The Insull Trusts was a network of public utilities and electric railways that had been created through extensive borrowing. Because of the Great Depression and questionable corporate governance, the empire folded in 1932 amid scandal. Following Insull’s collapse, the U.S. Congress enacted the Public Utility Holding Company Act, which requires extensive financial disclosures by utility companies.
Samuel Insull was one of the most respected businessmen of his era. He appeared on the cover of
Time magazine on at least three occasions and controlled a huge corporate empire. Insull, who had started out as the secretary of Thomas A. Edison, became vice president of Edison General Electric Company in 1889 and president of Chicago Edison Company in 1892. By 1908, he had formed the Commonwealth Edison Company in Chicago and made it the greatest single electricity producer in the world. He was responsible for unifying rural electrification efforts and eventually took control of financially troubled electric commuter trains. He administered an integrated electrical conglomerate and was revered for making electric power universally cheap and abundant to millions.
Insull was an early supporter of utility regulation; he recognized that government regulation would treat utilities as natural monopolies and, thus, would allow them to grow without competition. This would allow for greater economies of scale and permit electric companies to sell electricity at lower prices. Eventually, Insull became a director of eighty-five corporations, chairman of sixty-five, and president of eleven. He controlled a utilities empire worth more than four billion dollars. This control was achieved through a trust system a series of holding companies that allowed Insull to organize his companies in a pyramid fashion, with a series of much-leveraged companies owning each others’ shares.
At the age of seventy-three, Insull was indicted for perpetrating a corporate fraud and cheating investors of millions of dollars. He fled the United States to avoid prosecution but was eventually returned to face trial. In his state and federal trials, however, he was acquitted of all charges.
With the start of the Depression in 1929, the number of passengers on the Insull railroads declined, people who had lost their jobs tried to cut costs by conserving electricity, and there was less money available from bankers and investors. Losses at the Insull companies soared. Several of his companies went into receivership in 1931, but the real collapse of the Insull empire began in 1932 with the bankruptcy of the Chicago Rapid Transit Company (CRT). Insull’s other holdings had been drained of cash to support the CRT. As a result, Insull was left in financial ruin. Little cash was available from lenders, but this did not matter because Insull had previously made enemies of many of New York’s financial leaders, leaving him without support from the national financial markets as well.
In June, 1932, Insull initially fled to France, then to Italy, Greece, and Istanbul, Turkey. He resisted extradition but eventually was caught when the U.S. Coast Guard illegally boarded the ship he was on in the Mediterranean and brought him back to the United States for trial. Millions of investors had lost money in the Insull companies. A scapegoat was needed, and that person was Insull. The indictment for fraud was enough to convince the public that the federal and state authorities were trying to do something about the situation. The prosecutors made a strong point, arguing that Insull’s 1931 salary had been $485,767, while 25 percent of Americans were out of work. However, Insull was acquitted on all charges. During the trial, he explained that he had fled the United States because he felt that if he had stayed, his trial would have been politicized because the state prosecutor had been running for reelection.
In 1932, the accounting firm Arthur Andersen & Company was selected to oversee the financial restoration of Insull’s bankrupt utilities empire. During the 1920’s, the Andersen company had started a service known as financial and industrial investigations, which were specialized studies using accounting analysis to evaluate organizational structures, plants, or products. This proficiency landed the firm the Insull job.
Despite the publicity surrounding the bankruptcy of the Insull Trusts and Insull’s flight to avoid prosecution, there was little in the way of criminal activity. Insull was guilty of nothing more than participating in a few wash sales of stocks in the last days when the Depression was toppling his empire. Although Insull was tried on a variety of charges, he was subsequently acquitted of all wrongdoing. Insull’s empire did not all crumble at the same time. Small companies would periodically file for bankruptcy, and some never succumbed to bankruptcy. For many of those companies that did go bankrupt early in the Depression, Insull was appointed by the court as their trustee.
One accountant explained the situation at the Insull Trusts with the comment that although Insull’s holdings might have been difficult to unravel, there was no secrecy involved. One of his biographers described the Insull Trusts as being so full of intricacies that they almost defied human understanding.
At the age of seventy-eight, Insull died of a heart attack in 1938 in a Paris subway station. He had eighty-four cents in his pocket, leading to rumors that he died nearly penniless. Others, however, say that his wallet must have been stolen by a thief before the police arrived on the scene. He was buried in London, England, the city of his birth.
The scandalous collapse of the energy-based empire created by Insull resulted in investors losing millions of dollars in 1932. The immediate result of the collapse was the enactment of the Public Utility Holding Company Act
After trial, Insull was left with nothing. In 1935, one of his companies voted to give him an eighteen thousand dollar annual pension because of his fundamental contributions to the electricity industry, contributions that led to three major shifts in American history. First, Insull’s innovations in the delivery of low-cost electric power made possible the modern consumer age. Second, the failure of his financial empire became a basis for New Deal laws that affect corporate America into the twenty-first century. Third, his creation of the power grid, which fuels large urban areas, was instrumental in creating the modern city.
In summary, the case of Insull was more of a rumored scandal than a real scandal. Insull and his companies were as much victims of the Great Depression as were the investors who lost their fortunes because of the bankruptcy of his empire. Insull lost more than anyone else; his son claimed that the loss of his utility properties was the ultimate cause of his death.
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Busch, Francis X. Guilty or Not Guilty? An Account of the Trials of the Leo Frank Case, the D. C. Stephenson Case, the Samuel Insull Case, the Alger Hiss Case. Buffalo, N.Y.: William S. Hein, 1998. Includes an overview of the Insull trial. -
McDonald, Forrest. Insull. Chicago: University of Chicago Press, 1962. The foremost work on the life of Insull, his management style, and his problems after the downfall of his companies. A classic work. -
Ramsay, M. L. Pyramids of Power: The Story of Roosevelt, Insull, and the Utility Wars. 1937. Reprint. New York: Da Capo Press, 1975. Explains how the Insull companies were organized in a pyramid structure that allowed one person Insull to control hundreds of companies with a very small investment. Also discusses the passage of the Public Utility Holding Company Act of 1935. -
Wasik, John F. The Merchant of Power: Sam Insull, Thomas Edison, and the Creation of the Modern Metropolis. New York: Palgrave Macmillan, 2006. An excellent biography of Insull, essentially written as a rags-to-riches story. Quite sympathetic to its subject. Includes discussion of Insull’s personal wealth, all of which he lost in the Great Depression. The author claims that Insull was the model for Orson Welles’s film Citizen Kane.
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