THE HALLIBURTON AGENDA
The Politics of Oil and Money
By Dan Briody
4
The Politics of Oil and Money
By Dan Briody
4
Guns and Butter
Whenever a nation enters into armed conflict, the business
climate is of course fundamentally, if temporarily, altered.
Stock markets plummet, consumers spend less, and corporations are faced with a series of critical decisions as the uncertainty of war sets in. How long will the conflict last? How will it
affect our strategy? What should we do in the meantime? How
a company answers these questions determines whether it
thrives, survives, or dies in wartime.
During time of war, companies find themselves in a position
to profit from that war by changing, sometimes dramatically,
their core business to serve the needs of the nation and its military. When enough businesses choose this course, production
in other areas of the nation’s economy inevitably suffers. It is
known as the Guns and Butter Curve, the economic principle that
demonstrates opportunity cost; you can get more of something
only if you give up something else. As a nation produces more guns (or any variety of goods and services for the military), it is
incapable of producing as much butter (or food, or any other
domestic products).
The ongoing work of the American military in Iraq and Afghanistan and the promise by President Bush
of a long, protracted war on terrorism has forced many companies to reconsider their business models. Halliburton, a company that has been experiencing severe problems of late with its
core business, oil field services, is but one of those companies
that has seen its balance of revenues tilt toward war-related
work, be it through Kellogg Brown & Root’s (KBR) support of
the army or the rebuilding of Iraq’s oil infrastructure. But this
is not the first time Brown & Root, or its parent company, Halliburton, has been in this position.
Understanding a company like Brown & Root and Halliburton is nearly impossible without historical context. All of
the confusing talk of no-bid, cost-plus contracts in Iraq and
the relationship of Dick Cheney to Halliburton make little
sense when viewed as an isolated event. It might even seem
excusable to the casual observer. Taken with the company’s
history, particularly its long relationship with Lyndon Johnson and other prominent politicians, an undeniable pattern
emerges, one that is far less likely to be overlooked. The
abuse of political influence is endemic to Brown & Root, a
pathology that repeats itself decade after decade. And the
story rarely changes.
In protracted war, like World War II, the effects of the Guns
and Butter Curve can be drastic. Companies must adapt to
the changes foisted on them, and they must do it quickly, or
they will miss out on an opportunity that could cost them their
business. Halliburton, the eventual parent company of Brown
& Root, came into the World War II era riding high. They had bucked the trend of the Great Depression, generating impossibly high profits during a time when most companies were
drowning in red ink. They continued to invest in technology
and expansion, even while their competitors filed for bankruptcy. And Halliburton remained focused on the business
they knew best: oil well services.
For Halliburton, there was no real need to restructure their
business during the war, though they did contribute peripherally to the war effort. They had a thriving business in a field
that would only grow in importance during the 1940s, as the
country’s demand for energy grew exponentially in an attempt
to fuel the war machines. By concentrating on extracting more
oil from each well in the United States and its allies, Halliburton was set up for an impressive run during the war.
In contrast, as the war approached, Brown & Root had just
had its first taste of success in government contracting in
building the Mansfield Dam (previously known as the Marshall Field Dam). The company made several million dollars in
profit from the job, which George Brown understated as “a
nice bit of work” that had vaulted the company onto the federal government’s favored contractor list. With their new congressman working hard for them in Washington, the next
direction for Brown & Root was all too clear: defense contracting. While the simple and direct Erle Halliburton chose to eschew the sophistry of lobbying and government contracting,
Herman Brown had embraced the inner workings of the federal government. Both men loathed the New Deal. Both resented having to pay taxes. And while both men distrusted
politicians intensely, each would take very different paths to
achieving success during the war. Brown & Root would choose
guns. Halliburton would choose butter.
•••
By 1938, Adolph Hitler had already begun mobilizing the
German military in anticipation of successive invasions of
Czechoslovakia and Poland in 1939. War in Europe was imminent, but the impact of Nazi aggression in Eastern Europe had
yet to spread to the United States. Erle Halliburton had little
interest in the events of Eastern Europe, however, as his oilwell cementing company had just pulled down its largest profit
ever in 1937: a $2 million windfall that allowed him to expand
the business, even buying out his former boss and the Perkins
Cementing company. Howco owned a fleet of 100 cementing
trucks, painted primary red, that roared from field to field
across an ever-expanding geography, and they now had nearly
500 employees. Using new techniques like acidizing and well logging, Howco was significantly cutting down the time it took
to drill wells, while improving the profits from each successful
well. Business was booming, but Erle Halliburton was still the
same intense, hard-working man who drove endlessly across
the southwest drumming up work.
The Depression had come and gone, leaving Howco untouched. The trajectory of Howco’s profitability alone suggested the 1930s were a boom time in American business. In
1938, the company began a new type of work that eventually
became one of the most important in its portfolio: offshore
drilling. It was, at first, an awkward and untested process.
Though the cementing crews had experience working in shallow water—marshes and swamps in the Louisiana delta—they
had never done work that required barges. In the Gulf of
Mexico, Howco loaded its trucks onto enormous barges that
floated out to the Creole field, a few miles off the coast of Louisiana. It was a stopgap solution that met with mixed
results. Trucks were obviously not the best means of getting
to offshore well sites. Eventually, Howco employed a small armada of ships to do the offshore jobs. But for now, trucks on
boats would have to do.
The company also ramped up its international operations.
Using a corporate structure that later would allow Halliburton
to do business in several countries under United States or
United Nations sanctions, Howco set up the Compania Halliburton de Cementacion y Fomento in Venezuela. Establishing this new company made it possible for Howco to take
advantage of local incentives for Venezuelan-based companies.
This ultimately led to the creation of similar operations in
Colombia, Ecuador, and Peru. On the company’s international expansion, Erle Halliburton remarked, “It is not my
idea to just make money out of a country, but to develop it and
raise the economic standards of its people.” This is a claim that
would be called into question long after Halliburton’s death
in 1957.
By the end of 1940, Britain, France, Australia, and Canada
had already declared war on Germany. Paris was occupied by
the Nazis, and the massive German air raids on London had
begun. It was clear that the United States would not be able to
remain neutral for long. By the summer of 1941, Roosevelt had
frozen German and Italian assets in America, cut off relations
with Japan, and announced an oil embargo against all aggressor states. It was clear that Howco’s business was going to be affected by the coming World War, but how?
Halliburton knew what he was good at and decided not to
stray too far from his company’s core strengths. The best thing
Howco could do for the country after it declared war on the Axis powers in late 1941 was to help produce oil. The company
continued to churn out technological advances during the
war, helping the nascent industry grow and evolve.
Demand for oil in the United States skyrocketed through
the war years, and Howco’s business thrived. When many employees left to join the war effort, Howco increased its work
week from 54 to 60 hours to make up the difference. Acknowledging the additional workload on those remaining, Halliburton increased the executive pay at Howco during this time,
and established an employee profit-sharing program and retirement benefits package. Just as the Depression had not set
Howco back financially, neither did World War II.
Howco was not entirely adverse to war profiteering, despite
it’s founders political leanings. The company found its way into
military contracting, if only for a few years. It established a War
Products Engineering division, and made gun mount bearings
for the navy, fixtures and dies for Boeing’s B-29 bombers, and
even got some cementing work, building landing strips for the
army air corps. Overall, the work for the war effort was minimal
and secondary to Howco’s oil well services juggernaut. And
Erle Halliburton was not about to change his formula for success, certainly not for the U.S. government. He spent his own
money in starting up the war products business and accepted
no loans from the government.
He became more interested in
politics as time went on, fighting against unionization, excessive taxation, and what he saw as the spread of socialism in
America. In a 1949 issue of the company newsletter, The Cementer, Halliburton aired his views. “As the politicians have become more powerful, the operation of free enterprise and the
things that we in our generation have tried to accomplish have
become more difficult. If the trend continues . . . the ingenuity and efforts of the next generation will be so sapped through
taxation by the politicians that human progress will be reduced to the speed of a snail.”
Comments like these hold obvious irony when you consider
that huge portions of Halliburton’s revenues today come from
government contracting paid for by the taxpayers. If Erle Halliburton had his way, his company would never have gone that
route. He had managed to isolate and protect his company from
both domestic and international crises, but in 1947, after the
end of World War II, Halliburton began to withdraw from the
day-to-day operations.
At the age of 55, he turned over
the presidency of his beloved company to his brother, John
Halliburton. Erle remained intensely interested in technical innovations and ways to improve the oil well business. Through
all of his years, since he first caught the oil bug out in California, until the day he passed away in 1957, Erle Halliburton
stayed focused. He was an oilman, an inventor, and an entrepreneur. He died having earned many times over the million
dollars he once boasted about making. It was only after his
death that the company would, for the first time, stray from the
rigid path of the previous four decades, culminating with
the purchase of Brown & Root in 1962. It was a future that Halliburton himself could never have imagined and most assuredly would not have condoned.
•••
While Erle Halliburton remained definitively opposed to
entangling Halliburton in the world of political back
scratching, Herman Brown took Brown & Root in a markedly
different direction. The Mansfield Dam had been a brutal and complicated transaction for the company, albeit a highly
profitable one. Herman Brown had seen what the power of one
well-placed politician could do for his bank account. Despite
his opposition to the New Deal and the creeping socialism it
represented, by the start of World War II Herman Brown
had transformed his company from a hard labor, simple roadbuilding business to that of a New Deal capitalist corporation.
Through its work securing the Mansfield Dam contract, Brown
learned a lesson his company would never forget: The right
politician at the right time can make you very, very rich.
Brown’s politics had not changed, but he had developed an
overwhelming desire and uncanny ability to follow the money.
During the Depression, the money came from federal handouts, and Herman Brown proved himself flexible enough to
accept that reality. During World War II, the money was coming from defense contracts, and once again, Brown & Root
made a seamless transition from New Deal capitalist to defense contractor in the blink of an eye. As Brown & Root’s
needs changed, so did Lyndon Johnson’s politics. In the face
of the approaching war, the supposedly liberal Johnson took
on the rhetoric of an anti-union, Communist-hating reactionary, even going so far as to equate the two. “New Dealer or
no, again and again he cast his anti-union votes, and by 1947
the alliance (of Brown & Root and Johnson) became common
knowledge as his political identity changed from left to right
before everyone’s eyes,” writes Ronnie Dugger, the Johnson biographer that gained unprecedented access to Johnson before, during, and after his years as president. Johnson had thus
demonstrated his commitment to Brown & Root, and the time
had come for Herman Brown to return the favor.
•••
The Mansfield Dam had saved Brown & Root from certain
bankruptcy and provided enough capital to last for years.
But it was important to Brown & Root for other reasons as well.
The contract had led to two other dam projects along the Colorado, the Marble Falls Dam and the Wirtz Dam (named after
Alvin Wirtz), and vaulted the company into the ranks of the
largest construction concerns in the nation. Ironically, building the dams turned out to be a much-needed public service.
Flooding of the Colorado virtually ended after the completion
of the Mansfield Dam, and the electricity that the LCRA was
able to produce from the combination of the dams earned the
agency the nickname, “Texas’ Little TVA,” after the infamous
New Deal–era Tennessee Valley Authority (TVA).
Not surprisingly, Brown & Root played large role in bringing
electricity to the rural Hill Country of Texas. The Pedernales
Electric Cooperative, in charge of electrifying the countryside of central Texas, awarded the company a contract to erect
1,830 miles of electric line. The work consisted of blasting
holes in solid rock, accomplished by a combination of dynamite and manual labor and hauling rock fragments out of the
hole by hand. The work was subsidized by five-dollar contributions from the residents of the Hill Country, a hefty fee for
some of the most impoverished people in the country. Many of
the residents bartered their labor in exchange for the electricity the lines would eventually carry to their homes. By the late
1940s, the hillsides were awash in electric light, and all of the
legal wrangling that led to the dams supplying the energy was
forgotten.
The profits earned from the Mansfield, Marble Falls, and
Wirtz Dams only further whetted Herman Brown’s appetite
for more federal work. With war looming, Brown knew the
direction the company must now take. With Johnson on his
side, he liked his chances of competing in Texas and abroad
for defense work. The first target of Brown’s desire was an air
base that was being planned for Puerto Rico.
In April 1939,
Roosevelt was ramping up the country’s military spending in
earnest and signed a bill for $66,800,000 for the first wave of
new air bases. Brown & Root had no experience in building
bases, or really in anything of a military nature. But the company had faith in its man in office. And it didn’t hurt that
Johnson was now on the Naval Affairs Committee.
At this time, the spring of 1939, the Browns and Johnson exchanged several correspondences, all of which are on file at
the Lyndon B. Johnson Library in Austin. The letters almost
take on the tone of courtship, with increasing professions of
devotion and loyalty. One note, from George Brown to Johnson, closed, “I hope you know, Lyndon, how I feel reverence to
what you have done for me and I am going to try to show my
appreciation through the years to come with actions rather
than words if I can find out when and where I can return at
least a portion of the favors.”
Lyndon replied, “I wish I could dictate as sweet a letter as
you wrote me. . . . I really enjoyed being with Herman this
time. . . . We had a lot of heart-to-heart talks and, I believe,
know each other a lot better. Knowing is believing, you know.”
The letter demonstrates the ease with which Johnson got along
with George Brown, and the slow and sometimes painful process he encountered in befriending Herman. Over the course
of the year, George Brown and Lyndon Johnson became very close, and saw each other often. They got together both in
Austin and Washington to talk politics and business and work
on building a mutually beneficial relationship.
Their friendship blossoming and their usefulness to each
other apparent, Johnson was set to go to work for the Brown
brothers again, this time in Puerto Rico. But Johnson soon realized that he didn’t have the power to sway federal allocations
outside of Texas the way he could inside the state. Two days
after Roosevelt authorized the $66.8 million bill, Johnson told
the Browns that he had talked with Admiral Ben Moreell, who
headed the navy’s construction at the time, but had not been
able to further the Browns’ desires. “I’ll do all I can to get you
any information on the Puerto Rican project and will let you
know when anything breaks. You know how hard it is to get any
dope in advance, but I’ll have my eyes open. I’ll probably wire
you if I run into anything which seems likely.”
Johnson was unable to work his magic. Despite his appointment to the Naval Affairs Committee, LBJ was not yet influential within the navy. Undaunted, Brown & Root submitted a bid
on the Puerto Rican air base, a bid that was lost in the crowd.
After the contract was awarded to another competitor, Johnson
asked Moreell for an explanation why Brown & Root had not
won the contract. He was humbled by the response, which he
received from a low-level administrator, that simply stated,
“Pursuant to your inquiry relative to the reason why Brown &
Root, Inc. . . . were not selected as the contractors for the San
Juan Air Base project . . . because they had no experience.”
What was a natural consideration for the majority of corporations, but had never been an obstacle for Brown & Root before
was suddenly a problem. But the firm’s faith in Johnson was
undiminished.
•••
His Puerto Rican bid rebuffed, Herman Brown decided to
focus on business closer to home—that is, closer to Johnson’s power base. Rumors had been circulating for years that
the navy was interested in building an air base in Texas. Several different sites had been proposed, but Brown was zeroing
in on Corpus Christi where Johnson’s friend and former boss,
Richard Kleberg, was the congressman. Progress on the site
had stalled in Washington. The navy was ambivalent toward
the site, unsure whether the base would be developed at all, let
alone within the coming years. Herman Brown wanted that
contract, even more than he wanted the Mansfield Dam. It was
potentially far more lucrative, and with war fast becoming a
reality, he knew that an entrée into military contracting would
ensure the future of the company. But the situation was politically complicated—almost impossibly so.
The trouble stemmed from the Browns’ ongoing support of
John Nance Garner, known as “Cactus Jack,” Roosevelt’s vice
president and a fellow Texan. Garner’s relationship with
Roosevelt had begun to unravel, and by mid-1939, it became
apparent that Garner was going to oppose Roosevelt in his
1940 presidential bid. The two had become openly critical of
each other, resulting in a deep division within Texas state
politics. Johnson had staked his entire political career on
Roosevelt, and it was far too late to change course.
Most
Texans, however, were more loyal to Garner. Herman Brown
in particular identified with Garner’s hard-line stance against
unions. Garner’s own fortunes had been built on the back
of cheap, unregulated labor, and Brown was becoming increasingly and resolutely anti-union. Houston’s congressman, Albert Thomas, also backed Garner, and in August 1939,
stated that “every member of the Texas delegation is for Vice
President Garner.”
If Johnson was going to be able to help the Browns secure
the Corpus Christi contract, which at this point was on life
support, he would need the brothers to withdraw their support of Garner. Then, Johnson could claim responsibility for
shifting the corporate politics in Houston from Garner to
Roosevelt, and gain leverage with the president, ultimately
using his influence to win the navy contracts for the Browns.
This was an extremely risky proposition for the Browns.
Garner, after all, was the vice president, and Lyndon Johnson
was merely a freshman congressman, albeit with some limited
entrée to the president. In order for the gamble to pay off,
Johnson would have to be able to parlay the support of the
Browns for Roosevelt into political favoritism. It was a long
shot, to be sure, but Herman Brown was growing increasingly
comfortable with Johnson’s ability to manipulate the system.
George Brown sensed that Lyndon needed the Brown brothers
to do something drastic, but was too shy to ask. He wrote to
Lyndon in October 1939, “I have been sitting here all week
waiting to hear from you. . . . I felt that you had something on
your mind last week but did not get around to getting it off.”
That was the opening that Johnson was looking for. From that
point on, Johnson, who had single-handedly saved the Browns
from financial ruin, would never again be shy in asking
Brown & Root for help. And Brown & Root would never be shy
in offering it.
With Herman Brown and Lyndon Johnson, the normal
power structure between a politician and businessman was inverted. It should have been that Johnson was the independent thinker, calling shots on behalf of his constituents, and not
letting the overbearing influence of one prominent businessman dictate his actions. Instead, it was Herman Brown that
held all the sway, directing not just Johnson, but countless
politicians over the years.
This inverted relationship at Brown
& Root carries forward to today. While supporting the army
in Bosnia, military officials became so confused about their
relationship with the contractor, Brown & Root, that they
were actually afraid of upsetting Brown & Root by placing too
many constraints on the company. One commander even referred to the company as the “customer” of the army, illustrating the ability of Brown & Root, for decades, to flip the normal
vendor-customer relationship on its head.
Exercising his dominance over local politicians, Herman
Brown immediately instructed the malleable Albert Thomas to
stop backing Garner and start backing Roosevelt. Thomas had
a reputation for following Brown’s orders to the letter, and
four months after Thomas had announced his strong support
for Garner, his vote swung the other way.
The move started a domino effect in Washington. Showing
his appreciation for what Johnson had done for him in Texas,
the state that would be most difficult for him to win in the primaries, Roosevelt appointed a good friend of Johnson and the
Browns as undersecretary of the Interior. The recipient of this
position? None other than Alvin Wirtz, who was still acting
counsel for Brown & Root. Wirtz had originally been opposed
to Roosevelt’s politics, particularly the New Deal or Roosevelt’s
controversial court-packing plan of years before.
But since he
had Lyndon Johnson acting as his go-between, arranging projects and cultivating relationships as was the case with the
Mansfield Dam, Wirtz had warmed to Roosevelt. Wirtz’s job, aside from working under Harold Ickes at the Department of
the Interior, was to lead Roosevelt’s campaign in Texas against
Garner. In an indirect way, the move was also a nod to Herman
Brown, who now had another powerful ally in Washington.
In addition to this generous move by Roosevelt, the navy was
instructed to consult with Johnson on all contracts being
awarded in the state of Texas. Suddenly, Brown & Root was seriously considered for naval contracts, the first of which was the
Corpus Christi Naval Air Station, which had become a much
higher priority of the navy. It was quickly pushed onto the preferred list of navy projects in February 1940, months after it had
been considered a lost cause by Kleberg and the Browns.
At this point, things will begin to sound eerily familiar to
anyone who has followed the events surrounding Halliburton
in the wake of the Iraq invasion in 2003. The contract for the
Corpus Christi Naval Air Station was deemed a “cost-plus” contract, meaning that the contractor would recoup all expenses
plus a built-in, guaranteed profit based on a pre-negotiated percentage. Normally, that profit can range from 2 percent to 10
percent, depending on the nature of the work and the structure of incentive clauses. The problem with contracts of this
nature, as will be discussed in later chapters, is that a contractor has an incentive to increase the expense of the job, thereby
increasing its profit. Great for the contractor, not so great for
the taxpayer.
In addition, it was decided that the contract would not be
put out for competitive bidding. Instead, it was to be negotiated at the navy’s discretion. In a scenario that would play itself out again and again throughout the company’s history,
Brown & Root was the only firm seriously negotiating with the
navy for the contract, which it ultimately was awarded. In a matter of months, Brown & Root had gone from being a company that was too inexperienced to build a naval air base in
Puerto Rico to being the sole contractor under consideration
for this particular job. Things were changing very quickly now.
The urgency of the Corpus Christi site had been ratcheted up
from “not emergent” to high priority. And it would be big—
both in pure dimension and in cost.
The original price tag for
the job was $23,381,000, and Brown & Root would take a 5 percent profit on top of that. Of all the air bases that the navy was
planning at the time, the Corpus Christi site would be almost
twice as large as any other. And its funding was fast-tracked,
while the others were put on hold until defense appropriations were approved. Almost miraculously, plans for the base
had already been drawn up and work had begun by the time
news of its existence hit public awareness. Other contractors
never even had a chance. Johnson had done it again.
The issue of Brown & Root’s inexperience had not gone away,
however. Even though they had been awarded the contract, the
government felt more comfortable having another, more experienced contractor in on the job, if in name only. Brown & Root
was informed that it would need to cut in Henry J. Kaiser, another road builder turned New Deal capitalist. Kaiser had taken
a remarkably similar path to riches as Herman Brown—from
building roads to bridges to dams and defense contracting. At
the time, Kaiser was a much more recognizable name than
Herman Brown, and Herman knew that Kaiser was about to get
something for nothing. To minimize the impact Kaiser would
have on Brown & Root’s profits, Herman sent George, the consummate salesman, to Washington to negotiate the deal. Kaiser
knew that the Browns needed him more than he needed them,
and as such, asked for a healthy 75 percent of the project. George Brown, countered with 25 percent, which Kaiser found
insulting. Brown turned to leave the room. Kaiser said, “Well,
what are you going to do?” Brown replied, “I already told you
what I’m going to do.” Kaiser acquiesced, took his 25 percent,
and did virtually nothing to earn it. He set up a company called
the Columbia Inspection Company for the express purpose of
working on the Corpus Christi job.
The Browns invited another partner into the deal as well:
Bellows Construction. Herman Brown knew something that the
navy didn’t—neither Kaiser nor Brown & Root knew how to
build an air base of this magnitude. Like the Mansfield Dam
before it, the Browns sought a partner with expertise, and Bellows agreed. “We needed someone who had done buildings,”
said George Brown. “We hadn’t done many.” With the construction team in place, work began on the base on July 26, 1940.
•••
Once started, the project began to grow in size and cost almost
immediately. First there was an increase of more than $6 million to the price tag. Then another $13 million. Then another
$2 million. With the costs mushrooming and the workforce—at
peak 9,300—expanding, Brown & Root found itself in a powerful position in Texas with the ability to dole out subcontracts
and jobs to their friends and associates. Alvin Wirtz asked that
his brother’s firm be considered for the architectural design of
the buildings on the base. The Browns were known to regularly
hand out jobs to friends of the family, a serious snub to the
union activists that regularly disrupted work on Brown & Root
sites. As the job grew, contractors from around the country
wanted in, but found the door firmly shut. Tommy Corcoran said that James Forrestal, the undersecretary of the navy,
“twisted a hell of a lot of tails” to keep the job the exclusive
purview of “Lyndon’s friends.” By the time the project was complete, the total cost was $125 million, more than five times the
original value of the contract, and the largest and most profitable work the Browns had ever done.
Looking back on its work for the navy in Corpus Christi,
George Brown reflected that it was “the only contract [Johnson] ever played any role in.” He admitted that Johnson had
recommended Brown & Root to Admiral Moreell, who had ultimately awarded the contract. He went on to say that “getting
the Corpus Christi contract was the hardest selling work I ever
did. The navy told us it just didn’t think we could do the job.”
The navy was at least partly correct in their original assessment. For $29 million, Brown & Root could not, and did not,
do the job. They did it for $125 million.
George Brown’s statement that Corpus Christi was the only
job that Johnson helped with was, of course, untrue. The Mansfield Dam was almost entirely Johnson’s doing. And subsequent
work would be too, as the relationship between Johnson and the
Browns continued to grow. Johnson’s own comments to Ronnie
Dugger, years later, directly conflict with Brown’s recollection.
Johnson went so far as to claim that “I never recommended
them for a contract in my life. They never asked me to do anything for ’em. Nothing in the record will show it.”
Dugger, who was far more lenient in reporting Johnson’s
compromised relationship with the Browns than Caro, clarified
in his biography of Johnson “this was a most deceptive response. In the first place, it would be a mistake to believe that
the way these things must happen in the life of a skillful
politician, the businessman comes in and says, ‘Congressman, there’s a wad of dough to be made. . . . Get me a contract and
I’ll take care of you.’ Rather, the politician and the businessman are friends; they have dinner together; they are mutually
aware there is money to be made. . . . Who gets the contract?
A great deal depends on who knows what first; then there are
the bureaucrats who make the discretionary decisions. Information is provided to the businessman; perhaps an aide sees a
bureaucrat. Nothing official or formal, but when the politician needs help, he has a friend.”
Dugger’s comments reflect the subtle and discreet nature of
political influence peddling, and his words are all the more relevant today. It bears mentioning that Brown & Root did good
work on the air base although it cost a great deal more than
originally anticipated. The company had completed 60 percent
of the base in just eight months, allowing for cadets to begin
training at the base ahead of schedule. In January 1943, the
company received a coveted award from the navy, the ArmyNavy Production Award, known as the Army-Navy “E,” for
“those plants and organizations which showed excellence in
producing ships, weapons, and equipment for the navy.” While
their methods of attaining contracts may have been suspect,
the work they did once the contracts were in hand was undeniably solid. As such, their contract work with the navy was just
getting started.
•••
Through his relationship with Lyndon Johnson, Herman
Brown had learned again and again the value of key politicians when it came to scoring lucrative government work. But
Brown’s efforts to manipulate politicians did not begin and end with Johnson. Albert Thomas, the young congressman
from Houston that had already been instrumental in getting
Brown the Corpus Christi contract, would prove even more
valuable than Johnson during World War II. From a pure bottom line perspective, it was Thomas, not Johnson, who introduced Herman Brown to the most profitable business yet:
shipbuilding.
The federal government had originally rejected Thomas’ attempt to bring a naval air base to the Houston area. All the
same, the eager representative did his share in making certain
that the work being done in Corpus Christi, which lay outside
his district, would ultimately be done by Brown & Root, a company already based in his district. Thomas wouldn’t quit with
building air bases. He continued to pursue other defense work
in his district as well, lobbying the government for contracts of
every kind. In March 1941, a small boatmaker in Houston won
a $2 million contract to build four Patrol Craft subchasers for
the navy. The job was meager, in relative terms, but the company, Platzer Boat Works, quickly found itself in over its head.
With bankers threatening to withdraw their funds, Platzer was
in danger of insolvency, with the four subchasers incomplete.
Thomas devised a solution. Knowing the navy was in a bind,
needing the boats urgently, he recommended Brown & Root to
Admiral Sam Robertson, head of the navy’s Bureau of Ships.
Soon, the phone rang at Brown & Root, and a navy official
asked if the company could help Platzer out. Of course, Brown
& Root had no experience building ships. But the opportunity
was too good to pass up. Herman Brown knew that the navy was
ramping up production of ships dramatically, and immediately
saw the small contract as a way to get into shipbuilding in a big
way. As he had learned with the Corpus Christi project, the military was far more interested in having their deadlines met
than with controlling costs. Once a contract was won, increasing the costs to the military was a foregone conclusion. The
Browns decided to take the job, but they didn’t want to get
Brown & Root involved because of the inherent risks of the business. Instead, they started the Brown Shipbuilding company.
“We didn’t know the stern from the aft—I mean the bow—of
the boat,” confessed George Brown years later. Again, inexperience didn’t matter. Herman Brown had been shuffling hundreds of thousands of dollars through Johnson and into the
Democratic Party’s coffers for the better part of a year now. He
had helped substantially in getting Roosevelt reelected, and
packing the House of Representatives with Roosevelt loyalists.
He was repaying his considerable debt to Johnson, and everyone in Washington knew it. That the Browns were approached
to get into the navy shipbuilding business was not because of
their expertise—it was because Herman Brown’s money had put
more politicians in office in Texas than the Democratic National Committee.
The Browns quickly turned around Platzer’s dying operation. They hired men from every field imaginable: oilmen,
farmers, welders, road builders—anyone with two hands. Only
5 percent of Brown Shipbuilding’s original employees had any
experience in shipbuilding. The navy gave them a contract extension in September 1941 for eight more subchasers and an
additional $5 million. Herman Brown’s latest gamble was beginning to pay off as the Two-Ocean Navy Bill signed by Roosevelt in the summer of 1940 kept new orders rolling in.
Thomas kept the pressure on the navy, writing them “We are
hopeful that additional orders will be forthcoming, and we
have good reasons for believing the [Brown Shipbuilding] shipyard will be a permanent industry, continuing its operations after the war.”
By 1943, shipbuilding was the biggest business in Houston,
and Brown & Root employed more than 15,000 men. By February 1942, three months after the Japanese bombed Pearl
Harbor, Brown Shipbuilding’s first boat, PC-565, slid down
the ways and into the Gulf Coast. On watching the spectacle,
George Brown remarked, “I was praying she wouldn’t turn
wrong side up.” The boat would go on to be the first PC to
down a German submarine. The Browns, without an ounce of
shipbuilding experience, were doing the unimaginable: building boats that outfoxed the German military machine.
Brown Shipbuilding was fast and efficient, and the navy
knew it. In January 1942, the company scored a contract for 18
Destroyer Escorts for $3.3 million each. The navy contracted
for the brothers to build another shipyard, for another $6 million, and leased it to the Browns for one dollar a year. A few
months later, the navy ordered 32 landing craft infantries for
$17 million. The money was pouring in, and the ships were
sliding out to sea. Time magazine, in early 1943, called the
Browns “Texas Wonder Boys,” and noted that “Destroyer Escorts were plopping into the water so fast it startled even veteran Navy men, and average building time was being slashed
two-thirds . . . the infant company’s backlog is now over
$300,000,000—more orders on hand than giant 38-year old
Bethlehem Steel had three years ago.”
The Browns had proven again that given the chance to build
in any industry, they would get the job done quickly. By October
1943, Brown Shipbuilding employed a jaw-dropping 23,000 people, just two years after its formation. Between 1941 and 1945,
the company built 359 ships in all, and won contracts exceeding $500 million. How did this company, which didn’t even exist before 1941, do it? Part of the answer lies in Herman Brown’s hiring and employment policies, which were staunchly anti-union.
Reports of unsatisfactory working conditions at Brown Shipbuilding had begun to surface the first year of its existence. Albert Thomas was kept busy reassuring officials at the Office of Production Management that nothing would come between Brown Shipbuilding getting boats in the water on time. But the navy investigated the problem, and the War Manpower Commission issued a report blasting Brown Shipbuilding. “Turnover has lately become a serious problem at both yards . . . long hours, excessive commuting distances, lack of nearby housing, and poor lunchroom facilities,” were blamed for the discontent. “An unnecessarily severe policy of refusing to rehire any worker who was discharged by any foreman or official of the company and failure of the firm to attempt to hold workers who express a desire to quit also is a contributing factor.”
The report only caused Herman Brown to dig his heels in deeper. He had worked hard his whole life, and could not be persuaded to allow workers to artificially limit their loads, for the same pay. It particularly offended Brown for this issue to be surfacing during wartime when patriotism alone should be carrying the day. He wrote an article in the company newspaper entitled “Slugger or Slacker.” In it he opined, “Slacker is a rough word . . . we still think it’s exactly the right word to apply to some of the men working here in the yards. No, they aren’t shirking service in the armed forces, and they aren’t draft dodgers; they’re WORK-dodgers. And any man who imagines that our war effort doesn’t call for the best he’s got, every hour of the day he spends at the yards, is a slacker. . . . Look yourself over carefully—are you a producer, or a slacker?”
Brown’s tough words backfired. Nine different labor unions wrote to Brown Shipbuilding demanding that employees at the company be allowed to seek collective representation. The letters were ignored, sparking the involvement of the National Labor Relations Board (NLRB). The NLRB set a hearing on the matter, at which Alvin Wirtz argued on behalf of Brown Shipbuilding that the NLRB had no jurisdiction, an argument that was summarily dismissed by the NLRB. Elections were held, unions were formed, and Brown continued to defy them. “It has never been necessary for any employee in any enterprise with which I have been associated to designate a union as his exclusive bargaining agency in order to get a square deal,” he told his employees. The unions struck, and picketed in front of the Brown Shipbuilding facilities. But many workers crossed the line and continued to work, in part fueled by the patriotic war rhetoric of Herman Brown.
Lyndon Johnson, whose liberal politics had been forged by the New Deal, supported his friends with vehemence. He sponsored a “work or fight” bill in the House Naval Committee that would allow the draft board to receive the names of absentees from navy contractors. The names would be thrown to the top of the draft pool. It was an outrageous proposal, meant to scare the unionists back to work. Johnson was saying, in essence, that if you weren’t willing to work, “the draft board will get you if you don’t watch out.” There’s no telling what would have happened if Johnson’s proposed legislation had been enacted, but military officials were having none of it. It would have brought with it an army full of bitter, unmotivated soldiers already with a predilection for loafing or malingering.
The New Deal government was solidly behind the right of workers to organize, but that didn’t mean anything to Johnson, who continued to vote against labor laws. The central issue facing the federal government on this issue was crucial to Brown & Root and Brown Shipbuilding, and their ability to win future contracts. If the government were to be either neutral or against the unions, it automatically gave “open shop” companies like Brown & Root a very real advantage. Open shop companies would consistently be able to underbid those with unions. During the war, the federal government had little choice but to shift to a muted stance against unions, which were considered to be subversive to the war effort. This enabled companies like Brown & Root, which had resisted unions from the start, to profit at the expense of union companies.
After the war, Herman Brown continued to lobby hard for union-busting laws in Texas. The infamous “Right to Work” laws of Texas were largely Brown’s doing, as he prodded the Texas legislature to set new rules for unions. The company led a vicious battle against the Texas AFL-CIO in the late 1940s, suing every chapter in sight for damages incurred from picketing its plants. Nat Wells, the lawyer that represented one of the craftsmen unions, had this to say of Herman Brown. “I say it’s unfair to get the most public work of any contractor in the state, and on every hour of that work for every man . . . taking fifty cents an hour and adding it to his own millions. . . . You know, I’m pretty tired of that socialized millionaire, who is sucking at the public teat, if you please, who has made his millions from your pocket and mine in tax money, starting with a dam down here by Austin, most of the highway work in the state, political connections that gets him lots of federal work; that’s your money and my money, our tax money . . .”
The Browns remained defiant. In most cases, they were able to stall the NLRB for long enough to complete the job in question, rendering the labor complaints moot. They were accused of intimidating, threatening, and firing unionizers from several different jobs. While the labor disputes and disruptions were a nuisance, Brown & Root bulled its way through every case, clinging to its ideals of an open shop. In rare cases, the company was forced to make compromises, but the ethos of “right to work” laws stayed strong within the company for years to come. Bill Trott, a Brown & Root road crew employee from 1951 to 1992, put it this way, “I don’t know of anybody that ever worked for me that wanted to be part of union. I remember a bumper sticker I once saw in Louisiana. It said, ‘Vote against the right-to-work law’. . . silliest thing I ever saw.”
Both Howco and Brown & Root managed to profit from wartime, though in vastly different ways. Erle Halliburton kept his head down during World War II, refocusing his business on furthering the oil-field services business. Herman Brown threw himself and his company headlong into world events, capitalizing on the desperation of the military during war. Though the Browns may have exploited the system more effectively than Halliburton, the company’s success would not come without scrutiny. Having identified themselves so closely 90 Guns and Butter with Lyndon Johnson, and by fighting some very public battles with labor organizations, Brown & Root raised its profile during the war, and thus made itself a political target. As a result, the company would live with a reputation for political influence peddling right up until the modern day, and its relationship with Johnson would bring an official investigation of its political contributions that would nearly ruin it.
From early on Olds, who would eventually rise to become the chairman of the Federal Power Commission (FPC) under Roosevelt and then Truman, was on a philosophical collision course with the Brown brothers. A voracious academic, Olds decided at a young age to dedicate his life to balancing out the disparity of wealth in the United States. In particular, Olds had seen the horrifying effects of industrialization on working families in Holyoke, Massachusetts, while a college student in nearby Amherst in the early 1900s and vowed to “have some effect toward mitigating the evil of poverty.” After college, Olds set out to find the most meaningful profession in pursuit of his goal. Idealistic, but aware of his own limitations, he brought his passion to the slums of South Boston.
Like many who enter the field of social work, Olds was quickly disillusioned by the inherent shortcomings of the system. He wasn’t learning anything about the root causes of economic disparity. He was simply witnessing, somewhat helplessly, the tragedy of its effects. He turned to religion as a possible answer, and became a minister in a congregationalist church in Brooklyn. But again, Olds met with an institution that had already accepted defeat in the worsening battle against poverty. As the son of a mathematics professor and a former mathematics honor student himself, Olds took a job with the Industrial Relations Commission during World War I. He was charged with combing through reams of data in an attempt to determine how wages should be set during wartime. What he found was the disheartening reality that while productivity in America continued to rise, wages did not. The average worker was not sharing in the success of American business, and labor unions were being suppressed, sometimes brutally, by powerful industrial companies with the government on their side. He decided at that point that the only solution to this complex and deepening problem was a fundamental shift in the role that government played in regulating labor disputes. Either by owning the sprawling monopolies—like railroads and utilities—or by backing labor, the government must intervene.
It was a philosophy that Olds had evolved through his work as a social worker, minister, and government employee. His brilliance and compassion made him utterly qualified to reach the conclusion. But it placed him diametrically opposite Herman Brown and his “right to work” philosophy. Though he didn’t know it yet, and wouldn’t until it was too late, the antilabor forces were gaining political clout that would ultimately vanquish any hope Leland Olds had of making a difference.
Though his ideas were vaguely socialistic, Olds believed that the capitalistic society could work to defeat poverty within the constructs of democracy, he just wasn’t sure how. So he went to work learning more about the power industry, how rates were set, how wages were set, and how it could be done better. He did this work on his own, even while on vacation, poring over volumes of texts at his local library in Chicago. He crunched numbers and created new formulas. He did it because he still wanted to be an instrument of change that would allow more impoverished and rural citizens to afford electricity. In the course of his research, he learned that by lowering rates, public utilities could actually increase their profits by expanding their customer base. He wrote thousands of articles, hoping that his words could counter the juggernaut that was American industry in the golden age of the 1920s.
Bringing power to impoverished families became an obsession for Olds. He felt strongly that power would, at the very least, mitigate what he felt was the “evil of poverty.” When Franklin D. Roosevelt (FDR), then governor of New York, called on Olds to share his views on the subject in 1929, he was armed with statistics and research that impressed the sympathetic governor. He offered Olds a job as the executive secretary of the New York State Power Authority, and his ideas were immediately put into action by the agency. By increasing its authority over setting rates, the Power Authority strong-armed reluctant utilities into lowering rates, and as Olds had predicted, their profits increased. His work was finally starting to make a difference, and he had found his calling in government service.
In 1939, after his relationship with FDR had blossomed into a mutual respect and admiration, Olds came to Washington and was appointed the head of the FPC by Roosevelt. Over the previous decade, he had tempered his more radical ideas of a complete government overhaul, and his belief in Roosevelt had engendered a new philosophy that government regulation could work to reverse the negative effects of rampant industrialization. He now knew for certain that change could take place, and as chairman of the FPC, he was in a position to make it happen.
Over the next five years, through the trials of World War II, Olds turned around the fledgling government agency, instilling passion and purpose in its work. He treated his subordinates with paternal respect, and infected the FPC with enthusiasm. He often worked through the night, consuming massive amounts of raw data. He earned the reputation of a fair arbiter in the ongoing battles between labor and industry. He realized and accepted that a healthy utility was better than a broken utility. The utility had a right to a fair profit, and he helped them to realize those profits by lowering rates and extending their service. By the end of his first five-year term at the helm of the FPC, Olds had gained the respect of both the industry and the New Dealers—no small task. Meanwhile, it was business as usual at Brown & Root.
By 1941, Secretary of the Interior Harold Ickes was calling for an overland pipeline to counter the vulnerability of the tanker system. Ickes believed that as hostilities between America and Germany intensified, the Germans would go after the tankers in an attempt to disrupt the country’s energy supply. Though it seemed an obvious move, the Supplies Priorities and Allocation Board (SPAB) rejected Ickes’ request, because it would require the diversion of important resources, like steel and labor, away from higher priority munitions and airplanes projects. Ickes joined forces with 11 private oil companies to help him plead his case. Convincing the oil industry to join in the fight wasn’t difficult when the executives considered what a government funded pipeline to the East would do for their business. But the SPAB was steadfast and refused request after request to build the pipeline.
It wasn’t until February 1942 that the SPAB relented. German submarines downed 12 American tankers off the East Coast that month alone. By March, the Germans were notching up three tankers a day, as oil spread like a slick, black blanket over the surface of the Atlantic Ocean. Oil supplies to the East Coast had been cut to just 70,000 barrels a day from 1.5 million before the war. By the summer, work began on the two longest pipelines in the country, reaching about 1,500 miles each. The Big Inch was 24 inches in diameter, and the Little Big Inch, 20 inches. The construction, done on a cost-plus basis, cost the federal government—the consortium of private industry that was so eager to have the pipeline built withdrew its financial commitment when it became clear the government would have to build the pipelines regardless of their involvement—$138.5 million in total, and delivered more than 366,000,000 barrels of oil to the East by August 1945. Ickes had been right, and the Inch lines staved off a massive energy crisis in the East.
Oil companies with their experience building pipelines, naturally wanted to gain control of the project, but they were not the only interested parties. The natural gas industry, at this time in its infancy, also felt that the lines could be converted into natural gas conduits, providing a cheap and efficient source of fuel to the East that competed favorably with coal. The coal and railroad industries (which transported the majority of the coal), sensing the threat to their established customer base in the East, fought hard to keep the Inch lines in the control of the government and out of the hands of oil and gas interests. The stage was set for a mighty battle.
E. Holley Poe, who had spent most of his professional life as a representative of the natural gas industry, began to string together a group of men who would fight for control of the Inch lines. His history of work with the American Gas Association and later in the Petroleum Administration for War (PAW), put him in an excellent position to follow the intent of the government in disbursing the Inch lines. Poe also had a seat on the Committee on Postwar Disposal of Pipe Lines, a position that afforded him a measure of direct control over the future of the Inch lines. As such, Poe began lobbying on behalf of the natural gas industry, claiming that the East Coast was in dire need of the fuel to offset the shortages of coal in the region. Less expensive and more efficient than coal, Poe’s argument for natural gas met with limited agreement. But Poe had an ulterior motive. He had been scheming all along to put together his own bid for the Inch lines, though he had not alerted anyone in the various government agencies upon which he sat of his plans. Instead, Poe simultaneously influenced the agency’s decisions while crafting a consortium to bid on the lines.
The War Assets Administration (WAA) felt strongly, though, that the Inch lines should be sold to the oil companies, since it would require no substantive changes to the pipeline itself. Converting the pipelines to natural gas would be costly, and in the case of a future military conflict, would render the lines useless for petroleum distribution. When the auction for the Inch lines was set, it was clear that oil companies would be given priority. Poe was losing his battle, and even in his position on the Committee on Postwar Disposal of Pipe Lines, was unable to curb the momentum toward the oil companies. But Poe was going to submit a bid anyway, because with the right men behind him—powerful and politically influential men like Herman and George Brown—he might be able to persuade the government to reconsider its position.
Poe went to work putting together a dream team of investors. He scooped up Charles Francis, a partner in Houston law firm Vinson, Elkins, Weems and Francis, and counsel to Brown & Root. From there it was an easy step to secure the financial muscle the team would need. Francis got Herman and George Brown to come on board. Brown & Root had worked on some of the construction of the Inch lines originally, and as the main financial backer of the team, George Brown took over Poe’s operation and dominated the bidding process. The Browns also brought with them the undying support of Lyndon Johnson, and a host of other politicians that could play a key role in submitting a successful bid.
The group, now called the Texas Eastern Transmission Company, submitted its bid along with 16 other interested parties. But the bidding process was severely flawed. There was no standard on which the bids were to be judged, nor was there any standard bidding format. Some bids were heavy on cash up front, others on ongoing payments, and still others were being funded by debt. The WAA was in over their heads and had no idea how to get the most money for the Inch lines. Meanwhile, Texas Eastern continued to meet with influencers in Washington, pleading the case of the natural gas industry. Francis met with General John O’Brien, of the WAA, and assured him that Texas Eastern would convert the lines back to oil distribution in the case of a national emergency. Then Francis met with H.S. Smith of the House Surplus Property Investigating Committee and pleaded for him to “immediately commence an investigation of the proceedings that had been followed in offering these lines for sale [and] . . . pointed out that there were no standards for bidding, no good faith deposits required, and that the whole matter had been handled in a very unbusinesslike manner.”
As Francis was relentlessly pushing Texas Eastern’s agenda, the nascent company got a break. While Texas Eastern was working all fronts, trying to convince the government of the need for natural gas in the East, the coal miners went on strike. The government forced the workers back to the mines, but the damage had been done. The strike laid bare the vulnerability of the East Coast to the coal monopolies and made a strong case for delivering natural gas as an alternative energy source to the East. The strike occurred while the House Surplus Property Investigating Committee, at Francis’ request, was looking into the bidding process on the Inch lines. The chairman of the WAA, Robert Littlejohn, rejected all the original bids on the lines. He created a standard bid submission form and announced a new bidding process that would not give favor to the oil companies. Instead, the Inch lines would go to the highest bidder, period.
The WAA had followed Francis’ recommendations to the letter, and the result was a new level playing field on which Texas Eastern knew it could compete and win. George Brown and his crew began lining up the money needed to back a successful bid. The company issued 150,000 shares of stock at $1.00 a share, enough to cover the good faith deposit required for bidding. Herman and George were each in for a 14.25 percent stake, and lent money to others wanting to subscribe to the initial offering, in exchange for their voting rights. Mainly through friends and business associates, Texas Eastern marshaled enough financial backing to cover what would eventually be a $143,127,000 bid for the Inch lines. The night before the bid was to be submitted, one of Texas Eastern’s directors slept with the bid under his pillow. After he deposited the bid in the WAA’s post office box, he sat guard to ensure that no competitor would see the bid. On February 10, 1947, more than a year after the process had begun, Texas Eastern emerged as the highest bidder, and was awarded ownership of the Big Inch, and Little Big Inch pipelines to the East.
With the bidding out of the way, it was time for Texas Eastern to start making money on its core business, transporting natural gas to the East. Operating in the natural gas industry, though, was different than any kind of business in which the Browns had previously been engaged. The natural gas industry was heavily regulated by the FPC. Competition, pricing, and the right to build pipelines and pipeline extension all fell under the purview of the FPC. Enter Leland Olds.
As chairman of the FPC, Olds would be keeping a close eye on the business of Texas Eastern. Herman Brown loathed government regulation and felt that it gutted capitalism of its naturally competitive elements. But there were no competitive elements in the natural gas business, particularly in the Northeast, because Texas Eastern was the only company with access to the market. The Browns thought the WAA was handing them a virtual monopoly on gas to the East. Olds had other ideas.
Olds was considered very even-handed when setting prices for the gas industry. He had allowed for a 9.5 percent profit for natural gas distributors, seen as generous by industry analysts. Obviously, Texas Eastern wanted to set its own prices, especially as demand for natural gas began to take off with the coal shortages in the East. But even with the restrictions that the FPC placed on Texas Eastern, the company’s IPO had been oversubscribed and brought a windfall of profits to the original investors. In other words, the stock market thought that Texas Eastern was going to clean up.
The Browns knew that if the natural gas industry were to be deregulated, they would be able to charge twice, maybe three times the prices the FPC had imposed. Their return on investment would skyrocket, and the Browns would become the next generation of industrialists, like Rockefeller before them. The company began a frenzied lobbying push to deregulate the industry. Senator Robert S. Kerr, a republican from Oklahoma, conceived of a bill in 1948 that would end the FPC’s grip on the industry. Olds wasn’t having any of it. His testimony against the bill led to President Truman’s veto. The natural gas interests were up in arms. The Browns pleaded with Johnson that Olds had to be stopped. That he was single-handedly socializing the country. And in truth, he was costing them hundreds of millions.
Olds’ term at the helm of the FPC was up for renomination in 1949, and the Browns smelled their opportunity. They insisted that Johnson defeat Olds and end his regulatory regime. The oil interests throughout Texas also wanted badly to see Olds defeated, as his policies often curtailed their own capitalistic instincts. Johnson, now a senator, knew that he would need the support of the oil industry if he was ever to make a run for president. So, at the behest of the Browns, Lyndon Johnson was going to have to take down a fellow New Dealer and man of great integrity.
He was going to have to destroy Leland Olds.
Though he likely didn’t need it, Johnson was constantly reminded by his Texas friends of the need to remove Leland Olds. In a letter from Francis to Johnson dated April 13, 1949, Francis implored Johnson to work on behalf of the oil and gas interests. He complained that “even the most brazen criminals” could get a “square deal” in this country, and “it would seem to me that the oil and gas industry is entitled to parity treatment with criminals.” He concluded the letter, “I trust that this major problem will have your immediate attention.”
The first thing that Johnson did was angle for the chairmanship of the subcommittee that would be evaluating Olds’ renomination. It wasn’t exactly a coveted position, so Johnson had no problem securing the post. He then arranged hearings to be held on the renomination—hearings that would entail witnesses and evidence for and against Leland Olds. Only Johnson had a plan. Leland Olds was expecting a rather routine hearing, like the one he endured five years prior, ending in unanimous support of his confirmation. The only hurdle Olds had encountered during the previous hearing was some tepid accusations that he had communist leanings during the 1920s. None of the charges were taken seriously, and Olds was cleared for another five years.
Johnson was going to play the communist card again, but this time he was going to back it up. In the five years since the end of World War II, the fear of communism was starting to take hold in earnest. Though it was still years before Joseph McCarthy would give his first speech, the undercurrent of anticommunism was swelling. Johnson assembled a legal team that began researching Olds’ history, looking for anything that could indicate a sympathy toward communism. Alvin Wirtz, the Browns’ right-hand man, headed up the research arm of Johnson’s operation. The group first looked to Olds’ record as chairman of the FPC, scouring documents for any hint of socialist tendencies, anything that could be construed as less than capitalist. They could find nothing. Olds’ record was spotless and stunningly fair. If anything, Johnson’s research in that area proved why Leland Olds should be confirmed.
Johnson’s team needed a new approach. They began poring over Leland Olds’ now 20-year-old articles he had written for the Federated Press. Many of the articles espoused somewhat radical ideas, but nothing that could be mistaken for communist support. But among the subscribers to the Federated Press wire service was the Daily Worker, a communist newspaper that closely followed labor issues, something Olds wrote about often. Johnson made photocopies of scores of articles and loaded them onto Brown & Root’s DC-3, flew them to Austin, and began painting Olds red.
Johnson and Wirtz worked over their evidence the way a district attorney would prepare to discredit a witness. Of the 1800 articles that Leland Olds had written for Federated Press, only 54 of them were to make it into the hearings. And of those, incomplete thoughts, out-of-context phrases, and incriminating fragments of Olds’ writing were parsed out. Johnson picked out witnesses to give testimony during the hearings. Alvin Wirtz was aided in this regard by Ed Clark, who not incidentally owned 40,000 shares of Texas Eastern stock. Clark knew that Johnson was on nothing more than a witch hunt. “He [Johnson] would call early in the morning— ‘Communists! Communists!’ Bullshit! Communists had nothing to do with this, and he knew it, and I knew he knew it,” Clark said. But no matter how much this course of action disgusted Clark, he understood that this was business.
It was only a few weeks before the hearings before Olds had an idea what was coming. He had expected some questions about communism, but as had happened five years prior, he expected the charges to be dismissed as laughable. But when Johnson changed the makeup of the committee, excusing admirers of Olds and replacing them with anticommunist hardliners, it became clear to Olds that he was heading into an ambush. Without proper time to prepare, Olds arrived at the hearing with his wife, an FPC aide, and only a cursory response to the anticipated charges of communist leanings. 123s
Olds had a statement prepared that would refute many of the allegations Lyle was making against him. In fact, Olds was ready to talk about the way his ideas had evolved from early in his career, and how his record at the FPC demonstrated that. When Olds began to read his statement, however, committee members, shocked by what they had just heard from Lyle, cut him off. Johnson would not allow Olds to read his statement in full, and so for hours on end, his statement sat unread while he fielded angry assaults by the stacked committee. Johnson himself came after Olds, insisting on yes or no answers like an attorney treating a hostile witness.
For two days the committee embarrassed, humiliated, and harassed Olds. Johnson noted that Olds had once been a member of the American Labor Party, a group that, after Olds had left, became a communist organization. Johnson seized on the fact that Olds could not remember when he left the group, something he had done 10 years earlier. He became openly hostile toward Olds, and continually inhibited Olds’ ability to defend himself effectively. When witnesses were called in defense of Olds, Johnson hurried them through their testimony, looking at his watch, and cutting them off as soon as their time had expired. One of the witnesses against Olds, William N. Bonner, an attorney from Houston that had interests in the natural gas industry, called Olds a “traitor to our country, a crackpot, and a jackass wholly unfit to make rules.” Another witness, Texas attorney Hayden Head, actually argued that because Olds was so intelligent, he was a danger to the American way.
The media began to catch on to what was happening during the hearings. The Washington Post, the Nation, and the New Republic all came to the defense of Olds, and excoriated the tactics being used by the Johnson-led committee. It didn’t matter though. It was too late for Leland Olds.
The committee voted 10 to 2 against Olds’ confirmation, but the Senate still needed to vote. During the committee’s proceedings, Johnson had been sure to call on his fellow senators to let them know how things were going. Some senators came to Olds’ defense, but the seeds had been sown by Johnson, and when the senate voted, Olds garnered only 15 votes in his favor, 53 against. Johnson returned to Houston on the Brown & Root plane and went immediately to the Herman Brown’s suite in the Lamar Hotel, Suite 8F. He was met with a hero’s welcome by the Brown brothers and the rest of their crowd. He went hunting with the Browns at their hunting camp, called Falfurrias. Frank “Posh” Oltorf, Brown & Root’s longtime lobbyist, would have this to say about Johnson’s victory in Washington. “Even after everything Lyndon had done—even after the Taft-Harley and the way he fought Truman on the FEPC and all that—they [independent oilmen] had still been suspicious. They still thought he was too radical. But now he had tangibly put something in their pockets. Somebody who put money in their pockets couldn’t be a radical. They weren’t suspicious anymore.” Herman Brown had placed his bets with Johnson long ago. Now all of his buddies would as well.
Olds’ replacement at the FPC was Mon Wallgren, a man that Fortune magazine characterized as “quite possibly the least effective chairman, or even member, the FPC has ever had. ...A lazy fellow [and] too preoccupied with politicking to pay proper attention to FPC business.” Olds watched as the regulations he had worked so hard to enact were systematically weakened or repealed with Wallgren at the helm.
But things between Texas Eastern and the FPC did not get much better. Wallgren’s time at the helm threw the agency into disarray, leading to a disorganized and unmotivated group of commissioners. Policy was doled out inconsistently, and industry never knew what to expect from FPC rulings. Ironically, regulation of natural gas prices actually became far more rigid beginning in 1954, and Texas Eastern would again find itself in a mighty battle with FPC commissioners. Those battles would continue until the days of deregulation in the 1970s. After going through all that trouble of not only ousting Leland Olds, but destroying his life and reputation while they were at it, the Browns were no better off.
Fortunately for Texas Eastern, the demand for natural gas had absolutely taken off. The company could not supply it fast enough, as coal prices continued to rise, and the benefits of natural gas became apparent to consumers. Texas Eastern built new pipelines into New York, New England, and adjacent to their existing Inch lines, just to get more gas into the regions they served. The company, for a brief time, enjoyed a monopoly on supplying Texas natural gas to the East, but soon, with the market burgeoning, competitors rendered the natural gas industry into an oligopoly, regulated by the FPC. Prices did creep up from year to year, increasing from 4.9 cents per million cubic feet in 1945 to 10.4 cents in 1955, mostly driven by demand alone, and still far less expensive than the manufactured gas produced by coal. Gradually, the manufactured gas industry was supplanted by natural gas, as competitors and pipelines sprang up throughout the Northeast.
The Brown brothers, while doing well in natural gas, hedged their bets on the heavily regulated business. As expected, Brown & Root won contract after contract from Texas Eastern to rebuild the Inch pipelines as well as build new ones. This was an eventuality that Herman and George Brown counted on when agreeing to bid on the Inch lines in the first place. Again, with little experience working on pipelines, Brown & Root gained valuable experience and profit from Texas Eastern’s expansion into new markets. Brown & Root worked on 88 different jobs for Texas Eastern, ranging from new pipelines to compressor stations. Their revenues from Texas Eastern alone between 1947 and 1984 was $1.3 billion.
As contracting partners, this was a conflict of interest. In a 1950s letter from Charles Francis, now Texas Eastern’s general counsel, to then president of the company Dick Carpenter, Francis laid out the issue. “Both the Federal Power Commission and the Securities Exchange Commission regard Herman and George Brown as controlling partners [of Texas Eastern]. We have always denied this but such is a matter open to debate. In rate cases, the Commission Staff takes the viewpoint that all contracts with controlling partners or directors are presumed to be unfair and inequitable and the burden of proof rests upon Texas Eastern to prove the fairness. . . . Hence, it is essential for our next rate case that these contracts be carefully scrutinized, legally approved and adopted by the Board of Directors, without the vote of Messrs. Herman and George Brown. Even with these safety provisions, the difficulties in a rate case in matters of this kind are very great . . .” The company knew what they were doing was wrong and unfair to Texas Eastern shareholders, but there were a number of legal avenues they pursued to make it look right. Regardless, Brown & Root continued to scoop up contract after contract from Texas Eastern, becoming the natural gas company’s primary contractor.
Over the ensuing decades, Texas Eastern would diversify into everything from refined petroleum products, coal slurry, and natural gas importing, development, and production. They would build pipelines all over the world, enter the gas exploration frenzy in the North Sea, and even get heavy into Houston real estate development in the late 1960s (the construction of all of which was handled by Brown & Root). The company bought 32 blocks of downtown Houston, much of it run down slums, and planned a grand Houston Center, “the biggest privately owned real estate development project ever.” Texas Eastern had visions of elevated walkways, people movers, and underground garages. But by 1989, when Texas Eastern was sold to Panhandle Eastern Corp. (for $2.5 billion in stock), Houston Center consisted of only three office buildings and a Four Seasons hotel. Many of the blocks originally purchased for $50 million, remain undeveloped to this day.
The story of Texas Eastern is, in a nutshell, characteristic of the lengths the Brown brothers would go to increase their power and profit. They had become professional influence peddlers, perfecting the art like no one before them. Looking for the big score, the Browns parlayed political muscle into instant profits upon purchasing the Inch lines. They then battled regulatory agencies, fought off charges of conflict of interest, and worked their political contacts to obtain favorable rates. After having made so much money from the government during the New Deal, then again during World War II, the company continued to trade on publicly owned surplus goods after the war. All the while, the Browns fought labor, taxation, and government regulation, all the same things that had built their fortunes to begin with.
The fact that Leland Olds was a casualty of the Brown machine is ironic for many reasons. Most importantly, Olds was molded by the same force that made Lyndon Johnson— Roosevelt’s New Deal. He fought for many of the same things that Johnson believed in. And he very well may have been better for the Browns many business concerns than his successor at the FPC. But Johnson didn’t consider any of that when he took up the battle to unseat Olds. Johnson had only one thing on his mind: the Browns’ money. Working for the Browns became Johnson’s overriding concern, and for good reason. The Browns were working for Johnson, too.
From the time that Johnson became a congressman in 1937, through his successful Senate run in 1948, he collected hundreds of thousands of dollars, maybe millions, from the Browns and their friends. While the extent of the relationship was apparent to some close observers in and around Texas, the rest of the country had no idea how deep the ties between Johnson and the Browns went. With so much money at stake at every stroke of a pen in Washington, the Browns’ investments in Johnson were well worth it. Johnson would eventually become part of one of the most powerful circles of influence in all of the nation, the Suite 8F crowd. This group of Houston businessmen and politicians met regularly at Herman Brown’s suite in the Lamar Hotel in downtown Houston. Ideas were exchanged, plans were hatched, and money changed hands. Though times were different then, echos of the Suite 8F crowd still exists today, only with different players and even higher stakes.
Ultimately, even in the corrupt and free-wheeling political environment of Houston in the 1940s and 1950s, something had to give. Johnson and the Browns were unabashedly brazen about their mutual interests. Before and especially after the Leland Olds episode, journalists and regulatory agencies began looking more closely at the relationship between the Texan cronies, resulting in an investigation that would nearly end the careers of both.
next
Our Man in Office
•••
Union problems had bubbled up throughout Brown & Root’s
history. There were problems on the Mansfield Dam, then
bigger problems at Corpus Christi. The more employees the
company took on, the bigger the problems became. By the time
Brown Shipbuilding was employing its peak number of employees, Brown’s “open shop” philosophy was hitting a wall, and his
workers were getting fed up. Reports of unsatisfactory working conditions at Brown Shipbuilding had begun to surface the first year of its existence. Albert Thomas was kept busy reassuring officials at the Office of Production Management that nothing would come between Brown Shipbuilding getting boats in the water on time. But the navy investigated the problem, and the War Manpower Commission issued a report blasting Brown Shipbuilding. “Turnover has lately become a serious problem at both yards . . . long hours, excessive commuting distances, lack of nearby housing, and poor lunchroom facilities,” were blamed for the discontent. “An unnecessarily severe policy of refusing to rehire any worker who was discharged by any foreman or official of the company and failure of the firm to attempt to hold workers who express a desire to quit also is a contributing factor.”
The report only caused Herman Brown to dig his heels in deeper. He had worked hard his whole life, and could not be persuaded to allow workers to artificially limit their loads, for the same pay. It particularly offended Brown for this issue to be surfacing during wartime when patriotism alone should be carrying the day. He wrote an article in the company newspaper entitled “Slugger or Slacker.” In it he opined, “Slacker is a rough word . . . we still think it’s exactly the right word to apply to some of the men working here in the yards. No, they aren’t shirking service in the armed forces, and they aren’t draft dodgers; they’re WORK-dodgers. And any man who imagines that our war effort doesn’t call for the best he’s got, every hour of the day he spends at the yards, is a slacker. . . . Look yourself over carefully—are you a producer, or a slacker?”
Brown’s tough words backfired. Nine different labor unions wrote to Brown Shipbuilding demanding that employees at the company be allowed to seek collective representation. The letters were ignored, sparking the involvement of the National Labor Relations Board (NLRB). The NLRB set a hearing on the matter, at which Alvin Wirtz argued on behalf of Brown Shipbuilding that the NLRB had no jurisdiction, an argument that was summarily dismissed by the NLRB. Elections were held, unions were formed, and Brown continued to defy them. “It has never been necessary for any employee in any enterprise with which I have been associated to designate a union as his exclusive bargaining agency in order to get a square deal,” he told his employees. The unions struck, and picketed in front of the Brown Shipbuilding facilities. But many workers crossed the line and continued to work, in part fueled by the patriotic war rhetoric of Herman Brown.
Lyndon Johnson, whose liberal politics had been forged by the New Deal, supported his friends with vehemence. He sponsored a “work or fight” bill in the House Naval Committee that would allow the draft board to receive the names of absentees from navy contractors. The names would be thrown to the top of the draft pool. It was an outrageous proposal, meant to scare the unionists back to work. Johnson was saying, in essence, that if you weren’t willing to work, “the draft board will get you if you don’t watch out.” There’s no telling what would have happened if Johnson’s proposed legislation had been enacted, but military officials were having none of it. It would have brought with it an army full of bitter, unmotivated soldiers already with a predilection for loafing or malingering.
The New Deal government was solidly behind the right of workers to organize, but that didn’t mean anything to Johnson, who continued to vote against labor laws. The central issue facing the federal government on this issue was crucial to Brown & Root and Brown Shipbuilding, and their ability to win future contracts. If the government were to be either neutral or against the unions, it automatically gave “open shop” companies like Brown & Root a very real advantage. Open shop companies would consistently be able to underbid those with unions. During the war, the federal government had little choice but to shift to a muted stance against unions, which were considered to be subversive to the war effort. This enabled companies like Brown & Root, which had resisted unions from the start, to profit at the expense of union companies.
After the war, Herman Brown continued to lobby hard for union-busting laws in Texas. The infamous “Right to Work” laws of Texas were largely Brown’s doing, as he prodded the Texas legislature to set new rules for unions. The company led a vicious battle against the Texas AFL-CIO in the late 1940s, suing every chapter in sight for damages incurred from picketing its plants. Nat Wells, the lawyer that represented one of the craftsmen unions, had this to say of Herman Brown. “I say it’s unfair to get the most public work of any contractor in the state, and on every hour of that work for every man . . . taking fifty cents an hour and adding it to his own millions. . . . You know, I’m pretty tired of that socialized millionaire, who is sucking at the public teat, if you please, who has made his millions from your pocket and mine in tax money, starting with a dam down here by Austin, most of the highway work in the state, political connections that gets him lots of federal work; that’s your money and my money, our tax money . . .”
The Browns remained defiant. In most cases, they were able to stall the NLRB for long enough to complete the job in question, rendering the labor complaints moot. They were accused of intimidating, threatening, and firing unionizers from several different jobs. While the labor disputes and disruptions were a nuisance, Brown & Root bulled its way through every case, clinging to its ideals of an open shop. In rare cases, the company was forced to make compromises, but the ethos of “right to work” laws stayed strong within the company for years to come. Bill Trott, a Brown & Root road crew employee from 1951 to 1992, put it this way, “I don’t know of anybody that ever worked for me that wanted to be part of union. I remember a bumper sticker I once saw in Louisiana. It said, ‘Vote against the right-to-work law’. . . silliest thing I ever saw.”
Both Howco and Brown & Root managed to profit from wartime, though in vastly different ways. Erle Halliburton kept his head down during World War II, refocusing his business on furthering the oil-field services business. Herman Brown threw himself and his company headlong into world events, capitalizing on the desperation of the military during war. Though the Browns may have exploited the system more effectively than Halliburton, the company’s success would not come without scrutiny. Having identified themselves so closely 90 Guns and Butter with Lyndon Johnson, and by fighting some very public battles with labor organizations, Brown & Root raised its profile during the war, and thus made itself a political target. As a result, the company would live with a reputation for political influence peddling right up until the modern day, and its relationship with Johnson would bring an official investigation of its political contributions that would nearly ruin it.
5
Collateral Damage:
The Leland Olds Story
Brown & Root’s success did not come without casualties.
Though in the 1940s, Brown & Root was still 60 years away
from actually losing employees in war zones like Afghanistan
and Iraq, the company left a different kind of victim in the
wake of its tremendous surge in political power in the post World War II era: political casualties. There had already been
C.N. Avery and James Buchanan’s widow back in Austin, both
of whom lost out on the opportunity to succeed Buchanan in
Congress when Lyndon Johnson decided to run. Those victims were more incidental in nature: it wasn’t personal, they
just happened to be in the way of Johnson and Brown’s uncontained ambitions. Most people who fell by the wayside
as the Johnson/Brown machine plowed its way to Washington got back up and led normal lives. Leland Olds was not
so lucky.From early on Olds, who would eventually rise to become the chairman of the Federal Power Commission (FPC) under Roosevelt and then Truman, was on a philosophical collision course with the Brown brothers. A voracious academic, Olds decided at a young age to dedicate his life to balancing out the disparity of wealth in the United States. In particular, Olds had seen the horrifying effects of industrialization on working families in Holyoke, Massachusetts, while a college student in nearby Amherst in the early 1900s and vowed to “have some effect toward mitigating the evil of poverty.” After college, Olds set out to find the most meaningful profession in pursuit of his goal. Idealistic, but aware of his own limitations, he brought his passion to the slums of South Boston.
Like many who enter the field of social work, Olds was quickly disillusioned by the inherent shortcomings of the system. He wasn’t learning anything about the root causes of economic disparity. He was simply witnessing, somewhat helplessly, the tragedy of its effects. He turned to religion as a possible answer, and became a minister in a congregationalist church in Brooklyn. But again, Olds met with an institution that had already accepted defeat in the worsening battle against poverty. As the son of a mathematics professor and a former mathematics honor student himself, Olds took a job with the Industrial Relations Commission during World War I. He was charged with combing through reams of data in an attempt to determine how wages should be set during wartime. What he found was the disheartening reality that while productivity in America continued to rise, wages did not. The average worker was not sharing in the success of American business, and labor unions were being suppressed, sometimes brutally, by powerful industrial companies with the government on their side. He decided at that point that the only solution to this complex and deepening problem was a fundamental shift in the role that government played in regulating labor disputes. Either by owning the sprawling monopolies—like railroads and utilities—or by backing labor, the government must intervene.
It was a philosophy that Olds had evolved through his work as a social worker, minister, and government employee. His brilliance and compassion made him utterly qualified to reach the conclusion. But it placed him diametrically opposite Herman Brown and his “right to work” philosophy. Though he didn’t know it yet, and wouldn’t until it was too late, the antilabor forces were gaining political clout that would ultimately vanquish any hope Leland Olds had of making a difference.
Though his ideas were vaguely socialistic, Olds believed that the capitalistic society could work to defeat poverty within the constructs of democracy, he just wasn’t sure how. So he went to work learning more about the power industry, how rates were set, how wages were set, and how it could be done better. He did this work on his own, even while on vacation, poring over volumes of texts at his local library in Chicago. He crunched numbers and created new formulas. He did it because he still wanted to be an instrument of change that would allow more impoverished and rural citizens to afford electricity. In the course of his research, he learned that by lowering rates, public utilities could actually increase their profits by expanding their customer base. He wrote thousands of articles, hoping that his words could counter the juggernaut that was American industry in the golden age of the 1920s.
Bringing power to impoverished families became an obsession for Olds. He felt strongly that power would, at the very least, mitigate what he felt was the “evil of poverty.” When Franklin D. Roosevelt (FDR), then governor of New York, called on Olds to share his views on the subject in 1929, he was armed with statistics and research that impressed the sympathetic governor. He offered Olds a job as the executive secretary of the New York State Power Authority, and his ideas were immediately put into action by the agency. By increasing its authority over setting rates, the Power Authority strong-armed reluctant utilities into lowering rates, and as Olds had predicted, their profits increased. His work was finally starting to make a difference, and he had found his calling in government service.
In 1939, after his relationship with FDR had blossomed into a mutual respect and admiration, Olds came to Washington and was appointed the head of the FPC by Roosevelt. Over the previous decade, he had tempered his more radical ideas of a complete government overhaul, and his belief in Roosevelt had engendered a new philosophy that government regulation could work to reverse the negative effects of rampant industrialization. He now knew for certain that change could take place, and as chairman of the FPC, he was in a position to make it happen.
Over the next five years, through the trials of World War II, Olds turned around the fledgling government agency, instilling passion and purpose in its work. He treated his subordinates with paternal respect, and infected the FPC with enthusiasm. He often worked through the night, consuming massive amounts of raw data. He earned the reputation of a fair arbiter in the ongoing battles between labor and industry. He realized and accepted that a healthy utility was better than a broken utility. The utility had a right to a fair profit, and he helped them to realize those profits by lowering rates and extending their service. By the end of his first five-year term at the helm of the FPC, Olds had gained the respect of both the industry and the New Dealers—no small task. Meanwhile, it was business as usual at Brown & Root.
•••
Throughout the war, though many labor issues persisted, most
of the conflicts took a back seat to the military effort. Just as
the Browns had seen on many occasions, workers were torn between a strong tendency to want to support their country in
the war and wanting to earn decent wages. In many cases, patriotism won out, paving the way for unfettered industry in the
years after the war. Government and industry had gone into
business together to fight the war. The result was an astonishing blurring of the boundaries between public and private
constituencies. By the end of the war, the government owned
as much as 25 percent of America’s industry. Between the New
Deal and the war, the government had acquired extraordinary
control over what had been private industry in years past, particularly in the energy sector. That meant that when the war
was over, the instant availability of military surplus goods
would create a wild investment opportunity. By 1941, Secretary of the Interior Harold Ickes was calling for an overland pipeline to counter the vulnerability of the tanker system. Ickes believed that as hostilities between America and Germany intensified, the Germans would go after the tankers in an attempt to disrupt the country’s energy supply. Though it seemed an obvious move, the Supplies Priorities and Allocation Board (SPAB) rejected Ickes’ request, because it would require the diversion of important resources, like steel and labor, away from higher priority munitions and airplanes projects. Ickes joined forces with 11 private oil companies to help him plead his case. Convincing the oil industry to join in the fight wasn’t difficult when the executives considered what a government funded pipeline to the East would do for their business. But the SPAB was steadfast and refused request after request to build the pipeline.
It wasn’t until February 1942 that the SPAB relented. German submarines downed 12 American tankers off the East Coast that month alone. By March, the Germans were notching up three tankers a day, as oil spread like a slick, black blanket over the surface of the Atlantic Ocean. Oil supplies to the East Coast had been cut to just 70,000 barrels a day from 1.5 million before the war. By the summer, work began on the two longest pipelines in the country, reaching about 1,500 miles each. The Big Inch was 24 inches in diameter, and the Little Big Inch, 20 inches. The construction, done on a cost-plus basis, cost the federal government—the consortium of private industry that was so eager to have the pipeline built withdrew its financial commitment when it became clear the government would have to build the pipelines regardless of their involvement—$138.5 million in total, and delivered more than 366,000,000 barrels of oil to the East by August 1945. Ickes had been right, and the Inch lines staved off a massive energy crisis in the East.
•••
The end of the war touched off a mad scramble to gain control of the Big Inch and Little Big Inch pipelines, two of the
most valuable government assets being unloaded back into the
private sector. The fight for the valuable lines, which would give control of a considerable amount of the petroleum supply
to the East, was waged by a variety of interests. The winners
would need to employ “political entrepreneurship,” the best
term yet to describe the type of business Brown & Root was
now in. For the government’s part, there was a need to avoid
creating new industrial monopolies in allocating war surplus
assets, and the Inch lines had considerable potential for doing
so. Ignoring the power of the oil and gas industry would eventually prove too much for the disorganized and overmatched
government agencies put in place to sell off war assets. And
when the Brown brothers were thrown into the mix, the fight
was all but over. Oil companies with their experience building pipelines, naturally wanted to gain control of the project, but they were not the only interested parties. The natural gas industry, at this time in its infancy, also felt that the lines could be converted into natural gas conduits, providing a cheap and efficient source of fuel to the East that competed favorably with coal. The coal and railroad industries (which transported the majority of the coal), sensing the threat to their established customer base in the East, fought hard to keep the Inch lines in the control of the government and out of the hands of oil and gas interests. The stage was set for a mighty battle.
E. Holley Poe, who had spent most of his professional life as a representative of the natural gas industry, began to string together a group of men who would fight for control of the Inch lines. His history of work with the American Gas Association and later in the Petroleum Administration for War (PAW), put him in an excellent position to follow the intent of the government in disbursing the Inch lines. Poe also had a seat on the Committee on Postwar Disposal of Pipe Lines, a position that afforded him a measure of direct control over the future of the Inch lines. As such, Poe began lobbying on behalf of the natural gas industry, claiming that the East Coast was in dire need of the fuel to offset the shortages of coal in the region. Less expensive and more efficient than coal, Poe’s argument for natural gas met with limited agreement. But Poe had an ulterior motive. He had been scheming all along to put together his own bid for the Inch lines, though he had not alerted anyone in the various government agencies upon which he sat of his plans. Instead, Poe simultaneously influenced the agency’s decisions while crafting a consortium to bid on the lines.
The War Assets Administration (WAA) felt strongly, though, that the Inch lines should be sold to the oil companies, since it would require no substantive changes to the pipeline itself. Converting the pipelines to natural gas would be costly, and in the case of a future military conflict, would render the lines useless for petroleum distribution. When the auction for the Inch lines was set, it was clear that oil companies would be given priority. Poe was losing his battle, and even in his position on the Committee on Postwar Disposal of Pipe Lines, was unable to curb the momentum toward the oil companies. But Poe was going to submit a bid anyway, because with the right men behind him—powerful and politically influential men like Herman and George Brown—he might be able to persuade the government to reconsider its position.
Poe went to work putting together a dream team of investors. He scooped up Charles Francis, a partner in Houston law firm Vinson, Elkins, Weems and Francis, and counsel to Brown & Root. From there it was an easy step to secure the financial muscle the team would need. Francis got Herman and George Brown to come on board. Brown & Root had worked on some of the construction of the Inch lines originally, and as the main financial backer of the team, George Brown took over Poe’s operation and dominated the bidding process. The Browns also brought with them the undying support of Lyndon Johnson, and a host of other politicians that could play a key role in submitting a successful bid.
The group, now called the Texas Eastern Transmission Company, submitted its bid along with 16 other interested parties. But the bidding process was severely flawed. There was no standard on which the bids were to be judged, nor was there any standard bidding format. Some bids were heavy on cash up front, others on ongoing payments, and still others were being funded by debt. The WAA was in over their heads and had no idea how to get the most money for the Inch lines. Meanwhile, Texas Eastern continued to meet with influencers in Washington, pleading the case of the natural gas industry. Francis met with General John O’Brien, of the WAA, and assured him that Texas Eastern would convert the lines back to oil distribution in the case of a national emergency. Then Francis met with H.S. Smith of the House Surplus Property Investigating Committee and pleaded for him to “immediately commence an investigation of the proceedings that had been followed in offering these lines for sale [and] . . . pointed out that there were no standards for bidding, no good faith deposits required, and that the whole matter had been handled in a very unbusinesslike manner.”
As Francis was relentlessly pushing Texas Eastern’s agenda, the nascent company got a break. While Texas Eastern was working all fronts, trying to convince the government of the need for natural gas in the East, the coal miners went on strike. The government forced the workers back to the mines, but the damage had been done. The strike laid bare the vulnerability of the East Coast to the coal monopolies and made a strong case for delivering natural gas as an alternative energy source to the East. The strike occurred while the House Surplus Property Investigating Committee, at Francis’ request, was looking into the bidding process on the Inch lines. The chairman of the WAA, Robert Littlejohn, rejected all the original bids on the lines. He created a standard bid submission form and announced a new bidding process that would not give favor to the oil companies. Instead, the Inch lines would go to the highest bidder, period.
The WAA had followed Francis’ recommendations to the letter, and the result was a new level playing field on which Texas Eastern knew it could compete and win. George Brown and his crew began lining up the money needed to back a successful bid. The company issued 150,000 shares of stock at $1.00 a share, enough to cover the good faith deposit required for bidding. Herman and George were each in for a 14.25 percent stake, and lent money to others wanting to subscribe to the initial offering, in exchange for their voting rights. Mainly through friends and business associates, Texas Eastern marshaled enough financial backing to cover what would eventually be a $143,127,000 bid for the Inch lines. The night before the bid was to be submitted, one of Texas Eastern’s directors slept with the bid under his pillow. After he deposited the bid in the WAA’s post office box, he sat guard to ensure that no competitor would see the bid. On February 10, 1947, more than a year after the process had begun, Texas Eastern emerged as the highest bidder, and was awarded ownership of the Big Inch, and Little Big Inch pipelines to the East.
•••
Texas Eastern immediately began paying enormous dividends
to the Browns. An initial public offering (IPO) of stock in
the young company was tendered at $9.50 a share. The original investors had put in $150,000 of their own money, which,
after the IPO had become worth $9,975,000. The Brown brothers alone netted $2.7 million from the IPO. Media reports
characterized the sale to Texas Eastern as unfair profits made
from what was originally taxpayer money that was used to
build the pipelines. The House Surplus Property Committee
commenced an investigation looking at the use of political influence during the bidding process. But the sale was final, and
the House committee dropped the investigation, though it is
not known why. With the bidding out of the way, it was time for Texas Eastern to start making money on its core business, transporting natural gas to the East. Operating in the natural gas industry, though, was different than any kind of business in which the Browns had previously been engaged. The natural gas industry was heavily regulated by the FPC. Competition, pricing, and the right to build pipelines and pipeline extension all fell under the purview of the FPC. Enter Leland Olds.
As chairman of the FPC, Olds would be keeping a close eye on the business of Texas Eastern. Herman Brown loathed government regulation and felt that it gutted capitalism of its naturally competitive elements. But there were no competitive elements in the natural gas business, particularly in the Northeast, because Texas Eastern was the only company with access to the market. The Browns thought the WAA was handing them a virtual monopoly on gas to the East. Olds had other ideas.
Olds was considered very even-handed when setting prices for the gas industry. He had allowed for a 9.5 percent profit for natural gas distributors, seen as generous by industry analysts. Obviously, Texas Eastern wanted to set its own prices, especially as demand for natural gas began to take off with the coal shortages in the East. But even with the restrictions that the FPC placed on Texas Eastern, the company’s IPO had been oversubscribed and brought a windfall of profits to the original investors. In other words, the stock market thought that Texas Eastern was going to clean up.
The Browns knew that if the natural gas industry were to be deregulated, they would be able to charge twice, maybe three times the prices the FPC had imposed. Their return on investment would skyrocket, and the Browns would become the next generation of industrialists, like Rockefeller before them. The company began a frenzied lobbying push to deregulate the industry. Senator Robert S. Kerr, a republican from Oklahoma, conceived of a bill in 1948 that would end the FPC’s grip on the industry. Olds wasn’t having any of it. His testimony against the bill led to President Truman’s veto. The natural gas interests were up in arms. The Browns pleaded with Johnson that Olds had to be stopped. That he was single-handedly socializing the country. And in truth, he was costing them hundreds of millions.
Olds’ term at the helm of the FPC was up for renomination in 1949, and the Browns smelled their opportunity. They insisted that Johnson defeat Olds and end his regulatory regime. The oil interests throughout Texas also wanted badly to see Olds defeated, as his policies often curtailed their own capitalistic instincts. Johnson, now a senator, knew that he would need the support of the oil industry if he was ever to make a run for president. So, at the behest of the Browns, Lyndon Johnson was going to have to take down a fellow New Dealer and man of great integrity.
He was going to have to destroy Leland Olds.
•••
Perhaps the most striking thing about the coming battle between Lyndon Johnson and Leland Olds, besides the overwhelming odds against Olds, was the fact that both men came
from such similar backgrounds. Both men knew poverty first
hand, and fought to improve the plight of the poor. Both men
were handpicked by Roosevelt during the New Deal, and
worked to further the ideals Roosevelt embodied during his
presidency. Both men believed in rural electrification, and
worked, by different means, to bring power to the least fortunate citizens of America. They were friends, colleagues, and
kindred souls. But now, Leland Olds was standing in the way of
Lyndon Johnson’s friends who were increasing their already
formidable fortunes. Though he likely didn’t need it, Johnson was constantly reminded by his Texas friends of the need to remove Leland Olds. In a letter from Francis to Johnson dated April 13, 1949, Francis implored Johnson to work on behalf of the oil and gas interests. He complained that “even the most brazen criminals” could get a “square deal” in this country, and “it would seem to me that the oil and gas industry is entitled to parity treatment with criminals.” He concluded the letter, “I trust that this major problem will have your immediate attention.”
The first thing that Johnson did was angle for the chairmanship of the subcommittee that would be evaluating Olds’ renomination. It wasn’t exactly a coveted position, so Johnson had no problem securing the post. He then arranged hearings to be held on the renomination—hearings that would entail witnesses and evidence for and against Leland Olds. Only Johnson had a plan. Leland Olds was expecting a rather routine hearing, like the one he endured five years prior, ending in unanimous support of his confirmation. The only hurdle Olds had encountered during the previous hearing was some tepid accusations that he had communist leanings during the 1920s. None of the charges were taken seriously, and Olds was cleared for another five years.
Johnson was going to play the communist card again, but this time he was going to back it up. In the five years since the end of World War II, the fear of communism was starting to take hold in earnest. Though it was still years before Joseph McCarthy would give his first speech, the undercurrent of anticommunism was swelling. Johnson assembled a legal team that began researching Olds’ history, looking for anything that could indicate a sympathy toward communism. Alvin Wirtz, the Browns’ right-hand man, headed up the research arm of Johnson’s operation. The group first looked to Olds’ record as chairman of the FPC, scouring documents for any hint of socialist tendencies, anything that could be construed as less than capitalist. They could find nothing. Olds’ record was spotless and stunningly fair. If anything, Johnson’s research in that area proved why Leland Olds should be confirmed.
Johnson’s team needed a new approach. They began poring over Leland Olds’ now 20-year-old articles he had written for the Federated Press. Many of the articles espoused somewhat radical ideas, but nothing that could be mistaken for communist support. But among the subscribers to the Federated Press wire service was the Daily Worker, a communist newspaper that closely followed labor issues, something Olds wrote about often. Johnson made photocopies of scores of articles and loaded them onto Brown & Root’s DC-3, flew them to Austin, and began painting Olds red.
Johnson and Wirtz worked over their evidence the way a district attorney would prepare to discredit a witness. Of the 1800 articles that Leland Olds had written for Federated Press, only 54 of them were to make it into the hearings. And of those, incomplete thoughts, out-of-context phrases, and incriminating fragments of Olds’ writing were parsed out. Johnson picked out witnesses to give testimony during the hearings. Alvin Wirtz was aided in this regard by Ed Clark, who not incidentally owned 40,000 shares of Texas Eastern stock. Clark knew that Johnson was on nothing more than a witch hunt. “He [Johnson] would call early in the morning— ‘Communists! Communists!’ Bullshit! Communists had nothing to do with this, and he knew it, and I knew he knew it,” Clark said. But no matter how much this course of action disgusted Clark, he understood that this was business.
It was only a few weeks before the hearings before Olds had an idea what was coming. He had expected some questions about communism, but as had happened five years prior, he expected the charges to be dismissed as laughable. But when Johnson changed the makeup of the committee, excusing admirers of Olds and replacing them with anticommunist hardliners, it became clear to Olds that he was heading into an ambush. Without proper time to prepare, Olds arrived at the hearing with his wife, an FPC aide, and only a cursory response to the anticipated charges of communist leanings. 123s
•••
The hearings began and Johnson went right for the jugular.
His first witness was Congressman John Lyle of Corpus
Christi, where many of the natural gas resources in the country originated. Lyle began, “I am here to oppose Mr. Olds because he has—-through a long and prolific career—attacked
the church. He has attacked our schools; he has ridiculed symbols of patriotism and loyalty such as the Fourth of July; he has
advocated public ownership; he has reserved his applause for
Lenin and Lenin’s system . . .” Lyle used the photocopies of
Olds’ articles, some two decades old, to prove that Leland
Olds was a communist and subversive force to government.
The articles were pulled out of the Daily Worker, not one of the
79 other publications that also picked up Federated Press articles. There was nobody in the room willing to stand up for Leland Olds, because Johnson had seen to that. The ideas that
Lyle presented were wildly out of context, and some outright
fabricated. The hunt was on. Olds had a statement prepared that would refute many of the allegations Lyle was making against him. In fact, Olds was ready to talk about the way his ideas had evolved from early in his career, and how his record at the FPC demonstrated that. When Olds began to read his statement, however, committee members, shocked by what they had just heard from Lyle, cut him off. Johnson would not allow Olds to read his statement in full, and so for hours on end, his statement sat unread while he fielded angry assaults by the stacked committee. Johnson himself came after Olds, insisting on yes or no answers like an attorney treating a hostile witness.
For two days the committee embarrassed, humiliated, and harassed Olds. Johnson noted that Olds had once been a member of the American Labor Party, a group that, after Olds had left, became a communist organization. Johnson seized on the fact that Olds could not remember when he left the group, something he had done 10 years earlier. He became openly hostile toward Olds, and continually inhibited Olds’ ability to defend himself effectively. When witnesses were called in defense of Olds, Johnson hurried them through their testimony, looking at his watch, and cutting them off as soon as their time had expired. One of the witnesses against Olds, William N. Bonner, an attorney from Houston that had interests in the natural gas industry, called Olds a “traitor to our country, a crackpot, and a jackass wholly unfit to make rules.” Another witness, Texas attorney Hayden Head, actually argued that because Olds was so intelligent, he was a danger to the American way.
The media began to catch on to what was happening during the hearings. The Washington Post, the Nation, and the New Republic all came to the defense of Olds, and excoriated the tactics being used by the Johnson-led committee. It didn’t matter though. It was too late for Leland Olds.
The committee voted 10 to 2 against Olds’ confirmation, but the Senate still needed to vote. During the committee’s proceedings, Johnson had been sure to call on his fellow senators to let them know how things were going. Some senators came to Olds’ defense, but the seeds had been sown by Johnson, and when the senate voted, Olds garnered only 15 votes in his favor, 53 against. Johnson returned to Houston on the Brown & Root plane and went immediately to the Herman Brown’s suite in the Lamar Hotel, Suite 8F. He was met with a hero’s welcome by the Brown brothers and the rest of their crowd. He went hunting with the Browns at their hunting camp, called Falfurrias. Frank “Posh” Oltorf, Brown & Root’s longtime lobbyist, would have this to say about Johnson’s victory in Washington. “Even after everything Lyndon had done—even after the Taft-Harley and the way he fought Truman on the FEPC and all that—they [independent oilmen] had still been suspicious. They still thought he was too radical. But now he had tangibly put something in their pockets. Somebody who put money in their pockets couldn’t be a radical. They weren’t suspicious anymore.” Herman Brown had placed his bets with Johnson long ago. Now all of his buddies would as well.
•••
Leland Olds and his family were already teetering on the
brink of poverty, and when he lost his job at the FPC, he
needed work badly. President Truman managed to set him up
in the Water Resources Policy Commission, but after Truman
left office in 1953, Olds had nowhere to go. He started a consulting firm and gave various public speeches, but sadly Leland Olds would find himself impoverished forever after. His
wife took the hearings especially hard though. She took her
contempt for Lyndon Johnson to the grave. Olds’ replacement at the FPC was Mon Wallgren, a man that Fortune magazine characterized as “quite possibly the least effective chairman, or even member, the FPC has ever had. ...A lazy fellow [and] too preoccupied with politicking to pay proper attention to FPC business.” Olds watched as the regulations he had worked so hard to enact were systematically weakened or repealed with Wallgren at the helm.
But things between Texas Eastern and the FPC did not get much better. Wallgren’s time at the helm threw the agency into disarray, leading to a disorganized and unmotivated group of commissioners. Policy was doled out inconsistently, and industry never knew what to expect from FPC rulings. Ironically, regulation of natural gas prices actually became far more rigid beginning in 1954, and Texas Eastern would again find itself in a mighty battle with FPC commissioners. Those battles would continue until the days of deregulation in the 1970s. After going through all that trouble of not only ousting Leland Olds, but destroying his life and reputation while they were at it, the Browns were no better off.
Fortunately for Texas Eastern, the demand for natural gas had absolutely taken off. The company could not supply it fast enough, as coal prices continued to rise, and the benefits of natural gas became apparent to consumers. Texas Eastern built new pipelines into New York, New England, and adjacent to their existing Inch lines, just to get more gas into the regions they served. The company, for a brief time, enjoyed a monopoly on supplying Texas natural gas to the East, but soon, with the market burgeoning, competitors rendered the natural gas industry into an oligopoly, regulated by the FPC. Prices did creep up from year to year, increasing from 4.9 cents per million cubic feet in 1945 to 10.4 cents in 1955, mostly driven by demand alone, and still far less expensive than the manufactured gas produced by coal. Gradually, the manufactured gas industry was supplanted by natural gas, as competitors and pipelines sprang up throughout the Northeast.
The Brown brothers, while doing well in natural gas, hedged their bets on the heavily regulated business. As expected, Brown & Root won contract after contract from Texas Eastern to rebuild the Inch pipelines as well as build new ones. This was an eventuality that Herman and George Brown counted on when agreeing to bid on the Inch lines in the first place. Again, with little experience working on pipelines, Brown & Root gained valuable experience and profit from Texas Eastern’s expansion into new markets. Brown & Root worked on 88 different jobs for Texas Eastern, ranging from new pipelines to compressor stations. Their revenues from Texas Eastern alone between 1947 and 1984 was $1.3 billion.
As contracting partners, this was a conflict of interest. In a 1950s letter from Charles Francis, now Texas Eastern’s general counsel, to then president of the company Dick Carpenter, Francis laid out the issue. “Both the Federal Power Commission and the Securities Exchange Commission regard Herman and George Brown as controlling partners [of Texas Eastern]. We have always denied this but such is a matter open to debate. In rate cases, the Commission Staff takes the viewpoint that all contracts with controlling partners or directors are presumed to be unfair and inequitable and the burden of proof rests upon Texas Eastern to prove the fairness. . . . Hence, it is essential for our next rate case that these contracts be carefully scrutinized, legally approved and adopted by the Board of Directors, without the vote of Messrs. Herman and George Brown. Even with these safety provisions, the difficulties in a rate case in matters of this kind are very great . . .” The company knew what they were doing was wrong and unfair to Texas Eastern shareholders, but there were a number of legal avenues they pursued to make it look right. Regardless, Brown & Root continued to scoop up contract after contract from Texas Eastern, becoming the natural gas company’s primary contractor.
Over the ensuing decades, Texas Eastern would diversify into everything from refined petroleum products, coal slurry, and natural gas importing, development, and production. They would build pipelines all over the world, enter the gas exploration frenzy in the North Sea, and even get heavy into Houston real estate development in the late 1960s (the construction of all of which was handled by Brown & Root). The company bought 32 blocks of downtown Houston, much of it run down slums, and planned a grand Houston Center, “the biggest privately owned real estate development project ever.” Texas Eastern had visions of elevated walkways, people movers, and underground garages. But by 1989, when Texas Eastern was sold to Panhandle Eastern Corp. (for $2.5 billion in stock), Houston Center consisted of only three office buildings and a Four Seasons hotel. Many of the blocks originally purchased for $50 million, remain undeveloped to this day.
The story of Texas Eastern is, in a nutshell, characteristic of the lengths the Brown brothers would go to increase their power and profit. They had become professional influence peddlers, perfecting the art like no one before them. Looking for the big score, the Browns parlayed political muscle into instant profits upon purchasing the Inch lines. They then battled regulatory agencies, fought off charges of conflict of interest, and worked their political contacts to obtain favorable rates. After having made so much money from the government during the New Deal, then again during World War II, the company continued to trade on publicly owned surplus goods after the war. All the while, the Browns fought labor, taxation, and government regulation, all the same things that had built their fortunes to begin with.
The fact that Leland Olds was a casualty of the Brown machine is ironic for many reasons. Most importantly, Olds was molded by the same force that made Lyndon Johnson— Roosevelt’s New Deal. He fought for many of the same things that Johnson believed in. And he very well may have been better for the Browns many business concerns than his successor at the FPC. But Johnson didn’t consider any of that when he took up the battle to unseat Olds. Johnson had only one thing on his mind: the Browns’ money. Working for the Browns became Johnson’s overriding concern, and for good reason. The Browns were working for Johnson, too.
From the time that Johnson became a congressman in 1937, through his successful Senate run in 1948, he collected hundreds of thousands of dollars, maybe millions, from the Browns and their friends. While the extent of the relationship was apparent to some close observers in and around Texas, the rest of the country had no idea how deep the ties between Johnson and the Browns went. With so much money at stake at every stroke of a pen in Washington, the Browns’ investments in Johnson were well worth it. Johnson would eventually become part of one of the most powerful circles of influence in all of the nation, the Suite 8F crowd. This group of Houston businessmen and politicians met regularly at Herman Brown’s suite in the Lamar Hotel in downtown Houston. Ideas were exchanged, plans were hatched, and money changed hands. Though times were different then, echos of the Suite 8F crowd still exists today, only with different players and even higher stakes.
Ultimately, even in the corrupt and free-wheeling political environment of Houston in the 1940s and 1950s, something had to give. Johnson and the Browns were unabashedly brazen about their mutual interests. Before and especially after the Leland Olds episode, journalists and regulatory agencies began looking more closely at the relationship between the Texan cronies, resulting in an investigation that would nearly end the careers of both.
next
Our Man in Office
No comments:
Post a Comment