by John T. Flynn
(Published in Harpers Magazine, Jan. 1934)
The story of Cleveland is the story of a small group of acquisitive men gone mad. It is, of course, something more. It is the story of the rickety system under which we live at work in an American city. By looking at Cleveland these last dozen years one may see that grim thing which we have materialized into a living monster-the depression-actually coming to life.
We may think of the nation in those shameful twenties as a vast orchestra, tooting, cymballing, saxophoning, and blowing away in a crashing, noisy, disordered symphony of jazz, led by a complacent chef d'orchestre in the White House. Gradually the orchestra got itself more and more out of tune and tempo, more and more unmanageable, rising to shocking heights of weird disharmonies, one player after another falling back exhausted with his maniacal music, but utterly unnoticed by those who remained, until the whole band sank down in one howling clamor of disintegrating jazz in 1929.
Cleveland had begun to toot fitfully upon its bassoon well before the final disaster. One of her citizens describes her plight graphically. One day in November, 1913, the city awoke to find herself buried under a blizzard. A storm had started off Newfoundland and traveled southwest. Another started off the Carolinas and traveled west. They met in Cleveland. This, the weather expert explained, produced a blizzard. This is what has happened in Cleveland now. Two storms have met. One of them is that vast, encircling blast called the depression. The other is of more local origin. It was due to the operations of Cleveland promoters-the Van Sweringens, the Eatons, the Painters, the Nutts, the bankers, the real estate men, and the smaller fry who sowed the wind in those sunshiny days of Calvin Coolidge. They met in Cleveland in 1929. And this, may I add, is what happened to your town, wherever it is. For every village had its quota of little Insulls, its Van Sweringens, its Mitchells and Wiggins and Eatons on a small scale.
As early as 1924 a blow had fallen on that marvelous city. For Cleveland is a marvelous city. The place is solid. Wealth, strength, well-being are there-or at least once were. Its iron masters, its oil magnates, its railroad giants have kept flowing into it for decades a ceaseless stream of riches. But, for all its wealth, something had gone awry nearly a decade ago. Population rose, but real estate values fell. In 1929, when Mr. Coolidge went out of office, property values along Euclid Avenue were just half what they were when he took office. Population increased by 13%; land values fell by 50 per cent. Outside the city, country land values were being cut by 24 per cent. This was but one of the surface indications of the presence of the canker in the vitals of the city. But no one paid any attention to it. A man would have been denounced as a traitor and subversive knocker had he so much as whispered it. There were a thousand sick cities in America then. There were whole regions which were ravaged by various economic diseases. But it was the era of the booster and the promoter, and the great prophylactic for all ills was silence.
To understand all this you have to be introduced to two gentlemen of Shaker Heights-Otis and Mantis Van Sweringen-the "Van Sweringen boys" as they were once affectionately called in Cleveland, though somewhat more realistic names have been applied to them since. These strange exhibits-darlings of the success sagas of the twenties-began as newsboys on the streets of Cleveland and ended by taking possession of the town as their oyster, and then dropping the oyster in the stew. How much real ability they have-where their intelligence leaves off and their brass begins-no one can say. They are mysterious. Few know them or ever see them. They have the daring of John W. Gates when they are juggling millions, but they turn shy at the approach of strangers. Through a series of audacious maneuvers they acquired an immense railroad empire, but when the grandiose Union Station and Terminal Tower building was dedicated and twenty-five hundred sat down to a splendid banquet in Cleveland to honor them, they remained away and listened to the festivities over the radio in the Shaker Heights farm.
They do not travel. They have never been to Europe. They never leave Cleveland save on business. They formulate their endless plans in the private upper reaches of their Terminal Tower and oftener still in their bachelor hideaway, the Daisy Hill Farm-the farm, some Cleveland wag explains, where schemes come true. These shy gentlemen, nevertheless, have kept a bewildering collection of railroads, trolley systems, buildings, stores, hotels, coal companies, shipping companies, terminals, office buildings circling round in one of the most sensational juggling acts in history.
They began as real estate dealers in their early twenties; before long they had become subdividers. They made money. Then they took a tract of land on the outskirts of Cleveland which had once been settled by the Shakers; cut it up into lots, built high class homes on it, called it Shaker Heights, and sold the product at enormous profits. But Shaker Heights was isolated. So the Van Sweringens built a rapid-transit trolley line into Cleveland to bring the denizens of Shaker Heights into town. They needed a terminal in Cleveland. The Public Square was the radial terminal point of all Cleveland trolley lines. The Nickel Plate Railroad had its terminus there. The Van Sweringens conceived the idea of bringing their trolleys into the Nickel Plate station. And thus the trouble began.
The Nickel Plate line belonged to the New York Central Railroad. But at the moment Fate decreed, through the agency of the Interstate Commerce Commission, that the New York Central should divest itself of the stock of the Nickel Plate. The Central had to sell. Why should not the Van Sweringens buy the road? And that is what they did.
The means they devised for doing this were to be the pattern for all they did later. This operation introduced them to two powerful weapons which they were to use with compelling effect. One of these was the holding company. The other was the use of other people's money in banks. It is the perfection and abuses of these two implements which have brought capitalistic America to the verge of despair.
The Van Sweringens bought the Nickel Plate for $8,500,000 on the installment plan. They were to pay $2,000,000 down and $650,000 a year. But they didn't have $2,000,000. How was the transaction to be managed?
First, they organized a holding company-the Nickel Plate Securities Corporation. The agreement to buy the Nickel Plate stock was made by that company. For the initial payment the Van Sweringens negotiated a loan of $2,000,000 from the Guardian Trust and Savings Bank and put up the agreement as collateral.
The Nickel Plate Securities Corporation then issued $2,075,000 of Preferred stock and $12,500,000 of common stock. The Van Sweringens sold $1,575,000 of the preferred stock to various persons for cash. To these purchasers they gave an equal amount of common stock--$1,575,000 of it. They subscribed to $500,000 of the preferred themselves and got $500,000 of common. When this was done the Nickel Plate Securities Corporation had its $2,075,000 cash with which to take up the bank loan. The Van Sweringen associates owned $1,575,000 pf preferred and the same amount of common. The Van Sweringens themselves owned $500,000 of preferred and the same amount of common. They owned an additional $10,000,000 of common for which they had paid nothing. But where did they get the $500,000? They borrowed that from the Guardian Trust Company also and put up the new stock as security. Thus they got possession and control of their first railroad-the Nickel Plate-without drawing a single dollar from their own funds. They secured not only the railroad but the terminal site for their trolley line and, as it turned out, a good many other things besides.
From this point the Van Sweringens now detoured from the more or less simple pastures of speculative real estate subdividing into the troublous field of railroad finance. They went forward until they added one road after another to what was to become one of the most extensive transportation systems in the country. But the stratagem by which they acquired the Nickel Plate road continued to be the pattern for their subsequent adventures. The holding company device, now a commonplace in modern American corporate organization, plus free entry into the funds of the people of Cleveland entrusted to the city's banks, were all they needed.
In time they took over the Chesapeake and Ohio Railroad. That required something over seven million dollars. The purchase was made by the same Nickel Plate Securities Corporation. It had no money. But by this time the Van Sweringens had a new holding company-the Vaness Company. So the Nickel Plate borrowed the money from the Vaness Company. The Vaness Company borrowed three million of the needed funds from the Guardian Trust Company. Where the remaining four million came from I do not know, but undoubtedly from other banks.
Next the up-and-coming young real estate dealers added the Erie Railroad-that ancient plaything of Daniel Drew, Jay Gould, and Jim Fiske-to their string. They paid about $11,200,000 for the stock that was acquired. The Vaness Company secured loans during this period from the various Cleveland banks of $11,200,000.
Before they made an end of their expansions, the shy young Shaker Heights hermits took over the Pere Marquette and many smaller roads and then the Missouri-Pacific, carrying their standard across the continent to the coast. They owned coal companies, shipping companies, land and water terminals, hotels, trolley lines, innumerable buildings, all tied together in a series of holding companies which were in turn held by a great master holding company-the Allegheny Corporation, formed in 1929. Stocks could be passed round from one such company to another. It was possible to hide any act which the promoters wished. Thus when they bought the Erie road, their purchase included 73,000 shares. The market value of these shares at the time was 80. But they paid 100 for them. This excessive price was not apparent, because 70,000 shares were transferred to the Nickel Plate Corporation at 80 or $5,600,000. Then 3,000 shares were transferred to the Vaness Company at $550 a share, or $1,650,000.
Thus was formed that wide-spreading tangle of railroad mileage which began with a suburban subdivision and ended as one of the few great transportation systems of the country. It was so complicated that O. P. Van Sweringen himself could not keep track of it, as he testified before a Senate committee. And it was all done with the money of other people which the promoters drew out of the banks of Cleveland.
These adventures in aggrandizement drew the Van Sweringens, in their operations at least, far from their beloved Cleveland. But they found time to expand their talents upon a tremendous real estate flourish at home. They secured, you will recall, the terminal site for their trolley line and a railroad or two to boot. Now they proposed to build a union station. And out of this proposal grew another dream. The Van Sweringens found themselves to be as much in need of a fitting monument as the Fisher Brothers, the Chryslers, the Woolworths, and other pyramid builders of that vainglorious decade. And so they projected a great tower-the Terminal Tower-in whose lofty upper stories these two lone eagles might establish their eyries. And they dreamed still another dream. What they had done out on the pastures of Shaker Heights they would do in the heart of Cleveland.
The Terminal Tower would front on the Public Square which in bygone days had been the center of Cleveland's business. But business for many years had been moving up Euclid Avenue and Public Square was under the blight which has fallen on so much of Cleveland's downtown property. The Van Sweringens decided they would buy the lots and crumbling buildings round the Terminal and behind the station. They would recreate the Public Square as the heart of the city's commercial life. They would remake the map of Cleveland.
But this immediately precipitated war. The Van Sweringens would have to close old streets and open new ones. This required the approval of the city. The ordinances were subject to referendum. There was a hotly contested election. The Civic League fought them. The Van Sweringen plan meant disrupting all existing plans for the city's development. The League was backed by the merchants and business interests who saw their properties and their business threatened by this bold attempt to divert the stream of commerce from the settled business streets. But the Van Sweringens knew how to capture both politicians and plebiscite. They won the day.
Then followed that feverish and reckless development which greets the eye of the visitor to Cleveland as he leaves the railroad station. First they arranged to build the central ornament of the plan-the Terminal Tower building. The station would occupy the space underground-for tracks, waiting rooms, and so forth. The Van Sweringens sold all the land to the Terminal Company which was to build the station and which was to belong to the three railroads interested. But they reserved the "air rights" over six and a half acres-the acres where their building was to stand. That is, they reserved the right to use this land from the ground up. The railroad companies could use it from the ground down.
They sold the land, but retained the right to put up a building on it. In other words, they could sell their cake and hold on to it too. They erected their immense forty-story building-using the air above the land.
Then they began to develop the property round the Tower building. They put up three giant office buildings, they built a hotel, they sponsored other buildings. They tried to get the department stores to move down to the Square, but the merchants wisely refused. They had their properties in a section which usage and experience had developed into the business center. The Van Sweringens finally bought one of the large department stores-the Higbie [Higbee] Company-put up an eight million dollar building on the Square and moved the store there. The money for this operation was obtained from the Metropolitan Life Insurance Company.
In their battle to change the face of the city's business section they played another trump card and, incidentally, introduced another trick into corporate finance. They decided to get control of the city's trolley and bus lines. They could then use them to divert traffic as they pleased. But buying up trolley lines and bus lines costs money, and the Van Sweringens have always succeeded in getting things without money. These lines belonged to a single corporation-the Cleveland Railway Company. Most of the stock belonged to old families, and much of it was in estates which were managed by the big banks. That made matters easy. The Van Sweringens, instead of buying the stock, rented it. Under this curious procedure, they paid $10 a share for the privilege of holding and voting the stocks of this corporation. They guaranteed dividends at six per cent a year and took an option to buy outright in three years.
There were 300,000 shares. The rental required $3,000,000. This they borrowed from the banks, putting up the rental agreement and option as security. They got half of it from the Guardian Trust Company. This rental agreement and option they put into the control of another holding company which they organized, called the Metropolitan Utilities, Inc. Last year that company was found to owe the banks $4,355,000, or $1,355,000 more than the rental value of the stock. The Metropolitan assumed the direction of the trolley and bus lines of Cleveland.
The merchants have tried for years to have cars routed through the Public Square through an underground tunnel, so that people could reach Euclid Avenue without transferring in bad weather. But the Van Sweringens paid no attention to this plea. Their intent seemingly has been to destroy Euclid Avenue. Again citizens and merchants have sought to build a subway in Cleveland, but again the Van Sweringens have opposed and defeated the plan.
Aside from the merits of all these controversies, the fact which stands out is this: that in this great city the important functions of the town were no longer devoted to the service of the population, but became merely instruments in the hands of promoters to serve their ends. Banks were no longer banks. Streetcars were only incidentally means of transportation. City plans, stores, office buildings, railroads were no longer directed to their primary purposes, but became only so many clubs in the bags of these promoters for playing their ambitious game.
All the time these men continued to draw more and more funds from the banks. By 1932 they and their various holding companies owed the two closed Cleveland banks over sixteen million dollars and another twenty-three million in New York and other banks.
None of these things would have been possible to these rugged individualists without the aid of the banks and society. A rugged individualist cannot fight barehanded. He must have weapons. These he gets from the government in the form of the modern corporation charter. The government issues these financial machine guns to commercial adventurers for the asking. The ammunition for the forays is served out by the bankers from the people's funds entrusted to their care.
And so while the Van Sweringens grew and flourished, Cleveland's banks yielded to that pernicious degeneracy which has made the American banker a target for the world's scorn. The city had three outstanding banks-the Cleveland Trust Company, the Union Trust Company, the Guardian Trust Company. They dominated the banking resources of the community. They had branches in every quarter of the city. And of course they had their affiliates. The Union Trust Company had its Union Cleveland Company. The Guardian Trust Company had its Guardian Securities Corporation. With these affiliates, completely liberated from the restraints placed on banks, they could do what they liked. For example, when the Guardian Trust Company put up its ornate and pretentious edifice it organized a corporation to own the Building. Thus the New England Company came into being. But presently we find the New England Company, and through it, the bank, in the hotel business. It bought the Hollenden Hotel. It lost a million dollars on this venture in operating expenses during a period of years. But the bank defended the investment recently on the ground that when prohibition made its exit the bank would recoup its losses at the hotel bar. It built an annex to the hotel. That annex was erected by a Cleveland building company. And one of the ranking vice-presidents of the bank was a member of the building firm. In one year the hotel company showed a deficit of $2,000,000. But this was hidden by boosting the appraisal of the building by $2,000,000. The bank held the note of the hotel company for over a million dollars. But it hid this loss by selling the note of the Hollenden Hotel Company, which it owned, to the New England Company, which it also owned. Thus can banks pass checks, losses, unsavory items around among their subsidiaries, if allowed to have them, and escape detection. A government examiner of the bank, after its collapse, declared that the subsidiaries of the bank had caused it losses of nearly fifteen million dollars.
It is inevitable that men who conduct business in this manner will find themselves after a while lost in a maze of conflicting responsibilities and that the ordinary guide posts of morality will become obscured. Men cannot do business on both sides of every counter without impairing their judgement and finally blunting their perceptions of right conduct. And so we find the bankers who gave out their depositors' money to the Van Sweringens and others diverting it also into their own personal enterprises. Firms in which the president and various vice-presidents of the Guardian Trust Company were interested owed $4,500,000 to the bank. The president of the Guardian borrowed $18,000 from his bank without security. He borrowed $91,000 on a mortgage on his home which was assessed for tax purposes at $49,000. He had loans of $68,000 in the Union Trust Company. Officers and directors borrowed not only from their own banks, but from one another's banks. The directors of the Union Trust Company owed $6,881,000 when the bank closed. Officials of the Federal Reserve Board and of the Reconstruction Finance Corporation had large loans at these banks. Millions were borrowed by the affiliates. In the Union Trust Company alone the Van Sweringens, Eaton, and Painter had loans aggregating $24,000,000-more than the capital stock of the bank.
Millions were loaned on security of the most dubious type. Halsey, Stuart, the bankers who were prominent in the Insull transactions, had an arrangement to borrow on listed securities on a ten per cent margin and on unlisted securities on a twenty per cent margin. Loans were made to countless wild-cat corporate ventures in Cleveland, so that the defaulted portfolios of the banks resemble a commercial graveyard. Losses were hidden away in all sorts of subsidiaries.
All this was being done, not by a group of blue-sky adventurers, but by the very elect of the city. These were the men who ruled the city through the golden years, who dominated its political and social life. They were the superior men of the town. They damned politicians for their grafting. They lectured the town on its problems. They denounced bolshevists. They themselves were the repositories of patriotism. They fulminated against what they called "destructive critics."
To some of them, Mr. Hoover turned when the nation ran upon evil days and needed advice. And yet now is it not plain that they were the real enemies of the system they pretended to guard? Some of these men were naturally good men poisoned by their contact with easy money and the bad ethics of business. But it must be recorded that many of them were that type which modern business invites to the top-acquisitive, unscrupulous men, devoured by their hunger for money, cursed with a talent for getting it. It is one of the most mortifying criticisms of our present business methods that they bring to leadership in our cities the worst type of men. High idealism, profound concern for the interests of the masses of the people, expert knowledge of the social and economic problems of the community, willingness to sacrifice one's interest to these public purposes-all these qualifications are so much dross in the making of American city leaders. The man who knows how to make money, and in the making of it knows how to use all the commercial trickery which the government puts at his disposal, is the gentleman who rises to leadership. With money he can buy fame and honors; he can buy sycophants. He can buy publicity. He can buy men to write speeches for him and to solve his other problems. He can build monuments to himself. He can buy politicians and political preferment. Cleveland bowed down before such men, and now she is paying the price of their faithlessness and her own simplicity.
It is now easy to see why, as the great storm of October, 1929, struck the city of Cleveland, it brought its strength against a town whose financial structure was precarious. Immediately the promoters and the banks they had borrowed from began to tremble. These insiders somewhat suspected their plight, but the facts were kept from the public. There had been only four examinations of the Guardian Trust Company by the State examiner in six years. The State law requires two examinations a year save in Clearing House cities, where one will suffice. This is because the Clearing House is supposed to examine the banks. But there had been no Clearing House examination of the Guardian Trust in over six years. Yet in the great lobby of the bank hung a large glass placard with the legend "Member of the Cleveland Clearing House-The Sign of Safety."
For years the government had been denouncing the little banks as unsafe and protecting the big banks which were rotten through and through. But by midsummer of 1931 the end was in sight. In July there was a devastating slump in employment. The nation sank down almost exhausted. Banks everywhere began to close. Later Mr. Hoover declared that these troubles flowed from England's abandonment of the gold standard. The shock was too much for American banks, though, oddly, it did not shatter any British banks. Of course the reason American banks began to fail was because they had been formed in the image of these Cleveland banks. The situation finally reached panic proportions, when it was met by the formation of the Reconstruction Finance Corporation. And among the early rescues of that amazing institution were the Van Sweringens and the Cleveland banks they had drawn upon. Within six months of its formation nearly fifty million dollars of government funds were poured into the various Van Sweringen railroads to keep them out of receiverships, much of the money to repay bank loans. And in the end some of them had to go into the hands of receivers in spite of all the rescue work. The Van Sweringens themselves were in desperate straits. They had a loan of nearly five million dollars in one of these Cleveland banks. The loan was to the Vaness Company and was secured by some $6,500,000 of collateral. They needed more money and arranged for it in New York. But they needed that collateral for the new loans in New York. They went to the Cleveland bank, had the $5,000.000 loan of the Vaness Company transferred to their own names, thus releasing the collateral worth about $600,000.
Such banking could not go on forever. And the banks had to turn to the Reconstruction Finance Corporation. The Guardian Trust Company, with six million of Van Sweringen paper in its portfolio, got $12,000,000 from the government. The Union Trust, with ten million of Van Sweringen paper, got $14,000,000 from the R. F. C.
But all this was fruitless. The whole structure was so feeble that it was at the mercy of the first breeze. What came was no breeze but a blast from Michigan. Already there had been demoralizing bank failures in Toledo and Akron. Millions were being drawn from the big Detroit banks. They were hopelessly insolvent now, all their best assets pledged for the government loans. When the crash came in Detroit and the Michigan holiday was declared, Detroiters rushed for their money. A few weeks later the Cleveland banks had to suspend. And after the President closed the nation's banks, these two institutions did not reopen. I say two institutions, but each had numerous branches all over Cleveland.
They are closed now. They have inflicted a dreadful blow upon that great city. Millions in savings have been lost. But worse, millions more in savings are gone which were put into worthless securities and equally worthless real estate bonds which these banks and their allies made possible. Millions more have been lost through the purchase of lots from the subdividers and still more millions poured into useless improvements on these subdivisions by the county. It is estimated that the county spent $100,000,000 putting in streets, lights, sewers, sidewalks, and water for real estate subdivisions, much of which lies now untenanted and abandoned. In the last one hundred years of growth, Cleveland has not covered as many lots of ground as now lie unused as a result of these foolish adventures.
What is more, millions in taxes remain unpaid. The Van Sweringen companies owe in taxes for the current year and in back taxes over $3,500,000. Their real estate adventure round the Public Square has cost countless millions, supplied by mortgages and bonds now in default. Taxes on much of this property are unpaid, while its promotion has cut in half the tax values of the property in the old-established Euclid Avenue section of Cleveland.
What is to be the end of all this? Perhaps I ought not close this sorry tale without offering a suggestion. All this disorder and damage is but the logical result of the notion which has guided the growth of American cities. A city is a dwelling place of men and women. Their security, their happiness, their comfort, their varied objectives all require certain services at the hands of the city. Supplying those services makes up the functions of the city's political and social and economic organization. If those functions are to be seized, under the forms of law and with the aid of the money belonging to the people, by a small group of adventurous men to be used for their own purposes the city will suffer.
Not only will it lose the benefit of those functions, but it will be victimized in many other ways. Yet this is precisely what happens. And it happens because our people look with complacence on the kind of disloyalties and betrayals by which the resources of a great city were forged into weapons for inordinately acquisitive men. I repeat here what I have observed before; that America has a job to perform in civilizing herself.