[].1 Utilities
As we mentioned in section [ ], copper is a key candidate for the
role of a contested good, and the costs associated with it during the
1920s were significant.
The category of firms which were probably the most directly affected by
the dynamics of copper prices were public utilities in the electric
industry which would use copper for building power lines and laying down
electric wires.
Bierman provides evidence that the stock market crash in October 1929
was caused by the deteriorated position of public utilities. He notes
that the stocks of public utilities were the ones most affected by the
market downturn. Their total value fell by 55%, while those of
industrial firms and railroads declined by 48% and 32%, respectively.
The stocks of some prominent public utilities lost 70-80% of their
value from their high to the low point in 1929.
Bierman brings up two main reasons for the troubles in the public
utility sector. First, he suggest that the stocks of public utilities
were significantly overvalued on the eve of the market crash. According
to his calculations, their market value was three times their book
value. Secondly, in early October, the body that was responsible for the
regulation of public utilities in the state of Massachusetts – the
Massachusetts Department of Public Utilities – made a decision which
could have foreshadowed the negative turn in the regulatory stance
toward public utilities around the US by rejecting the stock split of
Edison Electric Illuminating Company of Boston. As Bierman further
documents, it was not the decision as such but the accompanying messages
that were essential for the perceived profitability of the company and
public utilities more generally:
The Massachusetts Department of Public Utilities (New York Times,
October 12, p. 27) did not want to imply to investors that this was the
“forerunner of substantial increases in dividends.” They stated that
the expectation of increased dividends was not justified, offered
“scathing criticisms of the company” (October 16, p. 42) and concluded
“the public will take over such utilities as try to gobble up all
profits available.”
On October 15, the Boston City Council advised the mayor to initiate
legislation for public ownership of Edison, on October 16, the
Department announced it would investigate the level of rates being
charged by Edison, and on October 19, it set the dates for the inquiry.
On Tuesday, October 15 (p. 41), there was a discussion in the Times of
the Massachusetts decision in the column “Topic in Wall Street.” It
“excited intense interest in public utility circles yesterday and
undoubtedly had effect in depressing the issues of this group. The
decision is a far-reaching one and Wall Street expressed the greatest
interest in what effect it will have, if any, upon commissions in other
States.”
Boston Edison had closed at 360 on Friday, October 11, before the
announcement was released. It dropped 61 points at its low on Monday,
(October 14) but closed at 328, a loss of 32 points.
On October 16 (p. 42), the Times reported that Governor Allen of
Massachusetts was launching a full investigation of Boston Edison
including “dividends, depreciation, and surplus.”
Bierman also points at a similar regulatory challenges against public
utilities in New York State:
Massachusetts was not alone in challenging the profit levels of
utilities. The Federal Trade Commission, New York City, and New York
State were all challenging the status of public utility regulation. New
York Governor (Franklin D. Roosevelt) appointed a committee on October 8
to investigate the regulation of public utilities in the state. The
Committee stated, “this inquiry is likely to have far-reaching effects
and may lead to similar action in other States.” Both the October 17
and October 19 issues of the Times carried articles regarding the New
York investigative committee. Professor Bonbright, a Roosevelt
appointee, described the regulatory process as a “vicious system”
(October 19, p. 21), which ignored consumers. The Chairman of the Public
Service Commission, testifying before the Committee wanted more control
over utility holding companies, especially management fees and other
transfers.
The mechanism suggested by Bierman does not appear to be sufficient in
itself to have caused the collapse in the public utility stock prices
but the picture changes if we take into account that public utilities
may have been a major part of the potential cluster of ABCT-predicted
excessively long projects.
The graph below from Braddock-Hickman indicates that the bond debt of
public utilities was growing rapidly in the second half of the 1920s,
and especially in 1927-29, and that by the end of the decade the share
of this industry in the total value of bonds outstanding has caught up
with that of railroads (around 30%).