do it? Do
they like to pay taxes over there?” Of
course, they do not, but, as Caplin said
at the time, “we have a lot going for us
that the Europeans haven’t.” One thing
we have going for us is tradition.
American income taxes originated and
developed not as a result of the efforts of
monarchs to fill their coffers at the
expense of their subjects but as a result
of the efforts of an elected government to
serve the general interest. A widely
travelled tax lawyer observed not long
ago, “In most countries, it’s impossible
to engage in a serious discussion of
income taxes, because they aren’t taken
seriously.” They are taken seriously
here, and part of the reason is the power
and skill of our income-tax police force,
the Internal Revenue Service.
Unquestionably,
the
“swarm
of
officials” feared by the Pennsylvania
congressman in 1894 has come into
being—and there are those who would
add that the officials have the
“inquisitorial powers” he also feared.
As of the beginning of 1965, the Internal
Revenue Service had approximately
sixty thousand employees, including
more than six thousand revenue officers
and more than twelve thousand revenue
agents, and these eighteen thousand men,
possessing the right to inquire into every
penny of everyone’s income and into
matters like exactly what was discussed
at an expense-account meal, and armed
with the threat of heavy punishments,
have powers that might reasonably be
called inquisitorial. But the I.R.S.
engages in many activities besides actual
tax collecting, and some of these suggest
that it exercises its despotic powers in
an equitable way, if not actually in a
benevolent one. Notable among the
additional activities is a taxpayereducation program on a scale that
occasionally inspires an official to boast
that the I.R.S. runs the largest university
in the world. As part of this program, it
puts out dozens of publications
explicating various aspects of the law,
and it is proud of the fact that the most
general of these—a blue-covered
pamphlet entitled “Your Federal Income
Tax,” which is issued annually and in
1965 could be bought for forty cents at
any District Director’s office—is so
popular that it is often reprinted by
private publishers, who sell it to the
unwary for a dollar or more, pointing
out, with triumphant accuracy, that it is
an official government publication.
(Since government publications are not
copyrighted, this is perfectly legal.) The
I.R.S. also conducts “institutes” on
technical questions every December for
the enlightenment of the vast corps of
“tax practitioners”—accountants and
lawyers—who will shortly be preparing
the returns of individuals and
corporations. It puts out elementary tax
manuals designed specially for free
distribution to any high schools that ask
for them—and, according to one I.R.S.
official, some eighty-five per cent of
American high schools did ask for them
in one recent year. (The question of
whether schoolchildren ought to be
spending their time boning up on the tax
laws is one that the I.R.S. considers to
be outside its scope.) Furthermore, just
before the tax deadline each year, the
I.R.S. customarily goes on television
with spot advertisements offering tax
pointers and reminders. It is proud to say
that, of the various spots, a clear
majority have been in the interests of
protecting taxpayers from overpaying.
In the fall of 1963, the I.R.S. took a
big step toward increasing the efficiency
of its collections still further, and, by a
feat worthy of the wolf in “Little Red
Riding Hood,” it managed to present the
step to the public as a grandmotherly
move to help everybody out. The step
was the establishment of a so-called
national-identity file, involving the
assignment to every taxpayer of an
account number (usually his Social
Security number), and its intention was
to practically eliminate the problem
created by people who fail to declare
their income from corporate dividends
or from interest on bank accounts or
bonds—a form of evasion that was
thought to have been costing the Treasury
hundreds of millions a year. But that is
not all. When the number is entered in
the proper place on a return, “this will
make certain that you are given
immediate credit for taxes reported and
paid by you, and that any refund will be
promptly recorded in your favor”—so
Commissioner
Caplin
commented
brightly on the front cover of the 1964
tax-return forms. The I.R.S. then began
taking another giant step—the adoption
of a system for automating a large part of
the tax-checking process, in which seven
regional computers would collect and
collate data that would be fed into a
master data-processing center at
Martinsburg, West Virginia. This
installation, designed to make a quarter
of a million number comparisons per
second, began to be called the
Martinsburg Monster even before it was
in full operation. In 1965, between four
and five million returns a year were
given a complete audit, and all returns
were checked for mathematical errors.
Some of this mathematical work was
being done by computers and some by
people, but by 1967, when the computer
system was going full blast, all the
mathematical work was done by
machine, thus freeing many I.R.S.
employees to subject even more returns
to detailed audits. According to a
publication authorized by the I.R.S. back
in 1963, though, “the capacity and
memory of the [computer] system will
help taxpayers who forget prior year
credits or who do not take full advantage
of their rights under the laws.” In short,
it was going to be a friendly monster.
the mask that the I.R.S. had presented
to the country in recent years has worn a
rather ghastly expression of benignity,
part of the explanation is probably
nothing more sinister than the fact that
Caplin, the man who dominated it in
those years, is a cheerful extrovert and a
natural politician, and that his influence
continued to be felt under the man who
was appointed to succeed him as
Commissioner in December 1964—a
young Washington lawyer named
Sheldon S. Cohen, who took over the job
after a six-month interim during which
an I.R.S. career man named Bertrand M.
Harding
served
as
Acting
Commissioner. (When Caplin resigned
as Commissioner, he stepped out of
IF
politics, at least temporarily, returning to
his Washington law practice as a
specialist in, among other things, the tax
problems of businessmen.) Caplin is
widely considered to have been one of
the best Commissioners of Internal
Revenue in history, and, at the very least,
he was certainly an improvement on two
fairly recent occupants of the post, one
of whom, some time after leaving it, was
convicted and sentenced to two years in
prison for evading his own income
taxes, and the other of whom
subsequently ran for public office on a
platform of opposition to any federal
income tax—as a former umpire might
stump the country against baseball.
Among the accomplishments that
Mortimer Caplin, a small, quick-spoken,
dynamic man who grew up in New York
City and used to be a University of
Virginia law professor, is credited with
as Commissioner is the abolition of the
practice that had previously been
alleged to exist of assigning collection
quotas to I.R.S. agents. He gave the top
echelons of I.R.S. an air of integrity
beyond cavil, and, what was perhaps
most striking, managed the strange feat
of projecting to the nation a sort of
enthusiasm for taxes, considered
abstractly. Thus he managed to collect
them with a certain style—a sort of
subsidiary New Frontier, which he
called the New Direction. The chief
thrust of the New Direction was to put
increased emphasis on education leading
toward increased voluntary compliance
with the tax law, instead of concentrating
on the search for and prosecution of
conscious offenders. In a manifesto that
Caplin issued to his swarm of officials
in the spring of 1961, he wrote, “We all
should understand that the Service is not
simply running a direct enforcement
business aimed at making $2 billion in
additional
assessments,
collecting
another billion from delinquent accounts,
and prosecuting a few hundred evaders.
Rather, it is charged with administering
an enormous self-assessment tax system
which raises over $90 billion from what
people themselves put down on their tax
returns and voluntarily pay, with another
$2 or $3 billion coming from direct
enforcement activities. In short, we
cannot forget that 97 per cent of our total
revenue comes from self-assessment or
voluntary compliance, with only three
per cent coming directly from
enforcement. Our chief mission is to
encourage and achieve more effective
voluntary compliance.… The New
Direction is really a shift in emphasis.
But it is a very important shift.” It may
be, though, that the true spirit of the New
Direction is better epitomized on the
jacket of a book entitled “The American
Way in Taxation,” edited by Lillian
Doris, which was published in 1963
with the blessing of Caplin, who wrote
the foreword. “Here is the exciting story
of the largest and most efficient tax
collecting organization the world has
ever known—the United States Internal
Revenue Service!” the jacket announced,
in part. “Here are the stirring events, the
bitterly-fought legislative battles, the
dedicated civil servants that have
marched through the past century and left
an indelible imprint on our nation.
You’ll thrill to the epic legal battle to
kill the income tax … and you’ll be
astonished at the future plans of the
I.R.S. You’ll see how giant computers,
now on the drawing boards, are going to
affect the tax collection system and
influence the lives of many American
men and women in new and unusual
ways!” It sounded a bit like a circus
barker hawking a public execution.
It is debatable whether the New
Direction watchword of “voluntary
compliance” could properly be used to
describe a system of tax collection under
which some three-quarters of all
collections from individuals are
obtained through withholding at the
source, under which the I.R.S. and its
Martinsburg Monster lurk to catch the
unwary evader, and under which the
punishment for evasion runs up to five
years in prison per offense in addition to
extremely heavy financial penalties.
Caplin, however, did not seem to feel a
bit of concern over this point. With
tireless good humor, he made the rounds
of the nation’s organizations of
businessmen, accountants, and lawyers,
giving luncheon talks in which he
praised them for their voluntary
compliance in the past, exhorted them to
greater efforts in the future, and assured
them that it was all in a good cause.
“We’re still striving for the human touch
in our tax administration,” declared the
essay on the cover of the 1964 tax-return
forms, which Caplin signed, and which
he says he composed in collaboration
with his wife. “I see a lot of humor in
this job,” he told a caller a few hours
after remarking to a luncheon meeting of
the Kiwanis Club of Washington at the
Mayflower Hotel, “Last year was the
fiftieth anniversary of the income-tax
amendment to the Constitution, but the
Internal Revenue Service somehow or
other didn’t seem to get any birthday
cakes.” This might perhaps be
considered a form of gallows humor,
except that the hangman is not supposed
to be the one who makes the jokes.
Cohen, the Commissioner who
succeeded Caplin and was still in office
in mid-1968, is a born-and-bred
Washingtonian who, in 1952, graduated
from George Washington University Law
School at the top of his class; served in a
junior capacity with the I.R.S. for the
next four years; practiced law in
Washington for seven years after that,
eventually becoming a partner in the
celebrated firm of Arnold, Fortas &
Porter; at the beginning of 1964 returned
to the I.R.S., as its chief counsel; and a
year later, at the age of thirty-seven,
became the youngest Commissioner of
Internal Revenue in history. A man with
close-cropped brown hair, candid eyes,
and a guileless manner that makes him
seem even younger than he is, Cohen
came from the chief counsel’s office
with the reputation of having uplifted it
both practically and philosophically; he
was responsible for an administrative
reorganization that has been widely
praised as making faster decisions
possible, and for a demand that the
I.R.S. be consistent in its legal stand in
cases against taxpayers (that it refrain
from taking one position on a fine point
of Code interpretation in Philadelphia,
say, and the opposite position on the
same point in Omaha), which is
considered a triumph of high principle
over governmental greed. In general,
Cohen said upon assuming office, he
intended to continue Caplin’s policies—
to emphasize “voluntary compliance,” to
strive for agreeable, or at least not
disagreeable,
relations
with the
taxpaying public, and so on. He is a less
gregarious and a more reflective man
than Caplin, however, and this
difference has had its effect on the I.R.S.
as a whole. He has stuck relatively close
to his desk, leaving the luncheon-circuit
pep talks to subordinates. “Mort was
wonderful at that sort of thing,” Cohen
said in 1965. “Public opinion of the
Service is high now as a result of his big
push in that direction. We want to keep it
high without more pushing on my part.
Anyhow, I couldn’t do it well—I’m not
made that way.”
A charge that has often been made,
and continues to be made, is that the
office of Commissioner carries with it
far too much power. The Commissioner
has no authority to propose changes in
rates or initiate other new tax legislation
—the authority to propose rate changes
belongs to the Secretary of the Treasury,
who may or may not seek the
Commissioner’s advice in the matter,
and the enactment of new tax laws is, of
course, the job of Congress and the
President—but tax laws, since they must
cover so many different situations, are
necessarily written in rather general
terms, and the Commissioner is solely
responsible (subject to reversal in the
courts) for writing the regulations that
are supposed to explain the laws in
detail. And sometimes the regulations
are a bit cloudy themselves, and in such
cases who is better qualified to explain
them
than
their
author,
the
Commissioner? Thus it comes about that
almost every word that drops from the
Commissioner’s mouth, whether at his
desk or at luncheon meetings, is
immediately distributed by the various
tax publishing services to tax
accountants and lawyers all over the
country and is gobbled up by them with
an avidity not always accorded the
remarks of an appointed official.
Because of this, some people see the
Commissioner as a virtual tyrant. Others,
including both theoretical and practical
tax
experts,
disagree.
Jerome
Hellerstein, who is a law professor at
New York University Law School as
well as a tax adviser, says, “The latitude
of action given the Commissioner is
great, and it’s true that he can do things
that may affect the
economic
development of the country as well as
the fortunes of individuals and
corporations. But if he had small
freedom of action, it would result in
rigidity and certainty of interpretation,
and would make it much easier for tax
practitioners like me to manipulate the
law to their clients’ advantage. The
Commissioner’s latitude gives him a
healthy unpredictability.”
Caplin did not knowingly
abuse his power, nor has Cohen done so.
Upon visiting first one man and then the
other in the Commissioner’s office, I
found that both conveyed the impression
of being men of high intelligence who
were living—as Arthur M. Schlesinger,
Jr., has said that Thoreau lived—at a
high degree of moral tension. And the
cause of the moral tension is not hard to
CERTAINLY
find; it almost surely stemmed from the
difficulty of presiding over compliance,
voluntary or involuntary, with a law of
which one does not very heartily
approve. In 1958, when Caplin appeared
—as a witness versed in tax matters,
rather than as Commissioner of Internal
Revenue—before the House Ways and
Means Committee, he proposed an
across-the-board program of reforms,
including, among other things, either the
total elimination or a drastic curbing of
favored treatment for capital gains; the
lowering of percentage depletion rates
on petroleum and other minerals; the
withholding of taxes on dividends and
interest; and the eventual drafting of an
entirely new income-tax law to replace
the 1954 Code, which he declared had
led to “hardships, complexities, and
opportunities for tax avoidance.” Shortly
after Caplin left office, he explained in
detail what his ideal tax law would be
like. Compared to the present tax law, it
would be heroically simple, with
loopholes eliminated, and most personal
deductions and exemptions eliminated,
too, and with a rate scale ranging from
10 to 50 per cent.
In Caplin’s case, the resolution of
moral tension, insofar as he achieved it,
was not entirely the result of rational
analysis. “Some critics take a
completely cynical view of the income
tax,” he mused one day during his stint
as Commissioner. “They say, in effect,
‘It’s a mess, and nothing can be done
about it.’ I can’t go along with that. True,
many compromises are necessary, and
will continue to be. But I refuse to
accept a defeatist attitude. There’s a
mystic quality about our tax system. No
matter how bad it may be from the
technical standpoint, it has a vitality
because of the very high level of
compliance.” He paused for quite a long
time, perhaps finding a flaw in his own
argument; in the past, after all, universal
compliance with a law has not always
been a sign that it was either intelligent
or just. Then he went on, “Looking over
the sweep of years, I think we’ll come
out well. Probably a point of crisis of
some kind will make us begin to see
beyond selfish interests. I’m optimistic
that fifty years from now we’ll have a
pretty good tax.”
As for Cohen, he was working in the
legislation-drafting section of the I.R.S.
at the time the present Code was written,
and he had a hand in its composition.
One might suppose that this fact would
cause him to have a certain proprietary
feeling toward it, but apparently that is
not so. “Remember that we had a
Republican administration then, and I’m
a Democrat,” he said one day in 1965.
“When you are drafting a statute, you
operate as a technician. Any pride you
may feel afterward is pride in technical
competence.” So Cohen can reread his
old prose, now enshrined as law, with
neither elation nor remorse, and he has
not the slightest hesitation about
endorsing Caplin’s opinion that the Code
leads to “hardships, complexities, and
opportunities for tax avoidance.” He is
more pessimistic than Caplin about
finding the answer in simplification.
“Perhaps we can move the rates down
and get rid of some deductions,” he says,
“but then we may find we need new
deductions, in the interests of fairness. I
suspect that a complex society requires a
complex tax law. If we put in a simpler
code, it would probably be complex
again in a few years.”
II
nation has the government it
deserves,” the French writer and
diplomat Joseph de Maistre declared in
1811. Since the primary function of
government is to make laws, the
statement implies that every nation has
the laws it deserves, and if the doctrine
may be considered at best a half truth in
the case of governments that exist by
force, it does seem persuasive in the
case of governments that exist by
popular consent. If the single most
important law now on the statute books
of the United States is the income-tax
law, it would follow that we must have
the income-tax law we deserve. Much of
“EVERY
the voluminous discussion of the
income-tax law in recent years has
centered on plain violations of it, among
them the deliberate padding of taxdeductible business-expense accounts,
the matter of taxable income that is left
undeclared on tax returns, fraudulently
or otherwise—a sum estimated at as
high as twenty-five billion dollars a year
—and the matter of corruption within the
ranks of the Internal Revenue Service,
which some authorities believe to be
fairly common, at least in large cities.
Such forms of outlawry, of course,
reflect timeless and worldwide human
frailties. The law itself, however, has
certain characteristics that are more
closely related to a particular time and
place, and if de Maistre was right, these
should reflect national characteristics;
the income-tax law, that is, should be to
some extent a national mirror. How does
the reflection look?
repeat, then, the basic law under
which income taxes are now imposed is
the Internal Revenue Code of 1954, as
amplified by innumerable regulations
issued by the Internal Revenue Service,
interpreted by innumerable judicial
decisions, and amended by several Acts
of Congress, including the Revenue Act
of 1964, which embodied the biggest tax
cut in our history. The Code, a document
longer than “War and Peace,” is phrased
—inevitably, perhaps—in the sort of
TO
jargon that stuns the mind and
disheartens the spirit; a fairly typical
sentence, dealing with the definition of
the word “employment,” starts near the
bottom of page 564, includes more than
a thousand words, nineteen semicolons,
forty-two simple parentheses, three
parentheses within parentheses, and
even one unaccountable interstitial
period, and comes to a gasping end, with
a definitive period, near the top of page
567. Not until one has penetrated to the
part of the Code dealing with exportimport taxes (which fall within its
province, along with estate taxes and
various other federal imposts) does one
come upon a comprehensible and
diverting sentence like “Every person
who shall export oleomargarine shall
brand upon every tub, firkin, or other
package containing such article the word
‘Oleomargarine,’ in plain Roman letters
not less than one-half inch square.” Yet a
clause on page 2 of the Code, though it is
not a sentence at all, is as clear and
forthright as one could wish; it sets forth
without ado the rates at which the
incomes of single individuals are to be
taxed: 20 per cent on taxable income of
not over $2,000; 22 per cent on taxable
income of over $2,000 but not over
$4,000; and so on up to a top rate of 91
per cent on taxable income of over
$200,000. (As we have seen, the rates
were amended downward in 1964 to a
top of 70 per cent.) Right at the start,
then, the Code makes its declaration of
principle, and, to judge by the rate table,
it is implacably egalitarian, taxing the
poor relatively lightly, the well-to-do
moderately, and the very rich at levels
that verge on the confiscatory.
But, to repeat a point that has become
so well known that it scarcely needs
repeating, the Code does not live up to
its principles very well. For proof of
this, one need look no further than some
of the recent score sheets of the income
tax—a set of volumes entitled Statistics
of Income, which are published annually
by the Internal Revenue Service. For
1960, individuals with gross incomes of
between $4,000 and $5,000, after taking
advantage of all their deductions and
personal exemptions, and availing
themselves of the provision that allows
married couples and the heads of
households to be taxed at rates generally
lower than those for single persons,
ended up paying an average tax bill of
about one-tenth of their reportable
receipts, while those in the $10,000–
$15,000 range paid a bill of about oneseventh, those in the $25,000–$50,000
range paid a bill of not quite a quarter,
and those in the $50,000–$100,000
range paid a bill of about a third. Up to
this point, clearly, we find a progression
according to ability to pay, much as the
rate table prescribes. However, the
progression stops abruptly when we
reach the top income brackets—that is,
at just the point where it is supposed to
become most marked. For 1960, the
$150,000–$200,000,
$200,000–
$500,000, $500,000$ 1,000,000 and
million-plus groups each paid, on the
average, less than 50 per cent of their
reportable incomes, and when one takes
into consideration the fact that the richer
a man is, the likelier it is that a huge
proportion of his money need not even
be reported as gross taxable income—
all income from certain bonds, for
example, and half of all income from
long-term capital gains—it becomes
evident that at the very top of the income
scale the percentage rate of actual
taxation turns downward. The evidence
is confirmed by the Statistics of Income
for 1961, which breaks down figures on
payments according to bracket, and
which shows that although 7,487
taxpayers declared gross incomes of
$200,000 or more, fewer than five
hundred of them had net income that was
taxed at the rate of 91 per cent.
Throughout its life, the rate of 91 per
cent was a public tranquilizer, making
everyone in the lower bracket feel
fortunate not to be rich, and not hurting
the rich very much. And then, to top off
the joke, if that is what it is, there are the
people with more income than anyone
else who pay less tax than anyone else—
that is, those with annual incomes of a
million dollars or more who manage to
find perfectly legal ways of paying no
income tax at all. According to Statistics
of Income, there were eleven of them in
1960, out of a national total of three
hundred and six million-a-year men, and
seventeen in 1961, out of a total of three
hundred and ninety-eight. In plain fact,
the income tax is hardly progressive at
all.
The explanation of this disparity
between appearance and reality, so huge
that it lays the Code open to a broad
accusation of hypocrisy, is to be found in
the detailed exceptions to the standard
rates which lurk in its dim depths—
exceptions that are usually called
special-interest provisions or, more
bluntly, loopholes. (“Loophole,” as all
fair-minded users of the word are ready
to admit, is a somewhat subjective
designation, for one man’s loophole may
be another man’s lifeline—or perhaps at
some other time, the same man’s
lifeline.) Loopholes were noticeably
absent from the original 1913 incometax law. How they came to be law and
why they remain law are questions
involving
politics
and
possibly
metaphysics, but their actual workings
are relatively simple, and are
illuminating to watch. By far the
simplest method of avoiding income
taxes—at least for someone who has a
large amount of capital at his disposal—
is to invest in the bonds of states,
municipalities, port authorities, and toll
roads; the interest paid on all such bonds
is unequivocally tax-exempt. Since the
interest on high-grade tax-exempt bonds
in recent years has run from three to five
per cent, a man who invests ten million
dollars in them can collect $300,000 to
$500,000 a year tax-free without putting
himself or his tax lawyer to the slightest
trouble; if he had been foolish enough to
sink the money in ordinary investments
yielding, say, five per cent, he would
have had a taxable income of $500,000,
and at the 1964 rate, assuming that he
was single, had no other income, and did
not avail himself of any dodges, he
would have to pay taxes of almost
$367,000. The exemption on state and
municipal bonds has been part of our
income-tax law since its beginnings; it
was based originally on Constitutional
grounds and is now defended on the
ground that the states and towns need the
money. Most Secretaries of the Treasury
have looked on the exemption with
disfavor, but not one has been able to
accomplish its repeal.
Probably the most important specialinterest provision in the Code is the one
that concerns capital gains. The staff of
the Joint Economic Committee of
Congress wrote in a report issued in
1961, “Capital gains treatment has
become one of the most impressive
loopholes in the federal revenue
structure.” What the provision says, in
essence, is that a taxpayer who makes a
capital investment (in real estate, a
corporation, a block of stock, or
whatever), holds on to it for at least six
months, and then sells it at a profit is
entitled to be taxed on the profit at a rate
much lower than the rate on ordinary
income; to be specific, the rate is half of
that taxpayer’s ordinary top tax rate or
twenty-five per cent whichever is less.
What this means to anyone whose
income would normally put him in a
very high tax bracket is obvious: he must
find a way of getting as much as possible
of that income in the form of capital
gains. Consequently, the game of finding
ways of converting ordinary income into
capital gains has become very popular in
the past decade or two. The game is
often won without much of a struggle. On
television one evening in the middle
1960s, David Susskind asked six
assembled multimillionaires whether
any of them considered tax rates a
stumbling block on the highroad to
wealth in America. There was a long
silence, almost as if the notion were new
to the multimillionaires, and then one of
them, in the tone of some one explaining
something to a child, mentioned the
capital-gains provision and said that he
didn’t consider taxes much of a problem.
There was no more discussion of high
tax rates that night.
If the
capital-gains
provision
resembles the exemption on certain
bonds in that the advantages it affords
are of benefit chiefly to the rich, it
differs in other ways. It is by far the
more accommodating of the two
loopholes; indeed, it is a sort of mother
loophole capable of spawning other
loopholes. For example, one might think
that a taxpayer would need to have
capital before he could have a capital
gain. Yet a way was discovered—and
was passed into law in 1950—for him to
get the gain before he has the capital.
This is the stock-option provision.
Under its terms, a corporation may give
its executives the right to buy its shares
at any time within a stipulated period—
say, five years—at or near the openmarket price at the time of the granting of
the option; later on, if, as has happened
so often, the market price of the stock
goes sky-high, the executives may
exercise their options to buy the stock at
the old price, may sell it on the open
market some time later at the new price,
and may pay only capital-gains rates on
the difference, provided that they go
through these motions without unseemly
haste. The beauty of it all from an
executive’s point of view is that once the
stock has gone up substantially in value,
his option itself becomes a valuable
commodity, against which he can borrow
the cash he needs in order to exercise it;
then, having bought the stock and sold it
again, he can pay off his debt and have a
capital gain that has arisen from the
investment of no capital. The beauty of it
all from the corporations’ point of view
is that they can compensate their
executives partly in money taxable at
relatively low rates. Of course, the
whole scheme comes to nothing if the
company’s stock goes down, which does
happen occasionally, or if it simply
doesn’t go up, but even then the
executive has had a free play on the
roulette wheel of the stock market, with
a chance of winning a great deal and
practically no danger of losing anything
—something that the tax law offers no
other group.
By favoring capital gains over
ordinary income, the Code seems to be
putting forward two very dubious
notions—that one form of unearned
income is more deserving than any form
of earned income, and that people with
money to invest are more deserving than
people without it. Hardly anyone
contends that the favored treatment of
capital gains can be justified on the
ground of fairness; those who consider
this aspect of the matter are apt to agree
with Hellerstein, who has written,
“From a sociological viewpoint, there is
a good deal to be said for more severe
taxation of profit from appreciation in
the value of property than from personalservice income.” The defense, then, is
based on other grounds. For one, there is
a respectable economic theory that
supports a complete exemption of
capital gains from income tax, the
argument being that whereas wages and
dividends or interest from investments
are fruits of the capital tree, and are
therefore taxable income, capital gains
represent the growth of the tree itself,
and are therefore not income at all. This
distinction is actually embedded in the
tax laws of some countries—most
notably in the tax law of Britain, which
in principle did not tax capital gains
until 1964. Another argument—this one
purely pragmatic—has it that the capitalgains provision is necessary to
encourage people to take risks with their
capital. (Similarly, the advocates of
stock options say that corporations need
them to attract and hold executive
talent.) Finally, nearly all tax authorities
are agreed that taxing capital gains on
exactly the same basis as other income,
which is what most reformers say ought
to be done, would involve formidable
technical difficulties.
Particular subcategories of the rich
and the well-paid can avail themselves
of various other avenues of escape,
including corporate pension plans,
which, like stock options, contribute to
the solution of the tax problems of
executives; tax-free foundations set up
ostensibly for charitable and educational
purposes, of which over fifteen thousand
help to ease the tax burdens of their
benefactors, though the charitable and
educational activities of some of them
are more or less invisible; and personal
holding companies, which, subject to
rather strict regulations, enable persons
with very high incomes from personal
services like writing and acting to
reduce their taxes by what amounts to
incorporating themselves. Of the whole
array of loopholes in the Code, however,
probably the most widely loathed is the
percentage depletion allowance on oil.
As the word “depletion” is used in the
Code, it refers to the progressive
exhaustion of irreplaceable natural
resources, but as used on oilmen’s tax
returns, it proves to mean a miraculously
glorified form of what is ordinarily
called
depreciation.
Whereas
a
manufacturer may claim depreciation on
a piece of machinery as a tax deduction
only until he has deducted the original
cost of the machine—until, that is, the
machine is theoretically worthless from
wear—an individual or corporate oil
investor, for reasons that defy logical
explanation, may go on claiming
percentage depletion on a producing
well indefinitely, even if this means that
the original cost of the well has been
recovered many times over. The oildepletion allowance is 27.5 per cent a
year up to a maximum of half of the oil
investor’s net income (there are smaller
allowances on other natural resources,
such as 23 per cent on uranium, 10 per
cent on coal, and 5 per cent on oyster
and clam shells), and the effect it has on
the taxable income of an oil investor,
especially when it is combined with the
effects of other tax-avoidance devices,
is truly astonishing; for instance, over a
recent five-year period one oilman had a
net income of fourteen and a third
million dollars, on which he paid taxes
of $80,000, or six-tenths of one per cent.
Unsurprisingly, the percentage-depletion
allowance is always under attack, but,
also unsurprisingly, it is defended with
tigerish zeal—so tigerish that even
President Kennedy’s 1961 and 1963
proposals for tax revision, which, taken
together, are generally considered the
broadest program of tax reform ever put
forward by a chief executive, did not
venture to suggest its repeal. The usual
argument is that the percentage-depletion
allowance is needed in order to
compensate oilmen for the risks
involved in speculative drilling, and thus
insure an adequate supply of oil for
national use, but many people feel that
this argument amounts to saying, “The
depletion allowance is a necessary and
desirable federal subsidy to the oil
industry,” and thereby scuttles itself,
since granting subsidies to individual
industries is hardly the proper task of the
income tax.
1964 Revenue Act does practically
nothing to plug the loopholes, but it does
make them somewhat less useful, in that
the drastic reduction of the basic rates
on high incomes has probably led some
high-bracket taxpayers simply to quit
bothering with the less convenient or
effective of the dodges. Insofar as the
new bill reduces the disparity between
the
Code’s
promises
and
its
performance, that is, it represents a kind
of adventitious reform. (One way to cure
all income-tax evasion would be to
repeal the income tax.) However, quite
apart from the sophistry—since 1964
happily somewhat lessened—that the
Code embodies, it has certain
discernible
and
disturbing
THE
characteristics that have not been
changed and may be particularly hard to
change in the future. Some of them have
to do with its methods of allowing and
disallowing deductions for travel and
entertainment expenses by persons who
are in business for themselves, or by
persons who are employed but are not
reimbursed for their business expenses
—deductions that were estimated fairly
recently at between five and ten billion
dollars a year, with a resulting reduction
in federal revenue of between one and
two
billion.
The
travel-andentertainment problem—or the T & E
problem, as it is customarily called—
has been around a long time, and has
stubbornly resisted various attempts to
solve it. One of the crucial points in T &
E history occurred in 1930, when the
courts ruled that the actor and songwriter
George M. Cohan—and therefore
anyone else—was entitled to deduct his
business expenses on the basis of a
reasonable estimate even if he could not
produce any proof of having paid that
sum or even produce a detailed
accounting. The Cohan rule, as it came
to be called, remained in effect for more
than three decades, during which it was
invoked every spring by thousands of
businessmen as ritually as Moslems turn
toward Mecca. Over those decades,
estimated business deductions grew like
kudzu vines as the estimators became
bolder, with the result that the Cohan
rule and other flexible parts of the T & E
regulations were subjected to a series of
attacks by would-be reformers. Bills that
would have virtually or entirely
eliminated the Cohan rule were
introduced in Congress in 1951 and
again in 1959, only to be defeated—in
one case, after an outcry that T & E
reform would mean the end of the
Kentucky Derby—and in 1961 President
Kennedy proposed legislation that not
only would have swept aside the Cohan
rule but, by reducing to between four and
seven dollars a day the amount that a
man could deduct for food and
beverages, would have all but put an end
to the era of deductibility in American
life. No such fundamental social change
took place. Loud and long wails of
anguish
instantly
arose,
from
businessmen and also from hotels,
restaurants, and night clubs, and many of
the Kennedy proposals were soon
abandoned. Nevertheless, through a
series of amendments to the Code passed
by Congress in 1962 and put into effect
by a set of regulations issued by the
Internal Revenue Service in 1963, they
did lead to the abrogation of the Cohan
rule, and the stipulation that, generally
speaking, all business deductions, no
matter how small, would thenceforward
have to be substantiated by records, if
not by actual receipts.
Yet even a cursory look at the law as
it has stood since then shows that the
new, reformed T & E rules fall
somewhat short of the ideal—that, in
fact, they are shot through with
absurdities and underlaid by a kind of
philistinism. For travel to be deductible,
it must be undertaken primarily for
business rather than for pleasure and it
must be “away from home”—that is to
say, not merely commuting. The “awayfrom-home” stipulation raises the
question of where home is, and leads to
the concept of a “tax home,” the place
one must be away from in order to
qualify for travel deductions; a
businessman’s tax home, no matter how
many country houses, hunting lodges, and
branch offices he may have, is the
general area—not just the particular
building, that is—of his principal place
of employment. As a result, marriage
partners who commute to work in two
different cities have separate tax homes,
but, fortunately, the Code continues to
recognize their union to the extent of
allowing them the tax advantages
available to other married people;
although there have been tax marriages,
the tax divorce still belongs to the future.
As for entertainment, now that the
writers of I.R.S. regulations have been
deprived of the far-reaching Cohan rule,
they are forced to make distinctions of
almost theological nicety, and the upshot
of the distinctions is to put a direct
premium on the habit—which some
people have considered all too prevalent
for many years anyhow—of talking
business at all hours of the day and night,
and in all kinds of company. For
example, deductions are granted for the
entertainment of business associates at
night clubs, theatres, or concerts only if
a “substantial and bona fide business
discussion” takes place before, during,
or after the entertainment. (One is
reluctant to picture the results if
businessmen take to carrying on business
discussions in great numbers during
plays or concerts.) On the other hand, a
businessman who entertains another in a
“quiet business setting,” such as a
restaurant with no floor show, may claim
a deduction even if little or no business
is actually discussed, as long as the
meeting has a business purpose.
Generally speaking, the noisier and more
confusing or distracting the setting, the
more business talk there must be; the
regulations specifically include cocktail
parties in the noisy-and-distracting
category, and, accordingly, require
conspicuous amounts of business
discussion before, during, or after them,
though a meal served to a business
associate at the host’s home may be
deductible with no such discussion at
all. In the latter case, however, as the J.
K. Lasser Tax Institute cautions in its
popular guide “Your Income Tax,” you
must “be ready to prove that your motive
… was commercial rather than social.”
In other words, to be on the safe side,
talk business anyhow. Hellerstein has
written, “Henceforth, tax men will
doubtless urge their clients to talk
business at every turn, and will ask them
to admonish their wives not to object to
shop talk if they want to continue their
accustomed style of living.”
Entertainment on an elaborate scale is
discouraged in the post-1963 rules, but,
as the Lasser booklet notes, perhaps a
little jubilantly, “Congress did not
specifically put into law a provision
barring
lavish
or
extravagant
entertainment.” Instead, it decreed that a
businessman may deduct depreciation
and operating expenses on an
“entertainment facility”—a yacht, a
hunting lodge, a swimming pool, a
bowling alley, or an airplane, for
instance—provided he uses it more than
half the time for business. In a booklet
entitled “Expense Accounts 1963,”
which is one of many publications for
the guidance of tax advisers that are
issued periodically by Commerce
Clearing House, Inc., the rule was
explained by means of the following
example:
A yacht is maintained … for the entertainment of
customers. It is used 25% of the time for relaxation.…
Since the yacht is used 75% of the time for business
purposes, it is used primarily for the furtherance of the
taxpayer’s business and 75% of the maintenance
expenses … are deductible entertainment facility
expenses. If the yacht had been used only 40% for
business, no deduction would be allowed.
The method by which the yachtsman is
to measure business time and pleasure
time is not prescribed. Presumably, time
when the yacht is in drydock or is in the
water with only her crew aboard would
count as neither, though it might be
argued that the owner sometimes derives
pleasure simply from watching her
swing at anchor. The time to be
apportioned, then, must be the time when
he and some guests are aboard her, and
perhaps his most efficient way of
complying with the law would be to
install two stopwatches, port and
starboard, one to be kept running during
business cruising and the other during
pleasure cruising. Perhaps a favoring
westerly might speed a social cruise
home an hour early, or a September
blow delay the last leg of a business
cruise, and thus tip the season’s business
time above the crucial fifty-percent
figure. Well might the skipper pray for
such timely winds,
since
the
deductibility of his yacht could easily
double his after-tax income for the year.
In short, the law is nonsense.
Some experts feel that the change in T
& E regulations represents a gain for our
society because quite a few taxpayers
who may have been inclined to fudge a
bit under general provisions like the
Cohan rule do not have the stomach or
the heart to put down specific fraudulent
items. But what has been gained in the
way of compliance may have been lost
in a certain debasement of our national
life. Scarcely ever has any part of the tax
law tended so energetically to compel
the
commercialization of social
intercourse, or penalized so particularly
the amateur spirit, which, Richard
Hofstadter declares in his book “AntiIntellectualism in American Life,”
characterized the founders of the
republic. Perhaps the greatest danger of
all is that, by claiming deductions for
activities that are technically business
but actually social—that is, by
complying with the letter of the law—a
man may cheapen his life in his own
eyes. One might argue that the founders,
if they were alive today, would
scornfully decline to mingle the social
and the commercial, the amateur and the
professional, and would disdain to claim
any but the most unmistakable expenses.
But, under the present tax laws, the
question would be whether they could
afford such a lordly overpayment of
taxes, or should even be asked to make
the choice.
has been maintained that the Code
discriminates against intellectual work,
the principal evidence being that while
depreciation may be claimed on all
kinds of exhaustible physical property
and depletion may be claimed on natural
IT
resources, no such deductions are
allowed in the case of exhaustion of the
mental or imaginative capacities of
creative artists and inventors—even
though the effects of brain fag are
sometimes all too apparent in the later
work and incomes of such persons. (It
has also been argued that professional
athletes are discriminated against, in that
the Code does not allow for
depreciation
of
their
bodies.)
Organizations like the Authors League of
America have contended, further, that the
Code is unfair to authors and other
creative people whose income, because
of the nature of their work and the
economics of its marketing, is apt to
fluctuate wildly from year to year, so
that they are taxed exorbitantly in good
years and are left with too little to tide
them over bad years. A provision of the
1964 bill intended to take care of this
situation provided creative artists,
inventors, and other receivers of sudden
large income with a four-year averaging
formula to ease the tax bite of a windfall
year.
But if the Code is anti-intellectual, it
is probably so only inadvertently—and
is certainly so only inconsistently. By
granting tax-exempt status to charitable
foundations, it facilitates the award of
millions of dollars a year—most of
which would otherwise go into the
government’s coffers—to scholars for
travel and living expenses while they
carry out research projects of all kinds.
And by making special provisions in
respect to gifts of property that has
appreciated in value, it has—whether
advertently or inadvertently—tended not
only to force up the prices that painters
and sculptors receive for their work but
to channel thousands of works out of
private collections and into public
museums. The mechanics of this process
are by now so well known that they need
be merely outlined: a collector who
donates a work of art to a museum may
deduct on his income-tax return the fair
value of the work at the time of the
donation, and need pay no capital-gains
tax on any increase in its value since the
time he bought it. If the increase in value
has been great and the collector’s tax
bracket is very high, he may actually
come out ahead on the deal. Besides
burying some museums under such an
avalanche of bounty that their staffs are
kept busy digging themselves out, these
provisions have tended to bring back
into existence that lovable old figure
from the pre-tax past, the rich dilettante.
In recent years, some high-bracket
people have fallen into the habit of
making
serial
collections—PostImpressionists for a few years, perhaps,
followed by Chinese jade, and then by
modern American painting. At the end of
each period, the collector gives away
his entire collection, and when the taxes
he would otherwise have paid are
calculated, the adventure is found to
have cost him practically nothing.
The low cost of high-income people’s
charitable contributions, whether in the
form of works of art or simply in the
form of money and other property, is one
of the oddest fruits of the Code. Of
approximately five billion dollars
claimed
annually
as
deductible
contributions on personal income-tax
returns, by far the greater part is in the
form of assets of one sort or another that
have appreciated in value, and comes
from persons with very high incomes.
The reasons can be made clear by a
simple example: A man with a top
bracket of 20 per cent who gives away
$1,000 in cash incurs a net cost of $800.
A man with a top bracket of 60 per cent
who gives away the same sum in cash
incurs a net cost of $400. If, instead, this
same high-bracket man gives $1,000 in
the form of stock that he originally
bought for $200, he incurs a net cost of
only $200. It is the Code’s enthusiastic
encouragement of large-scale charity that
has led to most of the cases of milliondollar-a-year men who pay no tax at all;
under one of its most peculiar
provisions, anyone whose income tax
and contributions combined have
amounted to nine-tenths or more of his
taxable income for eight out of the ten
preceding years is entitled by way of
reward to disregard in the current year
the usual restrictions on the amount of
deductible contributions, and can escape
the tax entirely.
Thus the Code’s provisions often
enable mere fiscal manipulation to
masquerade as charity, substantiating a
frequent charge that the Code is morally
muddleheaded,
or
worse.
The
provisions
also
give
rise
to
muddleheadedness in others. The appeal
made by large fund-raising drives in
recent years, for example, has been
uneasily divided between a call to good
works and an explanation of the tax
advantages to the donor. An instructive
example is a commendably thorough
booklet entitled “Greater Tax Savings …
A Constructive Approach,” which was
used by Princeton in a large capitalfunds drive. (Similar, not to say nearly
identical, booklets have been used by
Harvard, Yale, and many other
institutions.) “The responsibilities of
leadership are great, particularly in an
age when statesmen, scientists, and
economists must make decisions which
will almost certainly affect mankind for
generations to come,” the pamphlet’s
foreword starts out, loftily, and goes on
to explain, “The chief purpose of this
booklet is to urge all prospective donors
to give more serious thought to the
manner in which they make their gifts.…
There are many different ways in which
substantial gifts can be made at
comparatively low cost to the donor. It
is important that prospective donors
acquaint
themselves
with
these
opportunities.”
The
opportunities
expounded in the subsequent pages
include ways of saving on taxes through
gifts of appreciated securities, industrial
property, leases, royalties, jewelry,
antiques, stock options, residences, life
insurance, and inventory items, and
through the use of trusts (“The trust
approach has great versatility”). At one
point, the suggestion is put forward that,
instead of actually giving anything away,
the owner of appreciated securities may
wish to sell them to Princeton, for cash,
at the price he originally paid for them;
this might appear to the simple-minded
to be a commercial transaction, but the
booklet points out, accurately, that in the
eyes of the Code the difference between
the securities’ current market value and
the lower price at which they are sold to
Princeton represents pure charity, and is
fully deductible as such. “While we
have laid heavy emphasis on the
importance of careful tax planning,” the
final paragraph goes, “we hope no
inference will be drawn that the thought
and spirit of giving should in any way be
subordinated to tax considerations.”
Indeed it should not, nor need it be; with
the heavy substance of giving so deftly
minimized, or actually removed, its
spirit can surely fly unrestrained.
of the most marked traits of the
Code—to bring this ransacking of its
character to a close—is its complexity,
and this complexity is responsible for
some of its most far-reaching social
effects; it is a virtual necessity for many
taxpayers to seek professional help if
they want to minimize their taxes legally,
and since first-rate advice is expensive
and in short supply, the rich are thereby
given still another advantage over the
poor, and the Code becomes more
undemocratic in its action than it is in its
provisions. (And the fact that fees for tax
advice are themselves deductible means
that tax advice is one more item on the
long list of things that cost less and less
to those who have more and more.) All
ONE
the free projects of taxpayer education
and taxpayer assistance offered by the
Internal Revenue Service—and they are
extensive and well meant—cannot begin
to compete with the paid services of a
good independent tax expert, if only
because the I.R.S., whose first duty is to
collect revenue, is involved in an
obvious conflict of interest when it sets
about explaining to people how to avoid
taxes. The fact that about half of all the
revenue derived from individual returns
for 1960 came from adjusted gross
incomes of $9,000 or less is not
attributable entirely to provisions of the
Code; in part, it results from the fact that
low-income taxpayers cannot afford to
be shown how to pay less.
The huge army of people who give tax
advice—“practitioners,” they are called
in the trade—is a strange and disturbing
side effect of the Code’s complexity. The
exact size of this army is unknown, but
there are a few guideposts. By a recent
count some eighty thousand persons,
most of them lawyers, accountants, and
former I.R.S. employees, held cards,
granted by the Treasury Department, that
officially entitle them to practice the
trade of tax adviser and to appear as
such before the I.R.S.; in addition, there
is an uncounted host of unlicensed, and
often unqualified, persons who prepare
tax returns for a fee—a service that
anyone may legally perform. As for
lawyers, the undisputed plutocrats, if not
the undisputed aristocrats, of the taxadvice industry, there is scarcely a
lawyer in the country who is not
concerned with taxes at one time or
another during a year’s practice, and
every year there are more lawyers who
are concerned with nothing else. The
American Bar Association’s taxation
section, composed mostly of nothingbut-tax lawyers, has some nine thousand
members; in the typical large New York
law firm one out of five lawyers devotes
all of his time to tax matters; and the
New York University Law School’s tax
department, an enormous brood hen for
the hatching of tax lawyers, is larger than
the whole of an average law school. The
brains that go into tax avoidance, which
are generally recognized as including
some of the best legal brains extant,
constitute a wasted national resource, it
is
widely
contended—and
this
contention is cheerfully upheld by some
leading tax lawyers, who seem only too
glad to affirm, first, that their mental
capacities are indeed exceptional, and,
second, that these capacities are indeed
being squandered on trivia. “The law
has its cycles,” one of them explained
recently. “In the United States, the big
thing until about 1890 was property law.
Then came a period when it was
corporation law, and now it’s various
specialties, of which the most important
is taxes. I’m perfectly willing to admit
that I’m engaged in work that has a
limited social value. After all, what are
we talking about when we talk about tax
law? At best, only the question of what
an individual or a corporation should
fairly pay in support of the government.
All right, why do I do tax work? In the
first place, it’s a fascinating intellectual
game—along with litigation, probably
the most intellectually challenging
branch of the law as it is now practiced.
In the second place, although it’s
specialized in one sense, in another
sense it isn’t. It cuts through every field
of law. One day you may be working
with a Hollywood producer, the next day
with a big real-estate man, the next with
a corporation executive. In the third
place, it’s a highly lucrative field.”
egalitarian on the
surface and systematically oligarchic
underneath,
unconscionably
complicated,
whimsically
discriminatory, specious in its reasoning,
pettifogging
in
its
language,
demoralizing to charity, an enemy of
discourse, a promoter of shop talk, a
squanderer of talent, a rock of support to
the property owner but a weighty onus to
the underpaid, an inconstant friend to the
artist and scholar—if the national
mirror-image is all these things, it has its
good points as well. Certainly no
conceivable income-tax law could
please everybody, and probably no
equitable one could entirely please
anybody; Louis Eisenstein notes in his
HYPOCRITICALLY
book “The Ideologies of Taxation,”
“Taxes are a changing product of the
earnest effort to have others pay them.”
With the exception of its more flagrant
special-interest provisions, the Code
seems to be a sincerely written
document—at worst misguided—that is
aimed at collecting unprecedented
amounts
of
money
from
an
unprecedentedly complex society in the
fairest possible way, at encouraging the
national economy, and at promoting
worthy undertakings. When it is
intelligently
and
conscientiously
administered, as it has been of late, our
national income-tax law is quite
possibly as equitable as any in the
world.
But to enact an unsatisfactory law and
then try to compensate for its
shortcomings by good administration is,
clearly, an absurd procedure. One
solution that is more logical—to abolish
the income tax—is proposed chiefly by
some members of the radical right, who
consider any income tax Socialistic or
Communistic, and who would have the
federal government simply stop spending
money, though abolition is also
advanced, as a theoretical ideal rather
than as a practical possibility, by certain
economists who are looking around for
alternative ways of raising at least a
significant fraction of the sums now
produced by the income tax. One such
alternative is a value-added tax, under
which manufacturers, wholesalers, and
retailers would be taxed on the
difference between the value of the
goods they bought and that of the goods
they sold; among the advantages claimed
for it are that it would spread the tax
burden more evenly through the
productive process than a businessincome tax does, and that it would
enable the government to get its money
sooner. Several countries, including
France and Germany, have value-added
taxes, though as supplements rather than
alternatives to income taxes, but no
federal tax of the sort is more than
remotely in prospect in this country.
Other suggested means of lightening the
burden of the income tax are to increase
the number of items subject to excise
taxes, and apply a uniform rate to them,
so as to create what would amount to a
federal sales tax; to increase user taxes,
such as tolls on federally owned bridges
and recreation facilities; and to enact a
law permitting federal lotteries, like the
lotteries that were permitted from
colonial times up to 1895, which helped
finance such projects as the building of
Harvard,
the
fighting
of
the
Revolutionary War, and the building of
many schools, bridges, canals, and
roads. One obvious disadvantage of all
these schemes is that they would collect
revenue with relatively little regard to
ability to pay, and for this reason or
others none of them stand a chance of
being enacted in the foreseeable future.
A special favorite of theoreticians, but
of hardly anyone else, is something
called the expenditure tax—the taxing of
individuals on the basis of their total
annual expenditures rather than on their
income. The proponents of this tax—
diehard adherents of the economics of
scarcity—argue that it would have the
primary virtue of simplicity; that it
would have the beneficial effect of
encouraging savings; that it would be
fairer than the income tax, because it
would tax what people took out of the
economy rather than what they put into it;
and that it would give the government a
particularly handy control instrument
with which to keep the national economy
on an even keel. Its opponents contend
that it wouldn’t really be simple at all,
and would be ridiculously easy to
evade; that it would cause the rich to
become richer, and doubtless stingier as
well; and, finally, that by putting a
penalty on spending it would promote
depression. In any event, both sides
concede that its enactment in the United
States is not now politically practicable.
An expenditure tax was seriously
proposed for the United States by
Secretary of the Treasury Henry
Morgenthau, Jr., in 1942, and for Britain
by a Cambridge economist (later a
special adviser to the National Treasury)
named Nicholas Kaldor, in 1951, though
neither proponent asked for repeal of the
income tax. Both proposals were all but
unanimously hooted down. “The
expenditure tax is a beautiful thing to
contemplate,” one of its admirers said
recently. “It would avoid almost all the
pitfalls of the income tax. But it’s a
dream.” And so it is, in the Western
world; such a tax has been put in effect
only in India and Ceylon.
With no feasible substitute in sight,
then, the income tax seems to be here to
stay, and any hope for better taxation
seems to lie in its reform. Since one of
the Code’s chief flaws is its complexity,
reform might well start with that. Efforts
at simplification have been made with
regularity since 1943, when Secretary
Morgenthau set up a committee to study
the subject, and there have been
occasional small successes; simplified
instructions, for example, and a
shortened form for taxpayers who wish
to itemize deductions but whose affairs
are relatively uncomplicated were both
introduced
during
the
Kennedy
administration. Obviously, though, these
were mere guerrilla-skirmish victories.
One obstacle to any victory more
sweeping is the fact that many of the
Code’s complexities were introduced in
no interest other than that of fairness to
all, and apparently cannot be removed
without sacrificing fairness. The
evolution of the special family-support
provisions provides a striking example
of how the quest for equity sometimes
leads straight to complexity. Up to 1948,
the fact that some states had and some
didn’t have community-property laws
resulted in an advantage to married
couples in the community-property
states; those couples, and those couples
only, were allowed to be taxed as if
their total income were divided equally
between them, even though one spouse
might actually have a high income and
the other none at all. To correct this
clear-cut inequity, the federal Code was
modified to extend the income-dividing
privilege to all married persons. Even
apart from the resulting discrimination
against
single
persons
without
dependents—which remains enshrined
and unchallenged in the Code today—
this correction of one inequity led to the
creation of another, the correction of
which led to still another; before the
Chinese-box sequence was played out,
account had been taken of the legitimate
special problems of persons who had
family responsibilities although they
were not married, then of working wives
with expenses for child care during
business hours, and then of widows and
widowers. And each change made the
Code more complex.
The loopholes are another matter. In
their case, complexity serves not equity
but its opposite, and their persistent
survival constitutes a puzzling paradox;
in a system under which the majority
presumably makes the laws, tax
provisions that blatantly favor tiny
minorities over everybody else would
seem to represent the civil-rights
principle run wild—a kind of antidiscrimination
program
for
the
protection of millionaires. The process
by which new tax legislation comes into
being—an original proposal from the
Treasury Department or some other
source, passage in turn by the House
Ways and Means Committee, the whole
House, the Senate Finance Committee,
and the whole Senate, followed by the
working out of a House-Senate
compromise by a conference committee,
followed by repassage by the House and
the Senate and, finally, followed by
signing by the President—is indeed a
tortuous one, at any stage of which a bill
may be killed or shelved. However,
though the public has plenty of
opportunity to protest special-interest
provisions, what public pressure there is
is apt to be greater in favor of them than
against them. In the book on tax
loopholes called “The Great Treasury
Raid,” Philip M. Stern points out several
forces that seem to him to work against
the enactment of tax-reform measures,
among them the skill, power, and
organization of the anti-reform lobbies;
the diffuseness and political impotence
of the pro-reform forces within the
government; and the indifference of the
general public, which expresses
practically no enthusiasm for tax reform
through letters to congressmen or by any
other means, perhaps in large part
because
it
is
stunned
into
incomprehension and consequent silence
by the mind-boggling technicality of the
whole subject. In this sense, the Code’s
complexity is its impenetrable elephant
hide. Thus the Treasury Department,
which, as the agency charged with
collecting federal revenues, has a natural
interest in tax reform, is often left, along
with a handful of reform-minded
legislators, like Senators Paul H.
Douglas of Illinois, Albert Gore of
Tennessee, and Eugene J. McCarthy of
Minnesota, on a lonely and indefensible
salient.
believe that some “point of
crisis” will eventually cause specially
favored groups to look beyond their
selfish interests, and the rest of the
country to overcome its passivity, to
such an extent that the income tax will
come to give back a more flattering
picture of the country than it does now.
When this will happen, if ever, they do
not specify. But the general shape of the
picture hoped for by some of those who
care most about it is known. The ideal
income tax envisioned for the far future
by many reformers would be
characterized by a short and simple
OPTIMISTS
Code with comparatively low rates and
with a minimum of exceptions to them. In
its main structural features, this ideal tax
would bear a marked resemblance to the
1913 income tax—the first ever to be put
in effect in the United States in
peacetime. So if the unattainable visions
of today should eventually materialize,
the income tax would be just about back
where it started.
4
A Reasonable Amount
of Time
whether of distant
public events, impending business
developments, or even the health of
political figures, has always been a
PRIVATE INFORMATION,
valuable commodity to traders in
securities—so valuable that some
commentators have suggested that stock
exchanges are markets for such
information just as much as for stocks.
The money value that a market puts on
information
is
often
precisely
measurable in terms of the change in
stock prices that it brings about, and the
information is almost as readily
convertible into money as any other
commodity; indeed, to the extent that it is
used for barter between traders, it is a
kind of money. Moreover, until quite
recently, the propriety of the use of
inside dope for their own enrichment by
those fortunate enough to possess it went
largely
unquestioned.
Nathan
Rothschild’s judicious use of advance
news of Wellington’s victory at Waterloo
was the chief basis of the Rothschild
fortune in England, and no Royal
commission or enraged public rose to
protest;
similarly,
and
almost
simultaneously, on this side of the
Atlantic John Jacob Astor made an
unchallenged bundle on advance news of
the Ghent treaty ending the War of 1812.
In the post-Civil War era in the United
States the members of the investing
public, such as it was, still docilely
accepted the right of the insider to trade
on his privileged knowledge, and were
content to pick up any crumbs that he
might drop along the way. (Daniel Drew,
a vintage insider, cruelly denied them
even this consolation by dropping
poisoned crumbs in the form of
misleading memoranda as to his
investment plans, which he would
elaborately strew in public places.)
Most
nineteenth-century
American
fortunes were enlarged by, if they were
not actually founded on, the practice of
insider trading, and just how different
our present social and economic order
would be if such trading had been
effectively forbidden in those days
provides a subject for fascinating, if
bootless, speculation. Not until 1910 did
anyone publicly question the morality of
corporate officers, directors, and
employees trading in the shares of their
own companies, not until the nineteen
twenties did it come to be widely
thought of as outrageous that such
persons should be permitted to play the
market game with what amounts to a
stacked deck, and not until 1934 did
Congress pass legislation intended to
restore equity. The legislation, the
Securities Exchange Act, requires
corporate insiders to forfeit to their
corporations any profits they may realize
on short-term trades in their own firms’
stock, and provides further, in a section
that was implemented in 1942 by a rule
designated as 10B-5, that no stock trader
may use any scheme to defraud or “make
any untrue statement of a material fact or
… omit to state a material fact.”
Since omitting to state material facts
is the essence of using inside
information, the law—while it does not
forbid insiders to buy their own stock,
nor to keep the profits provided they
hold onto the stock more than six months
—would seem to outlaw the stacked
deck. In practice, though, until very
recently the 1942 rule was treated
almost as if it didn’t exist; it was
invoked by the Securities and Exchange
Commission, the federal enforcement
body set up under the Securities
Exchange Act, only rarely and in cases
so flagrant as to be probably
prosecutable even without it, under
common law. And there were apparent
reasons for this laxity. For one thing, it
has been widely argued that the
privilege of cashing in on their corporate
secrets is a necessary incentive to
business executives to goad them to their
best efforts, and it is coolly contended
by a few authorities that the uninhibited
presence of insiders in the market,
however offensive to the spirit of fair
play, is essential to a smooth, orderly
flow of trading. Moreover, it is
contended that the majority of all stock
traders, whether or not they are
technically insiders, possess and
conceal inside information of one sort or
another, or at least hope and believe that
they do, and that therefore an evenhanded application of Rule 10B-5 would
result in nothing less than chaos on Wall
Street. So in letting the rule rest largely
untroubled in the rulebook for twenty
years, the S.E.C. seemed to be
consciously refraining from hitting Wall
Street in one of its most vulnerable
spots. But then, after a couple of
preliminary jabs, it went for the spot
with a vengeance. The lawsuit in which
it did so was a civil complaint against
the Texas Gulf Sulphur Company and
thirteen men who were directors or
employees of that company; it was tried
without a jury in the United States
District Court in Foley Square on May
9th through June 21st, 1966, and as the
presiding judge, Dudley J. Bonsal,
remarked mildly at one point during the
trial, “I guess we all agree that we are
plowing new ground here to some
extent.” Plowing, and perhaps sowing
too; Henry G. Manne, in a recent book
entitled “Insider Trading and the Stock
Market,” says that the case presents in
almost classic terms the whole problem
of insider trading, and expresses the
opinion that its resolution “may
determine the law in this field for many
years to come.”
events that led to the S.E.C.’s action
began in March, 1959, when Texas Gulf,
a New York City-based company that
was the world’s leading producer of
sulphur, began conducting aerial
geophysical surveys over the Canadian
Shield, a vast, barren, forbidding area of
THE
eastern Canada that in the distant but not
forgotten past had proved to be a fertile
source of gold. What the Texas Gulf
airmen were looking for was neither
sulphur nor gold. Rather, it was
sulphides—deposits
of
sulphur
occurring in chemical combination with
other useful minerals, such as zinc and
copper. What they had in mind was
discovering mineable veins of such
minerals so that Texas Gulf could
diversify its activities and be less
dependent upon sulphur, the market price
of which had been slipping. From time
to time during the two years that the
surveys went on intermittently, the
geophysical instruments in the scanning
planes would behave strangely, their
needles jiggling in such a way as to
indicate the presence of electrically
conductive material in the earth. The
areas where such things happened,
called “anomalies” by geophysicists,
were duly logged and mapped by the
surveyors. All told, several thousand
anomalies were found. It’s a long way
from an anomaly to a workable mine, as
must be evident to anyone who knows
that while most sulphides are
electrically conductive, so are many
other things, including graphite, the
worthless pyrites called fool’s gold, and
even water; nevertheless, several
hundred of the anomalies that the Texas
Gulf men had found were considered to
be worthy of ground investigation, and
among the most promising-looking of all
was one situated at a place designated
on their maps as the Kidd-55 segment—
one square mile of muskeg marsh, lightly
wooded and almost devoid of
outcropping rocks, about fifteen miles
north of Timmins, Ontario, an old goldmining town that is itself some three
hundred and fifty miles northwest of
Toronto. Since Kidd-55 was privately
owned, the company’s first problem was
to get title to it, or to enough of it to
make possible exploratory ground
operations; for a large company to
acquire land in an area where it is
known to be engaged in mining
exploration obviously involves delicacy
in the extreme, and it was not until June,
1963, that Texas Gulf was able to get an
option permitting it to drill on the
northeast quarter section of Kidd-55. On
October 29th and 30th of that year a
Texas Gulf engineer, Richard H.
Clayton,
conducted
a
ground
electromagnetic survey of the northeast
quarter, and was satisfied with what he
found. A drill rig was moved to the site,
and on November 8th, the first test drill
hole was begun.
There followed a thrilling, if
uncomfortable, several days at Kidd-55.
The man in charge of the drilling crew
was a young Texas Gulf geologist named
Kenneth Darke, a cigar smoker with a
rakish gleam in his eye, who looked a
good deal more like the traditional
notion of a mining prospector than that of
the organization man he was. For three
days the drilling went on, bringing out of
the earth a cylindrical core of material
an inch and a quarter in diameter, which
served as the first actual sample of what
the rock under Kidd-55 contained. As
the core came up, Darke studied it
critically, inch by inch and foot by foot,
using no instruments but only his eyes
and his knowledge of what various
mineral deposits look like in their
natural state. On the evening of Sunday,
November 10th, by which time the drill
was down one hundred and fifty feet,
Darke telephoned his immediate
superior, Walter Holyk, Texas Gulf’s
chief geologist, at his home in Stamford,
Conn. to report on his findings so far.
(He made the call from Timmins, since
there was no telephone at the Kidd-55
drill site.) Darke, Holyk has since said,
was “excited.” And so, apparently, was
Holyk after he had heard what Darke had
to say, because he immediately set in
motion quite a corporate flap for a
Sunday night. That same evening, Holyk
called his superior, Richard D.
Mollison, a Texas Gulf vice president
who lived near Holyk in Greenwich, and
—still the same evening—Mollison
called his boss, Charles F. Fogarty,
executive vice president and the
company’s No. 2 man, in nearby Rye, to
pass Darke’s report on up the line.
Further reports were made the next day
through the same labyrinth of command
—Darke to Holyk to Mollison to
Fogarty. As a result of them, Holyk,
Mollison, and Fogarty all decided to go
to Kidd-55 to see for themselves.
Holyk got there first; he arrived at
Timmins on November 12th, checked in
at the Bon Air Motel, and got out to
Kidd-55 by jeep and muskeg tractor in
time to see the completion of the drill
hole and to help Darke visually estimate
and log the core. By this time the
weather, which had hitherto been
passable for Timmins in mid-November,
had turned nasty. In fact, it was “quite
inclement,” Holyk, a Canadian in his
forties with a doctorate in geology from
Massachusetts Institute of Technology,
has since said. “It was cold, windy,
threatening snow and rain, and … we
were much more concerned with
personal comfort than we were with the
details of the core hole. Ken Darke was
writing, and I was looking at the core,
trying to make estimates of the mineral
content.” To add to the difficulty of
working outdoors under such conditions,
some of the core had come out of the
ground covered with dirt and grease, and
had to be washed with gasoline before
its contents could even be guessed at.
Despite all difficulties, Holyk succeeded
in making an appraisal of the core that
was, to say the least, startling. Over the
six hundred or so feet of its final length,
he estimated, there appeared to be an
average copper content of 1.15% and an
average zinc content of 8.64%. A
Canadian stockbroker with special
knowledge of the mining industry was to
say later that a drill core of such length
and such mineral content “is just beyond
your wildest imagination.”
Gulf didn’t have a surefire mine
yet; there was always the possibility that
the mineral vein was a long, thin one,
too limited to be commercially
exploitable, and that by a fantastic
chance the drill had happened to go
“down dip”—that is, straight into the
vein like a sword into a sheath. What
TEXAS
was needed was a pattern of several
drill holes, beginning at different spots
on the surface and entering the earth at
different angles, to establish the shape
and limits of the deposit. And such a
pattern could not be made until Texas
Gulf had title to the other three quartersegments of Kidd-55. Getting title would
take time if it were possible at all, but
meanwhile, there were several steps that
the company could and did take. The
drill rig was moved away from the site
of the test hole. Cut saplings were stuck
in the ground around the hole, to restore
the appearance of the place to a
semblance of its natural state. A second
test hole was drilled, as ostentatiously
as possible, some distance away, at a
place where a barren core was expected
—and found. All of these camouflage
measures, which were in conformity
with long-established practice among
miners who suspect that they have made
a strike, were supplemented by an order
from Texas Gulf’s president, Claude O.
Stephens, that no one outside the actual
exploration group, even within the
company, should be told what had been
found. Late in November, the core was
shipped off, in sections, to the Union
Assay Office in Salt Lake City for
scientific analysis of its contents. And
meanwhile, of course, Texas Gulf began
discreetly putting out feelers for the
purchase of the rest of Kidd-55.
And meanwhile other measures,
which may or may not have been related
to the events north of Timmins, were
being taken. On November 12th, Fogarty
bought three hundred shares of Texas
Gulf stock; on the 15th he added seven
hundred more shares, on November 19th
five hundred more, and on November
26th two hundred more. Clayton bought
two hundred on the 15th, Mollison one
hundred on the same day; and Mrs.
Holyk bought fifty on the 29th and one
hundred more on December 10th. But
these purchases, as things turned out,
were only the harbingers of a period of
apparently intense affection for Texas
Gulf stock among certain of its officers
and employees, and even some of their
friends. In mid-December, the report on
the core came back from Salt Lake City,
and it showed that Holyk’s rough-andready estimate had been amazingly
accurate; the copper and zinc contents
were found to be almost exactly what he
had said, and there were 3.94 ounces of
silver per ton thrown in as a sort of
bonus. Late in December, Darke made a
trip to Washington, D.C. and vicinity,
where he recommended Texas Gulf stock
to a girl he knew there and her mother;
these two, who came to be designated in
the trial as the “tippees,” subsequently
passed along the recommendation to two
other persons who, logically enough,
thereby became the “sub-tippees.”
Between December 30th and the
following February 17th, Darke’s
tippees and sub-tippees purchased all
told 2,100 shares of Texas Gulf stock,
and in addition they purchased what are
known in the brokerage trade as “calls”
on 1,500 additional shares. A call is an
option to buy a stated amount of a certain
stock at a fixed price—generally near
the current market price—at any time
during a stated period. Calls on most
listed stocks are always on sale by
dealers who specialize in them. The
purchaser pays a generally rather
moderate sum for his option; if the stock
then goes up during the stated period, the
rise can easily be converted into almost
pure profit for him, while if the stock
stays put or goes down, he simply tears
up his call the way a horseplayer tears
up a losing ticket, and loses nothing but
the cost of the call. Therefore calls
provide the cheapest possible way of
gambling on the stock market, and the
most convenient way of converting
inside information into cash.
Back in Timmins, Darke, put
temporarily out of business as a
geologist by the winter freeze and the
land-ownership problem at Kidd-55,
seems to have managed to keep time
from hanging heavy on his hands. In
January, he entered into a private
partnership with another Timmins man
who wasn’t a Texas Gulf employee to
stake and claim Crown lands around
Timmins for their own benefit. In
February, he told Holyk of a barroom
conversation that had occurred in
Timmins one gelid winter evening, in
which an acquaintance of his had let fall
that he’d heard rumors of a Texas Gulf
strike nearby and was therefore going to
stake a few claims of his own.
Horrified, Holyk, as he recalled later,
told Darke to reverse the previous
policy of avoiding Kidd-55 like the
plague, and to “go right into the … area
and stake all the claims we need;” also
to “steer away this acquaintance. Give
him a helicopter ride or anything, just get
him out of the way.” Darke presumably
complied with this order. Moreover,
during the first three months of 1964 he
bought three hundred shares of Texas
Gulf outright, bought calls on three
thousand more shares, and added several
more persons, one of them his brother, to
his growing list of tippees. Holyk and
Clayton were somewhat less financially
active during the same period, but they
did add substantially to their Texas Gulf
holdings—in the case of Holyk and his
wife, particularly through the use of
calls, which they’d scarcely even heard
of before, but which were getting to be
quite the rage in Texas Gulf circles.
Signs of spring began to come at last,
and with them came a triumphant
conclusion to the company’s land
acquisition program. By March 27th,
Texas Gulf had pretty much what it
needed; that is, it had either clear title or
mineral rights to the three remaining
segments of Kidd-55, except for ten-percent profit concessions on two of the
segments, the stubborn owner of the
concession in one case being the Curtis
Publishing Company. After a final burst
of purchases by Darke, his tippees, and
his sub-tippees on March 30th and 31st
(among them all, six hundred shares and
calls on 5,100 more shares for the two
days), drilling was resumed in the stillfrozen muskeg at Kidd-55, with Holyk
and Darke both on the site this time. The
new hole—the third in all, but only the
second operational one, since one of the
two drilled in November had been the
dummy intended to create a diversion—
was begun at a point some distance from
the first and at an oblique angle to it, to
advance the bracketing process.
Observing and logging the core as it
came out of the ground, Holyk found that
he could scarcely hold a pencil because
of the cold; but he must have been
warmed inwardly by the fact that
promising mineralization began to
appear after the first hundred feet. He
made his first progress report to Fogarty
by telephone on April 1st. Now a
gruelling daily routine was adopted at
Timmins and Kidd-55. The actual
drilling crew stayed at the site
continuously, while the geologists, in
order to keep their superiors in New
York posted, had to make frequent trips
to telephones in Timmins, and what with
the seven-foot snowdrifts along the way
the fifteen-mile trek between the town
and the drilling camp customarily took
three and a half to four hours. One after
another, new drill holes, begun at
different places around the anomaly and
pitched at different angles to it, were
plunged into the earth. At first, only one
drill rig could be used at a time because
of a shortage of water, which was
necessary to the operation; the ground
was frozen solid and covered by deep
snow, and water had to be laboriously
pumped from under the ice on a pond
about a half mile from Kidd-55. The
third hole was finished on April 7th, and
a fourth immediately begun with the
same rig; the following day, the water
shortage having eased somewhat, a fifth
hole was inaugurated with a second drill
rig, and two days after that—on the 10th
—a third rig was pressed into service to
drill still another hole. All in all, during
the first days of April the principals in
the affair were kept busy; in fact, during
that period their buying of calls on Texas
Gulf seems to have come to a standstill.
Bit by bit the drilling revealed the
lineaments of a huge ore deposit; the
third hole established that the original
one had not gone “down dip” as had
been feared, the fourth established that
the mineral vein was a satisfactorily
deep one, and so on. At some point—the
exact point was to become a matter of
dispute—Texas Gulf came to know that
it had a workable mine of considerable
proportions, and as this point
approached, the focus of attention shifted
from drillers and geologists to staff men
and financiers, who were to be the
principal object of the S.E.C.’s
disapproval later on. At Timmins, snow
fell so heavily on April 8th and most of
the 9th that not even the geologists could
get from the town to Kidd-55, but
toward evening on the 9th, when they
finally made it after a hair-raising
journey of seven and a half hours, with
them was no lesser light than Vice
President Mollison, who had turned up
in Timmins the previous day. Mollison
spent the night at the drill site and left at
about noon the next day—in order, he
explained
later,
to
avoid
the
outdoorsmen’s lunch they served at
Kidd-55 which was too hearty for a
deskbound man like him. But before
going he issued instructions for the
drilling of a mill test hole, which would
produce a relatively large core that
could be used to determine the
amenability of the mineral material to
routine mill processing. Normally, a mill
test hole is not drilled until a workable
mine is believed to exist. And so it may
have been in this case; two S.E.C.
mining experts were to insist later,
against contrary opinions of experts for
the defense, that by the time Mollison
gave his order, Texas Gulf had
information on the basis of which it
could have calculated that the ore
reserves at Kidd-55 had a gross assay
value of at least two hundred million
dollars.
famous Canadian mining grapevine
was humming by now, and in retrospect
the wonder is that it had been relatively
quiet for so long. (A Toronto broker was
to remark during the trial, “I have seen
drillers drop the goddam drill and beat it
for a brokerage office as fast as they can
… [or else] they pick up the telephone
and call Toronto.” After such a call, the
broker went on, the status of every Bay
THE
Street penny-stock tout depends, for a
time, on how close a personal
acquaintance he can claim with the
driller who made the strike, just as a
racetrack
tout’s
status
depends
sometimes on the degree of intimacy he
can claim with a jockey or a horse.)
“The moccasin telegraph has Texas
Gulf’s activity centered in Kidd
Township. A battery of drills are
reported to be at work,” said The
Northern Miner, a Toronto weekly of
immense influence in the mining-stock
set, on the 9th, and the same day the
Toronto Daily Star declared that
Timmins
was
“bug-eyed
with
excitement” and that “the magic word on
every street corner and in every barber
shop is ‘Texas Gulf.’” The phones in
Texas Gulf’s New York headquarters
were buzzing with frenzied queries,
which the officers coldly turned aside.
On the 10th, President Stephens was
concerned enough about the rumors to
seek counsel from one of his most
trusted associates—Thomas S. Lamont,
senior member of the Texas Gulf board
of directors, former second-generation
Morgan partner, holder of various lofty
offices, past and present, in the Morgan
Guaranty Trust Company, and bearer of a
name that had long been one to conjure
with in Wall Street. Stephens told
Lamont what had been going on north of
Timmins (it was the first Lamont had
heard of it), made it clear that he himself
did not yet feel that the evidence
justified bug eyes, and asked what
Lamont thought ought to be done about
the exaggerated reports. As long as they
stayed in the Canadian press, Lamont
replied, “I think you might be able to
live with them.” However, he added, if
they should get into the papers in the
United States, it might be well to give
the press an announcement that would set
the record straight and avoid undue
gyrations in the stock market.
The following day, Saturday the 11th,
the reports reached the United States
papers with a bang. The Times and
Herald Tribune both ran accounts on the
Texas Gulf discovery, and the latter,
putting its story on the front page, spoke
of “the biggest ore strike since gold was
discovered more than sixty years ago in
Canada.” After reading these stories,
perhaps with eyes bugging slightly,
Stephens notified Fogarty that a press
release should be issued in time for
Monday’s papers, and over the weekend
Fogarty, with the help of several other
company officials, worked one up.
Meanwhile, things were not standing
still at Kidd-55; on the contrary, later
testimony held that on Saturday and
Sunday, as more and more core came up
from the drill holes full of copper and
zinc ore, the calculable value of the mine
was increasing almost hour by hour.
However, Fogarty did not communicate
with Timmins after Friday night, so the
statement that he and his colleagues
issued to the press on Sunday afternoon
was not based on the most up-to-theminute information. Whether because of
that or for some other reason, the
statement did not convey the idea that
Texas Gulf thought it had a new
Comstock Lode. Characterizing the
published reports as exaggerated and
unreliable, it admitted only that recent
drilling on “one property near Timmins”
had led to “preliminary indications that
more drilling would be required for
proper evaluation of the prospect;” went
on to say that “the drilling done to date
has not been conclusive;” and then,
putting the same thought in what can
hardly be called another way, added that
“the work done to date has not been
sufficient to reach definite conclusions.”
The idea thus couched, or perhaps one
should say bedded down, evidently
came across to the public when it
appeared
in
Monday
morning’s
newspapers, because Texas Gulf stock
was not nearly so buoyant early that
week as it might have been expected to
be if the enthusiastic Times and Herald
Tribune stories had gone unchallenged.
The stock, which had been selling at
around 17 or 18 the previous November
and had crept up over the intervening
months to around 30, opened Monday on
the New York Stock Exchange at 32—a
rise of nearly two points over Friday’s
closing—only to reverse direction and
sink to 30⅞ before the day’s trading,
was over, and to slip off still further on
the following two days and at one point
on Wednesday touch a low of 28⅞.
Evidently, investors and traders had
been considerably impressed by Texas
Gulf’s Sunday mood of deprecation. But
on those same three days, Texas Gulf
people in both Canada and New York
seem to have been in quite another
mood. At Kidd-55 on Monday the 13th,
the day the low-keyed press release was
reported in newspapers, the mill test
hole was completed, drills continued to
grind away on three regular test holes,
and a reporter for The Northern Miner
was shown around and briefed on the
findings by Mollison, Holyk, and Darke.
The things they told the reporter make it
clear, in retrospect, that whatever the
drafters of the release may have
believed on Sunday, the men at Kidd-55
knew on Monday that they had a mine
and a big one. However, the world was
not to know it, or at least not from that
source, until Thursday morning, when
the next issue of the Miner would appear
in subscribers’ mail and on newsstands.
Tuesday evening, Mollison and Holyk
flew to Montreal, where they were
planning to attend the annual convention
of the Canadian Institute of Mining and
Metallurgy, a gathering of several
hundred leading mining and investment
people. Upon arriving at the Queen
Elizabeth Hotel where the convention
was in progress, Mollison and Holyk
were startled to find themselves greeted
like film stars. The place had evidently
been humming all day with rumors of a
Texas Gulf discovery and everyone
wanted to be the first to get the firsthand
lowdown on it; in fact, a battery of
television cameras had been set up for
the express purpose of covering such
remarks as the emissaries from Timmins
might want to make. Not being
authorized to make any remarks,
Mollison and Holyk turned abruptly on
their heels and fled the Queen Elizabeth,
holing up for the night in a Montreal
airport motel. The following day,
Wednesday the 15th, they flew from
Montreal to Toronto in the company, by
prearrangement, of the Minister of Mines
of the Province of Ontario and his
deputy; en route they briefed the minister
on the Kidd-55 situation, whereupon the
minister declared that he wanted to clear
the air by making a public announcement
on the matter as soon as possible, and
then, with Mollison’s help, he drafted
such an announcement. According to a
copy that Mollison made and kept, the
announcement stated, in part, that “the
information now in hand … gives the
company confidence to allow me to
announce that Texas Gulf Sulphur has a
mineable body of zinc, copper, and
silver ore of substantial dimensions that
will be developed and brought to
production as soon as possible.”
Mollison and Holyk were given to
believe that the minister would make his
statement in Toronto at eleven o’clock
that evening, over radio and television,
and that thus Texas Gulf’s good news
would become public property a few
hours before The Northern Miner
appeared early the next day. But for
reasons that have never been given, the
minister didn’t make the announcement
that evening.
At Texas Gulf headquarters, at 200
Park Avenue, there was a similar air of
mounting crisis. The company happened
to have a regular monthly board-ofdirectors meeting scheduled for
Thursday morning, and on Monday
Francis G. Coates, a director who lived
in Houston, Texas, and who hadn’t heard
of the Kidd-55 strike, telephoned
Stephens to inquire whether he ought to
bother to come. Stephens said he ought,
but didn’t explain why. Better and better
news kept filtering in from the drill site,
and some time on Wednesday, the Texas
Gulf officers decided that it was time to
write a new press release, to be issued
at a press conference that would follow
the
Thursday-morning
directors’
meeting. Stephens, Fogarty, and David
M. Crawford, the company’s secretary,
composed the release that afternoon.
This time around, the release was based
on the very latest information, and
moreover, its language was happily
devoid of both repetition and
equivocation. It read, in part, “Texas
Gulf Sulphur Company has made a major
strike of zinc, copper, and silver in the
Timmins area … Seven drill holes are
now essentially complete and indicate
an ore body of at least 800 feet in length,
300 feet in width, and having a vertical
depth of more than 800 feet. This is a
major discovery. The preliminary data
indicate a reserve of more than 25
million tons of ore.” As to the striking
difference between this release and the
one of three days earlier, the new one
stated that “considerably more data has
been accumulated” in the interim. And
no one could deny this; a reserve of
more than twenty-five million tons of ore
meant that the value of the ore was not
the two hundred million dollars that was
alleged to have been calculable a week
earlier, but many times that much.
In the course of the same hectic day in
New York, the engineer Clayton and the
company secretary Crawford found time
to call their brokers and order
themselves some Texas Gulf stock—two
hundred shares in Clayton’s case, three
hundred in Crawford’s. And Crawford
soon decided that he hadn’t plunged
deeply enough; shortly after eight
o’clock the next morning, after an
apparently preoccupied night at the Park
Lane Hotel, he awakened his broker
with a second call and doubled his
order.
Thursday morning, the first hard
news of the Timmins strike spread
through the North American investment
world, rapidly but erratically. Between
seven and eight o’clock, mailmen and
newsstands in Toronto began distributing
copies
of
The
Northern-Miner
containing the piece by the reporter who
had visited Kidd55, in which he
described the strike with a good deal of
mining jargon but did not omit to call it,
in language comprehensible enough for
anyone, “a brilliant exploration success”
ON
and “a major new zinc-copper-silver
mine.” At about the same time, the
Miner was on its way out to subscribers
south of the border in Detroit and
Buffalo, and a few hundred newsstand
copies appear to have arrived in New
York between nine and ten o’clock. The
paper’s physical appearance here,
however, was preceded by telephone
reports on its contents from Toronto, and
by about 9:15 the news that Texas Gulf
had hit it big for sure was the talk of
New York brokerage offices. A
customer’s man in the Sixtieth Street
office of E. F. Hutton & Company
complained later that his broker cronies
had been so eager to natter on the
telephone about Texas Gulf early that
morning as to substantially prevent him
from communicating with his customers;
however, he did manage to squeeze in a
call to two of them, a husband and wife
for whom he was able to turn a rather
quick profit in Texas Gulf—to be exact,
a profit of $10,500 in less than an hour.
(“It is clear that we are all in the wrong
business,” Judge Bonsal was to comment
when he heard this. Or as the late
Wieland Wagner once remarked in
another context, “I shall be quite
explicit. Valhalla is Wall Street.”) At the
Stock Exchange itself early that day, the
traders in the Luncheon Club, which
before the ten-o’clock opening serves as
a breakfast club, were all munching on
the Texas Gulf situation along with their
toast and eggs.
At the directors’ meeting at 200 Park,
which began promptly at nine, the
directors were shown the new statement
that was shortly to be released to the
press, and Stephens, Fogarty, Holyk, and
Mollison, as representatives of the
exploration group, commented in turn on
the Timmins discovery. Stephens also
stated that the Ontario Minister of Mines
had announced it publicly in Toronto the
previous evening (a misstatement, of
course, although an unintentional one;
actually, the minister was making his
announcement to the Ontario Parliament
press gallery in Toronto at almost the
same moment Stephens was speaking).
The directors’ meeting ended at about
ten o’clock, whereupon a clutch of
reporters—twenty-two
of
them,
representing many of the major United
States newspapers and magazines,
general and financial—trooped into the
board room for the press conference, the
Texas Gulf directors all remaining in
their places. Stephens distributed copies
of the press release to the reporters and
then, in fulfillment of a curious ritual that
governs such affairs, read it aloud.
While he was engaged in this redundant
recital various reporters began to drift
away (“they began sort of leaking out of
the room” was the way Lamont put it
later) to telephone the sensational news
to their publications; still more of them
slipped away during the events that
subsequently rounded out the press
conference—the showing of some
innocuous colored slides of the
countryside around Timmins, and an
exhibition and explanation by Holyk of
some drill cores—and by the time it
ended, at around 10:15, only a handful of
reporters were left. This certainly didn’t
mean that the affair had been a flop. On
the contrary, a press conference is
perhaps the only kind of show whose
success is in direct proportion to the
number of people who leave before it is
over.
The actions of two of the Texas Gulf
directors, Coates and Lamont, during the
next half hour or so were to give rise to
the most controversial part of the
S.E.C.’s complaint, and, since the
controversy has now been inscribed in
the law, those actions are likely to be
studied for at least a generation by
inside stock traders seeking guidance as
to what they must do to be saved, or at
least to avoid being damned. The
essence of the controversy was timing,
and in particular, the timing of Coates’
and Lamont’s maneuvers in relation to
that of the dissemination of the Texas
Gulf news by the Dow Jones News
Service, the familiar spot-news facility
for investors. Few investment offices in
the United States are without the service,
and its prestige is such that in some
investment circles the moment a piece of
news becomes public is considered to
be determined by the moment it crosses
the broad tape. As to the morning of
April 16th, 1964, a Dow Jones reporter
was not only among those at the Texas
Gulf press conference but was among
those who left early to telephone the
news to his office. According to his
recollection, the reporter made his call
between 10:10 and 10:15, and normally
an item of such importance as the one he
sent would begin to be printed out by
Dow Jones machines in offices from
coast to coast within two or three
minutes after being telephoned in. In
fact, though, the Texas Gulf story did not
begin to appear until 10:54, an entirely
inexplicable forty-odd minutes later. The
mystery of the broad tape message, like
the mystery of the Minister of Mines’
announcement, was left unraveled in the
trial on grounds of irrelevance; an
engaging aspect of the rules of evidence
is their tendency to leave a few things to
the imagination.
Coates, the Texan, was the first
director to embark upon what he can
hardly have thought of at the time as a
historically significant course. Either
before or immediately after the end of
the press conference he went into an
office adjoining the board room, where
he borrowed a telephone and called his
son-in-law, H. Fred Haemisegger, who
is a stockbroker in Houston. Coates, as
he related later, told Haemisegger of the
Texas Gulf discovery and added that he
had waited to call until “after the public
announcement” because he was “too old
to get into trouble with the S.E.C.” He
then placed an order for two thousand
shares of Texas Gulf stock for four
family trusts of which he was a trustee,
though not personally a beneficiary. The
stock, which had opened on the Stock
Exchange some twenty minutes earlier at
a fraction above 30 in very active but by
no means decisively bullish trading, was
now rapidly on its way up, but by acting
quickly Haemisegger managed to buy the
block for Coates at between 31 and
31⅝, getting his orders in to his firm’s
floor
broker
well
before
the
unaccountably delayed news began to
come out on the broad tape.
Lamont, in the Wall Street tradition of
plungers rather than the Texas one, made
his move with decision but with an
elegant, almost languorous lack of hurry.
Instead of leaving the board room at the
conclusion of the press conference, he
stayed there for some twenty minutes,
not doing much of anything. “I milled
around … and listened to some of them
chatter and talk with each other, and
slapped people on the back,” he
recounted later. Then, at 10:39 or 10:40,
he went to a nearby office and
telephoned a colleague and friend of his
at the Morgan Guaranty Trust Company
—Longstreet Hinton, the bank’s
executive vice president and the head of
its trust department. Earlier in the week
Hinton had asked Lamont if he, as a
Texas Gulf director, could shed any light
on the rumors of an ore discovery that
were appearing in the press, and Lamont
had replied that he couldn’t. Now
Lamont, as he recalled later, told Hinton
“that there was news which had come
out, or was shortly coming out, on the
ticker, which would be of interest to
him, regarding Texas Gulf Sulphur.” “Is
it good?” Hinton asked, and Lamont
replied that it was “pretty good” or
“very good.” (Neither man is sure which
he said, but it doesn’t matter, since in
New York bankerese “pretty good”
means “very good.”) In any case, Hinton
did not follow the advice to look at the
Dow Jones ticker, even though a
machine was ticking twenty feet from his
office; instead, he immediately called
the bank’s trading department and asked
for a market quotation on Texas Gulf.
After getting it, he placed an order to
buy 3,000 shares for the account of the
Nassau Hospital, of which he was
treasurer. All this occupied no more than
two minutes from the time Lamont had
left the press conference. The order had
been transmitted from the bank to the
Stock Exchange and executed, and
Nassau Hospital had its stock, before
Hinton would have seen anything about
Texas Gulf on the broad tape if he had
been looking at it. But he was not
looking at it; he was otherwise
occupied. After placing the Nassau
Hospital order, he went to the office of
the Morgan Guaranty officer in charge of
pension trusts and suggested that he buy
some Texas Gulf for the trusts. In a
matter of less than a half an hour, the
bank had ordered 7,000 shares for its
pension fund and profit-sharing account
—two thousand of them before the
announcement had begun to appear on
the broad tape, and the rest either while
it was appearing or within a few minutes
afterward. A bit more than an hour after
that—at 12:33 p.m.—Lamont bought
3,000 shares for himself and members of
his family, this time having to pay 34½
for them, since Texas Gulf by that time
was on its way up for fair. As it was to
continue to be for days, months, and
years. It closed that afternoon at 36⅜, it
reached a high of 58⅜ later that month,
and by the end of 1966, when
commercial production of ore was at
last under way at Kidd-55 and the
enormous new mine was expected to
account for one-tenth of Canada’s total
annual production of copper and onequarter of its total annual production of
zinc, the stock was selling at over 100.
Anyone who had bought Texas Gulf
between November 12th, 1963 and the
morning (or even the lunch hour) of
April 16th, 1964 had therefore at least
tripled his money.
the most arresting aspect of the
Texas Gulf trial—apart from the fact that
a trial was taking place at all—was the
vividness and variety of the defendants
who came before Judge Bonsal, ranging
as they did from a hot-eyed mining
prospector like Clayton (a genuine
Welchman with a degree in mining from
the University of Cardiff) through
vigorous and harried corporate nabobs
like Fogarty and Stephens to a Texas
wheeler-dealer like Coates and a
polished Brahmin of finance like
Lamont. (Darke, who had left Texas
Gulf’s employ soon after April, 1964 to
become a private investor—which may
PERHAPS
or may not indicate that he had become a
man of independent means—declined to
appear at the trial on the ground that his
Canadian nationality put him beyond the
reach of subpoena by a United States
court, and the S.E.C. grieved loudly over
this refusal; defense counsel, however,
scornfully insisted that the S.E.C. was
really delighted to have Darke absent,
thus allowing plaintiff to paint him as
Mephistopheles hiding in the wings.)
The S.E.C, after its counsel, Frank E.
Kennamer Jr., had announced his
intention to “drag to light and pillory the
misconduct of these defendants,” asked
the court to issue a permanent injunction
forbidding Fogarty, Mollison, Clayton,
Holyk, Darke, Crawford, and several
other corporate insiders who had bought
stock or calls between November 8th,
1963 and April 15th, 1964, from ever
again “engaging in any act … which
operates or would operate as a fraud or
deceit upon any person in connection
with purchase or sale of securities”;
further—and here it was breaking
entirely new ground—it prayed that the
Court order the defendants to make
restitution to the persons they had
allegedly defrauded by buying stock or
calls from them on the basis of inside
information. The S.E.C. also charged
that the pessimistic April 12th press
release was deliberately deceptive, and
asked that because of it Texas Gulf be
enjoined from “making any untrue
statement of material fact or omitting to
state a material fact.” Apart from any
question of loss of corporate face, the
nub of the matter here lay in the fact that
such a judgment, if granted, might well
open the way for legal action against the
company by any stockholder who had
sold his Texas Gulf stock to anybody in
the interim between the first press
release and the second one, and since the
shares that had changed hands during that
period had run into the millions, it was a
nub indeed.
Apart from legal technicalities,
counsel based its defense of the early
insider stock purchases chiefly on the
argument that the information yielded by
the first drill hole in November had
made the prospect of a workable mine
not a sure thing but only a sporting
proposition, and to buttress this
argument, it paraded before the judge a
platoon of mining experts who testified
as to the notorious fickleness of first
drill holes, some of the witnesses going
so far as to say that the hole might very
well have turned out to be not an asset
but a liability to Texas Gulf. The people
who had bought stock or calls during the
winter insisted that the drill hole had had
little or nothing to do with their decision
—they had been motivated simply by the
feeling that Texas Gulf was a good
investment at that juncture on general
principles; and Clayton attributed his
abrupt appearance as a substantial
investor to the fact that he had just
married a well-to-do wife. The S.E.C.
countered with its own parade of
experts, maintaining that the nature of the
first core had been such as to make the
existence of a rich mine an
overwhelming probability, and that
therefore those privy to the facts about it
had possessed a material fact. As the
S.E.C. put it saltily in a post-trial brief,
“the argument that the defendants were
free to purchase the stock until the
existence of a mine had been established
beyond doubt is equivalent to saying that
there is no unfairness in betting on a
horse entered in a race, knowing that the
animal has received an illegal stimulant,
because in the homestretch the horse
might drop dead.” Defense counsel
declined to be drawn into argument on
the equine analogy. As to the pessimistic
April 12th release, the S.E.C. made
much of the fact that Fogarty, its chief
drafter, had based it on information that
was almost forty-eight hours old when it
was issued, despite the fact that
communications between Kidd-55,
Timmins, and New York were relatively
good at the time, and expressed the view
that “the most indulgent explanation for
his strange conduct is that Dr. Fogarty
simply did not care whether he gave the
shareholders of Texas Gulf and the
public a discouraging statement based on
stale information.” Brushing aside the
question of staleness, the defense
asserted that the release “accurately
stated the status of the drilling in the
opinion of Stephens, Fogarty, Mollison,
Holyk, and Clayton,” that “the problem
presented was obviously one of
judgment,” and that the company had
been in a particularly difficult and
sensitive position in that if it had,
instead, issued an overly optimistic
report that had later proved to have been
based on false hopes, it could just as
well have then been accused of fraud for
that.
Weighing the crucial question of
whether the information obtained from
the first drill hole had been “material,”
Judge Bonsal concluded that the
definition of materiality in such
instances must be a conservative one.
There was, he pointed out, a question of
public policy involved: “It is important
under our free-enterprise system that
insiders, including directors, officers,
and employees, be encouraged to own
securities of their company. The
incentive that comes with stock
ownership benefits both the company
and the stockholders.” Keeping his
definition conservative, he decided that
up until the evening of April 9th, when
three converging drill holes positively
established the three-dimensionality of
the ore deposit, material information had
not been in hand, and the decisions of the
insiders to buy Texas Gulf stock before
that date, even if based on the drilling
results, were no more than perfectly
sporting, and legal, “educated guesses.”
(A newspaper columnist who disagreed
with the judge’s finding was to remark
that the guesses had been so educated as
to qualify for summa cum laude.) In the
case of Darke, the judge found that the
spate of stock purchases by his tippees
and sub-tippees on the last days of
March seemed highly likely to have been
instigated by word from Darke that
drilling at Kidd-55 was about to be
resumed; but even here, according to
Judge
Bonsal’s
logic,
material
information did not yet exist and
therefore could neither be acted upon
nor passed along to others.
Case was therefore dismissed against
all educated guessers who had bought
stock or calls, or made recommendations
to tippees, before the evening of April
9th. With Clayton and Crawford, who
had been so injudicious as to buy or
order stock on April 15th, it was another
matter. The judge found no evidence that
they had intended to deceive or defraud
anyone, but they had made their
purchases with the full knowledge that a
great mine had been found and that it
would be announced the next day—in
short, with material private information
in hand. Therefore they were found to
have violated Rule 10B-5, and in due
time would presumably be enjoined
from doing such a thing again and made
to offer restitution to the persons they
bought their April 15th shares from—
assuming, of course, that such persons
can be found, the complexities of stockexchange trading being such that it isn’t
always an easy matter to figure out
exactly whom one has been dealing with
on any particular transaction. The law in
our time is, and probably ought to
remain,
almost
unrealistically
humanistic; in its eyes, corporations are
people, stock exchanges are streetcorner marketplaces where buyer and
seller haggle face to face, and computers
scarcely exist.
As for the April 12th press release,
the judge found it in retrospect “gloomy”
and “incomplete,” but he acknowledged
that its purpose had been the worthy one
of correcting the exaggerated rumors that
had been appearing and decided that the
S.E.C. had failed to prove that it was
false, misleading, or deceptive. Thus he
dismissed the complaint that Texas Gulf
had deliberately tried to confuse its
stockholders and the public.
to this point, it was two wins against
a whole string of losses for the S.E.C.,
and the right of a miner to drop his drill
and run for a brokerage office appeared
to have retained most of its sanctity,
provided at least that his drill hole is the
UP
first of a series. But there remained to be
settled the matter that, of all those
contested in the case, was of the most
consequence to stockholders, stock
traders, and the national economy, as
opposed to the members of corporate
mining exploration groups. It was the
matter of the April 16th activities of
Coates and Lamont, and its importance
lay in the fact that it turned on the
question of precisely when, in the eyes
of the law, a piece of information ceases
to be inside and becomes public. The
question had never before been
subjected to anything like so exacting a
test, so what came out of the Texas Gulf
case would instantly become the legal
authority on the subject until superseded
by some even more refined case.
The basic position of the S.E.C. was
that the stock purchases of Coates, and
the circumspect tip given by Lamont to
Hinton by telephone, were illegal use of
inside information because they were
accomplished before the announcement
of the ore strike on the Dow Jones broad
tape—an announcement that the S.E.C.’s
lawyers kept referring to as the
“official” one, although the Dow Jones
service, much as it might like to, derives
no such status from any authority other
than custom. But the S.E.C. went further
than that. Even if the two directors’
telephone calls had been made after the
“official” announcement, it contended,
they would have been improper and
illegal unless enough time had elapsed
for the news to be thoroughly absorbed
by members of the investing public not
privileged to attend the press conference
or even to be watching the broad tape at
the right moment. Defense counsel saw
things rather differently. In its view, far
from being culpable regardless of
whether or not they had acted before or
after the broad tape announcement, its
clients were innocent in either case. In
the first place, the lawyers contended,
Coates and Lamont had every reason to
believe the news was out, since
Stephens had said during the directors’
meeting that it had been released by the
Ontario Minister of Mines the previous
evening, and therefore Coates and
Lamont acted in good faith; in the second
place, counsel went on, what with the
buzzing in brokerage offices and the
early-morning excitement at the Stock
Exchange, to all intents and purposes the
news really was out, via osmosis and
The Northern Miner, considerably
before it appeared on the ticker or
before the mooted telephone calls were
made. Lamont’s lawyers argued that
their client hadn’t advised Hinton to buy
Texas Gulf stock, anyhow; he’d merely
advised him to look at the broad tape, an
act as innocent to recommend as to
perform, and what Hinton had done then
had been entirely on his own hook. In
sum, the lawyers for the two sides could
agree on neither whether the rules had
been violated nor what the rules actually
were; indeed, it was one of the defense’s
contentions that the S.E.C. was asking
the court to write new rules and then
apply them retroactively, while the
plaintiff insisted that he was merely
asking that an old rule, 10B-5, be
applied broadly, in the spirit of the
Marquis of Queensberry. Near the end of
the trial Lamont’s lawyers, bearing
down hard, created a courtroom
sensation by introducing a surprise
exhibit, a large, elaborate map of the
United States dotted with colored flags,
some blue, some red, some green, some
gold, some silver—each flag, the
lawyers announced, denoting a place
where the Texas Gulf news had been
disseminated before Lamont had acted
or it had reached the broad tape. On
questioning, it came out that all but eight
of the flags represented offices of the
brokerage firm of Merrill Lynch, Pierce,
Fenner & Smith, on whose interoffice
wire the news had been carried at 10:29;
but while this revelation of the highly
limited scope of the dissemination may
have mitigated the legal force of the
map, it apparently did not mitigate the
esthetic impression on the judge. “Isn’t
that beautiful?” he exclaimed, while the
S.E.C. men fumed in chagrin, and when
one of the proud defense lawyers
noticed a couple of locations on the map
that had been overlooked and pointed
out that there should really be even more
flags, Judge Bonsal, still bemused,
shook his head and said he was afraid
that wouldn’t work, since all known
colors seemed to have been used
already.
Lamont’s fastidiousness in waiting
until 12:33, almost two hours after his
call to Hinton, before he bought stock for
himself and his family left the S.E.C.
unimpressed—and it was here that the
Commission took its most avant-garde
stand and asked the judge for a decision
that would forge most fearlessly into the
legal jungles of the future. As the stand
was set forth in the S.E.C. briefs, “It is
the Commission’s position that even
after corporate information has been
published in the news media, insiders,
are still under a duty to refrain from
securities transactions until there had
elapsed a reasonable amount of time in
which the securities industry, the
shareholders, and the investing public
can evaluate the development and make
informed investment decisions …
Insiders must wait at least until the
information is likely to have reached the
average investor who follows the market
and he has had some opportunity to
consider it.” In the Texas Gulf case, the
S.E.C. argued, one hour and thirty-nine
minutes after the start of the broad-tape
transmission was not long enough for
that evaluation, as evidenced by the fact
that the enormous rise in the price of
Texas Gulf stock had hardly more than
started by that time, and therefore
Lamont’s 12:33 purchases had violated
the Securities Exchange Act. What, then,
did the S.E.C. think would be “a
reasonable amount of time”? That would
“vary from case to case,” the S.E.C.’s
counsel Kennamer said in his
summation, according to the nature of the
inside information; for example, word of
a dividend cut would probably percolate
through the dullest investor’s brain in a
very short time, while a piece of news
as unusual and abstruse as Texas Gulf’s
might take days, or even longer. It
would, Kennamer said, be “a nearly
impossible task to formulate a rigid set
of rules that would apply in all situations
of this sort.” Therefore, in the S.E.C.’s
canon, the only way an insider could
find out whether he had waited long
enough before buying his company’s
stock was by being haled into court and
seeing what the judge would decide.
Lamont’s counsel, led by S. Hazard
Gillespie, went after this stand with the
same zeal, if not actually glee, that had
marked its foray into cartography. First,
Gillespie said, the S.E.C. had contended
that Coates’ call to Haemisegger and
Lamont’s to Hinton had been wrong
because they had been made before the
broadtape announcement; then it had said
that Lamont’s later stock purchase had
been wrong because it had been made
after the announcement, but not long
enough after. If these apparently opposite
courses of action were both fraud, what
was right conduct? The S.E.C. seemed to
want to have the rules made up as it
went along—or, rather, to have the
courts make them up. As Gillespie put
the matter more formally, the S.E.C. was
“asking the court to write … a rule
judicially and to apply it retroactively to
adjudicate Mr. Lamont guilty of fraud
because of conduct which he reasonably
believed to be entirely proper.”
It wouldn’t stand up, Judge Bonsal
agreed—and for that matter, neither
would the S.E.C.’s contention that the
time of the broad-tape transmission had
been the time when the news had
become public. He took the narrower
view that, based on legal precedent, the
controlling moment had been the one
when the press release had been read
and handed to the reporters, even though
hardly any outsider—that is, hardly
anybody at all—had known of it for
some time afterward. Clearly troubled
by the implications of this finding, Judge
Bonsal added that “it may be, as the
Commission contends, that a more
effective rule should be established to
preclude insiders from acting on
information after it has been announced
but before it has been absorbed by the
public.” But he didn’t think it was up to
him to write such a rule. Nor did he
think it was up to him to determine
whether or not Lamont had waited long
enough before placing his 12:33 order. If
it were left to judges to make such
determinations, he said, “this could only
lead to uncertainty. A decision in one
case would not control another case with
different facts. No insider would know
whether he had waited long enough … If
a waiting period is to be fixed, this
could be most appropriately done by the
Commission.” No one would bell the
cat, and the complaints against Coates
and Lamont were dismissed.
S.E.C. appealed all the dismissals,
and Clayton and Crawford, the only two
THE
defendants found to have violated the
Securities Exchange Act, appealed the
judgments against them. In its appeal
brief the Commission painstakingly
reviewed the evidence and suggested to
the Circuit Court that Judge Bonsal had
erred in his interpretation of it, while the
defense brief for Clayton and Crawford
concentrated on the possibly detrimental
effects of the doctrine implied in the
finding against them. Might not the
doctrine mean, for example, that every
security analyst who does his best to
ferret out little-known facts about a
particular
company,
and
then
recommends that company’s stock to his
customers as he is paid to do, could be
adjudged
an insider
improperly
distributing tips precisely because of his
diligence? Might it not tend to “stifle
investment by corporate personnel and
impede the flow of corporate
information to investors”?
Perhaps so. At all events, in August,
1968, the U.S. Court of Appeals for the
Second Circuit handed down a decision
which flatly reversed Judge Bonsal’s
findings on just about every score except
the findings against Crawford and
Clayton, which were affirmed. The
Appeals Court found that the original
November drill hole had provided
material evidence of a valuable ore
deposit, and that therefore Fogarty,
Mollison, Darke, Holyk, and all other
insiders who had bought Texas Gulf
stock or calls on it during the winter
were guilty of violations of the law; that
the gloomy April 12th press release had
been ambiguous and perhaps misleading;
and that Coates had improperly and
illegally jumped the gun in placing his
orders right after the April 16th press
conference. Only Lamont—the charges
against whom had been dropped
following his death shortly after the
lower court decision—and a Texas Gulf
office manager, John Murray, remained
exonerated.
The decision was a famous victory for
the S.E.C., and the first reaction of Wall
Street was to cry out that it would make
for utter confusion. Pending further
appeals to the Supreme Court, it would,
at least, result in an interesting
experiment. For the first time in the
history of the world, the effort would
have to be made, in Wall Street, to
conduct a stock market without the use of
a stacked deck.
5
Xerox Xerox Xerox
Xerox
mimeograph
machine—the
first
mechanical
duplicator of written pages that was
practical for office use—was put on the
WHEN
THE
ORIGINAL
market by the A. B. Dick Company, of
Chicago, in 1887, it did not take the
country by storm. On the contrary, Mr.
Dick—a former lumberman who had
become bored with copying his price
lists by hand, had tried to invent a
duplicating machine himself, and had
finally obtained rights to produce the
mimeograph from its inventor, Thomas
Alva Edison—found himself faced with
a formidable marketing problem.
“People didn’t want to make lots of
copies of office documents,” says his
grandson C. Matthews Dick, Jr.,
currently a vice-president of the A. B.
Dick Company, which now manufactures
a whole line of office copiers and
duplicators, including mimeograph
machines. “By and large, the first users
of the thing were non-business
organizations like churches, schools, and
Boy Scout troops. To attract companies
and professional men, Grandfather and
his associates had to undertake an
enormous missionary effort. Office
duplicating by machine was a new and
unsettling idea that upset longestablished office patterns. In 1887, after
all, the typewriter had been on the
market only a little over a decade and
wasn’t yet in widespread use, and
neither was carbon paper. If a
businessman or a lawyer wanted five
copies of a document, he’d have a clerk
make five copies—by hand. People
would say to Grandfather, ‘Why should I
want to have a lot of copies of this and
that lying around? Nothing but clutter in
the office, a temptation to prying eyes,
and a waste of good paper.’”
On another level, the troubles that the
elder Mr. Dick encountered were
perhaps connected with the generally
bad repute that the notion of making
copies of graphic material had been held
in for a number of centuries—a bad
repute reflected in the various overtones
of the English noun and verb “copy.”
The Oxford English Dictionary makes it
clear that during those centuries there
was an aura of deceit associated with
the word; indeed, from the late sixteenth
century until Victorian times “copy” and
“counterfeit” were nearly synonymous.
(By the middle of the seventeenth
century, the medieval use of the noun
“copy” in the robust sense of “plenty” or
“abundance” had faded out, leaving
behind nothing but its adjective form,
“copious.”) “The only good copies are
those which exhibit the defects of bad
originals,” La Rochefoucauld wrote in
his “Maxims” in 1665. “Never buy a
copy of a picture,” Ruskin pronounced
dogmatically in 1857, warning not
against
chicanery
but
against
debasement. And the copying of written
documents was often suspect, too.
“Though the attested Copy of a Record
be good proof, yet the Copy of a Copy
never so well attested … will not be
admitted as proof in Judicature,” John
Locke wrote in 1690. At about the same
time, the printing trade contributed to the
language the suggestive expression “foul
copy,” and it was a favorite Victorian
habit to call one object, or person, a
pale copy of another.
Practical necessity arising out of
increasing
industrialization
was
doubtless chiefly responsible for a
twentieth-century reversal of these
attitudes.
In
any
case,
office
reproduction began to grow very
rapidly. (It may seem paradoxical that
this growth coincided with the rise of the
telephone, but perhaps it isn’t. All the
evidence suggests that communication
between people by whatever means, far
from simply accomplishing its purpose,
invariably breeds the need for more.)
The typewriter and carbon paper came
into common use after 1890, and
mimeographing became a standard office
procedure soon after 1900. “No office is
complete
without
an
Edison
Mimeograph,” the Dick Company felt
able to boast in 1903. By that time, there
were already about a hundred and fifty
thousand of the devices in use; by 1910
there were probably over two hundred
thousand, and by 1940 almost half a
million. The offset printing press—a
mettlesome competitor capable of
producing work much handsomer than
mimeographed output—was successfully
adapted for office use in the nineteenthirties and forties, and is now standard
equipment in most large offices. As with
the mimeograph machine, though, a
special master page must be prepared
before reproduction can start—a
relatively expensive and time-consuming
process—so the offset press is
economically useful only when a
substantial number of copies are wanted.
In office-equipment jargon, the offset
press and the mimeograph are
“duplicators” rather than “copiers,” the
dividing line between duplicating and
copying
being
generally
drawn
somewhere between ten and twenty
copies. Where technology lagged longest
was in the development of efficient and
economical
copiers.
Various
photographic devices that did not
require the making of master pages—of
which the most famous was (and still is)
the Photostat—began appearing around
1910, but because of their high cost,
slowness, and difficulty of operation,
their usefulness was largely limited to
the copying of architectural and
engineering drawings
and
legal
documents. Until after 1950, the only
practical machine for making a copy of a
business letter or a page of typescript
was a typewriter with carbon paper in
its platen.
The nineteen-fifties were the raw,
pioneering years of mechanized office
copying. Within a short time, there
suddenly appeared on the market a
whole batch of devices capable of
reproducing most office papers without
the use of a master page, at a cost of only
a few cents per copy, and within a time
span of a minute or less per copy. Their
technology varied—Minnesota Mining
&
Manufacturing’s
Thermo-Fax,
introduced in 1950, used heat-sensitive
copying paper; American Photocopy’s
Dial-A-Matic Autostat (1952) was
based on a refinement of ordinary
photography; Eastman Kodak’s Verifax
(1953) used a method called dye
transfer; and so on—but almost all of
them, unlike Mr. Dick’s mimeograph,
immediately found a ready market, partly
because they filled a genuine need and
partly, it now seems clear, because they
and their function exercised a powerful
psychological fascination on their users.
In a society that sociologists are forever
characterizing as “mass,” the notion of
making one-of-a-kind things into manyof-a-kind things showed signs of
becoming a real compulsion. However,
all these pioneer copying machines had
serious and frustrating inherent defects;
for example, Autostat and Verifax were
hard to operate and turned out damp
copies that had to be dried, while
Thermo-Fax copies tended to darken
when exposed to too much heat, and all
three could make copies only on special
treated paper supplied by the
manufacturer. What was needed for the
compulsion to flower into a mania was a
technological breakthrough, and the
breakthrough came at the turn of the
decade with the advent of a machine that
worked on a new principle, known as
xerography, and was able to make dry,
good-quality, permanent copies on
ordinary paper with a minimum of
trouble. The effect was immediate.
Largely as a result of xerography, the
estimated number of copies (as opposed
to duplicates) made annually in the
United States sprang from some twenty
million in the mid-fifties to nine and a
half billion in 1964, and to fourteen
billion in 1966—not to mention billions
more in Europe, Asia, and Latin
America. More than that, the attitude of
educators toward printed textbooks and
of business people toward written
communication underwent a discernible
change; avant-garde philosophers took to
hailing xerography as a revolution
comparable in importance to the
invention of the wheel; and coinoperated copying machines began
turning up in candy stores and beauty
parlors. The mania—not as immediately
disrupting as the tulip mania in
seventeenth-century
Holland
but
probably destined to be considerably
farther-reaching—was in full swing.
The company responsible for the great
breakthrough and the one on whose
machines the majority of these billions
of copies were made was, of course, the
Xerox Corporation, of Rochester, New
York. As a result, it became the most
spectacular big-business success of the
nineteen-sixties. In 1959, the year the
company—then called Haloid Xerox,
Inc.—introduced its first automatic
xerographic office copier, its sales were
thirty-three million dollars. In 1961, they
were sixty-six million, in 1963 a
hundred and seventy-six million, and in
1966 over half a billion. As Joseph C.
Wilson, the chief executive of the firm,
pointed out, this growth rate was such
that if maintained for a couple of
decades (which, perhaps fortunately for
everyone, couldn’t possibly happen),
Xerox sales would be larger than the
gross national product of the United
States. Unplaced in Fortune’s ranking of
the five hundred largest American
industrial companies in 1961, Xerox by
1964 had attained two-hundred-andtwenty-seventh place, and by 1967 it had
climbed to hundred-and-twenty-sixth.
Fortune’s ranking is based on annual
sales; according to certain other criteria,
Xerox placed much higher than hundredand-seventy-first. For example, early in
1966 it ranked about sixty-third in the
country in net profits, probably ninth in
ratio of profit to sales, and about
fifteenth in terms of the market value of
its stock—and in this last respect the
young upstart was ahead of such long-
established industrial giants as U.S.
Steel, Chrysler, Procter & Gamble, and
R.C.A. Indeed, the enthusiasm the
investing public showed for Xerox made
its shares the stock market Golconda of
the sixties. Anyone who bought its stock
toward the end of 1959 and held on to it
until early 1967 would have found his
holding worth about sixty-six times its
original price, and anyone who was
really fore-sighted and bought Haloid in
1955 would have seen his original
investment grow—one might almost say
miraculously—a hundred and eighty
times. Not surprisingly, a covey of
“Xerox millionaires” sprang up—
several hundred of them all told, most of
whom either lived in the Rochester area
or had come from there.
The Haloid Company, started in
Rochester in 1906, was the grandfather
of Xerox, just as one of its founders—
Joseph C. Wilson, a sometime
pawnbroker and sometime mayor of
Rochester—was the grandfather of his
namesake, the 1946–1968 boss of
Xerox.
Haloid
manufactured
photographic papers, and, like all
photographic
companies—and
especially those in Rochester—it lived
in the giant shadow of its neighbor,
Eastman Kodak. Even in this subdued
light, though, it was effective enough to
weather the Depression in modestly
good shape. In the years immediately
after the Second World War, however,
both competition and labor costs
increased, sending Haloid on a search
for new products. One of the
possibilities its scientists hit upon was a
copying process that was being worked
on at the Battelle Memorial Institute, a
large non-profit industrial-research
organization in Columbus, Ohio. At this
point, the story flashes back to 1938 and
a second-floor kitchen above a bar in
Astoria, Queens, which was being used
as a makeshift laboratory by an obscure
thirty-two-year-old inventor named
Chester F. Carlson. The son of a barber
of Swedish extraction, and a graduate in
physics of the California Institute of
Technology, Carlson was employed in
New York in the patent department of P.
R. Mallory & Co., an Indianapolis
manufacturer of electrical and electronic
components; in quest of fame, fortune,
and independence, he was devoting his
spare time to trying to invent an office
copying machine, and to help him in this
endeavor he had hired Otto Kornei, a
German refugee physicist. The fruit of
the two men’s experiments was a
process by which, on October 22, 1938,
after using a good deal of clumsy
equipment and producing considerable
smoke and stench, they were able to
transfer from one piece of paper to
another the unheroic message “10–22–
38 Astoria.” The process, which
Carlson called electrophotography, had
—and has—five basic steps: sensitizing
a photoconductive surface to light by
giving it an electrostatic charge (for
example, by rubbing it with fur);
exposing this surface to a written page to
form an electrostatic image; developing
the latent image by dusting the surface
with a powder that will adhere only to
the charged areas; transferring the image
to some sort of paper; and fixing the
image by the application of heat. The
steps, each of them in itself familiar
enough in connection with other
technologies, were utterly new in
combination—so new, in fact, that the
kings and captains of commerce were
markedly slow to recognize the
potentialities of the process. Applying
the knowledge he had picked up in his
job downtown, Carlson immediately
wove a complicated net of patents
around the invention (Kornei shortly left
to take a job elsewhere, and thus
vanished
permanently
from
the
electrophotographic scene) and set about
trying to peddle it. Over the next five
years, while continuing to work for
Mallory, he pursued his moonlighting in
a new form, offering rights to the
process to every important officeequipment company in the country, only
to be turned down every time. Finally, in
1944, Carlson persuaded Battelle
Memorial Institute to undertake further
development work on his process in
exchange for three-quarters of any
royalties that might accrue from its sale
or license.
Here the flashback ends and
xerography, as such, comes into being.
By 1946, Battelle’s work on the Carlson
process had come to the attention of
various people at Haloid, among them
the younger Joseph C. Wilson, who was
about to assume the presidency of the
company. Wilson communicated his
interest to a new friend of his—Sol M.
Linowitz, a bright and vigorously
public-spirited young lawyer, recently
back from service in the Navy, who was
then busy organizing a new Rochester
radio station that would air liberal
views as a counterbalance to the
conservative views of the Gannett
newspapers. Although Haloid had its
own lawyers, Wilson, impressed with
Linowitz, asked him to look into the
Battelle thing as a “one-shot” job for the
company. “We went to Columbus to see
a piece of metal rubbed with cat’s fur,”
Linowitz has since said. Out of that trip
and others came an agreement giving
Haloid rights to the Carlson process in
exchange for royalties to Carlson and
Battelle, and committing it to share with
Battelle in the work and the costs of
development. Everything else, it seemed,
flowed from that agreement. In 1948, in
search of a new name for the Carlson
process, a Battelle man got together with
a professor of classical languages at
Ohio State University, and by combining
two words from classical Greek they
came up with “xerography,” or “dry
writing.” Meanwhile, small teams of
scientists at Battelle and Haloid,
struggling to develop the process, were
encountering baffling and unexpected
technical problems one after another; at
one point, indeed, the Haloid people
became so discouraged that they
considered selling most of their
xerography rights to International
Business Machines. But the deal was
finally called off, and as the research
went on and the bills for it mounted,
Haloid’s commitment to the process
gradually became a do-or-die affair. In
1955, a new agreement was drawn up,
under which Haloid took over full title
to the Carlson patents and the full cost of
the development project, in payment for
which it issued huge bundles of Haloid
shares to Battelle, which, in turn, issued
a bundle or two to Carlson. The cost
was staggering. Between 1947 and
1960, Haloid spent about seventy-five
million dollars on research in
xerography, or about twice what it
earned from its regular operations during
that period; the balance was raised
through borrowing and through the
wholesale issuance of common stock to
anyone who was kind, reckless, or
prescient enough to take it. The
University of Rochester, partly out of
interest in a struggling local industry,
bought an enormous quantity for its
endowment fund at a price that
subsequently, because of stock splits,
amounted to fifty cents a share. “Please
don’t be mad at us if we find we have to
sell our Haloid stock in a couple of
years to cut our losses on it,” a
university official nervously warned
Wilson. Wilson promised not to be mad.
Meanwhile, he and other executives of
the company took most of their pay in the
form of stock, and some of them went as
far as to put up their savings and the
mortgages on their houses to help the
cause along. (Prominent among the
executives by this time was Linowitz,
whose association with Haloid had
turned out to be anything but a one-shot
thing; instead, he became Wilson’s righthand man, taking charge of the
company’s crucial patent arrangements,
organizing and guiding its international
affiliations, and eventually serving for a
time as chairman of its board of
directors.) In 1958, after prayerful
consideration, the company’s name was
changed to Haloid Xerox, even though
no xerographic product of major
importance was yet on the market. The
trademark “XeroX” had been adopted by
Haloid several years earlier—a
shameless imitation of Eastman’s
“Kodak,” as Wilson has admitted. The
terminal “X” soon had to be
downgraded to lower case, because it
was found that nobody would bother to
capitalize it, but the near-palindrome, at
least as irresistible as Eastman’s,
remained. XeroX or Xerox, the
trademark, Wilson has said, was
adopted and retained against the
vehement advice of many of the firm’s
consultants, who feared that the public
would find it unpronounceable, or would
think it denoted an anti-freeze, or would
be put in mind of a word highly
discouraging to financial ears—“zero.”
Then, in 1960, the explosion came,
and suddenly everything was reversed.
Instead of worrying about whether its
trade name would be successful, the
company was worrying about its
becoming too successful, for the new
verb “to xerox” began to appear so
frequently in conversation and in print
that the company’s proprietary rights in
the name were threatened, and it had to
embark on an elaborate campaign
against such usage. (In 1961, the
company went the whole hog and
changed its name to plain Xerox
Corporation.) And instead of worrying
about the future of themselves and their
families, the Xerox executives were
worrying about their reputation with the
friends and relatives whom they had
prudently advised not to invest in the
stock at twenty cents a share. In a word,
everybody who held Xerox stock in
quantity had got rich or richer—the
executives who had scrimped and
sacrificed, the University of Rochester,
Battelle Memorial Institute, and even, of
all people, Chester F. Carlson, who had
come out of the various agreements with
Xerox stock that at 1968 prices was
worth many million dollars, putting him
(according to Fortune) among the sixtysix richest people in the country.
baldly outlined, the story of Xerox
has an old-fashioned, even a nineteenthcentury, ring—the lonely inventor in his
crude laboratory, the small, familyoriented company, the initial setbacks,
the reliance on the patent system, the
resort to classical Greek for a trade
name, the eventual triumph gloriously
vindicating the free-enterprise system.
THUS
But there is another dimension to Xerox.
In the matter of demonstrating a sense of
responsibility to society as a whole,
rather than just to its stockholders,
employees, and customers, it has shown
itself to be the reverse of most
nineteenth-century companies—to be,
indeed, in the advance guard of
twentieth-century companies. “To set
high goals, to have almost unattainable
aspirations, to imbue people with the
belief that they can be achieved—these
are as important as the balance sheet,
perhaps more so,” Wilson said once, and
other Xerox executives have often gone
out of their way to emphasize that “the
Xerox spirit” is not so much a means to
an end as a matter of emphasizing
“human values” for their own sake. Such
platform rhetoric is far from uncommon
in big-business circles, of course, and
when it comes from Xerox executives it
is just as apt to arouse skepticism—or
even, considering the company’s huge
profits, irritation. But there is evidence
that Xerox means what it says. In 1965,
the company donated $1,632,548 to
educational and charitable institutions,
and $2,246,000 in 1966; both years the
biggest recipients were the University of
Rochester and the Rochester Community
Chest, and in each case the sum
represented around one and a half per
cent of the company’s net income before
taxes. This is markedly higher than the
percentage that most large companies set
aside for good works; to take a couple of
examples from among those often cited
for
their
liberality,
R.C.A.’s
contributions for 1965 amounted to
about seven-tenths of one per cent of
pre-tax
income,
and
American
Telephone
&
Telegraph’s
to
considerably less than one per cent. That
Xerox intended to persist in its highminded ways was indicated by its
commitment of itself in 1966 to the “oneper-cent program,” often called the
Cleveland Plan—a system inaugurated
in that city under which local industries
agree to give one per cent of pre-tax
income annually to local educational
institutions, apart from their other
donations—so that if Xerox income
continues to soar, the University of
Rochester and its sister institutions in the
area can face the future with a certain
assurance.
In other matters, too, Xerox has taken
risks for reasons that have nothing to do
with profit. In a 1964 speech, Wilson
said, “The corporation cannot refuse to
take a stand on public issues of major
concern”—a piece of business heresy if
there ever was one, since taking a stand
on a public issue is the obvious way of
alienating customers and potential
customers who take the opposite stand.
The chief public stand that Xerox has
taken is in favor of the United Nations—
and, by implication, against its
detractors. Early in 1964, the company
decided to spend four million dollars—a
year’s
advertising
budget—on
underwriting a series of networktelevision programs dealing with the
U.N., the programs to be unaccompanied
by commercials or
any other
identification of Xerox apart from a
statement at the beginning and end of
each that Xerox had paid for it. That July
and August—some three months after the
decision had been announced—Xerox
suddenly received an avalanche of
letters opposing the project and urging
the company to abandon it. Numbering
almost fifteen thousand, the letters
ranged
in
tone
from
sweet
reasonableness to strident and emotional
denunciation. Many of them asserted that
the U.N. was an instrument for depriving
Americans of their Constitutional rights,
that its charter had been written in part
by American Communists, and that it
was constantly being used to further
Communist objectives, and a few letters,
from company presidents, bluntly
threatened to remove the Xerox
machines from their offices unless the
series was cancelled. Only a handful of
the letter writers mentioned the John
Birch Society, and none identified
themselves as members of it, but
circumstantial evidence suggested that
the avalanche represented a carefully
planned Birch campaign. For one thing,
a recent Birch Society publication had
urged that members write to Xerox to
protest the U.N. series, pointing out that
a flood of letters had succeeded in
persuading a major airline to remove the
U.N. insigne from its airplanes. Further
evidence of a systematic campaign
turned up when an analysis, made at
Xerox’s instigation, showed that the
fifteen thousand letters had been written
by only about four thousand persons. In
any event, the Xerox offices and
directors declined to be persuaded or
intimidated; the U.N. series appeared on
the American Broadcasting Company
network in 1965, to plaudits all around.
Wilson later maintained that the series—
and the decision to ignore the protest
against it—made Xerox many more
friends than enemies. In all his public
statements on the subject, he insisted on
characterizing what many observers
considered a rather rare stroke of
business idealism, as simply sound
business judgment.
In the fall of 1966, Xerox began
encountering a measure of adversity for
the first time since its introduction of
xerography. By that time, there were
more than forty companies in the office
copier business, many of them producing
xerographic devices under license from
Xerox. (The only important part of its
technology for which Xerox had refused
to grant a license was a selenium drum
that enables its own machines to make
copies on ordinary paper. All competing
products still required treated paper.)
The great advantage that Xerox had been
enjoying was the one that the first to
enter a new field always enjoys—the
advantage of charging high prices. Now,
as Barron’s pointed out in August, it
appeared that “this once-fabulous
invention may—as all technological
advances inevitably must—soon evolve
into an accepted commonplace.” Cutrate latecomers were swarming into
copying; one company, in a letter sent to
its stockholders in May, foresaw a time
when a copier selling for ten or twenty
dollars could be marketed “as a toy”
(one was actually marketed for about
thirty dollars in 1968) and there was
even talk of the day when copiers would
be given away to promote sales of
paper, the way razors have long given
away to promote razor blades. For some
years, realizing that its cozy little
monopoly would eventually pass into the
public domain, Xerox had been
widening its interests through mergers
with companies in other fields, mainly
publishing and education; for example,
in 1962 it had bought University
Microfilms, a library on microfilm of
unpublished manuscripts, out-of-print
books,
doctoral
dissertations,
periodicals, and newspapers, and in
1965 it had tacked on two other
companies—American
Education
Publications, the country’s largest
publisher of educational periodicals for
primary- and secondary-school students,
and Basic Systems, a manufacturer of
teaching machines. But these moves
failed to reassure that dogmatic critic the
marketplace, and Xerox stock ran into a
spell of heavy weather. Between late
June, 1966, when it stood at 267¾, and
early October, when it dipped to 131⅝,
the market value of the company was
more than cut in half. In the single
business week of October 3rd through
October 7th, Xerox dropped 42½ points,
and on one particularly alarming day—
October 6th—trading in Xerox on the
New York Stock Exchange had to be
suspended for five hours because there
were about twenty-five million dollars’
worth of shares on sale that no one
wanted to buy.
I find that companies are inclined to be
at their most interesting when they are
undergoing a little misfortune, and
therefore I chose the fall of 1966 as the
time to have a look at Xerox and its
people—something I’d had in mind to do
for a year or so. I started out by getting
acquainted with one of its products. The
Xerox line of copiers and related items
was by then a comprehensive one. There
was, for instance, the 914, a desksize
machine that makes black-and-white
copies of almost any page—printed,
handwritten, typed, or drawn, but not
exceeding nine by fourteen inches in size
—at a rate of about one copy every six
seconds; the 813, a much smaller device,
which can stand on top of a desk and is
essentially a miniaturized version of the
914 (or, as Xerox technicians like to say,
“a 914 with the air left out”); the 2400, a
high-speed reproduction machine that
looks like a modern kitchen stove and
can cook up copies at a rate of forty a
minute, or twenty-four hundred an hour;
the Copyflo, which is capable of
enlarging microfilmed pages into
ordinary booksize pages and printing
them; the LDX, by which documents can
be transmitted over telephone wires,
microwave radio, or coaxial cable; and
the Telecopier, a non-xerographic
device, designed and manufactured by
Magnavox but sold by Xerox, which is a
sort of junior version of the LDX and is
especially interesting to a layman
because it consists simply of a small box
that, when attached to an ordinary
telephone, permits the user to rapidly
transmit a small picture (with a good
deal of squeaking and clicking, to be
sure) to anyone equipped with a
telephone and a similar small box. Of all
these, the 914, the first automatic
xerographic product and the one that
constituted the big breakthrough, was
still much the most important both to
Xerox and to its customers.
It has been suggested that the 914 is
the most successful commercial product
in history, but the statement cannot be
authoritatively confirmed or denied, if
only because Xerox does not publish
precise revenue figures on its individual
products; the company does say, though,
that in 1965 the 914 accounted for about
sixty-two per cent of its total operating
revenues, which works out to something
over $243,000,000. In 1966 it could be
bought for $27,500, or it could be rented
for twenty-five dollars monthly, plus at
least forty-nine dollars’ worth of copies
at four cents each. These charges were
deliberately set up to make renting more
attractive than buying, because Xerox
ultimately makes more money that way.
The 914, which is painted beige and
weighs six hundred and fifty pounds,
looks a good deal like a modern Lshaped metal desk; the thing to be copied
—a flat page, two pages of an open
book, or even a small three-dimensional
object like a watch or a medal—is
placed face down on a glass window in
the flat top surface, a button is pushed,
and nine seconds later the copy pops
into a tray where an “out” basket might
be if the 914 actually were a desk.
Technologically, the 914 is so complex
(more complex, some Xerox salesmen
insist, than an automobile) that it has an
annoying tendency to go wrong, and
consequently Xerox maintains a field
staff of thousands of repairmen who are
presumably ready to answer a call on
short notice. The most common
malfunction is a jamming of the supply
of copy paper, which is rather
picturesquely called a “mispuff,”
because each sheet of paper is raised
into position to be inscribed by an
interior puff of air, and the malfunction
occurs when the puff goes wrong. A bad
mispuff can occasionally put a piece of
the paper in contact with hot parts,
igniting it and causing an alarming cloud
of white smoke to issue from the
machine; in such a case the operator is
urged to do nothing, or, at most, to use a
small fire extinguisher that is attached to
it, since the fire burns itself out
comparatively harmlessly if left alone,
whereas a bucket of water thrown over a
914 may convey potentially lethal
voltages to its metal surface. Apart from
malfunctions, the machine requires a
good deal of regular attention from its
operator, who is almost invariably a
woman. (The girls who operated the
earliest typewriters were themselves
called “typewriters,” but fortunately
nobody
calls
Xerox
operators
“xeroxes.”) Its supply of copying paper
and black electrostatic powder, called
“toner,” must be replenished regularly,
while its most crucial part, the selenium
drum, must be cleaned regularly with a
special non-scratchy cotton, and waxed
every so often. I spent a couple of
afternoons with one 914 and its operator,
and observed what seemed to be the
closest relationship between a woman
and a piece of office equipment that I
had ever seen. A girl who uses a
typewriter or switchboard has no
interest in the equipment, because it
holds no mystery, while one who
operates a computer is bored with it,
because it is utterly incomprehensible.
But a 914 has distinct animal traits: it
has to be fed and curried; it is
intimidating but can be tamed; it is
subject to unpredictable bursts of
misbehavior; and, generally speaking, it
responds in kind to its treatment. “I was
frightened of it at first,” the operator I
watched told me. “The Xerox men say,
‘If you’re frightened of it, it won’t
work,’ and that’s pretty much right. It’s a
good scout; I’m fond of it now.”
Xerox salesmen, I learned from talks
with some of them, are forever trying to
think of new uses for the company’s
copiers, but they have found again and
again that the public is well ahead of
them. One rather odd use of xerography
insures that brides get the wedding
presents they want. The prospective
bride submits her list of preferred
presents to a department store; the store
sends the list to its bridal-registry
counter, which is equipped with a Xerox
copier; each friend of the bride, having
been tactfully briefed in advance, comes
to this counter and is issued a copy of
the list, whereupon he does his shopping
and then returns the copy with the
purchased items checked off, so that the
master list may be revised and thus
ready for the next donor. (“Hymen, iö
Hymen, Hymen!”) Again, police
departments in New Orleans and various
other places, instead of laboriously
typing up a receipt for the property
removed from people who spend the
night in the lockup, now place the
property itself—wallet, watch, keys, and
such—on the scanning glass of a 914,
and in a few seconds have a sort of
pictographic receipt. Hospitals use
xerography to copy electrocardiograms
and laboratory reports, and brokerage
firms to get hot tips to customers more
quickly. In fact, anybody with any sort of
idea that might be advanced by copying
can go to one of the many cigar or
stationery stores that have a coinoperated copier and indulge himself. (It
is interesting to note that Xerox took to
producing coin-operated 914s in two
configurations—one that works for a
dime and one that works for a quarter;
the buyer or leaser of the machine could
decide which he wanted to charge.)
Copying has its abuses, too, and they
are clearly serious. The most obvious
one is overcopying. A tendency formerly
identified with bureaucrats has been
spreading—the urge to make two or
more copies when one would do, and to
make one when none would do; the
phrase “in triplicate,” once used to
denote bureaucratic waste, has become a
gross understatement. The button waiting
to be pushed, the whir of action, the neat
reproduction dropping into the tray—all
this adds up to a heady experience, and
the neophyte operator of a copier feels
an impulse to copy all the papers in his
pockets. And once one has used a
copier, one tends to be hooked. Perhaps
the chief danger of this addiction is not
so much the cluttering up of files and
loss of important material through
submersion as it is the insidious growth
of a negative attitude toward originals—
a feeling that nothing can be of
importance unless it is copied, or is a
copy itself.
A
more
immediate
problem of
xerography is the overwhelming
temptation it offers to violate the
copyright laws. Almost all large public
and college libraries—and many highschool libraries as well—are now
equipped with copying machines, and
teachers and students in need of a few
copies of a group of poems from a
published book, a certain short story
from an anthology, or a certain article
from a scholarly journal have developed
the habit of simply plucking it from the
library’s shelves, taking it to the
library’s reproduction department, and
having the required number of Xerox
copies made. The effect, of course, is to
deprive the author and the publisher of
income. There are no legal records of
such infringements of copyright, since
publishers and authors almost never sue
educators, if only because they don’t
know that the infringements have
occurred; furthermore, the educators
themselves often have no idea that they
have done anything illegal. The
likelihood that many copyrights have
already been infringed unknowingly
through xerography became indirectly
apparent a few years ago when a
committee of educators sent a circular to
teachers from coast to coast informing
them explicitly what rights to reproduce
copyrighted material they did and did
not have, and the almost instant sequel
was a marked rise in the number of
requests from educators to publishers for
permissions. And there was more
concrete evidence of the way things
were going; for example, in 1965 a staff
member of the library school of the
University of New Mexico publicly
advocated that libraries spend ninety per
cent of their budgets on staff, telephones,
copying, telefacsimiles, and the like, and
only ten per cent—a sort of tithe—on
books and journals.
To a certain extent, libraries attempt
to police copying on their own. The
photographic service of the New York
Public Library’s main branch, which
fills some fifteen hundred requests a
week for copies of library matter,
informs patrons that “copyrighted
material will not be reproduced beyond
‘fair use’”—that is, the amount and kind
of reproduction, generally confined to
brief excerpts, that have been
established by legal precedent as not
constituting infringement. The library
goes on, “The applicant assumes all
responsibility for any question that may
arise in the making of the copy and in the
use made thereof.” In the first part of its
statement the library seems to assume the
responsibility and in the second part to
renounce it, and this ambivalence may
reflect an uneasiness widely felt among
users of library copiers. Outside library
walls, there often does not seem to be
even this degree of scruple. Business
people who are otherwise meticulous in
their observance of the law seem to
regard copyright infringement about as
seriously as they regard jaywalking. A
writer I’ve heard about was invited to a
seminar of high-level and high-minded
industrial leaders and was startled to
find that a chapter from his most recent
book had been copied and distributed to
the participants, to serve as a basis for
discussion. When the writer protested,
the businessmen were taken aback, and
even injured; they had thought the writer
would be pleased by their attention to
his work, but the flattery, after all, was
of the sort shown by a thief who
commends a lady’s jewelry by making
off with it.
In the opinion of some commentators,
what has happened so far is only the first
phase of a kind of revolution in graphics.
“Xerography is bringing a reign of terror
into the world of publishing, because it
means that every reader can become
both author and publisher,” the Canadian
sage Marshall McLuhan wrote in the
spring, 1966, issue of the American
Scholar. “Authorship and readership
alike can become production-oriented
under xerography.… Xerography is
electricity invading the world of
typography, and it means a total
revolution in this old sphere.” Even
allowing for
McLuhan’s
erratic
ebullience (“I change my opinions
daily,” he once confessed), he seems to
have got his teeth into something here.
Various
magazine
articles
have
predicted nothing less than the
disappearance of the book as it now
exists, and pictured the library of the
future as a sort of monster computer
capable of storing and retrieving the
contents of books electronically and
xerographically. The “books” in such a
library would be tiny chips of computer
film—“editions of one.” Everyone
agrees that such a library is still some
time away. (But not so far away as to
preclude a wary reaction from
forehanded publishers. Beginning late in
1966, the long-familiar “all rights
reserved” rigmarole on the copyright
page of all books published by Harcourt,
Brace & World was altered to read, a bit
spookily, “All rights reserved. No part
of this publication may be reproduced or
transmitted in any form or by any means,
electronic or mechanical, including
photocopy, recording, or any information
storage and retrieval system …” Other
publishers quickly followed the
example.) One of the nearest approaches
to it in the late sixties was the Xerox
subsidiary University Microfilms, which
could, and did, enlarge its microfilms of
out-of-print books and print them as
attractive and highly legible paperback
volumes, at a cost to the customer of four
cents a page; in cases where the book
was covered by copyright, the firm paid
a royalty to the author on each copy
produced. But the time when almost
anyone can make his own copy of a
published book at lower than the market
price is not some years away; it is now.
All that the amateur publisher needs is
access to a Xerox machine and a small
offset printing press. One of the lesser
but still important attributes of
xerography is its ability to make master
copies for use on offset presses, and
make them much more cheaply and
quickly than was previously possible.
According to Irwin Karp, counsel to the
Authors League of America, an edition
of fifty copies of any printed book could
in 1967 be handsomely “published”
(minus the binding) by this combination
of technologies in a matter of minutes at
a cost of about eight-tenths of a cent per
page, and less than that if the edition was
larger. A teacher wishing to distribute to
a class of fifty students the contents of a
sixty-four-page book of poetry selling
for three dollars and seventy-five cents
could do so, if he were disposed to
ignore the copyright laws, at a cost of
slightly over fifty cents per copy.
The danger in the new technology,
authors and publishers have contended,
is that in doing away with the book it
may do away with them, and thus with
writing itself. Herbert S. Bailey, Jr.,
director of Princeton University Press,
wrote in the Saturday Review of a
scholar friend of his who has cancelled
all his subscriptions to scholarly
journals; instead, he now scans their
tables of contents at his public library
and makes copies of the articles that
interest him. Bailey commented, “If all
scholars followed [this] practice, there
would be no scholarly journals.”
Beginning in the middle sixties,
Congress has been considering a
revision of the copyright laws—the first
since 1909. At the hearings, a committee
representing the National Education
Association and a clutch of other
education groups argued firmly and
persuasively that if education is to keep
up with our national growth, the present
copyright law and the fair-use doctrine
should be liberalized for scholastic
purposes. The authors and publishers,
not
surprisingly,
opposed
such
liberalization,
insisting that any
extension of existing rights would tend to
deprive them of their livelihoods to
some degree now, and to a far greater
degree in the uncharted xerographic
future. A bill that was approved in 1967
by the House Judiciary Committee
seemed to represent a victory for them,
since it explicitly set forth the fair-use
doctrine and contained no educationalcopying exemption. But the final
outcome of the struggle was still
uncertain late in 1968. McLuhan, for
one, was convinced that all efforts to
preserve the old forms of author
protection represent backward thinking
and are doomed to failure (or, anyway,
he was convinced the day he wrote his
American Scholar article). “There is no
possible protection from technology
except by technology,” he wrote. “When
you create a new environment with one
phase of technology, you have to create
an anti-environment with the next.” But
authors are seldom good at technology,
and probably do not flourish in antienvironments.
In dealing with this Pandora’s box that
Xerox products have opened, the
company seems to have measured up
tolerably well to its lofty ideals as set
forth by Wilson. Although it has a
commercial interest in encouraging—or,
at least, not discouraging—more and
more copying of just about anything that
can be read, it makes more than a token
effort to inform the users of its machines
of their legal responsibilities; for
example, each new machine that is
shipped out is accompanied by a
cardboard poster giving a long list of
things that may not be copied, among
them paper money, government bonds,
postage
stamps,
passports,
and
“copyrighted material of any manner or
kind without permission of the copyright
owner.” (How many of these posters end
up in wastebaskets is another matter.)
Moreover, caught in the middle between
the contending factions in the fight over
revision of copyright law, it resisted the
temptation to stand piously aside while
raking in the profits, and showed an
exemplary sense of social responsibility
—at least from the point of view of the
authors and publishers. The copying
industry in general, by contrast, tended
either to remain neutral or to lean to the
educators’ side. At a 1963 symposium
on copyright revision, an industry
spokesman went as far as to argue that
machine copying by a scholar is merely
a convenient extension of hand copying,
which has traditionally been accepted as
legitimate. But not Xerox. Instead, in
September, 1965, Wilson wrote to the
House Judiciary Committee flatly
opposing any kind of special copying
exemption in any new law. Of course, in
evaluating this seemingly quixotic stand
one ought to remember that Xerox is a
publishing firm as well as a copyingmachine firm; indeed, what with
American Education Publications and
University Microfilms, it is one of the
largest publishing firms in the country.
Conventional publishers, I gathered from
my researches, sometimes find it a bit
bewildering to be confronted by this
futuristic giant not merely as an alien
threat to their familiar world but as an
energetic colleague and competitor
within it.
had a look at some Xerox
products and devoted some thought to
the social implications of their use, I
HAVING
went to Rochester to scrape up a firsthand acquaintance with the company and
to get an idea how its people were
reacting to their problems, material and
moral. At the time I went, the material
problems certainly seemed to be to the
fore, since the week of the forty-twoand-a-half-point stock drop was not long
past. On the plane en route, I had before
me a copy of Xerox’s most recent proxy
statement, which listed the number of
Xerox shares held by each director as of
February, 1966, and I amused myself by
calculating some of the directors’ paper
losses in that one bad October week,
assuming that they had held on to their
stock. Chairman Wilson, for example,
had held 154,026 common shares in
February, so his loss would have been
$6,546,105. Linowitz’s holding was
35,166 shares, for a loss of $1,494,555.
Dr. John H. Dessauer, executive vicepresident in charge of research, had held
73,845 shares and was therefore
presumably out $3,138,412.50. Such
sums could hardly be considered trivial
even by Xerox executives. Would I, then,
find their premises pervaded by gloom,
or at least by signs of shock?
The Xerox executive offices were on
the upper floors of Rochester’s Midtown
Tower, the ground level of which is
occupied by Midtown Plaza, an indoor
shopping mall. (Later that year, the
company moved its headquarters across
the street to Xerox Square, a complex
that includes a thirty-story office
building, an auditorium for civic as well
as company use, and a sunken ice rink.)
Before going up to the Xerox offices, I
took a turn or two around the mall, and
found it to be equipped with all kinds of
shops, a café, kiosks, pools, trees, and
benches
that—in
spite
of
an
oppressively bland
and
affluent
atmosphere, created mainly, I suspect, by
bland piped-in music—were occupied
in part by bums, just like the benches in
outdoor malls. The trees had a tendency
to languish for lack of light and air, but
the bums looked O.K. Having ascended
by elevator, I met a Xerox publicrelations man with whom I had an
appointment, and immediately asked him
how the company had reacted to the
stock drop. “Oh, nobody takes it too
seriously,” he replied. “You hear a lot of
lighthearted talk about it at the golf
clubs. One fellow will say to another,
‘You buy the drinks—I dropped another
eighty thousand dollars on Xerox
yesterday.’ Joe Wilson did find it a bit
traumatic that day they had to suspend
trading on the Stock Exchange, but
otherwise he took it in stride. In fact, at a
party the other day when the stock was
way down and a lot of people were
clustering around him asking him what it
all meant, I heard him say, ‘Well, you
know, it’s very rarely that opportunity
knocks twice.’ As for the office, you
scarcely hear the subject mentioned at
all.” As a matter of fact, I scarcely did
hear it mentioned again while I was at
Xerox, and this sang-froid turned out to
be justified, because within a little more
than a month the stock had made up its
entire loss, and within a few more
months it had moved up to an all-time
high.
I spent the rest of that morning calling
on three scientific and technical Xerox
men and listening to nostalgic tales of
the early years of xerographic
development. The first of these men was
Dr. Dessauer, the previous week’s threemillion-dollar
loser,
whom
I
nevertheless found looking tranquil—as
I guess I should have expected, in view
of the fact that his Xerox stock was still
presumably worth more than nine and a
half million dollars. (A few months later
it was presumably worth not quite
twenty million.) Dr. Dessauer, a
German-born veteran of the company
who had been in charge of its research
and engineering ever since 1938 and
was then also vice-chairman of its
board, was the man who first brought
Carlson’s invention to the attention of
Joseph Wilson, after he had read an
article about it in a technical journal in
1945. Stuck up on his office wall, I
noticed, was a greeting card from
members of his office staff in which he
was hailed as the “Wizard,” and I found
him to be a smiling, youthful-looking
man with just enough of an accent to
pass muster for wizardry.
“You want to hear about the old days,
eh?” Dr. Dessauer said. “Well, it was
exciting. It was wonderful. It was also
terrible. Sometimes I was going out of
my mind, more or less literally. Money
was the main problem. The company
was fortunate in being modestly in the
black, but not far enough. The members
of our team were all gambling on the
project. I even mortgaged my house—all
I had left was my life insurance. My
neck was way out. My feeling was that if
it didn’t work Wilson and I would be
business failures but as far as I was
concerned I’d also be a technical failure.
Nobody would ever give me a job again.
I’d have to give up science and sell
insurance or something.” Dr. Dessauer
threw a retrospectively distracted glance
at the ceiling and went on, “Hardly
anybody was very optimistic in the early
years. Various members of our own
group would come in and tell me that the
damn thing would never work. The
biggest risk was that electrostatics
would prove to be not feasible in high
humidity. Almost all the experts assumed
that—they’d say, ‘You’ll never make
copies in New Orleans.’ And even if it
did work, the marketing people thought
we were dealing with a potential market
of no more than a few thousand
machines. Some advisers told us that we
were absolutely crazy to go ahead with
the project. Well, as you know,
everything worked out all right—the 914
worked, even in New Orleans, and there
was a big market for it. Then came the
desk-top version, the 813. I stuck my
neck way out again on that, holding out
for a design that some experts
considered too fragile.”
I asked Dr. Dessauer whether his neck
was now out on anything in the way of
new research, and, if so, whether it is as
exciting as xerography was. He replied,
“Yes to both questions, but beyond that
the subject is privileged knowledge.”
Dr. Harold E. Clark, the next man I
saw, had been in direct charge of the
xerography-development program under
Dr. Dessauer’s supervision, and he gave
me more details on how the Carlson
invention had been coaxed and nursed
into a commercial product. “Chet
Carlson was morphological,” began Dr.
Clark, a short man with a professorial
manner who was, in fact, a professor of
physics before he came to Haloid in
1949. I probably looked blank, because
Dr. Clark gave a little laugh and went
on, “I don’t really know whether
‘morphological’ means anything. I think
it means putting one thing together with
another thing to get a new thing. Anyway,
that’s what Chet was. Xerography had
practically no foundation in previous
scientific work. Chet put together a
rather odd lot of phenomena, each of
which was obscure in itself and none of
which had previously been related in
anyone’s thinking. The result was the
biggest thing in imaging since the coming
of photography itself. Furthermore, he
did it entirely without the help of a
favorable scientific climate. As you
know, there are dozens of instances of
simultaneous discovery down through
scientific history, but no one came
anywhere near being simultaneous with
Chet. I’m as amazed by his discovery
now as I was when I first heard of it. As
an invention, it was magnificent. The
only trouble was that as a product it
wasn’t any good.”
Dr. Clark gave another little laugh and
went on to explain that the turning point
was reached at the Battelle Memorial
Institute, and in a manner fully consonant
with the tradition of scientific advances’
occurring more or less by mistake. The
main trouble was that Carlson’s
photoconductive surface, which was
coated with sulphur, lost its qualities
after it had made a few copies and
became useless. Acting on a hunch
unsupported by scientific theory, the
Battelle researchers tried adding to the
sulphur a small quantity of selenium, a
non-metallic element previously used
chiefly in electrical resistors and as a
coloring material to redden glass. The
selenium-and-sulphur surface worked a
little better than the all-sulphur one, so
the Battelle men tried adding a little
more selenium. More improvement.
They gradually kept increasing the
percentage until they had a surface
consisting entirely of selenium—no
sulphur. That one worked best of all, and
thus it was found, backhandedly, that
selenium and selenium alone could make
xerography practical.
“Think of it,” Dr. Clark said, looking
thoughtful himself. “A simple thing like
selenium—one of the earth’s elements,
of which there are hardly more than a
hundred altogether, and a common one at
that. It turned out to be the key. Once its
effectiveness was discovered, we were
around the corner, although we didn’t
know it at the time. We still hold patents
covering the use of selenium in
xerography—almost a patent on one of
the elements. Not bad, eh? Nor do we
understand exactly how selenium works,
even now. We’re mystified, for example,
by the fact that it has no memory effects
—no traces of previous copies are left
on the selenium-coated drum—and that it
seems to be theoretically capable of
lasting indefinitely. In the lab, a
selenium-coated drum will last through a
million processes, and we don’t
understand why it wears out even then.
So, you see, the development of
xerography was largely empirical. We
were trained scientists, not Yankee
tinkers, but we struck a balance between
Yankee tinkering and scientific inquiry.”
Next, I talked with Horace W. Becker,
the Xerox engineer who was principally
responsible for bringing the 914 from the
working-model stage to the production
line. A Brooklynite with a talent,
appropriate to his assignment, for
eloquent anguish, he told me of the hairraising obstacles and hazards that
surrounded this progress. When he
joined Haloid Xerox in 1958, his
laboratory was a loft above a Rochester
garden-seed–packaging establishment;
something was wrong with the roof, and
on hot days drops of molten tar would
ooze through it and spatter the engineers
and the machines. The 914 finally came
of age in another lab, on Orchard Street,
early in 1960. “It was a beat-up old loft
building, too, with a creaky elevator and
a view of a railroad siding where cars
full of pigs kept going by,” Becker told
me, “but we had the space we needed,
and it didn’t drip tar. It was at Orchard
Street that we finally caught fire. Don’t
ask me how it happened. We decided it
was time to set up an assembly line, and
we did. Everybody was keyed up. The
union people temporarily forgot their
grievances, and the bosses forgot their
performance ratings. You couldn’t tell an
engineer from an assembler in that place.
No one could stay away—you’d sneak in
on a Sunday, when the assembly line
was shut down, and there would be
somebody adjusting something or just
puttering around and admiring our work.
In other words, the 914 was on its way
at last.”
But once the machine was on its way
out of the shop and on to showrooms and
customers, Becker related, his troubles
had only begun, because he was now
held responsible for malfunctions and
design deficiencies, and when it came to
having a spectacular collapse just at the
moment when the public spotlight was
full on it, the 914 turned out to be a
veritable Edsel. Intricate relays declined
to work, springs broke, power supplies
failed, inexperienced users dropped
staples and paper clips into it and fouled
the works (necessitating the installation
in every machine of a staple-catcher),
and the expected difficulties in humid
climates
developed,
along with
unanticipated ones at high altitudes. “All
in all,” Becker said, “at that time the
machines had a bad habit, when you
pressed the button, of doing nothing.” Or
if the machines did do something, it was
something wrong. At the 914’s first big
showing in London, for instance, Wilson
himself was on hand to put a ceremonial
forefinger to its button; he did so, and
not only was no copy made but a giant
generator serving the line was blown
out. Thus was xerography introduced in
Great Britain, and, considering the
nature of its début, the fact that Britain
later become far and away the biggest
overseas user of the 914 appears to be a
tribute to both Xerox resilience and
British patience.
That afternoon, a Xerox guide drove
me out to Webster, a farm town near the
edge of Lake Ontario, a few miles from
Rochester, to see the incongruous
successor to Becker’s leaky and drafty
lofts—a huge complex of modern
industrial buildings, including one of
roughly a million square feet where all
Xerox copiers are assembled (except
those made by the company’s affiliates
in Britain and Japan), and another,
somewhat smaller but more svelte,
where research and development are
carried out. As we walked down one of
the humming production lines in the
manufacturing building, my guide
explained that the line operates sixteen
hours a day on two shifts, that it and the
other lines have been lagging behind
demand continuously for several years,
that there are now almost two thousand
employees working in the building, and
that their union is a local of the
Amalgamated Clothing Workers of
America, this anomaly being due chiefly
to the fact that Rochester used to be a
center of the clothing business and the
Clothing Workers has long been the
strongest union in the area.
After my guide had delivered me back
to Rochester, I set out on my own to
collect some opinions on the
community’s attitude toward Xerox and
its success. I found them to be
ambivalent. “Xerox has been a good
thing for Rochester,” said a local
businessman. “Eastman Kodak, of
course, was the city’s Great White
Father for years, and it is still far and
away the biggest local business,
although Xerox is now second and
coming up fast. Facing that kind of
challenge doesn’t do Kodak any harm—
in fact, it does it a lot of good. Besides,
a successful new local company means
new money and new jobs. On the other
hand, some people around here resent
Xerox. Most of the local industries go
back to the nineteenth century, and their
people aren’t always noted for
receptiveness to newcomers. When
Xerox was going through its meteoric
rise, some thought the bubble would
burst—no, they hoped it would burst. On
top of that, there’s been a certain amount
of feeling against the way Joe Wilson
and Sol Linowitz are always talking
about human values while making money
hand over fist. But, you know—the price
of success.”
I went out to the University of
Rochester, high on the banks of the
Genesee River, and had a talk with its
president, W. Allen Wallis. A tall man
with red hair, trained as a statistician,
Wallis served on the boards of several
Rochester companies, including Eastman
Kodak, which had always been the
university’s Santa Claus and remained
its biggest annual benefactor. As for
Xerox, the university had several sound
reasons for feeling kindly toward it. In
the first place, the university was a prize
example of a Xerox multimillionaire,
since its clear capital gain on the
investment amounted to around a
hundred million dollars and it had taken
out more than ten million in profits. In
the second place, Xerox annually comes
through with annual cash gifts second
only to Kodak’s, and had recently
pledged nearly six million dollars to the
university’s capital-funds drive. In the
third place, Wilson, a University of
Rochester graduate himself, had been on
the university’s board of trustees since
1949 and its chairman since 1959.
“Before I came here, in 1962, I’d never
even heard of corporations’ giving
universities such sums as Kodak and
Xerox give us now,” President Wallis
said. “And all they want in return is for
us to provide top-quality education—not
do their research for them, or anything
like that. Oh, there’s a good deal of
informal technical consulting between
our scientific people and the Xerox
people—same thing with Kodak, Bausch
& Lomb, and others—but that’s not why
they’re supporting the university. They
want to make Rochester a place that will
be attractive to the people they want
here. The university has never invented
anything for Xerox, and I guess it never
will.”
The next morning, in the Xerox
executive offices, I met the three
nontechnical Xerox men of the highest
magnitude, ending with Wilson himself.
The first of these was Linowitz, the
lawyer whom Wilson took on
“temporarily” in 1946 and kept on
permanently as his least dispensable
aide. (Since Xerox became famous, the
general public tended to think of
Linowitz as more than that—as, in fact,
the company’s chief executive. Xerox
officials were aware of this popular
misconception, and were mystified by it,
since Wilson, whether he was called
president, as he was until May of 1966,
or chairman of the board, as he was after
that, had been the boss right along.) I
caught Linowitz almost literally on the
run, since he had just been appointed
United States Ambassador to the
Organization of American States and
was about to leave Rochester and Xerox
for Washington and his new duties. A
vigorous man in his fifties, he fairly
exuded drive, intensity, and sincerity.
After apologizing for the fact that he had
only a few minutes to spend with me, he
said, rapidly, that in his opinion the
success of Xerox was proof that the old
ideals of free enterprise still held true,
and that the qualities that had made for
the company’s success were idealism,
tenacity, the courage to take risks, and
enthusiasm. With that, he waved
goodbye and was off. I was left feeling a
little like a whistle-stop voter who has
just been briefly addressed by a
candidate from the rear platform of a
campaign train, but, like many such
voters, I was impressed. Linowitz had
used those banal words not merely as if
he meant them but as if he had invented
them, and I had the feeling that Wilson
and Xerox were going to miss him.
I found C. Peter McColough, who had
been president of the company since
Wilson had moved up to chairman, and
who was apparently destined eventually
to succeed him as boss (as he did in
1968), pacing his office like a caged
animal, pausing from time to time at a
standup desk, where he would scribble
something or bark a few words into a
dictating machine. A liberal Democratic
lawyer, like Linowitz, but a Canadian by
birth, he is a cheerful extrovert who,
being in his early forties, was spoken of
as representing a new Xerox generation,
charged with determining the course that
the company would take next. “I face the
problems of growth,” he told me after he
had abandoned his pacing for a restless
perch on the edge of a chair. Future
growth on a large scale simply isn’t
possible in xerography, he went on—
there isn’t room enough left—and the
direction that Xerox is taking is toward
educational techniques. He mentioned
computers and teaching machines, and
when he said he could “dream of a
system whereby you’d write stuff in
Connecticut and within hours reprint it in
classrooms all over the country,” I got
the feeling that some of Xerox’s
educational dreams could easily become
nightmares. But then he added, “The
danger in ingenious hardware is that it
distracts attention from education. What
good is a wonderful machine if you
don’t know what to put on it?”
McColough said that since he came to
Haloid, in 1954, he felt he’d been part of
three entirely different companies—until
1959 a small one engaged in a dangerous
and exciting gamble; from 1959 to 1964
a growing one enjoying the fruits of
victory; and now a huge one branching
out in new directions. I asked him which
one he liked best, and he thought a long
time. “I don’t know,” he said finally. “I
used to feel greater freedom, and I used
to feel that everyone in the company
shared attitudes on specific matters like
labor relations. I don’t feel that way so
much now. The pressures are greater,
and the company is more impersonal. I
wouldn’t say that life has become easier,
or that it is likely to get easier in the
future.”
Of all the surprising things about
Joseph C. Wilson, not the least, I thought
when I was ushered into his presence,
was the fact that his office walls were
decorated with old-fashioned flowered
wallpaper. A sentimental streak in the
man at the head of Xerox seemed the
most unlikely of anomalies. But he had a
homey, unthreatening bearing to go with
the wallpaper; a smallish man in his late
fifties, he looked serious—almost grave
—during most of my visit, and spoke in
a slow, rather hesitant way. I asked him
how he had happened to go into his
family’s business, and he replied that as
a matter of fact he nearly hadn’t. English
literature had been his second major at
the university, and he had considered
either taking up teaching or going into
the financial and administrative end of
university work. But after graduating he
had gone on to the Harvard Business
School, where he had been a top student,
and somehow or other … In any case, he
had joined Haloid the year he left
Harvard, and there, he told me with a
sudden smile, he was.
The subjects that Wilson seemed to be
most keen on discussing were Xerox’s
non-profit activities and his theories of
corporate responsibility. “There are
certain feelings of resentment toward us
on this,” he said. “I don’t mean just from
stockholders complaining that we’re
giving their money away—that point of
view is losing ground. I mean in the
community. You don’t actually hear it,
but you sometimes get a kind of intuitive
feeling that people are saying, ‘Who do
these young upstarts think they are,
anyhow?’”
I asked whether the letter-writing
campaign against the U.N. television
series had caused any misgivings or
downright faintheartedness within the
company, and he said, “As an
organization, we never wavered. Almost
without exception, the people here felt
that the attacks only served to call
attention to the very point we were
trying to make—that world coöperation
is our business, because without it there
might be no world and therefore no
business. We believe we followed sound
business policy in going ahead with the
series. At the same time, I won’t
maintain that it was only sound business
policy. I doubt whether we would have
done it if, let’s say, we had all been
Birchers ourselves.”
Wilson went on slowly, “The whole
matter of committing the company to
taking stands on major public issues
raises questions that make us examine
ourselves all the time. It’s a matter of
balance. You can’t just be bland, or you
throw away your influence. But you
can’t take a stand on every major issue,
either. We don’t think it’s a corporation’s
job to take stands on national elections,
for example—fortunately, perhaps, since
Sol Linowitz is a Democrat and I’m a
Republican. Issues like university
education, civil rights, and Negro
employment clearly are our business. I’d
hope that we would have the courage to
stand up for a point of view that was
unpopular if we thought it was
appropriate to do so. So far, we haven’t
faced that situation—we haven’t found a
conflict between what we consider our
civic responsibility and good business.
But the time may come. We may have to
stand on the firing line yet. For example,
we’ve tried, without much fanfare, to
equip some Negro youths to take jobs
beyond sweeping the floor and so on.
The program required complete
coöperation from our union, and we got
it. But I’ve learned that, in subtle ways,
the honeymoon is over. There’s an
undercurrent of opposition. Here’s
something started, then, that if it grows
could confront us with a real business
problem. If it becomes a few hundred
objectors instead of a few dozen, things
might even come to a strike, and in such
a case I hope we and the union
leadership would stand up and fight. But
I don’t really know. You can’t honestly
predict what you’d do in a case like that.
I think I know what we’d do.”
Getting up and walking to a window,
Wilson said that, as he saw it, one of the
company’s major efforts now, and even
more in the future, must be to keep the
personal and human quality for which it
has come to be known. “Already we see
signs of losing it,” he said. “We’re trying
to indoctrinate new people, but twenty
thousand employees around the Western
Hemisphere isn’t like a thousand in
Rochester.”
I joined Wilson at the window,
preparatory to leaving. It was a dank,
dark morning, such as I’m told the city is
famous for much of the year, and I asked
him whether, on a gloomy day like this,
he was ever assailed by doubts that the
old quality could be preserved. He
nodded briefly and said, “It’s an
everlasting battle, which we may or may
not win.”
6
Making the Customers
Whole
of Tuesday, November
19th, 1963, a well-dressed but haggardlooking man in his middle thirties
presented himself at the executive
ON THE MORNING
offices of the New York Stock Exchange,
at 11 Wall Street, with the announcement
that he was Morton Kamerman,
managing partner of the brokerage firm
of Ira Haupt & Co., a member of the
Stock Exchange, and that he wanted to
see Frank J. Coyle, head of the
Exchange’s member-firms department.
After checking, a receptionist explained
politely that Mr. Coyle was tied up in a
meeting, whereupon the visitor said that
his mission was an urgent one and asked
to see Robert M. Bishop, the
department’s
second-in-command.
Bishop, the receptionist found, was
unavailable, too; he was tied up with an
important phone call. At length,
Kamerman, who seemed to be growing
more and more distracted, was ushered
into the presence of a less exalted
Exchange official named George H.
Newman. He then duly delivered his
message—that, to the best of his belief,
the capital reserve of the Haupt firm had
fallen
below
the
Exchange’s
requirements for member firms, and that
he was formally reporting the fact, in
accordance with regulations. While this
startling announcement was being made,
Bishop, in a nearby office, was
continuing his important telephone
conversation, the second party to which
was a knowledgeable Wall Streeter
whom Bishop has since declined to
identify. The caller was telling Bishop
he had reason to believe that two Stock
Exchange member firms—J. R. Williston
& Beane, Inc., and Ira Haupt & Co.—
were in financial trouble serious enough
to warrant the Exchange’s attention.
After hanging up, Bishop made an
interoffice call to Newman to tell him
what he had just heard. To Bishop’s
surprise, Newman already had the news,
or part of it. “As a matter of fact,
Kamerman is right here with me now,”
he said.
In this humdrum setting of office
confusion there began one of the most
trying—and in some ways one of the
most serious—crises in the Stock
Exchange’s long history. Before it was
over, this crisis had been exacerbated by
the greater crisis resulting from the
assassination of President Kennedy, and
out of it the Stock Exchange—which has
not always been noted for acting in the
public interest, and, indeed, had been
accused only a few months before by the
Securities and Exchange Commission of
an anti-social tendency to conduct itself
like
a
private
club—emerged
temporarily poorer by almost ten million
dollars but incalculably richer in the
esteem of at least some of its
countrymen. The event that had brought
Haupt and Williston & Beane into
straitened circumstances is history—or,
rather, future history. It was the sudden
souring of a huge speculation that these
two firms (along with various brokers
not members of the Stock Exchange) had
become involved in on behalf of a single
customer—the Allied Crude Vegetable
Oil & Refining Co., of Bayonne, New
Jersey. The speculation was in contracts
to buy vast quantities of cottonseed oil
and soybean oil for future delivery. Such
contracts are known as commodity
futures, and the element of speculation in
them lies in the possibility that by
delivery date the commodity will be
worth more (or less) than the contract
price. Vegetable-oil futures are traded
daily at the New York Produce
Exchange, at 2 Broadway, and at the
Board of Trade, in Chicago, and they are
bought and sold on behalf of customers
by about eighty of the four hundred-odd
firms that belong to the Stock Exchange
and conduct a public business. On the
day that Kamerman came to the
Exchange, the Haupt firm was holding
for Allied—on credit—so many
cottonseed-oil and soybean-oil contracts
that the change of a single penny per
pound in the prices of the commodities
meant a twelve-million-dollar change in
the value of the Allied account with
Haupt. On the two previous business
days—Friday the fifteenth and Monday
the eighteenth—the prices had dropped
an average of a little less than a cent and
a half per pound, and as a result Haupt
had demanded that Allied put up about
fifteen million dollars in cash to keep the
account seaworthy. Allied had declined
to do this, so Haupt—like any broker
when a customer operating on credit has
defaulted—was faced with the necessity
of selling out the Allied contracts to get
back what it could of its advances. The
suicidal extent of the risk that Haupt had
undertaken is further indicated by the
fact that while the firm’s capital in early
November had amounted to only about
eight million dollars, it had borrowed
enough money to supply a single
customer—Allied—with some thirtyseven million dollars to finance the oil
speculations. Worse still, as things
turned out it had accepted as collateral
for some of these advances enormous
amounts of actual cottonseed oil and
soybean oil from Allied’s inventory, the
presence of which in tanks at Bayonne
was attested to by warehouse receipts
stating the precise amount and kind of oil
on hand. Haupt had borrowed the money
it supplied Allied with from various
banks, passing along most of the
warehouse receipts to the banks as
collateral. All this would have been
well and good if it had not developed
later that many of the warehouse receipts
were forged, that much of the oil they
attested to was not, and probably never
had been, in Bayonne, and that Allied’s
president, Anthony De Angelis (who
was later sent to jail on a whole parcel
of charges), had apparently pulled off
the biggest commercial fraud since that
of Ivar Kreuger, the match king.
Where was the missing oil? How
could Allied’s direct and indirect
creditors, including some of the most
powerful and worldly-wise banks of the
United States and Great Britain, have
been so thoroughly gulled? Would
aggregate losses on the whole debacle
finally total a hundred and fifty million
dollars, as some authorities had
estimated, or would the bill be even
bigger? How could a leading Stock
Exchange firm like Haupt have been so
foolish as to take on such an
inconceivably risky commitment for a
single customer? These questions had
not even been raised, let alone
answered, on November 19th; some of
them have not been answered yet, and
some of them may not be answered for
years. What began to emerge on
November 19th, and what became clear
in the harrowing days that followed, was
that in the case of Haupt, which had
about twenty thousand individual stockmarket customers on its books, and in the
case of Williston & Beane, which had
about nine thousand, the impending
disaster directly involved the personal
savings of many totally innocent persons
who had never heard of Allied and had
only the vaguest notion of what
commodity trading is.
report to the Stock
Exchange did not mean that Haupt had
gone broke, and at the time he made it
KAMERMAN’S
Kamerman himself surely did not think
that his firm had gone broke; there is a
great difference between insolvency and
a mere failure to meet the Exchange’s
rather stringent capital requirements,
which are intended to provide a margin
of safety. Indeed, various Stock
Exchange officials have said that on that
Tuesday morning they did not consider
the Haupt situation to be especially
serious, while the Williston & Beane
situation, it was clear from the first, was
even less so. One of the first reactions in
the member-firms department was
chagrin that Kamerman had come to the
Exchange with his problem before the
Exchange, through its elaborate system
of audits and examinations, had
discovered the problem for itself. This,
the Exchange insists stubbornly, if a bit
lamely, was a matter of bad luck rather
than bad management. As a matter of
routine, the Exchange required each of
its member firms to fill out detailed
questionnaires on its financial condition
several times a year, and as an
additional check an expert accountant
from the Exchange staff descended
unexpectedly on each member firm at
least once a year to subject its books to a
surprise inspection. Ira Haupt & Co. had
filled out its most recent questionnaire
early in October, and since the huge
buildup in Allied’s commodities
position with Haupt took place after that,
the questionnaire showed nothing amiss.
As for the surprise inspection, the
Exchange’s man was in the Haupt offices
conducting it at the very time the trouble
broke. The auditor had been there for a
week, his nose buried in Haupt’s account
books, but the task of conducting such an
inspection is a tedious one, and by
November 19th the auditor hadn’t got
around to examining the Haupt
commodities department. “They had set
our man up with a desk in a department
where nothing unusual was going on,” an
Exchange official has since said. “It’s
easy to say now that he should have
smelled trouble, but he didn’t.”
At midmorning on Tuesday the
nineteenth, Coyle and Bishop sat down
with Kamerman to see what needed to
be done about Haupt’s problem, and
what could be done. Bishop remembers
that the atmosphere of the meeting was
by no means grim; according to
Kamerman’s figures, the amount of
capital that Haupt needed to bring it up
to snuff was about a hundred and eighty
thousand dollars—an almost paltry sum
for a firm of Haupt’s size. Haupt could
make up the deficiency either by
obtaining new money from outside or by
converting securities it owned into cash.
Bishop urged the latter course as the
quicker and surer, whereupon Kamerman
telephoned his firm and instructed his
partners to begin selling some of their
securities at once. The difficulty
apparently was going to be solved as
simply as that.
But during the rest of the day, after
Kamerman had left 11 Wall, the crisis
showed a tendency to go through the
process that in political circles had
come to be called escalation. In the late
afternoon, an ominous piece of news
arrived. Allied had just filed a
voluntary-bankruptcy
petition
in
Newark. Theoretically, the bankruptcy
did not affect the financial position of its
former brokers, since they held security
for the money they had supplied Allied
with; nevertheless, the news was
alarming in that it provided a hint of
worse news to follow. Such news,
indeed, was not long in coming; the same
evening, word reached the Stock
Exchange that the managers of the New
York Produce Exchange, in an effort to
forestall chaos in their market, had voted
to suspend all trading in cottonseed-oil
futures until further notice, and to require
immediate settlement of all outstanding
contracts at a price dictated by them.
Since the dictated price would have to
be a low one, this meant that any
remaining chance that Haupt or Williston
& Beane had of getting out from under
the Allied speculations on favorable
terms was gone.
In the member-firms department that
evening, Bishop was frantically trying to
get in touch with G. Keith Funston, the
president of the Stock Exchange, who
was first at a midtown dinner and then
on a train bound for Washington, where
he was scheduled to testify the next day
before a congressional committee. What
with one thing and another, Bishop was
busy in his office all evening; toward
midnight, he found himself the last man
in the member-firms department, and,
having decided it was too late to go
home to Fanwood, New Jersey, for the
night, he collapsed on a leather couch in
Coyle’s office. He had a restless night
there; the cleaning women were
considerately quiet, he said afterward,
but the phones kept ringing all night long.
Promptly at nine-thirty on Wednesday
morning, the Stock Exchange’s board of
governors met in the sixth-floor
Governors’ Room—which, with its regal
red carpet, fierce old portraits, and
fluted gilt columns, carries rather
uncomfortable connotations of Wall
Street’s checkered past—and, in
accordance with Exchange regulations,
voted to suspend Haupt and Williston &
Beane because of their capital
difficulties. The suspension was made
public a few minutes after trading
opened, at ten o’clock, by Henry M.
Watts, Jr., chairman of the board of
governors, who ascended a rostrum that
overlooks the trading floor, rang the bell
that normally signals the beginning or
ending of a day’s trading, and read an
announcement of it. From the point of
view of the public, the immediate effect
of the action was that the accounts of the
almost thirty thousand customers of the
two suspended firms were now frozen—
that is, the owners of the accounts could
neither sell their stocks nor get their
money out. Touched by the plight of
these unfortunates, the Stock Exchange
brass now set about trying to help the
beleaguered firms raise enough capital
to lift the suspensions and free the
accounts. In the case of Williston &
Beane, its efforts were triumphantly
successful. It developed that this firm
needed about half a million dollars to
get back into business, and so many
fellow-brokers came forward to help out
with loans that the firm actually had to
fight off unwanted offers. The half
million was finally accepted partly from
Walston & Co. and partly from Merrill
Lynch, Pierce, Fenner & Smith. (Cozily,
the Beane of Williston & Beane was the
very man who had been the caboose
when the firm’s name was Merrill
Lynch, Pierce, Fenner & Beane.)
Restored to financial health by this
timely injection of capital, Williston &
Beane was relieved of its suspension—
and its nine thousand customers were
relieved of their anxiety—just after noon
on Friday, or slightly more than two days
after the suspension had been imposed.
But in the case of Haupt things went
differently. It was clear by Wednesday
that the capital-shortage figure of a
hundred and eighty thousand dollars had
been the rosiest of dreams. Even so, it
appeared that the firm might still be
solvent despite its losses on the forced
sale of the oil contracts—on one
condition. The condition was that the oil
in Bayonne tanks that Allied had pledged
to Haupt as collateral—and that now,
through Allied’s default, belonged to
Haupt—could be sold to other oil
processors at a fair price. Richard M.
Crooks, an Exchange governor who,
unlike nearly all his colleagues, was an
expert on commodities trading, figured
that if the Bayonne oil were thus
unloaded, Haupt might still end up
slightly in the black. He therefore
telephoned a couple of the country’s
leading vegetable-oil processors and
urged them to bid on the oil. The replies
he received were unanimous and
startling. The leading processors
declined to make any bid at all, and they
left Crooks with the feeling that they
were suspicious of the Bayonne
warehouse receipts held by Haupt—that
they suspected some or all of them to be
forgeries. If these suspicions were well
founded, it would follow that some or
all of the oil attested to by the receipts
was not in Bayonne. “The situation was
very simple,” Crooks has said.
“Warehouse receipts are accepted in the
commodities business as practically as
good as currency, and now the
possibility had been raised that millions
of dollars of Haupt’s assets consisted of
counterfeit money.”
Still, all that Crooks knew definitely
on Wednesday morning was that the
processors would not bid on Allied oil,
and throughout the rest of Wednesday
and all day Thursday the Exchange
furiously went on trying to help Haupt
get back on its feet along with Williston
& Beane. Needless to say, the fifteen
partners of Haupt were busy at the same
endeavor, and in aid of it Kamerman told
the Times buoyantly on Wednesday
evening, “Ira Haupt & Co. is solvent and
is in an excellent financial position.”
Also on Wednesday evening, Crooks had
dinner in New York with a veteran
commodities broker from Chicago.
“Although I’m an optimist by
temperament, my experience tells me
that these things always turn out to be
much worse than they look at first,”
Crooks said recently. “I mentioned this
to my broker friend, and he agreed. The
next morning at about eleven-thirty, he
called me and said, ‘Dick, this thing is a
hundred per cent worse than even you
think.’” A bit later, at midday on
Thursday, the Exchange’s member-firms
department learned that many of Allied’s
warehouse receipts were indeed fake.
As nearly as can be determined, the
Haupt partners were making the same
unhappy discovery at about the same
time. At any rate, a number of them did
not go home Thursday evening but spent
the night at their offices at 111
Broadway, trying to figure out what their
position was. Bishop got home to
Fanwood that night, but he found that he
could sleep hardly any better there than
on Coyle’s couch. Accordingly, he rose
before dawn, took the Jersey Central’s
five-eight to the city, and on a hunch
went to the Haupt offices. There, in the
partners’ area—recently redecorated
with modern contour chairs, marbletopped filing cabinets, and refrigerators
disguised as desks—he found several of
the partners, unshaven and unkempt,
drowsing in their chairs. “They were
pretty shot by then,” Bishop said later.
And no wonder. After being awakened,
they told him that they had been up all
night calculating, and that at about three
o’clock they had come to the conclusion
that their position was hopeless; in view
of the worthlessness of the warehouse
receipts, the Haupt firm was insolvent.
Bishop took this disastrous intelligence
with him to the Stock Exchange, where
he waited for the sun to come up and for
everyone else to come to work.
one-forty on Friday afternoon, when
the stock market was already badly
rattled by the rumors of Haupt’s
AT
impending failure, the first reports of the
President’s assassination reached the
Exchange floor, in garbled form. Crooks,
who was there, says that the first thing he
heard was that the President had been
shot, the second was that the President’s
brother, the Attorney General, had also
been shot, and the third was that the
Vice-President had had a heart attack.
“The rumors came like machine-gun
bullets,” Crooks says. And they struck
with comparable impact. In the next
twenty-seven minutes, during which no
hard news arrived to relieve the
atmosphere of apocalypse, the prices of
stocks declined at a rate unparalleled in
the Exchange’s history. In less than half
an hour, the values of listed stocks
decreased by thirteen billion dollars,
and they would no doubt have dropped
further if the board of governors had not
closed the market for the day at seven
minutes past two. The panic’s immediate
effect on the Haupt situation was to make
the status of the twenty thousand frozen
accounts far worse, because now, in the
event of Haupt’s bankruptcy and the
consequent liquidation of many of the
accounts, the cashing in would have to
be done at panic prices, with heavy
losses to the accounts’ owners. A larger
and less calculable effect of the events
in Dallas was paralyzing despair.
However, Wall Street—or, rather, some
Wall Streeters—had a psychological
advantage over the rest of the country in
that there was work at hand to be done.
This
convergence
of
disasters
confronted them with a definable task.
Having testified in Washington on
Wednesday afternoon, Funston had
returned to New York that evening and
had spent most of Thursday as well as
Friday morning working on getting
Williston & Beane back in business.
Sometime during that period, as it was
gradually made clear that Haupt was not
merely short of capital but actually
insolvent, Funston became convinced the
Exchange and its member firms must
consider doing something virtually
unprecedented—that is, reimburse the
innocent victims of Haupt’s imprudence
with their own money. (The nearest thing
to a precedent for such action was the
case of DuPont, Homsey & Co., a small
Stock Exchange firm that went bankrupt
in 1960 as a result of fraud by one of its
partners; the Exchange then repaid the
firm’s customers the money they had
been divested of—about eight hundred
thousand dollars.) Now, having hurried
back to his office from a lunch date
shortly before the emergency closing of
the market, Funston set about putting his
plan into action, calling about thirty
leading brokers whose offices happened
to be nearby and asking them to trot over
to the Exchange immediately as an
unofficial delegation representing its
membership. Shortly after three o’clock,
the brokers were assembled in the South
Committee Room—a somewhat smaller
version of the Governors’ Room—and
Funston set before them the facts of the
Haupt case as he then knew them, along
with an outline of his plan for a solution.
The facts were these: Haupt owed about
thirty-six million dollars to a group of
United States and British banks; since
over twenty million of its assets were
represented by warehouse receipts that
now appeared to be worthless, there
was no hope that Haupt could pay its
debts. In the normal course of events,
therefore, Haupt would be sued by the
creditor banks when the courts reopened
next week, the cash and many of the
securities held by Haupt for its
customers would be tied up by the
creditors, and, according to Funston’s
liberal estimate, some of the customers
might end up getting back—after an
extended period caused by legal delays
—no more than sixty-five cents on the
dollar. And there was another side to the
case. If Haupt were to go into
bankruptcy, the psychological effect of
this, combined with the palpable effect
of Haupt’s considerable assets’ being
thrown on the market, might well lead to
further depression of a stock market
already in wild retreat at a time of grave
national crisis. Not only the welfare of
the Haupt customers was at stake, then,
but perhaps the national welfare, too.
Funston’s plan, simple enough in outline,
was that the Stock Exchange or its
members put up enough money to enable
all the Haupt customers to get back their
cash and securities—to be once again
“whole,” in the banking expression. (The
banking expression is etymologically
sound; “whole” derives from the AngloSaxon “hal,” which meant uninjured or
recovered from injury, and from which
“hale” is also derived.) Funston further
proposed that Haupt’s creditors, the
banks, be persuaded to defer any efforts
to collect their money until the customers
had been taken care of. Funston
estimated that the amount needed to do
the job might run to seven million
dollars, or even more.
Almost to a man, the assembled
brokers agreed to support this publicspirited, if not downright eleemosynary,
plan. But before the meeting was over a
difficulty arose. Now that the Stock
Exchange and the member firms had
decided on a deed of self-sacrifice, the
problem confronting each side—to a
certain extent, anyway—was how to
arrange to have the other side do the
sacrificing. Funston urged the member
firms to take over the entire matter. The
firms declined this suggestion with
thanks and countered by urging the Stock
Exchange to handle it. “If we do,”
Funston said, “you’ll have to repay us
the amount we pay out.” Out of this not
very dignified dialogue emerged an
agreement that initially the funds would
come out of the Exchange’s treasury,
with repayment to be apportioned among
the member firms later. A three-man
committee, headed by Funston, was
empowered to conduct negotiations to
bring the deal off.
The chief parties that needed
negotiating with were Haupt’s creditor
banks. Their unanimous consent to the
plan was essential, because if even one
of them insisted on immediate
liquidation of its loans “the pot would
fall in,” as the Exchange’s chairman,
Henry
Watts—a
fatherly-looking
graduate of Harvard and of Omaha
Beach,
1944—pungently
put
it.
Prominent among the creditors were four
local banks of towering prestige—Chase
Manhattan, Morgan Guaranty Trust, First
National City, and Manufacturers
Hanover Trust—which among them had
lent Haupt about eighteen and a half
million dollars. (Three of the banks have
remained notably reticent about the exact
amount of their ill-fated loans to Haupt,
but blaming them for their silence would
be like blaming a poker player who is
less than garrulous about a losing night.
The Chase, however, has said that Haupt
owed it $5,700,000.) Earlier in the
week, George Champion, chairman of
the Chase, had telephoned Funston; not
only did the Stock Exchange have a
friend at Chase, Champion assured him,
but the bank stood ready to give any help
it could in the Haupt matter. Funston now
called Champion and said he was ready
to take him up on his offer. He and
Bishop then began to try to assemble
representatives of the Chase and the
three other banks for an immediate
conference. Bishop remembers that he
felt highly bearish about the chances of
rounding up a group of bankers at five
o’clock on a Friday—even such an
exceptional Friday as this one—but to
his surprise he found practically all of
them at their battle stations and willing
to come straight to the Exchange.
Funston and his fellow-negotiators for
the Exchange—Chairman Watts and
Vice-Chairman Walter N. Frank—
conferred with the bankers from shortly
after five until well into the dinner hour.
The meeting was constructive, if tense.
“First, we all agreed that it was a devil
of a situation all around,” Funston
subsequently recalled. “Then we got
down to business. The bankers, of
course, were hoping that the Exchange
would pick up the whole thing, but we
quickly disabused them of that notion.
Instead, I made them an offer. We would
put up a certain sum in cash solely for
the benefit of the Haupt customers; in
exchange for every dollar that we put up,
the banks would defer collection—that
is, would temporarily refrain from
foreclosing—on two dollars. If, as we
then estimated, twenty-two and a half
million was needed to make Haupt
solvent, we would put up seven and a
half, and the banks would defer
collection of fifteen. They weren’t so
sure about our figures—they thought we
were too low—and they insisted that the
Exchange’s claim to get back any of its
contribution out of Haupt assets would
have to come after the banks’ claims for
their loans. We agreed to that. We all
fought and negotiated, and when we
finally went home there was general
agreement on the broad outline of the
thing. Of course, everyone recognized
that this meeting was only preliminary—
to begin with, by no means all the
creditor banks were represented at it—
and that both the detail work and much
of the hard bargaining would have to be
done over the weekend.”
Just how much detail work and hard
bargaining lay ahead became manifest on
Saturday. The Exchange’s board met at
eleven, and more than two-thirds of its
thirty-three members were present;
because of the Haupt crisis, some
governors had cancelled weekend plans,
and others had flown in from their
regular stands in such outposts as
Georgia and Florida. The board’s first
action—a decision to keep the Exchange
closed on Monday, the day of the
President’s funeral—was accomplished
with deep relief, because the holiday
would give the negotiators an additional
twenty-four hours in which to hammer
out a deal before the deadline
represented by the reopening of the
courts and the markets. Funston brought
the governors up to date on what was
known about Haupt’s financial position
and on the status of the negotiations that
had been begun with the banks; he also
gave them a new estimate of the sum that
might be required to make the Haupt
customers whole—nine million dollars.
After a fractional moment of silence,
several governors rose to say, in
essence, that they felt that more than
money was at stake; it was a question of
the relation of the Stock Exchange to the
country’s many million investors. The
meeting was then temporarily adjourned,
and, with the authority of the governors’
lofty sentiments to back it up, the
Exchange’s three-man committee got
down to negotiations with the bankers.
Thus, the pattern for Saturday and
Sunday was set. While the rest of the
nation sat stupefied in front of its
television sets, and while the downtown
Manhattan streets were as deserted as
they must have been during the yellowfever epidemics of the early nineteenth
century, the sixth floor of 11 Wall Street
was a nexus of utterly absorbed activity.
The Exchange’s committee would
remain closeted with the bankers until a
point was reached at which Funston and
his
colleagues
needed
further
authorization; then the board of
governors would go into session again
and either grant the new authority or
decline to do so. Between sessions, the
governors congregated in the hallways
or smoked and brooded in empty offices.
An ordinarily obscure corner of the
Exchange bureaucracy called the
Conduct and Complaints Department
was having a busy weekend, too; a staff
of half a dozen there was continuously
on the phone dealing with anxious
inquiries from Haupt customers, who
were feeling anything but hale. And, of
course, there were lawyers everywhere
—“I never saw so many lawyers in my
life,” one veteran Stock Exchange man
has said. Coyle estimates that there were
more than a hundred people at 11 Wall
Street during most of the weekend, and
since practically all local restaurants as
well as the Exchange’s own eating
facilities were closed, the food problem
was acute. On Saturday, the entire output
of a downtown lunch counter that had
shrewdly stayed open was bought up and
consumed, after which a taxi was
dispatched to Greenwich Village for
more supplies; on Sunday, one of the
Exchange
secretaries
thoughtfully
brought in an electric coffee-maker and a
huge bag of groceries and set up shop in
the Chairman’s Dining Room.
The bankers’ negotiating committee
now included men from two Haupt
creditors that had not been represented
on Friday—the National State Bank of
Newark and the Continental Illinois
National Bank & Trust Co., of Chicago.
(Still unrepresented were the four
British creditors—Henry Ansbacher &
Co.; William Brandt’s Sons & Co., Ltd.;
S. Japhet & Co., Ltd.; and Kleinwort,
Benson, Ltd. Moreover, with the
weekend half gone, they seemed to be
temporarily unrepresentable. It was
decided to continue negotiating without
the British banks and then, on Monday
morning, present any agreement to them
for approval.) A crucial point at issue, it
now developed, was the amount of cash
that would be needed from the Stock
Exchange to fulfill its part of the bargain.
The bankers accepted Funston’s formula
under which they would defer collection
of two dollars for every dollar that the
Exchange contributed to the cause, and
they did not doubt that Haupt was stuck
with about twenty-two and a half million
dollars’ worth of useless warehouse
receipts; however, they were unwilling
to take that figure as the maximum
amount that might be necessary to
liquidate Haupt. To be on the safe side,
they argued, the amount ought to be
based on Haupt’s over-all indebtedness
to them—thirty-six million—and this
meant that the Exchange’s cash
contribution would have to be not seven
and a half million but twelve. Another
point at issue was the question of to
whom the Exchange would pay whatever
sum was agreed upon. Some of the
bankers thought the money ought to go
straight into the coffers of Ira Haupt &
Co., to be dispensed by the firm itself to
its customers; the trouble with this
suggestion,
as
the
Exchange’s
representatives were not slow to point
out, was that it would put the Exchange’s
contribution entirely beyond its control.
As a final complication, one bank—the
Continental Illinois—was distinctly
reluctant to enter into the deal at all.
“The Continental’s people were thinking
in terms of their bank’s exposure,” an
Exchange
man
has
explained
sympathetically. “They thought our
arrangement might ultimately be more
damaging to them than a formal Haupt
bankruptcy and receivership. They
needed time to consider, to make sure
they were taking the proper action, but I
must say they were coöperative.”
Indeed, since it was primarily the Stock
Exchange’s good name that was at the
center of the planned deal, it would
appear that all the banks were marvels
of coöperation. After all, a banker is
legally and morally charged with doing
the best he can for his depositors and
stockholders, and is therefore hardly in a
position to indulge in grand gestures for
the public good; if his eyes are flinty,
they may mask a kind, but stifled, heart.
As for the Continental, it had reason to
be particularly slow to act, because its
“exposure” amounted to well over ten
million dollars, or much more than that
of any other bank. No one concerned has
been willing to say exactly what the
points were on which the Continental
held out, but it seems safe to assume that
no bank or person who had lent Haupt
less than ten million dollars can know
exactly how the Continental felt.
By the time the negotiations were
recessed, at about six o’clock Saturday
evening, a compromise had been
reached on the main issues—on the
amount-of-cash controversy by an
agreement that the Exchange would put
up an initial seven and a half million
with a pledge to go up to twelve million
if it became necessary, and on the
controversy about how the money would
be paid to the Haupt customers by
agreement that the Exchange’s chief
examiner would be appointed liquidator
of Haupt. But the Continental was still
recalcitrant, and, of course, the British
banks had not yet even been approached.
In any event, everybody shut up shop for
the night, with pledges to return early the
next afternoon, even though it was
Sunday. Funston, who was coming down
with a bad cold, went home to
Greenwich. The bankers went home to
places like Glen Cove and Basking
Ridge. Watts, a diehard commuter from
Philadelphia, went home to that tranquil
city. Even Bishop went home to
Fanwood.
At two o’clock Sunday afternoon, the
Exchange governors, their ranks now
augmented by arrivals from Los
Angeles, Minneapolis, Pittsburgh, and
Richmond, met in joint session with the
thirty representatives of member firms,
who were anxious to learn what they
were being committed to. After the
current status of the emerging agreement
had been explained to them, they voted
unanimously in favor of going ahead
with it. As the afternoon progressed,
even Continental Illinois softened its
opposition, and at about six o’clock,
after a series of frantic long-distance
telephone calls and attempts to track
down Continental officers on trains and
in airports, the Chicago bank agreed to
go along, explaining that it was doing so
in the public interest rather than in
pursuance of its officers’ best business
judgment. At about the same time, the
Times’ financial editor, Thomas E.
Mullaney—who, like the rest of the
press, had been rigidly excluded from
the sixth floor
throughout the
negotiations—called Funston to say he
had heard rumors of a plan on Haupt in
the offing. Because the British banks
would have reason to be miffed, at the
very least, if they should read in the next
morning’s air editions of a scheme to
dispose of their credits without their
agreement, or even their knowledge,
Funston had to give a reply that could
only depress still further the spirits of
the waiting twenty thousand customers.
“There is no plan,” he said.
question of who would undertake
the delicate task of cajoling the British
banks had come up early Sunday
afternoon. Funston, despite his cold, was
anxious to make the trip (for one thing,
he has since admitted, the drama of it
appealed to him), and had gone as far as
getting his secretary to reserve space on
a plane, but as the afternoon progressed
and the local problems continued to
appear intractable, it was decided that
he couldn’t be spared. Several other
THE
governors quickly volunteered to go, and
one of them, Gustave L. Levy, was
eventually selected, on the ground that
his firm, Goldman, Sachs & Co., had had
a long and close association with
Kleinwort, Benson, one of the British
banks, and that Levy himself was on
excellent terms with some of the
Kleinwort, Benson partners. (Levy
would later succeed Watts as chairman.)
Accordingly, Levy, accompanied by an
executive and a lawyer of the Chase—
who were presumably included in the
hope that they would set the British
banks an inspiring example of
coöperation—left 11 Wall Street shortly
after five o’clock and caught a Londonbound jet at seven. The trio sat up on the
plane most of the night, carefully
planning the approach they would make
to the bankers in the morning. They were
well advised to do so, because the
British banks certainly had no cause to
feel coöperative; their Stock Exchange
wasn’t in trouble. And there was more to
it than that. According to unimpeachable
sources, the four British banks had lent
Haupt a total of five and a half million
dollars, and these loans, like many shortterm loans made by foreign banks to
American brokers, had not been secured
by any collateral. Sources only
fractionally more impeachable maintain
that some of the loans had been extended
very recently—that is, a week or less
before the debacle. The money lent is
known to have consisted of Eurodollars,
a phantom but nonetheless serviceable
currency consisting of dollar deposits in
European banks; some four billion
Eurodollars were actively traded among
European financial institutions at that
time, and the banks that lent the five and
a half million to Haupt had first
borrowed them from somebody else.
According to a local expert in
international banking, Eurodollars are
customarily traded in huge blocks at a
relatively tiny profit; for instance, a bank
might borrow a block at four and a
quarter per cent and lend it at four and a
half per cent, at a net advantage of one
fourth of one per cent per annum.
Obviously, such transactions are looked
upon as practically without risk. Onefourth of one per cent of five and a half
million dollars over a period of one
week amounts to $264.42, which gives
some indication of the size of the profit
on the Haupt deal that the four British
banks would have been able to divide
among themselves, less expenses, if
everything had gone as planned. Instead,
they now stood to lose the whole bundle.
Levy and the Chase men arrived redeyed in London shortly after daybreak on
a depressingly drizzly morning. They
went to the Savoy to change their clothes
and have breakfast and then headed
straight for the City, London’s financial
district. Their first meeting was at the
Fenchurch Street establishment of
William Brandt’s Sons, which had put up
over half of the five and a half million.
The Brandt partners courteously offered
condolences on the death of the
President, and the Americans agreed that
it was a terrible thing, whereupon both
sides came to the point. The Brandt men
knew of Haupt’s impending failure but
not of the plan now afoot to rescue the
Haupt customers by avoiding a formal
bankruptcy; Levy explained this, and an
hour’s discussion followed, in the
course of which the Britons showed a
certain reluctance to go along—as well
they might. Having just been taken in by
one group of Yankees, they were not
anxious to be immediately taken in by
another. “They were very unhappy,”
Levy says. “They raised hell with me as
a representative of the New York Stock
Exchange, one of whose members had
got them into this jam. They wanted to
make a trade with us—to get a priority
in the collection of their claims in
exchange for coming along with us and
agreeing to defer collection. But their
trading position wasn’t really good; in a
bankruptcy proceeding, their claims,
based on unsecured loans, would have
been considered after the claims of
creditors who held collateral, and in my
opinion they would have never collected
a nickel. On the other hand, under the
terms of our offer they would be treated
equally with all the other Haupt
creditors except the customers. We had
to explain to them that we weren’t
trading.”
The Brandt men replied that before
deciding they wanted to think the matter
over, and also to hear what the other
British banks said. The American
delegates then repaired to the London
office of the Chase, on Lombard Street,
where, by prearrangement, they met with
representatives of the three other British
banks and Levy had a chance for a
reunion with his Kleinwort, Benson
friends. The circumstances of the
reunion were obviously less than happy,
but Levy says that his friends took a
realistic view of their situation and, with
heroic objectivity, actually helped their
fellow-Britons to see the American side
of the question. Nevertheless, this
meeting, like the earlier one, broke up
without commitment by anyone. Levy
and his colleagues stayed at the Chase
for lunch and then walked over to the
Bank of England, which was interested
in the Haupt loans to the extent that their
default would affect Britain’s balance of
payments. The Bank of England, through
one of its deputies, assured the visitors
of its distress over both America’s
national tragedy and Wall Street’s
parochial one, and advised them that
while it lacked the power to tell the
London banks what to do, in its judgment
they would be wise to go along with the
American scheme. Then, at about two
o’clock, the trio returned to Lombard
Street to wait nervously for word from
the banks. As it happened, a parallel
vigil was then beginning on Wall Street,
where it was nine o’clock on Monday
morning, and where Funston, just arrived
in his office and very much aware that
only one day remained in which to get
the deal wrapped up, was pacing his rug
as he waited for a call that would tell
him whether London was going to cause
the pot to fall in.
Kleinwort, Benson and S. Japhet &
Co. were the first to agree to go along,
Levy recalls. Then—after a silence of
perhaps half an hour, during which Levy
and his colleagues began to have an
agonizing sense of the minutes ticking
away in New York—an affirmative
answer came from Brandt. That was the
big one; with the chief creditor and two
of the three others in line, it was all but
certain that Ansbacher would join up. At
around 4 P.M. London time, Ansbacher
did, and Levy was finally able to place
the call that Funston had been waiting
for. Their mission accomplished, the
Americans went straight to the London
airport, and within three hours were on a
plane headed home.
On getting the good news, Funston felt
that the whole agreement was pretty well
in the bag at last, since all that was
needed to seal the bag was the signatures
of the fifteen Haupt general partners,
who seemed to have nothing to lose and
everything to gain from the plan. Still,
the task of getting those signatures was a
vital one. Short of a bankruptcy suit,
which everyone was trying to avoid, no
liquidator could distribute the Haupt
assets—not even the marble-topped
cabinets and the refrigerators—without
the partners’ permission. Accordingly,
late on Monday afternoon the Haupt
partners, each accompanied by his
lawyer, trooped into Chairman Watts’s
office at the Stock Exchange to learn
exactly what fate the Wall Street powers
had been arranging for them.
The Haupt partners could hardly have
found the projected agreement pleasant
reading, inasmuch as it prescribed,
among other things, that they were to
execute powers of attorney giving a
liquidator full control over Haupt’s
affairs. However, one of their own
lawyers gave them a short, pungent talk
pointing out that they were personally
liable for the firm’s debts whether or not
they signed the agreement, so they might
as well be public-spirited and sign it.
More briefly, they were over a barrel.
(Many of them later filed personal
bankruptcy papers.) One startling event
broke the even tenor of this gloomy
meeting. Shortly after the Haupt lawyer
had wound up his disquisition on the
facts of life, someone noticed an
unfamiliar and strikingly youthful face in
the crowd and asked its owner to
identify himself. The unhesitating reply
was “I’m Russell Watson, a reporter for
the Wall Street Journal.” There was a
short, stunned silence, in recognition of
the fact that an untimely leak might still
disturb the delicate balance of money
and emotion that made up the agreement.
Watson himself, who was twenty-four
and had been on the Journal for a year,
has since explained how he got into the
meeting, and under what circumstances
he left it. “I was new on the Stock
Exchange beat then,” he said afterward.
“Earlier in the day, there had been word
that Funston would probably hold a
press conference sometime that evening,
so I went over to the Exchange. At the
main entrance, I asked a guard where
Mr. Funston’s conference was. The
guard said it was on the sixth floor, and
ushered me into an elevator. I suppose
he thought I was a banker, a Haupt
partner, or a lawyer. On the sixth floor,
people were milling around everywhere.
I just walked off the elevator and into the
office where the meeting was—nobody
stopped me. I didn’t understand much of
what was going on. I got the feeling that
whatever was at stake, there was general
agreement but still a lot of haggling over
details to be done. I didn’t recognize
anybody there but Funston. I stood
around quietly for about five minutes
before anybody noticed me, and then
everybody said, pretty much at once,
‘Good God, get out of here!’ They didn’t
exactly kick me out, but I saw it was
time to go.”
During the haggling phase that
followed—a painfully protracted one, it
developed—the Haupt partners and their
lawyers made a command post of
Watts’s office, while the bank
representatives and their lawyers
camped in the North Committee Room,
just down the hall. Funston, who was
determined that news of a settlement
should be in the hands of investors
before the opening of the market next
morning, was going wild with irritation
and frustration, and in an effort to speed
things up he constituted himself a sort of
combination messenger boy and envoy.
“All Monday evening, I kept running
back and forth saying, ‘Look, they won’t
give in on this point, so you’ve got to,’”
he recalls. “Or I’d say, ‘Look what time
it is—only twelve hours until
tomorrow’s market opening! Initial
here.’”
At fifteen minutes past midnight, nine
and three-quarters hours before the
market’s reopening, the agreement was
signed in the South Committee Room by
the twenty-eight parties at interest, in an
atmosphere that a participant has
described as one of exhaustion and
general relief. As soon as the banks
opened on Tuesday morning, the Stock
Exchange deposited seven and a half
million dollars, a sum amounting to
roughly one-third of its available
reserve, in an account on which the
Haupt liquidator could draw; the same
morning, the liquidator himself—James
P. Mahony, a veteran member of the
Exchange’s staff—moved into the Haupt
offices to take charge. The stock market,
encouraged by confidence in the new
President or by news of the Haupt
settlement, or by a combination of the
two, had its greatest one-day rise in
history, more than eliminating Friday’s
losses. A week later, on December 2nd,
Mahony announced that $1,750,000, had
already been paid out of the Stock
Exchange account to bail out Haupt
customers; by December 12th, the figure
was up to $5,400,000, and by Christmas
to $6,700,000. Finally, on March 11,
1964, the Exchange was able to report
that it had dispensed nine and a half
million dollars, and that the Haupt
customers, with the exception of a
handful who couldn’t be found, were
whole again.
agreement, in which some people
saw an unmistakable implication that
Wall Street’s Establishment now felt
accountable for public harm caused by
the misdeeds, or even the misfortunes, of
any of its members, gave rise to a
THE
variety of reactions. The rescued Haupt
customers were predictably grateful, of
course. The Times said that the
agreement was evidence of “a sense of
responsibility that served to inspire
investor confidence” and “may have
helped to avoid a potential panic.” In
Washington,
President
Johnson
interrupted his first business day in
office to telephone Funston and
congratulate him. The chairman of the
S.E.C., William L. Cary, who was not
ordinarily given to throwing bouquets at
the Stock Exchange, said in December
that it had furnished “a dramatic,
impressive demonstration of its strength
and concern for the public interest.”
Other stock exchanges around the world
were silent on the matter, but if one may
judge by the unsentimental way that most
of them do business, some of their
officials must have been indulging in a
certain amount of headshaking over the
strange doings in New York. The Stock
Exchange’s member firms, who were
assessed for the nine and a half million
dollars over a period of three years,
appeared to be generally satisfied,
although a few of them were heard to
grumble that fine old firms with justified
reputations for skill and probity should
not be asked to pay the losses of greedy
upstarts who overstep and get caught out.
Oddly, almost no one seems to have
expressed gratitude to the British and
American banks, which recouped
something like half of their losses. It may
be that people simply don’t thank banks,
except in television commercials.
The
Stock
Exchange
itself,
meanwhile, was torn between blushingly
accepting congratulations and prudently,
if perhaps gracelessly, insisting that
what it had done wasn’t to be regarded
as a precedent—that it wouldn’t
necessarily do the same thing again. Nor
were the Exchange’s officials at all sure
that the same thing would have been
done if the Haupt case had occurred
earlier—even a very little earlier.
Crooks, who was chairman of the
Exchange in the early 1950s, felt that the
chances of such action during his term
would have been about fifty-fifty.
Funston, who assumed his office in
1951, felt that the matter would have
been “questionable” during the early
years of his incumbency. “One’s idea of
public responsibility is evolutionary,” he
said. He was particularly annoyed by the
idea, which he had heard repeatedly, that
the Exchange had acted out of a sense of
guilt. Psychoanalytic interpretations of
the event, he felt, were gratuitous, not to
say churlish. As for those older
governors who glared, quite possibly
balefully, at the negotiations from their
gilt frames in the Governors’ Room and
the North and South Committee Rooms,
their reaction to the whole proceeding
may be imagined but cannot be known.
7
The Impacted
Philosophers
problems facing
American industry today, one may learn
by talking with any of a large number of
industrialists who are not known to be
AMONG THE GREATEST
especially given to pontificating, is “the
problem of communication.” This
preoccupation with the difficulty of
getting a thought out of one head and into
another is something the industrialists
share with a substantial number of
intellectuals and creative writers, more
and more of whom seem inclined to
regard communication, or the lack of it,
as one of the greatest problems not just
of industry but of humanity. (A group of
avant-garde writers and artists have
given the importance of communication a
backhanded boost by flatly and
unequivocally proclaiming themselves to
be against it.) As far as the industrialists
are concerned, I admit that in the course
of hearing them invoke the word
“communication”—often in an almost
mystical way—over a period of years I
have had a lot of trouble figuring out
exactly what they meant. The general
thesis is clear enough; namely, that
everything would be all right, first, if
they could get through to each other
within their own organizations, and,
second, if they, or their organizations,
could get through to everybody else.
What has puzzled me is how and why, in
this day when the foundations sponsor
one study of communication after
another, individuals and organizations
fail so consistently to express
themselves understandably, or how and
why their listeners fail to grasp what
they hear.
A few years ago, I acquired a twovolume publication of the United States
Government Printing Office entitled
Hearings Before the Subcommittee on
Antitrust and Monopoly of the
Committee on the Judiciary, United
States
Senate,
Eighty-seventh
Congress, First Session, Pursuant to S.
Res. 52, and after a fairly diligent
perusal of its 1,459 pages I thought I
could begin to see what the industrialists
are talking about. The hearings,
conducted in April, May, and June,
1961, under the chairmanship of Senator
Estes Kefauver, of Tennessee, had to do
with the now famous price-fixing and
bid-rigging
conspiracies
in
the
electrical-manufacturing industry, which
had already resulted, the previous
February, in the imposition by a federal
judge in Philadelphia of fines totaling
$1,924,500 on twenty-nine firms and
forty-five of their employees, and also of
thirty-day prison sentences on seven of
the employees. Since there had been no
public presentation of evidence, all the
defendants having pleaded either guilty
or no defense, and since the records of
the grand juries that indicted them were
secret, the public had had little
opportunity to hear about the details of
the violations, and Senator Kefauver felt
that the whole matter needed a good
airing. The transcript shows that it got
one, and what the airing revealed—at
least within the biggest company
involved—was a breakdown in
intramural communication so drastic as
to make the building of the Tower of
Babel seem a triumph of organizational
rapport.
In a series of indictments brought by
the government in the United States
District Court in Philadelphia between
February and October, 1960, the twentynine companies and their executives
were charged with having repeatedly
violated Section 1 of the Sherman Act of
1890, which declares illegal “every
contract, combination in the form of trust
or otherwise, or conspiracy, in restraint
of trade or commerce among the several
States, or with foreign nations.” (The
Sherman Act was the instrument used in
the celebrated trust-busting activities of
Theodore Roosevelt, and along with the
Clayton Act of 1914 it has served as the
government’s weapon against cartels and
monopolies ever since.) The violations,
the government alleged, were committed
in connection with the sale of large and
expensive pieces of apparatus of a
variety that is required chiefly by public
and private electric-utility companies
(power
transformers,
switchgear
assemblies, and turbine-generator units,
among many others), and were the
outcome of a series of meetings attended
by executives of the supposedly
competing companies—beginning at
least as early as 1956 and continuing
into 1959—at which noncompetitive
price levels were agreed upon,
nominally sealed bids on individual
contracts were rigged in advance, and
each company was allocated a certain
percentage of the available business.
The government further alleged that, in
an effort to preserve the secrecy of these
meetings, the executives had resorted to
such devices as referring to their
companies by code numbers in their
correspondence, making telephone calls
from public booths or from their homes
rather than from their offices, and
doctoring the expense accounts covering
their get-togethers to conceal the fact that
they had all been in a certain city on a
certain day. But their stratagems did not
prevail. The federals, forcefully led by
Robert A. Bicks, then head of the
Antitrust Division of the Department of
Justice, succeeded in exposing them,
with considerable help from some of the
conspirators themselves, who, after an
employee of a small conspirator
company saw fit to spill the story in the
early fall of 1959, flocked to turn state’s
evidence.
The economic and social significance
of the whole affair may be demonstrated
clearly enough by citing just a few
figures. In an average year at the time of
the conspiracies, a total of more than one
and three-quarters billion dollars was
spent to purchase machines of the sort in
question, nearly a fourth of it by federal,
state, and local governments (which, of
course, means the taxpayers), and most
of the rest by private utility companies
(which are inclined to pass along any
rise in the cost of their equipment to the
public in the form of rate increases). To
take a specific example of the kind of
money involved in an individual
transaction, the list price of a 500,000kilowatt turbine-generator—a monstrous
device for producing electric power
from steam power—was often something
like sixteen million dollars. Actually,
manufacturers sometimes cut their prices
by as much as 25 percent in order to
make a sale, and therefore, if everything
was above board, it might have been
possible to buy the machine at a saving
of four million dollars; if representatives
of the companies making such generators
held a single meeting and agreed to fix
prices, they could, in effect, increase the
cost to the customer by the four million.
And in the end, the customer was almost
sure to be the public.
presenting the indictments in
Philadelphia,
Bicks
stated
that,
considered collectively, they revealed
“a pattern of violations which can fairly
be said to range among the most serious,
the most flagrant, the most pervasive that
have ever marked any basic American
industry.” Just before imposing the
sentences, Judge J. Cullen Ganey went
IN
even further; in his view, the violations
constituted “a shocking indictment of a
vast section of our economy, for what is
really at stake here is the survival of …
the free-enterprise system.” The prison
sentences showed that he meant it;
although there had been many successful
prosecutions for violation of the
Sherman Act during the seven decades
since its passage, it was rare indeed for
executives to be jailed. Not surprisingly,
therefore, the case kicked up quite a
ruckus in the press. The New Republic,
to be sure, complained that the
newspapers and magazines were
intentionally playing down “the biggest
business scandal in decades,” but the
charge did not seem to have much
foundation. Considering such things as
the public’s apathy toward switchgear,
the woeful bloodlessness of criminal
cases involving antitrust laws, and the
relatively few details of the conspiracies
that had emerged, the press in general
gave the story a good deal of space, and
even the Wall Street Journal and
Fortune ran uncompromising and highly
informative accounts of the debacle;
here and there, in fact, one could detect
signs of a revival of the spirit of oldtime antibusiness journalism as it existed
back in the thirties. After all, what could
be more exhilarating than to see several
dignified, impeccably tailored, and
highly paid executives of a few of the
nation’s most respected corporations
being trooped off to jail like common
pickpockets? It was certainly the biggest
moment for business-baiters since 1938,
when Richard Whitney, the former
president of the New York Stock
Exchange, was put behind bars for
speculating with his customers’ money.
Some called it the biggest since Teapot
Dome.
To top it all off, there was a prevalent
suspicion of hypocrisy in the very
highest places. Neither the chairman of
the board nor the president of General
Electric, the largest of the corporate
defendants, had been caught in the
government’s dragnet, and the same was
true of Westinghouse Electric, the
second-largest; these four ultimate
bosses let it be known that they had been
entirely ignorant of what had been going
on within their commands right up to the
time the first testimony on the subject
was given to the Justice Department.
Many people, however, were not
satisfied by these disclaimers, and,
instead, took the position that the
defendant executives were men in the
middle, who had broken the law only in
response either to actual orders or to a
corporate climate favoring price-fixing,
and who were now being allowed to
suffer for the sins of their superiors.
Among the unsatisfied was Judge Ganey
himself, who said at the time of the
sentencing, “One would be most naïve
indeed to believe that these violations of
the law, so long persisted in, affecting so
large a segment of the industry, and,
finally, involving so many millions upon
millions of dollars, were facts unknown
to those responsible for the conduct of
the corporation.… I am convinced that in
the great number of these defendants’
cases, they were torn between
conscience and approved corporate
policy, with the rewarding objectives of
promotion, comfortable security, and
large salaries.”
The public naturally wanted a
ringleader, an archconspirator, and it
appeared to find what it wanted in
General Electric, which—to the acute
consternation of the men endeavoring to
guide its destinies from company
headquarters, at 570 Lexington Avenue,
New York City—got the lion’s share of
attention both in the press and in the
Subcommittee hearings. With some
300,000 employees, and sales averaging
some four billion dollars a year over the
past ten years, it was not only far and
away the biggest of the twenty-nine
accused companies but, judged on the
basis of sales in 1959, the fifth-biggest
company in the country. It also drew a
higher total of fines ($437,500) than any
other company, and saw more of its
executives sent to jail (three, with eight
others receiving suspended sentences).
Furthermore, as if to intensify in this
hour of crisis the horror and shock of
true believers—and the glee of scoffers
—its highest-ranking executives had for
years tried to represent it to the public as
a paragon of successful virtue by issuing
encomiums to the free competitive
system, the very system that the pricefixing meetings were set up to mock. In
1959, shortly after the government’s
investigation of the violations had been
brought to the attention of G.E.’s
policymakers, the company demoted and
cut the pay of those of its executives who
admitted that they had been involved;
one vice-president, for example, was
informed that instead of the $127,000 a
year he had been getting he would now
get $40,000. (He had scarcely adjusted
himself to that blow when Judge Ganey
fined him four thousand dollars and sent
him to prison for thirty days, and shortly
after he regained his freedom, General
Electric eased him out entirely.) The
G.E. policy of imposing penalties of its
own on these employees, regardless of
what punishment the court might
prescribe, was not adopted by
Westinghouse, which waited until the
judge had disposed of the case and then
decided that the fines and prison
sentences he had handed out to its stable
of offenders were chastisement enough,
and did not itself penalize them at all.
Some people saw this attitude as
evidence that Westinghouse was
condoning the conspiracies, but others
regarded it as a commendable, if tacit,
admission that management at the highest
level in the conniving companies was
responsible—morally, at least—for the
whole mess and was therefore in no
position to discipline its erring
employees. In the view of these people,
G.E.’s
haste
to
penalize
the
acknowledged culprits on its payroll
strongly suggested that the firm was
trying to save its own skin by throwing a
few luckless employees to the wolves,
or—as Senator Philip A. Hart, of
Michigan, put it, more pungently, during
the hearings—“to do a Pontius Pilate
operation.”
EMBATTLED
days at 570 Lexington
Avenue! After years of cloaking the
company in the mantle of a wise and
benevolent corporate institution, the
public-relations
people
at
G.E.
headquarters were faced with the ugly
choice of representing its role in the
price-fixing affair as that of either a fool
or a knave. They tended strongly toward
“fool.” Judge Ganey, by his statement
that he assumed the conspiracies to have
been not only condoned but approved by
the top brass and the company as a
whole, clearly chose “knave.” But his
analysis may or may not have been the
right one, and after reading the Kefauver
Subcommittee testimony I have come to
the melancholy conclusion that the truth
will very likely never be known. For, as
the testimony shows, the clear waters of
moral responsibility at G.E. became
hopelessly muddied by a struggle to
communicate—a struggle so confused
that in some cases, it would appear, if
one of the big bosses at G.E. had
ordered a subordinate to break the law,
the message would somehow have been
garbled in its reception, and if the
subordinate had informed the boss that
he was holding conspiratorial meetings
with competitors, the boss might well
have been under the impression that the
subordinate was gossiping idly about
lawn parties or pinochle sessions.
Specifically, it would appear that a
subordinate who received a direct oral
order from his boss had to figure out
whether it meant what it seemed to or the
exact opposite, while the boss, in
conversing with a subordinate, had to
figure out whether he should take what
the man told him at face value or should
attempt to translate it out of a secret
code to which he was by no means sure
he had the key. That was the problem in
a nutshell, and I state it here thus baldly
as a suggestion for any potential
beneficiary of a foundation who may be
casting about for a suitable project on
which to draw up a prospectus.
For the past eight years or so, G.E.
had had a company rule called Directive
Policy 20.5, which read, in part, “No
employee shall enter into any
understanding, agreement, plan or
scheme, expressed or implied, formal or
informal, with any competitor, in regard
to prices, terms or conditions of sale,
production, distribution, territories, or
customers; nor exchange or discuss with
a competitor prices, terms or conditions
of sale, or any other competitive
information.” In effect, this rule was
simply an injunction to G.E.’s personnel
to obey the federal antitrust laws, except
that it was somewhat more concrete and
comprehensive in the matter of price
than they are. It was almost impossible
for executives with jurisdiction over
pricing policies at G.E. to be unaware of
20.5, or even hazy about it, because to
make sure that new executives were
acquainted with it and to refresh the
memories of old ones, the company
formally reissued and distributed it at
intervals, and all such executives were
asked to sign their names to it as an
earnest that they were currently
complying with it and intended to keep
on doing so. The trouble—at least during
the period covered by the court action,
and apparently for a long time before
that as well—was that some people at
G.E., including some of those who
regularly signed 20.5, simply did not
believe that it was to be taken seriously.
They assumed that 20.5 was mere
window dressing: that it was on the
books solely to provide legal protection
for the company and for the higher-ups;
that meeting illegally with competitors
was recognized and accepted as
standard practice within the company;
and that often when a ranking executive
ordered a subordinate executive to
comply with 20.5, he was actually
ordering him to violate it. Illogical as it
might seem, this last assumption
becomes comprehensible in the light of
the fact that, for a time, when some
executives
orally
conveyed,
or
reconveyed, the order, they were
apparently in the habit of accompanying
it with an unmistakable wink. In May of
1948, for example, there was a meeting
of G.E. sales managers during which the
custom of winking was openly
discussed. Robert Paxton, an upper-
level G.E. executive who later became
the company’s president, addressed the
meeting and delivered the usual
admonition about antitrust violations,
whereupon William S. Ginn, then a sales
executive in the transformer division,
under Paxton’s authority, startled him by
saying, “I didn’t see you wink.” Paxton
replied firmly, “There was no wink. We
mean it, and these are the orders.” Asked
by Senator Kefauver how long he had
been aware that orders issued at G.E.
were sometimes accompanied by winks,
Paxton replied that he had first observed
the practice way back in 1935, when his
boss had given him an instruction along
with a wink or its equivalent, and that
when, some time later, the significance
of the gesture dawned on him, he had
become so incensed that he had with
difficulty restrained himself from
jeopardizing his career by punching the
boss in the nose. Paxton went on to say
that his objections to the practice of
winking had been so strong as to earn
him a reputation in the company for
being an antiwink man, and that he, for
his part, had never winked.
Although Paxton would seem to have
left little doubt as to how he intended his
winkless order of 1948 to be
interpreted, its meaning failed to get
through to Ginn, for not long after it was
issued, he went out and fixed prices to a
fare-thee-well. (Obviously, it takes more
than one company to make a price-fixing
agreement, but all the testimony tends to
indicate that it was G.E. that generally
set the pattern for the rest of the industry
in such matters.) Thirteen years later,
Ginn—fresh from a few weeks in jail,
and fresh out of a $135,000-a-year job
—appeared before the Subcommittee to
account for, among other things, his
strange response to the winkless order.
He had disregarded it, he said, because
he had received a contrary order from
two of his other superiors in the G.E.
chain of command, Henry V. B. Erben
and Francis Fairman, and in explaining
why he had heeded their order rather
than Paxton’s he introduced the
fascinating concept of degrees of
communication—another theme for a
foundation grantee to get his teeth into.
Erben and Fairman, Ginn said, had been
more articulate, persuasive, and forceful
in issuing their order than Paxton had
been in issuing his; Fairman, especially,
Ginn stressed, had proved to be “a great
communicator, a great philosopher, and,
frankly, a great believer in stability of
prices.” Both Erben and Fairman had
dismissed Paxton as naïve, Ginn
testified, and, in further summary of how
he had been led astray, he said that “the
people who were advocating the Devil
were able to sell me better than the
philosophers that were selling the Lord.”
It would be helpful to have at hand a
report from Erben and Fairman
themselves on the communication
technique that enabled them to prevail
over Paxton, but unfortunately neither of
these philosophers could testify before
the Subcommittee, because by the time
of the hearings both of them were dead.
Paxton, who was available, was
described in Ginn’s testimony as having
been at all times one of the philosophersalesmen on the side of the Lord. “I can
clarify Mr. Paxton by saying Mr. Paxton
came closer to being an Adam Smith
advocate than any businessman I have
met in America,” Ginn declared. Still, in
1950, when Ginn admitted to Paxton in
casual conversation that he had
“compromised himself” in respect to
antitrust matters, Paxton merely told him
that he was a damned fool, and did not
report the confession to anyone else in
the company. Testifying as to why he did
not, Paxton said that when the
conversation occurred he was no longer
Ginn’s boss, and that, in the light of his
personal ethics, repeating such an
admission by a man not under his
authority would be “gossip” and
“talebearing.”
Meanwhile,
Ginn,
no
longer
answerable to Paxton, was meeting with
competitors at frequent intervals and
moving steadily up the corporate ladder.
In November, 1954, he was made
general manager of the transformer
division, whose headquarters were in
Pittsfield, Massachusetts—a job that put
him in line for a vice-presidency. At the
time of Ginn’s shift, Ralph J. Cordiner,
who has been chairman of the board of
General Electric since 1949, called him
down to New York for the express
purpose of enjoining him to comply
strictly and undeviatingly with Directive
Policy 20.5. Cordiner communicated this
idea so successfully that it was clear
enough to Ginn at the moment, but it
remained so only as long as it took him,
after leaving the chairman, to walk to
Erben’s office. There his comprehension
of what he had just heard became
clouded. Erben, who was head of G.E.’s
distribution group, ranked directly
below Cordiner and directly above
Ginn, and, according to Ginn’s
testimony, no sooner were they alone in
his office than he countermanded
Cordiner’s injunction, saying, “Now,
keep on doing the way that you have
been doing, but just be sensible about it
and use your head on the subject.”
Erben’s extraordinary communicative
prowess again carried the day, and Ginn
continued to meet with competitors. “I
knew Mr. Cordiner could fire me,” he
told Senator Kefauver, “but also I knew I
was working for Mr. Erben.”
At the end of 1954, Paxton took over
Erben’s job and thereby became Ginn’s
boss again. Ginn went right on meeting
with competitors, but, since he was
aware that Paxton disapproved of the
practice, didn’t tell him about it.
Moreover, he testified, within a month or
two he had become convinced that he
could not afford to discontinue attending
the meetings under any circumstances,
for in January, 1955, the entire
electrical-equipment industry became
embroiled in a drastic price war—
known as the “white sale,” because of
its timing and the bargains it afforded to
buyers—in which the erstwhile amiable
competitors began fiercely undercutting
one another. Such a manifestation of free
enterprise was, of course, exactly what
the intercompany conspiracies were
intended to prevent, but just at that time
the supply of electrical apparatus so
greatly exceeded the demand that first a
few of the conspirators and then more
and more began breaking the agreements
they themselves had made. In dealing
with the situation as best he could, Ginn
said, he “used the philosophies that had
been taught me previously”—by which
he meant that he continued to conduct
price-fixing meetings, in the hope that at
least some of the agreements made at
them would be honored. As for Paxton,
in Ginn’s opinion that philosopher was
not only ignorant of the meetings but so
constant in his devotion to the concept of
free and aggressive competition that he
actually enjoyed the price war,
disastrous though it was to everybody’s
profits. (In his own testimony, Paxton
vigorously denied that he had enjoyed
it.)
Within a year or so, the electricalequipment industry took an upturn, and in
January, 1957, Ginn, having ridden out
the storm relatively well, got his vicepresidency. At the same time, he was
transferred to Schenectady, to become
general manager of G.E.’s turbinegenerator division, and Cordiner again
called him into headquarters and gave
him a lecture on 20.5. Such lectures
were getting to be a routine with
Cordiner; every time a new employee
was assigned to a strategic managerial
post, or an old employee was promoted
to such a post, the lucky fellow could be
reasonably certain that he would be
summoned to the chairman’s office to
hear a rendition of the austere creed. In
his book The Heart of Japan, Alexander
Campbell reports that a large Japanese
electrical concern has drawn up a list of
seven company commandments (for
example, “Be courteous and sincere!”),
and that each morning, in each of its
thirty factories, the workers are required
to stand at attention and recite these in
unison, and then to sing the company
song
(“For
ever-increasing
production/Love your work, give your
all!”). Cordiner did not require his
subordinates to recite or sing 20.5—as
far as is known, he never even had it set
to music—but from the number of times
men like Ginn had it read to them or
otherwise recalled to their attention, they
must have come to know it well enough
to chant it, improvising a tune as they
went along.
This time, Cordiner’s message not
only made an impression on Ginn’s mind
but stuck there in unadulterated form.
Ginn, according to his testimony, became
a reformed executive and dropped his
price-fixing habits overnight. However,
it appears that his sudden conversion
cannot be attributed wholly to
Cordiner’s powers of communication, or
even to the drip-drip-drip effect of
repetition, for it was to a considerable
extent pragmatic in character, like the
conversion
of
Henry
VIII
to
Protestantism. He reformed, Ginn
explained to the Subcommittee, because
his “air cover was gone.”
“Your what was gone?” Senator
Kefauver asked.
“My air cover was gone,” replied
Ginn. “I mean I had lost my air cover.
Mr. Erben wasn’t around any more, and
all of my colleagues had gone, and I was
now working directly for Mr. Paxton,
knowing his feelings on the matter.…
Any philosophy that I had grown up with
before in the past was now out the
window.”
If Erben, who had not been Ginn’s
boss since late in 1954, had been the
source of his air cover, Ginn must have
been without its protection for over two
years, but, presumably, in the excitement
of the price war he had failed to notice
its absence. However that may have
been, here he now was, a man suddenly
shorn not only of his air cover but of his
philosophy. Swiftly filling the latter void
with a whole new set of principles, he
circulated copies of 20.5 among his
department managers in the turbinegenerator division and topped this off by
energetically adopting what he called a
“leprosy policy”; that is, he advised his
subordinates to avoid even casual social
contacts with their counterparts in
competing companies, because “once the
relationships are established, I have
come to the conclusion after many years
of hard experience that the relationships
tend to spread and the hanky-panky
begins to get going.” But now fate
played a cruel trick on Ginn, and, all
unknowing, he landed in the very
position that Paxton and Cordiner had
been in for years—that of a philosopher
vainly endeavoring to sell the Lord to a
flock that declined to buy his message
and was, in fact, systematically engaging
in the hanky-panky its leader had warned
it against. Specifically, during the whole
of 1957 and 1958 and the first part of
1959 two of Ginn’s subordinates were
piously signing 20.5 with one hand and,
with the other, briskly drawing up pricefixing agreements at a whole series of
meetings—in New York; Philadelphia;
Chicago; Hot Springs, Virginia; and
Skytop, Pennsylvania, to name a few of
their gathering places.
It appears that Ginn had not been able
to impart much of his shining new
philosophy to others, and that at the root
of his difficulty lay that old jinx, the
problem of communicating. Asked at the
hearings how his subordinates could
possibly have gone so far astray, he
replied, “I have got to admit that I made
a communication error. I didn’t sell this
thing to the boys well enough.… The
price is so important in the complete
running
of
a
business
that,
philosophically, we have got to sell
people not only just the fact that it is
against the law, but … that it shouldn’t
be done for many, many reasons. But it
has got to be a philosophical approach
and a communication approach.… Even
though … I had told my associates not to
do this, some of the boys did get off the
reservation.… I have to admit to myself
here an area of a failure in
communications … which I am perfectly
willing to accept my part of the
responsibility for.”
In earnestly striving to analyze the
cause of the failure, Ginn said, he had
reached the conclusion that merely
issuing directives, no matter how
frequently, was not enough; what was
needed was “a complete philosophy, a
complete understanding, a complete
breakdown of barriers between people,
if we are going to get some
understanding and really live and
manage these companies within the
philosophies that they should be
managed in.”
Senator Hart permitted himself to
comment, “You can communicate until
you are dead and gone, but if the point
you are communicating about, even
though it be a law of the land, strikes
your audience as something that is just a
folklore … you will never sell the
package.”
Ginn ruefully conceded that that was
true.
concept
of
degrees
of
communication was further developed,
by implication, in the testimony of
another defendant, Frank E. Stehlik, who
had been general manager of the G.E.
low-voltage-switchgear department from
May, 1956, to February, 1960. (As all
but a tiny minority of the users of
electricity are contentedly unaware,
switchgear serves to control and protect
apparatus used in the generation,
conversion,
transmission,
and
distribution of electrical energy, and
THE
more than $100 million worth of it is
sold annually in the United States.)
Stehlik received some of his business
guidance in the conventional form of
orders, oral and written, and some—
perhaps just as much, to judge by his
testimony—through a less intellectual,
more visceral medium of communication
that he called “impacts.” Apparently,
when something happened within the
company that made an impression on
him, he would consult a sort of internal
metaphysical voltmeter to ascertain the
force of the jolt that he had received,
and, from the reading he got, would
attempt to gauge the true drift of
company policy. For example, he
testified that during 1956, 1957, and
most of 1958 he believed that G.E. was
frankly and fully in favor of complying
with 20.5. But then, in the autumn of
1958, George E. Burens, Stehlik’s
immediate superior, told him that he,
Burens, had been directed by Paxton,
who by then was president of G.E., to
have lunch with Max Scott, president of
the I-T-E Circuit Breaker Company, an
important competitor in the switchgear
market. Paxton said in his own testimony
that while he had indeed asked Burens to
have lunch with Scott, he had instructed
him categorically not to talk about
prices, but apparently Burens did not
mention this caveat to Stehlik; in any
event, the disclosure that the high
command had told Burens to lunch with
an archrival, Stehlik testified, “had a
heavy impact on me.” Asked to amplify
this, he said, “There are a great many
impacts that influence me in my thinking
as to the true attitude of the company,
and that was one of them.” As the
impacts, great and small, piled up, their
cumulative effect finally communicated
to Stehlik that he had been wrong in
supposing the company had any real
respect for 20.5. Accordingly, when, late
in 1958, Stehlik was ordered by Burens
to begin holding price meetings with the
competitors, he was not in the least
surprised.
Stehlik’s compliance with Burens’
order ultimately brought on a whole new
series of impacts, of a much more
crudely communicative sort. In February,
1960, General Electric cut his annual
pay from $70,000 to $26,000 for
violating 20.5; a year later Judge Ganey
gave him a three-thousand-dollar fine
and a suspended thirty-day jail sentence
for violating the Sherman Act; and about
a month after that G.E. asked for, and
got, his resignation. Indeed, during his
last years with the firm Stehlik seems to
have received almost as many lacerating
impacts as a Raymond Chandler hero.
But testimony given at the hearings by L.
B. Gezon, manager of the marketing
section of the low-voltage-switchgear
department, indicated that Stehlik, again
like a Chandler hero, was capable of
dishing out blunt impacts as well as
taking them. Gezon, who was directly
under Stehlik in the line of command,
told the Subcommittee that although he
had taken part in price-fixing meetings
prior to April, 1956, when Stehlik
became his boss, he did not subsequently
engage in any antitrust violations until
late 1958, and that he did so then only as
the result of an impact that bore none of
the subtlety noted by Stehlik in his early
experience with this phenomenon. The
impact came directly from Stehlik, who,
it seems, left nothing to chance in
communicating with his subordinates. In
Gezon’s words, Stehlik told him “to
resume the meetings; that the company
policy was unchanged; the risk was just
as great as it ever had been; and that if
our activities were discovered, I
personally would be dismissed or
disciplined [by the company], as well as
punished by the government.” So Gezon
was left with three choices: to quit, to
disobey the direct order of his superior
(in which case, he thought, “they might
have found somebody else to do my
job”), or to obey the order, and thereby
violate the antitrust laws, with no
immunity
against
the
possible
consequences. In short, his alternatives
were comparable to those faced by an
international spy.
Although Gezon did resume the
meetings, he was not indicted, possibly
because he had been a relatively minor
price-fixer. General Electric, for its part,
demoted him but did not require him to
resign. Yet it would be a mistake to
assume that Gezon was relatively
untouched by his experience. Asked by
Senator Kefauver if he did not think that
Stehlik’s order had placed him in an
intolerable position, he replied that it
had not struck him that way at the time.
Asked whether he thought it unjust that
he had suffered demotion for carrying
out the order of a superior, he replied, “I
personally don’t consider it so.” To
judge by his answers, the impact on
Gezon’s heart and mind would seem to
have been heavy indeed.
other side of the communication
problem—the difficulty that a superior is
likely to encounter in understanding what
a subordinate tells him—is graphically
illustrated by the testimony of Raymond
W. Smith, who was general manager of
G.E.’s transformer division from the
beginning of 1957 until late in 1959, and
of Arthur F. Vinson, who in October,
1957, was appointed vice-president in
charge of G.E.’s apparatus group, and
also a member of the company’s
executive committee. Smith’s job was
the one Ginn had held for the previous
two years, and when Vinson got his job,
he became Smith’s immediate boss.
Smith’s highest pay during the period in
question was roughly $100,000 a year,
THE
while Vinson reached a basic salary of
$110,000 and also got a variable bonus,
ranging from $45,000 to $100,000.
Smith testified that on January 1, 1957,
the very day he took charge of the
transformer division—and a holiday, at
that—he met with Chairman Cordiner
and Executive Vice-President Paxton,
and Cordiner gave him the familiar
admonition about living up to 20.5.
However, later that year, the competitive
going got so rough that transformers
were selling at discounts of as much as
35 percent, and Smith decided on his
own hook that the time had come to
begin negotiating with rival firms in the
hope of stabilizing the market. He felt
that he was justified in doing this, he
said, because he was convinced that
both in company circles and in the whole
industry negotiations of this kind were
“the order of the day.”
By the time Vinson became his
superior, in October, Smith was
regularly
attending
price-fixing
meetings, and he felt that he ought to let
his new boss know what he was doing.
Accordingly, he told the Subcommittee,
on two or three occasions when the two
men found themselves alone together in
the normal course of business, he said to
Vinson, “I had a meeting with the clan
this morning.” Counsel for the
Subcommittee asked Smith whether he
had ever put the matter more bluntly—
whether, for example, he had ever said
anything like “We’re meeting with
competitors to fix prices. We’re going to
have a little conspiracy here and I don’t
want it to get out.” Smith replied that he
had never said anything remotely like
that—had done nothing more than make
remarks on the order of “I had a meeting
with the clan this morning.” He did not
elaborate on why he did not speak with
greater directness, but two logical
possibilities
present
themselves.
Perhaps he hoped that he could keep
Vinson informed about the situation and
at the same time protect him from the
risk of becoming an accomplice. Or
perhaps he had no such intention, and
was simply expressing himself in the
oblique,
colloquial
way
that
characterized much of his speaking.
(Paxton, a close friend of Smith’s, had
once complained to Smith that he was
“given to being somewhat cryptic” in his
remarks.) Anyhow, Vinson, according to
his own testimony, had flatly
misunderstood what Smith meant;
indeed, he could not recall ever hearing
Smith use the expression “meeting of the
clan,” although he did recall his saying
things like “Well, I am going to take this
new plan on transformers and show it to
the boys.” Vinson testified that he had
thought the “boys” meant the G.E.
district sales people and the company’s
customers, and that the “new plan” was
a new marketing plan; he said that it had
come as a rude shock to him to learn—a
couple of years later, after the case had
broken—that in speaking of the “boys”
and the “new plan,” Smith had been
referring to competitors and a pricefixing scheme. “I think Mr. Smith is a
sincere man,” Vinson testified. “I am
sure Mr. Smith … thought he was telling
me that he was going to one of these
meetings. This meant nothing to me.”
Smith, on the other hand, was
confident that his meaning had got
through to Vinson. “I never got the
impression that he misunderstood me,”
he insisted to the Subcommittee.
Questioning Vinson later, Kefauver
asked whether an executive in his
position,
with thirty-odd
years’
experience in the electrical industry,
could possibly be so naive as to
misunderstand a subordinate on such a
substantive matter as grasping who the
“boys” were. “I don’t think it is too
naive,” replied Vinson. “We have a lot
of boys.… I may be naïve, but I am
certainly telling the truth, and in this kind
of thing I am sure I am naïve.”
SENATOR KEFAUVER: Mr. Vinson, you wouldn’t be
a vice-president at $200,000 a year if you were naïve.
MR. VINSON: I think I could well get there by
being naïve in this area. It might help.
Here, in a different field altogether,
the communication problem again comes
to the fore. Was Vinson really saying to
Kefauver what he seemed to be saying—
that naïveté about antitrust violations
might be a help to a man in getting and
holding a $200,000-a-year job at
General Electric? It seems unlikely. And
yet what else could he have meant?
Whatever the answer, neither the federal
antitrust men nor the Senate investigators
were able to prove that Smith succeeded
in his attempts to communicate to Vinson
the fact that he was engaging in pricefixing. And, lacking such proof, they
were unable to establish what they gave
every appearance of going all out to
establish if they could: namely, that at
least some one man at the pinnacle of
G.E.’s management—some member of
the sacred executive committee itself—
was implicated. Actually, when the story
of the conspiracies first became known,
Vinson not only concurred in a company
decision to punish Smith by drastically
demoting him but personally informed
him of the decision—two acts that, if he
had grasped Smith’s meaning back in
1957, would have denoted a remarkable
degree of cynicism and hypocrisy.
(Smith, by the way, rather than accept the
demotion, quit General Electric and,
after being fined three thousand dollars
and given a suspended thirty-day prison
sentence by Judge Ganey, found a job
elsewhere, at ten thousand dollars a
year.)
This was not Vinson’s only brush with
the case. He was also among those
named in one of the grand jury
indictments that precipitated the court
action, this time in connection not with
his comprehension of Smith’s jargon but
with the conspiracy in the switchgear
department. On this aspect of the case,
four switchgear executives—Burens,
Stehlik, Clarence E. Burke, and H. Frank
Hentschel—testified before the grand
jury (and later before the Subcommittee)
that at some time in July, August, or
September of 1958 (none of them could
establish the precise date) Vinson had
had lunch with them in Dining Room B
of G.E.’s switchgear works in
Philadelphia, and that during the meal he
had instructed them to hold price
meetings with competitors. As a result of
this order, they said, a meeting attended
by
representatives
of
G.E.,
Westinghouse,
the
Allis-Chalmers
Manufacturing Company, the Federal
Pacific Electric Company, and the I-T-E
Circuit Breaker Company was held at
the Hotel Traymore in Atlantic City on
November 9, 1958, at which sales of
switchgear to federal, state, and
municipal agencies were divvied up,
with General Electric to get 39 percent
of the business, Westinghouse 35
percent, I-T-E 11 percent, AllisChalmers 8 percent, and Federal Pacific
Electric 7 percent. At subsequent
meetings, agreement was reached on
allocating sales of switchgear to private
buyers as well, and an elaborate formula
was worked out whereby the privilege
of submitting the lowest bid to
prospective customers was rotated
among the conspiring companies at twoweek intervals. Because of its periodic
nature, this was called the phase-of-themoon formula—a designation that in due
time led to the following lyrical
exchange between the Subcommittee and
L. W. Long, an executive of AllisChalmers:
SENATOR KEFAUVER: Who were the phasers-ofthe-mooners—phase-of-the-mooners?
MR. LONG: AS it developed, this so-called phaseof-the-moon operation was carried out at a level below
me, I think referred to as a working group.…
MR. FERRALL [counsel for the Subcommittee]:
Did they ever report to you about it?
MR. LONG: Phase of the moon? No.
Vinson told the Justice Department
prosecutors, and repeated to the
Subcommittee, that he had not known
about the Traymore meeting, the phaseof-the-mooners, or the existence of the
conspiracy itself until the case broke; as
for the lunch in Dining Room B, he
insisted that it had never taken place. On
this point, Burens, Stehlik, Burke, and
Hentschel submitted to lie-detector tests,
administered by the F.B.I., and passed
them. Vinson refused to take a liedetector test, at first explaining that he
was acting on advice of counsel and
against his personal inclination, and
later, after hearing how the four other
men had fared, arguing that if the
machine had not pronounced them liars,
it couldn’t be any good. It was
established that on only eight business
days during July, August, and September
had Burens, Burke, Stehlik, and
Hentschel all been together in the
Philadelphia plant at the lunch hour, and
Vinson produced some of his expense
accounts, which, he pointed out to the
Justice Department, showed that he had
been elsewhere on each of those days.
Confronted with this evidence, the
Justice Department dropped its case
against Vinson, and he stayed on as a
vice-president of General Electric.
Nothing that the Subcommittee elicited
from him cast any substantive doubt on
the defense that had impressed the
government prosecutors.
Thus, the uppermost echelon at G.E.
came through unscathed; the record
showed that participation in the
conspiracy went fairly far down in the
organization but not all the way to the
top. Gezon, everybody agreed, had
followed orders from Stehlik, and
Stehlik had followed orders from
Burens, but that was the end of the trail,
because although Burens said he had
followed orders from Vinson, Vinson
denied it and made the denial stick. The
government, at the end of its
investigation, stated in court that it could
not prove, and did not claim, that either
Chairman Cordiner or President Paxton
had authorized, or even known about, the
conspiracies, and thereby officially
ruled out the possibility that they had
resorted to at least a figurative wink.
Later, Paxton and Cordiner showed up in
Washington to testify before the
Subcommittee, and its interrogators
were similarly unable to establish that
they had ever indulged in any variety of
winking.
being described by Ginn as
General Electric’s stubbornest and most
dedicated advocate of free competition,
Paxton explained to the Subcommittee
AFTER
that his thinking on the subject had been
influenced not directly by Adam Smith
but, rather, by way of a former G.E. boss
he had worked under—the late Gerard
Swope. Swope, Paxton testified, had
always believed firmly that the ultimate
goal of business was to produce more
goods for more people at lower cost. “I
bought that then, I buy it now,” said
Paxton. “I think it is the most marvelous
statement of economic philosophy that
any industrialist has ever expressed.” In
the course of his testimony, Paxton had
an explanation, philosophical or
otherwise, of each of the several
situations related to price-fixing in
which his name had earlier been
mentioned. For instance, it had been
brought out that in 1956 or 1957 a young
man named Jerry Page, a minor
employee in G.E.’s switchgear division,
had written directly to Cordiner alleging
that the switchgear divisions of G.E. and
of several competitor companies were
involved in a conspiracy in which
information about prices was exchanged
by means of a secret code based on
different colors of letter paper. Cordiner
had turned the matter over to Paxton with
orders that he get to the bottom of it, and
Paxton had thereupon conducted an
investigation that led him to conclude
that the color-code conspiracy was
“wholly a hallucination on the part of
this boy.” In arriving at that conclusion,
Paxton had apparently been right,
although it later came out that there had
been a conspiracy in the switchgear
division during 1956 and 1957; this,
however, was a rather conventional one,
based simply on price-fixing meetings,
rather than on anything so gaudy as a
color code. Page could not be called to
testify because of ill health.
Paxton conceded that there had been
some occasions when he “must have
been pretty damn dumb.” (Dumb or not,
for his services as the company’s
president he was, of course, remunerated
on a considerably grander scale than
Vinson—receiving a basic annual salary
of $125,000, plus annual incentive
compensation of about $175,000, plus
stock options designed to enable him to
collect much more at low tax rates.) As
for Paxton’s attitude toward company
communications, he emerges as a
pessimist on this score. Upon being
asked at the hearings to comment on the
Smith-Vinson conversations of 1957, he
said that, knowing Smith, he just could
not “cast the man in the role of a liar,”
and went on:
When I was younger, I used to play a good deal of
bridge. We played about fifty rubbers of bridge, four of
us, every winter, and I think we probably played some
rather good bridge. If you gentlemen are bridge
players, you know that there is a code of signals that is
exchanged between partners as the game progresses.
It is a stylized form of playing.… Now, as I think about
this—and I was particularly impressed when I read
Smith’s testimony when he talked about a “meeting of
the clan” or “meeting of the boys”—I begin to think
that there must have been a stylized method of
communication between these people who were
dealing with competition. Now, Smith could say, “I told
Vinson what I was doing,” and Vinson wouldn’t have
the foggiest idea what was being told to him, and both
men could testify under oath, one saying yes and the
other man saying no, and both be telling the truth.…
[They] wouldn’t be on the same wavelength. [They]
wouldn’t have the same meanings. I think, I believe
now that these men did think that they were telling the
truth, but they weren’t communicating between each
other with understanding.
Here, certainly, is the gloomiest
possible analysis of the communications
problem.
Cordiner’s status, it appears
from his testimony, was approximately
that of the Boston Cabots in the
celebrated jingle. His services to the
CHAIRMAN
company,
for
which
he
was
recompensed in truly handsome style
(with, for 1960, a salary of just over
$280,000, plus contingent deferred
income of about $120,000, plus stock
options potentially worth hundreds of
thousands more), were indubitably many
and valuable, but they were performed
on such an exalted level that, at least in
antitrust matters, he does not seem to
have been able to have any earthly
communication at all. When he
emphatically told the Subcommittee that
at no time had he had so much as an
inkling of the network of conspiracies, it
could be deduced that his was a case not
of faulty communication but of no
communication. He did not speak to the
Subcommittee
of
philosophy or
philosophers, as Ginn and Paxton had
done, but from his past record of
ordering reissues of 20.5 and of
peppering his speeches and public
statements with praise of free enterprise,
it seems clear that he was un philosophe
sans le savoir—and one on the side of
selling the Lord, since no evidence was
adduced to suggest that he was given to
winking in any form. Kefauver ran
through a long list of antitrust violations
of which General Electric had been
accused over the past half-century,
asking Cordiner, who joined the
company in 1922, how much he knew
about each of them; usually, he replied
that he had known about them only after
the fact. In commenting on Ginn’s
testimony that Erben had countermanded
Cordiner’s direct order in 1954,
Cordiner said that he had read it with
“great alarm” and “great wonderment,”
since Erben had always indicated to him
“an intense competitive spirit,” rather
than any disposition to be friendly with
rival companies.
Throughout his testimony, Cordiner
used the curious expression “be
responsive to.” If, for instance, Kefauver
inadvertently asked the same question
twice, Cordiner would say, “I was
responsive to that a moment ago,” or if
Kefauver interrupted him, as he often
did, Cordiner would ask politely, “May I
be responsive?” This, too, offers a small
lead for a foundation grantee, who might
want to look into the distinction between
being responsive (a passive state) and
answering (an act), and their relative
effectiveness in the process of
communication.
Summing up his position on the case
as a whole, in reply to a question of
Kefauver’s about whether he thought that
G.E. had incurred “corporate disgrace,”
Cordiner said, “No, I am not going to be
responsive and say that General Electric
had corporate disgrace. I am going to
say that we are deeply grieved and
concerned.… I am not proud of it.”
Cordiner, then, had been able
to fairly deafen his subordinate officers
with lectures on compliance with the
rules of the company and the laws of the
country, but he had not been able to get
all those officers to comply with either,
and President Paxton could muse
thoughtfully on how it was that two of
his subordinates who had given
radically different accounts of a
conversation between them could be not
liars but merely poor communicators.
Philosophy seems to have reached a high
point at G.E., and communication a low
one. If executives could just learn to
understand one another, most of the
witnesses said or implied, the problem
of antitrust violations would be solved.
CHAIRMAN
But perhaps the problem is cultural as
well as technical, and has something to
do with a loss of personal identity that
comes from working in a huge
organization. The cartoonist Jules
Feiffer,
contemplating
the
communication
problem
in
a
nonindustrial
context,
has
said,
“Actually, the breakdown is between the
person and himself. If you’re not able to
communicate successfully between
yourself and yourself, how are you
supposed to make it with the strangers
outside?” Suppose, purely as a
hypothesis, that the owner of a company
who orders his subordinates to obey the
antitrust
laws
has
such
poor
communication with himself that he does
not really know whether he wants the
order to be complied with or not. If his
order is disobeyed, the resulting pricefixing may benefit his company’s coffers;
if it is obeyed, then he has done the right
thing. In the first instance, he is not
personally
implicated
in
any
wrongdoing, while in the second he is
positively involved in right doing.
What, after all, can he lose? It is perhaps
reasonable to suppose that such an
executive might communicate his
uncertainty more forcefully than his
order. Possibly yet another foundation
grantee should have a look at the reverse
of communication failure, where he
might discover that messages the sender
does not even realize he is sending
sometimes turn out to have got across
only too effectively.
Meanwhile, in the first years after the
Subcommittee
concluded
its
investigation, the defendant companies
were by no means allowed to forget
their transgressions. The law permits
customers who can prove that they have
paid artificially high prices as a result of
antitrust violations to sue for damages—
in most cases, triple damages—and suits
running into many millions of dollars
piled up so high that Chief Justice
Warren had to set up a special panel of
federal judges to plan how they should
all be handled. Needless to say,
Cordiner was not allowed to forget
about the matter, either; indeed, it would
be surprising if he was allowed a chance
to think about much else, for, in addition
to the suits, he had to contend with
active efforts—unsuccessful, as it turned
out—by
a
minority
group
of
stockholders to unseat him. Paxton
retired as president in April, 1961,
because of ill health dating back at least
to the previous January, when he
underwent a major operation. As for the
executives who pleaded guilty and were
fined or imprisoned, most of those who
had been employed by companies other
than G.E. remained with them, either in
their old jobs or in similar ones. Of
those who had been employed by G.E.,
none remained there. Some retired
permanently from business, others
settled for comparatively small jobs, and
a few landed big ones—most
spectacularly Ginn, who in June, 1961,
became president of Baldwin-LimaHamilton, manufacturers of heavy
machinery. And as for the future of
price-fixing in the electrical industry, it
seems safe to say that what with the
Justice Department, Judge Ganey,
Senator Kefauver, and the triple-damage
suits, the impact on the philosophers
who guide corporate policy was such
that they, and even their subordinates,
were likely to try to hew scrupulously to
the line for quite some time. Quite a
different question, however, is whether
they had made any headway in their
ability to communicate.
8
The Last Great Corner
and midsummer, 1958,
the common stock of the E. L. Bruce
Company, the nation’s leading maker of
hardwood floors, moved from a low of
just under $17 a share to a high of $190
a share. This startling, even alarming,
BETWEEN SPRING
rise was made in an ascending scale that
was climaxed by a frantic crescendo in
which the price went up a hundred
dollars a share in a single day. Nothing
of the sort had happened for a
generation. Furthermore—and even
more alarming—the rise did not seem to
have the slightest bit of relation to any
sudden hunger on the part of the
American public for new hardwood
floors. To the consternation of almost
everyone
concerned,
conceivably
including even some of the holders of
Bruce stock, it seemed to be entirely the
result of a technical stock-market
situation called a corner. With the
exception of a general panic such as
occurred in 1929, a corner is the most
drastic and spectacular of all
developments that can occur in the stock
market, and more than once in the
nineteenth and early twentieth centuries,
corners had threatened to wreck the
national economy.
The Bruce situation never threatened
to do that. For one thing, the Bruce
Company was so small in relation to the
economy as a whole that even the
wildest gyrations in its stock could
hardly have much national effect. For
another, the Bruce “corner” was
accidental—the by-product of a fight for
corporate control—rather than the result
of calculated manipulations, as most of
the historic corners had been. Finally,
this one eventually turned out to be not a
true corner at all, but only a near thing;
in September, Bruce stock quieted down
and settled at a reasonable level. But the
incident served to stir up memories,
some of them perhaps tinged with
nostalgia, among those flinty old Wall
Streeters who had been around to see the
classic corners—or at least the last of
them.
In June of 1922, the New York Stock
Exchange began listing the shares of a
corporation called Piggly Wiggly Stores
—a chain of retail self-service markets
situated mostly in the South and West,
with headquarters in Memphis—and the
stage was set for one of the most
dramatic financial battles of that gaudy
decade when Wall Street, only
negligently watched over by the federal
government, was frequently sent reeling
by the machinations of operators seeking
to enrich themselves and destroy their
enemies. Among the theatrical aspects of
this particular battle—a battle so
celebrated in its time that headline
writers referred to it simply as the
“Piggly Crisis”—was the personality of
the hero (or, as some people saw it, the
villain), who was a newcomer to Wall
Street, a country boy setting out
defiantly, amid the cheers of a good part
of rural America, to lay the slick
manipulators of New York by the heels.
He was Clarence Saunders, of Memphis,
a plump, neat, handsome man of fortyone who was already something of a
legend in his home town, chiefly because
of a house he was putting up there for
himself. Called the Pink Palace, it was
an enormous structure faced with pink
Georgia marble and built around an
awe-inspiring white-marble Roman
atrium, and, according to Saunders, it
would stand for a thousand years.
Unfinished though it was, the Pink
Palace was like nothing Memphis had
ever seen before. Its grounds were to
include a private golf course, since
Saunders liked to do his golfing in
seclusion. Even the makeshift estate
where he and his wife and four children
were camping out pending completion of
the Palace had its own golf course.
(Some people said that his preference
for privacy was induced by the attitude
of the local country club governors, who
complained that he had corrupted their
entire supply of caddies by the grandeur
of his tips.) Saunders, who had founded
the Piggly Wiggly Stores in 1919, had
most of the standard traits of the
flamboyant American promoters—
suspect generosity, a knack for attracting
publicity, love of ostentation, and so on
—but he also had some much less
common traits, notably a remarkably
vivid style, both in speech and writing,
and a gift, of which he may or may not
have been aware, for comedy. But like
so many great men before him, he had a
weakness, a tragic flaw. It was that he
insisted on thinking of himself as a hick,
a boob, and a sucker, and, in doing so,
he sometimes became all three.
This unlikely fellow was the man who
engineered the last real corner in a
nationally traded stock.
game of Corner—for in its heyday it
was a game, a high-stakes gambling
game, pure and simple, embodying a
good many of the characteristics of
poker—was one phase of the endless
Wall Street contest between bulls, who
want the price of a stock to go up, and
bears, who want it to go down. When a
game of Corner was under way, the
THE
bulls’ basic method of operation was, of
course, to buy stock, and the bears’ was
to sell it. Since the average bear didn’t
own any of the stock issue in contest, he
would resort to the common practice of
selling short. When a short sale is made,
the transaction is consummated with
stock that the seller has borrowed (at a
suitable rate of interest) from a broker.
Since brokers are merely agents, and not
outright owners, they, in turn, must
borrow the stock themselves. This they
do by tapping the “floating supply” of
stock that is in constant circulation
among investment houses—stock that
private investors have left with one
house or another for trading purposes,
stock that is owned by estates and trusts
and has been released for action under
certain prescribed conditions, and so on.
In essence, the floating supply consists
of all the stock in a particular
corporation that is available for trading
and is not immured in a safe-deposit box
or encased in a mattress. Though the
supply floats, it is scrupulously kept
track of; the short seller, borrowing, say,
a thousand shares from his broker,
knows that he has incurred an immutable
debt. What he hopes—the hope that
keeps him alive—is that the market price
of the stock will go down, enabling him
to buy the thousand shares he owes at a
bargain rate, pay off his debt, and pocket
the difference. What he risks is that the
lender, for one reason or another, may
demand that he deliver up his thousand
borrowed shares at a moment when their
market price is at a high. Then the
grinding truth of the old Wall Street
jingle is borne in upon him: “He who
sells what isn’t his’n must buy it back or
go to prison.” And in the days when
corners were possible, the short seller’s
sleep was further disturbed by the fact
that he was operating behind blank
walls; dealing only with agents, he never
knew either the identity of the purchaser
of his stock (a prospective cornerer?) or
the identity of the owner of the stock he
had borrowed (the same prospective
cornerer, attacking from the rear?).
Although it is sometimes condemned
as being the tool of the speculator, short
selling is still sanctioned, in a severely
restricted form, on all of the nation’s
exchanges. In its unfettered state, it was
the standard gambit in the game of
Corner. The situation would be set up
when a group of bears would go on a
well-organized spree of short selling,
and would often help their cause along
by spreading rumors that the company
back of the stock in question was on its
last legs. This operation was called a
bear raid. The bulls’ most formidable—
but, of course, riskiest—counter-move
was to try for a corner. Only a stock that
many traders were selling short could be
cornered; a stock that was in the throes
of a real bear raid was ideal. In the
latter situation, the would-be cornerer
would attempt to buy up the investment
houses’ floating supply of the stock and
enough of the privately held shares to
freeze out the bears; if the attempt
succeeded, when he called for the short
sellers to make good the stock they had
borrowed, they could buy it from no one
but him. And they would have to buy it at
any price he chose to ask, their only
alternatives—at least theoretically—
being to go into bankruptcy or to jail for
failure to meet their obligations.
In the old days of titanic financial
death struggles, when Adam Smith’s
ghost still smiled on Wall Street, corners
were fairly common and were often
extremely sanguinary, with hundreds of
innocent bystanders, as well as the
embattled principals, getting their
financial heads lopped off. The most
famous cornerer in history was that
celebrated old pirate, Commodore
Cornelius Vanderbilt, who engineered no
less than three successful corners during
the eighteen-sixties. Probably his classic
job was in the stock of the Harlem
Railway. By dint of secretly buying up
all its available shares while
simultaneously circulating a series of
untruthful rumors of imminent bankruptcy
to lure the short sellers in, he achieved
an airtight trap. Finally, with the air of a
man doing them a favor by saving them
from jail, he offered the cornered shorts
at $179 a share the stock he had bought
up at a small fraction of that figure. The
most generally disastrous corner was
that of 1901 in the stock of Northern
Pacific; to raise the huge quantities of
cash they needed to cover themselves,
the Northern Pacific shorts sold so many
other stocks as to cause a national panic
with world-wide repercussions. The
next-to-last great corner occurred in
1920, when Allan A. Ryan, a son of the
legendary Thomas Fortune Ryan, in
order to harass his enemies in the New
York Stock Exchange, sought to corner
the stock of the Stutz Motor Company,
makers of the renowned Stutz Bearcat.
Ryan achieved his corner and the Stock
Exchange short sellers were duly
squeezed. But Ryan, it turned out, had a
bearcat by the tail. The Stock Exchange
suspended Stutz dealings, lengthy
litigation followed, and Ryan came out
of the affair financially ruined.
Then, as at other times, the game of
Corner suffered from a difficulty that
plagues other games—post-mortem
disputes about the rules. The reform
legislation of the nineteen-thirties, by
outlawing any short selling that is
specifically intended to demoralize a
stock, as well as other manipulations
leading toward corners, virtually ruled
the game out of existence. Wall Streeters
who speak of the Corner these days are
referring to the intersection of Broad and
Wall. In U.S. stock markets, only an
accidental corner (or near-corner, like
the Bruce one) is now possible;
Clarence Saunders was the last
intentional player of the game.
has
been
variously
characterized by people who knew him
well as “a man of limitless imagination
and energy,” “arrogant and conceited as
all getout,” “essentially a four-year-old
child, playing at things,” and “one of the
most remarkable men of his generation.”
But there is no doubt that even many of
the people who lost money on his
promotional schemes believed that he
was the soul of honesty. He was born in
1881 to a poor family in Amherst
SAUNDERS
County, Virginia, and in his teens was
employed by the local grocer at the
pittance that is orthodox for future
tycoons taking on their first jobs—in his
case, four dollars a week. Moving ahead
fast, he went on to a wholesale grocery
company in Clarksville, Tennessee, and
then to one in Memphis, and, while still
in his twenties, organized a small retail
food chain called United Stores. He sold
that after a few years, did a stint as a
wholesale grocer on his own, and then,
in 1919, began to build a chain of retail
self-service markets, to which he gave
the engaging name of Piggly Wiggly
Stores. (When a Memphis business
associate once asked him why he had
chosen that name, he replied, “So people
would ask me what you just did.”) The
stores flourished so exuberantly that by
the autumn of 1922 there were over
twelve hundred of them. Of these, some
six hundred and fifty were owned
outright by Saunders’ Piggly Wiggly
Stores, Inc.; the rest were independently
owned, but their owners paid royalties
to the parent company for the right to
adopt its patented method of operations.
In 1923, an era when a grocery store
meant clerks in white aprons and often a
thumb on the scale, this method was
described by the New York Times with
astonishment: “The customer in a Piggly
Wiggly Store rambles down aisle after
aisle, on both sides of which are
shelves. The customer collects his
purchases and pays as he goes out.”
Although Saunders did not know it, he
had invented the supermarket.
A natural concomitant of the rapid rise
of Piggly Wiggly Stores, Inc., was the
acceptance of its shares for listing on the
New York Stock Exchange, and within
six months of that event Piggly Wiggly
stock had become known as a
dependable, if unsensational, dividendpayer—the kind of widows’-andorphans’ stock that speculators regard
with the respectful indifference that
crap-shooters feel about bridge. This
reputation, however, was shortlived. In
November,
1922,
several
small
companies that had been operating
grocery stores in New York, New
Jersey, and Connecticut under the name
Piggly Wiggly failed and went into
receivership. These companies had
scarcely any connection with Saunders’
concern; he had merely sold them the
right to use his firm’s catchy trade name,
leased them some patented equipment,
and washed his hands of them. But when
these independent Piggly Wigglys failed,
a group of stock-market operators
(whose identities never were revealed,
because they dealt through tight-lipped
brokers) saw in the situation a heavensent opportunity for a bear raid. If
individual Piggly Wiggly stores were
failing, they reasoned, then rumors could
be spread that would lead the
uninformed public to believe that the
parent firm was failing, too. To further
this belief, they began briskly selling
Piggly Wiggly short, in order to force the
price down. The stock yielded readily to
their pressure, and within a few weeks
its price, which earlier in the year had
hovered around fifty dollars a share,
dropped to below forty.
At this point, Saunders announced to
the press that he was about to “beat the
Wall Street professionals at their own
game” with a buying campaign. He was
by no means a professional himself; in
fact, prior to the listing of Piggly Wiggly
he had never owned a single share of
any stock quoted on the New York Stock
Exchange. There is little reason to
believe that at the beginning of his
buying campaign he had any intention of
trying for a corner; it seems more likely
that
his
announced
motive—the
unassailable one of supporting the price
of the stock in order to protect his own
investment and that of other Piggly
Wiggly stockholders—was all he had in
mind. In any case, he took on the bears
with characteristic zest, supplementing
his own funds with a loan of about ten
million dollars from a group of bankers
in Memphis, Nashville, New Orleans,
Chattanooga, and St. Louis. Legend has
it that he stuffed his ten million-plus, in
bills of large denomination, into a
suitcase, boarded a train for New York,
and, his pockets bulging with currency
that wouldn’t fit in the suitcase, marched
on Wall Street, ready to do battle. He
emphatically denied this in later years,
insisting that he had remained in
Memphis and masterminded his
campaign by means of telegrams and
long-distance telephone calls to various
Wall Street brokers. Wherever he was at
the time, he did round up a corps of
some twenty brokers, among them Jesse
L. Livermore, who served as his chief of
staff. Livermore, one of the most
celebrated American speculators of this
century, was then forty-five years old but
was still occasionally, and derisively,
referred to by the nickname he had
earned a couple of decades earlier—the
Boy Plunger of Wall Street. Since
Saunders regarded Wall Streeters in
general and speculators in particular as
parasitic scoundrels intent only on
battering down his stock, it seemed
likely that his decision to make an ally of
Livermore was a reluctant one, arrived
at simply with the idea of getting the
enemy chieftain into his own camp.
On the first day of his duel with the
bears, Saunders, operating behind his
mask of brokers, bought 33,000 shares
of Piggly Wiggly, mostly from the short
sellers; within a week he had brought the
total to 105,000—more than half of the
200,000 shares outstanding. Meanwhile,
ventilating his emotions at the cost of
tipping his hand, he began running a
series of advertisements in which he
vigorously and pungently told the
readers of Southern and Western
newspapers what he thought of Wall
Street. “Shall the gambler rule?” he
demanded in one of these effusions. “On
a white horse he rides. Bluff is his coat
of mail and thus shielded is a yellow
heart. His helmet is deceit, his spurs
clink with treachery, and the hoofbeats
of his horse thunder destruction. Shall
good business flee? Shall it tremble with
fear? Shall it be the loot of the
speculator?” On Wall Street, Livermore
went on buying Piggly Wiggly.
The effectiveness of Saunders’ buying
campaign was readily apparent; by late
January of 1923 it had driven the price
of the stock up over 60, or higher than
ever before. Then, to intensify the bear
raiders’ jitters, reports came in from
Chicago, where the stock was also
traded, that Piggly Wiggly was cornered
—that the short sellers could not replace
the stock they had borrowed without
coming to Saunders for supplies. The
reports were immediately denied by the
New York Stock Exchange, which
announced that the floating supply of
Piggly Wiggly was ample, but they may
have put an idea into Saunders’ head,
and this, in turn, may have prompted a
curious and—at first glance—mystifying
move he made in mid-February, when, in
another widely disseminated newspaper
advertisement, he offered to sell fifty
thousand shares of Piggly Wiggly stock
to the public at fifty-five dollars a share.
The ad pointed out, persuasively enough,
that the stock was paying a dividend of a
dollar four times a year—a return of
more than 7 percent. “This is to be a
quick proposition, subject to withdrawal
without prior notice,” the ad went on,
calmly but urgently. “To get in on the
ground floor of any big proposition is
the opportunity that comes to few, and
then only once in a lifetime.”
Anyone who is even slightly familiar
with modern economic life can scarcely
help wondering what the Securities and
Exchange Commission, which is charged
with seeing to it that all financial
advertising is kept factual, impersonal,
and unemotional, would have had to say
about the hard sell in those last two
sentences. But if Saunders’ first stockoffering ad would have caused an S.E.C.
examiner to turn pale, his second,
published four days later, might well
have induced an apoplectic seizure. A
full-page affair, it cried out, in huge
black type:
OPPORTUNITY! OPPORTUNITY!
It Knocks! It Knocks! It Knocks!
Do you hear? Do you listen? Do you understand?
Do you wait? Do you act now?…
Has a new Daniel appeared and the lions eat him
not?
Has a new Joseph come that riddles may be made
plain?
Has a new Moses been born to a new Promised
Land?
Why, then, asks the skeptical, can CLARENCE
SAUNDERS … be so generous to the public?
After finally making it clear that he
was selling common stock and not snake
oil, Saunders repeated his offer to sell at
fifty-five dollars a share, and went on to
explain that he was being so generous
because, as a farsighted businessman, he
was anxious to have Piggly Wiggly
owned by its customers and other small
investors, rather than by Wall Street
sharks. To many people, though, it
appeared that Saunders was being
generous to the point of folly. The price
of Piggly Wiggly on the New York Stock
Exchange was just then pushing 70; it
looked as if Saunders were handing
anyone who had fifty-five dollars in his
pocket a chance to make fifteen dollars
with no risk. The arrival of a new
Daniel, Joseph, or Moses might be
debatable, but opportunity certainly did
seem to be knocking, all right.
Actually, as the skeptical must have
suspected, there was a catch. In making
what sounded like such a costly and
unbusinesslike offer, Saunders, a rank
novice at Corner, had devised one of the
craftiest dodges ever used in the game.
One of the great hazards in Corner was
always that even though a player might
defeat his opponents, he would discover
that he had won a Pyrrhic victory. Once
the short sellers had been squeezed dry,
that is, the cornerer might find that the
reams of stock he had accumulated in the
process were a dead weight around his
neck; by pushing it all back into the
market in one shove, he would drive its
price down close to zero. And if, like
Saunders, he had had to borrow heavily
to get into the game in the first place, his
creditors could be expected to close in
on him and perhaps not only divest him
of his gains but drive him into
bankruptcy.
Saunders
apparently
anticipated this hazard almost as soon as
a corner was in sight, and accordingly
made plans to unload some of his stock
before winning instead of afterward. His
problem was to keep the stock he sold
from going right back into the floating
supply, thus breaking his corner; and his
solution was to sell his fifty-five-dollar
shares on the installment plan. In his
February advertisements, he stipulated
that the public could buy shares only by
paying twenty-five dollars down and the
balance in three ten-dollar installments,
due June 1st, September 1st, and
December 1st. In addition—and vastly
more important—he said he would not
turn over the stock certificates to the
buyers until the final installment had
been paid. Since the buyers obviously
couldn’t sell the certificates until they
had them, the stock could not be used to
replenish the floating supply. Thus
Saunders had until December 1st to
squeeze the short sellers dry.
Easy as it may be to see through
Saunders’ plan by hindsight, his
maneuver was then so unorthodox that
for a while neither the governors of the
Stock Exchange nor Livermore himself
could be quite sure what the man in
Memphis was up to. The Stock Exchange
began making formal inquiries, and
Livermore began getting skittish, but he
went on buying for Saunders’ account,
and succeeded in pushing Piggly
Wiggly’s price up well above 70. In
Memphis,
Saunders
sat
back
comfortably; he temporarily ceased
singing the praises of Piggly Wiggly
stock in his ads, and devoted them to
eulogizing apples, grapefruit, onions,
hams, and Lady Baltimore cakes. Early
in March, though, he ran another
financial ad, repeating his stock offer
and inviting any readers who wanted to
discuss it with him to drop in at his
Memphis office. He also emphasized
that quick action was necessary; time
was running out.
By now, it was apparent that Saunders
was trying for a corner, and on Wall
Street it was not only the Piggly Wiggly
bears who were becoming apprehensive.
Finally, Livermore, possibly reflecting
that in 1908 he had lost almost a million
dollars trying to get a corner in cotton,
could stand it no longer. He demanded
that Saunders come to New York and
talk things over. Saunders arrived on the
morning of March 12th. As he later
described the meeting to reporters, there
was a difference of opinion; Livermore,
he said—and his tone was that of a man
rather set up over having made a piker
out of the Boy Plunger—“gave me the
impression that he was a little afraid of
my financial situation and that he did not
care to be involved in any market
crash.” The upshot of the conference
was that Livermore bowed out of the
Piggly Wiggly operation, leaving
Saunders to run it by himself. Saunders
then boarded a train for Chicago to
attend to some business there. At
Albany, he was handed a telegram from
a member of the Stock Exchange who
was the nearest thing he had to a friend
in the white-charger-and-coat-of-mail
set. The telegram informed him that his
antics had provoked a great deal of
head-shaking in the councils of the
Exchange, and urged him to stop creating
a second market by advertising stock for
sale at a price so far below the quotation
on the Exchange. At the next station,
Saunders telegraphed back a rather
unresponsive reply. If it was a possible
corner the Exchange was fretting about,
he said, he could assure the governors
that they could put their fears aside,
since he himself was maintaining the
floating supply by daily offering stock
for loan in any amount desired. But he
didn’t say how long he would continue
to do so.
A week later, on Monday, March 19th,
Saunders ran a newspaper ad stating that
his stock offer was about to be
withdrawn; this was the last call. At the
time, or so he claimed afterward, he had
acquired all but 1,128 of Piggly
Wiggly’s 200,000 outstanding shares, for
a total of 198,872, some of which he
owned and the rest of which he
“controlled”—a reference to the
installment-plan
shares
whose
certificates he still held. Actually, this
figure was open to considerable
argument (there was one private investor
in Providence, for instance, who alone
held eleven hundred shares), but there is
no denying that Saunders had in his
hands practically every single share of
Piggly Wiggly then available for trading
—and that he therefore had his corner.
On that same Monday, it is believed,
Saunders telephoned Livermore and
asked if he would relent long enough to
see the Piggly Wiggly project through by
calling for delivery of all the shares that
were owed Saunders; in other words,
would Livermore please spring the trap?
Nothing doing, Livermore is supposed to
have replied, evidently considering
himself well out of the whole affair. So
the following morning, Tuesday, March
20th, Saunders sprang the trap himself.
turned out to be one of Wall Street’s
wilder days. Piggly Wiggly opened at
75½, up 5½ from the previous days’
closing price. An hour after the opening,
word arrived that Saunders had called
for delivery of all his Piggly Wiggly
stock. According to the rules of the
Exchange, stock called for under such
circumstances had to be produced by
two-fifteen the following afternoon. But
Piggly Wiggly, as Saunders well knew,
IT
simply wasn’t to be had—except, of
course, from him. To be sure, there were
a few shares around that were still held
by private investors, and frantic short
sellers trying to shake them loose bid
their price up and up. But by and large
there wasn’t much actual trading in
Piggly Wiggly, because there was so
little Piggly Wiggly to be traded. The
Stock Exchange post where it was
bought and sold became the center of a
mob scene as two-thirds of the brokers
on the floor clustered around it, a few of
them to bid but most of them just to push,
whoop, and otherwise get in on the
excitement. Desperate short sellers
bought Piggly Wiggly at 90, then at 100,
then at 110. Reports of sensational
profits made the rounds. The Providence
investor, who had picked up his eleven
hundred shares at 39 in the previous
autumn, while the bear raid was in full
cry, came to town to be in on the kill,
unloaded his holdings at an average
price of 105, and then caught an
afternoon train back home, taking with
him a profit of over seventy thousand
dollars. As it happened, he could have
done even better if he had bided his
time; by noon, or a little after, the price
of Piggly Wiggly had risen to 124, and it
seemed destined to zoom straight through
the lofty roof above the traders’ heads.
But 124 was as high as it went, for that
figure had barely been recorded when a
rumor reached the floor that the
governors of the Exchange were meeting
to consider the suspension of further
trading in the stock and the postponement
of the short sellers’ deadline for
delivery. The effect of such action would
be to give the bears time to beat the
bushes for stock, and thus to weaken, if
not break, Saunders’ corner. On the basis
of the rumor alone, Piggly Wiggly fell to
82 by the time the Exchange’s closing
bell ended the chaotic session.
The rumor proved to be true. After the
close of business, the Governing
Committee of the Exchange announced
both the suspension of trading in Piggly
Wiggly and the extension of the short
sellers’ delivery deadline “until further
action by this committee.” There was no
immediate official reason given for this
decision, but some members of the
committee unofficially let it be known
that they had been afraid of a repetition
of the Northern Pacific panic if the
corner were not broken. On the other
hand, irreverent side-liners were
inclined to wonder whether the
Governing Committee had not been
moved by the pitiful plight of the
cornered short sellers, many of whom—
as in the Stutz Motor case two years
earlier—were believed to be members
of the Exchange.
Despite all this, Saunders, in
Memphis, was in a jubilant, expansive
mood that Tuesday evening. After all, his
paper profits at that moment ran to
several million dollars. The hitch, of
course, was that he could not realize
them, but he seems to have been slow to
grasp that fact or to understand the extent
to which his position had been
undermined. The indications are that he
went to bed convinced that, besides
having personally brought about a firstclass mess on the hated Stock Exchange,
he had made himself a bundle and had
demonstrated how a poor Southern boy
could teach the city slickers a lesson. It
all must have added up to a heady
sensation. But, like most such sensations,
it didn’t last long. By Wednesday
evening, when Saunders issued his first
public utterance on the Piggly Crisis, his
mood had changed to an odd mixture of
puzzlement, defiance, and a somewhat
muted echo of the crowing triumph of the
night before. “A razor to my throat,
figuratively speaking, is why I suddenly
and without warning kicked the pegs
from under Wall Street and its gang of
gamblers and market manipulators,” he
declared in a press interview. “It was
strictly a question of whether I should
survive, and likewise my business and
the fortunes of my friends, or whether I
should be ‘licked’ and pointed to as a
boob from Tennessee. And the
consequence was that the boastful and
supposedly invulnerable Wall Street
powers
found
their
methods
controverted by well-laid plans and
quick action.” Saunders wound up his
statement by laying down his terms: the
Stock Exchange’s deadline extension
notwithstanding, he would expect
settlement in full on all short stock by 3
P.M. the next day—Thursday—at $150 a
share; thereafter his price would be
$250.
On Thursday, to Saunders’ surprise,
very few short sellers came forward to
settle; presumably those who did
couldn’t stand the uncertainty. But then
the Governing Committee kicked the
pegs from under Saunders by announcing
that the stock of Piggly Wiggly was
permanently stricken from its trading list
and that the short sellers would be given
a full five days from the original
deadline—that is, until two-fifteen the
following Monday—to meet their
obligations. In Memphis, Saunders, far
removed from the scene though he was,
could not miss the import of these moves
—he was now on the losing end of
things. Nor could he any longer fail to
see that the postponement of the short
sellers’ deadline was the vital issue. “As
I understand it,” he said in another
statement, handed to reporters that
evening, “the failure of a broker to meet
his clearings through the Stock Exchange
at the appointed time is the same as a
bank that would be unable to meet its
clearings, and all of us know what
would happen to that kind of a bank.…
The bank examiner would have a sign
stuck up on the door with the word
‘Closed.’ It is unbelievable to me that
the august and all-powerful New York
Stock Exchange is a welcher. Therefore
I continue to believe that the … shares of
stock still due me on contracts … will
be settled on the proper basis.” An
editorial in the Memphis Commercial
Appeal backed up Saunders’ cry of
treachery, declaring, “This looks like
what gamblers call welching. We hope
the home boy beats them to a frazzle.”
That
same
Thursday,
by a
coincidence, the annual financial report
of Piggly Wiggly Stores, Inc., was made
public. It was a highly favorable one—
sales, profits, current assets, and all
other significant figures were up sharply
over the year before—but nobody paid
any attention to it. For the moment, the
real worth of the company was
irrelevant; the point was the game.
Friday morning, the Piggly Wiggly
bubble burst. It burst because Saunders,
who had said his price would rise to
$250 a share after 3 P.M. Thursday, made
the startling announcement that he would
settle for a hundred. E. W. Bradford,
Saunders’ New York lawyer, was asked
why Saunders had suddenly granted this
striking concession. Saunders had done
it out of the generosity of his heart,
ON
Bradford replied gamely, but the truth
was soon obvious: Saunders had made
the concession because he’d had to. The
postponement granted by the Stock
Exchange had given the short sellers and
their brokers a chance to scan lists of
Piggly Wiggly stockholders, and from
these they had been able to smoke out
small blocks of shares that Saunders had
not cornered. Widows and orphans in
Albuquerque and Sioux City, who knew
nothing about short sellers and corners,
were only too happy, when pressed, to
dig into their mattresses or safe-deposit
boxes and sell—in the so-called overthe-counter market, since the stock could
no longer be traded on the Exchange—
their ten or twenty shares of Piggly
Wiggly for at least double what they had
paid for them. Consequently, instead of
having to buy stock from Saunders at his
price of $250 and then hand it back to
him in settlement of their loans, many of
the short sellers were able to buy it in
over-the-counter trading at around a
hundred dollars, and thus, with bitter
pleasure, pay off their Memphis
adversary not in cash but in shares of
Piggly Wiggly—the very last thing he
wanted just then. By nightfall Friday,
virtually all the short sellers were in the
clear,
having
redeemed
their
indebtedness either by these over-thecounter purchases or by paying Saunders
cash at his own suddenly deflated rate of
a hundred dollars a share.
That evening, Saunders released still
another statement, and this one, while
still defiant, was unmistakably a howl of
anguish. “Wall Street got licked and then
called for ‘mamma,’” it read. “Of all the
institutions in America, the New York
Stock Exchange is the worst menace of
all in its power to ruin all who dare to
oppose it. A law unto itself … an
association of men who claim the right
that no king or autocrat ever dared to
take: to make a rule that applies one day
on contracts and abrogate it the next day
to let out a bunch of welchers.… My
whole life from this day on will be
aimed toward the end of having the
public protected from a like occurrence.
… I am not afraid. Let Wall Street get
me if they can.” But it appeared that
Wall Street had got him; his corner was
broken, leaving him deeply in debt to the
syndicate of Southern bankers and
encumbered with a mountain of stock
whose immediate future was, to say the
least, precarious.
fulminations did not go
unheeded on Wall Street, and as a result
the Exchange felt compelled to justify
itself. On Monday, March 26th, shortly
after the Piggly Wiggly short sellers’
deadline had passed and Saunders’
corner was, for all practical purposes, a
dead issue, the Exchange offered its
apologia, in the form of a lengthy review
of the crisis from beginning to end. In
SAUNDEES’
presenting its case, the Exchange
emphasized the public harm that might
have been done if the corner had gone
unbroken, explaining, “The enforcement
simultaneously of all contracts for the
return of the stock would have forced the
stock to any price that might be fixed by
Mr. Saunders, and competitive bidding
for the insufficient supply might have
brought about conditions illustrated by
other corners, notably the Northern
Pacific corner in 1901.” Then, its syntax
yielding to its sincerity, the Exchange
went on to say that “the demoralizing
effects of such a situation are not limited
to those directly affected by the contracts
but extends to the whole market.”
Getting down to the two specific actions
it had taken—the suspension of trading
in Piggly Wiggly and the extension of the
short sellers’ deadline—the Exchange
argued that both of them were within the
bounds of its own constitution and rules,
and therefore irreproachable. Arrogant
as this may sound now, the Exchange had
a point; in those days its rules were just
about the only controls over stock
trading.
The question of whether, even by their
own rules, the slickers really played fair
with the boob is still debated among
fiscal antiquarians. There is strong
presumptive evidence that the slickers
themselves later came to have their
doubts. Regarding the right of the
Exchange to suspend trading in a stock
there can be no argument, since the right
was, as the Exchange claimed at the
time, specifically granted in its
constitution. But the right to postpone the
deadline for short sellers to honor their
contracts, though also claimed at the
time, is another matter. In June, 1925,
two years after Saunders’ corner, the
Exchange felt constrained to amend its
constitution with an article stating that
“whenever in the opinion of the
Governing Committee a corner has been
created in a security listed on the
Exchange … the Governing Committee
may postpone the time for deliveries on
Exchange contracts therein.” By
adopting a statute authorizing it to do
what it had done long before, the
Exchange would seem, at the very least,
to have exposed a guilty conscience.
immediate aftermath of the Piggly
Crisis was a wave of sympathy for
Saunders. Throughout the hinterland, the
public image of him became that of a
gallant champion of the underdog who
had been ruthlessly crushed. Even in
New York, the very lair of the Stock
Exchange, the Times conceded in an
editorial that in the minds of many
people Saunders represented St. George
and the Stock Exchange the dragon. That
the dragon triumphed in the end, said the
Times, was “bad news for a nation at
least 66⅔ per cent ‘sucker,’ which had
THE
its moment of triumph when it read that a
sucker had trimmed the interests and had
his foot on Wall Street’s neck while the
vicious manipulators gasped their lives
away.”
Not a man to ignore such a host of
friendly fellow suckers, Saunders went
to work to turn them to account. And he
needed them, for his position was
perilous indeed. His biggest problem
was what to do about the ten million
dollars that he owed his banker backers
—and didn’t have. The basic plan
behind his corner—if he had had any
plan at all—must have been to make
such a killing that he could pay back a
big slice of his debt out of the profits,
pay back the rest out of the proceeds
from his public stock sale, and then walk
off with a still huge block of Piggly
Wiggly stock free and clear. Even though
the cut-rate hundred-dollar settlement
had netted him a killing by most men’s
standards (just how much of a killing is
not known, but it has been reliably
estimated at half a million or so), it was
not a fraction of what he might have
reasonably expected it to be, and
because it wasn’t his whole structure
became an arch without a keystone.
Having paid his bankers what he had
received from the short sellers and from
his public stock sale, Saunders found
that he still owed them about five
million dollars, half of it due September
1, 1923, and the balance on January 1,
1924. His best hope of raising the money
lay in selling more of the vast bundle of
Piggly Wiggly shares he still had on
hand. Since he could no longer sell them
on the Exchange, he resorted to his
favorite form of self-expression—
newspaper advertising, this time
supplemented with a mail-order pitch
offering Piggly Wiggly again at fifty-five
dollars. It soon became evident, though,
that public sympathy was one thing and
public willingness to translate sympathy
into cash was quite another. Everyone,
whether in New York, Memphis, or
Texarkana, knew about the recent
speculative shenanigans in Piggly
Wiggly and about the dubious state of the
president’s finances. Not even Saunders’
fellow suckers would have any part of
his deal now, and the campaign was a
bleak failure.
Sadly accepting this fact, Saunders
next appealed to the local and regional
pride of his Memphis neighbors by
turning his remarkable powers of
persuasion to the job of convincing them
that his financial dilemma was a civic
issue. If he should go broke, he argued, it
would reflect not only on the character
and business acumen of Memphis but on
Southern honor in general. “I do not ask
for charity,” he wrote in one of the large
ads he always seemed able to find the
cash for, “and I do not request any
flowers for my financial funeral, but I do
ask … everybody in Memphis to
recognize and know that this is a serious
statement made for the purpose of
acquainting those who wish to assist in
this matter, that they may work with me,
and with other friends and believers in
my business, in a Memphis campaign to
have every man and woman who
possibly can in this city become one of
the partners of the Piggly Wiggly
business, because it is a good investment
first, and, second, because it is the right
thing to do.” Raising his sights in a
second ad, he declared, “For Piggly
Wiggly to be ruined would shame the
whole South.”
Just which argument proved the
clincher in persuading Memphis that it
should try to pull Saunders’ chestnuts out
of the fire is hard to say, but some part of
his line of reasoning clicked, and soon
the Memphis Commercial Appeal was
urging the town to get behind the
embattled local boy. The response of the
city’s business leaders was truly
inspiring to Saunders. A whirlwind
three-day campaign was planned, with
the object of selling fifty thousand shares
of his stock to the citizens of Memphis at
the old magic figure of fifty-five dollars
a share; in order to give buyers some
degree of assurance that they would not
later find themselves alone out on a
limb, it was stipulated that unless the
whole block was sold within the three
days, all sales would be called off. The
Chamber of Commerce sponsored the
drive; the American Legion, the Civitan
Club, and the Exchange Club fell into
line; and even the Bowers Stores and the
Arrow Stores, both competitors of
Piggly Wiggly in Memphis, agreed to
plug the worthy cause. Hundreds of
civic-minded volunteers signed up to
ring doorbells. On May 3rd, five days
before the scheduled start of the
campaign, 250 Memphis businessmen
assembled at the Gayoso Hotel for a
kickoff dinner. There were cheers when
Saunders, accompanied by his wife,
entered the dining room; one of the many
after-dinner speakers described him as
“the man who has done more for
Memphis than any in the last thousand
years”—a rousing tribute that put God
knew how many Chickasaw chiefs in
their place. “Business rivalries and
personal differences were swept away
like mists before the sun,” a Commercial
Appeal reporter wrote of the dinner.
The drive got off to a splendid start.
On the opening day—May 8th—society
women and Boy Scouts paraded the
streets of Memphis wearing badges that
read, “We’re One Hundred Per Cent for
Clarence Saunders and Piggly Wiggly.”
Merchants adorned their windows with
placards bearing the slogan “A Share of
Piggly Wiggly Stock in Every Home.”
Telephones
and
doorbells
rang
incessantly. In short order, 23,698 of the
50,000 shares had been subscribed for.
Yet at the very moment when most of
Memphis had become miraculously
convinced that the peddling of Piggly
Wiggly stock was an activity fully as
uplifting as soliciting for the Red Cross
or the Community Chest, ugly doubts
were brewing, and some vipers in the
home nest suddenly demanded that
Saunders consent to an immediate spot
audit of his company’s books. Saunders,
for whatever reasons, refused, but
offered to placate the skeptics by
stepping down as president of Piggly
Wiggly if such a move “would facilitate
the stock-selling campaign.” He was not
asked to give up the presidency, but on
May 9th, the second day of the
campaign, a watchdog committee of four
—three bankers and a businessman—
was appointed by the Piggly Wiggly
directors to help him run the company
for an interim period, while the dust
settled. That same day, Saunders was
confronted with another embarrassing
situation: why, the campaign leaders
wanted to know, was he continuing to
build his million-dollar Pink Palace at a
time when the whole town was working
for him for nothing? He replied hastily
that he would have the place boarded up
the very next day and that there would be
no further construction until his financial
future looked bright again.
The confusion attendant on these two
issues brought the drive to a standstill.
At the end of the third day, the total
number of shares subscribed for was
still under 25,000, and the sales that had
been made were canceled. Saunders had
to admit that the drive had been a failure.
“Memphis has fizzled,” he reportedly
added—although he was at great pains
to deny this a few years later, when he
needed more of Memphis’ money for a
new venture. It would not be surprising,
though, if he had made some such
imprudent remark, for he was
understandably suffering from a case of
frazzled nerves, and was showing the
strain. Just before the announcement of
the campaign’s unhappy end, he went
into a closed conference with several
Memphis business leaders and came out
of it with a bruised cheekbone and a torn
collar. None of the other men at the
meeting showed any marks of violence.
It just wasn’t Saunders’ day.
Although it was never established that
Saunders had had his hand improperly in
the Piggly Wiggly corporate till during
his cornering operation, his first
business move after the collapse of his
attempt to unload stock suggested that he
had at least had good reason to refuse a
spot audit of the company’s books. In
spite of futile grunts of protest from the
watchdog committee, he began selling
not Piggly Wiggly stock but Piggly
Wiggly stores—partly liquidating the
company, that is—and no one knew
where he would stop. The Chicago
stores went first, and those in Denver
and Kansas City soon followed. His
announced intention was to build up the
company’s treasury so that it could buy
the stock that the public had spurned, but
there was some suspicion that the
treasury
desperately
needed
a
transfusion just then—and not of Piggly
Wiggly stock, either. “I’ve got Wall
Street and the whole gang licked,”
Saunders reported cheerfully in June.
But in mid-August, with the September
1st deadline for repayment of two and a
half million dollars on his loan staring
him in the face and with nothing like that
amount of cash either on hand or in
prospect, he resigned as president of
Piggly Wiggly Stores, Inc., and turned
over his assets—his stock in the
company, his Pink Palace, and all the
rest of his property—to his creditors.
It remained only for the formal stamp
of failure to be put on Saunders
personally and on Piggly Wiggly under
his management. On August 22nd, the
New York auction firm of Adrian H.
Muller & Son, which dealt in so many
next-to-worthless stocks that its
salesroom was often called “the
securities graveyard,” knocked down
fifteen hundred shares of Piggly Wiggly
at a dollar a share—the traditional price
for securities that have been run into the
ground—and the following spring
Saunders
went
through
formal
bankruptcy proceedings. But these were
anticlimaxes. The real low point of
Saunders’ career was probably the day
he was forced out of his company’s
presidency, and it was then that, in the
opinion of many of his admirers, he
achieved his rhetorical peak. When he
emerged, harassed but still defiant, from
a directors’ conference and announced
his resignation to reporters, a hush fell.
Then Saunders added hoarsely, “They
have the body of Piggly Wiggly, but they
cannot have the soul.”
IF
by the soul of Piggly Wiggly Saunders
meant himself, then it did remain free—
free to go marching on in its own erratic
way. He never ventured to play another
game of Corner, but his spirit was far
from broken. Although officially
bankrupt, he managed to find people of
truly rocklike faith who were still
willing to finance him, and they enabled
him to live on a scale only slightly less
grand than in the past; reduced to playing
golf at the Memphis Country Club rather
than on his own private course, he
handed out caddy tips that the club
governors considered as corrupting as
ever. To be sure, he no longer owned the
Pink Palace, but this was about the only
evidence that served to remind his
fellow townsmen of his misfortunes.
Eventually, the unfinished pleasure dome
came into the hands of the city of
Memphis, which appropriated $150,000
to finish it and turn it into a museum of
natural history and industrial arts. As
such, it continues to sustain the Saunders
legend in Memphis.
After his downfall, Saunders spent the
better part of three years in seeking
redress of the wrongs that he felt he had
suffered in the Piggly Wiggly fight, and
in foiling the efforts of his enemies and
creditors to make things still more
unpleasant for him. For a while, he kept
threatening to sue the Stock Exchange for
conspiracy and breach of contract, but a
test suit, brought by some small Piggly
Wiggly stockholders, failed, and he
dropped the idea. Then, in January,
1926, he learned that a federal
indictment was about to be brought
against him for using the mails to
defraud in his mail-order campaign to
sell his Piggly Wiggly stock. He
believed,
incorrectly,
that
the
government had been egged on to bring
the indictment by an old associate of his
—John C. Burch, of Memphis, who had
become secretary-treasurer of Piggly
Wiggly after the shakeup. His patience
once more exhausted, Saunders went
around to Piggly Wiggly headquarters
and confronted Burch. This conference
proved far more satisfactory to Saunders
than his board-room scuffle on the day
the Memphis civic stock-selling drive
failed. Burch, according to Saunders,
“undertook in a stammering way to
deny” the accusation, whereupon
Saunders delivered a right to the jaw,
knocking off Burch’s glasses but not
doing much other damage. Burch
afterward belittled the blow as
“glancing,” and added an alibi that
sounded like that of any outpointed
pugilist: “The assault upon me was made
so suddenly that I did not have time or
opportunity to strike Mr. Saunders.”
Burch refused to press charges.
About a month later, the mail-fraud
indictment
was
brought
against
Saunders, but by that time, satisfied that
Burch was innocent of any dirty work,
he was his amiable old self again. “I
have only one thing to regret in this new
affair,” he announced pleasantly, “and
that is my fistic encounter with John C.
Burch.” The new affair didn’t last long;
in April the indictment was quashed by
the Memphis District Court, and
Saunders and Piggly Wiggly were finally
quits. By then, the company was well on
its way back up, and, with a greatly
changed
corporate
structure,
it
flourished on into the nineteen sixties;
housewives continued to ramble down
the aisles of hundreds of Piggly Wiggly
stores, now operated under a franchise
agreement with the Piggly Wiggly
Corporation, of Jacksonville, Florida.
Saunders, too, was well on his way
back up. In 1928, he started a new
grocery chain, which he—but hardly
anyone else—called the Clarence
Saunders, Sole Owner of My Name,
Stores, Inc. Its outlets soon came to be
known as Sole Owner stores, which was
precisely what they weren’t, for without
Saunders’ faithful backers they would
have existed only in his mind. Saunders’
choice of a corporate title, however,
was not designed to mislead the public;
rather, it was his ironic way of
reminding the world that, after the
skinning Wall Street had given him, his
name was about the only thing he still
had a clear title to. How many Sole
Owner customers—or governors of the
Stock Exchange, for that matter—got the
point is questionable. In any case, the
new stores caught on so rapidly and did
so well that Saunders leaped back up
from bankruptcy to riches, and bought a
million-dollar estate just outside
Memphis. He also organized and
underwrote a professional football team
called the Sole Owner Tigers—an
investment that paid off handsomely on
the fall afternoons when he could hear
cries of “Rah! Rah! Rah! Sole Owner!
Sole Owner! Sole Owner!” ringing
through the Memphis Stadium.
the second time, Saunders’ glory
was fleeting. The very first wave of the
depression hit Sole Owner Stores such a
FOR
crushing blow that in 1930 they went
bankrupt, and he was broke again. But
again he pulled himself together and
survived the debacle. Finding backers,
he planned a new chain of grocery
stores, and thought up a name for it that
was more outlandish, if possible, than
either of its predecessors—Keedoozle.
He never made another killing, however,
or bought another million-dollar estate,
though it was always clear that he
expected to. His hopes were pinned on
the Keedoozle, an electrically operated
grocery store, and he spent the better
part of the last twenty years of his life
trying to perfect it. In a Keedoozle store,
the merchandise was displayed behind
glass panels, each with a slot beside it,
like the food in an Automat. There the
similarity ended, for, instead of inserting
coins in the slot to open a panel and lift
out a purchase, Keedoozle customers
inserted a key that they were given on
entering the store. Moreover, Saunders’
thinking had advanced far beyond the
elementary stage of having the key open
the panel; each time a Keedoozle key
was inserted in a slot, the identity of the
item selected was inscribed in code on a
segment of recording tape embedded in
the key itself, and simultaneously the
item was automatically transferred to a
conveyor belt that carried it to an exit
gate at the front of the store. When a
customer had finished his shopping, he
would present his key to an attendant at
the gate, who would decipher the tape
and add up the bill. As soon as this was
paid, the purchases would be catapulted
into the customer’s arms, all bagged and
wrapped, by a device at the end of the
conveyor belt.
A couple of pilot Keedoozle stores
were tried out—one in Memphis and the
other in Chicago—but it was found that
the machinery was too complex and
expensive to compete with supermarket
pushcarts. Undeterred, Saunders set to
work on an even more intricate
mechanism—the Foodelectric, which
would do everything the Keedoozle
could do and add up the bill as well. It
will never corner the retail-store-
equipment market, though, because it
was still unfinished when Saunders died,
in October, 1953, five years too soon for
him to see the Bruce “corner”, which, in
any case, he would have been fully
entitled to scoff at as a mere squabble
among ribbon clerks.
9
A Second Sort of Life
Franklin D. Roosevelt’s
Presidency, when Wall Street and
Washington tended to be on cat-and-dog
terms, perhaps no New Dealer other than
That Man himself better typified the
New Deal in the eyes of Wall Street than
DURING
David Eli Lilienthal. The explanation of
this estimate of him in southern
Manhattan lay not in any specific antiWall Street acts of Lilienthal’s—indeed,
the scattering of financiers, among them
Wendell L. Willkie, who had personal
dealings with him generally found him to
be a reasonable sort of fellow—but in
what he had come to symbolize through
his association with the Tennessee
Valley Authority, which, as a
government-owned
electric-power
concern far larger than any private
power corporation in the country,
embodied Wall Street’s notion of
galloping Socialism. Because Lilienthal
was a conspicuous and vigorous member
of the T.V.A.’s three-man board of
directors from 1933 until 1941, and was
its chairman from 1941 until 1946, the
business community of that period, in his
phrase, thought he “wore horns.” In
1946, he became the first chairman of
the United States Atomic Energy
Commission, and when he gave up that
position, in February, 1950, at the age of
fifty, the Times said in a news story that
he had been “perhaps the most
controversial figure in Washington since
the end of the war.”
What has Lilienthal been up to in the
years since he left the government? As a
matter of public record, he has been up
to a number of things, all of them,
surprisingly, centered on Wall Street or
on private business, or both. For one
thing, Lilienthal is listed in any number
of business compendiums as the cofounder and the chairman of the board of
the
Development
&
Resources
Corporation. Several years ago, I
phoned D. & R.’s offices, then at 50
Broadway, New York City, and
discovered it to be a private firm—Wall
Street-backed as well as, give or take a
block, Wall Street-based—that provides
managerial, technical, business, and
planning
services
toward
the
development of natural resources
abroad. That is to say, D. & R.—whose
other co-founder, the late Gordon R.
Clapp, was Lilienthal’s successor as
T.V.A. chairman—is in the business of
helping governments set up programs
more or less similar to the T.V.A. Since
its formation, in 1955, I learned, D. & R.
had, at moderate but gratifying profit to
itself, planned and managed the
beginnings of a vast scheme for the
reclamation of Khuzistan, an arid and
poverty-stricken, though oil-rich, region
of western Iran; advised the government
of Italy on the development of its
backward southern provinces; helped the
Republic of Colombia set up a T.V.A.like authority for its potentially fertile
but flood-plagued Cauca Valley; and
offered advice to Ghana on water
supply, to the Ivory Coast on mineral
development, and to Puerto Rico on
electric power and atomic energy.
For another thing—and when I found
out about this, it struck me as
considerably more astonishing, on form,
than D. & R.—Lilienthal has made an
authentic fortune as a corporate officer
and entrepreneur. In a proxy statement of
the Minerals & Chemicals Corporation
of America, dated June 24, 1960, that
fell into my hands, I found Lilienthal
listed as a director of the firm and the
holder of 41,366 shares of its common
stock. These shares at the time of my
investigation were being traded on the
New York Stock Exchange at something
over twenty-five dollars each, and
simple multiplication revealed that they
represented a thumping sum by most
men’s standards, certainly including
those of a man who had spent most of his
life on government wages, without the
help of private resources.
And, for still another thing, in 1953
Harper & Brothers brought out
Lilienthal’s third book, “Big Business: A
New Era.” (His previous books were
“T.V.A.: Democracy on the March” and
“This I Do Believe,” which appeared in
1944 and 1949, respectively.) In “Big
Business,” Lilienthal argues that not only
the
productive
and
distributive
superiority of the United States but also
its national security depends on
industrial bigness; that we now have
adequate public safeguards against
abuses of big business, or know well
enough how to fashion them as required;
that big business does not tend to destroy
small business, as is often supposed, but,
rather, tends to promote it; and, finally,
that a big-business society does not
suppress individualism, as most
intellectuals believe, but actually tends
to encourage it by reducing poverty,
disease, and physical insecurity and
increasing the opportunities for leisure
and travel. Fighting words, in short,
from an old New Dealer.
Lilienthal is a man whose government
career I, as a newspaper reader, had
followed fairly closely. My interest in
him as a government official had
reached its peak in February, 1947,
when, in answer to a fierce attack on him
by his old enemy Senator Kenneth D.
McKellar,
of Tennessee,
during
Congressional hearings on his fitness for
the A.E.C. job, he uttered a spontaneous
statement of personal democratic faith
that for many people still ranks as one of
the most stirring attacks on what later
came to be known as McCarthyism.
(“One of the tenets of democracy that
grow out of this central core of a belief
that the individual comes first, that all
men are the children of God and their
personalities are therefore sacred,”
Lilienthal said, among other things, “is a
deep belief in civil liberties and their
protection; and a repugnance to anyone
who would steal from a human being that
which is most precious to him, his good
name, by imputing things to him, by
innuendo, or by insinuation.”) The
fragments of information I picked up
about his new, private career left me
confused. Wondering how Wall Street
and business life had affected Lilienthal,
and vice versa, in their belated
rapprochement, I got in touch with him,
and a day or so later, at his invitation,
drove out to New Jersey to spend the
afternoon with him.
and his wife, Helen Lamb
Lilienthal, lived on Battle Road, in
Princeton, where they had settled in
1957, after six years in New York City,
at first in a house on Beekman Place and
LILIENTHAL
later in an apartment on Sutton Place.
The Princeton house, which stands in a
plot of less than an acre, is of Georgian
brick with green shutters. Surrounded by
other houses of its kind, the place is
capacious yet anything but pretentious.
Lilienthal, wearing gray slacks and a
plaid sports shirt, met me at the front
door. At just past sixty, he was a tall,
trim man with a receding hairline, a
slightly hawklike profile, and candid,
piercing eyes. He led me into the living
room, where he introduced Mrs.
Lilienthal and then pointed out a couple
of household treasures—a large Oriental
rug in front of the fireplace, which he
said was a gift from the Shah of Iran,
and, hanging on the wall opposite the
fireplace, a Chinese scroll of the late
nineteenth century showing four rather
roguish men, who, he told me, have a
special meaning for him, since they are
upper-middle-rank
civil
servants.
Pointing to a particularly enigmaticlooking fellow, he added, with a smile,
that he always thought of that one as his
Oriental counterpart.
Mrs. Lilienthal went to get coffee, and
while she was gone, I asked Lilienthal to
tell me something of his post-government
life, starting at the beginning. “All right,”
he said. “The beginning: I left the A.E.C.
for a number of reasons. In that kind of
work, I feel, a fellow is highly
expendable. If you stayed too long, you
might find yourself placating industry or
the military, or both—building up what
would amount to an atomic pork barrel.
Another thing—I wanted to be allowed
to speak my mind more freely than I
could as a government official. I felt I’d
served my term. So I turned in my
resignation in November, 1949, and it
went into effect three months later. As
for the timing, I resigned then because,
for once, I wasn’t under fire. Originally,
I’d planned to do it earlier in 1949, but
then came the last Congressional attack
on me—the time Hickenlooper, of Iowa,
accused
me
of
‘incredible
mismanagement.’” I noticed that
Lilienthal did not smile in referring to
the Hickenlooper affair. “I entered
private life with both trepidation and
relief,” he went on. “The trepidation
was about my ability to make a living,
and it was very real. Oh, I’d been a
practicing lawyer as a young man, in
Chicago, before going into government
work, and made quite a lot of money at
it, too. But now I didn’t want to practice
law. And I was worried about what else
I could do. I was so obsessed with the
subject that I harped on it all the time,
and my wife and my friends began to kid
me. That Christmas of 1949, my wife
gave me a beggar’s tin cup, and one of
my friends gave me a guitar to go with it.
The feeling of relief—well, that was a
matter of personal privacy and freedom.
As a private citizen, I wouldn’t have to
be trailed around by hordes of security
officers as I had been at the A.E.C. I
wouldn’t have to answer the charges of
Congressional committees. And, above
all, I’d be able to talk freely to my wife
again.”
Mrs. Lilienthal had returned with the
coffee as her husband was talking, and
now she sat down with us. She comes, I
knew, from a family of pioneers who,
over several generations, moved
westward from New England to Ohio to
Indiana to Oklahoma, where she was
born. She seemed to me to look the part
—that of a woman of dignity, patience,
practicality, and gentle strength. “I can
tell you that my husband’s resignation
was a relief to me,” she said. “Before he
went with the A.E.C., we’d always
talked over all aspects of his work.
When he took that job, we agreed
between us that although we’d indulge in
the discussion of personalities as freely
as we pleased, he would never tell me
anything about the work of the A.E.C.
that I couldn’t read in the newspapers. It
was a terrible constraint to be under.”
Lilienthal nodded. “I’d come home at
night with some frightful experience in
me,” he said. “No one who so much as
touches the atom is ever quite the same
again. Perhaps I’d have been in a series
of conferences and listened to the kind of
talk that many military and scientific men
go in for—cities full of human beings
referred to as ‘targets,’ and that sort of
thing. I never got used to that impersonal
jargon. I’d come home sick at heart. But
I couldn’t talk about it to Helen. I wasn’t
allowed to get it off my chest.”
“And now there wouldn’t be any more
hearings,” Mrs. Lilienthal said. “Those
terrible hearings! I’ll never forget one
Washington cocktail party we went to,
for our sins. My husband had been going
through one of the endless series of
Congressional hearings. A woman in a
funny hat came gushing up to him and
said something like ‘Oh, Mr. Lilienthal, I
was so anxious to come to your hearings,
but I just couldn’t make it. I’m so sorry. I
just love hearings, don’t you?’”
Husband and wife looked at each
other, and this time Lilienthal managed a
grin.
seemed glad to get on to
what happened next. At about the time
his resignation became effective, he told
me, he was approached by various men
from Harvard representing the fields of
history, public administration, and law,
who asked him to accept an appointment
to the faculty. But he decided he didn’t
want to become a professor any more
than he wanted to practice law. Within
the next few weeks came offers from
numerous law firms in New York and
LILIENTHAL
Washington, and from some industrial
companies. Reassured by these that he
was not going to need the tin cup and
guitar after all, Lilienthal, after mulling
over the offers, finally turned them all
down and settled, in May, 1950, for a
part-time job as a consultant to the
celebrated banking firm of Lazard Frères
& Co., whose senior partner, André
Meyer, he had met through Albert
Lasker, a mutual friend. Lazard gave him
an office in its headquarters at 44 Wall,
but before he could do much consulting,
he was off on a lecture tour across the
United States, followed by a trip to
Europe that summer, with his wife, on
behalf of the late Collier’s magazine.
The trip did not result in any articles,
though, and on returning home in the fall
he found it necessary to get back on a
full-time income-producing basis; this he
did by becoming a consultant to various
other companies, among them the Carrier
Corporation and the Radio Corporation
of America. To Carrier he offered
advice on managerial problems. For
R.C.A., he worked on the question of
color television, ultimately advising his
client to concentrate on technical
research rather than on law-court
squabbles over patents; he also helped
persuade the company to press its
computer program and to stay out of the
construction of atomic reactors. Early in
1951, he took another trip abroad for
Collier’s—to India, Pakistan, Thailand,
and Japan. This trip produced an article
—published in Collier’s that August—in
which he proposed a solution to the
dispute between India and Pakistan over
Kashmir and the headwaters of the Indus
River. Lilienthal’s idea was that the
tension between the two countries could
best be lessened by a coöperative
program to improve living conditions in
the whole disputed area through
economic development of the Indus
Basin. Nine years later, largely through
the financial backing and moral support
of Eugene R. Black and the World Bank,
the Lilienthal plan was essentially
adopted, and an Indus treaty signed
between India and Pakistan. But the
immediate reaction to his article was
general indifference, and Lilienthal,
temporarily stymied and considerably
disillusioned, once more settled down to
the humbler problems of private
business.
At this point in Lilienthal’s narrative,
the doorbell rang. Mrs. Lilienthal went
to answer it, and I could hear her talking
to someone—a gardener, evidently—
about the pruning of some roses. After
listening restlessly for a minute or two,
Lilienthal called to his wife, “Helen,
please tell Domenic to prune those roses
farther back than he did last year!” Mrs.
Lilienthal went outside with Domenic,
and Lilienthal remarked, “Domenic
always prunes too gently, to my way of
thinking. It’s a case of our backgrounds
—Italy versus the Middle West.” Then,
resuming where he had left off, he said
that his association with Lazard Frères,
and more particularly with Meyer, had
led him into an association, first as a
consultant and later as an executive, with
a small company called the Minerals
Separation North American Corporation,
in which Lazard Frères had a large
interest. It was in this undertaking that,
unexpectedly, he made his fortune. The
company was in trouble, and Meyer’s
notion was that Lilienthal might be the
man to do something about it.
Subsequently, in the course of a series of
mergers, acquisitions, and other
maneuvers, the company’s name was
changed to, successively, the Attapulgus
Minerals & Chemicals Corporation, the
Minerals & Chemicals Corporation of
America, and, in 1960, the Minerals &
Chemicals
Philipp
Corporation;
meanwhile, its annual receipts rose from
about seven hundred and fifty thousand
dollars, for 1952, to something over two
hundred and seventy-four million, for
1960. For Lilienthal, the acceptance of
Meyer’s commission to look into the
company’s affairs was the beginning of a
four-year immersion in the day-to-day
problems of managing a business; the
experience, he said decisively, turned
out to be one of his life’s richest, and by
no means only in the literal sense of that
word.
reconstructed the corporate facts
behind Lilienthal’s experience partly
from what he told me in Princeton, partly
from a subsequent study of some of the
company’s published documents, and
partly from talks with other persons
interested in the firm. Minerals
Separation North American, which was
founded in 1916 as an offshoot of a
British firm, was a patent company,
deriving its chief income from royalties
on patents for processes used in refining
copper ore and the ores of other
nonferrous minerals. Its activities were
twofold—attempting to develop new
patents in its research laboratory, and
offering technical services to the mining
and manufacturing companies that leased
I HAVE
its old ones. By 1950, although it was
still netting a nice annual profit, it was in
a bad way. Under the direction of its
long-time president, Dr. Seth Gregory—
who was then over ninety but still ruled
the company with an iron hand,
commuting daily between his midtown
apartment hotel and his office, at 11
Broadway, in a regally purple RollsRoyce—it had cut down its research
activities to almost nothing and was
living on half a dozen old patents, all of
which were scheduled to go into the
public domain in from five to eight
years. In effect, it was a still healthy
company living under a death sentence.
Lazard Frères, as a large stockholder,
was understandably concerned. Dr.
Gregory was persuaded to retire on a
handsome pension, and in February,
1952, after working with Minerals
Separation for some time as a consultant,
Lilienthal was installed as the
company’s president and a member of its
board of directors. His first task was to
find a new source of income to replace
the fast-expiring patents, and he and the
other directors agreed that the way to
accomplish this was through a merger; it
fell to Lilienthal to participate in
arranging one between Minerals
Separation and another company in
which Lazard Frères—along with the
Wall Street firm of F. Eberstadt & Co.—
had large holdings: the Attapulgus Clay
Company, of Attapulgus, Georgia, which
produced a very rare kind of clay that is
useful in purifying petroleum products,
and which manufactured various
household products, among them a floor
cleaner called Speedi-Dri.
As a marriage broker between
Minerals Separation and Attapulgus,
Lilienthal had the touchy job of
persuading the executives of the
Southern company that they were not
being used as pawns by a bunch of
rapacious Wall Street bankers. Being an
agent of the bankers was an
unaccustomed role for Lilienthal, but he
evidently carried it off with aplomb,
despite the fact that his presence
complicated the emotional problems still
further by introducing into the situation a
whiff of galloping Socialism. “Dave
was very effective in building up the
Attapulgus people’s morale and
confidence,” another Wall Streeter has
told me. “He reconciled them to the
merger, and showed them its advantages
for them.” Lilienthal himself told me, “I
felt at home in the administrative and
technical parts of the job, but the
financial part had to be done by the
people from Lazard and Eberstadt.
Every time they began talking about
spinoffs and exchanges of shares, I was
lost. I didn’t even know what a spinoff
was.” (As Lilienthal knows now, it is,
not to get too technical about it, a
division of a company into two or more
companies—the opposite of a merger.)
The merger took place in December,
1952, and neither the Attapulgus people
nor the Minerals Separation people had
any reason to regret it, because both the
profits and the stock price of the newly
formed
company—the
Attapulgus
Minerals & Chemicals Corporation—
soon began to rise. At the time of the
merger, Lilienthal was made chairman of
the board of directors, at an annual
salary of eighteen thousand dollars.
Over the next three years, while serving
first in this position and later as
chairman of the executive committee, he
had a large part not only in the conduct
of the company’s routine affairs but also
in its further growth through a series of
new mergers—one in 1954, with Edgar
Brothers, a leading producer of kaolin
for paper coating, and two in 1955, with
a pair of limestone concerns in Ohio and
Virginia. The mergers and the increased
efficiency that went with them were not
long in paying off; between 1952 and
1955 the company’s net profit per share
more than quintupled.
The mechanics of Lilienthal’s own
rise from the comparative rags of a
public servant to the riches of a
successful entrepreneur are baldly
outlined in the company’s proxy
statements for its annual and special
stockholders’ meetings. (There are few
public documents more indiscreet than
proxy statements, in which the precise
private stockholdings of directors must
be listed.) In November, 1952, Minerals
Separation North American granted
Lilienthal, as a supplement to his annual
salary, a stock option.* His option
entitled him to buy as many as fifty
thousand shares of the firm’s stock from
its treasury at $4.87½ per share, then the
going rate, any time before the end of
1955, and in exchange he signed a
contract agreeing to serve the company
as an active executive throughout 1953,
1954, and 1955. The potential financial
advantage to him, of course, as to all
other recipients of stock options, lay in
the fact that if the price of the stock rose
substantially, he could buy shares at the
option price and thus have a holding that
would immediately be worth much more
than he paid for it. Furthermore, and
more important, if he should later decide
to sell his shares, the proceeds would be
a capital gain, taxable at a maximum rate
of 25%. Of course, if the stock failed to
go up, the option would be worthless.
But, like so many stocks of the midfifties, Lilienthal’s did go up,
fantastically. By the end of 1954,
according to the proxy statements,
Lilienthal had exercised his option to the
extent of buying twelve thousand seven
hundred and fifty shares, which were
then worth not $4.87½ each but about
$20. In February, 1955, he sold off four
thousand shares at $22.75 each, bringing
in ninety-one thousand dollars. This sum,
less capital-gains tax, was then applied
against further purchases under the
option, and in August, 1955, the proxy
statements show, Lilienthal raised his
holdings to almost forty thousand shares,
or close to the number he held at the time
of my visit to him. By that time, the
stock, which had at first been sold over
the counter, not only had achieved a
listing on the New York Stock Exchange
but had become one of the Exchange’s
highflying speculative favorites; its price
had skyrocketed to about forty dollars a
share, and Lilienthal, obviously, was
solidly in the millionaire class.
Moreover, the company was now on a
sound long-term basis, paying an annual
cash dividend of fifty cents a share, and
the Lilienthal family’s financial worries
were permanently over.
Fiscally speaking, Lilienthal told me,
his symbolic moment of triumph was the
day, in June of 1955, when the shares of
Minerals & Chemicals graduated to a
listing on the New York Stock Exchange.
In accordance with custom, Lilienthal, as
a top officer, was invited onto the floor
to shake hands with the president of the
Exchange and be shown around
generally. “I went through it in a daze,”
Lilienthal told me. “Until then, I’d never
been inside any stock exchange in my
life. It was all mysterious and
fascinating. No zoo could have seemed
more strange to me.” How the Stock
Exchange felt at this stage about having
the former wearer of horns on its floor is
not recorded.
telling me about his experience with
the company, Lilienthal had spoken with
zest and had made the whole thing sound
mysterious and fascinating. I asked him
what, apart from the obvious financial
inducement, had led him to devote
himself to the affairs of a small firm, and
how it had felt for the former boss of
T.V.A. and A.E.C. to be, in effect,
peddling Attapulgite, kaolin, limestone,
and Speedi-Dri. Lilienthal leaned back
in his chair and stared at the ceiling. “I
wanted an entrepreneurial experience,”
IN
he said. “I found a great appeal in the
idea of taking a small and quite crippled
company and trying to make something
of it. Building. That kind of building, I
thought, is the central thing in American
free enterprise, and something I’d
missed in all my government work. I
wanted to try my hand at it. Now, about
how it felt. Well, it felt plenty exciting. It
was full of intellectual stimulation, and a
lot of my old ideas changed. I conceived
a great new respect for financiers—men
like André Meyer. There’s a correctness
about them, a certain high sense of
honor, that I’d never had any conception
of. I found that business life is full of
creative, original minds—along with the
usual number of second-guessers, of
course. Furthermore, I found it
seductive. In fact, I was in danger of
becoming a slave. Business has its maneating side, and part of the man-eating
side is that it’s so absorbing. I found that
the things you read—for instance, that
acquiring money for its own sake can
become an addiction if you’re not
careful—are literally true. Certain good
friends helped keep me on the track—
men like Ferdinand Eberstadt, who
became my fellow-director after the
Attapulgus merger, and Nathan Greene,
special counsel to Lazard Frères, who
was on the board for a while. Greene
was a kind of business father confessor
to me. I remember his saying, ‘You think
you’ll make your pile and then be
independent. My friend, in Wall Street
you don’t just win your independence at
one stroke. To paraphrase Thomas
Jefferson, you have to win your
independence over again every day.’ I
found that he was right about that. Oh, I
had my problems. I questioned myself at
every step. It was exhausting. You see,
for so long I’d been associated with two
pretty far-reaching things—institutions. I
had a feeling of identity with them; in
that kind of work you are able to lose
your sense of self. Now, with myself to
worry about—my personal standards as
well as my financial future—I found
myself wondering all the time whether I
was making the right move. But that
part’s all in my journal, and you can read
it there, if you like.” *
I said I certainly would like to read it,
and Lilienthal led me to his study, in the
basement. It proved to be a good-sized
room whose windows opened on
window wells into which strands of ivy
were trailing; light came in from outside,
and even a little slanting sunshine, but
the tops of the window wells were too
high to permit a view of the garden or
the neighborhood. Lilienthal remarked,
“My neighbor Robert Oppenheimer
complained about the enclosed feeling
when he first saw this room. I told him
that was just the feeling I wanted!” Then
he showed me a filing cabinet, standing
in a corner; it contained the journal, in
rows and rows of loose-leaf notebooks,
the earliest of them dating back to its
author’s high-school days. Having
invited me to make myself at home,
Lilienthal left me alone in his study and
went back upstairs.
Taking him at his word, I went for a
turn or two around the room, looking at
the pictures on the walls and finding
about what might have been expected:
inscribed photographs from Franklin D.
Roosevelt, Harry S. Truman, Senator
George Norris, Louis Brandeis; pictures
of Lilienthal with Roosevelt, with
Willkie, with Fiorello LaGuardia, with
Nelson Rockefeller, with Nehru in India;
a night view of the Fontana Dam, in the
Tennessee Valley, being built under a
blaze of electricity supplied by T.V.A.
power plants. A man’s study reflects
himself as he wishes to be seen publicly,
but his journal, if he is honest, reflects
something else. I had not browsed long
in Lilienthal’s journal before I realized
that it was an extraordinary document—
not merely a historical source of unusual
interest but a searching record of a
public man’s thoughts and emotions. I
leafed through the years of his
association with Minerals & Chemicals,
and, scattered amid much about family,
Democratic politics, friends, trips
abroad, reflections on national policies,
and hopes and fears for the republic, I
came upon the following entries having
to do with business and life in New
York:
May 24, 1951: Looks as if I am in the minerals
business. In a small way, that could become a big way.
[He goes on to explain that he has just had his first
interview with Dr. Gregory, and is apparently
acceptable to the old man as the new president of the
company.]
May 31, 1951: [Starting in business] is like learning to
walk after a long illness.… At first you have to think:
move the right foot, move the left foot, etc. Then you
are walking without thinking, and then walking is
something one does with unconsciousness and utter
confidence. This latter state, as to business, has yet to
come, but I had the first touch of it today.
July 22, 1951: I recall Wendell Willkie saying to me
years ago, “Living in New York is a great experience.
I wouldn’t live anywhere else. It is the most exciting,
stimulating, satisfying spot in the world,” etc. I think
this was apropos of some remark I had made on a
business visit to New York—that I was certainly glad I
didn’t have to live in that madhouse of noise and dirt.
[Last] Thursday was a day in which I shared some of
Willkie’s feeling.… There was a grandeur about the
place, and adventure, a sense of being in the center of
a great achievement, New York City in the fifties.
October 28, 1951: What I am reaching for, perhaps,
is to have my cake and eat it, too, but in a way this is
not wholly senseless nor futile. That is, I can have
enough actual contact with the affairs of business to
keep a sense of reality, or develop one. How otherwise
can I explain the pleasure I get in visiting a copper
mine or talking to operators of an electric furnace, or a
coal-research project, or watching how André Meyer
works.… But along with that I want to be free enough
to think about what these things mean, free enough to
read outside the immediate field of interest. This
requires keeping out of status (the absence of which I
know makes me vaguely unhappy).
December 8, 1952: What is it that investment bankers
do for their money? Well, I have certainly had my eyes
opened, as to the amount of toil, sweat, frustrations,
problems—yes, and tears—that has to be gone
through.… If everyone who has something to sell in
the market had to be as meticulous and detailed in his
statements about what he is selling as those who offer
stock in the market are now, under the Truth in
Securities law, darn little would be sold, in time to be
useful, at least.
December 20, 1952: My purpose in this Attapulgus
venture is to make a good deal of money in a short
time, in a way (i.e., old man capital gains) that enables
me to keep three-fourths of it, instead of paying 80%
or more in income taxes.… But there is another
purpose: to have had the experience of business.…
The real reason, or the chief reason, is a feeling that
my life wouldn’t be complete, living in a business
period—that is, a time dominated by the business of
business—unless I had been active in that area. What
I wanted was to be an observer of this fascinating
activity that so colors and affects the world’s life, not
… an observer from without (as a writer, teacher) but
from the arena itself. I still have this feeling, and when
I get low and glad to chuck the whole thing (as I have
from time to time), the sustaining part is that even the
bumps and sore spots are experiences, actual
experiences within the business world.…
Then, too, [I wanted to be able to make] a
comparison of the managers of business, the spirit, the
tensions, the motivations, etc., with those of
government (something I keep doing anyway)—and
that needs doing to understand either government or
business. This requires actual valid experience in the
business world somewhat comparable to my long hiring
out in government matters.
I don’t kid myself that I will ever be accepted as a
businessman, not after those long years when I wore
horns, for all of them outside the Tennessee Valley at
least. And I feel less defensive—usually shown by a
belligerence—on this score than I did when I rarely
saw a tycoon or a Wall Streeter, whereas now I live
with them.…
January 18, 1953: I am now definitely committed [to
Minerals & Chemicals] for not less than three more
years … and morally committed to see the thing
through. While I can’t conceive that this business will
ever seem enough, an end of itself, to make up a
satisfactory life, yet the busy-ness, the activity, the
crises, the gambles, the management problems I must
face, the judgment about people, all combine to make
something far from dull. Add to this the good chance
of making a good deal of money.… My decision to try
business—that seemed to so many people a bit of
romantic moonshine—makes more sense today than it
did a year ago.
But there is something missing.…
December 2, 1953: Crawford Greenewalt [president
of du Pont] … introduced me in a speech (in
Philadelphia).… He noted that I had entered the
chemical business; bearing in mind that I had
previously headed the biggest things in America, bigger
than [any] private corporations, he was naturally a little
nervous about seeing me become a potential
competitor. It was kidding, but it was good kidding.
And it certainly gave little ole Attapulgus quite a
notice.
June 30, 1954: I have found a new kind of
satisfaction, and in a sense, fulfillment, in a business
career. I really never felt that the “consultant” thing
was being a businessman, or engaging in the realities
of a life of business. Too remote from the actual
thinking process, the exercise of judgment and
decision.… In this company, as we are evolving it,
there are so many of the elements of fun.… The
starting with almost nothing … the company depending
on patents alone … acquisition, mergers, stock issues,
proxy statements, the methods of financing internally
and by bank loans … also the way stock prices are
made, the silly and almost childlike basis upon which
grown men decide that a stock should be bought, and
at what price … the merger with Edgar, the great
[subsequent] rise in the price of their stock … the
review of the price structure. The beginning of better
costs. The catalyst idea. The drive and energy and
imagination: the nights and days (in the lab until 2 A.M.
night after night) and finally the beginning of a new
business.… It is quite a story.
(Later I got a rather different
perspective on Lilienthal’s reactions to
the transition from government to
business by talking to the man he had
described as his “business father
confessor,” Nathan Greene. “What
happens to a man who leaves top-level
government work and comes to Wall
Street as a consultant?” Greene asked
me rhetorically. “Well, usually it’s a big
letdown. In the government, Dave was
used to a sense of great authority and
power—tremendous
national
and
international responsibility. People
wanted to be seen with him. Foreign
dignitaries sought him out. He had all
sorts of facilities—rows of buttons on
his desk. He pushed them, and lawyers,
technicians, accountants appeared to do
his bidding. All right, now he comes to
Wall Street. There’s a big welcoming
reception, he meets all the partners of
his new firm and their wives, he’s given
a nice office with a carpet. But there’s
nothing on his desk—only one button,
and all it summons is a secretary. He
doesn’t have perquisites like limousines.
Furthermore, he really has no
responsibility. He says to himself, ‘I’m
an idea man, I’ve got to have some
ideas.’ He has some, but they’re not
given much attention by the partners. So
the outward form of his new work is a
letdown. The same with its content. In
Washington, it had been development of
natural resources, atomic energy, or the
like—world-shaking things. Now it turns
out to be some little business to make
money. It all seems a bit petty.
“Then, there’s the matter of money
itself. In the government, our
hypothetical man didn’t need it so badly.
He had all these services and the basic
comforts supplied him at no personal
cost, and besides he had a great sense of
moral superiority. He was able to sneer
at people who were out making money.
He could think of somebody in his lawschool class who was making a pile in
the Street, and say, ‘He’s sold out.’ Then
our man leaves government and goes to
the Wall Street fleshpots himself, and he
says, ‘Boy, am I going to make these
guys pay for my services!’ They do pay,
too. He gets big fees for consulting. Then
he finds out about big income taxes, how
he has to pay most of his income to the
government now instead of getting his
livelihood from it. The shoe is on the
other foot. He may—sometimes he does
—begin to scream ‘Confiscation!,’ just
like any old Wall Streeter.
“How did Dave handle these
problems? Well, he had his troubles—
after all, he was starting a second sort of
life—but he handled them just about as
well as they can be handled. He was
never bored, and he never screamed
‘Confiscation!’ He has a great capacity
for sinking himself in something. The
subject matter isn’t so important to him.
It’s almost as if he were able to think
that what he’s doing is important,
whether it is or not, simply because he’s
doing it. His ability was invaluable to
Minerals & Chemicals, and not just as
an administrator. Dave is a lawyer, after
all; he knows more about corporate
finances than he likes to admit. He
enjoys playing the barefoot boy, but he’s
hardly that. Dave is an almost perfect
example of somebody who kept his
independence while getting rich on Wall
Street.”)
One way and another, then—reading
through these ambivalent protestations in
the journal, and later hearing Greene—I
seemed to detect under the exuberance
and the absorption a nagging sense of
dissatisfaction, almost of compromise.
For Lilienthal, the obviously genuine
thrill of having a new kind of
experience, and an almost unimaginably
profitable one, had been, I sensed, a rose
with a worm in it. I went back up to the
living room. There I found Lilienthal fiat
on his back on the Shah’s rug underneath
a pile of pre-school-age children. At
least, it looked at first glance like a pile;
on closer inspection I found that it
consisted of just two boys. Mrs.
Lilienthal, who had returned from the
garden, introduced them as Allen and
Daniel Bromberger, sons of the
Lilienthals’ daughter, Nancy, and Sylvain
Bromberger,
adding
that
the
Brombergers were living nearby, since
Sylvain was teaching philosophy at the
university. (A few weeks later,
Bromberger moved on to the University
of Chicago.) The Lilienthals’ only other
offspring, David, Jr., lived in
Edgartown, Massachusetts, where he
had settled down to become a writer, as
he subsequently did. In response to the
urging of the senior Lilienthals, the
grandchildren climbed
off
their
grandfather and disappeared from the
room. When things were normal again, I
told Lilienthal my reaction to the entries
I had read in the journal, and he
hesitated for a while before speaking.
“Yes,” he said, finally. “Well, one thing
—it wasn’t making all that money that
worried me. That didn’t make me feel
either good or bad, by itself. In the
government years, we’d always paid our
bills, and by scrimping we’d been able
to save enough to send the kids to
college. We’d never thought much about
money. And then making a lot of it,
making a million—I was surprised, of
course. I’d never especially aimed at
that or thought it might happen to me. It’s
like when you’re a boy and you try to
jump six feet. Then you find you can
jump six feet, and you say, ‘Well, so
what?’ It’s sort of irrelevant. Over the
past few years, a lot of people have said
to me, ‘How does it feel to be rich?’ At
first, I was kind of offended—there
seemed to be an implied criticism in the
question—but I’m over that. I tell them it
doesn’t feel any special way. The way I
feel is—But this is going to sound
stuffy.”
“No, I don’t think it’s stuffy,” said
Mrs. Lilienthal, anticipating what was
coming.
“Yes, it is, but I’m going to say it
anyway,” said Lilienthal. “I don’t think
money makes much difference, as long
as you have enough.”
“I don’t quite agree,” said Mrs.
Lilienthal. “It doesn’t make much
difference when you’re young. You don’t
mind then, as long as you can struggle
along. But as you get older, it is helpful.”
Lilienthal nodded in deference to that.
Then he said that he thought the
undertone of dissatisfaction I had
noticed in the journal probably stemmed,
at least in part, from the fact that his
career in private business, absorbing
though it was, did not bring with it the
gratifications of public-service work.
True, he had not been deprived of them
entirely, because it was at the height of
his Minerals & Chemicals operations, in
1954, that he first went to Colombia, at
the request of that country’s government,
and, serving as a peso-a-year consultant,
started the Cauca Valley project that was
later continued by the Development &
Resources Corporation. But for the most
part being a top officer of Minerals &
Chemicals had kept him pretty well tied
down, and he’d had to regard the
Colombia work as a sideline, if not
merely a hobby. I found it impossible to
avoid seeing symbolic significance in
the fact that the principal material with
which Lilienthal the businessman had
been engaged was—clay.
I thought of something else in
Lilienthal’s life at that time that might
have taken some of the kick out of the
process of becoming a successful
businessman. His “Big Business” book
had come out when he was in the thick of
the Minerals & Chemicals work. I
wondered whether, since it is such an
uncritical paean to free enterprise, it had
been construed by some people as a
rationalization of his new career, and I
asked about this.
“Well, the ideas in the book were
rather a shock to some of my husband’s
New Deal friends, all right,” Mrs.
Lilienthal said, a bit dryly.
“They needed shocking, damn it!”
Lilienthal burst out. He spoke with some
heat, and I thought of the phrase in his
journal—used there in an entirely
different context but still in reference to
himself—about defensiveness shown by
belligerence. After a moment, he went
on, in a normal tone, “My wife and
daughter thought I didn’t spend enough
time working on the book, and they were
right. I wrote it in too much of a hurry.
My conclusions aren’t supported by
enough argument. For one thing, I should
have spelled out in more detail my
opposition to the way the antitrust laws
are administered. But the anti-trust part
wasn’t the real trouble. The thing that
really shook up some of my old friends
was what I said about big industry in
relation to individualism, and about the
machine in relation to aesthetics. Morris
Cooke, who used to be administrator of
the Rural Electrification Administration
—he was one who was shaken up. He
took me apart over the book, and I took
him apart back. The anti-bigness
dogmatists stopped having anything to do
with me. They simply wrote me off. I
wasn’t hurt or disappointed. Those
people are living on nostalgia; they look
backward, and I try to look forward.
Then, of course, there were the trust
busters. They really went after me. But
isn’t trust busting, in the sense of
breaking up big companies simply
because they’re big, pretty much a relic
of a past era? Yes, I still think I was
right in the main things I said—perhaps
ahead of my time, but right.”
“The trouble was the timing,” Mrs.
Lilienthal said. “The book came so close
to coinciding with my husband’s leaving
public service and going into private
business. Some people thought it
represented a change in point of view
induced by expediency. Which it didn’t!”
“No,” Lilienthal said. “The book was
written mostly in 1952, but all the ideas
in it were hatched while I was still in
public service. For example, my idea
that bigness is essential for national
security came in large part out of my
experiences in the A.E.C. The company
that had the research and manufacturing
facilities to make the atomic bomb an
operational weapon, so engineered that
it wouldn’t require Ph.D.s to use it in the
field—Bell Telephone, to be specific—
was a big company. Because it was so
big, the Anti-Trust Division of the
Department of Justice was seeking to
break the Bell System into several parts
—unsuccessfully, as it turned out—at the
very time we in the A.E.C. were calling
on it to do a vital defense job that
required unity. That seemed wrong.
More generally, the whole point of view
I expressed in the book goes way back to
my quarrel with Arthur Morgan, the first
T.V.A. chairman, in the early thirties. He
had great faith in a handicraft economy, I
was for large-scale industry. T.V.A.,
after all, was, and is, the biggest power
system in the free world. In T.V.A. I
always believed in bigness—along with
decentralization. But, you know, the
chapter I hoped would produce the most
discussion was the one on bigness as a
promoter of individualism. It did
produce discussion, of a sort. I
remember people—academic people,
mostly—coming up to me with
incredulous expressions and saying
something that started with ‘Do you
really believe …’ Well, my answer
would start with ‘Yes, I really do
believe …’”
One other touchy matter that Lilienthal
may have questioned himself about in the
process of making his Wall Street
fortune was the fact that in making it he
had not really needed to scream
“Confiscation,” since he had made it
through a tax loophole, the stock option.
Possibly there have been liberal,
reformist businessmen who have refused
to accept stock options on principle,
although I have never heard of one doing
so, and I am not convinced that such a
renunciation would be a sensible or
useful form of protest. In any event, I
didn’t ask Lilienthal about the matter; in
the absence of any accepted code of
journalism every journalist writes his
own, and in mine, such a question would
have come close to invasion of moral
privacy. In retrospect, though, I almost
wish I had violated my code that one
time. Lilienthal, being Lilienthal, might
have objected to the question
strenuously, but I think he would have
answered it equally strenuously, and
without hedging. As things were, after
discoursing on the critical reactions to
his book, “Big Business,” he got up and
walked to a window. “I see Domenic
has been pretty cautious about his rosepruning,” he said to his wife. “Maybe
I’ll go out later and cut them back some
more.” His jaw was set in a way that
made me feel pretty sure I knew how the
rose-pruning controversy was going to
be resolved.
triumphant solution to Lilienthal’s
problem—the way that he eventually
found to have his cake and eat it—was
the
Development
&
Resources
Corporation. The corporation arose out
THE
of a series of conversations between
Lilienthal and Meyer during the spring of
1955, in the course of which Lilienthal
pointed out that he was well acquainted
with dozens of foreign dignitaries and
technical personnel who had come to
visit the T.V.A., and said that their
intense interest in that project seemed to
indicate that at least some of their
countries would be receptive to the idea
of starting similar programs. “Our aim in
forming D. & R. was not to try to remold
the world, or any large part of it, but
only to try to help accomplish some
rather specific things, and, incidentally,
make a profit,” Lilienthal told me.
“André was not so sure about the profit
—we both knew there would be a deficit
at first—but he liked the idea of doing
constructive things, and Lazard Frères
decided to back us, in return for a half
interest in the corporation.” Clapp, who
was serving at the time as deputy New
York City administrator, came in as cofounder of the venture, and the
subsequent executive appointments made
D. & R. virtually a T.V.A. alumni
association: John Oliver, who became
executive vice-president, had been with
T.V.A. from 1942 to 1954, ending up as
its general manager; W. L. Voorduin,
who became director of engineering, had
been with T.V.A. for a decade and had
planned its whole system of dams;
Walton Seymour, who became vicepresident for industrial development,
had been a T.V.A. consultant on electricpower marketing for thirteen years; and
a dozen other former T.V.A. men were
scattered on down through the ranks.
In July, 1955, D. & R. set up shop at
44 Wall, and set to work finding clients.
What was to prove its most important
one came to light during a World Bank
meeting in Istanbul that Lilienthal and his
wife attended in September of that year.
At the meeting, Lilienthal fell in with
Abolhassan Ebtehaj, then head of a
seven-year development plan in Iran; as
it happened, Iran was just about the ideal
D. & R. client, since, for one thing, the
royalties on its nationalized oil industry
gave it considerable capital with which
to pay for the development of its
resources, and, for another, what it
desperately needed was technical and
professional guidance. The encounter
with Ebtehaj led to an invitation to
Lilienthal and Clapp to visit Iran as the
guests of the Shah, and see what they
thought could be done about Khuzistan.
Lilienthal’s employment contract with
Minerals & Chemicals ended that
December; although he stayed on as a
director, he was now free to devote all
his time, or nearly all of it, to D. & R. In
February, 1956, he and Clapp went to
Iran. “Before then, I blush to say, I had
never heard of Khuzistan,” Lilienthal
told me. “I’ve learned a lot about it
since then. It was the heart of the Old
Testament Elamite kingdom and later of
the Persian Empire. The ruins of
Persepolis are not far away, and those of
Susa, where King Darius had his winter
palace, are in the very center of
Khuzistan. In ancient times, the whole
region had an extensive waterconservation system—you can still find
the remains of canals that were probably
built by Darius twenty-five hundred
years ago—but after the decline of the
Persian Empire the water system was
ruined by invasion and neglect. Lord
Curzon described what the Khuzistan
uplands looked like a century ago—‘a
desert over which the eye may roam
unarrested for miles.’ It was that way
when we got there. Nowadays,
Khuzistan is one of the world’s richest
oil fields—the famous Abadan refinery
is at its southern tip—but the inhabitants,
two and a half million of them, haven’t
benefited from that. The rivers have
flowed unused, the fabulously rich soil
has lain fallow, and all but a tiny
fraction of the people have continued to
live in desperate poverty. When Clapp
and I first saw the place, we were
appalled. Still, for two old T.V.A. hands
like us, it was a dream; it was simply
crying out for development. We looked
for sites for dams, likely spots to hunt
for minerals and make soil-fertility
studies, and so on. We saw flares of
natural gas rising from oil fields. That
was
waste,
and
it
suggested
petrochemical plants, to use the gas for
making fertilizer and plastics. In eight
days we’d roughed out a plan, and in
about two weeks D. & R. had signed a
five-year contract with the Iranian
government.
“That was only the beginning. Bill
Voorduin, our chief engineer, flew out
there and spotted a wonderful dam site
at a place just a few miles from the ruins
of Susa—a narrow canyon with walls
that rise almost vertically from the bed
of the Dez River. We found we were
going to have to manage the project as
well as advise on it, and so our next job
was lining up our managerial group. To
give you some idea of the size of the
project, right now there are about seven
hundred people working on it at the
professional
level—a
hundred
Americans, three hundred Iranians, and
three hundred others, mostly Europeans,
who work directly for firms under
subcontracts. Besides that, there are
about forty-seven hundred Iranian
laborers. Over five thousand people, all
told. The entire plan includes fourteen
dams, on five different rivers, and will
take many years to finish. D. & R. has
just completed its first contract, for five
years, and signed a new one, for a year
and a half, with option to renew for
another five years. Quite a bit has been
accomplished already. Take the first dam
—the Dez one. It’s to be six hundred and
twenty feet high, or more than half again
as high as the Aswan, in Egypt, and it
will eventually irrigate three hundred
and sixty thousand acres and generate
five hundred and twenty thousand
kilowatts of electricity. It should be
finished early in 1963. Meanwhile, a
sugar plantation—the first in Khuzistan
in twenty-five centuries—has been
started, with irrigation by pumped water;
it should yield its first crop this summer,
and a sugar refinery will be ready by the
time the sugar is. Another thing:
eventually the region will supply its own
electric power from the dams, but for the
interim period a high-tension line, the
first anywhere in Iran, has been put in
over the seventy-two miles from Abadan
to Ahwaz—a city of a hundred and
twenty thousand that previously had no
power source except half a dozen little
diesels, which seldom worked.”
While the Iranian project was
proceeding, D. & R. was also busy
lining up and carrying out its programs
for Italy, Colombia, Ghana, the Ivory
Coast, and Puerto Rico, as well as
programs for private business groups in
Chile and the Philippines. A job that D.
& R. had just taken on for the United
States Army Corps of Engineers excited
Lilienthal enormously—an investigation
of the economic impact of power from a
proposed dam on the Alaskan sector of
the Yukon, which he described as “the
river with the greatest hydroelectric
potential remaining on this continent.”
Meanwhile, Lazard Frères retained its
financial interest in the firm and now
very happily collected its share of a
substantial annual profit, and Lilienthal
happily took to teasing Meyer about his
former skepticism as to D. & R.
financial prospects.
Lilienthal’s new career had meant a
highly peripatetic life both for him and
for Mrs. Lilienthal. He showed me his
foreign-travel log for 1960, which he
said was a fairly typical year, and it read
as follows:
January 23-March 26: Honolulu, Tokyo, Manila;
Iligan, Mindanao;
Manila, Bangkok, Siemreap, Bangkok; Tehran, Ahwaz,
Andimeshk, Ahwaz, Tehran; Geneva, Brussels,
Madrid; home.
October 11–17: Buenos Aires; Patagonia; home.
November 18–December 5: London, Tehran, Rome,
Milan, Paris, home.
Then he went and got the volume of
his journal that relates to those trips.
Turning to the pages on his stay in Iran
early last spring, I was particularly
struck by a few excerpts:
Ahwaz, March 5: The cry of the Arab women as the
Shah’s big black Chrysler passed them, a solid row
along the road from the airport, made me think of the
rebel yell; then I recognized it: it was the Indian yelp,
the kind we used to make as kids, moving our hand
over our mouths to give that undulating wail.
Ahwaz, March 11: Our experience in the villagers’
huts on Wednesday threw me into a deep pit. I
hovered between despair—which is an emotion I
consider a sin—and anger, which doesn’t do much
good, I suppose.
Andimeshk, March 9: … We have travelled many
miles, through dust, mudholes where we got stuck fast,
and some of the roughest “roads” I have ever known
—and we also travelled back to the ninth century, and
earlier, visiting villages and going into mud “homes”
quite unbelievable—and unforgettable forever and
ever. As the Biblical oath has it: Let my right hand
wither if I ever forget how some of the most attractive
of my fellow human beings live—are living tonight,
only a few kilometres from here, where we visited
them this afternoon.…
And yet I am as sure as I am writing these
notes that the Ghebli area, of only 45,000 acres,
swallowed in the vastness of the Khuzistan, will
become as well known as, say, the community of
Tupelo … became, or New Harmony or Salt Lake City
when it was founded by a handful of dedicated men in
a pass of the great Rockies.
The afternoon shadows were getting
long on Battle Road, and it was time for
me to be going. Lilienthal walked out to
my car with me, and on the way I asked
him whether he ever missed the roughand-tumble, and the limelight, of being
perhaps the most controversial man in
Washington. He grinned, and said,
“Sure.” When we reached the car, he
went on, “I never intended to be
especially combative, in Washington or
in the Tennessee Valley. It was just that
people kept disagreeing with me. But,
all right, I wouldn’t have put myself in
controversial situations so much if I
hadn’t wanted to. I guess I was
combative. When I was a kid, I was
interested in boxing. At high school—in
Michigan City, Indiana—I boxed a lot
with a cousin of mine, and while I was
in college, at DePauw, in central
Indiana, I took to boxing during the
summers with a man who had been a
professional light-heavyweight. The
Tacoma Tiger, he’d been called.
Working out with him was a challenge. If
I made a mistake, I’d be on the floor. I
wanted just once to land on him good. It
was my ambition. I never did, of course,
but I got to be a fairly good boxer. I
became boxing coach at DePauw while I
was an undergraduate. Later on, at
Harvard Law, I didn’t have time to keep
it up, and I never boxed seriously again.
But I don’t think that for me boxing was
an expression of combativeness for its
own sake. I think I considered
competence at defending yourself a
means of preserving your personal
independence. I learned that from my
father. ‘Be your own man,’ he used to
say. He’d come from Austria-Hungary,
the
part
that’s
now
eastern
Czechoslovakia, in the eighteen-eighties,
when he was about twenty, and he spent
his adult life as a storekeeper in various
Middle Western towns: Morton, Illinois,
where I was born; Valparaiso, Indiana;
Springfield, Missouri; Michigan City
and, later, Winamac, Indiana. He had
very pale-blue eyes that reflected the
insides of him. You could tell by looking
at him that he wouldn’t trade
independence for security. He didn’t
know how to dissemble, and wouldn’t
have wanted to if he had known how.
Well, to get back to my being
controversial,
or
combative,
or
whatever you call it, in Washington—
yes, there’s something missing when you
don’t have a McKellar laying it on the
line any more. The moral equivalent of
that for me now is taking on challenges,
different kinds of McKellars or Tacoma
Tigers, maybe—the Minerals &
Chemicals thing, the D. & R. thing—and
trying to meet them.”
I revisited Lilienthal in early summer,
1968, this time at D. & R.’s third home
office, a suite with a splendid harbor
view at I Whitehall Street. Both D. & R.
and he had moved along in the interim.
In Khuzistan, the Dez Dam had been
completed
on
schedule;
water
impounding had begun in November,
1962, the first power had been delivered
in May, 1963, and the region was now
not only supplying its own power but
producing enough surplus to attract
foreign industry. Meanwhile, agriculture
in the once-barren region was
flourishing as a result of irrigation made
possible by the dam, and, as Lilienthal—
sixty-eight now, and as combative as
ever—put it, “The gloomy economists
have to be gloomy about some other
underdeveloped country.” D. & R. had
just signed a new five-year contract with
Iran to carry on the work. Otherwise, the
firm had expanded its clientele to
include fourteen countries; its most
controversial undertaking was in
Vietnam, where, under contract with the
United States government, it was
cooperating with a similar group of
South Vietnamese in working up plans
for the postwar development of the
Mekong Valley. (This assignment had led
to criticism of Lilienthal by those who
took it to imply that he supported the
war; in fact, he told me, he regarded the
war as the disastrous outcome of a
series of “horrible miscalculations,” and
the planning of postwar resources
development as a separate matter. It was
clear enough, nevertheless, that the
criticism hurt. At the same time, D. & R.
was widening its horizons by beginning
to move, unexpectedly, into domestic
urban development, having been engaged
by private foundation-sponsored groups
in Queens County, New York and
Oakland County, Michigan to see
whether the T.V.A. approach might have
some value in dealing with those modern
deserts, the slums. “Just pretend this is
Zambia and tell us what you would do,”
these groups had said, in effect, to D. &
R.—a wildly imaginative idea, surely,
the usefulness of which remained to be
proved.
As for D. & R. itself and its place in
American business, Lilienthal recounted
that since I had seen him it had expanded
to the extent of opening a second
permanent office on the West Coast, had
considerably increased its profits, and
become essentially employee-owned,
with Lazard retaining only a token
interest. Most encouraging of all, at a
time when old-line business was having
serious recruitment problems because its
obsession with profit was repelling
high-minded youth, D. & R. found that its
idealistic objectives made it a magnet
for the most promising new graduates.
And as a result of all these things,
Lillienthal could at last say what he had
not been able to say on the earlier
occasion—that private enterprise was
now affording him more satisfaction than
he had ever derived from public service.
Is D. & R., then, a prototype of the
free enterprise of the future, accountable
half to its stockholders and half to the
rest of humanity? If so, then the irony is
complete, and Lilienthal, of all people,
ends up as the prototypical businessman.
* For a detailed discussion of stock options, see p.
101.
* This part of Lilienthal’s journal was eventually
published, in 1966.
10
Stockholder Season
a European diplomat
was quoted in the Times as saying, “The
American economy has become so big
that it is beyond the imagination to
comprehend. But now on top of size you
are getting rapid growth as well. It is a
A FEW YEARS AGO,
situation
of
fundamental
power
unequalled in the history of the world.”
At about the same time, A. A. Berle
wrote, in a study of corporate power,
that the five hundred or so corporations
that dominate that economy “represent a
concentration of power over economics
which makes the medieval feudal system
look like a Sunday-school party.” As for
the power within those corporations, it
clearly rests, for all practical purposes,
with their directors and their
professional managers (often not
substantial owners), who, Berle goes on
to suggest in the same essay, sometimes
constitute a self-perpetuating oligarchy.
Most fair-minded observers these days
seem to feel that the stewardship of the
oligarchs, from a social point of view,
isn’t anything like as bad as it might be,
and in many cases is pretty good, yet,
however that may be, the ultimate power
theoretically does not reside in them at
all. According to the corporate form of
organization, it resides in the
stockholders, of whom, in United States
business enterprises of all sizes and
descriptions, there are more than twenty
million. Even though the courts have
repeatedly ruled that a director does not
have to follow stockholder instructions,
any more than a congressman has to
follow the instructions of his
constituents, stockholders nevertheless
do elect directors, on the logical, if not
exactly democratic, basis of one share,
one vote. The stockholders are deprived
of their real power by a number of
factors, among which are their
indifference to it in times of rising
profits and dividends, their ignorance of
corporate affairs, and their sheer
numbers. One way or another, they vote
the management slate, and the results of
most director elections have a certain
Russian ring—ninety-nine per cent or
more of the votes cast in favor. The
chief, and in many cases the only,
occasion when stockholders make their
presence felt by management is at the
annual meeting. Company annual
meetings are customarily held in the
spring, and one spring—it was that of
1966—I made the rounds of a few of
them to get a line on what the theoretical
holders of all that feudal power had to
say for themselves, and also on the state
of their relations with their elected
directors.
What particularly commended the
1966 season to me was that it promised
to be a particularly lively one. Various
reports of a new “hard-line approach”
by
company
managements
to
stockholders had appeared in the press.
(I was charmed by the notion of a
candidate for office announcing his new
hard-line approach to voters right before
an election.) The new approach, it was
reported, was the upshot of events at the
previous year’s meetings, where a new
high in stockholder unruliness was
reached. The chairman of the
Communications Satellite Corporation
was forced to call on guards to eject
bodily two badgering stockholders at his
company’s meeting, in Washington.
Harland C. Forbes, who was then the
chairman of Consolidated Edison,
ordered one heckler off the premises in
New York, and, in Philadelphia,
American Telephone & Telegraph
Chairman Frederick R. Kappel was
goaded into announcing abruptly, “This
meeting is not being run by Robert’s
[Rules of Order]. It’s being run by me.”
(The executive director of the American
Society of Corporate Secretaries later
explained that precise application of
Robert’s rules would have had the effect
not of increasing the stockholders’
freedom of speech but, rather, of
restricting it. Mr. Kappel, the secretary
implied, had merely been protecting
stockholders
from
parliamentary
tyranny.) In Schenectady, Gerald L.
Phillippe, chairman of General Electric,
after several hours of fencing with
stockholders, summed up his new hard
line by saying, “I should like it to be
clear that next year, and in the years to
come, the chair may well adopt a more
rigorous attitude.” According to
Business Week, the General Electric
management then assigned a special task
force to the job of seeing what could be
done about cracking down on hecklers
by changing the annual-meeting pattern,
and early in 1966 the bible of
management, the Harvard Business
Review, entered the lists with an article
by O. Glenn Saxon, Jr., the head of a
company specializing in investor
services to management, in which he
recommended crisply that the chairmen
of annual meetings “recognize the
authority inherent in the role of the chair,
and resolve to use it appropriately.”
Apparently, the theoretical holders of
fundamental power unequalled in the
history of the world were about to be put
in their place.
thing I couldn’t help noticing as I
went over the schedule of the year’s
ONE
leading meetings was a trend away from
holding them in or near New York.
Invariably, the official reason given was
that the move would accommodate
stockholders from other areas who had
seldom, if ever, been able to attend in
the past; however, most of the noisiest
dissident stockholders seem to be based
in the New York area, and the moves
were taking place in the year of the new
hard line, so I found the likelihood of a
relationship between these two facts by
no means remote. United States Steel
holders, for example, were to meet in
Cleveland, making their second foray
outside their company’s nominal home
state of New Jersey since its formation,
in 1901. General Electric was going
outside New York State for the third
time in recent years—and going all the
way to Georgia, a state in which
management appeared to have suddenly
discovered
fifty-six
hundred
stockholders (or a bit more than one per
cent of the firm’s total roll) who were
badly in need of a chance to attend an
annual meeting. The biggest company of
them all, American Telephone &
Telegraph, had chosen Detroit, which
was its third site outside New York City
in its eighty-one-year history, the second
having been Philadelphia, where the
1965 session was held.
To open my own meeting-going
season, I tracked A.T.& T. to Detroit.
Leafing through some papers on the
plane going out there, I learned that the
number of A.T. & T. stockholders had
increased to an all-time record of almost
three million, and I fell to wondering
what would happen in the unlikely event
that all of them, or even half of them,
appeared in Detroit and demanded seats
at the meeting. At any rate, each one of
them had received by mail, a few weeks
earlier, a notice of the meeting along
with a formal invitation to attend, and it
seemed to me almost certain that
American industry had achieved another
“first”—the first time almost three
million individual invitations had ever
been mailed out to any event of any kind
anywhere. My fears on the first score
were put to rest when I got to Cobo Hall,
a huge riverfront auditorium, where the
meeting was to take place. The hall was
far from filled; the Yankees in their
better days would have been disgusted
with such a turnout on any weekday
afternoon. (The papers next day said the
attendance was four thousand and
sixteen.) Looking around, I noticed in the
crowd several families with small
children, one woman in a wheelchair,
one man with a beard, and just two
Negro
stockholders—the
last
observation
suggesting
that
the
trumpeters of “people’s capitalism”
might well do some coordinating with
the
civil-rights
movement.
The
announced time of the meeting was one-
thirty, and Chairman Kappel entered on
the dot and marched to a reading stand
on the platform; the eighteen other A.T.
& T. directors trooped to a row of seats
just behind him, and Mr. Kappel
gavelled the meeting to order.
From my reading and from annual
meetings that I’d attended in past years, I
knew that the meetings of the biggest
companies are usually marked by the
presence of so-called professional
stockholders—persons who make a fulltime occupation of buying stock in
companies or obtaining the proxies of
other stockholders, then informing
themselves more or less intimately about
the corporations’ affairs and attending
annual meetings to raise questions or
propose resolutions—and that the most
celebrated members of this breed were
Mrs. Wilma Soss, of New York, who
heads an organization of women
stockholders and votes the proxies of its
members as well as her own shares, and
Lewis D. Gilbert, also of New York,
who represents his own holdings and
those of his family—a considerable
total. Something I did not know, and
learned at the A.T. & T. meeting (and at
others I attended subsequently), was that,
apart from the prepared speeches of
management, a good many big-company
meetings really consist of a dialogue—in
some cases it’s more of a duel—
between the chairman and the few
professional
stockholders.
The
contributions of non-professionals run
strongly to ill-informed or tame
questions and windy encomiums of
management, and thus the task of making
cogent criticisms or asking embarrassing
questions falls to the professionals.
Though largely self-appointed, they
become,
by default,
the
sole
representatives of a huge constituency
that may badly need representing. Some
of them are not very good
representatives, and a few are so bad
that their conduct raises a problem in
American manners; these few repeatedly
say things at annual meetings—boorish,
silly, insulting, or abusive things—that
are apparently permissible by corporate
rules but are certainly impermissible by
drawing-room rules, and sometimes
succeed in giving the annual meetings of
mighty companies the general air of
barnyard squabbles. Mrs. Soss, a former
public-relations woman who has been a
tireless professional stockholder since
1947, is usually a good many cuts above
this level. True, she is not beyond
playing to the gallery by wearing bizarre
costumes to meetings; she tries, with
occasional success, to taunt recalcitrant
chairmen into throwing her out; she is
often scolding and occasionally abusive;
and nobody could accuse her of being
unduly concise. I confess that her
customary tone and manner set my teeth
on edge, but I can’t help recognizing that,
because she does her homework, she
usually has a point. Mr. Gilbert, who has
been at it since 1933 and is the dean of
them all, almost invariably has a point,
and by comparison with his colleagues
he is the soul of brevity and punctilio as
well as of dedication and diligence.
Despised as professional stockholders
are by most company managements, Mrs.
Soss and Mr. Gilbert are widely enough
recognized to be listed in Who’s Who in
America;
furthermore,
for
what
satisfaction it may bring them, they are
the nameless Agamemnons and Ajaxes,
invariably called “individuals,” in some
of the prose epics produced by the
business Establishment itself. (“The
greater portion of the discussion period
was taken up by questions and
statements of a few individuals on
matters that can scarcely be deemed
relevant.… Two individuals interrupted
the opening statement of the chairman.…
The chairman advised the individuals
who had interrupted to choose between
ceasing their interruption or leaving the
meeting.…” So reads, in part, the
official report of the 1965 A.T. & T.
annual meeting.) And although Mr.
Saxon’s piece in the Harvard Business
Review was entirely about professional
stockholders and how to deal with them,
the author’s corporate dignity did not
permit him to mention the name of even
one of them. Avoiding this was quite a
trick, but Mr. Saxon pulled it off.
Both Mrs. Soss and Mr. Gilbert were
present at Cobo Hall. Indeed, the
meeting had barely got under way before
Mr. Gilbert was on his feet complaining
that several resolutions he had asked the
company to include in the proxy
statement and the meeting agenda had
been omitted from both. Mr. Kappel—a
stern-looking man with steel-rimmed
spectacles, who was unmistakably cast
in the old-fashioned, aloof corporate
mold, rather than the new, more
permissive one—replied shortly that the
Gilbert proposals had referred to
matters that were not proper for
stockholder consideration, and had been
submitted too late, anyhow. Mr. Kappel
then announced that he was about to
report
on
company
operations,
whereupon the eighteen other directors
filed off the platform. Evidently, they
had been there only to be introduced, not
to field questions from stockholders.
Exactly where they went I don’t know;
they vanished from my field of vision,
and I wasn’t enlightened when, later on
in the meeting, Mr. Kappel responded to
a stockholder’s question as to their
whereabouts with the laconic statement
“They’re here.” Going it alone, Mr.
Kappel said in his report that “business
is booming, earnings are good, and the
prospect ahead is for more of the same,”
declared that A.T. & T. was eager for the
Federal Communications Commission to
get on with its investigation of telephone
rates, since the company had “no
skeletons in the closet,” and then painted
a picture of a bright telephonic future in
which “picture phones” will be
commonplace and light beams will carry
messages.
When Mr. Kappel’s address was over
and the management-sponsored slate of
directors for the coming year had been
duly nominated, Mrs. Soss rose to make
a nomination of her own—Dr. Frances
Arkin, a psychoanalyst. In explanation,
Mrs. Soss said that she felt A.T. & T.
ought to have a woman on its board, and
that, furthermore, she sometimes felt
some of the company’s executives would
be benefited by occasional psychiatric
examinations. (This remark seemed to
me gratuitous, but the balance of
manners
between
bosses
and
stockholders
was
subsequently
redressed, at least to my mind, at another
meeting, when the chairman suggested
that some of his firm’s stockholders
ought to see a psychiatrist.) The
nomination of Dr. Arkin was seconded
by Mr. Gilbert, although not until Mrs.
Soss, who was sitting a couple of seats
from him, had reached over and nudged
him vigorously in the ribs. Presently, a
professional stockholder named Evelyn
Y. Davis protested the venue of the
meeting, complaining that she had been
forced to come all the way from New
York by bus. Mrs. Davis, a brunette, was
the youngest and perhaps the bestlooking of the professional stockholders
but, on the basis of what I saw at the
A.T. & T. meeting and others, not the
best informed or the most temperate,
serious-minded, or worldly-wise. On
this occasion, she was greeted by
thunderous boos, and when Mr. Kappel
answered her by saying, “You’re out of
order. You’re just talking to the wind,”
he was loudly cheered. It was only then
that I understood the nature of the
advantage that the company had gained
by moving its meeting away from New
York: it had not succeeded in shaking off
the gadflies, but it had succeeded in
putting them in a climate where they
were subject to the rigors of that great
American emotion, regional pride. A
lady in a flowered hat who said she was
from Des Plaines, Illinois, emphasized
the point by rising to say, “I wish some
of the people here would behave like
intelligent adults, rather than two-yearolds.” (Prolonged applause.)
Even so, the sniping from the East
went on, and by three-thirty, when the
meeting had been in session for two
hours, Mr. Kappel was clearly getting
testy; he began pacing impatiently
around the platform, and his answers got
shorter and shorter. “O.K., O.K.” was
all he replied to one complaint that he
was dictatorial. The climax came in a
wrangle between him and Mrs. Soss
about the fact that A.T. & T., although it
had listed the business affiliations of its
nominees for director in a pamphlet that
was handed out at the meeting, had
failed to list them in the material mailed
out
to
the
stockholders,
the
overwhelming majority of whom were
not at the meeting and had done their
voting by proxy. Most other big
companies make such disclosures in
their mailed proxy statements, so the
stockholders were apparently entitled to
a reasonable explanation of why A.T. &
T. had failed to do so, but somewhere
along the way reason was left behind.
As the exchange progressed, Mrs. Soss
adopted a scolding tone and Mr. Kappel
an icy one; as for the crowd, it was
having a fine time booing the Christian,
if that is what Mrs. Soss represented,
and cheering the lion, if that is what Mr.
Kappel represented. “I can’t hear you,
sir,” Mrs. Soss said at one point. “Well,
if you’d just listen instead of talking—”
Mr. Kappel returned. Then Mrs. Soss
said something I didn’t catch, and it must
have been a telling bit of chairmanbaiting, because Mr. Kappel’s manner
changed completely, from ice to fire; he
began shaking his finger and saying he
wouldn’t stand for any more abuse, and
the floor microphone that Mrs. Soss had
been using was abruptly turned off.
Followed at a distance of ten or fifteen
feet by a uniformed security guard, and
to the accompaniment of deafening
booing and stamping, Mrs. Soss marched
up the aisle and took a stand in front of
the platform, facing Mr. Kappel, who
informed her that he knew she wanted
him to have her thrown out and that he
declined to comply.
Eventually, Mrs. Soss went back to
her seat and everybody calmed down.
The rest of the meeting, given over
largely to questions and comments from
amateur stockholders, rather than
professional ones, was certainly less
lively than what had gone before, and
not noticeably higher in intellectual
content. Stockholders from Grand
Rapids, Detroit, and Ann Arbor all
expressed the view that it would be best
to let the directors run the company,
although the Grand Rapids man objected
mildly that the “Bell Telephone Hour”
couldn’t be received on television in his
locality anymore. A man from Pleasant
Ridge, Michigan, spoke up for retired
stockholders who would like A.T. & T.
to plow less of its earnings back into
expansion, so that it could pay higher
dividends. A stockholder from rural
Louisiana stated that when he picked up
his telephone lately, the operator didn’t
answer for five or ten minutes. “Ah
brang it to your attention,” the Louisiana
man said, and Mr. Kappel promised to
have somebody look into the matter.
Mrs. Davis raised a complaint about
A.T. & T.’s contributions to charity,
giving Mr. Kappel the opportunity to
reply that he was glad the world
contained people more charitable than
she. (Tax-exempt applause.) A Detroit
man said, “I hope you won’t let the
abuse you’ve been subjected to by a few
malcontents keep you from bringing the
meeting back to the great Midwest
again.” It was announced that Dr. Arkin
had been defeated for a seat on the
board, since she had received a vote of
only 19,106 shares against some four
hundred million, proxy votes included,
for each candidate on the management
slate. (By approving the management
slate, a proxy voter can, in effect,
oppose a floor nomination, even though
he knows nothing about it.) And that was
how the 1966 annual meeting of the
world’s largest company went—or how
it went until five-thirty, when all but a
few hundred stockholders had left, and
when I headed for the airport to catch a
plane back to New York.
A.T. & T. meeting left me in a
thoughtful mood. Annual meetings, I
reflected, can be times to try the soul of
an admirer of representative democratic
government, especially when he finds
himself guiltily sympathizing with the
chairman who is being badgered from
the floor. The professional stockholders,
in their
wilder
moments,
are
management’s secret weapon; a Mrs.
Soss and a Mrs. Davis at their most
THE
strident could have made Commodore
Vanderbilt and Pierpont Morgan seem
like affable old gentlemen, and they can
make a latter-day magnate like Mr.
Kappel seem like a henpecked husband,
if not actually a champion of
stockholders’ rights. At such moments,
the professional stockholders become,
from a practical standpoint, enemies of
intelligent dissent. On the other hand, I
thought, they deserve sympathy, too,
whether or not one believes they have
right on their side, because they are in
the position of representing a
constituency that doesn’t want to be
represented. It’s hard to imagine anyone
more reluctant to claim his democratic
rights, or more suspicious of anyone
who tries to claim them for him, than a
dividend-fattened stockholder—and, of
course, most stockholders are thoroughly
dividend-fattened these days. Berle
speaks of the estate of stockholding as
being by its nature “passive-receptive,”
rather than “managing and creating;”
most of the A.T. & T. stockholders in
Detroit, it seemed to me, were so deeply
devoted to the notion of the company as
Santa Claus that they went beyond
passive receptivity to active cupboard
love. And the professional stockholders,
I felt, had taken on an assignment almost
as thankless as that of recruiting for the
Young Communist League among the
junior executives of the Chase Manhattan
Bank.
In view of Chairman Phillippe’s
warning
to
General
Electric
stockholders at Schenectady in 1965,
and of the report about the company’s
hard-line task force, it was with a sense
of being engaged in hot pursuit that I
boarded a southbound Pullman for the
General Electric annual meeting. This
one was held in Atlanta’s Municipal
Auditorium, a snappy hall, the rear of
which was brightened by an interior
garden complete with trees and a lawn,
and in spite of the fact that it was held on
a languorous, rainy Southern spring
morning, more than a thousand G.E.
stockholders turned out. As far as I
could see, three of them were Negroes,
and it was not long before I saw that
another of them was Mrs. Soss.
However exasperated he may have
become
the
previous
year
in
Schenectady, Mr. Phillippe, who also
conducted the 1966 meeting, was in
perfect control of himself and of the
situation this time around. Whether he
was expatiating on the wonders of
G.E.’s balance sheet and its laboratory
discoveries or sparring with the
professional stockholders, he spoke in
the same singsong way, delicately
treading the thin line between patient,
careful exposition and irony. Mr. Saxon,
in his Harvard Business Review article,
had written, “Top executives are finding
it necessary to learn how to lessen the
adverse impact of the few disrupters on
the majority of shareowners, while
simultaneously enhancing the positive
effects of the good things which do take
place in the annual meeting,” and, having
learned sometime earlier that the same
Mr. Saxon had been engaged by G.E. as
an adviser on stockholder relations, I
couldn’t help suspecting that Mr.
Philippe’s
performance
was
a
demonstration of Saxonism in action.
The professional stockholders, for their
part, responded by adopting precisely
the same ambiguous style, and the
resulting dialogue had the general air of
a conversation between two people who
have quarrelled and then decided, not
quite wholeheartedly, to make it up. (The
professional stockholders might have
demanded to know how much money
G.E. had spent in the interest of keeping
them under control, but they missed the
chance.) One of the exchanges in this
vein achieved a touch of wit. Mrs. Soss,
speaking in her sweetest tone, called
attention to the fact that one of the boardof-directors candidates—Frederick L.
Hovde, President of Purdue University
and former chairman of the Army
Scientific Advisory Panel—owned only
ten shares of G.E. stock, and said she
felt that the board should be made up of
more substantial holders, whereupon Mr.
Philippe pointed out, just as sweetly, that
the company had many thousands of
holders of ten or fewer shares, Mrs.
Soss among them, and suggested that
perhaps these small holders were
deserving of representation on the board
by one of their number. Mrs. Soss had to
concede a fine stroke of chairmanship,
and she did. On another matter, although
decorum was stringently maintained by
both sides, outward accord was less
complete. Several stockholders, Mrs.
Soss among them, had formally
proposed that the company adopt for its
director elections the system called
cumulative voting, under which a
stockholder may concentrate all the
votes he is entitled to on a single
candidate rather than spread them over
the whole slate, and which therefore
gives a minority group of stockholders a
much better chance of electing one
representative to the board. Cumulative
voting, though a subject of controversy
in big-business circles, for obvious
reasons, is nevertheless a perfectly
respectable idea; indeed, it is mandatory
for companies incorporated in more than
twenty states, and it is used by some four
hundred companies listed on the New
York Stock Exchange. Nevertheless, Mr.
Phillippe did not find it necessary to
answer Mrs. Soss’s argument for
cumulative voting; he chose instead to
stand on a brief company statement on
this subject that had been previously
mailed out to stockholders, the main
point of which was that the presence on
the G.E. board, as a result of cumulative
voting, of representatives of specialinterest groups might have a “divisive
and disruptive effect.” Of course, Mr.
Phillippe did not say he knew, as he
doubtless did know, that the company
had in hand more than enough proxies to
defeat the proposal.
Some companies, like some animals,
have their private, highly specialized
gadflies, who harass them and nobody
else, and General Electric is one. In this
instance, the gadfly was Louis A.
Brusati, of Chicago, who at the
company’s meetings over the past
thirteen years had advanced thirty-one
proposals, all of which had been
defeated by a vote of at least ninety-
seven per cent to three per cent. In
Atlanta, Mr. Brusati, a gray-haired man
built like a football player, was at it
again—not with proposals this time but
with questions. For one thing, he wanted
to know why Mr. Phillippe’s personal
holdings of G.E. stock, listed in the
proxy statement, now were four hundred
and twenty-three shares fewer than they
had been a year ago. Mr. Phillippe
replied that the difference represented
shares that he had contributed to family
trust funds, and added, mildly but with
emphasis, “I could say it’s none of your
business. I believe I have a right to the
privacy of my affairs.” There was more
reason for the mildness than for the
emphasis, as Mr. Brusati did not fail to
point out, in an impeccably unemotional
monotone; many of Mr. Phillippe’s
shares had been acquired under options
at preferential prices not available to
others, and, moreover, the fact that Mr.
Phillippe’s precise holdings had been
included in the proxy statement clearly
showed that in the opinion of the
Securities and Exchange Commission his
holdings were Mr. Brusati’s business.
Going on to the matter of the fees paid
directors, Mr. Brusati elicited from Mr.
Phillippe the information that over the
past seven years these had been raised
from twenty-five hundred dollars per
annum first to five thousand dollars and
then to seventy-five hundred. The
ensuing dialogue between the two men
went like this:
“By the way, who establishes those
fees?”
“Those fees are established by the
board of directors.”
“The board of directors establish their
own fees?”
“Yes.”
“Thank you.”
“Thank you, Mr. Brusati.”
Later on in the morning, there were
several lengthy and eloquent orations by
stockholders on the virtues of General
Electric and of the South, but this rather
elegantly elliptical exchange between
Mr. Brusati and Mr. Phillippe stuck in
my mind, for it seemed to sum up the
spirit of the meeting. Only after
adjournment—which came at twelvethirty, following Mr. Phillippe’s
announcement that the unopposed slate
of directors had been elected and that
cumulative voting had lost by 97.51 per
cent to 2.49 per cent—did I realize that
not only had there been no stamping,
booing, or shouting, as there had been in
Detroit, but regional pride had not had to
be invoked against the professional
stockholders. It had been General
Electric’s hole card, I felt, but General
Electric had won on the board, without
needing to turn it up.
meeting I attended had its easily
discernible characteristic tone, and that
of Chas. Pfizer & Co., the diversified
pharmaceutical and chemical firm, was
amicability. Pfizer, which in previous
years had customarily held its annual
meeting at its headquarters in Brooklyn,
reversed the trend by moving this year’s
meeting right into the lair of the most
vocal dissenters, midtown Manhattan,
but everything that I saw and heard
convinced me that the motivation behind
this move had been not a brash resolve
on the company’s part to beard the lions
in their den but a highly unfashionable
EACH
desire to get the maximum possible
turnout. Pfizer seemed to feel selfconfident
enough
to
meet
its
stockholders with its guard down. For
instance, in contrast with the other
meetings I attended, no stockholder
tickets were collected or credentials
checked at the entrance to the Grand
Ballroom of the Commodore Hotel,
where the Pfizer meeting was held; Fidel
Castro himself, whose oratorical style I
have occasionally felt that the
professional stockholders were using as
a model, could presumably have walked
in and said whatever he chose. Some
seventeen hundred persons, or nearly
enough to fill the ballroom, showed up,
and all the members of the Pfizer board
of directors sat on the platform from
start to finish and answered any
questions
addressed
to
them
individually.
Speaking, appropriately, with a faint
trace of a Brooklyn accent, Chairman
John E. McKeen welcomed the
stockholders as “my dear and cherished
friends” (I tried to imagine Mr. Kappel
and Mr. Phillippe addressing their
stockholders that way, and couldn’t, but
then their companies are bigger), and
said that on the way out everyone
present would be given a big freesample kit of Pfizer consumer products,
such as Barbasol, Desitin, and Imprévu.
Wooed thus by endearments and the
promise of gifts, and further softened up
by the report of President John J.
Powers, Jr., on current operations
(records all around) and immediate
prospects (more records expected), the
most
intransigent
professional
stockholder would have been hard put to
it to mount much of a rebellion at this
particular meeting, and, as it happened,
the only professional present seemed to
be John Gilbert, brother of Lewis. (I
learned later that Lewis Gilbert and
Mrs. Davis were in Cleveland that day,
attending the U.S. Steel meeting.) John
Gilbert is the sort of professional
stockholder the Pfizer management
deserves, or would like to think it does.
With an easygoing manner and a habit of
punctuating his words with selfdeprecating little laughs, he is the most
ingratiating gadfly imaginable (or was
on this occasion; I’m told he isn’t
always), and as he ran through what
seemed to be the standard Gilbert-family
repertoire
of
questions—on the
reliability of the firm’s auditors, the
salaries of its officers, the fees of its
directors—he seemed almost apologetic
that duty called on him to commit the
indelicacy of asking such things. As for
the amateur stockholders present, their
questions and comments were about like
those at the other meetings I’d attended,
but this time their attitude toward the
role of the professional stockholder was
noticeably different. Instead of being
overwhelmingly opposed, they appeared
to be split; to judge from the volume of
clapping and of discreet groaning, about
half of those present considered Gilbert
a nuisance and half considered him a
help. Powers left no doubt about how he
felt; before adjourning the meeting he
said, without irony, that he had
welcomed Gilbert’s questions, and made
a point of inviting him to come again
next year. And, indeed, during the later
stages of the Pfizer meeting, when
Gilbert, in a conversational way, was
praising the company for some things
and criticizing it for others, and the
various members of the board were
replying to his comments just as
informally, I got for the first time a
fleeting sense of genuine communication
between stockholders and managers.
Radio Corporation of America,
which had held its last two meetings far
from its New York headquarters—in Los
Angeles in 1964, in Chicago in 1965—
reserved the current trend even more
decisively than Pfizer by convening this
time in Carnegie Hall. The entire
orchestra and the two tiers of boxes
were
completely
filled
with
stockholders—about
twenty-three
hundred of them, of whom a strikingly
larger proportion than at any of my other
meetings was male. Mrs. Soss and Mrs.
Davis were on hand, though, along with
Lewis Gilbert and some professional
THE
stockholders I hadn’t seen before, and,
as with Pfizer, the company’s whole
board of directors sat on the platform,
where the chief centers of attraction in
R.C.A.’s case were David Sarnoff, the
company’s
seventy-five-year-old
chairman, and his forty-eight-year-old
son, Robert W. Sarnoff, who had been its
president since the beginning of the year.
For me, two aspects of the R.C.A.
meeting stood out: the evident respect,
amounting almost to veneration, of the
stockholders for their celebrated
chairman,
and
an unaccustomed
disposition of the amateur stockholders
to speak up for themselves. The elder
Mr. Sarnoff, looking hale and ready for
anything, conducted the meeting, and he
and several other R.C.A. executives
gave reports on company operations and
prospects, in the course of which the
words “record” and “growth” recurred
so monotonously that I, not being an
R.C.A. stockholder, began to nod. I was
brought wide awake with a jolt on one
occasion, though, when I heard Walter
D. Scott, chairman of R.C.A.’s
subsidiary the National Broadcasting
Company, say in connection with his
network’s television programming that
“creative resources are always running
ahead of demand.”
No one objected to that statement or to
anything else in the glowing reports, but
when they were over the stockholders
had their say on other matters. Mr.
Gilbert raised some favorite questions
of his about accounting procedures, and
a representative of R.C.A.’s accountants,
Arthur Young & Co., made replies that
seemed to satisfy Mr. Gilbert. A
Dickensian elderly lady, who identified
herself as Mrs. Martha Brand and said
she held “many thousands” of shares of
R.C.A. stock, expressed the view that
the accounting procedures of the
company should not even be questioned.
I have since learned that Mrs. Brand is a
professional stockholder who is an
anomaly within the profession, in that
she leans strongly toward the
management view of things. Mr. Gilbert
then advanced a proposal for the
adoption
of
cumulative
voting,
supporting it with about the same
arguments that Mrs. Soss had used at the
G.E. meeting. Mr. Sarnoff opposed the
motion, and so did Mrs. Brand, who
explained that she was sure the present
directors always worked tirelessly for
the welfare of the corporation, and
added this time that she was the holder
of “many, many thousands” of shares.
Two or three other stockholders spoke
up in favor of cumulative voting—the
only occasion at any meeting on which I
saw stockholders not easily identifiable
as professionals speak in dissent on a
matter of substance. (Cumulative voting
was defeated, 95.3 per cent to 4.7 per
cent.) Mrs. Soss, still in as mild a mood
as in Atlanta, said she was delighted to
see a woman, Mrs. Josephine Young
Case, sitting on the stage as a member of
the R.C.A. board, but deplored the fact
that Mrs. Case’s principal occupation
was given on the proxy statement as
“housewife.” Couldn’t a woman who
was chairman of the board of Skidmore
College at least be called a “home
executive”? Another lady stockholder
set off a round of applause by delivering
a paean to Chairman Sarnoff, whom she
called “the marvellous Cinderella man
of the twentieth century.”
Mrs. Davis—who had earlier
objected to the site of the meeting on the
ground, which I found dumfounding, that
Carnegie Hall was “too unsophisticated”
for R.C.A.—advanced a resolution
calling for company action “to insure
that hereafter no person shall serve as a
director after he shall have attained the
age of seventy-two.” Even though
similar rulings are in effect in many
companies, and even though the
proposal, not being retroactive, would
have no effect upon Mr. Sarnoff’s status,
it seemed to be aimed at him, and thus
Mrs. Davis demonstrated again her
uncanny knack of playing into
management’s hands. Nor did she appear
to help her cause by putting on a Batman
mask (the symbolism of which I didn’t
grasp) when she made it. At all events,
the proposal gave rise to several
impassioned defenses of Mr. Sarnoff,
and one of the speakers went on to
complain bitterly that Mrs. Davis was
insulting the intelligence of everyone
present. At this, the serious-minded Mr.
Gilbert leaped up to say, “I quite agree
about the silliness of her costume, but
there is a valid principle in her
proposal.” In making this Voltairian
distinction, Mr. Gilbert, to judge from
his evident state of agitation, was
achieving a triumph of reason over
inclination that was costing him plenty.
Mrs. Davis’s resolution was defeated
overwhelmingly; the margin against it
served to end the meeting with what
amounted to a rousing vote of confidence
in the Cinderella man.
farce, with elements of
slapstick, was the dominant mood of the
meeting of the Communications Satellite
Corporation, with which I wound up my
meeting-going season. Comsat is, of
course, the glamorous space-age
communications company that was set up
by the government in 1963 and turned
over to public ownership in a celebrated
stock sale in 1964. Upon arriving at the
meeting site—the Shoreham Hotel, in
Washington—I was scarcely startled to
discover Mrs. Davis, Mrs. Soss, and
Lewis Gilbert among the thousand or so
stockholders present. Mrs. Davis,
decked out in stage makeup, an orange
pith helmet, a short red skirt, white
boots, and a black sweater bearing in
CLASSIC
white letters the legend “I Was Born to
Raise Hell,” had planted herself
squarely in front of a battery of
television cameras. Mrs. Soss, as I had
learned by now was her custom, had
taken a place at the opposite side of the
room from Mrs. Davis, and this meant
that she was now as far as possible from
the television cameras. Considering that
Mrs. Soss does not ordinarily seem to be
averse to being photographed, I could
write down this choice of seat only as a
hard-won triumph of conscience akin to
Mr. Gilbert’s at Carnegie Hall. As for
Mr. Gilbert, he took a place not far from
Mrs. Soss, and thus, of course, a long
way from Mrs. Davis.
Since the previous year, Leo D.
Welch, the man who had conducted the
1965 Comsat meeting with such a firm
hand, has been replaced as chairman of
the company by James McCormack, a
West Point graduate, former Rhodes
Scholar, and retired Air Force general
with an impeccably polished manner,
who bears a certain resemblance to the
Duke of Windsor, and Mr. McCormack
was conducting this year’s session. He
warmed up with some preliminary
remarks in the course of which he noted
—-smoothly, but not without emphasis—
that as for the subject of any intervention
that a stockholder might choose to make,
“the field of relevance is quite narrow.”
When Mr. McCormack had finished his
warmup, Mrs. Soss made a brief speech
that may or may not have come within
the field of relevance; I missed most of
it, because the floor microphone
supplied to her wasn’t working right.
Mrs. Davis then claimed the floor, and
her mike was working all too well; as
the cameras ground, she launched into an
earsplitting tirade against the company
and its directors because there had been
a special door to the meeting room
reserved
for
the
entrance
of
“distinguished guests.” Mrs. Davis, in a
good many words, said she considered
this procedure undemocratic. “We
apologize, and when you go out, please
go by any door you want,” Mr.
McCormack said, but Mrs. Davis,
clearly unappeased, went on speaking.
And now the mood of farce was
heightened when it became clear that the
Soss-Gilbert faction had decided to
abandon all efforts to keep ranks closed
with Mrs. Davis. Near the height of her
oration, Mr. Gilbert, looking as outraged
as a boy whose ball game is being
spoiled by a player who doesn’t know
the rules or care about the game, got up
and began shouting, “Point of order!
Point of order!” But Mr. McCormack
spurned this offer of parliamentary help;
he ruled Mr. Gilbert’s point of order out
of order, and bade Mrs. Davis proceed. I
had no trouble deducing why he did this.
There were unmistakable signs that he,
unlike any other corporate chairman I
had seen in action, was enjoying every
minute of the goings on. Through most of
the meeting, and especially when the
professional stockholders had the floor,
Mr. McCormack wore the dreamy smile
of a wholly bemused spectator.
Eventually, Mrs. Davis’s speech built
up to a peak of both volume and content
at which she began making specific
allegations against individual Comsat
directors, and at this point three security
guards—two beefy men and a
determined-looking woman, all dressed
in gaudy bottle-green uniforms that might
have been costumes for “The Pirates of
Penzance”—appeared at the rear,
marched with brisk yet stately tread up
the center aisle, and assumed the
position of parade rest in the aisle
within handy reach of Mrs. Davis,
whereupon she abruptly concluded her
speech and sat down. “All right,” Mr.
McCormack said, still grinning.
“Everything’s cool now.”
The guards retired, and the meeting
proceeded. Mr. McCormack and the
Comsat president, Joseph V. Charyk,
gave the sort of glowing report on the
company that I had grown accustomed
to, Mr. McCormack going so far as to
say that Comsat might start showing its
first profit the following year rather than
in 1969, as originally forecast. (It did.)
Mr. Gilbert asked what fee, apart from
his regular salary, Mr. McCormack
received for attending directors’
meetings. Mr. McCormack replied that
he got no fee, and when Mr. Gilbert said,
“I’m glad you get nothing, I approve of
that,” everybody laughed and Mr.
McCormack grinned more broadly than
ever. (Mr. Gilbert was clearly trying to
make what he considered to be a serious
point, but this didn’t seem to be the day
for that sort of thing.) Mrs. Soss took a
dig at Mrs. Davis by saying pointedly
that anyone who opposed Mr.
McCormack as company chairman was
“lacking in perspicacity;” she did note,
however, that she couldn’t quite bring
herself to vote for Mr. Welch, the former
chairman, who was now a candidate for
the board, inasmuch as he had ordered
her thrown out last year. A peppy old
gentleman said that he thought the
company was doing fine and everyone
should have faith in it. Once, when Mr.
Gilbert said something that Mrs. Davis
didn’t like and Mrs. Davis, without
waiting to be recognized, began shouting
her objection across the room, Mr.
McCormack gave a short irrepressible
giggle. That single falsetto syllable,
magnificently
amplified
by
the
chairman’s microphone, was the motif of
the Comsat meeting.
On the plane returning from
Washington, as I was musing on the
meetings I had attended, it occurred to
me that if there had been no professional
stockholders at them I would probably
have learned almost as much as I did
about the companies’ affairs but that I
would have learned a good deal less
about
their
chief
executives’
personalities. It had, after all, been the
questions, interruptions, and speeches of
the professional stockholders that
brought the companies to life, in a sense,
by forcing each chairman to shed his
official portrait-by-Bachrach mask and
engage in a human relationship. More
often than not, this had been the hardly
satisfactory human relationship of nagger
and nagged, but anyone looking for
humanity in high corporate affairs can’t
afford to pick and choose. Still, some
doubts remained. Being thirty thousand
feet up in the air is conducive to taking
the broader view, and, doing so as we
winged over Philadelphia, I concluded
that, on the basis of what I had seen and
heard, both company managements and
stockholders might well consider a
lesson King Lear learned—that when the
role of dissenter is left to the Fool, there
may be trouble ahead for everybody.
11
One Free Bite
of young
scientists who were doing very well in
the research-and-development programs
of American companies in the fall of
1962 was one named Donald W.
Wohlgemuth, who was working for the
AMONG
THE
THOUSANDS
B. F. Goodrich Company, in Akron,
Ohio. A 1954 graduate of the University
of Michigan, where he had taken the
degree of Bachelor of Science in
chemical engineering, he had gone
directly from the university to a job in
the chemical laboratories of Goodrich,
at a starting salary of three hundred and
sixty-five dollars a month. Since then,
except for two years spent in the Army,
he had worked continuously for
Goodrich, in various engineering and
research capacities, and had received a
total of fifteen salary increases over the
six and a half years. In November, 1962,
as he approached his thirty-first
birthday, he was earning $10,644 a year.
A tall, self-contained, serious-looking
man of German ancestry, whose hornrimmed glasses gave him an owlish
expression, Wohlgemuth lived in a ranch
house in Wadsworth, a suburb of Akron,
with his wife and their fifteen-month-old
daughter. All in all, he seemed to be the
young American homme moyen réussi to
the point of boredom. What was
decidedly not routine about him, though,
was the nature of his job; he was the
manager of Goodrich’s department of
space-suit engineering, and over the past
years, in the process of working his way
up to that position, he had had a
considerable part in the designing and
construction of the suits worn by our
Mercury astronauts on their orbital and
suborbital flights.
Then, in the first week of November,
Wohlgemuth got a phone call from an
employment agent in New York, who
informed him that the executives of a
large company in Dover, Delaware,
were most anxious to talk to him about
the possibility of his taking a job with
them. Despite the caller’s reticence—a
trait common among employment agents
making first approaches to prospective
employees—Wohlgemuth instantly knew
the identity of the large company. The
International Latex Corporation, which
is best known to the public as a maker of
girdles and brassiéres, but which
Wohlgemuth knew to be also one of
Goodrich’s three major competitors in
the space-suit field, is situated in Dover.
He knew, further, that Latex had recently
been awarded a subcontract, amounting
to some three-quarters of a million
dollars, to do research and development
on space suits for the Apollo, or manon-the-moon, project. As a matter of
fact, Latex had won this contract in
competition with Goodrich, among
others, and was thus for the moment
much the hottest company in the spacesuit field. On top of that, Wohlgemuth
was somewhat discontented with his
situation at Goodrich; for one thing, his
salary, however bountiful it might seem
to
many
thirty-year-olds,
was
considerably below the average for
Goodrich employees of his rank, and, for
another, he had been turned down not
long before by the company authorities
when he asked for air-conditioning or
filtering to keep dust out of the plant area
allocated
to
space-suit
work.
Accordingly, after making arrangements
by phone with the executives mentioned
by the employment agent—and they did
indeed prove to be Latex men—
Wohlgemuth went to Dover the
following Sunday.
He stayed there a day and a half,
borrowing Monday from vacation time
that was due him from Goodrich, and
getting what he subsequently described
as “a real red-carpet treatment.” He was
taken on a tour of the Latex space-suitdevelopment facilities by Leonard
Shepard, director of the company’s
Industrial Products Division. He was
entertained at the home of Max Feller, a
Latex vice-president. He was shown the
Dover housing situation by another
company executive. Finally, before lunch
on Monday, he had a talk with all three
of the Latex executives, following which
—as Wohlgemuth later described the
scene in court—the three “removed
themselves to another room for
approximately ten minutes.” When they
reappeared, one of them offered
Wohlgemuth the position of manager of
engineering for the Industrial Products
Division, which included responsibility
for space-suit development, at an annual
salary of $13,700, effective at the
beginning of December. After getting his
wife’s approval by telephone—and it
was not hard to get, since she was
originally from Baltimore and was
delighted at the prospect of moving back
to her own part of the world—
Wohlgemuth accepted. He flew back to
Akron that night. First thing Tuesday
morning, Wohlgemuth confronted Carl
Effler, his immediate boss at Goodrich,
with the news that he was quitting at the
end of the month to take another job.
“Are you kidding?” Effler asked.
“No, I am not,” Wohlgemuth replied.
Following this crisp exchange, which
Wohlgemuth later reported in court,
Effler, in the time-honored tradition of
bereaved bosses, grumbled a bit about
the difficulty of finding a qualified
replacement before the end of the month.
Wohlgemuth spent the rest of the day
putting his department’s papers in order
and clearing his desk of unfinished
business, and the next morning he went
to see Wayne Galloway, a Goodrich
space-suit executive with whom he had
worked closely and had been on the
friendliest of terms for a long time; he
said later that he felt he owed it to
Galloway “to explain to him my side of
the picture” in person, even though at the
moment he was not under Galloway’s
supervision in the company chain of
command. Wohlgemuth began this
interview by rather melodramatically
handing Galloway a lapel pin in the form
of a Mercury capsule, which had been
awarded to him for his work on the
Mercury space suits; now, he said, he
felt he was no longer entitled to wear it.
Why, then, Galloway asked, was he
leaving? Simple enough, Wohlgemuth
said—he considered the Latex offer a
step up both in salary and in
responsibility. Galloway replied that in
making the move Wohlgemuth would be
taking to Latex certain things that did not
belong to him—specifically, knowledge
of the processes that Goodrich used in
making space suits. In the course of the
conversation,
Wohlgemuth
asked
Galloway what he would do if he were
to receive a similar offer. Galloway
replied that he didn’t know; for that
matter, he added, he didn’t know what he
would do if he were approached by a
group who had a foolproof plan for
robbing a bank. Wohlgemuth had to base
his decision on loyalty and ethics,
Galloway
said—a
remark
that
Wohlgemuth took as an accusation of bad
faith. He lost his temper, he later
explained, and gave Galloway a rash
answer. “Loyalty and ethics have their
price, and International Latex has paid
it,” he said.
After that, the fat was in the fire. Later
in the morning, Effler called Wohlgemuth
into his office and told him it had been
decided that he should leave the
Goodrich premises as soon as possible,
staying around only long enough to make
a list of projects that were pending and
to go through certain other formalities. In
mid-afternoon, while Wohlgemuth was
occupied with these tasks, Galloway
called him and told him that the
Goodrich legal department wanted to
see him. In the legal department, he was
asked whether he intended to use
confidential information belonging to
Goodrich on behalf of Latex. According
to the subsequent affidavit of a Goodrich
lawyer, he replied—again rashly
—“How are you going to prove it?” He
was then advised that he was not legally
free to make the move to Latex. While he
was not bound to Goodrich by the kind
of contract, common in American
industry, in which an employee agrees
not to do similar work for any competing
company for a stated period of time, he
had, on his return from the Army, signed
a routine paper agreeing “to keep
confidential all information, records,
and documents of the company of which
I may have knowledge because of my
employment”—something Wohlgemuth
had entirely forgotten until the Goodrich
lawyer reminded him. Even if he had not
made that agreement, the lawyer told him
now, he would be prevented from going
to work on space suits for Latex by
established principles of trade-secrets
law. Moreover, if he persisted in his
plan, Goodrich might sue him.
Wohlgemuth returned to his office and
put in a call to Feller, the Latex vicepresident he had met in Dover. While he
was waiting for the call to be completed,
he talked with Effler, who had come in
to see him, and whose attitude toward
his defection seemed to have stiffened
considerably. Wohlgemuth complained
that he felt at the mercy of Goodrich,
which, it seemed to him, was
unreasonably blocking his freedom of
action, and Effler upset him further by
saying that what had happened during the
past forty-eight hours could not be
forgotten and might well affect his future
with
Goodrich.
Wohlgemuth,
it
appeared, might be sued if he left and
scorned if he didn’t leave. When the
Dover call came through, Wohlgemuth
told Feller that in view of the new
situation he would be unable to go to
work for Latex.
That evening, however, Wohlgemuth’s
prospects seemed to take a turn for the
better. Home in Wadsworth, he called
the family dentist, and the dentist
recommended
a
local
lawyer.
Wohlgemuth told his story to the lawyer,
who thereupon consulted another lawyer
by phone. The two counsellors agreed
that Goodrich was probably bluffing and
would not really sue Wohlgemuth if he
went to Latex. The next morning—
Thursday—officials of Latex called him
back to assure him that their firm would
bear his legal expenses in the event of a
lawsuit, and, furthermore, would
indemnify him against any salary losses.
Thus
emboldened,
Wohlgemuth
delivered two messages within the next
couple of hours—one in person and one
by phone. He told Effler what the two
lawyers had told him, and he called the
legal department to report that he had
now changed his mind and was going to
work at International Latex after all.
Later that day, after completing the
cleanup job in his office, he left the
Goodrich premises for good, taking with
him no documents.
The following day—Friday—R. G.
Jeter, general counsel of Goodrich,
telephoned Emerson P. Barrett, director
of industrial relations for Latex, and
spoke of Goodrich’s concern for its
trade secrets if Wohlgemuth went to
work there. Barrett replied that although
“the work for which Wohlgemuth was
hired was design and construction of
space suits,” Latex was not interested in
learning any Goodrich trade secrets but
was “only interested in securing the
general professional abilities of Mr.
Wohlgemuth.” That this answer did not
satisfy Jeter, or Goodrich, became
manifest the following Monday. That
evening, while Wohlgemuth was in an
Akron restaurant called the Brown
Derby, attending a farewell dinner in his
honor given by forty or fifty of his
friends, a waitress told him that there
was a man outside who wanted to see
him. The man was a deputy sheriff of
Summit County, of which Akron is the
seat, and when Wohlgemuth came out,
the man handed him two papers. One
was a summons to appear in the Court of
Common Pleas on a date a week or so
off. The other was a copy of a petition
that had been filed in the same court that
day by Goodrich, praying that
Wohlgemuth be permanently enjoined
from, among other things, disclosing to
any unauthorized person any trade
secrets belonging to Goodrich, and
“performing any work for any
corporation … other than plaintiff,
relating to the design, manufacture
and/or sale of high-altitude pressure
suits, space suits and/or similar
protective garments.”
need for the protection of trade
secrets was fully recognized in the
Middle Ages, when they were so
jealously guarded by the craft guilds that
the guilds’ employees were rigorously
prevented from changing jobs. Laissezfaire industrial society, since it
emphasizes the principle that the
individual is entitled to rise in the world
by taking the best opportunity he is
offered, has been far more lenient about
job-jumping, but the right of an
THE
organization to keep its secrets has
survived. In American law, the basic
commandment on the subject was laid
down by Justice Oliver Wendell Holmes
in connection with a 1905 Chicago case.
Holmes wrote, “The plaintiff has the
right to keep the work which it has done,
or paid for doing, to itself. The fact that
others might do similar work, if they
wished, does not authorize them to steal
plaintiff’s.” This admirably downright,
if not highly sophisticated, ukase has
been cited in almost every trade-secrets
case that has come up since, but over the
years, as both scientific research and
industrial organization have become
infinitely more complex, so have the
questions of what, exactly, constitutes a
trade secret, and what constitutes
stealing it. The American Law Institute’s
“Restatement of the Law of Torts,” an
authoritative text issued in 1939,
grapples manfully with the first question
by stating, or restating, that “a trade
secret may consist of any formula,
pattern, device, or compilation of
information which is used in one’s
business, and which gives him an
opportunity to obtain an advantage over
competitors who do not know or use it.”
But in a case heard in 1952 an Ohio
court decided that the Arthur Murray
method of teaching dancing, though it
was unique and was presumably helpful
in luring customers away from
competitors, was not a trade secret. “All
of us have ‘our method’ of doing a
million things—our method of combing
our hair, shining our shoes, mowing our
lawn,” the court mused, and concluded
that a trade secret must not only be
unique and commercially helpful but
also have inherent value. As for what
constitutes thievery of trade secrets, in a
proceeding heard in Michigan in 1939,
in which the Dutch Cookie Machine
Company complained that one of its
former employees was threatening to use
its highly classified methods to make
cookie machines on his own, the trial
court decided that there were no fewer
than three secret processes by which
Dutch Cookie machines were made, and
enjoined the former employee from using
them in any manner; however, the
Michigan Supreme Court, on appeal,
found that the defendant, although he
knew the three secrets, did not plan to
use them in his own operations, and,
accordingly, it reversed the lower
court’s decision and vacated the
injunction.
And so on. Outraged dancing teachers,
cookie-machine manufacturers, and
others have made their way through
American courts, and the principles of
law regarding the protection of trade
secrets have become well established;
any difficulty arises chiefly in the
application of these principles to
individual cases. The number of such
cases has been rising sharply in recent
years, as research and development by
private industry have expanded, and a
good index to the rate of such expansion
is the fact that eleven and a half billion
dollars was spent in this work in 1962,
more than three times the figure for
1953. No company wants to see the
discoveries produced by all that money
go out of its doors in the attaché cases,
or even in the heads, of young scientists
bound for greener pastures. In
nineteenth-century America, the builder
of a better mousetrap was supposed to
have been a cynosure—provided, of
course, that the mousetrap was properly
patented. In those days of comparatively
simple technology, patents covered most
proprietary rights in business, so tradesecrets cases were rare. The better
mousetraps of today, however, like the
processes involved in outfitting a man to
go into orbit or to the moon, are often
unpatentable.
Since thousands of scientists and
billions of dollars might be affected by
the results of the trial of Goodrich v.
Wohlgemuth, it naturally attracted an
unusual amount of public attention. In
Akron, the court proceedings were much
discussed both in the local paper, the
Beacon Journal, and in conversation.
Goodrich is an old-line company, with a
strong streak of paternalism in its
relations with its employees, and with
strong feelings about what it regards as
business ethics. “We were exceptionally
upset by what Wohlgemuth did,” a
Goodrich executive of long standing said
recently. “In my judgment, the episode
caused more concern to the company
than anything that has happened in years.
In fact, in the ninety-three years that
Goodrich has been in business, we had
never before entered a suit to restrain a
former employee from disclosing trade
secrets. Of course, many employees in
sensitive positions have left us. But in
those cases the companies doing the
hiring
have
recognized
their
responsibilities. On one occasion, a
Goodrich chemist went to work for
another company under circumstances
that made it appear to us that he was
going to use our methods. We talked to
the man, and to his new employer, too.
The upshot was that the competing
company never brought out the product it
had hired our man to work on. That was
responsible conduct on the part of both
employee and company. As for the
Wohlgemuth case, the local community
and our employees were a bit hostile
toward us at first—a big company suing
a little guy, and so on. But they gradually
came around to our point of view.”
Interest outside Akron, which was
evidenced by a small flood of letters of
inquiry about the case, addressed to the
Goodrich legal department, made it
clear that Goodrich v. Wohlgemuth was
being watched as a bellwether. Some
inquiries were from companies that had
similar problems, or anticipated having
them, and a surprising number were from
relatives of young scientists, asking,
“Does this mean my boy is stuck in his
present job for the rest of his life?” In
truth, an important issue was at stake,
and pitfalls awaited the judge who heard
the case, no matter which way he
decided. On one side was the danger that
discoveries made in the course of
corporate research might become
unprotectable—a situation that would
eventually lead to the drying up of
private research funds. On the other side
was the danger that thousands of
scientists might, through their very
ability and ingenuity, find themselves
permanently locked in a deplorable, and
possibly unconstitutional, kind of
intellectual servitude—they would be
barred from changing jobs because they
knew too much.
trial—held in Akron, presided over
by Judge Frank H. Harvey, and
conducted, like all proceedings of its
type, without a jury—began on
November 26th and continued through
December 12th, with a week’s recess in
the middle; Wohlgemuth, who was
supposed to have started work at Latex
on December 3rd, remained in Akron
under a voluntary agreement with the
THE
court, and testified extensively in his
own defense. Injunction, the form of
relief that was sought by Goodrich and
the chief form of relief that is available
to anyone whose secrets have been
stolen, is a remedy that originated in
Roman law; it was anciently called
“interdict,” and is still so called in
Scotland. What Goodrich was asking, in
effect, was that the court issue a direct
order to Wohlgemuth not only forbidding
him to reveal Goodrich secrets but also
forbidding him to take employment in
any other
company’s
space-suit
department. Any violation of such an
order would be contempt of court,
punishable by a fine, or imprisonment,
or both. Just how seriously Goodrich
viewed the case became clear when its
team of lawyers proved to be headed by
Jeter himself, who, as vice-president,
secretary, the company’s ultimate
authority on patent law, general law,
employee relations, union relations, and
workmen’s compensation, and Lord
High Practically Everything Else, had
not found time to try a case in court
himself for ten years. The chief defense
counsel was Richard A. Chenoweth, of
the Akron law firm of Buckingham,
Doolittle & Burroughs, which Latex,
though it was not a defendant in the
action, had retained to handle the case,
in fulfillment of its promise to
Wohlgemuth.
From the outset, the two sides
recognized that if Goodrich was to
prevail, it had to prove, first, that it
possessed trade secrets; second, that
Wohlgemuth also possessed them, and
that a substantial peril of disclosure
existed; and, third, that it would suffer
irreparable injury if injunctive relief
was not granted. On the first point,
Goodrich attorneys, through their
questioning of Effler, Galloway, and one
other company employee, set out to
establish that Goodrich had a number of
unassailable space-suit secrets, among
them a way of making the hard shell of a
space helmet, a way of making the visor
seal, a way of making a sock ending, a
way of making the inner liner of gloves,
a way of fastening the helmet onto the
rest of the suit, and a way of applying a
wear-resistant material called neoprene
to two-way-stretch fabric. Wohlgemuth,
through
his
counsel’s
crossexaminations, sought to show that none
of these processes were secrets at all;
for example, in the case of the neoprene
process, which Effler had described as
“a very critical trade secret” of
Goodrich, defense counsel brought out
evidence that a Latex product that is
neither secret nor intended to be worn in
outer space—the Playtex Golden Girdle
—was made of two-way-stretch fabric
with neoprene applied to it, and, to
emphasize the point, Chenoweth
introduced a Playtex Golden Girdle for
all to see. Nor did either side neglect to
bring into court a space suit, in each
instance inhabited. The Goodrich suit, a
1961 model, was intended to
demonstrate what the company had
achieved by means of research—
research that it did not want to see
compromised through the loss of its
secrets. The Latex suit, also a 1961
model, was intended to show that Latex
was already ahead of Goodrich in
space-suit development and would
therefore have no interest in stealing
Goodrich secrets. The Latex suit was
particularly bizarre-looking, and the
Latex employee who wore it in court
looked
almost
excruciatingly
uncomfortable, as if he were
unaccustomed to the air of earth, or of
Akron. “His air tubes weren’t hooked
up, and he was hot,” the Beacon Journal
explained next day. At any rate, after he
had sat suffering for ten or fifteen
minutes
while
defense
counsel
questioned a witness about his costume,
he suddenly pointed in an agonized way
to his head, and the court record of what
followed, probably unique in the annals
of jurisprudence, reads like this:
MAN IN THE SPACE SUIT: May I take this off?
(Helmet).…
THE COURT: All right.
The second element in Goodrich’s
burden of proof—that Wohlgemuth was
privy to Goodrich secrets—was fairly
quickly
dealt
with,
because
Wohlgemuth’s lawyers conceded that
hardly anything the company knew about
space suits had been kept from him; they
based their defense on, first, the
unquestioned fact that he had taken no
papers away with him and, second, the
unlikelihood that he would be able to
remember the details of complex
scientific processes, even if he wanted
to. On the third element—the matter of
irreparable injury—Jeter pointed out
that Goodrich, which had made the first
full-pressure flying suit in history, for the
late
Wiley
Post’s
high-altitude
experiments in 1934, and which had
since poured vast sums into space-suit
research and development, was the
unquestioned pioneer and had up to then
been considered the leader in the field;
he tried to paint Latex, which had been
making full-pressure suits only since the
mid-fifties, as a parvenu with the
nefarious plan of cashing in on
Goodrich’s years of research by hiring
Wohlgemuth. Even if the intentions of
Latex and Wohlgemuth were the best in
the world, Jeter contended, Wohlgemuth
would inevitably reveal Goodrich
secrets in the course of working in
Latex’s space-suit department. In any
event, Jeter was unwilling to assume
good intentions. As evidence of bad
ones, there was, on the part of Latex, the
fact that the firm had deliberately sought
out Wohlgemuth, and, on the part of
Wohlgemuth, the statement he had made
to Galloway about the price of loyalty
and ethics. The defense disputed the
contention that a disclosure of secrets
would be inevitable, and, of course,
denied evil intentions on anyone’s part.
It rounded out its case with a statement
made in court under oath by
Wohlgemuth: “I will not reveal [to
International Latex] any items which in
my own mind I would consider to be
trade secrets of the B. F. Goodrich
Company.” This, of course, was cold
comfort to Goodrich.
Having heard the evidence and the
lawyers’ summations, Judge Harvey
reserved decision until a later date and
issued an order temporarily forbidding
Wohlgemuth to reveal the alleged secrets
or to work in the Latex space-suit
program; he could go on the Latex
payroll, but he had to stay out of space
suits until the court’s decision was
handed down. In mid-December,
Wohlgemuth, leaving his family behind,
went to Dover and began working for
Latex on other products; early in
January, by which time he had succeeded
in selling his house in Wadsworth and
buying one in Dover, his family joined
him at his new stand.
Akron, meanwhile, the lawyers had at
each other in briefs intended to sway
IN
Judge Harvey. Various fine points of law
were
debated,
learnedly
but
inconclusively; yet as the briefs wore
on, it became increasingly clear that the
essence of the case was quite simple.
For all practical purposes, there was no
controversy over the facts. What
remained in controversy was the
answers to two questions: First, should a
man be formally restrained from
revealing trade secrets when he has not
yet committed any such act, and when it
is not clear that he intends to? And,
secondly, should a man be prevented
from taking a job simply because the job
presents him with unique temptations to
break the law? Having scoured the
lawbooks, counsel for the defense found
exactly the text quotation they wanted in
support of the argument that both
questions should be answered in the
negative. (Unlike the decisions of other
courts, the general statements of the
authors of law textbooks have no official
standing in any court, but by using them
judiciously an advocate can express his
own opinions in someone else’s words
and buttress them with bibliographical
references.) The quotation was from a
text entitled “Trade Secrets,” which was
written by a lawyer named Ridsdale
Ellis and published in 1953, and it read,
in part, “Usually it is not until there is
evidence that the employee [who has
changed jobs] has not lived up to his
contract, expressed or implied, to
maintain secrecy, that the former
employer can take action. In the law of
torts there is the maxim: Every dog has
one free bite. A dog cannot be presumed
to be vicious until he has proved that he
is by biting someone. As with a dog, the
former employer may have to wait for a
former employee to commit some overt
act before he can act.” To counter this
doctrine—which,
besides
being
picturesque, appeared to have a
crushingly exact applicability to the case
under dispute—Goodrich’s lawyers
came up with a quotation of their own
from the very same book. (“Ellis on
trade secrets,” as the lawyers referred to
it in their briefs, was repeatedly used by
the two sides to belabor each other, for
the good reason that it was the only text
on the subject available in the Summit
County law library, where both sides did
the bulk of their research.) In support of
their cause, Goodrich counsel found that
Ellis had said, in connection with tradesecrets cases in which the defendant was
a company accused of luring away
another
company’s
confidential
employee: “Where the confidential
employee left to enter defendant’s
employment, an inference can be drawn
to supplement other circumstantial
evidence that the latter employment was
stimulated by a desire by the defendant
to learn plaintiff’s secrets.”
In other words, Ellis apparently felt
that when the circumstances look
suspicious, one free bite is not
permitted. Whether he contradicted
himself or merely refined his position is
a nice question; Ellis himself had died
several years earlier, so it was not
possible to consult him on the matter.
On February 20th, 1963, having
studied the briefs and deliberated on
them, Judge Harvey delivered his
decision, in the form of a nine-page
essay fraught with suspense. To begin
with, the Judge wrote, he was convinced
that Goodrich did have trade secrets
relative to space suits, and that
Wohlgemuth might be able to remember
and therefore be able to disclose some
of them to Latex, to the irreparable
injury of Goodrich. He declared, further,
that “there isn’t any doubt that the Latex
company was attempting to gain
[Wohlgemuth’s] valuable experience in
this particular specialized field for the
reason that they had this so-called
‘Apollo’ contract with the government,
and there isn’t any doubt that if he is
permitted to work in the space-suit
division of the Latex company … he
would have an opportunity to disclose
confidential information of the B. F.
Goodrich Company.” Still further, Judge
Harvey was convinced by the attitude of
Latex, as this was evidenced by the
conduct of its representatives in court,
that the company intended to try to get
Wohlgemuth to give it “the benefit of
every kind of information he had.” At
this point in the opinion, things certainly
looked black for the defense. However
—and the Judge was well down page 6
before he got to the “however”—what
he had concluded after studying the onefree-bite controversy among the lawyers
was that an injunction cannot be issued
against disclosure of trade secrets
before such disclosure has occurred
unless there is clear and substantial
evidence of evil intent on the part of the
defendant. The defendant in this case, the
Judge pointed out, was Wohlgemuth, and
if any evil intent was involved, it
appeared to be attributable to Latex
rather than to him. For this reason, along
with some technical ones, he wound up,
“It is the view and the Order of this
Court that Injunction be denied against
the defendant.”
Goodrich promptly appealed the
decision, and the Summit County Court
of Appeals, pending its own decision on
the case, issued another restraining
order, which differed from Judge
Harvey’s in that it permitted Wohlgemuth
to do space-suit work for Latex, but still
forbade him to disclose Goodrich’s
alleged trade secrets. Accordingly,
Wohlgemuth, with an initial victory
under his belt but with a new legal
struggle on his behalf ahead, went to
work in the Latex moon-suit shop.
Jeter and his colleagues, in their brief
to the Court of Appeals, stated
unequivocally that Judge Harvey had
been wrong not only in some of the
technical aspects of his decision but in
his finding that there must be evidence of
bad faith on the defendant’s part before
an injunction can be granted. “The
question to be decided is not one of
good or bad faith, but, rather, whether
there is a threat or a likelihood that trade
secrets will be disclosed,” the Goodrich
brief declared roundly—and a little
inconsistently, in view of all the time
and effort the company had expended on
attempts to pin bad faith on both Latex
and Wohlgemuth. Wohlgemuth’s lawyers,
of course, did not fail to point out the
inconsistency. “It seems strange indeed
that Goodrich should find fault with this
finding of Judge Harvey,” they remarked
in their brief. Quite clearly, they had
conceived for Judge Harvey feelings so
tender as to border on the protective.
The decision of the Court of Appeals
was handed down on May 22nd. Written
by Judge Arthur W. Doyle, with his two
colleagues of the court concurring, it
was a partial reversal of Judge Harvey.
Finding that “there exists a present real
threat of disclosure, even without actual
disclosure,” and that “an injunction may
… prevent a future wrong,” the court
granted an injunction that restrained
Wohlgemuth from disclosing to Latex
any of the processes and information
claimed as trade secrets by Goodrich.
On the other hand, Judge Doyle wrote,
“We have no doubt that Wohlgemuth had
the right to take employment in a
competitive business, and to use his
knowledge (other than trade secrets) and
experience for the benefit of his new
employer.” Plainly put, Wohlgemuth was
at last free to accept a permanent job
doing space-suit work for Latex,
provided only that he refrained from
disclosing Goodrich secrets in the
course of his work.
side carried the case above the
Summit County Court of Appeals—to the
Ohio Supreme Court and, beyond that, to
NEITHER
the United States Supreme Court—so
with the decision of the Appeals Court
the Wohlgemuth case was settled. Public
interest in it subsided soon after the trial
was over, but professional interest
continued to mount, and, of course, it
mounted still more after the Appeals
Court decision in May. In March, the
New York City Bar Association, in
collaboration with the American Bar
Association, had presented a symposium
on trade secrets, with the Wohlgemuth
case as its focus. In the later months of
that year, employers worried about loss
of trade secrets brought numerous suits
against former employees, presumably
relying on the Wohlgemuth decision as a
precedent. A year later there were more
than two dozen trade-secrets cases
pending in the courts, the most
publicized of them being the effort of E.
I. du Pont de Nemours & Co. to prevent
one of its former research engineers
from taking part in the production of
certain rare pigments for the American
Potash & Chemical Corporation.
It would be logical to suppose that
Jeter might be worried about
enforcement of the Appeals Court’s
order—might be afraid that Wohlgemuth,
working behind the locked door of the
Latex laboratory, and perhaps nursing a
grudge against Goodrich, would take his
one free bite in spite of the order, on the
assumption that he would not be caught.
However, Jeter didn’t look at things that
way. “Until and unless we learn
otherwise, we assume that Wohlgemuth
and International Latex, both having
knowledge of the court order, will
comply with the law,” Jeter said after
the case was concluded. “No specific
steps by Goodrich to police the
enforcement of the order have been
taken, or are contemplated. However, it
if should be violated, there are various
ways in which we would be likely to
find out. Wohlgemuth, after all, is
working with others, who come and go.
Out of perhaps twenty-five employees in
constant touch with him, it’s likely that
one or two will leave Latex within a
couple of years. Furthermore, you can
learn quite a lot from suppliers who deal
with both Latex and Goodrich; and also
from customers. However, I do not feel
that the order will be violated.
Wohlgemuth has been through a lawsuit.
It was quite an experience for him. He
now knows his responsibilities under the
law, which he may not have known
before.”
Wohlgemuth himself said late in 1963
that since the conclusion of the case he
had received a great many inquiries from
other scientists working in industry, the
gist of their questions being, “Does your
case mean that I’m married to my job?”
He told them that they would have to
draw
their
own
conclusions.
Wohlgemuth also said that the court
order had had no effect on his work in
the Latex space-suit department.
“Precisely what the Goodrich secrets
are is not spelled out in the order, and
therefore I have acted as if all the things
they alleged to be secrets actually are
secrets,” he said. “Nevertheless, my
efficiency is not impaired by my
avoiding disclosure of those things.
Take, for example, the use of
polyurethane as an inner liner—a
process that Goodrich claimed as a trade
secret. That was something Latex had
tried
previously
and
found
unsatisfactory. Therefore, it wasn’t
planning to investigate further along
those lines, and it still isn’t, I am just as
effective for Latex as if there had never
been an injunction. However, I will say
this. If I were to get a better offer from
some other company now, I’m sure I
would evaluate the question very
carefully—which is what I didn’t do the
last time.” Wohlgemuth—the new, posttrial Wohlgemuth—spoke in a noticeably
slow, tense way, with long pauses for
thought, as if the wrong word might
bring lightning down on his head. He
was a young man with a strong sense of
belonging to the future, and he looked
forward to making, if he could, a
material contribution to putting man on
the moon. At the same time, Jeter may
have been right; he was also a man who
had recently spent almost six months in
the toils of the law, and who worked,
and would continue to work, in the
knowledge that a slip of the tongue might
mean a fine, imprisonment, and
professional ruin.
12
In Defense of Sterling
I
of New York
stands on the block bounded by Liberty,
Nassau, and William Streets and Maiden
THE FEDERAL RESERVE BANK
Lane, on the slope of one of the few
noticeable hillocks remaining in the
bulldozed, skyscraper-flattened earth of
downtown Manhattan. Its entrance faces
Liberty, and its mien is dignified and
grim. Its arched ground-floor windows,
designed in imitation of those of the Pitti
and Riccardi Palaces in Florence, are
protected by iron grilles made of bars as
thick as a boy’s wrist, and above them
are rows of small rectangular windows
set in a blufflike fourteen-story wall of
sandstone and limestone, the blocks of
which once varied in color from brown
through gray to blue, but which soot has
reduced to a common gray; the façade’s
austerity is relieved only at the level of
the twelfth floor, by a Florentine loggia.
Two giant iron lanterns—near-replicas
of lanterns that adorn the Strozzi Palace
in Florence—flank the main entrance,
but they seem to be there less to please
or illuminate the entrant than to
intimidate him. Nor is the building’s
interior much more cheery or hospitable;
the ground floor features cavernous
groin vaulting and high ironwork
partitions in intricate geometric, floral,
and animal designs, and it is guarded by
hordes of bank security men, whose
dark-blue uniforms make them look
much like policemen.
Huge and dour as it is, the Federal
Reserve Bank, as a building, arouses
varied feelings in its beholders. To
admirers of the debonair new Chase
Manhattan Bank across Liberty Street,
which is notable for huge windows,
bright-colored tiled walls, and stylish
Abstract Expressionist paintings, it is an
epitome of nineteenth-century heavyfootedness in bank architecture, even
though it was actually completed in
1924. To an awestruck writer for the
magazine Architecture in 1927, it
seemed “as inviolable as the Rock of
Gibraltar and no less inspiring of one’s
reverent obeisance,” and possessed of
“a quality which, for lack of a better
word, I can best describe as ‘epic’” To
the mothers of young girls who work in
it as secretaries or pages, it looks like a
particularly sinister sort of prison. Bank
robbers
are
apparently
equally
respectful of its inviolability; there has
never been the slightest hint of an
attempt on it. To the Municipal Art
Society of New York, which now rates it
as a full-fledged landmark, it was until
1967 only a second-class landmark,
being assigned to Category II,
“Structures of Great Local or Regional
Importance
Which
Should
Be
Preserved,” rather than Category I,
“Structures of National Importance
Which Should Be Preserved at All
Costs.” On the other hand, it has one
indisputable edge on the Pitti, Riccardi,
and Strozzi Palaces: It is bigger than any
of them. In fact, it is a bigger Florentine
palace than has ever stood in Florence.
The Federal Reserve Bank of New
York is set apart from the other banks of
Wall Street in purpose and function as
well as in appearance. As by far the
largest and most important of the twelve
regional Federal Reserve Banks—
which, together with the Federal
Reserve Board in Washington and the
sixty-two hundred commercial banks that
are members, make up the Federal
Reserve System—it is the chief
operating arm of the United States’
central-banking institution. Most other
countries have only one central bank—
the Bank of England, the Bank of France,
and so on—rather than a network of such
banks, but the central banks of all
countries have the same dual purpose: to
keep the national currency in a healthy
state by regulating its supply, partly
through the degree of ease or difficulty
with which it may be borrowed, and,
when necessary, to defend its value in
relation to that of other national
currencies. To accomplish the first
objective, the New York bank
coöperates with its parent board and its
eleven brother banks in periodically
adjusting a number of monetary throttles,
of which the most visible (although not
necessarily the most important) is the
rate of interest at which it lends money
to other banks. As to the second
objective, by virtue of tradition and of
its situation in the nation’s and the
world’s greatest financial center, the
Federal Reserve Bank of New York is
the sole agent of the Federal Reserve
System and of the United States Treasury
in dealings with other countries. Thus,
on its shoulders falls the chief
responsibility for operations in defense
of the dollar. Those responsibilities
were weighing heavily during the great
monetary crisis of 1968—and, indeed,
since the defense of the dollar
sometimes involves the defense of other
currencies as well, over the preceding
three and a half years.
Charged as it is with acting in the
national interest—in fact having no other
purpose—the Federal Reserve Bank of
New York, together with its brother
banks, obviously is an arm of
government. Yet it has a foot in the freeenterprise camp; in what some might call
characteristic American fashion, it
stands squarely astride the chalk line
between government and business.
Although it functions as a government
agency, its stock is privately owned by
the member banks throughout the country,
to which it pays annual dividends
limited by law to six per cent per year.
Although its top officers take a federal
oath, they are not appointed by the
President of the United States, or even
by the Federal Reserve Board, but are
elected by the bank’s own board of
directors, and their salaries are paid not
out of the federal till but out of the
bank’s own income. Yet that income—
though, happily, always forthcoming—is
entirely incidental to the bank’s purpose,
and if it rises above expenses and
dividends the excess is automatically
paid into the United States Treasury. A
bank that considers profits incidental is
scarcely the norm in Wall Street, and this
attitude puts Federal Reserve Bank men
in a uniquely advantageous social
position. Because their bank is a bank,
after all, and a privately owned,
profitable one at that, they can’t be
dismissed
as
mere
government
bureaucrats; conversely, having their
gaze fixed steadily above the mire of
cupidity entitles them to be called the
intellectuals, if not actually the
aristocrats, of Wall Street banking.
Under them lies gold—still the
bedrock on which all money nominally
rests, though in recent times a bedrock
that has been shuddering ominously
under the force of various monetary
earthquakes. As of March, 1968, more
than thirteen thousand tons of the stuff,
worth more than thirteen billion dollars
and amounting to more than a quarter of
all the monetary gold in the free world,
reposed on actual bedrock seventy-six
feet below the Liberty Street level and
fifty below sea level, in a vault that
would be inundated if a system of sump
pumps did not divert a stream that
originally wandered through Maiden
Lane. The famous nineteenth-century
British economist Walter Bagehot once
told a friend that when his spirits were
low it used to cheer him to go down to
his bank and “dabble my hand in a heap
of sovereigns.” Although it is, to say the
least, a stimulating experience to go
down and look at the gold in the Federal
Reserve Bank vault, which is in the form
not of sovereigns but of dully gleaming
bars about the size and shape of building
bricks, not even the best-accredited
visitor is allowed to dabble his hands in
it; for one thing, the bars weigh about
twenty-eight pounds each and are
therefore ill-adapted to dabbling, and,
for another, none of the gold belongs to
either the Federal Reserve Bank or the
United States. All United States gold is
kept at Fort Knox, at the New York
Assay Office, or at the various mints; the
gold deposited at the Federal Reserve
Bank belongs to some seventy other
countries—the largest depositors being
European—which find it convenient to
store a good part of their gold reserves
there. Originally, most of them put gold
there for safekeeping during the Second
World War. After the war, the European
nations—with the exception of France—
not only left it in New York but greatly
increased its quantity as their economies
recovered.
Nor does the gold represent anything
like all the foreign deposits at Liberty
Street; investments of various sorts
brought the March ’68 total to more than
twenty-eight billion. As a banker for
most of the central banks of the nonCommunist world, and as the central
bank representing the world’s leading
currency, the Federal Reserve Bank of
New York is the undisputed chief citadel
of world currency. By virtue of this
position, it is afforded a kind of
fluoroscopic vision of the insides of
international finance, enabling it to
detect at a glance an incipiently diseased
currency here, a faltering economy there.
If, for example, Great Britain is running
a deficit in her foreign dealings, this
instantly shows up in the Federal
Reserve Bank’s books in the form of a
decline in the Bank of England’s
balance. In the fall of 1964, precisely
such a decline was occurring, and it
marked the beginning of a long, gallant,
intermittently hair-raising, and ultimately
losing struggle by a number of countries
and their central banks, led by the United
States and the Federal Reserve, to
safeguard the existing order of world
finance by preserving the integrity of the
pound sterling. One trouble with
imposing buildings is that they have a
tendency to belittle the people and
activities they enclose, and most of the
time it is reasonably accurate to think of
the Federal Reserve Bank as a place
where often bored people push around
workaday slips of paper quite similar to
those pushed around in other banks. But
since 1964 some of the events there, if
they have scarcely been capable of
inspiring reverent obeisance, have had a
certain epic quality.
in 1964, it began to be clear that
Britain, which for several years had
maintained an approximate equilibrium
in her international balance of payments
—that is, the amount of money she had
annually sent outside her borders had
been about equal to the amount she had
taken in—was running a substantial
deficit. Far from being the result of
domestic depression in Britain, this
situation was the result of overexuberant
domestic expansion; business was
EARLY
booming, and newly affluent Britons
were ordering bales and bales of costly
goods from abroad without increasing
the exports of British goods on anything
like the same scale. In short, Britain was
living beyond her means. A substantial
balance-of-payments deficit is a worry
to a relatively self-sufficient country like
the United States (indeed, the United
States was having that very worry at that
very time, and it would for years to
come), but to a trading nation like
Britain, about a quarter of whose entire
economy is dependent on foreign trade,
it constitutes a grave danger.
The situation was cause for growing
concern at the Federal Reserve Bank,
and the focal point of the concern was
the office, on the tenth floor, of Charles
A. Coombs, the bank’s vice-president in
charge of foreign operations. All
summer long, the fluoroscope showed a
sick and worsening pound sterling. From
the research section of the foreign
department, Coombs daily got reports
that a torrent of money was leaving
Britain. From underground, word rose
that the pile of gold bars in the locker
assigned to Britain was shrinking
appreciably—not through any foul play
in the vault but because so many of the
bars were being transferred to other
lockers in settlement of Britain’s
international debts. From the foreignexchange trading desk, on the seventh
floor, the news almost every afternoon
was that the open-market quotations on
the pound in terms of dollars had sunk
again that day. During July and August,
as the quotation dropped from $2.79 to
$2.7890, and then to $2.7875, the
situation was regarded on Liberty Street
as so serious that Coombs, who would
normally
handle
foreign-exchange
matters himself, only making routine
reports to those higher up, was
constantly conferring about it with his
boss, the Federal Reserve Bank’s
president, a tall, cool, soft-spoken man
named Alfred Hayes.
Mystifyingly complex though it may
appear, what actually happens in
international financial dealings is
essentially what happens in private
domestic transactions. The money
worries of a nation, like those of a
family, are the consequence of having
too much money go out and not enough
come in. The foreign sellers of goods to
Britain cannot spend the pounds they are
paid in their own countries, and
therefore they convert them into their
own currencies; this they do by selling
the pounds in the foreign-exchange
markets, just as if they were selling
securities on a stock exchange. The
market price of the pound fluctuates in
response to supply and demand, and so
do the prices of all other currencies—
all, that is, except the dollar, the sun in
the planetary system of currencies,
inasmuch as the United States has, since
1934, stood pledged to exchange gold in
any quantity for dollars at the pleasure of
any nation at the fixed price of thirty-five
dollars per ounce.
Under the pressure of selling, the
price of the pound goes down. But its
fluctuations are severely restricted. The
influence of market forces cannot be
allowed to lower or raise the price more
than a couple of cents below or above
the pound’s par value; if such wild
swings should occur unchecked, bankers
and businessmen everywhere who
traded with Britain would find
themselves involuntarily engaged in a
kind of roulette game, and would be
inclined to stop trading with Britain.
Accordingly,
under
international
monetary rules agreed upon at Bretton
Woods, New Hampshire, in 1944, and
elaborated at various other places at
later times, the pound in 1964, nominally
valued at $2.80, was allowed to
fluctuate only between $2.78 and $2.82,
and the enforcer of this abridgment of the
law of supply and demand was the Bank
of England. On a day when things were
going smoothly, the pound might be
quoted on the exchange markets at, say,
$2.7990, a rise of $.0015 from the
previous day’s closing. (Fifteenhundredths of a cent doesn’t sound like
much, but on a round million dollars,
which is generally the basic unit in
international monetary dealings, it
amounts to fifteen hundred dollars.)
When that happened, the Bank of
England needed to do nothing. If,
however, the pound was strong in the
markets and rose to $2.82 (something it
showed absolutely no tendency to do in
1964), the Bank of England was pledged
to—and would have been very happy to
—accept gold or dollars in exchange for
pounds at that price, thereby preventing
a further increase in the price and at the
same time increasing its own reserve of
gold and dollars, which serve as the
pound’s backing. If, on the other hand
(and this was a more realistic
hypothesis), the pound was weak and
sank to $2.78, the Bank of England’s
sworn duty was to intervene in the
market and buy with gold or dollars all
pounds offered for sale at that price,
however deeply this might have cut into
its own reserves. Thus, the central bank
of a spendthrift country, like the father of
a spendthrift family, is eventually forced
to pay the bills out of capital. But in
times of serious currency weakness the
central bank loses even more of its
reserves than this would suggest,
because of the vagaries of market
psychology. Prudent importers and
exporters seeking to protect their capital
and profits reduce to a minimum the sum
they hold in pounds and the length of
time they hold it. Currency speculators,
whose noses have been trained to sniff
out weakness, pounce on a falling pound
and make enormous short sales, in the
expectation of turning a profit on a
further drop, and the Bank of England
must absorb the speculative sales along
with the straightforward ones.
The
ultimate
consequence
of
unchecked currency weakness is
something that may be incomparably
more disastrous in its effects than family
bankruptcy. This is devaluation, and
devaluation of a key world currency like
the pound is the recurrent nightmare of
all central bankers, whether in London,
New York, Frankfurt, Zurich, or Tokyo.
If at any time the drain on Britain’s
reserves became so great that the Bank
of England was unable, or unwilling, to
fulfill its obligation to maintain the
pound at $2.78, the necessary result
would be devaluation. That is, the
$2.78-to-$2.82 limitation would be
abruptly
abrogated;
by
simple
government decree the par value of the
pound would be reduced to some lower
figure, and a new set of limits
established around the new parity. The
heart of the danger was the possibility
that what followed might be chaos not
confined to Britain. Devaluation, as the
most heroic and most dangerous of
remedies for a sick currency, is rightly
feared. By making the devaluing
country’s goods cheaper to others, it
boosts exports, and thus reduces or
eliminates a deficit in international
accounts, but at the same time it makes
both imports and domestic goods more
expensive at home, and thus reduces the
country’s standard of living. It is radical
surgery, curing a disease at the expense
of some of the patient’s strength and
well-being—and, in many cases, some
of his pride and prestige as well. Worst
of all, if the devalued currency is one
that, like the pound, is widely used in
international dealings, the disease—or,
more precisely, the cure—is likely to
prove contagious. To nations holding
large amounts of that particular currency
in their reserve vaults, the effects of the
devaluation is the same as if the vaults
had been burglarized. Such nations and
others, finding themselves at an
unacceptable trading disadvantage as a
result of the devaluation, may have to
resort to competitive devaluation of their
own currencies. A downward spiral
develops:
Rumors
of
further
devaluations are constantly in the wind;
the loss of confidence in other people’s
money leads to a disinclination to do
business across national borders; and
international trade, upon which depend
the food and shelter of hundreds of
millions of people around the world,
tends to decline. Just such a disaster
followed the classic devaluation of all
time, the departure of the pound from the
old gold standard in 1931—an event that
is still generally considered a major
cause of the worldwide Depression of
the thirties.
The process works similarly in
respect to the currencies of all the
hundred-odd countries that are members
of the International Monetary Fund, an
organization that originated at Bretton
Woods. For any country, a favorable
balance of payments means an
accumulation of dollars, either directly
or indirectly, which are freely
convertible into gold, in the country’s
central bank; if the demand for its
currency is great enough, the country
may revalue it upward—the reverse of a
devaluation—as both Germany and the
Netherlands did in 1961. Conversely, an
unfavorable balance of payments starts
the sequence of events that may end in
forced devaluation. The degree of
disruption of world trade that
devaluation of a currency causes
depends on that currency’s international
importance. (A large devaluation of the
Indian rupee in June, 1966, although it
was a serious matter to India, created
scarcely a ripple in the international
markets.) And—to round out this brief
outline of the rules of an intricate game
of which everybody everywhere is an
inadvertent player—even the lordly
dollar is far from immune to the effects
of an unfavorable balance of payments
or of speculation. Because of the
dollar’s pledged relation to gold, it
serves as the standard for all other
currencies, so its price does, not
fluctuate in the markets. However, it can
suffer weakness of a less visible but
equally ominous sort. When the United
States sends out substantially more
money (whether payment for imports,
foreign aid, investments, loans, tourist
expenses, or military costs) than it takes
in, the recipients freely buy their own
currencies with the newly acquired
dollars, thereby raising the dollar prices
of their own currencies; the rise in price
enables their central banks to take in still
more dollars, which they can sell back
to the United States for gold. Thus, when
the dollar is weak the United States
loses gold. France alone—a country
with a strong currency and no particular
official love of the dollar—required
thirty million dollars or more in United
States gold regularly every month for
several years prior to the autumn of
1966, and between 1958, when the
United States began running a serious
deficit in its international accounts, and
the middle of March 1968, our gold
reserve was halved—from twenty-two
billion eight hundred million to eleven
billion four hundred million dollars. If
the reserve ever dropped to an
unacceptably low level, the United
States would be forced to break its word
and lower the gold value of the dollar,
or even to stop selling gold entirely.
Either action would in effect be a
devaluation—the
one
devaluation,
because of the dollar’s preeminent
position, that would be more disruptive
to world monetary order than a
devaluation of the pound.
and Coombs, neither of whom is
old enough to have experienced the
events of 1931 at first hand as a banker
but both of whom are such diligent and
sensitive students of international
banking that they might as well have
done so, found that as the hot days of
1964 dragged on they had occasion to be
in almost daily contact by transatlantic
telephone with their Bank of England
counterparts—the Earl of Cromer,
HAYES
governor of the bank at that time, and
Roy A. O. Bridge, the governor’s
adviser on foreign exchange. It became
clear to them from these conversations
and from other sources that the
imbalance in Britain’s international
accounts was far from the whole trouble.
A crisis of confidence in the soundness
of the pound was developing, and the
main cause of it seemed to be the
election that Britain’s Conservative
Government was facing on October 15th.
The one thing that international financial
markets hate and fear above all others is
uncertainty. Any election represents
uncertainty, so the pound always has the
jitters just before Britons go to the polls,
but to the people who deal in currencies
this election looked particularly
menacing, because of their estimate of
the character of the Labour Government
that might come into power. The
conservative financiers of London, not to
mention those of Continental Europe,
looked with almost irrational suspicion
on Harold Wilson, the Labour choice for
Prime Minister; further, some of Mr.
Wilson’s economic advisers had
explicitly extolled the virtues of
devaluation of the pound in their earlier
theoretical writings; and, finally, there
was an all too pat analogy to be drawn
from the fact that the last previous term
of the British Labour Party in power had
been conspicuously marked, in 1949, by
a devaluation of sterling from the rate of
$4.03 to $2.80.
In these circumstances, almost all the
dealers in the world money markets,
whether they were ordinary international
businessmen or out-and-out currency
speculators, were anxious to get rid of
pounds—at least until after the election.
Like all speculative attacks, this one fed
on itself. Each small drop in the pound’s
price resulted in further loss of
confidence, and down, down went the
pound in the international markets—an
oddly diffused sort of exchange, which
does not operate in any central building
but, rather, is conducted by telephone
and cable between the trading desks of
banks in the world’s major cities.
Simultaneously, down, down went
British reserves, as the Bank of England
struggled to support the pound. Early in
September, Hayes went to Tokyo for the
annual meeting of the members of the
International Monetary Fund. In the
corridors of the building where
participants in the Fund met, he heard
one European central banker after
another express misgivings about the
state of the British economy and the
outlook for the British currency. Why
didn’t the British government take steps
at home to check its outlay and to
improve the balance of payments, they
asked each other. Why didn’t it raise the
Bank of England’s lending rate—the socalled bank rate—from its current five
per cent, since this move would have the
effect of raising British interest rates all
up and down the line, and would thus
serve the double purpose of damping
down domestic inflation and attracting
investment dollars to London from other
financial centers, with the result that
sterling would gain a sounder footing?
Doubtless the Continental bankers
also put such questions to the Bank of
England men in Tokyo; in any event, the
Bank of England men and their
counterparts in the British Exchequer
had not failed to put the questions to
themselves. But the proposed measures
would certainly be unpopular with the
British electorate, as unmistakable
harbingers of austerity, and the
Conservative Government, like many
governments before it, appeared to be
paralyzed by fear of the imminent
election. So it did nothing. In a strictly
monetary way, however, Britain did take
defensive measures during September.
The Bank of England had for several
years had a standing agreement with the
Federal Reserve that either institution
could borrow five hundred million
dollars from the other, over a short term,
at any time, with virtually no formalities;
now the Bank of England accepted this
standby loan and made arrangements to
supplement it with another five hundred
million dollars in short-term credit from
various European central banks and the
Bank of Canada. This total of a billion
dollars, together with Britain’s last-ditch
reserves in gold and dollars, amounting
to about two billion six hundred million,
constituted a sizable store of
ammunition. If the speculative assault on
the pound should continue or intensify,
answering fire would come from the
Bank of England in the form of dollar
investments in sterling made on the
battlefield of the free market, and
presumably the attackers would be put to
rout.
As might have been expected, the
assault did intensify after Labour came
out the victor in the October election.
The new British government realized at
the outset that it was faced with a grave
crisis, and that immediate and drastic
action was in order. It has since been
said that summary devaluation of the
pound was seriously considered by the
newly elected Prime Minister and his
advisers on finance—George Brown,
Secretary of State for Economic Affairs,
and James Callaghan, Chancellor of the
Exchequer. The idea was rejected,
though, and the measures they actually
took, in October and early November,
were a fifteen-percent emergency
surcharge on British imports (in effect, a
blanket raising of tariffs), an increased
fuel tax, and stiff new capital-gains and
corporation
taxes.
These
were
deflationary,
currency-strengthening
measures, to be sure, but the world
markets were not reassured. The
specific nature of the new taxes seems to
have disconcerted, and even enraged,
many financiers, in and out of Britain,
particularly in view of the fact that under
the new budget British government
spending on welfare benefits was
actually to be increased, rather than cut
back, as deflationary policy would
normally require. One way and another,
then, the sellers—or bears, in market
jargon—continued to be in charge of the
market for the pound in the weeks after
the election, and the Bank of England
was kept busy potting away at them with
precious shells from its borrowedbillion-dollar arsenal. By the end of
October, nearly half the billion was
gone, and the bears were still inexorably
advancing on the pound, a hundredth of a
cent at a time.
Hayes, Coombs, and their foreigndepartment colleagues on Liberty Street,
watching with mounting anxiety, were as
galled as the British by the fact that a
central bank defending its currency
against attack can have only the vaguest
idea of where the attack is coming from.
Speculation is inherent in foreign trade,
and by its nature is almost impossible to
isolate, identify, or even define. There
are degrees of speculation; the word
itself, like “selfishness” or “greed,”
denotes a judgment, and yet every
exchange of currencies might be called a
speculation in favor of the currency
being acquired and against the one being
disposed of. At one end of the scale are
perfectly
legitimate
business
transactions
that
have
specific
speculative effects. A British importer
ordering American merchandise may
legitimately pay up in pounds in advance
of delivery; if he does, he is speculating
against the pound. An American
importer who has contracted to pay for
British goods at a price set in pounds
may legitimately insist that his purchase
of the pounds he needs to settle his debt
be deferred for a certain period; he, too,
is speculating against the pound. (The
staggering importance to Britain of these
common commercial operations, which
are called “leads” and “lags,”
respectively, is shown by the fact that if
in normal times the world’s buyers of
British goods were all to withhold their
payments for as short a period as two
and a half months the Bank of England’s
gold and dollar reserves would vanish.)
At the other end of the scale is the dealer
in money who borrows pounds and then
converts the loan into dollars. Such a
dealer, instead of merely protecting his
business interests, is engaging in an outand-out speculative move called a short
sale; hoping to buy back the pounds he
owes more cheaply later on, he is simply
trying to make a profit on the decrease in
value he anticipates—and, what with the
low commissions prevailing in the
international
money market,
the
maneuver provides one of the world’s
most attractive forms of high-stakes
gambling.
Gambling of this sort, although in fact
it probably contributed far less to the
sterling crisis than the self-protective
measures taken by nervous importers
and exporters, was being widely blamed
for all the pound’s troubles of October
and November, 1964. Particularly in the
British Parliament, there were angry
references to speculative activity by “the
gnomes of Zurich”—Zurich being
singled out because Switzerland, whose
banking laws rigidly protect the
anonymity of depositors, is the blind pig
of
international
banking,
and
consequently much currency speculation,
originating in many parts of the world, is
funnelled through Zurich. Besides low
commissions and anonymity, currency
speculation has another attraction.
Thanks to time differentials and good
telephone service, the world money
market, unlike stock exchanges, race
tracks, and gambling casinos, practically
never closes. London opens an hour after
the Continent (or did until February
1968, when Britain adopted Continental
time), New York five (now six) hours
after that, San Francisco three hours
after that, and then Tokyo gets under
way about the time San Francisco
closes. Only a need for sleep or a lack
of money need halt the operations of a
really hopelessly addicted plunger
anywhere.
“It was not the gnomes of Zurich who
were beating down the pound,” a leading
Zurich banker subsequently maintained
—stopping short of claiming that there
were no gnomes there. Nonetheless,
organized short selling—what traders
call a bear raid—was certainly in
progress, and the defenders of the pound
in London and their sympathizers in New
York would have given plenty to catch a
glimpse of the invisible enemy.
IT
was in this atmosphere, then, that on
the weekend beginning November 7th
the leading central bankers of the world
held their regular monthly gathering in
Basel, Switzerland. The occasion for
such gatherings, which have been held
regularly since the nineteen-thirties
except during the Second World War, is
the monthly meeting of the board of
directors of the Bank for International
Settlements, which was established in
Basel in 1930 primarily as a clearing
house for the handling of reparations
payments arising out of the First World
War but has come to serve as an agency
of international monetary coöperation
and, incidentally, a kind of central
bankers’ club. As such, it is
considerably more limited in resources
and restricted as to membership than the
International Monetary Fund, but, like
other exclusive clubs, it is often the
scene of great decisions. Represented on
its board of directors are Britain,
France, West Germany, Italy, Belgium,
the
Netherlands,
Sweden,
and
Switzerland—in short, the economic
powers of Western Europe—while the
United States is a regular monthly guest
whose presence is counted on, and
Canada and Japan are less frequent
visitors. The Federal Reserve is almost
always represented by Coombs, and
sometimes by Hayes and other New
York officers as well.
In the nature of things, the interests of
the different central banks conflict; their
faces are set against each other almost as
if they were players in a poker game.
Even so, in view of the fact that
international troubles with money at
their root have almost as long a history
as similarly caused troubles between
individuals, the most surprising thing
about international monetary coöperation
is that it is so new. Through all the ages
prior to the First World War, it cannot be
said to have existed at all. In the
nineteen-twenties, it existed chiefly
through close personal ties between
individual central bankers, often
maintained in spite of the indifference of
their governments. On an official level,
it got off to a halting start through the
Financial Committee of the League of
Nations, which was supposed to
encourage joint action to prevent
monetary catastrophes. The sterling
collapse of 1931 and its grim sequel
were ample proof of the committee’s
failure. But better days were ahead. The
1944 international financial conference
at Bretton Woods—out of which
emerged not only the International
Monetary Fund but also the whole
structure of postwar monetary rules
designed to help establish and maintain
fixed exchange rates, as well as the
World Bank, designed to ease the flow
of money from rich countries to poor or
war-devastated ones—stands as a
milestone in economic coöperation
comparable to the formation of the
United Nations in political affairs. To
cite just one of the conference’s fruits, a
credit of more than a billion dollars
extended to Britain by the International
Monetary Fund during the Suez affair in
1956 prevented a major international
financial crisis then.
In subsequent years, economic
changes, like other changes, tended to
come more and more quickly; after
1958, monetary crises began springing
up virtually overnight, and the
International Monetary Fund, which is
hindered by slow-moving machinery,
sometimes proved inadequate to meet
such crises alone. Again the new spirit
of coöperation rose to the occasion, this
time with the richest of nations, the
United States, taking the lead. Starting in
1961, the Federal Reserve Bank, with
the approval of the Federal Reserve
Board and the Treasury in Washington,
joined the other leading central banks in
setting up a system of ever-ready
revolving credits, which soon came to
be called the “swap network.” The
purpose of the network was to
complement the International Monetary
Fund’s longer-term credit facilities by
giving central banks instant access to
funds they might need for a short period
in order to move fast and vigorously in
defense of their currencies. Its
effectiveness was not long in being put
to the test. Between its initiation in 1961
and the autumn of 1964, the swap
network had played a major part in the
triumphant defense against sudden and
violent speculative attacks on at least
three currencies: the pound, late in 1961;
the Canadian dollar, in June, 1961; and
the Italian lira, in March, 1964. By the
autumn of 1964, the swap agreements
(“L’accord de swap” to the French,
“die Swap-Verpflichtungen” to the
Germans) had come to be the very
cornerstone of international monetary
coöperation. Indeed, the five hundred
million American dollars that the Bank
of England was finding it necessary to
draw on at the very moment the bank’s
top officers were heading for Basel that
November weekend represented part of
the swap network, greatly expanded
from
its
comparatively
modest
beginnings.
As for the Bank for International
Settlements, in its capacity as a banking
institution it was a relatively minor cog
in all this machinery, but in its capacity
as a club it had over the years come to
play a far from unimportant role. Its
monthly board meetings served (and still
serve) as a chance for the central
bankers to talk in an informal
atmosphere—to exchange gossip, views,
and hunches such as could not
comfortably be indulged in either by
mail or over the international telephone
circuits. Basel, a medieval Rhenish city
that is dominated by the spires of its
twelfth-century Gothic cathedral and has
long been a thriving center of the
chemical industry, was originally chosen
as the site of the Bank for International
Settlements because it was a nodal point
for European railways. Now that most
international bankers habitually travel by
plane, that asset has become a liability,
for there is no long-distance air service
to Basel; delegates must deplane at
Zurich and continue by train or car. On
the other hand, Basel has several firstrate restaurants, and it may be that in the
view of the central-bank delegates this
advantage
outweighs
the
travel
inconvenience, for central banking—or
at least European central banking—has a
firmly established association with good
living. A governor of the National Bank
of Belgium once remarked to a visitor,
without a smile, that he considered one
of his duties to be that of leaving the
institution’s wine cellar better than he
had found it. A luncheon guest at the
Bank of France is generally told
apologetically, “In the tradition of the
bank, we serve only simple fare,” but
what follows is a repast during which
the constant discussion of vintages
makes any discussion of banking
awkward, if not impossible, and at
which the tradition of simplicity is
honored, apparently, by the serving of
only one wine before the cognac. The
table of the Bank of Italy is equally
elegant (some say the best in Rome), and
its surroundings are enhanced by the
priceless
Renaissance
paintings,
acquired as defaulted security on bad
loans over the years, that hang on the
walls. As for the Federal Reserve Bank
of New York, alcohol in any form is
hardly ever served there, banking is
habitually discussed at meals, and the
mistress of the kitchen appears almost
pathetically grateful whenever one of the
officers makes any sort of comment,
even a critical one, on the fare. But then
Liberty Street isn’t Europe.
In these democratic times, central
banking in Europe is thought of as the
last stronghold of the aristocratic
banking tradition, in which wit, grace,
and culture coexist easily with
commercial astuteness, and even
ruthlessness. The European counterparts
of the security guards on Liberty Street
are apt to be attendants in morning coats.
Until less than a generation ago,
formality of address between central
bankers was the rule. Some think that the
first to break it were the British, during
the Second World War, when, it is
alleged, a secret order went out that
British government and military
authorities were to address their
American counterparts by their first
names; in any event, first names are
frequently exchanged between European
and American central bankers now, and
one reason for this, unquestionably, is
the postwar rise in influence of the
dollar. (Another reason is that, in the
emerging era of coöperation, the central
bankers see more of each other than they
used to—not just in Basel but in
Washington, Paris, and Brussels, at
regular meetings of perhaps half a dozen
special banking committees of various
international organizations. The same
handful of top bankers parades so
regularly through the hotel lobbies of
those cities that one of them thinks they
must give the impression of being
hundreds strong, like the spear carriers
who cross the stage again and again in
the triumphal scene of “Aida.”) And
language, like the manner of its use, has
tended to follow economic power.
European central bankers have always
used French (“bad French,” some say) in
talking with each other, but during the
long period in which the pound was the
world’s leading currency English came
to be the first language of central
banking at large, and under the rule of
the dollar it continues to be. It is spoken
fluently and willingly by all the top
officers of every central bank except the
Bank of France, and even the Bank of
France officers are forced to keep
translators at hand, in consideration of
the seeming intractable inability or
unwillingness of most Britons and
Americans to become competent in any
language but their own. (Lord Cromer,
flouting tradition, speaks French with
complete authority.)
At Basel, good food and convenience
come before splendor; many of the
delegates favor an outwardly humble
restaurant in the main railroad station,
and the Bank for International
Settlements itself is modestly situated
between a tea shop and a hairdressing
establishment. On that November
weekend in 1964, Vice-President
Coombs was the only representative of
the Federal Reserve System on hand,
and, indeed, he was to be the key
banking representative of the United
States through the early and middle
phases of the crisis that was then
mounting. In an abstracted way, Coombs
ate and drank heartily with the others—
true to his institution’s traditions, he is
less than a gourmet—but his real interest
was in getting the sense of the meeting
and the private feelings of its
participants. He was the perfect man for
this task, inasmuch as he has the
unquestioning trust and respect of all his
foreign colleagues. The other leading
central bankers habitually call him by
his first name—less, it seems, in
deference to changed custom than out of
deep affection and admiration. They also
use it in speaking of him among
themselves; the name “Charliecoombs”
(run together thus out of long
habituation) is a word to conjure with in
central-banking circles. Charliecoombs,
they will tell you, is the kind of New
Englander (he is from Newton,
Massachusetts) who, although his
clipped speech and dry manner make
him seem a bit cool and detached, is
really
warm
and
intuitive.
Charliecoombs, although a Harvard
graduate (Class of 1940), is the kind of
unpretentious gray-haired man with halfrimmed spectacles and a precise manner
whom you might easily take for a
standard American small-town bank
president, rather than a master of one of
the world’s most complex skills. It is
generally conceded that if any one man
was the genius behind the swap network,
the man was the New England swapper
Charliecoombs.
At Basel, there was, as usual, a series
of formal sessions, each with its agenda,
but there was also, as usual, much
informal palaver in rump sessions held
in hotel rooms and offices and at a
formal Sunday-night dinner at which
there was no agenda but instead a free
discussion of what Coombs has since
referred to as “the hottest topic of the
moment.” There could be no question
about what that was; it was the condition
of the pound—and, indeed, Coombs had
heard little discussion of anything else
all weekend. “It was clear to me from
what I heard that confidence in sterling
was deteriorating,” he has said. Two
questions were on most of the bankers’
minds. One was whether the Bank of
England proposed to take some of the
pressure off the pound by raising its
lending rate. Bank of England men were
present, but getting an answer was not a
simple matter of asking them their
intentions; even if they had been willing
to say, they would not have been able to,
because the Bank of England is not
empowered to change its rate without the
approval—which in practice often
comes closer to meaning the instruction
—of the British government, and elected
governments have a natural dislike for
measures that make money tight. The
other question was whether Britain had
enough gold and dollars to throw into the
breach if the speculative assault should
continue. Apart from what was left of the
billion dollars from the expanded swap
network and what remained of its
drawing rights on the International
Monetary Fund, Britain had only its
official reserves, which had dropped in
the previous week to something under
two and a half billion dollars—their
lowest point in several years. Worse
than that was the frightful rate at which
the reserves were dwindling away; on a
single bad day during the previous week,
according to the guesses of experts, they
had dropped by eighty-seven million
dollars. A month of days like that and
they would be gone.
Even so, Coombs has said, nobody at
Basel that weekend dreamed that the
pressure on sterling could become as
intense as it actually did become later in
the month. He returned to New York
worried but resolute. It was not to New
York, however, that the main scene of the
battle for sterling shifted after the Basel
meeting; it was to London. The big
immediate question was whether or not
Britain would raise its bank rate that
week, and the day the answer would be
known was Thursday, November 12th. In
the matter of the bank rate, as in so many
other things, the British customarily
follow a ritual. If there is to be a change,
at noon on Thursday—then and then only
—a sign appears in the ground-floor
lobby of the Bank of England announcing
the new rate, and, simultaneously, a
functionary called the Government
Broker, decked out in a pink coat and top
hat, hurries down Throgmorton Street to
the London Stock Exchange and
ceremonially announces the new rate
from a rostrum. Noon on Thursday the
twelfth passed with no change; evidently
the Labour Government was having as
much trouble deciding on a bank-rate
rise after the election as the
Conservatives had had before. The
speculators, wherever they were,
reacted to such pusillanimity as one man.
On Friday the thirteenth, the pound,
which had been moderately buoyant all
week precisely because speculators had
been anticipating a bank-rate rise,
underwent a fearful battering, which sent
it down to a closing price of $2.7829—
barely more than a quarter of a cent
above the official minimum—and the
Bank of England, intervening frequently
to hold it even at that level, lost twentyeight million dollars more from its
reserves. Next day, the financial
commentator of the London Times, under
the byline Our City Editor, let himself
go. “The pound,” he wrote, “is not
looking as firm as might be hoped.”
following week saw the pattern
repeated, but in exaggerated form. On
Monday, Prime Minister Wilson, taking
a leaf out of Winston Churchill’s book,
THE
tried rhetoric as a weapon. Speaking at a
pomp-and-circumstance banquet at the
Guildhall in the City of London before
an audience that included, among many
other dignitaries, the Archbishop of
Canterbury, the Lord Chancellor, the
Lord President of the Council, the Lord
Privy Seal, the Lord Mayor of London,
and their wives, Wilson ringingly
proclaimed “not only our faith but our
determination to keep sterling strong and
to see it riding high,” and asserted that
the Government would not hesitate to
take whatever steps might become
necessary to accomplish this purpose.
While elaborately avoiding the dread
word “devaluation,” just as all other
British officials had avoided it all
summer, Wilson sought to make it
unmistakable that the Government now
considered such a move out of the
question. To emphasize this point, he
included a warning to speculators: “If
anyone at home or abroad doubts the
firmness of [our] resolve, let them be
prepared to pay the price for their lack
of faith in Britain.” Perhaps the
speculators were daunted by this verbal
volley, or perhaps they were again
moved to let up in their assault on the
pound by the prospect of a bank-rate rise
on Thursday; in any case, on Tuesday
and Wednesday the pound, though it
hardly rode high in the marketplace,
managed to ride a little less low than it
had on the previous Friday, and to do so
without the help of the Bank of England.
By Thursday, according to subsequent
reports, a sharp private dispute had
erupted between the Bank of England
and the British government on the bankrate question—Lord Cromer arguing, for
the bank, that a rise of at least one per
cent, and perhaps two per cent, was
absolutely essential, and Wilson, Brown,
and Callaghan still demurring. The
upshot was no bank-rate rise on
Thursday, and the effect of the inaction
was a swift intensification of the crisis.
Friday the twentieth was a black day in
the City of London. The Stock Exchange,
its investors moving in time with
sterling, had a terrible session. The Bank
of England had by now resolved to
establish its last-line trench on the pound
at $2.7825—a quarter of a cent above
the bottom limit. The pound opened on
Friday at precisely that level and
remained there all day, firmly pinned
down by the speculators’ hail of offers to
sell; meanwhile, the bank met all offers
at $2.7825 and, in doing so, used up
more of Britain’s reserves. Now the
offers were coming so fast that little
attempt was made to disguise their
places of origin; it was evident that they
were coming from everywhere—chiefly
from the financial centers of Europe, but
also from New York, and even from
London itself. Rumors of imminent
devaluation were sweeping the bourses
of the Continent. And in London itself an
ominous sign of cracking morale
appeared: devaluation was now being
mentioned openly even there. The
Swedish economist and sociologist
Gunnar Myrdal, in a luncheon speech in
London on Thursday, had suggested that
a slight devaluation might now be the
only possible solution to Britain’s
problems; once this exogenous comment
had broken the ice, Britons also began
using the dread word, and, in the next
morning’s Times, Our City Editor
himself was to say, in the tone of a
commander preparing the garrison for
possible surrender, “Indiscriminate
gossip about devaluation of the pound
can do harm. But it would be even
worse to regard use of that word as
taboo.”
When nightfall at last brought the
pound and its defenders a weekend
breather, the Bank of England had a
chance to assess its situation. What it
found was anything but reassuring. All
but a fraction of the billion dollars it had
arranged to borrow in September under
the expanded swap agreements had gone
into the battle. The right that remained to
it of drawing on the International
Monetary Fund was virtually worthless,
since the transaction would take weeks
to complete, and matters turned on days
and hours. What the bank still had—and
all that it had—was the British reserves,
which had gone down by fifty-six
million dollars that day and now stood at
around two billion. More than one
commentator has since suggested that
this sum could in a way be likened to the
few squadrons of fighter planes to which
the same dogged nation had been
reduced twenty-four years earlier at the
worst point in the Battle of Britain.
analogy is extravagant, and yet, in
the light of what the pound means, and
has meant, to the British, it is not
irrelevant. In a materialistic age, the
pound has almost the symbolic
importance that was once accorded to
the Crown; the state of sterling almost is
the state of Britain. The pound is the
THE
oldest of modern currencies. The term
“pound sterling” is believed to have
originated well before the Norman
Conquest, when the Saxon kings issued
silver pennies—called “sterlings” or
“starlings” because they sometimes had
stars inscribed on them—of which two
hundred and forty equalled one pound of
pure silver. (The shilling, representing
twelve sterlings, or one-twentieth of a
pound, did not appear on the scene until
after the Conquest.) Thus, sizable
payments in Britain have been reckoned
in pounds from its beginnings. The
pound, however, was by no means an
unassailably sound currency during its
first few centuries, chiefly because of
the early kings’ unfortunate habit of
relieving their chronic financial
embarrassment by debasing the coinage.
By melting down a quantity of sterlings,
adding to the brew some base metal and
no more silver, and then minting new
coins, an irresponsible king could
magically convert a hundred pounds
into, say, a hundred and ten, just like
that. Queen Elizabeth I put a stop to the
practice when, in a carefully planned
surprise move in 1561, she recalled
from circulation all the debased coins
issued by her predecessors. The result,
combined with the growth of British
trade, was a rapid and spectacular rise
in the prestige of the pound, and less
than a century after Elizabeth’s coup the
word “sterling” had assumed the
adjectival meaning that it still has
—“thoroughly excellent, capable of
standing every test.” By the end of the
seventeenth century, when the Bank of
England was founded to handle the
government’s finances, paper money was
beginning to be trusted for general use,
and it had come to be backed by gold as
well as silver. As time went on, the
monetary prestige of gold rose steadily
in relation to that of silver (in the
modern world silver has no standing as
a monetary reserve metal, and only in
some half-dozen countries does it now
serve as the principal metal in
subsidiary coinage), but it was not until
1816 that Britain adopted a gold
standard—that is, pledged itself to
redeem paper currency with gold coins
or bars at any time. The gold sovereign,
worth one pound, which came to
symbolize stability, affluence, and even
joy to more Victorians than Bagehot,
made its first appearance in 1817.
Prosperity begat emulation. Seeing
how Britain flourished, and believing
the gold standard to be at least partly
responsible, other nations adopted it one
after another: Germany in 1871;
Sweden, Norway, and Denmark in 1873;
France, Belgium, Switzerland, Italy, and
Greece in 1874; the Netherlands in
1875; and the United States in 1879. The
results were disappointing; hardly any of
the newcomers found themselves
immediately getting rich, and Britain,
which in retrospect appears to have
flourished as much in spite of the gold
standard as because of it, continued to
be the undisputed monarch of world
trade. In the half century preceding the
First World War, London was the
middleman in international finance, and
the pound was its quasi-official medium.
As David Lloyd George was later to
write nostalgically, prior to 1914 “the
crackle of a bill on London”—that is, of
a bill of credit in pounds sterling bearing
the signature of a London bank—“was as
good as the ring of gold in any port
throughout the civilized world.” The war
ended this idyll by disrupting the
delicate balance of forces that had made
it possible and by bringing to the fore a
challenger to the pound’s supremacy—
the United States dollar. In 1914,
Britain, hard pressed to finance its
fighting forces, adopted measures to
discourage demands for gold, thereby
abandoning the gold standard in
everything but name; meanwhile, the
value of a pound in dollars sank from
$4.86 to a 1920 low of $3.20. In an
effort to recoup its lost glory, Britain
resumed a full gold standard in 1925,
tying the pound to gold at a rate that
restored its old $4.86 relation to the
dollar. The cost of this gallant
overvaluation, however, was chronic
depression at home, not to mention the
political eclipse for some fifteen years
of the Chancellor of the Exchequer who
ordered it, Winston Churchill.
The general collapse of currencies
during the nineteen-thirties actually
began not in London but on the
Continent, when, in the summer of 1931,
a sudden run on the leading bank of
Austria, the Creditanstalt, resulted in its
failure. The domino principle of bank
failures—if such a thing can be said to
exist—then came into play. German
losses arising from this relatively minor
disaster resulted in a banking crisis in
Germany, and then, because huge
quantities of British funds were now
frozen in bankrupt institutions on the
Continent, the panic crossed the English
Channel and invaded the home of the
imperial pound itself. Demands for gold
in exchange for pounds quickly became
too heavy for the Bank of England to
meet, even with the help of loans from
France and the United States. Britain
was faced with the bleak alternatives of
setting an almost usurious bank rate—
between eight and ten per cent—in order
to hold funds in London and check the
gold outflow, or abandoning the gold
standard; the first choice, which would
have further depressed the domestic
economy, in which there were now more
than two and a half million unemployed,
was considered unconscionable, and
accordingly, on September 21, 1931, the
Bank of England announced suspension
of its responsibility to sell gold.
The move hit the financial world like
a thunderbolt. So great was the prestige
of the pound in 1931 that John Maynard
Keynes, the already famous British
economist, could say, not wholly in
irony, that sterling hadn’t left gold, gold
had left sterling. In either case, the
mooring of the old system was gone, and
chaos was the result. Within a few
weeks, all the countries on the vast
portion of the globe then under British
political or economic domination had
left the gold standard, most of the other
leading currencies had either left gold or
been drastically devalued in relation to
it, and in the free market the value of the
pound in terms of dollars had dropped
from $4.86 to around $3.50. Then the
dollar itself—the potential new mooring
—came loose. In 1933, the United
States, compelled by the worst
depression in its history, abandoned the
gold standard. A year later, it resumed it
in a modified form called the goldexchange standard, under which gold
coinage was ended and the Federal
Reserve was pledged to sell gold in bar
form to other central banks but to no one
else—and to sell it at a drastic
devaluation of forty-one per cent from
the old price. The United States
devaluation restored the pound to its old
dollar parity, but Britain found it small
comfort to be tied securely to a mooring
that was now shaky itself. Even so, over
the next five years, while beggar-myneighbor came to be the rule in
international finance, the pound did not
lose much more ground in relation to
other currencies, and when the Second
World War broke out, the British
government boldly pegged it at $4.03
and imposed controls to keep it there in
defiance of the free market. There, for a
decade, it remained—but only officially.
In the free market of neutral Switzerland,
it fluctuated all through the war in
reflection of Britain’s military fortunes,
sinking at the darkest moments to as low
as $2.
In the postwar era, the pound has been
almost continuously in trouble. The new
rules of the game of international finance
that were agreed upon at Bretton Woods
recognized that the old gold standard had
been far too rigid and the virtual paper
standard of the nineteen-thirties far too
unstable; a compromise accordingly
emerged, under which the dollar—the
new king of currencies—remained tied
to gold under the gold-exchange
standard, and the pound, along with the
other leading currencies, became tied
not to gold but to the dollar, at rates
fixed within stated limits. Indeed, the
postwar era was virtually ushered in by
a devaluation of the pound that was
about as drastic in amount as that of
1931, though far less so in its
consequences. The pound, like most
European currencies, had emerged from
Bretton Woods flagrantly overvalued in
relation to the shattered economy it
represented, and had been kept that way
only by government-imposed controls. In
the autumn of 1949, therefore, after a
year and a half of devaluation rumors,
burgeoning black markets in sterling, and
gold losses that had reduced the British
reserves to a dangerously low level, the
pound was devalued from $4.03 to
$2.80. With the isolated exceptions of
the United States dollar and the Swiss
franc, every important non-Communist
currency almost instantly followed the
pound’s example, but this time no drying
up of trade, or other chaos, ensued,
because the 1949 devaluations, unlike
those of 1931 and the years following,
were not the uncontrolled attempts of
countries riddled by depression to gain a
competitive advantage at any cost but
merely represented recognition by the
war-devastated countries that they had
recovered to the point where they could
survive relatively free international
competition without artificial props. In
fact, world trade, instead of drying up,
picked up sharply. But even at the new,
more rational evaluation the pound
continued its career of hairbreadth
escapes. Sterling crises of varying
magnitudes were weathered in 1952,
1955, 1957, and 1961. In its
unsentimental and tactless way, the
pound—just as by its gyrations in the
past it had accurately charted Britain’s
rise and fall as the greatest of world
powers—now, with its nagging recurrent
weakness, seemed to be hinting that even
such retrenchment as the British had
undertaken in 1949 was not enough to
suit their reduced circumstances.
And in November, 1964, these hints,
with their humiliating implications, were
not lost on the British people. The
emotional terms in which many of them
were thinking about the pound were well
illustrated by an exchange that took
place in that celebrated forum the letters
column of the Times when the crisis was
at its height. A reader named I. M. D.
Little wrote deploring all the breastbeating about the pound and particularly
the uneasy whispering about devaluation
—a matter that he declared to be an
economic rather than a moral issue.
Quick as a flash came a reply from a C.
S. Hadfield, among others. Was there
ever a clearer sign of soulless times,
Hadfield demanded, than Little’s letter?
Devaluation not a moral issue?
“Repudiation—for
that
is
what
devaluation is, neither more nor less—
has become respectable!” Hadfield
groaned, in the unmistakable tone, as old
in Britain as the pound itself, of the
outraged patriot.
IN
the ten days following the Basel
meeting, the first concern of the men at
the Federal Reserve Bank of New York
was not the pound but the dollar. The
American balance-of-payments deficit
had now crept up to the alarming rate of
almost six billion dollars a year, and it
was becoming clear that a rise in the
British bank rate, if it should be
unmatched by American action, might
merely shift some of the speculative
attack from the pound to the dollar.
Hayes and Coombs and the Washington
monetary
authorities—William
McChesney Martin, chairman of the
Federal Reserve Board, Secretary of the
Treasury Douglas Dillon, and UnderSecretary of the Treasury Robert Roosa
—came to agree that if the British should
raise their rate the Federal Reserve
would be compelled, in self-defense, to
competitively raise its rate above the
current level of three and a half per cent.
Hayes
had
numerous
telephone
conversations on this delicate point with
his London counterpart, Lord Cromer. A
deep-dyed aristocrat—a godson of King
George V and a grandson of Sir Evelyn
Baring, later the first Earl of Cromer
(who, as the British agent in Egypt, was
Chinese Gordon’s nemesis in 1884–85)
—Lord Cromer was also a banker of
universally acknowledged brilliance
and, at forty-three, the youngest man, as
far as anyone could remember, ever to
direct the fortunes of the Bank of
England; he and Hayes, in the course of
their frequent meetings at Basel and
elsewhere, had become warm friends.
During the afternoon of Friday the
twentieth, at any rate, the Federal
Reserve Bank had a chance to show its
good intentions by doing some front-line
fighting for the pound. The breather
provided by the London closing proved
to be illusory; five o’clock in London
was only noon in New York, and
insatiable speculators were able to go
on selling pounds for several more hours
in the New York market, with the result
that the trading room of the Federal
Reserve Bank temporarily replaced that
of the Bank of England as the command
post for the defense. Using as their
ammunition British dollars—or, more
precisely, United States dollars lent to
Britain under the swap agreements—the
Federal Reserve’s traders staunchly held
the pound at or above $2.7825, at everincreasing cost, of course, to the British
reserves. Mercifully, after the New York
closing the battle did not follow the sun
to San Francisco and on around the
world to Tokyo. Evidently, the attackers
had had their fill, at least for the time
being.
What followed was one of those
strange modern weekends in which
weighty matters are discussed and
weighty decisions taken among men who
are ostensibly sitting around relaxing in
various parts of the world. Wilson,
Brown, and Callaghan were at
Chequers, the Prime Minister’s country
estate, taking part in a conference that
had originally been scheduled to cover
the subject of national-defense policy.
Lord Cromer was at his country place in
Westerham, Kent. Martin, Dillon, and
Roosa were at their offices or their
homes, in and around Washington.
Coombs was at his home, in Green
Village, New Jersey, and Hayes was
visiting friends of his elsewhere in New
Jersey. At Chequers, Wilson and his two
financial ministers, leaving the military
brass to confer about defense policy
with each other, adjourned to an upstairs
gallery to tackle the sterling crisis; in
order to bring Lord Cromer into their
deliberations, they kept a telephone
circuit open to him in Kent, using a
scrambler system when they talked on it,
so as to avoid interception of their
words by their unseen enemies the
speculators. Sometime on Saturday, the
British reached their decision. Not only
would they raise the bank rate, and raise
it two per cent above its current level—
to seven per cent—but, in defiance of
custom, they would do so the first thing
Monday morning, rather than wait for
another Thursday to roll around. For one
thing, they reasoned, to postpone action
until Thursday would mean three and a
half more business days during which
the deadly drain of British reserves
would almost certainly continue and
might well accelerate; for another, the
sheer shock of the deliberate violation of
custom would serve to dramatize the
government’s
determination.
The
decision, once taken, was communicated
by British intermediaries in Washington
to the American monetary officials there,
and relayed to Hayes and Coombs in
New Jersey. Those two, knowing that the
agreed-upon plan for a concomitant rise
in the New York bank rate would now
have to be put into effect as quickly as
possible, got to work on the telephone
lining up a Monday-afternoon meeting of
the Federal Reserve Bank’s board of
directors, without whose initiative the
rate could not be changed. Hayes, a man
who sets great store by politeness, has
since said, with considerable chagrin,
that he fears he was the despair of his
hostess that weekend; not only was he on
the telephone most of the time but he was
prevented by the circumstances from
giving the slightest explanation of his
unseemly behavior.
What had been done—or, rather, was
about to be done—in Britain was plenty
to flutter the dovecotes of international
finance. Since the beginning of the First
World War, the bank rate there had never
gone higher than seven per cent and had
only occasionally gone that high; as for a
bank-rate change on a day other than
Thursday, the last time that had occurred,
ominously enough, was in 1931.
Anticipating lively action at the London
opening, which would take place at
about 5 A.M. New York time, Coombs
went to Liberty Street on Sunday
afternoon in order to spend the night at
the bank and be on hand when the
transatlantic doings began. As an
overnight companion he had a man who
found it advisable to sleep at the bank so
often that he habitually kept a packed
suitcase in his office—Thomas J. Roche,
at that time the senior foreign-exchange
officer. Roche welcomed his boss to the
sleeping quarters—a row of small,
motel-like rooms on the eleventh floor,
each equipped with maple furniture, Old
New York prints, a telephone, a clock
radio, a bathrobe, and a shaving kit—
and the two men discussed the
weekend’s developments for a while
before turning in. Shortly before five in
the morning, their radios woke them,
and, after a breakfast provided by the
night staff, they repaired to the foreignexchange trading room, on the seventh
floor, to man their fluoroscope.
At five-ten, they were on the phone to
the Bank of England, getting the news.
The bank-rate rise had been announced
promptly at the opening of the London
markets, to the accompaniment of great
excitement; later Coombs was to learn
that the Government Broker’s entrance
into the Stock Exchange, which is
usually the occasion for a certain hush,
had this time been greeted with such an
uproar that he had had difficulty making
his news known. As for the first market
reaction of the pound, it was (one
commentator said later) like that of a
race horse to dope; in the ten minutes
following the bank-rate announcement it
shot up to $2.7869, far above its Friday
closing. A few minutes later, the earlyrising New Yorkers were on the phone
to the Deutsche Bundesbank, the central
bank of West Germany, in Frankfurt, and
the Swiss National Bank, in Zurich,
sounding out Continental reaction. It was
equally good. Then they were back in
touch with the Bank of England, where
things were looking better and better.
The speculators against the pound were
on the run, rushing now to cover their
short sales, and by the time the first gray
light began to show in the windows on
Liberty Street, Coombs had heard that
the pound was being quoted in London at
$2.79—its best price since July, when
the crisis started.
It went on that way all day. “Seven
per cent will drag money from the
moon,” a Swiss banker commented,
paraphrasing the great Bagehot, who had
said, in his earthbound, Victorian way,
“Seven per cent will pull gold out of the
ground.” In London, the sense of security
was so strong that it allowed a return to
political bickering as usual; in
Parliament, Reginald Maudling, the chief
economic authority of the out-of-office
Conservatives, took the occasion to
remark that there wouldn’t have been a
crisis in the first place but for the actions
of the Labour Government, and
Chancellor of the Exchequer Callaghan
replied, with deadly politeness, “I must
remind the honorable gentleman that he
told us [recently] we had inherited his
problems.” Everybody was clearly
breathing easier. As for the Bank of
England, so great was the sudden clamor
for pounds that it saw a chance to
replenish its depleted supply of dollars,
and for a time that afternoon it actually
felt confident enough to switch sides in
the market, buying dollars with pounds
at just below $2.79. In New York, the
mood persisted after the London closing.
It was with a clear conscience about the
pound that the directors of the Federal
Reserve Bank of New York could—and,
that afternoon, did—carry out their plan
to raise their lending rate from three and
a half per cent to four per cent. Coombs
has since said, “The feeling here on
Monday afternoon was: They’ve done it
—they’ve pulled through again. There
was a general sigh of relief. The sterling
crisis seemed to be over.”
It wasn’t, though. “I remember that the
situation changed very fast on Tuesday
the twenty-fourth,” Hayes has said. That
day’s opening found the pound looking
firm at $2.7875. Substantial buying
orders for pounds were coming in now
from Germany, and the day ahead looked
satisfactory. So things continued until 6
A.M. in New York—noon on the
Continent. It is around then that the
various bourses of Europe—including
the most important ones, in Paris and
Frankfurt—hold the meetings at which
they set the day’s rate for each currency,
for the purpose of settling transactions in
stocks and bonds that involve foreign
currency, and these price-fixing sessions
are bound to influence the money
markets, since they give a clear
indication of the most influential
Continental sentiment in regard to each
currency. The bourse rates set for the
pound that day were such as to show a
renewed, and pronounced, lack of
confidence. At the same time, it
appeared subsequently, money dealers
everywhere, and particularly in Europe,
were having second thoughts about the
manner of the bank-rate rise the previous
day. At first, taken by surprise, they had
reacted enthusiastically, but now, it
seemed, they had belatedly decided that
the making of the announcement on
Monday indicated that Britain was
losing its grip. “What would it connote if
the British were to play a Cup final on
Sunday?” a European banker is said to
have asked a colleague. The only
possible answer was that it would
connote panic in Albion.
The effect of these second thoughts
was an astonishingly drastic turnabout in
market action. In New York between
eight and nine, Coombs, in the trading
room, watched with a sinking heart as a
tranquil pound market collapsed into a
rout. Selling orders in unheard-of
quantities
were
coming
from
everywhere. The Bank of England, with
the courage of desperation, advanced its
last-line trench from $2.7825 to
$2.7860, and, by constant intervention,
held the pound there. But it was clear
that the cost would soon become too
high; a few minutes after 9 A.M. New
York time, Coombs calculated that
Britain was losing reserves at the
unprecedented, and unsupportable, rate
of a million dollars a minute.
Hayes, arriving at the bank shortly
after nine, had hardly sat down at his
desk before this unsettling news reached
him from the seventh floor. “We’re in for
a hurricane,” Coombs told him, and went
on to say that the pressure on sterling
was now mounting so fast that there was
a real likelihood that Britain might be
forced either to devalue or to impose a
sweeping—and, for many reasons,
unacceptable—system of exchange
controls before the week was out. Hayes
immediately telephoned the governors of
the leading European central banks—
some of whom, because not all the
national markets had yet felt the full
weight of the crisis, were startled to
hear exactly how grave the situation was
—and pleaded with them not to
exacerbate the pressure on both the
pound and the dollar by raising their
own bank rates. (His job was scarcely
made easier by the fact that he had to
admit that his own bank had just raised
its rate.) Then he asked Coombs to come
up to his office. The pound, the two men
agreed, now had its back to the wall; the
British bank-rate rise had obviously
failed of its purpose, and at the milliona-minute rate of loss Britain’s well of
reserves would be dry in less than five
business days. The one hope now lay in
amassing, within a matter of hours, or
within a day or so at the most, a huge
bundle of credit from outside Britain to
enable the Bank of England to survive
the attack and beat it back. Such rescue
bundles had been assembled just a
handful of times before—for Canada in
1962, for Italy earlier in 1964, and for
Britain in 1961—but this time, it was
clear, a much bigger bundle than any of
those would be needed. The centralbanking world was faced not so much
with an opportunity for building a
milestone in the short history of
international monetary coöperation as
with the necessity for doing so.
Two other things were clear—that, in
view of the dollar’s troubles, the United
States could not hope to rescue the
pound unassisted, and that, the dollar’s
troubles notwithstanding, the United
States, with all its economic might,
would have to join the Bank of England
in initiating any rescue operation. As a
first step, Coombs suggested that the
Federal Reserve standby credit to the
Bank of England ought to be increased
forthwith from five hundred million
dollars to seven hundred and fifty
million. Unfortunately, fast action on this
proposal was hampered by the fact that,
under the Federal Reserve Act, any such
move could be made only by decision of
a Federal Reserve System committee,
whose members were scattered all over
the country. Hayes conferred by longdistance telephone (all around the
world, wires were now humming with
news of the pound’s extremity) with the
Washington monetary contingent, Martin,
Dillon, and Roosa, none of whom
disagreed with Coombs’ view of what
had to be done, and as a result of these
discussions a call went out from
Martin’s office to members of the key
committee, called the Open Market
Committee, for a meeting by telephone at
three o’clock that afternoon. Roosa, at
the Treasury, suggested that the United
States’ contribution to the kitty could be
further increased by arranging for a twohundred-and-fifty-million-dollar
loan
from the Export-Import Bank, a
Treasury-owned and Treasury-financed
institution in Washington. Hayes and
Coombs were naturally in favor of this,
and Roosa set in motion the bureaucratic
machinery to unlock that particular vault
—a process that, he warned, would
certainly take until evening.
As the early afternoon passed in New
York, with the millions of dollars
continuing to drain, minute by minute,
from Britain’s reserves, Hayes and
Coombs, along with their Washington
colleagues, were busy planning the next
step. If the swap increase and the
Export-Import Bank loan should come
through, the United States credits would
amount to a billion dollars all told; now,
in consultation with the beleaguered
garrison at the Bank of England, the
Federal Reserve Bank men began to
believe that, in order to make the
operation effective, the other leading
central banks—spoken of in centralbanking shorthand as “the Continent,”
even though they include the Banks of
Canada and Japan—would have to be
asked to put up additional credits on the
order of one and a half billion dollars,
or possibly even more. Such a sum
would make the Continent, collectively,
a bigger contributor to the cause than the
United States—a fact that Hayes and
Coombs realized might not sit too well
with the Continental bankers and their
governments.
At three o’clock, the Open Market
Committee held its telephone meeting—
twelve men sitting at their desks in six
cities, from New York to San Francisco.
The members heard Coombs’ dry,
unemotional voice describing the
situation
and
making
his
recommendation. They were quickly
convinced. In no more than fifteen
minutes, they had voted unanimously to
increase the swap credit to seven
hundred and fifty million dollars, on
condition that proportional credit
assistance could be obtained from other
central banks.
By late afternoon, tentative word had
come from Washington that prospects for
the Export-Import Bank loan looked
good, and that more definite word could
be expected before midnight. So the one
billion dollars in United States credits
appeared to be virtually in the bag. It
remained to tackle the Continent. It was
night now in Europe, so nobody there
could be tackled; the zero hour, then,
was Continental opening time the next
day, and the crucial period for the fate of
the pound would be the few hours after
that. Hayes, after leaving instructions for
a bank car to pick him up at his home, in
New Canaan, Connecticut, at four
o’clock in the morning, took his usual
commuting train from Grand Central
shortly after five. He has since
expressed a certain regret that he
proceeded in such a routine way at such
a dramatic moment. “I left the bank
rather reluctantly,” he says. “In
retrospect, I guess I wish I hadn’t. I
don’t mean as a practical matter—I was
just as useful at home, and, as a matter of
fact, I ended up spending most of the
evening on the phone with Charlie
Coombs, who stayed at the bank—but
just because something like that doesn’t
happen every day in a banker’s life. I’m
a creature of habit, I guess. Besides, it’s
something of a tenet of mine to insist on
keeping a proper balance between
private and professional life.” Although
Hayes does not say so, he may have been
thinking of something else, too. It can
safely be said to be something of a tenet
of central-bank presidents or governors
not to sleep at their places of business. If
word were ever to get out that the
methodical Hayes was doing so at a time
like this, he may have reasoned, it might
well be considered just as much a sign
of panic as a British bank-rate rise on a
Monday.
Meanwhile, Coombs was making
another night of it on Liberty Street; he
had gone home the previous night
because the worst had momentarily
appeared to be over, but now he stayed
on after regular work hours with Roche,
who hadn’t been home since the
previous weekend. Toward midnight,
Coombs received confirmation of the
Export-Import Bank’s two-hundred-and-
fifty-million-dollar credit, which had
arrived from Washington during the
evening, as promised. So now
everything was braced for the morning’s
effort. Coombs again installed himself in
one of the uninspiring eleventh-floor
cubicles, and, after a final marshalling of
the facts that would be needed for the
job of persuading the Continental
bankers, set his clock radio for threethirty and went to bed. A Federal
Reserve man with a literary bent and a
romantic temperament was later moved
to draw a parallel between the Federal
Reserve Bank that night and the British
camp on the eve of the Battle of
Agincourt in Shakespeare’s version, in
which King Henry mused so eloquently
on how participation in the coming
action would serve to ennoble even the
vilest of the troops, and how gentlemen
safe in bed at home would later think
themselves accursed that they had not
been at the battle scene. Coombs, a
practical man, had no such high-flown
opinion of his situation; even so, as he
dozed fitfully, waiting for morning to
reach Europe, he was well aware that
the events he was taking part in were
like nothing that had ever happened in
banking before.
II
So that evening, Tuesday, November 24,
1964, Hayes arrived at his home, in
New Canaan, Connecticut, at about sixthirty, exactly as usual, having
inexorably taken his usual 5:09 from
Grand Central. Hayes was a tall, slim,
soft-spoken man of fifty-four with keen
eyes framed by owlish round spectacles,
with a slightly schoolmasterish air and a
reputation for unflappability. By so
methodically going through familiar
motions at such a time, he realized with
amusement, he must seem to his
colleagues to be living up to his
reputation rather spectacularly. At his
house, a former caretaker’s cottage of
circa 1840 that the Hayeses had bought
and remodelled twelve years earlier, he
was greeted, as usual, by his wife, a
pretty and vivacious woman of AngloItalian descent named Vilma but always
called Bebba, who loves to travel, has
almost no interest in banking, and is the
daughter of the late Metropolitan Opera
baritone Thomas Chalmers. Since at that
time of year it was completely dark
when Hayes got home, he decided to
forgo a favorite early-evening unwinding
activity of his—walking to the top of a
grassy slope beside the house which
commands a fine view across the Sound
to Long Island. Anyway, he was not
really in a mood to unwind; instead, he
felt keyed up, and decided he might as
well stay that way overnight, since the
car from the bank was scheduled to call
at his door so early the next morning to
take him to work.
During dinner, Hayes and his wife
discussed subjects like the fact that their
son, Tom, who was a senior at Harvard,
would be arriving home the following
day for his Thanksgiving recess.
Afterward, Hayes settled down in an
armchair to read for a while. In banking
circles, he is thought of as a scholarly,
intellectual type, and, indeed, he is
scholarly and intellectual in comparison
with most bankers; even so, his extrabanking reading tends to be not constant
and all-embracing, as his wife’s is, but
sporadic, capricious, and intensive—
everything about Napoleon for a while,
perhaps, then a dry period, then a binge
on, say, the Civil War. Just then, he was
concentrating on the island of Corfu,
where he and Mrs. Hayes were planning
to spend some time. But before he had
got very far into his latest Corfu book he
was called to the telephone. The call
was from the bank. There were new
developments, which Coombs thought
President Hayes ought to be kept abreast
of.
To recapitulate in brief: drastic action
to save the pound, which the Federal
Reserve Bank not only would be
intimately involved in but would
actually join in initiating, was going to
be taken by the government banks—or
central banks, as they are more
commonly
called—of
the
nonCommunist world’s leading nations as
soon as possible after the next morning’s
opening of the London and Continental
financial markets, which would occur
between 4 and 5 A.M. New York time.
Britain was face to face with bankruptcy,
the reasons being that a huge deficit in
its international accounts over the
previous months had resulted in
concomitant losses in the gold and dollar
reserves held by the Bank of England;
that worldwide fear lest the newly
elected Labour Government decide, or
be forced, to ease the situation by
devaluing the pound from its dollar
parity of about $2.80 to some
substantially lower figure had caused a
flood of selling of pounds by hedgers
and speculators in the international
money markets; that the Bank of England,
fulfilling an international obligation to
sustain the pound at a free-market price
no lower than $2.78, had been losing
millions of dollars a day from its
reserves, which now stood at about two
billion dollars, their lowest point in
many years.
The remaining hope lay in amassing,
in a matter of hours before it would be
too late, an unheard-of sum in short-term
dollar credits to Britain from the central
banks of the world’s rich nations. With
such credits at its disposal, the Bank of
England would presumably be able to
buy up pounds so aggressively that the
speculative attack could be absorbed,
contained, and finally beaten back,
giving Britain time to set its economic
affairs in order. Just what the sum
necessary for rescue should be was an
open question, but earlier that day the
monetary authorities of the United States
and Britain had concluded that it would
have to be at least two billion dollars,
and perhaps even more. The United
States, through the Federal Reserve
Bank of New York and the Treasuryowned
Export-Import
Bank,
in
Washington, had that day committed
itself to one billion; the task that
remained was to persuade the other
leading
central
banks—habitually
spoken of in the central-banking world
as “the Continent,” even though they
include the Banks of Canada and Japan
—to lend more than a billion in addition.
Nothing of the kind had ever been
asked of the Continent before, through
the swap network or any other way. In
September, 1964, the Continent had
come through with its biggest collective
emergency credit so far—half a billion
dollars to the Bank of England for use in
defending the pound, already embattled
then. Now, with this half-billion loan
still outstanding and the pound in far
worse straits, the Continent was about to
be called upon for more than twice that
sum—perhaps five times that sum.
Obviously, the spirit of coöperation, if
not the quality of mercy, was about to be
strained. So Hayes’ musings that evening
may well have run.
With such portentous matters churning
around in his head, Hayes found it hard
to keep his mind on Corfu. Besides, the
prospect of the bank car’s arrival at four
o’clock made him feel that he should go
to bed early. As he prepared to do so,
Mrs. Hayes commented that since he
would have to get up in the middle of the
night, she supposed she ought to feel
sorry for him but since he was obviously
looking forward with keen anticipation
to whatever it was that would get him up
at that hour, she envied him instead.
on Liberty Street, Coombs slept
fitfully until he was awakened by the
clock radio in his room at about threethirty New York time—that is to say,
eight-thirty London time and nine-thirty
farther east on the European Continent. A
series of foreign-exchange crises
involving Europe had so accustomed
him to the time differential that he was
inclined to think in terms of the
European day, referring casually to 8
A.M. in New York as “lunchtime,” and 9
A.M. as “midafternoon.” So when he got
up it was, in his terms, “morning,”
despite the stars that were shining over
Liberty Street. Coombs got dressed,
went to his office, on the tenth floor,
where he had some breakfast provided
DOWN
by the bank’s regular night kitchen staff,
and began placing telephone calls to the
various leading central banks of the nonCommunist world. All the calls were put
through by one telephone operator, who
handles the Federal Reserve Bank’s
switchboard during off hours, and all of
them were eligible for a special
government-emergency priority that the
bank’s officers are entitled to claim, but
on this occasion it did not have to be
used, because at four-fifteen, when
Coombs began his telephoning, the
transatlantic circuits were almost
entirely clear.
The calls were made essentially to lay
the groundwork for what was to come.
The morning news from the Bank of
England, obtained in one of the first
calls from Liberty Street, was that
conditions were unchanged from the
previous day: the speculative attack on
the pound was continuing unabated, and
the Bank of England was sustaining the
pound’s price at $2.7860 by throwing
still more of its reserves on the market.
Coombs had reason to believe that when
the New York foreign-exchange market
opened, some five hours later, vast
additional quantities of pounds would be
thrown on the market on this side of the
Atlantic, and more British dollars and
gold would have to be spent. He
conveyed this alarming intelligence to
his counterparts at such institutions as
the Deutsche Bundesbank, in Frankfurt;
the Banque de France, in Paris; the
Banca d’Italia, in Rome; and the Bank of
Japan, in Tokyo. (In the last case, the
officers had to be reached at their
homes, for the fourteen-hour time
difference made it already past 6 P.M. in
the Orient.) Then, coming to the crux of
the matter, Coombs informed the
representatives of the various banks that
they were soon to be asked, in behalf of
the Bank of England, for a loan far
bigger than any they had ever been asked
for before. “Without going into specific
figures, I tried to make the point that it
was a crisis of the first magnitude,
which many of them still didn’t realize,”
Coombs has said. An officer of the
Bundesbank, who knew as much about
the extent of the crisis as anyone outside
London, Washington, and New York, has
said that in Frankfurt they were
“mentally prepared”—or “braced” might
be a better word—for the huge touch that
was about to be put on them, but that
right up to the time of Coombs’ call they
had been hoping the speculative attack
on the pound would subside of its own
accord, and even after the call they had
no idea how much they might be asked
for. In any event, as soon as Coombs
was off the wire the Bundesbank’s
governor called a board of managers’
meeting, and, as things turned out, the
meeting was to remain in session all day
long.
Still, all this was preparatory. Actual
requests, in specific amounts, had to be
made by the head of one central bank of
the head of another. At the time Coombs
was making his softening-up calls, the
head of the Federal Reserve Bank was
in the bank’s limousine, somewhere
between New Canaan and Liberty Street,
and the bank’s limousine, in flagrant
nonconformity with the James Bond style
of high-level international dealings, was
not equipped with a telephone.
the man being awaited, had been
president of the Federal Reserve Bank
of New York for a little over eight years,
having been chosen for the job, to his
own and almost everyone else’s
HAYES,
bewilderment, not from some position of
comparable eminence or from the
Federal Reserve’s own ranks but from
among the swarming legions of New
York commercial-bank vice-presidents.
Unorthodox as the appointment seemed
at the time, in retrospect it seems
providential. A study of Hayes’ early life
and youthful career gives the impression
that everything was somehow intended
to prepare him for dealing with this sort
of international monetary crisis, just as
the life of a writer or a painter
sometimes seems to have consisted
primarily of preparation for the
execution of a single work of art. If
Divine Providence, or perhaps its
financial department, when the huge
sterling crisis was imminent, had needed
an assessment of Hayes’ qualifications
for coping with this task and had hired
the celestial equivalent of an executive
recruiter to report on him, the dossier
might have read something like this:
“Born in Ithaca, New York, on July 4,
1910; grew up mostly in New York City.
Father a professor of Constitutional law
at Cornell, later a Manhattan investment
counsellor;
mother
a
former
schoolteacher, enthusiastic suffragette,
settlement-house worker, and political
liberal. Both parents birdwatchers.
Family
atmosphere
intellectual,
freethinking,
and
public-spirited.
Attended private schools in New York
City and Massachusetts and was usually
his school’s top-ranking student. Then
went to Harvard (freshman year only)
and Yale (three years: mathematics
major, Phi Beta Kappa in junior year,
ineffectual oar on class crew, graduated
1930 as top B.A. of class). Studied at
New College, Oxford, as Rhodes
Scholar 1931–33; there became firm
Anglophile, and wrote thesis on
‘Federal Reserve Policy and the
Working of the Gold Standard in the
Years 1923–30,’ although he had no
thought of ever joining the Federal
Reserve. Wishes now he had the thesis,
in case it contains blinding youthful
illuminations, but neither he nor New
College can find it. Entered New York
commercial banking in 1933, and rose
slowly but steadily (1938 annual salary
twenty-seven hundred dollars). Attained
title (albeit feeble title) of assistant
secretary at New York Trust Company in
1942; after a Navy stint, in 1947 became
an assistant vice-president and two
years later head of New York Trust’s
foreign department despite total lack of
previous experience in foreign banking.
Apparently learned fast; astounded his
colleagues and superiors, and gained
reputation among them as foreignexchange wizard by predicting precise
amount of 1949 pound devaluation
($4.03 to $2.80) a few weeks before it
occurred.
“Was appointed president of Federal
Reserve Bank of New York in 1956, to
his utter astonishment and that of New
York banking community, most of which
had never heard of this rather shy man.
Reacted calmly by taking his family on a
two-month vacation in Europe. The
consensus now is that Federal Reserve
Bank’s directors had almost implausible
prescience, or luck, in picking a foreignexchange expert just when the dollar
was weakening and international
monetary
coöperation
becoming
crucially important. Is liked by European
central bankers, who call him Al (which
often comes out sounding more like All).
Earns seventy-five thousand dollars a
year, making him the second-highest-
paid federal official after the President
of the United States, Federal Reserve
Bank salaries being intended to be more
or less competitive in banking terms
rather than in government-employee
terms. Is very tall and very thin. Tries to
observe regular commuting hours and
keep his private life sacrosanct, as a
matter of principle; considers regular
evening work at an office ‘outrageous.’
Complains that his son has a low
opinion of business; attributes this to
‘reverse snobbery’—but even then
remains calm.
“Conclusion: this is the very man for
the job of representing the United States’
central bank in a sterling crisis.”
And, indeed, Hayes readily fits the
picture of a perfectly planned and
perfectly tooled piece of machinery to
perform a certain complex task, but there
are other sides to him, and his character
contains as many paradoxes as the next
man’s. Although hardly anyone in
banking ever tries to describe Hayes
without using the words “scholarly” and
“intellectual,” Hayes tends to think of
himself as an indifferent scholar and
intellectual but an effective man of
action, and on the latter score the events
of November 25, 1964, seem to bear him
out. Although in some ways he is the
complete banker—in conformity with H.
G. Wells’ notion of such a banker, he
seems to “take money for granted as a
terrier takes rats,” and to be devoid of
philosophical curiosity about it—he has
a distinctly unbankerlike philosophical
curiosity about almost everything else.
And although casual acquaintances
sometimes pronounce him dull, his close
friends speak of a rare capacity for
enjoyment and an inner serenity that
seem to make him immune to the tensions
and distractions that fragment the lives
of so many of his contemporaries.
Doubtless the inner serenity was put to a
severe test as Hayes rode in the bank car
toward Liberty Street. When he arrived
at his desk at about five-thirty, Hayes’
first act was to punch Coombs’ button on
his interoffice phone and get the foreigndepartment chief’s latest appraisal of the
situation. He learned that, as he had
expected, the Bank of England’s
sickening dollar drain was continuing
unabated. Worse than that, though;
Coombs said his contacts with local
bankers who were also on emergency
early-morning vigil (men in the foreign
departments of the huge commercial
banks like the Chase Manhattan and the
First National City) indicated that
overnight there had accumulated a
fantastic pile of orders to unload pounds
on the New York market as soon as it
opened. The Bank of England, already
almost inundated, could expect a new
tidal wave from New York to hit in four
hours. The need for haste thus became
even more urgent. Hayes and Coombs
agreed that the project of putting together
an international package of credits to
Britain should be announced as soon as
possible after the New York opening—
perhaps as early as ten o’clock. So that
the bank would have a single center for
all its foreign communications, Hayes
decided to forsake his own office—a
spacious one with panelled walls and
comfortable chairs grouped around a
fireplace—and let Coombs’ quarters,
down the hall, which were much smaller
and more austere but more efficiently
arranged, serve as the command post.
Once there, he picked up one of three
telephones and asked the operator to get
him Lord Cromer, at the Bank of
England. When the connection was
made, the two men—the key figures in
the proposed rescue operation—
reviewed their plans a final time,
checking the sums they had tentatively
decided to ask of each central bank and
agreeing on who would call whom first.
In the eyes of some people, Hayes and
Lord Cromer make an oddly assorted
pair. Besides being a deep-dyed
aristocrat, George Rowland Stanley
Baring, third Earl of Cromer, is a deepdyed banker. A scion of the famous
London merchant bank of Baring
Brothers, the third Earl and godson of a
monarch went to Eton and Trinity
College, Cambridge, and spent twelve
years as a managing director of his
family’s bank and then two years—from
1959 to 1961—as Britain’s economic
minister and chief representative of his
country’s Treasury in Washington. If
Hayes had acquired his mastery of the
arcana of international banking by
patient study, Lord Cromer, who is no
scholar, acquired his by heredity,
instinct, or osmosis. If Hayes, despite
his unusual physical stature, could easily
be overlooked in a crowd, Lord Cromer,
who is of average height but debonair
and dashing, would cut a figure
anywhere. If Hayes is inclined to be a
bit hesitant about casual intimacies, Lord
Cromer is known for his hearty manner,
and has—doubtless unintentionally—
both
flattered
and
obscurely
disappointed many American bankers
who have been awed by his title by
quickly encouraging them to call him
Rowley. “Rowley is very self-confident
and decisive,” an American banker has
said. “He’s never afraid to barge in,
because he’s convinced of the
reasonableness of his own position. But
then he’s a reasonable man. He’s the
kind of man who in a crisis would be
able to grab the telephone and do
something about it.” This banker
confesses that until November 25, 1964,
he had not thought Hayes was that kind
of man.
Beginning at about six o’clock that
morning, Hayes did grab the phone, right
along with Lord Cromer. One after
another, the leading central bankers of
the world—among them President Karl
Blessing, of the Deutsche Bundesbank;
Dr. Guido Carli, of the Bank of Italy;
Governor Jacques Brunet, of the Bank of
France; Dr. Walter Schwegler, of the
Swiss National Bank; and Governor Per
Åsbrink, of the Swedish Riksbank—
picked up their phones and discovered,
some of them with considerable
surprise, the degree of gravity that the
sterling crisis had reached in the past
day, the fact that the United States had
committed itself to a short-term loan of
one billion dollars, and that they were
being asked to dig deep into their own
nations’ reserves to help tide sterling
over. Some first heard all this from
Hayes, some from Lord Cromer; in
either case, they heard it not from a
casual or official acquaintance but from
a fellow-member of that esoteric
fraternity the Basel club. Hayes, whose
position as representative of the one
country that had already pledged a huge
sum cast him almost automatically as the
leader of the operation, was careful to
make it clear in each of his calls that his
part in the proceedings was to put the
weight of the Federal Reserve behind a
request that formally came from the Bank
of England. “The pound’s situation is
critical, and I understand the Bank of
England is requesting a credit line of
two hundred and fifty million dollars
from you,” he would say, in his calm
way, to one Continental central-bank
governor or another. “I’m sure you
understand that this is a situation where
we all have to stand together.” (He and
Coombs always spoke English, of
course. Despite the fact that he had
recently been taking French refresher
lessons, and that at Yale he made one of
the most impressive academic records in
memory, Hayes doggedly remained a
dub at languages and still did not trust
himself to carry on an important business
conversation in anything but English.) In
those cases in which he was on
particularly close terms with his
Continental counterpart, he spoke more
informally, using a central-bankers’
jargon in which the conventional
numerical unit is a million dollars.
Hayes would say smoothly in such
cases, “Do you think you can come in
for, say, a hundred and fifty?”
Regardless of the degree of formality of
the approach Hayes made, the first
response, he says, was generally
cageyness, not unmixed with shock. “Is it
really as bad as all that, Al? We were
still hoping that the pound would
recover on its own” is the kind of thing
he recalls having heard several times.
When Hayes assured them that it was
indeed as bad as all that, and that the
pound would certainly not recover on its
own, the usual response was something
like “We’ll have to see what we can do
and then call you back.” Some of the
Continental central bankers have said
that what impressed them most about
Hayes’ first call was not so much what
he said as when he said it. Realizing that
it was still well before dawn in New
York, and knowing Hayes’ addiction to
what are commonly thought of as
bankers’ hours, these Europeans
perceived that things must be grave the
moment they heard his voice. As soon as
Hayes had broken the ice at each
Continental bank, Coombs would take
over and get down to details with his
counterparts.
The first round of calls left Hayes,
Lord Cromer, and their associates on
Liberty and Threadneedle Streets
relatively hopeful. Not one bank had
given them a flat no—not even, to their
delight, the Bank of France, although
French policy had already begun moving
sharply away from coöperation with
Britain and the United States in monetary
matters, among others. Furthermore,
several governors had surprised them by
suggesting
that
their
countries’
subscriptions to the loan might actually
be bigger than those suggested. With this
encouragement, Hayes and Lord Cromer
decided to raise their sights. They had
originally been aiming for credits of two
and a half billion dollars; now, on
reconsideration, they saw that there was
a chance for three billion. “We decided
to up the ante a little here and there,”
Hayes says. “There was no way of
knowing precisely what sum would be
the least that would do the job of turning
the tide. We knew we would be relying
to a large extent on the psychological
effect of our announcement—assuming
we would be able to make the
announcement. Three seemed to us a
good, round figure.”
But difficulties lay ahead, and the
biggest difficulty, it became clear as the
return calls from the various banks
began to come in, was to get the thing
done quickly. The hardest point to
convey, Hayes and Coombs found, was
that each passing minute meant a further
loss of a million dollars or more to the
British reserves, and that if normal
channels were followed the loans would
unquestionably come too late to avert
devaluation of the pound. Some of the
central banks were required by law to
consult their governments before making
a commitment and some were not, but
even those that were not insisted on
doing so, as a courtesy; this took time,
especially since more than one Finance
Minister, unaware that he was being
sought to approve an enormous loan on
an instant’s notice, with little evidence
of the necessity for it beyond the
assurance of Lord Cromer and Hayes,
was temporarily unavailable. (One
happened to be engaged in debate in his
country’s parliament.) And even in cases
where the Finance Minister was at hand,
he was sometimes reluctant to act in
such a shotgun way. Governments move
more deliberately in money matters than
central bankers do. Some of the Finance
Ministers said, in effect, that upon
proper submission of a balance sheet of
the Bank of England, along with a formal
written application for the emergency
credit, they would gladly consider the
matter. Furthermore, some of the central
banks themselves showed a maddening
inclination to stand on ceremony. The
foreign-exchange chief of one bank is
said to have replied to the request by
saying, “Well, isn’t this convenient! We
happen to have a board meeting
scheduled for tomorrow. We’ll take the
matter up then, and afterward we’ll get
in touch with you.” The reply of
Coombs, who happened to be the man on
the wire in New York, is not recorded in
substance, but its manner is reported to
have been uncharacteristically vehement.
Even Hayes’ celebrated imperturbability
was shaken a time or two, or so those
who were present have said; his tone
remained as calm and even as ever, but
its volume rose far above the usual
level.
The problems that the Continental
central banks faced in meeting the
challenge are well exemplified by the
situation at the richest and most
powerful of them, the Deutsche
Bundesbank. Its board of managers was
already sitting in emergency session as a
result of Coombs’ early call when
another New York call—this one from
Hayes to President Blessing—gave the
Bundesbank its first indication of exactly
how much it was being asked to put up.
The amounts the various central banks
were asked for that morning have never
been made public, but, on the basis of
what has become known, it is
reasonable to assume that the
Bundesbank was asked for half a billion
dollars—the highest quota of the lot, and
certainly the largest sum that any central
bank other than the Federal Reserve had
ever been called upon to supply to
another on a few hours’ notice. Hard on
the heels of Hayes’ call conveying this
jarring information, Blessing heard from
Lord Cromer, in London, who confirmed
everything that Hayes had said about the
seriousness of the crisis and repeated the
request. Wincing a bit, perhaps, the
Bundesbank managers agreed in
principle that the thing had to be done.
But right there their problems began.
Proper procedure must be adhered to,
Blessing and his aides decided. Before
taking any action, they must consult with
their economic partners in the European
Common Market and the Bank for
International Settlements, and the key
man to be consulted, since he was then
serving as president of the Bank for
International Settlements, was Dr.
Marius W. Holtrop, governor of the
Bank of the Netherlands, which, of
course, was also being asked to
contribute. A rush person-to-person call
was put through from Frankfurt to
Amsterdam.
Dr.
Holtrop,
the
Bundesbank managers were informed,
wasn’t in Amsterdam; by chance, he had
taken a train that morning to The Hague
to meet his country’s Finance Minister
for consultation on other matters. For the
Bank of the Netherlands to make any
such important commitment without the
knowledge of its governor was out of the
question, and, similarly, the Bank of
Belgium, a nation whose monetary
policies are linked inextricably with the
Netherlands’, was reluctant to act until
Amsterdam had given its O.K. So for an
hour or more, as millions of dollars
continued to drain out of the Bank of
England and the world monetary order
stood in jeopardy, the whole rescue
operation was hung up while Dr.
Holtrop, crossing the Dutch lowlands by
train, or perhaps already in The Hague
and tied up in a traffic jam, could not be
found.
this, of course, meant agonizing
frustration in New York. As morning
began here at last, Hayes’ and Coombs’
campaign got a boost from Washington.
The leading government monetary
authorities—Martin at the Federal
ALL
Reserve Board, Dillon and Roosa at the
Treasury—had all been intimately
involved in the previous day’s planning
for the rescue, and of course part of the
planning had been the decision to let the
New York bank, as the Federal Reserve
System’s and the Treasury’s normal
operating arm in international monetary
dealings,
serve
as
campaign
headquarters. So the members of the
Washington contingent had slept at home
and come to their offices at the normal
hour. Now, having learned from Hayes
of the difficulties that were developing,
Martin, Dillon, and Roosa pitched in
with transatlantic calls of their own to
emphasize the extent of America’s
concern over the matter. But no number
of calls from anywhere could hold back
the clock—or, for that matter, find Dr.
Holtrop—and Hayes and Coombs finally
had to abandon their idea of having a
credit bundle ready in time for an
announcement to the world at or near 10
A.M. in New York. And there were other
reasons, too, for a fading of the early
hopes. As the New York markets
opened, the extent of the alarm that had
spread around the financial world
overnight was only too clearly revealed.
The bank’s foreign-exchange trading
desk, on the seventh floor, reported that
the assault on the pound at the New York
opening had been fully as terrifying as
they had expected, and that the
atmosphere in the local exchange market
had reached a state not far from panic.
From the bank’s securities department
came an alarming report that the market
for United States government bonds was
coming under the heaviest pressure in
years, reflecting an ominous lack of
confidence in the dollar on the part of
bond traders. This intelligence served as
a grim reminder to Hayes and Coombs
of something they knew already—that a
fall of the pound in relation to the dollar
could quite possibly be followed, in a
kind of chain reaction, by a forced
devaluation of the dollar in relation to
gold, which might cause monetary chaos
everywhere. If Hayes and Coombs had
been permitting themselves any moments
of idle reverie in which to picture
themselves simply as good Samaritans,
this was just the news to bring them back
to reality. And then word arrived that the
wild tales flying around Wall Street
showed signs of crystallizing into a
single tale, demoralizingly credible
because it was so specific. The British
government, it was being said, would
announce a sterling devaluation at
around noon New York time. Here was
something that could be authoritatively
refuted, at least in respect to timing,
since Britain would obviously not
devalue while the credit negotiations
were under way. Torn between the
desire to quell a destructive rumor and
the need to keep the negotiations secret
until they were concluded, Hayes
compromised. He had one of his
associates call a few key Wall Street
bankers and traders to say, as
emphatically as possible, that the latest
devaluation rumor was, to his firm
knowledge, false. “Can you be more
specific?” the associate was asked, and
he replied, because there was nothing
else he could reply, “No, I can’t.”
This
unsupported
word
was
something, but it was not enough; the
foreign-exchange and bond markets were
only momentarily reassured. There were
times that morning, Hayes and Coombs
now admit, when they put down their
telephones, looked at each other across
the table in Coombs’ office, and
wordlessly exchanged the thought: It
isn’t going to be done in time. But—in
the best tradition of melodrama, which
sometimes seems to survive stubbornly
in nature at a time when it is dead in art
—just when things looked darkest, good
news began to arrive. Dr. Holtrop had
been tracked down in a restaurant in The
Hague, where he was having lunch with
the Netherlands’ Minister of Finance, Dr.
J. W. Witteveen; moreover, Dr. Holtrop
had endorsed the rescue operation, and
as for the matter of consulting his
government, that was no problem, since
the responsible representative of his
government was sitting across the table
from him. The chief obstacle was thus
overcome, and after Dr. Holtrop had
been reached the difficulties began
narrowing down to annoyances like the
necessity for continually apologizing to
the Japanese for routing them out of bed
as midnight arrived and passed in Tokyo.
The tide had turned. Before noon in New
York, Hayes and Coombs, and Lord
Cromer and his deputies in London as
well, knew that they had agreement in
principle from ten Continental central
banks—those in West Germany, Italy,
France, the Netherlands, Belgium,
Switzerland, Canada, Sweden, Austria,
and Japan—and also from the Bank for
International Settlements.
There remained the wait while each
central bank went through the painfully
slow process of completing whatever
formalities were required to make its
action legal and proper. The epitome of
orderliness, the Bundesbank, could not
act until it had obtained ratification from
the members of its board of directors,
most of whom were in provincial
outposts scattered around Germany. The
two leading Bundesbank deputies
divided up the job of calling the absent
directors and persuading them to go
along—a job that was made more
delicate by the fact that the absent
directors were being asked to approve
something that, in effect, the bank’s home
office had already undertaken to do. At
midafternoon by Continental time, while
the two deputies were busy at this
exercise in doubletalk, Frankfurt got a
new call from London. It was Lord
Cromer, no doubt sounding as
exasperated as his situation permitted,
and what he had to say was that the rate
of British reserve loss had become so
rapid that the pound could not survive
another
day.
Formalities
notwithstanding, it was a case of now or
never. (The Bank of England’s reserve
loss that day has never been announced.
The Economist later passed along a
guess that it may have run to five
hundred million dollars, or about a
quarter of all that remained in Britain’s
reserve coffers.) After Lord Cromer’s
call, the Bundesbank deputies tempered
their tact with brevity; they got
unanimous approval from the directors,
and shortly after five o’clock Frankfurt
time they were ready to tell Lord
Cromer and Hayes that the Bundesbank
was in for the requested half-billion
dollars.
Other central banks were coming in,
or were already in. Canada and Italy put
up two hundred million dollars each,
and doubtless were glad to do it,
inasmuch as their own currencies had
been the beneficiaries of much smaller
but otherwise similar international
bailout operations in 1962 and earlier in
1964, respectively. If a subsequent
report in the London Times is to be
accepted, France, Belgium, and the
Netherlands, no one of which ever
announced
the
amount
of
its
participation, each contributed two
hundred
million
dollars,
too.
Switzerland is known to have come
through with a hundred and sixty million
dollars and Sweden with a hundred
million dollars, while Austria, Japan,
and the Bank for International
Settlements rounded out the bundle with
still undisclosed amounts. By lunchtime
in New York, it was all over but the
shouting, and the last part of the task was
to make the shouting as effective as
possible to give it the fastest and most
forcible impact on the market.
The task brought to the fore another
Federal Reserve Bank man, its vicepresident in charge of public
information, Thomas Olaf Waage. Waage
(his name rhymes with “saga”) had been
present and active in Coombs’ office
almost all morning, constantly on the
phone as liaison man with Washington. A
born-and-bred New Yorker, the son of a
Norwegian-born local tug pilot and
fishing-boat captain, Waage is a man of
broad and unfeigned outside interests—
among them opera, Shakespeare,
Trollope, and his ancestral heritage,
sailing—and one consuming passion,
which is striving to convey not only the
facts but also the drama, suspense, and
excitement of central banking to a
skeptical and often glassy-eyed public.
In short, a banker who is a hopeless
romantic. So now he was overjoyed
when Hayes assigned to him the job of
preparing a news release that would
inform the world, as emphatically as
possible, about the rescue operation.
While Hayes and Coombs struggled to
tie up the loose ends of their package,
Waage was busy coördinating timing
with his counterparts at the Federal
Reserve Board and the Treasury
Department in Washington, which would
share in the issuing of the American
announcement, and at the Bank of
England, which, Hayes and Lord Cromer
had agreed, would issue a simultaneous
announcement of its own. “Two o’clock
in the afternoon New York time was the
hour we agreed upon for the
announcements, when it began to look as
if we’d have something to announce by
that time,” Waage recalls. “That was too
late to catch the Continental and London
markets that day, of course, but it left the
whole afternoon ahead until the New
York markets closed, at around five, and
if the sterling market could be
dramatically reversed here before
closing time, chances were the recovery
would continue on the Continent and in
London next day, when the American
markets would be closed for
Thanksgiving. As for the amount of the
combined credit we were planning to
announce, it still stood at three billion
dollars. But I remember that a last-
minute snag of a particularly
embarrassing sort developed. Very late
in the game, when we thought the whole
package was in hand, Charlie Coombs
and I counted up what had been pledged,
just to make sure, and we got only two
billion eight hundred and fifty million.
Apparently, we’d mislaid a hundred and
fifty million dollars somewhere. That’s
just
what
we’d
done—we’d
miscalculated. So it was all right.”
The package was assembled in time to
meet the new schedule, and statements
from the Federal Reserve, the Treasury,
and the Bank of England duly went out to
the news media simultaneously, at 2 P.M.
in New York and 7 P.M. in London. As a
result of Waage’s influence, the
American version, though it fell
somewhat short of the mood of, say, the
last scene of “Die Meistersinger,” was
nevertheless exceptionally stirring as
bank utterances go, speaking with a
certain subdued flamboyance of the
unprecedented nature of the sum
involved and of how the central banks
had “moved quickly to mobilize a
massive counterattack on speculative
selling of the pound.” The London
release had a different kind of
distinction, achieving something of the
quintessential Britishness that seems to
be reserved for moments of high crisis.
It read simply, “The Bank of England
have made arrangements under which
$3,000M. are made available for the
support of sterling.”
the secrecy of the operation
had been successfully preserved and the
announcement struck the New York
foreign-exchange market all of a heap,
because the reaction was as swift and as
electric as anyone could have wished.
Speculators against the pound decided
instantly and with no hesitation that their
game was up. Immediately after the
announcement, the Federal Reserve
Bank put in a bid for pounds at $2.7868
—a figure slightly above the level at
which the pound had been forcibly
maintained all day by the Bank of
England. So great was the rush of
APPARENTLY,
speculators to get free of their
speculative positions by buying pounds
that the Federal Reserve Bank found
very few pounds for sale at that price.
Around two-fifteen, there were a strange
and heartening few minutes in which no
sterling was available in New York at
any price. Pounds were eventually
offered for sale again at a higher price,
and were immediately gobbled up, and
thus the price went on climbing all
afternoon, to a closing of just above
$2.79.
Triumph! The pound was out of
immediate danger; the thing had worked.
Tributes to the success of the operation
began to pour in from everywhere. Even
the magisterial Economist was to
declare shortly, “Whatever other
networks break down, it seems, the
central bankers [have an] astonishing
capacity for instant results. And if theirs
is not the most desirable possible
mechanism, geared always to short-term
support of the status quo, it happens to
be the only working one.”
So, with the pound riding reasonably
high again, the Federal Reserve Bank
shut up for Thanksgiving, and the
bankers went home. Coombs recalls
having drunk a Martini unaccustomedly
fast. Hayes, home in New Canaan, found
that his son, Tom, had arrived from
Harvard. Both his wife and his son
noticed that he seemed to be in an
unusual state of excitement, and when
they asked about it he replied that he had
just been through the most completely
satisfying day of his entire working
career. Pressed for details, he gave them
a condensed and simplified account of
the rescue operation, keeping constantly
in mind the fact that his audience
consisted of a wife who had no interest
in banking and a son who had a low
opinion of business. The reaction he got
when his recital was concluded was of a
sort that might warm the heart of a
Waage, or of any earnest explicator of
banking derring-do to the unsympathetic
layman. “It was a little confusing at
first,” Mrs. Hayes has said, “but before
you were finished you had us on the edge
of our chairs.”
Waage, home in Douglaston, told his
wife of the day’s events in his
characteristic way. “It was St. Crispin’s
Day,” he exclaimed as he burst through
his doorway, “and I was with Harry!”
III
first become interested in the
pound and its perils at the time of the
1964 crisis, I found myself hooked by
the subject. Through the subsequent three
and a half years, I followed its ups and
downs in the American and British
HAVING
press, and at intervals went down to the
Federal Reserve Bank to renew my
acquaintance with its officers and see
what additional enlightenment I could
garner. The whole experience was a
resounding vindication of Waage’s thesis
that central banking can be suspenseful.
The pound wouldn’t stay saved. A
month after the big 1964 crisis, the
speculators resumed their assaults, and
by the end of that year the Bank of
England had used up more than half a
billion of its new three-billion-dollar
credit. Nor did the coming of the new
year bring surcease. In 1965, after a
relatively buoyant January, the pound
came under pressure again in February.
The November credit had been for a
term of three months; now, as the term
ran out, the nations that had made it
decided to extend it for another three
months, so that Britain would have more
time to put its economy in order. But late
in March the British economy was still
shaky, the pound was back below $2.79,
and the Bank of England was back in the
market. In April, Britain announced a
tougher budget, and a rally followed, but
the rally proved to be short-lived. By
early summer, the Bank of England had
drawn, and committed to the battle
against the speculators, more than a third
of the whole three billion. Heartened,
the speculators pressed their attack. Late
in June, high British officials, let it be
known that they now considered the
sterling crisis over, but they were
whistling in the dark; in July the pound
sank again, despite further belttightening in the British domestic
economy. By the end of July, the world
foreign-exchange market had become
convinced that a new crisis was shaping
up. By late August, the crisis had
arrived, and in some ways it was a more
dangerous one than that of the previous
November. The trouble was the market
seemed to believe that the central banks
were tired of pouring money into the
battle and would now let sterling fall,
regardless of the consequences. About
that time, I telephoned a leading local
foreign-exchange man I know to ask him
what he thought of the situation, and he
replied, “To my knowledge, the New
York market is one hundred per cent
convinced that devaluation of sterling is
coming this fall—and I don’t mean
ninety-five per cent, I mean one hundred
per cent.” Then, on September 11th, I
read in the papers that the same group of
central banks, this time with the
exception of France, had come through
with another last-minute rescue package,
the amount not being announced at the
time—it was subsequently reported to
have been around one billion—and over
the next few days I watched the market
price of the pound rise, little by little,
until by the end of the month it was
above $2.80 for the first time in sixteen
months.
The central banks had done it again,
and somewhat later I went down to the
Federal Reserve Bank to learn the
details. It was Coombs I saw, and I
found him in a sanguine and
extraordinarily talkative mood. “This
year’s operation was entirely different
from last year’s,” he told me. “It was an
aggressive move on our part, rather than
a last-ditch-defensive one. You see,
early this September we came to the
conclusion that the pound was grossly
oversold—that is, the amount of
speculation against it was way out of
proportion to what was justified by the
economic facts. Actually, during the first
eight months of the year, British exports
had risen more than five per cent over
the corresponding period in 1964, and
Britain’s 1964 balance-of-payments
deficit seemed likely to be cut in half in
1965. Very promising economic
progress, and the bearish speculators
seemed not to have taken account of it.
They had gone right on selling the pound
short, on the basis of technical market
factors. They were the ones who were in
an exposed position now. We decided
the time was ripe for an official
counterattack.”
The counterattack, Coombs went on to
explain, was plotted in leisurely fashion
this time—not on the telephone but face
to face, over the weekend of September
5th in Basel. The Federal Reserve Bank
was represented by Coombs, as usual,
and also by Hayes, who cut short his
long-planned vacation on Corfu to be
there. The coup was planned with
military precision. It was decided not to
announce the amount of the credit
package this time, in order to further
confuse and disconcert the enemy, the
speculators. The place chosen for the
launching was the trading room of the
Federal Reserve Bank, and the hour
chosen was 9 A.M. New York time—
early enough for London and the
Continent to be still conducting business
—on September 10th. At zero hour, the
Bank of England fired a preliminary
salvo by announcing that new centralbank arrangements would shortly enable
“appropriate action” to be taken in the
exchange markets. After allowing fifteen
minutes for the import of this demurely
menacing message to sink in, the Federal
Reserve Bank struck. Using, with British
concurrence, the new bundle of
international credit as its ammunition, it
simultaneously placed with all the major
banks operating in the New York
exchange market bids for sterling
totalling nearly thirty million dollars, at
the then prevailing rate of $2.7918.
Under this pressure, the market
immediately moved upward, and the
Federal Reserve Bank pursued the
movement, raising its bid price step by
step. At $2.7934, the bank temporarily
ceased operations—partly to see what
the market would do on its own, partly
just to confuse things. The market held
steady, showing that at that level there
were now as many independent buyers
of sterling as there were sellers, and that
the bears—speculators—were losing
their nerve. But the bank was far from
satisfied; returning vigorously to the
market, it bid the price on up to $2.7945
in the course of the day. And then the
snowball began to roll by itself—with
the results I had read about in my
newspapers. “It was a successful bear
squeeze,” Coombs told me with a certain
grim relish, which was easy to
sympathize with; I found myself musing
that for a banker to rout his opponents, to
smite them hip and thigh and drive them
to cover, and not for personal or
institutional profit but, rather, for the
public good, must be a source of rare,
unalloyed satisfaction.
I later learned from another banker
just how painfully the bears had been
squeezed. Margins of credit on currency
speculation being what they are—for
example, to commit a million dollars
against the pound a speculator might
need to put up only thirty or forty
thousand dollars in cash—most dealers
had made commitments running into the
tens of millions. When a dealer’s
commitment was ten million pounds, or
twenty-eight million dollars, each
change of one-hundredth of a cent in the
price of the pound meant a change of a
thousand dollars in the value of his
account. Between the $2.7918 on
September 10th, then, and the $2.8010
that the pound reached on September
29th, such a dealer on the short side of
the pound would have lost ninety-two
thousand dollars—enough, one might
suppose, to make him think twice before
selling sterling short again.
An extended period of calm followed.
The air of impending crisis that had hung
over the exchanges during most of the
preceding year disappeared, and for
more than six months the world sterling
market was sunnier than it had been at
any time in recent years. “The battle for
the pound sterling is now ended,” high
British officials (anonymous, and wisely
so) announced in November, on the first
anniversary of the 1964 rescue. Now, the
officials said, “we’re fighting the battle
for the economy.” Apparently, they were
winning that battle, too, because when
Britain’s balance-of-payments position
for 1965 was finally calculated, it
showed that the deficit had been not
merely halved, according to predictions,
but more than halved. And meanwhile
the pound’s strength enabled the Bank of
England not merely to pay off all its
short-term debts to other central banks
but also to accumulate in the open
market, in exchange for its newly
desirable pounds, more than a billion
fresh dollars to add to its precious
reserves. Thus, between September,
1965, and March, 1966, those reserves
rose from two billion six hundred
million dollars to three billion six
hundred million—a fairly safe figure.
And then the pound breezed nicely
through a national election campaign—
as always, a stormy time for the
currency. When I saw Coombs in the
spring of 1966, he seemed as cocky and
blasé about sterling as an old-time New
York Yankee rooter about his team.
I had all but concluded that following
the fortunes of the pound was no longer
any fun when a new crisis exploded. A
seamen’s strike contributed to a
recurrence of Britain’s trade deficit, and
in early June of 1966 the quotation was
back below $2.79 and the Bank of
England was reported to be back in the
market spending its reserves on the
defense. On June 13th, with something of
the insouciance of veteran firemen
responding to a routine call, back came
the central banks with a new bundle of
short-term credits. But these helped only
temporarily, and toward the end of July,
in an effort to get at the root of the
pound’s troubles by curing the deficit
once and for all, Prime Minister Wilson
imposed on the British people the most
stringent set of economic restraints ever
applied in his country in peacetime—
high taxes, a merciless squeeze on
credit, a freeze on wages and prices, a
cut in government welfare spending, and
a limit of a hundred and forty dollars on
the annual amount that each Briton could
spend on travel abroad. The Federal
Reserve, Coombs told me later, helped
by moving into the sterling market
immediately
after
the
British
announcement of the austerity program,
and the pound reacted satisfactorily to
this prodding. In September, for good
measure, the Federal Reserve increased
its swap line with the Bank of England
from seven hundred and fifty million to
one billion three hundred and fifty
million dollars. I saw Waage in
September, and he spoke warmly of all
the dollars that the Bank of England was
again accumulating. “Sterling crises
have become a bore,” the Economist
remarked at about this time, with the
most reassuring sort of British phlegm.
Calm again—and again for just a little
more than six months. In April of 1967,
Britain was free of short-term debt and
had ample reserves. But within a month
or so came the first of a series of
heartbreaking
setbacks.
Two
consequences of the brief Arab-Israeli
war—a huge flow of Arab funds out of
sterling into other currencies, and the
closing of the Suez Canal, one of
Britain’s main trade arteries—brought
on a new crisis almost overnight. In
June, the Bank of England (under new
leadership now, for in 1966 Lord
Cromer had been succeeded as governor
by Sir Leslie O’Brien) had to draw
heavily on its swap line with the Federal
Reserve, and in July the British
government found itself forced to renew
the painful economic restraints of the
previous year; even so, in September the
pound slipped down to $2.7830, its
lowest point since the 1964 crisis. I
called my foreign-exchange expert to ask
why the Bank of England—which in
November, 1964, had set its last-line
trench at $2.7860, and which, according
to its latest statement, now had on hand
reserves amounting to more than two and
a half billion dollars—was letting the
price slide so dangerously near the
absolute bottom (short of devaluation) of
$2.78. “Well, the situation isn’t quite as
desperate as the figure suggests,” he
replied. “The speculative pressure so far
isn’t anything like as strong as it was in
1964. And the fundamental economic
position this year—up to now, at least—
is much better. Despite the Middle East
war, the austerity program has taken
hold. For the first eight months of 1967,
Britain’s international payments have
been nearly in balance. The Bank of
England is evidently hoping that this
period of weakness of the pound will
pass without its intervention.”
At about that time, however, I became
aware of a disturbing portent in the air—
the apparent abandonment by the British
of their long-standing taboo against
bandying about the word “devaluation.”
Like other taboos, this one seemed to
have been based on a combination of
practical logic (talk about devaluation
could easily start a speculative stampede
and thereby bring it on) and superstition.
But now I found devaluation being freely
and frequently discussed in the British
press, and, in several respected journals,
actually advocated. Nor was that all.
Prime Minister Wilson, it is true,
continued to follow a careful path
around the word, even in the very act of
pledging, as he did over and over, that
his government would abstain from the
deed; there would be “no change in
existing policy” as to “overseas
monetary matters,” he said, delicately,
on one occasion. On July 24th, though,
Chancellor of the Exchequer James
Callaghan spoke openly in the House of
Commons
about
devaluation,
complaining that advocacy of it as a
national policy had become fashionable,
declaring that such a policy would
represent a breach of faith with other
nations and their people and also
pledging that his government would
never resort to it. His sentiments were
familiar
and
reassuring;
his
straightforward expression of them was
just the opposite. In the darkest days of
1964, no one had said “devaluation” in
Parliament.
All through the autumn, I had a feeling
that Britain was being overtaken by a
fiendish
concatenation
of
cruel
mischances, some specifically damaging
to the pound and others merely crushing
to British morale. The previous spring,
oil from a wrecked, and wretched,
tanker had defiled the beaches of
Cornwall; now an epidemic was
destroying tens, and ultimately hundreds,
of thousands of head of cattle. The
economic straitjacket that Britain had
worn for more than a year had swelled
unemployment to the highest level in
years and made the Labour Government
the most unpopular government in the
postwar era. (Six months later, in a poll
sponsored by the Sunday Times, Britons
would vote Wilson the fourth most
villainous man of the century, after
Hitler, de Gaulle, and Stalin, in that
order.) A dock strike in London and
Liverpool that began in mid-September
and was to drag on for more than two
months decreased still further the
already hobbled export trade, and put an
abrupt end to Britain’s remaining hope
of ending the year with its international
accounts in balance. Early in November,
1967, the pound stood at $2.7822, its
lowest point in a decade. And then
things went downhill fast. On the
evening of Monday the thirteenth, Wilson
took the occasion of his annual
appearance at the Lord Mayor of
London’s banquet—the very platform he
had used for his fiery commitment to the
defense of sterling in the crisis three
years earlier—to implore the country
and the world to disregard, as distorted
by temporary factors, his nation’s latest
foreign-trade statistics, which would be
released the next day. On Tuesday the
fourteenth,
Britain’s
foreign-trade
figures, duly released, showed an
October deficit of over a hundred
million pounds—the worst ever
reported. The Cabinet met at lunch on
Thursday the sixteenth, and that
afternoon, in the House of Commons,
Chancellor Callaghan, upon being asked
to confirm or deny rumors of an
enormous new central-bank credit that
would be contingent upon still further
unemployment-breeding
austerity
measures, replied with heat, and with
what was later called a lack of
discretion, “The Government will take
what decisions are appropriate in the
light of our understanding of the needs of
the British economy, and no one else’s.
And that, at this stage, does not include
the creation of any additional
unemployment.”
With one accord, the exchange
markets decided that the decision to
devalue had been taken and that
Callaghan had inadvertently let the cat
out of the bag. Friday the seventeenth
was the wildest day in the history of the
exchange markets, and the blackest in the
thousand-year history of sterling. In
holding it at $2.7825—the price decided
on this time as the last-line trench—the
Bank of England spent a quantity of
reserve dollars that it may never see fit
to reveal; Wall Street commercial
bankers who have reason to know have
estimated the amount at somewhere
around a billion dollars, which would
mean a continuous, day-long reserve
drain of over two million per minute.
Doubtless the British reserves dropped
below the two-billion-dollar mark, and
perhaps far below it. Late on a Saturday
—November 18th—full of confused
alarms,
Britain
announced
its
capitulation. I heard about it from
Waage, who telephoned me that
afternoon at five-thirty New York time.
“As of an hour ago, the pound was
devalued to two dollars and forty cents,
and the British bank rate went to eight
per cent,” he said. His voice was
shaking a little.
Saturday night, bearing in mind that
scarcely anything but a major war upsets
world financial arrangements more than
devaluation of a major currency, I went
down to the capital of world finance,
Wall Street, to look around. A nasty
wind was whipping papers through
empty streets, and there was the usual
ON
rather intimidating off-hours stillness in
that part-time city. There was something
unusual, though: the presence of rows of
lighted windows in the otherwise dark
buildings—for the most part, one lighted
row per building. Some of the rows I
could identify as the foreign departments
of the big banks. The heavy doors of the
banks were locked and barred; foreigndepartment men evidently ring to gain
entrance on weekends, or use invisible
side or rear entrances. Turning up my
coat collar, I headed up Nassau Street
toward Liberty to take a look at the
Federal Reserve Bank. I found it lighted
not in a single line but—more
hospitably, somehow—in an irregular
pattern over its entire Florentine façade,
yet it, too, presented to the street a
formidably closed front door. As I
looked at it, a gust of wind brought an
incongruous burst of organ music—
perhaps from Trinity Church, a few
blocks away—and I realized that in ten
or fifteen minutes I hadn’t seen anyone.
The scene seemed to me to epitomize
one of the two faces of central banking
—the cold and hostile face, suggesting
men in arrogant secrecy making
decisions that affect all the rest of us but
that we can neither influence nor even
comprehend, rather than the more
congenial face of elegant and learned
men of affairs beneficently saving
faltering currencies over their truffles
and wine at Basel. This was not the night
for the latter face.
On Sunday afternoon, Waage held a
press conference in a room on the tenth
floor of the bank, and I attended it, along
with a dozen other reporters, mostly
regulars on the Federal Reserve beat.
Waage discoursed generally on the
devaluation, parrying questions he didn’t
want to answer, sometimes by replying
to them, like the teacher he once was,
with questions of his own. It was still far
too early, he said, to tell how great the
danger was that the devaluation might
lead to “another 1931.” Almost any
prediction, he said, would be a matter of
trying to outguess millions of people and
thousands of banks around the world.
The next few days would tell the story.
Waage seemed stimulated rather than
depressed; his attitude was clearly one
of apprehension but also of resolution.
On the way out, I asked him whether he
had been up all night. “No, last evening I
went to ‘The Birthday Party,’ and I must
say Pinter’s world makes more sense
than mine does, these days,” he replied.
The outlines of what had happened
Thursday and Friday began to emerge
during the next few days. Most of the
rumors that had been abroad turned out
to have been more or less true. Britain
had been negotiating for another huge
credit to forestall devaluation—a credit
of the order of magnitude of the three-
billion-dollar 1964 package, with the
United States again planning to provide
the largest share. Whether Britain had
devalued from choice or necessity
remained
debatable.
Wilson,
in
explaining the devaluation to his people
in a television address, said that “it
would have been possible to ride out
this present tide of foreign speculation
against the pound by borrowing from
central banks and governments,” but that
such action this time would have been
“irresponsible,” because “our creditors
abroad might well insist on guarantees
about this or that aspect of our national
policies”; he did not say explicitly that
they had done so. In any event, the
British Cabinet had—with what grim
reluctance may be imagined—decided in
principle on devaluation as early as the
previous weekend, and then determined
the exact amount of the devaluation at its
Thursday-noon meeting. At that time, the
Cabinet had also resolved to help insure
the effectiveness of the devaluation by
imposing new austerity measures on the
nation, among them higher corporate
taxes, a cutback in defense spending, and
the highest bank rate in fifty years. As
for the two-day delay in putting the
devaluation into effect, which had been
so costly to British reserves, officials
now explained that the time had been
necessary for conferences with the other
leading monetary powers.
Such
conferences
were
required
by
international monetary rules before a
devaluation, and, besides, Britain had
urgently needed assurances from its
leading competitors in world trade that
they did not plan to vitiate the effect of
the British devaluation with matching
devaluations of their own. Some light
was now shed, too, on the sources of the
panic selling of pounds on Friday. By no
means all of it had been wanton
speculation by those famous—although
invisible and perhaps nonexistent—
gnomes of Zurich. On the contrary, much
of it had been a form of self-protection,
called hedging, by large international
corporations, many of them American,
that made short sales of sterling
equivalent to what they were due to be
paid in sterling weeks or months later.
The evidence of this was supplied by the
corporations themselves, some of them
being quick to assure their stockholders
that through their foresight they had
contrived to lose little or nothing on the
devaluation. International Telephone &
Telegraph, for example, announced on
Sunday that the devaluation would not
affect its 1967 earnings, because
“management anticipated the possibility
of devaluation for some time.”
International Harvester and Texas
Instruments reported that they had
protected themselves by making what
amounted to short sales of sterling. The
Singer Company said it might even have
accidentally made a profit on the deal.
Other American companies let it be
known that they had come out all right,
but declined to elaborate, on the ground
that if they revealed the methods they
had used they might be accused of taking
advantage of Britain in its extremity.
“Let’s just say we were smart” was the
way a spokesman for one company put
it. And perhaps that, if lacking in grace
and elegance, was fair enough. In the
jungle of international business, hedging
on a weak foreign currency is
considered a wholly legitimate use of
claws for self-defense. Selling short for
speculative purposes enjoys less
respectability, and it is interesting to
note that the ranks of those who
speculated against sterling on Friday,
and talked about it afterward, included
some who were far from Zurich. A group
of professional men in Youngstown,
Ohio—veteran stock-market players, but
never before international currency
plungers—decided on Friday that
sterling was about to be devalued, and
sold short seventy thousand pounds,
netting a profit of almost twenty-five
thousand dollars over the weekend. The
pounds sold had, of course, ultimately
been bought with dollars by the Bank of
England, thus adding a minuscule drop to
Britain’s reserve loss. Reading about the
little coup in the Wall Street Journal, to
which the group’s broker had reported it,
presumably with pride, I hoped the
apprentice gnomes of Youngstown had at
least grasped the implications of what
they were doing.
So much for Sunday and moral
speculation. On Monday, the financial
world, or most of it, went back to work,
and the devaluation began to be put to its
test. The test consisted of two questions.
Question One: Would the devaluation
accomplish its purpose for Britain—that
is, stimulate exports and reduce imports
sufficiently to cure the international
deficit and put an end to speculation
against the pound? Question Two: Would
it, as in 1931, be followed by a string of
competitive devaluations of other
currencies, leading ultimately to a
devaluation of the dollar in relation to
gold, worldwide monetary chaos, and
perhaps a world depression? I watched
the answers beginning to take shape.
On Monday, the banks and exchanges
in London remained firmly closed, by
government order, and all but a few
traders elsewhere avoided taking
positions in sterling in the Bank of
England’s absence from the market, so
the answer to the question of the pound’s
strength or weakness at its new valuation
was postponed; On Threadneedle and
Throgmorton Streets, crowds of brokers,
jobbers, and clerks milled around and
talked excitedly—but made no trades—
in a city where the Union Jack was
flying from all flagstaffs because it
happened to be the Queen’s wedding
anniversary. The New York stock market
opened sharply lower, then recovered.
(There was no really rational
explanation for the initial drop;
securities men pointed out that
devaluation just generally sounds
depressing.) By nightfall on Monday, it
had been announced that eleven other
currencies—those of Spain, Denmark,
Israel, Hong Kong, Malta, Guyana,
Malawi, Jamaica, Fiji, Bermuda, and
Ireland—were also being devalued.
That wasn’t so bad, because the
disruptive effect of a currency
devaluation is in direct proportion to the
importance of that currency in world
trade, and none of those currencies were
of great importance. The most ominous
move was Denmark’s, because Denmark
might easily be followed by its close
economic allies Norway, Sweden, and
the Netherlands, and that would be pretty
serious. Egypt, which was an instant
loser of thirty-eight million dollars on
pounds held in its reserves at the time of
devaluation, held firm, and so did
Kuwait, which lost eighteen million.
On Tuesday, the markets everywhere
were going full blast. The Bank of
England, back in business, set the new
trading limits of the pound at a floor of
$2.38 and a ceiling of $2.42, whereupon
the pound went straight to the ceiling,
like a balloon slipped from a child’s
hand, and stayed there all day; indeed,
for obscure reasons inapplicable to
balloons, it spent much of the day
slightly above the ceiling. Now, instead
of paying dollars for pounds, the Bank of
England was supplying pounds for
dollars, and thereby beginning the
process of rebuilding its reserves. I
called Waage to share what I thought
would be his jubilation, but found him
taking it all calmly. The pound’s
strength, he said, was “technical”—that
is, it was caused by the previous week’s
short sellers’ buying pounds back to cash
in their profits—and the first objective
test of the new pound would not come
until Friday. Seven more small
governments announced devaluations
during the day. In Malaysia, which had
devalued its old sterling-backed pound
but not its new dollar, based on gold,
and which continued to keep both
currencies in circulation, the injustice of
the situation led to riots, and over the
next two weeks more than twenty-seven
people were killed in them—the first
casualties of devaluation. Apart from
this painful reminder that the counters in
the engrossing game of international
finance are people’s livelihoods, and
even their lives, so far so good.
But on Wednesday the twenty-second
a less localized portent of trouble
appeared. The speculative attack that
had so long battered and at last crushed
the pound now turned, as everyone had
feared it might, on the dollar. As the one
nation that is committed to sell gold in
any quantity to the central bank of any
other nation at the fixed price of thirtyfive dollars an ounce, the United States
is the keystone of the world monetary
arch, and the gold in its Treasury—
which on that Wednesday amounted to
not quite thirteen billion dollars’ worth
—is the foundation. Federal Reserve
Board Chairman Martin had said
repeatedly that the United States would
under any condition continue to sell it on
demand, if necessary down to the last
bar. Despite this pledge, and despite
President Johnson’s reiteration of it
immediately after Britain’s devaluation,
speculators now began buying gold with
dollars in huge quantities, expressing the
same sort of skepticism toward official
assurances that was shown at about the
same time by New Yorkers who took to
accumulating and hoarding subway
tokens. Gold was suddenly in unusual
demand in Paris, Zurich, and other
financial centers, and most particularly
in London, the world’s leading gold
market, where people immediately
began to talk about the London Gold
Rush. The day’s orders for gold, which
some authorities estimated at over fifty
million dollars’ worth, seemed to come
in
from
everywhere—except,
presumably, from citizens of the United
States or Britain, who are forbidden by
law to buy or own monetary gold. And
who was to sell the stuff to these
invisible multitudes so suddenly
repossessed by the age-old lust for it?
Not the United States Treasury, which,
through the Federal Reserve, sold gold
only to central banks, and not other
central banks, which did not promise to
sell it at all. To fill this vacuum, still
another coöperative international group,
the London gold pool, had been
established in 1961. Provided by its
members—the United States, Britain,
Italy, the Netherlands, Switzerland, West
Germany, Belgium, and, originally,
France—with gold ingots in quantities
that might dazzle a Croesus (fifty-nine
per cent of the total coming from the
United States), the pool was intended to
quell money panics by supplying gold to
non-governmental buyers in any quantity
demanded, at a price effectively the
same as the Federal Reserve’s, and
thereby to protect the stability of the
dollar and the system.
And that is what the pool did on
Wednesday. Thursday, though, was much
worse, with the gold-buying frenzy in
both Paris and London breaking even the
records set during the Cuban missile
crisis of 1962, and many people, high
British and American officials among
them, became convinced of something
they had suspected from the first—that
the gold rush was part of a plot by
General de Gaulle and France to humble
first the pound and now the dollar. The
evidence, to be sure, was all
circumstantial, but it was persuasive. De
Gaulle and his Ministers had long been
on record as wishing to relegate the
pound and the dollar to international
roles far smaller than their current ones.
A suspicious amount of the gold buying,
even in London, was traceable to
France. On Monday evening, thirty-six
hours before the start of the gold rush,
France’s government had let slip,
through a press leak, that it intended to
withdraw from the gold pool (according
to subsequent information, France hadn’t
contributed anything to the pool since the
previous June anyhow), and the French
government was also accused of having
had a hand in spreading false rumors that
Belgium and Italy were about to
withdraw, too. And now it was coming
out, bit by bit, that in the days just before
the devaluation France had been by far
the most reluctant nation to join in
another credit package to rescue sterling,
and that, for good measure, France had
withheld until the very last minute its
assurance that it would maintain its own
exchange rate if Britain devalued. All in
all, there was a good case for the
allegation that de Gaulle & Co. had been
playing a mischievous part, and, whether
it was true or not, I couldn’t help feeling
that the accusations against them were
adding a good deal of spice to the
devaluation crisis—spice that would
become more piquant a few months later,
when the franc would be in dire straits,
and the United States forced by
circumstances to come to its aid.
Friday, in London, the pound spent
the whole day tight up against its ceiling,
and thus came through its first really
significant post-devaluation test with
colors flying. Only a few small
governments
had
announced
devaluations since Monday, and it was
now evident that Norway, Sweden, and
the Netherlands were going to hold firm.
But on the dollar front things looked
worse than ever. Friday’s gold buying in
London and Paris had far exceeded the
ON
previous day’s record, and estimates
were that gold sales in all markets over
the preceding three days added up to
something not far under the billiondollar
mark;
there
was
near
pandemonium all day in Johannesburg as
speculators scrambled to get their hands
on shares in gold-mining companies; and
all over Europe people were trading in
dollars not only for gold but for other
currencies as well. If the dollar was
hardly in the position that the pound had
occupied a week earlier, at least there
were
uncomfortable
parallels.
Subsequently, it was reported that in the
first days after devaluation the Federal
Reserve, so accustomed to lending
support to other currencies, had been
forced to borrow various foreign
currencies, amounting to almost two
billion dollars’ worth, in order to defend
its own.
Late Friday, having attended a
conference at which Waage was in an
unaccustomed
mood
of nervous
jocularity that made me nervous, too, I
left the Federal Reserve Bank half
believing that devaluation of the dollar
was going to be announced over the
weekend. Nothing of the sort happened;
on the contrary, the worst was
temporarily over. On Sunday, it was
announced
that
central-bank
representatives of the gold-pool
countries, Hayes and Coombs among
them, had met in Frankfurt and formally
agreed to continue maintaining the dollar
at its present gold-exchange rate with
their combined resources. This seemed
to remove any doubt that the dollar was
backed not only by the United States’
thirteen-billion-dollar gold hoard but
also by the additional fourteen billion
dollars’ worth of gold in the coffers of
Belgium, Britain, Italy, the Netherland,
Switzerland, and West Germany. The
speculators were apparently impressed.
On Monday, gold buying was much
lower in London and Zurich, continuing
at a record pace only in Paris—and this
in spite of a sulphurous press audience
granted that day by de Gaulle himself,
who, along with bemusing opinions on
various other matters, hazarded the view
that the trend of events was toward the
decline of the dollar’s international
importance. On Tuesday, gold sales
dropped sharply everywhere, even in
Paris. “A good day today,” Waage told
me on the phone that afternoon. “A better
day tomorrow, we hope.” On
Wednesday, the gold markets were back
to normal, but, as a result of the week’s
doings, the Treasury had lost some four
hundred and fifty tons of gold—almost
half a billion dollars’ worth—in
fulfilling its obligations to the gold pool
and meeting the demands of foreign
central banks.
Ten days after devaluation, everything
was quiet. But it was only a trough
between succeeding shock waves. From
December 8th to 18th, there came a new
spell of wild speculation against the
dollar, leaching another four hundred
tons or so of gold out of the pool; this,
like the previous wave, was eventually
calmed by reiterations on the part of the
United States and its gold-pool partners
of their determination to maintain the
status quo. By the end of the year, the
Treasury had lost almost a billion
dollars’ worth of gold since Britain’s
devaluation, reducing its gold stock to
below the twelve-billion-dollar mark
for the first time since 1937. President
Johnson’s balance-of-payments program,
announced January 1st, 1968 and based
chiefly on restrictions on American bank
lending and industrial investments
abroad, helped keep speculation down
for two months. But the gold rush was
not to be quelled so simply. All pledges
notwithstanding, it had powerful
economic and psychological forces
behind it. In a larger sense, it was an
expression of an age-old tendency to
distrust all paper currencies in times of
crisis, but more specifically it was the
long-feared
sequel
to
sterling
devaluation,
and—perhaps
most
specifically of all—it was a vote of no
confidence in the determination of the
United States to keep its economic
affairs in order, with particular
reference to a level of civilian
consumption beyond the dreams of
avarice at a time when ever-increasing
billions were being sent abroad to
support a war with no end in sight. The
money in which the world was supposed
to be putting its trust looked to the gold
speculators like that of the most reckless
and improvident spendthrift.
When they returned to the attack, on
February 29th—choosing that day for no
assignable reason except that a single
United States senator, Jacob Javits, had
just remarked, with either deadly
seriousness or casual indiscretion, that
he thought his country might do well to
suspend temporarily all gold payments
to foreign countries—it was with such
ferocity that the situation quickly got out
of hand. On March 1st, the gold pool
dispensed an estimated forty to fifty tons
in London (as against three or four tons
on a normal day); on March 5th and 6th,
forty tons per day; on March 8th, over
seventy-five tons; and on March 13th, a
total that could not be accurately
estimated but ran well over one hundred
tons. Meanwhile, the pound, which
could not possibly escape a further
devaluation if the dollar were to be
devalued in relation to gold, slipped
below its par of $2.40 for the first time.
Still another reiteration of the nowfamiliar pledges, this time from the
central-bankers’ club at Basel on March
10th, seemed to have no effect at all. The
market was in the classic state of chaos,
distrustful of every public assurance and
at the mercy of every passing rumor. A
leading Swiss banker grimly called the
situation “the most dangerous since
1931.” A member of the Basel club,
tempering desperation with charity, said
that the gold speculators apparently
didn’t realize their actions were
imperilling the world’s money. The New
York Times, in an editorial, said, “It is
quite clear that the international
payments system … is eroding.”
On Thursday, March 14th, panic was
added to chaos. London gold dealers, in
describing the day’s action, used the unBritish
words
“stampede,”
“catastrophe,” and “nightmare.” The
exact volume of gold sold that day was
unannounced, as usual—probably it
could not have been precisely counted,
in any case—but everyone agreed that it
had been an all-time record; most
estimates put the total at around two
hundred tons, or two hundred and twenty
million dollars’ worth, while the Wall
Street Journal put it twice that high. If
the former estimate was right, during the
trading day the United States Treasury
had paid out through its share of the gold
pool alone one million dollars in gold
every three minutes and forty-two
seconds; if the Journal figure was right
(as a subsequent Treasury announcement
made it appear to be), a million every
one minute and fifty-one seconds.
Clearly, this wouldn’t do. Like Britain in
1964, at this rate the United States
would have a bare cupboard in a matter
of days. That afternoon, the Federal
Reserve System raised its discount rate
from four and a half to five per cent—a
defensive measure so timid and
inadequate that one New York banker
compared it to a popgun, and the Federal
Reserve Bank of New York, as the
System’s foreign-exchange arm, was
moved to protest by refusing to go along
with the token raise. Late in the day in
New York, and toward midnight in
London, the United States asked Britain
to keep the gold market closed the next
day, Friday, to prevent further
catastrophe and clear the way to the
weekend,
when
face-to-face
international consultations could be
held. The bewildered American public,
largely unaware of the gold pool’s
existence, probably first sensed the
general shape of things when it learned
on Friday morning that Queen Elizabeth
II had met with her Ministers on the
crisis between midnight and 1 A.M.
On Friday, a day of nervous waiting,
the London markets were closed, and so
were foreign-exchange desks nearly
everywhere else, but gold shot up to a
big premium in the Paris market—a sort
of black market, from the American
standpoint—and in New York sterling,
unsupported by the firmly locked Bank
of England, briefly fell below its official
bottom price of $2.38 before rallying.
Over the weekend, the central bankers of
the gold-pool nations (the United States,
Britain, West Germany, Switzerland,
Italy, the Netherlands, and Belgium, with
France still conspicuously missing and,
indeed, uninvited this time) met in
Washington, with Coombs participating
for the Federal Reserve along with
Chairman Martin. After two full days of
rigidly secret discussions, while the
world of money waited with bated
breath, they announced their decisions
late on Sunday afternoon. The thirtyfive-dollar-an-ounce official monetary
price of gold would be kept for use in
all dealings among central banks; the
gold pool would be disbanded, and the
central banks would supply no more
gold to the London market, where
privately traded gold would be allowed
to find its own price; sanctions would be
taken against any central bank seeking to
profit from the price differential
between the central-bank price and the
free-market price; and the London gold
market would remain closed for a
couple of weeks, until the dust settled.
During the first few market days under
the new arrangements, the pound rallied
strongly, and the free-market price of
gold settled at between two and five
dollars above the central-bank price—a
differential considerably smaller than
many had expected.
The crisis had passed, or that crisis
had.
The
dollar
had
escaped
devaluation, and the international
monetary mechanism was intact. Nor
was the solution a particularly radical
one; after all, gold had been on a twoprice basis in 1960, before the gold pool
had been formed. But the solution was a
temporary, stopgap one, and the curtain
was not down on the drama yet. Like
Hamlet’s ghost, the pound, which had
started the action, was offstage now. The
principal actors onstage as summer
approached were the Federal Reserve
and the United States Treasury, doing
what they could in a technical way to
keep things on an even keel; the
Congress, complacent with prosperity,
preoccupied with coming elections, and
therefore resistant to higher taxes and
other
uncomfortable
retrenching
measures (on the very afternoon of the
London panic, the Senate Finance
Committee had voted down an incometax surcharge); and, finally, the
President, calling for “a program of
national austerity” to defend the dollar,
yet at the same time carrying on at everincreasing expense the Vietnam war,
which had become as menacing to the
health of America’s money as, in the
view of many, it was to that of
America’s soul. Ultimately, it appeared,
the nation had just three possible
economic courses: to somehow end the
Vietnam war, root of the payments
problem and therefore heart of the
matter; to adopt a full wartime economy,
with sky-high taxes, wage and price
controls, and perhaps rationing; or to
face forced devaluation of the dollar and
perhaps a depression-breeding world
monetary mess.
Looking beyond the Vietnam war and
its incredibly broad worldwide
monetary implications, the central
bankers went on plugging away. Two
weeks after the stopgap solution of the
dollar crisis, those of the ten most
powerful industrial countries met in
Stockholm and agreed, with only France
dissenting, on the gradual creation of a
new international monetary unit to
supplement gold as the bedrock
underlying all currencies. It will consist
(if action follows on resolution) of
special drawing rights on the
International Monetary Fund, available
to nations in proportion to their existing
reserve holdings. In bankers’ jargon the
rights will be called S.D.R.’s; in popular
jargon they were at once called paper
gold. The success of the plan in
achieving its ends—averting dollar
devaluation, overcoming the world
shortage of monetary gold, and thus
postponing indefinitely the threatened
mess—will depend on whether or not
men and nations can somehow at last, in
a triumph of reason, achieve what they
have failed to achieve in almost four
centuries of paper money: that is, to
overcome one of the oldest and least
rational of human traits, the lust for the
look and feel of gold itself, and come to
give truly equal value to a pledge
written on a piece of paper. The answer
to that question will come in the last act,
and the outlook for a happy ending is not
bright.
the last act was beginning to unfold—
after the sterling devaluation but before
the gold panic—I went down to Liberty
Street and saw Coombs and Hayes. I
found Coombs looking bone-tired but not
sounding disheartened about three years
AS
spent largely in a losing cause. “I don’t
see the fight for the pound as all having
been in vain,” he said. “We gained those
three years, and during that time the
British put through a lot of internal
measures to strengthen themselves. If
they’d been forced to devalue in 1964,
there’s a good chance that wage-andprice inflation would have eaten up any
benefit they derived and put them back in
the same old box. Also, over those three
years there have been further gains in
international monetary coöperation.
Goodness knows what would have
happened to the whole system with
devaluation in 1964. Without that threeyear international effort—that rearguard
action, you might say—sterling might
have collapsed in much greater disorder,
with far more damaging repercussions
than we’ve seen even now. Remember
that, after all, our effort and the effort of
the other central-banks wasn’t to hold up
sterling for its own sake. It was to hold
it up for the sake of preserving the
system. And the system has survived.”
Hayes, on the surface, seemed exactly
as he had when I last saw him, a year
and a half earlier—as placid and
unruffled as if he had been spending all
that time studying up on Corfu. I asked
him whether he was still living up to his
principle of keeping bankers’ hours, and
he replied, smiling very slightly, that the
principle had long since yielded to
expediency—that, as a time consumer,
the 1967 sterling crisis had made the
1964 crisis seem like child’s play, and
that the subsequent dollar crisis was
turning out to be more of the same. A
side benefit of the whole three-and-ahalf-year affair, he said, was that its
frequently excruciating melodrama had
contributed something to Mrs. Hayes’
interest in banking, and even something,
if not so much, to the position of
business in Tom’s scale of values.
When Hayes spoke of the devaluation,
however, I saw that his placidity was a
mask. “Oh, I was disappointed, all
right,” he said quietly. “After all, we
worked like the devil to prevent it. And
we nearly did. In my opinion, Britain
could have got enough assistance from
abroad to hold the rate. It could have
been done without France. Britain chose
to devalue. I think there’s a good chance
that the devaluation will eventually be a
success. And the gain for international
coöperation is beyond question. Charlie
Coombs and I could feel that at Frankfurt
in November, at the gold-pool meeting—
a sense everyone there had that now is
the time to lock arms. But still …”
Hayes paused, and when he spoke again
his voice was full of such quiet force
that I saw the devaluation through his
eyes—not as just a severe professional
reverse but as an ideal lost and an idol
fallen. He said, “That day in November,
here at the bank, when a courier brought
me the top-secret British document
informing us of the decision to devalue, I
felt physically sick. Sterling would not
be the same. It would never again
command the same amount of faith
around the world.”
Index
B. Dick Company, 145, 146, 147
dan refinery, 271
ount number, taxpayer, 90
ian H. Muller & Son, 245
on Beacon Journal, 304, 307
ska, 272
ed Crude Vegetable Oil & Refining Co.,
178, 179, 181
s-Chalmers Mfg. Co., 217, 218
erican Bar Association, 312; taxation
section of, 112
erican Broadcasting Company, 156
erican Education Publications, 156, 165
erican Law Institute, 303
erican Photocopy Co., 148
erican Potash & Chemical Corp., 312
erican Public
Harriss), 78
Finance
(Schultz
&
erican Scholar, 162, 164
erican Society of Corporate Secretaries,
278
erican Telephone and Telegraph Co., 8, 9,
15–28, 278; contributions by, 154;
stockholders’ meeting, 279–285
erican Way in Taxation, The (Doris, ed.),
92
-Intellectualism in
(Hofstadter), 108
American
Life
i-Trust Division, Department of Justice,
268
hitecture, 315
in, Frances, 282, 284
old, Fortas & Porter, 94
ow Stores, 243
hur Young and Co., 291
rink, Per, 358
or, John Jacob, 119
ntic Monthly, 11
mic Energy Commission, 250
pulgus Minerals & Chemicals Corp., 256,
257, 258
hincloss, Louis, 80
tralia, income tax in, 82
tria, bank failure in, 338
omobile dealers, 44, 71
omotive News, 60, 65
hors League of America, 109, 163
F. Goodrich Co., 297, 304, 306, 310
ehot, Walter, 317, 345
ley, Herbert S., Jr., 163
ance of payments, 319, 322
dwin-Lima-Hamilton, 223
k failures, domino principle of, 338
k of International Settlements, 328, 329,
332, 364, 365
k of Austria, 338
k of Belgium, 362
k of England, 194, 316, 320–326, 333–
375, 380
k of France, 316, 332, 360
k rate (Britain), 334, 335, 343, 347, 376,
377
Association of the City of New York, 312
ing, Sir Evelyn, 342
ing, George R. S. (see Cromer, 3rd Earl
of)
ing Brothers (London), 357
rett, Emerson P., 302
ron’s, 156
el, Switzerland, 329, 332, 333, 334
ic Systems, 156
elle Memorial Institute, 150–153, 168
elon, David T., 78
r raids, 227, 328
ker, Horace W., 169, 170
gium, tax collecting in, 88
l Telephone Co., 268
le, A. A., 276, 277, 285
ks, Robert A., 201, 202
-rigging, 200
Business: A New Era (Lilienthal), 251,
267, 269
hop, Robert M., 177, 180–184, 187, 191
ck, Eugene R., 255
ck Thursday, N.Y. Stock Exchange, 18
ssing, Karl, 358, 361
me, Neil L., 52
rd of Trade (Chicago), 178
sal, Dudley J., 120, 132, 136–144
wers Stores, 243
dford, E. W., 238
nd, Martha, 291
ech, Ernest R., 27, 30, 32, 41, 53, 54
tton Woods agreement, 320, 322, 329, 340
dge, Roy A. O., 324
mberger, Allen, 265
mberger, Daniel, 265
mberger, Nancy, 265
mberger, Sylvain, 265, 266
wn, George, 326, 335, 342
wn, Roy A., 30, 32, 43, 52, 56, 63, 68, 73
net, Jacques, 358
sati, Louis A., 287, 288
kingham, Doolittle & Burroughs, 306
ch, John C, 246
eau of Applied Social
Columbia University, 35
Research,
ens, George E., 213, 217, 218, 219
ke, Clarence E., 217, 218
iness Week, 68, 278
laghan, James, 326, 335, 342, 345, 374,
375
mpbell, Alexander, 210
ada:
Currency credit to,
347;
tax
collecting in, 88
adian Institute of Mining and Metallurgy,
130
adian Shield, 121
ital gains, 96, 101, 103; taxes on, 86, 87,
102
lin, Mortimer M., 88–97
bon paper, early use of, 147
li, Guido, 358
lson, Chester F., 150, 151, 153, 168
rier Corporation, 255
y, William L., 197
cade Pictures, 46
e, Josephine Young, 292
ca Valley (Colombia), 250, 267
tral banking, 330, 331, 332
lon, expenditure tax in, 115
mpion, George, 187
ritable contributions, as tax deduction,
110
ritable foundations, tax exemptions on,
109
ryk, Joseph V., 295
se Manhattan Bank, 186, 187, 192, 193,
315
noweth, Richard A., 306, 307
le, 272
ysler Corporation, 149
rchill, Winston, 338
pp, Gordon R., 250, 270, 271
rk, Harold E., 167, 168
yton, Richard H., 122–139, 143, 144
yton Antitrust Act (1914), 201
veland, Grover, 84
veland Plan of charitable contribution,
154
tes, Francis G., 131–136, 140–143
an, George M., 105
an rule, 105, 108
en, Sheldon S., 91–97
lier’s, 255
ombia, 250, 267, 272
umbia University, 35
mmerce Clearing House, 107
mmodity futures, 178
mmunication, problem of, 199–223
mmunications Satellite Corp., 278, 293
mmunist countries, income tax in, 88
mmunity property laws, 116
duct and Complaints Department N.Y.
Stock Exchange, 189
e, Fairfax M., 43, 44
fusion of Confusions (De la Vega), 2
solidated Edison, 278
sumer Reports, 58, 59, 66
sumers Union, 60
tinental central banks, 364
tinental Illinois National Bank & Trust
Co., 189, 190, 191
ke, Morris, 267
mbs, Charles A., 319, 323, 326, 328,
332–334, 341–354, 359, 361–372, 383,
386, 388
eland, Robert F. G., 48
iers, as opposed to duplicators, 147
py” as “counterfeit,” 146
yright laws, 163, 164
diner, Ralph J., 208, 210, 211, 215, 219,
221, 222, 223
ner, game of, 224–248
porate pension plans, 103
porations, income taxes on, 86
le, Frank J., 176, 177, 180, 189
nley, John J., 18
wford, David M., 131–139, 143, 144
ditanstalt (Bank of Austria), 338
mer, 3rd Earl of, 324, 332, 335, 342–343,
357–361, 364–366, 373
oks, Richard M., 182, 183, 184, 198
soe, Lewis D., 28
rency devaluation, 321
rency weakness, 321
tis Publishing Co., 126
zon, Lord, 271
las, Alexander J., 83
ke, Kenneth, 122–139
ius, King of Persia, 270
is, Evelyn, 282–284, 290–295
Angelis, Anthony, 179
la Vega, Joseph, 2, 3, 4, 5, 6, 7, 8, 11, 13,
15, 22, 24
letion allowance on petroleum, 86, 96,
103, 104
reciation, as tax deduction, 103
sauer, John H., 165, 166, 167
roit Free Press, 58
tsche Bundesbank, 361, 364, 365
aluation, 321, 322; of pound sterling,
374, 376; by various countries, 379–380
elopment & Resources Corp., 250, 267–
275
l-A-Matic Autostat, 148
mond, Walter H., 88
k, C. Matthews, Jr., 146
k mimeograph, 148
on, Douglas, 341, 342, 347, 362
count rate, Federal Reserve System, 385
idends, withholding of taxes on, 96
lars: gold exchangeability of, 320, 323;
weakening of, 347, 382–388
is, Lillian, 92
uglas, Paul H., 117
w-Jones average, 2
w-Jones News Service, 4, 13, 14, 15, 134
yle, Arthur W., 311
yle, J. C. (Larry), 45, 48, 61–64, 69, 72,
73
w, Daniel, 119
yfus & Co., 18
yfus Fund, 18
writing, 152
ch Cookie Machine Co., 303
licators, as opposed to copiers, 147
Pont de Nemours & Co., E.I., 312
Pont, Homsey & Co., 185
. Hutton & Co., 132
duPont de Nemours & Co., 312
L. Bruce Company, 224
tman Kodak, 148, 150
rstadt, Ferdinand, 260
ehaj, Abolhassen, 270
nomist, 365, 367, 373
ar Brothers, 258
son Mimeograph, 147
son, Thomas A., 145
el automobile, 26–75
er, Carl, 299, 300, 302, 306
enstein, Louis, 113
ctrical-manufacturing industry,
fixing and bid-rigging in, 200
price-
ctrophotography, 150
s, Ridsdale, 309
ertainment deductions, 104, 105, 106, 107
en, Henry V. B., 207–211, 221
C: A Review of General Semantics, 65
odollars, 192
opean countries, income tax in, 82
ise taxes, 114
enditure tax, 115
pense Accounts 1963,” 107
ort-Import Bank loan, 347, 348, 349, 352
berstadt & Co., 257
man, Francis, 207, 208
-use doctrine, 164
eral income tax, 76–117
eral lotteries, 114
eral Pacific Electric Co., 217
eral Reserve Act, 347
eral Reserve Bank, 329, 341
eral Reserve Bank of New York, 314, 315
eral Reserve Board, 316, 329
eral Reserve standby credit, 347
eral Reserve System, 316; discount rate,
385
fer, Jules, 222
er, Max, 299, 301
ancial Committee of League of Nations,
329
t National City Bank, 186
or specialists, N.Y. Stock Exchange, 16
arty, Charles F., 122–138
delectric, 248
l’s gold, 121
te, Cone & Belding, 40, 42, 43, 59, 71
bes, Harland C., 278
d, Henry, II, 27, 30, 32, 41, 51, 54, 63
d Foundation, 67
d Motor Company, 26–75
d Motor Company, Ltd. (England), 73
eign Tax & Trade Briefs, 88
tune, 149, 153, 203
ward Product Planning Committee, Ford
Motor Co., 28
nce: income tax in, 81, 82; tax collecting
in, 88; value added tax in, 114
nk, Walter N., 187
ston, G. Keith, 181, 185–188, 191, 194–
198
loway, Wayne, 300, 306
ey, J. Cullen, 202–205, 213, 217, 223
eral Electric Co., 203–207, 212–214,
217, 221, 222, 278, 279, 286–289
eral Foods, 72
many: bank failure in, 338; revaluation of
currency in (1961), 322; value added tax
in, 114
on, L. B., 213, 214, 219
na, 250, 272
s, taxes on, 109
bert, John, 290
bert, Lewis D., 280–282, 290–295
espie, S. Hazard, 142, 143
n, William S., 207–212, 215, 219, 221,
223
d, 317, 337; in exchange for dollars, 320,
323, 381
d-exchange standard, 339–340
d pool, London, 381–386
d standard: abandoned in U.S., 339;
adoption of by European countries, 338;
in Great Britain, 337
dman, Sachs & Co., 192
odrich Co. (see B.F. Goodrich Co.)
odrich v. Wohlgemuth, 304, 305
e, Albert, 117
phite, 121
at Ascent, The (Heilbroner), 12
at Britain: balance of payments of, 319,
372; bank rate of, 334, 335, 376, 377;
gold standard in, 337; income tax in, 81,
82; introduction of xerography in, 170;
raising of interest rates in, 325; sterling
crisis in, 315–389; tax collecting in, 88;
tax law of, 103
at Treasury Raid, The (Stern), 117
eater Tax Savings—A
Approach,” 110
ene, Nathan, 260, 264, 265
enewalt, Crawford, 263
gory, Seth, 256, 257
misegger, H. Fred, 134, 142
oid Co., 150, 152
Constructive
oid Xerox, Inc., 149, 153
court, Brace & World, 162
ding, Bertrand M., 91
lem Railway, 228
riss, C. Lowell, 78
t, Philip A., 205, 212
vard Business Review, 278, 281, 286
vey, Frank H., 305, 308, 310, 311
pt & Co. (see Ira Haupt & Co.)
akawa, S.I., 65
es, Alfred, 319, 323–326, 328, 341–370,
383, 388, 389
d taxes, 80
rt of Japan, The (Campbell), 210
lbroner, Robert L., 12
lerstein, Jerome, 85, 95, 102, 107
ry Anspacher & Co. (London), 189, 194
tschel, H. Frank, 217, 218
kenlooper, Bourke, 253
ton, Longstreet, 135, 140–142
stadter, Richard, 108
mes, Oliver Wendell, 303
trop, Marius W., 362, 364
yk, Walter, 122–126, 130, 133, 136, 138
use Judiciary Committee, 164
vde, Frederick L., 287
ologies of Taxation, The (Eisenstein), 113
a, 255; devaluation of rupee in, 322;
expenditure tax in, 115; income tax in,
82
us River, 255
aham, Joseph C., 57
nction, origin of, 305–306
ome tax, 80–82; avoidance of, 100; in
Communist countries, 88; in Florence
(15th century), 80; in various countries,
88
ome-tax law, 97
de information, legitimate use of, 118–144
der Trading and the Stock Market
(Manne), 120
llectual work, and taxes, 108
rdict, defined, 306
rest, withholding of taxes on, 96
rest rates, 316, 325
rnal Revenue Code: (1954), 79, 96, 98;
(1964), 100, 101, 102, 108, 113;
complexity of, 111
rnal Revenue Service,
taxpayer education, 112
89–97;
and
rnational Business Machines, 8, 9, 14, 18,
152
rnational Harvester, 378
rnational Latex Corp., 298, 299, 301,
306–311
rnational Monetary Fund, 322, 324–325,
329, 330; members of, 328; special
drawing rights on (S.D.R.), 387
rnational Telephone & Telegraph, 378
Haupt & Co., 176–189
, 250, 270, 274
y, 250, 272, 347
E Circuit Breaker Co., 213, 217
y Coast, 250–251, 272
. Williston & Beane, 177, 179, 181, 182,
185
an, income tax in, 82
ts, Jacob, 384
erson, Thomas, 260
r, R. G., 302, 306–308, 311–313
n Birch Society, 155
nson, Lyndon B., 80, 197, 381, 384
ge, J. Emmet, 48, 49, 50
ser, Henry J., 29
dor, Nicholas, 115
merman, Morton, 176–180, 183
pel, Frederick R., 278, 280–285
p, Irwin, 163
hmir, 255
doozle stores, 247, 248
auver, Estes, 200, 207, 210, 214, 216,
218, 221–223
auver Subcommittee, 205
namer, Frank E., Jr., 136, 142
nedy, John F., 3, 80, 104, 105, 177
nes, John M., 339
zistan, 250, 270–274
d-55 segment, 121–136
inwort, Benson, Ltd., 189, 192, 194
nei, Otto, 150, 151
fve, Richard, 28–74
isler, Charles, 46, 63
Branche, George M. L., Jr., 15, 16, 17, 18
Branche and Wood & Co., 15
Rochefoucauld, François, 146
mont, Thomas S., 128, 133, 135, 136, 140–
143
ker, Albert, 255
ser Tax Institute, 107
ex (see International Latex Corp.)
ard Frères & Co., 254–257, 269, 272, 275
gue of Nations, Financial Committee of,
329
er Brothers, 72
y, Gustave L., 192, 193, 194
raries, photocopying activities of, 161
enthal, David, Jr., 266
enthal, David E., 249–275
enthal, Helen Lamb, 252, 253, 254
owitz, Sol M., 151, 152, 165, 171, 172,
175
ermore, Jesse L., 231–235
yd George, David, 338
ke, John, 147
don gold pool, 381–386
don Times, 334, 336, 341, 365
g, L. W., 218
pholes, tax, 100, 104, 116
is XIV, King, 81
cheon Club (N. Y. Stock Exchange), 132
Cahill, Tom, 58
Carthy, Eugene J., 117
Colough, C. Peter, 172, 173
Cormack, James, 293, 294, 295
Keen, John E., 289
Kellar, Kenneth D., 251
Luhan, Marshall, 162, 164
Namara, Robert S., 72
gnavox Corp., 157
honey, James P., 196, 197
stre, Joseph de, 97
nne, Henry G., 120
nufacturers Hanover Trust Co., 186–187
gin calls, N. Y. Stock Exchange, 9, 10
tin, William McChesney, 341, 342, 347,
362, 381, 396
tinsburg Monster, 91
udling, Reginald, 345
xims (La Rochefoucauld), 146
chanix Illustrated, 58
kong Valley, 275
mphis Commercial Appeal, 238, 242, 243
rill, Lynch, Pierce, Fenner & Smith, 6, 7,
15, 141, 182
yer, André, 254, 256, 260, 269, 272
meograph machine, 145
meographing, early use of, 147
erals & Chemicals Corporation of
America, 251, 256, 259
erals & Chemicals Philipp Corp., 256
erals Separation North American Corp.,
256, 258
nesota Mining & Manufacturing Co., 148
lison, Richard D., 122–138
rgan, Arthur, 268
rgan, J. P., 1
rgan Guaranty Trust Co., 135, 186
rgan Library, 39
rgenthau, Henry, Jr., 115
ore, Marianne, 39, 40, 41
hner, Samuel, 6
or Trend, 58
laney, Thomas E., 191
nicipal Art Society of New York, 315
ray, Arthur, 303
ual funds, 23; selling by, 10
dal, Gunnar, 336
ce, James J., 64, 65
ional Automobile Dealers Association, 71
ional Broadcasting Co., 291
ional Education Association, 163
ional State Bank of Newark, 189
herlands, revaluation of currency in
(1961), 322
w Republic, 202
w York Herald Tribune, 128, 129
w York Produce Exchange, 178, 181
w York Public Library, 161
w York Stock Exchange, 1–25, 176–198
w York Times, 12, 57, 128, 129, 183, 197,
230, 241, 250, 385
w York University Law School, tax
department of, 112
w Yorker, 39
w Zealand, income tax in, 82
wman, George H., 177
thern Miner, The (Canada), 128, 130,
131, 132, 141
thern Pacific Railway, 228
Brien, Sir Leslie, 373
ce reproducing machines, 147, 149
set printing press, 147
ver, John, 270
mstead, Fred, 58
e-per-cent program,”
contributions, 154
of
n Market Committee, 347, 348
rcopying, 160
charitable
. Mallory & Co., 150
e, Jerry, 219, 220
istan, 255
er gold, 387
ton, Robert, 206–215, 219–223
l, Sir Robert, 82
sonal holding companies, 103
er & Co., 289
se-of-the-moon formula, 218
ippines, 272
lippe, Gerald L., 278, 286–289
tostats, early use of, 147
gly Wiggly Stores, 225, 229, 230, 235,
236, 238
ytex Golden Girdle, 306, 307
mley, H. Ladd, 19
nd sterling, 314–389; bourse rates of,
345; departure of from gold standard,
322; devaluation of, 336, 340, 374, 376;
origination of, 337; symbolic importance
of, 336
wers, John J.Jr., 290
wers of Attorney (Auchincloss), 80
ntice-Hall, Inc., 91
e-fixing, 200, 201
fessional stockholders, 280–296
nceton University Press, 163
cter & Gamble, 149
fessional athletes, and taxes, 109
rto Rico, 251, 272
tes, 121
io Corporation of America, 149, 255;
charitable contributions by,
stockholders’ meeting, 290–291
154;
ulations of tax law, 95
tatement of the Law of Torts, 303
tricted stock option, 87
enue Act (1964), 98, 104
olving credits, 329
de Island, colonial revenue system of, 83
he, Thomas J., 344, 349
hester, New York, 171
hester Community Chest, 154
o, Charles J., 11
sa, Robert, 341, 342, 347, 348, 362
sevelt, Theodore, 201
hschild, Nathan, 119
e 10B-5, of S.E.C., 119, 120, 139, 141
kin, John, 146
n, Allan A., 228
n, Thomas Fortune, 228, 229
aphet & Co., Ltd., 189, 194
noff, David, 291, 292
noff, Robert W., 291
urday Review, 163
nders, Clarence, 226, 229–238, 240–248
on, O. Glenn, Jr., 278, 281, 286
lesinger, Arthur M., Jr., 95
ultz, William J., 78
wegler, Walter, 358
tt, Max, 213
tt, Walter D., 291
urities and Exchange Commission, 120,
136–143, 177, 232, 240, 241
urities Exchange Act (1934), 119, 120
urity analysis, antiperistasis system of, 22
enium, 168, 169
gman, Edwin R. A., 81, 87
ing short, 227, 328
mour, Walton, 270
pard, Leonard, 299
rman, John, 84
rman Antitrust Act (1890), 84, 201
ling, introduction of, 337
rt selling, 227, 328
er, 337
ger Co., 378
eenth Amendment, U.S. Constitution, 85
th, Raymond W., 214–217, 220
e Owner stores, 247
e Owner Tigers football team, 247
s, Wilma, 280–287, 292–295
cial drawing rights (S.D.R.),
International Monetary Fund, 387
on
cial-interest provisions of U.S. tax law
(see Loopholes)
noff, 257
ndard Oil of New Jersey, 8, 18
e and municipal bonds, tax exemptions on,
100
istics of Income (I.R.S.), 99
hlik, Frank E., 212–219
phens, Claude O., 124, 128–138
n, Philip M., 117
ck crash (1962), 2, 4
ck market fluctuations, 1–24
ck-option provision, 101
ck options, 103
ck traders, 120
ckholder meetings, 276–296
z Motor Co., 228–229
ing, of automobiles, 30
z crisis (1956), 329
phides, 121
day Times (London), 374
skind, David, 101
ap network, 329, 330, 372–373
tzerland, banking laws of, 327
ope, Gerard, 219
A. (Tennessee Valley Authority), 250, 268
A.: Democracy on the March (Lilienthal),
251
e delays, on N. Y. Stock Exchange, 5
advice, 112
rates, 79
-checking, automation of, 91
deductions, 104–107
-free foundations, 103
x home,” 106
laws, 95
payer’s account number, 90
ecopier, 157
ritorial Enterprise, 83
as Gulf Sulphur Co., 120, 121, 123–140
rmo-Fax machine, 148
s I Do Believe (Lilienthal), 251
e Magazine, 68
mins, Ontario, 121
onto Daily Star, 128
ns World Airlines, 72
vel deductions, 104, 105, 106
asury Department, 117
sts, and taxes, 111
ain, Mark, 83
ewriter, early use of, 147
de secrets, 302–312
de secrets (Ellis), 309
ted Nations, support of by Xerox, 155
ted States: abandonment of gold standard
by, 339; Army Corps of Engineers, 272;
gold base in, 381; gold supply in, 381;
tax collecting in, 88; weakening of
dollar in, 347, 382–388
ted States Steel Corp., 18, 149, 279
ted Stores, 229
versity Microfilms, 156, 162, 165
versity of Rochester, 152, 153, 154, 171
r taxes, 114
ue-added tax, 114
derbilt, Cornelius, 228
fax machine, 148
nam, 275
son, Arthur F., 214–220
untary compliance in taxation, 92–95
rduin, W. L., 270, 271
age, Thomas Olaf, 365–366, 368, 373,
376–377, 380, 383
gner, Wieland, 132
l Street Journal, 64, 68, 69, 195, 203,
379, 385
lace, David, 34–42, 62–73
lis, W. Allen, 171
ston & Co., 182
nock, C. Gayle, 47, 48, 51–54, 62, 72, 74
ren, Earl, 223
son, Russell, 195
ts, Henry M., Jr., 181, 186, 187, 191
ch, Leo D., 293, 295
tinghouse Electric Co., 4, 203, 204, 217
erry, Joe H., 58
tney, Richard, 18, 203
liam Brandt’s Sons & Co., Ltd., 189, 193,
194
liston & Beane (see J. R. Williston &
Beane)
lkie, Wendell L., 249
son, Harold, 324, 334, 335, 342, 372,
374, 375, 377
son, Joseph C., Jr., 149–156, 164–166,
170–175
son, Joseph C., Sr., 150
hholding tax, 96
teveen, J. W., 364
hlgemuth, Donald W., 297–313
ld Bank, 255, 329
ography,
148–152;
copyright
infringements by, 161; introduced in
Great Britain, 170; and offset press, 163;
problems of, 160; use of selenium in,
168; uses of, 159
roX” (trademark), 153
ox Copyflo, 157
ox Corp., 145–175; community’s attitude
toward, 171; donations to educational
and charitable institutions by, 154;
United Nations support by, 155
ox 813 copy machine, 157
ox LDX, 157
ox 914 copy machine, 157, 158, 159, 169,
170
ox 2400 copymachine, 157
ur Federal Income Tax,” 89
ur Income Tax,” 107
on, 272
All rights reserved, including without limitation the right
to reproduce this ebook or any portion thereof in any
form or by any means, whether electronic or
mechanical, now known or hereinafter invented,
without the express written permission of the publisher.
Copyright © 1959, 1960, 1961, 1962, 1963, 1964, 1965,
1966, 1967, 1968, 1969 by John Brooks
All of the material in this book has appeared in the
New Yorker in slightly different form.
Cover design by Andrea Worthington
ISBN: 978-1-4976-4019-1
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