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Wall Street and Hollywood

board company production business

Receiverships and bankruptcies changed Wall Street’s relationship to the motion-picture industry. During the first two decades of its history, the film industry was financed almost exclusively from earnings or from private capital. When the movies proved their potential as big business, the great Wall Street and La Salle Street investment houses vied for the underwriting of new stock issues for capital expansion, which they sold to the public. Kuhn, Loeb & Company, for example, financed Famous Players’ acquisition of a theater chain beginning in 1919; Goldman, Sachs & Company bankrolled Warners’ acquisition of Vitagragh, First National, and Stanley Theatres during the conversion to sound; and Halsey, Stuart & Company enabled Fox Films to construct the Fox Movietone Studio and to acquire theaters during the same period. The wiring of the nation’s theaters and the construction of sound studios in Hollywood was financed largely by the Morgan and Rockefeller banking groups. In underwriting these stock issues, investment houses placed representatives on the boards of directors of the respective film companies, where they worked hand in hand with top management to oversee fiscal matters. When motion-picture firms went under during the Depression, these same bankers installed themselves in the top management positions and took charge of the distressed companies.

Bankers and financiers proved singularly inept in managing motion-picture businesses. They were skillful at cutting costs, but they did not have the know-how or the temperament to make pictures audiences liked. Take the case of Fox Films. After William Fox sold his interest in the company to Harley C. Clarke, the board appointed Clarke the new president and chief executive officer. Clarke’s credentials in addition to his post as head of General Theatres included the presidency of a Chicago-based holding company that owned or controlled more than fifty gas and electric companies in the United States and Great Britain. According to Gomery, Clarke “felt he could ‘clean up’ the mess by applying techniques of scientific business management which had worked so well in the utilities industry. But … standard business practices did not always work in the motion picture business. During the Great Depression they produced only debt. Clarke resigned in 1931 after only one year on the job.”

Clarke was succeeded by Edward R. Tinker, the former board chairman of the Chase National Bank. Tinker also failed to clean up the financial mess, and within a year the theater division of Fox filed for bankruptcy. Exit Tinker. Neither a former utility executive nor a former bank chairman had been able to cure the ailing motion-picture corporation.

Finally, the board chose a veteran of the movie business to direct the company. Sidney Kent, the former head of distribution at Paramount and “one of the driving forces behind Paramount’s rise to power,” said Gomery, used his considerable managerial skills to reorganize the theater chain, to put distribution back on the right track, and even to clear the company of debts. 26 But Kent understood that the long-term health of the company depended on a steady supply of popular films. Kent therefore revamped studio operations on the West Coast in 1935 by negotiating a merger of the Fox Film Corporation and Twentieth Century Pictures.

Twentieth Century was a highly successful independent production company that had been distributing through United Artists. Founded in 1933 by Joseph M. Schenck, UA’s chairman, the production unit revolved around the talents of Darryl F. Zanuck, the former production chief at Warners, and his associate, William Goetz, the son-in-law of Louis B. Mayer and a former RKO producer. Zanuck had joined Warner Bros, in 1924 at the age of twenty-two to become one of the most prolific scriptwriters in Hollywood. After making a name for himself creating the incredibly successful Rin Tin Tin series, he became studio manager and helped to guide operations through the transition to sound. In 1930 he was made head of production. In this position, Zanuck developed the formula for action-filled, fast-paced, and topical pictures that characterized the Warner output during the early thirties. Zanuck walked off the lot in 1933 when, at the conclusion of the bank moratorium, Harry Warner went back on his word to restore the salaries of studio employees who had taken cuts.

Schenck took advantage of the situation by going into partnership with Zanuck to supply United Artists with badly needed product. In his first year with Twentieth Century, Zanuck demonstrated his production skills by delivering twelve pictures, most of which were hits. Because of personality differences with UA’s owners, particularly with Mary Pickford and Charlie Chaplin, UA did not offer Zanuck a partnership in the company, as was its custom with successful producers. Schenck thereupon resigned from UA, taking Twentieth Century with him.

As part of the merger with Fox, Schenck was named chairman of the board of the newly named 20th Century-Fox Film Corporation, and Zanuck, vice-president in charge of production. Although the net worth of the former UA production unit was placed at $5 million, its earning capacity surpassed the huge Fox Film Corporation, which had assets of more than $50 million. Because of this, Twentieth Century appeared first in the composite name.

Paramount offers another case of Wall Street mismanagement. When the Depression hit the box office in 1931, Paramount named John Hertz, a retired Chicago taxicab millionaire and partner in Wall Street’s Lehman Brothers, to the board and appointed him chairman of the finance committee. Hertz slashed production budgets by a third, reduced salaries across the board, and streamlined distribution. But cost cutting could not attract people to Paramount’s theaters. Paramount was awash in red ink by 1933, convincing Hertz to step down just as the company opted for receivership.

During the receivership, “fifty-three different law firms, banks, protective committees, and experts yammered and bled for two and one-half years over the sick giant and its 500 subsidiaries,” said Fortune. After the court approved Paramount’s reorganization plan in July 1935, the new board of directors was led by former debtors and bankers, including Lehman Brothers, Electrical Research Products, Inc. (ERPI), and the Royal Insurance Company of Great Britain. Of the fifteen men on the board, only Adolph Zukor, the founder of the company, and one other member had any experience in motion pictures. Seeking to vindicate his tenure at the helm, Hertz convinced the board to name ERPI president John Otterson the chief executive of the company. Another solid businessman, Otterson, imitating Harley Clarke at Fox, tried to run Paramount like a public utility. Otterson bombarded the studio with cost-accounting procedures, efficiency schemes, and personnel forms, and morale sank to a new low.

To investigate the situation, Paramount’s board sought the advice of the prominent businessman and former film executive Joseph P. Kennedy, the father of future president John F. Kennedy. In his report to the board, Kennedy stated “that negative costs were exceeding their budgets by $7,000,000; that shooting schedules were being disregarded; that one scenario (average cost, $15,000) was junked for every one that could be charged to productions; that the planning of the 1936-37 program was hopelessly inchoate, costly stars were being alienated, writers were loafing, truck drivers were sulking, and things generally were in one hell of a mess.” Concluding his investigation, Kennedy told the board “to get rid of their quality businessmen or prepare for another receivership.”

Stanton Griffis, who headed the financiers and real estate men on Paramount’s board, acted in the summer of 1936. To replace the “quality businessmen” at the helm, Griffis installed a show-business management headed by Barney Balaban, a founding partner of the Chicago-based Balaban & Katz theater chain that had become a Paramount subsidiary in 1926. “In putting Balaban into the pilothouse at Par,” said Variety, “a theatre operator had been given the presidency of a dominant producer-distributor for the first time.” Adolph Zukor, who had been moved up to honorary chairman of the board, was placed in charge of the studio. Simultaneously, Griffis shook up the board by making ten new appointments. Leaving production entirely in Zukor’s hands, Balaban went to work putting Paramount’s house in order. Within six months, he had turned the company around and Paramount entered a new era of prosperity. Commenting on the reorganization, Fortune said, Paramount’s postbankruptcy directors “capped an era of Wall Street influence on management that had reduced the once accurate name of Paramount to a symbol of all that was ludicrous, luckless, and unprofitable in the show world.”

Wall Street’s involvement in the affairs of Hollywood gave rise to the belief in film scholarship that Wall Street took over virtual control of the film industry during the Depression. The idea was formulated by two Britishers, F. D. Klingender and Stuart Legg, in their book Money Behind the Screen, which was published in 1937. The gist of Klingender and Legg’s argument, in Janet Staiger’s words, is as follows:

The introduction of sound equipment (controlled by the electrical and telephone companies) gave the Morgan and Rockefeller [banking interests] virtual control over the major film companies. This was accomplished indirectly through their control of sound equipment and patents and directly through the number of their key executives on the boards of directors…. Writing in the middle of the 1930s depression, they claim: “Whether the movies will regain their former financial success ultimately depends on whether the Morgans and Rockefellers will find it in their best interest in the unceasing change of American life to provide the masses with the type of pictures that alone will induce them to flock to their cinemas.” (David Bordwell, Janet Staiger, and Kristin Thompson, The Classical Hollywood Cinema: Film Style and Mode of Production to 1960 [New York: Columbia University Press, 1985], p. 315)

Popularized by Lewis Jacobs’s The Rise of the American Film in 1939, the argument became dogma in film scholarship until Douglas Gomery and others offered alternative models for understanding the modern business enterprise. These revisionist accounts rest more or less on contemporary critiques of finance capitalism that focus on corporate hegemony—in other words, on management rather than ownership. Robert Sklar succinctly summarized the new thinking when he said that it is not so important “who owns the movie companies but who manages them.”

Investment bankers exercised financial control of motion-picture companies during the Depression, but failed to revive the sick firms. The revival of the industry occurred only when the majors behaved like modern business enterprises. Alfred D. Chandler, Jr., has defined the modern business enterprise as having two specific characteristics: “It contains many distinct operating units and is managed by a hierarchy of salaried executives.” 32 Motion-picture firms took on the first characteristic during the teens and twenties when they integrated both horizontally and vertically. As they grew in size, these firms became managerial, which is to say, they rationalized and organized operations into autonomous departments each headed by a professional manager. The founders ran the companies at first, but over time as death and economic convulsions took their toll, the founders were replaced by salaried executives. When this occurred, motion-picture firms took on the second characteristic of a modern business enterprise. At this point in a firm’s development, said Chandler,

the management of the enterprise became separated from its owner-ship…. Unless the owners or representatives of financial houses became full-time career managers within the enterprise itself, they did not have the information, the time, or the experience to play a dominant role in top-level decisions…. In time, the part-time owners and financiers on the board normally looked on the enterprise in the same way as did ordinary stockholders. It became a source of income and not a business to be managed. Of necessity, they left current operations and future plans to the career administrators. (Alfred D. Chandler, Jr., The Visible Hand: The Managerial Revolution in American Business [Cambridge, Mass.: Harvard University Press, 1977], pp. 9-10)

As mentioned earlier, Warner Bros, and Columbia Pictures were still run by their founders. However, both firms qualified as modern business enterprises according to Chandler’s definition because the founders had become full-time career managers, and very successful ones at that.

By the thirties, corporate operations were financed from within. To supplement internal financing, companies sometimes turned to commercial banks for lines of credit. Designed to be used for short-term loans, lines of credit evened out the cash flow to meet payrolls, to pay operating expenses, and to acquire raw materials for production, among other things. The amount of the line depended on a company’s needs, its fixed debt, and other obligations—in other words, its overall financial health. The point is, commercial banks did not make production loans per se to the major motion-picture companies. Nor did banks review motion-picture projects and pass on their commercial viability or artistic merit. Money for production came out of earned income—and the designated amount depended on the discretion of management.

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