Defending the Public From Greed

FDR's classic 1932 campaign speech

A month before the 1932 election, Franklin Roosevelt traveled to Portland, Oregon to deliver a speech about government and governance. Some 80 years later, his talk, given in the depths of the Depression to a nation that had yet to accept government as a key player, remains one of the clearest and most accessible explications of the relationship between the public and the private.

FDR specifically addressed the relationship of government to electric utilities but one could easily translate the theory and principles he proposes to today's banks, or cable companies or airlines.

In the decade before FDR's visit to Portland the electricity sector had undergone a sea change. Power companies that once served neighborhoods now served cities and even states. The era of competition when Chicago had 29 electric companies and New York at least 6 had given way to a consensus that the inherent nature of electricity production and distribution lent itself to monopolies.

The key question after 1920 was who would own and control these monopolies. At the local level, the war between the public and the private raged for a decade. More than 2200 smaller cities eventually built their own electric networks. Most large cities lost the battle although a few like Los Angeles, Seattle and Cleveland emerged victorious.

FDR began with the basic question, then and now. Why not leave electricity production and distribution in private, unregulated hands? He answered:

"The Presidential candidate delivered a theory of government that has stood the test of time. Government is a bulwark against greed. The natural resources of the country are a commons, a public trust to be used for the maximum public good."

"Let me take you back three hundred years to old King James of England. The reign of this king is remembered for many great events--two of them in particular. He gave us a great translation of the Bible, and, through his Lord Chancellor, a great statement of public policy. It was in the days when Shakespeare was writing Hamlet and when the English were settling Jamestown, that a public outcry rose in England from travelers who sought to cross the deeper streams and rivers by means of ferry-boats. Obviously these ferries, which were needed to connect the highway on one side with the highway on the other, were limited to specific points. They were, therefore, as you and I can understand, monopolistic in their nature. The ferryboat operators, because of the privileged position which they held, had the chance to charge whatever the traffic would bear, and bad service and high rates had the effect of forcing much trade and travel into long detours or to the dangers of attempting to ford the streams."

"The greed and avarice of some of these ferryboat owners were made known by an outraged people to the King himself, and he invited his great judge, Lord Hale, to advise him."

"The old law Lord replied that the ferrymen's business was quite different from other businesses, that the ferry business was, in fact, vested with a public character, that to charge excessive rates was to set up obstacles to public use, and that the rendering of good service was a necessary and public responsibility. "Every ferry," said Lord Hale, "ought to be under a public regulation, to-wit: that it give attendance at due time, keep a boat in due order, and take but reasonable toll."

Electric utilities, FDR argued, were also "vested with a public character" subject to public oversight. He then turned to the next question. How should government protect the public interest?

By 1932 virtually all states had created utility regulatory commissions. Interestingly among the leaders of the movement to create such commissions was Samuel Insull, former secretary and salesman for Thomas Edison and the creator of utility holding companies that controlled hundreds of utilities across many states. Insull had been the leading proponent of utilities as monopolies and promoted state regulatory commissions as the trade off for monopoly.

FDR embraced the public service commission as "a proper way for the people themselves to protect their interests." But he noted that regulatory commissions had largely abandoned their public interest role, exhibiting what today would be called regulatory capture. Roosevelt stated:

"It is an undoubted and undeniable fact that in our modern American practice the public service commissions of many States have often failed to live up to the very high purpose for which they were created. In many instances their selection has been obtained by the public utility corporations themselves. These corporations, to the prejudice of the public, have often influenced the actions of public service commissions. Moreover, some of the commissions have, either through deliberate intent or through sheer inertia, adopted a theory, a conception of their duties wholly at variance with the original object for which they were created."

FDR proposed a regulatory principle he had embraced when governor of NY, one that in most states would be considered controversial to this day. "(T)he Public Service not a mere arbitrator as between the people and the public utilities, ... (but) must act as agent of the public, upon its own initiative as well as upon petition...The regulating commission, my friends, must be a Tribune of the people...(engaged in) positive and active protection of the people against private greed!"

FDR provided his audience the clearest example of private greed in his time, the "Insull monstrosity." By 1930, ten holding companies owned 75 percent of the electric industry. Insull's empire was the biggest. Valued at $500 million it had only $27 million in equity. When the stock market faltered his holding company collapsed, wiping out the life savings of 600,000 shareholders. FDR explained:

"They did not realize that there had been arbitrary write-ups of assets and inflation of vast capital accounts. They did not realize that excessive prices had been paid for property acquired...They did not realize that sound subsidiaries had been milked and milked to keep alive the weaker sisters in the great chain. They did not realize that there had been borrowings and endings, an interchange of assets, of liabilities and of capital between the component parts of the whole."

The role of the public service commission was to protect the investor as well as the electric customer against private financial manipulation.

FDR then addressed the question of direct public ownership:

"I do not hold with those who advocate Government ownership or Government operation of all utilities. But the exceptions are of vital importance, local, state and is by no means possible, in every case, for Government to insure at all times by mere inspection, supervision and regulation that the public get a fair deal--in other words, to insure adequate service and reasonable rates."

"I therefore lay down the following principle: That where a community--a city or county or a district--is not satisfied with the service rendered or the rates charged by the private utility, it has the undeniable basic right, as one of its functions of Government, one of its functions of home rule, to set up, after a fair referendum to its voters has been had, its own governmentally owned and operated service...the very fact that a community can, by vote of the electorate, create a yardstick of its own, will, in most cases, guarantee good service and low rates to its population."

Finally, FDR addressed the question of the ownership of the vast natural resources on public lands, specifically because of its immense potential to generate electricity, the nation's rivers.

"The water power of the State should belong to all the people. The title to this power must rest forever in the people. No commission--not the Legislature itself--has any right to give, for any consideration whatever, a single potential kilowatt in virtual perpetuity to any person or corporation whatever. It is the duty of our representative bodies to see that this power is transferred into usable electrical energy and distributed at the lowest possible cost...and no inordinate profits must be allowed to those who act as the people's agent in bringing this power to their homes and workshops."

In less than 30 minutes, the Presidential candidate had delivered a theory of government that has stood the test of time. Government is a bulwark against greed. The natural resources of the country are a commons, a public trust to be used for the maximum public good. Government ownership is justified when the private sector fails or when corporations grow so large that local and state regulatory authorities can no longer "by mere inspection, supervision and regulation" protect the public interest. In the same speech FDR likened public ownership to a "'birch rod in the cupboard to be taken out and used only when the 'child' gets beyond the point where a mere scolding does no good."