A Rabble of Dead Money

II. EDISON, TESLA, WESTINGHOUSE, AND INSULL

The Niagara River, only thirty miles long, connects Lake Erie with Lake Ontario. The rate of turnover in Lake Erie water is very high, and average flow rates through the Niagara and over the falls into Lake Ontario approach 100,000 cubic feet per second, making it the single greatest source of potential hydroelectric power in North America. Over several years in the mid-1890s, a massive power-producing development took shape around the falls, with the explicit intention of being, as a later commentator put it, the "pioneer hydro-electric system, forerunner of modern utility power service… the great step in the transition from the century of mechanical power to the century of electrical power."⁵

The ancient Greeks were fascinated by electricity and magnetism, but European interest languished until the heroic age of sail spurred interest in the magnetic compass. A burst of development in the early nineteenth century—Volta, Ampère, Ohm, Faraday, and others—unveiled electricity's potential as an energy source. By the 1830s, weak electrical pulses were sending telegraphs, and by the 1870s, European cities had begun to install electric outdoor arc-lighting.

Arc-light was produced when a high-voltage spark leaped between two filaments. The light was harsh, very hot, and often uncomfortably bright. Thomas Edison, the first time he saw an arc-light demonstration in 1878, decided it was a dead end. But he saw a huge opportunity if electrical power could be "subdivided" to power softer, cooler, lower-voltage lighting solutions for the home. When Edison was seized with an idea, he became a bulldozer. Within a week he had invented a working prototype of an incandescent light bulb. He immediately announced it in the press, organized public tours of his laboratory in Menlo Park, New Jersey, and in due course roped in J. P. Morgan to raise the development capital.

When his publicist's hat was on, Edison could be reckless, and he announced that he would have a domestic electric lighting system in operation "within months." Back in the lab, however, he set out methodically to create not just a long-lasting incandescent bulb but a whole congeries of improved generators, circuits, wiring systems, meters, and countless accessories—resistors, conductors, insulators, and so on. His system for generating remote electrical power and conducting it safely to the home was specified down to the last screw. He made two complete working models of the generating plant and the transmission system, and personally supervised every detail of its installation—manufacturing his own wire and insisting that it be encased in pipes and buried underground. To keep Morgan happy, he built a private lighting system for his new house, powered by a basement coal-fueled steam engine. The neighbors hated it, but Morgan was delighted, and the press duly swooned when the interior of the mansion sprang marvelously to life with bright, steady, easy-on-the-eyes lamps and ceiling fixtures.

Finally, in August of 1882, after six months of careful testing, the first Edison generating plant, at Pearl Street in lower Manhattan, went on line, with eighty-five customers using four hundred 110-volt DC lamps. Within two years Edison had more than five hundred customers with more than 10,000 lamps, and was making a small profit. As soon as Pearl Street stabilized, he began multiplying central power stations in Manhattan and opening Edison power companies in other states. The industry exploded. By 1890, there were a thousand central power stations in America, plus thousands more dedicated generators in office buildings and factories. Street railways were also electrifying rapidly. By then, Edison had serious competition, especially Westinghouse Electric and Thomson-Houston.

The Niagara project, however, completely changed the profile of the industry. Rather unexpectedly, it turned into a shoot-out between Edison-style DC (direct current) technology—dominated by General Electric—and AC (alternating current) technology owned by Westinghouse. George Westinghouse, one of America's greatest entrepreneurs, and one of the few with a good grasp of science, had bought up most of the important AC patents, especially those of the eccentric Serbian genius, Nikola Tesla. AC was still a relatively untested technology, but its theoretical advantages over DC for a national system were hard to overlook. At the currents required for residential service, DC power could be transmitted only about a half mile, so electrifying a major city required honeycombing it with unsightly coal-fed steam generator plants. Westinghouse had lit the 1893 Chicago World's Fair with AC, but since it was only a local system, it did not settle the critical question of long-distance transmission. The assurances that it would work came almost entirely from the mathematicians.^*

The Niagara chief executive, Edward Dean Adams, and his chief engineer, Coleman Sellers Jr., made the decision to go with AC, and carried a majority of the directors, despite dissents from some of the experts. Adams, a small man with a large drooping mustache, was a banker and a lawyer who had gotten the job on Morgan's insistence—Morgan had been impressed by his performance in several complex railroad restructurings. Sellers, in his sixties, semi-retired, with an elegant white Van Dyke beard, was one of the country's premier engineers. Westinghouse's willingness to bet his company on AC was also a big factor in the final decision.

But the three must have endured night sweats at the sheer dare-deviltry of their undertaking. The major elements of the system were all constructed in parallel and were almost all started before major design decisions had been settled. The tailrace tunnel, the huge underground pipe that carried the discharged plant water back to the river, was started well before the power technology was sorted out. As excavation proceeded, the tunnel's specifications were changed several times, and it finally emerged as a mile-and-a-quarter-long, 24-foot-diameter monster, bigger than any high-pressure tunnel in the world. The beating heart of the complex was housed in a 200-foot long Stanford White limestone building about a mile from the falls. It comprised ten 5,000 horsepower (hp) alternators, or AC generators, 50,000 hp in all, each connected by a shaft to a water turbine 140 feet below. Beneath the powerhouse, at the top of each shaft, a seven-foot-six-inch-diameter pipe delivered free-falling river water to drive the turbine. The arrangement "far exceeded in power and speed and head of water any then in existence."⁶

Each combined alternator/turbine system weighed seventy-six tons, so the operational stresses would be extreme, requiring all system elements, like shafting and gearing, to be balanced with great accuracy. By itself, the complex turbine shape was a world-class machining challenge. After the first two alternator/turbine systems were constructed, there was a nine-month testing and adjustment process. The first power was delivered to customers in August, 1895, about a year later than originally projected. Successfully completing the project would have been a splendid accomplishment by any measure; given the lack of technical consensus at the outset, it bordered on the miraculous.

The first customers were heavy manufacturers close to the power plant. The acid test, however, was transmitting power to Buffalo, some twenty-six miles away. Excruciating street-franchise details first had to be worked through with the city fathers, but finally, at 12:01 on a Monday morning, on November 16, 1896, a switch was pulled in the powerhouse of the Buffalo street railway company, the lights came on, the dynamos hummed, and the nearly unlimited power of the Niagara River had been placed at the disposal of the citizens of Buffalo.

Over the next twenty years or so, AC became the utility power standard. The economics of large generating complexes serving extensive geographic regions were too compelling. That meant tricky conversions of existing power stations, and the gradual replacement of DC equipment by AC. The construction of ever-larger generating complexes and the retooling of industry away from steam and water power to electricity were major boosts to the engineering disciplines. Electricity may also have been the first American industry to be dominated by qualified engineers and scientists, rather than by ingenious tinkerers, like Edison. Tesla, who did calculus in his head, always maintained that "a little theory and calculation would have saved [Edison] 90 percent of his labor."⁷

The stunning growth of electrical utility companies, at the outset of the Progressive Era, naturally created an anti-monopoly backlash. Samuel Insull, a native Briton who emigrated to the United States to take a job as Edison's secretary and rose to become one of the greatest of utility moguls, took the issue head on, lecturing around the country. Using his flagship company in Chicago as his example—it had the country's highest customer penetration—he showed how the economics naturally drove to local monopolies: utilities had to build to meet peak demand, which varied greatly within a day. The greater the customer base, the greater variety of demand profiles, and the greater the opportunity to balance loads throughout the day, thus lowering costs and driving down rates. Insull's charts showed that as per capita revenue in the Chicago region had increased, prices to customers had fallen sharply. He argued forthrightly that electrical utilities should be exempted from the anti-monopoly laws, but in return they should accept state regulation of their rates and service standards. That message was skeptically received by many of his fellow power executives, but by getting out in front of the issue, he helped assure that regulatory schemes would be more to the industry's liking. We will come back to Insull, for he was a major figure in accelerating the growth of America's unique consumer-oriented economy before he became the poster boy for the consequences of excess leverage in an economic crash.

When all ten of the Niagara alternators were in service in 1900, they produced about a fifth of all electrical energy in the United States. By 1920, American electric power consumption had increased tenfold, and it more than doubled during the twenties. By then it was an independent force in driving social and economic changes throughout the country.

III. AND THEN CAME FORD

Henry Ford once described the mission of his Model T as follows:

The automobile was not an American invention, and Henry Ford was not the first in the industry. While he was a fine intuitive engineer in the American tinkerer tradition, his genius lay both in perceiving that the automobile could be a mass-market consumer product and then in creating the production and marketing systems to make his vision a reality.

Henry Ford was born in 1863, the oldest of six children on a prosperous farm in Dearborn, Michigan. He had little interest in farming but had a pronounced mechanical bent—as a young boy he made his own tools for repairing watches. By the time he was sixteen, a confident youth, lean and athletic, he left the farm for Detroit, had a string of mechanical employments, and became a qualified machinist. His next few years were spent moving between mechanical jobs in Detroit and working in Dearborn, both lumbering and repairing farm machinery. Along the way he became obsessed with the idea of building a practical car. Recently married, he finally moved permanently back to Detroit and took a job as a machinist at the Detroit Edison generating plant.

Ford's ability to fix almost any machine became a legend in Detroit machining circles. Within a few years, he was made Detroit Edison's chief engineer, essentially the primary troubleshooter, on call 24/7. His managers knew of his inventive interests, and they were anxious to keep him, so they allowed him to set up a workshop at the company and more or less come and go as he pleased.

Ford finished a prototype working car, the Quadricycle, in 1896. Another local inventor had his own horseless carriage out on the roads three months earlier, but Ford's was by far the more advanced machine, with a rear-mounted, two-cylinder, four-stroke engine^* and a sophisticated transmission with a neutral, low, and high gear, but no reverse, and a top speed of twenty miles per hour.

At the time, the leadership in automotive technology clearly rested in Germany. Nikolaus Otto had patented a one-cylinder, four-stroke engine in 1867, although he manufactured them for stationery uses. (Ford had repaired one in a Dearborn neighbor's threshing machine.) Gottlieb Daimler, who managed Otto's engine factory, and Karl Benz had both used them in prototype automobiles in the 1880s and had joined to form what is now Daimler AG in 1890.

The excitement over automobiles at the turn of the twentieth century was something like the dotcom boom at the turn of the twenty-first. More than five hundred automotive startups were founded within a decade, most of which quickly failed. The Duryea brothers, Frank and Charles of Springfield, Massachusetts, opened the first commercial plant in 1895, and were the first to actually sell a car. Elwood Haynes, an Indiana metallurgist, opened his factory in 1896, and may have been the first American car maker to make a profit. Ransom E. Olds's company opened in 1897, then relocated to Detroit and sold six hundred cars in 1901. Olds is also credited with the first automotive assembly line.

Ford's resolve had been greatly reinforced by a conversation with Thomas Edison at a 1896 New York technical conference for Edison engineers. Learning that Ford had built a "gas car," Edison pressed him for details, then, according to Ford:

Ford joined the ranks of manufacturing hopefuls the next year. After building a much improved Quadricycle, with a more passenger-friendly design, he raised $2,500 from a small circle of businessmen to finance a demonstration model. The new car sufficiently impressed Thomas Murphy, a Detroit banker, businessman, and car aficionado, that he led a local syndicate that raised $150,000 in 1899. Ford severed his ties with Detroit Edison to manage his first car company.

The venture was a failure, possibly because the investors insisted on a heavier, more upscale car than Ford wanted to build. But a second venture financed by Murphy failed as well. This time Murphy gave Ford his head on the design, but, almost fecklessly, Ford spent most of his time on a racing car. Frustrated, Murphy asked a local engineer, Henry Leland—a charter member of America's machinist hall of fame—to review the company's operations. Ford left in a huff—which might have been Murphy's intention. Leland took over, and he and Murphy created the Cadillac Motor Company.^* Ford finished his racing car and actually won two races against the then-national champion racer.

Ford's racing success prompted new interest from investors. Alexander Malcomson, a local coal magnate and a serial investor, agreed to finance a demonstration model that Ford called the Model A (not to be confused with the 1927 Model A that succeeded the famous Model T). The car was finished in early 1903, and a financing was closed in June—a very tight $49,000.

Ford quickly set up a factory and contracted out all the parts manufacture, enough to make 650 cars. By later standards, the cars were dogs, but as Allan Nevins points out, "Nobody in 1903–04 expected a car to run dependably."¹⁰