Intellectual on the Spot

(See Cover)

On a dollar measure, no arm of the Federal Government has so loud a say in so big a slice of U. S. business as the New Deal's Securities and Exchange Commission. Six different Acts of Congress give it power. Under the first (Securities Act of 1933) it has in six years passed on the registration statements of over 2,500 corporations issuing $15,591,262,000 of new securities. Under the second (Securities Exchange Act of 1934) it daily watches fluctuations in about $150,000,000,000 worth of stocks and bonds listed on 20 U. S. exchanges, can stop trading (for cause) in any one of them at a hat's drop, has done so 18 times. Under the Maloney Act (1938) it has additional authority over some 80 billion dollars' worth of securities not listed on these exchanges, watches their brokers regulate themselves. Under the Chandler Act (1938) it has loud kibitzing powers over corporate reorganizations, has watched the progress of 548 companies with pre-bankruptcy assets of $640,200,000 through the courts. Under the Barkley Act (1939) it must approve trust indentures. Under the Public Utilities Holding Company Act (1935) it has the broadest, toughest job of all: authority over the affairs of about half the U. S. power industry, the half (gross assets: $15,000,000,000 plus) that belongs to the great interstate holding-company systems. SEC, with a $5,300,000 budget and a staff of 1,618, has its hands full. Last week Senator Wagner was readying a bill to give it one more big job: regulation of the $4,500,000,000 investment-trust industry, in whose stinking entrails SEC has been probing for over two years.

SEC owes its existence, many of its powers, to a wave of front-page indignation engineered by Ferdinand Pecora, who took over the Senate Banking & Currency investigation of 1932-33. When he showed how Charlie Mitchell rigged the market in Anaconda; how Rudolph Spreckels made over$14,000,000 in the Kolster Radio pool while suckers lost their shirts; how Dick Whitney, pegging a German bond issue, waited till the Morgans were out before he "pulled the plug"; how the Stock Exchange of 1929 really worked--the New Deal was able to write its own ticket for Federal regulation of security issues and trading.

SEC's later powers came by narrower squeaks. Ben Cohen's Holding Company Act (after a stormy fight over its famed "death sentence," Section 11) passed the Senate by only one vote. A drastic remedy for bugs like Foshay, plagues like Insull, it aimed to reform the power industry, shift its control from Wall Street back to local managements. But the need for an SEC has never been seriously questioned, was recognized in the Republican platform of 1936. Its powers are really derived from the vast fear and suspicion of Wall Street that exists west of the Hudson. Established, effective, cocksure, SEC has a, long list of discretionary powers, many of them as yet untried.

Era of Good Feeling. Today, most of Wall Street is nostalgic about the first three years of SEC regulation. First there was Chairman Joseph Patrick Kennedy, ex-market operator, able administrator. He gave SEC its organizational framework, gave the exchanges a few trading rules, but was promoted before the fireworks began. Then there was a Frankfurter Democrat, cautious, legalistic James M. Landis, who gave the Exchange Act its milk teeth, never gnashed them except at gross manipulators like Specialist Mike Meehan. Landis allowed Wall Street to "regulate itself." Since Wall Street was then dominated by Dick Whitney's Old Guard, self-regulation for the New York Stock Exchange meant its continuance as a green-baize gentlemen's club. Toughest man on Landis' Commission was the head of its Trading and Exchange Division, sandy, steel-eyed William O. Douglas. When Landis retired to the cloud-wrapped deanship of Harvard Law School, Douglas became chairman. Ended was the Era of Good Feeling.

Showing muscle at once, Douglas demanded the Exchange adopt far stricter trading rules or have them imposed by SEC. Up rose the commission-broking element inside the Exchange itself, threw out the Old Guard, chose young William McChesney Martin for leader, adopted Douglas' trading rules almost verbatim (TIME, Aug. 15, 1938). With Thief Whitney's Old Guard in rout, Douglas staid his administrative hand; the Exchange began policing itself with such thoroughness that many a broker curses its rules louder than SEC's today. Bill Douglas threw out a final reform suggestion: that customers' credit balances in brokers' hands should be made as safe as in a bank. Then he retired to the Supreme Court.

To fill the empty Commission chair the President appointed fat, loquacious, truculent Leon Henderson. An anti-bigness radical, Henderson, backed by Thomas Gardiner ("Tommy") Corcoran, had risen from WPA's economics staff to Executive Secretary of TNEC. When he was talked of for chairman of SEC, even Wall Street's liberals shuddered. But Henderson, a freshwater economist, knew nothing of Wall Street or high finance. Hence the President (who suggests the chairman, permits the SECommissioners to elect him) changed his mind, drafted a stopgap for the job until Leon should learn the ropes. The stopgap, already a commissioner, knew Wall Street well. He was also an ardent New Dealer. Name: Jerome Frank. He became chairman ten months ago. Leon is still learning.

Jerome Frank is a warm-blooded, quick-witted, supersensitive, argument-loving man of 51 with a bald sloping brow, bulging eyes, and the slightly travel-worn air of a shambling, sub-leonine cat. At University of Chicago he is remembered as one of the two brightest students of pre-war generations. (The other: Benjamin Cohen.) Son of law-loving Chicago Lawyer Herman Frank, Jerome had a reputation for legal brilliance almost before he started practice. This he increased with the firm of Levinson, Becker, Schwartz & Frank, corporate specialists. Jerome also developed a reputation for hard work and absentmindedness. Asking his secretary to come to the office Sunday, he would fail to show up himself. On the North Western to and from his North Shore home he wrote novels, never published any. But he was a well-to-do corporation lawyer when he went to Manhattan in 1930 to join the slick big-time firm Chadbourne, Stanchfield & Levy. And he was still more so when he volunteered his services to the New Deal "for the duration" (his words to Felix Frankfurter) in early 1933. By that fall, as counsel to AAA, he had led the revolt of consumer-minded, non-agrarian New Dealers that ousted George Peek. Less than two years later he was himself ousted in a similar revolt against the more durable Chester Davis. Rex Tugwell, his friend and sponsor, quickly got him placed in RFC. Thence he moved to PWA, for which he won the Alabama Power case against the late great Newton D. Baker. By 1937 he was back in private practice, had earned $38,000 helping reorganize Missouri Pacific.

When the President summoned him to SEC that fall, the New Deal was entering its tough, fighting, back-to-the-wall phase. Said Bill Douglas: "It's lonely in the front-line trenches these days." Jerome Frank heroizes Douglas, joined the Commission. But he did so reluctantly. Reasons for reluctance: 1) he needed to make more money than a commissioner's $10,000 a year; 2) he had written his share of laws, hoped others would see them through. Temperamentally unsuited to trench warfare, Jerome Frank is above all an Intellectual.

When anti-New Dealers curse long-haired, radical theorists, they are unwittingly giving a three-word sketch of Jerome Frank. Too busy to think of haircuts, he often lets his greying mane hide his ears. Subtle, learned, mentally insatiable, he combs arcane source books for cosmic ideas, wholesales them in brilliant conversation to friends. At Chadbourne, Stanchfield & Levy the partners used to say: "It's worth $50,000 a year to us to have Jerry around just to hear him talk." In 1938, in a speech in Kansas City, he denounced fixed charges in favor of equity dividends. To make his point he invoked the following authorities: Aristotle, Lactantius, St. Luke, St. Basil, St. Chrysostom, St. Ambrose, St. Thomas Aquinas, Dante, Calvin, Cotton Mather, Andrew D. White, Chesterton, Will Rogers. Fond of parties, he holds his cigaret between his teeth, dominates the room with talk. Regularly he falls asleep at 10 p.m., wakes at 11:30, talking. A lover of word games, playful mental feats, he is often to be found contorted on the floor, acting out some far-fetched pun.* Battling with a fellow commissioner on a point of law, he recently sent him a memorandum containing the following: "As Coke would have said, id est quod cursum equorum facit."/- As a radical, Frank is not so uncompromising as shillelagh-artists like Corcoran, Old-Testament purists like Cohen, bouncers like Henderson. Least hardboiled, most likable of the New Dealers, he is nevertheless the most daring and original theorist among them too.

Jerome Frank's most radical words were written in 1930, directed at the Law. Then studying psychoanalysis, he applied its techniques to legal philosophers (Law and the Modern Mind), argued what a few had before and many have since: that there are no legal absolutes, there are only judges' prejudices. Seekers for certainty in the law, wrote he, are victims of the psychological hunger for a father-substitute.* To Scholar Frank, the most intriguing legal philosopher was Jehring, who saw the law as a pliant weapon, a means to an end. But the greatest was Justice Holmes, who saw the law as "an experiment" like life itself.

A wholesaler of ideas, Frank is also largely responsible for the semantics fad. But no theory, no dogma, sticks to Jerome Frank very long. A connoisseur of them, his only principle is not to become enslaved to any set of principles, to trust no rules beyond his own democratic instincts and pragmatic sense.

On the Spot. Few of the utility men or stockbrokers whom Chairman Frank was to regulate had ever read his books. But as an alternative to Henderson, he was welcomed as the more knowing man. No foe of bigness-as-such, he had helped write NRA, had praised (in Save America First) the social value of "the intelligent monopolist," especially when subjected to government guidance. Taking office, he called SEC "in a true sense, a conservative institution," its purpose "conserving, by improving, our profit system," promised no radical departures from the Douglas regime. Then he went to work.

Chairman Frank has a split, faction-ridden Commission. Seeing the chairmanship as a temporary job, he and Wife Florence Kiper Frank still live poised for flight in Washington's Wardman Park Hotel. Twice his resignation has been postponed at the President's behest; only now is he beginning to be regarded as a fixture. Besides backstage splits, he has open disagreement among his four commissioners. Two (since no more than three may be Democrats) are Republicans: bald, dumpy George Mathews, formerly of Wisconsin's progressive Public Service Commission, and tall, taciturn Judge Robert E. Healy of Vermont. Opposite them are Democrats Henderson and plodding Edwin Eicher of Iowa, a Corcoran-Cohen rubber stamp. No rubber stamp, no Republican, Frank bridges this split as Chief Justice Hughes bridged the Supreme Court of 1937, therefore holds the balance of power over as much of U. S. industry as SEC controls. Tougher than was Douglas', tougher than was Kennedy's is his job: to put up or shut up on all the threats and promises implicit in SEC.

In Wall Street, Frank found SEC's job partly done, the remainder "clearly indicated ... a technical job." Main point at issue was Douglas' idea for making customers' balances with brokers as secure as they would be in a bank. Frank announced that the Martin-Douglas "roundtable" method of regulation was "still doing business at the old stand." Last summer, however, Frank delivered a speech at the Roosevelt in Manhattan in which he bluntly told the Stock Exchange to solve the customers'-balance problem or accept SEC surveillance of all brokers' offices. Since then the Wall Street-Washington axis has been twisted and strained. One reason: the sodden state of the market, which gives all Wall Streeters more & more need for a goat. This week, Exchange President Martin was on his way to Washington to round-table several points with SEC. In his briefcase was a progress report on the customers'-balance problem: a fidelity insurance plan. In his ears were the mutterings of Exchange members, including his own progressive backers. Irked by uncertainties and red tape, Wall Street has long accused SEC of "mental cruelty." Last week, with the worst February (in volume of trading) since 1921 behind them, Martin's men were talking about something more ominous: a "fundamental cleavage" between the Street and Washington over principles of regulation. But Semanticist Frank, foe of word-spun principles, would rather avoid hostilities on the Stock Exchange front when he has more important things to do.

Power. Toughest, most tangled piece of unfinished business left by Chairman Douglas on Chairman Frank's desk is enforcement of the Holding Company Act, especially Section 11. Last week, more than two years after its effective date, SEC issued its first Section 11 command. It was directed at Electric Bond & Share, biggest, most far-flung holding company system of them all. Taking 121 paragraphs to list all its subsidiaries, pointing out that its Oregon properties are 3,100 air miles from its New York headquarters, SEC asked Bond & Share to show cause why it should not be unscrambled. Similar orders went to smaller Engineers Public Service and Middle West Corp., while six other major systems were told to expect theirs any day.

Not surprised were the holding companies. In January, Chairman Frank had reminded them of Section 11's purpose, reassured them somewhat. "Many of the holding companies," said he, "were created overnight, by the magic-silk-hat act of some reckless investment bankers. But our job is not of that kind. We have no rabbits and no silk hats. Ours is a slow, tedious process which will take years." The process, Jerome Frank believes, will prove to be not a death sentence to the utility industry, but a rejuvenation.

Besides show-cause orders, two weapons has Chairman Frank to speed the unscrambling. When a system goes bankrupt, SEC can guide (or veto) its reorganization plans. Guinea pig for this method is huge Associated Gas & Electric (TIME, March 4). And no holding company or subsidiary, however solvent, can issue any new security without SEC approval. Under this power SEC has already made 334 decisions, is making more every week. No decisions have caused stormier criticism.

Judicial Lawmaking. Most sensitive to criticism of all New Dealers, boyish Jerome Frank is constantly writing letters to unfriendly newspapers, often in longhand, always defending his views. More anxious to be liked than any of his predecessors, he is in the least likely spot for it. Ever since Douglas (and Depression II), SEC has been suspect among businessmen-in-general, accused of being the bottleneck through which new capital investment, hence Recovery, fails to squeeze. Those technically concerned with SEC (brokers, underwriters, lawyers) grumble increasingly about red tape, 20-day "cooling periods," ambiguous rules, duplication of registration statements, "arrogant & upstart" personnel. To offset their complaints, Chairman Frank thinks of the 10,000,000-odd trusting U. S. investors, resolves to guard them against needless shearing. On his tongue are figures from a recent Elmo Roper poll of New York Stock Exchange customers: 41% (a plurality) favor present regulations. And when utility men raise technical or ethical difficulties (over Section 11, over competitive bidding) that appeal to the judicial Frankian mind, at his elbow are Tom & Ben, pressing him to apply the tough Brandeisian letter of the law.

To resolve these conflicts, Jerome Frank needs all his legal brilliance, all his mental flexibility. In his utility securities decisions, he has stirred up a new criticism: that SEC, intended to be Wall Street's cop, is crossing the Rubicon between a government of laws and one of men. But to Legal Philosopher Frank, such a Rubicon is fiction, since any judicial decision is a government of men. Using the Holding Company Act as a means, he makes no bones about his sociological ends: 1) to encourage equity financing, so that U. S. utilities may avoid the bond-burdened fate of U. S. railroads; 2) to free operating utilities from Wall Street control, get their still profitable equities into public hands.

Jerome Frank knows that business bigness is here to stay. As one of the backstage voices helping to shape New Deal fiscal policy, he plumps regularly for reconstruction rather than mere reform. He is sure the impediments go much deeper than SEC red tape. Like any big businessman, he wants new outlets for new investment; a theorist, he sees the unscrambling of utilities as just that. To force it, he will render increasingly unpopular decisions; fewer & fewer friends will friendly Jerome Frank have. Consoling him is his strong belief that friends and foes have an ultimate community of interest. If his theory proves correct, future U. S. investors may well thank him for being a pioneer.

*A favorite: getting on all fours in a cage of chairs, barking. The word: perpendicular (purp-in-de-cooler).

/- That's what makes a horse-race.

* Favorite trick of footnote-fetichist Frank: a footnote at the end of every too-daring chapter saying: "The reader will remember that this is a partial explanation."

This file is automatically generated by a robot program, so reader's discretion is required.