Holding Company Proliferation Enables Corporate Consolidation and Regulatory Evasion

The holding company structure proliferates across American industry during the 1920s, enabling unprecedented corporate consolidation while evading antitrust enforcement and state regulation. Delaware’s permissive incorporation laws, offering minimal oversight and maximum management discretion, attract companies seeking to create complex pyramidal structures where a single holding company can control billions in assets with minimal actual investment. By the decade’s end, holding companies control approximately 65% of electric utility output, major railroad systems, and vast industrial empires, all while federal regulators lack jurisdiction over their operations.

Samuel Insull’s utility empire exemplifies the holding company model’s capacity for leverage and abuse. Starting with Chicago Edison, Insull builds a pyramid of holding companies controlling utilities across 32 states serving 4.5 million customers. Each level of holding company owns stock in companies below, amplifying both returns during good times and losses during downturns. A $1 investment at the pyramid’s apex can control $2,000 or more in utility assets. Insull’s Middle West Utilities controls Insull Utility Investments, which controls operating companies, which control subsidiaries - a structure designed to concentrate control while dispersing risk onto public shareholders and ratepayers.

The Van Sweringen brothers construct a similar pyramid controlling major railroads including the Chesapeake and Ohio, Erie, and Nickel Plate lines, using holding companies to evade the Interstate Commerce Commission’s jurisdiction over railroad consolidation. State utility regulators discover they cannot set rates for operating companies whose profits flow upward to unregulated holding companies incorporated in other states. The holding company structure enables managers to extract fees, inter-company loans at favorable rates, and service contracts from operating companies, transferring value from ratepayers and shareholders to insiders. When the market crashes in 1929, these leveraged structures collapse spectacularly: Insull’s empire implodes in 1932, destroying savings of 600,000 shareholders and prompting the Public Utility Holding Company Act of 1935.