Chapter 1 The Fluctuation
THE STOCK MARKET—the daytime adventure serial of thewell-to-do—would not be the stock market if it did not have itsups and downs. Any board-room sitter with a taste for WallStreet lore has heard of the retort that J. P. Morgan the Elderis supposed to have made to a na?ve acquaintance who hadventured to ask the great man what the market was going todo. “It will fluctuate,” replied Morgan dryly. And it has manyother distinctive characteristics. Apart from the economicadvantages and disadvantages of stock exchanges—theadvantage that they provide a free flow of capital to financeindustrial expansion, for instance, and the disadvantage thatthey provide an all too convenient way for the unlucky, theimprudent, and the gullible to lose their money—theirdevelopment has created a whole pattern of social behavior,complete with customs, language, and predictable responses togiven events. What is truly extraordinary is the speed withwhich this pattern emerged full blown following theestablishment, in 1611, of the world’s first important stockexchange—a roofless courtyard in Amsterdam—and the degreeto which it persists (with variations, it is true) on the NewYork Stock Exchange in the nineteen-sixties. Present-day stocktrading in the United States—a bewilderingly vast enterprise,involving millions of miles of private telegraph wires, computersthat can read and copy the Manhattan Telephone Directory inthree minutes, and over twenty million stockholderparticipants—would seem to be a far cry from a handful ofseventeenth-century Dutchmen haggling in the rain. But the fieldmarks are much the same. The first stock exchange was,inadvertently, a laboratory in which new human reactions wererevealed. By the same token, the New York Stock Exchange isalso a sociological test tube, forever contributing to the humanspecies’ self-understanding.
The behavior of the pioneering Dutch stock traders is ablydocumented in a book entitled “Confusion of Confusions,”
written by a plunger on the Amsterdam market named Josephde la Vega; originally published in 1688, it was reprinted inEnglish translation a few years ago by the Harvard BusinessSchool. As for the behavior of present-day American investorsand brokers—whose traits, like those of all stock traders, areexaggerated in times of crisis—it may be clearly revealedthrough a consideration of their activities during the last weekof May, 1962, a time when the stock market fluctuated in astartling way. On Monday, May 28th, the Dow-Jones averageof thirty leading industrial stocks, which has been computedevery trading day since 1897, dropped 34.95 points, or morethan it had dropped on any other day except October 28,1929, when the loss was 38.33 points. The volume of tradingon May 28th was 9,350,000 shares—the seventh-largestone-day turnover in Stock Exchange history. On Tuesday, May29th, after an alarming morning when most stocks sank farbelow their Monday-afternoon closing prices, the marketsuddenly changed direction, charged upward with astonishingvigor, and finished the day with a large, though notrecord-breaking, Dow-Jones gain of 27.03 points. Tuesday’srecord, or near record, was in trading volume; the 14,750,000shares that changed hands added up to the greatest one-daytotal ever except for October 29, 1929, when trading ran justover sixteen million shares. (Later in the sixties, ten, twelve, andeven fourteen-million share days became commonplace; the1929 volume record was finally broken on April 1st, 1968, andfresh records were set again and again in the next fewmonths.) Then, on Thursday, May 31st, after a Wednesdayholiday in observance of Memorial Day, the cycle wascompleted; on a volume of 10,710,000 shares, the fifth-greatestin history, the Dow-Jones average gained 9.40 points, leaving itslightly above the level where it had been before all theexcitement began.
The crisis ran its course in three days, but, needless to say,the post-mortems took longer. One of de la Vega’s observationsabout the Amsterdam traders was that they were “very cleverin inventing reasons” for a sudden rise or fall in stock prices,and the Wall Street pundits certainly needed all the clevernessthey could muster to explain why, in the middle of an excellentbusiness year, the market had suddenly taken its second-worstnose dive ever up to that moment. Beyond theseexplanations—among which President Kennedy’s April crackdownon the steel industry’s planned price increase ranked high—itwas inevitable that the postmortems should often compare May,1962, with October, 1929. The figures for price movement andtrading volume alone would have forced the parallel, even if theworst panic days of the two months—the twenty-eighth and thetwenty-ninth—had not mysteriously and, to some people,ominously coincided. But it was generally conceded that thecontrasts were more persuasive than the similarities. Between1929 and 1962, regulation of trading practices and limitationson the amount of credit extended to customers for thepurchase of stock had made it difficult, if not actuallyimpossible, for a man to lose all his money on the Exchange.
In short, de la Vega’s epithet for the Amsterdam stockexchange in the sixteen-eighties—he called it “this gambling hell,”
although he obviously loved it—had become considerably lessapplicable to the New York exchange in the thirty-three yearsbetween the two crashes.
THE 1962 crash did not come without warning, even thoughfew observers read the warnings correctly. Shortly after thebeginning of the year, stocks had begun falling at a prettyconsistent rate, and the pace had accelerated to the pointwhere the previous business week—that of May 21st throughMay 25th—had been the worst on the Stock Exchange sinceJune, 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? Opinionappears, in retrospect, to have been divided. The Dow-Jonesnews service, which sends its subscribers spot financial news byteleprinter, reflected a certain apprehensiveness between thetime it started its transmissions, at nine o’clock, and theopening of the Stock Exchange, at ten. During this hour, thebroad tape (as the Dow-Jones service, which is printed onvertically running paper six and a quarter inches wide, is oftencalled, to distinguish it from the Stock Exchange price tape,which is printed horizontally and is only three-quarters of aninch high) commented that many securities dealers had beenbusy over the weekend sending out demands for additionalcollateral to credit customers whose stock assets were shrinkingin value; remarked that the type of precipitate liquidation seenduring the previous week “has been a stranger to Wall Streetfor years;” and went on to give several items of encouragingbusiness news, such as the fact that Westinghouse had justreceived a new Navy contract. In the stock market, however,as de la Vega points out, “the news [as such] is often of littlevalue;” in the short run, the mood of the investors is whatcounts.
This mood became manifest within a matter of minutes afterthe Stock Exchange opened. At 10:11, the broad tape reportedthat “stocks at the opening were mixed and only moderatelyactive.” This was reassuring information, because “mixed” meantthat some were up and some were down, and also because afalling market is universally regarded as far less threateningwhen the amount of activity in it is moderate rather than great.
But the comfort was short-lived, for by 10:30 the StockExchange tape, which records the price and the share volumeof every transaction made on the floor, not only wasconsistently recording lower prices but, running at its maximumspeed of five hundred characters per minute, was six minuteslate. The lateness of the tape meant that the machine wassimply unable to keep abreast of what was going on, so fastwere trades being made. Normally, when a transaction iscompleted on the floor of the Exchange, at 11 Wall Street, anExchange employee writes the details on a slip of paper andsends it by pneumatic tube to a room on the fifth floor of thebuilding, where one of a staff of girls types it into the tickermachine for transmission. A lapse of two or three minutesbetween a floor transaction and its appearance on the tape isnormal, therefore, and is not considered by the Stock Exchangeto be “lateness;” that word, in the language of the Exchange, isused only to describe any additional lapse between the time asales slip arrives on the fifth floor and the time thehard-pressed ticker is able to accommodate it. (“The termsused on the Exchange are not carefully chosen,” complained dela Vega.) Tape delays of a few minutes occur fairly often onbusy trading days, but since 1930, when the type of ticker inuse in 1962 was installed, big delays had been extremely rare.
On October 24, 1929, when the tape fell two hundred andforty-six minutes behind, it was being printed at the rate of twohundred and eighty-five characters a minute; before May, 1962,the greatest delay that had ever occurred on the new machinewas thirty-four minutes.
Unmistakably, prices were going down and activity was goingup, but the situation was still not desperate. All that had beenestablished by eleven o’clock was that the previous week’sdecline was continuing at a moderately accelerated rate. But asthe 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,twenty-eight minutes; at 11:58, thirty-eight minutes; and at12:14, forty-three minutes. (To inject at least a seasoning ofup-to-date information into the tape when it is five minutes ormore in arrears, the Exchange periodically interrupted itsnormal progress to insert “flashes,” or current prices of a fewleading stocks. The time required to do this, of course, addedto the lateness.) The noon computation of the Dow-Jonesindustrial average showed a loss for the day so far of 9.86points.
Signs of public hysteria began to appear during the lunchhour. One sign was the fact that between twelve and two,when the market is traditionally in the doldrums, not only didprices continue to decline but volume continued to rise, with acorresponding effect on the tape; just before two o’clock, thetape delay stood at fifty-two minutes. Evidence that people areselling stocks at a time when they ought to be eating lunch isalways regarded as a serious matter. Perhaps just as convincinga portent of approaching agitation was to be found in theTimes Square office (at 1451 Broadway) of Merrill Lynch,Pierce, Fenner & Smith, the undisputed Gargantua of thebrokerage trade. This office was plagued by a peculiar problem:
because of its excessively central location, it was visited everyday at lunchtime by an unusual number of what are known inbrokerage circles as “walk-ins”—people who are securitiescustomers only in a minuscule way, if at all, but who find theatmosphere of a brokerage office and the changing prices onits quotation board entertaining, especially in times ofstock-market crisis. (“Those playing the game merely for thesake of entertainment and not because of greediness are easilyto be distinguished.”—de la Vega.) From long experience, theoffice manager, a calm Georgian named Samuel Mothner, hadlearned to recognize a close correlation between the currentdegree of public concern about the market and the number ofwalk-ins in his office, and at midday on May 28th the mob ofthem 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 toBangor, were by no means confined to disturbing signs andportents. An unrestrained liquidation of stocks was already wellunder way; in Mothner’s office, orders from customers wererunning five or six times above average, and nearly all of themwere orders to sell. By and large, brokers were urging theircustomers to keep cool and hold on to their stocks, at least forthe present, but many of the customers could not bepersuaded. In another midtown Merrill Lynch office, at 61 WestForty-eighth Street, a cable was received from a substantialclient living in Rio de Janeiro that said simply, “Please sell outeverything in my account.” Lacking the time to conduct along-distance argument in favor of forbearance, Merrill Lynchhad no choice but to carry out the order. Radio and televisionstations, which by early afternoon had caught the scent ofnews, were now interrupting their regular programs with spotbroadcasts on the situation; as a Stock Exchange publicationhas since commented, with some asperity, “The degree ofattention devoted to the stock market in these news broadcastsmay have contributed to the uneasiness among some investors.”
And the problem that brokers faced in executing the flood ofselling orders was by this time vastly complicated by technicalfactors. The tape delay, which by 2:26 amounted to fifty-fiveminutes, meant that for the most part the ticker was reportingthe prices of an hour before, which in many cases wereanywhere from one to ten dollars a share higher than thecurrent prices. It was almost impossible for a broker acceptinga selling order to tell his customer what price he might expectto get. Some brokerage firms were trying to circumvent thetape delay by using makeshift reporting systems of their own;among these was Merrill Lynch, whose floor brokers, aftercompleting a trade, would—if they remembered and had thetime—simply shout the result into a floorside telephoneconnected to a “squawk box” in the firm’s head office, at 70Pine Street. Obviously, haphazard methods like this were subjectto error.
On the Stock Exchange floor itself, there was no question ofany sort of rally; it was simply a case of all stocks’ decliningrapidly and steadily, on enormous volume. As de la Vega mighthave described the scene—as, in fact, he did ratherflamboyantly describe a similar scene—“The bears [that is, thesellers] are completely ruled by fear, trepidation, andnervousness. Rabbits become elephants, brawls in a tavernbecome rebellions, faint shadows appear to them as signs ofchaos.” Not the least worrisome aspect of the situation was thefact that the leading bluechip stocks, representing shares in thecountry’s largest companies, were right in the middle of thedecline; indeed, American Telephone & Telegraph, the largestcompany of them all, and the one with the largest number ofstockholders, was leading the entire market downward. On ashare volume greater than that of any of the more than fifteenhundred other stocks traded on the Exchange (most of themat a tiny fraction of Telephone’s price), Telephone had beenbattered by wave after wave of urgent selling all day, until attwo o’clock it stood at 104?—down 6? for the day—and wasstill in full retreat. Always something of a bellwether, Telephonewas now being watched more closely than ever, and each lossof a fraction of a point in its price was the signal for furtherdeclines all across the board. Before three o’clock, I.B.M. wasdown 17? points; Standard Oil of New Jersey, oftenexceptionally resistant to general declines, was off 3?; andTelephone itself had tumbled again, to 101?. Nor did thebottom appear to be in sight.
Yet the atmosphere on the floor, as it has since beendescribed by men who were there, was not hysterical—or, atleast, any hysteria was well controlled. While many brokerswere straining to the utmost the Exchange’s rule againstrunning on the floor, and some faces wore expressions thathave 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 mainattraction to the business.”—de la Vega.) But things were notentirely the same. “What I particularly remember is feelingphysically exhausted,” one floor broker has said. “On a crisisday, you’re likely to walk ten or eleven miles on thefloor—that’s been measured with pedometers—but it isn’t justthe distance that wears you down. It’s the physical contact. Youhave to push and get pushed. People climb all over you. Then,there were the sounds—the tense hum of voices that youalways get in times of decline. As the rate of decline increases,so does the pitch of the hum. In a rising market, there’s anentirely different sound. After you get used to the difference,you can tell just about what the market is doing with youreyes shut. Of course, the usual heavy joking went on, andmaybe the jokes got a little more forced than usual. Everybodyhas commented on the fact that when the closing bell rang, atthree-thirty, a cheer went up from the floor. Well, we weren’tcheering because the market was down. We were cheeringbecause it was over.”
BUT was it over? This question occupied Wall Street and thenational investing community all the afternoon and evening.
During the afternoon, the laggard Exchange ticker sloggedalong, solemnly recording prices that had long since becomeobsolete. (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 fiveo’clock, straightening out the details of trades, and then went totheir offices to work on their accounts. What the price tapehad to tell, when it finally got around to telling it, was auniformly sad tale. American Telephone had closed at 100?,down 11 for the day. Philip Morris had closed at 71?, down8? Campbell Soup had closed at 81, down 10?. I.B.M. hadclosed at 361, down 37?. And so it went. In brokerage offices,employees were kept busy—many of them for most of thenight—at various special chores, of which by far the mosturgent was sending out margin calls. A margin call is ademand for additional collateral from a customer who hasborrowed money from his broker to buy stocks and whosestocks are now worth barely enough to cover the loan. If acustomer is unwilling or unable to meet a margin call withmore collateral, his broker will sell the margined stock as soonas possible; such sales may depress other stocks further,leading to more margin calls, leading to more stock sales, andso on down into the pit. This pit had proved bottomless in1929, when there were no federal restrictions on stock-marketcredit. Since then, a floor had been put in it, but the factremains that credit requirements in May of 1962 were suchthat a customer could expect a call when stocks he hadbought on margin had dropped to between fifty and sixty percent of their value at the time he bought them. And at theclose of trading on May 28th nearly one stock in four haddropped as far as that from its 1961 high. The Exchange hassince estimated that 91,700 margin calls were sent out, mainlyby telegram, between May 25th and May 31st; it seems a safeassumption that the lion’s share of these went out in theafternoon, in the evening, or during the night of May28th—and not just the early part of the night, either. Morethan one customer first learned of the crisis—or first becameaware of its almost spooky intensity—on being awakened by thearrival of a margin call in the pre-dawn hours of Tuesday.
If the danger to the market from the consequences of marginselling was much less in 1962 than it had been in 1929, thedanger from another quarter—selling by mutual funds—wasimmeasurably greater. Indeed, many Wall Street professionalsnow say that at the height of the May excitement the merethought of the mutual-fund situation was enough to make themshudder. As is well known to the millions of Americans whohave bought shares in mutual funds over the past two decadesor so, they provide a way for small investors to pool theirresources under expert management; the small investor buysshares in a fund, and the fund uses the money to buy stocksand stands ready to redeem the investor’s shares at theircurrent asset value whenever he chooses. In a seriousstock-market decline, the reasoning went, small investors wouldwant to get their money out of the stock market and wouldtherefore ask for redemption of their shares; in order to raisethe cash necessary to meet the redemption demands, themutual funds would have to sell some of their stocks; thesesales would lead to a further stock-market decline, causingmore holders of fund shares to demand redemption—and soon down into a more up-to-date version of the bottomless pit.
The investment community’s collective shudder at this possibilitywas intensified by the fact that the mutual funds’ power tomagnify a market decline had never been seriously tested;practically nonexistent in 1929, the funds had built up thestaggering total of twenty-three billion dollars in assets by thespring of 1962, and never in the interim had the marketdeclined with anything like its present force. Clearly, iftwenty-three billion dollars in assets, or any substantial fractionof that figure, were to be tossed onto the market now, it couldgenerate a crash that would make 1929 seem like a stumble. Athoughtful broker named Charles J. Rolo, who was a bookreviewer for the Atlantic until he joined Wall Street’s literarycoterie in 1960, has recalled that the threat of a fund-induceddownward spiral, combined with general ignorance as towhether or not one was already in progress, was “so terrifyingthat you didn’t even mention the subject.” As a man whoseliterary sensibilities had up to then survived the well-knowncrassness of economic life, Rolo was perhaps a good witnesson other aspects of the downtown mood at dusk on May28th. “There was an air of unreality,” he said later. “No one,as far as I knew, had the slightest idea where the bottomwould be. The closing Dow-Jones average that day was downalmost thirty-five points, to about five hundred andseventy-seven. It’s now considered elegant in Wall Street todeny it, but many leading people were talking about a bottomof 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 aprofound feeling of depression of a very personal sort amongbrokers. We knew that our customers—by no means all ofthem rich—had suffered large losses as a result of our actions.
Say what you will, it’s extremely disagreeable to lose otherpeople’s money. Remember that this happened at the end ofabout twelve years of generally rising stock prices. After morethan a decade of more or less constant profits to yourself andyour customers, you get to think you’re pretty good. You’re ontop of it. You can make money, and that’s that. This breakexposed a weakness. It subjected one to a certain loss ofself-confidence, from which one was not likely to recoverquickly.” The whole thing was enough, apparently, to make abroker wish that he were in a position to adhere to de laVega’s cardinal rule: “Never give anyone the advice to buyor sell shares, because, where perspicacity is weakened, themost benevolent piece of advice can turn out badly.”
IT was on Tuesday morning that the dimensions of Monday’sdebacle became evident. It had by now been calculated that thepaper loss in value of all stocks listed on the Exchangeamounted to $20,800,000,000. This figure was an all-timerecord; even on October 28, 1929, the loss had been a mere$9,600,000,000, the key to the apparent inconsistency beingthe fact that the total value of the stocks listed on theExchange was far smaller in 1929 than in 1962. The newrecord also represented a significant slice of our nationalincome—specifically, almost four per cent. In effect, the UnitedStates had lost something like two weeks’ worth of productsand pay in one day. And, of course, there were repercussionsabroad. In Europe, where reactions to Wall Street are delayeda day by the time difference, Tuesday was the day of crisis; bynine o’clock that morning in New York, which was toward theend of the trading day in Europe, almost all the leadingEuropean exchanges were experiencing wild selling, with noapparent cause other than Wall Street’s crash. The loss inMilan was the worst in eighteen months. That in Brussels wasthe worst since 1946, when the Bourse there reopened afterthe war. That in London was the worst in at leasttwenty-seven years. In Zurich, there had been a sickeningthirty-per-cent selloff earlier in the day, but some of the losseswere now being cut as bargain hunters came into the market.
And another sort of backlash—less direct, but undoubtedly moreserious in human terms—was being felt in some of the poorercountries of the world. For example, the price of copper forJuly delivery dropped on the New York commodity market byforty-four one-hundredths of a cent per pound. Insignificant assuch a loss may sound, it was a vital matter to a smallcountry heavily dependent on its copper exports. In his recentbook “The Great Ascent,” Robert L. Heilbroner had cited anestimate that for every cent by which copper prices drop onthe New York market the Chilean treasury lost four milliondollars; by that standard, Chile’s potential loss on copper alonewas $1,760,000.
Yet perhaps worse than the knowledge of what had happenedwas the fear of what might happen now. The Times began aqueasy lead editorial with the statement that “somethingresembling an earthquake hit the stock market yesterday,” andthen took almost half a column to marshal its forces for thereasonably ringing affirmation “Irrespective of the ups anddowns of the stock market, we are and will remain themasters 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 disturbingreports of the market news from abroad, and by 9:45, withthe Exchange’s opening still a quarter of an hour away, wasasking itself the jittery question “When will the dumping ofstocks let up?” Not just yet, it concluded; all the signs seemedto indicate that the selling pressure was “far from satisfied.”
Throughout the financial world, ugly rumors were circulatingabout the imminent failure of various securities firms, increasingthe aura of gloom. (“The expectation of an event creates amuch deeper impression … than the event itself.”—de la Vega.)The fact that most of these rumors later proved false was nohelp at the time. Word of the crisis had spread overnight toevery town in the land, and the stock market had become thenational preoccupation. In brokerage offices, the switchboardswere jammed with incoming calls, and the customers’ areaswith walk-ins and, in many cases, television crews. As for theStock Exchange itself, everyone who worked on the floor hadgot there early, to batten down against the expected storm, andadditional hands had been recruited from desk jobs on theupper floors of 11 Wall to help sort out the mountains oforders. The visitors’ gallery was so crowded by opening timethat the usual guided tours had to be suspended for the day.
One group that squeezed its way onto the gallery that morningwas the eighth-grade class of Corpus Christi Parochial School, ofWest 121st Street; the class’s teacher, Sister Aquin, explained toa reporter that the children had prepared for their visit overthe previous two weeks by making hypothetical stock-marketinvestments with an imaginary ten thousand dollars each. “Theylost all their money,” said Sister Aquin.
The Exchange’s opening was followed by the blackest ninetyminutes in the memory of many veteran dealers, includingsome survivors of 1929. In the first few minutes, comparativelyfew stocks were traded, but this inactivity did not reflect calmdeliberation; on the contrary, it reflected selling pressure sogreat that it momentarily paralyzed action. In the interests ofminimizing sudden jumps in stock prices, the Exchange requiresthat one of its floor officials must personally grant hispermission before any stock can change hands at a pricediffering from that of the previous sale by one point or morefor a stock priced under twenty dollars, or by two points ormore for a stock priced above twenty dollars. Now sellers wereso plentiful and buyers so scarce that hundreds of stockswould have to open at price changes as great as that orgreater, and therefore no trading in them was possible until afloor official could be found in the shouting mob. In the caseof some of the key issues, like I.B.M., the disparity betweensellers and buyers was so wide that trading in them wasimpossible even with the permission of an official, and therewas nothing to do but wait until the prospect of getting abargain price lured enough buyers into the market. TheDow-Jones broad tape, stuttering out random prices andfragments of information as if it were in a state of shock,reported at 11:30 that “at least seven” Big Board stocks hadstill not opened; actually, when the dust had cleared itappeared that the true figure had been much larger than that.
Meanwhile, the Dow-Jones average lost 11.09 more points inthe first hour, Monday’s loss in stock values had beenincreased by several billion dollars, and the panic was in fullcry.
And along with panic came near chaos. Whatever else maybe said about Tuesday, May 29th, it will be long rememberedas the day when there was something very close to a completebreakdown of the reticulated, automated, mind-boggling complexof technical facilities that made nationwide stock-trading possiblein a huge country where nearly one out of six adults was astockholder. Many orders were executed at prices far differentfrom the ones agreed to by the customers placing the orders;many others were lost in transmission, or in the snow of scrappaper that covered the Exchange floor, and were neverexecuted at all. Sometimes brokerage firms were preventedfrom executing orders by simple inability to get in touch withtheir floor men. As the day progressed, Monday’s heavy-trafficrecords were not only broken but made to seem paltry; asone index, Tuesday’s closing-time delay in the Exchange tapewas two hours and twenty-three minutes, compared toMonday’s hour and nine minutes. By a heaven-sent stroke ofprescience, Merrill Lynch, which handled over thirteen per centof all public trading on the Exchange, had just installed a new7074 computer—the device that can copy the TelephoneDirectory in three minutes—and, with its help, managed to keepits accounts fairly straight. Another new Merrill Lynchinstallation—an automatic teletype switching system that occupiedalmost half a city block and was intended to expeditecommunication between the firm’s various offices—also rose tothe occasion, though it got so hot that it could not be touched.
Other firms were less fortunate, and in a number of themconfusion gained the upper hand so thoroughly that somebrokers, tired of trying in vain to get the latest quotations onstocks or to reach their partners on the Exchange floor, aresaid to have simply thrown up their hands and gone out for adrink. Such unprofessional behavior may have saved theircustomers a great deal of money.
But the crowning irony of the day was surely supplied by thesituation of the tape during the lunch hour. Just before noon,stocks reached their lowest levels—down twenty-three points onthe Dow-Jones average. (At its nadir, the average reached553.75—a safe distance above the 500 that the experts nowclaim was their estimate of the absolute bottom.) Then theyabruptly began an extraordinarily vigorous recovery. At 12:45,by which time the recovery had become a mad scramble tobuy, the tape was fifty-six minutes late; therefore, apart fromfleeting intimations supplied by a few “flash” prices, the tickerwas engaged in informing the stock-market community of aselling panic at a moment when what was actually in progresswas a buying panic.
THE great turnaround late in the morning took place in amanner that would have appealed to de la Vega’s romanticnature—suddenly and rather melodramatically. The key stockinvolved was American Telephone & Telegraph, which, just ason the previous day, was being universally watched and wasunmistakably influencing the whole market. The key man, bythe nature of his job, was George M. L. La Branche, Jr.,senior partner in La Branche and Wood & Co., the firm thatwas acting as floor specialist in Telephone. (Floor specialists arebroker-dealers who are responsible for maintaining orderlymarkets in the particular stocks with which they are charged.
In the course of meeting their responsibilities, they often havethe curious duty of taking risks with their own money againsttheir own better judgment. Various authorities, seeking toreduce the element of human fallibility in the market, havelately been trying to figure out a way to replace the specialistswith machines, but so far without success. One big stumblingblock seems to be the question: If the mechanical specialistsshould lose their shirts, who would pay their losses?) LaBranche, at sixty-four, was a short, sharp-featured, dapper,peppery man who was fond of sporting one of the Exchangefloor’s comparatively few Phi Beta Kappa keys; he had been aspecialist since 1924, and his firm had been the specialist inTelephone since late in 1929. His characteristic habitat—indeed,the spot where he spent some five and a half hours almostevery weekday of his life—was immediately in front of Post 15,in the part of the Exchange that is not readily visible from thevisitors’ gallery and is commonly called the Garage; there, feetplanted firmly apart to fend off any sudden surges of would-bebuyers or sellers, he customarily stood with pencil poised in athoughtful way over an unprepossessing loose-leaf ledger, inwhich he kept a record of all outstanding orders to buy andsell Telephone stock at various price levels. Not surprisingly, theledger was known as the Telephone book. La Branche had, ofcourse, been at the center of the excitement all day Monday,when Telephone was leading the market downward. Asspecialist, he had been rolling with the punch like a fighter—orto adopt his own more picturesque metaphor, bobbing like acork on ocean combers. “Telephone is kind of like the sea,” LaBranche said later. “Generally, it is calm and kindly. Then all ofa sudden a great wind comes and whips up a giant wave. Thewave sweeps over and deluges everybody; then it sucks backagain. You have to give with it. You can’t fight it, any morethan King Canute could.” On Tuesday morning, after Monday’sdrenching eleven-point drop, the great wave was still rolling; thesheer clerical task of sorting and matching the orders that hadcome in overnight—not to mention finding a Stock Exchangeofficial and obtaining his permission—took so long that the firsttrade in Telephone could not be made until almost an hourafter the Exchange’s opening. When Telephone did enter thelists, at one minute before eleven, its price was 98?—down2? from Monday’s closing. Over the next three-quarters of anhour or so, while the financial world watched it the way a seacaptain might watch the barometer in a hurricane, Telephonefluctuated between 99, which it reached on momentary minorrallies, and 98?, which proved to be its bottom. It touched thelower figure on three separate occasions, with rallies between—afact that La Branche has spoken of as if it had a magical ormystical significance. And perhaps it had; at any rate, after thethird 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 98?; a few minutes later, at 99; at11:50, at 99?; and finally, at 11:55, it sold at 100.
Many commentators have expressed the opinion that that firstsale of Telephone at 100 marked the exact point at which thewhole market changed direction. Since Telephone is among thestocks on which the ticker gives flashes during periods of tapedelay, the financial community learned of the transaction almostimmediately, and at a time when everything else it was hearingwas very bad news indeed; the theory goes that the hard factof Telephone’s recovery of almost two points worked togetherwith a purely fortuitous circumstance—the psychological impactof the good, round number 100—to tip the scales. La Branche,while agreeing that the rise of Telephone did a lot to bringabout the general upturn, differs as to precisely whichtransaction was the crucial one. To him, the first sale at 100was insufficient proof of lasting recovery, because it involvedonly a small number of shares (a hundred, as far as heremembers). He knew that in his book he had orders to sellalmost twenty thousand shares of Telephone at 100. If thedemand for shares at that price were to run out before thistwo-million-dollar supply was exhausted, then the price ofTelephone would drop again, possibly going as low as 98? fora fourth time. And a man like La Branche, given to thinking innautical terms, may have associated a certain finality with thenotion of going down for a fourth time.
It did not happen. Several small transactions at 100 weremade in rapid succession, followed by several more, involvinglarger volume. Altogether, about half the supply of the stock atthat price was gone when John J. Cranley, floor partner ofDreyfus & Co., moved unobtrusively into the crowd at Post 15and bid 100 for ten thousand shares of Telephone—justenough to clear out the supply and thus pave the way for afurther rise. Cranley did not say whether he was bidding onbehalf of his firm, one of its customers, or the Dreyfus Fund, amutual fund that Dreyfus & Co. managed through one of itssubsidiaries; the size of the order suggests that the principalwas the Dreyfus Fund. In any case, La Branche needed onlyto say “Sold,” and as soon as the two men had madenotations of it, the transaction was completed. Where-uponTelephone could no longer be bought for 100.
There is historical precedent (though not from de la Vega’sday) for the single large Stock Exchange transaction that turnsthe market, or is intended to turn it. At half past one onOctober 24, 1929—the dreadful day that has gone down infinancial history as Black Thursday—Richard Whitney, thenacting president of the Exchange and probably the best-knownfigure on its floor, strode conspicuously (some say “jauntily”) upto the post where U.S. Steel was traded, and bid 205, theprice of the last sale, for ten thousand shares. But there aretwo crucial differences between the 1929 trade and the 1962one. In the first place, Whitney’s stagy bid was a calculatedeffort to create an effect, while Cranley’s, delivered withoutfanfare, was apparently just a move to get a bargain for theDreyfus Fund. Secondly, only an evanescent rally followed the1929 deal—the next week’s losses made Black Thursday lookno worse than gray—while a genuinely solid recovery followedthe one in 1962. The moral may be that psychological gestureson the Exchange are most effective when they are neitherintended nor really needed. At all events, a general rally beganalmost immediately. Having broken through the 100 barrier,Telephone leaped wildly upward: at 12:18, it was traded at101?; at 12:41, at 103?; and at 1:05, at 106?. GeneralMotors went from 45? at 11:46 to 50 at 1:38. Standard Oil ofNew Jersey went from 46? at 11:46 to 51 at 1:28. U.S. Steelwent from 49? at 11:40 to 52? at 1:28. I.B.M. was, in itsway, the most dramatic case of the lot. All morning, its stockhad been kept out of trading by an overwhelmingpreponderance of selling orders, and the guesses as to itsultimate opening price varied from a loss of ten points to aloss of twenty or thirty; now such an avalanche of buyingorders appeared that when it was at last technically possible forthe stock to be traded, just before two o’clock, it opened upfour points, on a huge block of thirty thousand shares. At12:28, less than half an hour after the big Telephone trade, theDow-Jones news service was sure enough of what washappening to state flatly, “The market has turned strong.”
And so it had, but the speed of the turnaround producedmore irony. When the broad tape has occasion to transmit anextended news item, such as a report on a prominent man’sspeech, it customarily breaks the item up into a series of shortsections, which can then be transmitted at intervals, leaving timein the interstices for such spot news as the latest prices fromthe Exchange floor. This was what it did during the earlyafternoon of May 29th with a speech delivered to the NationalPress Club by H. Ladd Plumley, president of the United StatesChamber of Commerce, which began to be reported on theDow-Jones tape at 12:25, or at almost exactly the same timethat the same news source declared the market to have turnedstrong. As the speech came out in sections on the broad tape,it created an odd effect indeed. The tape started off by sayingthat Plumley had called for “a thoughtful appreciation of thepresent lack of business confidence.” At this point, there wasan interruption for a few minutes’ worth of stock prices, all ofthem sharply higher. Then the tape returned to Plumley, whowas now warming to his task and blaming the stock-marketplunge on “the coincidental impact of two confidence-upsettingfactors—a dimming of profit expectations and PresidentKennedy’s quashing of the steel price increase.” Then came alonger interruption, chock-full of reassuring facts and figures. Atits conclusion, Plumley was back on the tape, hammering awayat his theme, which had now taken on overtones of “I toldyou so.” “We have had an awesome demonstration that the‘right business climate’ cannot be brushed off as a MadisonAvenue cliché but is a reality much to be desired,” the broadtape quoted him as saying. So it went through the earlyafternoon; it must have been a heady time for the Dow-Jonessubscribers, who could alternately nibble at the caviar of higherstock prices and sip the champagne of Plumley’s jabs at theKennedy administration.
IT was during the last hour and a half on Tuesday that thepace of trading on the Exchange reached its most frantic. Theofficial count of trades recorded after three o’clock (that is, inthe last half hour) came to just over seven million shares—innormal times as they were reckoned in 1962, an unheard-offigure even for a whole day’s trading. When the closing bellsounded, a cheer again arose from the floor—this one a gooddeal more full-throated than Monday’s, because the day’s gainof 27.03 points in the Dow-Jones average meant that almostthree-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 heart-warmingfigures weren’t available until hours after the close, butexperienced securities men are vouchsafed visceral intuitions ofsurprising statistical accuracy; some of them claim that atTuesday’s closing they could feel in their guts a Dow-Jonesgain of over twenty-five points, and there is no reason todispute their claim.) The mood was cheerful, then, but thehours were long. Because of the greater trading volume, tickersticked and lights burned even farther into the night than theyhad on Monday; the Exchange tape did not print the day’s lasttransaction until 8:15—four and three-quarters hours after ithad actually occurred. Nor did the next day, Memorial Day,turn out to be a day off for the securities business. Wise oldWall Streeters had expressed the opinion that the holiday, fallingby happy chance in the middle of the crisis and thus providingan opportunity for the cooling of overheated emotions, mayhave been the biggest factor in preventing the crisis frombecoming a disaster. What it indubitably did provide was achance for the Stock Exchange and its memberorganizations—all of whom had been directed to remain at theirbattle stations over the holiday—to begin picking up the pieces.
The insidious effects of a late tape had to be explained tothousands of na?ve customers who thought they had boughtU.S. Steel at, say, 50, only to find later that they had paid 54or 55. The complaints of thousands of other customers couldnot be so easily answered. One brokerage house discoveredthat two orders it had sent to the floor at precisely the sametime—one to buy Telephone at the prevailing price, the other tosell the same quantity at the prevailing price—had resulted inthe seller’s getting 102 per share for his stock and the buyer’spaying 108 for his. Badly shaken by a situation that seemed tocast doubt on the validity of the law of supply and demand,the brokerage house made inquiries and found that the buyingorder had got temporarily lost in the crush and had failed toreach Post 15 until the price had gone up six points. Since themistake had not been the customer’s, the brokerage firm paidhim the difference. As for the Stock Exchange itself, it had avariety of problems to deal with on Wednesday, among themthat of keeping happy a team of television men from theCanadian Broadcasting Corporation who, having forgotten allabout the United States custom of observing a holiday on May30th, had flown down from Montreal to take pictures ofWednesday’s action on the Exchange. At the same time,Exchange officials were necessarily pondering the problem ofMonday’s and Tuesday’s scandalously laggard ticker, whicheveryone agreed had been at the very heart of—if not, indeed,the cause of—the most nearly catastrophic technical snarl inhistory. The Exchange’s defense of itself, later set down indetail, amounts, in effect, to a complaint that the crisis cametwo years too soon. “It would be inaccurate to suggest that allinvestors were served with normal speed and efficiency byexisting facilities,” the Exchange conceded, with characteristicconservatism, and went on to say that a ticker with almosttwice the speed of the present one was expected to be readyfor installation in 1964. (In fact, the new ticker and variousother automation devices, duly installed more or less on time,proved to be so heroically effective that the fantastic tradingpace of April, 1968 was handled with only negligible tapedelays.) The fact that the 1962 hurricane hit while the shelterwas under construction was characterized by the Exchange as“perhaps ironic.”
There was still plenty of cause for concern on Thursdaymorning. After a period of panic selling, the market has ahabit 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, andimmediately before the start of the truly disastrous slide thatwas to continue for years and precipitate the greatdepression—the Dow-Jones gain had been 28.40, representing arebound ominously comparable to this one. In other words, themarket still suffers at times from what de la Vega clinicallycalled “antiperistasis”—the tendency to reverse itself, thenreverse the reversal, and so on. A follower of the antiperistasissystem of security analysis might have concluded that themarket was now poised for another dive. As things turned out,of course, it wasn’t. Thursday was a day of steady, orderlyrises in stock prices. Minutes after the ten-o’clock opening, thebroad tape spread the news that brokers everywhere werebeing deluged with buying orders, many of them coming fromSouth America, Asia, and the Western European countries thatare normally active in the New York stock market. “Orders stillpouring in from all directions,” the broad tape announcedexultantly just before eleven. Lost money was magicallyreappearing, and more was on the way. Shortly before twoo’clock, the Dow-Jones tape, having proceeded from euphoriato insouciance, took time off from market reports to include anote on plans for a boxing match between Floyd Patterson andSonny Liston. Markets in Europe, reacting to New York on theupturn just as they had on the downturn, had risen sharply.
New York copper futures had recovered over eighty per centof their Monday and Tuesday-morning losses, so Chile’streasury was mostly bailed out. As for the Dow-Jones industrialaverage at closing, it figured out to 613.36, meaning that theweek’s losses had been wiped out in toto, with a little bit tospare. The crisis was over. In Morgan’s terms, the market hadfluctuated; in de la Vega’s terms, antiperistasis had beendemonstrated.
ALL that summer, and even into the following year, securityanalysts and other experts cranked out their explanations ofwhat had happened, and so great were the logic, solemnity,and detail of these diagnoses that they lost only a little of theirforce through the fact that hardly any of the authors had hadthe slightest idea what was going to happen before the crisisoccurred. Probably the most scholarly and detailed report onwho did the selling that caused the crisis was furnished by theNew York Stock Exchange itself, which began sending elaboratequestionnaires to its individual and corporate membersimmediately after the commotion was over. The Exchangecalculated that during the three days of the crisis rural areas ofthe country were more active in the market than theycustomarily are; that women investors had sold two and a halftimes as much stock as men investors; that foreign investorswere far more active than usual, accounting for 5.5 per cent ofthe total volume, and, on balance, were substantial sellers; and,most striking of all, that what the Exchange calls “publicindividuals”—individual investors, as opposed to institutional ones,which is to say people who would be described anywhere buton Wall Street as private individuals—played an astonishinglylarge role in the whole affair, accounting for an unprecedented56.8 per cent of the total volume. Breaking down the publicindividuals into income categories, the Exchange calculated thatthose with family incomes of over twenty-five thousand dollars ayear were the heaviest and most insistent sellers, while thosewith incomes under ten thousand dollars, after selling onMonday and early on Tuesday, bought so many shares onThursday that they actually became net buyers over thethree-day period. Furthermore, according to the Exchange’scalculations, about a million shares—or 3.5 per cent of the totalvolume during the three days—were sold as a result of margincalls. In sum, if there was a villain, it appeared to have beenthe relatively rich investor not connected with the securitiesbusiness—and, more often than might have been expected, thefemale, rural, or foreign one, in many cases playing the marketpartly on borrowed money.
The role of the hero was filled, surprisingly, by the mostfrightening of untested forces in the market—the mutual funds.
The Exchange’s statistics showed that on Monday, when priceswere plunging, the funds bought 530,000 more shares thanthey sold, while on Thursday, when investors in general werestumbling over each other trying to buy stock, the funds, onbalance, sold 375,000 shares; in other words, far fromincreasing the market’s fluctuation, the funds actually served asa stabilizing force. Exactly how this unexpectedly benign effectcame about remains a matter of debate. Since no one hasbeen heard to suggest that the funds acted out of sheerpublic-spiritedness during the crisis, it seems safe to assumethat they were buying on Monday because their managers hadspotted bargains, and were selling on Thursday because ofchances to cash in on profits. As for the problem ofredemptions, there were, as had been feared, a large numberof mutual-fund shareholders who demanded millions of dollarsof their money in cash when the market crashed, butapparently the mutual funds had so much cash on hand thatin most cases they could pay off their shareholders withoutselling substantial amounts of stock. Taken as a group, thefunds proved to be so rich and so conservatively managed thatthey not only could weather the storm but, by happyinadvertence, could do something to decrease its violence.
Whether the same conditions would exist in some future stormwas and is another matter.
In the last analysis, the cause of the 1962 crisis remainsunfathomable; what is known is that it occurred, and thatsomething like it could occur again. As one of Wall Street’saged, ever-anonymous seers put it recently, “I was concerned,but at no time did I think it would be another 1929. I neversaid the Dow-Jones would go down to four hundred. I saidfive hundred. The point is that now, in contrast to 1929, thegovernment, Republican or Democratic, realizes that it must beattentive to the needs of business. There will never beapple-sellers on Wall Street again. As to whether whathappened that May can happen again—of course it can. I thinkthat people may be more careful for a year or two, and thenwe may see another speculative buildup followed by anothercrash, and so on until God makes people less greedy.”
Or, as de la Vega said, “It is foolish to think that you canwithdraw from the Exchange after you have tasted thesweetness of the honey.”
Chapter 2 The Fate of the Edsel
RISE AND FLOWERINGIN the calendar of American economic life, 1955 was the Yearof the Automobile. That year, American automobile makers soldover seven million passenger cars, or over a million more thanthey had sold in any previous year. That year, General Motorseasily sold the public $325 million worth of new common stock,and the stock market as a whole, led by the motors, gyratedupward so frantically that Congress investigated it. And thatyear, too, the Ford Motor Company decided to produce a newautomobile in what was quaintly called the medium-pricerange—roughly, from $2,400 to $4,000—and went ahead anddesigned it more or less in conformity with the fashion of theday, which was for cars that were long, wide, low, lavishlydecorated with chrome, liberally supplied with gadgets, andequipped with engines of a power just barely insufficient tosend them into orbit. Two years later, in September, 1957, theFord Company put its new car, the Edsel, on the market, tothe accompaniment of more fanfare than had attended thearrival of any other new car since the same company’s ModelA, brought out thirty years earlier. The total amount spent onthe Edsel before the first specimen went on sale wasannounced as a quarter of a billion dollars; its launching—asBusiness Week declared and nobody cared to deny—was morecostly than that of any other consumer product in history. Asa starter toward getting its investment back, Ford counted onselling at least 200,000 Edsels the first year.
There may be an aborigine somewhere in a remote rainforest who hasn’t yet heard that things failed to turn out thatway. To be precise, two years two months and fifteen dayslater Ford had sold only 109,466 Edsels, and, beyond a doubt,many hundreds, if not several thousands, of those were boughtby Ford executives, dealers, salesmen, advertising men,assembly-line workers, and others who had a personal interestin seeing the car succeed. The 109,466 amounted toconsiderably less than one per cent of the passenger cars soldin 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 permanentlydiscontinued its production.
How could this have happened? How could a company somightily endowed with money, experience, and, presumably,brains have been guilty of such a monumental mistake? Evenbefore the Edsel was dropped, some of the more articulatemembers of the car-minded public had come forward with ananswer—an answer so simple and so seemingly reasonable that,though it was not the only one advanced, it became widelyaccepted as the truth. The Edsel, these people argued, wasdesigned, named, advertised, and promoted with a slavishadherence to the results of public-opinion polls and of theiryounger cousin, motivational research, and they concluded thatwhen the public is wooed in an excessively calculated manner,it tends to turn away in favor of some gruffer but morespontaneously attentive suitor. Several years ago, in the face ofan understandable reticence on the part of the Ford MotorCompany, which enjoys documenting its boners no more thananyone else, I set out to learn what I could about the Edseldebacle, and my investigations have led me to believe that whatwe have here is less than the whole truth.
For, although the Edsel was supposed to be advertised, andotherwise promoted, strictly on the basis of preferencesexpressed in polls, some old-fashioned snake-oil-selling methods,intuitive rather than scientific, crept in. Although it wassupposed to have been named in much the same way, sciencewas curtly discarded at the last minute and the Edsel wasnamed for the father of the company’s president, like anineteenth-century brand of cough drops or saddle soap. Asfor the design, it was arrived at without even a pretense ofconsulting the polls, and by the method that has been standardfor years in the designing of automobiles—that of simply poolingthe hunches of sundry company committees. The commonexplanation of the Edsel’s downfall, then, under scrutiny, turnsout 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 asymbolic sort—a modern American antisuccess story.
THE origins of the Edsel go back to the fall of 1948, sevenyears before the year of decision, when Henry Ford II, whohad been president and undisputed boss of the company sincethe death of his grandfather, the original Henry, a year earlier,proposed to the company’s executive committee, which includedErnest R. Breech, the executive vice-president, that studies beundertaken concerning the wisdom of putting on the market anew and wholly different medium-priced car. The studies wereundertaken. There appeared to be good reason for them. Itwas a well-known practice at the time for low-income ownersof Fords, Plymouths, and Chevrolets to turn in their symbols ofinferior caste as soon as their earnings rose above fivethousand dollars a year, and “trade up” to a medium-pricedcar. From Ford’s point of view, this would have been all welland good except that, for some reason, Ford owners usuallytraded up not to Mercury, the company’s only medium-pricedcar, but to one or another of the medium-priced cars put outby its big rivals—Oldsmobile, Buick, and Pontiac, among theGeneral Motors products, and, to a lesser extent, Dodge andDe Soto, the Chrysler candidates. Lewis D. Crusoe, then avice-president of the Ford Motor Company, was not overstatingthe case when he said, “We have been growing customers forGeneral Motors.”
The outbreak of the Korean War, in 1950, meant that Fordhad no choice but to go on growing customers for itscompetitors, since introducing a new car at such a time wasout of the question. The company’s executive committee putaside the studies proposed by President Ford, and therematters rested for two years. Late in 1952, however, the end ofthe war appeared sufficiently imminent for the company to pickup where it had left off, and the studies were energeticallyresumed by a group called the Forward Product PlanningCommittee, which turned over much of the detailed work tothe Lincoln-Mercury Division, under the direction of RichardKrafve (pronounced Kraffy), the division’s assistant generalmanager. Krafve, a forceful, rather saturnine man with ahabitually puzzled look, was then in his middle forties. The sonof a printer on a small farm journal in Minnesota, he hadbeen a sales engineer and management consultant beforejoining Ford, in 1947, and although he could not have knownit in 1952, he was to have reason to look puzzled. As the mandirectly responsible for the Edsel and its fortunes, enjoying itsbrief glory and attending it in its mortal agonies, he had arendezvous with destiny.
IN December, 1954, after two years’ work, the Forward ProductPlanning Committee submitted to the executive committee asix-volume blockbuster of a report summarizing its findings.
Supported by copious statistics, the report predicted the arrivalof the American millennium, or something a lot like it, in 1965.
By that time, the Forward Product Planning Committeeestimated, the gross national product would be $535 billion ayear—up more than $135 billion in a decade. (As a matter offact, this part of the millennium arrived much sooner than theForward Planners estimated. The G. N. P. passed $535 billionin 1962, and for 1965 was $681 billion.) The number of carsin operation would be seventy million—up twenty million. Morethan half the families in the nation would have incomes of overfive thousand dollars a year, and more than 40 percent of allthe cars sold would be in the medium-price range or better.
The report’s picture of America in 1965, presented in crushingdetail, was of a country after Detroit’s own heart—its banksoozing 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 wasclear. If by that time Ford had not come out with a secondmedium-priced car—not just a new model, but a newmake—and made it a favorite in its field, the company wouldmiss out on its share of the national boodle.
On the other hand, the Ford bosses were well aware of theenormous risks connected with putting a new car on themarket. They knew, for example, that of the 2,900 Americanmakes that had been introduced since the beginning of theAutomobile Age—the Black Crow (1905), the Averageman’s Car(1906), the Bug-mobile (1907), the Dan Patch (1911), and theLone Star (1920) among them—only about twenty were stillaround. They knew all about the automotive casualties that hadfollowed the Second World War—among them Crosley, whichhad given up altogether, and Kaiser Motors, which, though stillalive in 1954, was breathing its last. (The members of theForward Product Planning Committee must have glanced ateach other uneasily when, a year later, Henry J. Kaiser wrote,in a valediction to his car business, “We expected to toss fiftymillion dollars into the automobile pond, but we didn’t expect itto disappear without a ripple.”) The Ford men also knew thatneither of the other members of the industry’s powerful andwell-heeled Big Three—General Motors and Chrysler—hadventured to bring out a new standard-size make since theformer’s La Salle in 1927, and the latter’s Plymouth, in 1928,and that Ford itself had not attempted to turn the trick since1938, when it launched the Mercury.
Nevertheless, the Ford men felt bullish—so remarkably bullishthat they resolved to toss into the automobile pond five timesthe sum that Kaiser had. In April, 1955, Henry Ford II,Breech, and the other members of the executive committeeofficially approved the Forward Product Planning Committee’sfindings, and, to implement them, set up another agency, calledthe Special Products Division, with the star-crossed Krafve as itshead. Thus the company gave its formal sanction to the effortsof its designers, who, having divined the trend of events, hadalready been doodling for several months on plans for a newcar. Since neither they nor the newly organized Krafve outfit,when it took over, had an inkling of what the thing on theirdrawing boards might be called, it became known to everybodyat Ford, and even in the company’s press releases, as theE-Car—the “E,” it was explained, standing for “Experimental.”
The man directly in charge of the E-Car’s design—or, to usethe gruesome trade word, “styling”—was a Canadian, then notyet forty, named Roy A. Brown, who, before taking on theE-Car (and after studying industrial design at the Detroit ArtAcademy), had had a hand in the designing of radios, motorcruisers, colored-glass products, Cadillacs, Oldsmobiles, andLincolns.* Brown recently recalled his aspirations as he went towork on the new project. “Our goal was to create a vehiclewhich would be unique in the sense that it would be readilyrecognizable in styling theme from the nineteen other makes ofcars on the road at that time,” he wrote from England, whereat the time of his writing he was employed as chief stylist forthe Ford Motor Company, Ltd., manufacturers of trucks,tractors, and small cars. “We went to the extent of makingphotographic studies from some distance of all nineteen ofthese cars, and it became obvious that at a distance of a fewhundred feet the similarity was so great that it was practicallyimpossible to distinguish one make from the others.… Theywere 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 thesame time be familiar.”
While the E-Car was on the drawing boards in Ford’s stylingstudio—situated, like its administrative offices, in the company’sbarony of Dearborn, just outside Detroit—work on it progressedunder the conditions of melodramatic, if ineffectual, secrecy thatinvariably attend such operations in the automobile business:
locks on the studio doors that could be changed in fifteenminutes if a key should fall into enemy hands; a security forcestanding round-the-clock guard over the establishment; and atelescope to be trained at intervals on nearby high points ofthe terrain where peekers might be roosting. (All suchprecautions, however inspired, are doomed to fail, because noneof them provide a defense against Detroit’s version of theTrojan horse—the job-jumping stylist, whose cheerful treacherymakes it relatively easy for the rival companies to keep tabs onwhat the competition is up to. No one, of course, is betteraware of this than the rivals themselves, but thecloak-and-dagger stuff is thought to pay for itself in publicityvalue.) Twice a week or so, Krafve—head down, and sticking tolow ground—made the journey to the styling studio, where hewould confer with Brown, check up on the work as itproceeded, and offer advice and encouragement. Krafve wasnot the kind of man to envision his objective in a singlerevelatory flash; instead, he anatomized the styling of the E-Carinto a series of laboriously minute decisions—how to shape thefenders, what pattern to use with the chrome, what kind ofdoor handles to put on, and so on and on. If Michelangeloever added the number of decisions that went into theexecution of, say, his “David,” he kept it to himself, but Krafve,an orderly-minded man in an era of orderly-functioningcomputers, later calculated that in styling the E-Car he and hisassociates had to make up their minds on no fewer than fourthousand occasions. He reasoned at the time that if theyarrived at the right yes-or-no choice on every one of thoseoccasions, they ought, in the end, to come up with a stylisticallyperfect car—or at least a car that would be unique and at thesame time familiar. But Krafve concedes today that he found itdifficult thus to bend the creative process to the yoke ofsystem, principally because many of the four thousand decisionshe made wouldn’t stay put. “Once you get a general theme,you begin narrowing down,” he says. “You keep modifying, andthen modifying your modifications. Finally, you have to settle onsomething, because there isn’t any more time. If it weren’t forthe deadline you’d probably go on modifying indefinitely.”
Except for later, minor modifications of the modifiedmodifications, the E-Car had been fully styled by midsummer of1955. As the world was to learn two years later, its moststriking aspect was a novel, horse-collar-shaped radiator grille,set vertically in the center of a conventionally low, wide frontend—a blend of the unique and the familiar that was there forall to see, though certainly not for all to admire. In twoprominent respects, however, Brown or Krafve, or both, lostsight entirely of the familiar, specifying a unique rear end,marked by widespread horizontal wings that were in boldcontrast to the huge longitudinal tail fins then captivating themarket, and a unique cluster of automatic-transmission pushbuttons on the hub of the steering wheel. In a speech to thepublic delivered a while before the public had its first look atthe car, Krafve let fall a hint or two about its styling, which, hesaid, made it so “distinctive” that, externally, it was “immediatelyrecognizable from front, side, and rear,” and, internally, it was“the epitome of the push-button era without wild-blue-yonderBuck Rogers concepts.” At last came the day when the men inthe highest stratum of the Ford Hierarchy were given their firstglimpse of the car. It produced an effect that was little short ofapocalyptic. On August 15, 1955, in the ceremonial secrecy ofthe styling center, while Krafve, Brown, and their aides stoodby smiling nervously and washing their hands in air, themembers of the Forward Product Planning Committee, includingHenry Ford II and Breech, watched critically as a curtain waslifted to reveal the first full-size model of the E-Car—a clay one,with tinfoil simulating aluminum and chrome. According toeyewitnesses, the audience sat in utter silence for what seemedlike a full minute, and then, as one man, burst into a round ofapplause. Nothing of the kind had ever happened at anintracompany first showing at Ford since 1896, when old Henryhad bolted together his first horseless carriage.
ONE of the most persuasive and most frequently citedexplanations of the Edsel’s failure is that it was a victim of thetime lag between the decision to produce it and the act ofputting it on the market. It was easy to see a few years later,when smaller and less powerful cars, euphemistically called“compacts,” had become so popular as to turn the oldautomobile status-ladder upside down, that the Edsel was agiant step in the wrong direction, but it was far from easy tosee that in fat, tail-finny 1955. American ingenuity—which hasproduced the electric light, the flying machine, the tin Lizzie, theatomic bomb, and even a tax system that permits a man,under certain circumstances, to clear a profit by making acharitable donation *—has not yet found a way of getting anautomobile on the market within a reasonable time after itcomes off the drawing board; the making of steel dies, thealerting of retail dealers, the preparation of advertising andpromotion campaigns, the gaining of executive approval for eachsuccessive move, and the various other gavotte-like routines thatare considered as vital as breathing in Detroit and its environsusually consume about two years. Guessing future tastes ishard enough for those charged with planning the customaryannual changes in models of established makes; it is far harderto bring out an altogether new creation, like the E-Car, forwhich several intricate new steps must be worked into thedance pattern, such as endowing the product with a personalityand selecting a suitable name for it, to say nothing ofconsulting various oracles in an effort to determine whether, bythe time of the unveiling, the state of the national economy willmake bringing out any new car seem like a good idea.
Faithfully executing the prescribed routine, the Special ProductsDivision called upon its director of planning for marketresearch, David Wallace, to see what he could do aboutimparting 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 thePlatonic idea of the college professor—the very steel die fromwhich the breed is cut—although, in point of fact, hisbackground 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 constructionlaborer in New York City, and then spent ten years in marketresearch at Time. Still, impressions are what count, andWallace has admitted that during his tenure with Ford heconsciously stressed his professorial air for the sake of theadvantage it gave him in dealing with the bluff, practical men ofDearborn. “Our department came to be regarded as asemi-Brain Trust,” he says, with a certain satisfaction. Heinsisted, typically, on living in Ann Arbor, where he could baskin the scholarly aura of the University of Michigan, rather thanin Dearborn or Detroit, both of which he declared wereintolerable after business hours. Whatever the degree of hissuccess in projecting the image of the E-Car, he seems, by hissmall eccentricities, to have done splendidly at projecting theimage of Wallace. “I don’t think Dave’s motivation for being atFord was basically economic,” his old boss, Krafve, says. “Daveis the scholarly type, and I think he considered the job aninteresting challenge.” One could scarcely ask for better evidenceof image projection than that.
Wallace clearly recalls the reasoning—candid enough—thatguided him and his assistants as they sought just the rightpersonality for the E-Car. “We said to ourselves, ‘Let’s faceit—there is no great difference in basic mechanism between atwo-thousand-dollar Chevrolet and a six-thousand-dollarCadillac,’” he says. “‘Forget about all the ballyhoo,’ we said, ‘andyou’ll see that they are really pretty much the same thing.
Nevertheless, there’s something—there’s got to be something—inthe makeup of a certain number of people that gives them ayen for a Cadillac, in spite of its high price, or maybe becauseof it.’ We concluded that cars are the means to a sort ofdream fulfillment. There’s some irrational factor in people thatmakes them want one kind of car rather thananother—something that has nothing to do with the mechanismat all but with the car’s personality, as the customer imaginesit. What we wanted to do, naturally, was to give the E-Car thepersonality that would make the greatest number of peoplewant it. We figured we had a big advantage over the othermanufacturers of medium-priced cars, because we didn’t haveto worry about changing a pre-existent, perhaps somewhatobnoxious personality. All we had to do was create the exactone we wanted—from scratch.”
As the first step in determining what the E-Car’s exactpersonality should be, Wallace decided to assess the personalitiesof the medium-priced cars already on the market, and those ofthe so-called low-priced cars as well, since the cost of some ofthe cheap cars’ 1955 models had risen well up into themedium-price range. To this end, he engaged the ColumbiaUniversity Bureau of Applied Social Research to interview eighthundred recent car buyers in Peoria, Illinois, and another eighthundred in San Bernardino, California, on the mental imagesthey had of the various automobile makes concerned. (Inundertaking this commercial enterprise, Columbia maintained itsacademic independence by reserving the right to publish itsfindings.) “Our idea was to get the reaction in cities, amongclusters of people,” Wallace says. “We didn’t want a crosssection. What we wanted was something that would showinterpersonal factors. We picked Peoria as a place that isMidwestern, stereotyped, and not loaded with extraneousfactors—like a General Motors glass plant, say. We picked SanBernardino because the West Coast is very important in theautomobile business, and because the market there is quitedifferent—people tend to buy flashier cars.”
The questions that the Columbia researchers fared forth toask in Peoria and San Bernardino dealt exhaustively withpractically everything having to do with automobiles except suchmatters as how much they cost, how safe they were, andwhether they ran. In particular, Wallace wanted to know therespondents’ impressions of each of the existing makes. Who, intheir opinion, would naturally own a Chevrolet or a Buick orwhatever? People of what age? Of which sex? Of what socialstatus? From the answers, Wallace found it easy to puttogether a personality portrait of each make. The image of theFord came into focus as that of a very fast, strongly masculinecar, of no particular social pretensions, that mightcharacteristically be driven by a rancher or an automobilemechanic. In contrast, Chevrolet emerged as older, wiser,slower, a bit less rampantly masculine, and slightly moredistingué—a clergyman’s car. Buick jelled into a middle-agedlady—or, at least, more of a lady than Ford, sex in cars havingproved to be relative—with a bit of the devil still in her, whosemost felicitous mate would be a lawyer, a doctor, or adance-band leader. As for the Mercury, it came out as virtuallya hot rod, best suited to a young-buck racing driver; thus,despite its higher price tag, it was associated with personshaving incomes no higher than the average Ford owner’s, sono wonder Ford owners had not been trading up to it. Thisodd discrepancy between image and fact, coupled with thecircumstance that, in sober truth all four makes looked verymuch alike and had almost the same horsepower under theirhoods, only served to bear out Wallace’s premise that theautomobile fancier, like a young man in love, is incapable ofsizing up the object of his affections in anything resembling arational manner.
By the time the researchers closed the books on Peoria andSan Bernardino, they had elicited replies not only to thesequestions but to others, several of which, it would appear, onlythe most abstruse sociological thinker could relate tomedium-priced cars. “Frankly, we dabbled,” Wallace says. “Itwas a dragnet operation.” Among the odds and ends that thedragnet dredged up were some that, when pieced together, ledthe researchers to report:
By looking at those respondents whose annual incomes range from $4,000to $11,000, we can make an … observation. A considerable percentage ofthese respondents [to a question about their ability to mix cocktails] are inthe “somewhat” category on ability to mix cocktails.… Evidently, they do nothave much confidence in their cocktail-mixing ability. We may infer thatthese respondents are aware of the fact that they are in the learningprocess. They may be able to mix Martinis or Manhattans, but beyondthese popular drinks they don’t have much of a repertoire.
Wallace, dreaming of an ideally lovable E-Car, was delighted asreturns like these came pouring into his Dearborn office. Butwhen the time for a final decision drew near, it became clearto him that he must put aside peripheral issues likecocktail-mixing prowess and address himself once more to theold problem of the image. And here, it seemed to him, thegreatest pitfall was the temptation to aim, in accordance withwhat he took to be the trend of the times, for extremes ofmasculinity, youthfulness, and speed; indeed, the followingpassage 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 non-owners, and get gratifications out ofmastering a traditionally male role. But … there is no doubt that whatevergratifications women get out of their cars, and whatever social imagery theyattach to their automobiles, they do want to appear as women. Perhapsmore worldly women, but women.
Early in 1956, Wallace set about summing up all of hisdepartment’s findings in a report to his superiors in the SpecialProducts Division. Entitled “The Market and PersonalityObjectives of the E-Car” and weighty with facts andstatistics—though generously interspersed with terse sections initalics or capitals from which a hard-pressed executive could getthe gist of the thing in a matter of seconds—the report firstindulged in some airy, skippable philosophizing and then gotdown to conclusions:
What happens when an owner sees his make as a car which a womanmight buy, but is himself a man? Does this apparent inconsistency of carimage and the buyer’s own characteristics affect his trading plans? Theanswer quite definitely is Yes. When there is a conflict between ownercharacteristics and make image, there is greater planning to switch toanother make. In other words, when the buyer is a different kind ofperson from the person he thinks would own his make, he wants tochange 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 anowner with strong opposing characteristics would be in conflict. But conflictalso can occur when the make image is diffuse or weakly defined. In thiscase, the owner is in an equally frustrating position of not being able toget a satisfactory identification from his make.
The question, then, was how to steer between the Scylla of atoo definite car personality and the Charybdis of a too weakpersonality. To this the report replied, “Capitalize on imageryweakness of competition,” and went on to urge that in thematter of age the E-Car should take an imagery positionneither too young nor too old but right alongside that of themiddling Olds-mobile; that in the matter of social class, not tomince matters, “the E-Car might well take a status position justbelow Buick and Oldsmobile”; and that in the delicate matter ofsex it should try to straddle the fence, again along with theprotean Olds. In sum (and in Wallace typography):
The most advantageous personality for the E-Car might well be THESMART CAR FOR THE YOUNGER EXECUTIVE OR PROFESSIONALFAMILY 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 canattain 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 makeit!”
Before spirited but responsible adventurers could have faith inthe E-Car, however, it had to have a name. Very early in itshistory, Krafve had suggested to members of the Ford familythat the new car be named for Edsel Ford, who was the onlyson of old Henry; the president of the Ford Motor Companyfrom 1918 until his death, in 1943; and the father of the newgeneration of Fords—Henry II, Benson, and William Clay. Thethree brothers had let Krafve know that their father might nothave cared to have his name spinning on a million hubcaps,and they had consequently suggested that the Special ProductsDivision start looking around for a substitute. This it did, with azeal no less emphatic than it displayed in the personalitycrusade. In the late summer and early fall of 1955, Wallacehired the services of several research outfits, which sentinterviewers, 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 therespondent thought of some such name as Mars, Jupiter,Rover, Ariel, Arrow, Dart, or Ovation. They asked what freeassociations each name brought to mind, and having got ananswer to this one, they asked what word or words wasconsidered the opposite of each name, on the theory that,subliminally speaking, the opposite is as much a part of aname as the tail is of a penny. The results of all this, theSpecial Products Division eventually decided, were inconclusive.
Meanwhile, Krafve and his men held repeated sessions in adarkened room, staring, with the aid of a spotlight, at a seriesof cardboard signs, each bearing a name, as, one after another,they were flipped over for their consideration. One of the menthus engaged spoke up for the name Phoenix, because of itsconnotations of ascendancy, and another favored Altair, on theground that it would lead practically all alphabetical lists of carsand thus enjoy an advantage analogous to that enjoyed in theanimal kingdom by the aardvark. At a certain drowsy point inone session, somebody suddenly called a halt to thecard-flipping and asked, in an incredulous tone, “Didn’t I see‘Buick’ go by two or three cards back?” Everybody looked atWallace, the impresario of the sessions. He puffed on his pipe,smiled an academic smile, and nodded.
THE card-flipping sessions proved to be as fruitless as thesidewalk interviews, and it was at this stage of the game thatWallace, resolving to try and wring from genius what thecommon mind had failed to yield, entered into the celebratedcar-naming correspondence with the poet Marianne Moore,which was later published in The New Yorker and still later, inbook form, by the Morgan Library. “We should like this name… to convey, through association or other conjuration, somevisceral feeling of elegance, fleetness, advanced features anddesign,” Wallace wrote to Miss Moore, achieving a certainfeeling of elegance himself. If it is asked who among the godsof Dearborn had the inspired and inspiriting idea of enlistingMiss Moore’s services in this cause, the answer, according toWallace, is that it was no god but the wife of one of his juniorassistants—a young lady who had recently graduated fromMount Holyoke, where she had heard Miss Moore lecture. Hadher husband’s superiors gone a step further and actuallyadopted one of Miss Moore’s many suggestions—IntelligentBullet, for instance, or Utopian Turtletop, or Bullet Cloisonné, orPastelogram, or Mongoose Civique, or Andante con Moto(“Description of a good motor?” Miss Moore queried in regardto this last)—there is no telling to what heights the E-Car mighthave risen, but the fact is that they didn’t. Dissatisfied withboth the poet’s ideas and their own, the executives in theSpecial Products Division next called in Foote, Cone & Belding,the advertising agency that had lately been signed up to handlethe E-Car account. With characteristic Madison Avenue vigor,Foote, Cone & Belding organized a competition among theemployees of its New York, London, and Chicago offices,offering nothing less than one of the brand-new cars as a prizeto 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 SpecialProducts Division might regard this list as a trifle unwieldy, theagency got to work and cut it down to six thousand names,which it presented to them in executive session. “There youare,” a Foote, Cone man said triumphantly, flopping a sheaf ofpapers on the table. “Six thousand names, all alphabetized andcross-referenced.”
A gasp escaped Krafve. “But we don’t want six thousandnames,” he said. “We only want one.”
The situation was critical, because the making of dies for thenew car was about to begin and some of them would have tobear its name. On a Thursday, Foote, Cone & Belding canceledall leaves and instituted what is called a crash program,instructing its New York and Chicago offices to set aboutindependently cutting down the list of six thousand names toten and to have the job done by the end of the weekend.
Before the weekend was over, the two Foote, Cone officespresented their separate lists of ten to the Special ProductsDivision, and by an almost incredible coincidence, which allhands insist was a coincidence, four of the names on the twolists were the same; Corsair, Citation, Pacer, and Ranger hadmiraculously survived the dual scrutiny. “Corsair seemed to behead and shoulders above everything else,” Wallace says. “Alongwith other factors in its favor, it had done splendidly in thesidewalk interviews. The free associations with Corsair wererather romantic—‘pirate,’ ‘swashbuckler,’ things like that. For itsopposite, we got ‘princess,’ or something else attractive on thatorder. Just what we wanted.”
Corsair or no Corsair, the E-Car was named the Edsel in theearly spring of 1956, though the public was not informed untilthe following autumn. The epochal decision was reached at ameeting of the Ford executive committee held at a time when,as it happened, all three Ford brothers were away. In PresidentFord’s absence, the meeting was conducted by Breech, whohad become chairman of the board in 1955, and his mood thatday was brusque, and not one to linger long overswashbucklers and princesses. After hearing the final choices, hesaid, “I don’t like any of them. Let’s take another look at someof the others.” So they took another look at the favoredrejects, among them the name Edsel, which, in spite of thethree Ford brothers’ expressed interpretation of their father’sprobable wishes, had been retained as a sort of anchor towindward. Breech led his associates in a patient scrutiny of thelist until they came to “Edsel.” “Let’s call it that,” Breech saidwith calm finality. There were to be four main models of theE-Car, with variations on each one, and Breech soothed someof his colleagues by adding that the magic four—Corsair,Citation, Pacer, and Ranger—might be used, if anybody felt soinclined, as the subnames for the models. A telephone call wasput through to Henry II, who was vacationing in Nassau. Hesaid that if Edsel was the choice of the executive committee, hewould abide by its decision, provided he could get the approvalof the rest of his family. Within a few days, he got it.
As Wallace wrote to Miss Moore a while later: “We havechosen a name.… It fails somewhat of the resonance, gaiety,and zest we were seeking. But it has a personal dignity andmeaning to many of us here. Our name, dear Miss Moore,is—Edsel. I hope you will understand.”
IT may be assumed that word of the naming of the E-Carspread a certain amount of despair among the Foote, Cone &Belding backers of more metaphorical names, none of whomwon a free car—a despair heightened by the fact that thename “Edsel” had been ruled out of the competition from thefirst. But their sense of disappointment was as nothingcompared to the gloom that enveloped many employees of theSpecial Products Division. Some felt that the name of a formerpresident of the company, who had sired its current president,bore dynastic connotations that were alien to the Americantemper; others, who, with Wallace, had put their trust in thequirks of the mass unconscious, believed that “Edsel” was adisastrously unfortunate combination of syllables. What were itsfree associations? Pretzel, diesel, hard sell. What was itsopposite? It didn’t seem to have any. Still, the matter wassettled, and there was nothing to do but put the best possibleface on it. Besides, the anguish in the Special Products Divisionwas by no means unanimous, and Krafve himself, of course,was among those who had no objection to the name. He stillhas none, declining to go along with those who contend thatthe decline and fall of the Edsel may be dated from themoment of its christening.
Krafve, in fact, was so well pleased with the way matters hadturned out that when, at eleven o’clock on the morning ofNovember 19, 1956, after a long summer of thoughtful silence,the Ford Company released to the world the glad tidings thatthe E-Car had been named the Edsel, he accompanied theannouncement with a few dramatic flourishes of his own. Onthe very stroke of that hour on that day, the telephoneoperators in Krafve’s domain began greeting callers with “EdselDivision” instead of “Special Products Division”; all stationerybearing the obsolete letterhead of the division vanished and wasreplaced by sheaves of paper headed “Edsel Division”; andoutside the building a huge stainless-steel sign reading “EDSELDIVISION” rose ceremoniously to the rooftop. Krafve himselfmanaged to remain earthbound, though he had his ownreasons for feeling buoyant; in recognition of his leadership ofthe E-Car project up to that point, he was given the augusttitle of Vice-President of the Ford Motor Company and GeneralManager, Edsel Division.
From the administrative point of view, thisoff-with-the-old-on-with-the-new effect was merely harmlesswindow dressing. In the strict secrecy of the Dearborn testtrack, vibrant, almost full-fledged Edsels, with their name gravenon their superstructures, were already being road-tested; Brownand his fellow stylists were already well along with their designsfor the next year’s Edsel; recruits were already being signed upfor an entirely new organization of retail dealers to sell theEdsel to the public; and Foote, Cone & Belding, having beenrelieved of the burden of staging crash programs to collectnames and crash programs to get rid of them again, wasalready deep in schemes for advertising the Edsel, under thepersonal direction of a no less substantial pillar of his tradethan Fairfax M. Cone, the agency’s head man. In planning hiscampaign, Cone relied heavily on what had come to be calledthe “Wallace prescription”; that is, the formula for the Edsel’spersonality as set forth by Wallace back in the days before thebig naming bee—“The smart car for the younger executive orprofessional family on its way up.” So enthusiastic was Coneabout the prescription that he accepted it with only onerevision—the substitution of “middle-income” family for “youngerexecutive,” his hunch being that there were more middle-incomefamilies around than young executives, or even people whothought they were young executives. In an expansive mood,possibly induced by his having landed an account that wasexpected to bring billings of well over ten million dollars a year,Cone described to reporters on several occasions the kind ofcampaign he was plotting for the Edsel—quiet, self-assured, andavoiding as much as possible the use of the adjective “new,”
which, though it had an obvious application to the product, heconsidered rather lacking in cachet. Above all, the campaignwas to be classic in its calmness. “We think it would be awfulfor the advertising to compete with the car,” Cone told thepress. “We hope that no one will ever ask, ‘Say, did you seethat Edsel ad?’ in any newspaper or magazine or on television,but, instead, that hundreds of thousands of people will say, andsay again, ‘Man, did you read about that Edsel?’ or ‘Did yousee that car?’ This is the difference between advertising andselling.” Evidently enough, Cone felt confident about thecampaign and the Edsel. Like a chess master who has nodoubt that he will win, he could afford to explicate the brillianceof his moves even as he made them.
Automobile men still talk, with admiration for the virtuositydisplayed and a shudder at the ultimate outcome, of the EdselDivision’s drive to round up retail dealers. Ordinarily, anestablished manufacturer launches a new car through dealerswho are already handling his other makes and who, to beginwith, take on the upstart as a sort of sideline. Not so in thecase of the Edsel; Krafve received authorization from on highto go all out and build up a retail-dealer organization bymaking raids on dealers who had contracts with othermanufacturers, or even with the other Ford Companydivisions—Ford and Lincoln-Mercury. (Although the Ford dealersthus corralled were not obliged to cancel their old contracts, allthe emphasis was on signing up retail outlets exclusivelydedicated to the selling of Edsels.) The goal set for IntroductionDay—which, after a great deal of soul-searching, was finallyestablished as September 4, 1957—was twelve hundred Edseldealers from coast to coast. They were not to be just anydealers, either; Krafve made it clear that Edsel was interested insigning up only dealers whose records showed that they had amarked ability to sell cars without resorting to the high-pressuretricks of borderline legality that had lately been giving theautomobile business a bad name. “We simply have to havequality dealers with quality service facilities,” Krafve said. “Acustomer who gets poor service on an established brandblames the dealer. On an Edsel, he will blame the car.” Thegoal of twelve hundred was a high one, for no dealer, qualityor not, can afford to switch makes lightly. The average dealerhas at least a hundred thousand dollars tied up in his agency,and in large cities the investment is much higher. He must hiresalesmen, mechanics, and office help; buy his own tools,technical literature, and signs, the latter costing as much as fivethousand dollars a set; and pay the factory spot cash for thecars he receives from it.
The man charged with mobilizing an Edsel sales force alongthese exacting lines was J. C. (Larry) Doyle, who, as generalsales-and-marketing manager of the division, ranked second toKrafve himself. A veteran of forty years with the FordCompany, who had started with it as an office boy in KansasCity and had spent the intervening time mainly selling, Doylewas a maverick in his field. On the one hand, he had an airof kindness and consideration that made him the very antithesisof the glib, brash denizens of a thousand automobile rowsacross the continent, and, on the other, he did not trouble toconceal an old-time salesman’s skepticism about such things asanalyzing the sex and status of automobiles, a pursuit hecharacterized by saying, “When I play pool, I like to keep onefoot on the floor.” Still, he knew how to sell cars, and that waswhat the Edsel Division needed. Recalling how he and his salesstaff brought off the unlikely trick of persuading substantial andreputable men who had already achieved success in one of thetoughest of all businesses to tear up profitable franchises infavor of a risky new one, Doyle said not long ago, “As soon asthe first few new Edsels came through, early in 1957, we put acouple of them in each of our five regional sales offices.
Needless to say, we kept those offices locked and the blindsdrawn. Dealers in every make for miles around wanted to seethe car, if only out of curiosity, and that gave us the leveragewe needed. We let it be known that we would show the caronly to dealers who were really interested in coming with us,and then we sent our regional field managers out tosurrounding towns to try to line up the No. 1 dealer in eachto 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 theEdsel without listening to a complete one-hour pitch on thewhole situation by a member of our sales force. It worked verywell.” It worked so well that by midsummer, 1957, it was clearthat Edsel was going to have a lot of quality dealers onIntroduction Day. (In fact, it missed the goal of twelve hundredby a couple of dozen.) Indeed, some dealers in other makeswere apparently so confident of the Edsel’s success, or sobemused by the Doyle staff’s pitch, that they were entirelywilling to sign up after hardly more than a glance at the Edselitself. Doyle’s people urged them to study the car closely, andkept reciting the litany of its virtues, but the prospective Edseldealers would wave such protestations aside and demand acontract without further ado. In retrospect, it would seem thatDoyle could have given lessons to the Pied Piper.
Now that the Edsel was no longer the exclusive concern ofDearborn, the Ford Company was irrevocably committed togoing ahead. “Until Doyle went into action, the whole programcould have been quietly dropped at any time at a word fromtop management, but once the dealers had been signed up,there was the matter of honoring your contract to put out acar,” Krafve has explained. The matter was attended to withdispatch. Early in June, 1957, the company announced that ofthe $250 million it had set aside to defray the advance costs ofthe Edsel, $150 million was being spent on basic facilities,including the conversion of various Ford and Mercury plants tothe needs of producing the new cars; $50 million on specialEdsel tooling; and $50 million on initial advertising andpromotion. In June, too, an Edsel destined to be the star of atelevision commercial for future release was stealthily transportedin a closed van to Hollywood, where, on a locked sound stagepatrolled by security guards, it was exposed to the cameras inthe admiring presence of a few carefully chosen actors whohad sworn that their lips would be sealed from then untilIntroduction Day. For this delicate photographic operation theEdsel Division cannily enlisted the services of Cascade Pictures,which also worked for the Atomic Energy Commission, and, asfar as is known, there were no unintentional leaks. “We tookall the same precautions we take for our A.E.C. films,” a grimCascade official has since said.
Within a few weeks, the Edsel Division had eighteen hundredsalaried employees and was rapidly filling some fifteen thousandfactory jobs in the newly converted plants. On July 15th, Edselsbegan rolling off assembly lines at Somerville, Massachusetts;Mahwah, New Jersey; Louisville, Kentucky; and San Jose,California. The same day, Doyle scored an important coup bysigning up Charles Kreisler, a Manhattan dealer regarded asone of the country’s foremost practitioners in his field, who hadrepresented Oldsmobile—one of Edsel’s self-designatedrivals—before heeding the siren song from Dearborn. On July22nd, the first advertisement for the Edsel appeared—in Life. Atwo-page spread in plain black-and-white, it was impeccablyclassic and calm, showing a car whooshing down a countryhighway at such high speed that it was an indistinguishableblur. “Lately, some mysterious automobiles have been seen onthe roads,” the accompanying text was headed. It went on tosay that the blur was an Edsel being road-tested, andconcluded with the assurance “The Edsel is on its way.” Twoweeks later, a second ad appeared in Life, this one showing aghostly-looking car, covered with a white sheet, standing at theentrance to the Ford styling center. This time the headline read,“A man in your town recently made a decision that will changehis life.” The decision, it was explained, was to become anEdsel dealer. Whoever wrote the ad cannot have known howtruly he spoke.
DURING the tense summer of 1957, the man of the hour atEdsel was C. Gayle Warnock, director of public relations, whoseduty was not so much to generate public interest in theforthcoming product, there being an abundance of that, as tokeep the interest at white heat, and readily convertible into adesire to buy one of the new cars on or after IntroductionDay—or, as the company came to call it, Edsel Day. Warnock,a dapper, affable man with a tiny mustache, is a native ofConverse, Indiana, who, long before Krafve drafted him fromthe Ford office in Chicago, did a spot of publicity work forcounty fairs—a background that has enabled him to spice thehoneyed smoothness of the modern public-relations man with atouch of the old carnival pitchman’s uninhibited spirit. Recallinghis summons to Dearborn, Warnock says, “When Dick Krafvehired me, back in the fall of 1955, he told me, ‘I want you toprogram the E-Car publicity from now to Introduction Day.’ Isaid, ‘Frankly, Dick, what do you mean by “program”?’ He saidhe meant to sort of space it out, starting at the end andworking backward. This was something new to me—I was usedto taking what breaks I could get when I could get them—butI soon found out how right Dick was. It was almost too easyto get publicity for the Edsel. Early in 1956, when it was stillcalled the E-Car, Krafve gave a little talk about it out inPortland, Oregon. We didn’t try for anything more than a playin the local press, but the wire services picked the story upand it went out all over the country. Clippings came in by thebushel. Right then I realized the trouble we might be headedfor. The public was getting to be hysterical to see our car,figuring it was going to be some kind of dream car—likenothing they’d ever seen. I said to Krafve, ‘When they find outit’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 tightropebetween overplaying and underplaying the Edsel would be tosay nothing about the car as a whole but to reveal itsindividual charms a little at a time—a sort of automotive striptease (a phrase that Warnock couldn’t with proper dignity usehimself but was happy to see the New York Times use forhim). The policy was later violated now and then, purposely orinadvertently. For one thing, as the pre-Edsel Day summerwore on, reporters prevailed upon Krafve to authorize Warnockto show the Edsel to them, one at a time, on what Warnockcalled a “peekaboo,” or “you’ve-seen-it-now-forget-it,” basis. And,for another, Edsels loaded on vans for delivery to dealers wereappearing on the highways in ever-increasing numbers, coveredfore and aft with canvas flaps that, as if to whet the desire ofthe motoring public, were forever blowing loose. That summer,too, was a time of speechmaking by an Edsel foursomeconsisting of Krafve, Doyle, J. Emmet Judge, who was Edsel’sdirector 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 downand across the nation, the four orators moved around so fastand so tirelessly that Warnock, lest he lose track of them, tookto indicating their whereabouts with colored pins on a map inhis office. “Let’s see, Krafve goes from Atlanta to New Orleans,Doyle from Council Bluffs to Salt Lake City,” Warnock wouldmuse of a morning in Dearborn, sipping his second cup ofcoffee and then getting up to yank the pins out and jab themin again.
Although most of Krafve’s audiences consisted of bankers andrepresentatives of finance companies who it was hoped wouldlend money to Edsel dealers, his speeches that summer, farfrom echoing the general hoopla, were almost statesmanlike intheir cautious—even somber—references to the new car’sprospects. And well they might have been, for developments inthe general economic outlook of the nation were making moresanguine men than Krafve look puzzled. In July, 1957, thestock market went into a nose dive, marking the beginning ofwhat is recalled as the recession of 1958. Then, early inAugust, a decline in the sales of medium-priced 1957 cars of allmakes set in, and the general situation worsened so rapidlythat, before the month was out, Automotive News reportedthat dealers in all makes were ending their season with thesecond-largest number of unsold new cars in history. If Krafve,on his lonely rounds, ever considered retreating to Dearbornfor consolation, he was forced to put that notion out of hismind when, also in August, Mercury, Edsel’s own stablemate,served notice that it was going to make things as tough aspossible for the newcomer by undertaking a million-dollar,thirty-day advertising drive aimed especially at “price-consciousbuyers”—a clear reference to the fact that the 1957 Mercury,which was then being sold at a discount by most dealers, costless than the new Edsel was expected to. Meanwhile, sales ofthe Rambler, which was the only American-made small car thenin production, were beginning to rise ominously. In the face ofall these evil portents, Krafve fell into the habit of ending hisspeeches with a rather downbeat anecdote about the boardchairman of an unsuccessful dog-food company who said to hisfellow directors, “Gentlemen, let’s face facts—dogs don’t like ourproduct.” “As far as we’re concerned,” Krafve added on atleast one occasion, driving home the moral with admirableclarity, “a lot will depend on whether people like our car ornot.”
But most of the other Edsel men were unimpressed byKrafve’s misgivings. Perhaps the least impressed of all wasJudge, who, while doing his bit as an itinerant speaker,specialized in community and civic groups. Undismayed by thelimitations of the strip-tease policy, Judge brightened up hislectures by showing such a bewildering array of animatedgraphs, cartoons, charts, and pictures of parts of the car—allflashed on a CinemaScope screen—that his listeners usually gothalfway home before they realized that he hadn’t shown theman Edsel. He wandered restlessly around the auditorium as hespoke, shifting the kaleidoscopic images on the screen at willwith the aid of an automatic slide changer—a trick madepossible by a crew of electricians who laced the place inadvance with a maze of wires linking the device to dozens offloor switches, which, scattered about the hall, responded whenhe kicked them. Each of the “Judge spectaculars,” as theseperformances came to be known, cost the Edsel Division fivethousand dollars—a sum that included the pay and expenses ofthe technical crew, who would arrive on the scene a day or soahead 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 greatestaspects of this whole Edsel program is the philosophy ofproduct and merchandising behind it,” Judge might start off,with a desultory kick at a switch here, a switch there. “All ofus who have been a part of it are real proud of thisbackground and we are anxiously awaiting its success when thecar is introduced this fall.… Never again will we be associatedwith anything as gigantic and full of meaning as this particularprogram.… Here is a glimpse of the car which will be beforethe American public on September 4, 1957 [at this point, Judgewould show a provocative slide of a hubcap or section offender].… It is a different car in every respect, yet it has anelement of conservatism which will give it maximum appeal.…The distinctiveness of the frontal styling integrates with thesculptured patterns of the side treatment.…” And on and onJudge would rhapsodize, rolling out such awesome phrases as“sculptured sheet metal,” “highlight character,” and “graceful,flowing lines.” At last would come the ringing peroration. “Weare proud of the Edsel!” he would cry, kicking switches rightand left. “When it is introduced this fall, it will take its place onthe streets and highways of America, bringing new greatness tothe Ford Motor Company. This is the Edsel story.”
THE drum-roll climax of the strip tease was a three-day presspreview of the Edsel, undraped from pinched-in snout to flaringrear, that was held in Detroit and Dearborn on August 26th,27th, and 28th, with 250 reporters from all over the country inattendance. It differed from previous automotive jamborees ofits kind in that the journalists were invited to bring their wivesalong—and many of them did. Before it was over, it had costthe Ford Company ninety thousand dollars. Grand as it was,the conventionality of its setting was a disappointment toWarnock, who had proposed, and seen rejected, three localesthat he thought would provide a more offbeat ambiance—asteamer on the Detroit River (“wrong symbolism”); Edsel,Kentucky (“inaccessible by road”); and Haiti (“just turned downflat”). Thus hobbled, Warnock could do no better for thereporters and their wives when they converged on the Detroitscene on Sunday evening, August 25th, than to put them upat the discouragingly named Sheraton-Cadillac Hotel and toarrange for them to spend Monday afternoon hearing andreading about the long-awaited details of the entire crop ofEdsels—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 modelsthemselves were revealed to the reporters in the styling center’srotunda, and Henry II offered a few words of tribute to hisfather. “The wives were not asked to the unveiling,” a Foote,Cone man who helped plan the affair recalls. “It was toosolemn and businesslike an event for that. It went over fine.
There was excitement even among the hardenednewspapermen.” (The import of the stories that most of theexcited newspapermen filed was that the Edsel seemed to be agood car, though not so radical as its billing had suggested.)In the afternoon, the reporters were whisked out to the testtrack to see a team of stunt drivers put the Edsel through itspaces. This event, calculated to be thrilling, turned out to behair-raising, and even, for some, a little unstringing. Enjoinednot to talk too much about speed and horsepower, since onlya few months previously the whole automobile industry hadnobly resolved to concentrate on making cars instead ofdelayed-action bombs, Warnock had decided to emphasize theEdsel’s liveliness through deeds rather than words, and toaccomplish this he had hired a team of stunt drivers. Edselsran over two-foot ramps on two wheels, bounced from higherramps on all four wheels, were driven in crisscross patterns,grazing each other, at sixty or seventy miles per hour, andskidded into complete turns at fifty. For comic relief, there wasa clown driver parodying the daredevil stuff. All the while, thevoice of Neil L. Blume, Edsel’s engineering chief, could be heardon a loudspeaker, purring about “the capabilities, the safety, theruggedness, the maneuverability and performance of these newcars,” and skirting the words “speed” and “horsepower” asdelicately as a sandpiper skirts a wave. At one point, when anEdsel leaping a high ramp just missed turning over, Krafve’sface took on a ghastly pallor; he later reported that he hadnot known the daredevil stunts were going to be so extreme,and was concerned both for the good name of the Edsel andthe 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 overand all hands safe. But everyone else seemed to be having agrand time. The Foote, Cone man said, “You looked over thisgreen Michigan hill, and there were those glorious Edsels,performing gloriously in unison. It was beautiful. It was like theRockettes. It was exciting. Morale was high.”
Warnock’s high spirits had carried him to even wilderextremes of fancy. The stunt driving, like the unveiling, wasconsidered too rich for the blood of the wives, but theresourceful Warnock was ready for them with a fashion showthat he hoped they would find at least equally diverting. Heneed not have worried. The star of the show, who wasintroduced by Brown, the Edsel stylist, as a Paris couturière,both beautiful and talented, turned out at the final curtain tobe a female impersonator—a fact of which Warnock, toheighten the verisimilitude of the act, had given Brown noadvance warning. Things were never again quite the same sincebetween Brown and Warnock, but the wives were able to givetheir husbands an extra paragraph or two for their stories.
That evening, there was a big gala for one and all at thestyling center, which was itself styled as a night club for theoccasion, complete with a fountain that danced in time with themusic of Ray McKinley’s band, whose emblem, the letters“GM”—a holdover from the days of its founder, the late GlennMiller—was emblazoned, as usual, on the music stand of eachmusician, very nearly ruining the evening for Warnock. Thenext morning, at a windup press conference held by Fordofficials. Breech declared of the Edsel, “It’s a husky youngster,and, like most other new parents, we’re proud enough to popour buttons.” Then seventy-one of the reporters took thewheels of as many Edsels and set out for home—not to drivethe cars into their garages but to deliver them to theshowrooms of their local Edsel dealers. Let Warnock describethe highlights of this final flourish: “There were severalunfortunate occurrences. One guy simply miscalculated andcracked up his car running into something. No fault of theEdsel there. One car lost its oil pan, so naturally the motorfroze. It can happen to the best of cars. Fortunately, at thetime of this malfunction the driver was going through abeautiful-sounding town—Paradise, Kansas, I think it was—andthat gave the news reports about it a nice little positive touch.
The nearest dealer gave the reporter a new Edsel, and hedrove on home, climbing Pikes Peak on the way. Then one carcrashed through a tollgate when the brakes failed. That wasbad. It’s funny, but the thing we were most worriedabout—other drivers being so eager to get a look at the Edselsthat they’d crowd our cars off the road—happened only once.
That was on the Pennsylvania Turnpike. One of our reporterswas tooling along—no problems—when a Plymouth driver pulledup alongside to rubberneck, and edged so close that the Edselgot sideswiped. Minor damage.”
LATE in 1959, immediately after the demise of the Edsel,Business Week stated that at the big press preview a Fordexecutive had said to a reporter, “If the company weren’t in sodeep, we never would have brought it out now.” However,since Business Week neglected to publish this patentlysensational statement for over two years, and since to this dayall the former ranking Edsel executives (Krafve included,notwithstanding his preoccupation with the luckless dog-foodcompany) firmly maintained that right up to Edsel Day andeven for a short time thereafter they expected the Edsel tosucceed, it would seem that the quotation should be regardedas a highly suspect archaeological find. Indeed, during theperiod between the press preview and Edsel Day the spirit ofeverybody associated with the venture seems to have been oneof wild optimism. “Oldsmobile, Goodbye!” ran the headline onan ad, in the Detroit Free Press, for an agency that wasswitching 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 tomake him, at nine dollars apiece, five thousand rockets that,exploding in mid-air, would release nine-foot scale-model Edselsmade of rice paper that would inflate and descend likeparachutes; his head reeling with visions of filling America’sskies as well as its highways with Edsels on Edsel Day,Warnock was about to dash off an order when Krafve, lookingsomething more than puzzled, shook his head.
On September 3rd—E Day-minus-one—the prices of thevarious Edsel models were announced; for cars delivered toNew York they ran from just under $2,800 to just over$4,100. On E Day, the Edsel arrived. In Cambridge, a band leda gleaming motorcade of the new cars up MassachusettsAvenue; flying out of Richmond, California, a helicopter hired byone of the most jubilant of the dealers lassoed by Doyle spreada giant Edsel sign above San Francisco Bay; and all over thenation, from the Louisiana bayous to the peak of MountRainier to the Maine woods, one needed only a radio or atelevision set to know that the very air, despite Warnock’ssetback on the rockets, was quivering with the presence of theEdsel. The tone for Edsel Day’s blizzard of publicity was set byan ad, published in newspapers all over the country, in whichthe Edsel shared the spotlight with the Ford Company’sPresident Ford and Chairman Breech. In the ad, Ford lookedlike a dignified young father, Breech like a dignified gentlemanholding a full house against a possible straight, the Edsel justlooked like an Edsel. The accompanying text declared that thedecision to produce the car had been “based on what weknew, guessed, felt, believed, suspected—about you,” and added,“YOU are the reason behind the Edsel.” The tone was calmand confident. There did not seem to be much room for doubtabout the reality of that full house.
Before sundown, it was estimated, 2,850,000 people had seenthe new car in dealers’ showrooms. Three days later, in NorthPhiladelphia, an Edsel was stolen. It can reasonably be arguedthat the crime marked the high-water mark of publicacceptance of the Edsel; only a few months later, any but theleast fastidious of car thieves might not have bothered.
DECLINE AND FALLTHE most striking physical characteristic of the Edsel was, ofcourse, its radiator grille. This, in contrast to the wide andhorizontal grilles of all nineteen other American makes of thetime, was slender and vertical. Of chromium-plated steel, andshaped something like an egg, it sat in the middle of the car’sfront end, and was embellished by the word “EDSEL” inaluminum letters running down its length. It was intended tosuggest the front end of practically any car of twenty or thirtyyears ago and of most contemporary European cars, and thusto look at once seasoned and sophisticated. The trouble wasthat whereas the front ends of the antiques and the Europeancars were themselves high and narrow—consisting, indeed, oflittle more than the radiator grilles—the front end of the Edselwas broad and low, just like the front ends of all its Americancompetitors. Consequently, there were wide areas on either sideof the grille that had to be filled in with something, and filledin they were—with twin panels of entirely conventional horizontalchrome grillwork. The effect was that of an Oldsmobile with theprow of a Pierce-Arrow implanted in its front end, or, moremetaphorically, of the charwoman trying on the duchess’
necklace. The attempt at sophistication was so transparent as tobe endearing.
But if the grille of the Edsel appealed through guilelessness,the rear end was another matter. Here, too, there was amarked departure from the conventional design of the day.
Instead of the notorious tail fin, the car had what looked to itsfanciers like wings and to others, less ethereal-minded, likeeyebrows. The lines of the trunk lid and the rear fenders,swooping upward and outward, did somewhat resemble thewings of a gull in flight, but the resemblance was marred bytwo long, narrow tail lights, set partly in the trunk lid andpartly in the fenders, which followed those lines and created thestartling illusion, especially at night, of a slant-eyed grin. Fromthe front, the Edsel seemed, above all, anxious to please, evenat the cost of being clownish; from the rear it looked crafty,Oriental, smug, one-up—maybe a little cynical andcontemptuous, too. It was as if, somewhere between grille andrear fenders, a sinister personality change had taken place.
In other respects, the exterior styling of the Edsel was not farout of the ordinary. Its sides were festooned with a bit lessthan the average amount of chrome, and distinguished by agouged-out bullet-shaped groove extending forward from therear fender for about half the length of the car. Midway alongthis groove, the word “EDSEL” was displayed in chrome letters,and just below the rear window was a small grille-likedecoration, on which was spelled out—of all things—“EDSEL.”
(After all, hadn’t Stylist Brown declared his intention to create avehicle that would be “readily recognizable”?) In its interior, theEdsel strove mightily to live up to the prediction of GeneralManager Krafve that the car would be “the epitome of thepush-button era.” The push-button era in medium-priced carsbeing what it was, Krafve’s had been a rash prophecy indeed,but the Edsel rose to it with a devilish assemblage of gadgetssuch as had seldom, if ever, been seen before. On or near theEdsel’s dashboard were a push button that popped the trunklid open; a lever that popped the hood open; a lever thatreleased the parking brake; a speedometer that glowed redwhen the driver exceeded his chosen maximum speed; asingle-dial control for both heating and cooling; a tachometer, inthe best racing-car style; buttons to operate or regulate thelights, the height of the radio antenna, the heater-blower, thewindshield wiper, and the cigarette lighter; and a row of eightred lights to wink warnings that the engine was too hot, that itwasn’t hot enough, that the generator was on the blink, thatthe parking brake was on, that a door was open, that the oilpressure was low, that the oil level was low, and that thegasoline level was low, the last of which the skeptical drivercould confirm by consulting the gas gauge, mounted a fewinches away. Epitomizing this epitome, theautomatic-transmission control box—arrestingly situated on top ofthe steering post, in the center of the wheel—sprouted a galaxyof five push buttons so light to the touch that, as Edsel mencould hardly be restrained from demonstrating, they could bedepressed with a toothpick.
Of the four lines of Edsels, both of the two larger and moreexpensive ones—the Corsair and the Citation—were 219 incheslong, or two inches longer than the biggest of the Oldsmobiles;both were eighty inches wide, or about as wide as passengercars ever get; and the height of both was only fifty-seveninches, as low as any other medium-priced car. The Rangerand the Pacer, the smaller Edsels, were six inches shorter, aninch narrower, and an inch lower than the Corsair and theCitation. The Corsair and the Citation were equipped with345-horsepower engines, making them more powerful than anyother American car at the time of their debut, and the Rangerand the Pacer were good for 303 horsepower, near the top intheir 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 suchabruptness that in ten and three-tenths seconds it would bedoing a mile a minute, and in seventeen and a half seconds itwould be a quarter of a mile down the road. If anything oranybody happened to be in the way when the toothpicktouched the push button, so much the worse.
WHEN the wraps were taken off the Edsel, it received what isknown in the theatrical business as a mixed press. Theautomotive editors of the daily newspapers stuck mostly tostraight descriptions of the car, with only here and there aphrase or two of appraisal, some of it ambiguous (“Thedifference in style is spectacular,” noted Joseph C. Ingraham inthe New York Times) and some of it openly favorable (“Ahandsome and hard-punching newcomer,” said Fred Olmstead,in the Detroit Free Press). Magazine criticism was generallymore exhaustive and occasionally more severe. Motor Trend,the largest monthly devoted to ordinary automobiles, as distinctfrom hot rods, devoted eight pages of its October, 1957, issueto an analysis and critique of the Edsel by Joe H. Wherry, itsDetroit editor. Wherry liked the car’s appearance, its interiorcomfort, and its gadgets, although he did not always make itclear just why; in paying his respects to the transmissionbuttons on the steering post, he wrote, “You need not takeyour eyes off the road for an instant.” He conceded that therewere “untold opportunities for more … unique approaches,” buthe summed up his opinion in a sentence that fairly pepperedthe Edsel with honorific adverbs: “The Edsel performs fine,rides well, and handles good.” Tom McCahill, of MechanixIllustrated, generally admired the “bolt bag,” as heaffectionately called the Edsel, but he had some reservations,which, incidentally, throw some interesting light on anautomobile critic’s equivalent of an aisle seat. “On ribbedconcrete,” he reported, “every time I shot the throttle to thefloor quickly, the wheels spun like a gone-wild WaringBlendor.… At high speeds, especially through rough corners, Ifound the suspension a little too horsebacky.… I couldn’t helpbut wonder what this salami would really do if it had enoughroad adhesion.”
By far the most downright—and very likely the mostdamaging—panning that the Edsel got during its first monthsappeared in the January, 1958, issue of the Consumers unionmonthly, Consumer Reports, whose 800,000 subscribersprobably included more potential Edsel buyers than have everturned 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 caris almost entirely conventional in construction.… The amount of shakepresent in this Corsair body on rough roads—which wasn’t long in makingitself heard as squeaks and rattles—went well beyond any acceptable limit.…The Corsair’s handling qualities—sluggish, over-slow steering, sway and leanon 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’stendency to shake like jelly, Edsel handling represents retrogression ratherthan progress.… Stepping on the gas in traffic, or in passing cars, or justto feel the pleasurable surge of power, will cause those big cylinders reallyto 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 thedriver’s eyes clear down off the road. [Pace Mr. Wherry.] The“luxury-loaded” Edsel—as one magazine cover described it—will certainlyplease 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 “moreuselessly overpowered … more gadget bedecked, more hungwith expensive accessories than any car in its price class,” andgiving the Corsair and the Citation the bottom position in itscompetitive ratings. Like Krafve, Consumer Reports consideredthe Edsel an epitome; unlike Krafve, the magazine concludedthat the car seemed to “epitomize the many excesses” withwhich Detroit manufacturers were “repulsing more and morepotential car buyers.”
AND yet, in a way, the Edsel wasn’t so bad. It embodied muchof the spirit of its time—or at least of the time when it wasdesigned, early in 1955. It was clumsy, powerful, dowdy, gauche,well-meaning—a de Kooning woman. Few people, apart fromemployees of Foote, Cone & Belding, who were paid to do so,have adequately hymned its ability, at its best, to coax and jollythe harried owner into a sense of well-being. Furthermore, thedesigners of several rival makes, including Chevrolet, Buick, andFord, Edsel’s own stablemate, later flattered Brown’s styling byimitating at least one feature of the car’s much reviledlines—the rear-end wing theme. The Edsel was obviously jinxed,but to say that it was jinxed by its design alone would be anoversimplification, as it would be to say that it was jinxed byan excess of motivational research. The fact is that in the short,unhappy life of the Edsel a number of other factors contributedto its commercial downfall. One of these was the scarcelybelievable circumstance that many of the very first Edsels—thoseobviously destined for the most glaring public limelight—weredramatically imperfect. By its preliminary program of promotionand advertising, the Ford Company had built up anoverwhelming head of public interest in the Edsel, causing itsarrival to be anticipated and the car itself to be gawked at withmore eagerness than had ever greeted any automobile beforeit. After all that, it seemed, the car didn’t quite work. Within afew weeks after the Edsel was introduced, its pratfalls were thetalk of the land. Edsels were delivered with oil leaks, stickinghoods, trunks that wouldn’t open, and push buttons that, farfrom yielding to a toothpick, couldn’t be budged with ahammer. An obviously distraught man staggered into a bar upthe Hudson River, demanding a double shot without delay andexclaiming that the dashboard of his new Edsel had just burstinto flame. Automotive News reported that in general theearliest Edsels suffered from poor paint, inferior sheet metal,and faulty accessories, and quoted the lament of a dealer aboutone of the first Edsel convertibles he received: “The top wasbadly set, doors cockeyed, the header bar trimmed at thewrong angle, and the front springs sagged.” The FordCompany had the particular bad luck to sell to Consumersunion—which buys its test cars in the open market, as aprecaution against being favored with specially doctoredsamples—an Edsel in which the axle ratio was wrong, anexpansion plug in the cooling system blew out, thepower-steering pump leaked, the rear-axle gears were noisy,and the heater emitted blasts of hot air when it was turnedoff. A former executive of the Edsel Division has estimated thatonly about half of the first Edsels really performed properly.
A layman cannot help wondering how the Ford Company, inall its power and glory, could have been guilty of such a MackSennett routine of buildup and anticlimax. The wan,hard-working Krafve explains gamely that when a companybrings out a new model of any make—even an old and testedone—the first cars often have bugs in them. A more startlingtheory—though only a theory—is that there may have beensabotage in some of the four plants that assembled the Edsel,all but one of which had previously been, and currently alsowere, assembling Fords or Mercurys. In marketing the Edsel,the Ford Company took a leaf out of the book of GeneralMotors, which for years had successfully been permitting, andeven encouraging, the makers and sellers of its Oldsmobiles,Buicks, Pontiacs, and the higher-priced models of its Chevroletto fight for customers with no quarter given; faced with thesame sort of intramural competition, some members of theFord and Lincoln-Mercury Divisions of the Ford Companyopenly hoped from the start for the Edsel’s downfall. (Krafve,realizing what might happen, had asked that the Edsel beassembled in plants of its own, but his superiors turned himdown.) However, Doyle, speaking with the authority of aveteran of the automobile business as well as with that ofKrafve’s second-in-command, pooh-poohs the notion that theEdsel was the victim of dirty work at the plants. “Of course theFord and Lincoln-Mercury Divisions didn’t want to see anotherFord Company car in the field,” he says, “but as far as Iknow, anything they did at the executive and plant levels wasin competitive good taste. On the other hand, at the distributionand dealer level, you got some rough infighting in terms ofwhispering and propaganda. If I’d been in one of the otherdivisions, I’d have done the same thing.” No proud defeatedgeneral of the old school ever spoke more nobly.
It is a tribute of sorts to the men who gave the Edsel its bigbuildup that although cars tending to rattle, balk, and fall apartinto shiny heaps of junk kept coming off the assembly lines,things didn’t go badly at first. Doyle says that on Edsel Daymore than 6,500 Edsels were either ordered by or actuallydelivered to customers. That was a good showing, but therewere isolated signs of resistance. For instance, a New Englanddealer selling Edsels in one showroom and Buicks in anotherreported that two prospects walked into the Edsel showroom,took a look at the Edsel, and placed orders for Buicks on thespot.
In the next few days, sales dropped sharply, but that was tobe expected once the bloom was off. Automobile deliveries todealers—one of the important indicators in the trade—arecustomarily measured in ten-day periods, and during the firstten days of September, on only six of which the Edsel was onsale, it racked up 4,095; this was lower than Doyle’s first-dayfigure because many of the initial purchases were of modelsand color combinations not in stock, which had to befactory-assembled to order. The delivery total for the secondten-day period was off slightly, and that for the third wasdown to just under 3,600. For the first ten days of October,nine of which were business days, there were only 2,751deliveries—an average of just over three hundred cars a day.
In order to sell the 200,000 cars per year that would makethe Edsel operation profitable the Ford Company would have tomove an average of between six and seven hundred eachbusiness day—a good many more than three hundred a day.
On the night of Sunday, October 13th, Ford put on amammoth television spectacular for Edsel, pre-empting the timeordinarily allotted to the Ed Sullivan show, but though theprogram cost $400,000 and starred Bing Crosby and FrankSinatra, it failed to cause any sharp spurt in sales. Now it wasobvious that things were not going at all well.
Among the former executives of the Edsel Division, opinionsdiffer as to the exact moment when the portents of doombecame unmistakable. Krafve feels that the moment did notarrive until sometime late in October. Wallace, in his capacity asEdsel’s pipe-smoking semi-Brain Truster, goes a step further bypinning the start of the disaster to a specific date—October 4th,the day the first Soviet sputnik went into orbit, shattering themyth of American technical pre-eminence and precipitating apublic revulsion against Detroit’s fancier baubles. Public RelationsDirector Warnock maintains that his barometric sensitivity to thepublic temper enabled him to call the turn as early asmid-September; contrariwise, Doyle says he maintained hisoptimism until mid-November, by which time he was about theonly man in the division who had not concluded it would takea miracle to save the Edsel. “In November,” says Wallace,sociologically, “there was panic, and its concomitant—mobaction.” The mob action took the form of a concerted tendencyto blame the design of the car for the whole debacle; Edselmen who had previously had nothing but lavish praise for theradiator grille and rear end now went around muttering thatany fool could see they were ludicrous. The obvious sacrificialvictim was Brown, whose stock had gone through the roof atthe time of the regally accoladed debut of his design, in August,1955. Now, without having done anything further, for eitherbetter or worse, the poor fellow became the companyscapegoat. “Beginning in November, nobody talked to Roy,”
Wallace says. On November 27th, as if things weren’t badenough, Charles Kreisler, who as the only Edsel dealer inManhattan provided its prize showcase, announced that he wasturning in his franchise because of poor sales, and it wasrumored that he added, “The Ford Motor Company has laidan egg.” He thereupon signed up with American Motors to sellits Rambler, which, as the only domestic small car then on themarket, was already the possessor of a zooming sales curve.
Doyle grimly commented that the Edsel Division was “notconcerned” about Kreisler’s defection.
By December, the panic at Edsel had abated to the pointwhere its sponsors could pull themselves together and begincasting about for ways to get sales moving again. Henry FordII, manifesting himself to Edsel dealers on closed-circuittelevision, urged them to remain calm, promised that thecompany would back them to the limit, and said flatly, “TheEdsel is here to stay.” A million and a half letters went outover Krafve’s signature to owners of medium-priced cars, askingthem to drop around at their local dealers and test-ride theEdsel; everyone doing so, Krafve promised, would be given aneight-inch plastic scale model of the car, whether he bought afull-size one or not. The Edsel Division picked up the check forthe scale models—a symptom of desperation indeed, for undernormal circumstances no automobile manufacturer would makeeven a move to outfumble its dealers for such a tab. (Up tothat time, the dealers had paid for everything, as is customary.)The division also began offering its dealers what it called “salesbonuses,” which meant that the dealers could knock anythingfrom one hundred to three hundred dollars off the price ofeach car without reducing their profit margin. Krafve told areporter that sales up to then were about what he hadexpected them to be, although not what he had hoped theywould be; in his zeal not to seem unpleasantly surprised, heappeared to be saying that he had expected the Edsel to fail.
The Edsel’s advertising campaign, which had started withstudied dignity, began to sound a note of stridency. “Everyonewho has seen it knows—with us—that the Edsel is a success,”
a magazine ad declared, and in a later ad this phrase wastwice repeated, like an incantation: “The Edsel is a success. Itis a new idea—a YOU idea—on the American Road.… The Edselis a success.” Soon the even less high-toned but moredependable advertising themes of price and social status beganto intrude, in such sentences as “They’ll know you’ve arrivedwhen you drive up in an Edsel” and “The one that’s reallynew is the lowest-priced, too!” In the more rarefied sectors ofMadison Avenue, a resort to rhymed slogans is usuallyregarded as an indication of artistic depravity induced bycommercial necessity.
From the frantic and costly measures the Edsel Division tookin December, it garnered one tiny crumb: for the first ten-dayperiod of 1958, it was able to report, sales were up 18.6percent over those of the last ten days of 1957. The catch, asthe Wall Street Journal alertly noted, was that the latterperiod embraced one more selling day than the earlier one, so,for practical purposes, there had scarcely been a gain at all. Inany case, that early-January word of meretricious cheer turnedout to be the Edsel Division’s last gesture. On January 14,1958, the Ford Motor Company announced that it wasconsolidating the Edsel Division with the Lincoln-MercuryDivision to form a Mercury-Edsel-Lincoln Division, under themanagement of James J. Nance, who had been runningLincoln-Mercury. It was the first time that one of the majorautomobile companies had lumped three divisions into one sinceGeneral Motors’ merger of Buick, Oldsmobile, and Pontiac backin the depression, and to the people of the expunged EdselDivision the meaning of the administrative move was all tooclear. “With that much competition in a division, the Edselwasn’t going anywhere,” Doyle says. “It became a stepchild.”
FOR the last year and ten months of its existence, the Edselwas very much a stepchild—generally neglected, little advertised,and kept alive only to avoid publicizing a boner any more thannecessary and in the forlorn hope that it might go somewhereafter all. What advertising it did get strove quixotically to assurethe automobile trade that everything was dandy; inmid-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. Wethink it is quite significant that during the five months since the Edsel wasintroduced, Edsel sales have been greater than the first five months’ salesfor any other new make of car ever introduced on the American Road.…Edsel’s steady progress can be a source of satisfaction and a greatincentive to all of us.
Nance’s comparison, however, was almost meaningless, no newmake 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 toan article by S. I. Hayakawa, the semanticist, that waspublished in the spring of 1958 in ETC: A Review of GeneralSemantics, a quarterly magazine, under the title, “Why theEdsel Laid an Egg.” Hayakawa, who was both the founder andthe editor of ETC, explained in an introductory note that heconsidered the subject within the purview of general semanticsbecause automobiles, like words, are “important … symbols inAmerican culture,” and went on to argue that the Edsel’s flopcould 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 reasonableand practical transportation, thereby neglecting “the realityprinciple.” “What the motivation researchers failed to tell theirclients … is that only the psychotic and the gravely neuroticact out their irrationalities and their compensatory fantasies,”
Hayakawa admonished Detroit briskly, and added, “The troublewith selling symbolic gratification via such expensive items as …the Edsel Hermaphrodite … is the competition offered by muchcheaper forms of symbolic gratification, such as Playboy (fiftycents a copy), Astounding Science Fiction (thirty-five cents acopy), and television (free).”
Notwithstanding the competition from Playboy, or possiblybecause the symbol-motivated public included people who couldafford both, the Edsel kept rolling—but just barely. The carmoved, as salesmen say, though hardly at the touch of atoothpick. In fact, as a stepchild it sold about as well as it hadsold as a favorite son, suggesting that all the hoopla, whetherabout symbolic gratification or mere horsepower, had had littleeffect one way or the other. The new Edsels that wereregistered with the motor-vehicle bureaus of the various statesduring 1958 numbered 34,481—considerably fewer than newcars of any competing make, and less than one-fifth of the200,000 a year necessary if the Edsel was to show a profit,but still representing an investment by motorists of over ahundred million dollars. The picture actually brightened inNovember, 1958, with the advent of the Edsel’s second-yearmodels. Shorter by up to eight inches, lighter by up to fivehundred pounds, and with engines less potent by as much as158 horsepower, they had a price range running from fivehundred to eight hundred dollars less than that of theirpredecessors. The vertical grille and the slant-eyed rear endwere still there, but the modest power and proportionspersuaded Consumer Reports to relent and say, “The FordMotor Company, after giving last year’s initial Edsel model ablack eye, has made a respectable and even likable automobileof it.” Quite a number of motorists seemed to agree; about twothousand more Edsels were sold in the first half of 1959 thanhad been sold in the first half of 1958, and by the earlysummer of 1959 the car was moving at the rate of aroundfour thousand a month. Here, at last, was progress; sales wereat almost a quarter of the minimum profitable rate, instead of amere fifth.
On July 1, 1959, there were 83,849 Edsels on the country’sroads. The largest number (8,344) were in California, which isperennially beset with far and away the largest number of carsof practically all makes, and the smallest number were inAlaska, Vermont, and Hawaii (122, 119, and 110, respectively).
All in all, the Edsel seemed to have found a niche for itself asan amusingly eccentric curiosity. Although the Ford Company,with its stockholders’ money still disappearing week after weekinto the Edsel, and with small cars now clearly the order of theday, could scarcely affect a sentimental approach to the subject,it nonetheless took an outside chance and, in mid-October of1959, brought out a third series of annual models. The 1960Edsel appeared a little more than a month after the Falcon,Ford’s first—and instantly successful—venture into the small-carfield, and was scarcely an Edsel at all; gone were both thevertical grille and the horizontal rear end, and what remainedlooked like a cross between a Ford Fairlane and a Pontiac. Itsinitial sales were abysmal; by the middle of November only oneplant—in Louisville, Kentucky—was still turning out Edsels, and itwas turning out only about twenty a day. On November 19th,the Ford Foundation, which was planning to sell a block of itsvast holdings of stock in the Ford Motor Company, issued theprospectus that is required by law under such circumstances,and stated therein, in a footnote to a section describing thecompany’s products, that the Edsel had been “introduced inSeptember 1957 and discontinued in November 1959.” Thesame day, this mumbled admission was confirmed and amplifiedby a Ford Company spokesman, who did some mumbling ofhis own. “If we knew the reason people aren’t buying theEdsel, we’d probably have done something about it,” he said.
The final quantitative box score shows that from the beginningright up to November 19th, 110,810 Edsels were produced and109,466 were sold. (The remaining 1,344, almost all of them1960 models, were disposed of in short order with the help ofdrastic price cuts.) All told, only 2,846 of the 1960 Edsels wereever produced, making models of that year a potentialcollector’s item. To be sure, it will be generations before 1960Edsels are as scarce as the Type 41 Bugatti, of which no morethan eleven specimens were made, back in the late twenties, tobe sold only to bona-fide kings, and the 1960 Edsel’s reasonsfor being a rarity are not exactly as acceptable, socially orcommercially, as the Type 41 Bugatti’s. Still, a 1960-EdselOwners’ Club may yet appear.
The final fiscal box score on the Edsel fiasco will probablynever be known, because the Ford Motor Company’s publicreports do not include breakdowns of gains and losses withinthe individual divisions. Financial buffs estimate, however, thatthe company lost something like $200 million on the Edselafter it appeared; add to this the officially announcedexpenditure of $250 million before it appeared, subtract about ahundred million invested in plant and equipment that weresalvageable for other uses, and the net loss is $350 million. Ifthese estimates are right, every Edsel the companymanufactured cost it in lost money about $3,200, or about theprice of another one. In other, harsher words, the companywould have saved itself money if, back in 1955, it had decidednot to produce the Edsel at all but simply to give away 110,810specimens of its comparably priced car, the Mercury.
THE end of the Edsel set off an orgy of hindsight in the press.
Time declared, “The Edsel was a classic case of the wrong carfor the wrong market at the wrong time. It was also a primeexample of the limitations of market research, with its ‘depthinterviews’ and ‘motivational’ mumbo-jumbo.” Business Week,which shortly before the Edsel made its bow had described itwith patent solemnity and apparent approval, now pronouncedit “a nightmare” and appended a few pointedly critical remarksabout Wallace’s research, which was rapidly achieving ascapegoat status equal to that of Brown’s design. (Jumping upand down on motivational research was, and is, splendid sport,but, of course, the implication that it dictated, or eveninfluenced, the Edsel’s design is entirely false, since the research,being intended only to provide a theme for advertising andpromotion, was not undertaken until after Brown hadcompleted his design.) The Wall Street Journal’s obituary ofthe Edsel made a point that was probably sounder, andcertainly more original.
Large corporations are often accused of rigging markets, administeringprices, and otherwise dictating to the consumer [it observed]. And yesterdayFord Motor Company announced its two-year experiment with themedium-priced Edsel has come to an end … for want of buyers. All this isquite a ways from auto makers being able to rig markets or forceconsumers 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, theconsumer is the dictator without peer.
The tone of the piece was friendly and sympathetic; the FordCompany, it seemed, had endeared itself to the Journal byplaying the great American situation-comedy role of Daddy theBungler.
As for the post-mortem explanations of the debacle that havebeen offered by former Edsel executives, they are notable fortheir reflective tone—something like that of a knocked-out prizefighter opening his eyes to find an announcer’s microphonepushed into his face. In fact, Krafve, like many a flattenedpugilist, blames his own bad timing; he contends that if he hadbeen able to thwart the apparently immutable mechanics andeconomics of Detroit, and had somehow been able to bring outthe Edsel in 1955, or even 1956, when the stock market andthe medium-priced-car market were riding high, the car wouldhave done well and would still be doing well. That is to say, ifhe had seen the punch coming, he would have ducked. Krafverefuses to go along with a sizable group of laymen who tendto attribute the collapse to the company’s decision to call thecar the Edsel instead of giving it a brisker, more singablename, reducible to a nickname other than “Ed” or “Eddie,” andnot freighted with dynastic connotations. As far as he can see,Krafve still says, the Edsel’s name did not affect its fortunesone way or the other.
Brown agrees with Krafve that bad timing was the chiefmistake. “I frankly feel that the styling of the automobile hadvery little, if anything, to do with its failure,” he said later, andhis frankness may pretty safely be left unchallenged. “The Edselprogram, like any other project planned for future markets, wasbased on the best information available at the time in whichdecisions were made. The road to Hell is paved with goodintentions!”
Doyle, with the born salesman’s intensely personal feelingabout his customers, talks like a man betrayed by a friend—theAmerican public. “It was a buyers’ strike,” he says. “Peopleweren’t in the mood for the Edsel. Why not is a mystery tome. What they’d been buying for several years encouraged theindustry to build exactly this kind of car. We gave it to them,and they wouldn’t take it. Well, they shouldn’t have acted likethat. 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 workedand worked over the years—getting rid of gear-shifting,providing interior comfort, providing plus performance for usein emergencies! And now the public wants these little beetles. Idon’t get it!”
Wallace’s sputnik theory provides an answer to Doyle’squestion about why people weren’t in the mood, and,furthermore, it is sufficiently cosmic to befit a semi-BrainTruster. It also leaves Wallace free to defend the validity of hismotivational-research studies as of the time when they wereconducted. “I don’t think we yet know the depths of thepsychological effect that that first orbiting had on us all,” hesays. “Somebody had beaten us to an important gain intechnology, and immediately people started writing articles abouthow crummy Detroit products were, particularly the heavilyornamented 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 thesimplest car. The American people had put themselves on aself-imposed austerity program. Not buying Edsels was theirhair shirt.”
TO any relics of the sink-or-swim nineteenth-century days ofAmerican industry, it must seem strange that Wallace canafford to puff on his pipe and analyze the holocaust soamiably. The obvious point of the Edsel’s story is the defeat ofa giant motor company, but what is just as surprising is thatthe giant did not come apart, or even get seriously hurt in thefall, and neither did the majority of the people who went downwith him. Owing largely to the success of four of its othercars—the Ford, the Thunderbird, and, later on the small Falconand Comet and then the Mustang—the Ford Company, as aninvestment, survived gloriously. True, it had a bad time of it in1958, when, partly because of the Edsel, net income per shareof 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 1957high of about $60 to a 1958 low of under $40. But all theselosses were more than recouped in 1959, when net income pershare was $8.24, dividends per share were $2.80, and theprice of the stock reached a high of around $90. In 1960 and1961, things went even better. So the 280,000 Fordstockholders listed on the books in 1957 had had little tocomplain about unless they had sold at the height of the panic.
On the other hand, six thousand white-collar workers weresqueezed out of their jobs as a result of theMercury-Edsel-Lincoln consolidation, and the average number ofFord employees fell from 191,759 in 1957 to 142,076 thefollowing year, climbing back to only 159,541 in 1959. And, ofcourse, dealers who gave up profitable franchises in othermakes and then went broke trying to sell Edsels weren’t likelyto be very cheerful about the experience. Under the terms ofthe 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 squeezedout, and it can have been small comfort to those of them whowent bankrupt to learn later that when the Ford Companyfinally discontinued making the car, it agreed to pay those oftheir former colleagues who had weathered the crisis one-halfof the original cost of their Edsel signs, and was granting themsubstantial rebates on all Edsels in stock at the time ofdiscontinuance. Still, automobile dealers, some of whom work oncredit margins as slim as those of Miami hotel operators,occasionally go broke with even the most popular cars. Andamong those who earn their living in the rough-and-tumbleworld of automobile salesrooms, where Detroit is not alwaysspoken of with affection, many will concede that the FordCompany, once it had found itself stuck with a lemon, did asmuch as it reasonably could to bolster dealers who had casttheir lot with Edsel. A spokesman for the National AutomobileDealers Association has since stated, “So far as we know, theEdsel dealers were generally satisfied with the way they weretreated.”
Foote, Cone & Belding also ended up losing money on theEdsel account, since its advertising commissions did not entirelycompensate for the extraordinary expense it had gone to ofhiring sixty new people and opening up a posh office inDetroit. But its losses were hardly irreparable; the minute therewere no more Edsels to advertise, it was hired to advertiseLincolns, and although that arrangement did not last very long,the firm has happily survived to sing the praises of such clientsas General Foods, Lever Brothers, and Trans World Airways. Arather touching symbol of the loyalty that the agency’semployees have for its former client is the fact that for severalyears after 1959, on every workday its private parking lot inChicago was still dotted with Edsels. These faithful drivers,incidentally, are not unique. If Edsel owners have not found themeans to a dream fulfillment, and if some of them for a whilehad to put up with harrowing mechanical disorders, many ofthem more than a decade later cherish their cars as if theywere Confederate bills, and on Used Car Row the Edsel is ahigh-premium item, with few cars being offered.
By and large, the former Edsel executives did not just landon their feet, they landed in clover. Certainly no one canaccuse the Ford Company of giving vent to its chagrin in theold-fashioned way, by vulgarly causing heads to roll. Krafve wasassigned to assist Robert S. McNamara, at that time a Forddivisional vice-president (and later, of course, Secretary ofDefense), for a couple of months, and then he moved to astaff job in company headquarters, stayed there for about ayear, and left to become a vice-president of the RaytheonCompany, of Waltham, Massachusetts, a leading electronics firm.
In April, 1960, he was made its president. In the middle sixtieshe left to become a high-priced management consultant on theWest Coast. Doyle, too, was offered a staff job with Ford, butafter taking a trip abroad to think it over he decided to retire.
“It was a question of my relationship to my dealers,” heexplains. “I had assured them that the company was fullybehind the Edsel for keeps, and I didn’t feel that I was thefellow to tell them now that it wasn’t.” After his retirement,Doyle remained about as busy as ever, keeping an eye onvarious businesses in which he has set up various friends andrelatives, and conducting a consulting business of his own inDetroit. About a month before Edsel’s consolidation withMercury and Lincoln, Warnock, the publicity man, left thedivision to become director of news services for theInternational Telephone & Telegraph Corp., in New York—aposition he left in June, 1960, to become vice-president ofCommunications Counselors, the public-relations arm ofMcCann-Erickson. From there he went back to Ford, asEastern promotion chief for Lincoln-Mercury—a case of a headthat had not rolled but had instead been anointed. Brown, theembattled stylist, stayed on in Detroit for a while as chief stylistof Ford commercial vehicles and then went with the FordMotor 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 theFord version of Siberia. “I have found it to be a mostsatisfying experience, and one of the best steps I have evertaken in my … career,” he stated firmly in a letter fromEngland. “We are building a styling office and a styling teamsecond to none in Europe.” Wallace, the semi-Brain Truster,was asked to continue semi-Brain Trusting for Ford, and, sincehe still didn’t like living in Detroit, or near it, was permitted tomove to New York and to spend only two days a week atheadquarters. (“They didn’t seem to care any more where Ioperated from,” he says modestly.) At the end of 1958, he leftFord, and he has since finally achieved his heart’s desire—tobecome a full-time scholar and teacher. He set about getting adoctorate in sociology at Columbia, writing his thesis on socialchange in Westport, Connecticut, which he investigated by busilyquizzing its inhabitants; meanwhile, he taught a course on “TheDynamics of Social Behavior” at the New School for SocialResearch, in Greenwich Village. “I’m through with industry,” hewas heard to declare one day, with evident satisfaction, as heboarded a train for Westport, a bundle of questionnaires underhis arm. Early in 1962, he became Dr. Wallace.
The subsequent euphoria of these former Edsel men did notstem entirely from the fact of their economic survival; theyappear to have been enriched spiritually. They are inclined tospeak of their Edsel experience—except for those still with Ford,who are inclined to speak of it as little as possible—with theverve and garrulity of old comrades-in-arms hashing over theirmost thrilling campaign. Doyle is perhaps the most passionatereminiscer in the group. “It was more fun than I’ve ever hadbefore or since,” he told a caller in 1960. “I suppose that’sbecause I worked the hardest ever. We all did. It was a goodcrew. The people who came with Edsel knew they were takinga chance, and I like people who’ll take chances. Yes, it was awonderful experience, in spite of the unfortunate thing thathappened. And we were on the right track, too! When I wentto Europe just before retiring, I saw how it is there—nothingbut compact cars, yet they’ve still got traffic jams over there,they’ve still got parking problems, they’ve still got accidents. Justtry getting in and out of those low taxicabs without hitting yourhead, or try not to get clipped while you’re walking around theArc de Triomphe. This small-car thing won’t last forever. I can’tsee American drivers being satisfied for long with manualgear-shifting and limited performance. The pendulum will swingback.”
Warnock, like many a public-relations man before him, claimsthat 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 itcould have done if it had had the right product at the righttime. It could have made millions, that’s what! The whole thingwas two years out of my life that I’ll never forget. It washistory in the making. Doesn’t it all tell you something aboutAmerica in the fifties—high hopes, and less than completefulfillment of them?”
Krafve, the boss of the great team manqué, is entirelyprepared to testify that there is more to his formersubordinates’ talk than just the romantic vaporings of oldsoldiers. “It was a wonderful group to work with,” he said notlong ago. “They really put their hearts and guts into the job.
I’m interested in a crew that’s strongly motivated, and that onewas. When things went bad, the Edsel boys could have criedabout how they’d given up wonderful opportunities to comewith us, but if anybody did, I never heard about it. I’m notsurprised that they’ve mostly come out all right. In industry,you take a bump now and then, but you bounce back as longas you don’t get defeated inside. I like to get together withsomebody once in a while—Gayle Warnock or one of theothers—and go over the humorous incidents, the tragicincidents.…”
Whether the nostalgia of the Edsel boys for the Edsel runs tothe humorous or to the tragic, it is a thought-provokingphenomenon. Maybe it means merely that they miss thelimelight they first basked in and later squirmed in, or maybe itmeans that a time has come when—as in Elizabethan dramabut seldom before in American business—failure can have acertain grandeur that success never knows.
* The word “styling” is a weed deeply embedded in the garden ofautomobilia. In its preferred sense, the verb “to style” means to name; thusthe Special Products Division’s epic efforts to choose a name for the E-Car,which will be chronicled presently, were really the styling program, andwhat Brown and his associates were up to was something else again. In itssecond sense, says Webster, “to style” means “to fashion in … the acceptedstyle”; this was just what Brown, who hoped to achieve originality, wastrying not to do, so Brown’s must have been the antistyling program.
* For details on this product of the national creativity, see Chapter 3.
Chapter 3 The Federal Income
Tax I BEYOND A DOUBT, many prosperous and ostensibly intelligentAmericans have in recent years done things that to a na?veobserver might appear outlandish, if not actually lunatic. Men ofinherited wealth, some of them given to the denunciation ofgovernment in all its forms and manifestations, have shownthemselves to be passionately interested in the financing of stateand municipal governments, and have contributed huge sumsto this end. Weddings between persons with very high incomesand persons with not so high incomes have tended to takeplace most often near the end of December and least oftenduring January. Some exceptionally successful people, especiallyin the arts, have been abruptly and urgently instructed by theirfinancial advisers to do no more gainful work under anycircumstances for the rest of the current calendar year, andhave followed this advice, even though it sometimes came asearly as May or June. Actors and other people with highincomes from personal services have again and again becomethe proprietors of sand-and-gravel businesses, bowling alleys,and telephone-answering services, doubtless adding a certainélan to the conduct of those humdrum establishments.
Motion-picture people, as if fulfilling a clockwork schedule ofrenunciation and reconciliation, have repeatedly abjured theirnative soil in favor of foreign countries for periods of eighteenmonths—only to embrace it again in the nineteenth. Petroleuminvestors have peppered the earth of Texas with speculative oilwells, taking risks far beyond what would be dictated by normalbusiness judgment. Businessmen travelling on planes, riding intaxis, or dining in restaurants have again and again been seencompulsively making entries in little notebooks that, if they werequestioned, they would describe as “diaries;” however, far frombeing spiritual descendants of Samuel Pepys or Philip Hone,they were writing down only what everything cost. And ownersand part owners of businesses have arranged to share theirownership with minor children, no matter how young; indeed,in at least one case of partnership agreement has been delayedpending the birth of one partner.
As hardly anyone needs to be told, all these odd actions aredirectly traceable to various provisions of the federal income-taxlaw. Since they deal with birth, marriage, work, and styles andplaces of living, they give some idea of the scope of the law’ssocial effects, but since they are confined to the affairs of thewell-to-do, they give no idea of the breadth of its economicimpact. Inasmuch as almost sixty-three million individual returnswere filed in a typical recent year—1964—it is not surprisingthat the income-tax law is often spoken of as the law of theland that most directly affects the most individuals, andinasmuch as income-tax collections account for almostthree-quarters of our government’s gross receipts, it isunderstandable that it is considered our most important singlefiscal measure. (Out of a gross from all sources of a hundredand twelve billion dollars for the fiscal year that ended June30th, 1964, roughly fifty-four and a half billion came fromindividual income taxes and twenty-three and a third billionfrom corporation income taxes.) “In the popular mind, it isTHE 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 theeconomic effect of the tax has been so sweeping as to createtwo quite separate kinds of United States currency—before-taxmoney and after-tax money. At any rate, no corporation isever formed, nor are any corporation’s affairs conducted for asmuch as a single day, without the lavishing of earnestconsideration upon the income tax, and hardly anyone in anyincome group can get by without thinking of it occasionally,while some people, of course, have had their fortunes or theirreputations, or both, ruined as a result of their failure tocomply with it. As far afield as Venice, an American visitor afew years ago was jolted to find on a brass plaque affixed to acoin box for contributions to the maintenance fund of theBasilica of San Marco the words “Deductible for U.S.
Income-Tax Purposes.”
A good deal of the attention given to the income tax is basedon the proposition that the tax is neither logical nor equitable.
Probably the broadest and most serious charge is that the lawhas close to its heart something very much like a lie; that is, itprovides for taxing incomes at steeply progressive rates, andthen goes on to supply an array of escape hatches soconvenient that hardly anyone, no matter how rich, need paythe top rates or anything like them. For 1960, taxpayers withreportable incomes of between two hundred thousand and fivehundred thousand dollars paid, on the average, about 44 percent, and even those few who reported incomes of over amillion dollars paid well under 50 per cent—which happened tobe just about the percentage that a single taxpayer wassupposed to pay, and often did pay, if his income wasforty-two thousand dollars. Another frequently heard charge isthat the income tax is a serpent in the American Garden ofEden, offering such tempting opportunities for petty evasion thatit induces a national fall from grace every April. Still anotherschool of critics contends that because of its labyrinthine quality(the basic statute, the Internal Revenue Code of 1954, runs tomore than a thousand pages, and the court rulings andInternal Revenue Service regulations that elaborate it come toseventeen thousand) the income tax not only results in suchidiocies as gravel-producing actors and unborn partners but isin fact that anomaly, a law that a citizen may be unable tocomply with by himself. This situation, the critics declare, leadsto an undemocratic state of affairs, for only the rich can affordthe expensive professional advice necessary to minimize theirtaxes legally.
The income-tax law in toto has virtually no defenders, eventhough most fair-minded students of the subject agree that itseffect over the half century that it has been in force has beento 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 chiefreasons being the staggering complexity of the whole subject,which causes many people’s minds to go blank at the verymention of it, and the specific, knowledgeable, and energeticadvocacy by small groups of the particular provisions theybenefit from. Like any tax law, ours had a kind of immunity toreform; the very riches that people accumulate through the useof tax-avoidance devices can be—and constantly are—applied tofighting the elimination of those devices. Such influences,combined with the fierce demands made on the Treasury bydefense spending and other rising costs of government (evenleaving aside hot wars like the one in Vietnam), have broughtabout two tendencies so marked that they have assumed theshape of a natural political law: In the United States it iscomparatively easy to raise tax rates and to introducetax-avoidance devices, and it is comparatively hard to lower taxrates and to eliminate tax-avoidance devices. Or so it seemeduntil 1964, when half of this natural law was spectacularlychallenged by legislation, originally proposed by PresidentKennedy and pushed forward by President Johnson, thatreduced the basic rates on individuals in two stages from abottom of 20 per cent to a bottom of 14 per cent and from atop of 91 per cent to a top of 70 per cent, and reduced thetop tax on corporations from 52 per cent to 48 per cent—allin 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 PresidentKennedy included a program of substantial reforms to eliminatetax-avoidance devices, but so great was the outcry against thereforms that Kennedy himself soon abandoned most of them,and virtually none of them were enacted; on the contrary, thenew law actually extended or enlarged one or two of thedevices.
“Let’s face it, Clitus, we live in a tax era. Everything’s taxes,”
one lawyer says to another in Louis Auchincloss’s book ofshort stories called “Powers of Attorney,” and the secondlawyer, a traditionalist, can enter only a token demurrer.
Considering the omnipresence of the income tax in Americanlife, however, it is odd how rarely one encounters references toit in American fiction. This omission probably reflects thesubject’s lack of literary elegance, but it may also reflect anational uneasiness about the income tax—a sense that we havewilled into existence, and cannot will out of existence, apresence not wholly good or wholly bad but, rather, soimmense, outrageous, and morally ambiguous that it cannot beencompassed by the imagination. How in the world, one mayask, did it all happen?
AN income tax can be truly effective only in an industrialcountry where there are many wage and salary earners, andthe annals of income taxation up to the present century arecomparatively short and simple. The universal taxes of ancienttimes, like the one that brought Mary and Joseph to Bethlehemjust before the birth of Jesus, were invariably head taxes, withone fixed sum to be paid by everybody, rather than incometaxes. Before about 1800, only two important attempts weremade to establish income taxes—one in Florence during thefifteenth century, and the other in France during the eighteenth.
Generally speaking, both represented efforts by grasping rulersto mulct their subjects. According to the foremost historian ofthe income tax, the late Edwin R. A. Seligman, the Florentineeffort withered away as a result of corrupt and inefficientadministration. The eighteenth-century French tax, in the wordsof the same authority, “soon became honeycombed withabuses” and degenerated into “a completely unequal andthoroughly arbitrary imposition upon the less well-to-do classes,”
and, as such, it undoubtedly played its part in whipping up themurderous fervor that went into the French Revolution. Therate of the ancien-régime tax, which was enacted by LouisXIV in 1710, was 10 per cent, a figure that was cut in halflater, but not in time; the revolutionary regime eliminated thetax along with its perpetrators. In the face of this cautionaryexample, Britain enacted an income tax in 1798 to help financeher 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 annualincomes under sixty pounds, to 10 per cent, on incomes oftwo hundred pounds or more, and, for another, it wascomplicated, containing a hundred and twenty-four sections,which took up a hundred and fifty-two pages. Its unpopularitywas general and instantaneous, and a spate of pamphletsdenouncing it soon appeared; one pamphleteer, who purportedto be looking back at ancient barbarities from the year 2000,spoke of the income-tax collectors of old as “mercilessmercenaries” and “brutes … with all the rudeness that insolenceand self-important ignorance could suggest.” After yielding onlyabout six million pounds a year for three years—in large partbecause of widespread evasion—it was repealed in 1802, afterthe Treaty of Amiens, but the following year, when the Britishtreasury again found itself in straitened circumstances,Parliament enacted a new income-tax law. This one wasextraordinarily far ahead of its time, in that it included aprovision for the withholding of income at the source, and,perhaps for that reason, it was hated even more than theearlier tax had been, even though its top rate was only half ashigh. At a protest meeting held in the City of London in July,1803, several speakers made what, for Britons, must surelyhave been the ultimate commitment of enmity toward theincome tax. If such a measure were necessary to save thecountry, they said, then they would reluctantly have to chooseto let the country go.
Yet gradually, despite repeated setbacks, and even extendedperiods of total oblivion, the British income tax began toflourish. This may have been, as much as anything else, amatter of simple habituation, for a common thread runsthrough the history of income taxes everywhere: Opposition isalways at its most reckless and strident at the very outset; withevery year that passes, the tax tends to become stronger andthe voices of its enemies more muted. Britain’s income tax wasrepealed the year after the victory at Waterloo, was revived ina halfhearted way in 1832, was sponsored with enthusiasm bySir Robert Peel a decade later, and remained in effectthereafter. The basic rate during the second half of thenineteenth century varied between 5 per cent and less than 1per cent, and it was only 2? per cent, with a modest surtaxon high incomes, as late as 1913. The American idea of veryhigh rates on high incomes eventually caught on in Britain,though, and by the middle 1960’s the top British bracket wasover 90 per cent.
Elsewhere in the world—or at least in the economicallydeveloped world—country after country took the cue fromBritain and instituted an income tax at one time or anotherduring the nineteenth century. Post-revolutionary France soonenacted an income tax, but then repealed it and managed toget along without one for a number of years in the secondhalf of the century; eventually, though, the loss of revenueproved to be intolerable, and the tax returned, to become afixture of the French economy. An income tax was one of thefirst, if not one of the sweetest, fruits of Italian unity, whileseveral of the separate states that were to combine into theGerman 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 whoseincome-tax collections and the apparent docility of whosetaxpayers are now the envy of governments everywhere, it wasa laggard in the matter of instituting an income tax and foryears was an inveterate backslider in the matter of keeping oneon its statute books. It is true that in Colonial times there werevarious revenue systems bearing some slight resemblance toincome taxes—in Rhode Island at one point, for example, eachcitizen was supposed to guess the financial status of ten of hisneighbors, in regard to both income and property, in order toprovide a basis for tax assessments—but such schemes, beinginefficient and subject to obvious opportunities for abuse, wereshort-lived. The first man to propose a federal income tax wasPresident Madison’s Secretary of the Treasury, Alexander J.
Dallas; he did so in 1814, but a few months later the War of1812 ended, the demand for government revenue eased, andthe Secretary was hooted down so decisively that the subjectwas not revived until the time of the Civil War, when both theunion and the Confederacy enacted income-tax bills. Before1900, very few new income taxes appear to have been enactedanywhere without the stimulus of a war. National income taxeswere—and until quite recently largely remained—war anddefense measures. In June of 1862, prodded by public concernover a public debt that was increasing at the rate of twomillion dollars a day, Congress reluctantly passed a lawproviding for an income tax at progressive rates up to amaximum of 10 per cent, and on July 1st President Lincolnsigned it into law, along with a bill to punish the practice ofpolygamy. (The next day, stocks on the New York Exchangetook a dive, which was probably not attributable to thepolygamy bill.)“I am taxed on my income! This is perfectly gorgeous! Inever felt so important in my life before,” Mark Twain wrote inthe Virginia City, Nevada, Territorial Enterprise after he hadpaid his first income-tax bill, for the year 1864—$36.82,including a penalty of $3.12 for being late. Although few othertaxpayers were so enthusiastic, the law remained in force until1872. It was, however, subjected to a succession of ratereductions and amendments, one of them being the elimination,in 1865, of its progressive rates, on the arresting ground thatcollecting 10 per cent on high incomes and lower rates onlower incomes constituted undue discrimination against wealth.
Annual revenue collections mounted from two million dollars in1863 to seventy-three million in 1866, and then descendedsharply. For two decades, beginning in the earlyeighteen-seventies, the very thought of an income tax did notenter the American mind, apart from rare occasions whensome Populist or Socialist agitator would propose theestablishment of such a tax designed specifically to soak theurban rich. Then, in 1893, when it had become clear that thecountry was relying on an obsolete revenue system that puttoo little burden on businessmen and members of theprofessions, President Cleveland proposed an income tax. Theoutcry 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 senatorspoke darkly of “the professors with their books, the socialistswith their schemes … [and] the anarchists with their bombs,”
while over in the House a congressman from Pennsylvania laidhis cards on the table in the following terms:
An income tax! A tax so odious that no administration ever dared toimpose it except in time of war.… It is unutterably distasteful both in itsmoral and material aspects. It does not belong to a free country. It is classlegislation.… Do you desire to offer a reward to dishonesty and toencourage perjury? The imposition of the tax will corrupt the people. It willbring in its train the spy and the informer. It will necessitate a swarm ofofficials with inquisitorial powers.… Mr. Chairman, pass this bill and theDemocratic Party signs its death warrant.
The proposal that gave rise to these fulminations was for a taxat a uniform rate of 2 per cent on income in excess of fourthousand dollars, and it was enacted into law in 1894. TheDemocratic Party survived, but the new law did not. Before itcould be put into force, it was thrown out by the SupremeCourt, on the ground that it violated the Constitutional provisionforbidding “direct” taxes unless they were apportioned amongthe states according to population (curiously, this point had notbeen raised in connection with the Civil War income tax), andthe income-tax issue was dead again, this time for a decadeand a half. In 1909, by what a tax authority named JeromeHellerstein has called “one of the most ironic twists of politicalevents in American history,” the Constitutional amendment (thesixteenth) that eventually gave Congress the power to levy taxeswithout apportionment among the states was put forward bythe implacable opponents of the income tax, the Republicans,who took the step as a political move, confidently believing thatthe amendment would never be ratified by the states. To theirdismay, it was ratified in 1913, and later that year Congressenacted a graduated tax on individuals at rates ranging from 1per cent to 7 per cent, and also a flat tax of 1 per cent onthe net profits of corporations. The income tax has been withus ever since.
By and large, its history since 1913 has been one of risingrates and of the seasonable appearance of special provisions tosave people in the upper brackets from the inconvenience ofhaving to pay those rates. The first sharp rise took placeduring the First World War, and by 1918 the bottom rate was6 per cent and the top one, applicable to taxable income inexcess of a million dollars, was 77 per cent, or far more thanany government had previously ventured to exact on income ofany amount. But the end of the war and the “return tonormalcy” brought a reversal of the trend, and there followedan era of low taxes for rich and poor alike. Rates werereduced by degrees until 1925, when the standard rate scaleran from 1? per cent to an absolute top of 25 per cent, and,furthermore, a great majority of the country’s wage earnerswere relieved of paying any tax at all by being allowed personalexemptions of fifteen hundred dollars for a single person,thirty-five hundred dollars for a married couple, and fourhundred dollars for each dependent. This was not the wholestory, for it was during the twenties that special-interestprovisions began to appear, stimulated into being by thecomplex of political forces that has accounted for their increaseat intervals ever since. The first important one, adopted in1922, established the principle of favored treatment for capitalgains; this meant that money acquired through a rise in thevalue of investments was, for the first time, taxed at a lowerrate than money earned in wages or for services—as, ofcourse, it still is today. Then, in 1926, came the loophole thathas undoubtedly caused more gnashing of teeth among thosenot in a position to profit by it than any other—the percentagedepletion allowance on petroleum, which permits the owner of aproducing oil well to deduct from his taxable income up to27? per cent of his gross annual income from the well and tokeep deducting that much year after year, even though he hasdeducted the original cost of the well many times over.
Whether or not the twenties were a golden age for theAmerican people in general, they were assuredly a golden agefor the American taxpayer.
The depression and the New Deal brought with them a trendtoward higher tax rates and lower exemptions, which led up toa truly revolutionary era in federal income taxation—that of theSecond World War. By 1936, largely because of greatlyincreased public spending, rates in the higher brackets wereroughly double what they had been in the late twenties, andthe very top bracket was 79 per cent, while, at the low end ofthe scale, personal exemptions had been reduced to the pointwhere a single person was required to pay a small tax even ifhis income was only twelve hundred dollars. (As a matter offact, at that time most industrial workers’ incomes did notexceed twelve hundred dollars.) In 1944 and 1945, the ratescale for individuals reached its historic peak—23 per cent atthe low end and 94 per cent at the high one—while incometaxes on corporations, which had been creeping up graduallyfrom the original 1913 rate of 1 per cent, reached the pointwhere some companies were liable for 80 per cent. But therevolutionary thing about wartime taxation was not the veryhigh rates on high incomes; indeed, in 1942, when this upwardsurge was approaching full flood, a new means of escape forhigh-bracket taxpayers appeared, or an old one widened, forthe period during which stocks or other assets must be held inorder to benefit from the capital-gains provision was reducedfrom eighteen months to six. What was revolutionary was therise of industrial wages and the extension of substantial taxrates to the wage earner, making him, for the first time, animportant contributor to government revenue. Abruptly, theincome tax became a mass tax.
And so it has remained. Although taxes on big andmiddle-sized businesses settled down to a flat rate of 52 percent, rates on individual income did not change significantlybetween 1945 and 1964. (That is to say, the basic rates didnot change significantly; there were temporary remissions,amounting to anywhere from 5 per cent to 17 per cent of thesums due under the basic rates, during the years 1946 through1950.) The range was from 20 per cent to 91 per cent until1950; there was a small rise during the Korean War, but itwent right back there in 1954. In 1950, another importantescape route, the so-called “restricted stock option,” opened up,enabling some corporate executives to be taxed on part of theircompensation at low capital-gains rates. The significant change,invisible in the rate schedule, has been a continuation of theone begun in wartime; namely, the increase in theproportionate tax burden carried by the middle and lowerincome groups. Paradoxical as it may seem, the evolution ofour income tax has been from a low-rate tax relying forrevenue on the high income group to a high-rate tax relyingon the middle and lower-middle income groups. The Civil Warlevy, which affected only one per cent of the population, wasunmistakably a rich man’s tax, and the same was true of the1913 levy. Even in 1918, at the height of the budget squeezeproduced by the First World War, less than four and a halfmillion Americans, of a total population of more than ahundred million, had to file income-tax returns at all. In 1933,in the depths of the depression, only three and three-quartersmillion returns were filed, and in 1939 an élite consisting ofseven hundred thousand taxpayers, of a population of ahundred and thirty million, accounted for nine-tenths of allincome-tax collections, while in 1960 it took some thirty-twomillion taxpayers—something over one-sixth of the population—toaccount for nine-tenths of all collections, and a whopping bignine-tenths it was, totalling some thirty-five and a half billiondollars, compared to less than a billion in 1939.
The historian Seligman wrote in 1911 that the history ofincome taxation the world over consisted essentially of “evolutiontoward basing it on ability to pay.” One wonders whatqualifications he might add, on the basis of the Americanexperience since then, if he were still alive. Of course, onereason people with middle incomes pay far more in taxes thanthey used to is that there are far more of them. Changes inthe country’s social and economic structure have been as big afactor in the shift as the structure of the income tax has. Itremains probable, though, that, in actual practice, the aboriginalincome tax of 1913 extracted money from citizens with stricterregard to their ability to pay than the present income tax does.
WHATEVER the faults of our income-tax law, it is beyondquestion the best-obeyed income-tax law in the world, andincome taxes are now ubiquitous, from the Orient to theOccident and from pole to pole. (Practically all of the dozens ofnew nations that have come into being over the past few yearshave adopted income-tax measures. Walter H. Diamond, theeditor of a publication called Foreign Tax & Trade Briefs, hasnoted that as recently as 1955 he could rattle off the names oftwo dozen countries, large and small, that did not tax theindividual, but that in 1965 the only names he could rattle offwere those of a couple of British colonies, Bermuda and theBahamas; a couple of tiny republics, San Marino and Andorra;three oil-rich Middle Eastern countries, the Sultanate of Muscatand Oman, Kuwait, and Qatar; and two rather inhospitablecountries, Monaco and Saudi Arabia, which taxed the incomesof resident foreigners but not those of nationals. EvenCommunist countries have income taxes, though they count onthem for only a small percentage of their total revenue; Russiaapplies different rates to different occupations, shopkeepers andecclesiastics being in the high tax bracket, artists and writersnear the middle, and laborers and artisans at the bottom.)Evidence of the superior efficiency of tax collecting in theUnited States is plentiful; for instance, our costs foradministration and enforcement come to only about forty-fourcents for every hundred dollars collected, as against a ratemore than twice as high in Canada, more than three times ashigh in England, France, and Belgium, and many times as highin other places. This kind of American efficiency is the despairof foreign tax collectors. Toward the end of his term in officeMortimer M. Caplin, who was commissioner of InternalRevenue from January, 1961, until July, 1964, held consultationswith the leading tax administrators of six Western Europeancountries, and the question heard again and again was “Howdo you do it? Do they like to pay taxes over there?” Ofcourse, they do not, but, as Caplin said at the time, “we havea lot going for us that the Europeans haven’t.” One thing wehave going for us is tradition. American income taxes originatedand developed not as a result of the efforts of monarchs to filltheir coffers at the expense of their subjects but as a result ofthe efforts of an elected government to serve the generalinterest. A widely travelled tax lawyer observed not long ago,“In most countries, it’s impossible to engage in a seriousdiscussion of income taxes, because they aren’t taken seriously.”
They are taken seriously here, and part of the reason is thepower and skill of our income-tax police force, the InternalRevenue Service.
Unquestionably, the “swarm of officials” feared by thePennsylvania congressman in 1894 has come into being—andthere are those who would add that the officials have the“inquisitorial powers” he also feared. As of the beginning of1965, the Internal Revenue Service had approximately sixtythousand employees, including more than six thousand revenueofficers and more than twelve thousand revenue agents, andthese eighteen thousand men, possessing the right to inquireinto every penny of everyone’s income and into matters likeexactly what was discussed at an expense-account meal, andarmed with the threat of heavy punishments, have powers thatmight reasonably be called inquisitorial. But the I.R.S. engagesin many activities besides actual tax collecting, and some ofthese suggest that it exercises its despotic powers in anequitable way, if not actually in a benevolent one. Notableamong the additional activities is a taxpayer-education programon a scale that occasionally inspires an official to boast that theI.R.S. runs the largest university in the world. As part of thisprogram, it puts out dozens of publications explicating variousaspects of the law, and it is proud of the fact that the mostgeneral of these—a blue-covered pamphlet entitled “Your FederalIncome Tax,” which is issued annually and in 1965 could bebought for forty cents at any District Director’s office—is sopopular that it is often reprinted by private publishers, who sellit to the unwary for a dollar or more, pointing out, withtriumphant accuracy, that it is an official government publication.
(Since government publications are not copyrighted, this isperfectly legal.) The I.R.S. also conducts “institutes” on technicalquestions every December for the enlightenment of the vastcorps of “tax practitioners”—accountants and lawyers—who willshortly be preparing the returns of individuals and corporations.
It puts out elementary tax manuals designed specially for freedistribution to any high schools that ask for them—and,according to one I.R.S. official, some eighty-five per cent ofAmerican high schools did ask for them in one recent year.
(The question of whether schoolchildren ought to be spendingtheir time boning up on the tax laws is one that the I.R.S.
considers to be outside its scope.) Furthermore, just before thetax deadline each year, the I.R.S. customarily goes on televisionwith spot advertisements offering tax pointers and reminders. Itis proud to say that, of the various spots, a clear majority havebeen in the interests of protecting taxpayers from overpaying.
In the fall of 1963, the I.R.S. took a big step towardincreasing the efficiency of its collections still further, and, by afeat worthy of the wolf in “Little Red Riding Hood,” it managedto present the step to the public as a grandmotherly move tohelp everybody out. The step was the establishment of aso-called national-identity file, involving the assignment to everytaxpayer of an account number (usually his Social Securitynumber), and its intention was to practically eliminate theproblem created by people who fail to declare their incomefrom corporate dividends or from interest on bank accounts orbonds—a form of evasion that was thought to have beencosting the Treasury hundreds of millions a year. But that isnot all. When the number is entered in the proper place on areturn, “this will make certain that you are given immediatecredit for taxes reported and paid by you, and that any refundwill be promptly recorded in your favor”—so CommissionerCaplin commented brightly on the front cover of the 1964tax-return forms. The I.R.S. then began taking another giantstep—the adoption of a system for automating a large part ofthe tax-checking process, in which seven regional computerswould collect and collate data that would be fed into a masterdata-processing center at Martinsburg, West Virginia. Thisinstallation, designed to make a quarter of a million numbercomparisons per second, began to be called the MartinsburgMonster even before it was in full operation. In 1965, betweenfour and five million returns a year were given a completeaudit, and all returns were checked for mathematical errors.
Some of this mathematical work was being done by computersand some by people, but by 1967, when the computer systemwas going full blast, all the mathematical work was done bymachine, thus freeing many I.R.S. employees to subject evenmore returns to detailed audits. According to a publicationauthorized by the I.R.S. back in 1963, though, “the capacityand memory of the [computer] system will help taxpayers whoforget prior year credits or who do not take full advantage oftheir rights under the laws.” In short, it was going to be afriendly monster.
IF the mask that the I.R.S. had presented to the country inrecent years has worn a rather ghastly expression of benignity,part of the explanation is probably nothing more sinister thanthe fact that Caplin, the man who dominated it in those years,is a cheerful extrovert and a natural politician, and that hisinfluence continued to be felt under the man who wasappointed to succeed him as Commissioner in December1964—a young Washington lawyer named Sheldon S. Cohen,who took over the job after a six-month interim during whichan I.R.S. career man named Bertrand M. Harding served asActing Commissioner. (When Caplin resigned as Commissioner,he stepped out of politics, at least temporarily, returning to hisWashington law practice as a specialist in, among other things,the tax problems of businessmen.) Caplin is widely consideredto have been one of the best Commissioners of InternalRevenue in history, and, at the very least, he was certainly animprovement on two fairly recent occupants of the post, one ofwhom, some time after leaving it, was convicted and sentencedto two years in prison for evading his own income taxes, andthe other of whom subsequently ran for public office on aplatform of opposition to any federal income tax—as a formerumpire might stump the country against baseball. Among theaccomplishments that Mortimer Caplin, a small, quick-spoken,dynamic man who grew up in New York City and used to bea University of Virginia law professor, is credited with asCommissioner is the abolition of the practice that had previouslybeen alleged to exist of assigning collection quotas to I.R.S.
agents. He gave the top echelons of I.R.S. an air of integritybeyond cavil, and, what was perhaps most striking, managedthe strange feat of projecting to the nation a sort ofenthusiasm for taxes, considered abstractly. Thus he managedto collect them with a certain style—a sort of subsidiary NewFrontier, which he called the New Direction. The chief thrust ofthe New Direction was to put increased emphasis on educationleading toward increased voluntary compliance with the tax law,instead of concentrating on the search for and prosecution ofconscious offenders. In a manifesto that Caplin issued to hisswarm of officials in the spring of 1961, he wrote, “We allshould understand that the Service is not simply running adirect enforcement business aimed at making $2 billion inadditional assessments, collecting another billion from delinquentaccounts, and prosecuting a few hundred evaders. Rather, it ischarged with administering an enormous self-assessment taxsystem which raises over $90 billion from what peoplethemselves put down on their tax returns and voluntarily pay,with another $2 or $3 billion coming from direct enforcementactivities. In short, we cannot forget that 97 per cent of ourtotal revenue comes from self-assessment or voluntarycompliance, with only three per cent coming directly fromenforcement. Our chief mission is to encourage and achievemore effective voluntary compliance.… The New Direction isreally a shift in emphasis. But it is a very important shift.”
It may be, though, that the true spirit of the New Direction isbetter epitomized on the jacket of a book entitled “TheAmerican Way in Taxation,” edited by Lillian Doris, which waspublished in 1963 with the blessing of Caplin, who wrote theforeword. “Here is the exciting story of the largest and mostefficient tax collecting organization the world has everknown—the United States Internal Revenue Service!” the jacketannounced, in part. “Here are the stirring events, thebitterly-fought legislative battles, the dedicated civil servants thathave marched through the past century and left an indelibleimprint on our nation. You’ll thrill to the epic legal battle to killthe income tax … and you’ll be astonished at the future plansof the I.R.S. You’ll see how giant computers, now on thedrawing boards, are going to affect the tax collection systemand influence the lives of many American men and women innew and unusual ways!” It sounded a bit like a circus barkerhawking a public execution.
It is debatable whether the New Direction watchword of“voluntary compliance” could properly be used to describe asystem of tax collection under which some three-quarters of allcollections from individuals are obtained through withholding atthe source, under which the I.R.S. and its Martinsburg Monsterlurk to catch the unwary evader, and under which thepunishment for evasion runs up to five years in prison peroffense 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’sorganizations of businessmen, accountants, and lawyers, givingluncheon talks in which he praised them for their voluntarycompliance in the past, exhorted them to greater efforts in thefuture, and assured them that it was all in a good cause.
“We’re still striving for the human touch in our taxadministration,” declared the essay on the cover of the 1964tax-return forms, which Caplin signed, and which he says hecomposed in collaboration with his wife. “I see a lot of humorin this job,” he told a caller a few hours after remarking to aluncheon meeting of the Kiwanis Club of Washington at theMayflower Hotel, “Last year was the fiftieth anniversary of theincome-tax amendment to the Constitution, but the InternalRevenue Service somehow or other didn’t seem to get anybirthday cakes.” This might perhaps be considered a form ofgallows humor, except that the hangman is not supposed to bethe one who makes the jokes.
Cohen, the Commissioner who succeeded Caplin and was stillin office in mid-1968, is a born-and-bred Washingtonian who, in1952, graduated from George Washington University Law Schoolat the top of his class; served in a junior capacity with theI.R.S. for the next four years; practiced law in Washington forseven years after that, eventually becoming a partner in thecelebrated firm of Arnold, Fortas & Porter; at the beginning of1964 returned to the I.R.S., as its chief counsel; and a yearlater, at the age of thirty-seven, became the youngestCommissioner of Internal Revenue in history. A man withclose-cropped brown hair, candid eyes, and a guileless mannerthat makes him seem even younger than he is, Cohen camefrom the chief counsel’s office with the reputation of havinguplifted it both practically and philosophically; he wasresponsible for an administrative reorganization that has beenwidely praised as making faster decisions possible, and for ademand that the I.R.S. be consistent in its legal stand in casesagainst taxpayers (that it refrain from taking one position on afine point of Code interpretation in Philadelphia, say, and theopposite position on the same point in Omaha), which isconsidered a triumph of high principle over governmental greed.
In general, Cohen said upon assuming office, he intended tocontinue Caplin’s policies—to emphasize “voluntary compliance,”
to strive for agreeable, or at least not disagreeable, relationswith the taxpaying public, and so on. He is a less gregariousand a more reflective man than Caplin, however, and thisdifference has had its effect on the I.R.S. as a whole. He hasstuck relatively close to his desk, leaving the luncheon-circuitpep talks to subordinates. “Mort was wonderful at that sort ofthing,” Cohen said in 1965. “Public opinion of the Service ishigh now as a result of his big push in that direction. Wewant 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 bemade, is that the office of Commissioner carries with it far toomuch power. The Commissioner has no authority to proposechanges in rates or initiate other new tax legislation—theauthority to propose rate changes belongs to the Secretary ofthe Treasury, who may or may not seek the Commissioner’sadvice in the matter, and the enactment of new tax laws is, ofcourse, the job of Congress and the President—but tax laws,since they must cover so many different situations, arenecessarily written in rather general terms, and theCommissioner is solely responsible (subject to reversal in thecourts) for writing the regulations that are supposed to explainthe laws in detail. And sometimes the regulations are a bitcloudy themselves, and in such cases who is better qualified toexplain them than their author, the Commissioner? Thus itcomes about that almost every word that drops from theCommissioner’s mouth, whether at his desk or at luncheonmeetings, is immediately distributed by the various tax publishingservices to tax accountants and lawyers all over the countryand is gobbled up by them with an avidity not always accordedthe remarks of an appointed official. Because of this, somepeople 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 YorkUniversity Law School as well as a tax adviser, says, “Thelatitude of action given the Commissioner is great, and it’s truethat he can do things that may affect the economicdevelopment of the country as well as the fortunes ofindividuals and corporations. But if he had small freedom ofaction, it would result in rigidity and certainty of interpretation,and would make it much easier for tax practitioners like me tomanipulate the law to their clients’ advantage. TheCommissioner’s latitude gives him a healthy unpredictability.”
CERTAINLY Caplin did not knowingly abuse his power, nor hasCohen done so. Upon visiting first one man and then theother in the Commissioner’s office, I found that both conveyedthe impression of being men of high intelligence who wereliving—as Arthur M. Schlesinger, Jr., has said that Thoreaulived—at a high degree of moral tension. And the cause of themoral tension is not hard to find; it almost surely stemmedfrom the difficulty of presiding over compliance, voluntary orinvoluntary, with a law of which one does not very heartilyapprove. In 1958, when Caplin appeared—as a witness versedin tax matters, rather than as Commissioner of InternalRevenue—before the House Ways and Means Committee, heproposed an across-the-board program of reforms, including,among other things, either the total elimination or a drasticcurbing of favored treatment for capital gains; the lowering ofpercentage depletion rates on petroleum and other minerals; thewithholding of taxes on dividends and interest; and the eventualdrafting of an entirely new income-tax law to replace the 1954Code, which he declared had led to “hardships, complexities,and opportunities for tax avoidance.” Shortly after Caplin leftoffice, he explained in detail what his ideal tax law would belike. Compared to the present tax law, it would be heroicallysimple, with loopholes eliminated, and most personal deductionsand exemptions eliminated, too, and with a rate scale rangingfrom 10 to 50 per cent.
In Caplin’s case, the resolution of moral tension, insofar as heachieved 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. “Theysay, in effect, ‘It’s a mess, and nothing can be done about it.’
I can’t go along with that. True, many compromises arenecessary, and will continue to be. But I refuse to accept adefeatist attitude. There’s a mystic quality about our tax system.
No matter how bad it may be from the technical standpoint, ithas a vitality because of the very high level of compliance.” Hepaused for quite a long time, perhaps finding a flaw in his ownargument; in the past, after all, universal compliance with a lawhas not always been a sign that it was either intelligent or just.
Then he went on, “Looking over the sweep of years, I thinkwe’ll come out well. Probably a point of crisis of some kind willmake us begin to see beyond selfish interests. I’m optimisticthat fifty years from now we’ll have a pretty good tax.”
As for Cohen, he was working in the legislation-draftingsection of the I.R.S. at the time the present Code was written,and he had a hand in its composition. One might suppose thatthis fact would cause him to have a certain proprietary feelingtoward it, but apparently that is not so. “Remember that wehad a Republican administration then, and I’m a Democrat,” hesaid one day in 1965. “When you are drafting a statute, youoperate as a technician. Any pride you may feel afterward ispride in technical competence.” So Cohen can reread his oldprose, now enshrined as law, with neither elation nor remorse,and he has not the slightest hesitation about endorsing Caplin’sopinion that the Code leads to “hardships, complexities, andopportunities for tax avoidance.” He is more pessimistic thanCaplin about finding the answer in simplification. “Perhaps wecan move the rates down and get rid of some deductions,” hesays, “but then we may find we need new deductions, in theinterests of fairness. I suspect that a complex society requires acomplex tax law. If we put in a simpler code, it would probablybe complex again in a few years.”
II“EVERY nation has the government it deserves,” the Frenchwriter and diplomat Joseph de Maistre declared in 1811. Sincethe primary function of government is to make laws, thestatement implies that every nation has the laws it deserves,and if the doctrine may be considered at best a half truth inthe case of governments that exist by force, it does seempersuasive in the case of governments that exist by popularconsent. If the single most important law now on the statutebooks of the United States is the income-tax law, it wouldfollow that we must have the income-tax law we deserve. Muchof the voluminous discussion of the income-tax law in recentyears has centered on plain violations of it, among them thedeliberate padding of tax-deductible business-expense accounts,the matter of taxable income that is left undeclared on taxreturns, fraudulently or otherwise—a sum estimated at as highas twenty-five billion dollars a year—and the matter ofcorruption within the ranks of the Internal Revenue Service,which some authorities believe to be fairly common, at least inlarge cities. Such forms of outlawry, of course, reflect timelessand worldwide human frailties. The law itself, however, hascertain characteristics that are more closely related to aparticular time and place, and if de Maistre was right, theseshould reflect national characteristics; the income-tax law, that is,should be to some extent a national mirror. How does thereflection look?
TO repeat, then, the basic law under which income taxes arenow imposed is the Internal Revenue Code of 1954, asamplified by innumerable regulations issued by the InternalRevenue Service, interpreted by innumerable judicial decisions,and amended by several Acts of Congress, including theRevenue Act of 1964, which embodied the biggest tax cut inour history. The Code, a document longer than “War andPeace,” is phrased—inevitably, perhaps—in the sort of jargonthat stuns the mind and disheartens the spirit; a fairly typicalsentence, dealing with the definition of the word “employment,”
starts near the bottom of page 564, includes more than athousand words, nineteen semicolons, forty-two simpleparentheses, three parentheses within parentheses, and evenone unaccountable interstitial period, and comes to a gaspingend, with a definitive period, near the top of page 567. Notuntil one has penetrated to the part of the Code dealing withexport-import taxes (which fall within its province, along withestate taxes and various other federal imposts) does one comeupon a comprehensible and diverting sentence like “Everyperson who shall export oleomargarine shall brand upon everytub, firkin, or other package containing such article the word‘Oleomargarine,’ in plain Roman letters not less than one-halfinch square.” Yet a clause on page 2 of the Code, though it isnot a sentence at all, is as clear and forthright as one couldwish; it sets forth without ado the rates at which the incomesof single individuals are to be taxed: 20 per cent on taxableincome of not over $2,000; 22 per cent on taxable income ofover $2,000 but not over $4,000; and so on up to a top rateof 91 per cent on taxable income of over $200,000. (As wehave seen, the rates were amended downward in 1964 to atop of 70 per cent.) Right at the start, then, the Code makesits declaration of principle, and, to judge by the rate table, it isimplacably egalitarian, taxing the poor relatively lightly, thewell-to-do moderately, and the very rich at levels that verge onthe confiscatory.
But, to repeat a point that has become so well known that itscarcely needs repeating, the Code does not live up to itsprinciples very well. For proof of this, one need look no furtherthan some of the recent score sheets of the income tax—a setof volumes entitled Statistics of Income, which are publishedannually by the Internal Revenue Service. For 1960, individualswith gross incomes of between $4,000 and $5,000, after takingadvantage of all their deductions and personal exemptions, andavailing themselves of the provision that allows married couplesand the heads of households to be taxed at rates generallylower than those for single persons, ended up paying anaverage tax bill of about one-tenth of their reportable receipts,while those in the $10,000-$15,000 range paid a bill of aboutone-seventh, those in the $25,000-$50,000 range paid a bill ofnot quite a quarter, and those in the $50,000-$100,000 rangepaid a bill of about a third. Up to this point, clearly, we find aprogression according to ability to pay, much as the rate tableprescribes. However, the progression stops abruptly when wereach the top income brackets—that is, at just the point whereit 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 whenone takes into consideration the fact that the richer a man is,the likelier it is that a huge proportion of his money need noteven be reported as gross taxable income—all income fromcertain bonds, for example, and half of all income fromlong-term capital gains—it becomes evident that at the very topof the income scale the percentage rate of actual taxation turnsdownward. The evidence is confirmed by the Statistics ofIncome for 1961, which breaks down figures on paymentsaccording to bracket, and which shows that although 7,487taxpayers declared gross incomes of $200,000 or more, fewerthan five hundred of them had net income that was taxed atthe rate of 91 per cent. Throughout its life, the rate of 91 percent was a public tranquilizer, making everyone in the lowerbracket feel fortunate not to be rich, and not hurting the richvery much. And then, to top off the joke, if that is what it is,there are the people with more income than anyone else whopay less tax than anyone else—that is, those with annualincomes of a million dollars or more who manage to findperfectly legal ways of paying no income tax at all. Accordingto Statistics of Income, there were eleven of them in 1960,out of a national total of three hundred and six million-a-yearmen, and seventeen in 1961, out of a total of three hundredand ninety-eight. In plain fact, the income tax is hardlyprogressive at all.
The explanation of this disparity between appearance andreality, so huge that it lays the Code open to a broadaccusation of hypocrisy, is to be found in the detailedexceptions to the standard rates which lurk in its dimdepths—exceptions that are usually called special-interestprovisions or, more bluntly, loopholes. (“Loophole,” as allfair-minded users of the word are ready to admit, is asomewhat subjective designation, for one man’s loophole maybe another man’s lifeline—or perhaps at some other time, thesame man’s lifeline.) Loopholes were noticeably absent from theoriginal 1913 income-tax law. How they came to be law andwhy they remain law are questions involving politics andpossibly metaphysics, but their actual workings are relativelysimple, and are illuminating to watch. By far the simplestmethod of avoiding income taxes—at least for someone whohas a large amount of capital at his disposal—is to invest in thebonds 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 recentyears has run from three to five per cent, a man who investsten million dollars in them can collect $300,000 to $500,000 ayear tax-free without putting himself or his tax lawyer to theslightest trouble; if he had been foolish enough to sink themoney in ordinary investments yielding, say, five per cent, hewould have had a taxable income of $500,000, and at the1964 rate, assuming that he was single, had no other income,and did not avail himself of any dodges, he would have to paytaxes of almost $367,000. The exemption on state andmunicipal bonds has been part of our income-tax law since itsbeginnings; it was based originally on Constitutional groundsand is now defended on the ground that the states and townsneed the money. Most Secretaries of the Treasury have lookedon the exemption with disfavor, but not one has been able toaccomplish its repeal.
Probably the most important special-interest provision in theCode is the one that concerns capital gains. The staff of theJoint Economic Committee of Congress wrote in a report issuedin 1961, “Capital gains treatment has become one of the mostimpressive loopholes in the federal revenue structure.” What theprovision says, in essence, is that a taxpayer who makes acapital investment (in real estate, a corporation, a block ofstock, or whatever), holds on to it for at least six months, andthen sells it at a profit is entitled to be taxed on the profit ata rate much lower than the rate on ordinary income; to bespecific, the rate is half of that taxpayer’s ordinary top tax rateor twenty-five per cent whichever is less. What this means toanyone whose income would normally put him in a very hightax bracket is obvious: he must find a way of getting as muchas possible of that income in the form of capital gains.
Consequently, the game of finding ways of converting ordinaryincome into capital gains has become very popular in the pastdecade or two. The game is often won without much of astruggle. On television one evening in the middle 1960s, DavidSusskind asked six assembled multimillionaires whether any ofthem considered tax rates a stumbling block on the highroad towealth in America. There was a long silence, almost as if thenotion 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’tconsider taxes much of a problem. There was no morediscussion of high tax rates that night.
If the capital-gains provision resembles the exemption oncertain bonds in that the advantages it affords are of benefitchiefly to the rich, it differs in other ways. It is by far themore accommodating of the two loopholes; indeed, it is a sortof mother loophole capable of spawning other loopholes. Forexample, one might think that a taxpayer would need to havecapital before he could have a capital gain. Yet a way wasdiscovered—and was passed into law in 1950—for him to getthe gain before he has the capital. This is the stock-optionprovision. Under its terms, a corporation may give its executivesthe right to buy its shares at any time within a stipulatedperiod—say, five years—at or near the open-market price at thetime of the granting of the option; later on, if, as hashappened so often, the market price of the stock goessky-high, the executives may exercise their options to buy thestock at the old price, may sell it on the open market sometime later at the new price, and may pay only capital-gainsrates on the difference, provided that they go through thesemotions without unseemly haste. The beauty of it all from anexecutive’s point of view is that once the stock has gone upsubstantially in value, his option itself becomes a valuablecommodity, against which he can borrow the cash he needs inorder to exercise it; then, having bought the stock and sold itagain, he can pay off his debt and have a capital gain that hasarisen from the investment of no capital. The beauty of it allfrom the corporations’ point of view is that they cancompensate their executives partly in money taxable at relativelylow rates. Of course, the whole scheme comes to nothing if thecompany’s stock goes down, which does happen occasionally, orif it simply doesn’t go up, but even then the executive has hada free play on the roulette wheel of the stock market, with achance of winning a great deal and practically no danger oflosing anything—something that the tax law offers no othergroup.
By favoring capital gains over ordinary income, the Codeseems to be putting forward two very dubious notions—thatone form of unearned income is more deserving than anyform of earned income, and that people with money to investare more deserving than people without it. Hardly anyonecontends that the favored treatment of capital gains can bejustified on the ground of fairness; those who consider thisaspect of the matter are apt to agree with Hellerstein, who haswritten, “From a sociological viewpoint, there is a good deal tobe said for more severe taxation of profit from appreciation inthe value of property than from personal-service income.” Thedefense, then, is based on other grounds. For one, there is arespectable economic theory that supports a complete exemptionof capital gains from income tax, the argument being thatwhereas wages and dividends or interest from investments arefruits of the capital tree, and are therefore taxable income,capital gains represent the growth of the tree itself, and aretherefore not income at all. This distinction is actually embeddedin the tax laws of some countries—most notably in the tax lawof Britain, which in principle did not tax capital gains until 1964.
Another argument—this one purely pragmatic—has it that thecapital-gains provision is necessary to encourage people to takerisks with their capital. (Similarly, the advocates of stock optionssay that corporations need them to attract and hold executivetalent.) Finally, nearly all tax authorities are agreed that taxingcapital gains on exactly the same basis as other income, whichis what most reformers say ought to be done, would involveformidable technical difficulties.
Particular subcategories of the rich and the well-paid can availthemselves of various other avenues of escape, includingcorporate pension plans, which, like stock options, contribute tothe solution of the tax problems of executives; tax-freefoundations set up ostensibly for charitable and educationalpurposes, of which over fifteen thousand help to ease the taxburdens of their benefactors, though the charitable andeducational activities of some of them are more or less invisible;and personal holding companies, which, subject to rather strictregulations, enable persons with very high incomes frompersonal services like writing and acting to reduce their taxesby what amounts to incorporating themselves. Of the wholearray of loopholes in the Code, however, probably the mostwidely loathed is the percentage depletion allowance on oil. Asthe word “depletion” is used in the Code, it refers to theprogressive exhaustion of irreplaceable natural resources, but asused on oilmen’s tax returns, it proves to mean a miraculouslyglorified form of what is ordinarily called depreciation. Whereasa manufacturer may claim depreciation on a piece of machineryas a tax deduction only until he has deducted the original costof the machine—until, that is, the machine is theoreticallyworthless from wear—an individual or corporate oil investor, forreasons that defy logical explanation, may go on claimingpercentage depletion on a producing well indefinitely, even ifthis means that the original cost of the well has been recoveredmany times over. The oil-depletion allowance is 27.5 per cent ayear up to a maximum of half of the oil investor’s net income(there are smaller allowances on other natural resources, suchas 23 per cent on uranium, 10 per cent on coal, and 5 percent on oyster and clam shells), and the effect it has on thetaxable income of an oil investor, especially when it is combinedwith the effects of other tax-avoidance devices, is trulyastonishing; for instance, over a recent five-year period oneoilman had a net income of fourteen and a third milliondollars, on which he paid taxes of $80,000, or six-tenths ofone per cent. Unsurprisingly, the percentage-depletion allowanceis always under attack, but, also unsurprisingly, it is defendedwith tigerish zeal—so tigerish that even President Kennedy’s1961 and 1963 proposals for tax revision, which, taken together,are generally considered the broadest program of tax reformever put forward by a chief executive, did not venture tosuggest its repeal. The usual argument is that thepercentage-depletion allowance is needed in order tocompensate oilmen for the risks involved in speculative drilling,and thus insure an adequate supply of oil for national use, butmany people feel that this argument amounts to saying, “Thedepletion allowance is a necessary and desirable federal subsidyto the oil industry,” and thereby scuttles itself, since grantingsubsidies to individual industries is hardly the proper task ofthe income tax.
THE 1964 Revenue Act does practically nothing to plug theloopholes, but it does make them somewhat less useful, in thatthe drastic reduction of the basic rates on high incomes hasprobably led some high-bracket taxpayers simply to quitbothering with the less convenient or effective of the dodges.
Insofar as the new bill reduces the disparity between theCode’s promises and its performance, that is, it represents akind of adventitious reform. (One way to cure all income-taxevasion would be to repeal the income tax.) However, quiteapart from the sophistry—since 1964 happily somewhatlessened—that the Code embodies, it has certain discernible anddisturbing characteristics that have not been changed and maybe particularly hard to change in the future. Some of themhave to do with its methods of allowing and disallowingdeductions for travel and entertainment expenses by personswho are in business for themselves, or by persons who areemployed but are not reimbursed for their business expenses—deductions that were estimated fairly recently at between fiveand ten billion dollars a year, with a resulting reduction infederal revenue of between one and two billion. Thetravel-and-entertainment problem—or the T & E problem, as itis customarily called—has been around a long time, and hasstubbornly resisted various attempts to solve it. One of thecrucial points in T & E history occurred in 1930, when thecourts ruled that the actor and songwriter George M.
Cohan—and therefore anyone else—was entitled to deduct hisbusiness expenses on the basis of a reasonable estimate even ifhe could not produce any proof of having paid that sum oreven produce a detailed accounting. The Cohan rule, as it cameto be called, remained in effect for more than three decades,during which it was invoked every spring by thousands ofbusinessmen as ritually as Moslems turn toward Mecca. Overthose decades, estimated business deductions grew like kudzuvines as the estimators became bolder, with the result that theCohan rule and other flexible parts of the T & E regulationswere subjected to a series of attacks by would-be reformers.
Bills that would have virtually or entirely eliminated the Cohanrule were introduced in Congress in 1951 and again in 1959,only to be defeated—in one case, after an outcry that T & Ereform would mean the end of the Kentucky Derby—and in1961 President Kennedy proposed legislation that not onlywould have swept aside the Cohan rule but, by reducing tobetween four and seven dollars a day the amount that a mancould deduct for food and beverages, would have all but putan end to the era of deductibility in American life. No suchfundamental social change took place. Loud and long wails ofanguish instantly arose, from businessmen and also from hotels,restaurants, and night clubs, and many of the Kennedyproposals were soon abandoned. Nevertheless, through a seriesof amendments to the Code passed by Congress in 1962 andput into effect by a set of regulations issued by the InternalRevenue Service in 1963, they did lead to the abrogation of theCohan rule, and the stipulation that, generally speaking, allbusiness deductions, no matter how small, would thenceforwardhave to be substantiated by records, if not by actual receipts.
Yet even a cursory look at the law as it has stood since thenshows that the new, reformed T & E rules fall somewhat shortof the ideal—that, in fact, they are shot through with absurditiesand underlaid by a kind of philistinism. For travel to bedeductible, it must be undertaken primarily for business ratherthan for pleasure and it must be “away from home”—that is tosay, not merely commuting. The “away-from-home” stipulationraises the question of where home is, and leads to the conceptof a “tax home,” the place one must be away from in order toqualify for travel deductions; a businessman’s tax home, nomatter how many country houses, hunting lodges, and branchoffices he may have, is the general area—not just the particularbuilding, that is—of his principal place of employment. As aresult, marriage partners who commute to work in two differentcities have separate tax homes, but, fortunately, the Codecontinues to recognize their union to the extent of allowingthem the tax advantages available to other married people;although there have been tax marriages, the tax divorce stillbelongs to the future.
As for entertainment, now that the writers of I.R.S. regulationshave been deprived of the far-reaching Cohan rule, they areforced to make distinctions of almost theological nicety, and theupshot of the distinctions is to put a direct premium on thehabit—which some people have considered all too prevalent formany years anyhow—of talking business at all hours of the dayand night, and in all kinds of company. For example,deductions are granted for the entertainment of businessassociates at night clubs, theatres, or concerts only if a“substantial and bona fide business discussion” takes placebefore, during, or after the entertainment. (One is reluctant topicture the results if businessmen take to carrying on businessdiscussions in great numbers during plays or concerts.) On theother hand, a businessman who entertains another in a “quietbusiness setting,” such as a restaurant with no floor show, mayclaim a deduction even if little or no business is actuallydiscussed, as long as the meeting has a business purpose.
Generally speaking, the noisier and more confusing ordistracting the setting, the more business talk there must be;the regulations specifically include cocktail parties in thenoisy-and-distracting category, and, accordingly, requireconspicuous amounts of business discussion before, during, orafter them, though a meal served to a business associate at thehost’s home may be deductible with no such discussion at all.
In the latter case, however, as the J. K. Lasser Tax Institutecautions in its popular guide “Your Income Tax,” you must “beready to prove that your motive … was commercial rather thansocial.” In other words, to be on the safe side, talk businessanyhow. Hellerstein has written, “Henceforth, tax men willdoubtless urge their clients to talk business at every turn, andwill ask them to admonish their wives not to object to shoptalk if they want to continue their accustomed style of living.”
Entertainment on an elaborate scale is discouraged in thepost-1963 rules, but, as the Lasser booklet notes, perhaps alittle jubilantly, “Congress did not specifically put into law aprovision barring lavish or extravagant entertainment.” Instead, itdecreed that a businessman may deduct depreciation andoperating expenses on an “entertainment facility”—a yacht, ahunting lodge, a swimming pool, a bowling alley, or an airplane,for instance—provided he uses it more than half the time forbusiness. In a booklet entitled “Expense Accounts 1963,” whichis one of many publications for the guidance of tax advisersthat 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 used25% of the time for relaxation.… Since the yacht is used 75% of the timefor business purposes, it is used primarily for the furtherance of thetaxpayer’s business and 75% of the maintenance expenses … are deductibleentertainment facility expenses. If the yacht had been used only 40% forbusiness, no deduction would be allowed.
The method by which the yachtsman is to measure businesstime and pleasure time is not prescribed. Presumably, timewhen the yacht is in drydock or is in the water with only hercrew aboard would count as neither, though it might be arguedthat the owner sometimes derives pleasure simply fromwatching her swing at anchor. The time to be apportioned,then, must be the time when he and some guests are aboardher, and perhaps his most efficient way of complying with thelaw would be to install two stopwatches, port and starboard,one to be kept running during business cruising and the otherduring pleasure cruising. Perhaps a favoring westerly mightspeed a social cruise home an hour early, or a Septemberblow delay the last leg of a business cruise, and thus tip theseason’s business time above the crucial fifty-percent figure. Wellmight the skipper pray for such timely winds, since thedeductibility of his yacht could easily double his after-tax incomefor the year. In short, the law is nonsense.
Some experts feel that the change in T & E regulationsrepresents a gain for our society because quite a few taxpayerswho may have been inclined to fudge a bit under generalprovisions like the Cohan rule do not have the stomach or theheart to put down specific fraudulent items. But what has beengained in the way of compliance may have been lost in acertain debasement of our national life. Scarcely ever has anypart of the tax law tended so energetically to compel thecommercialization of social intercourse, or penalized soparticularly the amateur spirit, which, Richard Hofstadterdeclares in his book “Anti-Intellectualism in American Life,”
characterized the founders of the republic. Perhaps the greatestdanger of all is that, by claiming deductions for activities thatare technically business but actually social—that is, by complyingwith the letter of the law—a man may cheapen his life in hisown eyes. One might argue that the founders, if they werealive today, would scornfully decline to mingle the social and thecommercial, the amateur and the professional, and woulddisdain to claim any but the most unmistakable expenses. But,under the present tax laws, the question would be whetherthey could afford such a lordly overpayment of taxes, or shouldeven be asked to make the choice.
IT has been maintained that the Code discriminates againstintellectual work, the principal evidence being that whiledepreciation may be claimed on all kinds of exhaustible physicalproperty and depletion may be claimed on natural resources,no such deductions are allowed in the case of exhaustion ofthe mental or imaginative capacities of creative artists andinventors—even though the effects of brain fag are sometimesall too apparent in the later work and incomes of suchpersons. (It has also been argued that professional athletes arediscriminated against, in that the Code does not allow fordepreciation of their bodies.) Organizations like the AuthorsLeague of America have contended, further, that the Code isunfair to authors and other creative people whose income,because of the nature of their work and the economics of itsmarketing, is apt to fluctuate wildly from year to year, so thatthey are taxed exorbitantly in good years and are left with toolittle to tide them over bad years. A provision of the 1964 billintended to take care of this situation provided creative artists,inventors, and other receivers of sudden large income with afour-year averaging formula to ease the tax bite of a windfallyear.
But if the Code is anti-intellectual, it is probably so onlyinadvertently—and is certainly so only inconsistently. By grantingtax-exempt status to charitable foundations, it facilitates theaward of millions of dollars a year—most of which wouldotherwise go into the government’s coffers—to scholars fortravel and living expenses while they carry out research projectsof all kinds. And by making special provisions in respect to giftsof property that has appreciated in value, it has—whetheradvertently or inadvertently—tended not only to force up theprices that painters and sculptors receive for their work but tochannel thousands of works out of private collections and intopublic museums. The mechanics of this process are by now sowell known that they need be merely outlined: a collector whodonates a work of art to a museum may deduct on hisincome-tax return the fair value of the work at the time of thedonation, and need pay no capital-gains tax on any increase inits value since the time he bought it. If the increase in valuehas been great and the collector’s tax bracket is very high, hemay actually come out ahead on the deal. Besides buryingsome museums under such an avalanche of bounty that theirstaffs are kept busy digging themselves out, these provisionshave tended to bring back into existence that lovable old figurefrom the pre-tax past, the rich dilettante. In recent years, somehigh-bracket people have fallen into the habit of making serialcollections—Post-Impressionists for a few years, perhaps, followedby Chinese jade, and then by modern American painting. Atthe end of each period, the collector gives away his entirecollection, and when the taxes he would otherwise have paidare calculated, the adventure is found to have cost himpractically nothing.
The low cost of high-income people’s charitable contributions,whether in the form of works of art or simply in the form ofmoney and other property, is one of the oddest fruits of theCode. Of approximately five billion dollars claimed annually asdeductible contributions on personal income-tax returns, by farthe greater part is in the form of assets of one sort or anotherthat have appreciated in value, and comes from persons withvery high incomes. The reasons can be made clear by a simpleexample: A man with a top bracket of 20 per cent who givesaway $1,000 in cash incurs a net cost of $800. A man with atop bracket of 60 per cent who gives away the same sum incash incurs a net cost of $400. If, instead, this samehigh-bracket man gives $1,000 in the form of stock that heoriginally bought for $200, he incurs a net cost of only $200.
It is the Code’s enthusiastic encouragement of large-scale charitythat has led to most of the cases of million-dollar-a-year menwho pay no tax at all; under one of its most peculiarprovisions, anyone whose income tax and contributionscombined have amounted to nine-tenths or more of his taxableincome for eight out of the ten preceding years is entitled byway of reward to disregard in the current year the usualrestrictions on the amount of deductible contributions, and canescape the tax entirely.
Thus the Code’s provisions often enable mere fiscalmanipulation to masquerade as charity, substantiating a frequentcharge that the Code is morally muddleheaded, or worse. Theprovisions also give rise to muddleheadedness in others. Theappeal made by large fund-raising drives in recent years, forexample, has been uneasily divided between a call to goodworks and an explanation of the tax advantages to the donor.
An instructive example is a commendably thorough bookletentitled “Greater Tax Savings … A Constructive Approach,”
which was used by Princeton in a large capital-funds drive.
(Similar, not to say nearly identical, booklets have been used byHarvard, Yale, and many other institutions.) “Theresponsibilities of leadership are great, particularly in an agewhen statesmen, scientists, and economists must make decisionswhich will almost certainly affect mankind for generations tocome,” the pamphlet’s foreword starts out, loftily, and goes onto explain, “The chief purpose of this booklet is to urge allprospective donors to give more serious thought to the mannerin which they make their gifts.… There are many different waysin which substantial gifts can be made at comparatively lowcost to the donor. It is important that prospective donorsacquaint themselves with these opportunities.” The opportunitiesexpounded in the subsequent pages include ways of saving ontaxes through gifts of appreciated securities, industrial property,leases, royalties, jewelry, antiques, stock options, residences, lifeinsurance, and inventory items, and through the use of trusts(“The trust approach has great versatility”). At one point, thesuggestion is put forward that, instead of actually givinganything away, the owner of appreciated securities may wish tosell them to Princeton, for cash, at the price he originally paidfor them; this might appear to the simple-minded to be acommercial transaction, but the booklet points out, accurately,that in the eyes of the Code the difference between thesecurities’ current market value and the lower price at whichthey are sold to Princeton represents pure charity, and is fullydeductible as such. “While we have laid heavy emphasis on theimportance of careful tax planning,” the final paragraph goes,“we hope no inference will be drawn that the thought andspirit of giving should in any way be subordinated to taxconsiderations.” Indeed it should not, nor need it be; with theheavy substance of giving so deftly minimized, or actuallyremoved, its spirit can surely fly unrestrained.
ONE of the most marked traits of the Code—to bring thisransacking of its character to a close—is its complexity, and thiscomplexity is responsible for some of its most far-reaching socialeffects; it is a virtual necessity for many taxpayers to seekprofessional help if they want to minimize their taxes legally,and since first-rate advice is expensive and in short supply, therich are thereby given still another advantage over the poor,and the Code becomes more undemocratic in its action than itis in its provisions. (And the fact that fees for tax advice arethemselves deductible means that tax advice is one more itemon the long list of things that cost less and less to those whohave more and more.) All the free projects of taxpayereducation and taxpayer assistance offered by the InternalRevenue Service—and they are extensive and wellmeant—cannot begin to compete with the paid services of agood independent tax expert, if only because the I.R.S., whosefirst duty is to collect revenue, is involved in an obvious conflictof interest when it sets about explaining to people how to avoidtaxes. The fact that about half of all the revenue derived fromindividual returns for 1960 came from adjusted gross incomesof $9,000 or less is not attributable entirely to provisions of theCode; in part, it results from the fact that low-income taxpayerscannot 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 sideeffect of the Code’s complexity. The exact size of this army isunknown, but there are a few guideposts. By a recent countsome eighty thousand persons, most of them lawyers,accountants, and former I.R.S. employees, held cards, grantedby the Treasury Department, that officially entitle them topractice the trade of tax adviser and to appear as such beforethe I.R.S.; in addition, there is an uncounted host of unlicensed,and often unqualified, persons who prepare tax returns for afee—a service that anyone may legally perform. As for lawyers,the undisputed plutocrats, if not the undisputed aristocrats, ofthe tax-advice industry, there is scarcely a lawyer in thecountry who is not concerned with taxes at one time oranother during a year’s practice, and every year there aremore lawyers who are concerned with nothing else. TheAmerican Bar Association’s taxation section, composed mostly ofnothing-but-tax lawyers, has some nine thousand members; inthe typical large New York law firm one out of five lawyersdevotes all of his time to tax matters; and the New YorkUniversity Law School’s tax department, an enormous broodhen for the hatching of tax lawyers, is larger than the whole ofan average law school. The brains that go into tax avoidance,which are generally recognized as including some of the bestlegal brains extant, constitute a wasted national resource, it iswidely contended—and this contention is cheerfully upheld bysome 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 ontrivia. “The law has its cycles,” one of them explained recently.
“In the United States, the big thing until about 1890 wasproperty law. Then came a period when it was corporation law,and now it’s various specialties, of which the most important istaxes. I’m perfectly willing to admit that I’m engaged in workthat has a limited social value. After all, what are we talkingabout when we talk about tax law? At best, only the questionof what an individual or a corporation should fairly pay insupport of the government. All right, why do I do tax work?
In the first place, it’s a fascinating intellectual game—along withlitigation, probably the most intellectually challenging branch ofthe law as it is now practiced. In the second place, althoughit’s specialized in one sense, in another sense it isn’t. It cutsthrough every field of law. One day you may be working witha Hollywood producer, the next day with a big real-estate man,the next with a corporation executive. In the third place, it’s ahighly lucrative field.”
HYPOCRITICALLY egalitarian on the surface and systematicallyoligarchic underneath, unconscionably complicated, whimsicallydiscriminatory, specious in its reasoning, pettifogging in itslanguage, demoralizing to charity, an enemy of discourse, apromoter of shop talk, a squanderer of talent, a rock ofsupport to the property owner but a weighty onus to theunderpaid, an inconstant friend to the artist and scholar—if thenational mirror-image is all these things, it has its good pointsas well. Certainly no conceivable income-tax law could pleaseeverybody, and probably no equitable one could entirely pleaseanybody; Louis Eisenstein notes in his book “The Ideologies ofTaxation,” “Taxes are a changing product of the earnest effortto have others pay them.” With the exception of its moreflagrant special-interest provisions, the Code seems to be asincerely written document—at worst misguided—that is aimed atcollecting unprecedented amounts of money from anunprecedentedly complex society in the fairest possible way, atencouraging the national economy, and at promoting worthyundertakings. When it is intelligently and conscientiouslyadministered, as it has been of late, our national income-tax lawis quite possibly as equitable as any in the world.
But to enact an unsatisfactory law and then try tocompensate for its shortcomings by good administration is,clearly, an absurd procedure. One solution that is morelogical—to abolish the income tax—is proposed chiefly by somemembers of the radical right, who consider any income taxSocialistic or Communistic, and who would have the federalgovernment simply stop spending money, though abolition isalso advanced, as a theoretical ideal rather than as a practicalpossibility, by certain economists who are looking around foralternative ways of raising at least a significant fraction of thesums now produced by the income tax. One such alternative isa value-added tax, under which manufacturers, wholesalers, andretailers would be taxed on the difference between the value ofthe goods they bought and that of the goods they sold; amongthe advantages claimed for it are that it would spread the taxburden more evenly through the productive process than abusiness-income tax does, and that it would enable thegovernment to get its money sooner. Several countries, includingFrance and Germany, have value-added taxes, though assupplements rather than alternatives to income taxes, but nofederal tax of the sort is more than remotely in prospect inthis country. Other suggested means of lightening the burden ofthe income tax are to increase the number of items subject toexcise taxes, and apply a uniform rate to them, so as to createwhat would amount to a federal sales tax; to increase usertaxes, such as tolls on federally owned bridges and recreationfacilities; and to enact a law permitting federal lotteries, like thelotteries 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 manyschools, bridges, canals, and roads. One obvious disadvantage ofall these schemes is that they would collect revenue withrelatively little regard to ability to pay, and for this reason orothers none of them stand a chance of being enacted in theforeseeable future.
A special favorite of theoreticians, but of hardly anyone else, issomething called the expenditure tax—the taxing of individualson the basis of their total annual expenditures rather than ontheir income. The proponents of this tax—diehard adherents ofthe economics of scarcity—argue that it would have the primaryvirtue of simplicity; that it would have the beneficial effect ofencouraging savings; that it would be fairer than the incometax, because it would tax what people took out of the economyrather than what they put into it; and that it would give thegovernment a particularly handy control instrument with whichto keep the national economy on an even keel. Its opponentscontend that it wouldn’t really be simple at all, and would beridiculously easy to evade; that it would cause the rich tobecome richer, and doubtless stingier as well; and, finally, thatby putting a penalty on spending it would promote depression.
In any event, both sides concede that its enactment in theUnited States is not now politically practicable. An expendituretax was seriously proposed for the United States by Secretaryof the Treasury Henry Morgenthau, Jr., in 1942, and forBritain by a Cambridge economist (later a special adviser to theNational Treasury) named Nicholas Kaldor, in 1951, thoughneither proponent asked for repeal of the income tax. Bothproposals were all but unanimously hooted down. “Theexpenditure tax is a beautiful thing to contemplate,” one of itsadmirers said recently. “It would avoid almost all the pitfalls ofthe income tax. But it’s a dream.” And so it is, in the Westernworld; such a tax has been put in effect only in India andCeylon.
With no feasible substitute in sight, then, the income taxseems to be here to stay, and any hope for better taxationseems to lie in its reform. Since one of the Code’s chief flawsis its complexity, reform might well start with that. Efforts atsimplification have been made with regularity since 1943, whenSecretary Morgenthau set up a committee to study the subject,and there have been occasional small successes; simplifiedinstructions, for example, and a shortened form for taxpayerswho wish to itemize deductions but whose affairs are relativelyuncomplicated were both introduced during the Kennedyadministration. Obviously, though, these were mereguerrilla-skirmish victories. One obstacle to any victory moresweeping is the fact that many of the Code’s complexities wereintroduced in no interest other than that of fairness to all, andapparently cannot be removed without sacrificing fairness. Theevolution of the special family-support provisions provides astriking example of how the quest for equity sometimes leadsstraight to complexity. Up to 1948, the fact that some stateshad and some didn’t have community-property laws resulted inan advantage to married couples in the community-propertystates; those couples, and those couples only, were allowed tobe taxed as if their total income were divided equally betweenthem, even though one spouse might actually have a highincome and the other none at all. To correct this clear-cutinequity, the federal Code was modified to extend theincome-dividing privilege to all married persons. Even apartfrom the resulting discrimination against single persons withoutdependents—which remains enshrined and unchallenged in theCode today—this correction of one inequity led to the creationof another, the correction of which led to still another; beforethe Chinese-box sequence was played out, account had beentaken of the legitimate special problems of persons who hadfamily responsibilities although they were not married, then ofworking wives with expenses for child care during businesshours, and then of widows and widowers. And each changemade the Code more complex.
The loopholes are another matter. In their case, complexityserves not equity but its opposite, and their persistent survivalconstitutes a puzzling paradox; in a system under which themajority presumably makes the laws, tax provisions thatblatantly favor tiny minorities over everybody else would seemto represent the civil-rights principle run wild—a kind ofanti-discrimination program for the protection of millionaires.
The process by which new tax legislation comes into being—anoriginal proposal from the Treasury Department or some othersource, passage in turn by the House Ways and MeansCommittee, the whole House, the Senate Finance Committee,and the whole Senate, followed by the working out of aHouse-Senate compromise by a conference committee, followedby 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 protestspecial-interest provisions, what public pressure there is is aptto be greater in favor of them than against them. In the bookon tax loopholes called “The Great Treasury Raid,” Philip M.
Stern points out several forces that seem to him to workagainst the enactment of tax-reform measures, among them theskill, power, and organization of the anti-reform lobbies; thediffuseness and political impotence of the pro-reform forceswithin the government; and the indifference of the generalpublic, which expresses practically no enthusiasm for tax reformthrough letters to congressmen or by any other means,perhaps in large part because it is stunned intoincomprehension and consequent silence by the mind-bogglingtechnicality of the whole subject. In this sense, the Code’scomplexity is its impenetrable elephant hide. Thus the TreasuryDepartment, which, as the agency charged with collecting federalrevenues, has a natural interest in tax reform, is often left,along with a handful of reform-minded legislators, like SenatorsPaul H. Douglas of Illinois, Albert Gore of Tennessee, andEugene J. McCarthy of Minnesota, on a lonely and indefensiblesalient.
OPTIMISTS believe that some “point of crisis” will eventuallycause specially favored groups to look beyond their selfishinterests, and the rest of the country to overcome its passivity,to such an extent that the income tax will come to give back amore flattering picture of the country than it does now. Whenthis will happen, if ever, they do not specify. But the generalshape of the picture hoped for by some of those who caremost about it is known. The ideal income tax envisioned forthe far future by many reformers would be characterized by ashort and simple Code with comparatively low rates and with aminimum of exceptions to them. In its main structural features,this ideal tax would bear a marked resemblance to the 1913income tax—the first ever to be put in effect in the UnitedStates in peacetime. So if the unattainable visions of todayshould eventually materialize, the income tax would be justabout back where it started.

Chapter 4 A Reasonable Amount of Time
PRIVATE INFORMATION, whether of distant public events,impending business developments, or even the health of politicalfigures, has always been a valuable commodity to traders insecurities—so valuable that some commentators have suggestedthat stock exchanges are markets for such information just asmuch as for stocks. The money value that a market puts oninformation is often precisely measurable in terms of the changein stock prices that it brings about, and the information isalmost as readily convertible into money as any othercommodity; indeed, to the extent that it is used for barterbetween traders, it is a kind of money. Moreover, until quiterecently, the propriety of the use of inside dope for their ownenrichment by those fortunate enough to possess it went largelyunquestioned. Nathan Rothschild’s judicious use of advancenews of Wellington’s victory at Waterloo was the chief basis ofthe Rothschild fortune in England, and no Royal commission orenraged public rose to protest; similarly, and almostsimultaneously, on this side of the Atlantic John Jacob Astormade an unchallenged bundle on advance news of the Ghenttreaty ending the War of 1812. In the post-Civil War era in theUnited States the members of the investing public, such as itwas, still docilely accepted the right of the insider to trade onhis privileged knowledge, and were content to pick up anycrumbs that he might drop along the way. (Daniel Drew, avintage insider, cruelly denied them even this consolation bydropping poisoned crumbs in the form of misleadingmemoranda as to his investment plans, which he wouldelaborately strew in public places.) Most nineteenth-centuryAmerican fortunes were enlarged by, if they were not actuallyfounded on, the practice of insider trading, and just howdifferent our present social and economic order would be ifsuch trading had been effectively forbidden in those daysprovides a subject for fascinating, if bootless, speculation. Notuntil 1910 did anyone publicly question the morality ofcorporate officers, directors, and employees trading in theshares of their own companies, not until the nineteen twentiesdid it come to be widely thought of as outrageous that suchpersons should be permitted to play the market game withwhat amounts to a stacked deck, and not until 1934 didCongress pass legislation intended to restore equity. Thelegislation, the Securities Exchange Act, requires corporateinsiders to forfeit to their corporations any profits they mayrealize on short-term trades in their own firms’ stock, andprovides further, in a section that was implemented in 1942 bya rule designated as 10B-5, that no stock trader may use anyscheme to defraud or “make any untrue statement of amaterial fact or … omit to state a material fact.”
Since omitting to state material facts is the essence of usinginside information, the law—while it does not forbid insiders tobuy their own stock, nor to keep the profits provided they holdonto the stock more than six months—would seem to outlawthe stacked deck. In practice, though, until very recently the1942 rule was treated almost as if it didn’t exist; it wasinvoked by the Securities and Exchange Commission, the federalenforcement body set up under the Securities Exchange Act,only rarely and in cases so flagrant as to be probablyprosecutable even without it, under common law. And therewere apparent reasons for this laxity. For one thing, it hasbeen widely argued that the privilege of cashing in on theircorporate secrets is a necessary incentive to business executivesto goad them to their best efforts, and it is coolly contendedby a few authorities that the uninhibited presence of insiders inthe market, however offensive to the spirit of fair play, isessential to a smooth, orderly flow of trading. Moreover, it iscontended that the majority of all stock traders, whether or notthey are technically insiders, possess and conceal insideinformation of one sort or another, or at least hope andbelieve that they do, and that therefore an even-handedapplication of Rule 10B-5 would result in nothing less thanchaos on Wall Street. So in letting the rule rest largelyuntroubled in the rulebook for twenty years, the S.E.C. seemedto be consciously refraining from hitting Wall Street in one ofits most vulnerable spots. But then, after a couple ofpreliminary jabs, it went for the spot with a vengeance. Thelawsuit in which it did so was a civil complaint against theTexas Gulf Sulphur Company and thirteen men who weredirectors or employees of that company; it was tried without ajury in the United States District Court in Foley Square onMay 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 tosome extent.” Plowing, and perhaps sowing too; Henry G.
Manne, in a recent book entitled “Insider Trading and theStock Market,” says that the case presents in almost classicterms the whole problem of insider trading, and expresses theopinion that its resolution “may determine the law in this fieldfor many years to come.”
THE events that led to the S.E.C.’s action began in March,1959, when Texas Gulf, a New York City-based company thatwas the world’s leading producer of sulphur, began conductingaerial geophysical surveys over the Canadian Shield, a vast,barren, forbidding area of eastern Canada that in the distantbut not forgotten past had proved to be a fertile source ofgold. What the Texas Gulf airmen were looking for was neithersulphur nor gold. Rather, it was sulphides—deposits of sulphuroccurring in chemical combination with other useful minerals,such as zinc and copper. What they had in mind wasdiscovering mineable veins of such minerals so that Texas Gulfcould diversify its activities and be less dependent upon sulphur,the market price of which had been slipping. From time totime during the two years that the surveys went onintermittently, the geophysical instruments in the scanning planeswould behave strangely, their needles jiggling in such a way asto indicate the presence of electrically conductive material in theearth. The areas where such things happened, called“anomalies” by geophysicists, were duly logged and mapped bythe surveyors. All told, several thousand anomalies were found.
It’s a long way from an anomaly to a workable mine, as mustbe evident to anyone who knows that while most sulphides areelectrically conductive, so are many other things, includinggraphite, the worthless pyrites called fool’s gold, and evenwater; nevertheless, several hundred of the anomalies that theTexas Gulf men had found were considered to be worthy ofground investigation, and among the most promising-looking ofall was one situated at a place designated on their maps as theKidd-55 segment—one square mile of muskeg marsh, lightlywooded and almost devoid of outcropping rocks, about fifteenmiles north of Timmins, Ontario, an old gold-mining town thatis itself some three hundred and fifty miles northwest ofToronto. Since Kidd-55 was privately owned, the company’s firstproblem was to get title to it, or to enough of it to makepossible exploratory ground operations; for a large company toacquire land in an area where it is known to be engaged inmining exploration obviously involves delicacy in the extreme,and it was not until June, 1963, that Texas Gulf was able toget an option permitting it to drill on the northeast quartersection of Kidd-55. On October 29th and 30th of that year aTexas Gulf engineer, Richard H. Clayton, conducted a groundelectromagnetic survey of the northeast quarter, and wassatisfied 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 atKidd-55. The man in charge of the drilling crew was a youngTexas Gulf geologist named Kenneth Darke, a cigar smokerwith a rakish gleam in his eye, who looked a good deal morelike the traditional notion of a mining prospector than that ofthe organization man he was. For three days the drilling wenton, bringing out of the earth a cylindrical core of material aninch and a quarter in diameter, which served as the first actualsample of what the rock under Kidd-55 contained. As the corecame up, Darke studied it critically, inch by inch and foot byfoot, using no instruments but only his eyes and his knowledgeof what various mineral deposits look like in their natural state.
On the evening of Sunday, November 10th, by which time thedrill was down one hundred and fifty feet, Darke telephonedhis immediate superior, Walter Holyk, Texas Gulf’s chiefgeologist, at his home in Stamford, Conn. to report on hisfindings so far. (He made the call from Timmins, since therewas no telephone at the Kidd-55 drill site.) Darke, Holyk hassince said, was “excited.” And so, apparently, was Holyk afterhe had heard what Darke had to say, because he immediatelyset in motion quite a corporate flap for a Sunday night. Thatsame evening, Holyk called his superior, Richard D. Mollison, aTexas 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. 2man, in nearby Rye, to pass Darke’s report on up the line.
Further reports were made the next day through the samelabyrinth of command—Darke to Holyk to Mollison to Fogarty.
As a result of them, Holyk, Mollison, and Fogarty all decided togo to Kidd-55 to see for themselves.
Holyk got there first; he arrived at Timmins on November12th, checked in at the Bon Air Motel, and got out to Kidd-55by jeep and muskeg tractor in time to see the completion ofthe drill hole and to help Darke visually estimate and log thecore. By this time the weather, which had hitherto beenpassable for Timmins in mid-November, had turned nasty. Infact, it was “quite inclement,” Holyk, a Canadian in his fortieswith a doctorate in geology from Massachusetts Institute ofTechnology, has since said. “It was cold, windy, threateningsnow and rain, and … we were much more concerned withpersonal comfort than we were with the details of the corehole. Ken Darke was writing, and I was looking at the core,trying to make estimates of the mineral content.” To add to thedifficulty of working outdoors under such conditions, some ofthe core had come out of the ground covered with dirt andgrease, and had to be washed with gasoline before its contentscould even be guessed at. Despite all difficulties, Holyksucceeded in making an appraisal of the core that was, to saythe least, startling. Over the six hundred or so feet of its finallength, he estimated, there appeared to be an average coppercontent of 1.15% and an average zinc content of 8.64%. ACanadian stockbroker with special knowledge of the miningindustry was to say later that a drill core of such length andsuch mineral content “is just beyond your wildest imagination.”
TEXAS Gulf didn’t have a surefire mine yet; there was alwaysthe possibility that the mineral vein was a long, thin one, toolimited to be commercially exploitable, and that by a fantasticchance the drill had happened to go “down dip”—that is,straight into the vein like a sword into a sheath. What wasneeded was a pattern of several drill holes, beginning atdifferent spots on the surface and entering the earth atdifferent angles, to establish the shape and limits of the deposit.
And such a pattern could not be made until Texas Gulf hadtitle to the other three quarter-segments of Kidd-55. Getting titlewould take time if it were possible at all, but meanwhile, therewere several steps that the company could and did take. Thedrill rig was moved away from the site of the test hole. Cutsaplings were stuck in the ground around the hole, to restorethe 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 wasexpected—and found. All of these camouflage measures, whichwere in conformity with long-established practice among minerswho suspect that they have made a strike, were supplementedby an order from Texas Gulf’s president, Claude O. Stephens,that no one outside the actual exploration group, even withinthe company, should be told what had been found. Late inNovember, the core was shipped off, in sections, to the unionAssay Office in Salt Lake City for scientific analysis of itscontents. And meanwhile, of course, Texas Gulf began discreetlyputting out feelers for the purchase of the rest of Kidd-55.
And meanwhile other measures, which may or may not havebeen related to the events north of Timmins, were being taken.
On November 12th, Fogarty bought three hundred shares ofTexas Gulf stock; on the 15th he added seven hundred moreshares, on November 19th five hundred more, and onNovember 26th two hundred more. Clayton bought twohundred on the 15th, Mollison one hundred on the same day;and Mrs. Holyk bought fifty on the 29th and one hundredmore on December 10th. But these purchases, as things turnedout, were only the harbingers of a period of apparently intenseaffection for Texas Gulf stock among certain of its officers andemployees, and even some of their friends. In mid-December,the report on the core came back from Salt Lake City, and itshowed that Holyk’s rough-and-ready estimate had beenamazingly accurate; the copper and zinc contents were foundto be almost exactly what he had said, and there were 3.94ounces of silver per ton thrown in as a sort of bonus. Late inDecember, Darke made a trip to Washington, D.C. and vicinity,where he recommended Texas Gulf stock to a girl he knewthere and her mother; these two, who came to be designatedin the trial as the “tippees,” subsequently passed along therecommendation to two other persons who, logically enough,thereby became the “sub-tippees.” Between December 30th andthe following February 17th, Darke’s tippees and sub-tippeespurchased all told 2,100 shares of Texas Gulf stock, and inaddition they purchased what are known in the brokeragetrade as “calls” on 1,500 additional shares. A call is an optionto buy a stated amount of a certain stock at a fixedprice—generally near the current market price—at any timeduring a stated period. Calls on most listed stocks are alwayson sale by dealers who specialize in them. The purchaser paysa generally rather moderate sum for his option; if the stockthen goes up during the stated period, the rise can easily beconverted into almost pure profit for him, while if the stockstays put or goes down, he simply tears up his call the way ahorseplayer tears up a losing ticket, and loses nothing but thecost of the call. Therefore calls provide the cheapest possibleway of gambling on the stock market, and the most convenientway of converting inside information into cash.
Back in Timmins, Darke, put temporarily out of business as ageologist by the winter freeze and the land-ownership problemat Kidd-55, seems to have managed to keep time from hangingheavy on his hands. In January, he entered into a privatepartnership with another Timmins man who wasn’t a TexasGulf employee to stake and claim Crown lands around Timminsfor their own benefit. In February, he told Holyk of a barroomconversation that had occurred in Timmins one gelid winterevening, in which an acquaintance of his had let fall that he’dheard rumors of a Texas Gulf strike nearby and was thereforegoing to stake a few claims of his own. Horrified, Holyk, as herecalled later, told Darke to reverse the previous policy ofavoiding Kidd-55 like the plague, and to “go right into the …area and stake all the claims we need;” also to “steer awaythis acquaintance. Give him a helicopter ride or anything, justget him out of the way.” Darke presumably complied with thisorder. Moreover, during the first three months of 1964 hebought three hundred shares of Texas Gulf outright, boughtcalls on three thousand more shares, and added several morepersons, one of them his brother, to his growing list of tippees.
Holyk and Clayton were somewhat less financially active duringthe same period, but they did add substantially to their TexasGulf holdings—in the case of Holyk and his wife, particularlythrough the use of calls, which they’d scarcely even heard ofbefore, but which were getting to be quite the rage in TexasGulf circles.
Signs of spring began to come at last, and with them came atriumphant conclusion to the company’s land acquisitionprogram. By March 27th, Texas Gulf had pretty much what itneeded; that is, it had either clear title or mineral rights to thethree remaining segments of Kidd-55, except for ten-per-centprofit concessions on two of the segments, the stubborn ownerof the concession in one case being the Curtis PublishingCompany. After a final burst of purchases by Darke, histippees, and his sub-tippees on March 30th and 31st (amongthem all, six hundred shares and calls on 5,100 more sharesfor the two days), drilling was resumed in the still-frozenmuskeg at Kidd-55, with Holyk and Darke both on the site thistime. The new hole—the third in all, but only the secondoperational one, since one of the two drilled in November hadbeen the dummy intended to create a diversion—was begun ata point some distance from the first and at an oblique angle toit, to advance the bracketing process. Observing and logging thecore as it came out of the ground, Holyk found that he couldscarcely hold a pencil because of the cold; but he must havebeen warmed inwardly by the fact that promising mineralizationbegan to appear after the first hundred feet. He made his firstprogress report to Fogarty by telephone on April 1st. Now agruelling daily routine was adopted at Timmins and Kidd-55.
The actual drilling crew stayed at the site continuously, whilethe geologists, in order to keep their superiors in New Yorkposted, had to make frequent trips to telephones in Timmins,and what with the seven-foot snowdrifts along the way thefifteen-mile trek between the town and the drilling campcustomarily took three and a half to four hours. One afteranother, new drill holes, begun at different places around theanomaly and pitched at different angles to it, were plunged intothe earth. At first, only one drill rig could be used at a timebecause of a shortage of water, which was necessary to theoperation; the ground was frozen solid and covered by deepsnow, and water had to be laboriously pumped from under theice on a pond about a half mile from Kidd-55. The third holewas finished on April 7th, and a fourth immediately begun withthe same rig; the following day, the water shortage havingeased somewhat, a fifth hole was inaugurated with a seconddrill rig, and two days after that—on the 10th—a third rig waspressed into service to drill still another hole. All in all, duringthe first days of April the principals in the affair were keptbusy; in fact, during that period their buying of calls on TexasGulf seems to have come to a standstill.
Bit by bit the drilling revealed the lineaments of a huge oredeposit; the third hole established that the original one had notgone “down dip” as had been feared, the fourth establishedthat the mineral vein was a satisfactorily deep one, and so on.
At some point—the exact point was to become a matter ofdispute—Texas Gulf came to know that it had a workable mineof considerable proportions, and as this point approached, thefocus of attention shifted from drillers and geologists to staffmen and financiers, who were to be the principal object of theS.E.C.’s disapproval later on. At Timmins, snow fell so heavilyon April 8th and most of the 9th that not even the geologistscould get from the town to Kidd-55, but toward evening on the9th, when they finally made it after a hair-raising journey ofseven and a half hours, with them was no lesser light thanVice President Mollison, who had turned up in Timmins theprevious day. Mollison spent the night at the drill site and leftat about noon the next day—in order, he explained later, toavoid the outdoorsmen’s lunch they served at Kidd-55 whichwas too hearty for a deskbound man like him. But beforegoing he issued instructions for the drilling of a mill test hole,which would produce a relatively large core that could be usedto determine the amenability of the mineral material to routinemill processing. Normally, a mill test hole is not drilled until aworkable mine is believed to exist. And so it may have been inthis case; two S.E.C. mining experts were to insist later, againstcontrary opinions of experts for the defense, that by the timeMollison gave his order, Texas Gulf had information on thebasis of which it could have calculated that the ore reserves atKidd-55 had a gross assay value of at least two hundredmillion dollars.
THE famous Canadian mining grapevine was humming by now,and in retrospect the wonder is that it had been relatively quietfor so long. (A Toronto broker was to remark during the trial,“I have seen drillers drop the goddam drill and beat it for abrokerage office as fast as they can … [or else] they pick upthe telephone and call Toronto.” After such a call, the brokerwent on, the status of every Bay Street penny-stock toutdepends, for a time, on how close a personal acquaintance hecan claim with the driller who made the strike, just as aracetrack tout’s status depends sometimes on the degree ofintimacy he can claim with a jockey or a horse.) “Themoccasin telegraph has Texas Gulf’s activity centered in KiddTownship. A battery of drills are reported to be at work,” saidThe Northern Miner, a Toronto weekly of immense influencein the mining-stock set, on the 9th, and the same day theToronto Daily Star declared that Timmins was “bug-eyed withexcitement” and that “the magic word on every street cornerand in every barber shop is ‘Texas Gulf.’” The phones inTexas Gulf’s New York headquarters were buzzing with frenziedqueries, which the officers coldly turned aside. On the 10th,President Stephens was concerned enough about the rumors toseek counsel from one of his most trusted associates—ThomasS. Lamont, senior member of the Texas Gulf board ofdirectors, former second-generation Morgan partner, holder ofvarious lofty offices, past and present, in the Morgan GuarantyTrust Company, and bearer of a name that had long been oneto conjure with in Wall Street. Stephens told Lamont what hadbeen going on north of Timmins (it was the first Lamont hadheard of it), made it clear that he himself did not yet feel thatthe evidence justified bug eyes, and asked what Lamontthought ought to be done about the exaggerated reports. Aslong as they stayed in the Canadian press, Lamont replied, “Ithink you might be able to live with them.” However, he added,if they should get into the papers in the United States, it mightbe well to give the press an announcement that would set therecord straight and avoid undue gyrations in the stock market.
The following day, Saturday the 11th, the reports reached theUnited States papers with a bang. The Times and HeraldTribune both ran accounts on the Texas Gulf discovery, andthe latter, putting its story on the front page, spoke of “thebiggest ore strike since gold was discovered more than sixtyyears ago in Canada.” After reading these stories, perhaps witheyes bugging slightly, Stephens notified Fogarty that a pressrelease should be issued in time for Monday’s papers, and overthe weekend Fogarty, with the help of several other companyofficials, worked one up. Meanwhile, things were not standingstill at Kidd-55; on the contrary, later testimony held that onSaturday and Sunday, as more and more core came up fromthe drill holes full of copper and zinc ore, the calculable valueof 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 presson Sunday afternoon was not based on the mostup-to-the-minute information. Whether because of that or forsome other reason, the statement did not convey the idea thatTexas Gulf thought it had a new Comstock Lode. Characterizingthe published reports as exaggerated and unreliable, it admittedonly that recent drilling on “one property near Timmins” hadled to “preliminary indications that more drilling would berequired for proper evaluation of the prospect;” went on to saythat “the drilling done to date has not been conclusive;” andthen, putting the same thought in what can hardly be calledanother way, added that “the work done to date has not beensufficient to reach definite conclusions.”
The idea thus couched, or perhaps one should say beddeddown, evidently came across to the public when it appeared inMonday morning’s newspapers, because Texas Gulf stock wasnot nearly so buoyant early that week as it might have beenexpected to be if the enthusiastic Times and Herald Tribunestories had gone unchallenged. The stock, which had beenselling at around 17 or 18 the previous November and hadcrept up over the intervening months to around 30, openedMonday on the New York Stock Exchange at 32—a rise ofnearly two points over Friday’s closing—only to reverse directionand sink to 30? before the day’s trading, was over, and toslip off still further on the following two days and at one pointon Wednesday touch a low of 28?. Evidently, investors andtraders had been considerably impressed by Texas Gulf’sSunday mood of deprecation. But on those same three days,Texas Gulf people in both Canada and New York seem tohave been in quite another mood. At Kidd-55 on Monday the13th, the day the low-keyed press release was reported innewspapers, the mill test hole was completed, drills continued togrind away on three regular test holes, and a reporter for TheNorthern Miner was shown around and briefed on thefindings by Mollison, Holyk, and Darke. The things they toldthe reporter make it clear, in retrospect, that whatever thedrafters of the release may have believed on Sunday, the menat Kidd-55 knew on Monday that they had a mine and a bigone. However, the world was not to know it, or at least notfrom that source, until Thursday morning, when the next issueof the Miner would appear in subscribers’ mail and onnewsstands.
Tuesday evening, Mollison and Holyk flew to Montreal, wherethey were planning to attend the annual convention of theCanadian Institute of Mining and Metallurgy, a gathering ofseveral hundred leading mining and investment people. Uponarriving at the Queen Elizabeth Hotel where the convention wasin progress, Mollison and Holyk were startled to find themselvesgreeted like film stars. The place had evidently been hummingall day with rumors of a Texas Gulf discovery and everyonewanted to be the first to get the firsthand lowdown on it; infact, a battery of television cameras had been set up for theexpress purpose of covering such remarks as the emissariesfrom Timmins might want to make. Not being authorized tomake any remarks, Mollison and Holyk turned abruptly ontheir heels and fled the Queen Elizabeth, holing up for thenight in a Montreal airport motel. The following day,Wednesday the 15th, they flew from Montreal to Toronto in thecompany, by prearrangement, of the Minister of Mines of theProvince of Ontario and his deputy; en route they briefed theminister on the Kidd-55 situation, whereupon the ministerdeclared that he wanted to clear the air by making a publicannouncement 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, theannouncement stated, in part, that “the information now inhand … gives the company confidence to allow me toannounce that Texas Gulf Sulphur has a mineable body of zinc,copper, and silver ore of substantial dimensions that will bedeveloped and brought to production as soon as possible.”
Mollison and Holyk were given to believe that the ministerwould make his statement in Toronto at eleven o’clock thatevening, over radio and television, and that thus Texas Gulf’sgood news would become public property a few hours beforeThe Northern Miner appeared early the next day. But forreasons that have never been given, the minister didn’t makethe announcement that evening.
At Texas Gulf headquarters, at 200 Park Avenue, there was asimilar air of mounting crisis. The company happened to havea regular monthly board-of-directors meeting scheduled forThursday morning, and on Monday Francis G. Coates, adirector who lived in Houston, Texas, and who hadn’t heard ofthe Kidd-55 strike, telephoned Stephens to inquire whether heought to bother to come. Stephens said he ought, but didn’texplain why. Better and better news kept filtering in from thedrill site, and some time on Wednesday, the Texas Gulf officersdecided that it was time to write a new press release, to beissued at a press conference that would follow theThursday-morning directors’ meeting. Stephens, Fogarty, andDavid M. Crawford, the company’s secretary, composed therelease that afternoon. This time around, the release was basedon the very latest information, and moreover, its language washappily devoid of both repetition and equivocation. It read, inpart, “Texas Gulf Sulphur Company has made a major strikeof zinc, copper, and silver in the Timmins area … Seven drillholes are now essentially complete and indicate an ore body ofat least 800 feet in length, 300 feet in width, and having avertical depth of more than 800 feet. This is a majordiscovery. The preliminary data indicate a reserve of more than25 million tons of ore.” As to the striking difference betweenthis release and the one of three days earlier, the new onestated that “considerably more data has been accumulated” inthe interim. And no one could deny this; a reserve of morethan twenty-five million tons of ore meant that the value of theore was not the two hundred million dollars that was alleged tohave been calculable a week earlier, but many times that much.
In the course of the same hectic day in New York, theengineer Clayton and the company secretary Crawford foundtime to call their brokers and order themselves some TexasGulf stock—two hundred shares in Clayton’s case, threehundred in Crawford’s. And Crawford soon decided that hehadn’t plunged deeply enough; shortly after eight o’clock thenext morning, after an apparently preoccupied night at the ParkLane Hotel, he awakened his broker with a second call anddoubled his order.
ON Thursday morning, the first hard news of the Timminsstrike spread through the North American investment world,rapidly but erratically. Between seven and eight o’clock, mailmenand newsstands in Toronto began distributing copies of TheNorthern-Miner containing the piece by the reporter who hadvisited Kidd55, in which he described the strike with a gooddeal of mining jargon but did not omit to call it, in languagecomprehensible enough for anyone, “a brilliant explorationsuccess” and “a major new zinc-copper-silver mine.” At aboutthe same time, the Miner was on its way out to subscriberssouth of the border in Detroit and Buffalo, and a few hundrednewsstand copies appear to have arrived in New York betweennine and ten o’clock. The paper’s physical appearance here,however, was preceded by telephone reports on its contentsfrom Toronto, and by about 9:15 the news that Texas Gulfhad hit it big for sure was the talk of New York brokerageoffices. A customer’s man in the Sixtieth Street office of E. F.
Hutton & Company complained later that his broker cronieshad been so eager to natter on the telephone about Texas Gulfearly that morning as to substantially prevent him fromcommunicating with his customers; however, he did manage tosqueeze in a call to two of them, a husband and wife forwhom he was able to turn a rather quick profit in TexasGulf—to be exact, a profit of $10,500 in less than an hour. (“Itis clear that we are all in the wrong business,” Judge Bonsalwas to comment when he heard this. Or as the late WielandWagner once remarked in another context, “I shall be quiteexplicit. Valhalla is Wall Street.”) At the Stock Exchange itselfearly that day, the traders in the Luncheon Club, which beforethe ten-o’clock opening serves as a breakfast club, were allmunching on the Texas Gulf situation along with their toast andeggs.
At the directors’ meeting at 200 Park, which began promptlyat nine, the directors were shown the new statement that wasshortly 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 alsostated that the Ontario Minister of Mines had announced itpublicly in Toronto the previous evening (a misstatement, ofcourse, although an unintentional one; actually, the minister wasmaking his announcement to the Ontario Parliament pressgallery in Toronto at almost the same moment Stephens wasspeaking). 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 andmagazines, general and financial—trooped into the board roomfor the press conference, the Texas Gulf directors all remainingin their places. Stephens distributed copies of the press releaseto the reporters and then, in fulfillment of a curious ritual thatgoverns such affairs, read it aloud. While he was engaged inthis redundant recital various reporters began to drift away(“they began sort of leaking out of the room” was the wayLamont put it later) to telephone the sensational news to theirpublications; still more of them slipped away during the eventsthat subsequently rounded out the press conference—theshowing of some innocuous colored slides of the countrysidearound Timmins, and an exhibition and explanation by Holyk ofsome drill cores—and by the time it ended, at around 10:15,only a handful of reporters were left. This certainly didn’t meanthat the affair had been a flop. On the contrary, a pressconference is perhaps the only kind of show whose success isin direct proportion to the number of people who leave beforeit is over.
The actions of two of the Texas Gulf directors, Coates andLamont, during the next half hour or so were to give rise tothe most controversial part of the S.E.C.’s complaint, and, sincethe controversy has now been inscribed in the law, thoseactions are likely to be studied for at least a generation byinside stock traders seeking guidance as to what they must doto be saved, or at least to avoid being damned. The essence ofthe controversy was timing, and in particular, the timing ofCoates’ and Lamont’s maneuvers in relation to that of thedissemination of the Texas Gulf news by the Dow Jones NewsService, the familiar spot-news facility for investors. Fewinvestment offices in the United States are without the service,and its prestige is such that in some investment circles themoment a piece of news becomes public is considered to bedetermined by the moment it crosses the broad tape. As to themorning of April 16th, 1964, a Dow Jones reporter was notonly among those at the Texas Gulf press conference but wasamong those who left early to telephone the news to his office.
According to his recollection, the reporter made his call between10:10 and 10:15, and normally an item of such importance asthe one he sent would begin to be printed out by Dow Jonesmachines in offices from coast to coast within two or threeminutes after being telephoned in. In fact, though, the TexasGulf story did not begin to appear until 10:54, an entirelyinexplicable forty-odd minutes later. The mystery of the broadtape message, like the mystery of the Minister of Mines’
announcement, was left unraveled in the trial on grounds ofirrelevance; an engaging aspect of the rules of evidence is theirtendency to leave a few things to the imagination.
Coates, the Texan, was the first director to embark upon whathe can hardly have thought of at the time as a historicallysignificant course. Either before or immediately after the end ofthe press conference he went into an office adjoining the boardroom, where he borrowed a telephone and called hisson-in-law, H. Fred Haemisegger, who is a stockbroker inHouston. Coates, as he related later, told Haemisegger of theTexas Gulf discovery and added that he had waited to call until“after the public announcement” because he was “too old toget into trouble with the S.E.C.” He then placed an order fortwo thousand shares of Texas Gulf stock for four family trustsof which he was a trustee, though not personally a beneficiary.
The stock, which had opened on the Stock Exchange sometwenty minutes earlier at a fraction above 30 in very active butby no means decisively bullish trading, was now rapidly on itsway up, but by acting quickly Haemisegger managed to buythe block for Coates at between 31 and 31?, getting his ordersin to his firm’s floor broker well before the unaccountablydelayed news began to come out on the broad tape.
Lamont, in the Wall Street tradition of plungers rather thanthe Texas one, made his move with decision but with anelegant, almost languorous lack of hurry. Instead of leaving theboard room at the conclusion of the press conference, hestayed there for some twenty minutes, not doing much ofanything. “I milled around … and listened to some of themchatter and talk with each other, and slapped people on theback,” he recounted later. Then, at 10:39 or 10:40, he went toa nearby office and telephoned a colleague and friend of his atthe Morgan Guaranty Trust Company—Longstreet Hinton, thebank’s executive vice president and the head of its trustdepartment. Earlier in the week Hinton had asked Lamont ifhe, as a Texas Gulf director, could shed any light on therumors of an ore discovery that were appearing in the press,and Lamont had replied that he couldn’t. Now Lamont, as herecalled later, told Hinton “that there was news which hadcome out, or was shortly coming out, on the ticker, whichwould be of interest to him, regarding Texas Gulf Sulphur.” “Isit good?” Hinton asked, and Lamont replied that it was “prettygood” or “very good.” (Neither man is sure which he said, butit doesn’t matter, since in New York bankerese “pretty good”
means “very good.”) In any case, Hinton did not follow theadvice to look at the Dow Jones ticker, even though a machinewas ticking twenty feet from his office; instead, he immediatelycalled the bank’s trading department and asked for a marketquotation on Texas Gulf. After getting it, he placed an order tobuy 3,000 shares for the account of the Nassau Hospital, ofwhich he was treasurer. All this occupied no more than twominutes from the time Lamont had left the press conference.
The order had been transmitted from the bank to the StockExchange and executed, and Nassau Hospital had its stock,before Hinton would have seen anything about Texas Gulf onthe broad tape if he had been looking at it. But he was notlooking at it; he was otherwise occupied. After placing theNassau Hospital order, he went to the office of the MorganGuaranty officer in charge of pension trusts and suggested thathe buy some Texas Gulf for the trusts. In a matter of lessthan a half an hour, the bank had ordered 7,000 shares forits pension fund and profit-sharing account—two thousand ofthem before the announcement had begun to appear on thebroad tape, and the rest either while it was appearing or withina few minutes afterward. A bit more than an hour afterthat—at 12:33 p.m.—Lamont bought 3,000 shares for himselfand members of his family, this time having to pay 34? forthem, 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. Itclosed that afternoon at 36?, it reached a high of 58? laterthat month, and by the end of 1966, when commercialproduction of ore was at last under way at Kidd-55 and theenormous new mine was expected to account for one-tenth ofCanada’s total annual production of copper and one-quarter ofits total annual production of zinc, the stock was selling at over100. Anyone who had bought Texas Gulf between November12th, 1963 and the morning (or even the lunch hour) of April16th, 1964 had therefore at least tripled his money.
PERHAPS the most arresting aspect of the Texas Gulf trial—apartfrom the fact that a trial was taking place at all—was thevividness and variety of the defendants who came before JudgeBonsal, ranging as they did from a hot-eyed mining prospectorlike Clayton (a genuine Welchman with a degree in mining fromthe University of Cardiff) through vigorous and harriedcorporate nabobs like Fogarty and Stephens to a Texaswheeler-dealer like Coates and a polished Brahmin of financelike Lamont. (Darke, who had left Texas Gulf’s employ soonafter April, 1964 to become a private investor—which may ormay not indicate that he had become a man of independentmeans—declined to appear at the trial on the ground that hisCanadian nationality put him beyond the reach of subpoena bya United States court, and the S.E.C. grieved loudly over thisrefusal; defense counsel, however, scornfully insisted that theS.E.C. was really delighted to have Darke absent, thus allowingplaintiff to paint him as Mephistopheles hiding in the wings.)The S.E.C, after its counsel, Frank E. Kennamer Jr., hadannounced his intention to “drag to light and pillory themisconduct of these defendants,” asked the court to issue apermanent injunction forbidding Fogarty, Mollison, Clayton,Holyk, Darke, Crawford, and several other corporate insiderswho had bought stock or calls between November 8th, 1963and April 15th, 1964, from ever again “engaging in any act …which operates or would operate as a fraud or deceit uponany person in connection with purchase or sale of securities”;further—and here it was breaking entirely new ground—itprayed that the Court order the defendants to make restitutionto the persons they had allegedly defrauded by buying stock orcalls from them on the basis of inside information. The S.E.C.
also charged that the pessimistic April 12th press release wasdeliberately deceptive, and asked that because of it Texas Gulfbe enjoined from “making any untrue statement of material factor omitting to state a material fact.” Apart from any question ofloss of corporate face, the nub of the matter here lay in thefact that such a judgment, if granted, might well open the wayfor legal action against the company by any stockholder whohad sold his Texas Gulf stock to anybody in the interimbetween the first press release and the second one, and sincethe shares that had changed hands during that period had runinto the millions, it was a nub indeed.
Apart from legal technicalities, counsel based its defense of theearly insider stock purchases chiefly on the argument that theinformation yielded by the first drill hole in November hadmade the prospect of a workable mine not a sure thing butonly a sporting proposition, and to buttress this argument, itparaded before the judge a platoon of mining experts whotestified as to the notorious fickleness of first drill holes, someof the witnesses going so far as to say that the hole mightvery well have turned out to be not an asset but a liability toTexas Gulf. The people who had bought stock or calls duringthe winter insisted that the drill hole had had little or nothingto do with their decision—they had been motivated simply bythe feeling that Texas Gulf was a good investment at thatjuncture on general principles; and Clayton attributed his abruptappearance as a substantial investor to the fact that he hadjust married a well-to-do wife. The S.E.C. countered with itsown parade of experts, maintaining that the nature of the firstcore had been such as to make the existence of a rich minean overwhelming probability, and that therefore those privy tothe facts about it had possessed a material fact. As the S.E.C.
put it saltily in a post-trial brief, “the argument that thedefendants were free to purchase the stock until the existenceof a mine had been established beyond doubt is equivalent tosaying that there is no unfairness in betting on a horse enteredin a race, knowing that the animal has received an illegalstimulant, because in the homestretch the horse might dropdead.” Defense counsel declined to be drawn into argument onthe equine analogy. As to the pessimistic April 12th release, theS.E.C. made much of the fact that Fogarty, its chief drafter,had based it on information that was almost forty-eight hoursold when it was issued, despite the fact that communicationsbetween Kidd-55, Timmins, and New York were relatively goodat the time, and expressed the view that “the most indulgentexplanation for his strange conduct is that Dr. Fogarty simplydid not care whether he gave the shareholders of Texas Gulfand the public a discouraging statement based on staleinformation.” Brushing aside the question of staleness, thedefense asserted that the release “accurately stated the status ofthe drilling in the opinion of Stephens, Fogarty, Mollison, Holyk,and Clayton,” that “the problem presented was obviously one ofjudgment,” and that the company had been in a particularlydifficult and sensitive position in that if it had, instead, issuedan overly optimistic report that had later proved to have beenbased on false hopes, it could just as well have then beenaccused of fraud for that.
Weighing the crucial question of whether the informationobtained from the first drill hole had been “material,” JudgeBonsal concluded that the definition of materiality in suchinstances must be a conservative one. There was, he pointedout, a question of public policy involved: “It is important underour free-enterprise system that insiders, including directors,officers, and employees, be encouraged to own securities oftheir company. The incentive that comes with stock ownershipbenefits both the company and the stockholders.” Keeping hisdefinition conservative, he decided that up until the evening ofApril 9th, when three converging drill holes positively establishedthe three-dimensionality of the ore deposit, material informationhad not been in hand, and the decisions of the insiders to buyTexas Gulf stock before that date, even if based on the drillingresults, were no more than perfectly sporting, and legal,“educated guesses.” (A newspaper columnist who disagreed withthe judge’s finding was to remark that the guesses had beenso educated as to qualify for summa cum laude.) In the caseof Darke, the judge found that the spate of stock purchases byhis tippees and sub-tippees on the last days of March seemedhighly likely to have been instigated by word from Darke thatdrilling at Kidd-55 was about to be resumed; but even here,according to Judge Bonsal’s logic, material information did notyet exist and therefore could neither be acted upon nor passedalong to others.
Case was therefore dismissed against all educated guesserswho had bought stock or calls, or made recommendations totippees, before the evening of April 9th. With Clayton andCrawford, who had been so injudicious as to buy or orderstock on April 15th, it was another matter. The judge found noevidence that they had intended to deceive or defraud anyone,but they had made their purchases with the full knowledge thata great mine had been found and that it would be announcedthe next day—in short, with material private information inhand. Therefore they were found to have violated Rule 10B-5,and in due time would presumably be enjoined from doingsuch a thing again and made to offer restitution to the personsthey bought their April 15th shares from—assuming, of course,that such persons can be found, the complexities ofstock-exchange trading being such that it isn’t always an easymatter to figure out exactly whom one has been dealing withon any particular transaction. The law in our time is, andprobably ought to remain, almost unrealistically humanistic; in itseyes, corporations are people, stock exchanges are street-cornermarketplaces where buyer and seller haggle face to face, andcomputers scarcely exist.
As for the April 12th press release, the judge found it inretrospect “gloomy” and “incomplete,” but he acknowledged thatits purpose had been the worthy one of correcting theexaggerated rumors that had been appearing and decided thatthe S.E.C. had failed to prove that it was false, misleading, ordeceptive. Thus he dismissed the complaint that Texas Gulf haddeliberately tried to confuse its stockholders and the public.
UP to this point, it was two wins against a whole string oflosses for the S.E.C., and the right of a miner to drop his drilland run for a brokerage office appeared to have retained mostof its sanctity, provided at least that his drill hole is the first ofa series. But there remained to be settled the matter that, ofall those contested in the case, was of the most consequence tostockholders, stock traders, and the national economy, asopposed to the members of corporate mining explorationgroups. It was the matter of the April 16th activities of Coatesand Lamont, and its importance lay in the fact that it turnedon the question of precisely when, in the eyes of the law, apiece of information ceases to be inside and becomes public.
The question had never before been subjected to anything likeso exacting a test, so what came out of the Texas Gulf casewould instantly become the legal authority on the subject untilsuperseded by some even more refined case.
The basic position of the S.E.C. was that the stock purchasesof Coates, and the circumspect tip given by Lamont to Hintonby telephone, were illegal use of inside information because theywere accomplished before the announcement of the ore strikeon the Dow Jones broad tape—an announcement that theS.E.C.’s lawyers kept referring to as the “official” one, althoughthe Dow Jones service, much as it might like to, derives nosuch status from any authority other than custom. But theS.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 improperand illegal unless enough time had elapsed for the news to bethoroughly absorbed by members of the investing public notprivileged to attend the press conference or even to bewatching the broad tape at the right moment. Defense counselsaw things rather differently. In its view, far from being culpableregardless of whether or not they had acted before or after thebroad tape announcement, its clients were innocent in eithercase. In the first place, the lawyers contended, Coates andLamont had every reason to believe the news was out, sinceStephens had said during the directors’ meeting that it hadbeen released by the Ontario Minister of Mines the previousevening, and therefore Coates and Lamont acted in good faith;in the second place, counsel went on, what with the buzzing inbrokerage offices and the early-morning excitement at the StockExchange, to all intents and purposes the news really was out,via osmosis and The Northern Miner, considerably before itappeared on the ticker or before the mooted telephone callswere made. Lamont’s lawyers argued that their client hadn’tadvised Hinton to buy Texas Gulf stock, anyhow; he’d merelyadvised him to look at the broad tape, an act as innocent torecommend as to perform, and what Hinton had done thenhad been entirely on his own hook. In sum, the lawyers forthe two sides could agree on neither whether the rules hadbeen violated nor what the rules actually were; indeed, it wasone of the defense’s contentions that the S.E.C. was asking thecourt to write new rules and then apply them retroactively,while the plaintiff insisted that he was merely asking that an oldrule, 10B-5, be applied broadly, in the spirit of the Marquis ofQueensberry. Near the end of the trial Lamont’s lawyers,bearing down hard, created a courtroom sensation byintroducing a surprise exhibit, a large, elaborate map of theUnited States dotted with colored flags, some blue, some red,some green, some gold, some silver—each flag, the lawyersannounced, denoting a place where the Texas Gulf news hadbeen disseminated before Lamont had acted or it had reachedthe broad tape. On questioning, it came out that all but eightof the flags represented offices of the brokerage firm of MerrillLynch, Pierce, Fenner & Smith, on whose interoffice wire thenews had been carried at 10:29; but while this revelation ofthe highly limited scope of the dissemination may have mitigatedthe legal force of the map, it apparently did not mitigate theesthetic impression on the judge. “Isn’t that beautiful?” heexclaimed, while the S.E.C. men fumed in chagrin, and whenone of the proud defense lawyers noticed a couple of locationson the map that had been overlooked and pointed out thatthere should really be even more flags, Judge Bonsal, stillbemused, shook his head and said he was afraid that wouldn’twork, since all known colors seemed to have been usedalready.
Lamont’s fastidiousness in waiting until 12:33, almost twohours after his call to Hinton, before he bought stock forhimself and his family left the S.E.C. unimpressed—and it washere that the Commission took its most avant-garde stand andasked the judge for a decision that would forge most fearlesslyinto the legal jungles of the future. As the stand was set forthin the S.E.C. briefs, “It is the Commission’s position that evenafter corporate information has been published in the newsmedia, insiders, are still under a duty to refrain from securitiestransactions until there had elapsed a reasonable amount oftime in which the securities industry, the shareholders, and theinvesting public can evaluate the development and makeinformed investment decisions … Insiders must wait at leastuntil the information is likely to have reached the averageinvestor who follows the market and he has had someopportunity to consider it.” In the Texas Gulf case, the S.E.C.
argued, one hour and thirty-nine minutes after the start of thebroad-tape transmission was not long enough for thatevaluation, as evidenced by the fact that the enormous rise inthe price of Texas Gulf stock had hardly more than started bythat time, and therefore Lamont’s 12:33 purchases had violatedthe Securities Exchange Act. What, then, did the S.E.C. thinkwould be “a reasonable amount of time”? That would “varyfrom case to case,” the S.E.C.’s counsel Kennamer said in hissummation, according to the nature of the inside information;for example, word of a dividend cut would probably percolatethrough the dullest investor’s brain in a very short time, whilea piece of news as unusual and abstruse as Texas Gulf’s mighttake days, or even longer. It would, Kennamer said, be “anearly impossible task to formulate a rigid set of rules thatwould apply in all situations of this sort.” Therefore, in theS.E.C.’s canon, the only way an insider could find out whetherhe had waited long enough before buying his company’s stockwas by being haled into court and seeing what the judgewould decide.
Lamont’s counsel, led by S. Hazard Gillespie, went after thisstand with the same zeal, if not actually glee, that had markedits foray into cartography. First, Gillespie said, the S.E.C. hadcontended that Coates’ call to Haemisegger and Lamont’s toHinton had been wrong because they had been made beforethe broadtape announcement; then it had said that Lamont’slater stock purchase had been wrong because it had beenmade after the announcement, but not long enough after. Ifthese apparently opposite courses of action were both fraud,what was right conduct? The S.E.C. seemed to want to havethe rules made up as it went along—or, rather, to have thecourts make them up. As Gillespie put the matter moreformally, the S.E.C. was “asking the court to write … a rulejudicially and to apply it retroactively to adjudicate Mr. Lamontguilty of fraud because of conduct which he reasonably believedto be entirely proper.”
It wouldn’t stand up, Judge Bonsal agreed—and for thatmatter, neither would the S.E.C.’s contention that the time ofthe broad-tape transmission had been the time when the newshad become public. He took the narrower view that, based onlegal precedent, the controlling moment had been the one whenthe press release had been read and handed to the reporters,even though hardly any outsider—that is, hardly anybody atall—had known of it for some time afterward. Clearly troubledby the implications of this finding, Judge Bonsal added that “itmay be, as the Commission contends, that a more effective ruleshould be established to preclude insiders from acting oninformation after it has been announced but before it has beenabsorbed by the public.” But he didn’t think it was up to himto write such a rule. Nor did he think it was up to him todetermine whether or not Lamont had waited long enoughbefore placing his 12:33 order. If it were left to judges to makesuch determinations, he said, “this could only lead touncertainty. A decision in one case would not control anothercase with different facts. No insider would know whether hehad waited long enough … If a waiting period is to be fixed,this could be most appropriately done by the Commission.” Noone would bell the cat, and the complaints against Coates andLamont were dismissed.
THE S.E.C. appealed all the dismissals, and Clayton andCrawford, the only two defendants found to have violated theSecurities Exchange Act, appealed the judgments against them.
In its appeal brief the Commission painstakingly reviewed theevidence and suggested to the Circuit Court that Judge Bonsalhad erred in his interpretation of it, while the defense brief forClayton and Crawford concentrated on the possibly detrimentaleffects of the doctrine implied in the finding against them. Mightnot the doctrine mean, for example, that every security analystwho does his best to ferret out little-known facts about aparticular company, and then recommends that company’sstock to his customers as he is paid to do, could be adjudgedan insider improperly distributing tips precisely because of hisdiligence? Might it not tend to “stifle investment by corporatepersonnel and impede the flow of corporate information toinvestors”?
Perhaps so. At all events, in August, 1968, the U.S. Court ofAppeals for the Second Circuit handed down a decision whichflatly reversed Judge Bonsal’s findings on just about everyscore except the findings against Crawford and Clayton, whichwere affirmed. The Appeals Court found that the originalNovember drill hole had provided material evidence of avaluable ore deposit, and that therefore Fogarty, Mollison,Darke, Holyk, and all other insiders who had bought TexasGulf stock or calls on it during the winter were guilty ofviolations of the law; that the gloomy April 12th press releasehad been ambiguous and perhaps misleading; and that Coateshad improperly and illegally jumped the gun in placing hisorders right after the April 16th press conference. OnlyLamont—the charges against whom had been dropped followinghis death shortly after the lower court decision—and a TexasGulf office manager, John Murray, remained exonerated.
The decision was a famous victory for the S.E.C., and the firstreaction of Wall Street was to cry out that it would make forutter confusion. Pending further appeals to the Supreme Court,it would, at least, result in an interesting experiment. For thefirst time in the history of the world, the effort would have tobe made, in Wall Street, to conduct a stock market without theuse of a stacked deck.
Chapter 5 Xerox Xerox Xerox Xerox
WHEN THE ORIGINAL mimeograph machine—the first mechanicalduplicator of written pages that was practical for office use—wasput on the market by the A. B. Dick Company, of Chicago, in1887, it did not take the country by storm. On the contrary,Mr. Dick—a former lumberman who had become bored withcopying his price lists by hand, had tried to invent a duplicatingmachine himself, and had finally obtained rights to produce themimeograph from its inventor, Thomas Alva Edison—foundhimself faced with a formidable marketing problem. “Peopledidn’t want to make lots of copies of office documents,” sayshis grandson C. Matthews Dick, Jr., currently a vice-presidentof the A. B. Dick Company, which now manufactures a wholeline of office copiers and duplicators, including mimeographmachines. “By and large, the first users of the thing werenon-business organizations like churches, schools, and BoyScout troops. To attract companies and professional men,Grandfather and his associates had to undertake an enormousmissionary effort. Office duplicating by machine was a new andunsettling idea that upset long-established office patterns. In1887, after all, the typewriter had been on the market only alittle over a decade and wasn’t yet in widespread use, andneither was carbon paper. If a businessman or a lawyerwanted five copies of a document, he’d have a clerk make fivecopies—by hand. People would say to Grandfather, ‘Why shouldI 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. Dickencountered were perhaps connected with the generally badrepute that the notion of making copies of graphic material hadbeen held in for a number of centuries—a bad repute reflectedin the various overtones of the English noun and verb “copy.”
The Oxford English Dictionary makes it clear that during thosecenturies 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 themiddle of the seventeenth century, the medieval use of thenoun “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 thedefects of bad originals,” La Rochefoucauld wrote in his“Maxims” in 1665. “Never buy a copy of a picture,” Ruskinpronounced dogmatically in 1857, warning not against chicanerybut against debasement. And the copying of written documentswas often suspect, too. “Though the attested Copy of a Recordbe good proof, yet the Copy of a Copy never so well attested… will not be admitted as proof in Judicature,” John Lockewrote in 1690. At about the same time, the printing tradecontributed to the language the suggestive expression “foulcopy,” 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 wasdoubtless chiefly responsible for a twentieth-century reversal ofthese attitudes. In any case, office reproduction began to growvery rapidly. (It may seem paradoxical that this growthcoincided with the rise of the telephone, but perhaps it isn’t. Allthe evidence suggests that communication between people bywhatever means, far from simply accomplishing its purpose,invariably breeds the need for more.) The typewriter andcarbon paper came into common use after 1890, andmimeographing became a standard office procedure soon after1900. “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 thedevices in use; by 1910 there were probably over two hundredthousand, and by 1940 almost half a million. The offset printingpress—a mettlesome competitor capable of producing workmuch handsomer than mimeographed output—was successfullyadapted for office use in the nineteen-thirties and forties, and isnow standard equipment in most large offices. As with themimeograph machine, though, a special master page must beprepared before reproduction can start—a relatively expensiveand time-consuming process—so the offset press is economicallyuseful only when a substantial number of copies are wanted. Inoffice-equipment jargon, the offset press and the mimeographare “duplicators” rather than “copiers,” the dividing line betweenduplicating and copying being generally drawn somewherebetween ten and twenty copies. Where technology laggedlongest was in the development of efficient and economicalcopiers. Various photographic devices that did not require themaking of master pages—of which the most famous was (andstill is) the Photostat—began appearing around 1910, butbecause of their high cost, slowness, and difficulty of operation,their usefulness was largely limited to the copying ofarchitectural and engineering drawings and legal documents.
Until after 1950, the only practical machine for making a copyof a business letter or a page of typescript was a typewriterwith carbon paper in its platen.
The nineteen-fifties were the raw, pioneering years ofmechanized office copying. Within a short time, there suddenlyappeared on the market a whole batch of devices capable ofreproducing most office papers without the use of a masterpage, at a cost of only a few cents per copy, and within atime span of a minute or less per copy. Their technologyvaried—Minnesota Mining & Manufacturing’s Thermo-Fax,introduced in 1950, used heat-sensitive copying paper; AmericanPhotocopy’s Dial-A-Matic Autostat (1952) was based on arefinement of ordinary photography; Eastman Kodak’s Verifax(1953) used a method called dye transfer; and so on—butalmost all of them, unlike Mr. Dick’s mimeograph, immediatelyfound a ready market, partly because they filled a genuineneed and partly, it now seems clear, because they and theirfunction exercised a powerful psychological fascination on theirusers. In a society that sociologists are forever characterizing as“mass,” the notion of making one-of-a-kind things intomany-of-a-kind things showed signs of becoming a realcompulsion. However, all these pioneer copying machines hadserious and frustrating inherent defects; for example, Autostatand Verifax were hard to operate and turned out damp copiesthat had to be dried, while Thermo-Fax copies tended todarken when exposed to too much heat, and all three couldmake copies only on special treated paper supplied by themanufacturer. What was needed for the compulsion to flowerinto a mania was a technological breakthrough, and thebreakthrough came at the turn of the decade with the adventof a machine that worked on a new principle, known asxerography, and was able to make dry, good-quality, permanentcopies on ordinary paper with a minimum of trouble. The effectwas immediate. Largely as a result of xerography, the estimatednumber of copies (as opposed to duplicates) made annually inthe United States sprang from some twenty million in themid-fifties to nine and a half billion in 1964, and to fourteenbillion in 1966—not to mention billions more in Europe, Asia,and Latin America. More than that, the attitude of educatorstoward printed textbooks and of business people toward writtencommunication underwent a discernible change; avant-gardephilosophers took to hailing xerography as a revolutioncomparable in importance to the invention of the wheel; andcoin-operated copying machines began turning up in candystores and beauty parlors. The mania—not as immediatelydisrupting as the tulip mania in seventeenth-century Holland butprobably destined to be considerably farther-reaching—was infull swing.
The company responsible for the great breakthrough and theone on whose machines the majority of these billions of copieswere made was, of course, the Xerox Corporation, ofRochester, New York. As a result, it became the mostspectacular 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, itssales were thirty-three million dollars. In 1961, they weresixty-six million, in 1963 a hundred and seventy-six million, andin 1966 over half a billion. As Joseph C. Wilson, the chiefexecutive of the firm, pointed out, this growth rate was suchthat if maintained for a couple of decades (which, perhapsfortunately for everyone, couldn’t possibly happen), Xerox saleswould be larger than the gross national product of the UnitedStates. Unplaced in Fortune’s ranking of the five hundredlargest American industrial companies in 1961, Xerox by 1964had attained two-hundred-and-twenty-seventh place, and by1967 it had climbed to hundred-and-twenty-sixth. Fortune’sranking is based on annual sales; according to certain othercriteria, Xerox placed much higher thanhundred-and-seventy-first. For example, early in 1966 it rankedabout sixty-third in the country in net profits, probably ninth inratio of profit to sales, and about fifteenth in terms of themarket value of its stock—and in this last respect the youngupstart was ahead of such long-established industrial giants asU.S. Steel, Chrysler, Procter & Gamble, and R.C.A. Indeed, theenthusiasm the investing public showed for Xerox made itsshares the stock market Golconda of the sixties. Anyone whobought its stock toward the end of 1959 and held on to ituntil early 1967 would have found his holding worth aboutsixty-six times its original price, and anyone who was reallyfore-sighted and bought Haloid in 1955 would have seen hisoriginal investment grow—one might almost say miraculously—ahundred and eighty times. Not surprisingly, a covey of “Xeroxmillionaires” sprang up—several hundred of them all told, mostof whom either lived in the Rochester area or had come fromthere.
The Haloid Company, started in Rochester in 1906, was thegrandfather of Xerox, just as one of its founders—Joseph C.
Wilson, a sometime pawnbroker and sometime mayor ofRochester—was the grandfather of his namesake, the1946-1968 boss of Xerox. Haloid manufactured photographicpapers, and, like all photographic companies—and especiallythose in Rochester—it lived in the giant shadow of its neighbor,Eastman Kodak. Even in this subdued light, though, it waseffective enough to weather the Depression in modestly goodshape. In the years immediately after the Second World War,however, both competition and labor costs increased, sendingHaloid on a search for new products. One of the possibilitiesits scientists hit upon was a copying process that was beingworked on at the Battelle Memorial Institute, a large non-profitindustrial-research organization in Columbus, Ohio. At this point,the story flashes back to 1938 and a second-floor kitchenabove a bar in Astoria, Queens, which was being used as amakeshift laboratory by an obscure thirty-two-year-old inventornamed Chester F. Carlson. The son of a barber of Swedishextraction, and a graduate in physics of the California Instituteof Technology, Carlson was employed in New York in thepatent department of P. R. Mallory & Co., an Indianapolismanufacturer of electrical and electronic components; in questof fame, fortune, and independence, he was devoting his sparetime to trying to invent an office copying machine, and to helphim in this endeavor he had hired Otto Kornei, a Germanrefugee physicist. The fruit of the two men’s experiments was aprocess by which, on October 22, 1938, after using a gooddeal of clumsy equipment and producing considerable smokeand stench, they were able to transfer from one piece of paperto another the unheroic message “10-22-38 Astoria.” Theprocess, which Carlson called electrophotography, had—andhas—five basic steps: sensitizing a photoconductive surface tolight by giving it an electrostatic charge (for example, byrubbing it with fur); exposing this surface to a written page toform an electrostatic image; developing the latent image bydusting the surface with a powder that will adhere only to thecharged areas; transferring the image to some sort of paper;and fixing the image by the application of heat. The steps, eachof them in itself familiar enough in connection with othertechnologies, were utterly new in combination—so new, in fact,that the kings and captains of commerce were markedly slowto recognize the potentialities of the process. Applying theknowledge he had picked up in his job downtown, Carlsonimmediately wove a complicated net of patents around theinvention (Kornei shortly left to take a job elsewhere, and thusvanished permanently from the electrophotographic scene) andset about trying to peddle it. Over the next five years, whilecontinuing to work for Mallory, he pursued his moonlighting ina new form, offering rights to the process to every importantoffice-equipment company in the country, only to be turneddown every time. Finally, in 1944, Carlson persuaded BattelleMemorial Institute to undertake further development work onhis process in exchange for three-quarters of any royalties thatmight accrue from its sale or license.
Here the flashback ends and xerography, as such, comes intobeing. By 1946, Battelle’s work on the Carlson process hadcome to the attention of various people at Haloid, among themthe younger Joseph C. Wilson, who was about to assume thepresidency of the company. Wilson communicated his interest toa new friend of his—Sol M. Linowitz, a bright and vigorouslypublic-spirited young lawyer, recently back from service in theNavy, who was then busy organizing a new Rochester radiostation that would air liberal views as a counterbalance to theconservative views of the Gannett newspapers. Although Haloidhad its own lawyers, Wilson, impressed with Linowitz, askedhim to look into the Battelle thing as a “one-shot” job for thecompany. “We went to Columbus to see a piece of metalrubbed with cat’s fur,” Linowitz has since said. Out of that tripand others came an agreement giving Haloid rights to theCarlson process in exchange for royalties to Carlson andBattelle, and committing it to share with Battelle in the workand the costs of development. Everything else, it seemed, flowedfrom that agreement. In 1948, in search of a new name forthe Carlson process, a Battelle man got together with aprofessor of classical languages at Ohio State University, and bycombining two words from classical Greek they came up with“xerography,” or “dry writing.” Meanwhile, small teams ofscientists at Battelle and Haloid, struggling to develop theprocess, were encountering baffling and unexpected technicalproblems one after another; at one point, indeed, the Haloidpeople became so discouraged that they considered selling mostof their xerography rights to International Business Machines.
But the deal was finally called off, and as the research went onand the bills for it mounted, Haloid’s commitment to theprocess gradually became a do-or-die affair. In 1955, a newagreement was drawn up, under which Haloid took over fulltitle to the Carlson patents and the full cost of the developmentproject, in payment for which it issued huge bundles of Haloidshares to Battelle, which, in turn, issued a bundle or two toCarlson. The cost was staggering. Between 1947 and 1960,Haloid spent about seventy-five million dollars on research inxerography, or about twice what it earned from its regularoperations during that period; the balance was raised throughborrowing and through the wholesale issuance of commonstock to anyone who was kind, reckless, or prescient enough totake it. The University of Rochester, partly out of interest in astruggling local industry, bought an enormous quantity for itsendowment fund at a price that subsequently, because of stocksplits, amounted to fifty cents a share. “Please don’t be mad atus if we find we have to sell our Haloid stock in a couple ofyears to cut our losses on it,” a university official nervouslywarned Wilson. Wilson promised not to be mad. Meanwhile, heand other executives of the company took most of their pay inthe form of stock, and some of them went as far as to put uptheir savings and the mortgages on their houses to help thecause along. (Prominent among the executives by this time wasLinowitz, whose association with Haloid had turned out to beanything but a one-shot thing; instead, he became Wilson’sright-hand man, taking charge of the company’s crucial patentarrangements, organizing and guiding its international affiliations,and eventually serving for a time as chairman of its board ofdirectors.) In 1958, after prayerful consideration, the company’sname was changed to Haloid Xerox, even though noxerographic product of major importance was yet on themarket. The trademark “XeroX” had been adopted by Haloidseveral years earlier—a shameless imitation of Eastman’s“Kodak,” as Wilson has admitted. The terminal “X” soon had tobe downgraded to lower case, because it was found thatnobody 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 retainedagainst the vehement advice of many of the firm’s consultants,who feared that the public would find it unpronounceable, orwould think it denoted an anti-freeze, or would be put in mindof a word highly discouraging to financial ears—“zero.”
Then, in 1960, the explosion came, and suddenly everythingwas reversed. Instead of worrying about whether its tradename would be successful, the company was worrying about itsbecoming too successful, for the new verb “to xerox” began toappear so frequently in conversation and in print that thecompany’s proprietary rights in the name were threatened, andit had to embark on an elaborate campaign against such usage.
(In 1961, the company went the whole hog and changed itsname to plain Xerox Corporation.) And instead of worryingabout the future of themselves and their families, the Xeroxexecutives were worrying about their reputation with the friendsand relatives whom they had prudently advised not to invest inthe stock at twenty cents a share. In a word, everybody whoheld Xerox stock in quantity had got rich or richer—theexecutives who had scrimped and sacrificed, the University ofRochester, Battelle Memorial Institute, and even, of all people,Chester F. Carlson, who had come out of the variousagreements with Xerox stock that at 1968 prices was worthmany million dollars, putting him (according to Fortune)among the sixty-six richest people in the country.
THUS baldly outlined, the story of Xerox has an old-fashioned,even a nineteenth-century, ring—the lonely inventor in his crudelaboratory, the small, family-oriented company, the initialsetbacks, the reliance on the patent system, the resort toclassical Greek for a trade name, the eventual triumphgloriously vindicating the free-enterprise system. But there isanother dimension to Xerox. In the matter of demonstrating asense of responsibility to society as a whole, rather than just toits stockholders, employees, and customers, it has shown itselfto 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, toimbue people with the belief that they can be achieved—theseare as important as the balance sheet, perhaps more so,”
Wilson said once, and other Xerox executives have often goneout of their way to emphasize that “the Xerox spirit” is not somuch a means to an end as a matter of emphasizing “humanvalues” for their own sake. Such platform rhetoric is far fromuncommon in big-business circles, of course, and when itcomes from Xerox executives it is just as apt to arouseskepticism—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 andcharitable institutions, and $2,246,000 in 1966; both years thebiggest recipients were the University of Rochester and theRochester Community Chest, and in each case the sumrepresented around one and a half per cent of the company’snet income before taxes. This is markedly higher than thepercentage that most large companies set aside for good works;to take a couple of examples from among those often cited fortheir liberality, R.C.A.’s contributions for 1965 amounted toabout seven-tenths of one per cent of pre-tax income, andAmerican Telephone & Telegraph’s to considerably less thanone per cent. That Xerox intended to persist in its high-mindedways was indicated by its commitment of itself in 1966 to the“one-per-cent program,” often called the Cleveland Plan—asystem inaugurated in that city under which local industriesagree to give one per cent of pre-tax income annually to localeducational institutions, apart from their other donations—so thatif Xerox income continues to soar, the University of Rochesterand its sister institutions in the area can face the future with acertain assurance.
In other matters, too, Xerox has taken risks for reasons thathave nothing to do with profit. In a 1964 speech, Wilson said,“The corporation cannot refuse to take a stand on public issuesof major concern”—a piece of business heresy if there ever wasone, since taking a stand on a public issue is the obvious wayof alienating customers and potential customers who take theopposite stand. The chief public stand that Xerox has taken isin favor of the United Nations—and, by implication, against itsdetractors. Early in 1964, the company decided to spend fourmillion dollars—a year’s advertising budget—on underwriting aseries of network-television programs dealing with the U.N., theprograms to be unaccompanied by commercials or any otheridentification of Xerox apart from a statement at the beginningand end of each that Xerox had paid for it. That July andAugust—some three months after the decision had beenannounced—Xerox suddenly received an avalanche of lettersopposing the project and urging the company to abandon it.
Numbering almost fifteen thousand, the letters ranged in tonefrom sweet reasonableness to strident and emotionaldenunciation. Many of them asserted that the U.N. was aninstrument for depriving Americans of their Constitutional rights,that its charter had been written in part by AmericanCommunists, and that it was constantly being used to furtherCommunist objectives, and a few letters, from companypresidents, bluntly threatened to remove the Xerox machinesfrom their offices unless the series was cancelled. Only ahandful of the letter writers mentioned the John Birch Society,and none identified themselves as members of it, butcircumstantial evidence suggested that the avalanche representeda carefully planned Birch campaign. For one thing, a recentBirch Society publication had urged that members write toXerox to protest the U.N. series, pointing out that a flood ofletters had succeeded in persuading a major airline to removethe U.N. insigne from its airplanes. Further evidence of asystematic campaign turned up when an analysis, made atXerox’s instigation, showed that the fifteen thousand letters hadbeen written by only about four thousand persons. In anyevent, the Xerox offices and directors declined to be persuadedor intimidated; the U.N. series appeared on the AmericanBroadcasting Company network in 1965, to plaudits all around.
Wilson later maintained that the series—and the decision toignore the protest against it—made Xerox many more friendsthan enemies. In all his public statements on the subject, heinsisted on characterizing what many observers considered arather rare stroke of business idealism, as simply soundbusiness judgment.
In the fall of 1966, Xerox began encountering a measure ofadversity for the first time since its introduction of xerography.
By that time, there were more than forty companies in theoffice copier business, many of them producing xerographicdevices under license from Xerox. (The only important part ofits technology for which Xerox had refused to grant a licensewas a selenium drum that enables its own machines to makecopies on ordinary paper. All competing products still requiredtreated paper.) The great advantage that Xerox had beenenjoying was the one that the first to enter a new field alwaysenjoys—the advantage of charging high prices. Now, asBarron’s pointed out in August, it appeared that “thisonce-fabulous invention may—as all technological advancesinevitably must—soon evolve into an accepted commonplace.”
Cut-rate latecomers were swarming into copying; one company,in a letter sent to its stockholders in May, foresaw a time whena copier selling for ten or twenty dollars could be marketed “asa toy” (one was actually marketed for about thirty dollars in1968) and there was even talk of the day when copiers wouldbe given away to promote sales of paper, the way razors havelong given away to promote razor blades. For some years,realizing that its cozy little monopoly would eventually pass intothe public domain, Xerox had been widening its intereststhrough mergers with companies in other fields, mainlypublishing and education; for example, in 1962 it had boughtUniversity Microfilms, a library on microfilm of unpublishedmanuscripts, out-of-print books, doctoral dissertations, periodicals,and newspapers, and in 1965 it had tacked on two othercompanies—American Education Publications, the country’slargest publisher of educational periodicals for primary- andsecondary-school students, and Basic Systems, a manufacturerof teaching machines. But these moves failed to reassure thatdogmatic critic the marketplace, and Xerox stock ran into aspell of heavy weather. Between late June, 1966, when it stoodat 267?, and early October, when it dipped to 131?, themarket value of the company was more than cut in half. Inthe single business week of October 3rd through October 7th,Xerox dropped 42? points, and on one particularly alarmingday—October 6th—trading in Xerox on the New York StockExchange had to be suspended for five hours because therewere about twenty-five million dollars’ worth of shares on salethat no one wanted to buy.
I find that companies are inclined to be at their mostinteresting when they are undergoing a little misfortune, andtherefore I chose the fall of 1966 as the time to have a look atXerox and its people—something I’d had in mind to do for ayear or so. I started out by getting acquainted with one of itsproducts. The Xerox line of copiers and related items was bythen a comprehensive one. There was, for instance, the 914, adesksize machine that makes black-and-white copies of almostany page—printed, handwritten, typed, or drawn, but notexceeding nine by fourteen inches in size—at a rate of aboutone copy every six seconds; the 813, a much smaller device,which can stand on top of a desk and is essentially aminiaturized version of the 914 (or, as Xerox technicians like tosay, “a 914 with the air left out”); the 2400, a high-speedreproduction machine that looks like a modern kitchen stoveand can cook up copies at a rate of forty a minute, ortwenty-four hundred an hour; the Copyflo, which is capable ofenlarging microfilmed pages into ordinary booksize pages andprinting them; the LDX, by which documents can betransmitted over telephone wires, microwave radio, or coaxialcable; and the Telecopier, a non-xerographic device, designedand manufactured by Magnavox but sold by Xerox, which is asort of junior version of the LDX and is especially interestingto a layman because it consists simply of a small box that,when attached to an ordinary telephone, permits the user torapidly transmit a small picture (with a good deal of squeakingand clicking, to be sure) to anyone equipped with a telephoneand a similar small box. Of all these, the 914, the firstautomatic xerographic product and the one that constituted thebig breakthrough, was still much the most important both toXerox and to its customers.
It has been suggested that the 914 is the most successfulcommercial product in history, but the statement cannot beauthoritatively confirmed or denied, if only because Xerox doesnot publish precise revenue figures on its individual products;the company does say, though, that in 1965 the 914 accountedfor about sixty-two per cent of its total operating revenues,which works out to something over $243,000,000. In 1966 itcould be bought for $27,500, or it could be rented fortwenty-five dollars monthly, plus at least forty-nine dollars’ worthof copies at four cents each. These charges were deliberatelyset up to make renting more attractive than buying, becauseXerox ultimately makes more money that way. The 914, whichis painted beige and weighs six hundred and fifty pounds, looksa good deal like a modern L-shaped metal desk; the thing tobe copied—a flat page, two pages of an open book, or even asmall three-dimensional object like a watch or a medal—isplaced face down on a glass window in the flat top surface, abutton is pushed, and nine seconds later the copy pops into atray where an “out” basket might be if the 914 actually were adesk. Technologically, the 914 is so complex (more complex,some Xerox salesmen insist, than an automobile) that it has anannoying tendency to go wrong, and consequently Xeroxmaintains a field staff of thousands of repairmen who arepresumably ready to answer a call on short notice. The mostcommon malfunction is a jamming of the supply of copy paper,which is rather picturesquely called a “mispuff,” because eachsheet of paper is raised into position to be inscribed by aninterior puff of air, and the malfunction occurs when the puffgoes wrong. A bad mispuff can occasionally put a piece of thepaper in contact with hot parts, igniting it and causing analarming cloud of white smoke to issue from the machine; insuch a case the operator is urged to do nothing, or, at most,to use a small fire extinguisher that is attached to it, since thefire burns itself out comparatively harmlessly if left alone,whereas a bucket of water thrown over a 914 may conveypotentially lethal voltages to its metal surface. Apart frommalfunctions, the machine requires a good deal of regularattention from its operator, who is almost invariably a woman.
(The girls who operated the earliest typewriters were themselvescalled “typewriters,” but fortunately nobody calls Xerox operators“xeroxes.”) Its supply of copying paper and black electrostaticpowder, called “toner,” must be replenished regularly, while itsmost crucial part, the selenium drum, must be cleaned regularlywith a special non-scratchy cotton, and waxed every so often. Ispent a couple of afternoons with one 914 and its operator,and observed what seemed to be the closest relationshipbetween a woman and a piece of office equipment that I hadever seen. A girl who uses a typewriter or switchboard has nointerest in the equipment, because it holds no mystery, whileone who operates a computer is bored with it, because it isutterly incomprehensible. But a 914 has distinct animal traits: ithas 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 wasfrightened of it at first,” the operator I watched told me. “TheXerox men say, ‘If you’re frightened of it, it won’t work,’ andthat’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, areforever trying to think of new uses for the company’s copiers,but they have found again and again that the public is wellahead of them. One rather odd use of xerography insures thatbrides get the wedding presents they want. The prospectivebride submits her list of preferred presents to a departmentstore; the store sends the list to its bridal-registry counter,which is equipped with a Xerox copier; each friend of thebride, having been tactfully briefed in advance, comes to thiscounter and is issued a copy of the list, whereupon he doeshis shopping and then returns the copy with the purchaseditems checked off, so that the master list may be revised andthus ready for the next donor. (“Hymen, i? Hymen, Hymen!”)Again, police departments in New Orleans and various otherplaces, instead of laboriously typing up a receipt for theproperty removed from people who spend the night in thelockup, now place the property itself—wallet, watch, keys, andsuch—on the scanning glass of a 914, and in a few secondshave a sort of pictographic receipt. Hospitals use xerography tocopy electrocardiograms and laboratory reports, and brokeragefirms to get hot tips to customers more quickly. In fact,anybody with any sort of idea that might be advanced bycopying can go to one of the many cigar or stationery storesthat have a coin-operated copier and indulge himself. (It isinteresting to note that Xerox took to producing coin-operated914s in two configurations—one that works for a dime and onethat works for a quarter; the buyer or leaser of the machinecould decide which he wanted to charge.)Copying has its abuses, too, and they are clearly serious. Themost obvious one is overcopying. A tendency formerly identifiedwith bureaucrats has been spreading—the urge to make two ormore copies when one would do, and to make one when nonewould do; the phrase “in triplicate,” once used to denotebureaucratic waste, has become a gross understatement. Thebutton waiting to be pushed, the whir of action, the neatreproduction dropping into the tray—all this adds up to aheady experience, and the neophyte operator of a copier feelsan impulse to copy all the papers in his pockets. And onceone has used a copier, one tends to be hooked. Perhaps thechief danger of this addiction is not so much the cluttering upof files and loss of important material through submersion as itis the insidious growth of a negative attitude toward originals—afeeling that nothing can be of importance unless it is copied, oris a copy itself.
A more immediate problem of xerography is the overwhelmingtemptation it offers to violate the copyright laws. Almost all largepublic and college libraries—and many high-school libraries aswell—are now equipped with copying machines, and teachersand students in need of a few copies of a group of poemsfrom a published book, a certain short story from ananthology, or a certain article from a scholarly journal havedeveloped the habit of simply plucking it from the library’sshelves, taking it to the library’s reproduction department, andhaving 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 onlybecause they don’t know that the infringements have occurred;furthermore, the educators themselves often have no idea thatthey have done anything illegal. The likelihood that manycopyrights have already been infringed unknowingly throughxerography became indirectly apparent a few years ago when acommittee of educators sent a circular to teachers from coastto coast informing them explicitly what rights to reproducecopyrighted material they did and did not have, and the almostinstant sequel was a marked rise in the number of requestsfrom educators to publishers for permissions. And there wasmore concrete evidence of the way things were going; forexample, in 1965 a staff member of the library school of theUniversity of New Mexico publicly advocated that libraries spendninety per cent of their budgets on staff, telephones, copying,telefacsimiles, and the like, and only ten per cent—a sort oftithe—on books and journals.
To a certain extent, libraries attempt to police copying on theirown. The photographic service of the New York Public Library’smain branch, which fills some fifteen hundred requests a weekfor copies of library matter, informs patrons that “copyrightedmaterial will not be reproduced beyond ‘fair use’”—that is, theamount and kind of reproduction, generally confined to briefexcerpts, that have been established by legal precedent as notconstituting infringement. The library goes on, “The applicantassumes all responsibility for any question that may arise in themaking of the copy and in the use made thereof.” In the firstpart of its statement the library seems to assume theresponsibility and in the second part to renounce it, and thisambivalence may reflect an uneasiness widely felt among usersof library copiers. Outside library walls, there often does notseem to be even this degree of scruple. Business people whoare otherwise meticulous in their observance of the law seem toregard copyright infringement about as seriously as they regardjaywalking. A writer I’ve heard about was invited to a seminarof high-level and high-minded industrial leaders and was startledto find that a chapter from his most recent book had beencopied and distributed to the participants, to serve as a basisfor discussion. When the writer protested, the businessmenwere taken aback, and even injured; they had thought thewriter would be pleased by their attention to his work, but theflattery, after all, was of the sort shown by a thief whocommends a lady’s jewelry by making off with it.
In the opinion of some commentators, what has happened sofar is only the first phase of a kind of revolution in graphics.
“Xerography is bringing a reign of terror into the world ofpublishing, because it means that every reader can becomeboth author and publisher,” the Canadian sage MarshallMcLuhan wrote in the spring, 1966, issue of the AmericanScholar. “Authorship and readership alike can becomeproduction-oriented under xerography.… Xerography is electricityinvading the world of typography, and it means a totalrevolution in this old sphere.” Even allowing for McLuhan’serratic ebullience (“I change my opinions daily,” he onceconfessed), he seems to have got his teeth into something here.
Various magazine articles have predicted nothing less than thedisappearance of the book as it now exists, and pictured thelibrary of the future as a sort of monster computer capable ofstoring and retrieving the contents of books electronically andxerographically. The “books” in such a library would be tinychips of computer film—“editions of one.” Everyone agrees thatsuch a library is still some time away. (But not so far away asto 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 byHarcourt, Brace & World was altered to read, a bit spookily,“All rights reserved. No part of this publication may bereproduced or transmitted in any form or by any means,electronic or mechanical, including photocopy, recording, or anyinformation storage and retrieval system …” Other publishersquickly followed the example.) One of the nearest approaches toit in the late sixties was the Xerox subsidiary UniversityMicrofilms, which could, and did, enlarge its microfilms ofout-of-print books and print them as attractive and highlylegible paperback volumes, at a cost to the customer of fourcents a page; in cases where the book was covered bycopyright, the firm paid a royalty to the author on each copyproduced. But the time when almost anyone can make his owncopy of a published book at lower than the market price is notsome years away; it is now. All that the amateur publisherneeds is access to a Xerox machine and a small offset printingpress. One of the lesser but still important attributes ofxerography is its ability to make master copies for use onoffset presses, and make them much more cheaply and quicklythan was previously possible. According to Irwin Karp, counselto the Authors League of America, an edition of fifty copies ofany printed book could in 1967 be handsomely “published”
(minus the binding) by this combination of technologies in amatter of minutes at a cost of about eight-tenths of a cent perpage, and less than that if the edition was larger. A teacherwishing to distribute to a class of fifty students the contents ofa sixty-four-page book of poetry selling for three dollars andseventy-five cents could do so, if he were disposed to ignorethe copyright laws, at a cost of slightly over fifty cents percopy.
The danger in the new technology, authors and publishershave contended, is that in doing away with the book it may doaway with them, and thus with writing itself. Herbert S. Bailey,Jr., director of Princeton University Press, wrote in theSaturday Review of a scholar friend of his who has cancelledall his subscriptions to scholarly journals; instead, he now scanstheir tables of contents at his public library and makes copiesof the articles that interest him. Bailey commented, “If allscholars followed [this] practice, there would be no scholarlyjournals.” Beginning in the middle sixties, Congress has beenconsidering a revision of the copyright laws—the first since1909. At the hearings, a committee representing the NationalEducation Association and a clutch of other education groupsargued firmly and persuasively that if education is to keep upwith our national growth, the present copyright law and thefair-use doctrine should be liberalized for scholastic purposes.
The authors and publishers, not surprisingly, opposed suchliberalization, insisting that any extension of existing rights wouldtend to deprive them of their livelihoods to some degree now,and to a far greater degree in the uncharted xerographicfuture. A bill that was approved in 1967 by the HouseJudiciary Committee seemed to represent a victory for them,since it explicitly set forth the fair-use doctrine and containedno educational-copying exemption. But the final outcome of thestruggle was still uncertain late in 1968. McLuhan, for one, wasconvinced that all efforts to preserve the old forms of authorprotection represent backward thinking and are doomed tofailure (or, anyway, he was convinced the day he wrote hisAmerican Scholar article). “There is no possible protection fromtechnology except by technology,” he wrote. “When you createa new environment with one phase of technology, you have tocreate an anti-environment with the next.” But authors areseldom good at technology, and probably do not flourish inanti-environments.
In dealing with this Pandora’s box that Xerox products haveopened, the company seems to have measured up tolerablywell to its lofty ideals as set forth by Wilson. Although it has acommercial interest in encouraging—or, at least, not discouraging—more and more copying of just about anything thatcan be read, it makes more than a token effort to inform theusers of its machines of their legal responsibilities; for example,each new machine that is shipped out is accompanied by acardboard poster giving a long list of things that may not becopied, among them paper money, government bonds, postagestamps, passports, and “copyrighted material of any manner orkind without permission of the copyright owner.” (How many ofthese posters end up in wastebaskets is another matter.)Moreover, caught in the middle between the contending factionsin the fight over revision of copyright law, it resisted thetemptation to stand piously aside while raking in the profits,and showed an exemplary sense of social responsibility—at leastfrom the point of view of the authors and publishers. Thecopying industry in general, by contrast, tended either toremain neutral or to lean to the educators’ side. At a 1963symposium on copyright revision, an industry spokesman wentas far as to argue that machine copying by a scholar is merelya convenient extension of hand copying, which has traditionallybeen accepted as legitimate. But not Xerox. Instead, inSeptember, 1965, Wilson wrote to the House JudiciaryCommittee flatly opposing any kind of special copying exemptionin any new law. Of course, in evaluating this seemingly quixoticstand one ought to remember that Xerox is a publishing firmas well as a copying-machine firm; indeed, what with AmericanEducation Publications and University Microfilms, it is one of thelargest publishing firms in the country. Conventional publishers,I gathered from my researches, sometimes find it a bitbewildering to be confronted by this futuristic giant not merelyas an alien threat to their familiar world but as an energeticcolleague and competitor within it.
HAVING had a look at some Xerox products and devoted somethought to the social implications of their use, I went toRochester to scrape up a first-hand acquaintance with thecompany and to get an idea how its people were reacting totheir problems, material and moral. At the time I went, thematerial problems certainly seemed to be to the fore, since theweek of the forty-two-and-a-half-point stock drop was not longpast. On the plane en route, I had before me a copy ofXerox’s most recent proxy statement, which listed the numberof 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 theyhad held on to their stock. Chairman Wilson, for example, hadheld 154,026 common shares in February, so his loss wouldhave been $6,546,105. Linowitz’s holding was 35,166 shares, fora loss of $1,494,555. Dr. John H. Dessauer, executivevice-president in charge of research, had held 73,845 sharesand was therefore presumably out $3,138,412.50. Such sumscould hardly be considered trivial even by Xerox executives.
Would I, then, find their premises pervaded by gloom, or atleast by signs of shock?
The Xerox executive offices were on the upper floors ofRochester’s Midtown Tower, the ground level of which isoccupied by Midtown Plaza, an indoor shopping mall. (Laterthat year, the company moved its headquarters across thestreet to Xerox Square, a complex that includes a thirty-storyoffice building, an auditorium for civic as well as company use,and a sunken ice rink.) Before going up to the Xerox offices, Itook a turn or two around the mall, and found it to beequipped with all kinds of shops, a café, kiosks, pools, trees,and benches that—in spite of an oppressively bland and affluentatmosphere, created mainly, I suspect, by bland piped-inmusic—were occupied in part by bums, just like the benches inoutdoor malls. The trees had a tendency to languish for lack oflight and air, but the bums looked O.K. Having ascended byelevator, I met a Xerox public-relations man with whom I hadan appointment, and immediately asked him how the companyhad reacted to the stock drop. “Oh, nobody takes it tooseriously,” he replied. “You hear a lot of lighthearted talk aboutit at the golf clubs. One fellow will say to another, ‘You buythe drinks—I dropped another eighty thousand dollars on Xeroxyesterday.’ Joe Wilson did find it a bit traumatic that day theyhad to suspend trading on the Stock Exchange, but otherwisehe took it in stride. In fact, at a party the other day when thestock was way down and a lot of people were clusteringaround 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 atall.” As a matter of fact, I scarcely did hear it mentioned againwhile I was at Xerox, and this sang-froid turned out to bejustified, because within a little more than a month the stockhad made up its entire loss, and within a few more months ithad moved up to an all-time high.
I spent the rest of that morning calling on three scientific andtechnical Xerox men and listening to nostalgic tales of the earlyyears of xerographic development. The first of these men wasDr. Dessauer, the previous week’s three-million-dollar loser,whom I nevertheless found looking tranquil—as I guess I shouldhave expected, in view of the fact that his Xerox stock was stillpresumably worth more than nine and a half million dollars. (Afew months later it was presumably worth not quite twentymillion.) Dr. Dessauer, a German-born veteran of the companywho had been in charge of its research and engineering eversince 1938 and was then also vice-chairman of its board, wasthe man who first brought Carlson’s invention to the attentionof Joseph Wilson, after he had read an article about it in atechnical journal in 1945. Stuck up on his office wall, I noticed,was a greeting card from members of his office staff in whichhe was hailed as the “Wizard,” and I found him to be asmiling, youthful-looking man with just enough of an accent topass muster for wizardry.
“You want to hear about the old days, eh?” Dr. Dessauersaid. “Well, it was exciting. It was wonderful. It was alsoterrible. Sometimes I was going out of my mind, more or lessliterally. Money was the main problem. The company wasfortunate in being modestly in the black, but not far enough.
The members of our team were all gambling on the project. Ieven mortgaged my house—all I had left was my life insurance.
My neck was way out. My feeling was that if it didn’t workWilson and I would be business failures but as far as I wasconcerned I’d also be a technical failure. Nobody would evergive me a job again. I’d have to give up science and sellinsurance or something.” Dr. Dessauer threw a retrospectivelydistracted glance at the ceiling and went on, “Hardly anybodywas very optimistic in the early years. Various members of ourown group would come in and tell me that the damn thingwould never work. The biggest risk was that electrostaticswould prove to be not feasible in high humidity. Almost all theexperts assumed that—they’d say, ‘You’ll never make copies inNew Orleans.’ And even if it did work, the marketing peoplethought we were dealing with a potential market of no morethan a few thousand machines. Some advisers told us that wewere absolutely crazy to go ahead with the project. Well, asyou know, everything worked out all right—the 914 worked,even in New Orleans, and there was a big market for it. Thencame the desk-top version, the 813. I stuck my neck way outagain on that, holding out for a design that some expertsconsidered too fragile.”
I asked Dr. Dessauer whether his neck was now out onanything in the way of new research, and, if so, whether it isas exciting as xerography was. He replied, “Yes to bothquestions, but beyond that the subject is privileged knowledge.”
Dr. Harold E. Clark, the next man I saw, had been in directcharge of the xerography-development program under Dr.
Dessauer’s supervision, and he gave me more details on howthe Carlson invention had been coaxed and nursed into acommercial product. “Chet Carlson was morphological,” beganDr. Clark, a short man with a professorial manner who was, infact, a professor of physics before he came to Haloid in 1949.
I probably looked blank, because Dr. Clark gave a little laughand went on, “I don’t really know whether ‘morphological’
means anything. I think it means putting one thing togetherwith another thing to get a new thing. Anyway, that’s whatChet was. Xerography had practically no foundation in previousscientific work. Chet put together a rather odd lot ofphenomena, each of which was obscure in itself and none ofwhich had previously been related in anyone’s thinking. Theresult was the biggest thing in imaging since the coming ofphotography itself. Furthermore, he did it entirely without thehelp of a favorable scientific climate. As you know, there aredozens of instances of simultaneous discovery down throughscientific history, but no one came anywhere near beingsimultaneous with Chet. I’m as amazed by his discovery now asI was when I first heard of it. As an invention, it wasmagnificent. The only trouble was that as a product it wasn’tany good.”
Dr. Clark gave another little laugh and went on to explainthat the turning point was reached at the Battelle MemorialInstitute, and in a manner fully consonant with the tradition ofscientific advances’ occurring more or less by mistake. Themain trouble was that Carlson’s photoconductive surface, whichwas coated with sulphur, lost its qualities after it had made afew copies and became useless. Acting on a hunchunsupported by scientific theory, the Battelle researchers triedadding to the sulphur a small quantity of selenium, anon-metallic element previously used chiefly in electrical resistorsand as a coloring material to redden glass. Theselenium-and-sulphur surface worked a little better than theall-sulphur one, so the Battelle men tried adding a little moreselenium. More improvement. They gradually kept increasing thepercentage until they had a surface consisting entirely ofselenium—no sulphur. That one worked best of all, and thus itwas found, backhandedly, that selenium and selenium alonecould make xerography practical.
“Think of it,” Dr. Clark said, looking thoughtful himself. “Asimple thing like selenium—one of the earth’s elements, of whichthere are hardly more than a hundred altogether, and acommon one at that. It turned out to be the key. Once itseffectiveness was discovered, we were around the corner,although we didn’t know it at the time. We still hold patentscovering the use of selenium in xerography—almost a patent onone of the elements. Not bad, eh? Nor do we understandexactly how selenium works, even now. We’re mystified, forexample, by the fact that it has no memory effects—no tracesof previous copies are left on the selenium-coated drum—andthat it seems to be theoretically capable of lasting indefinitely. Inthe lab, a selenium-coated drum will last through a millionprocesses, and we don’t understand why it wears out eventhen. So, you see, the development of xerography was largelyempirical. We were trained scientists, not Yankee tinkers, butwe struck a balance between Yankee tinkering and scientificinquiry.”
Next, I talked with Horace W. Becker, the Xerox engineerwho was principally responsible for bringing the 914 from theworking-model stage to the production line. A Brooklynite witha talent, appropriate to his assignment, for eloquent anguish, hetold me of the hair-raising obstacles and hazards thatsurrounded this progress. When he joined Haloid Xerox in1958, his laboratory was a loft above a Rochestergarden-seed-packaging establishment; something was wrongwith the roof, and on hot days drops of molten tar would oozethrough it and spatter the engineers and the machines. The914 finally came of age in another lab, on Orchard Street, earlyin 1960. “It was a beat-up old loft building, too, with a creakyelevator and a view of a railroad siding where cars full of pigskept going by,” Becker told me, “but we had the space weneeded, and it didn’t drip tar. It was at Orchard Street that wefinally caught fire. Don’t ask me how it happened. We decidedit was time to set up an assembly line, and we did. Everybodywas keyed up. The union people temporarily forgot theirgrievances, 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, whenthe assembly line was shut down, and there would besomebody adjusting something or just puttering around andadmiring our work. In other words, the 914 was on its way atlast.”
But once the machine was on its way out of the shop andon to showrooms and customers, Becker related, his troubleshad only begun, because he was now held responsible formalfunctions and design deficiencies, and when it came tohaving a spectacular collapse just at the moment when thepublic spotlight was full on it, the 914 turned out to be averitable Edsel. Intricate relays declined to work, springs broke,power supplies failed, inexperienced users dropped staples andpaper clips into it and fouled the works (necessitating theinstallation in every machine of a staple-catcher), and theexpected difficulties in humid climates developed, along withunanticipated ones at high altitudes. “All in all,” Becker said, “atthat time the machines had a bad habit, when you pressed thebutton, of doing nothing.” Or if the machines did do something,it was something wrong. At the 914’s first big showing inLondon, for instance, Wilson himself was on hand to put aceremonial forefinger to its button; he did so, and not only wasno copy made but a giant generator serving the line wasblown out. Thus was xerography introduced in Great Britain,and, considering the nature of its début, the fact that Britainlater become far and away the biggest overseas user of the914 appears to be a tribute to both Xerox resilience andBritish patience.
That afternoon, a Xerox guide drove me out to Webster, afarm town near the edge of Lake Ontario, a few miles fromRochester, to see the incongruous successor to Becker’s leakyand drafty lofts—a huge complex of modern industrial buildings,including one of roughly a million square feet where all Xeroxcopiers are assembled (except those made by the company’saffiliates in Britain and Japan), and another, somewhat smallerbut more svelte, where research and development are carriedout. As we walked down one of the humming production linesin the manufacturing building, my guide explained that the lineoperates sixteen hours a day on two shifts, that it and theother lines have been lagging behind demand continuously forseveral years, that there are now almost two thousandemployees working in the building, and that their union is alocal of the Amalgamated Clothing Workers of America, thisanomaly being due chiefly to the fact that Rochester used to bea center of the clothing business and the Clothing Workers haslong been the strongest union in the area.
After my guide had delivered me back to Rochester, I set outon my own to collect some opinions on the community’sattitude toward Xerox and its success. I found them to beambivalent. “Xerox has been a good thing for Rochester,” saida local businessman. “Eastman Kodak, of course, was the city’sGreat White Father for years, and it is still far and away thebiggest local business, although Xerox is now second andcoming up fast. Facing that kind of challenge doesn’t do Kodakany harm—in fact, it does it a lot of good. Besides, a successfulnew local company means new money and new jobs. On theother hand, some people around here resent Xerox. Most ofthe local industries go back to the nineteenth century, and theirpeople aren’t always noted for receptiveness to newcomers.
When Xerox was going through its meteoric rise, some thoughtthe bubble would burst—no, they hoped it would burst. On topof that, there’s been a certain amount of feeling against theway Joe Wilson and Sol Linowitz are always talking abouthuman values while making money hand over fist. But, youknow—the price of success.”
I went out to the University of Rochester, high on the banksof 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 theuniversity’s Santa Claus and remained its biggest annualbenefactor. As for Xerox, the university had several soundreasons for feeling kindly toward it. In the first place, theuniversity was a prize example of a Xerox multimillionaire,since its clear capital gain on the investment amounted toaround a hundred million dollars and it had taken out morethan ten million in profits. In the second place, Xerox annuallycomes through with annual cash gifts second only to Kodak’s,and had recently pledged nearly six million dollars to theuniversity’s capital-funds drive. In the third place, Wilson, aUniversity of Rochester graduate himself, had been on theuniversity’s board of trustees since 1949 and its chairman since1959. “Before I came here, in 1962, I’d never even heard ofcorporations’ giving universities such sums as Kodak and Xeroxgive us now,” President Wallis said. “And all they want inreturn is for us to provide top-quality education—not do theirresearch for them, or anything like that. Oh, there’s a gooddeal of informal technical consulting between our scientificpeople and the Xerox people—same thing with Kodak, Bausch& Lomb, and others—but that’s not why they’re supporting theuniversity. They want to make Rochester a place that will beattractive to the people they want here. The university hasnever invented anything for Xerox, and I guess it never will.”
The next morning, in the Xerox executive offices, I met thethree nontechnical Xerox men of the highest magnitude, endingwith Wilson himself. The first of these was Linowitz, the lawyerwhom Wilson took on “temporarily” in 1946 and kept onpermanently as his least dispensable aide. (Since Xerox becamefamous, the general public tended to think of Linowitz as morethan that—as, in fact, the company’s chief executive. Xeroxofficials were aware of this popular misconception, and weremystified by it, since Wilson, whether he was called president,as he was until May of 1966, or chairman of the board, as hewas after that, had been the boss right along.) I caughtLinowitz almost literally on the run, since he had just beenappointed United States Ambassador to the Organization ofAmerican States and was about to leave Rochester and Xeroxfor Washington and his new duties. A vigorous man in hisfifties, he fairly exuded drive, intensity, and sincerity. Afterapologizing for the fact that he had only a few minutes tospend with me, he said, rapidly, that in his opinion the successof Xerox was proof that the old ideals of free enterprise stillheld true, and that the qualities that had made for thecompany’s success were idealism, tenacity, the courage to takerisks, and enthusiasm. With that, he waved goodbye and wasoff. I was left feeling a little like a whistle-stop voter who hasjust been briefly addressed by a candidate from the rearplatform of a campaign train, but, like many such voters, I wasimpressed. Linowitz had used those banal words not merely asif he meant them but as if he had invented them, and I hadthe feeling that Wilson and Xerox were going to miss him.
I found C. Peter McColough, who had been president of thecompany since Wilson had moved up to chairman, and whowas apparently destined eventually to succeed him as boss (ashe did in 1968), pacing his office like a caged animal, pausingfrom time to time at a standup desk, where he would scribblesomething or bark a few words into a dictating machine. Aliberal Democratic lawyer, like Linowitz, but a Canadian by birth,he is a cheerful extrovert who, being in his early forties, wasspoken of as representing a new Xerox generation, chargedwith determining the course that the company would take next.
“I face the problems of growth,” he told me after he hadabandoned his pacing for a restless perch on the edge of achair. Future growth on a large scale simply isn’t possible inxerography, he went on—there isn’t room enough left—and thedirection that Xerox is taking is toward educational techniques.
He mentioned computers and teaching machines, and when hesaid he could “dream of a system whereby you’d write stuff inConnecticut and within hours reprint it in classrooms all overthe country,” I got the feeling that some of Xerox’s educationaldreams could easily become nightmares. But then he added,“The danger in ingenious hardware is that it distracts attentionfrom education. What good is a wonderful machine if you don’tknow what to put on it?”
McColough said that since he came to Haloid, in 1954, he felthe’d been part of three entirely different companies—until 1959a small one engaged in a dangerous and exciting gamble; from1959 to 1964 a growing one enjoying the fruits of victory; andnow a huge one branching out in new directions. I asked himwhich one he liked best, and he thought a long time. “I don’tknow,” he said finally. “I used to feel greater freedom, and Iused to feel that everyone in the company shared attitudes onspecific matters like labor relations. I don’t feel that way somuch now. The pressures are greater, and the company ismore impersonal. I wouldn’t say that life has become easier, orthat it is likely to get easier in the future.”
Of all the surprising things about Joseph C. Wilson, not theleast, I thought when I was ushered into his presence, was thefact that his office walls were decorated with old-fashionedflowered wallpaper. A sentimental streak in the man at thehead of Xerox seemed the most unlikely of anomalies. But hehad a homey, unthreatening bearing to go with the wallpaper;a smallish man in his late fifties, he looked serious—almostgrave—during most of my visit, and spoke in a slow, ratherhesitant way. I asked him how he had happened to go into hisfamily’s business, and he replied that as a matter of fact henearly hadn’t. English literature had been his second major atthe university, and he had considered either taking up teachingor going into the financial and administrative end of universitywork. But after graduating he had gone on to the HarvardBusiness School, where he had been a top student, andsomehow or other … In any case, he had joined Haloid theyear he left Harvard, and there, he told me with a suddensmile, he was.
The subjects that Wilson seemed to be most keen ondiscussing were Xerox’s non-profit activities and his theories ofcorporate responsibility. “There are certain feelings ofresentment toward us on this,” he said. “I don’t mean justfrom stockholders complaining that we’re giving their moneyaway—that point of view is losing ground. I mean in thecommunity. You don’t actually hear it, but you sometimes get akind of intuitive feeling that people are saying, ‘Who do theseyoung upstarts think they are, anyhow?’”
I asked whether the letter-writing campaign against the U.N.
television series had caused any misgivings or downrightfaintheartedness within the company, and he said, “As anorganization, we never wavered. Almost without exception, thepeople here felt that the attacks only served to call attention tothe very point we were trying to make—that world co?perationis our business, because without it there might be no worldand therefore no business. We believe we followed soundbusiness policy in going ahead with the series. At the sametime, I won’t maintain that it was only sound business policy. Idoubt whether we would have done it if, let’s say, we had allbeen Birchers ourselves.”
Wilson went on slowly, “The whole matter of committing thecompany to taking stands on major public issues raisesquestions that make us examine ourselves all the time. It’s amatter of balance. You can’t just be bland, or you throw awayyour influence. But you can’t take a stand on every majorissue, either. We don’t think it’s a corporation’s job to takestands on national elections, for example—fortunately, perhaps,since Sol Linowitz is a Democrat and I’m a Republican. Issueslike university education, civil rights, and Negro employmentclearly are our business. I’d hope that we would have thecourage to stand up for a point of view that was unpopular ifwe thought it was appropriate to do so. So far, we haven’tfaced that situation—we haven’t found a conflict between whatwe consider our civic responsibility and good business. But thetime may come. We may have to stand on the firing line yet.
For example, we’ve tried, without much fanfare, to equip someNegro youths to take jobs beyond sweeping the floor and soon. The program required complete co?peration from ourunion, and we got it. But I’ve learned that, in subtle ways, thehoneymoon is over. There’s an undercurrent of opposition.
Here’s something started, then, that if it grows could confrontus with a real business problem. If it becomes a few hundredobjectors instead of a few dozen, things might even come to astrike, and in such a case I hope we and the union leadershipwould stand up and fight. But I don’t really know. You can’thonestly predict what you’d do in a case like that. I think Iknow what we’d do.”
Getting up and walking to a window, Wilson said that, as hesaw it, one of the company’s major efforts now, and evenmore in the future, must be to keep the personal and humanquality for which it has come to be known. “Already we seesigns of losing it,” he said. “We’re trying to indoctrinate newpeople, but twenty thousand employees around the WesternHemisphere isn’t like a thousand in Rochester.”
I joined Wilson at the window, preparatory to leaving. It wasa dank, dark morning, such as I’m told the city is famous formuch of the year, and I asked him whether, on a gloomy daylike this, he was ever assailed by doubts that the old qualitycould be preserved. He nodded briefly and said, “It’s aneverlasting battle, which we may or may not win.”

Chapter 6 Making the Customers Whole
ON THE MORNING of Tuesday, November 19th, 1963, awell-dressed but haggard-looking man in his middle thirtiespresented himself at the executive offices of the New YorkStock Exchange, at 11 Wall Street, with the announcement thathe was Morton Kamerman, managing partner of the brokeragefirm of Ira Haupt & Co., a member of the Stock Exchange,and that he wanted to see Frank J. Coyle, head of theExchange’s member-firms department. After checking, areceptionist explained politely that Mr. Coyle was tied up in ameeting, whereupon the visitor said that his mission was anurgent one and asked to see Robert M. Bishop, thedepartment’s second-in-command. Bishop, the receptionist found,was unavailable, too; he was tied up with an important phonecall. At length, Kamerman, who seemed to be growing moreand more distracted, was ushered into the presence of a lessexalted Exchange official named George H. Newman. He thenduly delivered his message—that, to the best of his belief, thecapital reserve of the Haupt firm had fallen below theExchange’s requirements for member firms, and that he wasformally reporting the fact, in accordance with regulations. Whilethis startling announcement was being made, Bishop, in anearby office, was continuing his important telephoneconversation, the second party to which was a knowledgeableWall Streeter whom Bishop has since declined to identify. Thecaller was telling Bishop he had reason to believe that twoStock Exchange member firms—J. R. Williston & Beane, Inc.,and Ira Haupt & Co.—were in financial trouble serious enoughto warrant the Exchange’s attention. After hanging up, Bishopmade an interoffice call to Newman to tell him what he hadjust heard. To Bishop’s surprise, Newman already had thenews, or part of it. “As a matter of fact, Kamerman is righthere with me now,” he said.
In this humdrum setting of office confusion there began oneof the most trying—and in some ways one of the mostserious—crises in the Stock Exchange’s long history. Before itwas over, this crisis had been exacerbated by the greater crisisresulting from the assassination of President Kennedy, and outof it the Stock Exchange—which has not always been noted foracting in the public interest, and, indeed, had been accusedonly a few months before by the Securities and ExchangeCommission of an anti-social tendency to conduct itself like aprivate club—emerged temporarily poorer by almost ten milliondollars but incalculably richer in the esteem of at least some ofits countrymen. The event that had brought Haupt andWilliston & Beane into straitened circumstances is history—or,rather, future history. It was the sudden souring of a hugespeculation that these two firms (along with various brokers notmembers of the Stock Exchange) had become involved in onbehalf of a single customer—the Allied Crude Vegetable Oil &Refining Co., of Bayonne, New Jersey. The speculation was incontracts to buy vast quantities of cottonseed oil and soybeanoil for future delivery. Such contracts are known as commodityfutures, and the element of speculation in them lies in thepossibility that by delivery date the commodity will be worthmore (or less) than the contract price. Vegetable-oil futures aretraded daily at the New York Produce Exchange, at 2Broadway, and at the Board of Trade, in Chicago, and theyare bought and sold on behalf of customers by about eighty ofthe four hundred-odd firms that belong to the Stock Exchangeand conduct a public business. On the day that Kamermancame to the Exchange, the Haupt firm was holding forAllied—on credit—so many cottonseed-oil and soybean-oilcontracts that the change of a single penny per pound in theprices of the commodities meant a twelve-million-dollar changein the value of the Allied account with Haupt. On the twoprevious business days—Friday the fifteenth and Monday theeighteenth—the prices had dropped an average of a little lessthan a cent and a half per pound, and as a result Haupt haddemanded that Allied put up about fifteen million dollars incash to keep the account seaworthy. Allied had declined to dothis, so Haupt—like any broker when a customer operating oncredit has defaulted—was faced with the necessity of selling outthe Allied contracts to get back what it could of its advances.
The suicidal extent of the risk that Haupt had undertaken isfurther indicated by the fact that while the firm’s capital in earlyNovember had amounted to only about eight million dollars, ithad borrowed enough money to supply a singlecustomer—Allied—with some thirty-seven million dollars tofinance the oil speculations. Worse still, as things turned out ithad accepted as collateral for some of these advancesenormous amounts of actual cottonseed oil and soybean oilfrom Allied’s inventory, the presence of which in tanks atBayonne was attested to by warehouse receipts stating theprecise amount and kind of oil on hand. Haupt had borrowedthe money it supplied Allied with from various banks, passingalong most of the warehouse receipts to the banks as collateral.
All this would have been well and good if it had not developedlater that many of the warehouse receipts were forged, thatmuch of the oil they attested to was not, and probably neverhad been, in Bayonne, and that Allied’s president, Anthony DeAngelis (who was later sent to jail on a whole parcel ofcharges), had apparently pulled off the biggest commercial fraudsince that of Ivar Kreuger, the match king.
Where was the missing oil? How could Allied’s direct andindirect creditors, including some of the most powerful andworldly-wise banks of the United States and Great Britain, havebeen so thoroughly gulled? Would aggregate losses on thewhole debacle finally total a hundred and fifty million dollars, assome authorities had estimated, or would the bill be evenbigger? How could a leading Stock Exchange firm like Haupthave been so foolish as to take on such an inconceivably riskycommitment for a single customer? These questions had noteven been raised, let alone answered, on November 19th; someof them have not been answered yet, and some of them maynot be answered for years. What began to emerge onNovember 19th, and what became clear in the harrowing daysthat followed, was that in the case of Haupt, which had abouttwenty thousand individual stock-market customers on its books,and in the case of Williston & Beane, which had about ninethousand, the impending disaster directly involved the personalsavings of many totally innocent persons who had never heardof Allied and had only the vaguest notion of what commoditytrading is.
KAMERMAN’S report to the Stock Exchange did not mean thatHaupt had gone broke, and at the time he made it Kamermanhimself surely did not think that his firm had gone broke;there is a great difference between insolvency and a merefailure to meet the Exchange’s rather stringent capitalrequirements, which are intended to provide a margin of safety.
Indeed, various Stock Exchange officials have said that on thatTuesday morning they did not consider the Haupt situation tobe especially serious, while the Williston & Beane situation, itwas clear from the first, was even less so. One of the firstreactions in the member-firms department was chagrin thatKamerman had come to the Exchange with his problem beforethe Exchange, through its elaborate system of audits andexaminations, had discovered the problem for itself. This, theExchange insists stubbornly, if a bit lamely, was a matter ofbad luck rather than bad management. As a matter of routine,the Exchange required each of its member firms to fill outdetailed questionnaires on its financial condition several times ayear, and as an additional check an expert accountant from theExchange staff descended unexpectedly on each member firmat least once a year to subject its books to a surpriseinspection. Ira Haupt & Co. had filled out its most recentquestionnaire early in October, and since the huge buildup inAllied’s commodities position with Haupt took place after that,the questionnaire showed nothing amiss. As for the surpriseinspection, the Exchange’s man was in the Haupt officesconducting it at the very time the trouble broke. The auditorhad been there for a week, his nose buried in Haupt’s accountbooks, but the task of conducting such an inspection is atedious one, and by November 19th the auditor hadn’t gotaround to examining the Haupt commodities department. “Theyhad set our man up with a desk in a department wherenothing unusual was going on,” an Exchange official has sincesaid. “It’s easy to say now that he should have smelledtrouble, but he didn’t.”
At midmorning on Tuesday the nineteenth, Coyle and Bishopsat down with Kamerman to see what needed to be doneabout Haupt’s problem, and what could be done. Bishopremembers that the atmosphere of the meeting was by nomeans grim; according to Kamerman’s figures, the amount ofcapital that Haupt needed to bring it up to snuff was about ahundred and eighty thousand dollars—an almost paltry sum fora firm of Haupt’s size. Haupt could make up the deficiencyeither by obtaining new money from outside or by convertingsecurities it owned into cash. Bishop urged the latter course asthe quicker and surer, whereupon Kamerman telephoned hisfirm and instructed his partners to begin selling some of theirsecurities at once. The difficulty apparently was going to besolved as simply as that.
But during the rest of the day, after Kamerman had left 11Wall, the crisis showed a tendency to go through the processthat in political circles had come to be called escalation. In thelate afternoon, an ominous piece of news arrived. Allied hadjust filed a voluntary-bankruptcy petition in Newark.
Theoretically, the bankruptcy did not affect the financial positionof its former brokers, since they held security for the moneythey had supplied Allied with; nevertheless, the news wasalarming 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 theNew York Produce Exchange, in an effort to forestall chaos intheir market, had voted to suspend all trading in cottonseed-oilfutures until further notice, and to require immediate settlementof all outstanding contracts at a price dictated by them. Sincethe dictated price would have to be a low one, this meant thatany remaining chance that Haupt or Williston & Beane had ofgetting out from under the Allied speculations on favorableterms was gone.
In the member-firms department that evening, Bishop wasfrantically trying to get in touch with G. Keith Funston, thepresident of the Stock Exchange, who was first at a midtowndinner and then on a train bound for Washington, where hewas scheduled to testify the next day before a congressionalcommittee. What with one thing and another, Bishop was busyin his office all evening; toward midnight, he found himself thelast man in the member-firms department, and, having decidedit was too late to go home to Fanwood, New Jersey, for thenight, he collapsed on a leather couch in Coyle’s office. He hada restless night there; the cleaning women were consideratelyquiet, he said afterward, but the phones kept ringing all nightlong.
Promptly at nine-thirty on Wednesday morning, the StockExchange’s board of governors met in the sixth-floorGovernors’ Room—which, with its regal red carpet, fierce oldportraits, and fluted gilt columns, carries rather uncomfortableconnotations of Wall Street’s checkered past—and, in accordancewith Exchange regulations, voted to suspend Haupt andWilliston & Beane because of their capital difficulties. Thesuspension was made public a few minutes after tradingopened, at ten o’clock, by Henry M. Watts, Jr., chairman ofthe board of governors, who ascended a rostrum thatoverlooks the trading floor, rang the bell that normally signalsthe beginning or ending of a day’s trading, and read anannouncement of it. From the point of view of the public, theimmediate effect of the action was that the accounts of thealmost thirty thousand customers of the two suspended firmswere now frozen—that is, the owners of the accounts couldneither sell their stocks nor get their money out. Touched bythe plight of these unfortunates, the Stock Exchange brass nowset about trying to help the beleaguered firms raise enoughcapital to lift the suspensions and free the accounts. In thecase of Williston & Beane, its efforts were triumphantlysuccessful. It developed that this firm needed about half amillion dollars to get back into business, and so manyfellow-brokers came forward to help out with loans that thefirm actually had to fight off unwanted offers. The half millionwas finally accepted partly from Walston & Co. and partly fromMerrill Lynch, Pierce, Fenner & Smith. (Cozily, the Beane ofWilliston & Beane was the very man who had been thecaboose when the firm’s name was Merrill Lynch, Pierce,Fenner & Beane.) Restored to financial health by this timelyinjection of capital, Williston & Beane was relieved of itssuspension—and its nine thousand customers were relieved oftheir anxiety—just after noon on Friday, or slightly more thantwo days after the suspension had been imposed.
But in the case of Haupt things went differently. It was clearby Wednesday that the capital-shortage figure of a hundredand eighty thousand dollars had been the rosiest of dreams.
Even so, it appeared that the firm might still be solvent despiteits losses on the forced sale of the oil contracts—on onecondition. The condition was that the oil in Bayonne tanks thatAllied had pledged to Haupt as collateral—and that now,through Allied’s default, belonged to Haupt—could be sold toother oil processors at a fair price. Richard M. Crooks, anExchange governor who, unlike nearly all his colleagues, was anexpert on commodities trading, figured that if the Bayonne oilwere thus unloaded, Haupt might still end up slightly in theblack. He therefore telephoned a couple of the country’s leadingvegetable-oil processors and urged them to bid on the oil. Thereplies he received were unanimous and startling. The leadingprocessors declined to make any bid at all, and they leftCrooks with the feeling that they were suspicious of theBayonne warehouse receipts held by Haupt—that they suspectedsome or all of them to be forgeries. If these suspicions werewell founded, it would follow that some or all of the oil attestedto by the receipts was not in Bayonne. “The situation was verysimple,” Crooks has said. “Warehouse receipts are accepted inthe commodities business as practically as good as currency,and now the possibility had been raised that millions of dollarsof Haupt’s assets consisted of counterfeit money.”
Still, all that Crooks knew definitely on Wednesday morningwas that the processors would not bid on Allied oil, andthroughout the rest of Wednesday and all day Thursday theExchange furiously went on trying to help Haupt get back onits feet along with Williston & Beane. Needless to say, thefifteen partners of Haupt were busy at the same endeavor, andin aid of it Kamerman told the Times buoyantly on Wednesdayevening, “Ira Haupt & Co. is solvent and is in an excellentfinancial position.” Also on Wednesday evening, Crooks haddinner in New York with a veteran commodities broker fromChicago. “Although I’m an optimist by temperament, myexperience tells me that these things always turn out to bemuch worse than they look at first,” Crooks said recently. “Imentioned this to my broker friend, and he agreed. The nextmorning 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’smember-firms department learned that many of Allied’swarehouse receipts were indeed fake.
As nearly as can be determined, the Haupt partners weremaking the same unhappy discovery at about the same time.
At any rate, a number of them did not go home Thursdayevening but spent the night at their offices at 111 Broadway,trying to figure out what their position was. Bishop got hometo Fanwood that night, but he found that he could sleep hardlyany better there than on Coyle’s couch. Accordingly, he rosebefore dawn, took the Jersey Central’s five-eight to the city,and on a hunch went to the Haupt offices. There, in thepartners’ area—recently redecorated with modern contour chairs,marble-topped filing cabinets, and refrigerators disguised asdesks—he found several of the partners, unshaven andunkempt, drowsing in their chairs. “They were pretty shot bythen,” Bishop said later. And no wonder. After being awakened,they told him that they had been up all night calculating, andthat at about three o’clock they had come to the conclusionthat their position was hopeless; in view of the worthlessness ofthe warehouse receipts, the Haupt firm was insolvent. Bishoptook this disastrous intelligence with him to the Stock Exchange,where he waited for the sun to come up and for everyoneelse to come to work.
AT one-forty on Friday afternoon, when the stock market wasalready badly rattled by the rumors of Haupt’s impendingfailure, the first reports of the President’s assassination reachedthe Exchange floor, in garbled form. Crooks, who was there,says that the first thing he heard was that the President hadbeen shot, the second was that the President’s brother, theAttorney General, had also been shot, and the third was thatthe Vice-President had had a heart attack. “The rumors camelike machine-gun bullets,” Crooks says. And they struck withcomparable impact. In the next twenty-seven minutes, duringwhich no hard news arrived to relieve the atmosphere ofapocalypse, the prices of stocks declined at a rate unparalleledin the Exchange’s history. In less than half an hour, the valuesof listed stocks decreased by thirteen billion dollars, and theywould no doubt have dropped further if the board ofgovernors had not closed the market for the day at sevenminutes past two. The panic’s immediate effect on the Hauptsituation was to make the status of the twenty thousand frozenaccounts far worse, because now, in the event of Haupt’sbankruptcy and the consequent liquidation of many of theaccounts, the cashing in would have to be done at panic prices,with heavy losses to the accounts’ owners. A larger and lesscalculable effect of the events in Dallas was paralyzing despair.
However, Wall Street—or, rather, some Wall Streeters—had apsychological advantage over the rest of the country in thatthere was work at hand to be done. This convergence ofdisasters confronted them with a definable task.
Having testified in Washington on Wednesday afternoon,Funston had returned to New York that evening and hadspent most of Thursday as well as Friday morning working ongetting Williston & Beane back in business. Sometime duringthat period, as it was gradually made clear that Haupt was notmerely short of capital but actually insolvent, Funston becameconvinced the Exchange and its member firms must considerdoing something virtually unprecedented—that is, reimburse theinnocent victims of Haupt’s imprudence with their own money.
(The nearest thing to a precedent for such action was the caseof DuPont, Homsey & Co., a small Stock Exchange firm thatwent bankrupt in 1960 as a result of fraud by one of itspartners; the Exchange then repaid the firm’s customers themoney they had been divested of—about eight hundredthousand dollars.) Now, having hurried back to his office froma lunch date shortly before the emergency closing of themarket, Funston set about putting his plan into action, callingabout thirty leading brokers whose offices happened to benearby and asking them to trot over to the Exchangeimmediately as an unofficial delegation representing itsmembership. Shortly after three o’clock, the brokers wereassembled in the South Committee Room—a somewhat smallerversion of the Governors’ Room—and Funston set before themthe facts of the Haupt case as he then knew them, along withan outline of his plan for a solution. The facts were these:
Haupt owed about thirty-six million dollars to a group of UnitedStates and British banks; since over twenty million of its assetswere represented by warehouse receipts that now appeared tobe worthless, there was no hope that Haupt could pay itsdebts. In the normal course of events, therefore, Haupt wouldbe sued by the creditor banks when the courts reopened nextweek, the cash and many of the securities held by Haupt forits customers would be tied up by the creditors, and, accordingto Funston’s liberal estimate, some of the customers might endup getting back—after an extended period caused by legaldelays—no more than sixty-five cents on the dollar. And therewas another side to the case. If Haupt were to go intobankruptcy, the psychological effect of this, combined with thepalpable effect of Haupt’s considerable assets’ being thrown onthe market, might well lead to further depression of a stockmarket 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 itsmembers put up enough money to enable all the Hauptcustomers to get back their cash and securities—to be onceagain “whole,” in the banking expression. (The bankingexpression is etymologically sound; “whole” derives from theAnglo-Saxon “hal,” which meant uninjured or recovered frominjury, and from which “hale” is also derived.) Funston furtherproposed that Haupt’s creditors, the banks, be persuaded todefer any efforts to collect their money until the customers hadbeen taken care of. Funston estimated that the amount neededto do the job might run to seven million dollars, or even more.
Almost to a man, the assembled brokers agreed to supportthis public-spirited, if not downright eleemosynary, plan. Butbefore the meeting was over a difficulty arose. Now that theStock Exchange and the member firms had decided on a deedof self-sacrifice, the problem confronting each side—to a certainextent, anyway—was how to arrange to have the other side dothe sacrificing. Funston urged the member firms to take overthe entire matter. The firms declined this suggestion with thanksand countered by urging the Stock Exchange to handle it. “Ifwe do,” Funston said, “you’ll have to repay us the amount wepay out.” Out of this not very dignified dialogue emerged anagreement that initially the funds would come out of theExchange’s treasury, with repayment to be apportioned amongthe member firms later. A three-man committee, headed byFunston, was empowered to conduct negotiations to bring thedeal off.
The chief parties that needed negotiating with were Haupt’screditor banks. Their unanimous consent to the plan wasessential, because if even one of them insisted on immediateliquidation of its loans “the pot would fall in,” as the Exchange’schairman, Henry Watts—a fatherly-looking graduate of Harvardand of Omaha Beach, 1944—pungently put it. Prominent amongthe creditors were four local banks of towering prestige—ChaseManhattan, Morgan Guaranty Trust, First National City, andManufacturers Hanover Trust—which among them had lentHaupt about eighteen and a half million dollars. (Three of thebanks have remained notably reticent about the exact amountof their ill-fated loans to Haupt, but blaming them for theirsilence would be like blaming a poker player who is less thangarrulous about a losing night. The Chase, however, has saidthat Haupt owed it $5,700,000.) Earlier in the week, GeorgeChampion, chairman of the Chase, had telephoned Funston; notonly did the Stock Exchange have a friend at Chase, Championassured him, but the bank stood ready to give any help itcould in the Haupt matter. Funston now called Champion andsaid he was ready to take him up on his offer. He and Bishopthen began to try to assemble representatives of the Chase andthe three other banks for an immediate conference. Bishopremembers that he felt highly bearish about the chances ofrounding up a group of bankers at five o’clock on aFriday—even such an exceptional Friday as this one—but to hissurprise he found practically all of them at their battle stationsand willing to come straight to the Exchange.
Funston and his fellow-negotiators for the Exchange—ChairmanWatts and Vice-Chairman Walter N. Frank—conferred with thebankers from shortly after five until well into the dinner hour.
The meeting was constructive, if tense. “First, we all agreed thatit was a devil of a situation all around,” Funston subsequentlyrecalled. “Then we got down to business. The bankers, ofcourse, were hoping that the Exchange would pick up thewhole thing, but we quickly disabused them of that notion.
Instead, I made them an offer. We would put up a certainsum in cash solely for the benefit of the Haupt customers; inexchange for every dollar that we put up, the banks woulddefer collection—that is, would temporarily refrain fromforeclosing—on two dollars. If, as we then estimated, twenty-twoand a half million was needed to make Haupt solvent, wewould put up seven and a half, and the banks would defercollection of fifteen. They weren’t so sure about ourfigures—they thought we were too low—and they insisted thatthe Exchange’s claim to get back any of its contribution out ofHaupt assets would have to come after the banks’ claims fortheir loans. We agreed to that. We all fought and negotiated,and when we finally went home there was general agreementon the broad outline of the thing. Of course, everyonerecognized that this meeting was only preliminary—to begin with,by no means all the creditor banks were represented at it—andthat both the detail work and much of the hard bargainingwould have to be done over the weekend.”
Just how much detail work and hard bargaining lay aheadbecame manifest on Saturday. The Exchange’s board met ateleven, and more than two-thirds of its thirty-three memberswere present; because of the Haupt crisis, some governors hadcancelled weekend plans, and others had flown in from theirregular stands in such outposts as Georgia and Florida. Theboard’s first action—a decision to keep the Exchange closed onMonday, the day of the President’s funeral—was accomplishedwith deep relief, because the holiday would give the negotiatorsan additional twenty-four hours in which to hammer out a dealbefore the deadline represented by the reopening of the courtsand the markets. Funston brought the governors up to date onwhat was known about Haupt’s financial position and on thestatus of the negotiations that had been begun with the banks;he also gave them a new estimate of the sum that might berequired to make the Haupt customers whole—nine milliondollars. After a fractional moment of silence, several governorsrose to say, in essence, that they felt that more than moneywas at stake; it was a question of the relation of the StockExchange to the country’s many million investors. The meetingwas then temporarily adjourned, and, with the authority of thegovernors’ lofty sentiments to back it up, the Exchange’sthree-man committee got down to negotiations with thebankers.
Thus, the pattern for Saturday and Sunday was set. While therest of the nation sat stupefied in front of its television sets,and while the downtown Manhattan streets were as deserted asthey must have been during the yellow-fever epidemics of theearly nineteenth century, the sixth floor of 11 Wall Street was anexus of utterly absorbed activity. The Exchange’s committeewould remain closeted with the bankers until a point wasreached at which Funston and his colleagues needed furtherauthorization; then the board of governors would go intosession again and either grant the new authority or decline todo so. Between sessions, the governors congregated in thehallways or smoked and brooded in empty offices. An ordinarilyobscure corner of the Exchange bureaucracy called the Conductand Complaints Department was having a busy weekend, too; astaff of half a dozen there was continuously on the phonedealing with anxious inquiries from Haupt customers, who werefeeling anything but hale. And, of course, there were lawyerseverywhere—“I never saw so many lawyers in my life,” oneveteran Stock Exchange man has said. Coyle estimates thatthere were more than a hundred people at 11 Wall Streetduring most of the weekend, and since practically all localrestaurants as well as the Exchange’s own eating facilities wereclosed, the food problem was acute. On Saturday, the entireoutput of a downtown lunch counter that had shrewdly stayedopen was bought up and consumed, after which a taxi wasdispatched to Greenwich Village for more supplies; on Sunday,one of the Exchange secretaries thoughtfully brought in anelectric coffee-maker and a huge bag of groceries and set upshop in the Chairman’s Dining Room.
The bankers’ negotiating committee now included men fromtwo Haupt creditors that had not been represented onFriday—the National State Bank of Newark and the ContinentalIllinois National Bank & Trust Co., of Chicago. (Stillunrepresented 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 weekendhalf gone, they seemed to be temporarily unrepresentable. Itwas decided to continue negotiating without the British banksand then, on Monday morning, present any agreement to themfor approval.) A crucial point at issue, it now developed, wasthe amount of cash that would be needed from the StockExchange to fulfill its part of the bargain. The bankers acceptedFunston’s formula under which they would defer collection oftwo dollars for every dollar that the Exchange contributed tothe cause, and they did not doubt that Haupt was stuck withabout twenty-two and a half million dollars’ worth of uselesswarehouse receipts; however, they were unwilling to take thatfigure as the maximum amount that might be necessary toliquidate Haupt. To be on the safe side, they argued, theamount ought to be based on Haupt’s over-all indebtedness tothem—thirty-six million—and this meant that the Exchange’scash contribution would have to be not seven and a halfmillion but twelve. Another point at issue was the question ofto whom the Exchange would pay whatever sum was agreedupon. Some of the bankers thought the money ought to gostraight into the coffers of Ira Haupt & Co., to be dispensed bythe 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 entirelybeyond its control. As a final complication, one bank—theContinental Illinois—was distinctly reluctant to enter into the dealat all. “The Continental’s people were thinking in terms of theirbank’s exposure,” an Exchange man has explainedsympathetically. “They thought our arrangement might ultimatelybe more damaging to them than a formal Haupt bankruptcyand receivership. They needed time to consider, to make surethey were taking the proper action, but I must say they wereco?perative.” Indeed, since it was primarily the Stock Exchange’sgood name that was at the center of the planned deal, itwould appear that all the banks were marvels of co?peration.
After all, a banker is legally and morally charged with doing thebest he can for his depositors and stockholders, and istherefore hardly in a position to indulge in grand gestures forthe public good; if his eyes are flinty, they may mask a kind,but stifled, heart. As for the Continental, it had reason to beparticularly slow to act, because its “exposure” amounted to wellover ten million dollars, or much more than that of any otherbank. No one concerned has been willing to say exactly whatthe points were on which the Continental held out, but itseems safe to assume that no bank or person who had lentHaupt less than ten million dollars can know exactly how theContinental felt.
By the time the negotiations were recessed, at about sixo’clock Saturday evening, a compromise had been reached onthe main issues—on the amount-of-cash controversy by anagreement that the Exchange would put up an initial seven anda half million with a pledge to go up to twelve million if itbecame necessary, and on the controversy about how themoney would be paid to the Haupt customers by agreementthat the Exchange’s chief examiner would be appointedliquidator of Haupt. But the Continental was still recalcitrant,and, of course, the British banks had not yet even beenapproached. In any event, everybody shut up shop for thenight, with pledges to return early the next afternoon, eventhough it was Sunday. Funston, who was coming down with abad cold, went home to Greenwich. The bankers went home toplaces like Glen Cove and Basking Ridge. Watts, a diehardcommuter 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 withthe thirty representatives of member firms, who were anxiousto learn what they were being committed to. After the currentstatus of the emerging agreement had been explained to them,they voted unanimously in favor of going ahead with it. As theafternoon progressed, even Continental Illinois softened itsopposition, and at about six o’clock, after a series of franticlong-distance telephone calls and attempts to track downContinental officers on trains and in airports, the Chicago bankagreed to go along, explaining that it was doing so in thepublic interest rather than in pursuance of its officers’ bestbusiness judgment. At about the same time, the Times’ financialeditor, Thomas E. Mullaney—who, like the rest of the press,had been rigidly excluded from the sixth floor throughout thenegotiations—called Funston to say he had heard rumors of aplan on Haupt in the offing. Because the British banks wouldhave reason to be miffed, at the very least, if they should readin the next morning’s air editions of a scheme to dispose oftheir credits without their agreement, or even their knowledge,Funston had to give a reply that could only depress still furtherthe spirits of the waiting twenty thousand customers. “There isno plan,” he said.
THE question of who would undertake the delicate task ofcajoling the British banks had come up early Sunday afternoon.
Funston, despite his cold, was anxious to make the trip (forone thing, he has since admitted, the drama of it appealed tohim), and had gone as far as getting his secretary to reservespace on a plane, but as the afternoon progressed and thelocal problems continued to appear intractable, it was decidedthat he couldn’t be spared. Several other governors quicklyvolunteered to go, and one of them, Gustave L. Levy, waseventually selected, on the ground that his firm, Goldman,Sachs & Co., had had a long and close association withKleinwort, Benson, one of the British banks, and that Levyhimself was on excellent terms with some of the Kleinwort,Benson partners. (Levy would later succeed Watts aschairman.) Accordingly, Levy, accompanied by an executive anda lawyer of the Chase—who were presumably included in thehope that they would set the British banks an inspiringexample of co?peration—left 11 Wall Street shortly after fiveo’clock and caught a London-bound jet at seven. The trio satup on the plane most of the night, carefully planning theapproach they would make to the bankers in the morning.
They were well advised to do so, because the British bankscertainly had no cause to feel co?perative; their StockExchange wasn’t in trouble. And there was more to it thanthat. According to unimpeachable sources, the four Britishbanks had lent Haupt a total of five and a half million dollars,and these loans, like many short-term loans made by foreignbanks to American brokers, had not been secured by anycollateral. Sources only fractionally more impeachable maintainthat some of the loans had been extended very recently—thatis, a week or less before the debacle. The money lent isknown to have consisted of Eurodollars, a phantom butnonetheless serviceable currency consisting of dollar deposits inEuropean banks; some four billion Eurodollars were activelytraded among European financial institutions at that time, andthe banks that lent the five and a half million to Haupt hadfirst borrowed them from somebody else. According to a localexpert in international banking, Eurodollars are customarilytraded in huge blocks at a relatively tiny profit; for instance, abank might borrow a block at four and a quarter per centand lend it at four and a half per cent, at a net advantage ofone fourth of one per cent per annum. Obviously, suchtransactions are looked upon as practically without risk.
One-fourth of one per cent of five and a half million dollarsover a period of one week amounts to $264.42, which givessome indication of the size of the profit on the Haupt deal thatthe four British banks would have been able to divide amongthemselves, less expenses, if everything had gone as planned.
Instead, they now stood to lose the whole bundle.
Levy and the Chase men arrived red-eyed in London shortlyafter daybreak on a depressingly drizzly morning. They went tothe Savoy to change their clothes and have breakfast and thenheaded straight for the City, London’s financial district. Theirfirst meeting was at the Fenchurch Street establishment ofWilliam Brandt’s Sons, which had put up over half of the fiveand a half million. The Brandt partners courteously offeredcondolences on the death of the President, and the Americansagreed that it was a terrible thing, whereupon both sides cameto the point. The Brandt men knew of Haupt’s impendingfailure but not of the plan now afoot to rescue the Hauptcustomers by avoiding a formal bankruptcy; Levy explained this,and an hour’s discussion followed, in the course of which theBritons showed a certain reluctance to go along—as well theymight. 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 withme as a representative of the New York Stock Exchange, oneof whose members had got them into this jam. They wantedto make a trade with us—to get a priority in the collection oftheir claims in exchange for coming along with us and agreeingto defer collection. But their trading position wasn’t really good;in a bankruptcy proceeding, their claims, based on unsecuredloans, would have been considered after the claims of creditorswho held collateral, and in my opinion they would have nevercollected a nickel. On the other hand, under the terms of ouroffer they would be treated equally with all the other Hauptcreditors except the customers. We had to explain to them thatwe weren’t trading.”
The Brandt men replied that before deciding they wanted tothink the matter over, and also to hear what the other Britishbanks said. The American delegates then repaired to theLondon office of the Chase, on Lombard Street, where, byprearrangement, they met with representatives of the threeother British banks and Levy had a chance for a reunion withhis Kleinwort, Benson friends. The circumstances of the reunionwere obviously less than happy, but Levy says that his friendstook a realistic view of their situation and, with heroicobjectivity, actually helped their fellow-Britons to see theAmerican side of the question. Nevertheless, this meeting, likethe earlier one, broke up without commitment by anyone. Levyand his colleagues stayed at the Chase for lunch and thenwalked over to the Bank of England, which was interested inthe Haupt loans to the extent that their default would affectBritain’s balance of payments. The Bank of England, throughone of its deputies, assured the visitors of its distress over bothAmerica’s national tragedy and Wall Street’s parochial one, andadvised them that while it lacked the power to tell the Londonbanks what to do, in its judgment they would be wise to goalong with the American scheme. Then, at about two o’clock,the trio returned to Lombard Street to wait nervously for wordfrom the banks. As it happened, a parallel vigil was thenbeginning on Wall Street, where it was nine o’clock on Mondaymorning, and where Funston, just arrived in his office and verymuch aware that only one day remained in which to get thedeal wrapped up, was pacing his rug as he waited for a callthat would tell him whether London was going to cause thepot to fall in.
Kleinwort, Benson and S. Japhet & Co. were the first toagree to go along, Levy recalls. Then—after a silence of perhapshalf an hour, during which Levy and his colleagues began tohave an agonizing sense of the minutes ticking away in NewYork—an affirmative answer came from Brandt. That was thebig one; with the chief creditor and two of the three others inline, it was all but certain that Ansbacher would join up. Ataround 4 P.M. London time, Ansbacher did, and Levy wasfinally able to place the call that Funston had been waiting for.
Their mission accomplished, the Americans went straight to theLondon airport, and within three hours were on a planeheaded home.
On getting the good news, Funston felt that the wholeagreement was pretty well in the bag at last, since all that wasneeded to seal the bag was the signatures of the fifteen Hauptgeneral partners, who seemed to have nothing to lose andeverything to gain from the plan. Still, the task of getting thosesignatures was a vital one. Short of a bankruptcy suit, whicheveryone was trying to avoid, no liquidator could distribute theHaupt assets—not even the marble-topped cabinets and therefrigerators—without the partners’ permission. Accordingly, lateon Monday afternoon the Haupt partners, each accompaniedby his lawyer, trooped into Chairman Watts’s office at the StockExchange to learn exactly what fate the Wall Street powers hadbeen arranging for them.
The Haupt partners could hardly have found the projectedagreement pleasant reading, inasmuch as it prescribed, amongother things, that they were to execute powers of attorneygiving a liquidator full control over Haupt’s affairs. However,one of their own lawyers gave them a short, pungent talkpointing out that they were personally liable for the firm’s debtswhether or not they signed the agreement, so they might aswell be public-spirited and sign it. More briefly, they were overa barrel. (Many of them later filed personal bankruptcy papers.)One startling event broke the even tenor of this gloomymeeting. Shortly after the Haupt lawyer had wound up hisdisquisition on the facts of life, someone noticed an unfamiliarand strikingly youthful face in the crowd and asked its ownerto identify himself. The unhesitating reply was “I’m RussellWatson, a reporter for the Wall Street Journal.” There was ashort, stunned silence, in recognition of the fact that anuntimely leak might still disturb the delicate balance of moneyand emotion that made up the agreement. Watson himself, whowas twenty-four and had been on the Journal for a year, hassince explained how he got into the meeting, and under whatcircumstances he left it. “I was new on the Stock Exchangebeat then,” he said afterward. “Earlier in the day, there hadbeen word that Funston would probably hold a pressconference sometime that evening, so I went over to theExchange. At the main entrance, I asked a guard where Mr.
Funston’s conference was. The guard said it was on the sixthfloor, and ushered me into an elevator. I suppose he thought Iwas a banker, a Haupt partner, or a lawyer. On the sixthfloor, people were milling around everywhere. I just walked offthe elevator and into the office where the meeting was—nobodystopped me. I didn’t understand much of what was going on. Igot the feeling that whatever was at stake, there was generalagreement but still a lot of haggling over details to be done. Ididn’t recognize anybody there but Funston. I stood aroundquietly for about five minutes before anybody noticed me, andthen everybody said, pretty much at once, ‘Good God, get outof here!’ They didn’t exactly kick me out, but I saw it wastime to go.”
During the haggling phase that followed—a painfully protractedone, it developed—the Haupt partners and their lawyers madea command post of Watts’s office, while the bankrepresentatives and their lawyers camped in the NorthCommittee Room, just down the hall. Funston, who wasdetermined that news of a settlement should be in the handsof investors before the opening of the market next morning,was going wild with irritation and frustration, and in an effortto speed things up he constituted himself a sort of combinationmessenger boy and envoy. “All Monday evening, I kept runningback 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 itis—only twelve hours until tomorrow’s market opening! Initialhere.’”
At fifteen minutes past midnight, nine and three-quartershours before the market’s reopening, the agreement was signedin the South Committee Room by the twenty-eight parties atinterest, in an atmosphere that a participant has described asone of exhaustion and general relief. As soon as the banksopened on Tuesday morning, the Stock Exchange depositedseven and a half million dollars, a sum amounting to roughlyone-third of its available reserve, in an account on which theHaupt liquidator could draw; the same morning, the liquidatorhimself—James P. Mahony, a veteran member of theExchange’s staff—moved into the Haupt offices to take charge.
The stock market, encouraged by confidence in the newPresident or by news of the Haupt settlement, or by acombination of the two, had its greatest one-day rise in history,more than eliminating Friday’s losses. A week later, onDecember 2nd, Mahony announced that $1,750,000, hadalready been paid out of the Stock Exchange account to bailout Haupt customers; by December 12th, the figure was up to$5,400,000, and by Christmas to $6,700,000. Finally, onMarch 11, 1964, the Exchange was able to report that it haddispensed nine and a half million dollars, and that the Hauptcustomers, with the exception of a handful who couldn’t befound, were whole again.
THE agreement, in which some people saw an unmistakableimplication that Wall Street’s Establishment now felt accountablefor public harm caused by the misdeeds, or even themisfortunes, of any of its members, gave rise to a variety ofreactions. The rescued Haupt customers were predictablygrateful, of course. The Times said that the agreement wasevidence of “a sense of responsibility that served to inspireinvestor confidence” and “may have helped to avoid a potentialpanic.” In Washington, President Johnson interrupted his firstbusiness day in office to telephone Funston and congratulatehim. The chairman of the S.E.C., William L. Cary, who was notordinarily given to throwing bouquets at the Stock Exchange,said in December that it had furnished “a dramatic, impressivedemonstration of its strength and concern for the publicinterest.” Other stock exchanges around the world were silenton the matter, but if one may judge by the unsentimental waythat most of them do business, some of their officials musthave been indulging in a certain amount of headshaking overthe strange doings in New York. The Stock Exchange’smember firms, who were assessed for the nine and a halfmillion dollars over a period of three years, appeared to begenerally satisfied, although a few of them were heard togrumble that fine old firms with justified reputations for skilland probity should not be asked to pay the losses of greedyupstarts who overstep and get caught out. Oddly, almost noone seems to have expressed gratitude to the British andAmerican banks, which recouped something like half of theirlosses. It may be that people simply don’t thank banks, exceptin television commercials.
The Stock Exchange itself, meanwhile, was torn betweenblushingly accepting congratulations and prudently, if perhapsgracelessly, insisting that what it had done wasn’t to beregarded as a precedent—that it wouldn’t necessarily do thesame thing again. Nor were the Exchange’s officials at all surethat the same thing would have been done if the Haupt casehad occurred earlier—even a very little earlier. Crooks, who waschairman of the Exchange in the early 1950s, felt that thechances of such action during his term would have been aboutfifty-fifty. Funston, who assumed his office in 1951, felt that thematter would have been “questionable” during the early yearsof his incumbency. “One’s idea of public responsibility isevolutionary,” he said. He was particularly annoyed by the idea,which he had heard repeatedly, that the Exchange had actedout of a sense of guilt. Psychoanalytic interpretations of theevent, he felt, were gratuitous, not to say churlish. As for thoseolder governors who glared, quite possibly balefully, at thenegotiations from their gilt frames in the Governors’ Room andthe North and South Committee Rooms, their reaction to thewhole proceeding may be imagined but cannot be known.
Chapter 7 The Impacted Philosophers
AMONG THE GREATEST problems facing American industry today,one may learn by talking with any of a large number ofindustrialists who are not known to be especially given topontificating, is “the problem of communication.” Thispreoccupation with the difficulty of getting a thought out of onehead and into another is something the industrialists share witha substantial number of intellectuals and creative writers, moreand more of whom seem inclined to regard communication, orthe lack of it, as one of the greatest problems not just ofindustry but of humanity. (A group of avant-garde writers andartists have given the importance of communication abackhanded boost by flatly and unequivocally proclaimingthemselves to be against it.) As far as the industrialists areconcerned, I admit that in the course of hearing them invokethe word “communication”—often in an almost mysticalway—over a period of years I have had a lot of troublefiguring out exactly what they meant. The general thesis is clearenough; namely, that everything would be all right, first, if theycould get through to each other within their own organizations,and, second, if they, or their organizations, could get through toeverybody else. What has puzzled me is how and why, in thisday when the foundations sponsor one study of communicationafter another, individuals and organizations fail so consistently toexpress themselves understandably, or how and why theirlisteners fail to grasp what they hear.
A few years ago, I acquired a two-volume publication of theUnited States Government Printing Office entitled HearingsBefore the Subcommittee on Antitrust and Monopoly of theCommittee 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 Ithought I could begin to see what the industrialists are talkingabout. The hearings, conducted in April, May, and June, 1961,under the chairmanship of Senator Estes Kefauver, ofTennessee, had to do with the now famous price-fixing andbid-rigging conspiracies in the electrical-manufacturing industry,which had already resulted, the previous February, in theimposition by a federal judge in Philadelphia of fines totaling$1,924,500 on twenty-nine firms and forty-five of theiremployees, and also of thirty-day prison sentences on seven ofthe employees. Since there had been no public presentation ofevidence, all the defendants having pleaded either guilty or nodefense, and since the records of the grand juries that indictedthem were secret, the public had had little opportunity to hearabout the details of the violations, and Senator Kefauver feltthat the whole matter needed a good airing. The transcriptshows that it got one, and what the airing revealed—at leastwithin the biggest company involved—was a breakdown inintramural communication so drastic as to make the building ofthe Tower of Babel seem a triumph of organizational rapport.
In a series of indictments brought by the government in theUnited States District Court in Philadelphia between Februaryand October, 1960, the twenty-nine companies and theirexecutives were charged with having repeatedly violated Section1 of the Sherman Act of 1890, which declares illegal “everycontract, combination in the form of trust or otherwise, orconspiracy, in restraint of trade or commerce among theseveral States, or with foreign nations.” (The Sherman Act wasthe instrument used in the celebrated trust-busting activities ofTheodore Roosevelt, and along with the Clayton Act of 1914 ithas served as the government’s weapon against cartels andmonopolies ever since.) The violations, the government alleged,were committed in connection with the sale of large andexpensive pieces of apparatus of a variety that is requiredchiefly by public and private electric-utility companies (powertransformers, switchgear assemblies, and turbine-generator units,among many others), and were the outcome of a series ofmeetings attended by executives of the supposedly competingcompanies—beginning at least as early as 1956 and continuinginto 1959—at which noncompetitive price levels were agreedupon, nominally sealed bids on individual contracts were riggedin advance, and each company was allocated a certainpercentage of the available business. The government furtheralleged that, in an effort to preserve the secrecy of thesemeetings, the executives had resorted to such devices asreferring to their companies by code numbers in theircorrespondence, making telephone calls from public booths orfrom their homes rather than from their offices, and doctoringthe expense accounts covering their get-togethers to conceal thefact that they had all been in a certain city on a certain day.
But their stratagems did not prevail. The federals, forcefully ledby Robert A. Bicks, then head of the Antitrust Division of theDepartment of Justice, succeeded in exposing them, withconsiderable help from some of the conspirators themselves,who, after an employee of a small conspirator company saw fitto spill the story in the early fall of 1959, flocked to turn state’sevidence.
The economic and social significance of the whole affair maybe demonstrated clearly enough by citing just a few figures. Inan average year at the time of the conspiracies, a total of morethan one and three-quarters billion dollars was spent topurchase machines of the sort in question, nearly a fourth of itby federal, state, and local governments (which, of course,means the taxpayers), and most of the rest by private utilitycompanies (which are inclined to pass along any rise in thecost of their equipment to the public in the form of rateincreases). To take a specific example of the kind of moneyinvolved in an individual transaction, the list price of a500,000-kilowatt turbine-generator—a monstrous device forproducing electric power from steam power—was oftensomething like sixteen million dollars. Actually, manufacturerssometimes cut their prices by as much as 25 percent in orderto make a sale, and therefore, if everything was above board, itmight have been possible to buy the machine at a saving offour million dollars; if representatives of the companies makingsuch generators held a single meeting and agreed to fix prices,they could, in effect, increase the cost to the customer by thefour million. And in the end, the customer was almost sure tobe the public.
IN presenting the indictments in Philadelphia, Bicks stated that,considered collectively, they revealed “a pattern of violationswhich can fairly be said to range among the most serious, themost flagrant, the most pervasive that have ever marked anybasic American industry.” Just before imposing the sentences,Judge J. Cullen Ganey went even further; in his view, theviolations constituted “a shocking indictment of a vast section ofour economy, for what is really at stake here is the survival of… the free-enterprise system.” The prison sentences showedthat he meant it; although there had been many successfulprosecutions for violation of the Sherman Act during the sevendecades since its passage, it was rare indeed for executives tobe jailed. Not surprisingly, therefore, the case kicked up quite aruckus in the press. The New Republic, to be sure,complained that the newspapers and magazines wereintentionally playing down “the biggest business scandal indecades,” but the charge did not seem to have muchfoundation. Considering such things as the public’s apathytoward switchgear, the woeful bloodlessness of criminal casesinvolving antitrust laws, and the relatively few details of theconspiracies that had emerged, the press in general gave thestory a good deal of space, and even the Wall Street Journaland Fortune ran uncompromising and highly informativeaccounts of the debacle; here and there, in fact, one coulddetect signs of a revival of the spirit of old-time antibusinessjournalism as it existed back in the thirties. After all, what couldbe more exhilarating than to see several dignified, impeccablytailored, and highly paid executives of a few of the nation’smost respected corporations being trooped off to jail likecommon pickpockets? It was certainly the biggest moment forbusiness-baiters since 1938, when Richard Whitney, the formerpresident of the New York Stock Exchange, was put behindbars for speculating with his customers’ money. Some called itthe biggest since Teapot Dome.
To top it all off, there was a prevalent suspicion of hypocrisyin the very highest places. Neither the chairman of the boardnor the president of General Electric, the largest of thecorporate defendants, had been caught in the government’sdragnet, and the same was true of Westinghouse Electric, thesecond-largest; these four ultimate bosses let it be known thatthey had been entirely ignorant of what had been going onwithin their commands right up to the time the first testimonyon the subject was given to the Justice Department. Manypeople, however, were not satisfied by these disclaimers, and,instead, took the position that the defendant executives weremen in the middle, who had broken the law only in responseeither to actual orders or to a corporate climate favoringprice-fixing, and who were now being allowed to suffer for thesins of their superiors. Among the unsatisfied was Judge Ganeyhimself, who said at the time of the sentencing, “One would bemost na?ve indeed to believe that these violations of the law, solong 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 thecorporation.… I am convinced that in the great number ofthese defendants’ cases, they were torn between conscience andapproved corporate policy, with the rewarding objectives ofpromotion, 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 toguide its destinies from company headquarters, at 570Lexington Avenue, New York City—got the lion’s share ofattention both in the press and in the Subcommittee hearings.
With some 300,000 employees, and sales averaging some fourbillion dollars a year over the past ten years, it was not onlyfar and away the biggest of the twenty-nine accused companiesbut, judged on the basis of sales in 1959, the fifth-biggestcompany in the country. It also drew a higher total of fines($437,500) than any other company, and saw more of itsexecutives sent to jail (three, with eight others receivingsuspended sentences). Furthermore, as if to intensify in thishour of crisis the horror and shock of true believers—and theglee of scoffers—its highest-ranking executives had for yearstried to represent it to the public as a paragon of successfulvirtue by issuing encomiums to the free competitive system, thevery system that the price-fixing meetings were set up to mock.
In 1959, shortly after the government’s investigation of theviolations had been brought to the attention of G.E.’spolicymakers, the company demoted and cut the pay of thoseof its executives who admitted that they had been involved; onevice-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 whenJudge Ganey fined him four thousand dollars and sent him toprison for thirty days, and shortly after he regained hisfreedom, 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, wasnot adopted by Westinghouse, which waited until the judge haddisposed of the case and then decided that the fines andprison sentences he had handed out to its stable of offenderswere chastisement enough, and did not itself penalize them atall. Some people saw this attitude as evidence thatWestinghouse was condoning the conspiracies, but othersregarded it as a commendable, if tacit, admission thatmanagement at the highest level in the conniving companieswas responsible—morally, at least—for the whole mess and wastherefore in no position to discipline its erring employees. In theview of these people, G.E.’s haste to penalize the acknowledgedculprits on its payroll strongly suggested that the firm wastrying to save its own skin by throwing a few lucklessemployees to the wolves, or—as Senator Philip A. Hart, ofMichigan, put it, more pungently, during the hearings—“to do aPontius Pilate operation.”
EMBATTLED days at 570 Lexington Avenue! After years ofcloaking the company in the mantle of a wise and benevolentcorporate institution, the public-relations people at G.E.
headquarters were faced with the ugly choice of representing itsrole in the price-fixing affair as that of either a fool or a knave.
They tended strongly toward “fool.” Judge Ganey, by hisstatement that he assumed the conspiracies to have been notonly condoned but approved by the top brass and thecompany as a whole, clearly chose “knave.” But his analysismay or may not have been the right one, and after readingthe Kefauver Subcommittee testimony I have come to themelancholy conclusion that the truth will very likely never beknown. For, as the testimony shows, the clear waters of moralresponsibility at G.E. became hopelessly muddied by a struggleto communicate—a struggle so confused that in some cases, itwould appear, if one of the big bosses at G.E. had ordered asubordinate to break the law, the message would somehowhave been garbled in its reception, and if the subordinate hadinformed the boss that he was holding conspiratorial meetingswith competitors, the boss might well have been under theimpression that the subordinate was gossiping idly about lawnparties or pinochle sessions. Specifically, it would appear that asubordinate who received a direct oral order from his boss hadto figure out whether it meant what it seemed to or the exactopposite, while the boss, in conversing with a subordinate, hadto figure out whether he should take what the man told himat face value or should attempt to translate it out of a secretcode to which he was by no means sure he had the key.
That was the problem in a nutshell, and I state it here thusbaldly as a suggestion for any potential beneficiary of afoundation who may be casting about for a suitable project onwhich to draw up a prospectus.
For the past eight years or so, G.E. had had a company rulecalled Directive Policy 20.5, which read, in part, “No employeeshall 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 discusswith a competitor prices, terms or conditions of sale, or anyother competitive information.” In effect, this rule was simply aninjunction to G.E.’s personnel to obey the federal antitrust laws,except that it was somewhat more concrete and comprehensivein the matter of price than they are. It was almost impossiblefor executives with jurisdiction over pricing policies at G.E. to beunaware of 20.5, or even hazy about it, because to make surethat new executives were acquainted with it and to refresh thememories of old ones, the company formally reissued anddistributed it at intervals, and all such executives were asked tosign their names to it as an earnest that they were currentlycomplying with it and intended to keep on doing so. Thetrouble—at least during the period covered by the court action,and apparently for a long time before that as well—was thatsome people at G.E., including some of those who regularlysigned 20.5, simply did not believe that it was to be takenseriously. They assumed that 20.5 was mere window dressing:
that it was on the books solely to provide legal protection forthe company and for the higher-ups; that meeting illegally withcompetitors was recognized and accepted as standard practicewithin the company; and that often when a ranking executiveordered a subordinate executive to comply with 20.5, he wasactually ordering him to violate it. Illogical as it might seem, thislast assumption becomes comprehensible in the light of the factthat, for a time, when some executives orally conveyed, orreconveyed, the order, they were apparently in the habit ofaccompanying it with an unmistakable wink. In May of 1948,for example, there was a meeting of G.E. sales managersduring which the custom of winking was openly discussed.
Robert Paxton, an upper-level G.E. executive who later becamethe company’s president, addressed the meeting and deliveredthe usual admonition about antitrust violations, whereuponWilliam S. Ginn, then a sales executive in the transformerdivision, under Paxton’s authority, startled him by saying, “Ididn’t see you wink.” Paxton replied firmly, “There was nowink. We mean it, and these are the orders.” Asked bySenator Kefauver how long he had been aware that ordersissued at G.E. were sometimes accompanied by winks, Paxtonreplied that he had first observed the practice way back in1935, when his boss had given him an instruction along with awink or its equivalent, and that when, some time later, thesignificance of the gesture dawned on him, he had become soincensed that he had with difficulty restrained himself fromjeopardizing his career by punching the boss in the nose.
Paxton went on to say that his objections to the practice ofwinking had been so strong as to earn him a reputation in thecompany for being an antiwink man, and that he, for his part,had never winked.
Although Paxton would seem to have left little doubt as tohow he intended his winkless order of 1948 to be interpreted,its meaning failed to get through to Ginn, for not long after itwas issued, he went out and fixed prices to a fare-thee-well.
(Obviously, it takes more than one company to make aprice-fixing agreement, but all the testimony tends to indicatethat it was G.E. that generally set the pattern for the rest ofthe industry in such matters.) Thirteen years later, Ginn—freshfrom a few weeks in jail, and fresh out of a $135,000-a-yearjob—appeared before the Subcommittee to account for, amongother things, his strange response to the winkless order. Hehad disregarded it, he said, because he had received a contraryorder from two of his other superiors in the G.E. chain ofcommand, Henry V. B. Erben and Francis Fairman, and inexplaining why he had heeded their order rather than Paxton’she introduced the fascinating concept of degrees ofcommunication—another theme for a foundation grantee to gethis teeth into. Erben and Fairman, Ginn said, had been morearticulate, persuasive, and forceful in issuing their order thanPaxton had been in issuing his; Fairman, especially, Ginnstressed, had proved to be “a great communicator, a greatphilosopher, and, frankly, a great believer in stability of prices.”
Both Erben and Fairman had dismissed Paxton as na?ve, Ginntestified, and, in further summary of how he had been ledastray, he said that “the people who were advocating the Devilwere able to sell me better than the philosophers that wereselling the Lord.”
It would be helpful to have at hand a report from Erben andFairman themselves on the communication technique thatenabled them to prevail over Paxton, but unfortunately neitherof 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 ashaving been at all times one of the philosopher-salesmen onthe side of the Lord. “I can clarify Mr. Paxton by saying Mr.
Paxton came closer to being an Adam Smith advocate thanany businessman I have met in America,” Ginn declared. Still,in 1950, when Ginn admitted to Paxton in casual conversationthat he had “compromised himself” in respect to antitrustmatters, Paxton merely told him that he was a damned fool,and did not report the confession to anyone else in thecompany. Testifying as to why he did not, Paxton said thatwhen the conversation occurred he was no longer Ginn’s boss,and that, in the light of his personal ethics, repeating such anadmission by a man not under his authority would be “gossip”
and “talebearing.”
Meanwhile, Ginn, no longer answerable to Paxton, was meetingwith competitors at frequent intervals and moving steadily upthe corporate ladder. In November, 1954, he was made generalmanager of the transformer division, whose headquarters werein Pittsfield, Massachusetts—a job that put him in line for avice-presidency. At the time of Ginn’s shift, Ralph J. Cordiner,who has been chairman of the board of General Electric since1949, called him down to New York for the express purpose ofenjoining him to comply strictly and undeviatingly with DirectivePolicy 20.5. Cordiner communicated this idea so successfullythat it was clear enough to Ginn at the moment, but itremained so only as long as it took him, after leaving thechairman, to walk to Erben’s office. There his comprehension ofwhat he had just heard became clouded. Erben, who was headof G.E.’s distribution group, ranked directly below Cordiner anddirectly above Ginn, and, according to Ginn’s testimony, nosooner were they alone in his office than he countermandedCordiner’s injunction, saying, “Now, keep on doing the way thatyou have been doing, but just be sensible about it and useyour head on the subject.” Erben’s extraordinary communicativeprowess again carried the day, and Ginn continued to meetwith competitors. “I knew Mr. Cordiner could fire me,” he toldSenator Kefauver, “but also I knew I was working for Mr.
Erben.”
At the end of 1954, Paxton took over Erben’s job andthereby became Ginn’s boss again. Ginn went right on meetingwith competitors, but, since he was aware that Paxtondisapproved of the practice, didn’t tell him about it. Moreover,he testified, within a month or two he had become convincedthat he could not afford to discontinue attending the meetingsunder any circumstances, for in January, 1955, the entireelectrical-equipment industry became embroiled in a drastic pricewar—known as the “white sale,” because of its timing and thebargains it afforded to buyers—in which the erstwhile amiablecompetitors began fiercely undercutting one another. Such amanifestation of free enterprise was, of course, exactly what theintercompany conspiracies were intended to prevent, but just atthat time the supply of electrical apparatus so greatly exceededthe demand that first a few of the conspirators and then moreand more began breaking the agreements they themselves hadmade. In dealing with the situation as best he could, Ginn said,he “used the philosophies that had been taught mepreviously”—by which he meant that he continued to conductprice-fixing meetings, in the hope that at least some of theagreements made at them would be honored. As for Paxton, inGinn’s opinion that philosopher was not only ignorant of themeetings but so constant in his devotion to the concept of freeand aggressive competition that he actually enjoyed the pricewar, disastrous though it was to everybody’s profits. (In hisown testimony, Paxton vigorously denied that he had enjoyedit.)Within a year or so, the electrical-equipment industry took anupturn, and in January, 1957, Ginn, having ridden out thestorm relatively well, got his vice-presidency. At the same time,he was transferred to Schenectady, to become general managerof G.E.’s turbine-generator division, and Cordiner again calledhim into headquarters and gave him a lecture on 20.5. Suchlectures were getting to be a routine with Cordiner; every timea new employee was assigned to a strategic managerial post, oran old employee was promoted to such a post, the lucky fellowcould be reasonably certain that he would be summoned to thechairman’s office to hear a rendition of the austere creed. Inhis book The Heart of Japan, Alexander Campbell reportsthat a large Japanese electrical concern has drawn up a list ofseven company commandments (for example, “Be courteousand sincere!”), and that each morning, in each of its thirtyfactories, the workers are required to stand at attention andrecite these in unison, and then to sing the company song(“For ever-increasing production/Love your work, give yourall!”). Cordiner did not require his subordinates to recite or sing20.5—as far as is known, he never even had it set tomusic—but from the number of times men like Ginn had itread to them or otherwise recalled to their attention, they musthave come to know it well enough to chant it, improvising atune as they went along.
This time, Cordiner’s message not only made an impressionon Ginn’s mind but stuck there in unadulterated form. Ginn,according to his testimony, became a reformed executive anddropped his price-fixing habits overnight. However, it appearsthat his sudden conversion cannot be attributed wholly toCordiner’s powers of communication, or even to thedrip-drip-drip effect of repetition, for it was to a considerableextent pragmatic in character, like the conversion of Henry VIIIto Protestantism. He reformed, Ginn explained to theSubcommittee, because his “air cover was gone.”
“Your what was gone?” Senator Kefauver asked.
“My air cover was gone,” replied Ginn. “I mean I had lostmy air cover. Mr. Erben wasn’t around any more, and all ofmy colleagues had gone, and I was now working directly forMr. Paxton, knowing his feelings on the matter.… Anyphilosophy that I had grown up with before in the past wasnow 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 beenwithout its protection for over two years, but, presumably, inthe excitement of the price war he had failed to notice itsabsence. However that may have been, here he now was, aman suddenly shorn not only of his air cover but of hisphilosophy. Swiftly filling the latter void with a whole new set ofprinciples, he circulated copies of 20.5 among his departmentmanagers in the turbine-generator division and topped this offby energetically adopting what he called a “leprosy policy”; thatis, he advised his subordinates to avoid even casual socialcontacts with their counterparts in competing companies,because “once the relationships are established, I have come tothe conclusion after many years of hard experience that therelationships tend to spread and the hanky-panky begins to getgoing.” But now fate played a cruel trick on Ginn, and, allunknowing, he landed in the very position that Paxton andCordiner had been in for years—that of a philosopher vainlyendeavoring to sell the Lord to a flock that declined to buy hismessage and was, in fact, systematically engaging in thehanky-panky its leader had warned it against. Specifically,during the whole of 1957 and 1958 and the first part of 1959two of Ginn’s subordinates were piously signing 20.5 with onehand and, with the other, briskly drawing up price-fixingagreements 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 ofhis shining new philosophy to others, and that at the root ofhis difficulty lay that old jinx, the problem of communicating.
Asked at the hearings how his subordinates could possibly havegone so far astray, he replied, “I have got to admit that Imade a communication error. I didn’t sell this thing to the boyswell enough.… The price is so important in the completerunning of a business that, philosophically, we have got to sellpeople not only just the fact that it is against the law, but …that it shouldn’t be done for many, many reasons. But it hasgot to be a philosophical approach and a communicationapproach.… Even though … I had told my associates not to dothis, some of the boys did get off the reservation.… I have toadmit to myself here an area of a failure in communications …which I am perfectly willing to accept my part of theresponsibility for.”
In earnestly striving to analyze the cause of the failure, Ginnsaid, he had reached the conclusion that merely issuingdirectives, no matter how frequently, was not enough; whatwas needed was “a complete philosophy, a completeunderstanding, a complete breakdown of barriers betweenpeople, if we are going to get some understanding and reallylive and manage these companies within the philosophies thatthey should be managed in.”
Senator Hart permitted himself to comment, “You cancommunicate until you are dead and gone, but if the point youare 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.
THE concept of degrees of communication was furtherdeveloped, 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 arecontentedly unaware, switchgear serves to control and protectapparatus used in the generation, conversion, transmission, anddistribution of electrical energy, and more than $100 millionworth of it is sold annually in the United States.) Stehlikreceived some of his business guidance in the conventionalform of orders, oral and written, and some—perhaps just asmuch, to judge by his testimony—through a less intellectual,more visceral medium of communication that he called“impacts.” Apparently, when something happened within thecompany that made an impression on him, he would consult asort of internal metaphysical voltmeter to ascertain the force ofthe jolt that he had received, and, from the reading he got,would attempt to gauge the true drift of company policy. Forexample, he testified that during 1956, 1957, and most of 1958he believed that G.E. was frankly and fully in favor ofcomplying with 20.5. But then, in the autumn of 1958, GeorgeE. Burens, Stehlik’s immediate superior, told him that he,Burens, had been directed by Paxton, who by then waspresident of G.E., to have lunch with Max Scott, president ofthe I-T-E Circuit Breaker Company, an important competitor inthe switchgear market. Paxton said in his own testimony thatwhile he had indeed asked Burens to have lunch with Scott, hehad instructed him categorically not to talk about prices, butapparently Burens did not mention this caveat to Stehlik; inany event, the disclosure that the high command had toldBurens to lunch with an archrival, Stehlik testified, “had aheavy impact on me.” Asked to amplify this, he said, “Thereare a great many impacts that influence me in my thinking asto the true attitude of the company, and that was one ofthem.” As the impacts, great and small, piled up, theircumulative effect finally communicated to Stehlik that he hadbeen wrong in supposing the company had any real respectfor 20.5. Accordingly, when, late in 1958, Stehlik was orderedby Burens to begin holding price meetings with the competitors,he was not in the least surprised.
Stehlik’s compliance with Burens’ order ultimately brought ona whole new series of impacts, of a much more crudelycommunicative sort. In February, 1960, General Electric cut hisannual pay from $70,000 to $26,000 for violating 20.5; a yearlater Judge Ganey gave him a three-thousand-dollar fine and asuspended thirty-day jail sentence for violating the ShermanAct; and about a month after that G.E. asked for, and got, hisresignation. Indeed, during his last years with the firm Stehlikseems to have received almost as many lacerating impacts as aRaymond Chandler hero. But testimony given at the hearingsby L. B. Gezon, manager of the marketing section of thelow-voltage-switchgear department, indicated that Stehlik, againlike a Chandler hero, was capable of dishing out blunt impactsas well as taking them. Gezon, who was directly under Stehlikin the line of command, told the Subcommittee that althoughhe had taken part in price-fixing meetings prior to April, 1956,when Stehlik became his boss, he did not subsequently engagein any antitrust violations until late 1958, and that he did sothen only as the result of an impact that bore none of thesubtlety noted by Stehlik in his early experience with thisphenomenon. The impact came directly from Stehlik, who, itseems, left nothing to chance in communicating with hissubordinates. In Gezon’s words, Stehlik told him “to resume themeetings; that the company policy was unchanged; the risk wasjust as great as it ever had been; and that if our activitieswere discovered, I personally would be dismissed or disciplined[by the company], as well as punished by the government.” SoGezon was left with three choices: to quit, to disobey the directorder of his superior (in which case, he thought, “they mighthave found somebody else to do my job”), or to obey theorder, and thereby violate the antitrust laws, with no immunityagainst the possible consequences. In short, his alternatives werecomparable 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 requirehim to resign. Yet it would be a mistake to assume that Gezonwas relatively untouched by his experience. Asked by SenatorKefauver if he did not think that Stehlik’s order had placedhim in an intolerable position, he replied that it had not struckhim that way at the time. Asked whether he thought it unjustthat he had suffered demotion for carrying out the order of asuperior, he replied, “I personally don’t consider it so.” Tojudge by his answers, the impact on Gezon’s heart and mindwould seem to have been heavy indeed.
THE other side of the communication problem—the difficulty thata superior is likely to encounter in understanding what asubordinate tells him—is graphically illustrated by the testimonyof Raymond W. Smith, who was general manager of G.E.’stransformer division from the beginning of 1957 until late in1959, and of Arthur F. Vinson, who in October, 1957, wasappointed 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 twoyears, and when Vinson got his job, he became Smith’simmediate boss. Smith’s highest pay during the period inquestion was roughly $100,000 a year, while Vinson reached abasic salary of $110,000 and also got a variable bonus, rangingfrom $45,000 to $100,000. Smith testified that on January 1,1957, the very day he took charge of the transformerdivision—and a holiday, at that—he met with Chairman Cordinerand Executive Vice-President Paxton, and Cordiner gave himthe familiar admonition about living up to 20.5. However, laterthat year, the competitive going got so rough that transformerswere selling at discounts of as much as 35 percent, and Smithdecided on his own hook that the time had come to beginnegotiating with rival firms in the hope of stabilizing the market.
He felt that he was justified in doing this, he said, because hewas convinced that both in company circles and in the wholeindustry negotiations of this kind were “the order of the day.”
By the time Vinson became his superior, in October, Smithwas regularly attending price-fixing meetings, and he felt that heought to let his new boss know what he was doing.
Accordingly, he told the Subcommittee, on two or threeoccasions when the two men found themselves alone togetherin the normal course of business, he said to Vinson, “I had ameeting with the clan this morning.” Counsel for theSubcommittee asked Smith whether he had ever put the mattermore bluntly—whether, for example, he had ever said anythinglike “We’re meeting with competitors to fix prices. We’re goingto have a little conspiracy here and I don’t want it to get out.”
Smith replied that he had never said anything remotely likethat—had done nothing more than make remarks on the orderof “I had a meeting with the clan this morning.” He did notelaborate on why he did not speak with greater directness, buttwo logical possibilities present themselves. Perhaps he hopedthat he could keep Vinson informed about the situation and atthe same time protect him from the risk of becoming anaccomplice. Or perhaps he had no such intention, and wassimply expressing himself in the oblique, colloquial way thatcharacterized much of his speaking. (Paxton, a close friend ofSmith’s, had once complained to Smith that he was “given tobeing somewhat cryptic” in his remarks.) Anyhow, Vinson,according to his own testimony, had flatly misunderstood whatSmith meant; indeed, he could not recall ever hearing Smithuse the expression “meeting of the clan,” although he did recallhis saying things like “Well, I am going to take this new planon transformers and show it to the boys.” Vinson testified thathe had thought the “boys” meant the G.E. district sales peopleand the company’s customers, and that the “new plan” was anew marketing plan; he said that it had come as a rude shockto him to learn—a couple of years later, after the case hadbroken—that in speaking of the “boys” and the “new plan,”
Smith had been referring to competitors and a price-fixingscheme. “I think Mr. Smith is a sincere man,” Vinson testified.
“I am sure Mr. Smith … thought he was telling me that hewas going to one of these meetings. This meant nothing tome.”
Smith, on the other hand, was confident that his meaning hadgot through to Vinson. “I never got the impression that hemisunderstood me,” he insisted to the Subcommittee.
Questioning Vinson later, Kefauver asked whether an executivein his position, with thirty-odd years’ experience in the electricalindustry, could possibly be so naive as to misunderstand asubordinate on such a substantive matter as grasping who the“boys” were. “I don’t think it is too naive,” replied Vinson. “Wehave a lot of boys.… I may be na?ve, but I am certainly tellingthe truth, and in this kind of thing I am sure I am na?ve.”
SENATOR KEFAUVER: Mr. Vinson, you wouldn’t be a vice-president at$200,000 a year if you were na?ve.
MR. VINSON: I think I could well get there by being na?ve in this area.
It might help.
Here, in a different field altogether, the communicationproblem again comes to the fore. Was Vinson really saying toKefauver what he seemed to be saying—that na?veté aboutantitrust violations might be a help to a man in getting andholding a $200,000-a-year job at General Electric? It seemsunlikely. And yet what else could he have meant? Whatever theanswer, neither the federal antitrust men nor the Senateinvestigators were able to prove that Smith succeeded in hisattempts to communicate to Vinson the fact that he wasengaging in price-fixing. And, lacking such proof, they wereunable to establish what they gave every appearance of goingall out to establish if they could: namely, that at least some oneman at the pinnacle of G.E.’s management—some member ofthe sacred executive committee itself—was implicated. Actually,when the story of the conspiracies first became known, Vinsonnot only concurred in a company decision to punish Smith bydrastically demoting him but personally informed him of thedecision—two acts that, if he had grasped Smith’s meaning backin 1957, would have denoted a remarkable degree of cynicismand hypocrisy. (Smith, by the way, rather than accept thedemotion, quit General Electric and, after being fined threethousand dollars and given a suspended thirty-day prisonsentence by Judge Ganey, found a job elsewhere, at tenthousand dollars a year.)This was not Vinson’s only brush with the case. He was alsoamong those named in one of the grand jury indictments thatprecipitated the court action, this time in connection not withhis comprehension of Smith’s jargon but with the conspiracy inthe switchgear department. On this aspect of the case, fourswitchgear executives—Burens, Stehlik, Clarence E. Burke, andH. Frank Hentschel—testified before the grand jury (and laterbefore the Subcommittee) that at some time in July, August, orSeptember of 1958 (none of them could establish the precisedate) Vinson had had lunch with them in Dining Room B ofG.E.’s switchgear works in Philadelphia, and that during themeal he had instructed them to hold price meetings withcompetitors. As a result of this order, they said, a meetingattended by representatives of G.E., Westinghouse, theAllis-Chalmers Manufacturing Company, the Federal PacificElectric Company, and the I-T-E Circuit Breaker Company washeld at the Hotel Traymore in Atlantic City on November 9,1958, at which sales of switchgear to federal, state, andmunicipal agencies were divvied up, with General Electric to get39 percent of the business, Westinghouse 35 percent, I-T-E 11percent, Allis-Chalmers 8 percent, and Federal Pacific Electric 7percent. At subsequent meetings, agreement was reached onallocating sales of switchgear to private buyers as well, and anelaborate formula was worked out whereby the privilege ofsubmitting the lowest bid to prospective customers was rotatedamong the conspiring companies at two-week intervals. Becauseof its periodic nature, this was called the phase-of-the-moonformula—a designation that in due time led to the followinglyrical exchange between the Subcommittee and L. W. Long, anexecutive of Allis-Chalmers:
SENATOR KEFAUVER: Who were thephasers-of-the-mooners—phase-of-the-mooners?
MR. LONG: AS it developed, this so-called phase-of-the-moon operationwas carried out at a level below me, I think referred to as a workinggroup.…MR. FERRALL [counsel for the Subcommittee]: Did they ever report toyou about it?
MR. LONG: Phase of the moon? No.
Vinson told the Justice Department prosecutors, and repeatedto the Subcommittee, that he had not known about theTraymore meeting, the phase-of-the-mooners, or the existenceof the conspiracy itself until the case broke; as for the lunch inDining Room B, he insisted that it had never taken place. Onthis point, Burens, Stehlik, Burke, and Hentschel submitted tolie-detector tests, administered by the F.B.I., and passed them.
Vinson refused to take a lie-detector test, at first explaining thathe was acting on advice of counsel and against his personalinclination, and later, after hearing how the four other men hadfared, arguing that if the machine had not pronounced themliars, it couldn’t be any good. It was established that on onlyeight business days during July, August, and September hadBurens, Burke, Stehlik, and Hentschel all been together in thePhiladelphia plant at the lunch hour, and Vinson producedsome of his expense accounts, which, he pointed out to theJustice Department, showed that he had been elsewhere oneach of those days. Confronted with this evidence, the JusticeDepartment dropped its case against Vinson, and he stayed onas a vice-president of General Electric. Nothing that theSubcommittee elicited from him cast any substantive doubt onthe 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 wentfairly far down in the organization but not all the way to thetop. Gezon, everybody agreed, had followed orders from Stehlik,and Stehlik had followed orders from Burens, but that was theend of the trail, because although Burens said he had followedorders from Vinson, Vinson denied it and made the denialstick. The government, at the end of its investigation, stated incourt that it could not prove, and did not claim, that eitherChairman Cordiner or President Paxton had authorized, or evenknown about, the conspiracies, and thereby officially ruled outthe possibility that they had resorted to at least a figurativewink. Later, Paxton and Cordiner showed up in Washington totestify before the Subcommittee, and its interrogators weresimilarly unable to establish that they had ever indulged in anyvariety of winking.
AFTER being described by Ginn as General Electric’s stubbornestand most dedicated advocate of free competition, Paxtonexplained to the Subcommittee that his thinking on the subjecthad been influenced not directly by Adam Smith but, rather, byway of a former G.E. boss he had worked under—the lateGerard Swope. Swope, Paxton testified, had always believedfirmly that the ultimate goal of business was to produce moregoods for more people at lower cost. “I bought that then, Ibuy it now,” said Paxton. “I think it is the most marvelousstatement of economic philosophy that any industrialist has everexpressed.” In the course of his testimony, Paxton had anexplanation, philosophical or otherwise, of each of the severalsituations related to price-fixing in which his name had earlierbeen mentioned. For instance, it had been brought out that in1956 or 1957 a young man named Jerry Page, a minoremployee in G.E.’s switchgear division, had written directly toCordiner alleging that the switchgear divisions of G.E. and ofseveral competitor companies were involved in a conspiracy inwhich information about prices was exchanged by means of asecret code based on different colors of letter paper. Cordinerhad turned the matter over to Paxton with orders that he getto the bottom of it, and Paxton had thereupon conducted aninvestigation that led him to conclude that the color-codeconspiracy 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 inthe switchgear division during 1956 and 1957; this, however,was a rather conventional one, based simply on price-fixingmeetings, 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 whenhe “must have been pretty damn dumb.” (Dumb or not, forhis services as the company’s president he was, of course,remunerated on a considerably grander scale thanVinson—receiving a basic annual salary of $125,000, plus annualincentive compensation of about $175,000, plus stock optionsdesigned to enable him to collect much more at low tax rates.)As for Paxton’s attitude toward company communications, heemerges as a pessimist on this score. Upon being asked at thehearings to comment on the Smith-Vinson conversations of1957, he said that, knowing Smith, he just could not “cast theman in the role of a liar,” and went on:
When I was younger, I used to play a good deal of bridge. We playedabout fifty rubbers of bridge, four of us, every winter, and I think weprobably played some rather good bridge. If you gentlemen are bridgeplayers, you know that there is a code of signals that is exchangedbetween 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 readSmith’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 astylized method of communication between these people who were dealingwith 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 mansaying no, and both be telling the truth.… [They] wouldn’t be on the samewavelength. [They] wouldn’t have the same meanings. I think, I believenow that these men did think that they were telling the truth, but theyweren’t communicating between each other with understanding.
Here, certainly, is the gloomiest possible analysis of thecommunications problem.
CHAIRMAN Cordiner’s status, it appears from his testimony, wasapproximately that of the Boston Cabots in the celebrated jingle.
His services to the company, for which he was recompensed intruly 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 thousandsmore), were indubitably many and valuable, but they wereperformed on such an exalted level that, at least in antitrustmatters, he does not seem to have been able to have anyearthly communication at all. When he emphatically told theSubcommittee that at no time had he had so much as aninkling of the network of conspiracies, it could be deduced thathis was a case not of faulty communication but of nocommunication. He did not speak to the Subcommittee ofphilosophy or philosophers, as Ginn and Paxton had done, butfrom his past record of ordering reissues of 20.5 and ofpeppering his speeches and public statements with praise offree enterprise, it seems clear that he was un philosophe sansle savoir—and one on the side of selling the Lord, since noevidence was adduced to suggest that he was given to winkingin any form. Kefauver ran through a long list of antitrustviolations of which General Electric had been accused over thepast half-century, asking Cordiner, who joined the company in1922, how much he knew about each of them; usually, hereplied that he had known about them only after the fact. Incommenting on Ginn’s testimony that Erben hadcountermanded Cordiner’s direct order in 1954, Cordiner saidthat he had read it with “great alarm” and “greatwonderment,” since Erben had always indicated to him “anintense competitive spirit,” rather than any disposition to befriendly with rival companies.
Throughout his testimony, Cordiner used the curiousexpression “be responsive to.” If, for instance, Kefauverinadvertently asked the same question twice, Cordiner wouldsay, “I was responsive to that a moment ago,” or if Kefauverinterrupted him, as he often did, Cordiner would ask politely,“May I be responsive?” This, too, offers a small lead for afoundation grantee, who might want to look into the distinctionbetween being responsive (a passive state) and answering (anact), and their relative effectiveness in the process ofcommunication.
Summing up his position on the case as a whole, in reply toa question of Kefauver’s about whether he thought that G.E.
had incurred “corporate disgrace,” Cordiner said, “No, I am notgoing to be responsive and say that General Electric hadcorporate disgrace. I am going to say that we are deeplygrieved and concerned.… I am not proud of it.”
CHAIRMAN Cordiner, then, had been able to fairly deafen hissubordinate officers with lectures on compliance with the rulesof the company and the laws of the country, but he had notbeen able to get all those officers to comply with either, andPresident Paxton could muse thoughtfully on how it was thattwo of his subordinates who had given radically differentaccounts of a conversation between them could be not liars butmerely poor communicators. Philosophy seems to have reacheda high point at G.E., and communication a low one. Ifexecutives could just learn to understand one another, most ofthe witnesses said or implied, the problem of antitrust violationswould be solved. But perhaps the problem is cultural as well astechnical, and has something to do with a loss of personalidentity that comes from working in a huge organization. Thecartoonist Jules Feiffer, contemplating the communicationproblem in a nonindustrial context, has said, “Actually, thebreakdown is between the person and himself. If you’re notable 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 companywho orders his subordinates to obey the antitrust laws hassuch poor communication with himself that he does not reallyknow whether he wants the order to be complied with or not.
If his order is disobeyed, the resulting price-fixing may benefithis company’s coffers; if it is obeyed, then he has done theright thing. In the first instance, he is not personally implicatedin any wrongdoing, while in the second he is positively involvedin right doing. What, after all, can he lose? It is perhapsreasonable to suppose that such an executive mightcommunicate his uncertainty more forcefully than his order.
Possibly yet another foundation grantee should have a look atthe reverse of communication failure, where he might discoverthat messages the sender does not even realize he is sendingsometimes turn out to have got across only too effectively.
Meanwhile, in the first years after the Subcommittee concludedits investigation, the defendant companies were by no meansallowed to forget their transgressions. The law permitscustomers who can prove that they have paid artificially highprices as a result of antitrust violations to sue for damages—inmost cases, triple damages—and suits running into manymillions of dollars piled up so high that Chief Justice Warrenhad to set up a special panel of federal judges to plan howthey should all be handled. Needless to say, Cordiner was notallowed to forget about the matter, either; indeed, it would besurprising if he was allowed a chance to think about muchelse, for, in addition to the suits, he had to contend with activeefforts—unsuccessful, as it turned out—by a minority group ofstockholders to unseat him. Paxton retired as president in April,1961, because of ill health dating back at least to the previousJanuary, when he underwent a major operation. As for theexecutives who pleaded guilty and were fined or imprisoned,most of those who had been employed by companies otherthan G.E. remained with them, either in their old jobs or insimilar ones. Of those who had been employed by G.E., noneremained there. Some retired permanently from business, otherssettled for comparatively small jobs, and a few landed bigones—most spectacularly Ginn, who in June, 1961, becamepresident of Baldwin-Lima-Hamilton, manufacturers of heavymachinery. And as for the future of price-fixing in the electricalindustry, it seems safe to say that what with the JusticeDepartment, Judge Ganey, Senator Kefauver, and thetriple-damage suits, the impact on the philosophers who guidecorporate policy was such that they, and even theirsubordinates, were likely to try to hew scrupulously to the linefor quite some time. Quite a different question, however, iswhether they had made any headway in their ability tocommunicate.
Chapter 8 The Last Great Corner
BETWEEN SPRING and midsummer, 1958, the common stock ofthe E. L. Bruce Company, the nation’s leading maker ofhardwood floors, moved from a low of just under $17 a shareto a high of $190 a share. This startling, even alarming, risewas made in an ascending scale that was climaxed by a franticcrescendo in which the price went up a hundred dollars ashare in a single day. Nothing of the sort had happened for ageneration. Furthermore—and even more alarming—the rise didnot seem to have the slightest bit of relation to any suddenhunger on the part of the American public for new hardwoodfloors. 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-marketsituation called a corner. With the exception of a general panicsuch as occurred in 1929, a corner is the most drastic andspectacular of all developments that can occur in the stockmarket, and more than once in the nineteenth and earlytwentieth centuries, corners had threatened to wreck thenational economy.
The Bruce situation never threatened to do that. For onething, the Bruce Company was so small in relation to theeconomy as a whole that even the wildest gyrations in its stockcould hardly have much national effect. For another, the Bruce“corner” was accidental—the by-product of a fight for corporatecontrol—rather than the result of calculated manipulations, asmost of the historic corners had been. Finally, this oneeventually turned out to be not a true corner at all, but only anear thing; in September, Bruce stock quieted down and settledat a reasonable level. But the incident served to stir upmemories, some of them perhaps tinged with nostalgia, amongthose flinty old Wall Streeters who had been around to see theclassic corners—or at least the last of them.
In June of 1922, the New York Stock Exchange began listingthe shares of a corporation called Piggly Wiggly Stores—a chainof retail self-service markets situated mostly in the South andWest, with headquarters in Memphis—and the stage was set forone of the most dramatic financial battles of that gaudy decadewhen Wall Street, only negligently watched over by the federalgovernment, was frequently sent reeling by the machinations ofoperators seeking to enrich themselves and destroy theirenemies. Among the theatrical aspects of this particular battle—abattle so celebrated in its time that headline writers referred toit simply as the “Piggly Crisis”—was the personality of the hero(or, as some people saw it, the villain), who was a newcomerto Wall Street, a country boy setting out defiantly, amid thecheers of a good part of rural America, to lay the slickmanipulators of New York by the heels. He was ClarenceSaunders, of Memphis, a plump, neat, handsome man offorty-one who was already something of a legend in his hometown, chiefly because of a house he was putting up there forhimself. Called the Pink Palace, it was an enormous structurefaced with pink Georgia marble and built around anawe-inspiring white-marble Roman atrium, and, according toSaunders, it would stand for a thousand years. Unfinishedthough it was, the Pink Palace was like nothing Memphis hadever seen before. Its grounds were to include a private golfcourse, since Saunders liked to do his golfing in seclusion. Eventhe makeshift estate where he and his wife and four childrenwere camping out pending completion of the Palace had itsown golf course. (Some people said that his preference forprivacy was induced by the attitude of the local country clubgovernors, who complained that he had corrupted their entiresupply of caddies by the grandeur of his tips.) Saunders, whohad founded the Piggly Wiggly Stores in 1919, had most of thestandard traits of the flamboyant American promoters—suspectgenerosity, 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, forcomedy. But like so many great men before him, he had aweakness, a tragic flaw. It was that he insisted on thinking ofhimself as a hick, a boob, and a sucker, and, in doing so, hesometimes became all three.
This unlikely fellow was the man who engineered the last realcorner in a nationally traded stock.
THE game of Corner—for in its heyday it was a game, ahigh-stakes gambling game, pure and simple, embodying a goodmany of the characteristics of poker—was one phase of theendless Wall Street contest between bulls, who want the priceof a stock to go up, and bears, who want it to go down.
When a game of Corner was under way, the bulls’ basicmethod of operation was, of course, to buy stock, and thebears’ was to sell it. Since the average bear didn’t own any ofthe stock issue in contest, he would resort to the commonpractice of selling short. When a short sale is made, thetransaction is consummated with stock that the seller hasborrowed (at a suitable rate of interest) from a broker. Sincebrokers are merely agents, and not outright owners, they, inturn, must borrow the stock themselves. This they do bytapping the “floating supply” of stock that is in constantcirculation among investment houses—stock that privateinvestors have left with one house or another for tradingpurposes, stock that is owned by estates and trusts and hasbeen released for action under certain prescribed conditions,and so on. In essence, the floating supply consists of all thestock in a particular corporation that is available for trading andis not immured in a safe-deposit box or encased in a mattress.
Though the supply floats, it is scrupulously kept track of; theshort seller, borrowing, say, a thousand shares from his broker,knows that he has incurred an immutable debt. What hehopes—the hope that keeps him alive—is that the market priceof the stock will go down, enabling him to buy the thousandshares he owes at a bargain rate, pay off his debt, and pocketthe difference. What he risks is that the lender, for one reasonor another, may demand that he deliver up his thousandborrowed shares at a moment when their market price is at ahigh. Then the grinding truth of the old Wall Street jingle isborne in upon him: “He who sells what isn’t his’n must buy itback or go to prison.” And in the days when corners werepossible, the short seller’s sleep was further disturbed by thefact that he was operating behind blank walls; dealing only withagents, he never knew either the identity of the purchaser ofhis stock (a prospective cornerer?) or the identity of the ownerof the stock he had borrowed (the same prospective cornerer,attacking from the rear?).
Although it is sometimes condemned as being the tool of thespeculator, short selling is still sanctioned, in a severelyrestricted form, on all of the nation’s exchanges. In itsunfettered state, it was the standard gambit in the game ofCorner. The situation would be set up when a group of bearswould go on a well-organized spree of short selling, and wouldoften help their cause along by spreading rumors that thecompany back of the stock in question was on its last legs.
This operation was called a bear raid. The bulls’ mostformidable—but, of course, riskiest—counter-move was to try fora corner. Only a stock that many traders were selling shortcould be cornered; a stock that was in the throes of a realbear raid was ideal. In the latter situation, the would-becornerer would attempt to buy up the investment houses’
floating supply of the stock and enough of the privately heldshares to freeze out the bears; if the attempt succeeded, whenhe called for the short sellers to make good the stock they hadborrowed, they could buy it from no one but him. And theywould have to buy it at any price he chose to ask, their onlyalternatives—at least theoretically—being to go into bankruptcy orto jail for failure to meet their obligations.
In the old days of titanic financial death struggles, when AdamSmith’s ghost still smiled on Wall Street, corners were fairlycommon and were often extremely sanguinary, with hundredsof innocent bystanders, as well as the embattled principals,getting their financial heads lopped off. The most famouscornerer in history was that celebrated old pirate, CommodoreCornelius Vanderbilt, who engineered no less than threesuccessful corners during the eighteen-sixties. Probably hisclassic job was in the stock of the Harlem Railway. By dint ofsecretly buying up all its available shares while simultaneouslycirculating a series of untruthful rumors of imminent bankruptcyto lure the short sellers in, he achieved an airtight trap. Finally,with the air of a man doing them a favor by saving themfrom jail, he offered the cornered shorts at $179 a share thestock he had bought up at a small fraction of that figure. Themost generally disastrous corner was that of 1901 in the stockof Northern Pacific; to raise the huge quantities of cash theyneeded to cover themselves, the Northern Pacific shorts sold somany other stocks as to cause a national panic with world-widerepercussions. The next-to-last great corner occurred in 1920,when Allan A. Ryan, a son of the legendary Thomas FortuneRyan, in order to harass his enemies in the New York StockExchange, sought to corner the stock of the Stutz MotorCompany, makers of the renowned Stutz Bearcat. Ryanachieved his corner and the Stock Exchange short sellers wereduly squeezed. But Ryan, it turned out, had a bearcat by thetail. The Stock Exchange suspended Stutz dealings, lengthylitigation followed, and Ryan came out of the affair financiallyruined.
Then, as at other times, the game of Corner suffered from adifficulty that plagues other games—post-mortem disputes aboutthe rules. The reform legislation of the nineteen-thirties, byoutlawing any short selling that is specifically intended todemoralize a stock, as well as other manipulations leadingtoward corners, virtually ruled the game out of existence. WallStreeters who speak of the Corner these days are referring tothe intersection of Broad and Wall. In U.S. stock markets, onlyan accidental corner (or near-corner, like the Bruce one) isnow possible; Clarence Saunders was the last intentional playerof the game.
SAUNDERS has been variously characterized by people whoknew him well as “a man of limitless imagination and energy,”
“arrogant and conceited as all getout,” “essentially afour-year-old child, playing at things,” and “one of the mostremarkable men of his generation.” But there is no doubt thateven many of the people who lost money on his promotionalschemes believed that he was the soul of honesty. He wasborn in 1881 to a poor family in Amherst County, Virginia, andin his teens was employed by the local grocer at the pittancethat is orthodox for future tycoons taking on their first jobs—inhis case, four dollars a week. Moving ahead fast, he went onto a wholesale grocery company in Clarksville, Tennessee, andthen to one in Memphis, and, while still in his twenties,organized a small retail food chain called United Stores. He soldthat after a few years, did a stint as a wholesale grocer on hisown, and then, in 1919, began to build a chain of retailself-service markets, to which he gave the engaging name ofPiggly Wiggly Stores. (When a Memphis business associate onceasked him why he had chosen that name, he replied, “Sopeople would ask me what you just did.”) The stores flourishedso exuberantly that by the autumn of 1922 there were overtwelve hundred of them. Of these, some six hundred and fiftywere owned outright by Saunders’ Piggly Wiggly Stores, Inc.;the rest were independently owned, but their owners paidroyalties to the parent company for the right to adopt itspatented method of operations. In 1923, an era when agrocery store meant clerks in white aprons and often a thumbon the scale, this method was described by the New YorkTimes with astonishment: “The customer in a Piggly WigglyStore rambles down aisle after aisle, on both sides of which areshelves. The customer collects his purchases and pays as hegoes out.” Although Saunders did not know it, he had inventedthe supermarket.
A natural concomitant of the rapid rise of Piggly WigglyStores, Inc., was the acceptance of its shares for listing on theNew York Stock Exchange, and within six months of that eventPiggly Wiggly stock had become known as a dependable, ifunsensational, dividend-payer—the kind of widows’-and-orphans’
stock that speculators regard with the respectful indifferencethat crap-shooters feel about bridge. This reputation, however,was shortlived. In November, 1922, several small companies thathad been operating grocery stores in New York, New Jersey,and Connecticut under the name Piggly Wiggly failed and wentinto receivership. These companies had scarcely any connectionwith Saunders’ concern; he had merely sold them the right touse his firm’s catchy trade name, leased them some patentedequipment, and washed his hands of them. But when theseindependent Piggly Wigglys failed, a group of stock-marketoperators (whose identities never were revealed, because theydealt through tight-lipped brokers) saw in the situation aheaven-sent opportunity for a bear raid. If individual PigglyWiggly stores were failing, they reasoned, then rumors could bespread that would lead the uninformed public to believe thatthe parent firm was failing, too. To further this belief, theybegan briskly selling Piggly Wiggly short, in order to force theprice down. The stock yielded readily to their pressure, andwithin a few weeks its price, which earlier in the year hadhovered around fifty dollars a share, dropped to below forty.
At this point, Saunders announced to the press that he wasabout to “beat the Wall Street professionals at their own game”
with a buying campaign. He was by no means a professionalhimself; in fact, prior to the listing of Piggly Wiggly he hadnever owned a single share of any stock quoted on the NewYork Stock Exchange. There is little reason to believe that atthe beginning of his buying campaign he had any intention oftrying for a corner; it seems more likely that his announcedmotive—the unassailable one of supporting the price of thestock in order to protect his own investment and that of otherPiggly Wiggly stockholders—was all he had in mind. In anycase, he took on the bears with characteristic zest,supplementing his own funds with a loan of about ten milliondollars from a group of bankers in Memphis, Nashville, NewOrleans, Chattanooga, and St. Louis. Legend has it that hestuffed his ten million-plus, in bills of large denomination, into asuitcase, boarded a train for New York, and, his pocketsbulging with currency that wouldn’t fit in the suitcase, marchedon Wall Street, ready to do battle. He emphatically denied thisin later years, insisting that he had remained in Memphis andmasterminded his campaign by means of telegrams andlong-distance telephone calls to various Wall Street brokers.
Wherever he was at the time, he did round up a corps ofsome twenty brokers, among them Jesse L. Livermore, whoserved as his chief of staff. Livermore, one of the mostcelebrated American speculators of this century, was thenforty-five years old but was still occasionally, and derisively,referred to by the nickname he had earned a couple ofdecades earlier—the Boy Plunger of Wall Street. Since Saundersregarded Wall Streeters in general and speculators in particularas parasitic scoundrels intent only on battering down his stock,it seemed likely that his decision to make an ally of Livermorewas a reluctant one, arrived at simply with the idea of gettingthe 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 ofPiggly Wiggly, mostly from the short sellers; within a week hehad brought the total to 105,000—more than half of the200,000 shares outstanding. Meanwhile, ventilating his emotionsat the cost of tipping his hand, he began running a series ofadvertisements in which he vigorously and pungently told thereaders of Southern and Western newspapers what he thoughtof Wall Street. “Shall the gambler rule?” he demanded in oneof these effusions. “On a white horse he rides. Bluff is his coatof mail and thus shielded is a yellow heart. His helmet isdeceit, his spurs clink with treachery, and the hoofbeats of hishorse thunder destruction. Shall good business flee? Shall ittremble with fear? Shall it be the loot of the speculator?” OnWall Street, Livermore went on buying Piggly Wiggly.
The effectiveness of Saunders’ buying campaign was readilyapparent; by late January of 1923 it had driven the price ofthe stock up over 60, or higher than ever before. Then, tointensify the bear raiders’ jitters, reports came in from Chicago,where the stock was also traded, that Piggly Wiggly wascornered—that the short sellers could not replace the stock theyhad borrowed without coming to Saunders for supplies. Thereports were immediately denied by the New York StockExchange, which announced that the floating supply of PigglyWiggly was ample, but they may have put an idea intoSaunders’ head, and this, in turn, may have prompted acurious and—at first glance—mystifying move he made inmid-February, when, in another widely disseminated newspaperadvertisement, he offered to sell fifty thousand shares of PigglyWiggly stock to the public at fifty-five dollars a share. The adpointed out, persuasively enough, that the stock was paying adividend of a dollar four times a year—a return of more than7 percent. “This is to be a quick proposition, subject towithdrawal without prior notice,” the ad went on, calmly buturgently. “To get in on the ground floor of any big propositionis the opportunity that comes to few, and then only once in alifetime.”
Anyone who is even slightly familiar with modern economic lifecan scarcely help wondering what the Securities and ExchangeCommission, which is charged with seeing to it that all financialadvertising is kept factual, impersonal, and unemotional, wouldhave had to say about the hard sell in those last twosentences. But if Saunders’ first stock-offering ad would havecaused an S.E.C. examiner to turn pale, his second, publishedfour 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 sogenerous to the public?
After finally making it clear that he was selling common stockand not snake oil, Saunders repeated his offer to sell atfifty-five dollars a share, and went on to explain that he wasbeing so generous because, as a farsighted businessman, hewas anxious to have Piggly Wiggly owned by its customers andother small investors, rather than by Wall Street sharks. Tomany people, though, it appeared that Saunders was beinggenerous to the point of folly. The price of Piggly Wiggly onthe New York Stock Exchange was just then pushing 70; itlooked as if Saunders were handing anyone who had fifty-fivedollars in his pocket a chance to make fifteen dollars with norisk. The arrival of a new Daniel, Joseph, or Moses might bedebatable, but opportunity certainly did seem to be knocking, allright.
Actually, as the skeptical must have suspected, there was acatch. In making what sounded like such a costly andunbusinesslike offer, Saunders, a rank novice at Corner, haddevised one of the craftiest dodges ever used in the game. Oneof the great hazards in Corner was always that even though aplayer might defeat his opponents, he would discover that hehad won a Pyrrhic victory. Once the short sellers had beensqueezed dry, that is, the cornerer might find that the reams ofstock he had accumulated in the process were a dead weightaround his neck; by pushing it all back into the market in oneshove, he would drive its price down close to zero. And if, likeSaunders, he had had to borrow heavily to get into the gamein the first place, his creditors could be expected to close in onhim and perhaps not only divest him of his gains but drivehim into bankruptcy. Saunders apparently anticipated thishazard almost as soon as a corner was in sight, andaccordingly made plans to unload some of his stock beforewinning instead of afterward. His problem was to keep thestock he sold from going right back into the floating supply,thus breaking his corner; and his solution was to sell hisfifty-five-dollar shares on the installment plan. In his Februaryadvertisements, he stipulated that the public could buy sharesonly by paying twenty-five dollars down and the balance inthree ten-dollar installments, due June 1st, September 1st, andDecember 1st. In addition—and vastly more important—he saidhe would not turn over the stock certificates to the buyers untilthe final installment had been paid. Since the buyers obviouslycouldn’t sell the certificates until they had them, the stock couldnot be used to replenish the floating supply. Thus Saundershad until December 1st to squeeze the short sellers dry.
Easy as it may be to see through Saunders’ plan byhindsight, his maneuver was then so unorthodox that for awhile neither the governors of the Stock Exchange norLivermore himself could be quite sure what the man inMemphis was up to. The Stock Exchange began making formalinquiries, and Livermore began getting skittish, but he went onbuying for Saunders’ account, and succeeded in pushing PigglyWiggly’s price up well above 70. In Memphis, Saunders satback comfortably; he temporarily ceased singing the praises ofPiggly Wiggly stock in his ads, and devoted them to eulogizingapples, grapefruit, onions, hams, and Lady Baltimore cakes.
Early in March, though, he ran another financial ad, repeatinghis stock offer and inviting any readers who wanted to discussit with him to drop in at his Memphis office. He alsoemphasized that quick action was necessary; time was runningout.
By now, it was apparent that Saunders was trying for acorner, and on Wall Street it was not only the Piggly Wigglybears who were becoming apprehensive. Finally, Livermore,possibly reflecting that in 1908 he had lost almost a milliondollars trying to get a corner in cotton, could stand it nolonger. He demanded that Saunders come to New York andtalk things over. Saunders arrived on the morning of March12th. As he later described the meeting to reporters, there wasa difference of opinion; Livermore, he said—and his tone wasthat of a man rather set up over having made a piker out ofthe Boy Plunger—“gave me the impression that he was a littleafraid of my financial situation and that he did not care to beinvolved in any market crash.” The upshot of the conferencewas that Livermore bowed out of the Piggly Wiggly operation,leaving Saunders to run it by himself. Saunders then boarded atrain for Chicago to attend to some business there. At Albany,he was handed a telegram from a member of the StockExchange who was the nearest thing he had to a friend in thewhite-charger-and-coat-of-mail set. The telegram informed himthat his antics had provoked a great deal of head-shaking inthe councils of the Exchange, and urged him to stop creating asecond market by advertising stock for sale at a price so farbelow the quotation on the Exchange. At the next station,Saunders telegraphed back a rather unresponsive reply. If itwas a possible corner the Exchange was fretting about, he said,he could assure the governors that they could put their fearsaside, since he himself was maintaining the floating supply bydaily offering stock for loan in any amount desired. But hedidn’t say how long he would continue to do so.
A week later, on Monday, March 19th, Saunders ran anewspaper ad stating that his stock offer was about to bewithdrawn; this was the last call. At the time, or so he claimedafterward, he had acquired all but 1,128 of Piggly Wiggly’s200,000 outstanding shares, for a total of 198,872, some ofwhich he owned and the rest of which he “controlled”—areference to the installment-plan shares whose certificates hestill held. Actually, this figure was open to considerableargument (there was one private investor in Providence, forinstance, who alone held eleven hundred shares), but there isno denying that Saunders had in his hands practically everysingle share of Piggly Wiggly then available for trading—and thathe therefore had his corner. On that same Monday, it isbelieved, Saunders telephoned Livermore and asked if he wouldrelent long enough to see the Piggly Wiggly project through bycalling 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, evidentlyconsidering himself well out of the whole affair. So the followingmorning, Tuesday, March 20th, Saunders sprang the traphimself.
IT turned out to be one of Wall Street’s wilder days. PigglyWiggly opened at 75?, up 5? from the previous days’ closingprice. An hour after the opening, word arrived that Saundershad called for delivery of all his Piggly Wiggly stock. Accordingto the rules of the Exchange, stock called for under suchcircumstances had to be produced by two-fifteen the followingafternoon. But Piggly Wiggly, as Saunders well knew, simplywasn’t to be had—except, of course, from him. To be sure,there were a few shares around that were still held by privateinvestors, and frantic short sellers trying to shake them loosebid their price up and up. But by and large there wasn’t muchactual trading in Piggly Wiggly, because there was so little PigglyWiggly to be traded. The Stock Exchange post where it wasbought and sold became the center of a mob scene astwo-thirds of the brokers on the floor clustered around it, afew of them to bid but most of them just to push, whoop, andotherwise get in on the excitement. Desperate short sellersbought Piggly Wiggly at 90, then at 100, then at 110. Reportsof sensational profits made the rounds. The Providence investor,who had picked up his eleven hundred shares at 39 in theprevious autumn, while the bear raid was in full cry, came totown to be in on the kill, unloaded his holdings at an averageprice of 105, and then caught an afternoon train back home,taking with him a profit of over seventy thousand dollars. As ithappened, he could have done even better if he had bided histime; by noon, or a little after, the price of Piggly Wiggly hadrisen to 124, and it seemed destined to zoom straight throughthe lofty roof above the traders’ heads. But 124 was as high asit went, for that figure had barely been recorded when arumor reached the floor that the governors of the Exchangewere meeting to consider the suspension of further trading inthe stock and the postponement of the short sellers’ deadlinefor delivery. The effect of such action would be to give thebears time to beat the bushes for stock, and thus to weaken, ifnot break, Saunders’ corner. On the basis of the rumor alone,Piggly Wiggly fell to 82 by the time the Exchange’s closing bellended the chaotic session.
The rumor proved to be true. After the close of business, theGoverning Committee of the Exchange announced both thesuspension of trading in Piggly Wiggly and the extension of theshort sellers’ delivery deadline “until further action by thiscommittee.” There was no immediate official reason given forthis decision, but some members of the committee unofficiallylet it be known that they had been afraid of a repetition of theNorthern Pacific panic if the corner were not broken. On theother hand, irreverent side-liners were inclined to wonderwhether the Governing Committee had not been moved by thepitiful plight of the cornered short sellers, many of whom—as inthe Stutz Motor case two years earlier—were believed to bemembers of the Exchange.
Despite all this, Saunders, in Memphis, was in a jubilant,expansive mood that Tuesday evening. After all, his paperprofits at that moment ran to several million dollars. The hitch,of course, was that he could not realize them, but he seems tohave been slow to grasp that fact or to understand the extentto which his position had been undermined. The indications arethat he went to bed convinced that, besides having personallybrought about a first-class mess on the hated Stock Exchange,he had made himself a bundle and had demonstrated how apoor Southern boy could teach the city slickers a lesson. It allmust have added up to a heady sensation. But, like most suchsensations, it didn’t last long. By Wednesday evening, whenSaunders 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 triumphof the night before. “A razor to my throat, figuratively speaking,is why I suddenly and without warning kicked the pegs fromunder Wall Street and its gang of gamblers and marketmanipulators,” he declared in a press interview. “It was strictlya question of whether I should survive, and likewise mybusiness and the fortunes of my friends, or whether I shouldbe ‘licked’ and pointed to as a boob from Tennessee. And theconsequence was that the boastful and supposedly invulnerableWall Street powers found their methods controverted bywell-laid plans and quick action.” Saunders wound up hisstatement by laying down his terms: the Stock Exchange’sdeadline extension notwithstanding, he would expect settlementin 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 sellerscame forward to settle; presumably those who did couldn’tstand the uncertainty. But then the Governing Committee kickedthe pegs from under Saunders by announcing that the stock ofPiggly Wiggly was permanently stricken from its trading list andthat the short sellers would be given a full five days from theoriginal deadline—that is, until two-fifteen the followingMonday—to meet their obligations. In Memphis, Saunders, farremoved from the scene though he was, could not miss theimport of these moves—he was now on the losing end ofthings. Nor could he any longer fail to see that thepostponement of the short sellers’ deadline was the vital issue.
“As I understand it,” he said in another statement, handed toreporters that evening, “the failure of a broker to meet hisclearings through the Stock Exchange at the appointed time isthe same as a bank that would be unable to meet its clearings,and all of us know what would happen to that kind of abank.… The bank examiner would have a sign stuck up on thedoor with the word ‘Closed.’ It is unbelievable to me that theaugust and all-powerful New York Stock Exchange is a welcher.
Therefore I continue to believe that the … shares of stock stilldue me on contracts … will be settled on the proper basis.”
An editorial in the Memphis Commercial Appeal backed upSaunders’ cry of treachery, declaring, “This looks like whatgamblers call welching. We hope the home boy beats them toa frazzle.”
That same Thursday, by a coincidence, the annual financialreport of Piggly Wiggly Stores, Inc., was made public. It was ahighly favorable one—sales, profits, current assets, and all othersignificant figures were up sharply over the year before—butnobody paid any attention to it. For the moment, the realworth of the company was irrelevant; the point was the game.
ON Friday morning, the Piggly Wiggly bubble burst. It burstbecause Saunders, who had said his price would rise to $250a share after 3 P.M. Thursday, made the startlingannouncement that he would settle for a hundred. E. W.
Bradford, Saunders’ New York lawyer, was asked whySaunders had suddenly granted this striking concession.
Saunders had done it out of the generosity of his heart,Bradford replied gamely, but the truth was soon obvious:
Saunders had made the concession because he’d had to. Thepostponement granted by the Stock Exchange had given theshort sellers and their brokers a chance to scan lists of PigglyWiggly stockholders, and from these they had been able tosmoke out small blocks of shares that Saunders had notcornered. Widows and orphans in Albuquerque and Sioux City,who knew nothing about short sellers and corners, were onlytoo happy, when pressed, to dig into their mattresses orsafe-deposit boxes and sell—in the so-called over-the-countermarket, since the stock could no longer be traded on theExchange—their ten or twenty shares of Piggly Wiggly for atleast double what they had paid for them. Consequently, insteadof having to buy stock from Saunders at his price of $250and then hand it back to him in settlement of their loans,many of the short sellers were able to buy it inover-the-counter trading at around a hundred dollars, and thus,with bitter pleasure, pay off their Memphis adversary not incash but in shares of Piggly Wiggly—the very last thing hewanted just then. By nightfall Friday, virtually all the shortsellers were in the clear, having redeemed their indebtednesseither by these over-the-counter purchases or by payingSaunders cash at his own suddenly deflated rate of a hundreddollars a share.
That evening, Saunders released still another statement, andthis 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 StockExchange is the worst menace of all in its power to ruin allwho dare to oppose it. A law unto itself … an association ofmen who claim the right that no king or autocrat ever daredto take: to make a rule that applies one day on contracts andabrogate it the next day to let out a bunch of welchers.… Mywhole life from this day on will be aimed toward the end ofhaving the public protected from a like occurrence.… I am notafraid. Let Wall Street get me if they can.” But it appeared thatWall Street had got him; his corner was broken, leaving himdeeply in debt to the syndicate of Southern bankers andencumbered with a mountain of stock whose immediate futurewas, to say the least, precarious.
SAUNDEES’ fulminations did not go unheeded on Wall Street,and as a result the Exchange felt compelled to justify itself. OnMonday, March 26th, shortly after the Piggly Wiggly shortsellers’ deadline had passed and Saunders’ corner was, for allpractical purposes, a dead issue, the Exchange offered itsapologia, in the form of a lengthy review of the crisis frombeginning to end. In presenting its case, the Exchangeemphasized the public harm that might have been done if thecorner had gone unbroken, explaining, “The enforcementsimultaneously of all contracts for the return of the stock wouldhave forced the stock to any price that might be fixed by Mr.
Saunders, and competitive bidding for the insufficient supplymight have brought about conditions illustrated by othercorners, notably the Northern Pacific corner in 1901.” Then, itssyntax yielding to its sincerity, the Exchange went on to saythat “the demoralizing effects of such a situation are not limitedto those directly affected by the contracts but extends to thewhole market.” Getting down to the two specific actions it hadtaken—the suspension of trading in Piggly Wiggly and theextension of the short sellers’ deadline—the Exchange arguedthat both of them were within the bounds of its ownconstitution and rules, and therefore irreproachable. Arrogant asthis may sound now, the Exchange had a point; in those daysits rules were just about the only controls over stock trading.
The question of whether, even by their own rules, the slickersreally played fair with the boob is still debated among fiscalantiquarians. There is strong presumptive evidence that theslickers themselves later came to have their doubts. Regardingthe right of the Exchange to suspend trading in a stock therecan be no argument, since the right was, as the Exchangeclaimed at the time, specifically granted in its constitution. Butthe right to postpone the deadline for short sellers to honortheir contracts, though also claimed at the time, is anothermatter. In June, 1925, two years after Saunders’ corner, theExchange felt constrained to amend its constitution with anarticle stating that “whenever in the opinion of the GoverningCommittee a corner has been created in a security listed onthe Exchange … the Governing Committee may postpone thetime for deliveries on Exchange contracts therein.” By adoptinga statute authorizing it to do what it had done long before, theExchange would seem, at the very least, to have exposed aguilty conscience.
THE immediate aftermath of the Piggly Crisis was a wave ofsympathy for Saunders. Throughout the hinterland, the publicimage of him became that of a gallant champion of theunderdog who had been ruthlessly crushed. Even in New York,the very lair of the Stock Exchange, the Times conceded in aneditorial that in the minds of many people Saundersrepresented 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 66? per cent ‘sucker,’ whichhad its moment of triumph when it read that a sucker hadtrimmed the interests and had his foot on Wall Street’s neckwhile 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 heneeded them, for his position was perilous indeed. His biggestproblem was what to do about the ten million dollars that heowed his banker backers—and didn’t have. The basic planbehind his corner—if he had had any plan at all—must havebeen to make such a killing that he could pay back a big sliceof his debt out of the profits, pay back the rest out of theproceeds from his public stock sale, and then walk off with astill huge block of Piggly Wiggly stock free and clear. Eventhough the cut-rate hundred-dollar settlement had netted him akilling by most men’s standards (just how much of a killing isnot known, but it has been reliably estimated at half a millionor so), it was not a fraction of what he might have reasonablyexpected it to be, and because it wasn’t his whole structurebecame an arch without a keystone.
Having paid his bankers what he had received from the shortsellers and from his public stock sale, Saunders found that hestill owed them about five million dollars, half of it dueSeptember 1, 1923, and the balance on January 1, 1924. Hisbest hope of raising the money lay in selling more of the vastbundle of Piggly Wiggly shares he still had on hand. Since hecould no longer sell them on the Exchange, he resorted to hisfavorite form of self-expression—newspaper advertising, this timesupplemented with a mail-order pitch offering Piggly Wigglyagain at fifty-five dollars. It soon became evident, though, thatpublic sympathy was one thing and public willingness totranslate sympathy into cash was quite another. Everyone,whether in New York, Memphis, or Texarkana, knew about therecent speculative shenanigans in Piggly Wiggly and about thedubious state of the president’s finances. Not even Saunders’
fellow suckers would have any part of his deal now, and thecampaign was a bleak failure.
Sadly accepting this fact, Saunders next appealed to the localand regional pride of his Memphis neighbors by turning hisremarkable powers of persuasion to the job of convincing themthat his financial dilemma was a civic issue. If he should gobroke, he argued, it would reflect not only on the characterand business acumen of Memphis but on Southern honor ingeneral. “I do not ask for charity,” he wrote in one of thelarge ads he always seemed able to find the cash for, “and Ido not request any flowers for my financial funeral, but I doask … everybody in Memphis to recognize and know that thisis a serious statement made for the purpose of acquaintingthose who wish to assist in this matter, that they may workwith me, and with other friends and believers in my business,in a Memphis campaign to have every man and woman whopossibly can in this city become one of the partners of thePiggly Wiggly business, because it is a good investment first,and, second, because it is the right thing to do.” Raising hissights in a second ad, he declared, “For Piggly Wiggly to beruined would shame the whole South.”
Just which argument proved the clincher in persuadingMemphis that it should try to pull Saunders’ chestnuts out ofthe fire is hard to say, but some part of his line of reasoningclicked, and soon the Memphis Commercial Appeal was urgingthe town to get behind the embattled local boy. The responseof the city’s business leaders was truly inspiring to Saunders. Awhirlwind three-day campaign was planned, with the object ofselling fifty thousand shares of his stock to the citizens ofMemphis at the old magic figure of fifty-five dollars a share; inorder to give buyers some degree of assurance that they wouldnot later find themselves alone out on a limb, it was stipulatedthat unless the whole block was sold within the three days, allsales would be called off. The Chamber of Commercesponsored the drive; the American Legion, the Civitan Club,and the Exchange Club fell into line; and even the BowersStores and the Arrow Stores, both competitors of Piggly Wigglyin Memphis, agreed to plug the worthy cause. Hundreds ofcivic-minded volunteers signed up to ring doorbells. On May3rd, five days before the scheduled start of the campaign, 250Memphis businessmen assembled at the Gayoso Hotel for akickoff dinner. There were cheers when Saunders, accompaniedby his wife, entered the dining room; one of the manyafter-dinner speakers described him as “the man who has donemore for Memphis than any in the last thousand years”—arousing tribute that put God knew how many Chickasaw chiefsin their place. “Business rivalries and personal differences wereswept away like mists before the sun,” a Commercial Appealreporter wrote of the dinner.
The drive got off to a splendid start. On the openingday—May 8th—society women and Boy Scouts paraded thestreets of Memphis wearing badges that read, “We’re OneHundred Per Cent for Clarence Saunders and Piggly Wiggly.”
Merchants adorned their windows with placards bearing theslogan “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 atthe very moment when most of Memphis had becomemiraculously convinced that the peddling of Piggly Wiggly stockwas an activity fully as uplifting as soliciting for the Red Crossor the Community Chest, ugly doubts were brewing, and somevipers in the home nest suddenly demanded that Saundersconsent to an immediate spot audit of his company’s books.
Saunders, for whatever reasons, refused, but offered to placatethe skeptics by stepping down as president of Piggly Wiggly ifsuch a move “would facilitate the stock-selling campaign.” Hewas not asked to give up the presidency, but on May 9th, thesecond day of the campaign, a watchdog committee offour—three bankers and a businessman—was appointed by thePiggly Wiggly directors to help him run the company for aninterim period, while the dust settled. That same day, Saunderswas confronted with another embarrassing situation: why, thecampaign leaders wanted to know, was he continuing to buildhis million-dollar Pink Palace at a time when the whole townwas working for him for nothing? He replied hastily that hewould have the place boarded up the very next day and thatthere would be no further construction until his financial futurelooked bright again.
The confusion attendant on these two issues brought the driveto a standstill. At the end of the third day, the total number ofshares subscribed for was still under 25,000, and the sales thathad been made were canceled. Saunders had to admit that thedrive had been a failure. “Memphis has fizzled,” he reportedlyadded—although he was at great pains to deny this a fewyears later, when he needed more of Memphis’ money for anew venture. It would not be surprising, though, if he hadmade some such imprudent remark, for he was understandablysuffering from a case of frazzled nerves, and was showing thestrain. Just before the announcement of the campaign’sunhappy end, he went into a closed conference with severalMemphis business leaders and came out of it with a bruisedcheekbone and a torn collar. None of the other men at themeeting showed any marks of violence. It just wasn’t Saunders’
day.
Although it was never established that Saunders had had hishand improperly in the Piggly Wiggly corporate till during hiscornering operation, his first business move after the collapse ofhis attempt to unload stock suggested that he had at least hadgood reason to refuse a spot audit of the company’s books. Inspite of futile grunts of protest from the watchdog committee,he began selling not Piggly Wiggly stock but Piggly Wigglystores—partly liquidating the company, that is—and no oneknew where he would stop. The Chicago stores went first, andthose in Denver and Kansas City soon followed. His announcedintention was to build up the company’s treasury so that itcould buy the stock that the public had spurned, but there wassome suspicion that the treasury desperately needed atransfusion just then—and not of Piggly Wiggly stock, either.
“I’ve got Wall Street and the whole gang licked,” Saundersreported cheerfully in June. But in mid-August, with theSeptember 1st deadline for repayment of two and a half milliondollars on his loan staring him in the face and with nothinglike that amount of cash either on hand or in prospect, heresigned as president of Piggly Wiggly Stores, Inc., and turnedover his assets—his stock in the company, his Pink Palace, andall the rest of his property—to his creditors.
It remained only for the formal stamp of failure to be put onSaunders personally and on Piggly Wiggly under hismanagement. On August 22nd, the New York auction firm ofAdrian H. Muller & Son, which dealt in so manynext-to-worthless stocks that its salesroom was often called “thesecurities graveyard,” knocked down fifteen hundred shares ofPiggly Wiggly at a dollar a share—the traditional price forsecurities that have been run into the ground—and thefollowing spring Saunders went through formal bankruptcyproceedings. But these were anticlimaxes. The real low point ofSaunders’ career was probably the day he was forced out ofhis company’s presidency, and it was then that, in the opinionof many of his admirers, he achieved his rhetorical peak. Whenhe emerged, harassed but still defiant, from a directors’
conference and announced his resignation to reporters, a hushfell. Then Saunders added hoarsely, “They have the body ofPiggly Wiggly, but they cannot have the soul.”
IF by the soul of Piggly Wiggly Saunders meant himself, then itdid remain free—free to go marching on in its own erratic way.
He never ventured to play another game of Corner, but hisspirit was far from broken. Although officially bankrupt, hemanaged to find people of truly rocklike faith who were stillwilling to finance him, and they enabled him to live on a scaleonly slightly less grand than in the past; reduced to playing golfat the Memphis Country Club rather than on his own privatecourse, he handed out caddy tips that the club governorsconsidered as corrupting as ever. To be sure, he no longerowned the Pink Palace, but this was about the only evidencethat served to remind his fellow townsmen of his misfortunes.
Eventually, the unfinished pleasure dome came into the handsof the city of Memphis, which appropriated $150,000 to finishit and turn it into a museum of natural history and industrialarts. As such, it continues to sustain the Saunders legend inMemphis.
After his downfall, Saunders spent the better part of threeyears in seeking redress of the wrongs that he felt he hadsuffered in the Piggly Wiggly fight, and in foiling the efforts ofhis enemies and creditors to make things still more unpleasantfor him. For a while, he kept threatening to sue the StockExchange for conspiracy and breach of contract, but a test suit,brought by some small Piggly Wiggly stockholders, failed, andhe dropped the idea. Then, in January, 1926, he learned that afederal indictment was about to be brought against him forusing the mails to defraud in his mail-order campaign to sellhis Piggly Wiggly stock. He believed, incorrectly, that thegovernment had been egged on to bring the indictment by anold associate of his—John C. Burch, of Memphis, who hadbecome secretary-treasurer of Piggly Wiggly after the shakeup.
His patience once more exhausted, Saunders went around toPiggly Wiggly headquarters and confronted Burch. Thisconference proved far more satisfactory to Saunders than hisboard-room scuffle on the day the Memphis civic stock-sellingdrive failed. Burch, according to Saunders, “undertook in astammering way to deny” the accusation, whereupon Saundersdelivered a right to the jaw, knocking off Burch’s glasses butnot doing much other damage. Burch afterward belittled theblow as “glancing,” and added an alibi that sounded like that ofany outpointed pugilist: “The assault upon me was made sosuddenly 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 broughtagainst Saunders, but by that time, satisfied that Burch wasinnocent of any dirty work, he was his amiable old self again.
“I have only one thing to regret in this new affair,” heannounced pleasantly, “and that is my fistic encounter withJohn C. Burch.” The new affair didn’t last long; in April theindictment was quashed by the Memphis District Court, andSaunders and Piggly Wiggly were finally quits. By then, thecompany was well on its way back up, and, with a greatlychanged corporate structure, it flourished on into the nineteensixties; housewives continued to ramble down the aisles ofhundreds of Piggly Wiggly stores, now operated under afranchise agreement with the Piggly Wiggly Corporation, ofJacksonville, Florida.
Saunders, too, was well on his way back up. In 1928, hestarted a new grocery chain, which he—but hardly anyoneelse—called the Clarence Saunders, Sole Owner of My Name,Stores, Inc. Its outlets soon came to be known as Sole Ownerstores, which was precisely what they weren’t, for withoutSaunders’ faithful backers they would have existed only in hismind. Saunders’ choice of a corporate title, however, was notdesigned to mislead the public; rather, it was his ironic way ofreminding the world that, after the skinning Wall Street hadgiven him, his name was about the only thing he still had aclear title to. How many Sole Owner customers—or governorsof the Stock Exchange, for that matter—got the point isquestionable. In any case, the new stores caught on so rapidlyand did so well that Saunders leaped back up from bankruptcyto riches, and bought a million-dollar estate just outsideMemphis. He also organized and underwrote a professionalfootball team called the Sole Owner Tigers—an investment thatpaid off handsomely on the fall afternoons when he could hearcries of “Rah! Rah! Rah! Sole Owner! Sole Owner! SoleOwner!” ringing through the Memphis Stadium.
FOR the second time, Saunders’ glory was fleeting. The veryfirst wave of the depression hit Sole Owner Stores such acrushing blow that in 1930 they went bankrupt, and he wasbroke again. But again he pulled himself together and survivedthe debacle. Finding backers, he planned a new chain ofgrocery stores, and thought up a name for it that was moreoutlandish, if possible, than either of its predecessors—Keedoozle.
He never made another killing, however, or bought anothermillion-dollar estate, though it was always clear that he expectedto. His hopes were pinned on the Keedoozle, an electricallyoperated grocery store, and he spent the better part of the lasttwenty years of his life trying to perfect it. In a Keedoozlestore, the merchandise was displayed behind glass panels, eachwith a slot beside it, like the food in an Automat. There thesimilarity ended, for, instead of inserting coins in the slot toopen a panel and lift out a purchase, Keedoozle customersinserted a key that they were given on entering the store.
Moreover, Saunders’ thinking had advanced far beyond theelementary stage of having the key open the panel; each timea Keedoozle key was inserted in a slot, the identity of the itemselected was inscribed in code on a segment of recording tapeembedded in the key itself, and simultaneously the item wasautomatically transferred to a conveyor belt that carried it to anexit gate at the front of the store. When a customer hadfinished his shopping, he would present his key to an attendantat the gate, who would decipher the tape and add up the bill.
As soon as this was paid, the purchases would be catapultedinto the customer’s arms, all bagged and wrapped, by a deviceat the end of the conveyor belt.
A couple of pilot Keedoozle stores were tried out—one inMemphis and the other in Chicago—but it was found that themachinery was too complex and expensive to compete withsupermarket pushcarts. Undeterred, Saunders set to work onan even more intricate mechanism—the Foodelectric, whichwould do everything the Keedoozle could do and add up thebill as well. It will never corner the retail-store-equipmentmarket, though, because it was still unfinished when Saundersdied, in October, 1953, five years too soon for him to see theBruce “corner”, which, in any case, he would have been fullyentitled to scoff at as a mere squabble among ribbon clerks.
Chapter 9 A Second Sort of Life
DURING Franklin D. Roosevelt’s Presidency, when Wall Streetand Washington tended to be on cat-and-dog terms, perhapsno New Dealer other than That Man himself better typified theNew Deal in the eyes of Wall Street than David Eli Lilienthal.
The explanation of this estimate of him in southern Manhattanlay not in any specific anti-Wall Street acts ofLilienthal’s—indeed, the scattering of financiers, among themWendell L. Willkie, who had personal dealings with himgenerally found him to be a reasonable sort of fellow—but inwhat he had come to symbolize through his association withthe Tennessee Valley Authority, which, as a government-ownedelectric-power concern far larger than any private powercorporation in the country, embodied Wall Street’s notion ofgalloping Socialism. Because Lilienthal was a conspicuous andvigorous member of the T.V.A.’s three-man board of directorsfrom 1933 until 1941, and was its chairman from 1941 until1946, the business community of that period, in his phrase,thought he “wore horns.” In 1946, he became the firstchairman of the United States Atomic Energy Commission, andwhen he gave up that position, in February, 1950, at the ageof fifty, the Times said in a news story that he had been“perhaps the most controversial figure in Washington since theend of the war.”
What has Lilienthal been up to in the years since he left thegovernment? As a matter of public record, he has been up toa number of things, all of them, surprisingly, centered on WallStreet or on private business, or both. For one thing, Lilienthalis listed in any number of business compendiums as theco-founder 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, anddiscovered it to be a private firm—Wall Street-backed as well as,give or take a block, Wall Street-based—that providesmanagerial, technical, business, and planning services toward thedevelopment of natural resources abroad. That is to say, D. &R.—whose other co-founder, the late Gordon R. Clapp, wasLilienthal’s successor as T.V.A. chairman—is in the business ofhelping governments set up programs more or less similar tothe T.V.A. Since its formation, in 1955, I learned, D. & R. had,at moderate but gratifying profit to itself, planned and managedthe beginnings of a vast scheme for the reclamation ofKhuzistan, an arid and poverty-stricken, though oil-rich, regionof western Iran; advised the government of Italy on thedevelopment of its backward southern provinces; helped theRepublic of Colombia set up a T.V.A.-like authority for itspotentially fertile but flood-plagued Cauca Valley; and offeredadvice to Ghana on water supply, to the Ivory Coast onmineral development, and to Puerto Rico on electric power andatomic energy.
For another thing—and when I found out about this, it struckme as considerably more astonishing, on form, than D. &R.—Lilienthal has made an authentic fortune as a corporateofficer and entrepreneur. In a proxy statement of the Minerals& Chemicals Corporation of America, dated June 24, 1960, thatfell into my hands, I found Lilienthal listed as a director of thefirm and the holder of 41,366 shares of its common stock.
These shares at the time of my investigation were being tradedon the New York Stock Exchange at something overtwenty-five dollars each, and simple multiplication revealed thatthey represented a thumping sum by most men’s standards,certainly including those of a man who had spent most of hislife on government wages, without the help of private resources.
And, for still another thing, in 1953 Harper & Brothersbrought 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 onlythe productive and distributive superiority of the United Statesbut also its national security depends on industrial bigness; thatwe now have adequate public safeguards against abuses of bigbusiness, or know well enough how to fashion them asrequired; that big business does not tend to destroy smallbusiness, as is often supposed, but, rather, tends to promote it;and, finally, that a big-business society does not suppressindividualism, as most intellectuals believe, but actually tends toencourage it by reducing poverty, disease, and physicalinsecurity 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 anewspaper reader, had followed fairly closely. My interest inhim as a government official had reached its peak in February,1947, when, in answer to a fierce attack on him by his oldenemy Senator Kenneth D. McKellar, of Tennessee, duringCongressional hearings on his fitness for the A.E.C. job, heuttered a spontaneous statement of personal democratic faiththat for many people still ranks as one of the most stirringattacks on what later came to be known as McCarthyism.
(“One of the tenets of democracy that grow out of this centralcore of a belief that the individual comes first, that all men arethe children of God and their personalities are thereforesacred,” Lilienthal said, among other things, “is a deep belief incivil liberties and their protection; and a repugnance to anyonewho would steal from a human being that which is mostprecious to him, his good name, by imputing things to him, byinnuendo, or by insinuation.”) The fragments of information Ipicked up about his new, private career left me confused.
Wondering how Wall Street and business life had affectedLilienthal, and vice versa, in their belated rapprochement, I gotin touch with him, and a day or so later, at his invitation,drove out to New Jersey to spend the afternoon with him.
LILIENTHAL and his wife, Helen Lamb Lilienthal, lived on BattleRoad, in Princeton, where they had settled in 1957, after sixyears in New York City, at first in a house on Beekman Placeand later in an apartment on Sutton Place. The Princetonhouse, which stands in a plot of less than an acre, is ofGeorgian brick with green shutters. Surrounded by otherhouses of its kind, the place is capacious yet anything butpretentious. Lilienthal, wearing gray slacks and a plaid sportsshirt, met me at the front door. At just past sixty, he was atall, trim man with a receding hairline, a slightly hawklikeprofile, and candid, piercing eyes. He led me into the livingroom, where he introduced Mrs. Lilienthal and then pointed outa couple of household treasures—a large Oriental rug in frontof the fireplace, which he said was a gift from the Shah ofIran, and, hanging on the wall opposite the fireplace, a Chinesescroll of the late nineteenth century showing four rather roguishmen, who, he told me, have a special meaning for him, sincethey are upper-middle-rank civil servants. Pointing to aparticularly enigmatic-looking fellow, he added, with a smile, thathe always thought of that one as his Oriental counterpart.
Mrs. Lilienthal went to get coffee, and while she was gone, Iasked Lilienthal to tell me something of his post-governmentlife, starting at the beginning. “All right,” he said. “Thebeginning: I left the A.E.C. for a number of reasons. In thatkind of work, I feel, a fellow is highly expendable. If you stayedtoo long, you might find yourself placating industry or themilitary, or both—building up what would amount to an atomicpork barrel. Another thing—I wanted to be allowed to speakmy mind more freely than I could as a government official. Ifelt I’d served my term. So I turned in my resignation inNovember, 1949, and it went into effect three months later. Asfor the timing, I resigned then because, for once, I wasn’tunder fire. Originally, I’d planned to do it earlier in 1949, butthen came the last Congressional attack on me—the timeHickenlooper, of Iowa, accused me of ‘incrediblemismanagement.’” I noticed that Lilienthal did not smile inreferring to the Hickenlooper affair. “I entered private life withboth trepidation and relief,” he went on. “The trepidation wasabout my ability to make a living, and it was very real. Oh, I’dbeen a practicing lawyer as a young man, in Chicago, beforegoing into government work, and made quite a lot of money atit, too. But now I didn’t want to practice law. And I wasworried about what else I could do. I was so obsessed withthe subject that I harped on it all the time, and my wife andmy friends began to kid me. That Christmas of 1949, my wifegave me a beggar’s tin cup, and one of my friends gave me aguitar to go with it. The feeling of relief—well, that was amatter of personal privacy and freedom. As a private citizen, Iwouldn’t have to be trailed around by hordes of securityofficers as I had been at the A.E.C. I wouldn’t have to answerthe charges of Congressional committees. And, above all, I’d beable to talk freely to my wife again.”
Mrs. Lilienthal had returned with the coffee as her husbandwas talking, and now she sat down with us. She comes, Iknew, from a family of pioneers who, over several generations,moved westward from New England to Ohio to Indiana toOklahoma, where she was born. She seemed to me to look thepart—that of a woman of dignity, patience, practicality, andgentle strength. “I can tell you that my husband’s resignationwas 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 tookthat job, we agreed between us that although we’d indulge inthe discussion of personalities as freely as we pleased, he wouldnever tell me anything about the work of the A.E.C. that Icouldn’t read in the newspapers. It was a terrible constraint tobe under.”
Lilienthal nodded. “I’d come home at night with some frightfulexperience in me,” he said. “No one who so much as touchesthe atom is ever quite the same again. Perhaps I’d have beenin a series of conferences and listened to the kind of talk thatmany military and scientific men go in for—cities full of humanbeings referred to as ‘targets,’ and that sort of thing. I nevergot used to that impersonal jargon. I’d come home sick atheart. But I couldn’t talk about it to Helen. I wasn’t allowed toget it off my chest.”
“And now there wouldn’t be any more hearings,” Mrs.
Lilienthal said. “Those terrible hearings! I’ll never forget oneWashington cocktail party we went to, for our sins. Myhusband had been going through one of the endless series ofCongressional hearings. A woman in a funny hat came gushingup to him and said something like ‘Oh, Mr. Lilienthal, I was soanxious 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 timeLilienthal managed a grin.
LILIENTHAL seemed glad to get on to what happened next. Atabout the time his resignation became effective, he told me, hewas approached by various men from Harvard representing thefields of history, public administration, and law, who asked himto accept an appointment to the faculty. But he decided hedidn’t want to become a professor any more than he wantedto practice law. Within the next few weeks came offers fromnumerous law firms in New York and Washington, and fromsome industrial companies. Reassured by these that he was notgoing to need the tin cup and guitar after all, Lilienthal, aftermulling over the offers, finally turned them all down andsettled, in May, 1950, for a part-time job as a consultant to thecelebrated banking firm of Lazard Frères & Co., whose seniorpartner, André Meyer, he had met through Albert Lasker, amutual friend. Lazard gave him an office in its headquarters at44 Wall, but before he could do much consulting, he was offon a lecture tour across the United States, followed by a tripto Europe that summer, with his wife, on behalf of the lateCollier’s magazine. The trip did not result in any articles,though, and on returning home in the fall he found itnecessary to get back on a full-time income-producing basis;this he did by becoming a consultant to various othercompanies, among them the Carrier Corporation and the RadioCorporation of America. To Carrier he offered advice onmanagerial problems. For R.C.A., he worked on the question ofcolor television, ultimately advising his client to concentrate ontechnical research rather than on law-court squabbles overpatents; he also helped persuade the company to press itscomputer program and to stay out of the construction ofatomic reactors. Early in 1951, he took another trip abroad forCollier’s—to India, Pakistan, Thailand, and Japan. This tripproduced an article—published in Collier’s that August—in whichhe proposed a solution to the dispute between India andPakistan over Kashmir and the headwaters of the Indus River.
Lilienthal’s idea was that the tension between the two countriescould best be lessened by a co?perative program to improveliving conditions in the whole disputed area through economicdevelopment of the Indus Basin. Nine years later, largelythrough the financial backing and moral support of Eugene R.
Black and the World Bank, the Lilienthal plan was essentiallyadopted, and an Indus treaty signed between India andPakistan. But the immediate reaction to his article was generalindifference, and Lilienthal, temporarily stymied and considerablydisillusioned, once more settled down to the humbler problemsof private business.
At this point in Lilienthal’s narrative, the doorbell rang. Mrs.
Lilienthal went to answer it, and I could hear her talking tosomeone—a gardener, evidently—about the pruning of someroses. After listening restlessly for a minute or two, Lilienthalcalled to his wife, “Helen, please tell Domenic to prune thoseroses farther back than he did last year!” Mrs. Lilienthal wentoutside with Domenic, and Lilienthal remarked, “Domenic alwaysprunes too gently, to my way of thinking. It’s a case of ourbackgrounds—Italy versus the Middle West.” Then, resumingwhere he had left off, he said that his association with LazardFrères, and more particularly with Meyer, had led him into anassociation, first as a consultant and later as an executive, witha small company called the Minerals Separation North AmericanCorporation, in which Lazard Frères had a large interest. Itwas in this undertaking that, unexpectedly, he made his fortune.
The company was in trouble, and Meyer’s notion was thatLilienthal 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, itsannual receipts rose from about seven hundred and fiftythousand dollars, for 1952, to something over two hundred andseventy-four million, for 1960. For Lilienthal, the acceptance ofMeyer’s commission to look into the company’s affairs was thebeginning of a four-year immersion in the day-to-day problemsof managing a business; the experience, he said decisively,turned out to be one of his life’s richest, and by no meansonly in the literal sense of that word.
I HAVE reconstructed the corporate facts behind Lilienthal’sexperience partly from what he told me in Princeton, partlyfrom a subsequent study of some of the company’s publisheddocuments, and partly from talks with other persons interestedin the firm. Minerals Separation North American, which wasfounded in 1916 as an offshoot of a British firm, was a patentcompany, deriving its chief income from royalties on patents forprocesses used in refining copper ore and the ores of othernonferrous minerals. Its activities were twofold—attempting todevelop new patents in its research laboratory, and offeringtechnical services to the mining and manufacturing companiesthat leased its old ones. By 1950, although it was still netting anice annual profit, it was in a bad way. Under the direction ofits long-time president, Dr. Seth Gregory—who was then overninety but still ruled the company with an iron hand,commuting daily between his midtown apartment hotel and hisoffice, at 11 Broadway, in a regally purple Rolls-Royce—it hadcut down its research activities to almost nothing and was livingon half a dozen old patents, all of which were scheduled to gointo the public domain in from five to eight years. In effect, itwas a still healthy company living under a death sentence.
Lazard Frères, as a large stockholder, was understandablyconcerned. Dr. Gregory was persuaded to retire on ahandsome pension, and in February, 1952, after working withMinerals Separation for some time as a consultant, Lilienthalwas installed as the company’s president and a member of itsboard of directors. His first task was to find a new source ofincome to replace the fast-expiring patents, and he and theother directors agreed that the way to accomplish this wasthrough a merger; it fell to Lilienthal to participate in arrangingone between Minerals Separation and another company inwhich Lazard Frères—along with the Wall Street firm of F.
Eberstadt & Co.—had large holdings: the Attapulgus ClayCompany, of Attapulgus, Georgia, which produced a very rarekind of clay that is useful in purifying petroleum products, andwhich manufactured various household products, among them afloor cleaner called Speedi-Dri.
As a marriage broker between Minerals Separation andAttapulgus, Lilienthal had the touchy job of persuading theexecutives of the Southern company that they were not beingused as pawns by a bunch of rapacious Wall Street bankers.
Being an agent of the bankers was an unaccustomed role forLilienthal, but he evidently carried it off with aplomb, despitethe fact that his presence complicated the emotional problemsstill further by introducing into the situation a whiff of gallopingSocialism. “Dave was very effective in building up the Attapulguspeople’s morale and confidence,” another Wall Streeter has toldme. “He reconciled them to the merger, and showed them itsadvantages for them.” Lilienthal himself told me, “I felt at homein the administrative and technical parts of the job, but thefinancial part had to be done by the people from Lazard andEberstadt. Every time they began talking about spinoffs andexchanges of shares, I was lost. I didn’t even know what aspinoff was.” (As Lilienthal knows now, it is, not to get tootechnical about it, a division of a company into two or morecompanies—the opposite of a merger.) The merger took placein December, 1952, and neither the Attapulgus people nor theMinerals Separation people had any reason to regret it, becauseboth the profits and the stock price of the newly formedcompany—the Attapulgus Minerals & ChemicalsCorporation—soon began to rise. At the time of the merger,Lilienthal was made chairman of the board of directors, at anannual salary of eighteen thousand dollars. Over the next threeyears, while serving first in this position and later as chairmanof the executive committee, he had a large part not only in theconduct of the company’s routine affairs but also in its furthergrowth through a series of new mergers—one in 1954, withEdgar Brothers, a leading producer of kaolin for paper coating,and two in 1955, with a pair of limestone concerns in Ohioand Virginia. The mergers and the increased efficiency thatwent with them were not long in paying off; between 1952 and1955 the company’s net profit per share more than quintupled.
The mechanics of Lilienthal’s own rise from the comparativerags of a public servant to the riches of a successfulentrepreneur are baldly outlined in the company’s proxystatements for its annual and special stockholders’ meetings.
(There are few public documents more indiscreet than proxystatements, in which the precise private stockholdings ofdirectors must be listed.) In November, 1952, MineralsSeparation North American granted Lilienthal, as a supplementto his annual salary, a stock option.* His option entitled him tobuy as many as fifty thousand shares of the firm’s stock fromits treasury at $4.87? per share, then the going rate, any timebefore the end of 1955, and in exchange he signed a contractagreeing to serve the company as an active executivethroughout 1953, 1954, and 1955. The potential financialadvantage to him, of course, as to all other recipients of stockoptions, lay in the fact that if the price of the stock rosesubstantially, he could buy shares at the option price and thushave a holding that would immediately be worth much morethan he paid for it. Furthermore, and more important, if heshould later decide to sell his shares, the proceeds would be acapital gain, taxable at a maximum rate of 25%. Of course, ifthe stock failed to go up, the option would be worthless. But,like so many stocks of the mid-fifties, Lilienthal’s did go up,fantastically. By the end of 1954, according to the proxystatements, Lilienthal had exercised his option to the extent ofbuying twelve thousand seven hundred and fifty shares, whichwere then worth not $4.87? each but about $20. InFebruary, 1955, he sold off four thousand shares at $22.75each, bringing in ninety-one thousand dollars. This sum, lesscapital-gains tax, was then applied against further purchasesunder the option, and in August, 1955, the proxy statementsshow, Lilienthal raised his holdings to almost forty thousandshares, or close to the number he held at the time of my visitto him. By that time, the stock, which had at first been soldover the counter, not only had achieved a listing on the NewYork Stock Exchange but had become one of the Exchange’shighflying speculative favorites; its price had skyrocketed toabout forty dollars a share, and Lilienthal, obviously, was solidlyin the millionaire class. Moreover, the company was now on asound long-term basis, paying an annual cash dividend of fiftycents a share, and the Lilienthal family’s financial worries werepermanently over.
Fiscally speaking, Lilienthal told me, his symbolic moment oftriumph was the day, in June of 1955, when the shares ofMinerals & Chemicals graduated to a listing on the New YorkStock Exchange. In accordance with custom, Lilienthal, as a topofficer, was invited onto the floor to shake hands with thepresident of the Exchange and be shown around generally. “Iwent through it in a daze,” Lilienthal told me. “Until then, I’dnever been inside any stock exchange in my life. It was allmysterious and fascinating. No zoo could have seemed morestrange to me.” How the Stock Exchange felt at this stageabout having the former wearer of horns on its floor is notrecorded.
IN telling me about his experience with the company, Lilienthalhad spoken with zest and had made the whole thing soundmysterious and fascinating. I asked him what, apart from theobvious financial inducement, had led him to devote himself tothe affairs of a small firm, and how it had felt for the formerboss of T.V.A. and A.E.C. to be, in effect, peddling Attapulgite,kaolin, limestone, and Speedi-Dri. Lilienthal leaned back in hischair and stared at the ceiling. “I wanted an entrepreneurialexperience,” he said. “I found a great appeal in the idea oftaking a small and quite crippled company and trying to makesomething of it. Building. That kind of building, I thought, is thecentral thing in American free enterprise, and something I’dmissed in all my government work. I wanted to try my handat it. Now, about how it felt. Well, it felt plenty exciting. It wasfull of intellectual stimulation, and a lot of my old ideaschanged. I conceived a great new respect for financiers—menlike André Meyer. There’s a correctness about them, a certainhigh sense of honor, that I’d never had any conception of. Ifound that business life is full of creative, original minds—alongwith the usual number of second-guessers, of course.
Furthermore, I found it seductive. In fact, I was in danger ofbecoming a slave. Business has its man-eating side, and part ofthe man-eating side is that it’s so absorbing. I found that thethings you read—for instance, that acquiring money for its ownsake can become an addiction if you’re not careful—are literallytrue. Certain good friends helped keep me on the track—menlike Ferdinand Eberstadt, who became my fellow-director afterthe Attapulgus merger, and Nathan Greene, special counsel toLazard Frères, who was on the board for a while. Greene wasa kind of business father confessor to me. I remember hissaying, ‘You think you’ll make your pile and then beindependent. My friend, in Wall Street you don’t just win yourindependence at one stroke. To paraphrase Thomas Jefferson,you have to win your independence over again every day.’ Ifound that he was right about that. Oh, I had my problems. Iquestioned myself at every step. It was exhausting. You see, forso long I’d been associated with two pretty far-reachingthings—institutions. I had a feeling of identity with them; in thatkind of work you are able to lose your sense of self. Now,with myself to worry about—my personal standards as well asmy financial future—I found myself wondering all the timewhether I was making the right move. But that part’s all in myjournal, and you can read it there, if you like.” *I said I certainly would like to read it, and Lilienthal led meto his study, in the basement. It proved to be a good-sizedroom whose windows opened on window wells into whichstrands of ivy were trailing; light came in from outside, andeven a little slanting sunshine, but the tops of the window wellswere too high to permit a view of the garden or theneighborhood. Lilienthal remarked, “My neighbor RobertOppenheimer complained about the enclosed feeling when hefirst saw this room. I told him that was just the feeling Iwanted!” Then he showed me a filing cabinet, standing in acorner; it contained the journal, in rows and rows of loose-leafnotebooks, the earliest of them dating back to its author’shigh-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 theroom, looking at the pictures on the walls and finding aboutwhat might have been expected: inscribed photographs fromFranklin 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 inIndia; a night view of the Fontana Dam, in the TennesseeValley, being built under a blaze of electricity supplied by T.V.A.
power plants. A man’s study reflects himself as he wishes to beseen publicly, but his journal, if he is honest, reflects somethingelse. I had not browsed long in Lilienthal’s journal before Irealized that it was an extraordinary document—not merely ahistorical source of unusual interest but a searching record of apublic man’s thoughts and emotions. I leafed through the yearsof his association with Minerals & Chemicals, and, scatteredamid much about family, Democratic politics, friends, tripsabroad, reflections on national policies, and hopes and fears forthe republic, I came upon the following entries having to dowith 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 justhad his first interview with Dr. Gregory, and is apparently acceptable to theold man as the new president of the company.]
May 31, 1951: [Starting in business] is like learning to walk after a longillness.… At first you have to think: move the right foot, move the leftfoot, etc. Then you are walking without thinking, and then walking issomething one does with unconsciousness and utter confidence. This latterstate, as to business, has yet to come, but I had the first touch of ittoday.
July 22, 1951: I recall Wendell Willkie saying to me years ago, “Living inNew York is a great experience. I wouldn’t live anywhere else. It is themost exciting, stimulating, satisfying spot in the world,” etc. I think this wasapropos of some remark I had made on a business visit to NewYork—that I was certainly glad I didn’t have to live in that madhouse ofnoise and dirt. [Last] Thursday was a day in which I shared some ofWillkie’s feeling.… There was a grandeur about the place, and adventure, asense of being in the center of a great achievement, New York City in thefifties.
October 28, 1951: What I am reaching for, perhaps, is to have my cakeand eat it, too, but in a way this is not wholly senseless nor futile. Thatis, I can have enough actual contact with the affairs of business to keep asense of reality, or develop one. How otherwise can I explain the pleasureI get in visiting a copper mine or talking to operators of an electricfurnace, 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 thesethings mean, free enough to read outside the immediate field of interest.
This requires keeping out of status (the absence of which I know makesme vaguely unhappy).
December 8, 1952: What is it that investment bankers do for theirmoney? Well, I have certainly had my eyes opened, as to the amount oftoil, sweat, frustrations, problems—yes, and tears—that has to be gonethrough.… If everyone who has something to sell in the market had to beas meticulous and detailed in his statements about what he is selling asthose who offer stock in the market are now, under the Truth inSecurities 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 agood 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% ormore in income taxes.… But there is another purpose: to have had theexperience of business.… The real reason, or the chief reason, is a feelingthat my life wouldn’t be complete, living in a business period—that is, atime dominated by the business of business—unless I had been active inthat area. What I wanted was to be an observer of this fascinating activitythat 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, andwhen I get low and glad to chuck the whole thing (as I have from timeto time), the sustaining part is that even the bumps and sore spots areexperiences, actual experiences within the business world.…Then, too, [I wanted to be able to make] a comparison of the managersof business, the spirit, the tensions, the motivations, etc., with those ofgovernment (something I keep doing anyway)—and that needs doing tounderstand either government or business. This requires actual validexperience in the business world somewhat comparable to my long hiringout in government matters.
I don’t kid myself that I will ever be accepted as a businessman, notafter those long years when I wore horns, for all of them outside theTennessee Valley at least. And I feel less defensive—usually shown by abelligerence—on this score than I did when I rarely saw a tycoon or aWall 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 tosee the thing through. While I can’t conceive that this business will everseem enough, an end of itself, to make up a satisfactory life, yet thebusy-ness, the activity, the crises, the gambles, the management problems Imust face, the judgment about people, all combine to make something farfrom 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 ofromantic 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 enteredthe chemical business; bearing in mind that I had previously headed thebiggest things in America, bigger than [any] private corporations, he wasnaturally a little nervous about seeing me become a potential competitor. Itwas kidding, but it was good kidding. And it certainly gave little oleAttapulgus 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 ofbusiness. Too remote from the actual thinking process, the exercise ofjudgment and decision.… In this company, as we are evolving it, there areso many of the elements of fun.… The starting with almost nothing … thecompany 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 basisupon which grown men decide that a stock should be bought, and atwhat price … the merger with Edgar, the great [subsequent] rise in theprice of their stock … the review of the price structure. The beginning ofbetter costs. The catalyst idea. The drive and energy and imagination: thenights and days (in the lab until 2 A.M. night after night) and finally thebeginning of a new business.… It is quite a story.
(Later I got a rather different perspective on Lilienthal’sreactions to the transition from government to business bytalking to the man he had described as his “business fatherconfessor,” Nathan Greene. “What happens to a man wholeaves top-level government work and comes to Wall Street asa consultant?” Greene asked me rhetorically. “Well, usually it’s abig letdown. In the government, Dave was used to a sense ofgreat authority and power—tremendous national andinternational responsibility. People wanted to be seen with him.
Foreign dignitaries sought him out. He had all sorts offacilities—rows of buttons on his desk. He pushed them, andlawyers, technicians, accountants appeared to do his bidding. Allright, now he comes to Wall Street. There’s a big welcomingreception, he meets all the partners of his new firm and theirwives, he’s given a nice office with a carpet. But there’s nothingon his desk—only one button, and all it summons is asecretary. 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 theoutward form of his new work is a letdown. The same with itscontent. In Washington, it had been development of naturalresources, atomic energy, or the like—world-shaking things. Nowit turns out to be some little business to make money. It allseems 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 theseservices and the basic comforts supplied him at no personalcost, 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 law-school class who wasmaking a pile in the Street, and say, ‘He’s sold out.’ Then ourman leaves government and goes to the Wall Street fleshpotshimself, and he says, ‘Boy, am I going to make these guys payfor my services!’ They do pay, too. He gets big fees forconsulting. Then he finds out about big income taxes, how hehas to pay most of his income to the government now insteadof 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 histroubles—after all, he was starting a second sort of life—but hehandled them just about as well as they can be handled. Hewas never bored, and he never screamed ‘Confiscation!’ Hehas a great capacity for sinking himself in something. Thesubject matter isn’t so important to him. It’s almost as if hewere able to think that what he’s doing is important, whether itis or not, simply because he’s doing it. His ability wasinvaluable to Minerals & Chemicals, and not just as anadministrator. Dave is a lawyer, after all; he knows more aboutcorporate finances than he likes to admit. He enjoys playingthe barefoot boy, but he’s hardly that. Dave is an almostperfect example of somebody who kept his independence whilegetting rich on Wall Street.”)One way and another, then—reading through these ambivalentprotestations in the journal, and later hearing Greene—I seemedto detect under the exuberance and the absorption a naggingsense of dissatisfaction, almost of compromise. For Lilienthal, theobviously genuine thrill of having a new kind of experience, andan almost unimaginably profitable one, had been, I sensed, arose 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 rugunderneath a pile of pre-school-age children. At least, it lookedat first glance like a pile; on closer inspection I found that itconsisted of just two boys. Mrs. Lilienthal, who had returnedfrom the garden, introduced them as Allen and DanielBromberger, sons of the Lilienthals’ daughter, Nancy, andSylvain Bromberger, adding that the Brombergers were livingnearby, since Sylvain was teaching philosophy at the university.
(A few weeks later, Bromberger moved on to the University ofChicago.) The Lilienthals’ only other offspring, David, Jr., livedin Edgartown, Massachusetts, where he had settled down tobecome a writer, as he subsequently did. In response to theurging of the senior Lilienthals, the grandchildren climbed offtheir grandfather and disappeared from the room. When thingswere normal again, I told Lilienthal my reaction to the entries Ihad read in the journal, and he hesitated for a while beforespeaking. “Yes,” he said, finally. “Well, one thing—it wasn’tmaking all that money that worried me. That didn’t make mefeel either good or bad, by itself. In the government years,we’d always paid our bills, and by scrimping we’d been able tosave enough to send the kids to college. We’d never thoughtmuch about money. And then making a lot of it, making amillion—I was surprised, of course. I’d never especially aimed atthat or thought it might happen to me. It’s like when you’re aboy and you try to jump six feet. Then you find you canjump six feet, and you say, ‘Well, so what?’ It’s sort ofirrelevant. Over the past few years, a lot of people have said tome, ‘How does it feel to be rich?’ At first, I was kind ofoffended—there seemed to be an implied criticism in thequestion—but I’m over that. I tell them it doesn’t feel anyspecial way. The way I feel is—But this is going to soundstuffy.”
“No, I don’t think it’s stuffy,” said Mrs. Lilienthal, anticipatingwhat was coming.
“Yes, it is, but I’m going to say it anyway,” said Lilienthal. “Idon’t think money makes much difference, as long as you haveenough.”
“I don’t quite agree,” said Mrs. Lilienthal. “It doesn’t makemuch difference when you’re young. You don’t mind then, aslong as you can struggle along. But as you get older, it ishelpful.”
Lilienthal nodded in deference to that. Then he said that hethought the undertone of dissatisfaction I had noticed in thejournal probably stemmed, at least in part, from the fact thathis career in private business, absorbing though it was, did notbring with it the gratifications of public-service work. True, hehad not been deprived of them entirely, because it was at theheight of his Minerals & Chemicals operations, in 1954, that hefirst went to Colombia, at the request of that country’sgovernment, and, serving as a peso-a-year consultant, startedthe Cauca Valley project that was later continued by theDevelopment & Resources Corporation. But for the most partbeing a top officer of Minerals & Chemicals had kept himpretty well tied down, and he’d had to regard the Colombiawork as a sideline, if not merely a hobby. I found it impossibleto avoid seeing symbolic significance in the fact that theprincipal material with which Lilienthal the businessman hadbeen engaged was—clay.
I thought of something else in Lilienthal’s life at that time thatmight have taken some of the kick out of the process ofbecoming a successful businessman. His “Big Business” bookhad come out when he was in the thick of the Minerals &Chemicals work. I wondered whether, since it is such anuncritical paean to free enterprise, it had been construed bysome people as a rationalization of his new career, and I askedabout this.
“Well, the ideas in the book were rather a shock to some ofmy husband’s New Deal friends, all right,” Mrs. Lilienthal said,a bit dryly.
“They needed shocking, damn it!” Lilienthal burst out. Hespoke with some heat, and I thought of the phrase in hisjournal—used there in an entirely different context but still inreference to himself—about defensiveness shown by belligerence.
After a moment, he went on, in a normal tone, “My wife anddaughter thought I didn’t spend enough time working on thebook, and they were right. I wrote it in too much of a hurry.
My conclusions aren’t supported by enough argument. For onething, I should have spelled out in more detail my opposition tothe way the antitrust laws are administered. But the anti-trustpart wasn’t the real trouble. The thing that really shook upsome of my old friends was what I said about big industry inrelation to individualism, and about the machine in relation toaesthetics. Morris Cooke, who used to be administrator of theRural Electrification Administration—he was one who wasshaken up. He took me apart over the book, and I took himapart back. The anti-bigness dogmatists stopped having anythingto do with me. They simply wrote me off. I wasn’t hurt ordisappointed. Those people are living on nostalgia; they lookbackward, and I try to look forward. Then, of course, therewere the trust busters. They really went after me. But isn’ttrust busting, in the sense of breaking up big companies simplybecause they’re big, pretty much a relic of a past era? Yes, Istill think I was right in the main things I said—perhaps aheadof my time, but right.”
“The trouble was the timing,” Mrs. Lilienthal said. “The bookcame so close to coinciding with my husband’s leaving publicservice and going into private business. Some people thought itrepresented 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 publicservice. For example, my idea that bigness is essential fornational security came in large part out of my experiences inthe A.E.C. The company that had the research andmanufacturing facilities to make the atomic bomb an operationalweapon, so engineered that it wouldn’t require Ph.D.s to use itin the field—Bell Telephone, to be specific—was a big company.
Because it was so big, the Anti-Trust Division of theDepartment of Justice was seeking to break the Bell Systeminto several parts—unsuccessfully, as it turned out—at the verytime we in the A.E.C. were calling on it to do a vital defensejob that required unity. That seemed wrong. More generally,the whole point of view I expressed in the book goes wayback to my quarrel with Arthur Morgan, the first T.V.A.
chairman, in the early thirties. He had great faith in ahandicraft economy, I was for large-scale industry. T.V.A., afterall, was, and is, the biggest power system in the free world. InT.V.A. I always believed in bigness—along with decentralization.
But, you know, the chapter I hoped would produce the mostdiscussion was the one on bigness as a promoter ofindividualism. It did produce discussion, of a sort. I rememberpeople—academic people, mostly—coming up to me withincredulous 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 questionedhimself about in the process of making his Wall Street fortunewas the fact that in making it he had not really needed toscream “Confiscation,” since he had made it through a taxloophole, the stock option. Possibly there have been liberal,reformist businessmen who have refused to accept stockoptions on principle, although I have never heard of one doingso, and I am not convinced that such a renunciation would bea sensible or useful form of protest. In any event, I didn’t askLilienthal about the matter; in the absence of any acceptedcode of journalism every journalist writes his own, and in mine,such a question would have come close to invasion of moralprivacy. In retrospect, though, I almost wish I had violated mycode that one time. Lilienthal, being Lilienthal, might haveobjected to the question strenuously, but I think he would haveanswered it equally strenuously, and without hedging. As thingswere, after discoursing on the critical reactions to his book, “BigBusiness,” he got up and walked to a window. “I see Domenichas been pretty cautious about his rose-pruning,” he said to hiswife. “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 Iknew how the rose-pruning controversy was going to beresolved.
THE triumphant solution to Lilienthal’s problem—the way that heeventually found to have his cake and eat it—was theDevelopment & Resources Corporation. The corporation aroseout of a series of conversations between Lilienthal and Meyerduring the spring of 1955, in the course of which Lilienthalpointed out that he was well acquainted with dozens of foreigndignitaries and technical personnel who had come to visit theT.V.A., and said that their intense interest in that projectseemed to indicate that at least some of their countries wouldbe receptive to the idea of starting similar programs. “Our aimin forming D. & R. was not to try to remold the world, or anylarge part of it, but only to try to help accomplish some ratherspecific things, and, incidentally, make a profit,” Lilienthal toldme. “André was not so sure about the profit—we both knewthere would be a deficit at first—but he liked the idea of doingconstructive things, and Lazard Frères decided to back us, inreturn for a half interest in the corporation.” Clapp, who wasserving at the time as deputy New York City administrator,came in as co-founder of the venture, and the subsequentexecutive appointments made D. & R. virtually a T.V.A. alumniassociation: John Oliver, who became executive vice-president,had been with T.V.A. from 1942 to 1954, ending up as itsgeneral manager; W. L. Voorduin, who became director ofengineering, had been with T.V.A. for a decade and hadplanned its whole system of dams; Walton Seymour, whobecame vice-president for industrial development, had been aT.V.A. consultant on electric-power marketing for thirteen years;and a dozen other former T.V.A. men were scattered on downthrough the ranks.
In July, 1955, D. & R. set up shop at 44 Wall, and set towork finding clients. What was to prove its most important onecame to light during a World Bank meeting in Istanbul thatLilienthal and his wife attended in September of that year. Atthe meeting, Lilienthal fell in with Abolhassan Ebtehaj, thenhead of a seven-year development plan in Iran; as it happened,Iran was just about the ideal D. & R. client, since, for onething, the royalties on its nationalized oil industry gave itconsiderable capital with which to pay for the development ofits resources, and, for another, what it desperately needed wastechnical and professional guidance. The encounter with Ebtehajled to an invitation to Lilienthal and Clapp to visit Iran as theguests of the Shah, and see what they thought could be doneabout Khuzistan. Lilienthal’s employment contract with Minerals& Chemicals ended that December; although he stayed on as adirector, he was now free to devote all his time, or nearly allof it, to D. & R. In February, 1956, he and Clapp went toIran. “Before then, I blush to say, I had never heard ofKhuzistan,” Lilienthal told me. “I’ve learned a lot about it sincethen. It was the heart of the Old Testament Elamite kingdomand later of the Persian Empire. The ruins of Persepolis arenot far away, and those of Susa, where King Darius had hiswinter palace, are in the very center of Khuzistan. In ancienttimes, the whole region had an extensive water-conservationsystem—you can still find the remains of canals that wereprobably built by Darius twenty-five hundred years ago—butafter the decline of the Persian Empire the water system wasruined by invasion and neglect. Lord Curzon described whatthe Khuzistan uplands looked like a century ago—‘a desert overwhich the eye may roam unarrested for miles.’ It was that waywhen we got there. Nowadays, Khuzistan is one of the world’srichest oil fields—the famous Abadan refinery is at its southerntip—but the inhabitants, two and a half million of them, haven’tbenefited from that. The rivers have flowed unused, thefabulously rich soil has lain fallow, and all but a tiny fraction ofthe people have continued to live in desperate poverty. WhenClapp and I first saw the place, we were appalled. Still, for twoold T.V.A. hands like us, it was a dream; it was simply cryingout for development. We looked for sites for dams, likely spotsto hunt for minerals and make soil-fertility studies, and so on.
We saw flares of natural gas rising from oil fields. That waswaste, and it suggested petrochemical plants, to use the gas formaking fertilizer and plastics. In eight days we’d roughed out aplan, and in about two weeks D. & R. had signed a five-yearcontract with the Iranian government.
“That was only the beginning. Bill Voorduin, our chiefengineer, flew out there and spotted a wonderful dam site at aplace just a few miles from the ruins of Susa—a narrowcanyon with walls that rise almost vertically from the bed of theDez River. We found we were going to have to manage theproject as well as advise on it, and so our next job was liningup our managerial group. To give you some idea of the size ofthe project, right now there are about seven hundred peopleworking on it at the professional level—a hundred Americans,three hundred Iranians, and three hundred others, mostlyEuropeans, who work directly for firms under subcontracts.
Besides that, there are about forty-seven hundred Iranianlaborers. Over five thousand people, all told. The entire planincludes fourteen dams, on five different rivers, and will takemany years to finish. D. & R. has just completed its firstcontract, for five years, and signed a new one, for a year anda half, with option to renew for another five years. Quite a bithas been accomplished already. Take the first dam—the Dezone. It’s to be six hundred and twenty feet high, or more thanhalf again as high as the Aswan, in Egypt, and it will eventuallyirrigate three hundred and sixty thousand acres and generatefive hundred and twenty thousand kilowatts of electricity. Itshould be finished early in 1963. Meanwhile, a sugarplantation—the first in Khuzistan in twenty-five centuries—hasbeen started, with irrigation by pumped water; it should yieldits first crop this summer, and a sugar refinery will be readyby the time the sugar is. Another thing: eventually the regionwill supply its own electric power from the dams, but for theinterim period a high-tension line, the first anywhere in Iran,has been put in over the seventy-two miles from Abadan toAhwaz—a city of a hundred and twenty thousand thatpreviously had no power source except half a dozen littlediesels, which seldom worked.”
While the Iranian project was proceeding, D. & R. was alsobusy lining up and carrying out its programs for Italy,Colombia, Ghana, the Ivory Coast, and Puerto Rico, as well asprograms for private business groups in Chile and thePhilippines. A job that D. & R. had just taken on for theUnited States Army Corps of Engineers excited Lilienthalenormously—an investigation of the economic impact of powerfrom a proposed dam on the Alaskan sector of the Yukon,which he described as “the river with the greatest hydroelectricpotential remaining on this continent.” Meanwhile, Lazard Frèresretained its financial interest in the firm and now very happilycollected its share of a substantial annual profit, and Lilienthalhappily took to teasing Meyer about his former skepticism as toD. & R. financial prospects.
Lilienthal’s new career had meant a highly peripatetic life bothfor him and for Mrs. Lilienthal. He showed me hisforeign-travel log for 1960, which he said was a fairly typicalyear, 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 relatesto those trips. Turning to the pages on his stay in Iran earlylast spring, I was particularly struck by a few excerpts:
Ahwaz, March 5: The cry of the Arab women as the Shah’s big blackChrysler passed them, a solid row along the road from the airport, mademe think of the rebel yell; then I recognized it: it was the Indian yelp, thekind we used to make as kids, moving our hand over our mouths to givethat undulating wail.
Ahwaz, March 11: Our experience in the villagers’ huts on Wednesdaythrew me into a deep pit. I hovered between despair—which is an emotionI 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” Ihave ever known—and we also travelled back to the ninth century, andearlier, visiting villages and going into mud “homes” quite unbelievable—andunforgettable forever and ever. As the Biblical oath has it: Let my righthand wither if I ever forget how some of the most attractive of my fellowhuman 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, willbecome as well known as, say, the community of Tupelo … became, orNew Harmony or Salt Lake City when it was founded by a handful ofdedicated men in a pass of the great Rockies.
The afternoon shadows were getting long on Battle Road, andit was time for me to be going. Lilienthal walked out to my carwith me, and on the way I asked him whether he ever missedthe rough-and-tumble, and the limelight, of being perhaps themost controversial man in Washington. He grinned, and said,“Sure.” When we reached the car, he went on, “I neverintended to be especially combative, in Washington or in theTennessee Valley. It was just that people kept disagreeing withme. But, all right, I wouldn’t have put myself in controversialsituations so much if I hadn’t wanted to. I guess I wascombative. When I was a kid, I was interested in boxing. Athigh school—in Michigan City, Indiana—I boxed a lot with acousin of mine, and while I was in college, at DePauw, incentral Indiana, I took to boxing during the summers with aman who had been a professional light-heavyweight. TheTacoma Tiger, he’d been called. Working out with him was achallenge. If I made a mistake, I’d be on the floor. I wantedjust once to land on him good. It was my ambition. I neverdid, of course, but I got to be a fairly good boxer. I becameboxing coach at DePauw while I was an undergraduate. Lateron, at Harvard Law, I didn’t have time to keep it up, and Inever boxed seriously again. But I don’t think that for meboxing was an expression of combativeness for its own sake. Ithink I considered competence at defending yourself a means ofpreserving your personal independence. I learned that from myfather. ‘Be your own man,’ he used to say. He’d come fromAustria-Hungary, the part that’s now eastern Czechoslovakia, inthe eighteen-eighties, when he was about twenty, and he spenthis 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 tradeindependence for security. He didn’t know how to dissemble,and wouldn’t have wanted to if he had known how. Well, toget back to my being controversial, or combative, or whateveryou call it, in Washington—yes, there’s something missing whenyou don’t have a McKellar laying it on the line any more. Themoral equivalent of that for me now is taking on challenges,different kinds of McKellars or Tacoma Tigers, maybe—theMinerals & Chemicals thing, the D. & R. thing—and trying tomeet 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 IWhitehall Street. Both D. & R. and he had moved along in theinterim. In Khuzistan, the Dez Dam had been completed onschedule; water impounding had begun in November, 1962, thefirst power had been delivered in May, 1963, and the regionwas now not only supplying its own power but producingenough surplus to attract foreign industry. Meanwhile,agriculture in the once-barren region was flourishing as a resultof irrigation made possible by the dam, and, asLilienthal—sixty-eight now, and as combative as ever—put it,“The gloomy economists have to be gloomy about some otherunderdeveloped country.” D. & R. had just signed a newfive-year contract with Iran to carry on the work. Otherwise,the firm had expanded its clientele to include fourteencountries; its most controversial undertaking was in Vietnam,where, under contract with the United States government, itwas cooperating with a similar group of South Vietnamese inworking up plans for the postwar development of the MekongValley. (This assignment had led to criticism of Lilienthal bythose who took it to imply that he supported the war; in fact,he told me, he regarded the war as the disastrous outcome ofa series of “horrible miscalculations,” and the planning ofpostwar resources development as a separate matter. It wasclear enough, nevertheless, that the criticism hurt. At the sametime, D. & R. was widening its horizons by beginning to move,unexpectedly, into domestic urban development, having beenengaged by private foundation-sponsored groups in QueensCounty, New York and Oakland County, Michigan to seewhether the T.V.A. approach might have some value in dealingwith those modern deserts, the slums. “Just pretend this isZambia and tell us what you would do,” these groups had said,in effect, to D. & R.—a wildly imaginative idea, surely, theusefulness 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 expandedto the extent of opening a second permanent office on theWest Coast, had considerably increased its profits, and becomeessentially employee-owned, with Lazard retaining only a tokeninterest. Most encouraging of all, at a time when old-linebusiness was having serious recruitment problems because itsobsession with profit was repelling high-minded youth, D. & R.
found that its idealistic objectives made it a magnet for themost promising new graduates. And as a result of all thesethings, Lillienthal could at last say what he had not been ableto say on the earlier occasion—that private enterprise was nowaffording him more satisfaction than he had ever derived frompublic service.
Is D. & R., then, a prototype of the free enterprise of thefuture, accountable half to its stockholders and half to the restof humanity? If so, then the irony is complete, and Lilienthal, ofall 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.
Chapter 10 Stockholder Season
A FEW YEARS AGO, a European diplomat was quoted in theTimes as saying, “The American economy has become so bigthat it is beyond the imagination to comprehend. But now ontop of size you are getting rapid growth as well. It is asituation of fundamental power unequalled in the history of theworld.” At about the same time, A. A. Berle wrote, in a studyof corporate power, that the five hundred or so corporationsthat dominate that economy “represent a concentration ofpower over economics which makes the medieval feudal systemlook like a Sunday-school party.” As for the power within thosecorporations, it clearly rests, for all practical purposes, with theirdirectors and their professional managers (often not substantialowners), who, Berle goes on to suggest in the same essay,sometimes constitute a self-perpetuating oligarchy. Mostfair-minded observers these days seem to feel that thestewardship of the oligarchs, from a social point of view, isn’tanything like as bad as it might be, and in many cases ispretty good, yet, however that may be, the ultimate powertheoretically does not reside in them at all. According to thecorporate form of organization, it resides in the stockholders, ofwhom, in United States business enterprises of all sizes anddescriptions, there are more than twenty million. Even thoughthe courts have repeatedly ruled that a director does not haveto follow stockholder instructions, any more than acongressman has to follow the instructions of his constituents,stockholders nevertheless do elect directors, on the logical, if notexactly democratic, basis of one share, one vote. Thestockholders are deprived of their real power by a number offactors, among which are their indifference to it in times ofrising profits and dividends, their ignorance of corporate affairs,and their sheer numbers. One way or another, they vote themanagement slate, and the results of most director electionshave a certain Russian ring—ninety-nine per cent or more ofthe votes cast in favor. The chief, and in many cases the only,occasion when stockholders make their presence felt bymanagement is at the annual meeting. Company annualmeetings are customarily held in the spring, and one spring—itwas that of 1966—I made the rounds of a few of them to geta line on what the theoretical holders of all that feudal powerhad to say for themselves, and also on the state of theirrelations with their elected directors.
What particularly commended the 1966 season to me wasthat it promised to be a particularly lively one. Various reportsof a new “hard-line approach” by company managements tostockholders had appeared in the press. (I was charmed by thenotion of a candidate for office announcing his new hard-lineapproach to voters right before an election.) The newapproach, it was reported, was the upshot of events at theprevious year’s meetings, where a new high in stockholderunruliness was reached. The chairman of the CommunicationsSatellite Corporation was forced to call on guards to eject bodilytwo badgering stockholders at his company’s meeting, inWashington. Harland C. Forbes, who was then the chairman ofConsolidated Edison, ordered one heckler off the premises inNew York, and, in Philadelphia, American Telephone &Telegraph Chairman Frederick R. Kappel was goaded intoannouncing abruptly, “This meeting is not being run byRobert’s [Rules of Order]. It’s being run by me.” (Theexecutive director of the American Society of CorporateSecretaries later explained that precise application of Robert’srules would have had the effect not of increasing thestockholders’ freedom of speech but, rather, of restricting it. Mr.
Kappel, the secretary implied, had merely been protectingstockholders from parliamentary tyranny.) In Schenectady,Gerald L. Phillippe, chairman of General Electric, after severalhours of fencing with stockholders, summed up his new hardline by saying, “I should like it to be clear that next year, andin the years to come, the chair may well adopt a morerigorous attitude.” According to Business Week, the GeneralElectric management then assigned a special task force to thejob of seeing what could be done about cracking down onhecklers by changing the annual-meeting pattern, and early in1966 the bible of management, the Harvard Business Review,entered the lists with an article by O. Glenn Saxon, Jr., thehead of a company specializing in investor services tomanagement, in which he recommended crisply that thechairmen of annual meetings “recognize the authority inherentin the role of the chair, and resolve to use it appropriately.”
Apparently, the theoretical holders of fundamental powerunequalled in the history of the world were about to be put intheir place.
ONE thing I couldn’t help noticing as I went over the scheduleof the year’s leading meetings was a trend away from holdingthem in or near New York. Invariably, the official reason givenwas that the move would accommodate stockholders from otherareas who had seldom, if ever, been able to attend in the past;however, most of the noisiest dissident stockholders seem to bebased in the New York area, and the moves were taking placein the year of the new hard line, so I found the likelihood of arelationship between these two facts by no means remote.
United States Steel holders, for example, were to meet inCleveland, making their second foray outside their company’snominal home state of New Jersey since its formation, in 1901.
General Electric was going outside New York State for the thirdtime in recent years—and going all the way to Georgia, a statein which management appeared to have suddenly discoveredfifty-six hundred stockholders (or a bit more than one per centof the firm’s total roll) who were badly in need of a chance toattend an annual meeting. The biggest company of them all,American Telephone & Telegraph, had chosen Detroit, whichwas its third site outside New York City in its eighty-one-yearhistory, the second having been Philadelphia, where the 1965session was held.
To open my own meeting-going season, I tracked A.T.& T. toDetroit. Leafing through some papers on the plane going outthere, I learned that the number of A.T. & T. stockholders hadincreased to an all-time record of almost three million, and Ifell to wondering what would happen in the unlikely event thatall of them, or even half of them, appeared in Detroit anddemanded seats at the meeting. At any rate, each one of themhad received by mail, a few weeks earlier, a notice of themeeting along with a formal invitation to attend, and it seemedto me almost certain that American industry had achievedanother “first”—the first time almost three million individualinvitations had ever been mailed out to any event of any kindanywhere. My fears on the first score were put to rest when Igot to Cobo Hall, a huge riverfront auditorium, where themeeting was to take place. The hall was far from filled; theYankees in their better days would have been disgusted withsuch a turnout on any weekday afternoon. (The papers nextday said the attendance was four thousand and sixteen.)Looking around, I noticed in the crowd several families withsmall children, one woman in a wheelchair, one man with abeard, and just two Negro stockholders—the last observationsuggesting that the trumpeters of “people’s capitalism” mightwell do some coordinating with the civil-rights movement. Theannounced time of the meeting was one-thirty, and ChairmanKappel entered on the dot and marched to a reading stand onthe platform; the eighteen other A.T. & T. directors trooped toa row of seats just behind him, and Mr. Kappel gavelled themeeting to order.
From my reading and from annual meetings that I’d attendedin past years, I knew that the meetings of the biggestcompanies are usually marked by the presence of so-calledprofessional stockholders—persons who make a full-timeoccupation of buying stock in companies or obtaining theproxies of other stockholders, then informing themselves moreor less intimately about the corporations’ affairs and attendingannual meetings to raise questions or propose resolutions—andthat the most celebrated members of this breed were Mrs.
Wilma Soss, of New York, who heads an organization ofwomen stockholders and votes the proxies of its members aswell as her own shares, and Lewis D. Gilbert, also of NewYork, who represents his own holdings and those of hisfamily—a considerable total. Something I did not know, andlearned at the A.T. & T. meeting (and at others I attendedsubsequently), was that, apart from the prepared speeches ofmanagement, a good many big-company meetings really consistof a dialogue—in some cases it’s more of a duel—between thechairman and the few professional stockholders. Thecontributions of non-professionals run strongly to ill-informed ortame questions and windy encomiums of management, andthus the task of making cogent criticisms or askingembarrassing questions falls to the professionals. Though largelyself-appointed, they become, by default, the sole representativesof a huge constituency that may badly need representing. Someof them are not very good representatives, and a few are sobad 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 permissibleby corporate rules but are certainly impermissible bydrawing-room rules, and sometimes succeed in giving theannual meetings of mighty companies the general air ofbarnyard squabbles. Mrs. Soss, a former public-relations womanwho has been a tireless professional stockholder since 1947, isusually a good many cuts above this level. True, she is notbeyond playing to the gallery by wearing bizarre costumes tomeetings; she tries, with occasional success, to taunt recalcitrantchairmen into throwing her out; she is often scolding andoccasionally abusive; and nobody could accuse her of beingunduly concise. I confess that her customary tone and mannerset 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 ofthem all, almost invariably has a point, and by comparison withhis colleagues he is the soul of brevity and punctilio as well asof dedication and diligence. Despised as professionalstockholders are by most company managements, Mrs. Sossand Mr. Gilbert are widely enough recognized to be listed inWho’s Who in America; furthermore, for what satisfaction itmay bring them, they are the nameless Agamemnons andAjaxes, invariably called “individuals,” in some of the prose epicsproduced by the business Establishment itself. (“The greaterportion of the discussion period was taken up by questions andstatements of a few individuals on matters that can scarcely bedeemed relevant.… Two individuals interrupted the openingstatement of the chairman.… The chairman advised theindividuals who had interrupted to choose between ceasing theirinterruption or leaving the meeting.…” So reads, in part, theofficial report of the 1965 A.T. & T. annual meeting.) Andalthough Mr. Saxon’s piece in the Harvard Business Reviewwas entirely about professional stockholders and how to dealwith them, the author’s corporate dignity did not permit him tomention the name of even one of them. Avoiding this wasquite 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 hehad asked the company to include in the proxy statement andthe meeting agenda had been omitted from both. Mr. Kappel—astern-looking man with steel-rimmed spectacles, who wasunmistakably cast in the old-fashioned, aloof corporate mold,rather than the new, more permissive one—replied shortly thatthe Gilbert proposals had referred to matters that were notproper for stockholder consideration, and had been submittedtoo late, anyhow. Mr. Kappel then announced that he wasabout to report on company operations, whereupon theeighteen other directors filed off the platform. Evidently, theyhad been there only to be introduced, not to field questionsfrom stockholders. Exactly where they went I don’t know; theyvanished from my field of vision, and I wasn’t enlightenedwhen, later on in the meeting, Mr. Kappel responded to astockholder’s question as to their whereabouts with the laconicstatement “They’re here.” Going it alone, Mr. Kappel said in hisreport that “business is booming, earnings are good, and theprospect ahead is for more of the same,” declared that A.T. &T. was eager for the Federal Communications Commission toget on with its investigation of telephone rates, since thecompany had “no skeletons in the closet,” and then painted apicture 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 themanagement-sponsored slate of directors for the coming yearhad been duly nominated, Mrs. Soss rose to make anomination of her own—Dr. Frances Arkin, a psychoanalyst. Inexplanation, Mrs. Soss said that she felt A.T. & T. ought tohave a woman on its board, and that, furthermore, shesometimes felt some of the company’s executives would bebenefited by occasional psychiatric examinations. (This remarkseemed to me gratuitous, but the balance of manners betweenbosses and stockholders was subsequently redressed, at least tomy mind, at another meeting, when the chairman suggestedthat some of his firm’s stockholders ought to see apsychiatrist.) The nomination of Dr. Arkin was seconded by Mr.
Gilbert, although not until Mrs. Soss, who was sitting a coupleof seats from him, had reached over and nudged himvigorously in the ribs. Presently, a professional stockholdernamed Evelyn Y. Davis protested the venue of the meeting,complaining that she had been forced to come all the wayfrom New York by bus. Mrs. Davis, a brunette, was theyoungest and perhaps the best-looking of the professionalstockholders but, on the basis of what I saw at the A.T. & T.
meeting and others, not the best informed or the mosttemperate, serious-minded, or worldly-wise. On this occasion,she was greeted by thunderous boos, and when Mr. Kappelanswered her by saying, “You’re out of order. You’re justtalking to the wind,” he was loudly cheered. It was only thenthat I understood the nature of the advantage that thecompany had gained by moving its meeting away from NewYork: it had not succeeded in shaking off the gadflies, but ithad succeeded in putting them in a climate where they weresubject to the rigors of that great American emotion, regionalpride. A lady in a flowered hat who said she was from DesPlaines, Illinois, emphasized the point by rising to say, “I wishsome of the people here would behave like intelligent adults,rather than two-year-olds.” (Prolonged applause.)Even so, the sniping from the East went on, and bythree-thirty, when the meeting had been in session for twohours, Mr. Kappel was clearly getting testy; he began pacingimpatiently around the platform, and his answers got shorterand shorter. “O.K., O.K.” was all he replied to one complaintthat he was dictatorial. The climax came in a wrangle betweenhim and Mrs. Soss about the fact that A.T. & T., although ithad listed the business affiliations of its nominees for director ina pamphlet that was handed out at the meeting, had failed tolist them in the material mailed out to the stockholders, theoverwhelming majority of whom were not at the meeting andhad done their voting by proxy. Most other big companiesmake such disclosures in their mailed proxy statements, so thestockholders were apparently entitled to a reasonableexplanation of why A.T. & T. had failed to do so, butsomewhere along the way reason was left behind. As theexchange progressed, Mrs. Soss adopted a scolding tone andMr. Kappel an icy one; as for the crowd, it was having a finetime 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, ifyou’d just listen instead of talking—” Mr. Kappel returned. ThenMrs. Soss said something I didn’t catch, and it must have beena telling bit of chairman-baiting, because Mr. Kappel’s mannerchanged completely, from ice to fire; he began shaking hisfinger and saying he wouldn’t stand for any more abuse, andthe floor microphone that Mrs. Soss had been using wasabruptly turned off. Followed at a distance of ten or fifteen feetby a uniformed security guard, and to the accompaniment ofdeafening booing and stamping, Mrs. Soss marched up the aisleand took a stand in front of the platform, facing Mr. Kappel,who informed her that he knew she wanted him to have herthrown out and that he declined to comply.
Eventually, Mrs. Soss went back to her seat and everybodycalmed down. The rest of the meeting, given over largely toquestions and comments from amateur stockholders, ratherthan professional ones, was certainly less lively than what hadgone before, and not noticeably higher in intellectual content.
Stockholders from Grand Rapids, Detroit, and Ann Arbor allexpressed the view that it would be best to let the directorsrun the company, although the Grand Rapids man objectedmildly that the “Bell Telephone Hour” couldn’t be received ontelevision 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 itcould pay higher dividends. A stockholder from rural Louisianastated that when he picked up his telephone lately, the operatordidn’t answer for five or ten minutes. “Ah brang it to yourattention,” the Louisiana man said, and Mr. Kappel promised tohave somebody look into the matter. Mrs. Davis raised acomplaint about A.T. & T.’s contributions to charity, giving Mr.
Kappel the opportunity to reply that he was glad the worldcontained people more charitable than she. (Tax-exemptapplause.) A Detroit man said, “I hope you won’t let the abuseyou’ve been subjected to by a few malcontents keep you frombringing the meeting back to the great Midwest again.” It wasannounced that Dr. Arkin had been defeated for a seat on theboard, since she had received a vote of only 19,106 sharesagainst some four hundred million, proxy votes included, foreach candidate on the management slate. (By approving themanagement slate, a proxy voter can, in effect, oppose a floornomination, even though he knows nothing about it.) And thatwas how the 1966 annual meeting of the world’s largestcompany went—or how it went until five-thirty, when all but afew hundred stockholders had left, and when I headed for theairport to catch a plane back to New York.
THE A.T. & T. meeting left me in a thoughtful mood. Annualmeetings, I reflected, can be times to try the soul of anadmirer of representative democratic government, especiallywhen he finds himself guiltily sympathizing with the chairmanwho is being badgered from the floor. The professionalstockholders, in their wilder moments, are management’s secretweapon; a Mrs. Soss and a Mrs. Davis at their most stridentcould have made Commodore Vanderbilt and Pierpont Morganseem like affable old gentlemen, and they can make a latter-daymagnate like Mr. Kappel seem like a henpecked husband, if notactually a champion of stockholders’ rights. At such moments,the professional stockholders become, from a practicalstandpoint, enemies of intelligent dissent. On the other hand, Ithought, they deserve sympathy, too, whether or not onebelieves they have right on their side, because they are in theposition of representing a constituency that doesn’t want to berepresented. It’s hard to imagine anyone more reluctant toclaim his democratic rights, or more suspicious of anyone whotries to claim them for him, than a dividend-fattenedstockholder—and, of course, most stockholders are thoroughlydividend-fattened these days. Berle speaks of the estate ofstockholding as being by its nature “passive-receptive,” ratherthan “managing and creating;” most of the A.T. & T.
stockholders in Detroit, it seemed to me, were so deeplydevoted to the notion of the company as Santa Claus that theywent beyond passive receptivity to active cupboard love. Andthe professional stockholders, I felt, had taken on anassignment almost as thankless as that of recruiting for theYoung Communist League among the junior executives of theChase Manhattan Bank.
In view of Chairman Phillippe’s warning to General Electricstockholders at Schenectady in 1965, and of the report aboutthe company’s hard-line task force, it was with a sense ofbeing engaged in hot pursuit that I boarded a southboundPullman for the General Electric annual meeting. This one washeld in Atlanta’s Municipal Auditorium, a snappy hall, the rearof which was brightened by an interior garden complete withtrees and a lawn, and in spite of the fact that it was held ona languorous, rainy Southern spring morning, more than athousand G.E. stockholders turned out. As far as I could see,three of them were Negroes, and it was not long before I sawthat another of them was Mrs. Soss.
However exasperated he may have become the previous yearin Schenectady, Mr. Phillippe, who also conducted the 1966meeting, was in perfect control of himself and of the situationthis time around. Whether he was expatiating on the wondersof G.E.’s balance sheet and its laboratory discoveries or sparringwith the professional stockholders, he spoke in the samesingsong way, delicately treading the thin line between patient,careful exposition and irony. Mr. Saxon, in his HarvardBusiness Review article, had written, “Top executives arefinding it necessary to learn how to lessen the adverse impactof the few disrupters on the majority of shareowners, whilesimultaneously enhancing the positive effects of the good thingswhich do take place in the annual meeting,” and, havinglearned sometime earlier that the same Mr. Saxon had beenengaged by G.E. as an adviser on stockholder relations, Icouldn’t help suspecting that Mr. Philippe’s performance was ademonstration of Saxonism in action. The professionalstockholders, for their part, responded by adopting precisely thesame ambiguous style, and the resulting dialogue had thegeneral air of a conversation between two people who havequarrelled and then decided, not quite wholeheartedly, to makeit up. (The professional stockholders might have demanded toknow how much money G.E. had spent in the interest ofkeeping them under control, but they missed the chance.) Oneof the exchanges in this vein achieved a touch of wit. Mrs.
Soss, speaking in her sweetest tone, called attention to the factthat one of the board-of-directors candidates—Frederick L.
Hovde, President of Purdue University and former chairman ofthe Army Scientific Advisory Panel—owned only ten shares ofG.E. stock, and said she felt that the board should be madeup of more substantial holders, whereupon Mr. Philippe pointedout, just as sweetly, that the company had many thousands ofholders of ten or fewer shares, Mrs. Soss among them, andsuggested that perhaps these small holders were deserving ofrepresentation on the board by one of their number. Mrs. Sosshad to concede a fine stroke of chairmanship, and she did. Onanother matter, although decorum was stringently maintained byboth sides, outward accord was less complete. Severalstockholders, Mrs. Soss among them, had formally proposedthat the company adopt for its director elections the systemcalled cumulative voting, under which a stockholder mayconcentrate all the votes he is entitled to on a single candidaterather than spread them over the whole slate, and whichtherefore gives a minority group of stockholders a much betterchance of electing one representative to the board. Cumulativevoting, 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 morethan twenty states, and it is used by some four hundredcompanies listed on the New York Stock Exchange.
Nevertheless, Mr. Phillippe did not find it necessary to answerMrs. Soss’s argument for cumulative voting; he chose instead tostand on a brief company statement on this subject that hadbeen previously mailed out to stockholders, the main point ofwhich was that the presence on the G.E. board, as a result ofcumulative voting, of representatives of special-interest groupsmight have a “divisive and disruptive effect.” Of course, Mr.
Phillippe did not say he knew, as he doubtless did know, thatthe company had in hand more than enough proxies to defeatthe proposal.
Some companies, like some animals, have their private, highlyspecialized gadflies, who harass them and nobody else, andGeneral Electric is one. In this instance, the gadfly was Louis A.
Brusati, of Chicago, who at the company’s meetings over thepast thirteen years had advanced thirty-one proposals, all ofwhich had been defeated by a vote of at least ninety-seven percent to three per cent. In Atlanta, Mr. Brusati, a gray-hairedman built like a football player, was at it again—not withproposals this time but with questions. For one thing, hewanted to know why Mr. Phillippe’s personal holdings of G.E.
stock, listed in the proxy statement, now were four hundredand twenty-three shares fewer than they had been a year ago.
Mr. Phillippe replied that the difference represented shares thathe had contributed to family trust funds, and added, mildly butwith emphasis, “I could say it’s none of your business. I believeI have a right to the privacy of my affairs.” There was morereason for the mildness than for the emphasis, as Mr. Brusatidid not fail to point out, in an impeccably unemotionalmonotone; many of Mr. Phillippe’s shares had been acquiredunder options at preferential prices not available to others, and,moreover, the fact that Mr. Phillippe’s precise holdings hadbeen included in the proxy statement clearly showed that in theopinion of the Securities and Exchange Commission his holdingswere Mr. Brusati’s business. Going on to the matter of the feespaid directors, Mr. Brusati elicited from Mr. Phillippe theinformation that over the past seven years these had beenraised from twenty-five hundred dollars per annum first to fivethousand dollars and then to seventy-five hundred. The ensuingdialogue 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 andeloquent orations by stockholders on the virtues of GeneralElectric and of the South, but this rather elegantly ellipticalexchange between Mr. Brusati and Mr. Phillippe stuck in mymind, for it seemed to sum up the spirit of the meeting. Onlyafter adjournment—which came at twelve-thirty, following Mr.
Phillippe’s announcement that the unopposed slate of directorshad been elected and that cumulative voting had lost by 97.51per cent to 2.49 per cent—did I realize that not only had therebeen no stamping, booing, or shouting, as there had been inDetroit, but regional pride had not had to be invoked againstthe professional stockholders. It had been General Electric’s holecard, I felt, but General Electric had won on the board, withoutneeding to turn it up.
EACH meeting I attended had its easily discernible characteristictone, and that of Chas. Pfizer & Co., the diversifiedpharmaceutical and chemical firm, was amicability. Pfizer, whichin previous years had customarily held its annual meeting at itsheadquarters in Brooklyn, reversed the trend by moving thisyear’s meeting right into the lair of the most vocal dissenters,midtown Manhattan, but everything that I saw and heardconvinced me that the motivation behind this move had beennot a brash resolve on the company’s part to beard the lionsin their den but a highly unfashionable desire to get themaximum possible turnout. Pfizer seemed to feel self-confidentenough to meet its stockholders with its guard down. Forinstance, in contrast with the other meetings I attended, nostockholder tickets were collected or credentials checked at theentrance to the Grand Ballroom of the Commodore Hotel,where the Pfizer meeting was held; Fidel Castro himself, whoseoratorical style I have occasionally felt that the professionalstockholders were using as a model, could presumably havewalked in and said whatever he chose. Some seventeenhundred persons, or nearly enough to fill the ballroom, showedup, and all the members of the Pfizer board of directors saton the platform from start to finish and answered anyquestions addressed to them individually.
Speaking, appropriately, with a faint trace of a Brooklynaccent, Chairman John E. McKeen welcomed the stockholdersas “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 saidthat on the way out everyone present would be given a bigfree-sample kit of Pfizer consumer products, such as Barbasol,Desitin, and Imprévu. Wooed thus by endearments and thepromise of gifts, and further softened up by the report ofPresident John J. Powers, Jr., on current operations (recordsall around) and immediate prospects (more records expected),the most intransigent professional stockholder would have beenhard put to it to mount much of a rebellion at this particularmeeting, and, as it happened, the only professional presentseemed to be John Gilbert, brother of Lewis. (I learned laterthat Lewis Gilbert and Mrs. Davis were in Cleveland that day,attending the U.S. Steel meeting.) John Gilbert is the sort ofprofessional stockholder the Pfizer management deserves, orwould like to think it does. With an easygoing manner and ahabit of punctuating his words with self-deprecating little laughs,he is the most ingratiating gadfly imaginable (or was on thisoccasion; I’m told he isn’t always), and as he ran throughwhat seemed to be the standard Gilbert-family repertoire ofquestions—on the reliability of the firm’s auditors, the salaries ofits officers, the fees of its directors—he seemed almostapologetic that duty called on him to commit the indelicacy ofasking such things. As for the amateur stockholders present,their questions and comments were about like those at theother meetings I’d attended, but this time their attitude towardthe role of the professional stockholder was noticeably different.
Instead of being overwhelmingly opposed, they appeared to besplit; to judge from the volume of clapping and of discreetgroaning, about half of those present considered Gilbert anuisance and half considered him a help. Powers left no doubtabout how he felt; before adjourning the meeting he said,without irony, that he had welcomed Gilbert’s questions, andmade a point of inviting him to come again next year. And,indeed, during the later stages of the Pfizer meeting, whenGilbert, in a conversational way, was praising the company forsome things and criticizing it for others, and the variousmembers of the board were replying to his comments just asinformally, I got for the first time a fleeting sense of genuinecommunication between stockholders and managers.
THE Radio Corporation of America, which had held its last twomeetings far from its New York headquarters—in Los Angelesin 1964, in Chicago in 1965—reserved the current trend evenmore decisively than Pfizer by convening this time in CarnegieHall. The entire orchestra and the two tiers of boxes werecompletely filled with stockholders—about twenty-three hundredof them, of whom a strikingly larger proportion than at any ofmy other meetings was male. Mrs. Soss and Mrs. Davis wereon hand, though, along with Lewis Gilbert and someprofessional stockholders I hadn’t seen before, and, as withPfizer, the company’s whole board of directors sat on theplatform, where the chief centers of attraction in R.C.A.’s casewere David Sarnoff, the company’s seventy-five-year-oldchairman, 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: theevident respect, amounting almost to veneration, of thestockholders for their celebrated chairman, and anunaccustomed disposition of the amateur stockholders to speakup for themselves. The elder Mr. Sarnoff, looking hale andready for anything, conducted the meeting, and he and severalother R.C.A. executives gave reports on company operationsand 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 ajolt on one occasion, though, when I heard Walter D. Scott,chairman of R.C.A.’s subsidiary the National BroadcastingCompany, say in connection with his network’s televisionprogramming that “creative resources are always running aheadof demand.”
No one objected to that statement or to anything else in theglowing reports, but when they were over the stockholders hadtheir say on other matters. Mr. Gilbert raised some favoritequestions of his about accounting procedures, and arepresentative of R.C.A.’s accountants, Arthur Young & Co.,made replies that seemed to satisfy Mr. Gilbert. A Dickensianelderly lady, who identified herself as Mrs. Martha Brand andsaid she held “many thousands” of shares of R.C.A. stock,expressed the view that the accounting procedures of thecompany should not even be questioned. I have since learnedthat Mrs. Brand is a professional stockholder who is ananomaly within the profession, in that she leans strongly towardthe management view of things. Mr. Gilbert then advanced aproposal for the adoption of cumulative voting, supporting itwith about the same arguments that Mrs. Soss had used atthe G.E. meeting. Mr. Sarnoff opposed the motion, and so didMrs. Brand, who explained that she was sure the presentdirectors always worked tirelessly for the welfare of thecorporation, and added this time that she was the holder of“many, many thousands” of shares. Two or three otherstockholders spoke up in favor of cumulative voting—the onlyoccasion at any meeting on which I saw stockholders not easilyidentifiable as professionals speak in dissent on a matter ofsubstance. (Cumulative voting was defeated, 95.3 per cent to4.7 per cent.) Mrs. Soss, still in as mild a mood as in Atlanta,said she was delighted to see a woman, Mrs. Josephine YoungCase, sitting on the stage as a member of the R.C.A. board,but deplored the fact that Mrs. Case’s principal occupation wasgiven on the proxy statement as “housewife.” Couldn’t awoman who was chairman of the board of Skidmore College atleast be called a “home executive”? Another lady stockholderset off a round of applause by delivering a paean to ChairmanSarnoff, whom she called “the marvellous Cinderella man of thetwentieth century.”
Mrs. Davis—who had earlier objected to the site of themeeting on the ground, which I found dumfounding, thatCarnegie Hall was “too unsophisticated” for R.C.A.—advanced aresolution calling for company action “to insure that hereafterno person shall serve as a director after he shall have attainedthe age of seventy-two.” Even though similar rulings are ineffect in many companies, and even though the proposal, notbeing retroactive, would have no effect upon Mr. Sarnoff’sstatus, it seemed to be aimed at him, and thus Mrs. Davisdemonstrated again her uncanny knack of playing intomanagement’s hands. Nor did she appear to help her cause byputting on a Batman mask (the symbolism of which I didn’tgrasp) when she made it. At all events, the proposal gave riseto several impassioned defenses of Mr. Sarnoff, and one of thespeakers went on to complain bitterly that Mrs. Davis wasinsulting the intelligence of everyone present. At this, theserious-minded Mr. Gilbert leaped up to say, “I quite agreeabout the silliness of her costume, but there is a valid principlein her proposal.” In making this Voltairian distinction, Mr.
Gilbert, to judge from his evident state of agitation, wasachieving a triumph of reason over inclination that was costinghim plenty. Mrs. Davis’s resolution was defeated overwhelmingly;the margin against it served to end the meeting with whatamounted to a rousing vote of confidence in the Cinderellaman.
CLASSIC farce, with elements of slapstick, was the dominantmood of the meeting of the Communications SatelliteCorporation, with which I wound up my meeting-going season.
Comsat is, of course, the glamorous space-age communicationscompany that was set up by the government in 1963 andturned over to public ownership in a celebrated stock sale in1964. Upon arriving at the meeting site—the Shoreham Hotel, inWashington—I was scarcely startled to discover Mrs. Davis, Mrs.
Soss, and Lewis Gilbert among the thousand or so stockholderspresent. Mrs. Davis, decked out in stage makeup, an orangepith helmet, a short red skirt, white boots, and a black sweaterbearing in white letters the legend “I Was Born to Raise Hell,”
had planted herself squarely in front of a battery of televisioncameras. 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 possiblefrom the television cameras. Considering that Mrs. Soss doesnot ordinarily seem to be averse to being photographed, Icould write down this choice of seat only as a hard-wontriumph of conscience akin to Mr. Gilbert’s at Carnegie Hall. Asfor Mr. Gilbert, he took a place not far from Mrs. Soss, andthus, of course, a long way from Mrs. Davis.
Since the previous year, Leo D. Welch, the man who hadconducted the 1965 Comsat meeting with such a firm hand,has been replaced as chairman of the company by JamesMcCormack, a West Point graduate, former Rhodes Scholar,and retired Air Force general with an impeccably polishedmanner, who bears a certain resemblance to the Duke ofWindsor, and Mr. McCormack was conducting this year’ssession. He warmed up with some preliminary remarks in thecourse of which he noted—-smoothly, but not withoutemphasis—that as for the subject of any intervention that astockholder might choose to make, “the field of relevance isquite narrow.” When Mr. McCormack had finished his warmup,Mrs. Soss made a brief speech that may or may not havecome within the field of relevance; I missed most of it, becausethe floor microphone supplied to her wasn’t working right. Mrs.
Davis then claimed the floor, and her mike was working all toowell; as the cameras ground, she launched into an earsplittingtirade against the company and its directors because there hadbeen a special door to the meeting room reserved for theentrance of “distinguished guests.” Mrs. Davis, in a good manywords, said she considered this procedure undemocratic. “Weapologize, and when you go out, please go by any door youwant,” Mr. McCormack said, but Mrs. Davis, clearlyunappeased, went on speaking. And now the mood of farcewas heightened when it became clear that the Soss-Gilbertfaction had decided to abandon all efforts to keep ranks closedwith Mrs. Davis. Near the height of her oration, Mr. Gilbert,looking as outraged as a boy whose ball game is being spoiledby a player who doesn’t know the rules or care about thegame, got up and began shouting, “Point of order! Point oforder!” But Mr. McCormack spurned this offer of parliamentaryhelp; he ruled Mr. Gilbert’s point of order out of order, andbade Mrs. Davis proceed. I had no trouble deducing why hedid this. There were unmistakable signs that he, unlike anyother corporate chairman I had seen in action, was enjoyingevery 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 bemusedspectator.
Eventually, Mrs. Davis’s speech built up to a peak of bothvolume and content at which she began making specificallegations against individual Comsat directors, and at this pointthree security guards—two beefy men and a determined-lookingwoman, all dressed in gaudy bottle-green uniforms that mighthave been costumes for “The Pirates of Penzance”—appeared atthe rear, marched with brisk yet stately tread up the centeraisle, and assumed the position of parade rest in the aislewithin handy reach of Mrs. Davis, whereupon she abruptlyconcluded 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, gavethe sort of glowing report on the company that I had grownaccustomed to, Mr. McCormack going so far as to say thatComsat might start showing its first profit the following yearrather than in 1969, as originally forecast. (It did.) Mr. Gilbertasked what fee, apart from his regular salary, Mr. McCormackreceived for attending directors’ meetings. Mr. McCormackreplied that he got no fee, and when Mr. Gilbert said, “I’mglad you get nothing, I approve of that,” everybody laughedand Mr. McCormack grinned more broadly than ever. (Mr.
Gilbert was clearly trying to make what he considered to be aserious point, but this didn’t seem to be the day for that sortof thing.) Mrs. Soss took a dig at Mrs. Davis by sayingpointedly that anyone who opposed Mr. McCormack ascompany 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 theboard, inasmuch as he had ordered her thrown out last year.
A peppy old gentleman said that he thought the company wasdoing fine and everyone should have faith in it. Once, whenMr. Gilbert said something that Mrs. Davis didn’t like and Mrs.
Davis, without waiting to be recognized, began shouting herobjection across the room, Mr. McCormack gave a shortirrepressible giggle. That single falsetto syllable, magnificentlyamplified by the chairman’s microphone, was the motif of theComsat meeting.
On the plane returning from Washington, as I was musing onthe meetings I had attended, it occurred to me that if therehad been no professional stockholders at them I wouldprobably have learned almost as much as I did about thecompanies’ affairs but that I would have learned a good dealless about their chief executives’ personalities. It had, after all,been the questions, interruptions, and speeches of theprofessional stockholders that brought the companies to life, ina sense, by forcing each chairman to shed his officialportrait-by-Bachrach mask and engage in a human relationship.
More often than not, this had been the hardly satisfactoryhuman relationship of nagger and nagged, but anyone lookingfor humanity in high corporate affairs can’t afford to pick andchoose. Still, some doubts remained. Being thirty thousand feetup in the air is conducive to taking the broader view, and,doing so as we winged over Philadelphia, I concluded that, onthe basis of what I had seen and heard, both companymanagements and stockholders might well consider a lessonKing Lear learned—that when the role of dissenter is left to theFool, there may be trouble ahead for everybody.
Chapter 11 One Free Bite
AMONG THE THOUSANDS of young scientists who were doingvery well in the research-and-development programs ofAmerican companies in the fall of 1962 was one named DonaldW. Wohlgemuth, who was working for the B. F. GoodrichCompany, in Akron, Ohio. A 1954 graduate of the University ofMichigan, where he had taken the degree of Bachelor ofScience in chemical engineering, he had gone directly from theuniversity to a job in the chemical laboratories of Goodrich, ata starting salary of three hundred and sixty-five dollars amonth. Since then, except for two years spent in the Army, hehad worked continuously for Goodrich, in various engineeringand research capacities, and had received a total of fifteensalary 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 ofGerman ancestry, whose horn-rimmed glasses gave him anowlish expression, Wohlgemuth lived in a ranch house inWadsworth, a suburb of Akron, with his wife and theirfifteen-month-old daughter. All in all, he seemed to be theyoung American homme moyen réussi to the point ofboredom. What was decidedly not routine about him, though,was the nature of his job; he was the manager of Goodrich’sdepartment of space-suit engineering, and over the past years,in the process of working his way up to that position, he hadhad a considerable part in the designing and construction ofthe suits worn by our Mercury astronauts on their orbital andsuborbital flights.
Then, in the first week of November, Wohlgemuth got aphone call from an employment agent in New York, whoinformed him that the executives of a large company in Dover,Delaware, were most anxious to talk to him about thepossibility of his taking a job with them. Despite the caller’sreticence—a trait common among employment agents makingfirst approaches to prospective employees—Wohlgemuth instantlyknew the identity of the large company. The International LatexCorporation, which is best known to the public as a maker ofgirdles and brassiéres, but which Wohlgemuth knew to be alsoone of Goodrich’s three major competitors in the space-suitfield, is situated in Dover. He knew, further, that Latex hadrecently been awarded a subcontract, amounting to somethree-quarters of a million dollars, to do research anddevelopment on space suits for the Apollo, orman-on-the-moon, project. As a matter of fact, Latex had wonthis contract in competition with Goodrich, among others, andwas thus for the moment much the hottest company in thespace-suit field. On top of that, Wohlgemuth was somewhatdiscontented with his situation at Goodrich; for one thing, hissalary, however bountiful it might seem to many thirty-year-olds,was considerably below the average for Goodrich employees ofhis rank, and, for another, he had been turned down not longbefore by the company authorities when he asked forair-conditioning or filtering to keep dust out of the plant areaallocated to space-suit work. Accordingly, after makingarrangements by phone with the executives mentioned by theemployment agent—and they did indeed prove to be Latexmen—Wohlgemuth went to Dover the following Sunday.
He stayed there a day and a half, borrowing Monday fromvacation time that was due him from Goodrich, and gettingwhat he subsequently described as “a real red-carpettreatment.” He was taken on a tour of the Latexspace-suit-development facilities by Leonard Shepard, director ofthe company’s Industrial Products Division. He was entertainedat the home of Max Feller, a Latex vice-president. He wasshown the Dover housing situation by another companyexecutive. Finally, before lunch on Monday, he had a talk withall three of the Latex executives, following which—asWohlgemuth later described the scene in court—the three“removed themselves to another room for approximately tenminutes.” When they reappeared, one of them offeredWohlgemuth the position of manager of engineering for theIndustrial Products Division, which included responsibility forspace-suit development, at an annual salary of $13,700, effectiveat the beginning of December. After getting his wife’s approvalby telephone—and it was not hard to get, since she wasoriginally from Baltimore and was delighted at the prospect ofmoving back to her own part of the world—Wohlgemuthaccepted. He flew back to Akron that night. First thing Tuesdaymorning, Wohlgemuth confronted Carl Effler, his immediate bossat Goodrich, with the news that he was quitting at the end ofthe month to take another job.
“Are you kidding?” Effler asked.
“No, I am not,” Wohlgemuth replied.
Following this crisp exchange, which Wohlgemuth laterreported in court, Effler, in the time-honored tradition ofbereaved bosses, grumbled a bit about the difficulty of finding aqualified replacement before the end of the month. Wohlgemuthspent the rest of the day putting his department’s papers inorder and clearing his desk of unfinished business, and thenext morning he went to see Wayne Galloway, a Goodrichspace-suit executive with whom he had worked closely and hadbeen on the friendliest of terms for a long time; he said laterthat he felt he owed it to Galloway “to explain to him my sideof the picture” in person, even though at the moment he wasnot under Galloway’s supervision in the company chain ofcommand. Wohlgemuth began this interview by rathermelodramatically handing Galloway a lapel pin in the form of aMercury capsule, which had been awarded to him for his workon the Mercury space suits; now, he said, he felt he was nolonger entitled to wear it. Why, then, Galloway asked, was heleaving? Simple enough, Wohlgemuth said—he considered theLatex offer a step up both in salary and in responsibility.
Galloway replied that in making the move Wohlgemuth wouldbe taking to Latex certain things that did not belong tohim—specifically, knowledge of the processes that Goodrich usedin making space suits. In the course of the conversation,Wohlgemuth asked Galloway what he would do if he were toreceive a similar offer. Galloway replied that he didn’t know; forthat matter, he added, he didn’t know what he would do if hewere approached by a group who had a foolproof plan forrobbing a bank. Wohlgemuth had to base his decision onloyalty and ethics, Galloway said—a remark that Wohlgemuthtook as an accusation of bad faith. He lost his temper, he laterexplained, and gave Galloway a rash answer. “Loyalty andethics have their price, and International Latex has paid it,” hesaid.
After that, the fat was in the fire. Later in the morning, Efflercalled Wohlgemuth into his office and told him it had beendecided that he should leave the Goodrich premises as soon aspossible, staying around only long enough to make a list ofprojects that were pending and to go through certain otherformalities. In mid-afternoon, while Wohlgemuth was occupiedwith these tasks, Galloway called him and told him that theGoodrich legal department wanted to see him. In the legaldepartment, he was asked whether he intended to useconfidential information belonging to Goodrich on behalf ofLatex. According to the subsequent affidavit of a Goodrichlawyer, he replied—again rashly—“How are you going to proveit?” He was then advised that he was not legally free to makethe move to Latex. While he was not bound to Goodrich bythe kind of contract, common in American industry, in whichan employee agrees not to do similar work for any competingcompany for a stated period of time, he had, on his returnfrom the Army, signed a routine paper agreeing “to keepconfidential all information, records, and documents of thecompany of which I may have knowledge because of myemployment”—something Wohlgemuth had entirely forgotten untilthe Goodrich lawyer reminded him. Even if he had not madethat agreement, the lawyer told him now, he would beprevented from going to work on space suits for Latex byestablished principles of trade-secrets law. Moreover, if hepersisted in his plan, Goodrich might sue him.
Wohlgemuth returned to his office and put in a call to Feller,the Latex vice-president he had met in Dover. While he waswaiting for the call to be completed, he talked with Effler, whohad come in to see him, and whose attitude toward hisdefection seemed to have stiffened considerably. Wohlgemuthcomplained that he felt at the mercy of Goodrich, which, itseemed to him, was unreasonably blocking his freedom ofaction, and Effler upset him further by saying that what hadhappened during the past forty-eight hours could not beforgotten and might well affect his future with Goodrich.
Wohlgemuth, it appeared, might be sued if he left and scornedif he didn’t leave. When the Dover call came through,Wohlgemuth told Feller that in view of the new situation hewould be unable to go to work for Latex.
That evening, however, Wohlgemuth’s prospects seemed totake a turn for the better. Home in Wadsworth, he called thefamily dentist, and the dentist recommended a local lawyer.
Wohlgemuth told his story to the lawyer, who thereuponconsulted another lawyer by phone. The two counsellors agreedthat Goodrich was probably bluffing and would not really sueWohlgemuth if he went to Latex. The nextmorning—Thursday—officials of Latex called him back to assurehim that their firm would bear his legal expenses in the eventof a lawsuit, and, furthermore, would indemnify him against anysalary losses. Thus emboldened, Wohlgemuth delivered twomessages within the next couple of hours—one in person andone by phone. He told Effler what the two lawyers had toldhim, and he called the legal department to report that he hadnow changed his mind and was going to work at InternationalLatex after all. Later that day, after completing the cleanup jobin his office, he left the Goodrich premises for good, taking withhim no documents.
The following day—Friday—R. G. Jeter, general counsel ofGoodrich, telephoned Emerson P. Barrett, director of industrialrelations for Latex, and spoke of Goodrich’s concern for itstrade secrets if Wohlgemuth went to work there. Barrett repliedthat although “the work for which Wohlgemuth was hired wasdesign and construction of space suits,” Latex was notinterested in learning any Goodrich trade secrets but was “onlyinterested in securing the general professional abilities of Mr.
Wohlgemuth.” That this answer did not satisfy Jeter, orGoodrich, became manifest the following Monday. That evening,while Wohlgemuth was in an Akron restaurant called theBrown Derby, attending a farewell dinner in his honor given byforty or fifty of his friends, a waitress told him that there wasa man outside who wanted to see him. The man was adeputy sheriff of Summit County, of which Akron is the seat,and when Wohlgemuth came out, the man handed him twopapers. One was a summons to appear in the Court ofCommon Pleas on a date a week or so off. The other was acopy of a petition that had been filed in the same court thatday by Goodrich, praying that Wohlgemuth be permanentlyenjoined from, among other things, disclosing to anyunauthorized person any trade secrets belonging to Goodrich,and “performing any work for any corporation … other thanplaintiff, relating to the design, manufacture and/or sale ofhigh-altitude pressure suits, space suits and/or similar protectivegarments.”
THE need for the protection of trade secrets was fullyrecognized in the Middle Ages, when they were so jealouslyguarded by the craft guilds that the guilds’ employees wererigorously prevented from changing jobs. Laissez-faire industrialsociety, since it emphasizes the principle that the individual isentitled to rise in the world by taking the best opportunity heis offered, has been far more lenient about job-jumping, butthe right of an organization to keep its secrets has survived. InAmerican law, the basic commandment on the subject was laiddown by Justice Oliver Wendell Holmes in connection with a1905 Chicago case. Holmes wrote, “The plaintiff has the right tokeep the work which it has done, or paid for doing, to itself.
The fact that others might do similar work, if they wished, doesnot authorize them to steal plaintiff’s.” This admirably downright,if not highly sophisticated, ukase has been cited in almost everytrade-secrets case that has come up since, but over the years,as both scientific research and industrial organization havebecome infinitely more complex, so have the questions of what,exactly, constitutes a trade secret, and what constitutes stealingit. The American Law Institute’s “Restatement of the Law ofTorts,” an authoritative text issued in 1939, grapples manfullywith the first question by stating, or restating, that “a tradesecret may consist of any formula, pattern, device, orcompilation of information which is used in one’s business, andwhich gives him an opportunity to obtain an advantage overcompetitors who do not know or use it.” But in a case heardin 1952 an Ohio court decided that the Arthur Murray methodof teaching dancing, though it was unique and was presumablyhelpful in luring customers away from competitors, was not atrade secret. “All of us have ‘our method’ of doing a millionthings—our method of combing our hair, shining our shoes,mowing our lawn,” the court mused, and concluded that atrade secret must not only be unique and commercially helpfulbut also have inherent value. As for what constitutes thievery oftrade secrets, in a proceeding heard in Michigan in 1939, inwhich the Dutch Cookie Machine Company complained that oneof its former employees was threatening to use its highlyclassified methods to make cookie machines on his own, thetrial court decided that there were no fewer than three secretprocesses by which Dutch Cookie machines were made, andenjoined the former employee from using them in any manner;however, the Michigan Supreme Court, on appeal, found thatthe defendant, although he knew the three secrets, did not planto use them in his own operations, and, accordingly, it reversedthe lower court’s decision and vacated the injunction.
And so on. Outraged dancing teachers, cookie-machinemanufacturers, and others have made their way throughAmerican courts, and the principles of law regarding theprotection of trade secrets have become well established; anydifficulty arises chiefly in the application of these principles toindividual cases. The number of such cases has been risingsharply in recent years, as research and development by privateindustry have expanded, and a good index to the rate of suchexpansion is the fact that eleven and a half billion dollars wasspent in this work in 1962, more than three times the figurefor 1953. No company wants to see the discoveries producedby all that money go out of its doors in the attaché cases, oreven in the heads, of young scientists bound for greenerpastures. In nineteenth-century America, the builder of a bettermousetrap was supposed to have been a cynosure—provided,of course, that the mousetrap was properly patented. In thosedays of comparatively simple technology, patents covered mostproprietary rights in business, so trade-secrets cases were rare.
The better mousetraps of today, however, like the processesinvolved in outfitting a man to go into orbit or to the moon,are often unpatentable.
Since thousands of scientists and billions of dollars might beaffected by the results of the trial of Goodrich v. Wohlgemuth,it naturally attracted an unusual amount of public attention. InAkron, the court proceedings were much discussed both in thelocal paper, the Beacon Journal, and in conversation. Goodrichis an old-line company, with a strong streak of paternalism inits relations with its employees, and with strong feelings aboutwhat it regards as business ethics. “We were exceptionally upsetby what Wohlgemuth did,” a Goodrich executive of longstanding said recently. “In my judgment, the episode causedmore concern to the company than anything that hashappened in years. In fact, in the ninety-three years thatGoodrich has been in business, we had never before entered asuit 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 haverecognized their responsibilities. On one occasion, a Goodrichchemist went to work for another company undercircumstances that made it appear to us that he was going touse our methods. We talked to the man, and to his newemployer, too. The upshot was that the competing companynever brought out the product it had hired our man to workon. That was responsible conduct on the part of both employeeand company. As for the Wohlgemuth case, the localcommunity and our employees were a bit hostile toward us atfirst—a big company suing a little guy, and so on. But theygradually came around to our point of view.”
Interest outside Akron, which was evidenced by a small floodof letters of inquiry about the case, addressed to the Goodrichlegal department, made it clear that Goodrich v. Wohlgemuthwas being watched as a bellwether. Some inquiries were fromcompanies that had similar problems, or anticipated havingthem, and a surprising number were from relatives of youngscientists, asking, “Does this mean my boy is stuck in hispresent job for the rest of his life?” In truth, an importantissue was at stake, and pitfalls awaited the judge who heardthe case, no matter which way he decided. On one side wasthe danger that discoveries made in the course of corporateresearch might become unprotectable—a situation that wouldeventually lead to the drying up of private research funds. Onthe other side was the danger that thousands of scientistsmight, through their very ability and ingenuity, find themselvespermanently locked in a deplorable, and possiblyunconstitutional, kind of intellectual servitude—they would bebarred from changing jobs because they knew too much.
THE trial—held in Akron, presided over by Judge Frank H.
Harvey, and conducted, like all proceedings of its type, withouta jury—began on November 26th and continued throughDecember 12th, with a week’s recess in the middle;Wohlgemuth, who was supposed to have started work at Latexon December 3rd, remained in Akron under a voluntaryagreement with the court, and testified extensively in his owndefense. Injunction, the form of relief that was sought byGoodrich and the chief form of relief that is available to anyonewhose secrets have been stolen, is a remedy that originated inRoman law; it was anciently called “interdict,” and is still socalled in Scotland. What Goodrich was asking, in effect, wasthat the court issue a direct order to Wohlgemuth not onlyforbidding him to reveal Goodrich secrets but also forbiddinghim to take employment in any other company’s space-suitdepartment. Any violation of such an order would be contemptof court, punishable by a fine, or imprisonment, or both. Justhow seriously Goodrich viewed the case became clear when itsteam of lawyers proved to be headed by Jeter himself, who, asvice-president, secretary, the company’s ultimate authority onpatent law, general law, employee relations, union relations, andworkmen’s compensation, and Lord High Practically EverythingElse, had not found time to try a case in court himself for tenyears. The chief defense counsel was Richard A. Chenoweth, ofthe Akron law firm of Buckingham, Doolittle & Burroughs,which Latex, though it was not a defendant in the action, hadretained to handle the case, in fulfillment of its promise toWohlgemuth.
From the outset, the two sides recognized that if Goodrichwas to prevail, it had to prove, first, that it possessed tradesecrets; second, that Wohlgemuth also possessed them, and thata substantial peril of disclosure existed; and, third, that it wouldsuffer irreparable injury if injunctive relief was not granted. Onthe first point, Goodrich attorneys, through their questioning ofEffler, Galloway, and one other company employee, set out toestablish that Goodrich had a number of unassailable space-suitsecrets, among them a way of making the hard shell of aspace helmet, a way of making the visor seal, a way of makinga sock ending, a way of making the inner liner of gloves, away of fastening the helmet onto the rest of the suit, and away of applying a wear-resistant material called neoprene totwo-way-stretch fabric. Wohlgemuth, through his counsel’scross-examinations, sought to show that none of theseprocesses were secrets at all; for example, in the case of theneoprene process, which Effler had described as “a very criticaltrade secret” of Goodrich, defense counsel brought out evidencethat a Latex product that is neither secret nor intended to beworn in outer space—the Playtex Golden Girdle—was made oftwo-way-stretch fabric with neoprene applied to it, and, toemphasize the point, Chenoweth introduced a Playtex GoldenGirdle for all to see. Nor did either side neglect to bring intocourt a space suit, in each instance inhabited. The Goodrichsuit, a 1961 model, was intended to demonstrate what thecompany had achieved by means of research—research that itdid not want to see compromised through the loss of itssecrets. The Latex suit, also a 1961 model, was intended toshow that Latex was already ahead of Goodrich in space-suitdevelopment and would therefore have no interest in stealingGoodrich secrets. The Latex suit was particularly bizarre-looking,and the Latex employee who wore it in court looked almostexcruciatingly uncomfortable, as if he were unaccustomed to theair of earth, or of Akron. “His air tubes weren’t hooked up,and he was hot,” the Beacon Journal explained next day. Atany rate, after he had sat suffering for ten or fifteen minuteswhile defense counsel questioned a witness about his costume,he suddenly pointed in an agonized way to his head, and thecourt record of what followed, probably unique in the annals ofjurisprudence, 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—thatWohlgemuth was privy to Goodrich secrets—was fairly quicklydealt with, because Wohlgemuth’s lawyers conceded that hardlyanything the company knew about space suits had been keptfrom him; they based their defense on, first, the unquestionedfact that he had taken no papers away with him and, second,the unlikelihood that he would be able to remember the detailsof complex scientific processes, even if he wanted to. On thethird element—the matter of irreparable injury—Jeter pointedout that Goodrich, which had made the first full-pressure flyingsuit in history, for the late Wiley Post’s high-altitude experimentsin 1934, and which had since poured vast sums into space-suitresearch and development, was the unquestioned pioneer andhad up to then been considered the leader in the field; hetried to paint Latex, which had been making full-pressure suitsonly since the mid-fifties, as a parvenu with the nefarious planof cashing in on Goodrich’s years of research by hiringWohlgemuth. Even if the intentions of Latex and Wohlgemuthwere the best in the world, Jeter contended, Wohlgemuthwould inevitably reveal Goodrich secrets in the course ofworking in Latex’s space-suit department. In any event, Jeterwas unwilling to assume good intentions. As evidence of badones, there was, on the part of Latex, the fact that the firmhad deliberately sought out Wohlgemuth, and, on the part ofWohlgemuth, the statement he had made to Galloway about theprice of loyalty and ethics. The defense disputed the contentionthat a disclosure of secrets would be inevitable, and, of course,denied evil intentions on anyone’s part. It rounded out its casewith a statement made in court under oath by Wohlgemuth: “Iwill not reveal [to International Latex] any items which in myown mind I would consider to be trade secrets of the B. F.
Goodrich Company.” This, of course, was cold comfort toGoodrich.
Having heard the evidence and the lawyers’ summations,Judge Harvey reserved decision until a later date and issuedan order temporarily forbidding Wohlgemuth to reveal thealleged secrets or to work in the Latex space-suit program; hecould go on the Latex payroll, but he had to stay out of spacesuits until the court’s decision was handed down. Inmid-December, Wohlgemuth, leaving his family behind, went toDover and began working for Latex on other products; early inJanuary, by which time he had succeeded in selling his housein Wadsworth and buying one in Dover, his family joined himat his new stand.
IN Akron, meanwhile, the lawyers had at each other in briefsintended to sway Judge Harvey. Various fine points of lawwere debated, learnedly but inconclusively; yet as the briefswore on, it became increasingly clear that the essence of thecase was quite simple. For all practical purposes, there was nocontroversy over the facts. What remained in controversy wasthe answers to two questions: First, should a man be formallyrestrained from revealing trade secrets when he has not yetcommitted any such act, and when it is not clear that heintends to? And, secondly, should a man be prevented fromtaking a job simply because the job presents him with uniquetemptations to break the law? Having scoured the lawbooks,counsel for the defense found exactly the text quotation theywanted in support of the argument that both questions shouldbe answered in the negative. (Unlike the decisions of othercourts, the general statements of the authors of law textbookshave no official standing in any court, but by using themjudiciously an advocate can express his own opinions insomeone else’s words and buttress them with bibliographicalreferences.) The quotation was from a text entitled “TradeSecrets,” which was written by a lawyer named Ridsdale Ellisand published in 1953, and it read, in part, “Usually it is notuntil there is evidence that the employee [who has changedjobs] has not lived up to his contract, expressed or implied, tomaintain secrecy, that the former employer can take action. Inthe law of torts there is the maxim: Every dog has one freebite. A dog cannot be presumed to be vicious until he hasproved that he is by biting someone. As with a dog, theformer employer may have to wait for a former employee tocommit some overt act before he can act.” To counter thisdoctrine—which, besides being picturesque, appeared to have acrushingly exact applicability to the case underdispute—Goodrich’s lawyers came up with a quotation of theirown from the very same book. (“Ellis on trade secrets,” as thelawyers referred to it in their briefs, was repeatedly used bythe two sides to belabor each other, for the good reason thatit was the only text on the subject available in the SummitCounty law library, where both sides did the bulk of theirresearch.) In support of their cause, Goodrich counsel foundthat Ellis had said, in connection with trade-secrets cases inwhich the defendant was a company accused of luring awayanother company’s confidential employee: “Where theconfidential employee left to enter defendant’s employment, aninference can be drawn to supplement other circumstantialevidence that the latter employment was stimulated by a desireby the defendant to learn plaintiff’s secrets.”
In other words, Ellis apparently felt that when thecircumstances look suspicious, one free bite is not permitted.
Whether he contradicted himself or merely refined his positionis 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 anddeliberated on them, Judge Harvey delivered his decision, in theform of a nine-page essay fraught with suspense. To beginwith, the Judge wrote, he was convinced that Goodrich didhave trade secrets relative to space suits, and that Wohlgemuthmight be able to remember and therefore be able to disclosesome of them to Latex, to the irreparable injury of Goodrich.
He declared, further, that “there isn’t any doubt that the Latexcompany was attempting to gain [Wohlgemuth’s] valuableexperience in this particular specialized field for the reason thatthey had this so-called ‘Apollo’ contract with the government,and there isn’t any doubt that if he is permitted to work inthe space-suit division of the Latex company … he would havean opportunity to disclose confidential information of the B. F.
Goodrich Company.” Still further, Judge Harvey was convincedby the attitude of Latex, as this was evidenced by the conductof its representatives in court, that the company intended to tryto get Wohlgemuth to give it “the benefit of every kind ofinformation he had.” At this point in the opinion, thingscertainly looked black for the defense. However—and the Judgewas well down page 6 before he got to the “however”—whathe had concluded after studying the one-free-bite controversyamong the lawyers was that an injunction cannot be issuedagainst disclosure of trade secrets before such disclosure hasoccurred unless there is clear and substantial evidence of evilintent on the part of the defendant. The defendant in this case,the Judge pointed out, was Wohlgemuth, and if any evil intentwas involved, it appeared to be attributable to Latex ratherthan to him. For this reason, along with some technical ones,he wound up, “It is the view and the Order of this Court thatInjunction be denied against the defendant.”
Goodrich promptly appealed the decision, and the SummitCounty Court of Appeals, pending its own decision on the case,issued another restraining order, which differed from JudgeHarvey’s in that it permitted Wohlgemuth to do space-suit workfor Latex, but still forbade him to disclose Goodrich’s allegedtrade secrets. Accordingly, Wohlgemuth, with an initial victoryunder his belt but with a new legal struggle on his behalfahead, 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 notonly in some of the technical aspects of his decision but in hisfinding that there must be evidence of bad faith on thedefendant’s part before an injunction can be granted. “Thequestion to be decided is not one of good or bad faith, but,rather, whether there is a threat or a likelihood that tradesecrets will be disclosed,” the Goodrich brief declaredroundly—and a little inconsistently, in view of all the time andeffort the company had expended on attempts to pin bad faithon both Latex and Wohlgemuth. Wohlgemuth’s lawyers, ofcourse, did not fail to point out the inconsistency. “It seemsstrange indeed that Goodrich should find fault with this findingof Judge Harvey,” they remarked in their brief. Quite clearly,they had conceived for Judge Harvey feelings so tender as toborder on the protective.
The decision of the Court of Appeals was handed down onMay 22nd. Written by Judge Arthur W. Doyle, with his twocolleagues of the court concurring, it was a partial reversal ofJudge Harvey. Finding that “there exists a present real threatof disclosure, even without actual disclosure,” and that “aninjunction may … prevent a future wrong,” the court grantedan injunction that restrained Wohlgemuth from disclosing toLatex any of the processes and information claimed as tradesecrets by Goodrich. On the other hand, Judge Doyle wrote,“We have no doubt that Wohlgemuth had the right to takeemployment in a competitive business, and to use hisknowledge (other than trade secrets) and experience for thebenefit of his new employer.” Plainly put, Wohlgemuth was atlast free to accept a permanent job doing space-suit work forLatex, provided only that he refrained from disclosing Goodrichsecrets in the course of his work.
NEITHER side carried the case above the Summit County Courtof Appeals—to the Ohio Supreme Court and, beyond that, tothe United States Supreme Court—so with the decision of theAppeals Court the Wohlgemuth case was settled. Public interestin it subsided soon after the trial was over, but professionalinterest continued to mount, and, of course, it mounted stillmore after the Appeals Court decision in May. In March, theNew York City Bar Association, in collaboration with theAmerican Bar Association, had presented a symposium on tradesecrets, with the Wohlgemuth case as its focus. In the latermonths of that year, employers worried about loss of tradesecrets 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-secretscases pending in the courts, the most publicized of them beingthe effort of E. I. du Pont de Nemours & Co. to prevent oneof its former research engineers from taking part in theproduction of certain rare pigments for the American Potash &Chemical Corporation.
It would be logical to suppose that Jeter might be worriedabout enforcement of the Appeals Court’s order—might beafraid that Wohlgemuth, working behind the locked door of theLatex laboratory, and perhaps nursing a grudge againstGoodrich, would take his one free bite in spite of the order, onthe assumption that he would not be caught. However, Jeterdidn’t look at things that way. “Until and unless we learnotherwise, we assume that Wohlgemuth and International Latex,both having knowledge of the court order, will comply with thelaw,” Jeter said after the case was concluded. “No specific stepsby Goodrich to police the enforcement of the order have beentaken, 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 andgo. Out of perhaps twenty-five employees in constant touchwith him, it’s likely that one or two will leave Latex within acouple of years. Furthermore, you can learn quite a lot fromsuppliers who deal with both Latex and Goodrich; and alsofrom customers. However, I do not feel that the order will beviolated. Wohlgemuth has been through a lawsuit. It was quitean experience for him. He now knows his responsibilities underthe law, which he may not have known before.”
Wohlgemuth himself said late in 1963 that since the conclusionof the case he had received a great many inquiries from otherscientists working in industry, the gist of their questions being,“Does your case mean that I’m married to my job?” He toldthem that they would have to draw their own conclusions.
Wohlgemuth also said that the court order had had no effecton his work in the Latex space-suit department. “Precisely whatthe Goodrich secrets are is not spelled out in the order, andtherefore I have acted as if all the things they alleged to besecrets actually are secrets,” he said. “Nevertheless, myefficiency is not impaired by my avoiding disclosure of thosethings. Take, for example, the use of polyurethane as an innerliner—a process that Goodrich claimed as a trade secret. Thatwas something Latex had tried previously and foundunsatisfactory. Therefore, it wasn’t planning to investigate furtheralong those lines, and it still isn’t, I am just as effective forLatex as if there had never been an injunction. However, I willsay this. If I were to get a better offer from some othercompany now, I’m sure I would evaluate the question verycarefully—which is what I didn’t do the last time.”
Wohlgemuth—the new, post-trial Wohlgemuth—spoke in anoticeably slow, tense way, with long pauses for thought, as ifthe wrong word might bring lightning down on his head. Hewas a young man with a strong sense of belonging to thefuture, and he looked forward to making, if he could, amaterial contribution to putting man on the moon. At the sametime, Jeter may have been right; he was also a man who hadrecently spent almost six months in the toils of the law, andwho worked, and would continue to work, in the knowledgethat a slip of the tongue might mean a fine, imprisonment, andprofessional ruin.


Chapter 12 In Defense of Sterling
THE FEDERAL RESERVE BANK of New York stands on the blockbounded by Liberty, Nassau, and William Streets and MaidenLane, on the slope of one of the few noticeable hillocksremaining in the bulldozed, skyscraper-flattened earth ofdowntown Manhattan. Its entrance faces Liberty, and its mienis dignified and grim. Its arched ground-floor windows, designedin imitation of those of the Pitti and Riccardi Palaces inFlorence, are protected by iron grilles made of bars as thick asa boy’s wrist, and above them are rows of small rectangularwindows set in a blufflike fourteen-story wall of sandstone andlimestone, the blocks of which once varied in color from brownthrough gray to blue, but which soot has reduced to acommon gray; the fa?ade’s austerity is relieved only at the levelof the twelfth floor, by a Florentine loggia. Two giant ironlanterns—near-replicas of lanterns that adorn the Strozzi Palacein Florence—flank the main entrance, but they seem to bethere less to please or illuminate the entrant than to intimidatehim. Nor is the building’s interior much more cheery orhospitable; the ground floor features cavernous groin vaultingand high ironwork partitions in intricate geometric, floral, andanimal designs, and it is guarded by hordes of bank securitymen, whose dark-blue uniforms make them look much likepolicemen.
Huge and dour as it is, the Federal Reserve Bank, as abuilding, arouses varied feelings in its beholders. To admirers ofthe 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 ofnineteenth-century heavy-footedness in bank architecture, eventhough it was actually completed in 1924. To an awestruckwriter for the magazine Architecture in 1927, it seemed “asinviolable as the Rock of Gibraltar and no less inspiring ofone’s reverent obeisance,” and possessed of “a quality which,for lack of a better word, I can best describe as ‘epic’” To themothers of young girls who work in it as secretaries or pages,it looks like a particularly sinister sort of prison. Bank robbersare apparently equally respectful of its inviolability; there hasnever been the slightest hint of an attempt on it. To theMunicipal Art Society of New York, which now rates it as afull-fledged landmark, it was until 1967 only a second-classlandmark, being assigned to Category II, “Structures of GreatLocal or Regional Importance Which Should Be Preserved,”
rather than Category I, “Structures of National ImportanceWhich Should Be Preserved at All Costs.” On the other hand,it has one indisputable edge on the Pitti, Riccardi, and StrozziPalaces: It is bigger than any of them. In fact, it is a biggerFlorentine palace than has ever stood in Florence.
The Federal Reserve Bank of New York is set apart from theother banks of Wall Street in purpose and function as well asin appearance. As by far the largest and most important of thetwelve regional Federal Reserve Banks—which, together with theFederal Reserve Board in Washington and the sixty-twohundred commercial banks that are members, make up theFederal Reserve System—it is the chief operating arm of theUnited States’ central-banking institution. Most other countrieshave only one central bank—the Bank of England, the Bank ofFrance, and so on—rather than a network of such banks, butthe central banks of all countries have the same dual purpose:
to keep the national currency in a healthy state by regulatingits supply, partly through the degree of ease or difficulty withwhich it may be borrowed, and, when necessary, to defend itsvalue in relation to that of other national currencies. Toaccomplish the first objective, the New York bank co?perateswith its parent board and its eleven brother banks inperiodically adjusting a number of monetary throttles, of whichthe most visible (although not necessarily the most important) isthe rate of interest at which it lends money to other banks. Asto the second objective, by virtue of tradition and of itssituation in the nation’s and the world’s greatest financial center,the Federal Reserve Bank of New York is the sole agent of theFederal Reserve System and of the United States Treasury indealings with other countries. Thus, on its shoulders falls thechief responsibility for operations in defense of the dollar. Thoseresponsibilities were weighing heavily during the great monetarycrisis of 1968—and, indeed, since the defense of the dollarsometimes involves the defense of other currencies as well, overthe preceding three and a half years.
Charged as it is with acting in the national interest—in facthaving no other purpose—the Federal Reserve Bank of NewYork, together with its brother banks, obviously is an arm ofgovernment. Yet it has a foot in the free-enterprise camp; inwhat some might call characteristic American fashion, it standssquarely astride the chalk line between government andbusiness. Although it functions as a government agency, itsstock is privately owned by the member banks throughout thecountry, to which it pays annual dividends limited by law to sixper 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 thebank’s own board of directors, and their salaries are paid notout of the federal till but out of the bank’s own income. Yetthat income—though, happily, always forthcoming—is entirelyincidental to the bank’s purpose, and if it rises above expensesand dividends the excess is automatically paid into the UnitedStates Treasury. A bank that considers profits incidental isscarcely the norm in Wall Street, and this attitude puts FederalReserve 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 meregovernment bureaucrats; conversely, having their gaze fixedsteadily above the mire of cupidity entitles them to be calledthe intellectuals, if not actually the aristocrats, of Wall Streetbanking.
Under them lies gold—still the bedrock on which all moneynominally rests, though in recent times a bedrock that hasbeen shuddering ominously under the force of variousmonetary earthquakes. As of March, 1968, more than thirteenthousand tons of the stuff, worth more than thirteen billiondollars and amounting to more than a quarter of all themonetary gold in the free world, reposed on actual bedrockseventy-six feet below the Liberty Street level and fifty belowsea level, in a vault that would be inundated if a system ofsump pumps did not divert a stream that originally wanderedthrough Maiden Lane. The famous nineteenth-century Britisheconomist Walter Bagehot once told a friend that when hisspirits were low it used to cheer him to go down to his bankand “dabble my hand in a heap of sovereigns.” Although it is,to say the least, a stimulating experience to go down and lookat the gold in the Federal Reserve Bank vault, which is in theform not of sovereigns but of dully gleaming bars about thesize and shape of building bricks, not even the best-accreditedvisitor is allowed to dabble his hands in it; for one thing, thebars weigh about twenty-eight pounds each and are thereforeill-adapted to dabbling, and, for another, none of the goldbelongs to either the Federal Reserve Bank or the UnitedStates. All United States gold is kept at Fort Knox, at the NewYork Assay Office, or at the various mints; the gold depositedat the Federal Reserve Bank belongs to some seventy othercountries—the largest depositors being European—which find itconvenient to store a good part of their gold reserves there.
Originally, most of them put gold there for safekeeping duringthe Second World War. After the war, the Europeannations—with the exception of France—not only left it in NewYork but greatly increased its quantity as their economiesrecovered.
Nor does the gold represent anything like all the foreigndeposits at Liberty Street; investments of various sorts broughtthe March ’68 total to more than twenty-eight billion. As abanker for most of the central banks of the non-Communistworld, and as the central bank representing the world’s leadingcurrency, the Federal Reserve Bank of New York is theundisputed chief citadel of world currency. By virtue of thisposition, it is afforded a kind of fluoroscopic vision of theinsides of international finance, enabling it to detect at a glancean incipiently diseased currency here, a faltering economy there.
If, for example, Great Britain is running a deficit in her foreigndealings, this instantly shows up in the Federal Reserve Bank’sbooks in the form of a decline in the Bank of England’sbalance. In the fall of 1964, precisely such a decline wasoccurring, and it marked the beginning of a long, gallant,intermittently hair-raising, and ultimately losing struggle by anumber of countries and their central banks, led by the UnitedStates and the Federal Reserve, to safeguard the existing orderof world finance by preserving the integrity of the poundsterling. One trouble with imposing buildings is that they have atendency to belittle the people and activities they enclose, andmost of the time it is reasonably accurate to think of theFederal Reserve Bank as a place where often bored peoplepush around workaday slips of paper quite similar to thosepushed around in other banks. But since 1964 some of theevents there, if they have scarcely been capable of inspiringreverent obeisance, have had a certain epic quality.
EARLY in 1964, it began to be clear that Britain, which forseveral years had maintained an approximate equilibrium in herinternational balance of payments—that is, the amount of moneyshe had annually sent outside her borders had been aboutequal to the amount she had taken in—was running asubstantial deficit. Far from being the result of domesticdepression in Britain, this situation was the result ofoverexuberant domestic expansion; business was booming, andnewly affluent Britons were ordering bales and bales of costlygoods from abroad without increasing the exports of Britishgoods on anything like the same scale. In short, Britain wasliving beyond her means. A substantial balance-of-paymentsdeficit is a worry to a relatively self-sufficient country like theUnited States (indeed, the United States was having that veryworry at that very time, and it would for years to come), butto a trading nation like Britain, about a quarter of whose entireeconomy is dependent on foreign trade, it constitutes a gravedanger.
The situation was cause for growing concern at the FederalReserve Bank, and the focal point of the concern was theoffice, on the tenth floor, of Charles A. Coombs, the bank’svice-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, Coombsdaily got reports that a torrent of money was leaving Britain.
From underground, word rose that the pile of gold bars in thelocker assigned to Britain was shrinking appreciably—notthrough any foul play in the vault but because so many of thebars were being transferred to other lockers in settlement ofBritain’s international debts. From the foreign-exchange tradingdesk, on the seventh floor, the news almost every afternoonwas that the open-market quotations on the pound in terms ofdollars had sunk again that day. During July and August, asthe quotation dropped from $2.79 to $2.7890, and then to$2.7875, the situation was regarded on Liberty Street as soserious that Coombs, who would normally handleforeign-exchange matters himself, only making routine reports tothose higher up, was constantly conferring about it with hisboss, the Federal Reserve Bank’s president, a tall, cool,soft-spoken man named Alfred Hayes.
Mystifyingly complex though it may appear, what actuallyhappens in international financial dealings is essentially whathappens in private domestic transactions. The money worries ofa nation, like those of a family, are the consequence of havingtoo much money go out and not enough come in. The foreignsellers of goods to Britain cannot spend the pounds they arepaid in their own countries, and therefore they convert theminto their own currencies; this they do by selling the pounds inthe foreign-exchange markets, just as if they were sellingsecurities on a stock exchange. The market price of the poundfluctuates in response to supply and demand, and so do theprices of all other currencies—all, that is, except the dollar, thesun in the planetary system of currencies, inasmuch as theUnited States has, since 1934, stood pledged to exchange goldin any quantity for dollars at the pleasure of any nation at thefixed price of thirty-five dollars per ounce.
Under the pressure of selling, the price of the pound goesdown. But its fluctuations are severely restricted. The influenceof market forces cannot be allowed to lower or raise the pricemore than a couple of cents below or above the pound’s parvalue; if such wild swings should occur unchecked, bankers andbusinessmen everywhere who traded with Britain would findthemselves 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 BrettonWoods, New Hampshire, in 1944, and elaborated at variousother places at later times, the pound in 1964, nominally valuedat $2.80, was allowed to fluctuate only between $2.78 and$2.82, and the enforcer of this abridgment of the law of supplyand demand was the Bank of England. On a day when thingswere going smoothly, the pound might be quoted on theexchange markets at, say, $2.7990, a rise of $.0015 from theprevious day’s closing. (Fifteen-hundredths of a cent doesn’tsound like much, but on a round million dollars, which isgenerally the basic unit in international monetary dealings, itamounts to fifteen hundred dollars.) When that happened, theBank of England needed to do nothing. If, however, the poundwas strong in the markets and rose to $2.82 (something itshowed absolutely no tendency to do in 1964), the Bank ofEngland was pledged to—and would have been very happyto—accept gold or dollars in exchange for pounds at that price,thereby preventing a further increase in the price and at thesame time increasing its own reserve of gold and dollars, whichserve as the pound’s backing. If, on the other hand (and thiswas a more realistic hypothesis), the pound was weak andsank to $2.78, the Bank of England’s sworn duty was tointervene in the market and buy with gold or dollars allpounds offered for sale at that price, however deeply this mighthave cut into its own reserves. Thus, the central bank of aspendthrift country, like the father of a spendthrift family, iseventually forced to pay the bills out of capital. But in times ofserious currency weakness the central bank loses even more ofits reserves than this would suggest, because of the vagaries ofmarket psychology. Prudent importers and exporters seeking toprotect their capital and profits reduce to a minimum the sumthey hold in pounds and the length of time they hold it.
Currency speculators, whose noses have been trained to sniffout weakness, pounce on a falling pound and make enormousshort sales, in the expectation of turning a profit on a furtherdrop, and the Bank of England must absorb the speculativesales along with the straightforward ones.
The ultimate consequence of unchecked currency weakness issomething that may be incomparably more disastrous in itseffects than family bankruptcy. This is devaluation, anddevaluation of a key world currency like the pound is therecurrent nightmare of all central bankers, whether in London,New York, Frankfurt, Zurich, or Tokyo. If at any time thedrain on Britain’s reserves became so great that the Bank ofEngland was unable, or unwilling, to fulfill its obligation tomaintain the pound at $2.78, the necessary result would bedevaluation. That is, the $2.78-to-$2.82 limitation would beabruptly abrogated; by simple government decree the par valueof the pound would be reduced to some lower figure, and anew set of limits established around the new parity. The heartof the danger was the possibility that what followed might bechaos not confined to Britain. Devaluation, as the most heroicand most dangerous of remedies for a sick currency, is rightlyfeared. By making the devaluing country’s goods cheaper toothers, it boosts exports, and thus reduces or eliminates adeficit in international accounts, but at the same time it makesboth imports and domestic goods more expensive at home, andthus reduces the country’s standard of living. It is radicalsurgery, curing a disease at the expense of some of thepatient’s strength and well-being—and, in many cases, some ofhis pride and prestige as well. Worst of all, if the devaluedcurrency is one that, like the pound, is widely used ininternational dealings, the disease—or, more precisely, thecure—is likely to prove contagious. To nations holding largeamounts of that particular currency in their reserve vaults, theeffects of the devaluation is the same as if the vaults had beenburglarized. Such nations and others, finding themselves at anunacceptable trading disadvantage as a result of the devaluation,may have to resort to competitive devaluation of their owncurrencies. A downward spiral develops: Rumors of furtherdevaluations are constantly in the wind; the loss of confidencein other people’s money leads to a disinclination to do businessacross national borders; and international trade, upon whichdepend the food and shelter of hundreds of millions of peoplearound the world, tends to decline. Just such a disasterfollowed the classic devaluation of all time, the departure of thepound from the old gold standard in 1931—an event that is stillgenerally considered a major cause of the worldwide Depressionof the thirties.
The process works similarly in respect to the currencies of allthe hundred-odd countries that are members of theInternational Monetary Fund, an organization that originated atBretton Woods. For any country, a favorable balance ofpayments means an accumulation of dollars, either directly orindirectly, which are freely convertible into gold, in the country’scentral bank; if the demand for its currency is great enough,the country may revalue it upward—the reverse of adevaluation—as both Germany and the Netherlands did in 1961.
Conversely, an unfavorable balance of payments starts thesequence of events that may end in forced devaluation. Thedegree of disruption of world trade that devaluation of acurrency causes depends on that currency’s internationalimportance. (A large devaluation of the Indian rupee in June,1966, although it was a serious matter to India, created scarcelya ripple in the international markets.) And—to round out thisbrief outline of the rules of an intricate game of whicheverybody everywhere is an inadvertent player—even the lordlydollar is far from immune to the effects of an unfavorablebalance of payments or of speculation. Because of the dollar’spledged relation to gold, it serves as the standard for all othercurrencies, so its price does, not fluctuate in the markets.
However, it can suffer weakness of a less visible but equallyominous sort. When the United States sends out substantiallymore money (whether payment for imports, foreign aid,investments, loans, tourist expenses, or military costs) than ittakes in, the recipients freely buy their own currencies with thenewly acquired dollars, thereby raising the dollar prices of theirown currencies; the rise in price enables their central banks totake in still more dollars, which they can sell back to theUnited States for gold. Thus, when the dollar is weak theUnited States loses gold. France alone—a country with a strongcurrency and no particular official love of the dollar—requiredthirty million dollars or more in United States gold regularlyevery month for several years prior to the autumn of 1966,and between 1958, when the United States began running aserious deficit in its international accounts, and the middle ofMarch 1968, our gold reserve was halved—from twenty-twobillion eight hundred million to eleven billion four hundredmillion dollars. If the reserve ever dropped to an unacceptablylow level, the United States would be forced to break its wordand lower the gold value of the dollar, or even to stop sellinggold entirely. Either action would in effect be a devaluation—theone devaluation, because of the dollar’s preeminent position,that would be more disruptive to world monetary order than adevaluation of the pound.
HAYES and Coombs, neither of whom is old enough to haveexperienced the events of 1931 at first hand as a banker butboth of whom are such diligent and sensitive students ofinternational banking that they might as well have done so,found that as the hot days of 1964 dragged on they hadoccasion to be in almost daily contact by transatlantic telephonewith their Bank of England counterparts—the Earl of Cromer,governor of the bank at that time, and Roy A. O. Bridge, thegovernor’s adviser on foreign exchange. It became clear tothem from these conversations and from other sources that theimbalance in Britain’s international accounts was far from thewhole trouble. A crisis of confidence in the soundness of thepound was developing, and the main cause of it seemed to bethe election that Britain’s Conservative Government was facingon October 15th. The one thing that international financialmarkets hate and fear above all others is uncertainty. Anyelection represents uncertainty, so the pound always has thejitters just before Britons go to the polls, but to the peoplewho deal in currencies this election looked particularly menacing,because of their estimate of the character of the LabourGovernment that might come into power. The conservativefinanciers of London, not to mention those of ContinentalEurope, looked with almost irrational suspicion on HaroldWilson, the Labour choice for Prime Minister; further, some ofMr. Wilson’s economic advisers had explicitly extolled the virtuesof devaluation of the pound in their earlier theoretical writings;and, finally, there was an all too pat analogy to be drawn fromthe fact that the last previous term of the British Labour Partyin power had been conspicuously marked, in 1949, by adevaluation of sterling from the rate of $4.03 to $2.80.
In these circumstances, almost all the dealers in the worldmoney markets, whether they were ordinary internationalbusinessmen or out-and-out currency speculators, were anxiousto get rid of pounds—at least until after the election. Like allspeculative attacks, this one fed on itself. Each small drop inthe pound’s price resulted in further loss of confidence, anddown, down went the pound in the international markets—anoddly diffused sort of exchange, which does not operate in anycentral building but, rather, is conducted by telephone and cablebetween the trading desks of banks in the world’s major cities.
Simultaneously, down, down went British reserves, as the Bankof England struggled to support the pound. Early in September,Hayes went to Tokyo for the annual meeting of the membersof the International Monetary Fund. In the corridors of thebuilding where participants in the Fund met, he heard oneEuropean central banker after another express misgivings aboutthe state of the British economy and the outlook for the Britishcurrency. Why didn’t the British government take steps athome to check its outlay and to improve the balance ofpayments, they asked each other. Why didn’t it raise the Bankof England’s lending rate—the so-called bank rate—from itscurrent five per cent, since this move would have the effect ofraising British interest rates all up and down the line, andwould thus serve the double purpose of damping downdomestic inflation and attracting investment dollars to Londonfrom other financial centers, with the result that sterling wouldgain a sounder footing?
Doubtless the Continental bankers also put such questions tothe Bank of England men in Tokyo; in any event, the Bank ofEngland men and their counterparts in the British Exchequerhad not failed to put the questions to themselves. But theproposed measures would certainly be unpopular with theBritish electorate, as unmistakable harbingers of austerity, andthe Conservative Government, like many governments before it,appeared to be paralyzed by fear of the imminent election. Soit did nothing. In a strictly monetary way, however, Britain didtake defensive measures during September. The Bank ofEngland had for several years had a standing agreement withthe Federal Reserve that either institution could borrow fivehundred million dollars from the other, over a short term, atany time, with virtually no formalities; now the Bank of Englandaccepted this standby loan and made arrangements tosupplement it with another five hundred million dollars inshort-term credit from various European central banks and theBank of Canada. This total of a billion dollars, together withBritain’s last-ditch reserves in gold and dollars, amounting toabout two billion six hundred million, constituted a sizable storeof ammunition. If the speculative assault on the pound shouldcontinue or intensify, answering fire would come from the Bankof England in the form of dollar investments in sterling madeon the battlefield of the free market, and presumably theattackers would be put to rout.
As might have been expected, the assault did intensify afterLabour came out the victor in the October election. The newBritish government realized at the outset that it was faced witha grave crisis, and that immediate and drastic action was inorder. It has since been said that summary devaluation of thepound was seriously considered by the newly elected PrimeMinister and his advisers on finance—George Brown, Secretaryof State for Economic Affairs, and James Callaghan, Chancellorof the Exchequer. The idea was rejected, though, and themeasures 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, andstiff new capital-gains and corporation taxes. These weredeflationary, currency-strengthening measures, to be sure, butthe world markets were not reassured. The specific nature ofthe new taxes seems to have disconcerted, and even enraged,many financiers, in and out of Britain, particularly in view ofthe fact that under the new budget British governmentspending on welfare benefits was actually to be increased,rather than cut back, as deflationary policy would normallyrequire. One way and another, then, the sellers—or bears, inmarket jargon—continued to be in charge of the market for thepound in the weeks after the election, and the Bank ofEngland was kept busy potting away at them with preciousshells from its borrowed-billion-dollar arsenal. By the end ofOctober, nearly half the billion was gone, and the bears werestill inexorably advancing on the pound, a hundredth of a centat a time.
Hayes, Coombs, and their foreign-department colleagues onLiberty Street, watching with mounting anxiety, were as galledas the British by the fact that a central bank defending itscurrency against attack can have only the vaguest idea ofwhere the attack is coming from. Speculation is inherent inforeign trade, and by its nature is almost impossible to isolate,identify, or even define. There are degrees of speculation; theword itself, like “selfishness” or “greed,” denotes a judgment,and yet every exchange of currencies might be called aspeculation in favor of the currency being acquired and againstthe one being disposed of. At one end of the scale areperfectly legitimate business transactions that have specificspeculative effects. A British importer ordering Americanmerchandise may legitimately pay up in pounds in advance ofdelivery; if he does, he is speculating against the pound. AnAmerican importer who has contracted to pay for British goodsat a price set in pounds may legitimately insist that hispurchase of the pounds he needs to settle his debt be deferredfor a certain period; he, too, is speculating against the pound.
(The staggering importance to Britain of these commoncommercial operations, which are called “leads” and “lags,”
respectively, is shown by the fact that if in normal times theworld’s buyers of British goods were all to withhold theirpayments for as short a period as two and a half months theBank of England’s gold and dollar reserves would vanish.) Atthe other end of the scale is the dealer in money who borrowspounds and then converts the loan into dollars. Such a dealer,instead of merely protecting his business interests, is engagingin an out-and-out speculative move called a short sale; hopingto buy back the pounds he owes more cheaply later on, he issimply trying to make a profit on the decrease in value heanticipates—and, what with the low commissions prevailing inthe international money market, the maneuver provides one ofthe world’s most attractive forms of high-stakes gambling.
Gambling of this sort, although in fact it probably contributedfar less to the sterling crisis than the self-protective measurestaken by nervous importers and exporters, was being widelyblamed for all the pound’s troubles of October and November,1964. Particularly in the British Parliament, there were angryreferences to speculative activity by “the gnomes ofZurich”—Zurich being singled out because Switzerland, whosebanking laws rigidly protect the anonymity of depositors, is theblind pig of international banking, and consequently muchcurrency speculation, originating in many parts of the world, isfunnelled through Zurich. Besides low commissions andanonymity, currency speculation has another attraction. Thanksto time differentials and good telephone service, the worldmoney market, unlike stock exchanges, race tracks, andgambling casinos, practically never closes. London opens anhour after the Continent (or did until February 1968, whenBritain adopted Continental time), New York five (now six)hours after that, San Francisco three hours after that, andthen Tokyo gets under way about the time San Franciscocloses. Only a need for sleep or a lack of money need halt theoperations of a really hopelessly addicted plunger anywhere.
“It was not the gnomes of Zurich who were beating downthe pound,” a leading Zurich banker subsequentlymaintained—stopping short of claiming that there were nognomes there. Nonetheless, organized short selling—what traderscall a bear raid—was certainly in progress, and the defenders ofthe pound in London and their sympathizers in New Yorkwould have given plenty to catch a glimpse of the invisibleenemy.
IT was in this atmosphere, then, that on the weekend beginningNovember 7th the leading central bankers of the world heldtheir regular monthly gathering in Basel, Switzerland. Theoccasion for such gatherings, which have been held regularlysince the nineteen-thirties except during the Second World War,is the monthly meeting of the board of directors of the Bankfor International Settlements, which was established in Basel in1930 primarily as a clearing house for the handling ofreparations payments arising out of the First World War buthas come to serve as an agency of international monetaryco?peration and, incidentally, a kind of central bankers’ club. Assuch, it is considerably more limited in resources and restrictedas to membership than the International Monetary Fund, but,like other exclusive clubs, it is often the scene of greatdecisions. Represented on its board of directors are Britain,France, West Germany, Italy, Belgium, the Netherlands, Sweden,and Switzerland—in short, the economic powers of WesternEurope—while the United States is a regular monthly guestwhose presence is counted on, and Canada and Japan are lessfrequent visitors. The Federal Reserve is almost alwaysrepresented by Coombs, and sometimes by Hayes and otherNew York officers as well.
In the nature of things, the interests of the different centralbanks conflict; their faces are set against each other almost asif they were players in a poker game. Even so, in view of thefact that international troubles with money at their root havealmost as long a history as similarly caused troubles betweenindividuals, the most surprising thing about internationalmonetary co?peration is that it is so new. Through all the agesprior to the First World War, it cannot be said to have existedat all. In the nineteen-twenties, it existed chiefly through closepersonal ties between individual central bankers, oftenmaintained in spite of the indifference of their governments. Onan official level, it got off to a halting start through theFinancial Committee of the League of Nations, which wassupposed to encourage joint action to prevent monetarycatastrophes. The sterling collapse of 1931 and its grim sequelwere ample proof of the committee’s failure. But better dayswere ahead. The 1944 international financial conference atBretton Woods—out of which emerged not only theInternational Monetary Fund but also the whole structure ofpostwar monetary rules designed to help establish and maintainfixed exchange rates, as well as the World Bank, designed toease the flow of money from rich countries to poor orwar-devastated ones—stands as a milestone in economicco?peration comparable to the formation of the United Nationsin political affairs. To cite just one of the conference’s fruits, acredit of more than a billion dollars extended to Britain by theInternational Monetary Fund during the Suez affair in 1956prevented a major international financial crisis then.
In subsequent years, economic changes, like other changes,tended to come more and more quickly; after 1958, monetarycrises began springing up virtually overnight, and theInternational Monetary Fund, which is hindered by slow-movingmachinery, sometimes proved inadequate to meet such crisesalone. Again the new spirit of co?peration rose to the occasion,this time with the richest of nations, the United States, takingthe lead. Starting in 1961, the Federal Reserve Bank, with theapproval of the Federal Reserve Board and the Treasury inWashington, joined the other leading central banks in setting upa system of ever-ready revolving credits, which soon came tobe called the “swap network.” The purpose of the network wasto complement the International Monetary Fund’s longer-termcredit facilities by giving central banks instant access to fundsthey might need for a short period in order to move fast andvigorously in defense of their currencies. Its effectiveness wasnot long in being put to the test. Between its initiation in 1961and the autumn of 1964, the swap network had played amajor part in the triumphant defense against sudden andviolent speculative attacks on at least three currencies: thepound, late in 1961; the Canadian dollar, in June, 1961; andthe Italian lira, in March, 1964. By the autumn of 1964, theswap agreements (“L’accord de swap” to the French, “dieSwap-Verpflichtungen” to the Germans) had come to be thevery cornerstone of international monetary co?peration. Indeed,the five hundred million American dollars that the Bank ofEngland was finding it necessary to draw on at the verymoment the bank’s top officers were heading for Basel thatNovember weekend represented part of the swap network,greatly expanded from its comparatively modest beginnings.
As for the Bank for International Settlements, in its capacityas a banking institution it was a relatively minor cog in all thismachinery, but in its capacity as a club it had over the yearscome to play a far from unimportant role. Its monthly boardmeetings served (and still serve) as a chance for the centralbankers to talk in an informal atmosphere—to exchange gossip,views, and hunches such as could not comfortably be indulgedin either by mail or over the international telephone circuits.
Basel, a medieval Rhenish city that is dominated by the spiresof its twelfth-century Gothic cathedral and has long been athriving center of the chemical industry, was originally chosenas the site of the Bank for International Settlements because itwas a nodal point for European railways. Now that mostinternational bankers habitually travel by plane, that asset hasbecome a liability, for there is no long-distance air service toBasel; delegates must deplane at Zurich and continue by trainor car. On the other hand, Basel has several first-raterestaurants, and it may be that in the view of the central-bankdelegates this advantage outweighs the travel inconvenience, forcentral banking—or at least European central banking—has afirmly established association with good living. A governor of theNational Bank of Belgium once remarked to a visitor, without asmile, that he considered one of his duties to be that of leavingthe institution’s wine cellar better than he had found it. Aluncheon guest at the Bank of France is generally toldapologetically, “In the tradition of the bank, we serve onlysimple fare,” but what follows is a repast during which theconstant discussion of vintages makes any discussion of bankingawkward, if not impossible, and at which the tradition ofsimplicity is honored, apparently, by the serving of only onewine before the cognac. The table of the Bank of Italy isequally elegant (some say the best in Rome), and itssurroundings are enhanced by the priceless Renaissancepaintings, acquired as defaulted security on bad loans over theyears, that hang on the walls. As for the Federal Reserve Bankof New York, alcohol in any form is hardly ever served there,banking is habitually discussed at meals, and the mistress of thekitchen appears almost pathetically grateful whenever one of theofficers makes any sort of comment, even a critical one, on thefare. But then Liberty Street isn’t Europe.
In these democratic times, central banking in Europe isthought of as the last stronghold of the aristocratic bankingtradition, in which wit, grace, and culture coexist easily withcommercial astuteness, and even ruthlessness. The Europeancounterparts of the security guards on Liberty Street are apt tobe attendants in morning coats. Until less than a generationago, formality of address between central bankers was the rule.
Some think that the first to break it were the British, duringthe Second World War, when, it is alleged, a secret order wentout that British government and military authorities were toaddress their American counterparts by their first names; inany event, first names are frequently exchanged betweenEuropean and American central bankers now, and one reasonfor this, unquestionably, is the postwar rise in influence of thedollar. (Another reason is that, in the emerging era ofco?peration, the central bankers see more of each other thanthey used to—not just in Basel but in Washington, Paris, andBrussels, at regular meetings of perhaps half a dozen specialbanking committees of various international organizations. Thesame handful of top bankers parades so regularly through thehotel lobbies of those cities that one of them thinks they mustgive the impression of being hundreds strong, like the spearcarriers who cross the stage again and again in the triumphalscene of “Aida.”) And language, like the manner of its use, hastended to follow economic power. European central bankershave always used French (“bad French,” some say) in talkingwith each other, but during the long period in which the poundwas the world’s leading currency English came to be the firstlanguage of central banking at large, and under the rule of thedollar it continues to be. It is spoken fluently and willingly byall the top officers of every central bank except the Bank ofFrance, and even the Bank of France officers are forced tokeep translators at hand, in consideration of the seemingintractable inability or unwillingness of most Britons andAmericans to become competent in any language but their own.
(Lord Cromer, flouting tradition, speaks French with completeauthority.)At Basel, good food and convenience come before splendor;many of the delegates favor an outwardly humble restaurant inthe main railroad station, and the Bank for InternationalSettlements itself is modestly situated between a tea shop and ahairdressing establishment. On that November weekend in 1964,Vice-President Coombs was the only representative of theFederal Reserve System on hand, and, indeed, he was to bethe key banking representative of the United States through theearly and middle phases of the crisis that was then mounting.
In an abstracted way, Coombs ate and drank heartily with theothers—true to his institution’s traditions, he is less than agourmet—but his real interest was in getting the sense of themeeting and the private feelings of its participants. He was theperfect man for this task, inasmuch as he has theunquestioning trust and respect of all his foreign colleagues. Theother leading central bankers habitually call him by his firstname—less, it seems, in deference to changed custom than outof deep affection and admiration. They also use it in speakingof him among themselves; the name “Charliecoombs” (runtogether thus out of long habituation) is a word to conjurewith 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 drymanner make him seem a bit cool and detached, is reallywarm and intuitive. Charliecoombs, although a Harvard graduate(Class of 1940), is the kind of unpretentious gray-haired manwith half-rimmed spectacles and a precise manner whom youmight easily take for a standard American small-town bankpresident, rather than a master of one of the world’s mostcomplex skills. It is generally conceded that if any one manwas the genius behind the swap network, the man was theNew England swapper Charliecoombs.
At Basel, there was, as usual, a series of formal sessions, eachwith its agenda, but there was also, as usual, much informalpalaver in rump sessions held in hotel rooms and offices andat a formal Sunday-night dinner at which there was no agendabut instead a free discussion of what Coombs has sincereferred to as “the hottest topic of the moment.” There couldbe no question about what that was; it was the condition ofthe pound—and, indeed, Coombs had heard little discussion ofanything else all weekend. “It was clear to me from what Iheard that confidence in sterling was deteriorating,” he has said.
Two questions were on most of the bankers’ minds. One waswhether the Bank of England proposed to take some of thepressure off the pound by raising its lending rate. Bank ofEngland men were present, but getting an answer was not asimple matter of asking them their intentions; even if they hadbeen willing to say, they would not have been able to, becausethe Bank of England is not empowered to change its ratewithout the approval—which in practice often comes closer tomeaning the instruction—of the British government, and electedgovernments have a natural dislike for measures that makemoney tight. The other question was whether Britain hadenough gold and dollars to throw into the breach if thespeculative assault should continue. Apart from what was left ofthe billion dollars from the expanded swap network and whatremained of its drawing rights on the International MonetaryFund, Britain had only its official reserves, which had droppedin the previous week to something under two and a half billiondollars—their lowest point in several years. Worse than that wasthe frightful rate at which the reserves were dwindling away;on a single bad day during the previous week, according to theguesses of experts, they had dropped by eighty-seven milliondollars. A month of days like that and they would be gone.
Even so, Coombs has said, nobody at Basel that weekenddreamed that the pressure on sterling could become as intenseas it actually did become later in the month. He returned toNew York worried but resolute. It was not to New York,however, that the main scene of the battle for sterling shiftedafter the Basel meeting; it was to London. The big immediatequestion was whether or not Britain would raise its bank ratethat week, and the day the answer would be known wasThursday, November 12th. In the matter of the bank rate, asin so many other things, the British customarily follow a ritual.
If there is to be a change, at noon on Thursday—then andthen only—a sign appears in the ground-floor lobby of theBank of England announcing the new rate, and, simultaneously,a functionary called the Government Broker, decked out in apink coat and top hat, hurries down Throgmorton Street to theLondon Stock Exchange and ceremonially announces the newrate from a rostrum. Noon on Thursday the twelfth passedwith no change; evidently the Labour Government was havingas much trouble deciding on a bank-rate rise after the electionas the Conservatives had had before. The speculators, whereverthey were, reacted to such pusillanimity as one man. On Fridaythe thirteenth, the pound, which had been moderately buoyantall week precisely because speculators had been anticipating abank-rate rise, underwent a fearful battering, which sent itdown to a closing price of $2.7829—barely more than aquarter of a cent above the official minimum—and the Bank ofEngland, intervening frequently to hold it even at that level, losttwenty-eight million dollars more from its reserves. Next day,the financial commentator of the London Times, under thebyline Our City Editor, let himself go. “The pound,” he wrote,“is not looking as firm as might be hoped.”
THE following week saw the pattern repeated, but inexaggerated form. On Monday, Prime Minister Wilson, taking aleaf out of Winston Churchill’s book, tried rhetoric as a weapon.
Speaking at a pomp-and-circumstance banquet at the Guildhallin the City of London before an audience that included, amongmany other dignitaries, the Archbishop of Canterbury, the LordChancellor, the Lord President of the Council, the Lord PrivySeal, the Lord Mayor of London, and their wives, Wilsonringingly proclaimed “not only our faith but our determinationto keep sterling strong and to see it riding high,” and assertedthat the Government would not hesitate to take whatever stepsmight become necessary to accomplish this purpose. Whileelaborately avoiding the dread word “devaluation,” just as allother British officials had avoided it all summer, Wilson soughtto make it unmistakable that the Government now consideredsuch a move out of the question. To emphasize this point, heincluded a warning to speculators: “If anyone at home orabroad doubts the firmness of [our] resolve, let them beprepared to pay the price for their lack of faith in Britain.”
Perhaps the speculators were daunted by this verbal volley, orperhaps they were again moved to let up in their assault onthe pound by the prospect of a bank-rate rise on Thursday; inany case, on Tuesday and Wednesday the pound, though ithardly rode high in the marketplace, managed to ride a littleless low than it had on the previous Friday, and to do sowithout the help of the Bank of England.
By Thursday, according to subsequent reports, a sharp privatedispute had erupted between the Bank of England and theBritish government on the bank-rate question—Lord Cromerarguing, for the bank, that a rise of at least one per cent, andperhaps two per cent, was absolutely essential, and Wilson,Brown, and Callaghan still demurring. The upshot was nobank-rate rise on Thursday, and the effect of the inaction wasa swift intensification of the crisis. Friday the twentieth was ablack day in the City of London. The Stock Exchange, itsinvestors moving in time with sterling, had a terrible session.
The Bank of England had by now resolved to establish itslast-line trench on the pound at $2.7825—a quarter of a centabove the bottom limit. The pound opened on Friday atprecisely that level and remained there all day, firmly pinneddown by the speculators’ hail of offers to sell; meanwhile, thebank met all offers at $2.7825 and, in doing so, used up moreof Britain’s reserves. Now the offers were coming so fast thatlittle attempt was made to disguise their places of origin; it wasevident that they were coming from everywhere—chiefly fromthe financial centers of Europe, but also from New York, andeven from London itself. Rumors of imminent devaluation weresweeping the bourses of the Continent. And in London itself anominous sign of cracking morale appeared: devaluation wasnow being mentioned openly even there. The Swedisheconomist and sociologist Gunnar Myrdal, in a luncheon speechin London on Thursday, had suggested that a slight devaluationmight now be the only possible solution to Britain’s problems;once this exogenous comment had broken the ice, Britons alsobegan using the dread word, and, in the next morning’s Times, Our City Editor himself was to say, in the tone of acommander preparing the garrison for possible surrender,“Indiscriminate gossip about devaluation of the pound can doharm. But it would be even worse to regard use of that wordas taboo.”
When nightfall at last brought the pound and its defenders aweekend breather, the Bank of England had a chance toassess its situation. What it found was anything but reassuring.
All but a fraction of the billion dollars it had arranged toborrow in September under the expanded swap agreementshad gone into the battle. The right that remained to it ofdrawing on the International Monetary Fund was virtuallyworthless, since the transaction would take weeks to complete,and matters turned on days and hours. What the bank stillhad—and all that it had—was the British reserves, which hadgone down by fifty-six million dollars that day and now stoodat around two billion. More than one commentator has sincesuggested that this sum could in a way be likened to the fewsquadrons of fighter planes to which the same dogged nationhad been reduced twenty-four years earlier at the worst pointin the Battle of Britain.
THE analogy is extravagant, and yet, in the light of what thepound means, and has meant, to the British, it is notirrelevant. In a materialistic age, the pound has almost thesymbolic importance that was once accorded to the Crown; thestate of sterling almost is the state of Britain. The pound is theoldest of modern currencies. The term “pound sterling” isbelieved 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 onthem—of which two hundred and forty equalled one pound ofpure silver. (The shilling, representing twelve sterlings, orone-twentieth of a pound, did not appear on the scene untilafter the Conquest.) Thus, sizable payments in Britain havebeen reckoned in pounds from its beginnings. The pound,however, was by no means an unassailably sound currencyduring its first few centuries, chiefly because of the early kings’
unfortunate habit of relieving their chronic financialembarrassment by debasing the coinage. By melting down aquantity of sterlings, adding to the brew some base metal andno more silver, and then minting new coins, an irresponsibleking could magically convert a hundred pounds into, say, ahundred and ten, just like that. Queen Elizabeth I put a stopto the practice when, in a carefully planned surprise move in1561, she recalled from circulation all the debased coins issuedby her predecessors. The result, combined with the growth ofBritish trade, was a rapid and spectacular rise in the prestigeof the pound, and less than a century after Elizabeth’s coupthe word “sterling” had assumed the adjectival meaning that itstill has—“thoroughly excellent, capable of standing every test.”
By the end of the seventeenth century, when the Bank ofEngland was founded to handle the government’s finances,paper money was beginning to be trusted for general use, andit had come to be backed by gold as well as silver. As timewent on, the monetary prestige of gold rose steadily in relationto that of silver (in the modern world silver has no standing asa monetary reserve metal, and only in some half-dozencountries does it now serve as the principal metal in subsidiarycoinage), but it was not until 1816 that Britain adopted a goldstandard—that is, pledged itself to redeem paper currency withgold coins or bars at any time. The gold sovereign, worth onepound, which came to symbolize stability, affluence, and evenjoy to more Victorians than Bagehot, made its first appearancein 1817.
Prosperity begat emulation. Seeing how Britain flourished, andbelieving 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 immediatelygetting rich, and Britain, which in retrospect appears to haveflourished as much in spite of the gold standard as because ofit, continued to be the undisputed monarch of world trade. Inthe half century preceding the First World War, London wasthe middleman in international finance, and the pound was itsquasi-official medium. As David Lloyd George was later to writenostalgically, prior to 1914 “the crackle of a bill onLondon”—that is, of a bill of credit in pounds sterling bearingthe signature of a London bank—“was as good as the ring ofgold in any port throughout the civilized world.” The war endedthis idyll by disrupting the delicate balance of forces that hadmade it possible and by bringing to the fore a challenger tothe pound’s supremacy—the United States dollar. In 1914,Britain, hard pressed to finance its fighting forces, adoptedmeasures to discourage demands for gold, thereby abandoningthe gold standard in everything but name; meanwhile, the valueof 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 afull gold standard in 1925, tying the pound to gold at a ratethat restored its old $4.86 relation to the dollar. The cost ofthis gallant overvaluation, however, was chronic depression athome, not to mention the political eclipse for some fifteen yearsof the Chancellor of the Exchequer who ordered it, WinstonChurchill.
The general collapse of currencies during the nineteen-thirtiesactually began not in London but on the Continent, when, inthe summer of 1931, a sudden run on the leading bank ofAustria, the Creditanstalt, resulted in its failure. The dominoprinciple of bank failures—if such a thing can be said toexist—then came into play. German losses arising from thisrelatively minor disaster resulted in a banking crisis in Germany,and then, because huge quantities of British funds were nowfrozen in bankrupt institutions on the Continent, the paniccrossed the English Channel and invaded the home of theimperial pound itself. Demands for gold in exchange for poundsquickly 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 analmost usurious bank rate—between eight and ten per cent—inorder to hold funds in London and check the gold outflow, orabandoning the gold standard; the first choice, which wouldhave further depressed the domestic economy, in which therewere now more than two and a half million unemployed, wasconsidered unconscionable, and accordingly, on September 21,1931, the Bank of England announced suspension of itsresponsibility to sell gold.
The move hit the financial world like a thunderbolt. So greatwas the prestige of the pound in 1931 that John MaynardKeynes, the already famous British economist, could say, notwholly in irony, that sterling hadn’t left gold, gold had leftsterling. In either case, the mooring of the old system wasgone, and chaos was the result. Within a few weeks, all thecountries on the vast portion of the globe then under Britishpolitical or economic domination had left the gold standard,most of the other leading currencies had either left gold orbeen drastically devalued in relation to it, and in the freemarket the value of the pound in terms of dollars had droppedfrom $4.86 to around $3.50. Then the dollar itself—thepotential new mooring—came loose. In 1933, the United States,compelled by the worst depression in its history, abandoned thegold standard. A year later, it resumed it in a modified formcalled the gold-exchange standard, under which gold coinagewas ended and the Federal Reserve was pledged to sell gold inbar form to other central banks but to no one else—and to sellit at a drastic devaluation of forty-one per cent from the oldprice. The United States devaluation restored the pound to itsold dollar parity, but Britain found it small comfort to be tiedsecurely to a mooring that was now shaky itself. Even so, overthe next five years, while beggar-my-neighbor came to be therule in international finance, the pound did not lose much moreground in relation to other currencies, and when the SecondWorld War broke out, the British government boldly pegged itat $4.03 and imposed controls to keep it there in defiance ofthe free market. There, for a decade, it remained—but onlyofficially. In the free market of neutral Switzerland, it fluctuatedall 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 continuouslyin trouble. The new rules of the game of international financethat were agreed upon at Bretton Woods recognized that theold gold standard had been far too rigid and the virtual paperstandard of the nineteen-thirties far too unstable; a compromiseaccordingly emerged, under which the dollar—the new king ofcurrencies—remained tied to gold under the gold-exchangestandard, and the pound, along with the other leadingcurrencies, became tied not to gold but to the dollar, at ratesfixed within stated limits. Indeed, the postwar era was virtuallyushered in by a devaluation of the pound that was about asdrastic in amount as that of 1931, though far less so in itsconsequences. The pound, like most European currencies, hademerged from Bretton Woods flagrantly overvalued in relationto the shattered economy it represented, and had been keptthat way only by government-imposed controls. In the autumnof 1949, therefore, after a year and a half of devaluationrumors, burgeoning black markets in sterling, and gold lossesthat had reduced the British reserves to a dangerously lowlevel, the pound was devalued from $4.03 to $2.80. With theisolated exceptions of the United States dollar and the Swissfranc, every important non-Communist currency almost instantlyfollowed the pound’s example, but this time no drying up oftrade, or other chaos, ensued, because the 1949 devaluations,unlike those of 1931 and the years following, were not theuncontrolled attempts of countries riddled by depression to gaina competitive advantage at any cost but merely representedrecognition by the war-devastated countries that they hadrecovered to the point where they could survive relatively freeinternational competition without artificial props. In fact, worldtrade, instead of drying up, picked up sharply. But even at thenew, more rational evaluation the pound continued its career ofhairbreadth escapes. Sterling crises of varying magnitudes wereweathered in 1952, 1955, 1957, and 1961. In its unsentimentaland tactless way, the pound—just as by its gyrations in thepast it had accurately charted Britain’s rise and fall as thegreatest of world powers—now, with its nagging recurrentweakness, seemed to be hinting that even such retrenchmentas the British had undertaken in 1949 was not enough to suittheir reduced circumstances.
And in November, 1964, these hints, with their humiliatingimplications, were not lost on the British people. The emotionalterms in which many of them were thinking about the poundwere well illustrated by an exchange that took place in thatcelebrated forum the letters column of the Times when thecrisis was at its height. A reader named I. M. D. Little wrotedeploring all the breast-beating about the pound and particularlythe uneasy whispering about devaluation—a matter that hedeclared to be an economic rather than a moral issue. Quickas a flash came a reply from a C. S. Hadfield, among others.
Was there ever a clearer sign of soulless times, Hadfielddemanded, than Little’s letter? Devaluation not a moral issue?
“Repudiation—for that is what devaluation is, neither more norless—has become respectable!” Hadfield groaned, in theunmistakable tone, as old in Britain as the pound itself, of theoutraged patriot.
IN the ten days following the Basel meeting, the first concern ofthe men at the Federal Reserve Bank of New York was notthe pound but the dollar. The American balance-of-paymentsdeficit had now crept up to the alarming rate of almost sixbillion dollars a year, and it was becoming clear that a rise inthe British bank rate, if it should be unmatched by Americanaction, might merely shift some of the speculative attack fromthe pound to the dollar. Hayes and Coombs and theWashington monetary authorities—William McChesney Martin,chairman of the Federal Reserve Board, Secretary of theTreasury Douglas Dillon, and Under-Secretary of the TreasuryRobert Roosa—came to agree that if the British should raisetheir rate the Federal Reserve would be compelled, inself-defense, to competitively raise its rate above the currentlevel of three and a half per cent. Hayes had numeroustelephone conversations on this delicate point with his Londoncounterpart, Lord Cromer. A deep-dyed aristocrat—a godson ofKing George V and a grandson of Sir Evelyn Baring, later thefirst Earl of Cromer (who, as the British agent in Egypt, wasChinese Gordon’s nemesis in 1884-85)—Lord Cromer was alsoa banker of universally acknowledged brilliance and, atforty-three, the youngest man, as far as anyone couldremember, ever to direct the fortunes of the Bank of England;he and Hayes, in the course of their frequent meetings at Baseland elsewhere, had become warm friends.
During the afternoon of Friday the twentieth, at any rate, theFederal Reserve Bank had a chance to show its goodintentions by doing some front-line fighting for the pound. Thebreather provided by the London closing proved to be illusory;five o’clock in London was only noon in New York, andinsatiable speculators were able to go on selling pounds forseveral more hours in the New York market, with the resultthat the trading room of the Federal Reserve Bank temporarilyreplaced that of the Bank of England as the command post forthe defense. Using as their ammunition British dollars—or, moreprecisely, United States dollars lent to Britain under the swapagreements—the Federal Reserve’s traders staunchly held thepound at or above $2.7825, at ever-increasing cost, of course,to the British reserves. Mercifully, after the New York closingthe battle did not follow the sun to San Francisco and onaround the world to Tokyo. Evidently, the attackers had hadtheir fill, at least for the time being.
What followed was one of those strange modern weekends inwhich weighty matters are discussed and weighty decisionstaken among men who are ostensibly sitting around relaxing invarious parts of the world. Wilson, Brown, and Callaghan wereat Chequers, the Prime Minister’s country estate, taking part ina conference that had originally been scheduled to cover thesubject of national-defense policy. Lord Cromer was at hiscountry place in Westerham, Kent. Martin, Dillon, and Roosawere at their offices or their homes, in and aroundWashington. Coombs was at his home, in Green Village, NewJersey, and Hayes was visiting friends of his elsewhere in NewJersey. At Chequers, Wilson and his two financial ministers,leaving the military brass to confer about defense policy witheach other, adjourned to an upstairs gallery to tackle thesterling crisis; in order to bring Lord Cromer into theirdeliberations, they kept a telephone circuit open to him in Kent,using a scrambler system when they talked on it, so as toavoid interception of their words by their unseen enemies thespeculators. Sometime on Saturday, the British reached theirdecision. Not only would they raise the bank rate, and raise ittwo per cent above its current level—to seven per cent—but, indefiance of custom, they would do so the first thing Mondaymorning, rather than wait for another Thursday to roll around.
For one thing, they reasoned, to postpone action until Thursdaywould mean three and a half more business days during whichthe deadly drain of British reserves would almost certainlycontinue and might well accelerate; for another, the sheer shockof the deliberate violation of custom would serve to dramatizethe government’s determination. The decision, once taken, wascommunicated by British intermediaries in Washington to theAmerican monetary officials there, and relayed to Hayes andCoombs in New Jersey. Those two, knowing that theagreed-upon plan for a concomitant rise in the New York bankrate would now have to be put into effect as quickly aspossible, got to work on the telephone lining up aMonday-afternoon meeting of the Federal Reserve Bank’s boardof directors, without whose initiative the rate could not bechanged. Hayes, a man who sets great store by politeness, hassince said, with considerable chagrin, that he fears he was thedespair of his hostess that weekend; not only was he on thetelephone most of the time but he was prevented by thecircumstances from giving the slightest explanation of hisunseemly behavior.
What had been done—or, rather, was about to be done—inBritain was plenty to flutter the dovecotes of internationalfinance. Since the beginning of the First World War, the bankrate there had never gone higher than seven per cent and hadonly occasionally gone that high; as for a bank-rate change ona day other than Thursday, the last time that had occurred,ominously enough, was in 1931. Anticipating lively action at theLondon opening, which would take place at about 5 A.M. NewYork time, Coombs went to Liberty Street on Sunday afternoonin order to spend the night at the bank and be on handwhen the transatlantic doings began. As an overnightcompanion he had a man who found it advisable to sleep atthe bank so often that he habitually kept a packed suitcase inhis office—Thomas J. Roche, at that time the seniorforeign-exchange officer. Roche welcomed his boss to thesleeping quarters—a row of small, motel-like rooms on theeleventh floor, each equipped with maple furniture, Old NewYork prints, a telephone, a clock radio, a bathrobe, and ashaving kit—and the two men discussed the weekend’sdevelopments for a while before turning in. Shortly before fivein the morning, their radios woke them, and, after a breakfastprovided by the night staff, they repaired to theforeign-exchange trading room, on the seventh floor, to mantheir fluoroscope.
At five-ten, they were on the phone to the Bank of England,getting the news. The bank-rate rise had been announcedpromptly at the opening of the London markets, to theaccompaniment of great excitement; later Coombs was to learnthat the Government Broker’s entrance into the StockExchange, which is usually the occasion for a certain hush, hadthis time been greeted with such an uproar that he had haddifficulty making his news known. As for the first marketreaction of the pound, it was (one commentator said later) likethat of a race horse to dope; in the ten minutes following thebank-rate announcement it shot up to $2.7869, far above itsFriday closing. A few minutes later, the early-rising NewYorkers were on the phone to the Deutsche Bundesbank, thecentral bank of West Germany, in Frankfurt, and the SwissNational Bank, in Zurich, sounding out Continental reaction. Itwas equally good. Then they were back in touch with the Bankof England, where things were looking better and better. Thespeculators against the pound were on the run, rushing now tocover their short sales, and by the time the first gray lightbegan to show in the windows on Liberty Street, Coombs hadheard 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 moneyfrom the moon,” a Swiss banker commented, paraphrasing thegreat 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 topolitical bickering as usual; in Parliament, Reginald Maudling, thechief economic authority of the out-of-office Conservatives, tookthe occasion to remark that there wouldn’t have been a crisisin the first place but for the actions of the Labour Government,and Chancellor of the Exchequer Callaghan replied, with deadlypoliteness, “I must remind the honorable gentleman that he toldus [recently] we had inherited his problems.” Everybody wasclearly breathing easier. As for the Bank of England, so greatwas the sudden clamor for pounds that it saw a chance toreplenish its depleted supply of dollars, and for a time thatafternoon it actually felt confident enough to switch sides in themarket, buying dollars with pounds at just below $2.79. In NewYork, the mood persisted after the London closing. It was witha clear conscience about the pound that the directors of theFederal Reserve Bank of New York could—and, that afternoon,did—carry out their plan to raise their lending rate from threeand a half per cent to four per cent. Coombs has since said,“The feeling here on Monday afternoon was: They’ve doneit—they’ve pulled through again. There was a general sigh ofrelief. The sterling crisis seemed to be over.”
It wasn’t, though. “I remember that the situation changed veryfast on Tuesday the twenty-fourth,” Hayes has said. That day’sopening found the pound looking firm at $2.7875. Substantialbuying orders for pounds were coming in now from Germany,and the day ahead looked satisfactory. So things continued until6 A.M. in New York—noon on the Continent. It is around thenthat the various bourses of Europe—including the mostimportant ones, in Paris and Frankfurt—hold the meetings atwhich they set the day’s rate for each currency, for thepurpose of settling transactions in stocks and bonds that involveforeign currency, and these price-fixing sessions are bound toinfluence the money markets, since they give a clear indicationof the most influential Continental sentiment in regard to eachcurrency. The bourse rates set for the pound that day weresuch as to show a renewed, and pronounced, lack ofconfidence. At the same time, it appeared subsequently, moneydealers everywhere, and particularly in Europe, were havingsecond thoughts about the manner of the bank-rate rise theprevious day. At first, taken by surprise, they had reactedenthusiastically, but now, it seemed, they had belatedly decidedthat the making of the announcement on Monday indicatedthat Britain was losing its grip. “What would it connote if theBritish were to play a Cup final on Sunday?” a Europeanbanker is said to have asked a colleague. The only possibleanswer was that it would connote panic in Albion.
The effect of these second thoughts was an astonishinglydrastic turnabout in market action. In New York between eightand nine, Coombs, in the trading room, watched with a sinkingheart as a tranquil pound market collapsed into a rout. Sellingorders 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, byconstant intervention, held the pound there. But it was clearthat the cost would soon become too high; a few minutes after9 A.M. New York time, Coombs calculated that Britain waslosing reserves at the unprecedented, and unsupportable, rate ofa million dollars a minute.
Hayes, arriving at the bank shortly after nine, had hardly satdown at his desk before this unsettling news reached him fromthe seventh floor. “We’re in for a hurricane,” Coombs told him,and went on to say that the pressure on sterling was nowmounting so fast that there was a real likelihood that Britainmight be forced either to devalue or to impose asweeping—and, for many reasons, unacceptable—system ofexchange controls before the week was out. Hayes immediatelytelephoned the governors of the leading European centralbanks—some of whom, because not all the national marketshad yet felt the full weight of the crisis, were startled to hearexactly how grave the situation was—and pleaded with themnot to exacerbate the pressure on both the pound and thedollar by raising their own bank rates. (His job was scarcelymade easier by the fact that he had to admit that his ownbank had just raised its rate.) Then he asked Coombs tocome up to his office. The pound, the two men agreed, nowhad its back to the wall; the British bank-rate rise hadobviously failed of its purpose, and at the million-a-minute rateof loss Britain’s well of reserves would be dry in less than fivebusiness days. The one hope now lay in amassing, within amatter of hours, or within a day or so at the most, a hugebundle of credit from outside Britain to enable the Bank ofEngland to survive the attack and beat it back. Such rescuebundles had been assembled just a handful of times before—forCanada in 1962, for Italy earlier in 1964, and for Britain in1961—but this time, it was clear, a much bigger bundle thanany of those would be needed. The central-banking world wasfaced not so much with an opportunity for building a milestonein the short history of international monetary co?peration aswith the necessity for doing so.
Two other things were clear—that, in view of the dollar’stroubles, the United States could not hope to rescue the poundunassisted, and that, the dollar’s troubles notwithstanding, theUnited States, with all its economic might, would have to jointhe Bank of England in initiating any rescue operation. As afirst step, Coombs suggested that the Federal Reserve standbycredit to the Bank of England ought to be increased forthwithfrom five hundred million dollars to seven hundred and fiftymillion. Unfortunately, fast action on this proposal washampered by the fact that, under the Federal Reserve Act, anysuch move could be made only by decision of a FederalReserve System committee, whose members were scattered allover the country. Hayes conferred by long-distance telephone(all around the world, wires were now humming with news ofthe pound’s extremity) with the Washington monetarycontingent, Martin, Dillon, and Roosa, none of whom disagreedwith Coombs’ view of what had to be done, and as a result ofthese discussions a call went out from Martin’s office tomembers of the key committee, called the Open MarketCommittee, for a meeting by telephone at three o’clock thatafternoon. Roosa, at the Treasury, suggested that the UnitedStates’ contribution to the kitty could be further increased byarranging for a two-hundred-and-fifty-million-dollar loan fromthe Export-Import Bank, a Treasury-owned andTreasury-financed institution in Washington. Hayes and Coombswere naturally in favor of this, and Roosa set in motion thebureaucratic machinery to unlock that particular vault—a processthat, he warned, would certainly take until evening.
As the early afternoon passed in New York, with the millionsof dollars continuing to drain, minute by minute, from Britain’sreserves, Hayes and Coombs, along with their Washingtoncolleagues, were busy planning the next step. If the swapincrease and the Export-Import Bank loan should comethrough, the United States credits would amount to a billiondollars all told; now, in consultation with the beleagueredgarrison at the Bank of England, the Federal Reserve Bankmen began to believe that, in order to make the operationeffective, the other leading central banks—spoken of incentral-banking shorthand as “the Continent,” even though theyinclude the Banks of Canada and Japan—would have to beasked to put up additional credits on the order of one and ahalf billion dollars, or possibly even more. Such a sum wouldmake the Continent, collectively, a bigger contributor to thecause than the United States—a fact that Hayes and Coombsrealized might not sit too well with the Continental bankers andtheir governments.
At three o’clock, the Open Market Committee held itstelephone meeting—twelve men sitting at their desks in six cities,from New York to San Francisco. The members heardCoombs’ dry, unemotional voice describing the situation andmaking his recommendation. They were quickly convinced. Inno more than fifteen minutes, they had voted unanimously toincrease the swap credit to seven hundred and fifty milliondollars, on condition that proportional credit assistance could beobtained from other central banks.
By late afternoon, tentative word had come from Washingtonthat 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 tobe virtually in the bag. It remained to tackle the Continent. Itwas night now in Europe, so nobody there could be tackled;the zero hour, then, was Continental opening time the nextday, and the crucial period for the fate of the pound would bethe few hours after that. Hayes, after leaving instructions for abank car to pick him up at his home, in New Canaan,Connecticut, at four o’clock in the morning, took his usualcommuting train from Grand Central shortly after five. He hassince expressed a certain regret that he proceeded in such aroutine way at such a dramatic moment. “I left the bankrather reluctantly,” he says. “In retrospect, I guess I wish Ihadn’t. I don’t mean as a practical matter—I was just as usefulat home, and, as a matter of fact, I ended up spending mostof the evening on the phone with Charlie Coombs, who stayedat the bank—but just because something like that doesn’thappen every day in a banker’s life. I’m a creature of habit, Iguess. Besides, it’s something of a tenet of mine to insist onkeeping a proper balance between private and professional life.”
Although Hayes does not say so, he may have been thinkingof something else, too. It can safely be said to be something ofa tenet of central-bank presidents or governors not to sleep attheir places of business. If word were ever to get out that themethodical Hayes was doing so at a time like this, he mayhave reasoned, it might well be considered just as much a signof panic as a British bank-rate rise on a Monday.
Meanwhile, Coombs was making another night of it on LibertyStreet; he had gone home the previous night because theworst had momentarily appeared to be over, but now hestayed on after regular work hours with Roche, who hadn’tbeen home since the previous weekend. Toward midnight,Coombs received confirmation of the Export-Import Bank’stwo-hundred-and-fifty-million-dollar credit, which had arrivedfrom Washington during the evening, as promised. So noweverything was braced for the morning’s effort. Coombs againinstalled himself in one of the uninspiring eleventh-floor cubicles,and, after a final marshalling of the facts that would be neededfor the job of persuading the Continental bankers, set his clockradio for three-thirty and went to bed. A Federal Reserve manwith a literary bent and a romantic temperament was latermoved to draw a parallel between the Federal Reserve Bankthat night and the British camp on the eve of the Battle ofAgincourt in Shakespeare’s version, in which King Henry musedso eloquently on how participation in the coming action wouldserve to ennoble even the vilest of the troops, and howgentlemen safe in bed at home would later think themselvesaccursed that they had not been at the battle scene. Coombs,a practical man, had no such high-flown opinion of hissituation; even so, as he dozed fitfully, waiting for morning toreach Europe, he was well aware that the events he was takingpart in were like nothing that had ever happened in bankingbefore.
IISo that evening, Tuesday, November 24, 1964, Hayes arrived athis home, in New Canaan, Connecticut, at about six-thirty,exactly as usual, having inexorably taken his usual 5:09 fromGrand Central. Hayes was a tall, slim, soft-spoken man offifty-four with keen eyes framed by owlish round spectacles,with a slightly schoolmasterish air and a reputation forunflappability. By so methodically going through familiar motionsat such a time, he realized with amusement, he must seem tohis colleagues to be living up to his reputation ratherspectacularly. At his house, a former caretaker’s cottage of circa1840 that the Hayeses had bought and remodelled twelve yearsearlier, he was greeted, as usual, by his wife, a pretty andvivacious woman of Anglo-Italian descent named Vilma butalways called Bebba, who loves to travel, has almost no interestin banking, and is the daughter of the late Metropolitan Operabaritone Thomas Chalmers. Since at that time of year it wascompletely dark when Hayes got home, he decided to forgo afavorite early-evening unwinding activity of his—walking to thetop of a grassy slope beside the house which commands a fineview across the Sound to Long Island. Anyway, he was notreally in a mood to unwind; instead, he felt keyed up, anddecided he might as well stay that way overnight, since the carfrom the bank was scheduled to call at his door so early thenext morning to take him to work.
During dinner, Hayes and his wife discussed subjects like thefact that their son, Tom, who was a senior at Harvard, wouldbe arriving home the following day for his Thanksgiving recess.
Afterward, Hayes settled down in an armchair to read for awhile. In banking circles, he is thought of as a scholarly,intellectual type, and, indeed, he is scholarly and intellectual incomparison with most bankers; even so, his extra-bankingreading tends to be not constant and all-embracing, as hiswife’s is, but sporadic, capricious, and intensive—everythingabout Napoleon for a while, perhaps, then a dry period, then abinge on, say, the Civil War. Just then, he was concentratingon the island of Corfu, where he and Mrs. Hayes wereplanning to spend some time. But before he had got very farinto his latest Corfu book he was called to the telephone. Thecall was from the bank. There were new developments, whichCoombs 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 intimatelyinvolved in but would actually join in initiating, was going to betaken by the government banks—or central banks, as they aremore commonly called—of the non-Communist world’s leadingnations as soon as possible after the next morning’s opening ofthe London and Continental financial markets, which wouldoccur between 4 and 5 A.M. New York time. Britain was faceto face with bankruptcy, the reasons being that a huge deficitin its international accounts over the previous months hadresulted in concomitant losses in the gold and dollar reservesheld by the Bank of England; that worldwide fear lest thenewly elected Labour Government decide, or be forced, to easethe situation by devaluing the pound from its dollar parity ofabout $2.80 to some substantially lower figure had caused aflood of selling of pounds by hedgers and speculators in theinternational money markets; that the Bank of England, fulfillingan international obligation to sustain the pound at a free-marketprice no lower than $2.78, had been losing millions of dollars aday from its reserves, which now stood at about two billiondollars, their lowest point in many years.
The remaining hope lay in amassing, in a matter of hoursbefore it would be too late, an unheard-of sum in short-termdollar credits to Britain from the central banks of the world’srich nations. With such credits at its disposal, the Bank ofEngland would presumably be able to buy up pounds soaggressively that the speculative attack could be absorbed,contained, and finally beaten back, giving Britain time to set itseconomic affairs in order. Just what the sum necessary forrescue should be was an open question, but earlier that daythe monetary authorities of the United States and Britain hadconcluded that it would have to be at least two billion dollars,and perhaps even more. The United States, through theFederal Reserve Bank of New York and the Treasury-ownedExport-Import Bank, in Washington, had that day committeditself to one billion; the task that remained was to persuade theother leading central banks—habitually spoken of in thecentral-banking world as “the Continent,” even though theyinclude the Banks of Canada and Japan—to lend more than abillion in addition.
Nothing of the kind had ever been asked of the Continentbefore, through the swap network or any other way. InSeptember, 1964, the Continent had come through with itsbiggest collective emergency credit so far—half a billion dollarsto the Bank of England for use in defending the pound,already embattled then. Now, with this half-billion loan stilloutstanding and the pound in far worse straits, the Continentwas about to be called upon for more than twice thatsum—perhaps five times that sum. Obviously, the spirit ofco?peration, if not the quality of mercy, was about to bestrained. 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, theprospect of the bank car’s arrival at four o’clock made him feelthat he should go to bed early. As he prepared to do so, Mrs.
Hayes commented that since he would have to get up in themiddle of the night, she supposed she ought to feel sorry forhim but since he was obviously looking forward with keenanticipation to whatever it was that would get him up at thathour, she envied him instead.
DOWN on Liberty Street, Coombs slept fitfully until he wasawakened by the clock radio in his room at about three-thirtyNew York time—that is to say, eight-thirty London time andnine-thirty farther east on the European Continent. A series offoreign-exchange crises involving Europe had so accustomedhim to the time differential that he was inclined to think interms of the European day, referring casually to 8 A.M. in NewYork as “lunchtime,” and 9 A.M. as “midafternoon.” So whenhe got up it was, in his terms, “morning,” despite the starsthat were shining over Liberty Street. Coombs got dressed,went to his office, on the tenth floor, where he had somebreakfast provided by the bank’s regular night kitchen staff,and began placing telephone calls to the various leading centralbanks of the non-Communist world. All the calls were putthrough by one telephone operator, who handles the FederalReserve Bank’s switchboard during off hours, and all of themwere eligible for a special government-emergency priority thatthe bank’s officers are entitled to claim, but on this occasion itdid not have to be used, because at four-fifteen, when Coombsbegan his telephoning, the transatlantic circuits were almostentirely clear.
The calls were made essentially to lay the groundwork forwhat was to come. The morning news from the Bank ofEngland, obtained in one of the first calls from Liberty Street,was that conditions were unchanged from the previous day: thespeculative attack on the pound was continuing unabated, andthe 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 Yorkforeign-exchange market opened, some five hours later, vastadditional quantities of pounds would be thrown on the marketon this side of the Atlantic, and more British dollars and goldwould have to be spent. He conveyed this alarming intelligenceto his counterparts at such institutions as the DeutscheBundesbank, in Frankfurt; the Banque de France, in Paris; theBanca d’Italia, in Rome; and the Bank of Japan, in Tokyo. (Inthe last case, the officers had to be reached at their homes, forthe fourteen-hour time difference made it already past 6 P.M. inthe Orient.) Then, coming to the crux of the matter, Coombsinformed the representatives of the various banks that theywere soon to be asked, in behalf of the Bank of England, fora loan far bigger than any they had ever been asked forbefore. “Without going into specific figures, I tried to make thepoint that it was a crisis of the first magnitude, which many ofthem still didn’t realize,” Coombs has said. An officer of theBundesbank, who knew as much about the extent of the crisisas anyone outside London, Washington, and New York, hassaid that in Frankfurt they were “mentally prepared”—or“braced” might be a better word—for the huge touch that wasabout to be put on them, but that right up to the time ofCoombs’ call they had been hoping the speculative attack onthe pound would subside of its own accord, and even after thecall they had no idea how much they might be asked for. Inany event, as soon as Coombs was off the wire theBundesbank’s governor called a board of managers’ meeting,and, as things turned out, the meeting was to remain insession all day long.
Still, all this was preparatory. Actual requests, in specificamounts, had to be made by the head of one central bank ofthe head of another. At the time Coombs was making hissoftening-up calls, the head of the Federal Reserve Bank was inthe bank’s limousine, somewhere between New Canaan andLiberty Street, and the bank’s limousine, in flagrantnonconformity with the James Bond style of high-levelinternational dealings, was not equipped with a telephone.
HAYES, the man being awaited, had been president of theFederal Reserve Bank of New York for a little over eight years,having been chosen for the job, to his own and almosteveryone else’s bewilderment, not from some position ofcomparable eminence or from the Federal Reserve’s own ranksbut from among the swarming legions of New Yorkcommercial-bank vice-presidents. Unorthodox as the appointmentseemed at the time, in retrospect it seems providential. A studyof Hayes’ early life and youthful career gives the impressionthat everything was somehow intended to prepare him fordealing with this sort of international monetary crisis, just asthe life of a writer or a painter sometimes seems to haveconsisted primarily of preparation for the execution of a singlework of art. If Divine Providence, or perhaps its financialdepartment, when the huge sterling crisis was imminent, hadneeded an assessment of Hayes’ qualifications for coping withthis task and had hired the celestial equivalent of an executiverecruiter to report on him, the dossier might have readsomething like this:
“Born in Ithaca, New York, on July 4, 1910; grew up mostlyin New York City. Father a professor of Constitutional law atCornell, later a Manhattan investment counsellor; mother aformer schoolteacher, enthusiastic suffragette, settlement-houseworker, and political liberal. Both parents birdwatchers. Familyatmosphere intellectual, freethinking, and public-spirited. Attendedprivate schools in New York City and Massachusetts and wasusually his school’s top-ranking student. Then went to Harvard(freshman year only) and Yale (three years: mathematicsmajor, Phi Beta Kappa in junior year, ineffectual oar on classcrew, graduated 1930 as top B.A. of class). Studied at NewCollege, Oxford, as Rhodes Scholar 1931-33; there became firmAnglophile, and wrote thesis on ‘Federal Reserve Policy and theWorking of the Gold Standard in the Years 1923-30,’ althoughhe had no thought of ever joining the Federal Reserve. Wishesnow he had the thesis, in case it contains blinding youthfulilluminations, but neither he nor New College can find it.
Entered New York commercial banking in 1933, and roseslowly but steadily (1938 annual salary twenty-seven hundreddollars). Attained title (albeit feeble title) of assistant secretary atNew York Trust Company in 1942; after a Navy stint, in 1947became an assistant vice-president and two years later head ofNew York Trust’s foreign department despite total lack ofprevious experience in foreign banking. Apparently learned fast;astounded his colleagues and superiors, and gained reputationamong them as foreign-exchange wizard by predicting preciseamount of 1949 pound devaluation ($4.03 to $2.80) a fewweeks before it occurred.
“Was appointed president of Federal Reserve Bank of NewYork in 1956, to his utter astonishment and that of New Yorkbanking community, most of which had never heard of thisrather shy man. Reacted calmly by taking his family on atwo-month vacation in Europe. The consensus now is thatFederal Reserve Bank’s directors had almost implausibleprescience, or luck, in picking a foreign-exchange expert justwhen the dollar was weakening and international monetaryco?peration becoming crucially important. Is liked by Europeancentral bankers, who call him Al (which often comes outsounding more like All). Earns seventy-five thousand dollars ayear, making him the second-highest-paid federal official afterthe President of the United States, Federal Reserve Banksalaries being intended to be more or less competitive inbanking terms rather than in government-employee terms. Isvery tall and very thin. Tries to observe regular commutinghours and keep his private life sacrosanct, as a matter ofprinciple; considers regular evening work at an office‘outrageous.’ Complains that his son has a low opinion ofbusiness; attributes this to ‘reverse snobbery’—but even thenremains calm.
“Conclusion: this is the very man for the job of representingthe United States’ central bank in a sterling crisis.”
And, indeed, Hayes readily fits the picture of a perfectlyplanned and perfectly tooled piece of machinery to perform acertain complex task, but there are other sides to him, and hischaracter contains as many paradoxes as the next man’s.
Although hardly anyone in banking ever tries to describe Hayeswithout using the words “scholarly” and “intellectual,” Hayestends to think of himself as an indifferent scholar andintellectual but an effective man of action, and on the latterscore the events of November 25, 1964, seem to bear him out.
Although in some ways he is the complete banker—inconformity with H. G. Wells’ notion of such a banker, heseems to “take money for granted as a terrier takes rats,” andto be devoid of philosophical curiosity about it—he has adistinctly unbankerlike philosophical curiosity about almosteverything else. And although casual acquaintances sometimespronounce him dull, his close friends speak of a rare capacityfor enjoyment and an inner serenity that seem to make himimmune to the tensions and distractions that fragment the livesof so many of his contemporaries. Doubtless the inner serenitywas put to a severe test as Hayes rode in the bank cartoward Liberty Street. When he arrived at his desk at aboutfive-thirty, Hayes’ first act was to punch Coombs’ button on hisinteroffice phone and get the foreign-department chief’s latestappraisal of the situation. He learned that, as he had expected,the Bank of England’s sickening dollar drain was continuingunabated. Worse than that, though; Coombs said his contactswith local bankers who were also on emergency early-morningvigil (men in the foreign departments of the huge commercialbanks like the Chase Manhattan and the First National City)indicated that overnight there had accumulated a fantastic pileof orders to unload pounds on the New York market as soonas it opened. The Bank of England, already almost inundated,could expect a new tidal wave from New York to hit in fourhours. The need for haste thus became even more urgent.
Hayes and Coombs agreed that the project of putting togetheran international package of credits to Britain should beannounced as soon as possible after the New Yorkopening—perhaps as early as ten o’clock. So that the bankwould have a single center for all its foreign communications,Hayes decided to forsake his own office—a spacious one withpanelled walls and comfortable chairs grouped around afireplace—and let Coombs’ quarters, down the hall, which weremuch smaller and more austere but more efficiently arranged,serve as the command post. Once there, he picked up one ofthree telephones and asked the operator to get him LordCromer, at the Bank of England. When the connection wasmade, the two men—the key figures in the proposed rescueoperation—reviewed their plans a final time, checking the sumsthey had tentatively decided to ask of each central bank andagreeing on who would call whom first.
In the eyes of some people, Hayes and Lord Cromer makean oddly assorted pair. Besides being a deep-dyed aristocrat,George Rowland Stanley Baring, third Earl of Cromer, is adeep-dyed banker. A scion of the famous London merchantbank of Baring Brothers, the third Earl and godson of amonarch went to Eton and Trinity College, Cambridge, andspent twelve years as a managing director of his family’s bankand then two years—from 1959 to 1961—as Britain’s economicminister and chief representative of his country’s Treasury inWashington. If Hayes had acquired his mastery of the arcanaof international banking by patient study, Lord Cromer, who isno scholar, acquired his by heredity, instinct, or osmosis. IfHayes, despite his unusual physical stature, could easily beoverlooked in a crowd, Lord Cromer, who is of average heightbut debonair and dashing, would cut a figure anywhere. IfHayes is inclined to be a bit hesitant about casual intimacies,Lord Cromer is known for his hearty manner, andhas—doubtless unintentionally—both flattered and obscurelydisappointed many American bankers who have been awed byhis title by quickly encouraging them to call him Rowley.
“Rowley is very self-confident and decisive,” an Americanbanker has said. “He’s never afraid to barge in, because he’sconvinced of the reasonableness of his own position. But thenhe’s a reasonable man. He’s the kind of man who in a crisiswould be able to grab the telephone and do something aboutit.” This banker confesses that until November 25, 1964, hehad not thought Hayes was that kind of man.
Beginning at about six o’clock that morning, Hayes did grabthe phone, right along with Lord Cromer. One after another,the leading central bankers of the world—among them PresidentKarl Blessing, of the Deutsche Bundesbank; Dr. Guido Carli, ofthe Bank of Italy; Governor Jacques Brunet, of the Bank ofFrance; Dr. Walter Schwegler, of the Swiss National Bank; andGovernor Per ?sbrink, of the Swedish Riksbank—picked uptheir phones and discovered, some of them with considerablesurprise, the degree of gravity that the sterling crisis hadreached in the past day, the fact that the United States hadcommitted itself to a short-term loan of one billion dollars, andthat they were being asked to dig deep into their own nations’
reserves to help tide sterling over. Some first heard all thisfrom Hayes, some from Lord Cromer; in either case, theyheard it not from a casual or official acquaintance but from afellow-member of that esoteric fraternity the Basel club. Hayes,whose position as representative of the one country that hadalready pledged a huge sum cast him almost automatically asthe leader of the operation, was careful to make it clear ineach of his calls that his part in the proceedings was to putthe weight of the Federal Reserve behind a request thatformally came from the Bank of England. “The pound’ssituation is critical, and I understand the Bank of England isrequesting a credit line of two hundred and fifty million dollarsfrom you,” he would say, in his calm way, to one Continentalcentral-bank governor or another. “I’m sure you understandthat this is a situation where we all have to stand together.”
(He and Coombs always spoke English, of course. Despite thefact that he had recently been taking French refresher lessons,and that at Yale he made one of the most impressive academicrecords in memory, Hayes doggedly remained a dub atlanguages and still did not trust himself to carry on animportant business conversation in anything but English.) Inthose cases in which he was on particularly close terms withhis Continental counterpart, he spoke more informally, using acentral-bankers’ jargon in which the conventional numerical unitis 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 Hayesmade, the first response, he says, was generally cageyness, notunmixed with shock. “Is it really as bad as all that, Al? Wewere still hoping that the pound would recover on its own” isthe kind of thing he recalls having heard several times. WhenHayes assured them that it was indeed as bad as all that, andthat the pound would certainly not recover on its own, theusual response was something like “We’ll have to see what wecan do and then call you back.” Some of the Continentalcentral bankers have said that what impressed them mostabout Hayes’ first call was not so much what he said as whenhe said it. Realizing that it was still well before dawn in NewYork, and knowing Hayes’ addiction to what are commonlythought of as bankers’ hours, these Europeans perceived thatthings must be grave the moment they heard his voice. Assoon as Hayes had broken the ice at each Continental bank,Coombs would take over and get down to details with hiscounterparts.
The first round of calls left Hayes, Lord Cromer, and theirassociates on Liberty and Threadneedle Streets relatively hopeful.
Not one bank had given them a flat no—not even, to theirdelight, the Bank of France, although French policy had alreadybegun moving sharply away from co?peration with Britain andthe United States in monetary matters, among others.
Furthermore, several governors had surprised them bysuggesting that their countries’ subscriptions to the loan mightactually be bigger than those suggested. With thisencouragement, Hayes and Lord Cromer decided to raise theirsights. They had originally been aiming for credits of two and ahalf billion dollars; now, on reconsideration, they saw that therewas a chance for three billion. “We decided to up the ante alittle here and there,” Hayes says. “There was no way ofknowing precisely what sum would be the least that would dothe job of turning the tide. We knew we would be relying to alarge extent on the psychological effect of ourannouncement—assuming we would be able to make theannouncement. Three seemed to us a good, round figure.”
But difficulties lay ahead, and the biggest difficulty, it becameclear as the return calls from the various banks began to comein, was to get the thing done quickly. The hardest point toconvey, Hayes and Coombs found, was that each passingminute meant a further loss of a million dollars or more to theBritish reserves, and that if normal channels were followed theloans would unquestionably come too late to avert devaluationof the pound. Some of the central banks were required by lawto consult their governments before making a commitment andsome were not, but even those that were not insisted on doingso, as a courtesy; this took time, especially since more thanone Finance Minister, unaware that he was being sought toapprove an enormous loan on an instant’s notice, with littleevidence of the necessity for it beyond the assurance of LordCromer and Hayes, was temporarily unavailable. (One happenedto be engaged in debate in his country’s parliament.) And evenin cases where the Finance Minister was at hand, he wassometimes reluctant to act in such a shotgun way.
Governments move more deliberately in money matters thancentral bankers do. Some of the Finance Ministers said, ineffect, that upon proper submission of a balance sheet of theBank of England, along with a formal written application for theemergency credit, they would gladly consider the matter.
Furthermore, some of the central banks themselves showed amaddening inclination to stand on ceremony. Theforeign-exchange chief of one bank is said to have replied tothe request by saying, “Well, isn’t this convenient! We happento have a board meeting scheduled for tomorrow. We’ll takethe matter up then, and afterward we’ll get in touch with you.”
The reply of Coombs, who happened to be the man on thewire in New York, is not recorded in substance, but its manneris reported to have been uncharacteristically vehement. EvenHayes’ celebrated imperturbability was shaken a time or two, orso those who were present have said; his tone remained ascalm and even as ever, but its volume rose far above theusual level.
The problems that the Continental central banks faced inmeeting the challenge are well exemplified by the situation atthe richest and most powerful of them, the DeutscheBundesbank. Its board of managers was already sitting inemergency session as a result of Coombs’ early call whenanother New York call—this one from Hayes to PresidentBlessing—gave the Bundesbank its first indication of exactly howmuch it was being asked to put up. The amounts the variouscentral banks were asked for that morning have never beenmade public, but, on the basis of what has become known, itis reasonable to assume that the Bundesbank was asked forhalf a billion dollars—the highest quota of the lot, and certainlythe largest sum that any central bank other than the FederalReserve had ever been called upon to supply to another on afew hours’ notice. Hard on the heels of Hayes’ call conveyingthis jarring information, Blessing heard from Lord Cromer, inLondon, who confirmed everything that Hayes had said aboutthe seriousness of the crisis and repeated the request. Wincinga bit, perhaps, the Bundesbank managers agreed in principlethat the thing had to be done. But right there their problemsbegan. Proper procedure must be adhered to, Blessing and hisaides decided. Before taking any action, they must consult withtheir economic partners in the European Common Market andthe Bank for International Settlements, and the key man to beconsulted, since he was then serving as president of the Bankfor International Settlements, was Dr. Marius W. Holtrop,governor of the Bank of the Netherlands, which, of course, wasalso being asked to contribute. A rush person-to-person callwas put through from Frankfurt to Amsterdam. Dr. Holtrop,the Bundesbank managers were informed, wasn’t inAmsterdam; by chance, he had taken a train that morning toThe Hague to meet his country’s Finance Minister forconsultation on other matters. For the Bank of the Netherlandsto make any such important commitment without theknowledge of its governor was out of the question, and,similarly, the Bank of Belgium, a nation whose monetary policiesare linked inextricably with the Netherlands’, was reluctant toact until Amsterdam had given its O.K. So for an hour ormore, as millions of dollars continued to drain out of the Bankof 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 inThe Hague and tied up in a traffic jam, could not be found.
ALL this, of course, meant agonizing frustration in New York.
As morning began here at last, Hayes’ and Coombs’ campaigngot a boost from Washington. The leading governmentmonetary authorities—Martin at the Federal Reserve Board,Dillon and Roosa at the Treasury—had all been intimatelyinvolved in the previous day’s planning for the rescue, and ofcourse part of the planning had been the decision to let theNew York bank, as the Federal Reserve System’s and theTreasury’s normal operating arm in international monetarydealings, serve as campaign headquarters. So the members ofthe Washington contingent had slept at home and come totheir offices at the normal hour. Now, having learned fromHayes of the difficulties that were developing, Martin, Dillon,and Roosa pitched in with transatlantic calls of their own toemphasize the extent of America’s concern over the matter. Butno number of calls from anywhere could hold back theclock—or, for that matter, find Dr. Holtrop—and Hayes andCoombs finally had to abandon their idea of having a creditbundle ready in time for an announcement to the world at ornear 10 A.M. in New York. And there were other reasons, too,for a fading of the early hopes. As the New York marketsopened, the extent of the alarm that had spread around thefinancial world overnight was only too clearly revealed. Thebank’s foreign-exchange trading desk, on the seventh floor,reported that the assault on the pound at the New Yorkopening had been fully as terrifying as they had expected, andthat the atmosphere in the local exchange market had reacheda state not far from panic. From the bank’s securitiesdepartment came an alarming report that the market forUnited States government bonds was coming under the heaviestpressure in years, reflecting an ominous lack of confidence inthe dollar on the part of bond traders. This intelligence servedas a grim reminder to Hayes and Coombs of something theyknew already—that a fall of the pound in relation to the dollarcould quite possibly be followed, in a kind of chain reaction, bya forced devaluation of the dollar in relation to gold, whichmight cause monetary chaos everywhere. If Hayes and Coombshad been permitting themselves any moments of idle reverie inwhich to picture themselves simply as good Samaritans, thiswas just the news to bring them back to reality. And thenword arrived that the wild tales flying around Wall Streetshowed signs of crystallizing into a single tale, demoralizinglycredible because it was so specific. The British government, itwas being said, would announce a sterling devaluation ataround noon New York time. Here was something that couldbe authoritatively refuted, at least in respect to timing, sinceBritain would obviously not devalue while the credit negotiationswere under way. Torn between the desire to quell a destructiverumor and the need to keep the negotiations secret until theywere concluded, Hayes compromised. He had one of hisassociates call a few key Wall Street bankers and traders tosay, as emphatically as possible, that the latest devaluationrumor was, to his firm knowledge, false. “Can you be morespecific?” the associate was asked, and he replied, becausethere was nothing else he could reply, “No, I can’t.”
This unsupported word was something, but it was notenough; the foreign-exchange and bond markets were onlymomentarily reassured. There were times that morning, Hayesand Coombs now admit, when they put down their telephones,looked at each other across the table in Coombs’ office, andwordlessly exchanged the thought: It isn’t going to be done intime. But—in the best tradition of melodrama, which sometimesseems to survive stubbornly in nature at a time when it isdead in art—just when things looked darkest, good news beganto arrive. Dr. Holtrop had been tracked down in a restaurantin The Hague, where he was having lunch with theNetherlands’ Minister of Finance, Dr. J. W. Witteveen;moreover, Dr. Holtrop had endorsed the rescue operation, andas for the matter of consulting his government, that was noproblem, since the responsible representative of his governmentwas sitting across the table from him. The chief obstacle wasthus overcome, and after Dr. Holtrop had been reached thedifficulties began narrowing down to annoyances like thenecessity for continually apologizing to the Japanese for routingthem out of bed as midnight arrived and passed in Tokyo. Thetide had turned. Before noon in New York, Hayes andCoombs, and Lord Cromer and his deputies in London as well,knew that they had agreement in principle from ten Continentalcentral banks—those in West Germany, Italy, France, theNetherlands, Belgium, Switzerland, Canada, Sweden, Austria, andJapan—and also from the Bank for International Settlements.
There remained the wait while each central bank wentthrough the painfully slow process of completing whateverformalities were required to make its action legal and proper.
The epitome of orderliness, the Bundesbank, could not act untilit had obtained ratification from the members of its board ofdirectors, most of whom were in provincial outposts scatteredaround Germany. The two leading Bundesbank deputies dividedup the job of calling the absent directors and persuading themto go along—a job that was made more delicate by the factthat the absent directors were being asked to approvesomething that, in effect, the bank’s home office had alreadyundertaken to do. At midafternoon by Continental time, whilethe 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 reserveloss had become so rapid that the pound could not surviveanother day. Formalities notwithstanding, it was a case of nowor never. (The Bank of England’s reserve loss that day hasnever been announced. The Economist later passed along aguess that it may have run to five hundred million dollars, orabout a quarter of all that remained in Britain’s reservecoffers.) After Lord Cromer’s call, the Bundesbank deputiestempered their tact with brevity; they got unanimous approvalfrom the directors, and shortly after five o’clock Frankfurt timethey were ready to tell Lord Cromer and Hayes that theBundesbank 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, anddoubtless were glad to do it, inasmuch as their own currencieshad been the beneficiaries of much smaller but otherwisesimilar international bailout operations in 1962 and earlier in1964, respectively. If a subsequent report in the London Timesis to be accepted, France, Belgium, and the Netherlands, noone of which ever announced the amount of its participation,each contributed two hundred million dollars, too. Switzerland isknown to have come through with a hundred and sixty milliondollars and Sweden with a hundred million dollars, whileAustria, Japan, and the Bank for International Settlementsrounded out the bundle with still undisclosed amounts. Bylunchtime in New York, it was all over but the shouting, andthe last part of the task was to make the shouting as effectiveas possible to give it the fastest and most forcible impact onthe market.
The task brought to the fore another Federal Reserve Bankman, its vice-president in charge of public information, ThomasOlaf Waage. Waage (his name rhymes with “saga”) had beenpresent and active in Coombs’ office almost all morning,constantly on the phone as liaison man with Washington. Aborn-and-bred New Yorker, the son of a Norwegian-born localtug pilot and fishing-boat captain, Waage is a man of broadand unfeigned outside interests—among them opera,Shakespeare, Trollope, and his ancestral heritage, sailing—andone consuming passion, which is striving to convey not only thefacts but also the drama, suspense, and excitement of centralbanking to a skeptical and often glassy-eyed public. In short, abanker who is a hopeless romantic. So now he was overjoyedwhen Hayes assigned to him the job of preparing a newsrelease that would inform the world, as emphatically as possible,about the rescue operation. While Hayes and Coombs struggledto tie up the loose ends of their package, Waage was busyco?rdinating timing with his counterparts at the Federal ReserveBoard and the Treasury Department in Washington, whichwould share in the issuing of the American announcement, andat the Bank of England, which, Hayes and Lord Cromer hadagreed, would issue a simultaneous announcement of its own.
“Two o’clock in the afternoon New York time was the hour weagreed upon for the announcements, when it began to look asif we’d have something to announce by that time,” Waagerecalls. “That was too late to catch the Continental and Londonmarkets that day, of course, but it left the whole afternoonahead until the New York markets closed, at around five, andif the sterling market could be dramatically reversed here beforeclosing time, chances were the recovery would continue on theContinent and in London next day, when the Americanmarkets would be closed for Thanksgiving. As for the amountof the combined credit we were planning to announce, it stillstood at three billion dollars. But I remember that a last-minutesnag of a particularly embarrassing sort developed. Very late inthe game, when we thought the whole package was in hand,Charlie Coombs and I counted up what had been pledged, justto make sure, and we got only two billion eight hundred andfifty million. Apparently, we’d mislaid a hundred and fifty milliondollars somewhere. That’s just what we’d done—we’dmiscalculated. So it was all right.”
The package was assembled in time to meet the newschedule, and statements from the Federal Reserve, theTreasury, and the Bank of England duly went out to the newsmedia simultaneously, at 2 P.M. in New York and 7 P.M. inLondon. As a result of Waage’s influence, the American version,though it fell somewhat short of the mood of, say, the lastscene of “Die Meistersinger,” was nevertheless exceptionallystirring as bank utterances go, speaking with a certain subduedflamboyance of the unprecedented nature of the sum involvedand of how the central banks had “moved quickly to mobilizea massive counterattack on speculative selling of the pound.”
The London release had a different kind of distinction,achieving something of the quintessential Britishness that seemsto be reserved for moments of high crisis. It read simply, “TheBank of England have made arrangements under which$3,000M. are made available for the support of sterling.”
APPARENTLY, the secrecy of the operation had been successfullypreserved and the announcement struck the New Yorkforeign-exchange market all of a heap, because the reaction wasas swift and as electric as anyone could have wished.
Speculators against the pound decided instantly and with nohesitation that their game was up. Immediately after theannouncement, the Federal Reserve Bank put in a bid forpounds at $2.7868—a figure slightly above the level at whichthe pound had been forcibly maintained all day by the Bank ofEngland. So great was the rush of speculators to get free oftheir speculative positions by buying pounds that the FederalReserve Bank found very few pounds for sale at that price.
Around two-fifteen, there were a strange and heartening fewminutes in which no sterling was available in New York at anyprice. Pounds were eventually offered for sale again at a higherprice, and were immediately gobbled up, and thus the pricewent on climbing all afternoon, to a closing of just above $2.79.
Triumph! The pound was out of immediate danger; the thinghad worked. Tributes to the success of the operation began topour in from everywhere. Even the magisterial Economist wasto declare shortly, “Whatever other networks break down, itseems, the central bankers [have an] astonishing capacity forinstant results. And if theirs is not the most desirable possiblemechanism, geared always to short-term support of the statusquo, it happens to be the only working one.”
So, with the pound riding reasonably high again, the FederalReserve Bank shut up for Thanksgiving, and the bankers wenthome. Coombs recalls having drunk a Martini unaccustomedlyfast. Hayes, home in New Canaan, found that his son, Tom,had arrived from Harvard. Both his wife and his son noticedthat he seemed to be in an unusual state of excitement, andwhen they asked about it he replied that he had just beenthrough the most completely satisfying day of his entire workingcareer. Pressed for details, he gave them a condensed andsimplified account of the rescue operation, keeping constantly inmind the fact that his audience consisted of a wife who had nointerest in banking and a son who had a low opinion ofbusiness. The reaction he got when his recital was concludedwas of a sort that might warm the heart of a Waage, or ofany earnest explicator of banking derring-do to theunsympathetic layman. “It was a little confusing at first,” Mrs.
Hayes has said, “but before you were finished you had us onthe edge of our chairs.”
Waage, home in Douglaston, told his wife of the day’s eventsin his characteristic way. “It was St. Crispin’s Day,” heexclaimed as he burst through his doorway, “and I was withHarry!”
IIIHAVING first become interested in the pound and its perils atthe time of the 1964 crisis, I found myself hooked by thesubject. Through the subsequent three and a half years, Ifollowed its ups and downs in the American and British press,and at intervals went down to the Federal Reserve Bank torenew my acquaintance with its officers and see what additionalenlightenment I could garner. The whole experience was aresounding vindication of Waage’s thesis that central bankingcan be suspenseful.
The pound wouldn’t stay saved. A month after the big 1964crisis, the speculators resumed their assaults, and by the end ofthat year the Bank of England had used up more than half abillion of its new three-billion-dollar credit. Nor did the comingof the new year bring surcease. In 1965, after a relativelybuoyant January, the pound came under pressure again inFebruary. The November credit had been for a term of threemonths; now, as the term ran out, the nations that had madeit decided to extend it for another three months, so that Britainwould have more time to put its economy in order. But late inMarch the British economy was still shaky, the pound wasback below $2.79, and the Bank of England was back in themarket. In April, Britain announced a tougher budget, and arally followed, but the rally proved to be short-lived. By earlysummer, the Bank of England had drawn, and committed tothe battle against the speculators, more than a third of thewhole three billion. Heartened, the speculators pressed theirattack. Late in June, high British officials, let it be known thatthey now considered the sterling crisis over, but they werewhistling in the dark; in July the pound sank again, despitefurther belt-tightening in the British domestic economy. By theend of July, the world foreign-exchange market had becomeconvinced that a new crisis was shaping up. By late August,the crisis had arrived, and in some ways it was a moredangerous one than that of the previous November. Thetrouble was the market seemed to believe that the centralbanks were tired of pouring money into the battle and wouldnow let sterling fall, regardless of the consequences. About thattime, I telephoned a leading local foreign-exchange man I knowto ask him what he thought of the situation, and he replied,“To my knowledge, the New York market is one hundred percent convinced that devaluation of sterling is coming thisfall—and I don’t mean ninety-five per cent, I mean onehundred per cent.” Then, on September 11th, I read in thepapers that the same group of central banks, this time with theexception of France, had come through with another last-minuterescue package, the amount not being announced at thetime—it was subsequently reported to have been around onebillion—and over the next few days I watched the market priceof the pound rise, little by little, until by the end of the monthit was above $2.80 for the first time in sixteen months.
The central banks had done it again, and somewhat later Iwent down to the Federal Reserve Bank to learn the details. Itwas Coombs I saw, and I found him in a sanguine andextraordinarily talkative mood. “This year’s operation wasentirely different from last year’s,” he told me. “It was anaggressive move on our part, rather than a last-ditch-defensiveone. You see, early this September we came to the conclusionthat the pound was grossly oversold—that is, the amount ofspeculation against it was way out of proportion to what wasjustified by the economic facts. Actually, during the first eightmonths of the year, British exports had risen more than fiveper cent over the corresponding period in 1964, and Britain’s1964 balance-of-payments deficit seemed likely to be cut in halfin 1965. Very promising economic progress, and the bearishspeculators seemed not to have taken account of it. They hadgone right on selling the pound short, on the basis of technicalmarket factors. They were the ones who were in an exposedposition now. We decided the time was ripe for an officialcounterattack.”
The counterattack, Coombs went on to explain, was plotted inleisurely fashion this time—not on the telephone but face toface, over the weekend of September 5th in Basel. The FederalReserve Bank was represented by Coombs, as usual, and alsoby Hayes, who cut short his long-planned vacation on Corfu tobe there. The coup was planned with military precision. It wasdecided not to announce the amount of the credit package thistime, in order to further confuse and disconcert the enemy, thespeculators. The place chosen for the launching was the tradingroom of the Federal Reserve Bank, and the hour chosen was9 A.M. New York time—early enough for London and theContinent to be still conducting business—on September 10th. Atzero hour, the Bank of England fired a preliminary salvo byannouncing that new central-bank arrangements would shortlyenable “appropriate action” to be taken in the exchangemarkets. After allowing fifteen minutes for the import of thisdemurely menacing message to sink in, the Federal ReserveBank struck. Using, with British concurrence, the new bundle ofinternational credit as its ammunition, it simultaneously placedwith all the major banks operating in the New York exchangemarket bids for sterling totalling nearly thirty million dollars, atthe then prevailing rate of $2.7918. Under this pressure, themarket immediately moved upward, and the Federal ReserveBank pursued the movement, raising its bid price step by step.
At $2.7934, the bank temporarily ceased operations—partly tosee what the market would do on its own, partly just toconfuse things. The market held steady, showing that at thatlevel there were now as many independent buyers of sterlingas there were sellers, and that the bears—speculators—werelosing 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 beganto roll by itself—with the results I had read about in mynewspapers. “It was a successful bear squeeze,” Coombs toldme with a certain grim relish, which was easy to sympathizewith; I found myself musing that for a banker to rout hisopponents, to smite them hip and thigh and drive them tocover, and not for personal or institutional profit but, rather, forthe public good, must be a source of rare, unalloyedsatisfaction.
I later learned from another banker just how painfully thebears had been squeezed. Margins of credit on currencyspeculation being what they are—for example, to commit amillion dollars against the pound a speculator might need toput up only thirty or forty thousand dollars in cash—mostdealers had made commitments running into the tens ofmillions. When a dealer’s commitment was ten million pounds,or twenty-eight million dollars, each change of one-hundredth ofa cent in the price of the pound meant a change of athousand dollars in the value of his account. Between the$2.7918 on September 10th, then, and the $2.8010 that thepound reached on September 29th, such a dealer on the shortside of the pound would have lost ninety-two thousanddollars—enough, one might suppose, to make him think twicebefore selling sterling short again.
An extended period of calm followed. The air of impendingcrisis that had hung over the exchanges during most of thepreceding year disappeared, and for more than six months theworld sterling market was sunnier than it had been at anytime in recent years. “The battle for the pound sterling is nowended,” high British officials (anonymous, and wisely so)announced in November, on the first anniversary of the 1964rescue. Now, the officials said, “we’re fighting the battle for theeconomy.” Apparently, they were winning that battle, too,because when Britain’s balance-of-payments position for 1965was finally calculated, it showed that the deficit had been notmerely halved, according to predictions, but more than halved.
And meanwhile the pound’s strength enabled the Bank ofEngland not merely to pay off all its short-term debts to othercentral banks but also to accumulate in the open market, inexchange for its newly desirable pounds, more than a billionfresh dollars to add to its precious reserves. Thus, betweenSeptember, 1965, and March, 1966, those reserves rose fromtwo billion six hundred million dollars to three billion sixhundred million—a fairly safe figure. And then the poundbreezed nicely through a national election campaign—as always,a stormy time for the currency. When I saw Coombs in thespring of 1966, he seemed as cocky and blasé about sterling asan old-time New York Yankee rooter about his team.
I had all but concluded that following the fortunes of thepound was no longer any fun when a new crisis exploded. Aseamen’s strike contributed to a recurrence of Britain’s tradedeficit, and in early June of 1966 the quotation was back below$2.79 and the Bank of England was reported to be back inthe market spending its reserves on the defense. On June 13th,with something of the insouciance of veteran firemen respondingto a routine call, back came the central banks with a newbundle of short-term credits. But these helped only temporarily,and toward the end of July, in an effort to get at the root ofthe pound’s troubles by curing the deficit once and for all,Prime Minister Wilson imposed on the British people the moststringent set of economic restraints ever applied in his countryin peacetime—high taxes, a merciless squeeze on credit, a freezeon wages and prices, a cut in government welfare spending,and a limit of a hundred and forty dollars on the annualamount that each Briton could spend on travel abroad. TheFederal Reserve, Coombs told me later, helped by moving intothe sterling market immediately after the British announcementof the austerity program, and the pound reacted satisfactorily tothis prodding. In September, for good measure, the FederalReserve increased its swap line with the Bank of England fromseven hundred and fifty million to one billion three hundredand fifty million dollars. I saw Waage in September, and hespoke warmly of all the dollars that the Bank of England wasagain accumulating. “Sterling crises have become a bore,” theEconomist remarked at about this time, with the mostreassuring 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 hadample reserves. But within a month or so came the first of aseries of heartbreaking setbacks. Two consequences of the briefArab-Israeli war—a huge flow of Arab funds out of sterling intoother currencies, and the closing of the Suez Canal, one ofBritain’s main trade arteries—brought on a new crisis almostovernight. In June, the Bank of England (under new leadershipnow, for in 1966 Lord Cromer had been succeeded asgovernor by Sir Leslie O’Brien) had to draw heavily on itsswap line with the Federal Reserve, and in July the Britishgovernment found itself forced to renew the painful economicrestraints of the previous year; even so, in September thepound slipped down to $2.7830, its lowest point since the 1964crisis. I called my foreign-exchange expert to ask why the Bankof England—which in November, 1964, had set its last-linetrench at $2.7860, and which, according to its latest statement,now had on hand reserves amounting to more than two and ahalf billion dollars—was letting the price slide so dangerouslynear the absolute bottom (short of devaluation) of $2.78. “Well,the situation isn’t quite as desperate as the figure suggests,” hereplied. “The speculative pressure so far isn’t anything like asstrong as it was in 1964. And the fundamental economicposition this year—up to now, at least—is much better. Despitethe Middle East war, the austerity program has taken hold. Forthe first eight months of 1967, Britain’s international paymentshave been nearly in balance. The Bank of England is evidentlyhoping that this period of weakness of the pound will passwithout its intervention.”
At about that time, however, I became aware of a disturbingportent in the air—the apparent abandonment by the British oftheir long-standing taboo against bandying about the word“devaluation.” Like other taboos, this one seemed to have beenbased on a combination of practical logic (talk about devaluationcould easily start a speculative stampede and thereby bring iton) and superstition. But now I found devaluation being freelyand frequently discussed in the British press, and, in severalrespected journals, actually advocated. Nor was that all. PrimeMinister Wilson, it is true, continued to follow a careful patharound the word, even in the very act of pledging, as he didover and over, that his government would abstain from thedeed; there would be “no change in existing policy” as to“overseas monetary matters,” he said, delicately, on oneoccasion. On July 24th, though, Chancellor of the ExchequerJames Callaghan spoke openly in the House of Commonsabout devaluation, complaining that advocacy of it as a nationalpolicy had become fashionable, declaring that such a policywould represent a breach of faith with other nations and theirpeople and also pledging that his government would neverresort to it. His sentiments were familiar and reassuring; hisstraightforward expression of them was just the opposite. In thedarkest days of 1964, no one had said “devaluation” inParliament.
All through the autumn, I had a feeling that Britain was beingovertaken by a fiendish concatenation of cruel mischances,some specifically damaging to the pound and others merelycrushing to British morale. The previous spring, oil from awrecked, and wretched, tanker had defiled the beaches ofCornwall; now an epidemic was destroying tens, and ultimatelyhundreds, of thousands of head of cattle. The economicstraitjacket that Britain had worn for more than a year hadswelled unemployment to the highest level in years and madethe Labour Government the most unpopular government in thepostwar era. (Six months later, in a poll sponsored by theSunday Times, Britons would vote Wilson the fourth mostvillainous man of the century, after Hitler, de Gaulle, and Stalin,in that order.) A dock strike in London and Liverpool thatbegan in mid-September and was to drag on for more thantwo months decreased still further the already hobbled exporttrade, and put an abrupt end to Britain’s remaining hope ofending the year with its international accounts in balance. Earlyin November, 1967, the pound stood at $2.7822, its lowestpoint in a decade. And then things went downhill fast. On theevening of Monday the thirteenth, Wilson took the occasion ofhis annual appearance at the Lord Mayor of London’sbanquet—the very platform he had used for his fierycommitment to the defense of sterling in the crisis three yearsearlier—to implore the country and the world to disregard, asdistorted by temporary factors, his nation’s latest foreign-tradestatistics, which would be released the next day. On Tuesdaythe fourteenth, Britain’s foreign-trade figures, duly released,showed an October deficit of over a hundred millionpounds—the worst ever reported. The Cabinet met at lunch onThursday the sixteenth, and that afternoon, in the House ofCommons, Chancellor Callaghan, upon being asked to confirmor deny rumors of an enormous new central-bank credit thatwould be contingent upon still further unemployment-breedingausterity measures, replied with heat, and with what was latercalled a lack of discretion, “The Government will take whatdecisions are appropriate in the light of our understanding ofthe needs of the British economy, and no one else’s. And that,at this stage, does not include the creation of any additionalunemployment.”
With one accord, the exchange markets decided that thedecision to devalue had been taken and that Callaghan hadinadvertently let the cat out of the bag. Friday the seventeenthwas the wildest day in the history of the exchange markets,and the blackest in the thousand-year history of sterling. Inholding it at $2.7825—the price decided on this time as thelast-line trench—the Bank of England spent a quantity ofreserve dollars that it may never see fit to reveal; Wall Streetcommercial bankers who have reason to know have estimatedthe amount at somewhere around a billion dollars, which wouldmean a continuous, day-long reserve drain of over two millionper minute. Doubtless the British reserves dropped below thetwo-billion-dollar mark, and perhaps far below it. Late on aSaturday—November 18th—full of confused alarms, Britainannounced its capitulation. I heard about it from Waage, whotelephoned me that afternoon at five-thirty New York time. “Asof an hour ago, the pound was devalued to two dollars andforty cents, and the British bank rate went to eight per cent,”
he said. His voice was shaking a little.
ON Saturday night, bearing in mind that scarcely anything but amajor war upsets world financial arrangements more thandevaluation of a major currency, I went down to the capital ofworld finance, Wall Street, to look around. A nasty wind waswhipping papers through empty streets, and there was theusual rather intimidating off-hours stillness in that part-time city.
There was something unusual, though: the presence of rows oflighted windows in the otherwise dark buildings—for the mostpart, one lighted row per building. Some of the rows I couldidentify as the foreign departments of the big banks. The heavydoors of the banks were locked and barred; foreign-departmentmen evidently ring to gain entrance on weekends, or useinvisible side or rear entrances. Turning up my coat collar, Iheaded up Nassau Street toward Liberty to take a look at theFederal Reserve Bank. I found it lighted not in a single linebut—more hospitably, somehow—in an irregular pattern over itsentire Florentine fa?ade, yet it, too, presented to the street aformidably closed front door. As I looked at it, a gust of windbrought an incongruous burst of organ music—perhaps fromTrinity Church, a few blocks away—and I realized that in tenor fifteen minutes I hadn’t seen anyone. The scene seemed tome to epitomize one of the two faces of central banking—thecold and hostile face, suggesting men in arrogant secrecymaking decisions that affect all the rest of us but that we canneither influence nor even comprehend, rather than the morecongenial face of elegant and learned men of affairs beneficentlysaving 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 aroom on the tenth floor of the bank, and I attended it, alongwith a dozen other reporters, mostly regulars on the FederalReserve beat. Waage discoursed generally on the devaluation,parrying questions he didn’t want to answer, sometimes byreplying to them, like the teacher he once was, with questionsof his own. It was still far too early, he said, to tell how greatthe danger was that the devaluation might lead to “another1931.” Almost any prediction, he said, would be a matter oftrying to outguess millions of people and thousands of banksaround the world. The next few days would tell the story.
Waage seemed stimulated rather than depressed; his attitudewas clearly one of apprehension but also of resolution. On theway out, I asked him whether he had been up all night. “No,last evening I went to ‘The Birthday Party,’ and I must sayPinter’s world makes more sense than mine does, these days,”
he replied.
The outlines of what had happened Thursday and Fridaybegan to emerge during the next few days. Most of therumors that had been abroad turned out to have been moreor less true. Britain had been negotiating for another hugecredit to forestall devaluation—a credit of the order ofmagnitude of the three-billion-dollar 1964 package, with theUnited States again planning to provide the largest share.
Whether Britain had devalued from choice or necessityremained debatable. Wilson, in explaining the devaluation to hispeople in a television address, said that “it would have beenpossible to ride out this present tide of foreign speculationagainst the pound by borrowing from central banks andgovernments,” but that such action this time would have been“irresponsible,” because “our creditors abroad might well insiston guarantees about this or that aspect of our nationalpolicies”; he did not say explicitly that they had done so. Inany event, the British Cabinet had—with what grim reluctancemay be imagined—decided in principle on devaluation as earlyas the previous weekend, and then determined the exactamount of the devaluation at its Thursday-noon meeting. Atthat time, the Cabinet had also resolved to help insure theeffectiveness of the devaluation by imposing new austeritymeasures on the nation, among them higher corporate taxes, acutback in defense spending, and the highest bank rate in fiftyyears. As for the two-day delay in putting the devaluation intoeffect, which had been so costly to British reserves, officialsnow explained that the time had been necessary forconferences with the other leading monetary powers. Suchconferences were required by international monetary rulesbefore a devaluation, and, besides, Britain had urgently neededassurances from its leading competitors in world trade that theydid not plan to vitiate the effect of the British devaluation withmatching 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 thosefamous—although invisible and perhaps nonexistent—gnomes ofZurich. On the contrary, much of it had been a form ofself-protection, called hedging, by large international corporations,many of them American, that made short sales of sterlingequivalent to what they were due to be paid in sterling weeksor months later. The evidence of this was supplied by thecorporations themselves, some of them being quick to assuretheir stockholders that through their foresight they hadcontrived to lose little or nothing on the devaluation.
International Telephone & Telegraph, for example, announcedon Sunday that the devaluation would not affect its 1967earnings, because “management anticipated the possibility ofdevaluation for some time.” International Harvester and TexasInstruments reported that they had protected themselves bymaking what amounted to short sales of sterling. The SingerCompany said it might even have accidentally made a profit onthe deal. Other American companies let it be known that theyhad come out all right, but declined to elaborate, on theground that if they revealed the methods they had used theymight be accused of taking advantage of Britain in its extremity.
“Let’s just say we were smart” was the way a spokesman forone company put it. And perhaps that, if lacking in grace andelegance, was fair enough. In the jungle of internationalbusiness, hedging on a weak foreign currency is considered awholly legitimate use of claws for self-defense. Selling short forspeculative purposes enjoys less respectability, and it isinteresting to note that the ranks of those who speculatedagainst sterling on Friday, and talked about it afterward,included some who were far from Zurich. A group ofprofessional men in Youngstown, Ohio—veteran stock-marketplayers, but never before international currencyplungers—decided on Friday that sterling was about to bedevalued, and sold short seventy thousand pounds, netting aprofit of almost twenty-five thousand dollars over the weekend.
The pounds sold had, of course, ultimately been bought withdollars by the Bank of England, thus adding a minuscule dropto Britain’s reserve loss. Reading about the little coup in theWall Street Journal, to which the group’s broker hadreported it, presumably with pride, I hoped the apprenticegnomes of Youngstown had at least grasped the implications ofwhat they were doing.
So much for Sunday and moral speculation. On Monday, thefinancial world, or most of it, went back to work, and thedevaluation began to be put to its test. The test consisted oftwo questions. Question One: Would the devaluation accomplishits purpose for Britain—that is, stimulate exports and reduceimports sufficiently to cure the international deficit and put anend to speculation against the pound? Question Two: Would it,as in 1931, be followed by a string of competitive devaluationsof other currencies, leading ultimately to a devaluation of thedollar in relation to gold, worldwide monetary chaos, andperhaps a world depression? I watched the answers beginningto take shape.
On Monday, the banks and exchanges in London remainedfirmly closed, by government order, and all but a few traderselsewhere avoided taking positions in sterling in the Bank ofEngland’s absence from the market, so the answer to thequestion of the pound’s strength or weakness at its newvaluation was postponed; On Threadneedle and ThrogmortonStreets, crowds of brokers, jobbers, and clerks milled aroundand talked excitedly—but made no trades—in a city where theunion Jack was flying from all flagstaffs because it happened tobe the Queen’s wedding anniversary. The New York stockmarket opened sharply lower, then recovered. (There was noreally rational explanation for the initial drop; securities menpointed out that devaluation just generally sounds depressing.)By nightfall on Monday, it had been announced that elevenother currencies—those of Spain, Denmark, Israel, Hong Kong,Malta, Guyana, Malawi, Jamaica, Fiji, Bermuda, andIreland—were also being devalued. That wasn’t so bad, becausethe disruptive effect of a currency devaluation is in directproportion to the importance of that currency in world trade,and none of those currencies were of great importance. Themost ominous move was Denmark’s, because Denmark mighteasily 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 onpounds held in its reserves at the time of devaluation, heldfirm, 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 tradinglimits 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 balloonslipped from a child’s hand, and stayed there all day; indeed,for obscure reasons inapplicable to balloons, it spent much ofthe day slightly above the ceiling. Now, instead of paying dollarsfor pounds, the Bank of England was supplying pounds fordollars, and thereby beginning the process of rebuilding itsreserves. I called Waage to share what I thought would be hisjubilation, but found him taking it all calmly. The pound’sstrength, he said, was “technical”—that is, it was caused by theprevious week’s short sellers’ buying pounds back to cash intheir profits—and the first objective test of the new poundwould not come until Friday. Seven more small governmentsannounced devaluations during the day. In Malaysia, which haddevalued its old sterling-backed pound but not its new dollar,based on gold, and which continued to keep both currencies incirculation, the injustice of the situation led to riots, and overthe next two weeks more than twenty-seven people were killedin them—the first casualties of devaluation. Apart from thispainful reminder that the counters in the engrossing game ofinternational finance are people’s livelihoods, and even theirlives, so far so good.
But on Wednesday the twenty-second a less localized portentof trouble appeared. The speculative attack that had so longbattered and at last crushed the pound now turned, aseveryone had feared it might, on the dollar. As the one nationthat is committed to sell gold in any quantity to the centralbank of any other nation at the fixed price of thirty-five dollarsan ounce, the United States is the keystone of the worldmonetary arch, and the gold in its Treasury—which on thatWednesday amounted to not quite thirteen billion dollars’
worth—is the foundation. Federal Reserve Board ChairmanMartin had said repeatedly that the United States would underany condition continue to sell it on demand, if necessary downto the last bar. Despite this pledge, and despite PresidentJohnson’s reiteration of it immediately after Britain’s devaluation,speculators now began buying gold with dollars in hugequantities, expressing the same sort of skepticism toward officialassurances that was shown at about the same time by NewYorkers who took to accumulating and hoarding subway tokens.
Gold was suddenly in unusual demand in Paris, Zurich, andother financial centers, and most particularly in London, theworld’s leading gold market, where people immediately began totalk 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, whoare forbidden by law to buy or own monetary gold. And whowas to sell the stuff to these invisible multitudes so suddenlyrepossessed by the age-old lust for it? Not the United StatesTreasury, which, through the Federal Reserve, sold gold only tocentral banks, and not other central banks, which did notpromise to sell it at all. To fill this vacuum, still anotherco?perative international group, the London gold pool, had beenestablished in 1961. Provided by its members—the United States,Britain, Italy, the Netherlands, Switzerland, West Germany,Belgium, and, originally, France—with gold ingots in quantitiesthat might dazzle a Croesus (fifty-nine per cent of the totalcoming from the United States), the pool was intended to quellmoney panics by supplying gold to non-governmental buyers inany quantity demanded, at a price effectively the same as theFederal Reserve’s, and thereby to protect the stability of thedollar and the system.
And that is what the pool did on Wednesday. Thursday,though, was much worse, with the gold-buying frenzy in bothParis and London breaking even the records set during theCuban missile crisis of 1962, and many people, high British andAmerican officials among them, became convinced of somethingthey had suspected from the first—that the gold rush was partof a plot by General de Gaulle and France to humble first thepound and now the dollar. The evidence, to be sure, was allcircumstantial, but it was persuasive. De Gaulle and hisMinisters had long been on record as wishing to relegate thepound and the dollar to international roles far smaller thantheir 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’sgovernment had let slip, through a press leak, that it intendedto withdraw from the gold pool (according to subsequentinformation, France hadn’t contributed anything to the poolsince the previous June anyhow), and the French governmentwas also accused of having had a hand in spreading falserumors that Belgium and Italy were about to withdraw, too.
And now it was coming out, bit by bit, that in the days justbefore the devaluation France had been by far the mostreluctant nation to join in another credit package to rescuesterling, and that, for good measure, France had withheld untilthe very last minute its assurance that it would maintain itsown exchange rate if Britain devalued. All in all, there was agood case for the allegation that de Gaulle & Co. had beenplaying a mischievous part, and, whether it was true or not, Icouldn’t help feeling that the accusations against them wereadding a good deal of spice to the devaluation crisis—spice thatwould become more piquant a few months later, when thefranc would be in dire straits, and the United States forced bycircumstances to come to its aid.
ON Friday, in London, the pound spent the whole day tight upagainst its ceiling, and thus came through its first reallysignificant post-devaluation test with colors flying. Only a fewsmall governments had announced devaluations since Monday,and it was now evident that Norway, Sweden, and theNetherlands were going to hold firm. But on the dollar frontthings looked worse than ever. Friday’s gold buying in Londonand Paris had far exceeded the previous day’s record, andestimates were that gold sales in all markets over the precedingthree days added up to something not far under thebillion-dollar mark; there was near pandemonium all day inJohannesburg as speculators scrambled to get their hands onshares in gold-mining companies; and all over Europe peoplewere trading in dollars not only for gold but for othercurrencies as well. If the dollar was hardly in the position thatthe pound had occupied a week earlier, at least there wereuncomfortable parallels. Subsequently, it was reported that inthe first days after devaluation the Federal Reserve, soaccustomed to lending support to other currencies, had beenforced to borrow various foreign currencies, amounting toalmost two billion dollars’ worth, in order to defend its own.
Late Friday, having attended a conference at which Waagewas in an unaccustomed mood of nervous jocularity that mademe nervous, too, I left the Federal Reserve Bank half believingthat devaluation of the dollar was going to be announced overthe weekend. Nothing of the sort happened; on the contrary,the worst was temporarily over. On Sunday, it was announcedthat central-bank representatives of the gold-pool countries,Hayes and Coombs among them, had met in Frankfurt andformally agreed to continue maintaining the dollar at its presentgold-exchange rate with their combined resources. This seemedto remove any doubt that the dollar was backed not only bythe United States’ thirteen-billion-dollar gold hoard but also bythe additional fourteen billion dollars’ worth of gold in thecoffers of Belgium, Britain, Italy, the Netherland, Switzerland,and West Germany. The speculators were apparently impressed.
On Monday, gold buying was much lower in London andZurich, continuing at a record pace only in Paris—and this inspite of a sulphurous press audience granted that day by deGaulle himself, who, along with bemusing opinions on variousother matters, hazarded the view that the trend of events wastoward the decline of the dollar’s international importance. OnTuesday, gold sales dropped sharply everywhere, even in Paris.
“A good day today,” Waage told me on the phone thatafternoon. “A better day tomorrow, we hope.” On Wednesday,the gold markets were back to normal, but, as a result of theweek’s doings, the Treasury had lost some four hundred andfifty tons of gold—almost half a billion dollars’ worth—in fulfillingits obligations to the gold pool and meeting the demands offoreign central banks.
Ten days after devaluation, everything was quiet. But it wasonly a trough between succeeding shock waves. FromDecember 8th to 18th, there came a new spell of wildspeculation against the dollar, leaching another four hundredtons or so of gold out of the pool; this, like the previous wave,was eventually calmed by reiterations on the part of the UnitedStates and its gold-pool partners of their determination tomaintain the status quo. By the end of the year, the Treasuryhad lost almost a billion dollars’ worth of gold since Britain’sdevaluation, reducing its gold stock to below thetwelve-billion-dollar mark for the first time since 1937. PresidentJohnson’s balance-of-payments program, announced January1st, 1968 and based chiefly on restrictions on American banklending and industrial investments abroad, helped keepspeculation down for two months. But the gold rush was notto be quelled so simply. All pledges notwithstanding, it hadpowerful economic and psychological forces behind it. In alarger sense, it was an expression of an age-old tendency todistrust all paper currencies in times of crisis, but morespecifically it was the long-feared sequel to sterling devaluation,and—perhaps most specifically of all—it was a vote of noconfidence in the determination of the United States to keep itseconomic affairs in order, with particular reference to a level ofcivilian consumption beyond the dreams of avarice at a timewhen ever-increasing billions were being sent abroad to supporta war with no end in sight. The money in which the worldwas supposed to be putting its trust looked to the goldspeculators like that of the most reckless and improvidentspendthrift.
When they returned to the attack, on February29th—choosing that day for no assignable reason except that asingle United States senator, Jacob Javits, had just remarked,with either deadly seriousness or casual indiscretion, that hethought his country might do well to suspend temporarily allgold payments to foreign countries—it was with such ferocitythat the situation quickly got out of hand. On March 1st, thegold pool dispensed an estimated forty to fifty tons in London(as against three or four tons on a normal day); on March5th and 6th, forty tons per day; on March 8th, overseventy-five tons; and on March 13th, a total that could not beaccurately estimated but ran well over one hundred tons.
Meanwhile, the pound, which could not possibly escape afurther devaluation if the dollar were to be devalued in relationto gold, slipped below its par of $2.40 for the first time. Stillanother reiteration of the now-familiar pledges, this time fromthe central-bankers’ club at Basel on March 10th, seemed tohave no effect at all. The market was in the classic state ofchaos, distrustful of every public assurance and at the mercy ofevery passing rumor. A leading Swiss banker grimly called thesituation “the most dangerous since 1931.” A member of theBasel club, tempering desperation with charity, said that thegold speculators apparently didn’t realize their actions wereimperilling the world’s money. The New York Times, in aneditorial, said, “It is quite clear that the international paymentssystem … is eroding.”
On Thursday, March 14th, panic was added to chaos. Londongold dealers, in describing the day’s action, used the un-Britishwords “stampede,” “catastrophe,” and “nightmare.” The exactvolume of gold sold that day was unannounced, asusual—probably it could not have been precisely counted, in anycase—but everyone agreed that it had been an all-time record;most estimates put the total at around two hundred tons, ortwo hundred and twenty million dollars’ worth, while the WallStreet Journal put it twice that high. If the former estimatewas right, during the trading day the United States Treasuryhad paid out through its share of the gold pool alone onemillion dollars in gold every three minutes and forty-twoseconds; if the Journal figure was right (as a subsequentTreasury announcement made it appear to be), a million everyone minute and fifty-one seconds. Clearly, this wouldn’t do.
Like Britain in 1964, at this rate the United States would havea bare cupboard in a matter of days. That afternoon, theFederal Reserve System raised its discount rate from four anda half to five per cent—a defensive measure so timid andinadequate that one New York banker compared it to apopgun, and the Federal Reserve Bank of New York, as theSystem’s foreign-exchange arm, was moved to protest byrefusing to go along with the token raise. Late in the day inNew York, and toward midnight in London, the United Statesasked Britain to keep the gold market closed the next day,Friday, to prevent further catastrophe and clear the way to theweekend, when face-to-face international consultations could beheld. The bewildered American public, largely unaware of thegold pool’s existence, probably first sensed the general shape ofthings when it learned on Friday morning that Queen ElizabethII had met with her Ministers on the crisis between midnightand 1 A.M.
On Friday, a day of nervous waiting, the London marketswere closed, and so were foreign-exchange desks nearlyeverywhere else, but gold shot up to a big premium in theParis market—a sort of black market, from the Americanstandpoint—and in New York sterling, unsupported by thefirmly locked Bank of England, briefly fell below its officialbottom price of $2.38 before rallying. Over the weekend, thecentral bankers of the gold-pool nations (the United States,Britain, West Germany, Switzerland, Italy, the Netherlands, andBelgium, with France still conspicuously missing and, indeed,uninvited this time) met in Washington, with Coombsparticipating for the Federal Reserve along with ChairmanMartin. After two full days of rigidly secret discussions, whilethe world of money waited with bated breath, they announcedtheir decisions late on Sunday afternoon. Thethirty-five-dollar-an-ounce official monetary price of gold wouldbe kept for use in all dealings among central banks; the goldpool would be disbanded, and the central banks would supplyno more gold to the London market, where privately tradedgold would be allowed to find its own price; sanctions would betaken against any central bank seeking to profit from the pricedifferential between the central-bank price and the free-marketprice; and the London gold market would remain closed for acouple of weeks, until the dust settled. During the first fewmarket days under the new arrangements, the pound ralliedstrongly, and the free-market price of gold settled at betweentwo and five dollars above the central-bank price—a differentialconsiderably smaller than many had expected.
The crisis had passed, or that crisis had. The dollar hadescaped devaluation, and the international monetary mechanismwas intact. Nor was the solution a particularly radical one; afterall, gold had been on a two-price basis in 1960, before thegold 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 summerapproached were the Federal Reserve and the United StatesTreasury, doing what they could in a technical way to keepthings on an even keel; the Congress, complacent withprosperity, preoccupied with coming elections, and thereforeresistant to higher taxes and other uncomfortable retrenchingmeasures (on the very afternoon of the London panic, theSenate Finance Committee had voted down an income-taxsurcharge); and, finally, the President, calling for “a program ofnational austerity” to defend the dollar, yet at the same timecarrying on at ever-increasing expense the Vietnam war, whichhad 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 possibleeconomic courses: to somehow end the Vietnam war, root ofthe payments problem and therefore heart of the matter; toadopt a full wartime economy, with sky-high taxes, wage andprice controls, and perhaps rationing; or to face forceddevaluation of the dollar and perhaps a depression-breedingworld monetary mess.
Looking beyond the Vietnam war and its incredibly broadworldwide monetary implications, the central bankers went onplugging away. Two weeks after the stopgap solution of thedollar crisis, those of the ten most powerful industrial countriesmet in Stockholm and agreed, with only France dissenting, onthe gradual creation of a new international monetary unit tosupplement gold as the bedrock underlying all currencies. It willconsist (if action follows on resolution) of special drawing rightson the International Monetary Fund, available to nations inproportion to their existing reserve holdings. In bankers’ jargonthe rights will be called S.D.R.’s; in popular jargon they were atonce called paper gold. The success of the plan in achieving itsends—averting dollar devaluation, overcoming the worldshortage of monetary gold, and thus postponing indefinitely thethreatened mess—will depend on whether or not men andnations can somehow at last, in a triumph of reason, achievewhat they have failed to achieve in almost four centuries ofpaper money: that is, to overcome one of the oldest and leastrational of human traits, the lust for the look and feel of golditself, and come to give truly equal value to a pledge written ona piece of paper. The answer to that question will come in thelast act, and the outlook for a happy ending is not bright.
AS the last act was beginning to unfold—after the sterlingdevaluation but before the gold panic—I went down to LibertyStreet and saw Coombs and Hayes. I found Coombs lookingbone-tired but not sounding disheartened about three yearsspent largely in a losing cause. “I don’t see the fight for thepound as all having been in vain,” he said. “We gained thosethree years, and during that time the British put through a lotof internal measures to strengthen themselves. If they’d beenforced to devalue in 1964, there’s a good chance thatwage-and-price inflation would have eaten up any benefit theyderived and put them back in the same old box. Also, overthose three years there have been further gains in internationalmonetary co?peration. Goodness knows what would havehappened to the whole system with devaluation in 1964.
Without that three-year international effort—that rearguardaction, you might say—sterling might have collapsed in muchgreater disorder, with far more damaging repercussions thanwe’ve seen even now. Remember that, after all, our effort andthe effort of the other central-banks wasn’t to hold up sterlingfor its own sake. It was to hold it up for the sake ofpreserving the system. And the system has survived.”
Hayes, on the surface, seemed exactly as he had when I lastsaw him, a year and a half earlier—as placid and unruffled asif he had been spending all that time studying up on Corfu. Iasked him whether he was still living up to his principle ofkeeping bankers’ hours, and he replied, smiling very slightly,that the principle had long since yielded to expediency—that, asa time consumer, the 1967 sterling crisis had made the 1964crisis seem like child’s play, and that the subsequent dollarcrisis was turning out to be more of the same. A side benefitof the whole three-and-a-half-year affair, he said, was that itsfrequently excruciating melodrama had contributed something toMrs. Hayes’ interest in banking, and even something, if not somuch, to the position of business in Tom’s scale of values.
When Hayes spoke of the devaluation, however, I saw thathis placidity was a mask. “Oh, I was disappointed, all right,” hesaid quietly. “After all, we worked like the devil to prevent it.
And we nearly did. In my opinion, Britain could have gotenough assistance from abroad to hold the rate. It could havebeen done without France. Britain chose to devalue. I thinkthere’s a good chance that the devaluation will eventually be asuccess. And the gain for international co?peration is beyondquestion. Charlie Coombs and I could feel that at Frankfurt inNovember, at the gold-pool meeting—a sense everyone therehad that now is the time to lock arms. But still …” Hayespaused, and when he spoke again his voice was full of suchquiet force that I saw the devaluation through his eyes—not asjust a severe professional reverse but as an ideal lost and anidol fallen. He said, “That day in November, here at the bank,when a courier brought me the top-secret British documentinforming us of the decision to devalue, I felt physically sick.
Sterling would not be the same. It would never again commandthe same amount of faith around the world.”

The End