by John Brooks
AFTER being described by Ginn as General Electric’s stubbornest and most dedicated advocate of free competition, Paxton explained to the Subcommittee that his thinking on the subject had been influenced not directly by Adam Smith but, rather, by way of a former G.E. boss he had worked under—the late Gerard Swope. Swope, Paxton testified, had always believed firmly that the ultimate goal of business was to produce more goods for more people at lower cost. “I bought that then, I buy it now,” said Paxton. “I think it is the most marvelous statement of economic philosophy that any industrialist has ever expressed.” In the course of his testimony, Paxton had an explanation, philosophical or otherwise, of each of the several situations related to price-fixing in which his name had earlier been mentioned. For instance, it had been brought out that in 1956 or 1957 a young man named Jerry Page, a minor employee in G.E.’s switchgear division, had written directly to Cordiner alleging that the switchgear divisions of G.E. and of several competitor companies were involved in a conspiracy in which information about prices was exchanged by means of a secret code based on different colors of letter paper. Cordiner had turned the matter over to Paxton with orders that he get to the bottom of it, and Paxton had thereupon conducted an investigation that led him to conclude that the color-code conspiracy was “wholly a hallucination on the part of this boy.” In arriving at that conclusion, Paxton had apparently been right, although it later came out that there had been a conspiracy in the switchgear division during 1956 and 1957; this, however, was a rather conventional one, based simply on price-fixing meetings, rather than on anything so gaudy as a color code. Page could not be called to testify because of ill health.
Paxton conceded that there had been some occasions when he “must have been pretty damn dumb.” (Dumb or not, for his services as the company’s president he was, of course, remunerated on a considerably grander scale than Vinson—receiving a basic annual salary of $125,000, plus annual incentive compensation of about $175,000, plus stock options designed to enable him to collect much more at low tax rates.) As for Paxton’s attitude toward company communications, he emerges as a pessimist on this score. Upon being asked at the hearings to comment on the Smith-Vinson conversations of 1957, he said that, knowing Smith, he just could not “cast the man in the role of a liar,” and went on:
When I was younger, I used to play a good deal of bridge. We played about fifty rubbers of bridge, four of us, every winter, and I think we probably played some rather good bridge. If you gentlemen are bridge players, you know that there is a code of signals that is exchanged between partners as the game progresses. It is a stylized form of playing.… Now, as I think about this—and I was particularly impressed when I read Smith’s testimony when he talked about a “meeting of the clan” or “meeting of the boys”—I begin to think that there must have been a stylized method of communication between these people who were dealing with competition. Now, Smith could say, “I told Vinson what I was doing,” and Vinson wouldn’t have the foggiest idea what was being told to him, and both men could testify under oath, one saying yes and the other man saying no, and both be telling the truth.… [They] wouldn’t be on the same wavelength. [They] wouldn’t have the same meanings. I think, I believe now that these men did think that they were telling the truth, but they weren’t communicating between each other with understanding.
Here, certainly, is the gloomiest possible analysis of the communications problem.
CHAIRMAN Cordiner’s status, it appears from his testimony, was approximately that of the Boston Cabots in the celebrated jingle. His services to the company, for which he was recompensed in truly handsome style (with, for 1960, a salary of just over $280,000, plus contingent deferred income of about $120,000, plus stock options potentially worth hundreds of thousands more), were indubitably many and valuable, but they were performed on such an exalted level that, at least in antitrust matters, he does not seem to have been able to have any earthly communication at all. When he emphatically told the Subcommittee that at no time had he had so much as an inkling of the network of conspiracies, it could be deduced that his was a case not of faulty communication but of no communication. He did not speak to the Subcommittee of philosophy or philosophers, as Ginn and Paxton had done, but from his past record of ordering reissues of 20.5 and of peppering his speeches and public statements with praise of free enterprise, it seems clear that he was un philosophe sans le savoir—and one on the side of selling the Lord, since no evidence was adduced to suggest that he was given to winking in any form. Kefauver ran through a long list of antitrust violations of which General Electric had been accused over the past half-century, asking Cordiner, who joined the company in 1922, how much he knew about each of them; usually, he replied that he had known about them only after the fact. In commenting on Ginn’s testimony that Erben had countermanded Cordiner’s direct order in 1954, Cordiner said that he had read it with “great alarm” and “great wonderment,” since Erben had always indicated to him “an intense competitive spirit,” rather than any disposition to be friendly with rival companies.
Throughout his testimony, Cordiner used the curious expression “be responsive to.” If, for instance, Kefauver inadvertently asked the same question twice, Cordiner would say, “I was responsive to that a moment ago,” or if Kefauver interrupted him, as he often did, Cordiner would ask politely, “May I be responsive?” This, too, offers a small lead for a foundation grantee, who might want to look into the distinction between being responsive (a passive state) and answering (an act), and their relative effectiveness in the process of communication.
Summing up his position on the case as a whole, in reply to a question of Kefauver’s about whether he thought that G.E. had incurred “corporate disgrace,” Cordiner said, “No, I am not going to be responsive and say that General Electric had corporate disgrace. I am going to say that we are deeply grieved and concerned.… I am not proud of it.”
CHAIRMAN Cordiner, then, had been able to fairly deafen his subordinate officers with lectures on compliance with the rules of the company and the laws of the country, but he had not been able to get all those officers to comply with either, and President Paxton could muse thoughtfully on how it was that two of his subordinates who had given radically different accounts of a conversation between them could be not liars but merely poor communicators. Philosophy seems to have reached a high point at G.E., and communication a low one. If executives could just learn to understand one another, most of the witnesses said or implied, the problem of antitrust violations would be solved. But perhaps the problem is cultural as well as technical, and has something to do with a loss of personal identity that comes from working in a huge organization. The cartoonist Jules Feiffer, contemplating the communication problem in a nonindustrial context, has said, “Actually, the breakdown is between the person and himself. If you’re not able to communicate successfully between yourself and yourself, how are you supposed to make it with the strangers outside?” Suppose, purely as a hypothesis, that the owner of a company who orders his subordinates to obey the antitrust laws has such poor communication with himself that he does not really know whether he wants the order to be complied with or not. If his order is disobeyed, the resulting price-fixing may benefit his company’s coffers; if it is obeyed, then he has done the right thing. In the first instance, he is not personally implicated in any wrongdoing, while in the second he is positively involved in right doing. What, after all, can he lose? It is perhaps reasonable to suppose that such an executive might communicate his uncertainty more forcefully than his order. Possibly yet another foundation grantee should have a look at the reverse of communication failure, where he might discover that messages the sender does not even realize he is sending sometimes turn out to have got across only too effectively.
Meanwhile, in the first years after the Subcommittee concluded its investigation, the defendant companies were by no means allowed to forget their transgressions. The law permits customers who can prove that the
y have paid artificially high prices as a result of antitrust violations to sue for damages—in most cases, triple damages—and suits running into many millions of dollars piled up so high that Chief Justice Warren had to set up a special panel of federal judges to plan how they should all be handled. Needless to say, Cordiner was not allowed to forget about the matter, either; indeed, it would be surprising if he was allowed a chance to think about much else, for, in addition to the suits, he had to contend with active efforts—unsuccessful, as it turned out—by a minority group of stockholders to unseat him. Paxton retired as president in April, 1961, because of ill health dating back at least to the previous January, when he underwent a major operation. As for the executives who pleaded guilty and were fined or imprisoned, most of those who had been employed by companies other than G.E. remained with them, either in their old jobs or in similar ones. Of those who had been employed by G.E., none remained there. Some retired permanently from business, others settled for comparatively small jobs, and a few landed big ones—most spectacularly Ginn, who in June, 1961, became president of Baldwin-Lima-Hamilton, manufacturers of heavy machinery. And as for the future of price-fixing in the electrical industry, it seems safe to say that what with the Justice Department, Judge Ganey, Senator Kefauver, and the triple-damage suits, the impact on the philosophers who guide corporate policy was such that they, and even their subordinates, were likely to try to hew scrupulously to the line for quite some time. Quite a different question, however, is whether they had made any headway in their ability to communicate.
8
The Last Great Corner
BETWEEN SPRING and midsummer, 1958, the common stock of the E. L. Bruce Company, the nation’s leading maker of hardwood floors, moved from a low of just under $17 a share to a high of $190 a share. This startling, even alarming, rise was made in an ascending scale that was climaxed by a frantic crescendo in which the price went up a hundred dollars a share in a single day. Nothing of the sort had happened for a generation. Furthermore—and even more alarming—the rise did not seem to have the slightest bit of relation to any sudden hunger on the part of the American public for new hardwood floors. To the consternation of almost everyone concerned, conceivably including even some of the holders of Bruce stock, it seemed to be entirely the result of a technical stock-market situation called a corner. With the exception of a general panic such as occurred in 1929, a corner is the most drastic and spectacular of all developments that can occur in the stock market, and more than once in the nineteenth and early twentieth centuries, corners had threatened to wreck the national economy.
The Bruce situation never threatened to do that. For one thing, the Bruce Company was so small in relation to the economy as a whole that even the wildest gyrations in its stock could hardly have much national effect. For another, the Bruce “corner” was accidental—the by-product of a fight for corporate control—rather than the result of calculated manipulations, as most of the historic corners had been. Finally, this one eventually turned out to be not a true corner at all, but only a near thing; in September, Bruce stock quieted down and settled at a reasonable level. But the incident served to stir up memories, some of them perhaps tinged with nostalgia, among those flinty old Wall Streeters who had been around to see the classic corners—or at least the last of them.
In June of 1922, the New York Stock Exchange began listing the shares of a corporation called Piggly Wiggly Stores—a chain of retail self-service markets situated mostly in the South and West, with headquarters in Memphis—and the stage was set for one of the most dramatic financial battles of that gaudy decade when Wall Street, only negligently watched over by the federal government, was frequently sent reeling by the machinations of operators seeking to enrich themselves and destroy their enemies. Among the theatrical aspects of this particular battle—a battle so celebrated in its time that headline writers referred to it simply as the “Piggly Crisis”—was the personality of the hero (or, as some people saw it, the villain), who was a newcomer to Wall Street, a country boy setting out defiantly, amid the cheers of a good part of rural America, to lay the slick manipulators of New York by the heels. He was Clarence Saunders, of Memphis, a plump, neat, handsome man of forty-one who was already something of a legend in his home town, chiefly because of a house he was putting up there for himself. Called the Pink Palace, it was an enormous structure faced with pink Georgia marble and built around an awe-inspiring white-marble Roman atrium, and, according to Saunders, it would stand for a thousand years. Unfinished though it was, the Pink Palace was like nothing Memphis had ever seen before. Its grounds were to include a private golf course, since Saunders liked to do his golfing in seclusion. Even the makeshift estate where he and his wife and four children were camping out pending completion of the Palace had its own golf course. (Some people said that his preference for privacy was induced by the attitude of the local country club governors, who complained that he had corrupted their entire supply of caddies by the grandeur of his tips.) Saunders, who had founded the Piggly Wiggly Stores in 1919, had most of the standard traits of the flamboyant American promoters—suspect generosity, a knack for attracting publicity, love of ostentation, and so on—but he also had some much less common traits, notably a remarkably vivid style, both in speech and writing, and a gift, of which he may or may not have been aware, for comedy. But like so many great men before him, he had a weakness, a tragic flaw. It was that he insisted on thinking of himself as a hick, a boob, and a sucker, and, in doing so, he sometimes became all three.
This unlikely fellow was the man who engineered the last real corner in a nationally traded stock.
THE game of Corner—for in its heyday it was a game, a high-stakes gambling game, pure and simple, embodying a good many of the characteristics of poker—was one phase of the endless Wall Street contest between bulls, who want the price of a stock to go up, and bears, who want it to go down. When a game of Corner was under way, the bulls’ basic method of operation was, of course, to buy stock, and the bears’ was to sell it. Since the average bear didn’t own any of the stock issue in contest, he would resort to the common practice of selling short. When a short sale is made, the transaction is consummated with stock that the seller has borrowed (at a suitable rate of interest) from a broker. Since brokers are merely agents, and not outright owners, they, in turn, must borrow the stock themselves. This they do by tapping the “floating supply” of stock that is in constant circulation among investment houses—stock that private investors have left with one house or another for trading purposes, stock that is owned by estates and trusts and has been released for action under certain prescribed conditions, and so on. In essence, the floating supply consists of all the stock in a particular corporation that is available for trading and is not immured in a safe-deposit box or encased in a mattress. Though the supply floats, it is scrupulously kept track of; the short seller, borrowing, say, a thousand shares from his broker, knows that he has incurred an immutable debt. What he hopes—the hope that keeps him alive—is that the market price of the stock will go down, enabling him to buy the thousand shares he owes at a bargain rate, pay off his debt, and pocket the difference. What he risks is that the lender, for one reason or another, may demand that he deliver up his thousand borrowed shares at a moment when their market price is at a high. Then the grinding truth of the old Wall Street jingle is borne in upon him: “He who sells what isn’t his’n must buy it back or go to prison.” And in the days when corners were possible, the short seller’s sleep was further disturbed by the fact that he was operating behind blank walls; dealing only with agents, he never knew either the identity of the purchaser of his stock (a prospective cornerer?) or the identity of the owner of the stock he had borrowed (the same prospective cornerer, attacking from the rear?).
Although it is sometimes condemned as being the tool of the speculator, short selling is still sanctioned, in a severely restricted form, on all of the nation’s exchanges. In its unfettered state, it was t
he standard gambit in the game of Corner. The situation would be set up when a group of bears would go on a well-organized spree of short selling, and would often help their cause along by spreading rumors that the company back of the stock in question was on its last legs. This operation was called a bear raid. The bulls’ most formidable—but, of course, riskiest—counter-move was to try for a corner. Only a stock that many traders were selling short could be cornered; a stock that was in the throes of a real bear raid was ideal. In the latter situation, the would-be cornerer would attempt to buy up the investment houses’ floating supply of the stock and enough of the privately held shares to freeze out the bears; if the attempt succeeded, when he called for the short sellers to make good the stock they had borrowed, they could buy it from no one but him. And they would have to buy it at any price he chose to ask, their only alternatives—at least theoretically—being to go into bankruptcy or to jail for failure to meet their obligations.
In the old days of titanic financial death struggles, when Adam Smith’s ghost still smiled on Wall Street, corners were fairly common and were often extremely sanguinary, with hundreds of innocent bystanders, as well as the embattled principals, getting their financial heads lopped off. The most famous cornerer in history was that celebrated old pirate, Commodore Cornelius Vanderbilt, who engineered no less than three successful corners during the eighteen-sixties. Probably his classic job was in the stock of the Harlem Railway. By dint of secretly buying up all its available shares while simultaneously circulating a series of untruthful rumors of imminent bankruptcy to lure the short sellers in, he achieved an airtight trap. Finally, with the air of a man doing them a favor by saving them from jail, he offered the cornered shorts at $179 a share the stock he had bought up at a small fraction of that figure. The most generally disastrous corner was that of 1901 in the stock of Northern Pacific; to raise the huge quantities of cash they needed to cover themselves, the Northern Pacific shorts sold so many other stocks as to cause a national panic with world-wide repercussions. The next-to-last great corner occurred in 1920, when Allan A. Ryan, a son of the legendary Thomas Fortune Ryan, in order to harass his enemies in the New York Stock Exchange, sought to corner the stock of the Stutz Motor Company, makers of the renowned Stutz Bearcat. Ryan achieved his corner and the Stock Exchange short sellers were duly squeezed. But Ryan, it turned out, had a bearcat by the tail. The Stock Exchange suspended Stutz dealings, lengthy litigation followed, and Ryan came out of the affair financially ruined.
